Even Though Inflation Is Heating Up, the US Economic Outlook Is Good: Economist

[00:00:00] Speaker 1: The September Consumer Price Index report reveals that U.S. inflation rose to 3.7% annually. Joining us now to discuss is Christian Briggs, economist and CEO of Hard Asset Management. Christian, good afternoon. Can you just give us your takeaways from this inflation report? Is inflation going in the wrong direction? [00:00:21] Speaker 2: Well, first, thanks for having me. Actually, the inflation report wasn't that bad, considering that we're not in a credit inflationary environment. Inflation is not being caused by the expansion of credit. This is a commodity inflation market. In other words, we're seeing oil and gas, oil obviously at the crude level, the refined diesel and gasoline is starting to cause a little bit of havoc at the pump. But interesting enough is that everything that we touch, whether it's a commodity, it's a product, it's a service, at some point oil touches it, gas touches it, diesel touches it. So I think the Federal Reserve may actually look at this and go, you know, if we raise rates and looking at the inflation numbers that we're looking at right now, it wasn't that bad considering how much oil has gone up. Because when you look at what it affects, it's like everything. But it's not a credit inflation. It's not expansion of credit. Like some people might think that we need to raise rates to cool down. So I didn't think it was all that bad. And we will start to come down at some point. [00:01:22] Speaker 1: Okay. So if that is the case, then why did the Federal Reserve hike rates last time? Because I think if your statement is true, it's because of commodities, then there will be essentially the same argument last time. Why raise rates? Because Fed policy cannot impact the supply side. It only [00:01:42] Speaker 2: impacts the demand side. Okay. First of all, great question. And I love that you asked me that, because that's not being asked by people. The reason why they raise rates was to give the bond market, which really dictates policy of interest rates. You know, the Fed funds rate is really what the banks borrow at. Now, it will affect consumer credit and rates when they start to look to whether it's a home loan, boat loan, car loan, a HELOC. The real interest rate is the 10-year bond market. And when you look at why they raise rates, which goes right to the heart of my whole conversation here, and the way I'm trying to say it is, it was politics. It was to basically to say to the bond market, we hear you, you need something that's going to give you justification for probably not continuation of interest rate increases. And that's what they did. Now, you don't need to raise rates when you already have a fairly significant slowdown in the home, especially building, multifamily, single families. We're seeing, even though new existing home permits were up a little bit to almost 4 million seasonal this past few days ago, it's still not that much compared to what it normally is. And number two, you're going to see a significant come next, say, spring between now and then, because really the season for buying homes is from that like late March till kind of the end of September. You're going to see some slowdown until we get back to the next season. And prices are going to come down accordingly. I expect home prices to drop about 12% to 15% across the board, across the United States, and in pretty much every major market between now and next spring. That's deflationary. Okay, that's number one. Number two, rates will start to come down because the bond market realizes two things. One, it's not a credit inflationary market, not the environment that some people might think like it was in 22 or 23. And number two, I think the Fed's going to look at this and go, if we raise hikes, all we're doing is hurting preexisting lines of credit or banks willing to make those loans that can't because you have higher rates. And that would not be in the best interest of the economy, especially when 20% of the economy is based on home, home ownership, rental, construction, commercial, residential, and so forth. [00:03:47] Speaker 1: So if we strip out food and energy then, because you're saying it's a commodity inflation, if we look at the core side, what are you seeing? [00:03:56] Speaker 2: Well, the core side is a little expensive right now. I do see that. Okay, PPI, I saw that some of the distributors, because when you got the core, which is really at the heart of the problem, is really bringing in a lot of the new things at the higher levels. But I noticed that in the distribution, the wholesale market, the PPI, they're absorbing some of this. They're obviously not wanting to put all of the inflationary pressures on the consumer to the CPI. And I do believe that we're going to get used to just a higher cost of living. It's just the way it's going to be. But it may not be accelerating quite as fast next year as it is this year. And with the energy forecast that was just earlier on your program, which I agree 100%, the global slowdown in the global economy is going to lessen the demand for oil, that is going to be, in a sense, good news for inflation. I mean, if you're in the oil business, maybe not so much. But even with the Iran conflict, and some of the things that what's going on, I do think oil is going to get back down to that mid to low 80s, which at that point should bring us at that closer 3, 3, 3, 