May 12, 2026 • 38 mins
Inflation is heating up again, and the Federal Reserve may be running out of easy answers.
Mike Armstrong and Marc Fandetti break down the hotter-than-expected April CPI report as rising gas prices, higher shelter costs, and persistent inflation pressures push the economy closer to another potential inflation crisis.
Also covered:
Mike Armstrong and Marc Fandetti break down the hotter-than-expected April CPI report as rising gas prices, higher shelter costs, and persistent inflation pressures push the economy closer to another potential inflation crisis.
Also covered:
- Why the latest inflation report has economists increasingly worried
- How rising oil prices are feeding into food, housing, and consumer costs
- The growing fear that inflation expectations are becoming embedded again
- Why some analysts see uncomfortable parallels to the 1970s
- The debate over whether the Fed has already lost credibility
- Why cutting gas taxes may do more harm than good long term
- How higher mortgage rates are slowing the spring housing market
- Why workers are starting to lose ground again to inflation
- Whether the economy is moving closer to stagflation
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Episode Transcript
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Speaker 1 (00:00):
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a donation today. Face is the Financial Exchange with Mike
(01:07):
Armstrong and Mark Vandetti.
Speaker 2 (01:12):
Happy Inflation Tuesday to the listeners out there on the
Financial Exchange. It's Mike, Mark and Tucker with you. We
had a release of the April CPI this morning at
eight thirty am. We've got Michael Burry of Big Short
Fame calling for a market crash again. We've got gas
(01:33):
taxes incoming fed Share to discuss. But the definite big
news report of the week is this inflation report. It
is the topic on everyone's mind as gas prices surge,
and we've talked about how there are few items in
the world quite like gasoline that are as front and
center to consumers expectations for where prices are going to go.
(01:56):
Then gasoline and the inflation report that we this morning
from the Bureau of Labor Statistics confirmed I think a
lot of the fears and actually surpassed most economist expectations.
Speaker 3 (02:08):
So let's start right there.
Speaker 2 (02:10):
Mark on the April CPI report, which everyone knew was
going to be a hot reading, nonetheless, but came in,
thank you, Michael, came in a little bit hotter than expected.
So starting off with the headline numbers year over year inflation,
which is the one that you see printed most often
came in at three point eight percent. Expectations were for
(02:33):
three seven. When you strip out even the food and
energy piece, you came in at two point eight percent.
So even just looking at those core prices, you're now
approaching three percent on the year over year figures. The
month over month numbers after bumping up nine tens of
percent in March, you saw another six tens of percent
increase for all items inflation, and four tenths when you
(02:54):
stripped out food and energy on the month over month reading.
And so unsurprisingly here mark, if energy price is shooting up,
you are experiencing higher than comfortable inflation. But you might
be able to argue that we're starting to see some
bleed through into other categories here as well, other than
purely just energy. So takeaways from this month's inflation report,
(03:17):
which again not surprising in terms of the release but
hotter than expect, that.
Speaker 4 (03:21):
We have an inflation problem. The FED, which controls the
money supply and thus short term interest rates and thus
inflation in the long term, is the pretty much the
only entity that can fix it. Fixing the inflation problem
would probably require economic sacrifice. It did not in twenty
twenty two. Inflation came way down from twenty twenty two
(03:42):
to twenty twenty four, without a rise in unemployment, Without
an appreciable rise in unemployment, some other measures of labor
markets slack went up. So the question for the FED
now is do we accommodate this inflation, this oil price shock,
which has caused headline inflation to spike in the last
two months, gone up by one point five percent. I'm
(04:02):
just a cumulating. They the point nine yep from March,
in the point six from April. This is the highest
year over year inflation rate, the one that you recited
three point eight percent in three years when everybody thought
inflation was terrible. Um So, Mike, the Fed's got to
decide do we accommodate this and hope it doesn't become embedded,
(04:24):
Hope investors, firms, and people don't begin to bake this
level of inflation into their price and wage expectations, or alternatively,
does the FED push back.
Speaker 2 (04:38):
We'll get into some more of the details of the
report in a minute, but I do want to stay
on this subject of accommodating or not, because on the surface,
an oil price shock on its own, if you think
it could be resolved. You can make an argument for
accommodating it. And by accommodating we just mean the Fed
not intentionally trying to send the economy into recession because
(04:59):
of a price shock in one category. Give me the
counter argument now, because arguably, over the course of the
last four years, we have had three separate price shocks.
Now there is the twenty twenty two you know, inflation
shock from a combination of stimulus plus COVID era shutdowns.
There was the twenty twenty five price shock from tariffs,
(05:23):
and now we've got a twenty twenty six price shock
coming in from oil supplies. And all three of them
showed up in the data. But arguably are also perhaps
moving into consumers' expectations for what prices are you know,
what are normal price movements?
Speaker 4 (05:42):
The Yeah, the counter argument, I think it's at least twofold.
One is that the inflation rate now over the last
year three point eight percent, and expected inflation too, which
is the more important variable. They're way above the federal
funds rate, which is three point five percent. Said differently,
real Fed funds is now negative. Does that make sense?
(06:02):
So you take the nominal, you subtract either expected inflation
if you're being sort of pedantic about it, or just
the last twelve months as.
Speaker 3 (06:08):
A rule of them.
Speaker 2 (06:09):
The target rate for the Federal Reserve right now on
that Fed funds rate is three and a half to
three seven five. And what markint Okay referring to is, hey,
you know, when that rate is lower than the total
inflation rate, it's tough to argue that the policy is
trying to constrain inflation.
Speaker 4 (06:25):
Yeah, that's a preposterous argument at this point. So the
Fed's got a problem because real interest rates are generously
we'll call them zero more accurately, it's probably fair to
say that negative. That's very stimulative, Mike. So we've got
prices going up in monetary policy being stimulated. That's problem
number one on the Fed's plate. Another problem is inflation expectations.
(06:49):
They're going up. You saw headline possibly be possibly creep
into seep into core inflation. Headline inflation was up point six.
Core inflation double went from point two to point four.
There may be technical reasons for that, but I think
over emphasizing the technical reasons misses the forest, which is
the inflation problem. For the technical trees, which are sort
(07:11):
of like whack a mole, there's one every month that
you can cite as a special factor. So for at
least a couple reasons, Mike, this is this is a problem.
This is the biggest inflation. Were on the precipice of
a crisis here. I don't want to call it a
crisis yet, but we're on the edge of an inflation crisis,
obviously the biggest in twenty twenty two.
Speaker 2 (07:34):
So taking a look at the details of this report
here and breaking it down section by section, which I
don't think is useful for predicting the future, but I
think it is it is indicative of what people are
actually experiencing. So first of all, food food prices, which
were pretty flat during the month of Marsh did climb
(07:54):
pretty substantially in the month of April. You might be
able to blame that on diesel prices. You might be
able to blame that on grocery stores raising prices in
anticipation of higher prices from farmers due to the fertilizer.
Speaker 3 (08:08):
I'm not sure, but in neither case, the price for food.
Speaker 2 (08:11):
At home and away from home increased pretty dramatically. Overall,
the food category increased half percent in the month of
April seven tens of percent for food at home, meaning
grocery store prices up pretty substantially in the month of April.
Energy prices overall up nearly eleven percent in March, up
another nearly four percent in April here, so combined substantial increases.
(08:35):
Gasoline continues to be a big push on that front,
but it's really across the board between fuel, oil, electricity,
energy services, etc. All up substantially over the course of
the last two months. The other interesting one that is
worth mentioning because of the waiting it has in the
(08:58):
overall composition shelter here mark so shelter for the last
six months has been relatively muted, you know, averaging between
zero point two and point four percent monthly increases compared
to where we were a few years ago.
Speaker 3 (09:12):
That's welcome news.
Speaker 2 (09:14):
In April it shot up six tens of a percent,
and I don't think I can easily look at that
and blame it on gas prices shooting up or oil
prices going through the roof. We're talking about things like
rent prices that people pay or owner's equivalent rent that
is going into this calculation. And this one again another
important piece here because when we look at price movements,
(09:37):
we're looking most importantly at core prices and stripping out
some of the shocks that we get from food and
we get from energy prices. This one is in there,
and it is a massive component of that core prices
we saw bump up six tens of a percent. My
rent didn't go up in the month of April. Do
you have a sense for why we might be seeing that?
