#1014 - Ding Dong… Is the Fed’s Inflation Target Dead? | with Vincent Deluard

0:00It's crypto summer, which means it's festival season. At Real Vision, we're getting ready for the next festival of learning in partnership with Kraken. It's taking place April 18 and 19. And the theme is don't F up alts, memes and NFTs. Yep, there's a big world of digital assets beyond Bitcoin and ETH with lots of opportunity and lots of risk. We'll be bringing a ton of timely and actionable knowledge from speakers, including Raul Pal, Sergio Silva, Kevin Kelly, OSF and more. It's completely free to attend. Just go to realvision.com slash festival of learning to get the details and save your seat.

0:40We'll see you there.

0:50Is the Fed's inflation target dead? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Vincent Dillard, Director of Global Macro Strategy at Stonex. Hi, Vincent. Welcome back. Hi, Maggie. Very happy to be here. Yeah, great day. There's a lot going on. Well, it's not a great day, but it's a great time to have someone on to sort of shed some light on it, or at least give us your view, because it's really been all about inflation, right, this whole week, really for the last couple of weeks. And we've seen, you know, shifting thoughts. You have long been on the record as an inflationista.

1:26You've been arguing that we're in a period of higher prices, higher rates. This week, the market certainly sat up and paid attention. The inflation numbers were hotter for the most part. Stocks and bonds came under pressure. But for some, as we've been having conversations, this seems like it's an issue of timing rather than a broad or new regime that we're in. At least that seems like that's where the debate is. Let's have a listen to some of the highlights of our conversations, then we'll talk on the other side. We think that the economy, just like flipping a switch, goes from an expansionary period to a recessionary period.

2:07When in these types of situations, really all business cycles, there is a usually drawn out process to move from one to the other. And this cycle has been elongated in every fashion and every facet far more than maybe any other in economic history for a variety of reasons. Everything that I look at still tells me that we're in the downswing of the cycle. And that hasn't actually changed. The 10-year got to some really critical levels today, like 455. We're at this upper channel. I mean, it should start consolidating here because if it doesn't, there is that risk towards a gap towards like 475.

2:43And that's not something to kind of scoff at because if you remember, from November 1st until now, and the really big first start of the rally in both credit and then which helped out equities and everything else, was 10s went from 5 to 3.75. Then it stabilized somewhere around 4, 4.25. and nobody really paid attention. Like, all right, as long as tens are in the fours, low fours, and we'll keep buying stocks and equity and credit, right? But if it starts to go back up again and it doesn't feel like it's gonna stop, this is where the trio of the three macro, which is the 10-year rate, the dollar, and oil.

3:16Those three things can fast track a pretty big risk reduction in the market. Yeah, and not worried, too worried about default. So we're seeing that demand every time spreads start to widen, that demand really comes in. And we also had a lot of participation in the market on the private credit side. So it's taken some of the supply away that normally would probably have ended up in the high yield market. So I think that that's been a component as well. It has held in, but still a little bit cautious because, you know, when the spread moves, it spikes.

3:53And that's really just the tip of the iceberg of the conversations that we're having across the Real Vision platform. both macro, crypto, trying to figure out what's different, what's changed, what's the same. And we have such a diverse range of opinions. So as usual, you can get access to it all to join and find the right level for you. Just hit the link in the chat, the clink. So Vincent, what is your sense? Is this just a matter of pushing back the timing of potential easing, or is there a different dynamic going on? or it's going to be different this time, you know, like the other 12 months that it was supposed to be different.

4:35I mean, I don't know how long is long enough. The last sub 2 % patient print was February of 2021. So more than three years now, how long is transitory? I mean, how long before, you know, you, you call stock calling a spade a spade and accept that we've moved into a world of structurally higher deficits, structurally higher inflation, and structurally higher rates. I mean, the bond market has been fighting this reality tooth and nail. We are in a rare moment of clarity. Now, if you look at the futures implied probabilities, we're looking at, you know, between two and three cuts by the end of the year, which is more or less where the Fed has guided, just two months ago, pricing seven cuts.

5:29I mean, that tells you how much delusion there is amongst the supposedly smart fixed income market. So to me, no, it's not a question of timing. Of course, there'll be ebbs and flows. Who knows? Maybe this whole geopolitical drama clears up. I certainly hope it does. We could see some relief at this point. It looks like oil released the the dark nights that, you know, drives the three applicatives horsemen of higher rates, higher dollar and higher oil prices. So maybe that goes down. Yeah, we could get some relief again. It's not my expectation, but my forecast is that whatever relief we get is going to be temporary and that eventually we'll go back to where we are.

