Zandi Says Recession Coming; Fed Clueless

Today we’re going to talk about a common-sense approach that is about the Fed, you know, it’s one of my, one of my things that I like to talk about is the Fed. And I really wish I didn’t have to talk about it. But I think it’s so obvious that we’re screwed, right? And I want you to understand why we’re screwed, because so many people go through their life. And you know, believe me, that’s probably a better way to go through life and not worry about this stuff that I worry about with finances, and the Fed and the dollar and Bitcoin and all this stuff that keeps me up at night, you probably better you’re better off not worrying about but if you are listening and you want to learn about this stuff, I’ve got to take on it that’s a little bit different than some of the people that you see on the on the screens. And now there’s some smart people on the screens. But like I always say, you get an economist on the screen from Yale, and another one on the other side of the screen from Harvard. And they’re going to have two totally different opinions. So, the end of the day, nobody really knows. Right? So, I think I have just as good an opinion as they do. And, you probably do too. And some of it is like we don’t have we don’t know what’s going on behind the scenes. We don’t have ulterior motives. And if the last couple years have proved anything to us, is that there may be some ulterior motives and the things that our elected officials or that are appointed officials have been feeding us. My goal here is to just educate you and get you to make your own decision. And that you form your own decision. What I care about is that you take information, and I’m not the only source, get other sources. And you start to use your brain to figure out what the information is for you. And how that can affect your finances. And that’s what I’m about, this is the wealth architect podcast. It’s not the wealth politics podcast, right? 


So today, I’m going to be talking about a guy named Mark Zandi Mark Zandi with Moody’s Analytics. Moody’s is the company that right before the big crash of 2007/ 2008, which caused the Great Recession, is a company that came out and basically said, “Bear Stearns is fine, these companies are all fine and gave them all great credit rating”, so they get paid to get great credit rating. So of course, who do they get paid by? The company they are rating? Right? So, the problem there already. And so, you know, it’s not like these guys really know what they’re doing.  My opinion, I got some smart people, but they’re guessing their economy. Economics is guessing. Right? It’s just who guesses best. And so, there’s so many pieces, there’s macro-economic issues, and savings issues and investment issues and debt issues, and the Fed and the spending, and wars and bombs, all that stuff goes in to these opinions. So, get a load of some of what this guy is saying. Now, let me start by telling you that I want you to look at this chart, if you’re on video, if you’re not, what I want you to do is just imagine that there’s a piece of paper in front of you. And there’s a hockey stick that goes from lower left to upper right. And that’s just a small, you know, increase in the debt. Okay, we’re talking about the national debt in the US. And then all of a sudden, it just takes off and it goes straight up like a hockey stick. Right? You got that in your mind. Those of you that are watching us on video, you can see that. So, you can see that’s the debt, the debt is gone parabolic. And we all knew it was going to go parabolic in 2008, when we printed our way out of the financial catastrophe, what we should have done, and we talked about it at the time, is we should have let all the weak companies fail. All the companies that have been taking all this extra risk, and you know, putting all of us at risk and making all of this stuff happen. where people lost their homes, where people, were bankrupted. It created a lot of opportunity, but it would have done it anyway. But it would have cleaned out the phlegm, right? There was a lot of phlegm back then everybody was getting alone, if you could fog a mirror, you could get a loan. And those companies that were, we’re putting the mirror in front of you were all the ones that being irresponsible, they were just making money, and they were greedy, not a single person went to jail, not a single person was fined. Everybody got bailed out. Some companies, they “token” let them go out of business. But at the end of the day, all the guys that were in the group, in the club, got bailed out. And it always happens in, in a society where you have corruption. And I think that’s what we have. Now we have it in spades. And there’s a lot of money sloshing around, there’s a lot of money sloshing around.  My dad always used to say, “never let anybody sit next to a pile of money because they will want to spend it.” And that’s what we do here.  We create infinite amounts of money. And we have been for 100 years, and we certainly have been accelerating, hence the hockey stick over the last couple of years. And there’s waste there that’s causing inflation, I know you’re feeling the inflation. So, I’m setting a stage here. And I’m going to try to make this quick. The government has come out and said, inflation is really high, it’s really bad. And by the way, it’s the worst in 40 years. And they say inflation is up seven and a half percent. Now, I say this all the time, but the last time you went put gas in your car, even before the Ukrainian crisis was your gas only up seven and a half percent. It went from $2 to 369, or $4, or $5 in California, and it’s going higher. 