(10:00):
Is it actually something to be concerned about our rent prices,
you know, suddenly shooting up this spring in what seems
to be a pretty weak housing market.
Speaker 4 (10:08):
Well, they're imputed or inferreds, so we don't know. They
don't actually go ask as you know, they don't ask
people who are renting, would you pay less right compared
to a year ago. Some of you pointed this out
before we went on air today. I couldn't find a
authoritative explanation for why that process might have generated an
exaggerated core rate like it doubled from March to April.
(10:33):
That's suspiciously large. There's no way energy prices because of
the lag that that imputation process involves. So I don't
mean to be overly technical. This is not I have
no idea how they do this, So I'm not trying
to totally technical and I'm trying not to word salad this,
but I think I've already watched it. There's no way
that's attributable to energy seeping into Core. So what happened there,
(10:56):
maybe it's a little bit exaggerated. I'll just call it
like a book keeping effect, sort of timing in the
way that it's done. So maybe Shelter only went up
point three, and maybe Core only went up by point
three instead of point four. I'm really eager to see
today's median rate, which the Cleveland Fed calculates. It strips
out all the outliers, no matter where they originate from.
(11:17):
It was point three last month. If median went from
point three to point four, I think our concern would
be or at least my concern would be validated.
Speaker 3 (11:26):
Mike, let's take a quick break.
Speaker 2 (11:28):
When we come back, I do want to talk a
bit more about the inflation problem that we are seeing,
because who it's a problem for is the Federal Reserve,
and their job is to control this stuff, and we're
now facing i think arguably the third price shock that
we have seen in four years, and that becomes reminiscent
of other periods of time in history that we're very
(11:49):
problematic for the economy, the stock market, the bond market,
et ce quick break. We're gonna be talking about the
FED and this inflation report next on the Financial Exchange.
Speaker 1 (11:58):
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Speaker 3 (12:48):
Mark.
Speaker 2 (12:49):
We were talking about inflation before the break, and the
point that you made without fully going into the weeds
on it was we're at a very dangerous place with inflation.
Now I'll argue that it doesn't seem all that dangerous
given that you're over your numbers are only three point
eight percent. Recently, we dealt with nine percent year over
your inflation. Why would you argue that this moment in
(13:09):
time is particularly dangerous for because I think, yeah.
Speaker 4 (13:13):
For a couple of reasons. Expectations are going up. That's
how inflation becomes embedded. The more embedded it becomes, the
harder it becomes to kill. Second, and I can expand
on that one. Sure, Look, we got like an hour
and a half here to talk about this, so and
I'm gonna miss straight and I'm a lot Yeah, yeah,
we're going so's yeah.
Speaker 2 (13:29):
Yeah, yeah, Sorry advertisers going along on inflation.
Speaker 4 (13:34):
We'll do we'll we'll do live reads. It's no problem.
Speaker 3 (13:39):
God, I'm just here from music acts.
Speaker 4 (13:41):
Second, Mike, the FED has lost a lot of credibility
because of the political pressure that the administrations put on them.
I mean, I'm saying, like, if you love the president
and this offense, you turn your radio down for a second.
Speaker 3 (13:49):
But he's made it.
Speaker 4 (13:50):
Really hard for the FED to do their job. Warsh
is coming in fairly or unfairly perceived as his puppet,
ready to do his will that is lower interest rates.
Warsh has made these preposterous arguments that a I will
somehow usher in this golden era of productivity. We could
start cutting rates today in anticipation of that. I think
we're going to talk today about a story that makes
the case that AI investment is inflationary, at least in
(14:12):
the short term, because it pushes up demand for stuff.
So that argument doesn't hold water, and it might end
up being right, but we won't know for five years,
so this could not be happening, and worsh may turn
out to be a great fed chair.
Speaker 1 (14:25):
Mic.
Speaker 4 (14:25):
I think you've chasened. You've encouraged me to adopt sort
of a chasin posture with respect to this. Let's wait
and see. But the evidence, the facts and evidence, as
Chuck Zada would say, are not good. So for a
lot of reasons, Mike, you can see all these things
converging into a perfect inflation storm. The parallels with the
seventies are not perfect, but they're eerily reminiscent.
Speaker 1 (14:48):
They really are.
Speaker 4 (14:49):
We had food and energy price. If you look at
CPI in the seventies, it looks like a camel, you know,
the couple. I think camels have two humps, right, I
don't know, uh Met one got a couple hump in there.
We're hitting another We're going we we we just hit
a trough and we're going up another hump. The FED
seems committed to lowering interest rates, which is indefensible in
(15:10):
the current environment. So I don't I don't find a
lot of reasons to be hopeful about the Fed's ability
to tackle this.
Speaker 2 (15:18):
Mike, Yeah, I do worry about the Fed's credibility. I
especially worry about those expectations. And a conversation I was
having just yesterday with somebody buying a new car, giving
their existing Toyota to their daughter, and intending on buying
a new Toyota this spring for some forty odd thousand dollars.
And the question to me was, Hey, we went to
(15:39):
the credit union. We can get a you know, loan
for this car at four and a half percent, you know,
do we buy it now, do we buy it later?
Should we take the loan, should we should we borrow
the money? Should we take it from you know, cash
reserves that we have. And I won't go into what
the you know, what the conclusion was, but those are
(15:59):
the types of decisions that very much are affecting them
from an inflation expectation standpoint. Hey, should we just buy
this car now, because I bet the price. You know,
based on what the prices have done the last few years,
it looks like they're going to continue to go up. Hey,
you know, in the context of other interest rates that
I'm seeing four point two percent or four point five percent,
(16:20):
which would have been unthinkable you know, five years ago,
that doesn't seem quite as bad as borrowing money at
you know, six and a half percent for a mortgage,
for example. So yeah, let's go ahead and borrow it,
and we'll keep our cash invested, or we'll go do
something else with it. These maybe that's not the perfect
(16:42):
inflation expectation story, but the price of the vehicle one
absolutely is when people fear or expect prices to be volatile,
when they expect them to go up substantially, they start
doing things that don't make a ton of sense.
Speaker 3 (16:58):
Yes, yes, yes, they they.
Speaker 2 (17:00):
Start to put their money into assets that are not
assets because they're worried about the price of those things
going up. And one of those could be cars, another
one could be non perishable goods. But the problem with
those expectations, you know, on an individual level, if you
think that Toiletrice paper is going to get way more expensive.
It's you know, likely, it's unlikely to ruin your financial
(17:23):
situation by you know, filling a closet with toilet paper
because you're worried about prices going up. But in the aggregate,
if everyone believes that vehicles are going to become ten
percent more expensive a year from now and twenty percent
two years from now, and that tomatoes are going cans,
tomatoes are going to go through the roof of the
course the next twenty four months.
Speaker 3 (17:42):
Then they start bringing forward purchases.
Speaker 2 (17:44):
They start buying stuff faster and storing it, and that
exacerbates an issue of inflation, because you're adding demands to
the equation that wouldn't otherwise exist.
Speaker 4 (17:53):
Yeah, inflation has economic costs that manifest in sort of
subtle ways, the little changes in people's behavior. You gave
a couple of examples.
Speaker 3 (18:06):
One other, sorry, one of the big ones. I to
interrupt you.
Speaker 2 (18:08):
But if I think that prices are going to go
up at four percent next year, there's no way I'm
taking a two percent increase in my salary. I Am
going to go and negotiate heavily with my employer. And
there are very few costs quite like salaries and compensation
that contribute to the overall and that's.
Speaker 4 (18:28):
The textbook mechanism. Firms, companies, and people incorporate their expectations
into their wage and price demands. Now you could say, well,
that's not realistic. I don't walk into my employer's office
and demand a cola. But on average, that's a reasonable
way to think about how inflation expectations in this case
(18:50):
going up. And in the nineties we had the reverse process.
People didn't demand large enough wage increases given the level
of inflation, the rate of inflation, and their increase seeing productivity.
So that was a virtuous cycle. This is a is
a nasty.
Speaker 2 (19:04):
One, by the way. I know people love talking about
individual prices. Egg prices down thirty nine percent year over year,
unfortunately being offset by tomato prices which are up thirty
nine point seven percent and beef prices which are up
fourteen point eight percent year over year.
