From The Dugout: Navigating Economic Crossroads: Inflation, Manufacturing, and Global Shifts
Introducing the Dugout, a new segment of the podcast where hosts Paul and Clint go one-on-one and talk about what’s going on in the world. In this Dugout episode, Paul and Clint hit on inflation trends, the consumer's spending behavior, the potential impact of the Xi-Biden meeting, and deglobalization. The conversation also includes insights into the manufacturing renaissance, the importance of the CHIPS Act, and the potential for a rebirth of American manufacturing.
RECORDED NOVEMBER 15, 2023
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Fat Pitch Ep 14 - AUDIO
Tue, Nov 28, 2023 10:06AM • 27:50
SUMMARY KEYWORDS
inflation, consumer, globalization, taylor swift, cpi, fed, talk, fentanyl, meeting, number, held, china, country, stimulus, biden, thought, year, pretty, good, clint
SPEAKERS
Clint Sorenson, Paul Barausky
Paul Barausky 00:02
Welcome, everyone. This is Paul Barausky, Chief Distribution Officer from Sealy Investment Securities and I'm joined by my co-host Clint Sorenson of WealthShield and welcome to the newest episode of the Fat Pitch Podcast. Today, Clint, we don't have a guest. You and I just get to talk about things on our mind.
Clint Sorenson 00:21
Yeah, I love this. You and I just get to chop it up about all the stuff going on in the world.
Paul Barausky 00:25
And listen, since our friends are kind enough to listen to us on stage and on webinars and in meetings, why not put it out over the airwaves? So let's talk about three things this week. I think two of them are always on your mind. And one is on my mind. Number one inflation. We've been talking about since peak inflation last summer. I remember calling you from Booth School of Business in Chicago. It's daunting when you're the speaker after Austen Goolsbee. Second the consumer, which ties into inflation. And then let's talk about Xi- Biden, a meeting coming up. So where do you want to start?
Clint Sorenson 01:04
Yeah, let's start with inflation. I think that's the hot topic. Right? We had a great number yesterday in terms of beating expectations flat for the month over month. We had PPI out today too. And so PPI was better than expected as well, wholesale spinning was down, I think point 5%. But yeah, that's a big win.
Paul Barausky 01:23
Well, you look at peak inflation last summer, what we were 9.1, around May of last year on CPI? And
Clint Sorenson 01:34
Yeah, we talked about it slowing, right. I mean, it's pretty obvious that hey, inflation is going to slow. But everyone was in this camp that it was just going to continue to the moon. So it's been great to see that it's come down for sure.
Paul Barausky 01:45
Well, let me ask you a question. So there's all this confusion amongst the folks that I talked to about core, super core, right? CPI, TCE? What's next? Let's manufacture so I believe right now. And correct me if I'm wrong, that the Fed’s favorite number is core PCE, which they now have down below four for the last 30 days. And energy prices have not gone the way people thought they could have gone after the Hamas attack on Israel. What are you looking at when you look at inflation? Because it's clearly down?
Clint Sorenson 02:22
Yeah, it’s clearly down. You know, I look at the dollar, that's my favorite thing to look at. Right? So yeah, because it's a leading indicator to inflation. So everything's priced in dollars if you're a US consumer, so I really like to look at the dollar really is the inverse of the dollar. But if the dollar is stronger, pretty much six to 10 months down the road, you're gonna have inflation, weaker, dollar weaker six to 10 months down the road, you're gonna have inflation stronger. So I like to first look at the dollar, Paul. Next I obviously look at PPI right, I want to see what different commodity baskets are doing. And you can look at energy, right? If you look at energy and gas prices, you can pretty much get it figured out. A CPI is a little confusing because they calculate it a little differently. But I think that's the headline number there by pays attention to but I'm a little odd. I look at the dollar first and foremost.
