The Fed: In a Monetary and Macro Bind?

27:33And they undid much of the tapering that had taken place over the previous two years. And we've seen now the same thing with the bank term funding program that happened back in March, where the Fed literally, again, created hundreds of billions of dollars to bail out these institutions. We're going to take another quick break and be right back with more of the day's top analysis on the Real Vision daily briefing.

28:02So what's your take on the reversal of the quantitative easing and then the reversal of the reversal going from easing? What was your perspective on what happened there? Is it that Chair Powell comes in with the best of intentions? He goes in to do the right thing. And then you find out that there are just these cracks in the system that won't allow you fundamentally to do it because of the structural challenges that have been put in place because of over a decade at that point, I guess, of quantitative easing. And you find out that if you do that, if you take your finger out of the dam, it breaks.

28:38Right, exactly. I think Powell just failed to appreciate how bad the problems from Zerk truly are. And so when he gets to the Fed, he decides we need to begin normalizing operations. And they begin to do that. And the problem is that the high interest rates, you know, there's this big misnomer that we really should address, that high interest rates break things in the financial world. Nothing could be further from the truth. High interest rates expose what the low interest rates broke. The low interest rates do things like create interest rate risk. They incentivize malinvestment. And then those things rear their ugly head when interest rates begin to rise and people realize what the real cost of money is, what the real value of time is.

29:22And as a result of that, Powell figured out or Powell realized, I guess, that it wasn't worth the pain. And so he decided to once again put off the pain in the same way that the Fed did repeatedly, whether it was quantitative easing one, two, three. Talk a little bit about the natural rate of interest, R-star, how that gets calculated and how that changes over time. Well, it's essentially left up to the free market, to private individuals. You know, there's an interesting treatise, and the psychologist's name is eluding me at the moment. But he essentially argued that as societies become more and more hedonistic, they value the present more and the future less.

30:07And his observation was that essentially that natural rate of interest is going to change as culture changes. And so it was not so much a factor of things like technological advancement for him so much as it was simply a purely cultural and even somewhat of a religious phenomenon. on. I think he would go so far as to at least insinuate that to be the case as well. And so you don't see a constant R star, let's say. You don't see a constant natural rate of interest over time. It's a product of, as everything is with economics, right? It's a product of supply and demand. And the factors that create and compose those supply and demand curves are going to change over time.

30:56So we've talked a little bit about the how, the functional mechanics for how this stuff happens. We've talked about some of the risks that are building in the system, in your view. What is the likely forward path, the likely scenario? Do you have a sense of when or if some of these challenges that you've just discussed here are going to potentially manifest themselves in markets? Lots of investors, of course, are curious about the market-based implications for what's happening in the economy and with the central bank? Sure. It's a great question, Ash. One of the really interesting things, there's been a lot of attention right now on the banking sector about how so many banks are holding these massive mark-to-market losses on their balance sheet.

31:39In other words, they have assets that if they can hold them till maturity, there's very little default risk and they'll get paid. But if they need to sell them before that maturity, if they need to raise liquidity. In the meantime, they're going to have to take some very, very big losses because interest rates have risen. And as all of your viewers, I'm sure, know, in the bond market, you see prices and rates move in inverse directions. The Fed, however, is first and foremost among those who have lost value. The Fed has about$1.5 trillion of losses on its balance sheet. Now, the Fed has the luxury, since it has a printing press, of very rarely ever needing to sell assets before maturity.

32:25Most of the runoff that happens with its balance sheet is simply just allowing things to mature and then not replace them. But some of its balance sheet is actually being sold, and it's being sold at a loss. The bigger loss, though, is coming from these reverse repurchase agreement operations and the interest on reserve policy. And as a result of that, the Fed has racked up a cumulative loss of over$80 billion, which is amazing because the Fed normally turns a profit, which it doesn't keep. It turns that profit over to the Treasury in something called remittances. And so if you look at the chart that shows those remittances, you see something that doesn't look like the Federal Reserve.

33:08It doesn't look like it belongs to the Fed. It looks like it belongs to one of these failed regional banks where the earnings all of a sudden just fall off a cliff. But that's the result of the Fed's failed operations. And again, one of the ironies here is that the Fed is essentially just creating money to fuel its losses. and it's trying to fight inflation by creating money, which is quite paradoxical. And yet that is the instance in which the Fed currently finds itself. So now going forward, what on earth does the Fed do? Well, these things can't last forever because if they do, the inflation that the Fed is causing actually gets worse and worse and worse over time.