Speaker 4 (19:19):
So on average, your omelet might be a little cheaper.
Speaker 3 (19:21):
Those eggs are the big that's true.
Speaker 2 (19:23):
Yeah, your eggs compared to you're almost compared to a
year ago. You're better off, songs unless the tomatoes tomato
isn't there quick break wall Street Watch coming up next.
Speaker 1 (19:41):
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street Watch tracking the stocks, theodato and the headlines driving
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Radio and that.
Speaker 5 (20:01):
Marcus today is seeing a modest selloff after the April
Consumer Price Index revealed consumer prices rose three point eight
percent from a year ago, marking inflation's highest level in
three years, driven by higher gas prices. Right now, the
Dow is off about two thirds of a percent, SMP
(20:22):
five hundred is down three quarters of a percent, Nasdaq
down over one percent, Russell two thousand is down one percent,
Tenure treasure Field is up four basis points at four
point four five seven percent, and Oil is up over
three percent higher, trading at one hundred and one dollars
a barrel. Ebays Board said it has rejected video game
(20:46):
retailer Game stops unsolicited fifty six billion dollar takeover proposal,
saying the proposal was neither credible nor attractive. Game Stop
shares are off by one percent, while eBay stock is
down by half a percent, Meanwhile, Financial Times reporter that
Nelson Peltz's Treon Fund Management is seeking investor backing forbid
(21:06):
to take fast food chain Wendy's private, after the restaurant
operator shares have fallen more than forty percent over the
past year. Wendy's up by fourteen percent today. Elsewhere, shares
in telehealth company Hymn's and Hers sinking ten percent after
it swung to a quarterly loss as the companies moved
to alter its weight loss offerings drove up costs. The
(21:26):
company also cut its profit outlook. In under Armour stock
dropping by eighteen percent after the athletic apparel company posted
a fall in quarterly revenue.
Speaker 3 (21:37):
I'm Tucker Silva, and that is Wall Street Watch.
Speaker 2 (21:40):
Talking a lot about gas prices these days. According to
Triple A, the national average for a good old gallon
of gas is sitting at four dollars and fifty cents
right now, unless you're in California, which case it's six
point fifteen. That's up substantially, as everyone knows, and plenty
of states are talking about their gas tax as a
few of them have eliminated them temporarily. One state has
(22:04):
cut it a little bit, and we are talking about
it at the federal level. I don't really know if
anything's going to happen at the federal level, but I
think it's worth talking about this in the same context
that we talk about the Social Security Trust Fund and
the Medicare Trust funds and how all those programs work,
which we know are all functionally broken, and unsurprisingly, at
(22:26):
least in my mind, guess what, the US Highway Trust
Fund also functionally broken. It's insolvent structurally, does not have
enough revenue to ensure the projects, and it faces a
projected shortfall right now of over two hundred and forty
billion dollars by twenty thirty three. The shortfall is very
(22:48):
plainly the budgeted projects that the trust Fund is supposed
to pay for versus the revenue it is expected to
bring in. Assuming we keep the gas tax of eighteen
point six something like that eighteen point something since in
place without waiving it right now. So first things first,
(23:11):
would waiving the gas tax in the short term bring
down gas prices? Of course it would in the short term,
if you got rid of an eighteen cent tax on
the price of gasoline, it would bring it down, at
least temporarily.
Speaker 4 (23:24):
Presumed what's happening to demand?
Speaker 3 (23:25):
Yeah, that's what I want to get at squence. I
don't think we should.
Speaker 2 (23:29):
Sorry, it's eighteen point four cents and it's been there
since since nineteen ninety three, so clearly inflation isn't keeping pace,
which is why the trust fund is functionally insolvent. We,
you know, should not ignore the fact that we have
a litany of underfunded government programs, and what happens when
(23:49):
the Highway Trust Fund is functionally broken is that we
have to bail it out and basically spend money via
deficit spending in order to get these important structure projects done.
I don't think anyone looks at the state of the
US highway system and says, wow, that is, you know,
the defining characteristic of America in twenty twenty six. It
(24:09):
might have been in nineteen sixty. Today I don't think
it's quite the.
Speaker 3 (24:13):
We shine it.
Speaker 2 (24:14):
We should appreciate it, though, Oh it's it's fantastic, But
I don't think anybody looks at it today and says, well.
Speaker 4 (24:19):
It's not a novelty anymore. Hey, let's go drive on
the highway this Sunday for.
Speaker 2 (24:22):
The you know, for the whole day, right, So One,
there is the funding problem for our nation's infrastructure, which
is arguably crumbling across the country. Two would be what
does cutting the gas tax actually functionally due to due
to prices? Because in the short term, while I can
(24:43):
make an argument that prices could fall, I'm not sure
what it would do over the you know, six month
time period. So talk to me about demand destruction when
we talk about you know, oil prices and gas prices,
and why waving the gas tax might not actually be
a great idea.
Speaker 4 (24:57):
Well, in the short term, demand isn't very sensitive prices.
You got to go to work, supermarkets need food. Sure,
they can't make other arrangements. In the longer term, people
can change their behavior. I guess that's how I'd summarize it.
Speaker 2 (25:12):
So if gas prices are higher, I may not plan
that family vacation to Colorado and drive all the way
there because it's going to cost me forty percent more
in gas.
Speaker 4 (25:24):
Otherwise, I mean it's possible people drive a little bit
less this summer. But I think most Americans think of
a vacation domestically by car as the economical way to
do it. They're not gonna they're not going to not
drive to yellow Stone or a wally World. You know,
it's that's that's.
Speaker 3 (25:43):
A fictional reference. So I know what Wally World is.
Speaker 1 (25:47):
Okay, I don't know.
Speaker 4 (25:48):
I don't know how you spend your weekend.
Speaker 2 (25:51):
The point being here, Yeah, an eighteen cents cut to
the gas tax may temporarily help. It may also ultimately
convince people that, hey, you know, prices are going down.
I'm going to keep doing my plans and keep driving
as much as I should. It does not contribute to
demand destruction in the way that higher gas prices would.
Speaker 3 (26:09):
I personally actually like over the long term.
Speaker 2 (26:12):
Wouldn't be opposed to a flexible gas tax that once
it gets over four bucks a gallon, it does get reduced.
But I think the trade off would very clearly need
to be Okay, how are we going to rebuild the
Highway Trust Fund? And my answer would be, once gas
prices go back down below four bucks a gallon, you
jack that gas tax up, you know, and double it.
(26:33):
But I don't think either of these things are going
to happen. I don't think Congress is going to have
the willingness to cut the tax right now, and he
would need Congress to act here. I don't believe that
the president can change a tax rate based on executive
order alone.
Speaker 4 (26:46):
Now he may not know that, but I don't think
you can.
Speaker 3 (26:49):
So we will see. As all of this is.
Speaker 2 (26:52):
Going on, everyone and their mother is brainstorming how we
can bring down prices in this price surge moment that
we're experiencing right now. That's why people are talking about
cutting the gas tax, other areas that people are looking at.
Speaker 3 (27:04):
You could ease beef tariffs.
Speaker 2 (27:06):
Right now, we tariff the heck out of any beef
imports that come from anywhere in the world other than
the United States. And as we've talked about on this program,
due to how long it takes to raise cattle, it's
unlikely that beef prices domestically would come down anytime soon
without those imports. On the other hand, cattle farmers aren't
exactly raking in the dough and haven't been over the
(27:28):
last few decades, and now it's kind of their moment
to shine, so they would be adamantly opposed to that.
You have all these special interests, and ultimately there's one
thing I can think of that might bring down prices,
which would be eliminate tariffs, and that would work directly
against the President's own stated objectives.
Speaker 4 (27:47):
That was the worst policy I've seen in my life
or read about here or just about anywhere, except for
some that's not true.
Speaker 3 (27:54):
I've seen some really bad stuff in the US.
Speaker 4 (27:57):
Oh oh yeah, well, I mean.
Speaker 3 (27:59):
We Argentina way worse than what we're doing now.
Speaker 4 (28:01):
Yeah. Well, I mean we're well on our way.
Speaker 1 (28:07):
Mike.
Speaker 4 (28:08):
You know, these are all second and third best solutions.