3, 2% inflation rate. So I'm not worried about the core as much as I'm more worried about raising interest rates. You know, what little bit of credit expansion we could still have with the GDP was updated from a 1.5 revised up to a 2.2. That means that we've got some growth still. And wages are definitely going higher than the inflation number, especially now here with the cost of living. Did you see like Social Security just got a 3.6% bump by the administration, which is great. So that's going to keep up with the cost of living with the inflation. And I expect that wages will probably do that or better coming into next year. So I don't think it's as quite as bad. And today, when you look at the interest rates, they dropped, they skyrocketed on the news of the inflation. But go look at the 10 year, it went up and it came all the way back down. In fact, it's down on the day right now. That's an indication that the bond market thinks we may have topped on some of these interest [00:05:50] Speaker 1: rates, at least in the short term. So historically speaking, when the Federal Reserve considers rate hikes, does it separate the supply side issues from what they control? Do they take that into [00:06:04] Speaker 2: consideration? They do and they should, especially now. This is different than 21, 22 and 23. When there was 10 trillion dollars worth of influx of cash into the economy, whether it's from debt spending, COVID spending, and increasing all monetary policy, that was credit expansion, inflation, bar none. Then it became commodities. When you had a lot of things that were being obviously purchased down the road in about 18 to 24 months, and then gradually it was coming down. The tariffs did add some inflationary pressure to a lot of different products that are manufactured outside the United States that we import. Some of that's come down a little bit. But the biggest thing right now is oil. At the end of the day, the Federal Reserve is going to look at two things very specifically. If we raise rates, what does that do to the overall economy? Well, since housing and other things, not just housing, but I'm going to use housing because it's the biggest part of the conversation is 20% of the economy. You raise rates, you're actually hurting the housing market. And number two, it's not going to stop inflation. In fact, you're going to increase inflation. Home builders usually have construction loans that are tied to some type of LIBOR plus a percentage. And if that continues to go up, the banks will continue to raise a floating credit line, you know, the rate on credit line for construction loans and many, many other types of loans. And that's just going to add more cost to building something or servicing something or if it's a small business loan. So in the best interest of the United States, I would say maintain the rates, keep the bond market happy, tame the inflation for the next 90 to 180 days. And by springtime, we should actually be okay because it wasn't that bad. And if it was bad, the bond market today would maintain the high interest rates that we saw initially this [00:07:52] Speaker 1: morning when the numbers came out. Okay. Christian, how would you characterize the economy right now, the US economy and the labor market? Oh, that's a good question. All right. [00:08:06] Speaker 2: So there is some underlying softness in some of the bottom parts of the economy. We do have credit risk at some lower levels, but that credit risk has already been mitigated with the banks, the federal reserve. We pretty much have that baked in to the markets. And so there is a little bit of softness there, but at the end of the day, if you look at real wages, they are starting to move up. This 3.6% bump in social security benefits was fantastic. One of the largest I've ever seen, certainly in my time. So that obviously shows you there that it's a, the market is seeing proactive movements by the administration. And number two, they know that we're going to see a softening in the economy. And that is also going to decrease some of the demand for oil, which automatically decreases a lot of the demand for some products and services, and that will lower it. So I think the economy on the top end is doing great. I mean, the GDP was revised up from 1.5 to over two. And if we can continue to see that, and we're, you know, everyone says, oh, it's a data center driven economy. Not necessarily. There's still significant value. A lot of the banks are reporting kind of mixed earnings, but they weren't bad. Even the ones that were a little soft aren't that bad. And the ones that were good were great. So overall, it's a good economy. It's not great, but it's good. And there may be a little slowdown. GDP may slow down just a tiny little bit here in the fourth quarter and going in the first quarter. But overall, given the inflation that we had and a little bit of the [00:09:32] Speaker 1: shock, I think it's actually pretty darn good. Okay. So what indicators are you looking for, data points that you're looking for, that you're watching at, that'll give you the sign that we're going to go back in terms of the inflation rate. It's going up right now. At what point is it going to start decreasing from 3.7%? What are you looking at? When does that point happen? [00:09:57] Speaker 2: Okay. There's a couple of different indicators. Number one, look at the bond market. The bond market tells a lot of what's coming because they're already more proactive