Paul Barausky 03:09
So, when I look at all that though, here's what's interesting. This is a different Fed, there's Fed speak. I mean, I opened up the Bloomberg calendar on Monday, and I think, Are there 20 Fed speakers this week? It was something insane. And so we never used to run like this, right? There wasn't all this. I mean, there was some subliminal messaging. But it wasn't this onslaught of speakers. And so when I saw when, specifically earlier this week, when the two and the 10 near both mercifully for a guy in the real estate sector, like me, went down. I thought, This is great things are headed down. And then further, I started to look at Fed Funds, futures pricing and zero chance of a rate hike in any meeting. Anymore gone, done, though they have a rate cut at the June meeting went from 80% to 130%. So what that tells me is now we've got this complete overreaction by the markets and that the Fed wants to come in and I don't know, give speeches to say No, we really do mean higher for longer. You think I'm just overreacting or do you see anything in this?
Clint Sorenson 04:17
I mean, the market has no clue what the Fed’s gonna do. No one respects the long and variable lag between a Fed tightening cycle and its effects on the real economy, and in particular on inflation and all these other measures. So the market always overreacts to both sides. And unfortunately, I think the Fed is over tightened today. Inflation was set to come down from a rate of change perspective just based on base effects, right, because that was the math of it, is it was going to come down, and they tightened, kept tightening and tightening throughout the higher inflation times and now they're done. But now we're getting inflation that is resuming its downtrend and by our forecasts, we have maybe a slight uptick into the first half of next year, but not meaningful enough, in our opinion. It's falling not to 2% in terms of core inflation, but it's probably, you know, 3.2 to 3.6, somewhere in that range. But definitely the rate of change has come down significantly, and the Fed’s still holding rates high. So I think they have to cut rates because they need to monitor the real rate. But yeah, it'd be interesting to see how they play this because Powell, to your point, has just said, Hey, here it comes. We gotta go manage the expectations. We said it was transitory–it was, but it wasn't as transitory as the market likes. So we got to step out there and show em that we're gonna prioritize inflation, and we're channeling our inner Volcker, we're not Arthur Burns, and we're gonna go out there just kill inflation with inflation now. And we've overdone it, I think.
Paul Barausky 05:48
You know, you and I have had this discussion for well over a year now about the whole transitory thing, I've probably beaten it to death, personally, but managing that last point down from inflation, that's where all the risk is. You know, whether it's taking four down to three or three down to two, however you want to play at what measure you want. That risk is always I think, in that last percent or so, in not crashing the economy into a deep recession. Since you and I both feel like we're basically already in one in some way, shape, or form, and not deflationary. Right? That's why two was always the number, not zero. So the over cool the economy, and I think the concern right now, frankly, is the consumer. I had to get off of fintwit the other day, I still called Twitter. I don't know what X is. X to me it was Xavier McDaniel. Onyx. Still the only guy that tried to pick a fight with Shaq. Not the best move. And I guess he would be that old Dallas receiver, but I refuse to say his name being an Eagles fan. But Dez Bryant, in case you were wondering. But um, you know, the consumer is the X factor, right? Consumer’s been spending like a drunken sailor. And I just don't know how long that keeps up. Because going back to financial Twitter, everybody that's trying to show you clickbait is trying to show you how the consumer is driving off a cliff.
Clint Sorenson 07:23
Yeah. I mean, look, we had tons of pent up savings, right? If you think about how much stimulus was put into the system. I mean, it's amazing. We had PPP loans, idle loans, we had direct stimulus checks to individuals. We had, I mean, the Fed doubled its balance sheet in a matter of days. 4.4 trillion, we spent another five, 6 trillion. It was funny, I did a presentation, and I think I sent you the meme, but it was Will Ferrell walking in saying, You did it, congratulations. Like we literally set a record, a record US federal debt. We set a record in terms of spending in terms of deficit spending. And guess what, now we have $8.2 trillion of federal debt maturing in the next 12 months. We've got to issue ,we've got to reissue that much debt.
Paul Barausky 08:11
You know, you bring up a good point. Everybody wants to say the consumer is spending like a drunken sailor. Yes. So is our government.
Clint Sorenson 08:18
Exactly. It's crazy.
Paul Barausky 08:19
Are you aware that there's still something like 400 billion in Arca money that has to be pointed to the specific projects?