And by that I mean cutting gas tax prices. I
mean everybody agrees. The President would probably agree that it's
a gimmick, sure, because ultimately you're going to make the
revenue up to fund I mean, infrastructure is critical to
long run economic growth. You don't want to hamstring that
(28:29):
like you're robbing Peter to pay. You're robbing President Peter.
I was going to say, you know the expression to
pay Paul, but it's actually robbing President Peter to pay.
Excuse me, robbing future Peter to pray.
Speaker 3 (28:38):
President Chief Peter. You know what I'm saying.
Speaker 4 (28:40):
We're robbing the future here. That makes none of these
policies make any sense. They all seem very scatterbrained, reactive,
and just not well thought out, and I'm not just
like picking on the President though he's obvious the buck
stops with him right now. It's Congress too. And as
we talked about monetary policy, have you ever seen such
a can fu state on the part of the FOMC?
(29:03):
And my god, there's a leadership change happening right now.
If we come out of this in any reasonably stable
economic condition, it'll be like a small miracle.
Speaker 3 (29:12):
Let's take a quick break.
Speaker 2 (29:13):
When we come back, stagflation working its way around financial
circles again, We're going to define it. We're going to
talk about whether or not you should be worried about it.
Next on the Financial Exchange.
Speaker 1 (29:23):
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Speaker 5 (29:46):
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Speaker 3 (30:28):
Mark.
Speaker 2 (30:28):
We've talked a lot about stagflation over the course of
the last four years, in part because it's a fund
made up word that people like to bring out there,
in part because it is arguably the worst condition that
you can possibly get for an economy, a combination of recession,
stagnation and high prices and prices that are increasing over time.
(30:51):
People like to describe it as such. In twenty twenty two,
we did not get a stagflation.
Speaker 4 (30:55):
We haven't had it.
Speaker 2 (30:57):
We are now in one right we are not in
one right now. We're not in a moment of stagflation
right now.
Speaker 3 (31:04):
Now.
Speaker 4 (31:05):
Growth appears to be it about trend.
Speaker 2 (31:07):
We're at two percent GDP as in the most recent report.
I think it's very tough for me to argue that
we get there when companies like Google and Facebook are
going to spend seven hundred billion dollars on AI infrastructure
this year. I have a tough time saying that we
get there unless you see that part of the economy
just drop off a ledge. What would the economy look
(31:28):
like if those companies weren't spending a seven hundred billion
dollars great question might be pretty ugly. In the meantime,
they are, and so I will buy that we could
land ourselves in stagflation. I get especially concerned about it
when we're hit with multiple price shocks. But we're not
there right now, just as we weren't there.
Speaker 4 (31:44):
Internal workers are experiencing a bit of stagflation. As of
last month, average hourly earnings year over year was three
point six, inflation was three point eight. So for the
first time in three years, this is average. So there
are some people who did a lot better worse, But
for the first time in three years, workers' salaries are
not keeping up with increases in the cost of living.
(32:06):
Said differently, standards of living on average, not for everybody
are falling, so for some people this will feel like stagflation.
Speaker 2 (32:14):
Here's my problem with that. I agree, you know, workers,
it is what wages are stagnating, and that's not great.
I would also say that kind of to me like
saying that housing is in a recession, like either the
economy is in stagflation or it's not.
Speaker 4 (32:31):
And well, there is no terroisical term. There is no
technical definition of stagflation. Right, it was a term made up,
as you point out, it's this hybrid term stag for
stagnant inflation, for inflation obviously a combination of below trend
growth and above fill in the blank two percent, three percent,
and we're now at four percent inflation. It's just shocking.
Let that sink in. We just came off a big
(32:51):
inflation shock, we thought it was behind us. Then we
get tariffs, trade wars, an actual war in Iran, and
reporting a big percentage of the food services labor force,
and obviously inflation comes back, so you could say this
is self inflicted. It's just shocking to me that we're
dealing again with double the Fed's target rate of inflation
(33:13):
and a four year span good at.
Speaker 2 (33:15):
The same time that the incoming chair is talking about
desperate need to cut interest rates. So yeah, that part,
to me is quite shocking. Housing market, as I was
just talking about, expected to have a nice little spring
push here and falling well short of expectations. Home sales
barely moved a year over year. We're looking at four
(33:35):
point zero two million existing homes used homes if you will,
that's sold in the month of April. That's almost the
exact same rate that we saw a year ago. At
the same time, you are seeing the inventory levels continue
to tick up a little bit, maybe not as fast
as people were hoping, but we are now sitting at
(33:55):
nationwide just over a million homes for sale as of
April of twenty twenty six. Last year, we were at
nine hundred and fifty nine thousand, and Again, what I
always find useful is what did it look.
Speaker 3 (34:07):
Like pre pandemic.
Speaker 2 (34:09):
Well, we were at one point one four million homes
for sale in April of twenty nineteen, So to I guess,
my point would be we are very close to what
the housing market from an inventory perspective, looked like prior
to the COVID pandemic, when listings dropped some fifty percent nationally,
(34:31):
we are unlikely to see home sales tick up so
long as mortgage rates need to stay where they are, which,
to be clear, as of yesterday they were at six
point four to nine percent on average, according to Mortgage
News Daily, and with the ten year yield moving up
another four tenths of a percent this morning, we're likely
above six and a half percent by tomorrow, and so
(34:54):
we it'll be interesting. I'm not sure what I would
tell somebody if if they asked me, hey, does it
seem like a good time to sell your home right now?
Obviously that is heavily regionalized, but at the moment, it
seems that there's a lot of young people worried about
their working conditions, not working conditions, their ability to find jobs.
(35:15):
The mortgage rates are still very elevated compared to what
people think of as the status quo. When you're at
six and a half percent, I think there's a mental
framework thing that is a lot different compared to when
they were below six percent, and a inventory situation that
is improving, but in many parts of the country still
(35:37):
well below what we would consider to be normal.
Speaker 4 (35:40):
So isn't the answer to that question should I sell
my home right now, isn't it always? It depends Like
if you're moving for work, yeah, you sell your home,
don't be that's a foolish yeah consideration. But if you
were trying to be opportunistic about it, we'll go ahead
list it. If you're here in the Metro West area
where we broadcast from Metro West relative to Boston, or
on the south shore of Boston, your house will sell
in a day for ten percent over at. But if
(36:00):
you're out say where I am, closer to four ninety
five on the outskirts, you might be on the market
for three months, and if you really need to sell,
you might be taking aircut.
Speaker 3 (36:10):
Yeah, it's it is an ever changing market.
Speaker 2 (36:13):
But I think what is clear is it is not
a market that's conducive to a lot more home sales,
and those home sales that are that we're missing out
on right now, if you were expecting that increased pace
does a lot in terms of missing economic activity. We've
talked about this phenomenon before, but when you talk about
(36:34):
buying and selling a home, the amount of economic activity
that gets generated off of that financial transaction is pretty incredible. Right.
There is move there are moving costs. There are redecoration costs.
Assuming you're not doing any major renovations, there could be
major renovation costs.
Speaker 4 (36:50):
Though good housing doesn't drive the economy, economic growth drives housing.
Look at China. You can build a lot of houses,
and this is a bad example in part because China's
economy is relative vibrant. But people buy a home because
they expect a better future. So those investments that you
talked about by tech companies and potentially productivity enhancing stuff
are really what matter. I just don't want to put
(37:14):
the cart before the horse.
Speaker 3 (37:16):
I'm not saying you did that under No, I understand.
Speaker 4 (37:19):
So you're talking about like an accounting immediate accounting sense.
Speaker 3 (37:23):
No, you're right.
Speaker 2 (37:23):
I don't think that policy shouldn't be to increase housing
activity in order to generate economic activity.
Speaker 3 (37:31):
You're right.
Speaker 2 (37:31):
The economic activity, the optimism that people have about their
future should drive the.
Speaker 4 (37:37):
Yeah, it's like you could tell your kid you want
to generate some economic growth and scessarily go out mul lawns,
don't worry about school. No, Actually, they should be investing
in the buildings so called human capital. Their future earnings
will be higher. It's sort of long term growth versus
a short term.
Speaker 2 (37:52):
Pop do both markets markets strongly in negative territory. As
we close in on the eleven o'clock hour, we've got
the S and P five hundred off seven tenths of
a percent, Nasdaq off one point one, the Dow Jones
Industrial Average off two thirds of a percent, mostly on
this hotter than expected inflation reading and continued turmoil in
the Middle East. We'll be right back with a lot
(38:14):
more on the financial exchange.
