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gold card In

6:00

the 1970s, they took real interest rates

6:02

negative. No

6:05

one's talking about doing something like that right now.

6:07

I mean, I think what

6:09

I'm talking about or advocating for is that

6:11

it's important to start a recalibration of policy.

6:14

If they wait long enough, maybe they will have to go

6:17

more, but the idea is to do a little bit now

6:19

so you don't have to do more later and

6:21

sort of stabilize economic conditions at the

6:23

moment. I think what's important is

6:25

that there's really not much of a right tail

6:28

risk to the economy. I mean, I would agree

6:30

with Joe in the sense that I'm not going

6:32

to light my hair on fire over recession risk,

6:35

but it's just important

6:37

to note the areas of the economy

6:39

that have been kind of responsible for

6:41

some of the slowing that we've seen

6:44

this year. It's housing and

6:47

consumption. Okay. I mean, if

6:49

you look at nominal retail sales and

6:51

food services spending so far

6:53

this year, it's actually

6:56

basically where it was in December. So

6:58

it's been flat for five months. And

7:01

then when you look at new home sales, they've

7:03

generally been slowing. If

7:05

you look at new homes sold that

7:07

haven't yet been started, it suggests that

7:09

we're going to see continued weakness in

7:12

residential construction spending over the summer.

7:15

So it's not just

7:17

about the economy slowing, it is, but

7:19

it's really about the areas from where

7:22

that slowing is coming. And

7:24

so I think it's important to just keep that in the back

7:26

of your mind. And to

7:28

me, it's balance of risks. What

7:30

is the risk for the unemployment rate? Tell

7:32

me the downside story for unemployment. Why does

7:34

the labor market retighten at this point? It's

7:37

really hard to come up with it. And

7:40

with respect to inflation, what's the

7:42

upside scenario for inflation? So

7:44

I think this sort of idea that they're just going

7:47

to be a slave to the high frequency data and,

7:49

oh, just another few more months and we'll get there.

7:52

It's kind of ridiculous when you don't

7:54

have a fundamental story for why that

7:56

risk is really worth paying attention to.

7:58

I thought it was really revealing. I

8:01

think at the last press conference, Jerome Powell

8:03

was talking about import prices. He's like, well,

8:05

import prices rose and we can't really understand

8:07

why. And then literally like 24 hours later,

8:11

the import price number comes out and

8:13

it was a complete dud, like it

8:16

fell substantially. And

8:18

why would you worry about import prices if the

8:20

dollar strengthening? I mean, how do you, how do

8:22

import prices work? I mean, it's just, sometimes it's

8:24

important to kind of stick with first principles. And

8:27

so, I don't know. I mean, I just, they never

8:29

really had a good explanation for why Q1 was so

8:31

firm in the first place. And they're sort of a

8:33

slave to the high frequency data. And,

8:36

you know, I just think that you have to have

8:38

like a fundamental framework in place. And the way to

8:40

sort of frame this to the markets is, look, labor

8:43

markets are an important driver of inflation in

8:45

the way we think about the world. And

8:48

the inflationary impulse from the labor

8:50

market is basically zero. We've

8:53

trimmed excess labor demand as is evidenced by

8:55

job openings, which is a series that they've

8:57

been paying so much attention to. And

9:00

if you look at the unit labor costs over the

9:02

last year, they're running under 1%. So

9:05

where is the inflation going to come from? That

9:07

supports a recalibration of monetary policy.

9:10

I see. And we can

9:12

take it by approach. If that's what I would say,

9:14

but, you know, Joe, as you know, I don't have

9:16

a PhD and I'm not at

9:18

the Fed. So, you know. I don't have a PhD.

