You run at Citadel. A 30 odd billion dollar hedge fund.
And you also operate the world's largest market maker, and that gives you access
to unique sets of data and analytical insights.
So I want to know what does your intel and what is your gut telling you about
the state of the world right now? That's a great question.
So the state of the world right now. There's been two big debates.
Are we heading into recession? And what's the trajectory of inflation?
And of course, the two are intertwined. I think we've been a little bit on a
consensus. We have felt that we would not have a
recession this year and 2022 and in North America.
That's borne out to be true. We are we're highly confident we're
going to finish this year on a modest growth note.
Now, the issue, of course, is 2023. When the lagged effects of the Fed
having increased rates will really start to grind on the economy.
My team for Choice Things 2023. We avoid a recession.
I'm a little more skeptical about that. I think that for the Fed to to truly
conquer inflation here, we're gonna put unemployment somewhere where the mid 4
handle and I find it hard to believe we're not going to have a recession at
that point in time, sometime in the middle to back half of 2023.
So a little bit of internal debate. And and frankly, what makes it all so
special is we have these debates endlessly and it pushes all of us to
think more critically about our perspectives, our views, and, of course,
all the investment decisions that we make on inflation.
We think we've seen peak inflation. Now, owners equivalent rent, which is a
big driver, inflation, because of the way it's calculated and estimated, we'll
see that continue to show inflationary pressure for the next few months.
But spot rental rates appear to have peaked.
Many metropolitan areas a few weeks ago. So we think that one of the biggest
drivers of consumer prices, which is rent, has reached.
Near-term peak and then energy prices are likely to roll over in 2023 as
compared to their twelve month prior. So two of your really big drivers of
inflation, energy, rent, we think we've seen a peak in and then across.
Goods. We think this is going to be a really
good holiday season for consumers because American companies have built up
such a substantial inventory of goods that they're going to need to sell here
heading into the holidays. So we think we're going to see pretty
good pricing for consumers as goods become very attractively priced to move
them out of warehouses. Now, why is that?
Obviously, in the pandemic, you couldn't enjoy services, you couldn't take a
vacation, you weren't getting a massage, you were going to dinner with friends.
So you bought a lot of goods. I mean, I can't imagine how many flat
screen TVs were sold to Americans in the pandemic that are frankly not used
nearly as much today as they were a year ago.
So this the shift from a goods based economy to a service based economy is
going to create this depreciation and pricing of goods, which, of course, will
will help bring inflation down. So we think the inflationary path has
peaked. We think by the end of 2023 are our
central view is inflation will be back to roughly a low to mid 2s range, which
is a dramatic change from where we are today.
Some Fed officials. And of course, it's so important to talk
about the Federal Reserve. It sets the risk free rate for the rest
of the world and of course, has created unbelievable complications with the
strength of the dollar. For emerging markets, some Fed officials
can say the time has already come to back off.
I could cite Charles Evans. I could cite Lael Brainard, who didn't
say it's time now, but it will be time soon.
Are we there yet? It's sort of like saying you go to your
doctor, you've got a bacterial infection and he gives you 10 pills to take.
And you stopped taking them after pill number seven.
And then you relapse a few days later. Like it's not yet time for us to change
course on our monetary policy. We want to see that we put the inflation
genie back in the bottle. We we've endured a ton of pain in
getting to this point. The housing market is definitely under
duress. Durable goods sales are under duress,
high ticket items are just out of reach for consumers today.
But we haven't gotten the job done and the take the foot off the brake right
now and not finished the job I think is the absolute worst mistake the Fed could
possibly make. Why what happens if they again, back off
too early? If if if you take only seven pills
instead of 10, what are the consequences for the U.S.
economy and for the global economy? Furthermore, so the biggest concern is
you on anchor inflation expectations. So right now, the American public
believes not as much as we'd like, but the American public believes the Fed is
going to get the job done. If we take the foot off the brake, we
don't finish the course of antibiotics. Inflation starts to flare back up.
The Fed would've lost credibility if a Fed loses credibility and inflation
expectations on anchor. Then the amount by which we'll need to
raise rates and deter economic growth will be a much bigger bill to pay.
And we just we shouldn't put ourselves in a position to pay that bill.
We should get the job done now.