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(00:20):
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(01:07):
Armstrong and Mark Vandetti.
Speaker 2 (01:12):
Happy Inflation Tuesday to the listeners out there on the
Financial Exchange. It's Mike, Mark and Tucker with you. We
had a release of the April CPI this morning at
eight thirty am. We've got Michael Burry of Big Short
Fame calling for a market crash again. We've got gas
(01:33):
taxes incoming fed Share to discuss. But the definite big
news report of the week is this inflation report. It
is the topic on everyone's mind as gas prices surge,
and we've talked about how there are few items in
the world quite like gasoline that are as front and
center to consumers expectations for where prices are going to go.
(01:56):
Then gasoline and the inflation report that we this morning
from the Bureau of Labor Statistics confirmed I think a
lot of the fears and actually surpassed most economist expectations.
Speaker 3 (02:08):
So let's start right there.
Speaker 2 (02:10):
Mark on the April CPI report, which everyone knew was
going to be a hot reading, nonetheless, but came in,
thank you, Michael, came in a little bit hotter than expected.
So starting off with the headline numbers year over year inflation,
which is the one that you see printed most often
came in at three point eight percent. Expectations were for
(02:33):
three seven. When you strip out even the food and
energy piece, you came in at two point eight percent.
So even just looking at those core prices, you're now
approaching three percent on the year over year figures. The
month over month numbers after bumping up nine tens of
percent in March, you saw another six tens of percent
increase for all items inflation, and four tenths when you
(02:54):
stripped out food and energy on the month over month reading.
And so unsurprisingly here mark, if energy price is shooting up,
you are experiencing higher than comfortable inflation. But you might
be able to argue that we're starting to see some
bleed through into other categories here as well, other than
purely just energy. So takeaways from this month's inflation report,
(03:17):
which again not surprising in terms of the release but
hotter than expect, that.
Speaker 4 (03:21):
We have an inflation problem. The FED, which controls the
money supply and thus short term interest rates and thus
inflation in the long term, is the pretty much the
only entity that can fix it. Fixing the inflation problem
would probably require economic sacrifice. It did not in twenty
twenty two. Inflation came way down from twenty twenty two
(03:42):
to twenty twenty four, without a rise in unemployment, Without
an appreciable rise in unemployment, some other measures of labor
markets slack went up. So the question for the FED
now is do we accommodate this inflation, this oil price shock,
which has caused headline inflation to spike in the last
two months, gone up by one point five percent. I'm
(04:02):
just a cumulating. They the point nine yep from March,
in the point six from April. This is the highest
year over year inflation rate, the one that you recited
three point eight percent in three years when everybody thought
inflation was terrible. Um So, Mike, the Fed's got to
decide do we accommodate this and hope it doesn't become embedded,
(04:24):
Hope investors, firms, and people don't begin to bake this
level of inflation into their price and wage expectations, or alternatively,
does the FED push back.
Speaker 2 (04:38):
We'll get into some more of the details of the
report in a minute, but I do want to stay
on this subject of accommodating or not, because on the surface,
an oil price shock on its own, if you think
it could be resolved. You can make an argument for
accommodating it. And by accommodating we just mean the Fed
not intentionally trying to send the economy into recession because
(04:59):
of a price shock in one category. Give me the
counter argument now, because arguably, over the course of the
last four years, we have had three separate price shocks.
Now there is the twenty twenty two you know, inflation
shock from a combination of stimulus plus COVID era shutdowns.
There was the twenty twenty five price shock from tariffs,
(05:23):
and now we've got a twenty twenty six price shock
coming in from oil supplies. And all three of them
showed up in the data. But arguably are also perhaps
moving into consumers' expectations for what prices are you know,
what are normal price movements?
Speaker 4 (05:42):
The Yeah, the counter argument, I think it's at least twofold.
One is that the inflation rate now over the last
year three point eight percent, and expected inflation too, which
is the more important variable. They're way above the federal
funds rate, which is three point five percent. Said differently,
real Fed funds is now negative. Does that make sense?
(06:02):
So you take the nominal, you subtract either expected inflation
if you're being sort of pedantic about it, or just
the last twelve months as.
Speaker 3 (06:08):
A rule of them.
Speaker 2 (06:09):
The target rate for the Federal Reserve right now on
that Fed funds rate is three and a half to
three seven five. And what markint Okay referring to is, hey,
you know, when that rate is lower than the total
inflation rate, it's tough to argue that the policy is
trying to constrain inflation.
Speaker 4 (06:25):
Yeah, that's a preposterous argument at this point. So the
Fed's got a problem because real interest rates are generously
we'll call them zero more accurately, it's probably fair to
say that negative. That's very stimulative, Mike. So we've got
prices going up in monetary policy being stimulated. That's problem
number one on the Fed's plate. Another problem is inflation expectations.
(06:49):
They're going up. You saw headline possibly be possibly creep
into seep into core inflation. Headline inflation was up point six.
Core inflation double went from point two to point four.
There may be technical reasons for that, but I think
over emphasizing the technical reasons misses the forest, which is
the inflation problem. For the technical trees, which are sort
(07:11):
of like whack a mole, there's one every month that
you can cite as a special factor. So for at
least a couple reasons, Mike, this is this is a problem.
This is the biggest inflation. Were on the precipice of
a crisis here. I don't want to call it a
crisis yet, but we're on the edge of an inflation crisis,
obviously the biggest in twenty twenty two.
Speaker 2 (07:34):
So taking a look at the details of this report
here and breaking it down section by section, which I
don't think is useful for predicting the future, but I
think it is it is indicative of what people are
actually experiencing. So first of all, food food prices, which
were pretty flat during the month of Marsh did climb
(07:54):
pretty substantially in the month of April. You might be
able to blame that on diesel prices. You might be
able to blame that on grocery stores raising prices in
anticipation of higher prices from farmers due to the fertilizer.
Speaker 3 (08:08):
I'm not sure, but in neither case, the price for food.
Speaker 2 (08:11):
At home and away from home increased pretty dramatically. Overall,
the food category increased half percent in the month of
April seven tens of percent for food at home, meaning
grocery store prices up pretty substantially in the month of April.
Energy prices overall up nearly eleven percent in March, up
another nearly four percent in April here, so combined substantial increases.
(08:35):
Gasoline continues to be a big push on that front,
but it's really across the board between fuel, oil, electricity,
energy services, etc. All up substantially over the course of
the last two months. The other interesting one that is
worth mentioning because of the waiting it has in the
(08:58):
overall composition shelter here mark so shelter for the last
six months has been relatively muted, you know, averaging between
zero point two and point four percent monthly increases compared
to where we were a few years ago.
Speaker 3 (09:12):
That's welcome news.
Speaker 2 (09:14):
In April it shot up six tens of a percent,
and I don't think I can easily look at that
and blame it on gas prices shooting up or oil
prices going through the roof. We're talking about things like
rent prices that people pay or owner's equivalent rent that
is going into this calculation. And this one again another
important piece here because when we look at price movements,
(09:37):
we're looking most importantly at core prices and stripping out
some of the shocks that we get from food and
we get from energy prices. This one is in there,
and it is a massive component of that core prices
we saw bump up six tens of a percent. My
rent didn't go up in the month of April. Do
you have a sense for why we might be seeing that?
(10:00):
Is it actually something to be concerned about our rent prices,
you know, suddenly shooting up this spring in what seems
to be a pretty weak housing market.
Speaker 4 (10:08):
Well, they're imputed or inferreds, so we don't know. They
don't actually go ask as you know, they don't ask
people who are renting, would you pay less right compared
to a year ago. Some of you pointed this out
before we went on air today. I couldn't find a
authoritative explanation for why that process might have generated an
exaggerated core rate like it doubled from March to April.
(10:33):
That's suspiciously large. There's no way energy prices because of
the lag that that imputation process involves. So I don't
mean to be overly technical. This is not I have
no idea how they do this, So I'm not trying
to totally technical and I'm trying not to word salad this,
but I think I've already watched it. There's no way
that's attributable to energy seeping into Core. So what happened there,
(10:56):
maybe it's a little bit exaggerated. I'll just call it
like a book keeping effect, sort of timing in the
way that it's done. So maybe Shelter only went up
point three, and maybe Core only went up by point
three instead of point four. I'm really eager to see
today's median rate, which the Cleveland Fed calculates. It strips
out all the outliers, no matter where they originate from.
