TDI Podcast: Grocery Inflation Bomb (#965)

29:34But you have other problems. You know, you saw that piece I wrote this week about PPI and agricultural prices. That Straits of Hormuz blockade on not only on oil, but on urea and fertilizers, that's going to be long lasting. That's going to be inflationary. How, where is this difference that you're sensing from reporting on the political side of this from, oh, we're, you know, we can get through this quickly and we're America, we're strong, to Wall Street saying, wait a second, we need to gear up for this. It's funny because in the initial way of thinking, the way the markets were reacting, it was something of the reverse.

30:15And one of the very smart analysts from RBC said something along those lines a week ago where she said that she was struck by the fact that many Washington-based security analysts anyway, who probably operate a little bit behind the scenes, were working with much more of a longer duration timeline than people in the market. It seems like the market is at least waking up to that now, certainly in the energy markets and in the bond markets, which is kind of your first real signs of real concern here, that those markets are starting to get frightened. We have mortgage rates back at a three-month high.

30:55We have short-term bond yields are going up on the expectation that the Fed is now kind of in a box, that they are not going to lower rates. So, you know, the market is, I think, finally waking up to it. And while there are the pundits out there who are saying, you know, yes, this could only take this amount of time or that amount of time. I think the market's reaction to the idea that Qatar's LNG terminals and, you know, production has been impaired now, as they said, as they told us, for three to five years really matters. And it's a slow creep that's kind of kind of growing through the rest of the energy market.

31:30These things, as you say, they they ripple and they ripple into places like agriculture. And that's the part where you go from the idea of the transitory inflation, as, you know, the Fed officials and Janet Yellen like to say four years ago after Russia invaded Ukraine to something that is not transitory. As we saw, it took a long time for inflation to even come down to roughly the three percent level, which was still higher than optimal for the Fed. And that trend lower has now been once again completely interrupted. And now we're going the other direction. And then you have things like diesel fuel prices through the roof.

32:08And let's kind of just say the obvious. Who uses diesel fuel? Well, a lot of places, but truckers. Trucks use diesel fuel. And what do truckers do? They transport my widget from Florida to New York so you can get it and buy it there, right? You know what I'm saying? And that means that the widget price is going to go up. This is no longer a, hey, companies can absorb for so long. Like you've been probably hearing about this, right? Companies have been saying, we're going to absorb these tariffs. We don't know how long they're going to be on. Now we're maybe getting a refund. Now they're being hit again.

32:43How are companies reacting to this? Yeah, they are. So, I mean, the first areas you start to see things are the obvious ones, the energy companies and then airlines and people that are immediately affected by the likes of rising jet prices, jet fuel, that is. They are now starting to talk about whether they have to cut flights. They are talking about having to absorb a higher, you know, bill from jet fuel. But that hasn't even really sunk in and kind of fanned out into the rest of the world just yet. We're only starting to see the first trickles. I mean, C.H. Robinson, the logistics company, spoke about it last week.

33:19Honeywell, a few days ago, said that it is going to see, you know, some sort of revenue-related hit as a result of, you know, its operations in the Middle East being completely impaired. And then you brought up diesel and you brought up truckers and, you know, and agriculture. I mean, they use diesel for their machinery. They use it for fertilizer production, of which, of course, that has also been hit by what's happened in the Middle East. And it kind of It all then flows through back into groceries, back into, you know, making gigantic things like steel and aluminum and all that stuff. It, you know, continues here and we are, you know, into a bit of a worrying economic situation that, you know, seemed like we were finally receding from the combination of, you know, years of higher energy costs.

34:09And, of course, the, you know, shock from tariffs from 2025 that had finally started to recede as well. So, you know, it's interesting because I, the word I'm going to use, hand wringing, for a while, I was looking at this like, okay, you know what? Oil is going to go up, of course, straight to Hormuz problem. The straight of Hormuz, in my opinion, not a problem. That will eventually open up and that will get things rolling again. It is these attacks on, we'll call it the manufacturer of oil in the refiners or in any other production. Those that you all, think about this. I mean, if you're listening, think about this.

