Inflation Is Cooling, So Why Is the Fed Running Hot? | Macro Mondays

Andreas Steno and Mikkel Rosenvold are back on this Macro Monday episode to discuss why the Fed may still be overreading inflation risks; Mikkel digs into why Donald Trump ordered a pullback on military exercises in South Korea, and Andreas lays out the trades he likes right now in the current macro regime. 🔥 Get 𝗙𝗥𝗘𝗘 𝗔𝗖𝗖𝗘𝗦𝗦 to Real Vision https://rvtv.io/3YOZZUe Timestamps: 00:00 - Goldilocks Is Back? Why Growth and Inflation Are Finally Aligning 05:02 - US Consumer Strength vs Record-Low Sentiment: What’s Really Going On 10:41 - Why the Fed Could Be Wrong-Footed by Falling Inflation 13:07 - Four Reasons US Inflation Is Cooling Faster Than Expected 18:45 - Could Goldilocks Change the Midterm Election Outlook? 19:36 - Trump, South Korea, and the Growing Risk to Asia’s AI Supply Chain 22:08 - High-Bandwidth Memory, China, and the US Export-Control Problem 24:31 - Micron, Memory Stocks, and Why the AI Trade May Still Be Early 26:34 - The Best Macro Trade Now: Own Inflation Where the Fed Can’t See It 29:31 - Why a Weaker Dollar Could Unlock the Next Leg of the Rally Learn more about your ad choices. Visit podcastchoices.com/adchoices

• 0:00Speaker 00

  Sometimes maybe good, sometimes maybe shit.

• 0:21Speaker 01

  Hello out there, welcome to Real Vision, welcome to Macro Mondays. My name is Mikel Osmol, I'm your show as usual and I'm your host as usual on this show. And I'm joined, of course, by my partner in crime Andreas Steno. So Andreas, I want to get right to it, because this has been on my mind since earlier today, when you and I were in the office. We were heading out for lunch and you looked at me and said, this was back when you were actually in the office, you've obviously gone home now, I'm still in the office, but you looked at me and you said, Mikel, we're going Goldilocks. Are we going Goldilocks, Andreas?

• 0:59Speaker 02

  I think so, and I mean, the probability is clearly increasing, which is very, very odd at this stage of the business cycle. And let me just, for clarity, reiterate what Goldilocks actually means. It means that inflation is coming down while growth is recovering. It's a fairly rare mix, economically speaking, late in the cycle. But it's probably here due to a range of technicalities around inflation that we can discuss in detail on this show. But yeah, sure, I mean, we watch this on a daily basis in our Nowcasting and the probability of us entering a Goldilocks regime has risen over the past month and we're getting there. It's the second most likely regime by now.

• 1:43Speaker 02

  And it would wrong foot a lot of pundits if we get there, especially those who have banged the drum on inflation due to the Iran war over and over and over.

• 1:53Speaker 01

  Absolute interest. Speaking of Goldilocks, we have a true Goldilocks week, that's probably a bit much, but anyway, we have a great week ahead of us at the Real Vision, lots of great content. We obviously have all our usual publications on Real Vision, you need to be on ProTune to get full access, but on the AlphaTune, you can also get access to a weekly digest of our view of the world as well as some of our data points out there, including this macro regime that we're going to shift back to in just a minute. So lots of great content to find over at Real Vision, go check out your options there. But back to the show, Andreas, we'll dive much more into the outlook for the US consumer,

• 2:35Speaker 01

  what to expect there, the read on inflation and probably also cover some interesting developments in Trump's Asia policy over the past few days. And speaking of the US president, Andreas, I wanted to get your take on this, because I'm not a golfer, you're much more of a golf guy than I am, to say the least. And we had this from, I don't know who the US democratic socialists are, but anyway, I like the stat that Donald Trump has been golfing as per his public calendar, I haven't checked this, but I assume it's correct, he's been golfing for 45% of the days in his second term. This is a jab clearly at Donald Trump, but is this really bad for a president to be golfing? Is it a bit much perhaps? What's your take?

