EP 20: Tony Crescenzi, PIMCO Funds – What is the path for inflation and the Fed in 2023?

Welcome to 2023!  Two big questions for the year; where will inflation likely end up, and what is the Fed’s plan?  Let’s find out with Tony Crescenzi of PIMCO, after all PIMCO might know a thing or two about inflation and the Fed. 

Transcript

EP 20 PIMCO_mixdown

Tue, Jan 03, 2023 9:26AM • 45:39

SUMMARY KEYWORDS

inflation, fed, inflation rate, called, people, interest rates, year, yields, feds, markets, rate, supply, recession, money, investor, spending, podcast, impact, meaning, months

00:07

Welcome back to the podcast deconstructing Alpha. I'm your host Jeremy van Arkel with Frontier asset management, where I am the director of strategies and a principal and partner of the firm. Today's guest is going to be Tony Crescenzi. And today's subject is going to be an update on interest rates and inflation. And so for this subject, I could think of no better resource than Tony. He comes to us from PIMCO. PIMCO is a $2 trillion AUM asset manager based in Newport Beach, California, who specializes in fixed income management and who would know more about interest rates and inflation, then a firm of that size and caliber that focuses on Fixed Income Management. And so Tony Crescenzi, is stress strategist at PIMCO. And he is also a portfolio manager. And some of you might remember that we had Tony on the podcast about a year ago. And what a year it's been, right. So a year ago, we had rising inflation, very high asset prices, we had a Fed not really doing anything about inflation. And, and the you know, in general, the world looks pretty good if you didn't account for inflation. But since then, we've we've had a war in Ukraine, we've had supply side problems, we've had labor shortages, we've had the Fed raising interest rates fairly aggressively, and we've had asset price declines. And so I think it's about time for an update. And I think this is going to be timely. I think it's going to be quite packed with information. If we recall from the last podcast we did with Tony, this is going to be fact filled with lots of good estimates and outlooks on inflation and interest rates. So before we take a deep dive, I want to remind our listeners to stay on the call till or on the podcast till the end of the podcast for compliance notes and disclosures. And with that out of the way, let's get started. Ladies and gentlemen, Tony Crescenzi. Welcome to the podcast. Tony. So glad to have you back.

02:29

Thank you. Great to be here after a tumultuous year. Yes, but we're ready for the year ahead.

02:37

Yeah, last time we spoke there was almost none of these things occurring that we're experiencing this year. It was just in the beginnings of, of inflation. And the Fed hadn't done anything at that point in time. And so I thought this would be a great podcast to do an update on what's happened in the last year with interest rates in the Fed. And where we are in that cycle? Is that something you think you might know something about?

03:07

A few things we hope but as you said a year ago, the Fed didn't think it would do anything. And it did. They're the so called experts, the Fed itself thought its policy rate would end this year at 1% actually shaped as looks like it's headed to 5%. So it shows you that we don't not everyone has all the answers. And all we could do is try to assess the probabilities because that's what an investor has to go on.

03:38

Yeah, it is incredible. The how late to the game, it felt like the Fed was I mean, it I think we were at we were above 6%. And inflation before they even raised rates for the first time, which was very late to the game sounded like

03:56

it is and I think one could say that perhaps the Fed was late because it developed a new model developed this thing called average inflation targeting a new framework where it said, well, inflation has been low for so long, well, why don't we let it go above our 2% target for a little while and do nothing about it? Perhaps that was part of it. There are other factors like the war on Ukraine, of course, and its impact on energy prices, food prices, and the impact of that on the psyche. And because the psyche matters in terms of realized inflation, you know, how people feel about it can determine wage setting price setting. And all that combined caused this and so it's part of the reason perhaps the Fed was late to the game it's been playing catch up with for three quarter point moves.

04:53

Yeah. Yeah, so let's talk about let's let's let's talk about the, the actual inflation side So where? Where do you think we are in the inflation cycle here? When I've studied inflation cycles in the US, at least historically, it appears to me that it looks like from from low inflation to the peak of inflation, those inflation cycles last about three years in timing. So we've gone from 0% interest rates and about one and a half percent inflation, two or 4%, short term Fed funds rate. And now it appears that inflation is tailing off. So how do you feel about the inflation cycle? Where are we in this cycle? And does it all look pretty normal to you? Or is it very abnormal?

