Tune in for another exciting edition of the Macrocast! This week, Ylan, John, and Brendan dissect how geopolitical chess moves—like Russia's recent maneuvers and the Houthi conflicts—pose a threat to economic stability. The discussion includes commentary on stagflation and the Fed's delicate interest rate tightrope walk, considering how these decisions could affect the approaching 2024 election cycle. Through this lens, Ylan, John, and Brendan analyze the fiscal philosophies of emergent Republican leaders like Haley and DeSantis, compared to frontrunner Trump. They also turn their lens to Europe, analyzing ECB President Lagarde's hints at potential rate cuts and the broader implications for global monetary policy.
They cap things off with a peek into the insights shared at Davos, where AI's encroachment into the C-suite heralds a transformative era for knowledge work. Listen in for all this and more!
Tune in for another exciting edition of the Macrocast! This week, Ylan, John, and Brendan dissect how geopolitical chess moves—like Russia's recent maneuvers and the Houthi conflicts—pose a threat to economic stability. The discussion includes commentary on stagflation and the Fed's delicate interest rate tightrope walk, considering how these decisions could affect the approaching 2024 election cycle. Through this lens, Ylan, John, and Brendan analyze the fiscal philosophies of emergent Republican leaders like Haley and DeSantis, compared to frontrunner Trump. They also turn their lens to Europe, analyzing ECB President Lagarde's hints at potential rate cuts and the broader implications for global monetary policy.
They cap things off with a peek into the insights shared at Davos, where AI's encroachment into the C-suite heralds a transformative era for knowledge work. Listen in for all this and more!
Hello and welcome to another episode of the Macrocast. I'm your host, ilan Mui, and managing director at Penta. Brendan Walsh and John Fagan of Market's Policy Partners are here with me, as always on a very snowy day in Washington. Now, typically we spend most of the podcast talking about the economy and the markets, but this week it seems like all the political news, both here and overseas, have really taken center stage.
Speaker 1:So last week we discussed the possibility of what Ian Bremmer, over at the Eurasia Group is calling a geopolitical recession, and now we're sort of hearing that same sentiment echoed by Atlanta Fed president Rafael Bostic. He is pointing to political uncertainty as a potential risk factor to the soft landing that he's been sort of suggesting is underway in late 2023 through 2024. So it seems like that could be a reason. I mean, it seems like a cut both ways, guys. It seems like it could be a reason that the Fed ends up having to cut rates when the market expects if the geopolitical risk sort of materialized. But it also could be a reason that Fed might want to wait and to get out of the morass of political uncertainty before they make a move.
Speaker 2:Yeah, geopolitical risk, ilan is, it's just a very difficult thing for the Fed to cut rates into.
Speaker 2:I think, obviously, recession risk is kind of your classic hey, we know what to do in that case cut rates.
Speaker 2:But geopolitical risk is a completely different category and what we've seen, obviously in recent years is just how stagflationary these conflicts around the world can be, from the sort of energy as a weapon strategy that Russia employed early in the war in particular, and the attacks on supply chains and shipping that the Houthis in Yemen are performing right now.
Speaker 2:And these really are the kinds of dynamics that delivered that gigantic inflation spike in 2022. And it's not clear cut and certainly, at the very least, it creates a lot more uncertainty around the outlook for inflation, for the Fed and the markets had been essentially, at the end of last year, pricing an extraordinarily high conviction in a soft landing and that inflation would be so tame and so clearly defeated that the Fed would be free and clear to slash interest rates starting as early as March. But the consensus may not be wrong that we are headed for a soft landing and inflation will continue to go down, but the conviction is, I think we're just heading to a much lower conviction equilibrium, and the Fed is trying to express that through Raphael Bostick's, I think, pre-seant formulation here.
Speaker 3:Yeah, and Bostick, which John and I were talking about yesterday, has really been a very good leading indicator now for a couple of years. He kind of pivoted to a little more dovish stance on inflation well before the core did. So I think the market should definitely pay attention to his speech yesterday and we talked about it last week after the producer price index. The December numbers were amazing and so much of it was led, as it has been for the last six months, by actual deflation in the goods components which then have been seeping through to CPI. But if you have to ship everything 40% farther to get it around the Horn of Africa, that's more expensive.