33:52And so the Fed needs to wind these things down? How on earth is it going to do that? Well, it has two options. One, it can bring the supply and demand of loanable funds back together, and interest rates will then resemble what they really are. In other words, the nominal rate of interest will increasingly resemble the real rate, and the result of that is going to be a reduction in inflation. The problem is it is going to slam the brakes on the real economy, the private economy, while dramatically increasing the rate of interest that the Treasury is paying on its debt. And that is an option which the politicians are going to be none too happy about.

34:32The alternative is the Fed simply allows inflation to stay at elevated rates for an extended period of time. And we will do what we essentially did during much of the 1970s and even the first couple of years of the 80s, which is to inflate away the real cost of the debt. So none of these things are actually good options, but those are the options that the Fed is essentially left with at this point. So EJ, how do investors handicap which options they're going to take? I mean, just to play devil's advocate here for a moment, I've been doing this for a long time, and I remember covering these markets in 2009, 2010, and I remembered folks who had very serious experience with markets and macroeconomics, particularly folks who had backgrounds in Austrian economics saying, you know, this can't stand.

35:20This is voodoo. None of this stuff makes any sense. Everything is going to go to hell in a handbasket. And then you pull up the chart for the NASDAQ composite index starting when QE starts. And it's just unprecedented upward price accumulation on that. So I guess the question is, how do you reconcile what's happening in the underlying economy with what's actually happening in markets? How do you sort that out? How do you parse it? And how do you deal with these seeming potential disconnects precisely for the reasons that you enumerated earlier, which is that when you have essentially a magic bank account, you can, at least in nominal terms, have the impact that you want to see on these markets.

35:59I mean, we're looking at for the year right now, these numbers on S &P 500 is up about over 19 % on the year. NASDAQ Composite up 35 plus percent. NASDAQ 100 up nearly 42 % of the year, and we've just passed the end of the first half. One of the tragedies of ZERP was the fact that it encouraged speculation while disincentivizing investment in real assets. And so what we have seen over the age of ZERP is exactly that. We have seen phenomenal stock market returns that just simply have not matched earnings growth, for example, that simply have not matched increases in the size of the real economy.

36:40And that is all coming to an end now as the age of ZERP comes to an end as well. And you're going to see a shift away from those speculative ventures and towards an appreciation of real assets. But it's going to be much like, I guess the best way to put it is for the investor, let history be your guide. And so you have to ask, during times when the Fed was trying to fight inflation, there were a lot of price pressures in the economy, And we also had essentially stagnant economic growth. What were the assets that did best? And so investors want to hone in on that period of the late 70s and early 80s and say, OK, where are we today versus during that cycle?

37:26Right. We just had our 40 year high inflation. It has come down. And now we're moving into the stagnant phase. The Fed is belatedly trying to fight the inflation. And so you can essentially just map it out and say, where are we today versus back then? What are the assets back then that did well? And that's where you want to plow your money into today. Now, one of the differences is the fact that today the borrowings from the Treasury are just escalating at an absolutely just phenomenal pace. And I don't mean that in a good way. That's definitely used in the pejorative sense. But you can see borrowings by the Treasury are rising at such an incredible rate right now that it is eclipsed only by COVID.

38:14In the first month, I think it was, I want to say it was April 2020 was the month when we actually had a higher rate of borrowing. But outside of that, there's literally nothing in history that compares to what we saw when the debt ceiling was suspended. And so you have that added complexity as well. Now, going back to your question of how on earth does that affect the investor, that puts the Fed in a more difficult position. And the reason is that where is the Fed actually getting, excuse me, where is the Treasury getting this money from that it's borrowing? Well, it is going to have to get it from one of two places, either from the public or from the Fed.

38:55Now, right now, the Fed is drawing down the balance sheet. In other words, it is allowing more treasuries to mature and roll off than it is buying. So that's not an option. At the same time, the Fed is allowing things like reverse repurchase agreements to fall off. And same thing with bank balances. And so it doesn't look like the Fed's going to be any help there, which means the Treasury has to get this from the private economy. Now, that's going to do two things. One, it's increasing that demand on the loanable funds market, which is going to drive up rates, increase borrowing costs for the Treasury.