05:47

Quick answer is, it looks like inflation is now peaking. And next year, we'll we'll keep declining says disinflation, of declining inflation rates. So today, the inflation rate year over year is 7.7%. Taking out food and energy prices, it's 6.3. The Fed projection is for that figure to be somewhere in the threes are low to mid threes and pose somewhere in the high threes. To the quick answers, it looks like it's headed downward but not yet likely to reach the Feds 2%. Target. That's for the PCE, as it's called the personal consumption, deflator, confusing term, but it's it tends to run a few tenths below the one that's why they reported in on the evening news, the consumer price index, so the federal fall short, and then we'll have to reassess. But so the quick answer is it will decline but not reach to the 2% target. And it looks like in the 2020s, the trend will likely be for inflation to be above where it was in the 2010s, which is the wrong analog thinking about inflation and interest rates, but doesn't mean they'll have high inflation just may stick around a little bit.

07:04

So that's a that's an interesting statement he made there. So it sounds to me, like inflation, should be inflation sort of tailing off. And when you say it looks like it's going to be around 3% Does that mean a year from now?

07:20

Yeah. 2023 that's the way most forecasters seem to have it. Many realize that there are sticky elements, there's some odd way that the government calculates rents and housing is 40% of the CPI. Of course, to all of us, our biggest expense is the money we put toward our homes or, or our apartments or whatever it is that we live in, on dwellings. And in this calculation, they'll they'll ask a renter or homeowner, what the changes have been. And it takes a bit of time for to work its way through the system, meaning up to a year. So someone that had a rent increase six months ago will report that in that change today, because they're part of the pool of people that were quizzed on the matter. But even so that person quizzed about the figure today might say, well, I hadn't a rent increase of 10%, even though it occurred six months ago. But so what the Fed will probably do so what I'm saying is there's a weird, quirky impact on the rental component, which is a giant part of the CPI that will take time to work its way through the system as people quizzed about their their rent changes that takes them time to report it. But then the new information is that new leases being signed, those prices have simmered down a lot. People look at Zillow and things of that sort to try to figure out the game plan in terms of their forecasts for that component, then it looks like it's simmering down a great deal. And that's why we can look forward to better numbers nine months from now six months. Yeah. In terms of the housing impact,

09:11

so so it it there are components to inflation that are sticky or lagging. And then there are faster moving components. It is to me, at least when I looked at the 70s It's amazing how quickly inflation could fall once it starts falling.

09:29

Yes, mainly because think about productivity. So how more productive we are each year and the amount of humans that exist to make things and machines we gain an ability to to increase output by about one and a half percent more per year one and a half to 2%. And if there's more output in a year because there's more people and faster, better ability to produce from machines computers Roads, whatever it is, that supply is met by a drop or weakness and demand and balances things out. Because what we had after the pandemic was an excess of demand, we couldn't keep up with all of it and cause we saw lots of money distributed in the post pandemic response. And that money gets spent too quickly from an inflation perspective. And so that's what, why next year, it'll probably simmer down so it can begin to drop, simply because the demand levels have been kept down by the Feds rate increases and allow those who produce goods and services to catch up. And that's that's what seems to be underway right now.

10:43

So So yeah, so this inflation thing has two sides to it said demand and supply. And it does feel like both demand was increased with all the stimulus and people staying at home and people adjusting their the way they spend money suddenly. And then on the supply side, we definitely had supply shortages of workers and COVID, shutdowns and transportation networks and all this stuff. So to me that fed is pouring water on demand. So but the supply side just sort of needs time. Right, right. The Fed can fix COVID. shutdowns. Right.

11:26

Yeah. And on the supply side, that there is in terms of why we would think one should potentially think, believe this argument that the inflation rate will be higher this decade. And last on supply side is the labor story, which is the major component of the inflation picture because wages determined most costs to business businesses. labor supply will, as very low relative to demand this figure called jolts job openings and labor turnover survey shows that job openings around 11 million people, but the numbers of unemployed around 6 million says an excess of demand for workers relative to the supply. And it looks like it could persist for some time because of a major demographic event. This year should be the biggest year for retirements in history, because 1957 was the biggest birth year, last century. And so that's 65 years ago. Fast forward to now then you see those individuals just retiring in droves. The number of people turning 65, right now is 360,000 per month, it's massive. And the way less till the end of 2029. When the last baby boomer born in 1964, turns 65. And so this will limit the amount of labor that's available to companies to produce goods and services, making it hard for them to do so and therefore limiting their ability to keep up with demand and their need and also increases their desire to increase wages, which had been growing 3% pre pandemic rose to 5% Plus, who knows, maybe it'll trend 4% instead. So that added cost will get passed on to us consumer.