Clint Sorenson 08:28
Yeah. And it, yeah, exactly, Arca money and then the Act, which is sitting in accounts, we haven't even begun to see all the rest of the stimulus. Now. I think that the consumer, though, is tapping out because all that savings that they had from stimulus checks is kind of drying up, and we're seeing it in delinquencies. So credit card delinquencies on a year-over-year basis are up over 50%.
Paul Barausky 08:52
Yeah, they're up. So are balances.
Clint Sorenson 08:54
But that's higher than any other time. Highest since 1991. That's higher than it was in ‘08. So there is pain in the consumer. Now forecasting when they're going to stop spending is anyone's guess, right? But at the end of the day, we're seeing some some signs that suggest that consumption is not going to be as robust as it has been.
Paul Barausky 09:17
Do you think we're gonna see a holiday spending, a bad number or do you think we're still not close enough that we'll see a good number?
Clint Sorenson 09:24
Yeah, actually, I've been looking at some of the, you know, what they call the high frequency data by folks like Bank of America, etc. And if you're looking at some of that, it looks like it could be softer than expected, but who knows? Right? That's my guess based on that information, credit card spending data, but you're getting mixed reports there. I mean, the US–what we do is we spend money, consumers spend money. That's why stimulus works so well. Post pandemic is we gave people checks and then we wondered why we had inflation. They were locked up with a Prime account right? And they’re sitting on their Prime accounts saying, I can't leave the house. So I'm just gonna start buying stuff, they just buying everything.
Paul Barausky 10:02
It’s so funny you say that. You know my entire career in distribution programs, every time I talk to advisers, it's, Don't send the income to my client, when you have a liquidity event, send it back to the account. Otherwise, there's a new boat, or a new car. Just wired that way. And we grew up in a consumer driven culture, where, you know, let's get something new and shiny. It's just that's how we're wired, particularly in the United States. And they're not much better over in Europe. You know, I just got back from about two weeks over there. I was in Copenhagen for the first time, I no longer feel tall at six foot three. Amsterdam, and then Germany. And look, they spend over there. I don't think they spend to the degree we do. I think we've ruled the world, hit consumer culture.
Clint Sorenson 10:51
We’re completely out of control. I mean, it's nuts. If you think about what we do for status, right? It's such a baked in part of our culture, that's what GDP is 70 plus percent consumption–some years been as high as 90% driven by consumption. If we look at our most recent real GDP report, which came out a couple of weeks ago, three weeks ago, maybe. If you look at that, it was all two things: government spending and consumption. And we're doing both at record pace, at record levels. So yeah, it seems it holds up. I mean, I would expect rate of change to fall there, Paul.
Paul Barausky 11:24
Yeah, I agree with you. So back to inflation, the report that I focused in on earlier this week. It compared Morgan Stanley's number on inflation on Fed funds rate, etc, when cuts are going to come–Goldman Sachs, which I think was a little more sanguine, and then the Fed probably using the dot plots. I could not get over how aggressive Morgan Stanley's stance was, on how early and how large rate cuts are, and how by the time we're getting towards the end of ‘25. Wow.
Clint Sorenson 11:55
UBS came out too, and they said, 275 basis points of cuts next year. So they're really expecting not only inflation to fall, but you have to be expecting growth to fall, too. And we're in that camp too, Paul, if you look at I mean, leading economic indicators have been, have been consistently negative for 17 going on 18 months, coincident indicators have been slowing slowly. But yeah, we're starting to get signs: unemployment is starting to crack, right, we're seeing the unemployment rates crossed above the 12 month moving average, that's historically been a pretty good signal. If you look at a lot of a lot of states that are showing continued claims rising at above 10 to 20%, year over year, you're getting up to a level that's typically indicative of employment cracks, I think you're gonna see some signs of growth slowing and inflation continuing to slow throughout the course of next year. And I think that does historically warrant rate cuts. I just wonder if Powell is going to do that. That's my big question is, Is it enough political clearance? Are we just so conditioned like conditioned like Pavlov's dogs, that we're, we're seeing the ring of the bell as grow falling and inflation falling, and we're salivating over lower interest rates. Obviously, Wall Street wants them, it's gonna be interesting to see if Powell actually does that. He's not hinting it that currently.