34:47The oil is stuck in ships within the vessels that a floating long sea can't get through the Strait of Hormuz and then pass and get to its final destination. Okay, fine. The oil is there. It's there. So eventually it will get to where it needs to go. And you take that to its fullest completed thought, I would think, okay, stays elevated for a while because of supply constraints, and then it drops off. You cut off oil production, right? You cut off LNG, natural gas. You cut that all off. That's a whole different discussion, especially because it's not like, okay, start the boat and drive through.

35:25You're talking about the facility is down and how long does it take to rebuild it? Isn't that what's happening? Yes, that's what's happening. I mean, Qatar has already said it's going to be three to five years before it can get its capacity online. That's an enormous amount of capacity, 17 % of its capacity. And they're one of the biggest natural gas producers in the world, most of which obviously they export because they are very, very small countries. So they are there for export power. And the other big ones, of course, are Australia and the United States. And we've seen it with that and with other attacks.

35:56And it's not clear that those attacks are going to stop right now. Those things really do complicate things. And I would say that it's clear that a prolonged shutting of the Strait of Hormuz, which we are in right now, may ultimately ripple into other markets that we are perhaps in the United States not seeing as much because the international benchmarks are doing worse than U.S. crude in terms of the rise. But certainly that feeds through to big importers in Asia like Japan and like South Korea and, you know, China and the rest of those. And so what matters is having the supply that you have on hand and what may be sort of limiting the oil price rise is that it appears that, you know, quite a few countries did have a good deal of supply and storage as we do, as, you know, some of the EU nations do.

36:50But, you know, that's why there's this sort of, you know, weird sort of liminal space where what you're talking about could very well be true in that the supply that's out there in storage and floating storage and various caverns and things like that may be enough to hold over this market for a little bit if Hormuz can get open again. And if it doesn't, then that is not quite as bad as destruction of supply. But it certainly isn't good either. It's not close. But as you said, destruction of oil fields, of refineries, I mean, that is, you know, like people have said, the absolute nightmare when it comes to the energy world.

37:32And the only way you offset that is through demand destruction. It's through prices that go so high as to people that they stop using it. And of course, the places they'll stop using energy will be in emerging markets and in parts of Asia and places that depend on those imports from the Middle East. You know, it's interesting. You look at a country like South Korea and you would wonder, well, wait a minute. Why is South Korea getting hit so hard in their stock market due to the fact, which is a lot of technology there. But with this whole thing, they do not, and they're not the only ones, but they do not have any production of oil or energy at the country at all.

38:10They're fully reliant on outside sources. And the closest place to it was, you know, the Middle East, et cetera. And that's why their stock markets were moving like, what, 8%, 10%, 12 % in a day. Yep. Which is unbelievable. Now, mind you, the dollar came up a bit. Then it came down a bit. Then it came back up again. And that hurt a little bit from the South Korean won. But the main culprit was the fear that the energy was not there, especially to run their data centers. How are they going to do that, right, if not running through the LNG, liquid LNG and oil related? They have some renewables, but not enough.

38:53Not enough. Right. Pretty amazing. That's something to watch. EWY is the symbol, by the way, on the South Korean Kospi ETF. And that one is a real mover. A lot of fun to watch to see what's going on. But I'll tell you this too. If, in my opinion, if in fact there is a significant break in the oil prices, you'll see that jump pretty hard. Probably. I see that happening. So let's talk about the economy itself. Things that you're seeing here about, you know, we talk about this K-shaped recovery or this K-shaped, it's not a recovery anymore, it's an economy, where the haves, the people in the markets, those in the top 1%, 2%, 5 % are doing really well.

39:42Everybody else is not. The people that are reliant on a fixed paycheck are getting hurt by, this is before gas prices went up. Let's forget that. Let's forget about this last three weeks. Before that, the people on fixed income, those that were reliant on hourly wage, were seeing a much different picture over the last number of years, but especially over the last year when it comes to the economy. Can you explain that? Yeah, that's correct. And so what had been happening for a while, about four or five years ago as we came out of the pandemic, is that the folks on the lower end of the income ladder in terms of wages were actually seeing a little bit of catch up.

