Is This a Trampoline Landing? With Vincent Deluard

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2:23Is this a trampoline landing for the U.S.? Hi, everyone. Welcome to this extended Real Vision Daily Briefing. With me today is Vincent Deloard, Director of Global Macro Strategy at Stonex. Hi, Vincent. It's great to see you again. Happy to be here and very happy that you used my trampoline landing moniker. I'm trying to get that to trend on Twitter. And, you know, every bit helps. Thank you. We're going to do our part. All right. That's exactly why we chose it. And we're going to explain that for folks in just a minute. But just a reminder before we dive in, the second half of the show, today's extended.

2:58So we're going to go for an hour. We have so much to talk about. But the second half is exclusively for Real Vision members. So if you want to stay with us the whole time and you're watching on YouTube or listening in, go ahead and scan the QR code and jump on some of the incredible trials that we have right now so that you can do that. We want you to stay for the whole thing. So Vincent, the concept of a trampoline economic landing is something that you came up with and you've been writing about it. What do you mean by that? And why do you think that best describes what's happening in the U.S.

3:29economy right now? In terms of meaning, I think it's kind of self-explanatory, right? I mean, you jump on the trampoline and instead of continuing your downward momentum, you bounce back. and yeah that's that's how the best way I could describe the economy I mean you know a year ago you had all the serious economies and the banks you know kind of out recessioning each other out and oh the recession is going to hit and the commercial real estate and the regional banking crisis and kind of all these doomsday call and then you know well maybe it's not going to be a hard landing you know maybe it's going to be a soft money and then a no lending.

4:13And today we have Atlanta Fed GDP now cast at 4%. If I'm not mistaken, that's more than last quarter. So it is a trampoline lending. The recession that all these supposedly informed people expected turned out to be an economic reacceleration. And I would argue that it was entirely predictable if you paid attention to the right data in the right way. Yeah. And certainly over the last couple of weeks here, a lot of people have been talking about some of the fiscal stimulus and the fiscal side that most people just seem to either have forgotten about or they weren't sure how effective it was, or it seemed to have sort of fallen off the radar, but it's been making its way through the system.

4:58And I think you also think this has a lot to do with the momentum, correct? Yes. Many kind of have to go back to Keynes and Econ 101 and the power of fiscal spending. I think we've been a bit insulated from that maybe for 40 years. We spent our time focusing on central banks and thinking that central bankers were gods and thinking that, you know, all you had to do was watch a Fed funds rate. And that would tell you all the yield curve. That's another good one to know what the economy was going to do in six to 12 months. And it turns out that, you know, when you give people money, especially people who don't have a lot of money, they spend that money.

5:40And as that money gets spent, it creates economic growth. that should not have surprised anyone before this kind of odd era that we were into. I mean, I don't know if you want me to go into the sources. Well, you know, I think what's interesting is, and I highly recommend reading Vincent's research because it's always spot on in terms of detail, but also kind of thinking outside the box. The things that you listed, and maybe just rattle through them, is when you say that, When we say fiscal and you talk about when you give people money they'll spend, I think a lot of people were thinking about those sort of COVID payouts, the kind of one-off, stimulative, emergency measures.

6:22And since we're moving away from COVID, maybe that's why people kind of forgot about it. You pointed to things that are different and were part, I think, and it's interesting. And I want to hear about the staying power from that. So what are some of the things, fiscal things that you're looking at? And inflation reduction, that's part of it. that people have also now been saying, hang on a second, we're spending money on infrastructure in a way that we haven't in decades. What are the things that you're looking at? Yeah, definitely the IRA and the CHIPS Act are part of it. But I think most economists had that.

6:54Right. I agree. On their bingo cards. You're absolutely right about the COVID stimulus, kind of, you know, a lot of the CARES Act stuff. The ERC was kind of dropping off the cliff. but you had a second wave that I think people did not quite understand coming from the inflation shock of 2022. You have a tremendous amount of payments in the U.S. that are indexed on inflation. Most important of them is Social Security. I mean, you have 67 million people between retirement, disability, and survivorship. And we have the largest cost of living adjustment in 40 years. That was announced, by the way, October 13th.

7:39The day the market made the low, and we announced this, I think, 8.7 % cost of an increase. I mean, that's a lot. Social security goes out about$1.2 trillion every year. So you're going to almost put 10 % of that. That's$100 billion in people's pocket. And these checks, they hit every month. Right. It's not like a one-off payment bonus. That's what I think is really important about paying that out. Yeah, and they go to people who will spend that money, right? Because your average social security beneficiary is kind of working class, doesn't need to save, doesn't need to buy a house. Last year, he's been squeezed a bit by inflation.

