THE ENTIRE inflation outlook for the next year has changed: Expert

[00:00:01] Speaker 1: All right, so tomorrow Kevin Warsh is going to speak at the ECB Forum for Central Banks. But the real big first event in my mind, right, the one I'm really looking forward to is his testimony to the House Financial Services Committee on July 14th. Meanwhile, I think it's been amazing to hear all the various descriptions of who Kevin Warsh is, particularly since his FOMC debut. My next guest has better insight, though, than most. I want to bring in Hudson Bay Capital Management Senior Strategist Stephen Myron. Stephen, first of all, congratulations on the transition. So all the headlines that Warsh is a hawk and, you know, all of the experts said he was hawkish. And I thought it was mostly, you know, maybe the economic projections, you know, the inflation adjustments. Maybe that was hawkish, but I didn't think he was hawkish. In fact, on the contrary, I thought he was setting himself up to maybe be more accommodative next year after they remake the Fed. [00:00:58] Stephen Myron: Sure. So first of all, thank you for having me back. It's great to see you again. I think that Chairman Warsh went out of his way to say as little as possible. You know, I think he went out of his way to say, I'm not going to give you any guidance. I'm not going to tell you what I'm going to do. I'm not going to tell you what I'm thinking. I think at the end of the day, what's going to happen is he's going to do what he thinks the data and critically the forecast require for achieving the Fed's mandates. Now, I think maybe what happened is that in the absence of the chairman giving his own view or the committee's view about what's going to happen in the future, the market and a lot of the narratives ran with the dots. They ran with the projections the Fed put down. I think it's important to understand, in my view, those dots were already stale when they were before the ink was dry in June. And the reason is that as someone who's written down projections, who's written on my own dots, you're not a day trader on geopolitical headlines. And those dots were stale in March when the war had just broken out because we didn't know, is the war going to be over in a week? Is it going to be over in two weeks? Is oil going to be back to, you know, $60 a barrel like that? We didn't know it was going to take, you know, several months to wrap this thing up. And so you don't want to respond to a geopolitical headline until you have an idea about what the length of time is. It's not like, you know, jobs. [00:02:07] Speaker 1: You can't put a dot with an asterisk next to it? [00:02:09] Stephen Myron: You can't put a dot with – no, you can't. And so the dots in March were stale, and I think the dots in June were stale for the exact same reason but in the other direction. And failing the chairman giving any sort of guidance whatsoever, the market only had one thing to go with. And all of the, you know, algorithms that are programmed to respond to the language and respond to where the dots are placed, they just ran with the dots that, again, in my mind, didn't fully reflect the fact that energy has come in a lot, inflation expectations have come in a lot, and the entire inflation outlook over the next six months to a year has changed. [00:02:38] Speaker 1: And you look at these break-evens there, free fall, it's just – but again, on Wall Street, when the narrative evolves, everyone seems to glom onto it, and they hate to give it up. And ironically, the next day, the market was up big, and it's been up pretty good since then. Certainly, the equity markets were back on the four and a half on the 10 years. So I don't know why that persists. It still persists that, okay, this is war. She's a hawk. We didn't think he was going to be a hawk. I want to ask you about influence. Greenspan recently passed away, the maestro, and, you know, how much influence do you think will Greenspan have on Kevin Warsh, and let's even say a Stan Druckenmiller, who he's worked [00:03:22] Stephen Myron: with for a long time? Sure. So obviously, I think that they've both had a huge influence on Chairman Warsh. Certainly, he's, you know, he's very, very, very quick to praise both of them because they've had such a big effect on him. I think maybe one of the things that, you know, and again, I can't speak for him. Sure, sure. It's just my analysis from the outside. You know, I think maybe one of the things you see about Chairman Greenspan's influence on Kevin Warsh is a keen attention to the supply side, right? And one of the things that the way that manifests is changes to productivity growth and the outlook for productivity growth, and there's a lot that goes into that. And one thing that I think sort of Chairman Warsh has emphasized a lot that was very big in Greenspan's day also is technological change. And right now, it's manifesting in AI. It's going to allow us to do more with less. I think you're already starting to see some of that come through in the sense that we've had very strong GDP growth data, even with a relatively stagnant labor force. And I think that you sort of saw analogs, and this has been much discussed, you saw analogs with that in Greenspan's day with the telecoms industry. Now, I think, obviously, Stan Druckenmiller, one of the biggest, you know, one of the greatest