• 3:19Speaker 02

  Well, I salute it to a large extent, to be honest, you know, I'm an avid golfer, at least I played a lot of golf when I was younger. Currently, I'm trying to get my kids to find the interest in playing the game. I succeeded a lot more with my second son than with my first son. So let's see whether I get them on the golf course as often as Trump is. But having said that, you know, it's one of the best ways to have a, you know, long and informal discussion with people suffering from intensive disorders. And I sincerely think that Trump suffers from such one, which is why I've also, you know, I've always liked playing golf with business partners, clients and so on and

• 4:02Speaker 02

  so forth, because it gives you a nice natural flow in a discussion, because you also have something very concrete to talk about on a running basis, sitting next to each other in the golf buggy, right? So in that sense, I kind of get why he's doing it. And, you know, in our neck of the woods, we saw how the Finnish president managed to sneak in a business deal with the US after having played golf with Trump, right? I also think Lindsay Graham, maybe rest in peace, managed to sneak in a lot of his points to Trump during golf rounds, right? So yeah, you better start playing golf for as long as Trump is president, if you want something, if you want a word to say, if you know what I mean.

• 4:42Speaker 01

  I think this is probably the weakest criticism point you can have of Trump, but anyway, there are lots to talk about. We're not going to dive too much into that, I just thought it was a fun little one, Andreas. Let's move on to perhaps the chart of the week, one of the main charts in your weekly Steno Signals editorial here, the US consumer picture. And I'll let you introduce the author or the creator of this chart, as I know he's a good friend of yours.

• 5:08Speaker 02

  Well, yeah, he's my old boss, back from my time in the European banking system. And I think he's frankly one of the best business cycle analysts, you know, he's got a range of models based on everything that we know up until today in terms of economic key figures and how they typically pencil into everything from inflation to growth to various other cycle dynamics. One of the things that I've, you know, I've had long discussions with my old boss, his name is Michael Sarver, by the way, he's a good follow on X. I've had long discussions with him around this, because, you know, I've been a part

• 5:47Speaker 02

  of his team, like, it's almost a decade back now, time's flying, but, and a lot of these models are based on surveys. And I've found surveys to be incredibly weak in business cycle analysis, say since maybe 2021, thereabout, so since Covid, for a couple of reasons. And, you know, I've written a whole editorial on this and how to adjust your business cycle framework and so on and so forth, that we'll put out on Real Vision and Nowcast IQ today. But having said that, I actually think that the chart on page six, Mikel, is an incredibly good example of what I mean.

• 6:28Speaker 02

  And, you know, back to the Twitter post that you just shared from democratic socialists in the US, we have an incredibly tribalistic political environment at the moment, not just in the US, also to some extent in Europe now and I guess also elsewhere. And it's, it shows up in everything from consumer surveys to business surveys, et cetera, right? So we have, currently have the biggest disconnect in the history of the consumer sentiment survey versus what's actually going on. So consumers are telling you, this is an uncertain world, we think everything is crap,

• 7:10Speaker 02

  but they're still buying, which is, which is very odd, because typically those two go hand in hand, right? So how on earth have we gotten to the point where surveys point to almost a Sumpi apocalypse? It's the worst reading ever, more or less, in this survey, right? While equities are doing fine, the economy is doing fine, unemployment is low, it's not like people are unemployed either, right? There is no true economic reason why this is, except maybe inflation. Because the first disconnect, if you look closely here on the chart, is back from, you know, 2020, 2021, where we started seeing inflation for the first time in decades.

• 7:50Speaker 02

  And I think that is an important reason why surveys look poor, because if you, at least if you feel that inflation is really a big thing in the economy, you probably tend to answer more negatively in these surveys. And on top of it, and this is a very well proven phenomenon, but our, surveys have always been tribalistic, but they've turned way more tribalistic since Trump took office again. And, you know, based on my inbox evidence, I, you know, I feel this tribalism day in and day out, because if I say something that could be interpreted as positive around

• 8:32Speaker 02

  the current administration, I get a load of rage in my inbox from people against the Trump administration. If I say something against the Trump administration, I get a load of emails on why I suffer from Trump derangement syndrome and all of that. It is incredibly difficult to try and objectively stand in the middle of all of this and assess the business cycle and the inflation cycle and all of that. And it shows in surveys. You know, the worst example is probably the consumer survey on inflation, as soon as Trump mentioned tariffs, that survey just went to the moon and, you know, it never really materialized, right?