forecasting six months in advance. They're not looking at today's chart, the fundamentals today. They're saying, okay, in the next 90 to 180 days, what could happen that would give significant propositions either short or extend long positions in the bond market, whether they're going long or short. And I can tell you this after today, I think the indicators are showing the bond market, the 10 year. And this also goes back to the heart of your question. The treasury department has now started to look at not selling 20 year term bonds. That's good because they're looking at short term rates coming down. So their indications are the same thing. When you hear Scott percent and or the treasury department makes a pretty bold statements about we're going to get out of the long bond business, that's good because what they're saying is we don't need to be selling that bond because we think the short term yield is much better for us and the long term, believe it or not, because we think it's going to come down. So that's a good indication. The bond market itself, the general, I call it the generalization of the people that are out there that buy and sell this every day, which are the capital markets and the guys who run big funds and banks are saying, look, we think that the bond market may have topped. So that's a great indication like the 10 year, especially. And overall, the preexisting and the new permits for housing was actually revised up a little bit. The number was pretty good. So we're still seeing good real estate activity. But that's all predicated on a couple of things. Don't raise the rates too much. And number two, remember, this is a commodity driven inflationary environment, not a credit expansion. And if the Fed can maybe just take a little bit of foot off the gas, which I know they're watching, they watch your program. I know that. And maybe let the markets dictate the policy more at the interest rate bond market level than [00:11:50] Speaker 1: you do at the federal funds fund rate. Okay, so Christian, what do you think has been the impact? Because we have a new Fed chair, Kevin Warsh, and he indicated that maybe forward guidance is not the future under his watch. Has there any, has there been any impact due to this policy? [00:12:13] Speaker 2: Uh, yes, not as much as I thought there would be. I thought there would be a little bit more speculation on the interest rates because he wasn't giving forward guidance. But overall, what he has been trying to, at least I should say, not just Warsh, but some of the people that are on the board, the voting members, there's been a lot of kind of coming out with comments. You've seen a few of them say, well, I think maybe one rate hike and before the end of the year is more appropriate. I've heard today that one of the other members who is actually a voting member was talking about possibly three rate hikes next year. I think when they start to look at this and they say this again, this, we don't want to put ourselves into a recession here by, by the, not just the expansion, which is still expanding credit some, but now you've got contraction. We don't want contraction in the credit markets at all. And if you raise rates too much, all you're doing is increasing inflation, uh, at different levels. So I think what they're doing is they're going to watch this market very carefully and they're going to come to the realization as, and that is like all of us and even bank of America. I heard some Goldman Sachs and analysts say it pretty much the consensus is don't raise rates anymore because inflation will find its own way to come down as the commodity values come down, especially oil. [00:13:22] Speaker 1: So what would we need to see in the next inflation report, uh, to, to give some kind of assurance or reassurance that, uh, things are not moving in the wrong direction. You're saying that today's inflation report is not that bad with the next inflation report. Um, what it shows give confirmation. Um, what are you looking for the next one? [00:13:43] Speaker 2: I'm actually looking for some softness. I think the core is going to soften. I think what you're going to see now is, is some of the, the margins are going to come down. People are willing to take less money for the same product and service. And you're going to start to see that, that concentrate down to a thinner margin. And that's going to bring down some of the inflation, wholesalers, distributors, manufacturers, retailers, they're all willing to maintain the sales. They're going to start to compromise and give up a little bit of that margin. And that by itself is going to come down. And at some point we will have settlement between the United States and Iran. There will be a settlement. It's not going to last forever. This isn't, this isn't going to be a 30 year war or a three year war or three more months war. President Trump has a great plan. He knows what he's doing and what he's, what he's trying to do though, is to make sure and to ensure the viability of any agreement that's put forth is going to last, you know, not just a few years, but decades. So he's taking his time, but it will happen. We will have a resolution. And then next thing you know, with the next inflation report, I don't think we're going to see a big jump. I think what's going to happen is we're going to see some moderation. And if it just stays kind of where it's at and then slightly starts to go down, it's a slow process. I hate to