9:21

Tracy, do you have a PhD? No,

9:23

of course not. I have a postgraduate

9:25

diploma. I like the way

9:27

you pose this question, which is that it's

9:30

understandable in the abstract to say, you

9:32

know, it's understandable in the abstract to

9:34

say, oh, you know, there are risks

9:36

to both sides. But the onus does

9:38

seem to be on the sort of

9:40

hawks to say, okay, like if we're

9:42

going to get a reemergence of inflation,

9:44

where's it coming from? Because the story

9:46

about labor markets and so forth was

9:49

kind of a compelling story for years,

9:51

except now we do have this pretty

9:53

clear labor market slowing really across a

9:55

range of indicators. Here's my

9:57

question though, like, all right. So they want to see.

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13:38

Stiefel Nicholas and Company Incorporated, member SIPC

13:40

and NYSE. Neal,

13:42

you mentioned the idea of companies getting a

13:44

little bit more cautious just then. I

13:47

was overjoyed to see in one of

13:49

your most recent notes, not just a

13:51

mention, but an entire rendering of the

13:53

beverage curve, which is something that has

13:55

been kind of like a hot topic

13:57

in recent years. It's basically the relationship

13:59

between job openings and unemployment. And for

14:01

a while, lots of people were looking

14:04

at the beverage curve as sort of

14:06

like the key to whether or not

14:08

we would have a soft landing. But

14:10

it was really interesting. You were arguing

14:12

that looking at the beverage curve, it

14:14

seems like you could have an even

14:16

larger increase in unemployment if things start

14:18

to turn for the worst. Can you

14:20

talk to us about that? Yeah,

14:23

sure. So as you mentioned, the beverage curve

14:25

basically relates changes in the job vacancy rate

14:27

to unemployment. For the better

14:29

part of the last year, the labor markets have been operating

14:32

on sort of the

14:34

vertical part of the beverage curve.

14:37

So you can trim job

14:39

openings or labor demand. Job

14:41

openings are a proxy for excess labor demand.

14:43

You can trim excess labor demand without seeing

14:46

much of an increase in

14:48

the unemployment rate. And that's more or less what we've

14:50

seen for the better part of the last year. But

14:53

if you look at where the latest points are kind

14:55

of lining up, it looks like we're basically

14:58

we've normalized. So

15:00

in other words, any further deterioration

15:02

in labor demand from this point

15:04

will imply higher

15:06

unemployment. We're no longer on that vertical part

15:08

of the curve. And so

15:11

that's what I'm concerned about. And I

15:13

think the risk is, unemployment

15:16

never just goes up a

15:18

little bit, right? I

15:20

mean, it's either up a lot or not

15:22

at all. What

15:26

we've seen in the last year

15:29

has been somewhat ahistorical in the sense

15:31

that we've seen a fairly notable increase

15:33

in the unemployment rate. And we haven't

15:35

seen recession. But I mean,

15:37

how far do you really want to push that

15:39

experiment? Particularly when broader

15:42

measures of labor utilization

15:45

suggest that if anything, the U3

15:47

unemployment rate at the margin is probably

15:49

overstating the degree of health in the

15:51

labor market. But things like the

15:54

quits rate, they're actually lower today than they were

15:56

right before the pandemic. That's, of course, true for

15:58

the higher rate as well. As

16:00

I mentioned, I talked about unit labor costs,

16:03

but the fact that labor turnover is so low

16:05

and the quits rate's been coming down, that would

16:07

suggest that there's not really much wage pressure out

16:09

there. I mean, if anything, it's more

16:11

likely at this point that firms are

16:13

holding their workers flat relative

16:15

to last year, more so than changing

16:18

their pay, moving

16:20

their pay up rather. And so,

16:22

that again, I mean, so where's the

16:24

inflation coming from? The labor markets are

16:27

not consistent with an inflationary impulse. And

16:30

the Fed believes that they're running a

16:32

very, very hawkish policy. They should be

16:34

much more concerned about potential downside risk

16:36

to growth than upside risk

16:39

to inflation. And what do we know about growth?