(11:17):
It was point three last month. If median went from
point three to point four, I think our concern would
be or at least my concern would be validated.
Speaker 3 (11:26):
Mike, let's take a quick break.
Speaker 2 (11:28):
When we come back, I do want to talk a
bit more about the inflation problem that we are seeing,
because who it's a problem for is the Federal Reserve,
and their job is to control this stuff, and we're
now facing i think arguably the third price shock that
we have seen in four years, and that becomes reminiscent
of other periods of time in history that we're very
(11:49):
problematic for the economy, the stock market, the bond market,
et ce quick break. We're gonna be talking about the
FED and this inflation report next on the Financial Exchange.
Speaker 1 (11:58):
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Speaker 3 (12:48):
Mark.
Speaker 2 (12:49):
We were talking about inflation before the break, and the
point that you made without fully going into the weeds
on it was we're at a very dangerous place with inflation.
Now I'll argue that it doesn't seem all that dangerous
given that you're over your numbers are only three point
eight percent. Recently, we dealt with nine percent year over
your inflation. Why would you argue that this moment in
(13:09):
time is particularly dangerous for because I think, yeah.
Speaker 4 (13:13):
For a couple of reasons. Expectations are going up. That's
how inflation becomes embedded. The more embedded it becomes, the
harder it becomes to kill. Second, and I can expand
on that one. Sure, Look, we got like an hour
and a half here to talk about this, so and
I'm gonna miss straight and I'm a lot Yeah, yeah,
we're going so's yeah.
Speaker 2 (13:29):
Yeah, yeah, Sorry advertisers going along on inflation.
Speaker 4 (13:34):
We'll do we'll we'll do live reads. It's no problem.
Speaker 3 (13:39):
God, I'm just here from music acts.
Speaker 4 (13:41):
Second, Mike, the FED has lost a lot of credibility
because of the political pressure that the administrations put on them.
I mean, I'm saying, like, if you love the president
and this offense, you turn your radio down for a second.
Speaker 3 (13:49):
But he's made it.
Speaker 4 (13:50):
Really hard for the FED to do their job. Warsh
is coming in fairly or unfairly perceived as his puppet,
ready to do his will that is lower interest rates.
Warsh has made these preposterous arguments that a I will
somehow usher in this golden era of productivity. We could
start cutting rates today in anticipation of that. I think
we're going to talk today about a story that makes
the case that AI investment is inflationary, at least in
(14:12):
the short term, because it pushes up demand for stuff.
So that argument doesn't hold water, and it might end
up being right, but we won't know for five years,
so this could not be happening, and worsh may turn
out to be a great fed chair.
Speaker 1 (14:25):
Mic.
Speaker 4 (14:25):
I think you've chasened. You've encouraged me to adopt sort
of a chasin posture with respect to this. Let's wait
and see. But the evidence, the facts and evidence, as
Chuck Zada would say, are not good. So for a
lot of reasons, Mike, you can see all these things
converging into a perfect inflation storm. The parallels with the
seventies are not perfect, but they're eerily reminiscent.
Speaker 1 (14:48):
They really are.
Speaker 4 (14:49):
We had food and energy price. If you look at
CPI in the seventies, it looks like a camel, you know,
the couple. I think camels have two humps, right, I
don't know, uh Met one got a couple hump in there.
We're hitting another We're going we we we just hit
a trough and we're going up another hump. The FED
seems committed to lowering interest rates, which is indefensible in
(15:10):
the current environment. So I don't I don't find a
lot of reasons to be hopeful about the Fed's ability
to tackle this.
Speaker 2 (15:18):
Mike, Yeah, I do worry about the Fed's credibility. I
especially worry about those expectations. And a conversation I was
having just yesterday with somebody buying a new car, giving
their existing Toyota to their daughter, and intending on buying
a new Toyota this spring for some forty odd thousand dollars.
And the question to me was, Hey, we went to
(15:39):
the credit union. We can get a you know, loan
for this car at four and a half percent, you know,
do we buy it now, do we buy it later?
Should we take the loan, should we should we borrow
the money? Should we take it from you know, cash
reserves that we have. And I won't go into what
the you know, what the conclusion was, but those are
(15:59):
the types of decisions that very much are affecting them
from an inflation expectation standpoint. Hey, should we just buy
this car now, because I bet the price. You know,
based on what the prices have done the last few years,
it looks like they're going to continue to go up. Hey,
you know, in the context of other interest rates that
I'm seeing four point two percent or four point five percent,
(16:20):
which would have been unthinkable you know, five years ago,
that doesn't seem quite as bad as borrowing money at
you know, six and a half percent for a mortgage,
for example. So yeah, let's go ahead and borrow it,
and we'll keep our cash invested, or we'll go do
something else with it. These maybe that's not the perfect
(16:42):
inflation expectation story, but the price of the vehicle one
absolutely is when people fear or expect prices to be volatile,
when they expect them to go up substantially, they start
doing things that don't make a ton of sense.
Speaker 3 (16:58):
Yes, yes, yes, they they.
Speaker 2 (17:00):
Start to put their money into assets that are not
assets because they're worried about the price of those things
going up. And one of those could be cars, another
one could be non perishable goods. But the problem with
those expectations, you know, on an individual level, if you
think that Toiletrice paper is going to get way more expensive.
It's you know, likely, it's unlikely to ruin your financial
(17:23):
situation by you know, filling a closet with toilet paper
because you're worried about prices going up. But in the aggregate,
if everyone believes that vehicles are going to become ten
percent more expensive a year from now and twenty percent
two years from now, and that tomatoes are going cans,
tomatoes are going to go through the roof of the
course the next twenty four months.
Speaker 3 (17:42):
Then they start bringing forward purchases.
Speaker 2 (17:44):
They start buying stuff faster and storing it, and that
exacerbates an issue of inflation, because you're adding demands to
the equation that wouldn't otherwise exist.
Speaker 4 (17:53):
Yeah, inflation has economic costs that manifest in sort of
subtle ways, the little changes in people's behavior. You gave
a couple of examples.
Speaker 3 (18:06):
One other, sorry, one of the big ones. I to
interrupt you.
Speaker 2 (18:08):
But if I think that prices are going to go
up at four percent next year, there's no way I'm
taking a two percent increase in my salary. I Am
going to go and negotiate heavily with my employer. And
there are very few costs quite like salaries and compensation
that contribute to the overall and that's.
Speaker 4 (18:28):
The textbook mechanism. Firms, companies, and people incorporate their expectations
into their wage and price demands. Now you could say, well,
that's not realistic. I don't walk into my employer's office
and demand a cola. But on average, that's a reasonable
way to think about how inflation expectations in this case
(18:50):
going up. And in the nineties we had the reverse process.
People didn't demand large enough wage increases given the level
of inflation, the rate of inflation, and their increase seeing productivity.
So that was a virtuous cycle. This is a is
a nasty.
Speaker 2 (19:04):
One, by the way. I know people love talking about
individual prices. Egg prices down thirty nine percent year over year,
unfortunately being offset by tomato prices which are up thirty
nine point seven percent and beef prices which are up
fourteen point eight percent year over year.
Speaker 4 (19:19):
So on average, your omelet might be a little cheaper.
Speaker 3 (19:21):
Those eggs are the big that's true.
Speaker 2 (19:23):
Yeah, your eggs compared to you're almost compared to a
year ago. You're better off, songs unless the tomatoes tomato
isn't there quick break wall Street Watch coming up next.
Speaker 1 (19:41):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network till now full whoa
street Watch tracking the stocks, theodato and the headlines driving
markets so far today right here on the Nachel Exchange
Radio and that.