40:24That was notable for a year or two in part due to some fiscal policy and then just part labor-related issues. And that's disappeared. And of late, you know, the income gains are widening once again, both not just between, you know, the top and the bottom, but also between the top and the middle. And what's resulted is that much of the consumer spending in this country, in fact, almost half of it comes from the top 10 percent of earners in America. That is the thing that increasingly drives economic activity. And you can see it through the various announcements and pronouncements that come from publicly traded companies who talk about their efforts.

41:06You see numerous, up until recently, numerous airlines all talking about wanting to go up market. And I don't just mean the likes of Delta, which has always been in that area, but, you know, the likes of Frontier and Southwest and companies that were, you know, more inclined to serve the sort of broader mass market. You know, and you have the same thing. You know, one of the best performing stocks over the last something like 10 years or so has outdone most of the tech names is Walmart. Why? Because Walmart has found through online, its online memberships, that it can serve, you know, the plus 100 ,000 a year earners even more who are, you know, flocking to it.

41:49And that's become sort of the mainstay of things. And so sometimes I ask the question and I don't have a good answer for it is that you see the weakness in consumer sentiment surveys. You see that when those surveys go up, it's largely because the upper echelon earners, when asked, are happy about their stock portfolios. But you see the reasonably OK consumer spending figures that continue, at least until recently, to chug along in the United States. If we were in a recession, would we even know? Or is 70 percent of the country in recession and everybody else and the rest are the ones that are just kind of carrying this thing along?

42:24And maybe that's, you know, not much different from 10 years ago or something, but it can't, it's certainly not the way the economy always was. And so I can't help but think about that sometimes. And I don't know the answer to that question. It's like a company that does very well in their earnings, but yet multiple divisions are not doing well. Same thing. Right. You know, but what's interesting, you mentioned about Delta Airlines. Last week they came out with an announcement. They talked about how they, I don't even know how they did. I was like, what? They're like, they're projecting a much better travel season.

42:52All this stuff is going on, right? with people not wanting to fly due to war, people not wanting to fly, they don't want to deal with the whole line thing going on at the airports right now. And Delta comes out with this really rosy outlook. How does that happen? Yeah, that was curious to me as well. Seriously, it was weird, right? Yeah. Is it still, is it Ed Bastian? Is he still in charge of Delta? Is that who it is? He is. Yes, he is. And, you know, they had been doing, yes. And he is still in charge there and they had been doing very well. They seem to, at least as of right now, still have a very strong outlook for everything, which is interesting.

43:32And that was continuing up at least until very recently. It's possible that their Middle East business is pretty much de minimis. It's perhaps that their growth is the long haul flights to Europe and to Asia and places like that, as well as a lot of America. So and they do rely very heavily as much as they can on the higher priced seats in the economy plus in the first class and business cabins. So I am surprised in some sense by it, too. And we will be interested to see how that evolves over the next few months. Right. So, again, we see a lot of K going on, right? this world of many different levels.

44:17And, you know, if you're in one, you can only see that. If you're in the other, you can only see that. The markets themselves have been extraordinarily resilient, don't you think? Through all the things that we've seen in the last, I don't know, six months? I'm just going to do six months. We can go longer. But unbelievably resilient. And I think a lot of that still is the excess stimulus. A lot of people didn't see that the one big, beautiful bill act, the OBAA, that was, that was, that was stimulative. That was, yeah. And the expectation was that it was going to be stimulative for this year with some favorable things like tax refunds and that kind of thing.

44:54So the expectation was that that was going to come into the, you know, that that was also going to come into play as well. So, you know, we will see how that pans out as people start to get tax refunds. and if there is any kind of stimulative effect there as well. Right. Let's switch gears here. Let's talk about Powell. He's basically a lame duck right now, but yet still saying that if Warsh is not going to be confirmed, he'll stay in as a pro temp and just hang around. Not sure if he's going to stay in on the committee otherwise and also not going to be giving up any position at all until all the lawsuits are dropped.

45:38He came out with a conversation the other day where there was no change in the Fed funds rates and there was a lot of uncertainty. I think the most use of the word uncertainty in a Fed speech in a very long period of time. He also said that basically the war with inflation is not over. Right. Which I thought was pretty interesting. They were seemingly claiming victory or at least close to victory for a while. And now they're not. You got Stephen Mirren who's just, you know, I don't know what he's just wants rates lower. Forget him. But there was basically uniformity with the others about no increase.

