In this week’s edition of Wealthion’s Weekly Market Recap, Andrew Brill shares the most compelling insights from our expert guests.
From the state of the federal budget to why credit card rates aren’t regulated, EJ Antoni dives into key fiscal challenges. Michael Howell explores the economic slowdown in China and rising U.S. debt levels, while Noelle Acheson reflects on how much influence politicians really have over the economy. Vincent Deluard rounds out the analysis by breaking down the Fed’s recent rate cut and its potential market and economic implications.
Investment Concerns? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://www.wealthion.com/free
Andrew Brill 00:00
Welcome to the weekend, everybody. It’s finally here, after a long wait, four years, to be exact, the rate cut we’ve all been wishing would happen has happened, and it was a big one. Welcome to wealthions, weekly market recap. I’m your host, Andrew brill, let’s see what our experts had to say this week. Global liquidity expert, Michael Howell, joined us this week and expressed his feeling about the Fed’s concern over the US debt and the slowing economy. He said the US debt, on top of debt, is leading to raising liquidity levels and what might be the next Black Swan event. So why
James Connor 00:40
don’t we spend a few minutes talking about China? Because it is the second largest economy in the world, representing 20% of global GDP, and as you mentioned, there is a massive, slow slowdown there. We really never know what’s really going on in China, but maybe you can give us some sense of how bad things are in China and how it’s impacting the rest of the world. Well,
Michael Howell 01:01
I think what you’ve got to do in terms of analyzing China is to sort of split out the secular, the trend from the cycle. And as I said, if you look at the cycle, the cycle has really been affected adversely by a tight monetary policy. And that tight monetary policy is really rested on the fact that China has had a goal, which is maintaining a firm, or at least stable Yuan against the US dollar. And that really goes back to their maybe longer term ambitions of trying to create a rival for the US currency, certainly within the Asian region, maybe even ultimately globally. And what they perceive is that they can actually extract a lot of soft power, if you like, by having a robust currency. So that’s been one of their geopolitical goals, if you like. And therefore, as the US dollar has strengthened over the course of the last two to three years, what you’ve seen is the Chinese really struggle to maintain the value of the yuan, and therefore they’ve had to tighten monetary policy. Now the reason that’s significant is that all economies were hit, as we know, two to three years ago by the covid emergency, and the West came out of that, accomplished by a very easy fiscal and monetary policy, and in fact, so much so that we know we’ve got this short term legacy of inflation that policymakers are currently fighting. But China didn’t really have that luxury. And what China faced, as it was trying to come out of covid, was this tight monetary policy that was put in place by the by the People’s Bank to try and maintain this firm Yuan against the US dollar. So they’ve never really had the opportunity of really a recovery from covid. The economy has been in the doldrums for some time. That’s the cycle. Now, that cycle could be reversed as soon as they start to throw monetary policy or ease monetary policy back in, you know, on onto the economy. The secular is a very different question. And I think what China is really seeing now is something that is called by economists the middle income trap. And that really means that you get up to a certain level of income per head, and you just find it very, very difficult to actually grow any more. The easy growth is there, and the more difficult growth where you’ve got to you’ve got to actually incentivize the consumer, you’ve got to get deeper productivity gains. You’ve got to invest in new technologies, etc, etc. It’s actually very hard to come by. Now. The problem that China has had, or still has, in fact, is that the consumer is not really enfranchised in China. So if you look at Western economies, clearly they’re driven to a very, very large extent by consumer spending. That is not the case in China. Consumer spending is important, but it’s not the same share of GDP that you see in Europe or the states, and that’s something that the Chinese ultimately will have to remedy. That means that their economic growth really depends on two features. One is more and more capital spending, or particularly infrastructure spending. And the problem here is that you can’t just keep building bridges or roads to nowhere. They’re very unproductive. They create a lot of debt. They saddle the economy with interest expense, and ultimately, it’s a drag on economic growth. And the other dimension is export growth. Now, if you’ve got tariffs and trade protection isn’t emerging, it’s very difficult for China to actually maintain market share and actually grow its exports. So you can see the problems that China is facing, both secularly, cyclically and secularly, and those two problems are significant, and they’re basically causing China a lot of grief right now that have to be addressed. China is a big economy. This matters not just for China. It matters for the world, but we’re researching for some sort of solution, and I think the ultimate, my ultimate answer, is that the current model of red capitalism, if you like, just doesn’t work.
James Connor 04:51
So the consumer in the US economy represents approximately 70% of GDP. What would it be in China?
Michael Howell 04:58
No nearer 50% you. Right?
James Connor 05:00
And it’s interesting. You brought that up because a couple of high end retailer, retailers, lvhm and also Gucci, have both said their sales within China are down significantly. I think they it was around 50% so the consumer there is definitely feeling some pain. And I believe veil VHM also said their champagne sales were down 50% because people there have nothing to celebrate.
Michael Howell 05:22
Yeah, absolutely right. Yeah. They can’t even drown their Sorrentino media,
James Connor 05:27
what you said there. So first of all, the message that the Fed has been sending out for many months now is that they are hyper focused on inflation. They want to get inflation down from the high of 9% down to their target rate of 2% but you’re saying with this last speech that Powell made in Jackson Hole that he is now saying he’s still focused on inflation, but it sounds like they’re very concerned about what’s happening within the economy and the growth and the slowdown that we’re seeing in the economy. Do I have that right?
Michael Howell 05:57
You have that absolutely spot on. But also add another dimension, which is the fact that also financial stability is a key, key criteria, and that and that financial stability extends to the Treasury market on the ability of the government to fund itself. So we’ve got to look at these dimensions too.
James Connor 06:14
And so what were you saying the you think the Fed is concerned about what’s happening, even though they’re not saying in
Michael Howell 06:21
the economy, yeah, yeah. I think they are for sure. Are
James Connor 06:26
they more concerned about the inflation rate or about the economy slowing down? Oh, no. I
Michael Howell 06:31
think they’re more concerned by the economy slowing down. I think they that they’re not sure they’ve got a handle on it. Might be right,
James Connor 06:36
even though, yeah, okay, that’s good, because even though they don’t communicate that well,
Michael Howell 06:40
I think Powell’s last speech was sufficiently sort of nervous about the economy that it suggested there was some hint of panic. So
James Connor 06:47
do you think the Fed is sees a potential problem on their horizon, and that’s why they made these changes?
