Lots More With Skanda Amarnath on This Moment in Macro

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1:34Bloomberg Audio Studios. Podcasts. Radio. News. So here's why I'm so confused right now. Like if someone said to me. Just one reason. If someone said to me, look, you know, the economy is slowing down. Clearly job creation is in the tank. It's decelerating. housing is in the tank, et cetera. There's a bunch of sectors that are soft. We need rate cuts. I don't know. Okay. That sounds good. Inflation has come down quite a bit from where it was, but it's still elevated. And then if someone said, look, the stock market is at record highs. PPI just came in super hot. Inflation is still above levels, et cetera.

2:10Are you insane to even be talking about rate cuts? I'd be like, oh, yeah, okay. That makes sense too. Like I find many kinds of arguments to be very persuasive right here. I don't have a strong views. I'm not one for hyperbole. I try not to be right. I try to be a good journalist in that sense. But I would honestly say like this is one of the most difficult macro environments to call in probably my professional career, which is longer than I would necessarily like it to be at this point. But as you said, if you look at the stock market, which feeds into financial conditions, right? Look at financial conditions.

2:41Like financial conditions do not look that restrictive at the moment. And yet you do have people who say that actually we are still in restrictive territory and the labor market is weakening, as you said. And so we need a rate cut. So we have this one body of people who are talking about a potential Fed policy error. And then we have another body of people, including people from the Trump administration, who are talking about the need to do a 50 basis point cut in September. You could make the argument that the Fed is either committing a policy error now or contemplating a policy error. Then there's this whole dynamic with the fact that we know that there is this one incredible thing going on, which is all the AI spending and how that actually intersects with macro is very confusing.

3:22So we have Jackson Hole next week, which we're going to be at. I'm excited about Jackson Hole. So the scuttlebutt for journalists going to Jackson Hole is that apparently like the rooms are even higher demand than normal because behind all the macro debate, which we just laid out, there's also the question of Fed independence. Right. So interest in Jackson Hole is like higher than it's ever been. It's going to be a big Jackson Hole. Whatever the formal theme of the conference is going to be, you know, there's going to be some academic theme coming up. Whatever that is, that's not going to be the theme.

3:54The theme is going to be all of the talk about Fed independence. I did a deadlift. I am both the most popular trader and most successful trader at Citadel. Fed is going viral. Uh, barges. This is an after school special except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US. Black gold! These are the important questions. Is it robots taking over the world? No, I think that like in a couple of years, the AI will do a really good job of making the Odd Lots podcast. One day that person will have the mandate of heaven. How do I get more popular and successful?

4:31We do have the perfect guest. You're listening to Lots More, where we catch up with friends about what's going on right now. Because even when the Odd Lots is over, there's always lots more. And we really do have the perfect guest.

4:49skanda nice to have you here in our uh when joe's confused you're the guy we turn to yeah that's right let's start actually just quick take uh we're recording this 904 august 14th about 30 minutes ago we got that really hot ppi report but also i don't know what that means like it is a big deal what does it say what's going on there is it what does it mean for pce is it should mean is that margins are going to be crimped what's going on there i mean i think for ppi today should be seen as at least showing the inflationary side of the story is still there okay not just in terms of like some of the aggregates may be distorted for a lot of reasons but what matters for the fed's inflation gauges got moved up a bit okay so what you're gonna be tracking for inflation for july cpi ppi both matter and so that's gonna be moved up a bit so we're gonna be running at roughly 2.9 % on Corp BCE.

5:39That's what it is actually substantially. We are higher now than we were last year. It's starting to look like the progress is starting to turn the other direction. Now, there may be some reasons why it is transitory this time, that it is temporary. And yet it doesn't really feel great. And I imagine for Chair Powell, there's a feeling of, wait, I remember in 2021 in August, I was pretty confident that this was going to be short term. And then we saw some increases. And I said, well, we got to focus on getting the labor market back first. And then people kind of have held that against him accordingly.

6:12But now we have inflation picking up. And yeah, we also see a job market. Maybe employment levels look fine. Yeah. The momentum, the job growth that we're seeing in the latest release is understandably spooky too. I asked Mary Daly this question before, but do starting points matter here? Because if you look at the labor market, the labor market has been really, really strong in recent years, like certainly much stronger than people had expected. And so, OK, there are some signs of softening now. It does seem to be losing momentum. But we are still starting from a place of strength. Does that mean potentially the Fed can, you know, maybe let that one go and look more at the inflation risk, to your point?

