#1049 Darius Dale On How The Fed Is Losing The War With Inflation

Darius Dale is the Founder & CEO of 42 Macro, the leading macro risk manager adviser. In this conversation, we discuss the macro economy, 9.1% inflation rate in the United States, why Inflation does not appear to be subsiding any time soon, and how can we get out of this current economic crises. Darius joins us every Thursday on "The Best Business Show." To see the video with the corresponding charts that Darius references throughout the interview, go to "The Best Business Show: LIVE" YouTube Channel ======================= BCB Group is the leading payment services partner for the digital assets industry. BCB Group provides payment services in 30+ currencies, FX, cryptocurrency liquidity, digital asset custody and BLINC, which is BCB’s free, instant settlements network for the BCB client ecosystem. Find out more by visiting bcbgroup.com/pomp ======================= Exodus is leading the world out of the traditional financial system by building beautiful and user-friendly blockchain products. With its focus on design and user experience, Exodus has become one of the most popular and loved cryptocurrency apps. It’s supported on both desktop and mobile, allowing you to sync your wallet across multiple devices so you can have access to your funds anywhere. You can instantly exchange around 100 different cryptocurrencies straight from your wallet. Interactive charts let you view an asset’s price history and your portfolio’s performance over time. And maybe the best part, Exodus is integrated with the Trezor hardware wallet - making advanced security easy for everyone. Visit exodus.com/pomp for your free download or search Exodus on the App Store or Playstore. ======================= The Pod Pro Cover by Eight Sleep is the most advanced solution on the market for thermoregulation. It pairs dynamic cooling and heating with biometric tracking. Go to https://www.eightsleep.com/Pomp to check out the Pod Pro Cover and save $150 at checkout. Eight Sleep currently ships within the USA, Canada, and the UK. =======================

• 0:02Speaker 00

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Darius Dale is the founder and CEO of 42 Macro, the leading macro risk management advisor. In this conversation, we talk about what's going on in the macro economy, what's happening in the financial markets, how Darius is looking at various metrics, and also what you at home should be thinking about as you invest your capital. I really enjoyed this conversation with Darius, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. This episode is brought to you by BCB Group. With a dedicated focus on institutional payment services, BCB Group provides business banking, cryptocurrency, and foreign exchange market liquidity for many of the world's largest crypto-engaged financial institutions.

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• 3:00Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 3:24Speaker 00

  Darius Dale, how are you, my friend? What's up, bud? How you doing today? I'm doing pretty well, minus the 9.1% inflation that they are dealing with in the United States of America. Well, it's actually 11% if you look at it on a three-month annualized basis, but who's counting? Woo! Let's start there. 9.1% is the June 2022 CPI data. You say 11%. Explain the difference. Yeah, so if you look at it on a year-over-year rate of change basis, so like June of 2022, taking the percentage change from June of 21, you'd get wind up at 9.1%. But the more concerning issue is that we continue to accelerate on a trending basis. So looking at on a three-month annualized percentage change basis, we actually came in at 10.6%.

• 4:09Speaker 00

  So the time series continues to move away from the Fed's target, pushing us into a direction of more and more tightening. This report was a disaster across the board from the perspective of anybody who is anticipating on inflation, A, returning back towards chin on any reasonable timeframe, or B, anticipating a sort of what we've been talking about on the program or federal Ambulance sirens anytime soon. So when you see that, why do they use the 9.1%? The 12-month year-over-year versus the three-month annualized? Is it because the 12-month looks better? Or is there some other argument? Well, no, that so it's traditionally how you want to calculate in a sort of time series for the most part, you know, particularly inflation.