16:41

We know that growth is slowing relative to where

16:43

it was last year in

16:45

two important sectors, housing and consumption. Tracy, can I

16:47

say something that bothers me a little bit? Sure.

16:54

Now I'm nervous. No, no, it's not

16:56

that bad. So listening to like the

16:58

Fed officials, I'm trying

17:00

to think, I don't want to express an opinion here

17:03

because I don't do that, but can I just say

17:05

people, so there seems to be, and Neil described the

17:07

state of the labor market as the

17:09

hiring rate is down. So if you're looking for

17:11

a job, your odds of getting a job have

17:14

declined. Right. But we

17:16

haven't really had a layoff cycle. And so

17:18

there seems to be like some comfort with

17:20

this dynamic that's like, okay, like this is

17:22

softening. But like people who don't have a

17:24

job and looking for a job, just cause

17:26

they're not recent layoffs, like they count too.

17:29

No, for real, you know, like there seems to be

17:31

like this view it's like, oh, well it's okay. Cause

17:33

it's just that the hiring rate is down, but at

17:35

least we aren't seeing like layoffs. It's like, yeah, I'm

17:38

glad we're not seeing mass layoffs, but also the people

17:40

who are looking for a job are finding it harder

17:42

and harder. That's not good either. No, of course not.

17:44

I mean- The inventory thing works, right

17:46

guys? I mean, you don't have, right? I mean, it's

17:48

just basically it's taking longer for

17:50

the excess housing inventory. Yeah, sure. The

17:52

process that's driving up inventory is the

17:55

same thing with unemployment, right? Like if

17:57

you lose your job at

17:59

any given month. people are losing the job,

18:01

it's taking those people longer amounts of time

18:03

to find a job, right? So over time

18:05

you continue to, like, right, it's like a

18:08

bathtub model of unemployment. Yeah. No, I get

18:10

how the, I get how it works. I'm

18:12

just saying like, they count too. You should

18:14

make a t-shirt, Joe, that says they count

18:16

too. They count too. Actually, this reminds me,

18:18

so one thing I was thinking about is

18:20

like, so much of the labor market tightness

18:22

was driven by the services sector in recent

18:24

years. And you know, we saw the displacement

18:26

of workers there, and then it took a

18:29

while to get people back. And then there

18:31

was a ton of pent up demand and

18:33

everyone wanted to go out to restaurants again

18:35

or go on vacations or whatever. I

18:37

do feel like potentially the peak of that

18:39

is over, which kind of begs the question

18:42

of, well, if you're not going to

18:44

get additional tightness in the services market, then where

18:46

does it come from? I don't think it's going

18:48

to come from like AI investment and everyone suddenly

18:50

becomes a chat GPT prompter or something like that.

18:53

To that point, if you look at

18:55

average hourly earnings in retail

18:58

trade and leisure and

19:00

hospitality, they've

19:03

slowed precipitously over the last year. I

19:05

mean, those are the two industries, those

19:07

two sort of service industries that got

19:09

so much attention during the COVID pandemic,

19:12

because you know, sort of a

19:14

proxy for kind of low end service work, you

19:16

know, these are the people with high propensity to

19:18

suspend, but their wage growth has been

19:20

slowing over the last year. So

19:22

again, I mean, where is the inflation coming

19:24

from? I just keep coming back to

19:26

this point, like, where is the inflation coming from? You

19:29

know, people may, you know, you can

19:31

point to oil or something like that,

19:34

but I just don't really, that's not

19:36

really a broad increase in prices. Ultimately,

19:38

the labor markets are an important driver

19:40

for how the Fed thinks about inflation

19:42

rightly or wrongly. But right now, unit

19:45

labor costs are basically

19:47

zero. So, you know,

19:49

I think that there's room for prices to keep

19:51

coming down. Obviously, in

19:53

private and in public and in every

19:55

statement that any member of the Fed

19:58

has ever said, was kind of, Johan

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