Speaker 5 (20:01):
Marcus today is seeing a modest selloff after the April
Consumer Price Index revealed consumer prices rose three point eight
percent from a year ago, marking inflation's highest level in
three years, driven by higher gas prices. Right now, the
Dow is off about two thirds of a percent, SMP
(20:22):
five hundred is down three quarters of a percent, Nasdaq
down over one percent, Russell two thousand is down one percent,
Tenure treasure Field is up four basis points at four
point four five seven percent, and Oil is up over
three percent higher, trading at one hundred and one dollars
a barrel. Ebays Board said it has rejected video game
(20:46):
retailer Game stops unsolicited fifty six billion dollar takeover proposal,
saying the proposal was neither credible nor attractive. Game Stop
shares are off by one percent, while eBay stock is
down by half a percent, Meanwhile, Financial Times reporter that
Nelson Peltz's Treon Fund Management is seeking investor backing forbid
(21:06):
to take fast food chain Wendy's private, after the restaurant
operator shares have fallen more than forty percent over the
past year. Wendy's up by fourteen percent today. Elsewhere, shares
in telehealth company Hymn's and Hers sinking ten percent after
it swung to a quarterly loss as the companies moved
to alter its weight loss offerings drove up costs. The
(21:26):
company also cut its profit outlook. In under Armour stock
dropping by eighteen percent after the athletic apparel company posted
a fall in quarterly revenue.
Speaker 3 (21:37):
I'm Tucker Silva, and that is Wall Street Watch.
Speaker 2 (21:40):
Talking a lot about gas prices these days. According to
Triple A, the national average for a good old gallon
of gas is sitting at four dollars and fifty cents
right now, unless you're in California, which case it's six
point fifteen. That's up substantially, as everyone knows, and plenty
of states are talking about their gas tax as a
few of them have eliminated them temporarily. One state has
(22:04):
cut it a little bit, and we are talking about
it at the federal level. I don't really know if
anything's going to happen at the federal level, but I
think it's worth talking about this in the same context
that we talk about the Social Security Trust Fund and
the Medicare Trust funds and how all those programs work,
which we know are all functionally broken, and unsurprisingly, at
(22:26):
least in my mind, guess what, the US Highway Trust
Fund also functionally broken. It's insolvent structurally, does not have
enough revenue to ensure the projects, and it faces a
projected shortfall right now of over two hundred and forty
billion dollars by twenty thirty three. The shortfall is very
(22:48):
plainly the budgeted projects that the trust Fund is supposed
to pay for versus the revenue it is expected to
bring in. Assuming we keep the gas tax of eighteen
point six something like that eighteen point something since in
place without waiving it right now. So first things first,
(23:11):
would waiving the gas tax in the short term bring
down gas prices? Of course it would in the short term,
if you got rid of an eighteen cent tax on
the price of gasoline, it would bring it down, at
least temporarily.
Speaker 4 (23:24):
Presumed what's happening to demand?
Speaker 3 (23:25):
Yeah, that's what I want to get at squence. I
don't think we should.
Speaker 2 (23:29):
Sorry, it's eighteen point four cents and it's been there
since since nineteen ninety three, so clearly inflation isn't keeping pace,
which is why the trust fund is functionally insolvent. We,
you know, should not ignore the fact that we have
a litany of underfunded government programs, and what happens when
(23:49):
the Highway Trust Fund is functionally broken is that we
have to bail it out and basically spend money via
deficit spending in order to get these important structure projects done.
I don't think anyone looks at the state of the
US highway system and says, wow, that is, you know,
the defining characteristic of America in twenty twenty six. It
(24:09):
might have been in nineteen sixty. Today I don't think
it's quite the.
Speaker 3 (24:13):
We shine it.
Speaker 2 (24:14):
We should appreciate it, though, Oh it's it's fantastic, But
I don't think anybody looks at it today and says, well.
Speaker 4 (24:19):
It's not a novelty anymore. Hey, let's go drive on
the highway this Sunday for.
Speaker 2 (24:22):
The you know, for the whole day, right, So One,
there is the funding problem for our nation's infrastructure, which
is arguably crumbling across the country. Two would be what
does cutting the gas tax actually functionally due to due
to prices? Because in the short term, while I can
(24:43):
make an argument that prices could fall, I'm not sure
what it would do over the you know, six month
time period. So talk to me about demand destruction when
we talk about you know, oil prices and gas prices,
and why waving the gas tax might not actually be
a great idea.
Speaker 4 (24:57):
Well, in the short term, demand isn't very sensitive prices.
You got to go to work, supermarkets need food. Sure,
they can't make other arrangements. In the longer term, people
can change their behavior. I guess that's how I'd summarize it.
Speaker 2 (25:12):
So if gas prices are higher, I may not plan
that family vacation to Colorado and drive all the way
there because it's going to cost me forty percent more
in gas.
Speaker 4 (25:24):
Otherwise, I mean it's possible people drive a little bit
less this summer. But I think most Americans think of
a vacation domestically by car as the economical way to
do it. They're not gonna they're not going to not
drive to yellow Stone or a wally World. You know,
it's that's that's.
Speaker 3 (25:43):
A fictional reference. So I know what Wally World is.
Speaker 1 (25:47):
Okay, I don't know.
Speaker 4 (25:48):
I don't know how you spend your weekend.
Speaker 2 (25:51):
The point being here, Yeah, an eighteen cents cut to
the gas tax may temporarily help. It may also ultimately
convince people that, hey, you know, prices are going down.
I'm going to keep doing my plans and keep driving
as much as I should. It does not contribute to
demand destruction in the way that higher gas prices would.
Speaker 3 (26:09):
I personally actually like over the long term.
Speaker 2 (26:12):
Wouldn't be opposed to a flexible gas tax that once
it gets over four bucks a gallon, it does get reduced.
But I think the trade off would very clearly need
to be Okay, how are we going to rebuild the
Highway Trust Fund? And my answer would be, once gas
prices go back down below four bucks a gallon, you
jack that gas tax up, you know, and double it.
(26:33):
But I don't think either of these things are going
to happen. I don't think Congress is going to have
the willingness to cut the tax right now, and he
would need Congress to act here. I don't believe that
the president can change a tax rate based on executive
order alone.
Speaker 4 (26:46):
Now he may not know that, but I don't think
you can.
Speaker 3 (26:49):
So we will see. As all of this is.
Speaker 2 (26:52):
Going on, everyone and their mother is brainstorming how we
can bring down prices in this price surge moment that
we're experiencing right now. That's why people are talking about
cutting the gas tax, other areas that people are looking at.
Speaker 3 (27:04):
You could ease beef tariffs.
Speaker 2 (27:06):
Right now, we tariff the heck out of any beef
imports that come from anywhere in the world other than
the United States. And as we've talked about on this program,
due to how long it takes to raise cattle, it's
unlikely that beef prices domestically would come down anytime soon
without those imports. On the other hand, cattle farmers aren't
exactly raking in the dough and haven't been over the
(27:28):
last few decades, and now it's kind of their moment
to shine, so they would be adamantly opposed to that.
You have all these special interests, and ultimately there's one
thing I can think of that might bring down prices,
which would be eliminate tariffs, and that would work directly
against the President's own stated objectives.
Speaker 4 (27:47):
That was the worst policy I've seen in my life
or read about here or just about anywhere, except for
some that's not true.
Speaker 3 (27:54):
I've seen some really bad stuff in the US.
Speaker 4 (27:57):
Oh oh yeah, well, I mean.
Speaker 3 (27:59):
We Argentina way worse than what we're doing now.
Speaker 4 (28:01):
Yeah. Well, I mean we're well on our way.
Speaker 1 (28:07):
Mike.
Speaker 4 (28:08):
You know, these are all second and third best solutions.
And by that I mean cutting gas tax prices. I
mean everybody agrees. The President would probably agree that it's
a gimmick, sure, because ultimately you're going to make the
revenue up to fund I mean, infrastructure is critical to
long run economic growth. You don't want to hamstring that
(28:29):
like you're robbing Peter to pay. You're robbing President Peter.
I was going to say, you know the expression to
pay Paul, but it's actually robbing President Peter to pay.
Excuse me, robbing future Peter to pray.
Speaker 3 (28:38):
President Chief Peter. You know what I'm saying.
Speaker 4 (28:40):
We're robbing the future here. That makes none of these
policies make any sense. They all seem very scatterbrained, reactive,
and just not well thought out, and I'm not just
like picking on the President though he's obvious the buck
stops with him right now. It's Congress too. And as
we talked about monetary policy, have you ever seen such
a can fu state on the part of the FOMC?
(29:03):
And my god, there's a leadership change happening right now.