13:24

Right. So on that to summarize on the path of where we are in this inflation cycle, it does appear that inflation is falling, there are some lag numbers in there that are more longer term, but a good target for 2023 or generally accepted target for 2033 of where inflation is gonna be approximately 3%. Does that sound about right?

13:48

Yeah, in the in the threes. And but systematically, we have a declining inflation rate. So from sevens and sixes to meaning for the headline and the core rate. This is your headline, read my supply chain. Sorry, headline minus food and energy, some figures of the sevens and sixes into the threes and who knows maybe four, but the medically it's sort of down but it's still not there, so to speak with respect to the target. So you have to ask yourself a question Will the what I call the Powell press Continue will Powell the Fed Chair keep pressing to get the inflation rate down by raising interest rates more and more and more. It's causing more pain in the stock market the credit markets the interest rate markets and the economy will keep pressing through our our view is they won't they'll stop they'll be happy with it getting into that zone but getting it to 2% may have to engage in what Greenspan did, called opportunistic disinflation, simply wait for some good luck and then lock it in.

14:56

So the so that so so if we get to three or three and a half a year from now on inflation that's still higher than the Feds 2%. And it doesn't your to me what you're saying with the sort of almost permanent shift in jobs and and also the The higher a greater tendency to pay people more that that will keep inflation higher for longer. Now, that doesn't mean out of control inflation, but that three, that the Fed needs to adjust their target. Is that kind of what you're saying that to

15:36

do that, but there'll be a question over what the Fed does. Next. So it may pause at some point in 2023. On the idea that, well, we've achieved some success here cut the inflation rate in half into the threes. But it's still not good enough. So what do we do now plus the Fed will be facing Jeremy other factors that could affect the inflation rate in the long run, that's called resilience efforts. And here, investors simply need vision through a national security, Lance, imagine nations of Europe, their resilience efforts will include increased spending, increased spending on defense, increased spending in the brown to green energy transition as they try to get away from foreign oil. And also companies having experienced challenges in the so called supply chain will decide well, we better do something about that and invest more. And then there's also the health security issue. So the the efforts or monies that are in certain spending is seen as imperative, it's an imperative for Germany, for example, to spend to, to wean itself off foreign oil, or natural gas, it's an imperative. So money will get spent, it will drain what's called the global savings glut, which is the excess money that sits in the global financial system that had been pushing down interest rates, instead of get pulled out. And instead of going into savings, it gets spent. And that could feed inflation. So it's got more to worry about than just labor, supply and sell. So this extra spending that's occurring globally on resilience efforts. And one final point, real quick is that, think about I mentioned boomers, they were the ones that experienced inflation in the 70s and early 80s. Now, other generations have experienced inflation, X, millennials and z. So the Fed has to convince new legions of people that the inflation rate will stay down. That was the problem that Paul Volcker Fed chair from 1979, the problem he faced after 15 years of high inflation, he had to really go sky high with interest rates to convince the public, the Fed was serious, the effort will be smaller this time as to your problem. But they can't let up. They have to do what Powell said and keep at it, subtitle of invoke a book keeping at it just to to ensure that this doesn't get into people's heads too much.

18:20

So I I think you're a lot of that resonates very well with me. And that's a really good perspective. Like it's it's a perspective I kind of haven't heard in the in that the the 2% target the Fed is targeting may be off for a long time. And and maybe it's more like three or three and a half because of the labor market. And because of this sort of structural spending structural spending on defense and on shoring and changing the way inventories work.

18:54

It's a sacrifice of efficiency for resilience, you could say the companies in nations need resilience. And that could be sacrifice the efficiency that would otherwise lead to lower inflation rates. And the challenge at 3%. Inflation is again that to convince people it will stay down. So what if the Fed lets up markets are priced based on various instruments we could look at and observe for the Fed to cut the policy rate. Half point next year, we have to bring it to 5%. So back down to four and a half to cut interest rates. But with inflation at three, does it want to take the chance that it won't snap back to Borden or five and then the public suddenly like in the 70s and even the mid 60s That's to say, I don't believe I'm so happy about the Feds actions, unbelieving facial state down and then suddenly it feeds on itself.