39:29But the other added complexity here is the fact that as money is taken out of those things like reverse repurchase agreements, which the Fed was using to sterilize that money, that money is now going to be allowed to multiply in the banking system. In other words, it's going to make the Fed's inflation fight even harder. And so we can expect that these higher rates are going to have to stick around a lot longer than I think anyone at Treasury or Fed would like them to. But that's something that investors need to be aware of, right? Unless the Fed is going to just completely give up the ghost on the inflation fight, throw its hands in the air and say, forget it, we give up, these rates are going to have to stay high.

40:11Well, you know, it's really interesting that you should say that, EJ. I'm looking right now, just crossing here, as we're having this conversation live, Chair Powell is speaking. Here's a headline. Powell says Fed can afford to be a little more patient. Monetary policy will likely need to be more restrictive for longer, Powell says. Powell says Fed will determine future increases meeting by meeting. So precisely what you were just saying. Right. But of course, he's throwing a bone there to the people who think that the Fed's going to give up on the inflation fight, right? So once again, he's giving himself plenty of wiggle room, I think, in both directions.

40:53But at the end of the day, investors need to decide for themselves, is the Fed going to be more hawkish or more dovish here? And I don't mean in terms of like, are they going to do another quarter percentage point rate increase? Are they going to leave rates where they are? That's not what I'm referring to. You don't need to, I think, engage in that kind of minutiae and that kind of guessing game. I just mean, generally speaking, are they going to be okay with continuing 3 % inflation, or are they actually going to try to get it back down to the 2 % target? And again, that choice has to be made with the background of the activity at the Treasury is creating more inflationary pressure, not less.

41:39So something that you were touching on earlier that I found really interesting was essentially, it almost sounded like what you were talking about was a sectoral rotation in U.S. equities. You were talking about moving away from the types of very high growth, long duration tech types of stocks that we've seen have just been obviously sizzling here as a general rule since the beginning of the pandemic. What do you think that looks like? What are the implications for investors and how do you sort of frame out what those categories look like in your mind? Well, I think a lot of that is already beginning to unwind itself, right?

42:13We're already seeing a lot of those effects where these different companies have already begun, I should say, to position themselves, to essentially protect themselves from the interest rate risk to which they were so heavily exposed previously. And things like that are a huge part of what brought down Silicon Valley Bank, for instance, right? You had all of these clients who all of a sudden said, uh-oh, we can't afford to continue rolling over debt at these higher interest rates. And so they needed to withdraw their deposits to immediately begin paying down debt because they couldn't get favorable credit terms anymore.

42:50And voila, that's how you get a bank run when 80 % of your depositors are doing exactly that, making these massive deposit withdrawals. And so a lot of these businesses are finding themselves in a similar situation where they need to pay down debt instead of rolling it over, where they need to forestall capital expenditures instead of taking on additional debt. It's very interesting, Ash, when you look at the different surveys by the regional Federal Reserve banks, almost universally, you're seeing capital expenditures just fall off a cliff. In other words, businesses are not planning to make these large future investments.

43:27Instead, they are essentially taking just enough money to maintain current physical capital levels and not buy anything that's unnecessary. A lot of that has to do with just how uncertain the economic landscape is right now. But it also speaks to the fact that credit is genuinely becoming tighter. So what are the implications? What are the next order effects? And what are you looking to happen going forward based on that thesis? Well, there's a couple of things to think about here. Right. One of which is the fact that businesses who have already gone into this by paying off a lot of debt are in great shape.

44:05The problem is that's not a lot of businesses. Right. When when interest rates literally were lower than the the the dividend, the dividend return that you could get on a lot of stocks. What did many businesses do? You had major corporations that were better capitalized than some banks and yet decided to, instead of using their huge cash balances, take on debt in order to buy back their own stock. Why? Because they got a better rate of return on the dividends that they paid themselves than the interest that they had to pay to the financial institution from which they borrowed the money. So there are not a lot of businesses in that position.

44:43But those that are, those that were not suckered by those low interest rates are in a great position and I think are great investments going forward. So what are those opportunities specifically on a sector-by-sector basis or just more generally, however you think about where those opportunities are? I think a lot of it has to do, Ash, with looking at real assets, so non-speculative investments. Now, one of the curious things there is that you have a lot of commodities, for example, which are really getting beaten up right now as people are anticipating demand is just going to take it, just fall off a cliff more or less with a global recession.