Michael Howell 06:56
I think they they see a I think they recognize there’s a problem in terms of funding in the medium term for the US public sector, absolutely, because there is a big problem. And you just got to look at what the Congressional Budget Office is projecting for the future debt GDP ratio in America. I mean, there’s, there’s an underlying secular, fast rising, secular trend in mandatory spending that somehow has to be funded. And the CBO are very explicit about this as being a major problem in the medium term. So there’s a lot of debt financing to do. And I think the Federal Reserve and the Treasury together, because of their activities, their joint activities, in what I was saying, if you like, actively duration, managing the calendar, they’re very concerned about this. So I think this is a background point, but it’s an important point regarding the economy, I think Jay Powell flagged growing concerns among the FOMC about the integrity of the economy. I don’t think the economy is in recession. I don’t think it’s near that near recession, but I think the Federal Reserve maybe is hinting here that it’s uncertain about the medium term, whether it has control over the economy. And what they clearly want is to put some support in, in my view, so this is perhaps a cushion or a safety net underneath the economy, and therefore cutting interest rates now. And read that as adding more liquidity, which is the key factor, is really what they’re up to. I mean, at the end of the day, the Federal Reserve, despite what it’s, despite the market’s focus on in a monthly CPI numbers, Federal Reserve is really looking at what the fixed income markets are saying in terms of longer term break even inflation, that that’s really the key. This is the whole, the whole sort of, if you like, framework of Federal Reserve put in place for inflation fighting. And what that’s telling them is inflation is beaten. So
James Connor 08:44
you touched on debt, and the federal debt now stands at $35 trillion mind blowing number, and it’s growing by a trillion dollars every 100 days. Interest expense on that is a trillion dollars annually. So are you saying that the Fed is very concerned about potential interest rates when they go to refinance this debt, it’s going to be costing a whole lot more
Michael Howell 09:07
correct. I mean, that’s got to be a worry, because you can now see, I mean, just by the math of this, is that if interest rates go up, debt service costs go up, which means more debt. And what you’re doing is you’re piling debt on top of debt. And this is not a this is not a great situation to be in. So if you look at the debt GDP ratio of the US as projected by the Congressional Budget Office, it looks like an exponential curve upwards. I mean this. These are not healthy situations. We’ve got too much debt. You know, this is the problem. But the reality is, that one of the things that people have got to recognize is the debt goes hand in hand with liquidity. And we’re in a situation now where financial markets have moved very clearly away from being new capital raising mechanisms into being basically debt refinancing mechanisms. And that’s a very important, subtle but very important difference. Dollars. Now what that basically means is that liquidity is needed to roll over debt. And you know, the reality which people forget is that, you know, if I issue a five year bond today, that may be great for five years, but in five years time, I’ve got to refinance that bond. And to refinance You need balance sheet capacity, which is really liquidity in the markets. So you definitely have to have with rising debt levels, rising liquidity levels. Now the reality is that that liquidity spills out. For the last decade or two decades, most of that over spill of liquidity has gone into other financial assets. In the last two years. It was so significant that it spilled over into the high street, and so you’ve got consumer price inflation as well. But what we’re looking at is debt, which is growing at something like two to three percentage points faster than us, GDP, which basically means that you’re looking at something like, what, 8% per annum growth in debt, which means you’re getting 8% growth in liquidity, and that is the sort of benchmark or hurdle you’ve got to think about in terms of your asset market returns, because liquidity drives those asset market returns, and so you need assets that will keep pace with monetary inflation. Gold has shown us for centuries that’s what it does. It may lead lag a bit, but generally the trend is there. High quality equities seem to do that. That’s what experience shows. Fixed income markets do not do that. Prime residential real estate does that. And for the last five years, Bitcoin has done that.
James Connor 11:36
Michael You have said in the past that all financial disasters are brought on by an inability to refinance debt. Do you see that happening in the coming months? And I guess also what I’m asking here, do you see a potential black swan on the horizon, and that is an inability to refinance debt?
Michael Howell 11:56
Well, I think the sort of glib answer is yes, but I don’t know when, because the fact is that what you’ve seen historically, and you go back through history, and you go back, particularly in the last two decades, what you find is that every financial crisis has largely been a refinancing crisis. Think of 2008 think of the Asian financial crisis in 97 you know. Think of what happened in the US repo markets in 2019, all these, all these are instances where refinancing becomes a problem. I mean, you know, arguably, even Silicon Valley Bank was a refinancing crisis. And what it what it comes down to is, if we’ve got so much debt, we’re sitting on so much debt, that debt is a burden, that’s a cost, that debt has to be refinanced. And if that mountain of debt just keeps growing, the refinancing challenges obviously grow with it, and what you need is more and more liquidity to keep pace. Now, liquidity, as we’ve argued, is cyclical, and therefore if you get at a time when you need a lot of refinancing capacity, liquidity turning down, then you’ve got a problem. And in that environment, you either get debt defaults. People tend to fire sale assets so they can refinance in other areas, etc, and that’s where the tensions emerge. So it may be a good comment, but yes, we will get that, because at the end of the day, liquidity is cyclical, and it’s very you know, we can’t depend on monetary authorities to manage things perfectly. So I think it’s going to come. Is it going to come in the next 12 months? I think that’s very unlikely. Because I think the if you look at the other debt wall, the debt wall is probably about 18 months to two years away. That’s when a lot of debt has to be refinanced in the world economy, or the US economy in particular. And I think we’ve got a window now where there’s not that much, so it should be manageable. And the one I’ve argued liquidity is picking up, therefore there should be few problems. I think the question really comes is, when you get an inflection in that global liquidity cycle, which, if you go back to the first chart I showed, our reckoning is that that comes sometime towards the end of 2025 and that might be because inflation begins to pick up again. It may be because the world real economy starts to get more traction and financial markets suffer. Could even be because the Federal Reserve thinks it’s made a mistake and wants to push rates up again. Economist
Andrew Brill 14:21
EJ Anthony explained why rate cuts alone are not going to fix anything and what is left of the federal budget after mandatory spending. He explained how a post pandemic reality is misleading the employment numbers that are a key driver of rate cuts. He also touched on personal debt via credit cards and how energy exports could be the key to stabilizing the dollar and revitalizing the economy. What federal budget it seems like all we do is spend money.