19:51

Yeah, and that's what happened in the 70s. You had three waves of inflation.

19:55

60s as well as an example I sometimes forget. But they are Early 60s, one and a half percent inflation to like 1964 And then suddenly moved up. That pushed his policy rate to six, it led up because the quick inflation was letting him. And so cut rates down to four think it was and then it had to double it to nine by the end of the 60s because they cut rates too quickly. Yeah,

20:21

that's that it is amazing how persistent this problem is, you know, even though that factors, you know, that some of the factors are a lot of the factors that are driving inflation on the demand side, maybe this sort of stimulus and money supply. And on the supply side, we've got COVID, and supply chain interruptions. And, you know, I guess the war is gonna last the war in Ukraine is gonna last longer than people probably want it to. But it appears that a lot of those things are temporary, and that they should just kind of fade. And I think that's a that's probably the hope. And that's why we they're probably still hoping that if they adjust interest rates pretty aggressively, quickly, they could tamper this and push, get inflation back to normal. But the minute you let off the gas, it's back. Right, it could

21:11

be back. And so that's why the chair Powell in August and a major speech. So there's three lessons of history. One is to take responsibility. They can't say, as you mentioned, those factors that seem temporary, that the Fed was called transitory. They can't say, Well, it's because of this is because of that we have no we can't impact it. This is what the one Fed Chair said 1979. G. William Miller, two months after he left office at a speech in Belgrade, IMF meeting and chair Volcker was there. He said, Well, the Feds impotence, can't do anything about this rise and inflation, the inflation rate because it's all due to the oil embargo ticked Volker off and went back home because commodity prices are rising. He thought he had to do something about that pursues a worry about his own. keeping at it, attitude. And so the Fed has to take responsibility for one. Secondly, pay attention to how people feel about inflation, inflation expectations, so the federal watch 2023 The surveys, not just the market, the markets confidence, you see this in the various gauges, the Fed, the expectation is that the Fed will bring the inflation rate down to the low twos eventually. And then the third thing is to keep at it again, that's a paraphrase from Powell of book titled for Volker to not let up. You know, there's so many things in life as we understand, you can't let up you've got to be persistent. And you know, the fire keep putting water on, I can think of a lot of analogies just go to can't take any chances. That's what we should expect next year. That's, that's one thing to me real quick, if they do the opposite, and decide to not keep at it, like in 60s and 70s. Were the, again, the lessons of history. That's the kind of a worse outcome than being so tough. This is tough love as a way to think about.

23:11

So we're going forward for so so let's get to the Fed. So we've gone 4%, nine months, as the Fed funds rate changes from the word the policy setting now is 375 to four, right? And in nine months, that seems steep. It seems certainly steep in historical perspective, how quickly they've raised rates. And then, in theory, the rates take about, what, nine months to a year to really take hold in the economy.

23:40

Yeah, and then, arguably, in various studies and 18 months, but we here's one area where it's happened fast mortgage rates, everyone knows that it's gone up a lot this year and reached 7%. At one point that has had a big impact on housing very fast. The housing market sales are down 30% and Pfizer, zero practically. Yeah. So

24:05

there's this lag effect. And we're already at four. And we don't know what, zero to four. And so maybe incumbent on this. So a lot of research says it's not how high you raise rates, it's how far you've raised them from where they were. Right? Is that correct? And so we go from zero to four. That's a big move. Right?