45:23And so those things are more so, you could say the timing on those is much more difficult. The reason being is that if you buy them today, you're very likely buying at elevated rates. The problem is that if you ignore them completely, you're also ignoring the fact that inflation is going to cause them to continue to rise over time. Now, with commodities, obviously, you're looking at a futures market. You're not looking to take delivery of those things. And so if you want to buy over a longer period of time, you're typically not looking at yourself getting directly engaged in those future markets, right?

46:03You're looking at different financial instruments that are going to do that for you. But again, I think the best thing to do is to go back in time and to look at that period, late 70s, early 80s, and find the sectors that did the best in the conditions which so mirror ours today financially. And what are some of those sectors? And what's the hypothesis that you apply to it? Is it a value investing framework? And what were those sectors that overperformed during that period? Well, first, first, I'll take the opposite and say the absolute worst were government bonds. Right. And a huge reason for that was just because inflation just destroyed the value of those bonds.

46:42And inflation lasted much longer than people thought it was going to. Just like the Fed for so long said, oh, no, inflation's transitory. There's nothing to worry about. No, it wasn't transitory. It looks like it's here for the long haul. But in terms of things that did very well, hard assets, commodities did very well. Well, housing did very well. Now, I understand that we have a bit of a housing bubble. That's absolutely the case. You can't tell me that that is not an asset bubble right now. But at the same time, the Fed has shown just repeatedly over and over and over again that they are not going to allow these bubbles to pop completely.

47:21They might allow the pin to be inserted and a decent amount of air to be let out, as what happened in 2007, 2008, 2009. But thus far, at least with this cycle, the Fed continues to bail things out, just like they did March with the banking sector. And so we can expect, I think, that same thing to happen again and again. So while it may be the case that housing continues to take a hit, prices have been coming down the last several months, right? We can anticipate that's going to continue to happen as credit continues to tighten. But in the long haul, it definitely is a good bet. And it's also so interesting because the housing market is so highly regionalized.

48:02When I talk to friends in Southern California, folks here in New Jersey and Connecticut, I mean, the house that I was born in, my parents' starter house, my mom was a school teacher, my dad was working in construction,$900 ,000. You look at that and you think, this is just something that's not within the reach of a school teacher and a guy working in construction in 2023. But this is a very sort of regional phenomenon that we see in addition to the broader based rise in those as a general asset class. It's just such a complicated market and exists at so sort of many different levels of granularity.

48:34That's a great point. And you always want to be careful, even in the best of sectors, that you don't want to grab the bad apple out of the bunch. And so, for example, you have a lot of different places. San Francisco is a big one that comes to mind, right? You don't want to grab the one bad apple in the bunch. You don't want to reach in and invest essentially in the one place where there are so many bad policies at the local and state level that essentially are creating its own little catastrophe. Now, at the same time, I wouldn't go and invest in Miami right now either because of all the major metros in the United States, that probably is the biggest bubble right now.

49:15And so you have both sides of that trade, right, where you have areas that are greatly depressed right now but likely to stay that way. And then you have areas that are essentially blown up just way, way too much and will probably come down. It's almost like an inverted barbell, right? You have the, you have the bubblicious stuff and you have the stuff that looks bad for some of the socio-cultural reasons that are happening locally on the ground. So you were talking a little bit about the market that you would not want to be in, which is government bonds. Interesting that we saw after that, you know, if you look at the chart there, I mean, we've been in this like 40-year bull market for bonds.

49:50I mean, the most durable chart right now in financial markets is the steady march downward until this most recent cycle in the 10-year treasury yield. I mean, it's literally been my entire life. You couldn't go wrong buying government bonds if you started this after the Volcker era. Sure. But again, this is part of the problem with Zirp, is the fact that these things can't last forever. And when they end, they end catastrophically. And that's exactly what we're seeing right now. You have all these bonds that no one wants to hold. And so everyone is having to sell below par. And this systemic interest rate risk is finally rearing its ugly head.

50:31And I would add to that one point, which is, yes, nothing can last forever. But for people in markets, it feels as though it's lasted forever because it's been their entire careers. I mean, we're talking about folks working on Wall Street who are in their 60s now who have never seen anything but a bull market and government bonds. You know, it's a, Ash, it's a really, really great point. And, and, you know, when, when we recall the fact that so many investors, even, even among institutional investors are very, very young, I'm talking to people who actually are executing these trades, right? Have, have known nothing but the post global financial crisis world.

