00:00 Speaker A
What would you say, um, you learned this week, Michael? What were your big lessons, your big takeaways?
00:07 Michael
Well, to me, the most interesting part of the week was the fact that we sold off on the, um, CPI or the, I’m sorry, that we rallied on the CPI beat, and then we sold off on the PPI miss very briefly. The irony between those two is that the CPI outperformance was perceived as relatively positive for rate cuts. And then, of course, the PPI miss was very heavily tied into a particular segment of the, of the economy. It was tied to what’s called, um, tradeable services in particular portfolio management services. As a portfolio manager, I can assure you I did not raise my prices this week or this past month. What actually did happen is that that index is basically just a proxy for the S&P 500. So the great irony of this past week was we beat on CPI. That causes the, the S&P to rise. The S&P rising causes PPI to miss, which causes momentary distress. That was a fun learning this week.
00:57 Speaker A
It felt like, Michael, the markets looked at those prints, CPI and PPI, and said, listen, they looked it over and said, there’s nothing in these reports that derail the Fed from giving us that cut we expect in September. Is that what you saw?
01:14 Michael
Well, we certainly saw that with the CPI. We saw that pricing back off a little bit with the PPI miss, in particular, as I mentioned the areas and services, etc. Those are areas that are going to pass through to CPI and PCE in the next month. Um, that actually lowers the prospect that we’re going to get that giant rate cut, the 50 basis point cut that I think a lot of people had tried to price in. Um, we’ve already heard, um, Fed, you know, Fed presidents and governors come out and speak and say, we’re a little less favorable. Maybe we’re going to be a little bit more cautious after the PPI print.
02:05 Speaker A
I’ve had some economists on the show, Michael. Let’s get your take on this. Who say, listen, stop being so worried about the inflation boogie man. Inflation is going to come, and then it’s going to, it’s going to, it’s going to come, and then it’s going to ease. It’s going to be transitory. It’s not going to be persistent. Stop worrying. What do you make that argument?
02:33 Michael
So I generally fall in that camp, and I, I guess I’m one of the economists that you have on TV that say that sort of thing. But the, the, the simple reality is that the underlying forces in the global economy are actually quite deflationary, not inflationary. Slowing population growth, slowing labor force growth, this means all else equal that we need to make less investments to maintain the capital labor ratio, which is used for productivity gains. All else equal, this suggests that there’s less pressure than people want. A year ago, all we heard about is the shortage in housing. Now we’re hearing about rising inventories and supplies. Um, we have a very, very bifurcated economy right now. And the one thing that I would say that caught my attention and makes me a little bit nervous is in the inflation reports what we saw is a rapid acceleration and how much the government is paying for things. One of the views on inflation that I happen to subscribe to is ultimately, if the government decides to pay more for stuff, the rest of us are going to have to pay more for stuff. And so I’m a little cautious that we could see a pickup in inflation that’s a little bit more durable, but we’re just going to have to see how that plays out. Overall, I think we have to be very, very cognizant that slow growth is not particularly inflationary.