46:11I think they're starting to see things. The PPI numbers were absurdly high. So what's the thinking out there on the Fed penciling in a slightly higher inflation look for 2026? Yeah, no, it was very interesting to see that. And what's also interesting, the most recent meeting as well is that, you know, some of the other governors, Christopher Waller didn't dissent in favor of a cut this time either. He had dissented back in January and gave a big, you know, his statement through the Fed as to his reasons on it after supporting rate cuts prior to that. But if he's not on board, you know, then we're not getting interest rates lowered anytime soon.

46:51And so, you know, and Powell was talking a lot about inflation, the inflation overshoot, a lot of the upside risks right now. And it has been, And, you know, we've already had inflation that's been high as it is for several years now. And so while there may be some concerns about the labor market that still exists, the labor market seems to be on the softer side. The job growth has not been great. And he even said that we've essentially we're at no job growth right now. You're still talking about, you know, a lot of uncertainty around the war and where things stood. You know, never mind the unclear situation with tariffs, which maybe that by now had been baked in.

47:27But you can't help but think that, you know, there's certainly the Fed is now on hold. The market doesn't see them doing probably doing anything this year. And if they're going to do anything, it's a rate increase by the end of the year. And as you said, producer prices were up, you know, by the most since July. We're at the fastest rate of growth we've been in a year at 3.4 percent for wholesale prices. It hasn't been as bad in the consumer inflation, but you never know. And, you know, and and and from a consumer's perspective as well, the thing that people, of course, notice more than anything else is gasoline prices.

48:00And those are just defiantly moving higher, not far off of four dollars a gallon nationally, which is always been kind of a pain point number. So I don't see any way in which, you know, the Fed officials can really credibly call for more rate cuts. And obviously they don't as well. Unless we look through the oil situation and realize it's going to create a lot of pain for individuals. And therefore, the economy slows down precipitously, which is the potential outlook that I'm seeing now. Before, I didn't see any rate cuts at all because I thought inflation was there. And now you would look at me and say, well, Andrew, here's the deal.

48:41There's going to be more inflation coming. But that inflation due to the stoppage of maybe fertilizer that's going to slow the planting season and create less yield. And then the other thing about oil, that all, well, semi-temporary on oil. I'll put an asterisk on that one. But the thing is that that in itself can slow the economy down so dramatically. Uncertainty, war, higher prices, that they may actually have to look at other options. and think about looking through the inflationary numbers, what I think eventually, once we get to that point, and actually cut rates rather than raise rates. Because I think if they raise rates into that and they do it because the majority of the gains are in energy, that would be problematic for everything else.

49:27That's just an opinion. I understand what you're saying, and you may very well be right. It doesn't escape my mind that we are entering into an uncertain period that you've just described, whereupon energy costs and, you know, associated costs like agriculture and other things and transportation continue to rise while the relative weakness in the labor market and the uncertainty around that and the higher costs kind of restrain growth. And there's a word for that I've heard. But don't say it. It's not one. Don't say it. Yeah. Don't say it. But still, you can't help but, you know, think that that isn't entirely out of the realm of possibility here.

50:06Yeah, we're entering the 70s again.

50:11good grief yeah we're entering the 70s i can tell you stories about that but um let's switch and do a do a little bit of a a right turn a hard right turn sure let's talk about um private credit for a second here the private credit world it's interesting because uh i've told a story before i don't think i've told you about a year or so ago i was at a conference down in Miami. And I was asked to come to this cocktail party at the end of the conference to meet a bunch of the guys. And there was a bunch of people that have been on the show and all that at the conference. So I'm there. I'll go. So I went down to the conference, went to the cocktail hour and I get literally swarmed out of nowhere.

50:53Like, I don't, I don't even know. I'm just like minding my own business by the way. And I guess by people telling me, Hey, how much private credits in your portfolios? what you need private credit i'm like who are you you know yeah and they're telling me private credit private equity you got to have it it's the thing if everybody's doing it you got to do it let me give you my cards and i was like by the end of the event i'm like oh and there was one it wasn't an event it was a two drink cocktail hour that's what it was i was like this is ridiculous so i immediately started thinking about that that was about a year or so ago and decided i gotta steer clear of this stuff for a lot of reasons i always always steering clear but i'm not gonna get myself into it.