24:26

Yeah. And the way that is a simple way to think about it. It's in terms of the real interest rate, meaning if it's four, where's the future inflation rate if the market thinks it's three, and the market actually thinks it's going to be low twos? Well, let's suppose the markets wrong and it's going to be what consumers think by judging by surveys three, so that means the real rate for minus three is 1%. Now in throughout history, it's taken more than a 1% real rate for whatever reason to get Job done. So in in the 60s, I mentioned that the Fed had to move the rate eventually, to 9%, because the inflation rate had moved up to six. So it had a three point real rate. And that got the job done. But then in the 70s, they kind of forgot all that all that extra and had a lot of periods of inflation that was just new. So didn't have lessons of history. From 1975 to 79. It was zero or negative real rate. In other words, the chairs burns and Miller kept making what seniors mistakes now they kept saying, oh, inflation rates down, let's push rates down. But Volker knew otherwise he pushed the the real rates, five points. So three in the 60s, got it done. Volker put it at five, and kept it there a few years, and it got the job done. Now, typically, it's to roughly two to three. So the Feds going to move to a 5% policy rate, which is the expectation inflation is three. That's two points. It seems like maybe it's not enough, we have high inflation. But there's another thing to add to it. This thing called quantitative tightening by the Fed has been selling lettings, I should say selling but it's letting reducing the amount of holdings it has in mortgages, mortgage securities and treasuries. It is impact that's, that makes that 5% policy rate, more like six, there's a long math equation for that. But each trillion dollar reduction of the Feds so called Balance Sheet meaning reduction, and it's holding securities has an impact. That's almost like raising the policy rate a quarter point. And it's going to do that three years in a row a trillion dollars. So it's roughly about a percentage point of impact equivalent to have fed funds rate change. So 5% official rate, which is what will get reported in the media will be more like six because quantitative tightening is the real deal. I mean, look at mortgage rates and the damage to housing, so you can't exclude or what I should put it differently, you should include it include the impact of quantitative tightening in your analysis of how high the Fed need go to get the job done. So five plus one for that Qt thing is six minus the future inflation rate of three, or lower. And that seems like a pretty good real interest rate final thing really fast. There are two other apps, as they call it three F's of tightening that get the job done, the Fed with the equation, again, the three point real rate coming. And then fiscal big trillion dollar reduction spending post pandemic, the past year hasn't worked its way through the system, because a lot of the stimulus still is. But spending fell to 5.8 trillion according to the CBO. And third, tightening of financial conditions, the drop in portfolios in the past year hurts us and her spending combined seems like enough. So that's the bet. The only mistake would be the Fed lights up. And that's I mean, the way things go wrong with the Fed.

28:05

So that path for the Fed, what it sounds like to me, is the expected ending policy rate for the Fed of approximately 5%. Sounds about right, because that would account for having the Fed funds rate 3% Real above an ending 3% inflation rate if you count the Qt, right. And so five does sound like a realistic endpoint for Fed policy rate. And but then, but then the key would be that it historically, once you hit this peak Fed funds rate, the markets quote unquote, the markets or investors think the Feds overdone it, and the Fed is quick to lower. And that might not be the case this time. Is that what you're implying?

28:53

Yeah, so the that half point cut may not happen. But knock is still no is like a spoonful of medicine? Yeah. Just gonna. It's probably what's needed in the market. So be happy that the inflation rate has declined as a result. Feds steadfastness. Yeah. And

29:11

they still have a duty to play with, right. So they, they could stay at five and then just, you know, be less aggressive on QT. And people wouldn't see that.

29:20

But yeah, as well.

29:23

All right. Wow. There's a lot of data in there. And I'm going to do a data summary here at the end. I've been making a lot of notes and we'll see if we get it all right, we'll see if we can boil all this thing down to a few numbers. But before we get to that, so all of this so fed, fiscal, financial condition conditions are three the three apps of fighting inflation. All of this, you know, sounds like in the real economy, the physical economy will live in that we should be expecting a slowdown and and clearly I had to write an article to basically express my frustration with everybody saying the recession. The recession, recession recession, right. And it's definitely an overused word and average elation, obsession. Yeah, recession obsession. There you go. It's definitely an overused word. And he you know, you probably have this certain things you get tired of talking about. And but it does appear that a slowdown is common, right? It's like, it's like Game of Thrones like Winter's coming. Right. And we all see it. But it's incredible. First of all start with it's incredible how strong the economy has been. Right? Like GDP now is expecting 4.2% expected GDP growth in the fourth quarter for the annual rate 4.2. Pretty good, right? And so no recession yet. So what how would you respond to the all of this sounds like tightening, it sounds like we're gonna have a bad economy. And but we've been saying this for about a year now. And there's been unbelievable resilience in the economy.

