https://www.mauldineconomics.com/download/global-macro-update-transcript-ed-yardeni-eric-wallerstein
... what you call your Roaring '20s scenario
...The 1920s, a couple of years before that, we had the Great Wars they called it back then. Then after the Great War, which was World War I, we had the Spanish flu. And then in 1920, we had what they call a depression. Back then, they didn't use the word recession or downturn, so we don't know how bad it was, but it was pretty bad. And so anybody at the beginning of the 1920s who thought about the economic outlook must've been pretty depressed because nothing to be optimistic about. And yet it turned out to be the roaring 1920s. And that was because we had all these technological innovations—the automobile, washing machines, electricity, natural gas—all these things that dramatically improved the standard of living and the growth in the US economy.
... we think the same thing is happening in the current decade. The problem we have today is the labor shortage, and companies are responding to it, we think, by using technology to increase the productivity of workers. Not to get rid of workers, they are in short supply… but to augment their ability, not just to the old way of increasing productivity was to increase brawn ,the physical strength of humans, this is also increasing the ability of tthe brain to be augmented by things like artificial intelligence, robotics, automation, and so on....productivity is sort of fairy dust: It boosts real GDP, it keeps a lid on inflation, it allows wages to rise faster than prices, and it's great for profit margins.
...our 60% probability scenario.
... inflation... we see the Fed's PCE deflator, their preferred target, making its progress down towards 2% by year end. And when you take out shelter from CPI, we're already at 2.1 and 2.2 on headline and core. So we're basically there...We expect shelter to continue disinflating.
...There's a lot more immigration coming across the border so a bigger labor force. People need houses to live in. So that is one question in terms of demand. But yeah, we think while there's a rolling recession in single-family, plenty of building is going on and we're encouraged by that.
... 30 years ago, the ratio of average or median income to home prices was 3.6 times. So a home cost 3.6 times as much as your annual income, and now it's up to about 6.25.
The US consumer
...for the past couple of years people have been talking about the consumer cracking. .... That hasn't happened at all. And rising real incomes have really just supported spending.
...maxed-out borrowers are not even back to pandemic levels as a percentage of overall balances or overall households
...Capital One thinks that consumers remain strong...as a percentage of disposable income, debt remains at all-time lows outside of the COVID… debt servicing remains at all-time lows outside of the COVID aberration when there is a flood of cash... we don't see any cracks, especially with this labor market.
..there are different people in different points in their lives with different maximum amounts they can borrow and so on. But we have always paid attention to demography...
..., the baby boomers, to a large extent, don't have mortgages anymore. To a large extent, they're not paying tuition for their kids anymore. Their costs are really down.
...On the other hand, yeah, you've got younger people who are stretched. I... they're not getting paid enough to really go off on their own just yet.
...the key there is you don't get a recession when payroll employment's going up to record highs month after month
...rolling recessions ... it's still I think having some
... evidence that the housing rolling recession is bottoming...
...we had a recession was in retailing merchandise...we had this buying binge for merchandise coming out of the lockdowns....we went on our little buying binge, and now we're going on vacations where we're traveling more. We're going out to restaurants more. So I think that's what's going on with consumers as we mentioned before.
... the Fed ...? Do they need to cut rates?
No, we don't think so. I think it's pretty clear that the economy can handle interest rates at 5, 5.5%. I mean, if you think about it, that's kind of where rates have been over the long run and the economy did just fine. The post-great-financial-crisis world, and then COVID [inaudible 00:18:57] was kind of the aberration. So things are going fine.
Do you like the market as a whole? Is it as simple as “just buy the market and go home?”
...Energy is sort of the shock absorber in case things really blow up in the geopolitical realm
...Technology is all about increasing productivity. That's necessary to do because of labor shortages.
...Industrial stocks...we are building a lot of manufacturing plants, ...the financials, when they do well, you typically have a bull market. So we think that it's a pretty strong bull market, and we'd stay with all these areas
... All of a sudden utilities take off. We hadn't really thought about utilities as AI plays, but suddenly that's what they are. Investors that we talked to… some of them when we started talking about copper breaking out and gold and the metals doing well, said, "Well, I wasn't really prepared to invest in metals, but that's what you have to do in this kind of environment." So it's a bull market in almost everything.
...it sounds kind of counterintuitive, but in some ways higher rates are stimulative. And all those interest costs that we worry about in terms of fiscal policy, the government basically their second-biggest outlay is now net interest payments. Well, that's stimulus to the economy. So for now, it's helping a lot of people.
...it's called net interest outlays. And anything that's a government outlay tends to be stimulative. And so the government is paying out... What is it? And, Eric, it used to be... A year or two ago, it was like 300, 400 billion. Now it's 800 billion at a 12-month pace, and it'll probably be a trillion dollars in net interest paid by the government.
... economic history..... And so I've looked back in the late '20s and early '30s...it was the Smoot-Hawley Tariff of 1930 that shut off world trade. You shut off world trade, and guess what? You're going to get a global depression
...But I think trade issues are back. Clearly, Trump brought trade tariffs back. Biden's talking about those issues. ...China has been getting away with just ripping everybody off, taking advantage of the free trade system. And so naturally there's a backlash against that...deglobalization could be a source of inflation and could derail our happy talk about the rest of the decade and make it more like the 1970s, but we don't think so at this point.
would you say that it's fair to say that geopolitics is the number one risk to your investment thesis here? Ed Yardeni: Yeah, ...
...globalization was a major source of disinflation in global markets...
. China prospered, which is great. It was great to see all these Chinese people having better standards of living. And by the way, they did that because the Chinese Communist Party basically stepped back and let capitalism work, and it worked like a charm. And now the Communist party wants to take control back, and that's starting to create problems for them.
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