Speaker 2:And this is in an environment where we have more CPI data incoming, more inflation data incoming. Next week is the Fed's preferred metric. The extrapolations from the data that we've seen suggest it should be pretty tame, but we're getting to that point where the year-on-year comparisons, the base effect, are looking less, are less helpful, and isn't it always that last mile to go from three or two and a half to two? These are the more difficult moments in achieving the targets perhaps, and so this is where we've begun to see this week Federal bank officials like Bostick begin to put some calendar-based guidance out there, and typically this is different than data. It's different but related to data dependence and data dependence. That has been something that we've obviously seen Fed Chair Powell and the other FOMC members for a lot of last year talking about that data dependence.
Speaker 2:But this adds this element of we're data dependent and we don't think we're going to get enough data until this particular period in time. We had Bostick come out yesterday and say that he didn't think that he would have enough data to feel confident about cutting interest rates until the third quarter, and that's a long way different from where the market's pricing. We had ECB, european Central Bank, president Lagarde come out earlier in the week and say that the earliest she could see having enough information and data on the inflation side to feel confident to cut rates would be late spring and implying potentially summer rate cuts being the earliest that they could get going. Now things can change, but we think that this is the framing to add that calendar element into the data dependence to give the markets a little bit more structure in the guidance and to incrementally push back on those hey, they're going to cut in March expectations.
Speaker 3:Also Bostick's timeframe fits with. When the Fed did their caught the markets off-guard at the end of the year with their pivot, we looked at the tea leaves and thought, oh, what probably happened was they took a look at their 24 timeframe of growth and inflation and thought, oh, probably a mid-year cut would make sense. Then they looked, oh, we'll be in the midst of the election and we don't want it to make it seem like we're doing this to help or hurt one of the candidates. We better get this out of the way now, deal with the market probably overreacting to it, and then actually be able to do what we want to do. It does seem that both the data and the market is now coming back on sides, with maybe what the Fed was initially thinking with that pivot.
Speaker 2:On the political side. We'll talk a little bit more about politics in the context of the budget deal and the can kick that we saw. No Fed officials are going to say it, but let's say the candidate on the Republican side is Trump. That's former President Trump is very likely to win New Hampshire and then win South Carolina and then sew up the nomination. He has a very, very reflationary, one would assume, based on its early days and the campaign hasn't been super focused on economic messaging yet. But to the extent he has, it's tax cuts, lower interest rates, very reflationary. That's what President Trump is likely to do. That's what he did in his first term. If you're a Federal Reserve official looking at potential election outcomes, you have to factor in the possibility that one of the candidates is potentially going to be particularly in a reflationary and pro-growth economic model. They're never going to expressly say that, but I think it's going to be part of their thinking.
Speaker 1:Yeah, I thought that Bostic did a very nice little two-step in his speech in which he gave that calendar-based guidance that you mentioned, john, of possibly cutting rates in the third quarter, but then also gave themselves a data-dependent out in saying that if the inflation data is convincing, what is enough to be convincing? That's what folks are going to be parsing over the next few months. I'm sure that maybe they could move earlier. They're not trying to say that they are not stuck or tied to a certain date, but if the data comes in and it's looking good, then maybe they could be persuaded. The third quarter is an awfully convenient time when you look at the political calendar for making a decision, john. When you talk about a reflationary environment under the likely Republican nominee, he's also talking about 10% tariffs on all foreign imports.
Speaker 2:Pretty inflationary.
Speaker 1:It's right there. Maybe we can't afford to buy as many things if there's 10% tariff. I think the Trump's convincing win in Iowa, the fight for a distant second between Nikki Haley and Ron DeSantis clearly there have to be gaming out the potential of what would a Trump presidency mean, both for the economy and for the Fed as an institution. Trump has compared Jay Powell to President Xi of China, and not in a good way.
Speaker 2:Yeah, I think that would be a really interesting question to ask. Assuming he is the nominee, would you fire Chair Powell and put in someone who's going to cut interest rates? He said in interviews that interest rates are way too high. Nobody can do anything. He's a debt guy. He's a real estate guy. Trump's low interest rates what's not to love about low interest rates? If you're in that business, I think that we'll learn a lot from that.