51:31Let's put it that way. And that kind of really resonates with me now and how the move to really sucker, I use that word seriously and I use it unabashedly, sucker the retail into a non-liquid investment, which they said was semi-liquid, which is total bullshit, by the way. And they get them into this and not telling that really, you really can't get your money out without taking a major haircut on this. And here we are today. With 9%, I think there's a 9 % default right now, which is higher than ever that we've seen in a vehicle that you can't get your money out of. Right. Defaults would be worse if you could actually get your money out, by the way, because then there would be lack of liquidity.

52:23So you've got a liquidity lockup and you have a defaulting. Obviously, we never learn our lesson. Yeah. The reason private credit was born was because the need for, seriously, everybody should listen carefully. The need for a lack of transparency and hold up and lock up periods after the crapola that was pulled by the banks back in 2006 through 9. Right. That is no longer allowed. But once you bridge over to private credit, voila, you could do those kind of things. You could do that crazy kind of lending, lower your lending standards, hope for, wish for, you know, and that's what really happened here.

53:11And the question is, long-winded discussion to now throw back to you, is there any systemic risk in what's going on? You have to wonder, you know, you can't help but say, you know, you know, it doesn't repeat itself, but history does rhyme. This sector is now a two trillion dollar sector. And the worries that are coming through are the kinds of worries we've heard before. You know, returns start to fly. People start worrying about their money. Redemption start getting cut off. You know, they now start saying, well, you can't remove your money. Anytime somebody says you can't remove your money, people start to say, now I want my money.

53:48You know, that's, you know, a little bit more of a concern. The private credit sector is not as large as the subprime sector was with regard to housing. I mean, it's$2 trillion. I think the subprime was much larger than that. So in that respect, it's not as large. But, you know, there is a heavy amount of retail investment involved. The Investec people said it's somewhere around 16 percent of investment is retail investment, whereas in 2020 was like five and a half percent. So you you do have much more skin in the game from retail investment. Private default rates are growing. And so, you know, certainly there could be some ructions after you've already had, you know, a couple of those bankruptcies like those auto parts companies.

54:36You had the Blue Owl thing. And so you do have to worry about the transmission for all of the problems. if we start to see some real problems with economic growth may not be directly as a result of this. It may be that it is a side contributor if, you know, we see an economic slowdown as opposed to subprime housing where it was the absolute culprit and was at the center of everything that happened when the housing market cratered. But that doesn't mean that, you know, the world is, you know, or the country is out of the woods on it and that it shouldn't be paid attention to. It's just going to be yet one other thing that could be a problem for people.

55:16This is just, again, one, but private equity, private credit. I could tell you some of the private equity stuff that I've seen across my desk. I'm, I'm, that's not happening. I mean, literally, I could tell you none of it ever happened here. I have never, that I'm aware of, had any clients move into any, nothing that we've recommended. Nothing that we've said, we're doing this. We may have hedge funds and things of that nature and SMAs, much different Liquid, relatively liquid. Some have quarterly distributions. But okay, most of the – but this stuff where you're literally blind. Private equity, you're blind.

55:50You're hoping they're doing what they say they're doing with your money, and then they're sending you statements that are extraordinarily difficult for the average person to read. And then you have capital calls, and then you have distributions that are held back that can be utilized once again for capital calls in the future. So you have these kind of, I'm getting my money, but they can give it back to them. and a lot of strange things that go on inside of all this. Yes, absolutely. And they have total control of your money. And the transparency is not, which we call opaque. And dare I say that the oversight is much different than it is with your liquid investments through regular custodians and brokerages.

56:34Much different. Yeah. So if they don't get their shit together, to be honest with you, it's going to be a real death blow to this industry. The institutions will still want it, but retail is just going to say, you know, screw that. And by the way, you knew it was going to be a problem as soon as you started hearing them trying to get into the 401k plans. That was like the, oh God, here we go. Trying to rug pull on the 401ks, not a good idea. Yes, that's always the reason, isn't it? It's always the thing that you start to see is that as soon as you start to see this trickled into things like, you know, retirement plans and retail investment, it's kind of, you know, you can't help but feeling it's like the last rung on the ladder here, you know?