8:18So, hey, that extra$100 he gets every month, that goes straight into the economy. The exact opposite of what you see for 10 years, you try to stimulate the economy by giving more money to Jeff Bezos with the wealth effect. That doesn't work very well. But when you give money to people, that works. So, COLA is one of them. And then the second, which I think a lot of - Cost of living adjustment, that's the acronym that you hear. Cost of living adjustment is referred to as COLA. Yes. And the second that a lot of people missed was the adjustment to the income tax brackets. And this is very much the same idea.

8:51So that's to avoid something that's called bracket creep. So when you have high inflation, basically the value of everything goes up, like price, wages. So if you wouldn't move the tax bracket, you would fall off, you'd pay more in taxes, right? because 150 ,000 is now 200 ,000, so you're in the highest bracket. So what the IRS does is that every year, also in October, same time, based on the observed inflation, it's like, okay, I'm going to raise my brackets for next year. So October 18, the IRS came out and said, okay, we're going to raise it by about 7.1%. And that applied in January 2023. So pretty much everybody who's not in the highest bracket, because the highest bracket doesn't have a top, effectively got a 7 % tax rebate.

9:37This is money that we, American taxpayers, used to send to the Treasury every two-week pay period, and we don't have to do that. So you have all your 67 million retirees plus all the Americans who are working who are enjoying almost double-digit growth in their nominal income. At the same time, inflation is falling. I mean, I think it's going to come back, and maybe we'll get to that later, but effectively went from 9 % to 3 % inflation. But the adjustment for this year was based off last year's inflation. So there was kind of lag effect between when the inflation hit and when the compensation for the inflation hit.

10:13And I think this is where a lot of the stimulus came. And then after that, you're absolutely right to mention the IRA, the CHIPS Act. The thing about this big, you know, I can't remember, the number was something absurd, like$370 billion for the IRA, right? I mean, at the end of the day, it's just like, yeah, throwing a couple extra hundred, you know, just for show. But you can't spend$370 billion. That's physically not possible, right? So you have to spread it over time. Given the way public policy works, there's, you know, long and variable lags for fiscal policy as well. So a lot of that spending starts to hit.

10:50It's already in 2022, but it starts to hit in 2023. The chip stack, you can certainly see it. I mean, all the fabs being built all across the country, right? I mean, Texas, in Ohio. And these are huge projects, like$20,$30 billion projects. So you have all these sources of stimulus sitting at the same time. And again, this is direct spending. This is not, you know, like QE where, you know, you replace, you know, long-term bonds with short-term bonds or short-term bonds with bond reserves where you're actually just swapping to. Financial engineering at the margin. No, this is good old, you know, dig a hole and, you know, pay people to dig it and at night refill them.

11:31I mean, this is this is changing stuff. And yeah, when you when you do this in the economy, that's already running at potential where people still want to spend them. Yeah, you get some impulse out of this. 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. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus 500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo.

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12:55Yeah, I think that's really important because we've everyone sort of saying, how did we how did everybody seem to miss this? Because the calls for recession have been so persistent, so steady. And it was really characterized as, OK, well, we just don't know the lag from the Fed policy when those rate hikes will hit. It's just delayed. There have been offsets. But now you're hearing more and more. And that helps me understand maybe why people miss this and why they seem so surprised that we haven't seen more of a slowdown or more of a recession. And just a couple of comments from the audience who's listening.

13:37And Jonathan pointing out construction stocks are close to all-time highs. Jordan's saying it's pretty crazy all those years of QE just push assets higher. But really, we should have just been fixing bridges and potholes. I mean, there is that argument. You should require right there. I'm going to fix the bridges and let the billionaires, you know, alone. Yeah. Yeah, it should have been obvious from the start that, you know, the wealth effect benefits the wealthy, not that you get more bang for your buck fixing bridges than, you know, buying bonds. Absolutely. Apparently, a lot of economies thought otherwise.

14:16Yeah. So and now the staying power of this, because this is the important point, I think here when we're talking about that now, the IRA and some of that that chips spending, that massive number, you said it will take years and years to deploy. And there's always the chance. I think we all know how Washington works, that another party or something else comes in power deficits. Maybe people rethink that. And maybe you take some of that away or maybe you somehow figure out a way to claw some of that back. But when you're talking about this other stuff, it has staying power, talking about cost of living adjustment, index inflation, hard to find, figure out how they're going to take away money from seniors and Social Security.