Speaker 3:I did look up the Fed Act. He's not allowed to fire him from the Fed, but he is allowed to replace him as Chair. But if you got replaced by chair you would kind of figure you'd probably quit, yeah Right.
Speaker 2:Got to say a. Thing.
Speaker 1:Yeah, it's, it's. It'll be interesting to see how, how this plays out, and you know there were the minutes of or not the minutes, but the so I guess transcripts of the feds meetings back in 2018 that came out over the past week and when the fed was under a sharp attack, sharp criticism from former president Trump, and the feds dutiously avoided, apparently according to these transcripts, any mention of the president in their meetings or any sort of hint that they might be considering the political calculus and any of their decisions. That being said, you know they may not explicitly say it, but you have to imagine that it's in the back of their minds. I don't think. I don't think it's possible to ignore the political environment.
Speaker 2:Yeah, it's, it's. It's certainly going to be the elephant in in the in the room for some of the upcoming FOMC meetings. And yeah, they will. They will, as you say, try to studiously ignore it, but you know the independence of the fed, you know it's. It's one of the most, if not the most powerful institution in Washington, aside from the White House, and some would argue that it's more powerful than the White House. Right, and so the temptation. You know what what hasn't been politicized? You know what neutral institution in Washington DC hasn't been politicized at this point? Right, and so you know, there aren't that many.
Speaker 1:So I realized when we were having our discussion last week and sort of thinking through what President Trump's impact on the former, president Trump's impact on the economy could be if he, if you, were to win again, that I actually did know a whole lot about Nikki Haley and Ron DeSantis's economic plans. You know Ron DeSantis sort of made his name for fighting the corporate woke-ism battles, but you know their economic plans feel fairly traditional. I guess you know sort of standard Republican again cut taxes, cut income taxes. Nikki Haley wants to get rid of the federal gas tax. She's also going after salt, which I thought was interesting.
Speaker 1:Not going to win her a lot of votes in the suburbs if she's counting on that sort of more moderate voter. Right If she wants to get rid of the ability to deduct state and local taxes from your tax bill. So that's one that she has on her agenda. But you know they did not seem to have anything that would be surprising or perhaps disruptive to what we would expect from a fiscal picture from a Republican Trump's plan, for, you know, 10% tariffs on foreign imports. Of course that would be something that would be very difficult to model and could be a bomb on consumer spending. But the others seem to be, you know, fairly middle of the road.
Speaker 2:Yeah, and I think that you know one of the things that really is picking up in terms of the interest again is the deficit. You know we are looking at what was it? $34 trillion we just hit. Is that the latest milestone? So you know either both parties are. You know both parties are not covered in glory when it comes to fiscal conservatism over the past few years, but you know we have seen a. You know we've seen a appreciation that you know something has to be done. But what has to be done is not a campaign trail kind of discussion.
Speaker 2:If any of these candidates have any sort of plans to tame the deficit, it is not something they're going to be touting in the general election. You know, when asked about it, they are going to. You know they're going to. If you're a Republican, you're going to say the tax cuts pay for themselves, which is just a punchline. It should come with a rim shop. I mean, it's such a joke at this point. And if you're, you know, and if you're President Biden, you know controlling the deficit, who knows what they're going to say on that front, if asked? But it's, you know, entitlement reform these things are like not something that are going to win votes, and it's all about the, it's all about the election these days, so it's something that may be, you know, on the to-do list once the election is over, but we shall see.
Speaker 1:Well, I think the frustrating part for, you know, people who care about the fiscal trajectory of the country is that you know, it's not just on the campaign trail People make promises that they can't keep right.
Speaker 1:It's even when they pass the laws, even when the Congress tries to build in incentives for them to, you know, stay on the fiscal high road, that they can't seem to make it happen. So if we think back all the way to last spring or was it summer, I can't remember now it's all a big fog. But when the fiscal responsibility act was passed, when then Speaker Kevin McCarthy cut the deal with Democrats in order to lift the debt ceiling and to at least keep the lights on for the federal government, part of that agreement included an automatic sequester, an automatic one percent cut to defense and non-defense spending compared to FY23 levels, if Congress didn't do its job and pass full year appropriations bills, if they didn't, you know, actually go through the process of figuring out how money is going to be allocated to each government agency. And so they try to create an incentive for themselves to follow the rules and they themselves did agree that they should be following.