51:08And so they essentially have known nothing but a bull market. The closest thing they ever saw was the shakeup that happened, again, with the taper tantrum towards the end of 2019. But other than that, because, I mean, let's be honest, we can throw out COVID. That was a freak thing that had nothing to do with the regular business cycle. So once you remove that from the mix, you're absolutely right. These people know nothing but a bull market, and this is entirely new to them. And they're beginning to realize that the bull market they have known for essentially their whole life has been a tissue fire.

51:42Yeah, so it's so well said. And this idea of how young the folks who are making those allocation decisions are, they're so young where if their mom or their dad worked on Wall Street and they asked them about it, they've never seen it either. Absolutely. And this is a really good reminder that tulipomania was a real thing, right? And I'm sure a lot of your listeners have no idea what tulipomania was. But it was many, many years ago in areas of Europe, mostly in the Netherlands, if I remember correctly, where the tulip first came into existence. And you had all kinds of breeders, essentially, of tulips, if you want to call them that, where they came up with all these different color combinations.

52:25You even had people manage to come up with a black tulip, believe it or not. And for some reason, people thought these things were good investments. They literally were investing in these flowers and the amount of real goods and services paid for these things was astronomical. I mean, we're talking people were trading years worth of a laborer's wages for a flower. And everyone realized eventually that this was silly. And yet they continued to do it because of the greater fool strategy, which basically means that, look, I know this thing isn't worth what it's selling for. but I'm confident I'll be able to sell it to a greater fool tomorrow who will be willing to pay for more for it than I was today.

53:08And that worked for a very long time. And then literally overnight, the bottom fell out of the market and the market for tulips just was gone. There were literally no buyers. So I want to get to our viewer questions in just a second as we've got some good ones going on, but I want to ask this final question just to get back to the sectors, thinking about what happened in the 1970s, defensive stocks, consumer staples, healthcare, I believe. Essentially, any place where you could get revenue at a cheaper valuation did much better, outperformed. What are some of those lessons that you think about as you set up this context for very much what sounds like a 1970s stagflationary environment?

53:45Well, things like energies, utilities, those are also, I think, very good plays in this environment going forward as well, in part because they are so able to pass along costs, right? You're not talking about a business where if the price goes up, the consumer is able to cut back, for example. No, I still need to use a certain amount of energy. Now, can I do things like adjust my thermostat to reduce how much natural gas I'm using? Sure, absolutely. Even things like gasoline, although it's incredibly inelastic in the short term, in the long term, it is pretty elastic in terms of demand. Meaning new supply can come back on the market in the longer term as price rises.

54:28Well, that, but I can also change my behavior over time surprisingly well, right? Although the average, I think the average age of the American vehicle fleet is something like 11 or 12 years right now. But if you give it five years, you figure half of the fleet has turned over. And so one of the things that we saw, for example, in the 2010s, was as energy prices went up, people began to switch from heavier, less fuel-efficient vehicles to lighter, smaller, more fuel-efficient ones. And as a result of that, per person, we saw lower gasoline demand. It's so interesting that these markets that are essentially in the short-term very inelastic become longer-term elastic.

55:13You think, well, well, maybe that Cadillac Escalade is not such a great idea if I'm paying six bucks a gallon for gas, maybe I'll get the, you know, the Honda Accord hybrid. Right, right, exactly. But, you know, there's only so much that you can do that when it comes to utilities, when it comes to energy, right? There's only so much that I can reduce my energy consumption before I get to a point where I would just rather cut back somewhere else, right? So something like a restaurant, for example, where I can choose not to eat out, I can eat at home and save money there, I would rather do that than have to run around shutting all the lights off of my home or not turning the lights on at all, let's say.

55:53So again, I think things like energy and utilities, I would throw those in with some of the other things that we would consider the consumer staples. Okay, here's a question that comes with from Dee Gardner. Dee wants to know, can all central banks do this or just the U.S.? Essentially asking if the extraordinary power the Federal Reserve has is something that's mirrored by other central banks around the world. The answer to that is no. But to what degree do you think that answer is no? That's a really, really good question. I think a lot of it has to do with the fact that the United States dollar is still the reserve currency of the world.