• 9:14Speaker 02

  And in my opinion, it is also very, very evident when you look at economic forecasters right now, that it's, it's a politically toxic environment to do forecasting. When tariffs were implemented, all the big investment banks were banging the drum on tariffs fueled inflation. And now that we see net paybacks of tariffs.

• 9:46Speaker 02

  And I, trust me, I read all of these forecasts. None of the investment banks are highlighting it as a potential source of disinflation. So they highlighted it on the way up, but they're not highlighting it on the way down, and they're not even penciling it in. To me, that's a clear example of how toxic it is to kind of, you know, support the Trump economic policy mix when you're a part of one of the bigger economic institutions because he's done so much against the conventional economic wisdom. And, you know, the way that we've tried to navigate this is basically that, you know, we've used this window to set up probably one of the better now casting tools on earth to try and avoid being caught in these political discussions on a running basis.

• 10:31Speaker 02

  We just let the data speak for itself. And if we take a live reading on inflation and growth and so on and so forth, you can probably bring that up on the screens.

• 10:43Speaker 01

  Yeah, here we go.

• 10:44Speaker 02

  We're talking a very, very low probability that inflation is increasing. That's part number one out of the two components that create a Goldilocks environment. The second is that the light blue, the growth probability rebounds. And we had a nasty July alongside the momentum route that we saw in financial markets, but we're recovering. And I am, my best guess, and now I'm trying to front run my own data, is that it is more likely to go up than down. But I'm, you know, I'm not trying to front run it in my positioning. And what I've been saying for, you know, the past six, seven weeks is that this cocktail

• 11:24Speaker 02

  of very low, a very low probability of inflation picking up in the U.S. and currently mediocre growth environment from a rate of change perspective, which also showed up in quite a nasty job report last time around, will lead the Fed to be wrong footed on their main conclusions for the economy for the rest of the year, which in turn leads the market to reprice the Fed in a dovish direction. And we're starting to see that slowly but surely. The final piece of the puzzle is a weaker dollar. In my opinion, if you look at euro dollar, we probably broke higher over the course of the day. So it looks like we've been, you know, right with a six, seven weeks lead time again, which

• 12:08Speaker 02

  is exactly what we're trying to do with this now casting, trying to be, you know, one step ahead of the actual releases, trying to let the data speak for itself. And yeah, it's certainly been the right lean since we took that lean in our trading book to be short the dollar. It's not like it's been a home run trade, but it's been the right lean and we're getting there. And, you know, with the weaker dollar, a load of repercussions come, mostly positive for the global financial markets.

• 12:36Speaker 01

  Absolute interest. Let's dive a little bit more into the inflation reading here because it is still a little bit baffling to me that we are at these levels and we had, well, there's confirmation in the recent print. So what is holding inflation back so much? Is it a matter of the tariff repayment? I mean, we should have more effects from the Middle Eastern war. Why is inflation this low? What do you see when you look at the decomposition and how sustainable is this?

• 13:07Speaker 02

  So I can highlight four factors. You can read everything about my six, nine month outlook for inflation in the report that we just released today. But first of all, you know, let me just reiterate that it's odd at this stage of the cycle to call for lower inflation. And most of the members of the Federal Reserve, they think inflation risks are increasing because of how the cycle is developing. But take the, you know, the elephant in the room to begin with. You created an arbitrary spike in energy prices back in April, March, April, with the peak of the Iran war. Let's see whether we ever get a second memorandum of understanding or whether we'll start bombing Oman.

• 13:52Speaker 02

  Trump threatened, it was earlier today. But having said that, you know, the rate of change is clearly behind us, the peak in that in terms of energy prices. So that gives a natural disinflating impulse to the inflation index that, you know, energy prices have peaked, we're coming lower slowly but surely. It's not like it's been home run, but you know, they're coming down. It's been a nice addition to our thesis over the past couple of months. That is, you know, incredibly odd at this stage of the cycle because without the intervention in the Middle East, we would probably have had a more smooth ride higher in energy prices. Now we had a massive spike and then a retracement. So that leaves inflation on a lower path from here.