31:08

As you mentioned, there are lags. So they're individuals that house households that will see their mortgage rates rise when the adjustable rate mortgage comes due. So that impact hasn't been fully felt, nor has the impact of reduction in spending on investments within companies, they may decide we're gonna make it as much as before. So maybe we cut back and seeing a lot of announcements of layoffs takes time. But the good news is that there's the initial conditions, meaning in excess of demand versus supply of labor and other things means there's a better chance than usual for so called soft landing a soft landing is where GDP is above zero, but below potential, which growth potential, how fast we can grow is 1.8%. Because the people tend to be 1% more productive for a year. And it's point 3% more humans making things. So that's how we get to 1.8. So it's a wide runway in that sense. But the the obsession that bothers me as an investor is over whether or not there'll be one rather than on what it would look like based on the strength you mentioned, then there are numerous areas, I'll rattle off quickly. That's that that shouldn't lead one to think that if there is a recession, it's not going to be a deep recession. And more than likely number one, the household sector in looking today at the Dow and the Nasdaq is up 50%. The s&p 500 In five years, so household net worth. Because of that, and home prices still being up from five years ago, household net worth is up 40% $240 trillion $40 trillion increase in five years seems like a lot of money. That's number one, helping sick. Secondly, saving deposit balances for households, significant because we didn't spend money during the pandemic who was stuck at home etc. And there were checks distributed that help. It's another factor and their large household liabilities a low that loan to value ratio on their homes is 40 year low and about 40%. Meaning we don't have as much debt as we used to have. And then finally, I should say, the household sector has that jolts thing I mentioned lots of job openings working in people's favor and helping to boost wages. And on that front, think of security payments of 8.6%. This year, began last month. If inflation falls to three, that's a high real wage gain, and which will support spending second area and I'll go quickly on these others. The banking sector extremely strong, it matters because banks print money. From the money the Fed puts in the system only banks can create new money supply from reserves as they called and they are in sound shaved off stress tests by central banks prove that it matters to innovators, inventors, credit worthy borrowers money will keep flowing, keep the game going. And it doesn't always it's not always the case. It's as strong as they'd been in going into recession in quite some time, if ever. And third the imperatives I mentioned spending that will occur on energy transition defense, that going to happen, nothing will stop it. Because it just it's it's a security issue here resilience efforts and that sort of thing. Of final final thing is think about two sectors housing and autos. inventories are lean in the sectors that are interest rate sensitive. Home inventories are Are 3.2 months of supply, meaning? How much? How long would it take to get rid of the homes that are up on the MLS listings, and 3.2 months and normal figures six. And this is despite a massive drop in sales. So there's very lean inventories due to under building for decades. And then on automobiles, 20, somewhat days of supply, it's normally 60. And I wonder if people have sold cars, above the residual values, so So that's, that means the recession can't be that deep there. And so the thought is limitless. Other things that would make you say, recession, we don't want to say bring it on, but it's not like it'd be the

35:41

it's, that's the conclusion I've kind of come to is that when I, I turn on the TV, and I hear the dire outlooks of people, and, and all the bad scenarios, and all the holes we can fall in, right? And that when you just look at the data, everything looks very strong.

36:01

Yeah. And don't think people are, remarkably, have a remarkable ability to adapt, and all kinds of stressful situations throughout history, and the progress of humankind is unfettered. And so we can't overly worry about things. So there's the expression, as you mentioned, Winter's coming, but is long term investors should be thinking well, so spring, so much about a stock times related to the weather and high energy.

36:28

And maybe that's why, you know, maybe that's why corporate bonds are down, you know, 12 to 15%. And yields are up, and maybe that's why the stock markets down 20 to 30%. And earnings yields are up, right. Maybe it is the what everybody's afraid of is instantly priced. And then after the fact the thing they were afraid of isn't as bad as they thought.

36:53

So then I'm gonna buy the fact that's

36:56

alright, let's let's okay, you're ready to play my summary game here? Yeah, let's see if I can get this right. What should I just tell you the numbers? You tell me what they are? I'll tell you the number and then you say, All right, let's try this. So let's start with 3%. What did we say? 3%. was approximately

37:14

the inflation zone of where inflation is likely had it.

37:19

Okay, pretty good. So likely headed to 3% Somewhere out into the future? And unlikely not 2%. Right?

37:27

Not? Not likely. It's possible, but take an opportunity to get there.

37:34

So then 5% would be the what is the 5% of

37:39

funds rate? I mean, where the Fed takes its current three and a quarter three, three quarters for policy rate, probably around five.

37:45

And then what is Qt due to that?