• 4:53Speaker 00

  You want to look at it on a 12-year-over-year basis, you know, kind of take moves, removes all the seasonality that tends to be associated with different cycles in the economy, housing, consumer cycles, et cetera, et cetera. And so that's the cleanest read on a time series, you know, something like inflation. The problem is for COVID, we've had so many fits and starts as it relates to the different variants and the proliferation therein that it's been the time series on a year-over-year rate of change basis has been noisy. And to a degree, these inflation statistics are being flattered by some of the sort of advent of Delta that we saw, kind of the beginning of Delta that we saw in the summer of last year. But again, that's not the issue. The issue is that it actually is accelerating sequentially now. If you look at it over the last three months and annualize that percentage change, inflation

• 5:36Speaker 00

  on a headline basis is coming in at 10.6%. That's the fastest number we've seen in a few months. But more importantly, things like core inflation re-accelerating to, you know, where we had a 6. or 7.7% on a three-month annualized basis. And my two favorite statistics, something we've been talking about literally all year on the program, are median CPI and sticky CPI. So median CPI, what's the rate of change of all the different, different components of the entire CPI basket? There's hundreds of components. That is accelerating to 7.4% on a three-month annualized basis, which means the median three-month annualized rate of change of every single thing in the inflation basket is growing at a rate of 7.4%.

• 6:18Speaker 00

  And then if you look at isolate the variables that are most sticky, that tend to have, that tend to be less responsive to changes in the economy that tend to have prices move in a much more auto-correlated gradual fashion. That is running at 7.6% on a three-month annualized basis. That is a 40-year. High for that particular time series. When you start to look at this, we saw the Federal Reserve in November and December talk tough. In 2022, they started to raise interest rates and they've gotten more and more aggressive. They claim that they're going to do quantitative tightening and start selling assets off their balance sheet. While they're doing that and interest rates are going up, inflation is accelerating as well, both on a year-over-year basis, but also this three-month annualized basis. Why is that happening?

• 7:01Speaker 00

  And does this mean in July, we're just getting a big fat 1% interest rate hike? And they're going to try to bring the big boy weapons to the war now? Yeah, so I mean, I think one thing that's, so yeah, to answer your question, I think 100 basis points of a rate hike is very much on the table for the Fed's July 27th FOMC meeting. I think the bigger issue is, do they stay at this pace, right? Because right now, the Fed is operating currently under a framework that says our star, the neutral rate of the neutral interest rate, the interest rate that, you know, sort of the pause of the economy to neither accelerate nor decelerate, is somewhere around 2.5%. At least that's what Powell said their estimates were, the committee's estimates were going back to last, that last FOMC meeting on June 15th.

• 7:47Speaker 00

  We might start to get to a process whereby the Fed, looking at the data is sort of saying, hey, look, our policy is being really ineffective in terms of moving the needle on inflation. Maybe we have to revise up our expectations of our star. And then we actually have to start speeding up the pace of tightening. That's something, certainly something that has not happened yet and very much could happen if inflation continues to surprise the upside in the coming months. You've got a couple of charts here. The first is US headline CPI, energy and agriculture can't crash fast enough. Explain why you think that. Yeah, so we've seen, so commodity prices, if you look at industrial metals, energy, agricultural prices, energy prices, et cetera, are really starting to decline.

• 8:28Speaker 00

  I mean, if you look at it on an index basis, you know, industrial metals are off somewhere around 30% off their highs. Agricultural and energy around 20-plus percent off their highs. But as you can see in the food and energy price inflation, you know, we accelerated to 12.2% on food. Declined to thirty five percent on a three month annualized basis for energy, but obviously thirty five percent is not a reasonable number if you're trying to get inflation under control. And that's my point is that it's going to take time for the moves in commodity markets to be reflected in inflation statistics. It could take several months. Before those kinds of moves are actually, you know, adequately pushing inflation statistics down. So that's the first chart.

• 9:07Speaker 00

  That's kind of the first key takeaway there. It's that we might have to go through some more pain over a number of months before we actually see those declines reflected in the statistics. When you look at this next chart that we have here, you've got that both goods and service prices are melting up. Explain this. Yeah, so this is goes back to something we talked about this winter. We were like, hey, look, there's the goods disinflation is likely to become the driver of core CPI. For a moment there, it was causing core CPI to slow because we saw sort of the unwind of supply chain disruptions. We saw sort of consumer shift their purchasing, the dominance of the purchasing from goods to services. That's something that's happened on the first half of this year as well.