• 14:35Speaker 02

  And remember that the impulse from energy inflation will turn outright negative into early next year if nothing happens from here, right? It will be a big drag on the inflation trend. That's point number one. Point number two relates to tariffs. I think it is very, very underappreciated how important it is for the whole narrative around price hikes among executives, right? Because they're currently getting paid by the U.S. Treasury to stand pat on prices, right? And I could not think of a weaker PR story than to hike prices right when you receive the tariffs that were, you know, initially meant to be paid by you as a corporate, right?

• 15:20Speaker 02

  It wasn't the purpose of those tariffs to send the bill to the consumers. And now that the corporations are getting those money back, the consumers are not, right? You're not hiking prices. And I think this is an underreported reason why we see flatlining price trends in many categories at the moment. If you look at the PPI last week, consumer goods actually fell, it was roughly 75 basis points on the month. This is the exact category that should be most prone to indirect tariff pressures, but it's not. It's reversing. And I think this bodes very well for consumer goods in the CPI reports in coming months. Then we have the World Cup effect, right? If you look at the shelter component of the inflation report, it has looked incredibly

• 16:03Speaker 02

  soft two or three months in a row, mainly due to the subcomponent called lodging away from home. So basically hotel prices and the likes, right? Again, remember that when you host such a big event as the World Cup, a lot of the price impact is front jammed into the months ahead of the actual event, right? Because it's not like you book a hotel the minute before you fly to the U.S. to watch the World Cup, right? So, you know, the whole impact on decision making among the hotel chains, et cetera, is very front loaded. And therefore, we basically see the opposite now, whether trying to, you know, mean revert the prices.

• 16:47Speaker 02

  And maybe the final thing I'd say is that now that we're talking about the shelter category, it is also underappreciated how important the change of immigration strategy has been to the entire rental market, right? Of course, when you typically let in, I don't know, millions of people every year and you turn that into a flat net zero, or maybe even a net outflow, that of course impacts the rental market. And I think we're starting to see that slowly but surely. Of course, the impact from a reversal of the migration strategy happens with the lag. So I think those are four, you know, very actionable reasons why the inflation is not

• 17:30Speaker 02

  acting in the way it should, if you know what I mean, given where we are in the business cycle, because we are clearly in an up cycle, right? Also, the PMI evidence today from New York manufacturing empire index prove that we're still accelerating. So it is an incredibly odd mix and one that could lead to euphoric market trends, I think, if I'm right. Again, this is a game of probabilities, but the probability of a Goldilocks setup has clearly increased for the fourth quarter.

• 18:01Speaker 03

  So a quick break in your regular programming. If you're serious about your future, grab my free report called Prepare for 2030. I think you've got five years to make as much money as possible, and this guide will help you navigate what's coming. The link is in the description. Download it now.

• 18:19Speaker 01

  The political impact of inflation is really interesting, Andreas, because obviously when you see those big hikes, that is usually what takes down governments. It did last year or one and a half year ago in the US, it wiped every government in Europe. It got wiped after Covid. But then when you see disinflation, you see inflation normalizing, nobody cares. Nobody ascribes that to anyone, because it's just the way it usually is. So it's, I'm not sure if, this should obviously be quite positive for the midterms. I'm not sure it's going to be enough, unless we see really, really strong returns in the stock market. But let's see, Andreas. It's going to be interesting how those months play out.

• 19:01Speaker 02

  But given this view, I'm tempted to say, and I solely base that on, you know, economic regressions, on voter behaviour, I'm tempted to say that the Republicans are underpriced for the midterms, given where we are now. I don't hold it as a base case that they will have a strong midterms. But I think the risk scenario or the probabilities of them having a better than feared midterms are increasing.

• 19:29Speaker 01

  Yeah. One of the jokers in the bag, Andreas, that I wanted to shift our focus on towards the end of the show here is the Pacific Asia. Now, the backdrop, obviously, we have a big Trump-She summit on September 24. I read some reports out of China, mostly rumours perhaps, that they were struggling to work out which US official was actually preparing for this meeting. They don't know who's making, saving the agenda. This tells me two things. That tells me that Scott Bezner is probably not on this, on it yet. Hopefully he will be. That also gives me, always gives me a bit of comfort when he's handling things. It also opens up kind of a nasty outcome space for me, Andreas, that this meeting

• 20:12Speaker 01

  could have more shockers than the meeting we had last month. Obviously, over the weekend, we had the news that Trump is, first and foremost, he's pulling a carrier out of Southeast Asia, USS George Washington, is moving to the Gulf to replace the Abraham Lincoln.