E.J. Antoni 14:52
I would say that’s a pretty accurate assessment. What federal budget that’s that’s a good question. We don’t have a federal budget. We haven’t, for years, a. Uh, you know, the Republicans in the House promised we were going to get our 12 appropriation bills. Uh, here we are. We still don’t have them. It doesn’t look like we’re going to have them anytime soon. It looks like we’re just going to get, you know, another CR, another continuing resolution. So things haven’t really changed much. Unfortunately, that you know that’s particularly troubling given the data that we just got from the Treasury Department, they released their monthly Treasury statement for the month of August. It was the worst deficit we have ever seen for the month of August, ever and and that includes the two blowout spending years, 2020, and 2021, when, when we had all those literally trillions of dollars in excess spending that was allegedly related to the covid pandemic. So, you know, unfortunately, things are getting worse, not better. We’ve already hit a $1.9 trillion deficit for the current fiscal year. And for those you know, playing along at home, the current fiscal year doesn’t end yet. It includes the current month of September, so we still have a month to go, and we’ve already blown past treasuries deficit projections from earlier in the year. So yes, we’ll hit $2 trillion deficit yet again. Without question, it’s not good. You know, this Treasury statement actually had a lot of other rather igno ignominious firsts, not the least of which was interest on the debt has now cost over a trillion dollars for this fiscal year. And again, the fiscal year isn’t even done yet. So all of those folks who earlier in the year said, Alf, this trillion dollar on the debt, interest on the debt, yeah, that’s pie in the sky. It’ll never happen. Oh no, it did happen. And again, it’s getting worse. The fiscal year isn’t even done yet. So it’s a huge, huge problem, the fact that we just keep stringing together these, these more or less random, bloated spending bills, without actually having, as you said, any kind of federal budget
Andrew Brill 16:55
put together. Why don’t we regulate credit card interest? I mean it 30% EJ is just, that’s just, that’s absurd to me. I think I remember when I got a credit card as 12% was like, pay off your bill or you’re gonna pay 12% interest. Now there’s no way to get ahead of this. If you’ve fallen behind and you have credit, it takes you 2030, years just to make the minimum payment to pay off that debt, and if you need money, obviously you’re going back to the credit card. Why don’t we regulate these things?
E.J. Antoni 17:29
In short, Joe Biden, he was the senator from Delaware, and was effectively a lobbyist for credit card companies for a couple of decades, and got a lot of the not just simply removal of regulations, which I’ll touch on in a minute, but actually got preferential treatment for the credit card companies, where they actually have essentially protections under the law, which other types of creditors don’t. Now going back to the regulation side, I think it’s important to note that credit card debt is not like a lot of other debts in so far as while it’s it’s, well, let me put it this way, you don’t have the same kind of collateral on that debt as you do for others. In other words, if you don’t pay your car loan, what happens? Well, the creditor can take that car from you, right? They can repossess the vehicle, and then they have an asset now which they can sell to try to recoup some or all of their of their losses on your loan. You don’t have that with credit card debt. It is an unsecured loan. In other words, you know, I can, for example, I can go out and simply rack up credit card debt eating at restaurants. What asset Are you going to collect on? I mean, my stored up fat, I don’t know. So as a consequence of that, when the credit card company finds you, finds your loan non performing. In other words, you’re behind on your payments. You’re not making payments. They have to sell that debt to a debt collection agency, and it very typically sells for somewhere between five and 12 cents on the dollar. In other words, they’ll lose like 90% of the money they gave you, and so they have to make up for that somehow, and and the way they do that is by charging what appear to be extortionate interest rates. So the fact that the rates are so high today speaks not only to the fact that there are other alternative uses for that money which pay a high interest rate. So for example, instead of a very risky loan to a consumer at 30% they can have a zero risk loan to the Treasury at over 5% using things like T bills. So there’s not only that dynamic, right, that the alternatives are going up in interest rates in return, I should say, so you need a higher return on credit cards. But on top of that, the rate of loan non performance, again, defaults and delinquencies on credit cards is rising at the fastest pace. Dollars since the global financial crisis. Now that’s not to say the the levels themselves are the same. In other words, you know you were going from, let’s say, 1% to 5% and before we went from 15% to 19% so the levels are not the same, but the rate of increase is the same. And that’s that’s particularly scary, because it points to where we’re likely going in the future. So as credit in other words, as credit card companies anticipate more and more people not paying back their debt, they’re hiking the interest rates in order to try to recoup those losses. We’ve
Andrew Brill 20:31
heard a lot about, you know, the jobs that are being created, or the jobs that are where people are getting hired, or part time jobs. And it occurred to me that, you know, what is the new norm changing? Are we going to, you know, the pandemic, everybody was working from home. Everybody wanted to work two or three days a week. We kind of got used to a little bit more freedom, not being in an office, and all that is the is the norm in your research? Are you finding that the norm is changing, that the regular full time job that used to be there isn’t there anymore. And let’s face it, you know what a full time employee benefits are expensive. Other perks are expensive. So if you can hire a part time employee that you know, or two part time employees, and don’t have to pay out those benefits. Obviously, the dynamic changes is our new norm changing.
