I do have pensions on my list of questions. I'm going to guess we're not going to get to it just because I have so many other folks before we get there. But all right, so you talked about inflation. Let's dig into that just for a moment here, because in previous conversations, when we were really looking at the debt overhang, we were looking at the maturity of wave that was coming up for corporate America. We were expecting higher for longer and you and I, I think, have been, you know, respecters of the lag effect. Right. And so we have expected that as we move through the timeline here, the lag effect would continue to become more and more of a visible issue. It hasn't been in many ways. And we've talked about some of the reasons why liquidity being a big one to the point where I think a lot of people are now dismissing it. Hey, the Fed's been able to finesse this, you know, that we've just been able to make the, it's different this time. There's not

going to be more confident that it's about to happen. Yeah.

So, but because of the belief in the lag effect, you know, if I'm remembering correctly, you were saying, look, I think we're going to switch from worrying about inflation in 2023 to really worrying about deflation, you

know,

negative deflation in 2024. And you've talked a lot about Heather's historical precedent in past cycles where we went from like 5% CPI to like negative 2% in the standard of quarter or two. So, I'm curious if you, if that's still your default expectation for 2024 or if, you know, you think for a lot of the reasons we talked about, that's slowing that process down. And I'm just curious, do you have any concerns that if the Fed is pivoting too early here, right, you know, it's basically getting embark on a more stimulative type policy when the economy is quote unquote, doing just fine. Do we risk an Arthur Burns moment here where all of a sudden the inflationary spirits, you know, resume here and all of a sudden the Fed has to backtrack? Yeah. Well, I'm glad

you laid it out that way because my deflation or disinflation thesis has always been a function of asset price deflation, fueling goods and services price deflation. I never thought inflation in the economy would, you know, suddenly decelerate absent of correction in the markets in a reverse wealth effect that would be associated with that. So now that we're possibly taking that off the table by the Fed pumping money into the system before the crisis happens, it does change my outlook for inflation. Now, I'm not one of these who thinks we're headed into some hyperinflation and we're going back to 9%, but could we sit at 3% for a while and defy the Fed's expectation that inflation is going to quickly come down to its target? I think that's a very high possibility, especially when you lay on two things that I was just looking at. Well, one that we all know or aware of and that is that given what's happening in the mid east, you've got shipping issues and you have the prospect again of supply chain disruption that will continue to put upward pressure on input costs and to some extent feed through possibly to the CPI. But whatever that is, you're going to have more commodity and shipping and basic input price pressures. And then the second thing is, we have actually seen, I wouldn't call it an inventory liquidation cycle, but a lot of the inventory overhang that had been persisting for quarter after quarter after quarter has been shipped away. And typically inventory cycles and inflation not surprisingly moved together. So when you're building stock piles, it puts upward pressure on inflation. And when you're reducing stock piles, obviously it does the reverse. And we've come down sharply. I mean, inventory inventories are now posting no growth, basically. And we went from a huge increase after COVID, when they couldn't initially get any inventory, and then they overshot and over ordered the double and triple ordered just so they'd have stuff and then spent orders, maybe even over a year, trying to unwind all of that. Well, they've largely unwound that. So inventories are in a pretty good position. I wouldn't say they're, you know, conspicuously lean, but they're in a decent position where they don't necessarily have to worry about, you know, reducing them significantly farther now. I think we're, we're pretty even. So what my point is that the disinflationary pressure from drawing down that inventory has already been built into the numbers. So that drop from 9% in the CPI to three was in large part a function of that or alongside of it. And therefore, the impetus for further price deflation coming from the inventory thing is probably very limited. Unless we see a sharp contraction in consumer spending, which for the reasons we just talked about may not happen if people can continue to just run up their credit cards and not pay them back to sustain whatever consumption they want. So

related to that, one of the things that has surprised me and I'm guessing has surprised you in terms of just how things have been able to persist is the labor market held in far better through this Fed tightening cycle than most people expected. And to me, that is the, if not the key, one of the most key dominoes to be watching because if that can remain standing, then yeah, you know, as long as consumer spending is going on, we're two thirds consumer spending economy, you know, we'll probably muddle through okay. But if that falls, then it's game on for all the parada horribles that, you know, we've been talking about forever. And looking at the market, I mean, it's it's the jobs market. I mean, it is I can definitely name some stats that are softening. You know, the the the quits rates are down. Some of the payroll numbers are they're not bad, but they're not great. But you know, like continuing claims are coming down again. So like that's positive. It just doesn't seem like the job market is flashing super warning signals at this point in time. So while, you know, from a lag effect standpoint, and all sorts of reasons, we could think it it shouldn't probably fall in by now or we could think that there's risk spread to fall, it still looks a lot more robust than a lot would expect. So I'm just curious, what are your thoughts right now on

