The Fed's Latest Move Just Changed Everything | Darius Dale
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What is the main topic discussed in this episode?
and so when you start to invert things and start pricing them in units of dollars like instead of saying price of s p and one dollar what's one dollar's ability to purchase one share of the s p what is one dollar's ability to purchase one banana at the grocery store or one gallon of gas and you invert those prices you really see the structural multi-decade decline in our purchasing power that's been masked by these academic arguments that money supply has no impact in the real world which again sorry for me using this word again
What's going on, guys? Today, we've got a very special treat. We've got my friend Darius Dale. He's the founder and CEO of 42 Macro. And in this conversation, we talk about the plight of the people, how there's so much socialism going on, both implicitly and explicitly, and why that impacts your portfolio. And then last but not least, he gives some really nuanced, insightful thoughts about what's going on at the Fed, how Kevin Warsh is changing things up, and what he thinks that Kevin Warsh should be doing that he's not. All that in this conversation with my friend Darius Dale. All right, Darius, we are recording this right before the Fed's decision here for July. But I want to understand from your perspective, before we know what they do, what is your read as to what they should do?
And what is the data that's backing up that thought process?
Ooh, that's a deep question, man. And thanks again for having me. Always a pleasure to be with you and your audience, my brother. So what they will do, in our opinion, is very different from what they should do. What they should do is tighten with the balance sheet, shrink the balance sheet, scare the market into believing that they are serious with regards to their price stability mandate, but ultimately leave the policy rate alone. And the reason we say they should leave the policy rate alone is because we have this big multidimensional model that essentially tries to ascertain what the Fed should do over the near term and over the medium term based on the trends and key economic variables, as well as the deviation from the Fed's various mandates.
And that model is essentially saying the Fed should, on net, remain on hold now and stay on hold over the medium term. Now, going back to where I started this answer, the reason we think the Fed should tighten monetary policy over the near term, it has nothing to do with what's happening from an economic standpoint. So in our opinion, we think this is all about signaling. We think the Fed, as we talked about the last time I was on your show, we think the Fed needs to play action pass to set up the run, with play action passing being tightening cyclically and setting up the run, with the run being easing structurally. It's our belief that once we get the advent of the five task force findings later this year, early next year, that the net recommendations from those task forces will be extremely dovish.
and that is not priced into financial markets. And so if the Fed pivots from today's inflation problem to a series of extremely dovish policy recommendations, ultimately, that has risk that poses significant risk to the bond market, the long end of the curve. And so ultimately, we think they should take a step in between of tightening policy just to regain some credibility on inflation fighting.
What's fascinating to me is I think if you go back to 2019, inflation has been compounding at about 4% a year. So if you include all the ups and downs, it's about 4% compound annual growth rate to inflation over six, seven years. At the same time, inflation has been all over the place when it comes to the last, I don't know, eight months or so. During that period, even with the inflation spike, the Fed continues to expand their balance sheet. which kind of feels like it's the opposite of what you're saying. So what is their logic? What would they defend themselves by saying that that was the right thing to do?
Yeah, well, look, there's two schools of camp on the balance sheet and one school of thought is a very self-serving Wall Street focused.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:00–6:05
2
What should the Fed do next versus what will it likely do?
6:05–8:25
3
How does shrinking the Fed's balance sheet affect signaling and inflation credibility?
8:25–19:45
4
Why do some economists claim money supply no longer impacts the real economy?
19:45–34:08
Speakers
2 identifiedMore from The Pomp Podcast
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