56:32Now, that's getting a little perilous, right? We are doing, it's as if we're doing our level best to destroy the dollar as the reserve currency of the world right now. But the fact is it remains so. And one of the things that that has allowed the Fed to do is actually export inflation in much the same way that the British did in the interwar period when they foisted the pound sterling standard, well, I should say the pound sterling exchange standard on continental Europe. And so as the rest of the world uses dollars as they use them for settling international trade or for maintaining reserve balances, whatever the case may be.

57:11The fact of the matter is that as the Fed reduces the value of the dollar by creating more of it, it is reducing the value of the dollar, not just of dollars held domestically, but internationally as well. And so it is essentially a way that the Fed can tax the world in order to help pay for those unfunded treasury expenditures. So the Fed does have that unique power, which a lot of central banks around the world just simply don't. They don't have anything like that. Next question comes from Timothy Harris, who wants to know a little bit more about the difference between reverse repo and reverse purchasing.

57:49Oh, that's a really, really good question. So essentially, when we're talking about the repo market, right, these are strictly short-term loans. So this is something that the Fed is doing theoretically just so it can buy time for open market operations to catch up. So this is not something that is supposed to go on in perpetuity. But the Fed is allowing it to do so in this instance because, again, it's trying to square that circle of creating money for the government to spend without causing the commensurate inflation. But again, this is short term. This is supposed to be a loan versus those regular open market operations, right, where the opposite of the buying securities is going to be selling them.

58:37That's the reverse there. And you're simply just allowing that money to be extinguished as it comes back to the Fed, as opposed to sterilized, or if you want to think of it this way, as temporarily extinguished when the Fed decides to hold those funds overnight. Here's a question from Samantha Bowman. I love these devil's advocate questions. Does EJ believe that election could upend his thesis that rates will remain high at least in the interim 12 to 18 month period? Great question. Whether I think the results of an election could do that? Correct. That's a really, really good question. I think part of the reason why Powell decided to keep rates way too low for way too long was the fact that he wanted to be reappointed as Fed chair.

59:24And if he had started hiking rates when the reverse repo market started getting way out of whack, which that should have been the warning sign, right? Wow, we need to get rates up. Because don't forget, reverse repos are just as much a cause as they are in effect here. So when reverse repos are spiking like that, it's a signal to the Fed that it's having trouble maintaining a floor on interest rates. And so how do you get interest rates up? Well, you can either increase demand or you can reduce the supply. And instead of reducing the supply via selling off the balance sheet, they decided to do the opposite.

1:00:02They kept buying, which is why reverse repos just go through the roof. Except what did that do? Again, it allowed the Fed to make up for the Treasury's deficit without causing inflation to spike, at least not right away. But even reverse repos could only hold the dam, could only hold the water back in the dam for so long before it started to break. So I think that's a really, really great point that if we do see a change of power in the election, or even if we don't, you still have the problem of the president, whether he's a Republican or Democrat, is going to want lower interest rates, not higher rates.

1:00:37So that is certainly a consideration. We like to think the Fed is apolitical. We like to think it's above the fray. But I think Powell has shown us he's no Volcker, and he is none of those things. He is not above the fray. He is certainly not apolitical. So here's a headline. Rate cuts unlikely this year, Powell suggests. Downside to not curbing inflation outweigh the short-term pains, Powell says. talking about that right now, 2.10 spread, it's upside down, almost 100 basis points, coming in a little bit, I think, at 2 p.m., not really materially, from about 100 bps to, I don't know, call it 90, 97, so two, three basis points.

1:01:19Yeah, one of the really interesting things, though, Ash, with the yield curve, I think people are absolutely right to look at that as a recession indicator. But one of the things that's often missed about that is that the yield curve doesn't continue dropping usually into the recession. It actually begins to normalize before the recession hits. And it typically returns to parity, actually, before we actually are officially in recession, right? Meaning when NBER retrospectively dates it, that's when you see it actually coming back to being normalized and, in fact, positive. Right, right, exactly.

1:01:55So as we continue to see that yield curve steepen as we continue to see things get worse in that way. At this point, I don't anticipate the recession is actually going to, again, officially begin until December at the earliest at this point. So, E.J., we've been going now for about an hour. What have we missed? What other points did you want to talk about that you think is important for our listeners and viewers to understand? Well, I think one of the things that we often miss right now, because the Fed keeps talking about getting us back down to 2%, and a lot of people in the administration have been saying we're trending down towards 2%.