• 9:46Speaker 00

  If you look at the sort of the rate of change between goods and services, about a nine to ten, about a thousand basis points of a difference between the growth rate of services consumption and the growth rate of goods consumption. So that caused for a brief moment in time, core inflationary pressures to back off because goods was moving down faster than services was going up. Well, now you got both of them going up simultaneously. If you look at again, I mentioned goods, core goods inflation was at six point six percent, core services inflation at eight point two percent. You know, those two numbers are moving away from the actual year over year time series, which tells you that we're still building momentum to the upside in core inflationary pressures. And this is exactly what you would expect. Inflation is a lagging indicator to the broader economic cycle.

• 10:29Speaker 00

  And you typically see core inflationary pressures peter out last as you head into.

• 10:35Speaker 00

  And sort of middle parts of a recession. You've got leading indicators are rocketing past the moon, which is just an all time title for a slide. What is this saying? Thank you. Just to borrow some crypto mingles, let the kids know that I'm still hip. Anyway, so what we're showing here in this chart is I mentioned the first set of bars. The gray, by the way, to explain these bars, the three, the gray bar just shows the prior months, three month annualized rate of change and the blue bar is the most recent months of June. As you can see, we're moving in the wrong direction. If we're trying to get core PCE down, right? Median CPI, again, the median of everything in the inflation basket is now accelerating at a three point or at a seven, seven point four percent annualized rate of change.

• 11:16Speaker 00

  It's the highest three month rate of change, annualized rate of change we've ever seen in median CPI as time series goes back to the early eighties. If you look at it, the Atlanta Fed's got a sticky CPI, as I mentioned earlier, that that basket is accelerating at seven point six percent. On a three month annualized basis, the fastest period we've seen since August of nineteen eighty two. Neither you, nor I, nor John were born in August of nineteen eighty two. So the Fed's got a real serious inflation problem on their hands. And what I mean by that is that those two time series are very highly correlated to the third set of bars, which is core PCE. Which is the Fed's preferred inflation metric. So that's obviously an issue. When you look at this last one, overheating by double, what does this show us?

• 11:56Speaker 00

  Yeah, so this goes back to why I believe the Fed is very likely to remain very aggressive. They're the likely, the sort of the, there's a distribution of policy outcomes, right? The market is always pricing in some probability of X, Y, Z happening across the curve. You know, twenty five basis point hike, fifty basis point hike, seventy five basis point hike. Now we're having a legitimate discussion about a hundred basis point hike, which I'm not sure has ever happened in the US. Maybe it has, but certainly not in recent, in recent years. Probably Paul Volcker, I would imagine, gave us quite a few of those. But anyway, so when the Fed looks at the economy, it looks at the economy through two lens. It looks at everything through three lens. One, financial stability, that's kind of taking a backseat for now. Number two, the inflation, that's obviously the dominant driver of policy and has been and will likely continue to be

• 12:42Speaker 00

  the dominant driver of Fed policy for the medium term. But then there's Also the labor market. And so when the Fed looks at the labor market, they see a labor market that is truly and realistically overheating by a double. And what I mean by that, if unpacking this chart, the light blue bar show the sort of the, the, the trend annual three month annualized rate of change in the 2015, in the five years that ended 2019. So it's sort of like, hey, how do we trend it just, you know, across, you know, multiple years and, and, and cycles and swings in the economy? What's sort of the baseline rate of change? That's the blue bars and this, the gray bars just show the previous month and then the dark blue bars show um the most recent month. And as you can see from a private payrolls perspective, that's private employment, uh total, total, uh total non-farm payrolls in the private sector.

• 13:26Speaker 00

  You know, we're growing at a basically double the rate that we've grew at in the, in the um, in the, in the pre-crisis, uh in the pre-pandemic uh trend. Um, if you look at the second clustering of bars, which is average hourly earnings, you know, that, that three month annualized rate of change, the dark blue bars double what we're seeing uh relative to the light blue bar, which again was our baseline trend baseline prior to the pandemic. And then you take your eyes over to the far set of bars, uh which is kind of the real kind of tiki takeaway that tells the Fed they need to keep their foot very much firmly pressed on the brake here. Um, if you look at private uh sort of aggregate income growth for the private sector, when you productize all those three uh different uh different variables between uh total payroll employment, average hourly earnings and average hours worked.