Paul Barausky 13:11
But if he's been data driven on the way up, then he's got to be data driven on the way down, and we hear the complaints that they're so data driven on these increases, I'd like to think they are on the way down. And I'd like to think that they recognize the gross fiscal irresponsibility of the country and they say, We got to help that side out. And we got to take these rates down, because as you said, and anybody said, we might not say it as strongly as somebody as famous as Druckenmiller, who took Janet Yellen, literally behind the woodshed. Did you see she refuted his comments? For anybody that doesn't know what I'm talking about? I think the interview was what, about 10 days ago, Clint, maybe longer?
Clint Sorenson 13:54
Yeah, it was with Paul Tudor Jones, too, two of the greatest investors of all time talking about this. It was epic. I wish I could have been there. I was doing a pan on Dallas. I wish I would have been there in the audience.
Paul Barausky 14:07
And I was headed off to Europe for god knows what reason. My wife says, why are you going there in November? It's cloudy. I said, because people are working. It’s not August or they're off having a good time. Hey, one other thing we'll touch on a little bit longer on inflation, on another pod. This really was the summer of the woman, and you and I said I don't want to come out and ever be labeled a misogynist because I'm as you and I both as big of champions as we can have the power of the woman long underrecognized that in our country, but between the Barbie phenomenon and Taylor Swift becoming a billionaire. Let's unpack that on a future podcast and bring on one of our female colleagues to just talk about the pricing and consumer power that females now hold in our country.
Clint Sorenson 14:54
No, it's amazing. Long overdue for Taylor Swift to be a billionaire. That's amazing. I couldn't believe it when I saw it. The announcement that she was just now a billionaire. I was thinking how is–
Paul Barausky 15:03
A friend of mine who was over at the AT&T Stadium where she did three concerts, a good performer, even better business person. I think you’ll have to agree after this summer. And a little more interesting meet up, Travis Kelce and Taylor Swift is–me and Biden. My golly, I apologize. Is it next week? Do you know when it is? I don't I don't want to get on the computer here and look, and I've had a long week. But…
Clint Sorenson 15:34
No, it's right now he's already in San Francisco. They cleaned up San Francisco. You saw that how they cleaned it up in record time. So, and then Newsom gets on the, on the screen. And you know, I'm a Libertarian. I'm such a coward when it comes to being political. Right in the middle, right. So it's funny what Gavin Newsom says, just made me laugh. He said, Yeah, people are gonna say, I cleaned up the streets quickly because she was coming into town. And they're right. But he literally, the streets transformed overnight. And San Francisco looks like the city I love or used to love. It looks. It's clean. It looks wonderful. And she's there, Bides expected to meet and talk to you about several issues. I've heard a lot of interesting tidbits from folks. So–
Paul Barausky 16:24
I’d be curious you've heard. I'll just add that it must have been the same crew that cleaned up Beijing before the Olympic Games. The streets outside the bars in Hong Kong, which are not like they used to be. I will tell you, we could unpack a lot. I'd be curious what you think the keys to this meeting are? Because the problems in China right now are pretty severe, particularly from a commercial real estate lens. And then yeah, falls by this demographic cliff. And the one thing you and I don't like is, you know, the Chinese and Japanese consumption of our 10-year treasuries and longer the risk of that slowing even further and not being picked up by other parties.