1:02:35By the way, it's not just the administration. There are a whole host of conservative economists, if you want to call them that, who have been saying the same thing, right? We're trending back down to 2%. I actually just had lunch a few days ago with a chief economist of one of the five biggest banks in the country, and he thinks we are absolutely trending down towards 2%. And then I showed him one chart and he immediately got worried. And it's the chart that shows the CPI, how if you look at essentially both the Obama and the Trump years together, you have less than a 2 % annualized inflation rate.

1:03:10In other words, inflation was more or less not a problem. However, right after Joe Biden gets into office as a result of the spending, both from his administration as well as how Donald Trump primed the pump with all the spending under his administration and the purchase of government securities by the Fed in 2020, you see inflation just explode and it's over an 8 % annualized rate. That all ends around July of last year, when all of a sudden inflation begins to take a totally different trajectory, in large part because the Fed changes its behavior. But prices have not been rising at an annualized 2 % rate, rather a 3 % rate.

1:03:51In other words, as the months that are dropping off from that 8.5 % annualized period, as those become fewer and fewer and fewer, the number is going down and down and down. The number in this case being the annual rate of inflation. But it hasn't been approaching 2%. It's been approaching 3%. And the scary thing is there's no sign going forward that it's going to go down further. In other words, we seem to be stuck here at this 3%. That seems to be the new trend, which actually makes sense, right, at least from a theoretical perspective. that certainly tracks perfectly because government is spending and borrowing and continuing to print so much more money now than they were during those pre-pandemic years.

1:04:35So in a lot of ways, it makes sense that inflation is 50 % worse. Yeah. One of the things I really admire about you is there's no red team, blue team. It's just the data are what the data are. And bad decision making has no party. Right. Absolutely. Actually, that is, I think, probably the main reason why monetary policy is far and away my favorite branch of economics. It's exactly what you just said. Money has no political allegiance, right? A dollar bill doesn't care if it's in a Democrat's pocket or a Republican's pocket. And whether the Republican or the Democrat spends that money, it has the exact same economic effects.

1:05:12It has the exact same impact on inflation, on supply and demand. It doesn't matter in any way whatsoever. EJ, this has been a fantastic conversation. Your first time on the Real Vision platform. I have the feeling this is going to be the beginning of a beautiful friendship. We'd love to have you back to continue this conversation. Before you go, final thoughts, key takeaways that you'd like to leave our viewers and our listeners with from this conversation. You know, one of the things is that you can never, ever expect to get something out of nothing. And anytime you are promised that, you should immediately have your spider sense up, if you want to call it that, because you are being sold a bill of goods.

1:05:52Look, the sins of the past always catch up with you, be they moral or monetary. And what we are seeing today is all of those monetary sins catch up to us. And we are having to pay the price of what we should have paid for in the past. And now, as we see, for example, the debt ceiling being suspended and Treasury going on what is essentially a trillion-dollar borrowing spree, the Fed's attempt to keep all of the monsters it created at bay are becoming that much more difficult. And although it's good that the Treasury is not borrowing out of bank deposits because that would exacerbate the bank failures that we saw earlier in the year, instead where the money is coming from is mostly it's about 90 percent coming from reverse repos.

1:06:37And so you're taking money that was sitting there idle but sterilized and not expanding the money supply, and now it's going to go out, buy Treasury, borrowing and spending it into the private economy. And the result of that is going to be more inflation, which means, again, the Fed is going to have to slam on the brakes harder. And it never would have had to do this. The Fed never would have had to cause all of the problems it is causing today had it not caused the problems it did starting way back in 2007, 8, and 9, when it first went down this wrong road of zero interest rates, which it has continued up until just a short while ago.

1:07:17E.J. and Tony, fantastic way to end this conversation, marrying the news flow that we got today with the broader, bigger picture and explaining those functional mechanics, talking about the risks and as well as the opportunities, the investment thesis in U.S. equities and elsewhere. Fantastic conversation. Thank you again for joining us. No, Ash, thank you for having me. Well, we'll have you back really soon. This was a great one. Thank you, sir. I look forward to it. Thank you for watching, everyone.

1:07:51What's up, revolutionaries? Thanks for tuning in to the Real Vision Daily Briefing. For more content like this, head over to realvision.com and get unfiltered access to the very best, brightest, and biggest names in finance.

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