E.J. Antoni 21:25
I think you’re spot on Absolutely. You know, the post pandemic economy is radically different in certain ways than in 2019 and actually, this is why I have a lot of sympathy for the, you know, the bean counters at the Bureau of Labor Statistics, they are dealing with, with a lot right now, with a lot of problems, and their models and methodologies that they relied on for a very long time and had a proven track record all of a sudden, are failing them. So that’s where I have a lot of sympathy now. Where my sympathy goes away is the fact that these problems were evident in the spring of 2022 here we are, two years later, more than two years later, and nothing has been done to fix them. So now, now we’re going from, you know, I guess you could say ignorance to willful ignorance, right? And I will say this, the reasons behind why people, why workers are behaving differently, those reasons have also changed. So during the pandemic, people didn’t want to work as many hours. People wanted flexibility of things like being able to work from home. And today, the reason why people are getting are changing work or getting additional work or getting another part time job is simply because they can’t make ends meet. It’s because we’re in a cost of living crisis. And this is part of the reason why the growth in non farm payrolls. That’s the jobs report that we get every month, right when you hear those headlines, oh, 100,000 jobs added. Those are non farm payrolls. One of the key reasons why that has been exploding the last several years is so many people who already have a job having to get a second job or a third job because they can’t make ends meet. And the consequence of that is every time a business adds another payroll, even if it’s a part time, one doesn’t have to be a full time one, it gets counted as another job in those monthly reports. And again, the 40 hour a week job and the 20 hour a week job count exactly the same there. So it’s not as if you know, well, let me, let me give an example. I think if I lose my full time job, working 40 hours a week, and I get two part time jobs, I now go from being counted as one job to two I get double counted. Conversely, in the survey of households, that’s also part of that monthly jobs report, I still am only counted as a single person employed. And this helps explain the unprecedented divergence between those two surveys that we’ve seen the last several years, where the level of employment has been flat, and actually since November, has been going down, whereas the number of non farm payrolls, the number of jobs continues marching steadily higher. We are seeing fewer people employed, not more. We are seeing more people having to work multiple jobs. We’re also seeing people lose their full time jobs and replace them with multiple part time ones, but, and at first glance, you may think, Well, what does it matter if, if I lose a 40 hour a week job and I have to take 220 hour a week jobs, isn’t that kind of a wash if the pay is the same? No, because of something you mentioned already, which is benefits. And what we’re seeing today right now is a lot of businesses letting go full time workers and replacing them with part time ones because they can’t afford benefits anymore. We forget that inflation doesn’t just hurt the consumer, it hurts firms as well. And sure enough, if we look at the data from the Bureau of Labor Statistics, where they provide a price index for not only consumers, but for businesses as well. The CPI and. PPI respectively. What we find is that they are both up almost exactly the same, right, about 20% since January of 2021 in other words, all of the cost increases that you are seeing right now. So let’s say you go to the grocery store and you grab a dozen eggs, or 18 eggs, whatever it is, I go to Costco, so it’s like 72 at a time. You know, you buy your carton of eggs, and they’re up 50% in less than four years. It’s insane, but what we forget is that the store owner is also paying 50% more for those eggs, and that’s why, when we look at things like corporate profits, the profit margins really haven’t budged. So even though the nominal profits have gone through the roof, you adjust for inflation, and you find out they haven’t in the same way that the typical American family has a paycheck which has never been larger. That’s a fact. Nominal pay has never been higher than it is today. On average, I know for some people, it’s not, but on average, however, adjust for inflation and those larger paychecks right now by less than they did four years ago. Corporate profits are exactly the same again. Just within the last couple of weeks, we got data for retailers. We got data for manufacturers, all official data from the government. This isn’t my numbers. I’m making up. The official government data show that those businesses profits are down in real terms, adjusted for inflation, they have fallen. So, you know, kind of circling back here, I think that it’s really, really important to remember that while things may look very rosy on the surface, while the aggregate numbers are growing that does not represent the reality that people, whether it’s a business owner or a consumer, that people are feeling.
Andrew Brill 26:49
So if we were able to create energy fracking, use natural gas to make all the things that you were talking about, can we export that? Because that would increase the value of the
E.J. Antoni 27:01
dollar. We certainly could export it, absolutely. But one of the things right now that is hampering exports because, believe it or not, we’re actually drilling and mining like crazy right now in this country in order to meet global demand. When you have a lot of places around the world like Europe that have basically just shut off the taps to all their own energy. That’s why, for example, Russia is now importing more energy to the EU than ever before, despite all the sanctions. I mean, the crazy thing is, all those sanctions are doing is bankrupting our our so called European allies. But if we actually get rid of all the red tape that has been put on American energy exports over the last three years or so, you would have an energy export boom. You would, you would see the, you know, the tankers for for LNG, for example, shipping out from the from the Gulf and from the East Coast, and heading over to Europe and other places around the world too, quite frankly, and
Andrew Brill 28:01
that would give a huge boost to our economy, wouldn’t
E.J. Antoni 28:04
it? It certainly would, and not just in terms of the official data. I mean, obviously it would increase what we call net exports. So that would, that would add to GDP. But also, the other thing it does is, and this goes back to what you said with with strengthening the dollar is it gives people something to actually buy with our currency. And that’s been a big, big problem for for literally decades, people were essentially taking our currency and holding it as as the reserve currency of the world. That’s all beginning to unwind. A lot of that has to do with how we have mishandled the situation in the Ukraine and the very terrible steps that we have taken there with with confiscating dollar reserves, for example, taking money that that wasn’t even ours. So however you feel about that conflict, it was a terrible monetary move. And one of the effects of that has been people deciding to dump the dollar, whether for forex or for international exchange. The consequence here is that as the position of the dollar, as the world’s reserve currency, unwinds, we need to find uses for people’s dollars, and if we don’t, we are going to have 70 years worth of deficits come pouring back to this country. That’s when you’ll see a real inflation right
Andrew Brill 29:23
after the rate cut. Vincent Delaware joined us. Live on wealthion to talk about the half point rate cut. He’s wondering what the Fed is concerned over to drop the rate that much. He also talked about the risk of hyperinflation, how bad it could be, and where the stock market will head after this large cut. You Sorrentino
Maggie Lake 29:41
media, does this tell us so when, when the Fed does something aggressive like this, we often think, do they know something we don’t do? Should we think that perhaps the Fed is worried about something in the system, or is growth slowing? So. Flowing to the degree is a recession knocking at the door that the Fed would be worried enough to go 50? Is that how we should read this?