37:49

Yeah, the point. So it's really like six. And think of housing when I say that, because quantitative tightening has real impact on the economy. And so it's reduces the amount of work load on the federal funds rate.

38:06

So then that that puts two to three. So this is the final point would be two to three. So it's two to three,

38:11

right? On the real rate thing, the equivalent six minus the future inflation rate is three. And I didn't mention relative to the cycles of the past 40 years, it's pretty high. It's about double.

38:28

Yeah, and I noticed when I looked at inflation versus the Fed funds rate, that the Fed really does have to put the Fed funds rate above inflation, but they don't have to start with the Fed funds rate above inflation. Alright, but they have to meet in the middle somewhere. And the Fed funds rate has got to end up above inflation to actually have a meaningful impact.

38:47

What history shows? Yeah.

38:50

Well, that was fun. I think you got 100 on the low quiz on the end there. I think the last, the last name. The last theme here that I think was just really almost thematic for the sums this whole thing up is keep at it. You can't let up, which is the idea that I think a lot of these things that we just mentioned, there are probably estimates that are been discussed before. But you can't let up implies that if the Fed gets to 5% Fed funds rate, they're probably not going to quickly about face and go back down.

39:29

That's correct. Unless it's going to want to revert to make mistakes. What would be deemed as a mistake? It's not the sort of thing the Fed is likely to do. It's really devoted to its mission filled with a lot of great people with a lot of knowledge.

39:47

Yeah. And I appreciate you saying that because, you know, I've said this multiple times this year. I mean, people like to knock the Fed, but they're a pretty smart organization.

39:58

Right several 100 PhD So yeah, they know

40:01

they definitely are doing their homework. They don't probably don't always know exactly how the world's gonna unfold, but they're definitely doing their homework. Okay, for sure. So my final question, any thoughts that you might have? Is there anything we missed? Or is there anything you came into this call saying, I really like to talk about this, but I didn't even give you a chance.

40:20

Oh, just quickly, I mean, in terms of yield levels is the thing called the Bloomberg aggregate sort of like the s&p 500. of bonds, it puts together lots of different types of bonds treasuries and mortgages and corporate bonds and yielding close to 5%. And relative to history, that's not bad. And it was at 1% at the lows. So we think that's reasonably good. And investor today, in high quality bonds can earn yields, we think in six, six and a half percent zone and starting yield is the major determinant of future returns. And so hang on, these seem pretty attractive yields to us.

41:02

Yeah, absolutely. And this, you know, I would argue the same thing is going on in the stock market, if you if yield is your future determinant of expected returns for fixed income, and those yields are high. The earnings yield possibly could be related to future expected returns of equities. And it appears that earnings yields are high. And, and so hopefully, regardless of what's going on in the physical world, and all these things we like to talk about, that the actual capital markets pricing is laying up that we have a bit of an opportunity here

41:41

it is, and you know, what someone wants to make your fortunes while markets are down. It certainly doesn't seem to be the case when markets are up, although it's possible but lower prices repricing can be a good thing. And volatility can be a good thing for an investor with a long term mindset. And so maintaining a long term orientation now is vital and, and trying to get out of the funk of negativity, because it's bearish sentiment that tends to precede better times. And if I the one quick thing, after midterm election, all of them since 1982, both the s&p 500 and the major bond index was up a year later, not tell us how things are a year from now. But just another thing that might be in favor of these markets.

42:30

I I don't want to even add any of that. I don't want to even add anything to that last statement was made, which is a positive statement. Right? It's, it's, it's very easy in a time of negativity to just go negative and go down the holes, that but but we all have to stay positive. This is a long term investing as long term. And as you said, These moments are moments to really add value. And, and just kind of keep looking.

43:28

Yeah. Well, let's end on that positive note. So, again, thank you so much for being on this podcast. Thank you so much for sort of letting the script go where it goes, this was this was nicely unscripted, I think. And I think we got to some really great conclusions. Yeah. Should we, you know, I don't want to wait a year to have you back. But yeah, I wonder if a year from now everything will look totally different again.

44:02

And it could, yeah, as we know, see, the fun of mine, like a game watching a game. Every day is like one. You never know what the outcomes gonna be. So that's what makes it intriguing.

44:16

I thank you so much again, for your time and Jeremy. Yep, have a good one. Happy holidays. You too. Bye.

44:25

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