MAGGIE LAKE: Is inflation slowing fast enough for the Fed? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Gordon Johnson of GLJ Research.
I always get hung up on those letters together, Gordon. But this is the first time we've done the Daily Briefing together. So welcome. It's great to see you.
GORDON JOHNSON: I'm excited to be here. Thanks for having me.
MAGGIE LAKE: So we had a pretty good-looking day for stocks. They rallied. But we also saw bond yields inching up a little ahead of that big CPI number.
I think everyone is waiting for-- where are we with inflation? What are you expecting?
GORDON JOHNSON: Yeah, so I can't say what I'm expecting.
I think that, if you look at what the tea leaves from the government officials have been, whether it be comments from Janet Yellen or comments from some of those in the Biden administration, it seems like the number's going to come slightly below expectations.
I think that's why, partially, we've seen a big rally over the past few days. But I think the Fed has a long way to go. And I think they've made that extremely clear.
And we can get into those numbers. I don't know if you're ready to get into those numbers. But we can get into those numbers if you want to.
MAGGIE LAKE: Let's do it. Yeah. This is what's tricky.
So, before we dive into some of the granular stuff, should we be looking at the number that comes in or the rate of decline? So the absolute number we're inflation sitting or how much lower it is from the reading before.
GORDON JOHNSON: Right. I think the rate of decline, the month-over-month move, I think, is what's most important. But I also think it's important to keep in mind, look, Jay Powell and team have said we're targeting 2%.
And we're going to do, quote unquote, "whatever it takes to get to 2%." And we're so far away from 2%. And people across the world are hurting so badly.
And I think that, as we enter the winter and you see Putin as it looks from a high level losing the war, I think that the rise in energy prices is going to be something that has to be felt.
I also think the lag in rent component of CPI, that lagging actual real rents, I think that's going to continue to contribute to inflation.
And we can get into wages. They're sitting at record-high levels. They leveled off over the past three months. We can get into that.
But the point is, I think that, if you look at prior periods of inflation and Jay Powell had said-- look at what Volcker did or the governor prior to him. They rose rates.
They stopped raising too early. Inflation fell. And then, it rose back up, became a monster again. And he said he wants to avoid that.
So there's a couple of statistics I want to highlight. The first one I want to highlight is, every time, if you look at prior Fed hiking cycles, every time they went into a hiking cycle, we went into recession.
And we haven't come out of recession until they began to cut rates. And they said very, very clearly that they're not looking to cut rates all of next year.
So it looks like, Indeed, what they're looking to happen is for something to break before they start cutting rates again. And we're far, far away from something breaking.
Again, we can get into the numbers. And we will.
MAGGIE LAKE: Yeah. So, if we see inflation is starting to moderate-- so your line is, it's going to moderate. But it's not enough. It's not what the Fed needs to see.
Where's the moderation going to come from? And then, where does it still look sticky? So where's the moderation come from? What are we looking at there?
GORDON JOHNSON: That's a great question. So I think the moderation, clearly, is going to come from the energy sector. In the last print, the energy sector was the 800-pound gorilla, if you will, with respect to moderation.
So I think that continued weakness in oil price is not as weak this time as they were last time but continue to be weak. Gas prices at the pump continue to be weak.
I think that's what we're going to see the moderation. The stickiness, however, I think, is going to be in services inflation, which continues to go much higher, not related at all to commodity prices, as well as that rent component of inflation and wages.
I think those are going to be the sticky components. And look, it's very clear what the Fed said they want to do. It's like, they clearly are saying the only thing we could control is demand.
So effectively, what they are looking to do is, nicely put, temper demand. But, plainly put, they're looking to break some things. They're looking for weakness in actual demand.
They're looking for credit growth to slow, wage growth to slow, for wealth to come down. And again, I want to get into these numbers.
But they're looking for all those things to moderate to hurt demand in order to bring inflation down. And again, we are not there yet.
So I think that 7.8% annual number and a flat month-over-month number, while the market may get excited about that, that is not encouraging if you're a Fed governor and/or Jay Powell or if you're a congressional member looking to get reelected.
MAGGIE LAKE: Yeah. I think it's so hard to wrap our head around that, just because we think, finally, wages are up. Why would anyone want to see wages go down when an average person has really been struggling, right?
So we've got a kind of weird setup because we know housing's turned. We've seen some pretty big drops in the housing market.
And I just read someplace like, oh, now might be the time to buy that used car because it looks like some of those pressures also are starting to come down.
Those are two things, two parts of the economy that touched a lot of people. So you can imagine that people will be feeling-- we've already seen the inflation expectations move down because of lower gas.
And so now, all of a sudden, if those used car prices go down, it could actually make the consumer feel better. And that's not going to do anything to squash demand if that's what the Fed's targeting.