investors in history, has also had a big influence on him. They've worked together for a long period of time. I think that maybe one of the things he's taken away from Druckenmiller is the willingness to change one's mind when you're wrong, right? And one of the things that Druckenmiller's famous for is being able to re-evaluate things on the fly, and when new information comes to light, change his mind. Now, I think there's a tendency at the Fed to change your mind very, very slowly. The economists at the Fed, you know, they want the data to decisively reject the idea that an old model or an old parameter may not be working as it used to be before they discard it. And so they'll hold on to something that might not be working anymore for a little bit longer than they should. And I think that someone who comes from the investment industry, particularly someone who's worked with Druckenmiller, I think is going to be more flexible, more flexible of mind. I think that's a big asset. [00:05:19] Speaker 1: I love that you said that, because to your point, it feels like by the time the Fed has its eureka moment, it's so late that that's when we get these emergency moves, you know, like, you know, inflation will be temporary. And, you know, when we finally hike, it'll be 25. Oh, well, we're a little late than 50. We were a lot late. 75, 75, 75. I mean, it feels like you're behind. And by the way, 75, 75, 75 generates more, you know, fear than anything else, you know, and really brings down a lack of confidence. So I'm hoping, you know, over the course of the next couple of years that we can regain the confidence in the Fed. [00:05:54] Stephen Myron: But if you come back to another thing that Chairman Warsh has emphasized, like Chairman Greenspan, is the rejection of the idea of forward guidance, right? Now, one of the things that forward guidance does is it makes you too late to change your mind. And so, for example, if you look at what was happening after the pandemic, the Fed was still buying mortgages at the beginning of 2022, in part because they'd guided the market towards a very slow, long path of ending these things. They didn't want to disrupt market expectations that they themselves had set. And so you get to a point at which home prices are up 20% year over year, and the Fed is still buying mortgages. They're still injecting more credit into the housing market, even though home prices are up 20% year over year. In my mind, part of that is not wanting to have disrupted the previous forward guidance that they issued, because if you violate the forward guidance you've given, it makes your forward guidance less credible the next turnaround. [00:06:44] Speaker ?: Right. [00:06:44] Stephen Myron: And so I think one thing that we've seen from Chairman Warsh is just, I don't want to give forward guidance. Right. Because I don't want to be cornered into a situation like that, that made, in my mind, contributed to them being too late to turn around. [00:06:56] Speaker 1: I want to ask you quick about inflation or how to interpret or read inflation, core PCE versus maybe the trim mean. Can, speaking of changing minds, can Kevin Warsh persuade his fellow members to, hey, let's maybe use some different ways of measuring and looking at inflation? [00:07:17] Stephen Myron: So I think that's, I think that's important. As you're aware, he's got these task forces on deck. He's going to have a task force for thinking about, for thinking about inflation. I think that's going to be some of the most interesting thing that comes out of, out of the beginning of the Warsh Fed. Now, let me make a point, which is that the Federal Reserve targets headline inflation. Right. Congress gave them an overall mandate for stable prices, not for core or not for trimmed mean or median or anything else, right? It's, it's, it's headline inflation is the mandate, but the critical thing is that monetary policy has lags, right? Monetary policy, if you change interest rates today, doesn't affect the economy today, doesn't affect the economy next week, it takes a year to a year and a half for that filtering through the economy. So you need to be making policy today, not for the last three or six months of inflation data, you need to be making policy today for what's going to be happening a year from now, for the second half of 2027, right? And so people look at core inflation and they look at trimmed mean and they look at other measures. I've, I like market-based core also because I think the non-market elements have a lot of basically no statistical noise in them. People look at these various ways of slicing inflation as indicative of where overall inflation is going to be a year from now, because energy prices can be very volatile. They can shoot up and they can come down. And so if you're targeting overall prices, but you're targeting them a year from now because the monetary policy lags, looking at core, looking at trimmed mean can be more helpful in predicting where things are going to be a year from now than looking at headline. And so then it comes down to a question of which is going to be more predictive, which is going to be a better forecast of where things are a year from now. And that's going to depend a lot on what's driving the different measures. [00:08:58] Speaker 1: Good stuff. Steven, thank you very much. Appreciate it. Thank you.