• 20:30Speaker 01

  That's not overly dramatic. It's just a reminder that the Iran war is taking a toll on US global resources, military resources. I wouldn't read more into it than that. But then you had the news that Trump is going to limit the US involvement in joint military drills with South Korea. I'm still trying to, and I was very upfront about this on the platform, I'm still trying to work out the logic of this, because I get that Trump can be annoyed at South Korea for various things, geopolitical issues, they haven't really helped him in Iran, etc. But it's a big price to pay to risk antagonising Seoul,

• 21:09Speaker 01

  to risk that bedrock of the US AI supply, global AI supply lines. You had an interesting theory, and let's just workshop it a little bit here live, Andreas, that this might be related to Korean high bandwidth memory exports. Obviously, the majority of those go to Taiwan to sort of what, within the US AI supply line, but some of it goes to Malaysia, some of it goes to China, to the Chinese. Those are usually slightly older chips, but not always the case. So I'm wondering, Andreas, I'm not sure if this is the cause for Trump's irritation towards South Korea, but there could be spillovers to the memory

• 21:54Speaker 01

  space. That's what I'm fearing, because if we see a rift developing between the US and South Korea, it comes at a very, very bad time. It's something the Chinese can exploit. It could hit Samsung and Iskai Hynek. They have some, these Chinese fabs that are producing chips for the US market. They need renewed licences for that out of Washington. Can they get those? I'm starting to get a little bit worried. That's what I'm trying to say about this September 24 meeting, Andreas. What do you think on all of this? Is this something to factor in in the AI trade?

• 22:25Speaker 02

  Yeah, I'm trying to look up when the US exactly banned the HBM imports to China, but it's quite a while ago, and probably late 24, early 25, right? And the reason is obviously that high bandwidth memory is maybe equally as important as GPUs, maybe more important than GPUs by now for the whole AI build-out. But I am left without a doubt that China has got a lot of Hynek, HBM in their data centre mix, most likely via rerouting from Malaysia. And I say most likely since I, you know, I don't want to state it firm, because it's not like I follow the exact chip. But why on earth would Malaysia all

• 23:10Speaker 02

  of a sudden become big hub for high bandwidth memory? It's not a huge data centre country, right? And we've seen Malaysia being the middleman on various energy sanctions versus, for example, China, or versus Iran, right? Iran has managed to sneak oil via, probably via Malaysia to China as well. So it's nothing new that some of these smaller countries in regions with large trade sanctions, they manage to act as sort of an intermediary layer. Just ask the stans just close to Russia, after the sanction packages against Russia, suddenly Germany had a lot of trade with Kyrgyzstan. They've never traded before,

• 23:54Speaker 02

  and suddenly they had a lot of trade. I think it's the same thing that's going on here with the high bandwidth memory exports. But again, it's a theory. So could this be something that annoys the White House? Of course. And, you know, I just said to you earlier today, well, I wouldn't rule out that Trump got an update on this and then decided, okay, South Korea needs to pay the cost for this in one way or the other. The issue is just, you know, now they effectively want the South Koreans not to export anything to China, right, AI related. Did that probability increase after his tweet here? I'm not sure.

• 24:39Speaker 02

  But I think it's a very likely point. And while we're on the topic of memory, Michael, just earlier today, or was it Friday? I can't remember, JP Morgan raised its price target for Micron from $500 to $1,550, more than 3X. And the memory trade is working wonders again. It's probably the best performing trade over the past week or so, and one that we've, you know, held in high esteem, basically throughout the cycle. And I think it's still early, which is in sharp contrast to the economic consensus out there. And again, last week, Coe, we've managed to, you know, during their earning call, tell the world

• 25:21Speaker 02

  that they've rented out the A100 GPUs for another three years while they're already five to six years old. So they're basically renting them out for longer than what is typically assumed to be the depreciation period for these chips, right? So I think, once again, the AI cycle is wiping the floor with Michael Burry and his ilk, which we've been very vocal about, that, you know, the assumptions made by the hyperscalers, the assumptions made by market analysts around the memory stocks, etc., they're incredibly conservative still, which is in sharp contrast to the run-up to the year 2000. I'm not ruling out that we get to the euphoric phase, but you don't want to not participate in the euphoric phase.