14:57So that's probably pretty sticky, right? Well, yes and no. I mean, because really what matters is the impulse, right? It's the delta, right? So, of course, it's going to be, you know, it's going to be sticky, right? I mean, retirees are the largest consistency, you know, they will get their callers. But what matters is the size of this year's COLA versus last year's COLA. And keep in mind that it tracks inflation with a one-year lag. Okay, so it'll move with inflation, but right now it's in the economy. I think right now the estimate for next year's COLA is around 3%. That's what the League for American Seniors estimated came up last week with that number.

15:35So if we are what I expect, which is a rebound of inflation, and I think we see that in data tomorrow already, and then we kind of go to where I think inflation really should be, which is 4 % or 5%. I think that's where it's always been. You'll actually see retirees get a net real income loss next year as opposed to the kind of like 5 % real gain that they have. Same thing for the bracket story that I was mentioning about. Same story, right? The brackets in 2020 for your tax liability for 2023 will be based on inflation in 2023, which is going to be much lower. So it could be that if inflation re-accelerates, we'll have the bad kind of bracket creep where you go in the high bracket because inflation is higher than what the IRS had anticipated.

16:23So in a weird way, and I've spent, I don't know, hours on Twitter and podcasts arguing with all these recessionists this year, saying, no, this is not going to happen. You guys have it wrong. And I've always been kind of the lone bull on the economy. I suspect that I'm going to be more bearish on the economy than the consensus starting in January, February. Now, we'll get into 2024 with a lot of momentum, I think. But that momentum is going to slow. It's going to hit the brakes. And it could be that, you know, just at the time when the quote-unquote smart guys finally get it, the economy actually slows.

17:00because they i mean i'm not questioning the fact that you know the raising the headphones rate from zero to 5.5 percent in in 15 months i mean yeah at some point that's going to take a bite uh now i will say maybe you can go to into it later but there has been a weird stimulative effect at the beginning of this higher rates uh for the the fed's balance sheet effectively um but again And the delta was enormous this year because we went from zero, the Fed paid nothing on its liabilities until the first hike in March of 2022, to now they pay 5.3%. They have like$5 trillion in bank reserves and a reverse repo facility.

17:40So$5 trillion times 5%. That's$250 billion. The Fed is just writing checks to people. I mean, this is the GDP of a medium-sized country that the Fed is just literally at the end of the month. just crediting every bank balance with that money. So that was hugely stimulated this year because we went from zero. Next year, if we have the rate cuts that the market seems to price in, that impulse is going to be negative as well. Yeah. Okay, I want to put a pin in that because I want to come right back to that. But just very near term, both Colin and Christopher are asking, what do you expect for tomorrow's CPI?

18:21Do you think it's going to be in line? Do you think it's going to be weaker or hotter than consensus? This is very short-term right now, right? Yeah. I mean, making this kind of short-term forecast is the best way to look like a fool, and I will volunteer. And please keep in mind that I'm taking the hit here, so I'm going to say it's going to be hotter. I think consensus is for 0.2 % month over month and then three-ish year over year. I have a model that just looked at base effect and energy and it's probably going to be closer to 0.3 0.4 month of a month and then a reacceleration like 3.3 3.4 year over year um I'd have to run the exact numbers but basically the intuition is pretty simple right I mean base effect of right so June 2022 was the peak and then actually on a sequential basis dry 2022 was lower like this was the actual month of a month drop so we went from very negative base effect to very positive as far as inflation goes.

19:22Two, commodity prices. I mean, gasoline prices are very high. I live in California, about five everywhere. And that's a big short-term driver of inflation. And then third is the weakness of the dollar that probably will lead to some important inflation. So all in, I think we see a little bit of an upside surprise. I'm not sure that the market will entirely freak out because everything that I've kind of explained, I think eventually even the Wall Street economists will be able to understand that. And then, you know, oh, it's Bayes affected. So I think we surprised the upside. I don't think, and it's a huge upside.

20:03It's not crazy, though. Like a surprising upside, but within reason of what people are thinking about. I think for now, we still kind of have this narrative of the soft landing And that's kind of dominant. And, you know, I think we can withstand maybe one more month. But my view is that after that, it keeps going. And then that's kind of when we have the problem, maybe in the fall. So this was my next question. So what is your outlook? If we move just past the immediacy of this week's numbers, what is your outlook for inflation? So we've got all this momentum in the economy. And I'm holding the thought that you're going to get bearish next year.