GORDON JOHNSON: Right. So I want to highlight something. So, in the first 100 years of existence of the Federal Reserve, their balance sheet grew to roughly $990 billion. 100 years.
When COVID hit in 2020, in two months, their balance sheet grew by $3 trillion. That's 300 years of money printing in two months. And what that money printing did is effectively went to the intermediaries between the Fed and the real economy.
And those intermediaries, their prime dealers, essentially took that money, went out and bought a ton of assets, be it stocks, houses, and other assets.
And then, the Fed vocally told Congress to join in-- excuse my French-- their spending orgy, which Congress did to the tune of $5 trillion up until now. And you had raging inflation.
So what they did is they printed a just reckless amount of money. And then, they encouraged Congress to do the same which they did.
So I know it's easy to say, hey, wages are going up. They're going to hurt people. But Jerome Powell has said-- and if you look historically, it's true-- Inflation--
MAGGIE LAKE: I think we may have lost Gordon because he may have disconnected when he went to adjust his earbuds. We're going to try to get him back right now.
And just a reboot for those of you who are joining us. Hopefully, you can dial back in. We're talking about all of this because we have a big CPI number coming out tomorrow.
And it is something. In fact, we have a tweet-- I don't know if we can put that up-- that made us all laugh because we know that investors and traders are watching that.
But it just turns out, everybody is. This was something somebody grabbed, Joe Weisenthal grabbed from TV this morning-- "Crypto traders are still cautious ahead of CPI."
Everything right now seems to be about inflation and interest rates. So I was at the SALT Conference in New York. I think I mentioned they're holding their annual gathering.
And it was an interesting mix. Some conversations about crypto, of course, but also, especially now that they've sort of joined forces with FTX, it's an alternative investing conference.
And so, of course, there's going to be, in the alternative world, discussions about crypto digital assets. But there was a lot of conversations about macro, too, because all of this is impacting the inflation conversation.
The conversation about interest rates is affecting everything. I mean, I was in a private credit panel, listening to them have conversations. And that was one of the main talking points. It was about interest rates.
So we're at a really, really critical time right now. In fact, in one of the first kickoff panels we did, we all were listening to-- Mike Novogratz was talking with Tom Farley, who is the incoming CEO of Bullish. Mike Novogratz, head of Galaxy
And, although he is big in the crypto world now, he has a long, as Anthony Scaramucci pointed out, a very long history in the macro world. Long track record, very successful track record.
And so they were sort of discussing this environment. And he said some interesting things. Let's see if we can play a clip of that.
MIKE NOVOGRATZ: I was talking to one of my friends, who's kind of a legendary macro guy, had retired. He said, I'm coming back out of retirement because the environment's so ripe.
We're probably going into what will be 3 to 5 years of the golden age of macro. And I say that because, for the last 15 years, we've had this great moderation, low inflation, very low volatility and currencies and interest rates.
And all that's changed. We now have 8, 9% inflation. We're going to be in the midteens in the UK. You've got places like Japan that are keeping rates at 0. Or the US rates are going to 4%.
And so you've got dollar yen that's gone from 110 at the beginning of the year to 145. And I think that's going to continue.
MAGGIE LAKE: Golden era for macro. Now, that may freak a lot of people out because it doesn't seem like a golden period right now.
It seems like a really, really tough environment where, especially for anyone who's looked at their retirement accounts or their 401(k) or their crypto accounts, it's been really difficult.
A lot of people are down a lot. And we have bonds and stocks down. 60/40 portfolio's been getting killed. If you tried to go to bonds as a safe haven, that hasn't worked out.
We know everyone's been talking about the crypto winter and when that's going to be over. So it's a really difficult environment.
But I think what Mike's talking about is the fact that we are going to be in a period where asset classes are not going to just move in one direction.
We had a very, very long bull market. You just put your money in a fund. And you forgot about it. And, most likely, it went up if it was in US equities.
Anyway, this is going to be-- there's a lot of impact going on in between markets and cross markets. It's one of the reasons we launched The Academy on Real Vision.
So, if you're not sure what that comment means to you, go check it out. It gives you an overview of what that means, what macro means, as well as all the different things that you need to understand.
And, of course, Raoul's always posting. We have macro Insiders and stuff. So we got you on the macro front. But that's kind of the environment we're in right now.
Programming note, Ash and I will be at SALT all week, checking out everything in the alternative world and all the macro views.
Raoul is there, just finished up speaking with Dan Morehead, two of our favorites. So we'll have the full debrief on what they had to say as well.
So keep an eye on Twitter. We'll get that for you.
And we're going to say goodbye right now, I think. If we can get Gordon back, we'll pop back up. And we'll send you an alert that we did so.
Otherwise, Andreas is going to be back tomorrow with Tony Greer. So take care. Good luck out there.