• 26:04Speaker 02

  And I'll be sure to be loud when I think we get there. But I don't think that, you know, the current set of assumptions for hyperscalers, the set of assumptions for the memory hardware manufacturers and stuff like that, I don't think they're out of this well. I think they're pretty conservative, maybe slightly too conservative, anything, right?

• 26:25Speaker 01

  Absolutely, Andreas. Let's just round off. You gave a little bit of an update on Micron here. Any other changes in your outlook to positioning? We made a slight change in our ETF portfolio last week, which is available to the Alpha tier in Real Vision. We also run a macro portfolio with all the single stock names for the Pro tier. So any changes in your outlook and your playbook for the rest of the year, Andreas?

• 26:51Speaker 02

  So, you know, we're thankfully making a great rebound. We've had a great year so far, and, you know, we're running, I think, annualised between 40 and 45% returns since we launched the portfolio and it, by the way, this traded live. And I think, you know, the hardware build-out has obviously been pivotal for us. But if you look at, you know, the main thesis right now, and I'd like to bring the chart on the NAND flash and drum prices on the screens again, you know, I've just said that inflation is nowhere to be seen. That's stretching it, but at least it's trending down. But it's not like there is no inflation in the economy. It's just not the corners that you measure in the CPI index.

• 27:32Speaker 02

  For example, the massive increase, we're talking 1050X in memory prices, they're nowhere to be seen in the CPI index. Even the Apple price, you could see them, of course, in the July report on consumer inflation. But it was a surprise to me when I did the detailed study, that, you know, consumer electronics, they're mostly irrelevant to the consumer basket. So, Michael, I think you and I, we, I think we buy a new iPhone every other year, right? But that's, in a Western context, that's probably 1% of your consumption-ish, something like that, consumer electronics. You don't really pay anything for computers anymore, right?

• 28:16Speaker 02

  You don't, you don't pay anything for your flat screens, right? They're essentially, sorry, but it sounds almost arrogant, but they're essentially free for the middle class. I mean, it's not an impact on their budget. So you want to belong the parts of a market that is actually inflation-driven, while it's not impacting the Fed reaction function. And that sweet spot is perfect for AI hardware, right? Because it may impact the PPI, but it doesn't really impact the consumer. Even, you know, a big pass-through from the increase in chips costs will not really be felt at the consumer level, because, you know, you could increase the price of an iPhone two or three times, it won't happen. But, you

• 28:58Speaker 02

  know, you could increase the price of a computer one or two times. It's not a biggie for the middle class. It really isn't. It's much more important with the price of the pump, the price of food. And speaking of those, I think we're in for a treat. I think the price of energy, the price of food will decline from here and until early next year. And then we'll have to see from there, because we have this El Nino phenomenon and everything in between that, but we can get into the weeds of that another time.

• 29:26Speaker 01

  Great wordplay there, Andreas. Yeah. And just one note, I mentioned earlier that the Samsung and Hynek factories in China are producing exactly the NAND flash drives here. So very, very interesting developments there, also leading into the Trump-She summit. So lots of stuff to look forward to there. Any final remarks, Andreas? I feel like I caught you off there.

• 29:48Speaker 02

  No, I just want to say it again, that, you know, the highest conviction from our outcasting is a weaker dollar. It's kind of the final piece in the puzzle now with everything that we've highlighted six, seven weeks running. And I think we're in for a treat as investors into the fourth quarter if the dollar turns. And the price action is starting to look pretty promising. So thankfully, it seems like we've been a handful of weeks ahead of that, again, with our outcasting. And that's the whole, that's the whole point here. You cannot trust everything or anything at all in the survey landscape at the moment, because everything has become so tribalistic. So why not just listen to hard data live and try and get an advantage out of that?

• 30:32Speaker 01

  Absolutely. That's all we have for you this week, guys. Thanks a lot for tuning in. Check out all our accounts at realvision.com. And if nothing else, we'll see you next week.

• 30:42Speaker 03

  You obviously enjoyed the episode, because you're here with me at the end. But listen, don't forget to go to realvision.com/join and grab a free membership. It's an incredible community packed with alpha, great investment ideas, and the research that you need to help you unfuck your future. So get started now. Go to realvision.com/join.