20:38We'll get into that. But we've got all this momentum in the economy. What happens? what does that mean for inflation? It sounds like it would stand to reason that inflation is going to be problematic and we're going to see a resurgence because we've got all the strength in the economy, right? Yeah. Yeah. I mean, that's, in a way, my view about inflation is that we've reset at four or five percents. And we've been there, if you look at like the super core, the sticky, the trimming stuff, it's been there for about a year. Like the spike to 9 % was not very real right it was the oil shock the russia invasion the use car the plane tickets and then that took us down as well right but in reality maybe it was six percent last summer now it's around 4.5 uh and then that is my view that you know we will reset there that is actually a good thing for for the inflation target so i think that's where we want to go um in terms of of factors that i would stress so other than the short-term stuff we talked about the base effect and the energy prices, one area that I think people don't look at enough is healthcare.

21:41So according to the BLS, the price of healthcare in the U.S. has declined for nine straight months and is now cheaper to get cured in the U.S. than it was last year. So we have a deflation in healthcare. Sure as hell doesn't feel like that. I know. My premium went up by 15 % this year. I had my insurance. And I actually checked. Maybe I'm just unlucky. But no, I went to the ACA website, all the guys, the Obamacare that offer plans, it's up by a median 11 % this year. And it makes sense. I mean, the cost of everything has gone up tremendously. How could healthcare, which is mostly labor, how could that go down?

22:20I mean, we have these shortages of nurses, of doctors. Obviously, the big pharmaceuticals always know how to make money. I mean, healthcare is usually higher. How could that be? It's lower. And it's the same kind of mechanic. okay as in shelter you know like all the deflation is right now they love to point to shelter and owner's equivalent rent and it resets every year so it's lagging and blah blah blah blah blah okay fine i i mean i i can do that too but look look at how the bls looks at healthcare inflation you'll see the exact same dynamic annual resetting of prices because a lot of that negotiate rate and then instead of measuring the actual cost the it's imputed from the profits of insurance companies, which have been completely skewed over by COVID because for a year, no one went to the doctor because we were scared to have COVID.

23:13So we have this massive distortion that have created artificial deflation in the healthcare CPI, and that's 10 % of the index. So if you have 10 % of the index in deflation, if we go back to, let's say, 5%, that's 50 basis points added to the CPI. If we get that, there is no way we can get to 2 % on a sustained basis. 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.

23:44So I want to bring up a clip here because this is along the lines of what we've been talking about all week. Tony Greer sat down with Kevin Muir this week and had a great conversation about all of these topics. And Kevin expressed concern that the market psychology is too anchored in the past. Let's have a listen to a clip from that, and then we'll talk on the other side. I just want to contrast this and think about it in terms of 1982, when Volcker came and he broke the back of inflation, nobody wanted to own bonds. And the reason they didn't want to own bonds was because they were convinced inflation was coming back.

24:23and because they were convinced inflation was coming back, they kept the real rate, meaning the rate of bonds over inflation, extremely high for a long, long time. So you could earn positive real rates by buying the bond market because everyone thought it was coming back. Okay, it took many, many years for that kind of persistent real rate to decline. I think we have just the opposite right now, Tony. I think that we people continually underestimate how persistent inflation will be. And I think that that's why we're seeing people rush into the bond market back to the sentiment talking that we spoke about.

25:04They keep rushing back in there and they keep remembering the old era, the old era when rates went to 1 % or 0 % and how much money they made that way. So we are going to have persistent kind of over-optimism about bonds. And if you want, you can't just be short bonds. It doesn't quite work that way. Really what you want to be is long inflation.

25:30And that full conversation is available on our website. If you are not a member, you know what to do. Scan the QR code, O 'Brien has put a bunch of info in the chat for you. So, Vincent, are investors too quick to assume that we're going to revert back to a low inflation environment? Yeah, first off, great, great clip with Kevin. I mean, you know, fantastic guy. I mean, he's been in that higher for longer. His economy is stronger than you think camp at a time when it was not cool. So I... Kindred soul. Yes. You've been suffering together. He's also the nicest person. And so I'm very happy. And then, of course, I'm going to agree with what he says.

26:13I mean, he gets it right. I mean, you know, we drive in the rearview mirror, right? In the early 80s, people were traumatized by inflation and they kept interest rates too high for too long. And we're doing the exact opposite. Yeah. And it's interesting to bring it up, I think, because that part's about not just the data, about the psychology, how hard it is to turn psychology, turn that recency bias when that's all you've known. And in fact, Andreas was very honest about that when I asked him to my colleague, we were talking about this in a recent, I don't know if it was academy sessions or, and I said, what's the risk to your forecast or what do you worry about?