6:53I think it certainly matters. It's not the only thing that matters. I think momentum and starting point both matter. And the starting point is better. The momentum is some of the weakest we've seen outside of recession in a while. Now, some of that might be due to immigration. Some of that might be due to tariff uncertainty. Some of that might be due to interest rates are higher. And that matters for some sectors more, even if the financial conditions you just talked about are still pretty accommodative if you're talking about capital markets. So these are all kind of confusing in terms of what is the actual labor market trajectory that's permissible.

7:30I think the Fed is right now inclined to cut in September, given what we've seen in the labor market data. But I will just warn, just as the data got revised before, it could get revised again. It may be the case that May and June were the weakest months for job growth and that we see some local acceleration just because there's a little bit more certainty on trade policy than there was before. So there's still another jobs report before the September meeting. And there's another batch of inflation data that's also going to come out. And I think that will actually probably matter in the sense that typically you see price changes that are more volatile as you get into back to school season, holiday season, the turn of the calendar year.

8:09What we've seen thus far is typically the more benign months where you typically don't see prices change that much. So there's still a lot to play for in terms of going into the September meeting. So here's the thing I've been thinking about trying to conceptualize what's going on. And as Tracy mentioned, we talked to Mary Daly last week in Alaska, and she's kind of of the view right now, or she says that she does not think that the tariffs will be particularly inflationary or inflationary on a sustained basis. And there's certainly an argument, tariffs are tax increases and tax increases we don't think of as inflationary.

8:42We think of them as disinflationary, if anything. On the other hand, they throw a wrench into to supply chains. They have very different effects across different, like they sort of strike me as like a bit of just like throwing sand into gears. And if you combine throwing sand into gears with really big deficits, and now that I'm middle-aged, I talk about deficits. We got a pretty big July deficit number. It was 10 % higher than the year before. This is despite the tariff revenue. If you're throwing sand into gears of industry, making commerce less efficient by creating all these frictions, and you're pushing in all this money by expanding deficits, that strikes me as a potentially inflationary cocktail.

9:23I would agree. I think it's possible we have both, right? That there is what I would call stagflation light, right? Obviously, unemployment rates are still low. That's pretty distinct from the stagflation of the 70s. But the momentum in the labor market seems weaker because I think there probably is for any sort of trade sensitive sector. Think about construction, manufacturing, retail trade, wholesale trade, warehousing. These are all showing weakness in job growth more recently. And so we're seeing that side of the equation. That should be disinflationary at the margin, because less labor income should mean less consumer spending.

9:54And at the same time, you're putting in costs, adding to the business cost structure in ways that businesses can't stomach beyond a certain point, right? So some businesses are probably well positioned to absorb the hit to margin, but there's a limit to that as well. I think the issue with sort of the tariff slash trade shock, the modeling of it, is if you have costs be pushed through to consumers over time, that can still be consistent with just real incomes sort of declining, even if nominal income growth is on steadier footing. And so that would be a very tricky backdrop for the Fed to navigate.

10:30Just going back to inflation for a second, can you walk us through what's going on with energy prices at the moment? Because on the one hand, oil still pretty low, as we talked a lot about in Alaska. Yeah, people really care about the price of oil in Alaska, not necessarily the way that most car driving Americans do. It's funny, in America, in the quote, lower 48, which is a term I never used as much than in the last week, it's like an oil crisis is when it's really high. There is the exact opposite. Anyway, keep going. That's right. Okay. So oil prices are low, but at the same time, we're seeing some electricity prices rise, possibly a sort of crowding out effect from all the data center demand and AI enthusiasm and things like that.

11:13Yeah. So I think that there's a bifurcation in energy prices, right? So we have the standard commodity prices specifically for oil have stayed at the lower end of the range, right? We're still speaking in the maybe low 60s, right? And WTI. So these are prices that should be not painful for the consumer. And yet we also have electricity price increases. And the electricity price increases that we've seen, some part of that is due to natural gas price volatility, although natural gas prices more recently have come down. But there's also, there are a lot of things that go into electricity prices that are independent of that.