6:16We'll go back to seeing 5 % annual yield. We'll go back to talk about rate hikes, not cuts. And eventually, we'll start considering, which I think should be what should be obvious to everyone, which is we no longer live in a 2 % efficient world. And that we need to acknowledge that. And I think the sooner we do that, the better it will be for everyone involved. It's interesting you say that the bond market's been fighting it tooth and nail because you're right. We've seen the yields pop up and then they go back down and everyone thinks that's the turn that they've been waiting for. And it's been in a way that bonds usually aren't so volatile.

6:56In fact, Marty F saying, hey, all, stop the pain. And I think everyone felt that, right? We see bond yields back really kind of pinned toward that 4.5, big question mark, where they go from there. And stocks, stock route today, S &P worst day since January. but we see losses of 1 % across the board, 2 % for the Russell, the VIX up 16%. So there is a lot of hand-wringing and angst contributing to that mood, by the way. J.P. Morgan, CEO, bank earnings are coming out, Jamie Dimon saying that even though some of the economic indicators are good, that they are very alert to these risks really out there, including what you mentioned, overseas conflict, but also those inflationary pressures.

7:40You can understand why people are confused, though, because you also have Larry Fink from BlockRock coming out and saying, yeah, I think there'll be Fed rate cuts. So this is what's, I think, really been perplexing for people. So we took the question right from your research note, is the inflation target dead? You think so, right? And you think 2 % is dead. It was not a question in my research. Yeah, no, ours was. We start with a question. There is no question. You think it's dead. Yeah, that's a quick answer. And it's funny you should mention Larry Fink. It was just today he came up with, basically, I mean, he's a smart guy.

8:16I mean, he's not bad for a long time. But, you know, finally, he came out public by saying, hey, if we get down to 2.93%, that's a win for everybody. And when you see someone like Larry Fink, you know, world largest asset manager, start, you know, agreeing with crazy lunatics like me, that tells you that, you know, the pendulum is swinging. I mean, I love that quote about, it might be Gandhi or Schopenhauer or Elizabeth Holmes. One of the three, possibly all three about truth. You know, I'm going to go Schopenhauer because it sounds smarter. You know, the truth is first, you know, completely ignored.

8:56Then it's violently fought against. And then eventually it's accepted by everyone as evidence. And I've certainly seen that when it comes to the invasion target. And I think we're getting to stage three here, where you see very kind of mainstream consensual voices like Mohammed Airline, Al-Arian, like Larry Fink, telling you what was obvious, you know, two years ago is that we cannot have a 2 % patient target if we have structural deficit of 7 % of GDP. I mean, any central banker in emerging market can tell you that. Anyone who's studied basic math can tell you that. And we know the deficit is not going down, and it will be a lot easier to raise a target.

9:34And now it's really the matter of just kind of acknowledging it and doing it in a way that doesn't rattle markets too much, unless the U.S. government finance itself at rates we can afford. Hey, everyone. We're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. In an era where AI, robotics, biotech, and digital assets are reshaping our reality, staying ahead is not just an option, it's a necessity for investors and entrepreneurs. Investors who embrace the technological revolution will benefit from the evolving investment landscape.

10:13Understanding these shifts is crucial for reaping future rewards. Today, we're giving you access to a free Real Vision membership and access to one of our most popular videos with Real Vision co-founder and CEO Raoul Pal and David Matten, founder of New World Same Humans. This thrilling conversation between two experts is a deep dive into the profound technological shift that's begun and how it's transforming not just financial markets, but our entire way of life. Head to realvision.com slash exponential age. That's realvision.com slash exponential age to get free access today.

11:14once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments. S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, Forex, and beyond. With a simple and intuitive platform, you could trade anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus500. With over 20 years of experience, Plus500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify.

11:48Plus 500. It's trading with a plus.

11:56There's so many questions that come up with that, but I want to ask one from Sebastian right now because I want to sort of stay before we talk about policy implications of that. I want to stay with the inflation issue. And Sebastian said, hey, everyone, I'm quite confused about inflation. CPI 10-year rates say higher for longer, but Truflation is way below 2%. Where does this strong discrepancy come from? Great question, Sebastian. Yeah, I'm not especially on the Truflation number. I think a lot of that comes from prices that are scraped off the web. So there may be a bias towards the kind of core goods category that really went up like crazy in 2021, 2022, and now come down on the back of retailers liquidating excess inventories, supply chains getting better.

12:43They may be less overweight. To me, the real driver of inflation really are shelter, healthcare, and wages. These are the three big ones. And shelter is not coming down the way people expected it would. If anything, my impression is that we still need to catch up. I mean, if you look at a chart of the case sheet versus the owner's equivalent rent or the rent in the CPI versus zero observant index, I mean, we're still 20 % from below. So that catch-up process is not done. Healthcare is a complete disaster. The way it's computing the CPI is called a retainer earnings method for health insurance that messes everything up.

