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

0:00Andreas Steno:Summertime is maybe good, summertime is maybe shit.

0:21Mikkel Rosenvold:Hello, Robert. Welcome to Real Vision. Welcome to Macro Mondays. My name is Mikkel Rostner, 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, Mikkel, we're going Goldilocks. Are we going Goldilocks, Andreas?

0:59Andreas Steno: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 now casting and the probability of us entering a Goldilocks regime has risen over the past month and we're getting there.

1:40Andreas Steno:It's the second most likely regime by now. 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.

1:52Mikkel Rosenvold:Absolutely, Andres. 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 ProTier to get full access. But on the AlphaTier, 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 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.

2:27Mikkel Rosenvold:But back to the show, Andreas. We'll dive much more into the outlook for the U.S. consumer, 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 Speaking of the U.S. 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 U.S. 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.

3:05Mikkel Rosenvold:He's been golfing for 45 % of the days in his second term. um this is a jab clearly at donald trump but is this really bad for president to be golfing is it a bit much perhaps what's your take well i salute it to a large extent to be honest you know

3:22Andreas Steno:i'm an avid golfer at least that i played a lot of golf when i was younger um currently i'm trying to get my kids to find the interest in playing the game um i i have 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, it's one of the best ways to have a long and informal discussion with people suffering from attentive disorders. And I sincerely think that Trump suffers from such one, which is why I've always liked playing golf with business partners, clients, and so on and 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?

4:12Andreas Steno:So in that sense, I kind of get why he's doing it. And 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 Lindsey Graham, maybe rest in peace, He's 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.

4:42Mikkel Rosenvold: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 demo signals. editorial here, the US consumer picture. And I'll let you introduce the author or the creator of this chart. I know he's a good friend of yours.

5:08Andreas Steno: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 Sarva, by the way. He's a good follower on X. I've had long discussions with him around this because, you know, I've been a part of his team, like, it's almost a decade back now, but time's flying.

5:53Andreas Steno: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, Michael, is an incredibly good example of what I mean. And, you know, back to the Twitter post that you just shared from democratic socialists in the U.S., we have an incredibly tribalistic political environment at the moment, not just in the U.S., also to some extent in Europe now and I guess also elsewhere.

6:45Andreas Steno:and it shows up in everything from consumer surveys to business surveys, etc. So we 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, but they're still buying, 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 sumply 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.

7:32Andreas Steno: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 in the chart, is back from 2020, 2021, where we started seeing inflation for the first time in decades. And I think that is an important reason why surveys look poor because 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.

8:19Andreas Steno: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 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.

9:04Andreas Steno:As soon as Trump mentioned tariffs, that survey just went to the moon. And, you know, it never really materialized, right? And in my opinion, it is also very, very evident when you look at economic forecasters right now that it's a politically toxic environment to do forecasting in. 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 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.

9:59Andreas Steno:To me, that's a clear example of how toxic it is to kind of 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 we just let the data speak for itself and if 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.

10:44Andreas Steno: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 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 not trying to front run it in my positioning. And what I've been saying for the past six, seven weeks is that this cocktail of very low, a very low probability of inflation picking up in the US 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.

11:49Andreas Steno: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 right with a six, seven weeks lead time again, which is exactly what we're trying to do with this now casting, trying to be 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.

12:28Andreas Steno:And we're getting there. And with the weaker dollar, a load of repercussions come, mostly positive for the global financial markets.

12:37Mikkel Rosenvold:Absolutely. 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 all this confirmation in the recent print. So what is holding inflation back so much? Is it a measure of 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? So I can highlight four factors.

13:10Andreas Steno:You can read everything about my six, nine months out for inflation in the report that we just released today. But first of all, 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 elephant in the room to begin with. You created an arbitrary spike in energy prices back in March, April with the peak of the Iran war. Let's see whether we ever get a second memorandum on understanding whether we'll start bombing Oman.

13:52Andreas Steno:It's Trump threatened. It was earlier today. But having said that, 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 energy prices have peaked. We're coming lower slowly, but surely. It's not like it's been home run, but they're coming down. It's been a nice addition to our thesis over the past couple of months. That is 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.

14:31Andreas Steno:So that leaves inflation on a lower path from here. 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 print. 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 US 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 initially meant to be paid by you as a corporate.

15:19Andreas Steno: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 at roughly 75 basis points on the month. This is the exact category that should be most prone to indirect terrorist pressures, but it's not. It's reversing. And I think this built very well for consumer goods in the CPI reports in coming months.

15:55Andreas Steno:Then we have the World Cup effect, right? If you look at the shelter component of the inflation report, it has looked incredibly 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 US to watch the World Cup, right? So the whole impact on decision-making among the hotel chains, et cetera, is very front-loaded.

16:39Andreas Steno:And therefore, we basically see the opposite now where they're trying to mean revert the prices. 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. 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.

17:24Andreas Steno:So I think those are four very actionable reasons why the inflation is not 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 proved 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.

18:01Mikkel Rosenvold: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. The political impact of inflation is really interesting, Andres, because obviously when you see those big hikes, that is usually what takes down governments. 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.

18:41Mikkel Rosenvold:Nobody ascribes that to anyone because it's just the way it usually is. So 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.

19:02Andreas Steno:But given this view, I'm tempted to say, and I solely base that on economic regressions on voter behavior, 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 strong midterms, but I think the risk scenario or the probabilities of them having a better than feared midterms are increasing.

19:29Mikkel Rosenvold:Yeah. One of the jokers in the bank, 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-Xi summit on September 24th. I read some reports out of China, mostly rumors perhaps that they were struggling to work out which use official was actually preparing for this meeting. They don't know who's making the agenda. This tells me two things. That tells me that Scott Besson is probably not on this, on it yet. Hopefully he will be. But it 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 could have more shockers than the meeting we had last month.

20:16Mikkel Rosenvold:Obviously, over the weekend, we had the news that Trump is, First and foremost, he's pulling a carrier out of Southeast Asia. The USS George Washington is moving to the Gulf to replace the Abraham Lincoln. That's not overly dramatic. It's just a reminder that the Iran war is taking a toll on U.S. 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 U.S. 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 antagonizing Seoul, 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.

21:27Mikkel Rosenvold: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 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 Sky Hynix they have some these Chinese fabs that are producing chips for the US market they need renewed licenses for that out of Washington can they get those.

22:15Mikkel Rosenvold:I'm starting to get a little bit worried. That's what I'm trying to say about this September 24th meeting, Andreas. What do you think in all of this? Is this something to factor in the AI trade?

22:25Andreas Steno: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 I'm 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 Hynix, HBM, in their data center mix, most likely via rerouting from Malaysia. And I say most likely since 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 of a sudden become big hub for high bandwidth memory.

23:13Andreas Steno:It's not a huge data center 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 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 managed to act as sort of an intermediary layer. Just ask the stands just close to Russia after the sanction packages against Russia. Suddenly Germany had a lot of trade with Kyrgyzstan. They've never traded before 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.

24:02Andreas Steno: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, OK, 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, but I think it's a very likely point. And while we're on the topic of memory, Mikko, just earlier today, or was it Friday?

24:47Andreas Steno:I can't remember. JP Monken 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 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, CoalWeave managed to, during their earning call, tell the world 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?

25:37Andreas Steno: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. The assumptions made by the hyposcalers, the assumptions made by market analysts around the memory stocks, et cetera, 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. and I'll be sure to be loud when I think we get there, but I don't think that 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 world.