11:47And so in a lot of regions of the country, we're seeing capacity looks to be short. For the longest time, a lot of these, a lot of what you call sort of thermal sources of electricity generation are typically not very economical, right? We're economical in a short run sense, because we have more capacity than we need. So the ability to be paid for that capacity is not great. So that's why we retire coal plants. We retire nuclear plants. Now you're seeing the other side of that, right? And it takes a long time to build that stuff. And so the retirements are coming to a pause for, hey, we actually might be short on capacity if the data center demands are there.

12:24And building new capacity is very expensive, very time intensive. And that seems to be an issue in at least a number of major regions. So there's like the mid-Atlantic region, PJM. You're hearing this also show up though in terms of rates are increasing in Georgia. And New England has its own set of problems because it burns a lot of natural gas for electricity, but also doesn't have like the requisite pipeline capacity. I love that I'm double hedged to New England energy prices plus Con Ed in New York. Although I do have solar panels in Connecticut now, as we were discussing. So sometimes my bill is actually negative, which is lovely.

12:59The Texas hedge. This is the thing which is that, so I mentioned in the beginning, so much investment happening in AI, which doesn't seem to be paying off economy-wide yet. It's not like we've seen some great disinflationary boom where all these companies suddenly getting more efficient. Though maybe there are, I'm sure you can find pockets, but there is a lot of spending. And there's a lot of spending on gear, and there's a lot of spending on buildings, and a little bit of spending on labor. Some people have been talking about this crowding out effect. Jason Furman talked about it in a tweet that maybe this feels like a fiscal crowd of guys.

13:31Is that fair at this point? Or is it too soon to tell whether all this expenditure is - Skanda's been writing about this quite a bit as well. Yeah, I'm curious how you'd characterize it right now. I mean, obviously there's some bid for resources that could otherwise be deployed elsewhere. And also a bit sort of if let's say you're an investor and you're obviously some level of capital constraint going on. If you're investing everything in AI and basically cutting spending and investment in other areas, there's some sort of crowding out effect, but I would just also caution that's like a secondary effect, right?

14:00The primary one is still that there's more investment. But do you, on the electricity front though, is that connected or is that still just are many factors pushing up electricity across and maybe data centers are one of them? I think the data center effect is something probably better to describe up until this very moment. Like we're probably hitting something of an inflection point, right? So you are like low demand for electricity. has stopped sort of having sort of its local stagnation. Okay, yeah, yeah. But we haven't yet seen the pickup. The pickup is probably coming very soon, or maybe right now.

14:33And as that happens, and it has its pass through into pricing over the coming years, I think there will be a sort of super cycle dynamic to this. That is likely to weigh on costs and investments. Sorry, just to be clear, like those like price increases in Georgia that people are talking about, or it's too early to say, oh, that's data centers. It's a sort of yes and no question where economists give you both answers because it's like, if something stops going down and starts flattening out and starts to pick up, there is a, like, it may not have started going up in outright terms, but the dynamic is, it's part of the dynamic.

15:06So I think that, I think it's, it's both.

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17:23As we mentioned, Joe and I are going to Jackson Hole next week, and the theme doesn't really matter. The theme is central bank independence and if Powell is going to do what President Trump is asking him to do, which is cut rates. I'm thinking how to characterize this question. How does the central bank dynamic actually feed into the discussion around rates? I mean, I think there is on one level the Fed will tell you they're putting the blinders on. They don't listen to what Scott Besson is most actively lobbying for, which is 50 basis points. And yet you can't deny that there is going to be some issue of how does the Fed do something in a way where it doesn't look politically manipulated.

18:08The legitimacy in some ways of whatever the Fed does gets undermined. There's an optics problem now. If they don't do what the Treasury says, then they're clearly trying to push back against the Treasury in some way. And so then there will be one set of stakeholders who are upset. And at the same time, there are others who will be saying, like, if the Fed does cut 50 basis points, it's like, OK, they're just following the Treasury. We should just listen to Scott Besson now. And that is a dilemma for how you really handle the optics. Mary Daly talked about this on your episode, which was just you got to try to just explain your decisions, try to be transparent, try to be consistent.