Clint Sorenson 17:05
Yeah, I mean, you've seen economically, China's been in a tough spot. Right, US and China diplomatic relations have been not doing so hot, right? Especially since the Russia Ukraine war and the announcement of Russia or Xi and Putin’s kind of unbounded friendship. And I think that has really kind of accelerated tensions on both sides. And so I think I love to see us getting back to the table. I think it's really important, especially in terms of what's going on, but I saw something from Dr. Pippa Malmgren, and she said–I'm sorry if I mispronounced her last name–but she's awesome. I’ve heard her speak before and it's @DrPippaPam. So Michael, Drpippam is her X handle. And she sets up that I just thought was incredible. And I'm going to read it here because you know, she's who I follow typically on geopolitics is her and Peter Zeihan. But she said, “CIA boss heads for Z day and Kyiv as Ukraine falters on the back of the Xi and Biden meeting looking for the CIA to negotiate an armistice in Ukraine and Zelinsky will object, U.S. will insist on elections China will have to hold Russia back.” And that's what she kind of said. So I thought that was a really unique take on what's going on and not something I've thought about. And I'd wrote about this when the Ukraine Russia conflict started, I said Xi has to be the one to step up and, and broker peace. I think it's really important for China at this juncture. I think it's important for China on the world stage, I think, to hold globalization together. It is imperative for China who has, to your point, the bad economic situation, the terrible demographic situation. I mean, they just reported their first ever quarterly deficit and foreign direct investment. During the July September period. They've underreported population growth, they said the population actually dropped by 100 million people that came out last year. And you know, they've had a really weak economic environment, when you think about real estate being smoked this year, in a lot of negative headlines. So I think it makes sense for both of these sides to come back together, the number one and number two economy and to figure out ways to work together cooperatively for the greater good, quote, unquote, of society, but we'll see what happens. A lot of people are saying they're not holding out, you know, high hopes for the meeting. But I think the fact that the two superpowers are having a meeting is important.
Paul Barausky 19:34
Stonewalling each other and, you know, the saber-rattling we read in the South China Sea and things like that. But you're right. I mean, you touched on when you add commercial real estate being down over 30% BK on Country Garden in Evergrande. The youth employment problem is a nightmare so much so that they stop reporting. And I've heard whispers–I can't confirm this–that they’ll report an hour a week of work is employed. You know, I don't know, numbers are murky from a lot of corners. But take a look at that banking system and the stress it's under. It's four times as levered as we were in the global financial crisis. So when Bernanke recapped our system, I was get this wrong, it's somewhere between one 800 and a trillion, maybe? It's a little harder to recap, their’s at four times the leverage can do it. But that's not good for us. That's not good for anyone in the world to your point. And they can really have a major impact on what's going on over there in Russia, Ukraine and other parts of that area. Since you spoke about it, too. You look at the pressures on Taiwan and that whole South China Sea region. How important is that CHIPS Act and moving stuff back here to our country to you? Is that still a point of emphasis for you?
Clint Sorenson 20:57
Yeah, I think it's incredible. I think the manufacturing renaissance in the AI revolution, and what's going on across industry in the US, I think you have to prepare for globalization Peter Zans said it best in his book, he talks about the US stopping the policing of shipping routes back in 2015. The reason why we had globalization in his view, was that we have the US with the most powerful navy in the world policing shipping routes and making sure things run smoothly; they're moving from the area that they are produced the most efficiently to areas that need them the most so those areas can concentrate on producing other goods that they produce more efficiently and shipping those, right? And so under the protection of the US military, i.e. the US Navy, which is stronger than all the other navies combined by a factor of 10, right? When you think about that power going away, what you have is you have, in his view, deglobalization really picking up. And I think that that's what we've seen, we've seen a rise in deglobalization, I can't unsee it now that I see it everywhere. And when you have that happen, you have geopolitical tensions rise, and you have a significant amount of–
Paul Barausky 22:10
Here’s the problem with deglobalization. By its very nature, it's inflationary.
Clint Sorenson 22:13
Exactly, because you have a higher cost regime.
Paul Barausky 22:17
You’re hitting against that, too, particularly as you start out in the very early stages of deglobalization before you have efficiencies. And so, you know, kind of finish up this week's comments, you and I do this enough, sometime–
Clint Sorenson 22:32
I didn't finish all the CHIPS talk, but yeah, so
Paul Barausky 22:35
I'm always on my own agenda.
Clint Sorenson 22:38
No, I love that. But on the CHIPS that your point like, yeah, that's a higher cost machine. Because guess what we're gonna say, you know, what, we just had COVID, supply chains are broken, we've got deglobalization, I can't be held up and have our economic system held up, which is growing in its chip dependence, because I can't get chips from Taiwan. I can't run that risk. So what I need to have is I need to have chips manufactured here. So we have that big Taiwan semiconductor plant being facilitated that fab I think it's in Arizona.