Speaker 1:And yet here we are on what is today, january the 19th, and Congress still can't get its act together. They still can't write the appropriations bills in order to fund the government, fund federal agencies at the levels they had previously agreed to, and so that means that we could be facing a pretty dramatic cut in government spending come April 30th. And so every time that lawmakers try to kick the can down the road of government funding, every time they just pass a continuing resolution or a stock gap funding bill, they're getting closer and closer to the real deadline, which is they can't get it done by April 30th. Then we're going to see some dramatic cuts, and that could have a real impact on economic performance.
Speaker 2:Right, yeah, and for some members of the Republican caucus that's a feature, not a bug, right.
Speaker 1:Yeah, true, but the way that this was designed was so that when you actually look at the amount of the reductions, 1% across the board. But the impact would be greater on defense spending than it would be on non-defense spending. So Republicans almost knew that they would find themselves in this bind, and so they're sort of the defense spending that they have argued for so long needs to be maintained and even increased. That would face a bigger cut than the other types of spending that Democrats have put a greater priority on. So it's just incredibly frustrating to see that they can't even follow the laws that they pass themselves. But again, that deal was struck at a time when the Republican, the dynamic in the Republican Party was very different and the guy who cut that deal no longer on the hill.
Speaker 3:I mean, these are never easy, but this one kind of should have been one of the easier ones because of the way that we do the accounting. Like all the COVID stuff was running off anyways, but you get credit for it running off. So you know, optically we were going to lower it no matter what. But we still can't even come to some sort of agreement, even with the fuzzy accounting, chris.
Speaker 2:Hill Elon. I'm curious. We always criticize the can kick. Oh, another CR for six weeks, just a temporary band-aid and we're going to be back at this. However, maybe Speaker Johnson is looking at his cost-benefit analysis and he knows that he wants to do a deal. He's actually made some pretty constructive noises about keeping the top line agreement that they had and so forth, and the closer we get to the general election, the less likely that the Republican, even the far right, will want to do a big fight, will oust him and want to do another big fight over the speakership. So who knows, maybe he's got his eye on the calendar as well and trying to pick his spots so he can make a decision that's going to be unpopular with a lot of his caucus and still survive.
Speaker 1:Yeah, I think that's possible. I mean, maybe he's also saying, hey, the closer we get to April 30th, the better chance I have of actually getting folks to write these dang bills right and agree on them, because then you have the real sort of axe hanging over your head with the potential of that 1% sequester. But I also, if you look at who voted against the continuing resolution in the House, who voted against keeping the lights on through what is at March 1st and March 8th Elise Stefanik was on that list right. She's chair of the House of Republican Conference and has been rumored as a potential running mate for President Trump. You've got Jim Jordan right. You've got the Freedom Caucus folks who are against him, so at this point they're still willing to.
Speaker 1:Jody Errington, also the head of the House Budget Committee, voted against it. So you have folks who have a lot of sway within the Republican Conference who voted against this deal. You have folks who are also thinking about their political futures and trying to position themselves for a potential Trump presidency, and that may mean standing up to Speaker Johnson. So I'm not really sure how those dynamics are going to play out, because I think there could also be a lot of value to bucking the speaker politically. For some of the voters, that's right.
Speaker 2:Yeah, and just like the way you get those passes you're talking about is in the calendar.
Speaker 3:You know, like we don't have a year, you actually have like 12 days to actually pass things, and that just gets totally amplified in an election year, you know.
Speaker 1:Yeah, yeah, and there are efforts to try to take a step back and to think more holistically about how we should be approaching the question of debt and deficits. You know, there is this bipartisan I think it's called the Fiscal Commission Act that has got support from some moderate Democrats, it's got support from Speaker Johnson as well as, you know, house Republicans. So maybe there is a path there for something that could get done and that would essentially, you know, create another super committee with members of both parties as well as outside groups to try to come up with a resolution out of this mess. But that still feels more symbolic than anything, than a real effort to, you know, rethink the way that we approach our approach, our debt. But at least there is a symbolic effort going on, right, there's a recognition that the process is broken.