13:26The weight is off. I mean, I could go on forever on healthcare, but just, you know, reality is healthcare costs are increasing by 7%, 8%, 9 % a year. I think that everyone feels that. Right. And basically, everyone except the Bureau of Labor Statistics. That's right. But, you know, I love this. I don't know if you remember the original Jurassic Park movie. It's the beginning and they're doing the tour of the park. and Jeff Goldblum, the mathematician, presenting him, oh, the dinosaurs cannot have babies because they're all female and blah, blah, blah. Life finds a way. I love that quote, life finds a way.

14:12And I think that applies to the CPI, right? I mean, you have basically your economies that work really hard with hedonic adjustment and messed up shelter and understating healthcare CPI, But life finds a way. Someone is paying this insurance premium. And my impression is that it's going into wages, which is why we cannot seem to get under control this kind of core services at shelter. That part of the CPR, which really should bother people, if you look on a six-month annualized, probably only 6%, 7%. That's basically all wages, right? This is your waiters, your hairdresser, your plumbers, your car repair, your attorneys.

14:55and that part, I mean, not huge, but that's really the part that should give the Fed nightmare. And, you know, in the metaphor, that's the T-Rex, right? Life finds a way. The high, because you need to pay people higher because, yeah, resale prices have rebounded and they're extraordinarily affordable, especially the way mortgage rates are. And the health insurance costs are much, much, much higher than what the BLS tells you. So if you try to hide it from one part of the CPI, it pops up in another part. That's right. That's absolutely right. I love that. Great question from Serge as well. Could the fiscally aggressive policy or fiscal policy be giving too much liquidity to a strong economy working counter purposes to the Fed?

15:43I think we absolutely know that's the case. And it was sort of not well appreciated. Although I will say that you, Vincent, have, to be fair, been talking about this forever with us. And we're really at a contrary camp, bringing up populism, bringing all of that up really, really early on. So you should get credit for that. But I think the interesting thing you raise and why we started the show with your statement, we made it a question. We know the fiscal's working counter to the Fed. You're kind of saying the Fed's rolling over and not going to try to fight it anymore or fight it to the extent that it would need to to bring inflation back under control.

16:20That is very important. And to be honest, I mean, I always thought that would be the end game. I just didn't think it would come as early as March. Because maybe I got fooled by Powell. I mean, Powell is a, you know, he's a pretty smart guy. And I thought he talked a good game in 2022, you know, Jackson Hole, there will be pain. And then, you know. And he inflicted some. Yeah, he did. With that really hard, you know. Yeah, and NQT. and all that. He talked a good game. And then we had perfect alignment of the macro stars, second half 2023. Base effect was working for you. China, supply chains were clearing up.

17:04China was reopening, but reopening on the supply side, not so much boosting demand the way everybody thought. So we had this kind of golden moment, right? We said, oh my God, they nailed it. They got the soft landing. We can have our K &E. And then I think that kind of translate, you know, I think I always thought it was kind of an illusion. Honestly, I thought a lot of that was, you know, truly transitory, not like the 2021 transitory. It was about, you know, supply chain. It was about the stock, whatever. But for a few glorious months, it seemed like everything was under control. And then what started to take over because of that kind of fairytale scenario playing out was asset prices started rallying like crazy.

17:42Right, because rates dropped. Correct, correct, correct. Oh, we've got this down. We've got high growth forever. rates are going to drop. We see this monster rally build across pretty much every asset. And to me, this was the moment when history books will be written. The moment when the Fed abandoned the 2 % target, I will tell you, was that March press conference when maybe second or third question a journalist asked him, asked Powell about financial conditions. Now, Powell is a smart man. He knows what financial condition means. Financial condition basically means stock price. We can all see it with our eyes.

18:14And bond spread, right? Right, it wasn't a quiet part the market really dodges and gives this crazy answer on the Taylor rule. Uh, we think, you know, model policy is still restrictive, blah, blah, blah. He gave the all clear signal to the market. Okay. Go buy trade monkey JPEG and go buy some gold, which of course everyone did. Uh, and, and yeah, it's, it's shocking because if it had been Lagarde, like Lagarde is a little slower on the head, you know, I mean, I would maybe have been okay. Like she just, you know, she's a lawyer. She doesn't know what financial conditions are. But Jay Powell, he did it knowingly.

18:51And he knew that by saying that, he would trigger this kind of epic buy-everything rally. And that's when you saw, if you get break-evens, it's been straight up since then. So it's so interesting you say that because I think that the market was bracing for him to slap it down. Do you remember when we went into that? There was a lot of concern that he would come out of winning. So was I. I went on Twitter putting a long thread on like why Jay Powell's going to smack the market. Yeah. And because he'd done it before and he talked about Volcker and, you know, like that was so with that sort of genie coming back out, everybody.