employment? Well, I think this is another manifestation of that expectations creating the reality that I talked about at the beginning. At the same time, expectations on the part of lenders that their borrowers would be able to pay them back as rates came down, you know, enabled them to continue to shovel money at them basically and sustain these sort of feeble enterprises. Corporations acted the same way. So they basically operated on the assumption that you're going to see the Fed pivot and the economy is going to avert a hard landing. Therefore, why would I lay off all these people who I struggled so desperately to hire after COVID when I know that this is just a short term, bump in the road. And then once the Fed cuts rates will be back off to the races. So I'd rather suffer through this period holding more employment inventory, let's say that I normally would like to have just because I know that there's a light at the end of the tunnel. So if that assumption gets challenged, I think you could see a very dramatic and immediate reduction in employment. And that's what I've been waiting for for a while, is that this realization that, hey, that I thought I actually believed the Fed when they said hire for longer. And so I thought, you know, Wall Street spent all year going like this. Now we're not listening to you. And they kept saying it and saying it and saying it. And then lo and behold, Powell paved. I don't know why I should be shocked because it's not the first time he's done that where he said, no, hire for longer. And then the next day decided he's going to pivot. But so fully on me for actually believing what he said. But you know, if they do actually do that, it will shape the employment picture dramatically because they're sitting there with surplus labor inventory that they would shed, I would think rapidly if there was a perception that the landscape was not going to be, you know, pivot immediately. All

right. So two things. One, just to level set, do you agree with me that that would be a game on moment in terms of, you know, all the threats to the economy? All of a sudden, maybe get a chance to start coming in through the door.

You mean if employment were to turn the employment mark? Yes.

Yes. If that, you know, bet that the faith that the corporate fleet has right now that look, we're going to hold on to our human capital right now because this is going to be a transitory period. And then we'll get back in Saturdays and we'll have the right people. If they start saying, Oh, wait, that's not going to happen. And then they start shedding jobs. Does that finally open the door to all those issues that we've been worried

about? It's hard to imagine it wouldn't. You definitely think so. The other thing alongside it though would be corporate profits. You know, whether one can lead the other. So normally corporate profits, if they start to decline, will lead to the head cap. And we didn't see that last year. We actually had the profits recession without the labor recession. So maybe that will come as a con, you know, down the road when they realize, Hey, we actually are going to go to a double dipped profit recession. We're going to let go of these workers. But the other way around is you could have profit growth and this labor shedding that ultimately creates a profits recession because suddenly your consumers are out of work and therefore they're not buying stuff. And then right. And if

it leads that way, we might see profit growth initially, right? Oh, we've reduced our headcount. So therefore, profits are higher, but then the drop in consumer spending catches up. Right. So the reason where I'm going with all this is, okay, so let's say the Fed actually delivers on what it is guiding the markets, right? We're going to do three rate cuts in 2024, right? You're bringing the federal funds rate, right, to the discount rate down from what? I have an a quarter to four and a half, right? That's still pretty elevated. Yeah. Right. So my point is, is like, can the Fed's rate cuts, can they ride to the rescue in time to rescue the corporate America fleet from all the maturity while we rating? Can it ride to the housing markets rescue in time? Right. Yeah. Okay. Maybe maybe mortgage rates come down into the mid to higher fives, right? This is still really expensive mortgages to what people were used to just two years prior, right? So like, are we throwing a party on on somewhat false assumptions here? Yeah.

