We've talked about the markets we've talked about the Fed what's the economy telling us.
Well the economy has two parts to it. Obviously one part is what the real GDP is or auto sales. Then there's inflation and
inflation is by far the more important part right now. But on the first part of the economy is doing OK. As you know we survey
companies and our retail survey dropped sharply this week but still pretty elevated. Housing is really getting hit. But on
balance the economy is doing OK. I think it's by growing 2 or 3 percent but headed to 1 percent.
The rig count. I'm sorry. Bank bank loans came out this afternoon and they're up 11 percent now.
And retail sales this week were pretty decent on inflation which is much more important.
I'm pretty convinced that inflation is slowing of oil prices came down gasoline prices came down and.
In the weeds used car prices dropped about 3 percent in the latest month and we survey retailers pricing power that's now
plunging. You've heard the stories about the inventories being high and we have been tracking that for a long time. It's now
really coming down. But the most important part and we don't get much data on this
or wages. And obviously the labor markets are very tight. But they had
from the conference board this week a measure of CEO confidence was almost a record low.
And then another survey that showed 80 percent of workers were concerned about losing
their job. Go figure that.
But we survey employment agencies every week and ask them among other things about wage pressure. And that's
now pretty clearly locked down. So I think you're beginning to see some moderation in wages. On top of prices now cooling and
the economy is cooling. So Bob Ed sees inflation starting to come down. The question is how fast it's going down. It's
starting to come down. How do you see it and is it coming down enough and fast enough so the Fed will not have to go much
further and rate hikes. It's definitely on the down. But the question is where does it
settle out and and does it settle out at the level that the Fed expects it to
and that the markets are discounting. The markets are discounting two and a half. And you know we're coming down from
six so are higher on the core rate. So but there are really two big imbalances in the economy right now that are need to be
resolved through this tightening cycle. And we're we're still in this tightening cycle.
It's too early to really see the effects. It hasn't been that long. To see the effects. And so chances are you're going to get
more of that weakness as you as you go along. But there are two big imbalances in the economy right now that they're going to
have to be resolved. One is the level of nominal spending in relation to the to the output capacity of labor over the past
year. Nominal spending is up 10 percent and incomes are up 10 percent. And if incomes are up 10 percent that gets spent. And
you get more spending at 10 percent. So you've got to bring incomes down.
And if incomes are growing by 10 percent but labor can only produce goods at the rate of 4 percent you get a 6 percent
inflation rate. And that's the basic that's the first imbalance and that's the
basic cause of the inflation that we have right now. It's really not the supply chains. It's just too much spending
which came from the monetization of government debt and the fiscal stimulation. The second imbalance is the level of nominal
spending in relation to bond yields. So nominal spending is even higher above bond yields than it is above output. It's 7 7
percent above bond yields. So it's the highest in 60 years. So if if if spending if people's incomes are growing well beyond
bond yields it's very easy to make debt service payments. And even if you lose your job or money prices go up or something you
can get credit. And so the credit numbers it is referring to loans up eleven percent. You know that's a backstop on the
economy and spending. So. So it's it's the high level of spending and income in relation to interest rates and and labor
labor production. And it's the availability of credit to sustain that. And and that all means that you have to get a tightening
of monetary policy and a sustained tightening of monetary policy to bring about an equilibrium. So it strikes me that Bob Brown
has away wages pretty quickly there. That's one of the issues here which as you said that's the harder to get your arms around
where are with wages in that wage price spiral. Because in fact if we are going to have continued inflation we're going to want
to make more money. They're going to go to their bosses and say you need to pay me more. Well CEOs now are really bearish. So
they're going to be happy to have a CEO on. But you Bob and I think about the same way.
But money growth has been slowing for about 18 months. We'll talk about that because it was growing gangbusters for a long
time. But you're saying it's turned around. So in the conventional way you had the checks you had quantitative easing
and low interest rates and some money growth got up to almost 30 percent which is obviously extremely fast. And that's why you
have the strong no growth. Now with figures I got this afternoon on bank deposits money growth is well less than 5 percent. And
so we've set up the mechanism for this novel growth which is way too fast to slow down. But that's what has to happen. And
obviously this is a really interesting thing. If it slows down does it come out of real growth or out of prices.
If you have your 10 percent nominal growth which everybody can understand I think right now it's about 1 percent real and 9
percent price. Right. And if you go to say 5 percent nominal of what's the mix then.
But if you take that much money supply away if the money supply is really down should that fix the inflation problem. Take us a
long way. Yeah. Fixing the year total in an economy there the year total sources of funds
is your sources for spending. And there are three sources there's money there's credit and there's income. Right. And so
when you get to tightening monetary policy they're contracting money. And that's absolutely right. The first effect of a
contraction in money is on asset markets because if you think about the printing of money by the by the Fed or any other
central bank they print the money and then they go buy bonds or they print the money in that money then goes into stocks. So
that money more most directly affects the financial markets. Credit more goes into spending. Right. Because you know you take
out an auto loan to buy a car. You don't take out an auto loan to buy a bond. And the Fed doesn't print money to buy a car.
They print money to buy financial assets. So so what you have is a push pull where the contraction in liquidity from the central
bank is a drag on the financial markets. While the expansion of credit is a support to spending. And so
you've got you've got that working in both directions right now. Well that's interesting to me. At least credit is going up. That
sounds like it's a good it's going to spur growth but that makes it sound like that's actually gonna make the inflation situation
issue worse. Does the Fed need the credit to come in so. Probably so. In my view of it which is a straight Milton
Friedman takeover of those three pieces that Bob pointed out. The first one is
where it starts as the money growth. And I track global short rates. It's a global economy. And they have
a higher impact on the U.S. economy than Fed funds. And they've been going up for about 18 months same time that money growth
has been slowing. So I think we're pretty deep in this and we had a pretty good drop in the stock market to your point.
And now inflation is coming down and the markets are beginning to think that this is.
Introduction to the next chapter. That that the next appeal of a young man. He's exactly right. So the money is the first thing
right. The. But what that money is the first thing. But it needs to get to the second thing and the third thing to have the
permanent effects. Right. Which means you have to be in a tightening cycle for long enough for that to happen. Right. And
we've been in a tightening cycle for how many weeks. Right. If you look at it global you're right. 18 months. Exactly. But you
have to be a long enough. Right. And so you know as we look forward we think that there's there's gonna be it's too early to
tell really how this plays out in terms of whether it's weak growth or high inflation or which one. But you're probably going
to get some combination of weak growth high inflation and rising interest rates. And all three of those are rough on asset
prices. And the mix is going to be determined mostly by how aggressively the Fed and other central banks tighten and stay
tight. If they have to pay the price of a downturn.