18:39Those are really important things. it will matter to a point. And yet I'm sure there'll be plenty of cynics. Fed needs to start tweeting in all caps. Tracy, did you see the headline yesterday? I think it was say attributing CNBC that David Zervos is on Trump's short. No, you guys laugh. I like David. We have never had him on AdLodge, and which is an oversight. I've always liked talking to David though, but I feel like, you know we never got unfortunately paul mcculley uh the vet the long-haired iconoclastic guy from industry yeah and david zervos is like our the next best shot of this sort of iconoclastic guy who comes from wall street i like david i like david i feel like you know he's like the closest thing to like a contemporary kind of a mcculley-ish character i will say from a sartorial perspective it would be very interesting.

19:32Yeah, I've always loved Toyin to David. I mean, he would certainly be a character. He would be a great character. And so you probably get livelier press conferences. You make great press coverage. Do you have any thoughts on the derby? Every day the list of names gets longer. Do you have any thoughts on this process? I can't take it seriously, right? Really? I think as far as the number of names that have been thrown out, I don't think Janet Yellen is being considered actively. So these are things that seem very... That one elicited... I saw that headline too. So, and yeah, there are some names that are there.

20:02So, I mean, there are some names to take seriously. I'm not saying, but I do think the length of the list being offered, some of them are clearly not. Serious name is being put forth, but it may serve some tactical purpose for the kind of policies they want. If they're trying to broaden the list of people who they're considering, get those people to lobby more actively and publicly for lower rates, then that might be something to serve a White House. Nick Timberos at the Journal pointed this out in an article, which is that if you have 100 people who all think that they're in the running to be fed share that's 100 people going on tv saying now's a great time to cut rates and then you're sort of like wait why isn't powell cutting rates everyone on tv knows now's the time so there's some deep brilliance going on here i do have to ask though like the all the lobbying for lower rates we have a substantial number of rate cuts priced in over the next 12 months and yet long-term interest rates haven't really budged that much.

20:55Yeah. Which is, if you think about like where the pain points and the frustration are with like higher interest rates right now, or at least to the extent you think 4.3 % Fed funds rate is high, and that's part of the reason why 10-year yields are at 4.2, 4.3%, roughly speaking. Like you're not getting much effect from the rate cuts being priced right now. And I do think that kind of raises some questions about what is the actual objective here? Even if you get the rate cuts you so desperately wish, especially if it's coming at a time - feed into like the 30 year mortgage rate. Yeah, exactly. Housing was the big pain point.

21:29And you're not really getting that effect. That to me suggests like, there is some level of a credibility gap here. If you're just saying I'm going to cut rates no matter what, no matter what the inflation rate is, because I want to do it for political motivation. I mean, one, investors obviously need to be compensated on some level for risk or also for the risk that maybe some in the future rates might go back up. If the people who are arguing for lower rates today would argue for higher rates under a different political environment. That's not exactly, that doesn't lend itself to getting long-term interest rates lower.

21:59What's your take on why long-term interest rates haven't gone lower? I think there's probably two things here that stick out to me. One is, well, inflation still seems like it's there, right? We haven't gotten things back to 2%. And so there's just a risk of the Fed being caught off sides here if the Fed starts to cut more aggressively at a time when inflation might pick up. You can say, well, this time inflation is transitory. But it's like, we're dealing with potentially big macro adjustments. They might be costly. And if nominal incomes, labor income growth is reasonably solid, the cost might get pushed through, right?

22:31To the consumer, because the consumer can pay. And that's a dynamic that markets have to be sensitive to. So there's a level of, well, you're actually adding more inflation risk. And so that needs to be compensated for. There's also, I think, a level of political manipulation risk, right? If you actually did lower rates for reasons that aren't really grounded in data, I mean, Kevin Warsh said, I don't care about data dependence. You're not doing things for like relatively neutral reasons and you're doing things for political convenience. One, the political convenience can cut the other way at another point in time.

23:00Let's say there are people who are doing things for partisan reasons today and maybe it's a different person in the White House in the future. And then there's also just the issue of, well, there's just more instability. I want more compensation for that risk. And I do think like we're seeing if you look at the slope between five-year notes and 10-year notes. abnormally high, even considering that rate cuts have been priced in. I know that Joe is a return premium skeptic, and I, to some extent, am too, but I do think that there's more suggestive evidence now that you are seeing more demands for competition for risk.