I don't wanna start with you because I watched your video for a couple days ago and you said you've never seen in your career
and it is quite a career. One of the original people on Wall Street lingo to say you've never seen this kind of this
disconnect between the markets on the one hand and the economy on the other. Well I'm catching up.
I'm beginning to figure it out. So what happened this week. You mentioned the 20 basis point
increase in bond yields. And I see now that's the problem. And I've gone back really since then. I've looked at nineteen eighty
seven and bond yields just went straight up. They went up to over 10 percent. They kept going up
and they went up so high they finally killed the stock market. And so that's now I'm sort of getting it. And in that period the
economy was fine. Even when the market went down 30 percent the economy stayed
fine and the Fed finally had to eat back off.
But that's that's the issue. And you know that issue is being driven by inflation worries.
And the price of oil was up I think five five dollars this week. It's not made a new high. But it's moving back up. And so there
you have it. The economy is good. Earnings are good. Earnings have come in strong in the first quarter
but rates are going up and inflation is a worry. And you know Larry Summers is
on your show. I've been with him all the way. Inflation is not transitory
but that's that's the issue right there. So Bob Ed says that's the problem. Is it also the solution.
Because we really have a lot of inflation. Don't we have to tighten monetary conditions. Do we have to get the yields up in
order to get our arms around inflation. Yeah well
we think we're at the beginning of a process. We're at the beginning of a challenging period. The markets have discounted a
tightening but there hasn't really been a tightening yet. So we're going to find out where as the Fed plays the game we're
going to find out how they play it. They probably confronted with the most challenging set of
circumstances in the last 60 years 50 60 years since the 70s which is a monetary inflation. The inflation that we've
experienced in the last 20 years is what we might call a cyclical inflation. You get strong growth low unemployment you
know gets you get a little bit of inflation. They tighten preemptively against it. But by and large money and credit
growth was relatively stable. Nominal growth was not too high. What we have now is a monetary inflation which was brought about
by the injection of a massive amount of money credit into the system which is now getting spent in the form of nominal GDP
nominal spending. And that nominal spending is way more than the output. And as a natural result of that you get prices going up.
So as you play that out going forward it's it it's become a self reinforcing process. We've got a
we've got a self reinforcing inflation cycle going on which is due to monetary considerations. And so what's going to be
required to reverse that would be to reduce money and credit comparable to the to the money credit
that was put in the challenge. When you have a monetary inflation like this it
becomes very difficult for the Fed to simultaneously get the inflation rate that they want and the growth rate that they
want. So you and you typically then have to air on the side of it to have the growth rate you want. You accept too high of
inflation or if you fight inflation you get a recession. So that's we're just in the beginning of that game right now. So
how much we're doing already. I mean you've pointed out in your charts the M2 is actually coming down and had been growing
dramatically starting to come down already. They're about to start selling off the balance sheet taking some of that way. Are
we already on our way to get our arms around inflation through really getting control of money. David you shouldn't have Bob
and myself on the show. Because what you just laid out as you know I agree with one hundred and
twenty five percent. Know we had a huge increase in the checks to people. The balance
sheet went up like crazy. And that manifests itself in a huge increase in the money supply. And now we're just trying to
figure out how to get rid of that thing. So we got up to about 30 percent on a year on year basis. And in March it was down to
10 percent. And I would guess in April's play 7 percent. So we've we've already done quite a bit but not sending checks out
anymore. And the balance sheet is going to start to run off now. So we've
made some progress. And I'd say Bob I've been surprised at how much
has happened with just a 1 percent fund rate no shrinking the balance sheet. Suddenly mortgage rates up to around 50 basis
points. The dollar's up 15 percent and the stock market's down almost 50 percent. And some stocks have been. Know really. Are
50 or 70 percent. So are the markets doing part of the Fed's job for it.
Oh yeah for sure but probably not enough. And the you know Ed raises the point that the
financial markets are much weaker than the economy. That's kind of the reverse of where we were for a while where the financial
markets were much stronger than the economy. And that does relate to the kind of things he's talking about
where you know if you take something like money supply money supply is not growing like it was the Fed's not injecting money
as they were. They're going to be drawing it out. But if you look at an economy we sort of look at it in a very
simple way which is there's a total amount of sources of funds and then there's where they go. The uses of funds and they can
the sources that they're really only three sources of funds. You've got the money supply you've got credit and you've got
income. And that goes into spending and it goes into financial markets. And then there's is a residual that sits out with the
Fed. And the what's interesting is that different things go in different places. When you inject money in the system it tends
to go into the financial markets. Credit tends to go into spending. So what we've got going on right now is the tightening
has reduced the flow of money into the financial markets. So we've got a hole in the bond market. We've got yields going up
but the credit is going into spending. So spending is staying staying high. But interest rates and
prices are going up and prices are going down. It's the opposite of where we were. And this is going to be a
real balancing act because if you're the Fed and you tighten and the stock market falls and the bond yield goes up but the
spending and the inflation continues you know how do you play that game.
It's not gonna be easy. So we did get jobs numbers United States on Friday at the very end of the week. We're still creating a
lot of good jobs. Is that helping or is that hurting. We've got a lot more jobs that would increase actually the
amount of money you have to spend. Wages are going up. Does that helping or is that hurting.
Good question. Because you know the Fed wants the economy to slow down. And so this is one of the good news is bad news
programs. But employment when you sit down and think about the economy is very complicated. Housing capital spending credit
expansion. But employment is everything. And whether you work for Bloomberg or Bridgewater or a casino you counted in
employment and employment is definitely strong. I must have half a dozen measures of employment and they're all strong like the
employment numbers that came out today. I've been surprised that wages looked like they might be slowing a little bit but they're
still quite rapid. And I hadn't quite thought about. Bob what you said but bank loans are now really taken off. And so that's
in your three part program the money supply slowing. But now the bank loans are starting to go up.
Some still haven't quite figured out how think it's going to play out because in a period like 87 the economy really just
kept on going. And also in another soft landing period of 98 when you had Russia crisis of LTC M he looked back at it. I
thought we were nothing. We were completely dead. But the of you know came out right on through. So it'll be very interesting to
see how we thread the needle on this but I think we'll reach a point where the community will decide that the Fed can take a
little off the get break right now. We're not there yet. I mean I hardly started yet. So you know one of the things that
I had an interesting chart where you just added employment growth and wage growth. And I think they added that they added
up to 9 percent. Right. Right. That's basically income. Yeah. So if you got 9 percent income
growth you're going to get 9 percent spending growth because people spend their money. And if you got 9 percent spending
growth but output can't grow by 9 percent you're going to have inflation. So.
The you're probably at a peaking process like I think Ed points out
you've had a rise in bond yields you've had some tightening from the stock market the dollar and money supply slowing down a
little bit. But I think as you play that forward one of the things you have to think through is where does that all settle.
You may get it. It may at a turn like this but where does it settle. And if it settles at an inflation rate of 4 or 5 percent
is that could be accepted by the Fed or. And if you look at what's priced into the bond market and the interest rate markets
the short term interest rates only price to go up a little over 3 percent so far to 4 or 5 percent inflation rate. I'm stuck
with a negative real yield on cash and the inflation rate that's priced in for the future is only two point seven. So where you
settle out is as important as the turning points that you have.