Paul Barausky 23:06
It’s being held down by Columbus and Dayton, Ohio, you have whoever's doing upstate New York. I mean, it's a meaningful thing. And I think you and I have discussed and this is kind of one where I take us today, in the last five minutes or so, is you and I are huge believers, personally, in a chance for a rebirth of American manufacturing. And I'll speak for you. We both believe that we had jobs that were so far below the poverty line in manufacturing, they had to be in China or India, wherever, Vietnam. It just was not feasible here. With AI and robotics powered by AI and 3d printing to some degree. If we can move those lowest rung jobs back here, mostly automated, we can create more jobs further up the food chain, the income chain, that wouldn't have been here. So 1000 jobs, we create 100, I don't care that's net 100. Because the 1000 are gone. Yeah. To me, the biggest benefit in this country is we will be forced to finally make considerable improvements in infrastructure with our bridges and railways and ports. And it is so overdue and don't get me on my soapbox here, but we're not going to get typical 22-year-old Americans who are gonna do it, so we're still going to need legal immigration.
Clint Sorenson 24:34
Our population shrank this year. We're not quite it's down zero, it’s to zero.
Paul Barausky 24:41
Numbers are shocking.
Clint Sorenson 24:43
It's crazy. We have to have immigration. Immigration is not a we have to have. We've learned from Japan on what not having immigration does. If not, you run a risk of a major deflationary event.
Paul Barausky 24:56
Yeah. One minute, you know, the land under the palace in Tokyo is worth more than half of Manhattan and then they're buying up Manhattan. And the next thing you know, there's a demographic cliff. I mean, through living there. So I think we both love that. And I'd love to get a guest on some time to really unpack this potential rebirth of American manufacturing. I think it's something that goes across both sides of the political aisle. And it gets us to infrastructure. Let's face it, Trump, Biden, whoever's next, nobody's gotten anything meaningful done there. As people set out for their Thanksgiving and Hanukkah and Christmas holidays, they're going to see just how bad the roads and bridges, many of the airports are in the US and we still are the greatest place to live in the world. But by golly, let's get those things done. And since you brought it up, you know what scared me the most about some of the individual meetings I did in Europe? The amount of concern from some investors I talked to about fentanyl pouring into the US.
Clint Sorenson 25:57
If you look at the deaths in young men, it's painkillers and fentanyl is the largest culprit. If you look at it's amazing. The statistics are staggering.
Paul Barausky 26:10
You wouldn’t have thought I heard about that in Europe, would you?
Clint Sorenson 26:12
No, that's pretty crazy there. Because fentanyl like I don't understand. If I'm a drug dealer, that's the last thing I'm dealing– like killing my customers, my goal?
Paul Barausky 26:22
I look at drug dealers like viruses, and they say a virus learns to not kill its host so it can propagate. So that's a bad virus. Leave it to me to take us from inflation to fentanyl. They say ADD is a gift. This holidays. For those of you playing Fat Pitch bingo at home, we've covered inflation, the consumer, Xi and Biden, American manufacturing, and the scourge of fentanyl.
Clint Sorenson 26:57
And Taylor Swift. We actually got Taylor Swift in there too. So that's pretty amazing.
Paul Barausky 27:01
And I know the NFL loves Taylor Swift. Viewership is definitely up. Did you catch Carolina this weekend?
Clint Sorenson 27:09
I did. I didn't go to the game. But I did catch it. So it's nice to get a get a W. If we can beat Duke and I spell Duke with DOOK, sorry all my Duke friends out there. But if we can beat Duke I'm happy. But yeah, we still, you know, we've had a disappointing season. We started off so strong and lost two really close ones.
Paul Barausky 27:30
You were crying down the stretch last year as the tournament ended. Listen, everyone. Thank you for tuning in to this episode of the fat pitch podcast. And hopefully you'll join us for the next one. Clint, thanks again, Bud.
Clint Sorenson
See ya, Paul