57:20Yep. Yeah. Let's kind of close out with some of the AI discussion. And, you know, Anthropic, that's a big thing. It's in the middle of this whole mess with the government. It seems that they don't want to contractually obligate themselves. Well, the government won't allow them to put into the contract that Anthropic can essentially throttle some of the things they're doing in the event that Anthropic feels that it's against what their core beliefs are. Is that an explanation? Is that right? Is that correct? Yeah, I think so. I mean, yeah, that was the dispute between Anthropic and the Pentagon was over what kind of guardrails it would be, you know, by which it would use its AI tools.

58:00And there was this all kinds of, you know, you know, back and forth over it. You even start to, you know, get to the point where then it gets labeled a supply chain risk. But it's funny as a result, you know, we just published a story about where we spoke to some Pentagon staffers and other, you know, former officials say that the military is reluctant to give up on Anthropics AI tools because they think they're superior to the alternatives. They, I think, tend to think they're, you know, better, that the Claude model is the best one, that the XAI grok is inconsistent and nowhere near as good.

58:41And so, you know, ripping that out from what the Pentagon uses doesn't seem to be something that's going to happen easily. Of course, you know, the kind of rhetoric that we've seen from the likes of the administration makes you wonder whether they're going to continue to try to take retaliatory action against Anthropic, which, you know, in there's a but but it has been working with the Defense Department for a good while. And so it's been using their tools. And as a result, you know, the, you know, the Defense Department, I think, seems to really value it. And that gives you the impression that, you know, just sort of, you know, chopping this out and throwing in something new will not be easy and will make things less productive.

59:23Well, also the other thing that I heard, I have some colleagues and contacts in the industry that knows a lot about this situation, is that the biggest concern is if the government says no government contractor can utilize Anthropic in any of the work that they're doing related to the government, That means that the trickle-down impact of that, where a lot of people are already embedded and ingrained, the tentacles of anthropic usage is inside of those companies, separate companies, private companies, public companies. Whereas IBM may be using – I'm just picking this as a weird example. But IBM may be using Anthropic for something to do with something that attaches to this that, by the way, has – that the government, some part of the government may be working with.

1:00:13That wouldn't be allowed. And then all of a sudden it's going to be like, wait a minute, I got to rip out the entire usage of this to what? And that has to go to what degree? You follow what I mean? It's really problematic. Yes. There's some real questions that I think people have raised about this decision and what it will do as far as productivity, the undertaking of doing this. And then the questions about, you know, how other companies that had been working with Anthropic, will they be able to use it for their non-governmental activities? And how do they make sure they maintain that wall as well?

1:00:53It feels like a lot of, you know, make work, a lot of stuff that's been added in that will make things difficult for more people. It's a path of most resistance kind of move is how I think some people are putting it. It's going to be kind of fascinating what falls out of this because there is a period of time that everybody has to undo this. But my hope is that they can come to an agreement if it is the best product. You know, if it's the best product and there is a desire to have some guardrails on it, I don't see the necessary problem with that. There should be for all of these kinds of products.

1:01:27But who knows? Who knows? David Gaffin, Reuters. Make sure to check out Reuters. Just read what he has to write and what is going on in the business and stock and the world and all that over on Reuters. Thank you so much for joining me as always. I appreciate you. Yeah, it's great to be here. It's always good to talk to you. Thanks so much. Thanks, Andrew. See you. Yeah. See you. Another great show of great information with a great guest. We have some other ones coming on. Next week, Howard Linzen. If you have not heard Howard Linzen in the past, you need to tune in next week as he comes on. He is a no-holds-barred tech giant and marketing guru, social media maven.

1:02:06Just a great guy overall. I've known him since 2007, I would say. One of the first guests I ever had on this show, actually, was Howard Lindzen. And he is just a really funny. He has great information. I think you're going to really love him. Coming up the week after that, Thomas Thornton from Hedge Fund Telemetry. So we are lined up. We are locked and loaded. Things are good. Thank you for joining me this week and every week, and I'll see you again real soon.

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