Speaker 2:Yeah, the first step Evidence by what's going on. The first step to recovery is admit you've got a problem.
Speaker 1:Right 12 step process.
Speaker 3:But at the end of the year John and I were thinking of, you know, predictions that you know probably won't happen but could, and one we came up with was that if the Biden administration wins, you know Biden will be well into his mid 80s and most of the senior people on his staff will be at the end of their career and he kind of already passed all the big things that you know can get passed. So actually, if there's a chance for entitlement reform, joe Biden's your best chance. He could have a Nixon to China kind of moment, and especially with Social Security. Ironically that's an easy one you just raise the retirement age and we're living wrong. So they're longer, so there is precedent for it. But you know that's probably your highest chance in the, you know, short to medium term of anybody addressing it, because probably our next president is going to be younger and that's political suicide to be in your mid forties and try to cut entitlements.
Speaker 2:Yeah, on that Nixon and China thing, essentially in the entitlement arena, if a Republican president tried to do it the Democrats would form an impenetrable wall of opposition and it would, because you know it would be just too politically, it would just be too politically enticing to do that and they would. It would be a winner to beat them up on that. I think you can only have someone who's you know sort of left leaning, you know common person, you know bona fides are as rock solid as as President Biden's and a Democrat flag over moderates from his party into into the, into a bipartisan.
Speaker 2:We've seen him do bipartisan legislation. That's very difficult and and obviously he's. He is and he is not particularly well regarded by the far left of his party and so he's not going to, you know, be running in his last term. I don't think so. There's a real possibility of, you know, way out of the money option of the stars aligning for something real on entitlement reform, sensible entitlement reform. That that, you know, can really be part of his part of his legacy. But I don't think a president Trump could do it. I don't think he would want to do it necessarily, and I think that you know it would be something that the Democrats would just make too much political hay over.
Speaker 3:But well, we're not predicting that's going to happen. I can guarantee you that that's not going to be the centerpiece of his election campaign. Yeah, definitely not.
Speaker 1:You know this is a little bit of a tangent, but I was listening to NPR yesterday and they brought up the excellent point which I had not really considered is that because people are living and working longer, this is one of the first time, maybe the only time, that we've had four generations all in the same workforce. We still have boomers, gen X, millennials and Gen Z all working together. So I'm not sure whether to be excited about the fact that you know that there's this wealth of talent to draw from or sort of depressed about the fact that we're working longer so therefore we could be working with our grandkids.
Speaker 3:No, we were talking about that lunch yesterday. I mean, the amount of medical breakthroughs that are happening, it's kind of under reported but it's kind of going parabolic. So, jen, I was saying we're kind of maybe in that perfect zone where we'll probably be able to live to 100 very healthily, happily. But we were too old where it gets really crazy, where then we might live forever and have to decide whether you want to kill yourself or not.
Speaker 1:This has taken a dark turn.
Speaker 2:Well, I mean, if you want to look at people working well into their 80s boy, look no further than Congress and the politics. I mean, come on.
Speaker 3:Nancy Pelosi is better to do in your golden years.
Speaker 2:You really want to sit in those hearings I know Nancy.
Speaker 3:Pelosi is coming back. I thought she already said she was retiring.
Speaker 1:No, Steny Hoyer Was it Steny. Hoyer. Yes, steny Hoyer said I think he's going to run for another term, even though he stepped down from leadership positions.
Speaker 2:Grateful exits are very hard to perform in certain circumstances.
Speaker 1:In Congress and in rates, anything Right now.
Speaker 3:Get on a board, work four days a year and get paid a couple million dollars and go fishing.
Speaker 1:Kane's vision will never come true. I have a feeling.
Speaker 2:Yeah, I mean, you get the idea. Well, you know, you're in Congress long enough and you begin to think you're indispensable. What's the old saying about indispensable people? The graveyards are full of indispensable people All right, I'm not in the cream now.
Speaker 1:Once again an even darker term. Let's look at what's happening overseas, guys.
Speaker 3:Yeah, that's way darker. Yeah, I know.