This is why I said, I think at the very top, that it depends on whether the Fed goes soon enough and aggressively enough, because as you outlined, you know, if you were a junk-rated borrower, borrowing at four and your rates went to eight, and now they're going to go to six, you're still screwed. You know, it's still a massive increase in your debt service. And as I mentioned earlier, consumer debt relative to income is back to where it was in the global financial crisis. I mean, I remember just months ago, people pointing to that at, you know, at low levels saying, look, this increase in interest rates isn't an issue for the consumer because their debt service is still relatively low relative to income. And they, it's like, give it a minute. Where do you think all these rate hikes are going to be manifest? And in the blink of an eye, it went parabolic. Just like the rate that Fed funds rate did. So, I think that it's a Fed definitely has to move with a laugherty. And aggressively, if it's going to stave off the corporate default cycle, which is already underway. But then again, you get into this kind of issue of the expectations feeding the reality because, all right, let's say they don't cut in March. But if the markets believe, well, that just means they're definitely going to cut in April, it can sustain itself. I mean, the question is how long can the market hope sustain the whole construct without actual rate hikes being delivered? And I don't know how long that can go. I would say, frankly, it surprised me that it's been able to hold up this long. And in the face of, as I mentioned, the highest bankruptcies since the Great Recession, and then then COVID. And again, credit card delinquencies, some auto loan delinquencies, I think, are the all-time record high. So, there's a lot of bad news out there that the markets have completely ignored on the assumption that this pivot is coming. And they've ignored it for the better part of 12 months. And it was a good year, generally, not just for stocks, but for credit. So, I guess I have no idea how long they can sustain this on hope. But I would say every day that the Fed doesn't deliver, and if it doesn't deliver aggressively, it could be catastrophic for the markets, just because they've now, their expectations are so far a field of the fundamentals. I mean, just getting back to what's actually going on in the economy. When you look at the data, I know you mentioned Wolf Richter felt like it's hard to forecast a recession. When I look at the data, it's hard to believe that we're not already in a recession. When you look at things like the leading indicator down what?

It depends what you look at. Yeah, exactly. Yeah. So, a lot of leading indicators that inverted yield curves, I mean, just all sorts of tried and true recession

indicators. GDI versus GDP. We've never seen it. Like, there's so many unprecedented data points. Like, a GDI, we've never seen it go negative when GDP was positive before, except when you were in recession. But even during recessions, it's never been this dramatically diverged ever in history. So, I mean, there are just so many indicators out there. Then you look at, as I mentioned, real retail sales have gone nowhere for over a year. That's never been the case unless you've been mired in not just a medium recession, a deep, meaningful recession, like 90 or 2008. So, there are a lot of indicators out there that suggest we should be deep in a recession right now. And if the markets are that far afield from the reality, if the Fed doesn't deliver and deliver soon, we could get a reckoning of epic proportion. The other moving part in all this, though, that leaves me even more gun shy, is it's an election year. And you just can't be too cynical about the amount of effort that will be brought to bear to make sure that what we're talking about does not happen. You know, I have spoken to two people who are politically connected, who were telling me over a month ago, that the Biden administration rhetoric notwithstanding was pushing hard for energy producers to get out there and just pump as much, pump drill, get as much production as you can.

To lower the price of oil. Yeah.

And you see it in the numbers. You see the production, domestic production, I think is an all-time record. So, yeah, they want oil prices lower. So, and then who knows what happens with on the fiscal front, and then with the Fed suddenly doing a pivot. So, it's a really uncertain year. And that's why I guess I feel, you know, there's very little one can say with great certainty and confidence. And the one thing that I think I can say with confidence is that the dollar is going to pay the price for whatever policy sends we commit this year.

That's going to be the relief valve. That's the thing that's going to be sacrificed in order of continued stability. All right. Well, in beginning to wrap up here, Stephanie, and again, I could go on forever. And I know I'm going to get a ton of comments saying, Adam, why didn't you keep going?

No, I think they're going to be like, why didn't you stop at for an hour? No,

no, no, I can guarantee you that's not going to happen. Are there any indicators that you follow closely that we haven't talked about yet that you think are going to be important ones to

watch this year? Oh, wow. That's a good question. Yeah. Well, you know, I'm going to be watching that Baltic freight index for the shipping. What's happening with going on the Red Sea. Yeah, in shipping rates in general, because I think that's going to be important and obviously drives a lot of the input inflation side. And, you know, I'll be looking at things like the indeed weekly job postings to see what's going on on that front. I mean, we've definitely seen a slowdown in hiring in general and the payroll numbers and in, you know, like the indeed measure is definitely rolled over. But I'd look to see if that starts to accelerate to the downside or not. And, you know, obviously, I'm going to be watching the consumer spending and really parsing out what of that is units versus price. And if we're seeing any kind of shifts there and continue to keep an eye on, you know, the global movements in and out of the dollar, those will be sort of my main focus this year. But, you know, and on the credit front, obviously, I've been watching all the corporate, the corporate downgrades, we have the largest number of downgrades last year since the global financial crisis other than COVID. So, you know, like I said, all the credit metrics are there flashing red. But when you look at the Bloomberg screen, they're all flashing greens.