say this to people because they expect things to be changed in a month or two. It won't be like that. But as the earnings go up, the inflation starts to moderate from a growth period to a declining environment. And then you'll start to see it pretty much get back to where it was, but it may not happen until really springtime before it has any kind of real value. Would you say the energy [00:15:14] Speaker 1: disruption from the Iran war, the impacts of that, do you think it's behind us, the worst of it, [00:15:20] Speaker 2: that is, do you think it's behind us? Oh, boy, I sure hope so. You know, I've thought about that exact same thing. It's like the what ifs, what if it continues and things like that. I think we've all kind of, it's like a certain period of time where you jump into a cold plunge pool, you feel that initial shock, you stay in long enough, you're like, okay, I don't like this much longer. And I don't think either one of the United States or Iran like the way things are going, they want to kind of have a resolution. And I have a feeling that we'll start to kind of get numb to it a bit. If it does escalate, we're already kind of used to the inflation, we're used to volatility. And it may, unless it gets really out of hand, it may just kind of be one of those days where it's like, ah, another 10 cents at the pump. It's okay, as long as it's not like the hockey sticks, right, where the volatility is so pronounced in such a short period of time, that people can start to get used to it when it's baked in over time, right? It's like the old saying is how do you eat an elephant? One small bite at a time, you know, it's not noticed, it may take a bit, but it will get done. As long as we don't see 120 $130 oil, which I don't expect to see that unless we have some crazy conflict and catastrophic event over there, which I don't expect that at all. I think that we're going to see oil slowly go down. We're going to see the shock of what was become mitigated to almost pretty much just a normal occurrence. And then people get used to it short term memories, you know, once it starts to kind of level out, and I think we're going to be just fine. That's how you have to look at it. And companies will start to kind of mitigate any loss of customers and revenues by trying to maybe cut some of their margins a little bit. And AI is going to help too, which I just want to throw this out. AI is creating already more efficient companies and more efficient categories and environments. And that's actually increasing profitability. So where they may have to cut in some areas are making up for either less labor or being able to increase productivity and efficiency, through AI, which could make their products and services less expensive to the consumer, or even the manufacturer, or even at the core. And that in itself is going to bring a deflationary impact on the economy. So we are really in an okay position, but do I like $90 oil? Well, if I was Exxon Mobil or Conoco or a big oil major, I love big oil if I was in that business, because of where prices are. But considering the overall effect on the economy, I wish we could have oil under about $80. And I think we'll get there eventually, certainly by spring. [00:17:48] Speaker 1: Okay. Christian, maybe just one final question here I want to ask you. So what do you think is priced in right now by markets? What's not priced in as well? When we're talking about the Iran war, energy, what's priced in? What's not priced in? [00:18:04] Speaker 2: Well, today's market is probably priced in about two more rate hikes, which I'd be surprised if we do two rate hikes, because like I said, I don't think the Fed wants to increase the chances of a potential recession. So maybe one may happen. It wouldn't be surprised if they do one. I don't think they should, but let's say they did. But I think the market's already baked in about two, maybe three, given the sell off we've seen today, especially in technology, which is more interest rate sensitive. And at the end of the day, the overall conditions of the market, again, I said, are really good. We have good GDP growth. We have moderate inflation. One thing to make a note of, when you go back to the administrations all the way from Nixon forward, this is one of the lowest interest rate environments we've had in a current administration since Nixon. All the other administrations in the past had an average weighted inflation rates higher than this. And we got through it. I mean, as somebody growing up in the eighties, I remember 12% mortgage. I was a kid, but I remember my parents talking about, oh my goodness, 12% mortgages. And they were lucky to get that. So we're going to be just fine. We have a great pro-capitalist president. We have great administrators. And whilst we have a great business model, because we are the world's leader in technology innovation and aerospace and military defense. And because of that, watch for great gains in military and aerospace here as we go forward in technology as well. So wages will go up. It may not happen before Christmas, but next year, wages will outpace the inflation numbers. [00:19:32] Speaker 1: Right. And let's not forget all the manufacturing jobs that could be coming back when the factories go up. President Trump talking about trillions of dollars of investment into the United States. So let's see what happens. Christian, it's good to speak with you. Thank you very much. [00:19:49] Speaker 2: You too.