Speaker 1:That's happier.
Speaker 2:US economic outperformance just continues to be the theme, with the retail sales coming in strong and the last non-farm payrolls data showing the robustness of our labor markets. We got data from China earlier this week. It was really squishy and not particularly exciting. There was a sense that the GDP number was maybe massaged a little bit, but how much are they really massaging? These numbers are not good. They hit their target of around 5% growth last year maybe, but that is not exactly shooting the lights out. There was nothing in the data that came out from December that was particularly encouraging. Lots of weakness in retail. The property investment is still in freefall. It seems they just have endless headline risk. Shadow Bank went belly up and liquidated one of the biggest. This just seems to keep happening.
Speaker 3:The CEO was arrested.
Speaker 2:On Wall Street you've always got dramatic underperformance Chinese stocks, us stocks were up double digits last year and Chinese stocks were down double digits. Now we've got to have the bottom in here somewhere. That kind of thinking is always On CoinDex, it's just a disaster. For five years that's essentially been the sell. Every rally has been the right posture toward that. That's looking like it's going to get better in China. When you cast an eye over Europe, they had essentially a technical recession. Germany was in technical recession at the end of last year. Perhaps the purchasing managers indexes for January are coming out next week and they're likely to show continued doldrums in Europe, weakness in manufacturing in the US, but strength in services.
Speaker 1:Now we've got a bunch of wars.
Speaker 1:Brenda, we're trying to get out of the dark turn, brendan, trying to dig ourselves out of the dark place. The other thing that's going on internationally, of course, is Davos. I have to give a shout out to our colleagues who are over there, including Pentus President Matt McDonald, as well as Stacy Kerr, andy Whitehouse, colin McDevitt all some of our partners discussing the role of AI it seems like that was really the theme of Davos this year and Pentus own conference pension zone panel discuss the role of AI in terms of how that could change the jobs of C-suite executives and whether that could even mean that C-suite executives might feel some type of risk from the technological advancements that AI could bring.
Speaker 3:Yeah, and I think you guys did a great job of kind of being ahead of the curve on it, because I mean, just watching this week, it seems like every day a new company is announcing a round of playoffs that is directly related to efficiencies gained by AI, and the jobs that are lost aren't the blue collar ones. They're releasing the pretty good paying jobs.
Speaker 1:Yeah, this is so interesting I mean, we talked about this a little bit too when Michael Strang was on the podcast that this idea that the industrial revolution changed the way that we think about physical labor and the way that physical labor is done. We don't need as many people to do it. Ai could change the labor of knowledge, and we can use AI to sort of do some of the sort of basic functions of knowledge work today, and so really the people who will succeed are those who can layer on that deeper analysis or deeper critical thinking.
Speaker 3:But it does mean you might need fewer people, and I don't think that- you get to the 80 or 90 yard line and then you need an expert to take the rest of the way. But that's a lot of work that's replaced, and also that the AI does it a lot quicker than the humans had done it in the past too.
Speaker 1:Yeah, absolutely, and one thing that our president, matt, had said was that he doesn't really see an AI robot running a company. Right, I don't think that's the future that we're working for, and Kenny Rolls-Sund is very worried about this.
Speaker 3:We have to talk about it.
Speaker 1:This is not the Wizard of Oz.
Speaker 3:It's not the Wizard of Oz companies, but running a world.
Speaker 1:But also to the degree that AI, if you don't leverage it correctly, are you missing risk. Can AI help you see around the corner? Can AI help you be more efficient and productive and as a CEO, if you don't leverage that, then that's how you might be affected and that's how you might lose your job, as opposed to being replaced by a machine, an LLM. So fascinating stuff.
Speaker 3:Yeah, and it's just the beginning endings of this. I don't think we fully understand just how kind of new this technology is.
Speaker 1:Absolutely so. Lots more to discuss, both going on a Davos and, of course, on our podcast. But that does it for us this week. At the Macrocast, I'm Elan Moy with Penta. My co-hosts are John and Brendan of Markets Policy Partners. We hope that you enjoyed our show and remember you can always listen, like and subscribe to the Macrocast wherever you get your podcasts. Thanks for listening.