• 14:08Speaker 00

  You know, we're running at eight percent in, as it through the June uh jobs report. That's basically a double relative to where our trend rate of, of uh aggregate private sector income grew at uh in the 2015 and 2019 uh timeframe. So in our estimation, the Federal Reserve, the, the thousands of wonky PhD economists who are doing research just like we are doing, are looking at the labor market and saying it's giving them like four thumbs up. Uh, you know, it's the Rick James, like I wish I had more hands. They're getting four thumbs up to keep hiking rates, to keep doing very aggressive quantitative tightening until they are confirmed that they have broken something and they have not confirmed they've broken anything yet. We've seen people like Jamie Dimon and JP Morgan. They continue to say, hey, there's a very complex situation at play, very unprecedented.

• 14:53Speaker 00

  Uh, we don't know what's going to happen. They pause share buybacks. Uh, they are also kind of uh strengthening their balance sheet in preparation for potentially uh more issues in their loan book. Uh, but at the same time, we see the Morgan Stanley CEO saying that a deep and severe recession is Unlikely in the United States. What do you think most of the major players? These people have so much information at their fingertips. They have these massive, you know, teams of analysts. Why are they so confident or seem to be so sure that we aren't going to head to very, very bad economic times? Given the aggressiveness that it appears the Fed is going to have to pursue in interest rate hikes to get this inflation down? Well, let's, let's be honest here, right? Like Jamie Dimon is the head of a major, a major US bank, major multinational corporation.

• 15:38Speaker 00

  You know, he's not going to go out and spook all of his clients and tell them to do very, you know, aggressive things like withdraw capital, et cetera, et cetera. And basically shut down the financial sector. So he's not incentivized to tell people how bad it's likely to be. And quite frankly, I'm not sure he knows, right? At the end of the day, I don't think anyone knows the real depth and magnitude of the recession we're likely to enter at some point over the medium term. Because the reality is, you know, a lot, a lot of nonlinear things tend to happen in recession that either make it better or worse. Right? Like what if we're in recession in Q4 and then Russia decides to cut off all the gas to Europe? Europe goes into a great depression and makes our terms of trade significantly worse. And obviously corporate earnings, et cetera, get significantly worse. Or, you know, what if China has a banking crisis, which is something that's making the rumors and rounds in recent days?

• 16:22Speaker 00

  You know, there's a lot of things that happen when growth is slowing and liquidity is tightening. And so the reality is, I don't think anyone truly knows. But going back to the Fed, the Fed wants a mild recession. They won't tell you that, but we've done a tremendous amount of work. I think as much work as anybody I've seen in terms of quantifying the impact of recessions on things like labor, corporate profits, the market itself. And more importantly, inflation. And when you look at it from an inflation perspective, it's not really clear that there is a, you know, statistically significant relationship between the size of recessions and the drawdown we typically see in the Fed's preferred inflation metric, which is core PCE inflation. And so the Fed, but the one thing we do know is that you do need to get a recession to, to experience a drawdown of some sort.

• 17:06Speaker 00

  And the reality is, I think the Fed is well aware of that. Again, if I can sit in here, just a guy in a room and figure that out, certainly the thousands of PEG economists at the Federal Reserve can figure that out as well. And so ultimately, again, they're not going to tell you they'd like a mild recession, but the reality They're not going to get inflation down without it. We recently saw Vladimir Putin, he was in like a meeting and he was talking about essentially claiming checkmate on the global economy. And he was saying that when Russia invaded Ukraine, that was the end of the US dollar dominance on a global basis. And we now are headed towards a multipolar world. And I'm always careful to point out, I don't agree with most of what he's probably done.

• 17:50Speaker 00

  And I no way do I want to seem supportive of that specific individual or his actions. But I do think that time and again, he has continued to talk about the macro economy in a way that appears to be more honest or a different viewpoint than what we hear in the mainstream media in the United States of America. And so his argument was the financial sanctions proved to the world that you have to be friends with the US in order to continue to be using the US dollar system. Right? Or they could kick you out, freeze you, take your foreign reserves, all this stuff. How much do the sanctions specifically play into the inflation that we're seeing? Cause we're now a couple of months after, right?