Well, and when he won that is not flashing red that I know you watch very closely are credit spreads. That's

what I mean. Yeah. The actual credit quality is flashing red, but the market measures of risk appetite are all flashing green. So credit spreads. Yeah.

All right. Well, Stephanie, if on any of those key indicators throughout the year, you start seeing them move in ways that really catch your attention and influence your outlook or where things are headed. You just have an open invitation to come on this channel anytime and let let folks know. I'm going to I'm going to try to squeeze one or two more questions in before I wrap things up. If that's okay with you, just because they're so interesting and I really want to hear your thoughts on them. And of course, one is your your market outlook. We haven't even gotten a big question yet, which is just would you would you think the markets are going to do this coming year? We I know you think they're going to be pretty good for gold, but I'm curious any other assets, but before

we get there.

All right. So we talked about this sort of culture of moral hazard, right? There's a number of things I'd like to talk with you about more depth that we're not going to be able to do here, but let me just sort of mention them briefly. One is that I sort of call this the the transition from meritocracy to aristocracy, where the I think we're getting to the point where it's legitimate to ask the question, is the American dream really only available these days to those who are born rich, right? Where there's this huge, well-defined, we are hollowing out the basically the job system through cost

cutting

measures like offshoreing, but also automation and now AI, right? And it's getting increasingly, we're just we're removing those entry level jobs, right? We've given companies all sorts of incentives for a very long time, as we've made it more more expensive to employ human capital, but we've made it easier for them to replace that human capital, especially on the lower skill level, right? So the on-ramp for younger generations to build skills and create marketable skills, there's rungs of the latter are getting removed, right? So for this whole host of reasons, I think we're at risk of kind of building a bifurcated society here, where you have a very few doing very well and everybody else who's seeing their prospects as diminished and probably increasingly entering jobs that are in service of that top elite, right? This is the discussion I you and I could have for a long time, so it's unfair for me to ask you to opine too much on that one just a couple minutes, but the question I wanted to kind of get to through those questions and a few others I won't mention here, which is Stephanie, if I made you Empress of America, what reforms would you want to prioritize first?

Oh my gosh, wow, that is

a

question, I know.

Yeah, well I think one thing that I would try to do immediately is just sweeping deregulation, because I think one of the things that stands in the way of a lot of economic entrepreneurship and vitality and feeding that capital of spirit is just a tremendous amount of bureaucracy that's imposed on people trying to get started in business and the other side would be taxes along with it. I mean I think to have lower corporate taxes and less regulation would help revitalize a little bit of that entrepreneurial spirit and give people greater opportunity there. And I don't know if there's a way that you could also incentivize trade schools, because one thing we're learning right now from example, look at how Tarnished Harvard has become, and as you say a lot of these jobs, people pay tons of money to go and get a degree at one of these schools and then they're saddled with student debt and they don't really have much job opportunity, because a lot of these jobs as you said are being are either already occupied or they're going to be outsourced by AI or abroad or whatnot, maybe somehow come up with some incentive or promotions for going to trade schools and sort of bringing that back. I know that that's generally frowned upon as being lesser than, but I don't think so. I think that that would help restore a sense of pride in workmanship, etc.

A sense of value creation in the economy versus a lot of the paper degrees that a lot of these respectable colleges pump out. But also talking about paper

degrees, we've created a culture where our entire economy is basically there to create paper assets. A lot of it is just

we... Or not even paper, it's just to push digits from one side to the other.

I mean, we stop creating things and we've now gotten into the production of paper and digits as you say, and that's all very elegant and sophisticated, but I'm not sure, especially in the world of AI, that that's necessarily a sustainable economic model for us. And given the amount of debt that we've incurred in the process of doing that, I think maybe getting back to some simpler things might not be the worst thing in the world. And again, I don't know, but I would think that if you're building something that you can actually point to and provides some purpose, physical purpose, that that might give you a sense of pride in yourself and in your country and in your job. And that kind of thing, I mean, it may sound a little hokey, but I think that that actually is a powerful thing that might be worth getting back to.