Vincent Deluard 30:08
I mean, I would read it as the Fed is worried that it, you know, should have cut in in July, didn’t do it, and now he’s trying to make up the lost ground, and so that they don’t look too bad. I think the recession is, I mean, where, you know, you look at the kind of fed GDP, now it’s at 3% housing stalls are really good today. Unemployment rate ticked down. The last report, hours worked increased. I would have many questions for for Jay Powell, if I were in that room, like, what does he see? That makes him think that we need, you know, 50 basis. I mean, we could very well have gone, you know, 25 and increase the speed, if need be. But it seems like you know why front loaded so much, yeah.
Maggie Lake 30:54
So you don’t, do you think that that there’s, there’s very important to dig beneath some of the narratives here, right? And so do you think that the economy is slowing enough to face a recession? If not, why not? What are the things that you see that indicate the Fed should be a little bit more conservative here?
Vincent Deluard 31:14
Well, so in general, I think we have this massive issue with statistics. It started before covid, but got worse covid quality of statistics, and we’ve seen that all these revisions, all these adjustments, very low response rate. So since that happened, I spent a lot more time looking at the day treasury statement, which measures the cash coming in and out of the Treasury account, and specifically looking at tax collections. Because I believe this is, you know, tax collection. Everybody pays taxes. We all hate to do so. So no one pays more than they should, and we can see that on a daily basis. At this point for the year, tax collections are up 9% from last year, and there hasn’t been a change in tax law. So I don’t think there’s been any case in history where you’ve had people pay 9% more in taxes, and the economy falling into recession quite immediately. And if we look at the more recent trend, and of course, there’s some volatility, right? I mean, some some of the tax collection, you know, you get more money at the end of the month, beginning whatever, adjusting for that, there is no sign of a slowdown. So that’s what gives me confidence that the economy is not slowing. And then again, because there is so much uncertainty about the feds, the BLS release, I look at anecdotal stuff, because at the end of the day, I mean, the world is just, you know, a lot of anecdotes tied together. You look at TSA crossing, you know, how many people are flying across the country, record high, 10% higher than last year. You look at restaurant bookings, you look at Red Book index of retail sales, you look at concert attendance, all these kind of anecdotal stuff points to an economy that’s that’s doing just fine. So I legitimately do not know what the Fed is seeing, other than this massive pressure, you know, basically the market’s been, you know, I’ve been almost bullying the fed into carrying by 50 and, you know, contrary to prior instances, what happened, the Fed seems to have, you know, given it, yeah,
Maggie Lake 33:15
so if we look at, and I want to dig into a little bit more about, sort of, you know, what people should be thinking about when it comes to this, and maybe some of the sort of narratives to challenge that we hear out there. But when we look at the reaction, stocks are rallying, so if there’s no recession and the Fed’s now, you know, lowered interest rates, positive for risk assets, positive for US equities, yeah, of
Vincent Deluard 33:41
course, I mean by DJs buy, you know, the
Maggie Lake 33:46
DJ degenerating everybody.
Vincent Deluard 33:48
We have 3% inflation. And, you know, 6% nominal, 3% of the growth, and the Fed is cutting by 50. I mean, of course, by by everything, guys, it’s the Fed put, but with a strike price that’s like, way above anything that made sense before. And I would also look at gold. I mean, gold, you know, yeah, gold is at, what, 2600 on the day. Yeah, it’s almost got 2600 Yeah. But yeah, we have a, you know, fat cutting by by 50 bibs, when, the market is an all time high, and, you know, the non permanent rate is basically 50 Euro low, and inflation is one and a half percent above targets. So, yeah, I would definitely be a buyer of anything that represents a real claim against the economy, because this is very positive for nominal growth, I would guess
Maggie Lake 34:40
so. Because, you know, there are people who are looking, who’ve been, we’ve been coming into this thinking, we saw the wobbles now. We’re sitting near record highs again for equities, but we saw those wobbles in the summer. There’s been so much talk about the AI bubble bursting and people needing to get more conservative. There’s so much volatility. We’re, you know, season. In a tough time for markets, but this seems like it just opened the gates for the bull.
Vincent Deluard 35:07
I mean, there’s only 12 days left in September, right? So better, better get that bear market going soon.
Maggie Lake 35:15
Well, with this as a backdrop, it doesn’t seem like it. So okay, maybe for those who were worried about their equity position, this is, this is good news. What about if that? If it is the case, we’re looking at Treasury, yields look like they’re rising a little bit. What does that mean for bonds, if it’s good for stocks? Is it? Is it bad for bonds?
Vincent Deluard 35:40
I mean, I think it argues for, you know, steeper curves, right? I mean, you’re going to cut, you’re going to get the short end more than people thought. And then I think the long end needs to start pricing these kind of hyper reactive fed and the risk that, you know, growth and especially inflation increase. So if you were to think like, you know, the cats were going to come later, and then you kind of front load them, I make sense for the curve to be steeper and, yes, along and to the long rates to increase on the on the day. I mean, is that? What has been going on today? It looks
Maggie Lake 36:17
like an, you know, listen, we’re all getting this like that. You look on, look on your I’m looking on my Bloomberg right now, yeah, because where are we? Things are going to move quickly. So it
Vincent Deluard 36:27
fell, it fell on the news, and then bounced back. Now it’s still like 3.6 I mean, which is still, you know, if you think about an insanely low level for the for the 10 year one, again, you have real GDP growth for 3% for four quarters. Now inflation still, you know, some segments of inflation re accelerating if you get shelter, if you get core services, and you have a very easy fed and the chance that fiscal policy becomes even more commodity after the after the election, yeah. I mean, I would be max bearish on duration at this point. Is
Maggie Lake 37:03
there a risk of hyperinflation? So I know you’ve been concerned about inflation, and in your report, you talk about some things that you see as an indication that we haven’t tamed inflation, because if the Fed’s cutting 50, they’re basically saying like, we won the fight against inflation, right? But not so fast. Is that a risk that we could see a return to inflation? Maybe not hyperinflation,
Vincent Deluard 37:29
you know? So there’s, I recommend you guys. Steve hunker, I think, is the economist that’s a specialist, and he has this amazing table of case of hybrid. So he has this Hyperinflation is something that has a clear definition, if I think it’s a monthly rate, think it’s a monthly rate of inflation of about 50% for more than 28 days. So we’re talking like, you know, I’m not even sure that Venezuela qualifies here. Yeah, this is an extreme. We’re talking like, you know, Zimbabwe or Weimar Republic or Hungary 19. So I am not forecasting,
Maggie Lake 38:01
to be clear.