• 18:30Speaker 00

  There was this talk, maybe back in like March, I think, is when we first heard the Biden administration say, you know, Putin gas hike and the sanctions and kind of the actions. But they had only invaded in like the end of February. So it was unlikely that you were really going to get kind of price impact for something that was only existed for two weeks. Now we're three, four, five months later. It feels like now actually there could be price impact. But I don't know how to think about that. Like, how do you think through sanctions, geopolitical conflict, and then like we have this super high inflation? How do you unpack how much of it is contributing to the inflation? Ooh, that's a loaded question, my friend. So I'll try to address the various components.

• 19:13Speaker 00

  So you talked about sanctions, like one, I think you and I spoke about this in recent episodes, which is, you know, when you go back and look at where inflation was in January of 22, you know, prior to Russia crossing one border, Ukraine, you know, we were at 7.5% and now we're at 7, 6, or 9.1% again, year over year. For the month of June. So if you assume Russia added all that inflation, you know, maybe they've added, you know, let's call it 260 basis points of inflation. That's, oh, sorry, 160 basis points of inflation. That's, that's, that's, that's, obviously, Russia has not caused all that inflation. So there very clearly is a legitimate inflation problem in the US economy. Again, we just spent five minutes talking about how the labor market is overheating by a double that is generating a, for lack of a better word, a crap ton of inflation

• 19:58Speaker 00

  domestically, and that's further supported by core services inflation being at 8%. Russia has very little to do with our services inflation, our housing bubble that the Fed and the fiscal government more effectively created in a pandemic era. But going back to the sort of, you know, the specific impact of inflations, I think it's really difficult to sort of draw a one to one, like, well, these are very dynamic, like, impossible to model ecosystems, right? Like, one, it's almost like the butterfly, like, it's to some degree, but one thing we can sort of do is sort of a cross-sexual analysis to sort of understand kind of the relative impact of something like sanctions, right? We'll never be able to know what the actual true basis point amount of sanctions are, but we can look at something like the spread between US inflation relative to the rest of the world's inflation.

• 20:43Speaker 00

  And right now, if you factor in the most recent print, we're somewhere around, you know, 160, 170 basis points higher than the rest of the world's developed world, the Western world's inflation rates. That's in the 95th percentile of all readings going back as far back as we can get the data, you know, you know, 50, 60, 70 years. And so it's telling you that there are inflationary pressures in the US economy that are very much separate and apart from things like sanctions, et cetera, which are obviously impacting everyone at the same time. John, what questions you have? Darius, I'm curious about, like, we're obviously heading into unprecedented times. No one really knows what's going on. What are people doing with liquidity? Are people storing dry powder? And then how do you measure how much liquidity is being? Dried up or in the market currently? Yeah, great question, John. It's good to see you, man.

• 21:27Speaker 00

  Um, so you to to answer your question, yes, we are seeing uh some storing of dry powder, but it's not necessarily um as a function of of of investment decision making, right? The federal government through six and a half, let's call it six and a half trillion dollars into the economy uh through stimulus checks, PPP, et cetera, et cetera. And so we saw a dramatic uptick uh in the share uh in the ratio of of sort of a household cash and checkable deposits. So basically cash uh as a percent of overall net worth that went from basically like one percent to three percent. So households are much more capitalized from a a cash perspective, liquidity perspective than they have been in recent cycles. But the reality is, um, if you look at, you know, still with the the the share of ownership

• 22:10Speaker 00

  for things like, you know, stocks, et cetera, and more risky assets, those are coming off all time highs. What's suffered in that relationship in that basket has obviously been the household's allocation of fixed income, which has been and continues to track at an all time low. So but that's just only one factor at one side of liquidity. I mean, that's sort of the liquidity that'll be used in the real economy and in in in, you know, the real economy. The liquidity from the perspective of the financial markets, the one that we care about the most as investors, um, if you look at sort of Federal Reserve supply liquidity or net liquidity from that uh channel, and then is also the net liquidity we it's provided from uh the uh the fiscal channel through the lens of the Treasury General Accountant. When we do the math on this, and also now when I say this,

• 22:52Speaker 00

  our math suggests we could see over nine hundred billion dollars of of net liquidity drained from now through year end. That's that's bigger than the entire drainage of net liquidity we saw in the sort of twenty one months between, you know, kind of mid seventeen and mid twenty nineteen um as a function of quantity, the previous quantitative tightening program. So we're trying to squeeze more than twenty one months of QT in through the pipe in like six months. The Fed will break something. I I I'm convinced about that. I think it's pretty clear at this point they're going to break something if they try to do that, because again, the markets don't know how to digest that remove, the size of that removal liquidity at such a such a such a truncated period of time, and it's our expectation that that's going to cause some problems uh this fall. What are the biggest?