If we come out of this in any reasonably stable
economic condition, it'll be like a small miracle.
Speaker 3 (29:12):
Let's take a quick break.
Speaker 2 (29:13):
When we come back, stagflation working its way around financial
circles again, We're going to define it. We're going to
talk about whether or not you should be worried about it.
Next on the Financial Exchange.
Speaker 1 (29:23):
The Financial Exchange streams everyday live on YouTube. Subscribe to
our page and follow the markets all morning longs only
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about Wall Street and economic trends. Pace is the Financial
Exchange Radio Network.
Speaker 5 (29:46):
The Financial Exchange is incredibly proud to be a partner
of the Disabled American Veterans Department of Massachusetts. Nearly four
hundred runners up already registered for this year's DAB five k.
The event sold out in records. I'm li last year,
so head to dav five kid dot Boston for all
the information about how you can participate this November or
(30:07):
make a donation to support our great American heroes. Your
gifts help fund free rides to medical appointments for veterans,
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dot Boston and make your donation today. That's dav fivek
dot Boston.
Speaker 3 (30:28):
Mark.
Speaker 2 (30:28):
We've talked a lot about stagflation over the course of
the last four years, in part because it's a fund
made up word that people like to bring out there,
in part because it is arguably the worst condition that
you can possibly get for an economy, a combination of recession,
stagnation and high prices and prices that are increasing over time.
(30:51):
People like to describe it as such. In twenty twenty two,
we did not get a stagflation.
Speaker 4 (30:55):
We haven't had it.
Speaker 2 (30:57):
We are now in one right we are not in
one right now. We're not in a moment of stagflation
right now.
Speaker 3 (31:04):
Now.
Speaker 4 (31:05):
Growth appears to be it about trend.
Speaker 2 (31:07):
We're at two percent GDP as in the most recent report.
I think it's very tough for me to argue that
we get there when companies like Google and Facebook are
going to spend seven hundred billion dollars on AI infrastructure
this year. I have a tough time saying that we
get there unless you see that part of the economy
just drop off a ledge. What would the economy look
(31:28):
like if those companies weren't spending a seven hundred billion
dollars great question might be pretty ugly. In the meantime,
they are, and so I will buy that we could
land ourselves in stagflation. I get especially concerned about it
when we're hit with multiple price shocks. But we're not
there right now, just as we weren't there.
Speaker 4 (31:44):
Internal workers are experiencing a bit of stagflation. As of
last month, average hourly earnings year over year was three
point six, inflation was three point eight. So for the
first time in three years, this is average. So there
are some people who did a lot better worse, But
for the first time in three years, workers' salaries are
not keeping up with increases in the cost of living.
(32:06):
Said differently, standards of living on average, not for everybody
are falling, so for some people this will feel like stagflation.
Speaker 2 (32:14):
Here's my problem with that. I agree, you know, workers,
it is what wages are stagnating, and that's not great.
I would also say that kind of to me like
saying that housing is in a recession, like either the
economy is in stagflation or it's not.
Speaker 4 (32:31):
And well, there is no terroisical term. There is no
technical definition of stagflation. Right, it was a term made up,
as you point out, it's this hybrid term stag for
stagnant inflation, for inflation obviously a combination of below trend
growth and above fill in the blank two percent, three percent,
and we're now at four percent inflation. It's just shocking.
Let that sink in. We just came off a big
(32:51):
inflation shock, we thought it was behind us. Then we
get tariffs, trade wars, an actual war in Iran, and
reporting a big percentage of the food services labor force,
and obviously inflation comes back, so you could say this
is self inflicted. It's just shocking to me that we're
dealing again with double the Fed's target rate of inflation
(33:13):
and a four year span good at.
Speaker 2 (33:15):
The same time that the incoming chair is talking about
desperate need to cut interest rates. So yeah, that part,
to me is quite shocking. Housing market, as I was
just talking about, expected to have a nice little spring
push here and falling well short of expectations. Home sales
barely moved a year over year. We're looking at four
(33:35):
point zero two million existing homes used homes if you will,
that's sold in the month of April. That's almost the
exact same rate that we saw a year ago. At
the same time, you are seeing the inventory levels continue
to tick up a little bit, maybe not as fast
as people were hoping, but we are now sitting at
(33:55):
nationwide just over a million homes for sale as of
April of twenty twenty six. Last year, we were at
nine hundred and fifty nine thousand, and Again, what I
always find useful is what did it look.
Speaker 3 (34:07):
Like pre pandemic.
Speaker 2 (34:09):
Well, we were at one point one four million homes
for sale in April of twenty nineteen, So to I guess,
my point would be we are very close to what
the housing market from an inventory perspective, looked like prior
to the COVID pandemic, when listings dropped some fifty percent nationally,
(34:31):
we are unlikely to see home sales tick up so
long as mortgage rates need to stay where they are, which,
to be clear, as of yesterday they were at six
point four to nine percent on average, according to Mortgage
News Daily, and with the ten year yield moving up
another four tenths of a percent this morning, we're likely
above six and a half percent by tomorrow, and so
(34:54):
we it'll be interesting. I'm not sure what I would
tell somebody if if they asked me, hey, does it
seem like a good time to sell your home right now?
Obviously that is heavily regionalized, but at the moment, it
seems that there's a lot of young people worried about
their working conditions, not working conditions, their ability to find jobs.
(35:15):
The mortgage rates are still very elevated compared to what
people think of as the status quo. When you're at
six and a half percent, I think there's a mental
framework thing that is a lot different compared to when
they were below six percent, and a inventory situation that
is improving, but in many parts of the country still
(35:37):
well below what we would consider to be normal.
Speaker 4 (35:40):
So isn't the answer to that question should I sell
my home right now, isn't it always? It depends Like
if you're moving for work, yeah, you sell your home,
don't be that's a foolish yeah consideration. But if you
were trying to be opportunistic about it, we'll go ahead
list it. If you're here in the Metro West area
where we broadcast from Metro West relative to Boston, or
on the south shore of Boston, your house will sell
in a day for ten percent over at. But if
(36:00):
you're out say where I am, closer to four ninety
five on the outskirts, you might be on the market
for three months, and if you really need to sell,
you might be taking aircut.
Speaker 3 (36:10):
Yeah, it's it is an ever changing market.
Speaker 2 (36:13):
But I think what is clear is it is not
a market that's conducive to a lot more home sales,
and those home sales that are that we're missing out
on right now, if you were expecting that increased pace
does a lot in terms of missing economic activity. We've
talked about this phenomenon before, but when you talk about
(36:34):
buying and selling a home, the amount of economic activity
that gets generated off of that financial transaction is pretty incredible. Right.
There is move there are moving costs. There are redecoration costs.
Assuming you're not doing any major renovations, there could be
major renovation costs.
Speaker 4 (36:50):
Though good housing doesn't drive the economy, economic growth drives housing.
Look at China. You can build a lot of houses,
and this is a bad example in part because China's
economy is relative vibrant. But people buy a home because
they expect a better future. So those investments that you
talked about by tech companies and potentially productivity enhancing stuff
are really what matter. I just don't want to put
(37:14):
the cart before the horse.
Speaker 3 (37:16):
I'm not saying you did that under No, I understand.
Speaker 4 (37:19):
So you're talking about like an accounting immediate accounting sense.
Speaker 3 (37:23):
No, you're right.
Speaker 2 (37:23):
I don't think that policy shouldn't be to increase housing
activity in order to generate economic activity.
Speaker 3 (37:31):
You're right.
Speaker 2 (37:31):
The economic activity, the optimism that people have about their
future should drive the.
Speaker 4 (37:37):
Yeah, it's like you could tell your kid you want
to generate some economic growth and scessarily go out mul lawns,
don't worry about school. No, Actually, they should be investing
in the buildings so called human capital. Their future earnings
will be higher. It's sort of long term growth versus
a short term.
Speaker 2 (37:52):
Pop do both markets markets strongly in negative territory. As
we close in on the eleven o'clock hour, we've got
the S and P five hundred off seven tenths of
a percent, Nasdaq off one point one, the Dow Jones
Industrial Average off two thirds of a percent, mostly on
this hotter than expected inflation reading and continued turmoil in
the Middle East. We'll be right back with a lot
(38:14):
more on the financial exchange.
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