38:03
I mean, you know, price are comfortable
Maggie Lake 38:05
saying that you’re a bit of an inflationista, yes, yes. What
Vincent Deluard 38:10
I see happening is a reset of inflation to, you know, four by and I would argue we’re already there, that that was the point of Mario haircut. You know, it’s been four years now that we’ve had, you know, hairdressers making four or five or at least, I don’t know the hair addresses are making more, but certainly the customer haircut has been going up for for four and a half 5% for four years. Now, if you got more services, we already live in that world. I mean, the last sub 2% print was, what, February of 2021,
Maggie Lake 38:37
and that’s services. And when he’s talking about services, and this is why the haircutters are great. We’re having some fun with it, but it is really important, because a lot of our economy is based on services. And yes, totally all of us know that if you’ve gone out to eat, if you’ve tried to travel, all of the things that we do fall into the services category. And so while manufacturing has been weak, and you and many others have pointed this out, we have sort of dual economy services have held up and been strong. You’re also looking at shelter, which is important in CPI. We you had a chart I think we can pull up in in your research. Why is that something we need to be paying attention to? And you’re going to hear, you know, Owner, equivalent, rent, all these sort of fancy terms. But why does shelter matter? And what are you seeing there that worries you when it comes to inflation?
Vincent Deluard 39:23
I mean, the waste, right? I mean, it’s a 30% item in the CPI shelter. So you know, if you’re significantly above 2% on shelter, you know it’s going to be very hard to make that up with other categories, especially when you poor services at shelter at 445, percent, right? So you need intense deflation in goods and commodity prices to make up for that. Now, shelter is important, because shelter was the crux of the argument of the deflation risk recession is was that the way the Fed measures shelter costs for the BLS and then feeds into the Fed is lag, right? They have this, this survey where you ask people, How much do you think you would rent your house? Us for, and then the panel of rents that they use goes over slowly, so you’re lagging. And the idea was that the Fed started hiking to two years ago, we had a falling, actually, didn’t we have a falling, right? This inflation ran. So that’s going to feed through the data, and we’re going to see lower shelter prints. So we need to look at inflation X shelter and if you did that for a couple of months, you could see that we were below 2% below 2% at shelter. Now this relied on the premise that shelter was going to drop from that plateau of four 5% had been stuck at for many years now to something like 2% and we saw that in June. For one month, shelter was at 2.1 or 2.2% on its basis. But for the past month, July and August, we bounce back up and now above that plateau of 5% My view is that June was the odd month that was the problem, because if you look at at the end of the day, how do you set up the cost of a rent, right? You have, like, basically three items with one is the cost of the building. Now, what do we know about real estate prices? I mean, even if the case sheet is at an all time high, you know, in all the 20 cities that go in the case, you know, you have gains of more than 2% for the past year, I think, on average, about six to 7% so the price of the building is going up. Second bucket is, how much does it cost to maintain the building? How much do you have to pay for maintenance, for electricity, for insurance, for garbage collection, things of that nature, that’s going up. We’re going back to the service story, right? You know, the cost of the hairdresser basically is the same. The cost of the maintenance guys going up by 5% so the cost of maintaining the building is going up by 5% the cost of the building itself is going up by 5% now, the third item is the margin, right? I mean, how much other landlord take? Landlords typically are not charities, especially now that we have, you know, private equity owned real estate market, so I don’t see how you can sustainably have shelter even three 4% with that. So if shelter, which is a 30% wage on the CPI, stays at four 5% and core services is reset to four 5% I mean, that’s more than 50% of your CPI at that four 5% level, sure you can be lucky. And to some extent we are lucky, right? We have these very weak energy prices. We have this record on production that’s helping. We still have a lot. We import our deflation from China. We had a strong dollar, so we had all these kind of temporary thing that really took it down and gives the Fed, indeed, some space to maybe cut but we have not solved the problem. So I would stay at obviously not hyperinflation, but a reset to an inflation rate of four or 5% seems, I mean, it’s what has happened. We just yet couple
Maggie Lake 42:49
of important questions the that I want to ask you. And as I’m looking at this, stocks are bouncing around, and we expected this to happen, because there was a lot of decision they’re up, but they sort of rallied a lot, and then they sort of came back and they rallied because they’re trying to work through a lot of the tensions that Vincent’s talking about. If it’s positive for stocks, do you expect, or would history dictate that it goes to once again? The risk assets tech, mega cap tech, is that the area and is, does that happen once again at the expense of some value stocks?
43:26
Well, I mean rotation. Could
Maggie Lake 43:28
it look different this time if it’s equities?