• 23:36Speaker 00

  Losers when that happens. Go find, go, go, go to the riskiest part of the, the spectrum. Uh, if you look at the, uh, the, the spectrum of risks, you know? And those are the things that get, get destroyed. When liquidity dries up, it dries up in the fringes first. And it just keeps drying up and, and takes one asset class after another until eventually it's, it's getting close to your beloved S and P five hundred. Um, you know, so obviously we saw our friend Kathy Wood and her, um, her narratives basically got punted starting in Q one of last year. Um, and we've seen, since seen various sectors, style factors, small caps, you know, cyclical, high beta cyclicals, et cetera. Uh, within the equity market, all that stuff has taken turns in terms of peaking. I mean, you go back and look, the Nasdaq peaked in November and then finally.

• 24:20Speaker 00

  The S and P five hundred peaked in, uh, in January. And so, you know, when you talk about a reduction in liquidity. You know, what, what's really happening just from a technical standpoint, and I think this is important to explain as well. What the Fed is doing, the Fed is not selling bonds into the market. The Fed is not dumb enough to do that, at least not yet. Maybe, maybe they will. Um, but what they're really doing is saying, hey? We've been this gigantic buyer, at least on the secondary market, but we all can assume that it's basically the primary market because the Fed is controlling the primary dealers. They've been this entire gigantic buyer of U S treasuries throughout the, let's call it the last few years. Um, what they're doing is they're stepping away and forcing us as investors, as the private sector to capitalize the U S government.

• 25:03Speaker 00

  And the issue with that process is we generally run max invested as the private sector, you know, that, you know, maybe you might not be fully invested, but. Your cash is someone else's, um, you know, sort of, um, uh, your, your asset is someone else's liability. And so the reality is, is that as a federal reserve steps away to the tune of, let's call it nine hundred billion dollars over the next six months. We're going to have to capitalize that. Uh, we're going to have to roll over U S debt. We're going to have to capitalize the incremental, the debt issuance that they're doing to the tune. Of nine hundred plus billion dollars. That money's got to come from somewhere. It's going to come from, you know, it's not going to, you're not going to sell Bitcoin to buy a U S treasury bond. But you think about this as the cascading process. Price of Bitcoin goes down and the price of small caps go down, the price of S and P goes down, the price of.

• 25:46Speaker 00

  Apple credit goes down and eventually, um, people have enough liquidity, uh, that they need to capitalize the government because again, it's at the top. Of the global capital structure. It's money, it's gonna get money. Gotcha. So while we are recording this, we've got Weyler from the Fed is spouting off. And I'm just gonna read you a couple of the quotes that are pretty incredible. First, yesterday's inflation number was not a big surprise. What is your reaction to the Fed members now? I mean, what? Wait, what? We went from transitory last year to we're expecting nine, 10% inflation? That was quick. Yeah, no. I mean, look, Chris Waller and John and Jim Bullard,

• 26:30Speaker 00

  Chris Waller and Jim Bullard, both formerly of the Federal Reserve Bank of St. Louis. They probably do as much data collection and analysis as anybody out there. You know, they've been well out front in expecting higher inflation, above target inflation surprises, and thus have been well out front in leading their colleagues on the FOMC to getting, you know, leading them to the water that is higher interest rates and more quantitative tightening. So perhaps it wasn't a surprise to him because he's been sounding the alarm bell all along. Like, look, you guys need to hurry up. This is getting worse and worse and worse. The issue with it as it relates to the broader markets is that, you know, that consensus is now starting to become the modal outcome. Or sorry, that view is now becoming the consensus modal outcome amongst FOMC persistents.