19:27And you're right. It was it was very, very notable. You it was something really jumped out at me in your note. You said they are deliberately relaxing their inflation focus in order to prioritize their employment and asset price mandate. They don't have an asset price mandate, but you're saying you're just calling it out. Not in the book. No, they don't. Not in the book. They're just, you know, as we know, technically their mandate, dual mandate is full employment and price stability. It is not asset price. At this point, you may throw a fourth mandate that has to do - Yeah, exactly. You're just calling it, right?

20:02But I thought it was interesting because you are just addressing the elephant in the room. But the funny thing about, you know, Jokes aside about the Fed being political and all that. I don't know how I sound that. So the asset price mandate was more or less theorized by Bernanke in a 2010 speech, I think, about the wealth effect. Basically, I mean, it should have been rejected because it was bogus economics. But it basically trickled down applied to monetary policy. by inflating the value of the S &P 500, I'm making people feel richer and then they will spend. And as a result, that gets me, at the time, we had too low inflation, too low growth, that was a problem.

20:46So boosting asset prices basically was seen as a legitimate tool of that policy. And he theorized that. I think that was wrong, but whatever. Well, this is not an economic comment at all, because I totally understand what you're saying. But we all remember what was happening at that time and the wheels were coming off the global financial system. So he was perhaps suggesting that's an economic theory. I would say that like in the kind of old fashioned way where sentiment and symbols matter, that if that was the goal. It was kind of putting a floor. Just like, yeah, you know, and so, yeah, like it may be really bad economic policy, but in terms of sort of, you know, I don't know the exact right word to say, but the sentiment and think back to like shovel and pick and what Roosevelt did.

21:38I think it was on that. But that brings up a point that some people talk about, the financialization of the economy. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:55Right, right. One last thing I want to mention, the reason I brought that 2010 speech is because back then, inflation was not high enough. So the justification was, oh, we need higher asset pricing in order to feed inflation. And my point is, I guess, it's not symmetrical. Today, we have the exact opposite problem. Inflation is way too hot, and it's kind of stabilizing, as I was expecting, a plateau of like 3.54%. And if truly this were a legitimate economic argument, which we both know it was not, then you would say, well, that must be because asset prices are too high. I'm going to lower asset prices in order to bring inflation down.

22:34But you see it's kind of asymmetry in the reaction, right? When inflation is too low, yes, you boost asset prices. When inflation is too high, well, you also boost asset prices. And I really think it's the crux of the problem right now is asset prices. Because we've seen interest rates hike don't really work. We have this extraordinary liquid economy where people have refinanced at very low rates. So what higher rates mean for me, I mean, I locked in my mortgage at that 2%. So I get basically an annuity from the Fed on my cash. There's no way to ruin inflation without destroying generational wealth and assets?

23:10Yes, I would believe that. Interest rates don't work. That's terrible. It's a terrible scenario. You can't do it with liquidity because we had the Silicon Valley Bank crisis. We see what happens if you tighten too much. We already see the Fed actually tapering quantifying. So rates don't work. It doesn't work. Then you have Yellen spending like a drunk salesman, say, sailor, deficits of 7 % of GDP. Yeah, technically Congress. Technically Congress spends the money, not Treasury. Just small. Yes. Because they all pretend they didn't when they try to not raise the debt ceiling. They all pretend they didn't do that vote.

23:54Yellen just said it's a bipartisan consensus on - I'm spending like a drunken seller. Absolutely. It is the only thing everyone agrees on. Executing, signing the checks. Okay. Yes. So anyway, so you have this massive, the other question I was alluding to was the fiscal impact that that's running against you. Rates are not working. You cannot do liquidity. What do you have left as a central banker? The only thing you have left, if you're serious about bringing non-inflation, is asset prices. You need to hammer it down. Which is why they're not going to do it. Yes. Yes, yes. Exactly, because they can't.

24:27Yes. They can't. I mean, the fallout would be, and it's real. It's not just the popularity credibility to destroy assets for people who need them to retire because remember, Americans are most of retirement tied to the asset market. It's not pension-based anymore. Create that as a whole, you know, which seemed like a great idea to privatize that, but this is the other unintended consequence of that, that you have financialized the economy or tied assets to people's wellbeing being in a way that they never were a generation ago when you got, which is why I think, you know, I kind of, I mean, there's a part of me that still hates boomers that, that kind of wants this to happen, like this kind of great reset.

25:08And then, and boomers to, you know, sell their overpriced homes and, and take some pain and some share in this, in this adjustment. But I, I, I agree with you that it's not going to happen. It's generational, right? Because the people suffering now are the younger people. In order to protect the retirement of boomers. Yeah, and my view is always, okay, somehow we need to default on the boomers. And it's probably better to do it in real term than in nominal terms. Instead of, you know, lowering the value of every asset, I think you just basically increase inflation. And you reach the same outcome.