Vincent Deluard 43:32
I think we’ve tried way too hard to placate narratives on on tech and the relation between tech and interest rate. It’s a complex one. If you go by like, you know, CFA textbook, discounted cash flow model, okay, if you earn a lot of your cash flows in the in the far future, which is not by the not true for all tech, right? I mean, meta, for example, gets a lot of cash flow today. It’s not that clear that clear that NVIDIA will be able to maintain this high growth rate, but generally, start that tech stocks like Amazon, with most of the value of Amazon, will be realized, you know, 10 years and above, as opposed to say, an old company that trades for five times cash flow. So theoretically, if you lower the discount rate, the value of these cash flows that are far out in the future is bigger today, so the long duration assets, which include tech stocks, in theory, should do better when rates are lower. Now the question is, which rates are we talking about, right? Because, but the Fed cut is the overnight rating. Seems to me that if you look at the 10 year yield, the 10 year yield is kind of flattish on the day, right? So you have to look at 10 year or the 30 year to make that calculation in proper term. The reason I could discover us before I started this is because you could basically we placated narratives. And another narrative that worked quite as well was, Oh, these guys are out of cash, right? Apple famously sits on 200 billion cash. So when the Fed was. Raises rates, they actually make money. I mean, Apple is the money market from these guys as a phone company. So I think the reality is that, Hey, big Tech’s large cap stocks have gone up like crazy for, you know, five years now and then, we’ve just tried to justify this with, oh, that’s because of the interest rate channel, or that’s because of the duration channel. But I’m not sure that the two are unnecessarily related. If anything, I would think that lower rates probably help more small caps, because most small caps have more debt. Some of that debt is more kind of short term oriented. The ability for them to refinance a lower rate probably matters more than for an apple, which is a 250 year, 50 year debt, and that has more cash, and they know what to do with so they’re not, they don’t get, you know, the business is not impacted by what the Fed did today and
Andrew Brill 45:50
well, Atchison, author of the crypto is macro newsletter, joined speak up with Anthony Scaramucci this week and described her eureka moment and why she got into cryptocurrency As an investor. She also explained the impact of interest rates today compared with 40 years ago. She and Anthony also spoke about how much influence politicians really have on the economy, fiscal and monetary policies.
Anthony Scaramucci 46:16
What was your eureka moment?
Noelle Acheson 46:19
You’ve met Hal Finney. I didn’t know that. That is absolutely awesome. I mean, talk about an OG. I mean, you are now the OG. Because of that, my eureka moment was that the technology not
Anthony Scaramucci 46:27
though I want to interrupt you, I got into Bitcoin at 2020 I wasn’t smart enough. You were in the room. You were in the room. Understood it better. But unfortunately, I was an old geezer, and I was institutionalized, and not just a mental institution. No, I’m talking about being not just institutional investor. And so I missed one of the great, transformational things that are happening this century. But go ahead, it’s
Noelle Acheson 46:52
really hard. I mean, and you and I talk probably every single day to traditional investors, who will tell you it’s never going to work, or it’s just a risk asset. It’s not a I mean this, it’s hard to get out of that. I’ll give you a personal anecdote. I’m married to a traditional investment strategist, and it took me a year of dinner table debates to finally get him to finally get the Satoshi to drop, as it were. And of course, now he’s he’s all in that when they were along the lines of, yeah, but what backs it and yeah, but what backs the dollar anyway? Went round and round, and that eventually came through. But you were asking what I saw in it, it was the technology. I didn’t rest until I understood how the technology worked. Because we’ve all heard so many times, and I’m sure you probably thought this when you were talking to Hal back in the day, decentralized, yeah, right. Seeing that before know about the E cash and it’s, it’s centralized somewhere, right? Because pure decentralization is just not possible. And this is a humbling reminder that what we think today is just not possible may well be possible one day. And I studied the code, I made sure I understood how it worked, and I realized that whole Yes, decentralization is actually possible. With this way, we have a way for the network to pay itself. That was always the point of vulnerability before and of course, permissionless payments not really practical when people aren’t familiar with technology in the first place. I mean, permissionless payments actually need rails to move on. People need to be familiar with the concept. And in many cash heavy societies, especially in the Global South, that’s not really practical. So the more I researched this, the more I realized that permission payments, okay, there’s a lot of barriers here, but what I was actually looking at, and this is where I got another set of goosebumps, was a new type of marketplace. And marketplaces, again, just the ability to spin up marketplaces pretty much anywhere in the world, that is in itself very powerful, because marketplaces are a force not just of redistribution, not just of price discovery, but in theory, markets should be a force for freedom, and we can agree that they’ve grown up gated and therefore they’re not really fulfilling their potential. What would
Anthony Scaramucci 48:56
you say the impact is of interest rates today? Is it the same as it was 40 years ago. Are there other macro things that are happening in the market place? There’s there’s lots of technology that we have today, which is disinflationary. I know we’ve had a spasm of inflation here, but I think most people would agree that was related to the covid 19 pandemic and some of the monetary and fiscal policy that got imposed globally. But what are your thoughts on where we are with inflation? What are your thoughts on interest rates and how important is Federal Reserve movements one way or the other? That
Noelle Acheson 49:32
is such a fascinating question, such a deep question, and such a such a good question to be asking now, because things are changing on pretty much all of those fronts. One of the my favorite sayings, which is incredibly annoying to anyone who will listen to me, is everything’s relative and interest rates are the financial gravitas when there’s just not a lot of other competing forces for attention and. Me, and now that we have discovered, Anthony, that deficits don’t matter, and yes, I’m being somewhat ironic here, but yes, now that we have discovered that deficits don’t matter, do interest rates still matter, we have now embarked on an easing cycle. And is this really going to provide the liquidity stimulus that the market seems to be expecting when the tightening cycle didn’t tighten market liquidity at all. Financial conditions, according to the Chicago fed, even before we entered the easing cycle, they were as loose as before the tightening cycle started. So we can argue that the monetary policy is not having the impact it might have once had, now that we have discovered that people actually don’t really want to talk about the deficit anymore. Have you heard any of the candidates mention it? Yeah,
Anthony Scaramucci 50:53
it’s interesting. Yeah, no, I think, yeah, I know. I mean, I think this is one of the things. I mean, I’m going to get to the debt crisis in a second. But yes, no, I think we’re in total agreement. And so that begs the question, then, how do you feel about things like Central Bank digital currencies?