• 27:12Speaker 00

  We saw Cleveland Fed's Loretta Mester talk about the effect of 100 basis point rate hike, said she wouldn't rule it out. Mary Daly, who inherited, you know, Janet Yellen's seat at the Federal Reserve Bank of San Francisco, which is traditionally a very dovish leaning branch, is also signing off. And she says she's comfortable with 100 basis point rate hike. So I think Chris Waller is effectively taking somewhat of a career victory lap, saying, hey, look, I told you so. Let's get going. A second quote is that the market pricing for 100 basis points is getting ahead of themselves. Ooh. For July. Pushing back on that. Pushing back. Okay, that is an incrementally dovish commentary relative to where we were, where we closed yesterday. And so if he's saying the market's getting ahead of itself,

• 27:57Speaker 00

  what he's effectively saying is that, hey, look, we haven't gotten the boss to sign off on this yet. You know, what typically happens, and this is my own. ...of how the process works is whenever they need to change their messaging that from C. They push whoever in who's ever the most hawkish or the most dovish out of the door. And just have them, you know, kind of cast set up a cascading series of commentary. And so perhaps the Jerome Powell is pushing Mr. Wall out of the door and say, hey, just tone it down, try to get the market to tone down this this pricing one hundred basis point rate hike. Perhaps the Fed is not comfortable with that. But ultimately, what, you know, again, whether or not we get a hundred basis points or not. Is there really any functional difference between a hundred basis point rate hike? And a seventy five basis point rate hike heading into recession?

• 28:40Speaker 00

  Are you going to go from selling risk assets to buying risk assets as they only do seventy five basis points? No, the obviously, the answer is no, we don't really truly understand. The real, you know, linear, there's no real linear impact of financial tightening on the economy. We just know when you tighten, things get worse and when you ease, things get better. That's about as good as we can do as economists, so. I'm not particularly phased by that, but I do think it's interesting relative to a Fed that seem to be very sort of acquiescent to allowing the market to move them towards incrementally hawkish policy. But I guess it looks like they're putting the line in the sand, perhaps on seventy five basis points. They're trying. Last thing is, he says that he doesn't necessarily see that the United States has to suffer a recession.

• 29:22Speaker 00

  And he believes that unemployment essentially have to explode higher in order for that to occur. Do you think that is the only metric that would have to move for the recession to happen? And do you think that he is correct in saying that we don't have to suffer a recession if they keep doing what they're doing? No, so he's dead wrong on that again. That's slide seventy three through eighty in our July macro scouting report we published that last Friday. I think we've done a lot more work than he has on the impact of recessions on inflation. And to answer his question, you have to have a recession to get inflation where they are projecting it to be by the end of next year.

• 30:03Speaker 00

  Now, the Fed has a two point seven percent core P C forecast Q four to Q four for twenty twenty three. To get from where we are at four point seven percent in the most recent month, which might be going up actually just based on this move we've seen in in core inflation. ... measures, particularly median and sticky CPI, we got to do a hell of a lot of damage to the economy, particularly the labor economy, in order for that to occur, in order to get core PC down at 2.7%. So he's dead wrong on that view. And ultimately, you know, we think the markets are going to have to be surprised by the reality that, hey, look, we need a recession in order to get inflation down. And once you get into recessionary conditions, you know, it becomes very nonlinear. As I mentioned, all sorts of things could happen that can make it either better or worse. And the reality is, we just have to be there and be humble Basians when that's occurring as investors.

• 30:48Speaker 00

  Where can we send people to find you on the internet or learn more about 42 Macro? At this point, if people aren't subscribed to 42 Macro, after you hear this just absolute incredible articulation of what's going on in the world, I don't know what you guys are doing. But where can we send people to check out more? I appreciate that that kind endorsement, my friend. So 42macro.com is our website. Come check it out. We got a bunch of sample research out there for you. Kind of check out what you might like, what you don't like, what might be helpful for you. And then if you can't afford it, that's all good. We do our Macro Minute every day for those who have smaller budgets, smaller trading, smaller size. And then definitely follow me on Twitter at 42macro D Dale. Appreciate y'all. You're killing it, man. All right. Thank you very much. We'll see you next week. Appreciate you, guys. Thank you. Later. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one.

• 31:31Speaker 00

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