Noelle Acheson 51:11
They are political. They are purely political, not even domestically political. They are geopolitical. In some instances, obviously, the United States is not going to have a retail central bank digital currency, because that’s a political third rail. Europe will have a retail central bank digital currency, but no one’s going to use it. China already has one, and they will do whatever it takes to make sure people use it. This is a very interesting example. Actually, China has one. It’s got several pilots. It’s rolling them out. It’s had a big jump in transaction value as well. But we don’t really know who’s using that and why China has been struggling to get adoption. It’s try paying public workers in the central bank digital currency. They immediately convert it at the bank. So no one really wants to hold this. And if China, if China can’t get the use case going, then then, really, who can? But it does become a geopolitical tool. And obviously China does have other intention, other other goals. Perhaps in mind, I should say that with the cbdc, Europe’s goals in getting the retail cbdc off the ground, well, it just feels it needs to, to remain relevant. They actually have said this, that European Central Bank officials have said, Yeah, we just need to remain relevant. And for the United States, obviously, different equation whatsoever. India is struggling. Thailand has a source of cbdc. It’s not really one. It’s wholesale cbdc. Now that’s the geopolitical tool that is super interesting. What’s going on there? There are very few central banks that aren’t experimenting with wholesale CBDCs and the connections that they can trigger. And especially at a time where the United States is increasingly weaponizing the dollar, there are many nation states that are scrambling to find an alternative.
Anthony Scaramucci 52:52
Do politicians matter? Love that question.
Noelle Acheson 52:56
Yes. They really, really do they matter, not just for economic expectations setting, and we’ve seen a lot of that in the US presidential campaign so far. They matter for you. Economics, expectations setting, they also matter for just how much a population can be inspired to withstand discomfort in times of adjustment. I mean, a case in point is Argentina. I mean to vote in a government that has said, I am slashing budgets and there will be a lot of pain to vote them in. One, says a how, how bad things got, and God forbid that any of the the economies that we live in should get that bad. But it says how bad things got that they were voting for pain. But two, they did so because of the force of personality, because of the hope one particular politician delivered. And I’m not again, I’m not necessarily singing these praises here. There have been, you know, many unfortunate side effects of this, but still, we can look that as a case in point of why politicians do matter. Because if not, people are going to continue to vote for convenience, they’re going to continue to vote for yes, just give me more money. This worries me a lot about and again, this is slightly off topic, but it does tie in slightly to what you brought in about the central bank digital currencies, and that’s the idea of universal basic income that is starting to get some traction, again, in some circles. And again, who would not vote for free money? Yes, please give me more free money. But then how do you vote that party out?
Anthony Scaramucci 54:23
You know? You know, it’s an interesting thing, you know. And I would say policy matters right, and tax policy matters right? They they limited the state and local income tax deductions in the United States and the blue states that have heavy safety nets. A lot of people said, Okay, well, I’m going to migrate to a lower tax state. We had half a million people leave New York. So policy, people, politicians, they matter, right? Do you think
Noelle Acheson 54:50
that tax is political, or is it also influenced by other factors?
Anthony Scaramucci 54:58
It’s a good question. I have. To think about that. So, you know, I, I’m gonna, I’m gonna say that the big driver for me, and again, I could be wrong, and maybe this is me being a businessman and business centric, but the big driver for me is tax policy. I think tax policy is the central root of all policy, because people will move their behavior pursuant to taxes. And said differently, I live here in New York, so if I make $1.52 goes to my government. That would include Kathy oakle and Joe Biden. 48 cents goes to the Scaramucci family. So I’m a minority partner of my own life, my majority partner are the politicians as a result of tax policy, and so some of my friends have said, I don’t really like that. I’d like to be a majority partner. And they’ve moved down to Florida, where it’s now 6040 so that’s a
Noelle Acheson 55:54
really interesting way of looking at it. And I hadn’t thought of that’s really interesting. But then the more people that do that, that also changes Florida’s economics, which might, in the end, end up impacting its tax policy. Oh,
Anthony Scaramucci 56:05
yeah, no, they’re going to turn Florida Blue, because people are going it’ll lead to more economic growth. It’ll lead to more poor people. See, people forget this. Why do you have these high tax states in the port cities? We a lot of poor people show up at the port, and you need a safety net. And one of the big economic achievements for the United States is the great immigration story. Here we have very poor people that can show up here, Sergey Brin. He’s a refugee from Eastern Europe. He goes on to be worth 100 plus billion dollars. Develops Google alongside of Larry Page, and we can name hundreds and hundreds of people, Andrew Carnegie, throughout the course of economic history in the United States that come penniless and go on to be quite rich. But in these port cities, they’re blue for a reason. They they they are teaming with poor people, and sometimes poor people need a little lift or a little help to get, get to the starting block in in the country’s capitalism and so, so, you know, I thought it was a mistake to reduce or limit that state and local income tax could because what people tend to forget is the economics the port cities like New York, Boston, Philadelphia, San Francisco, etc. They’re the economic engine for the country, okay? And they percolate all of the economic activity in an innovation throughout the country. I’m not saying you can’t have economic innovation in the center of the country, but just study, study the country, you know? And that’s how it’s by and large, been so but hey, listen, you know? What do I know? Tax, to me, is the central policy. You get the taxes right and you motivate people through the right incentives, you can create a lot of economic growth. That
Noelle Acheson 57:48
is interesting. Do you think it’s changed in the US? I’m asking you questions here, but I’m interested. Do you think it’s changed in the US over the decades? The importance of tax policy?
Anthony Scaramucci 57:57
Well, I think, I think the way they taxes change, you know, I think it started out is that, you know, we’re going to tax you, and this is literally a bill for services. Your tax represents a bill for services, and now it’s like, we’re going to tax you, and it may or may not be a bill for services, but it’s going to be policy. It’s going to be political policy. We’re going to tax you in a way that’s going to foment or create political policy. So if we don’t want a big corporation like Amazon in Long Island City, well then we’ll make sure the taxes are such that they won’t be able to arrive in Long Island City, even though that would have created an unbelievable amount of jobs in the city of New York, there was a group of progressives or socialists. They didn’t want that, that that big business here, they want the business to benefit from those tax breaks, and so they spited themselves by not allowing for that business. So, so listen, I mean, you know, there’s, I don’t know, I think it become very political with the tax policy. It’s no longer a bill for services.
Andrew Brill 59:00
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