We have Russian oil, we have we have constraints in oil through straits and waterways, we have all kinds of problems. We have elimination of oil exploration in the United States, we have pipelines that are shut down, we have a lot of constriction that is creating to a lower supply. And if you know anything about supply and demand when there’s a lower supply, but the demand stays the same or goes higher. You get higher prices. And that’s what we’re getting right now. They can blame all the higher prices on Ukraine all they want. But higher prices have been happening since well, for a long time, right? Just go back to 10 years ago, and ask yourself how much you were paying for eggs? how much you were paying for a gallon of gas? how much you were paying for a cup of coffee? whatever it is for you, create your own basket of goods, I can tell you my basket of goods is running about 25 to 30%. Right? A Martini used to cost $9, a call brand Martini. Now Martini cost close to 20. That’s a 50% increase isn’t no seven and a half percent. I don’t care what they say, maybe you’ve got this basket of goods that you don’t need things that are expensive, or you’re not spending any money or whatever. But I don’t believe the official numbers is the point. So, create your own basket of goods. I think that you can use the seven and a half percent for the rest of this video. But the seven and a half percent is a bare minimum. And the Fed has a mandate to try to keep 2%. And last year in 2021. They were running around going well we don’t think inflation is a problem. Like you guys just printed trillions and trillions and trillions of dollars and you’re so stupid to say. “We don’t think inflation is a problem. We think it’s transitory”.  Transitory, well, what is transitory for the next 100 years, it’s transitory. Then they came about few months later and went oops, it’s not so transitory. We’re going to quit using that word. We’re retiring that word they said. So, they realize they screwed up. If you can’t believe them, then why do you believe them now? Why do you ever believe them? Guys? I want you to think by yourself. I want you to think for yourself. So, I want you to go back and listen to this guy. I’m going to play a few excerpts from an interview that he had on CNBC. Some smart stuff that he puts out there, guys, you listen to him, you know how that makes a lot of sense. But I want you to remember, the Fed has their own “mandate to keep”, you know, unemployment, low and inflation at a 2% rate. Well, if inflation is at a seven and a half percent, if you believe that number, then what they’re supposed to do? According to the economic theories that Paul Volcker stated is, you’re supposed to make money more expensive, because if money’s cheap, right, if money’s cheap, everybody borrows it. And they go spend it. When people spend money. Prices go up, right? There’s a lot of money and lots of supply of money. Ooh, you know what, I don’t care if I pay another dollar for that cup of coffee, I got plenty of money, right? I got a raise. You know, I got free money from the government. So, when that money is sloshing around, prices go up. So, what the Fed is supposed to do is make money more expensive, so it’s not sloshing around anymore. The banks don’t loan as much and when they do, it’s costly, right. It basically says slows down the economy. When the economy slows down, there’s not as much money sloshing around it prices are supposed to come down. Paul Volcker, raised prices to like 20%, in the 80s, early 80s, late 70s, right back in that period of time, we had horrible inflation, right? I remember my dad getting a mortgage at like, 20% a year was crazy. But on the other side, you could get a 12% a year CD, you put a million dollars in, you get $120,000 a year out, those days are gone, unfortunately for the old people. 


There’s a strong relationship between inflation expectations, certainly consumer inflation expectations, but also investor inflation expectations. I think you’re referring to the five year break even inflation expectations, they’re very highly correlated to oil prices. And if oil prices come back in the way which I would expect as the Russian Ukraine, event start to wind down.  Going forward, hopefully that’ll happen. But what if it doesn’t happen, right? I mean, they didn’t predict oil going up. They weren’t out there talking about this, and inflation was transitory. But what makes us think that we should believe them that oil prices are going to go down, they’re going to get that exactly right. You know, the supply side disruptions related to the pandemic start to by a global supply chain.  They start to perform a little bit better, inflation comes in, then then that’s a problem. And then I do think the Fed would step on the brakes harder, because at the end of the day, they work really hard to gain the credibility they have around that 2% inflation target, they’re not going to give that up easily. I love how he says supply chains are because of the pandemic, the supply chains are because of the pandemic, the supply chains are because the Fed printed all that money. And because they gave people money to sit at home. And because there were all these little restrictions and little rules about mandates and jabs and hiring and people aren’t happy. And in order to make them happy, you got to pay them more, it’s again goes back to the money inflation. Yeah, I think he’s sending a very clear, crystal clear, strong signal that,” hey, look, we have a 2% target. That’s where we’ve been, that’s where we are. That’s where we’re going to stay. And we’re going to do everything that’s necessary to get us there as fast as possible”. Now, clearly, you’ve got all these things going on with the pandemic and the supply side disruptions in Russia, Ukraine, and it’s going to take a bit of time to get things back down to target, but we are going back to target. Oh, yeah, sending a crystal-clear signal. Have you heard? Have you heard this guy talk? He doesn’t send a crystal-clear signal about anything. If you ask him, do you think inflation is going to stay? You know, at seven and a half percent? He goes, well, maybe we might want to think about joking about making a comment about it being down like he doesn’t answer any single question. And here’s Andy’s saying, Oh, he’s crystal clear. Come on, give me a break, and cement down those inflation expectations? Because then they will they make it a lot easier to actually get inflation down to the target? You know, some are asking Mark, what’s the big deal? If inflation is 3%? Or 3.1%, or 3.2%? Over the next five years? What would you tell them? Well, that presupposes that the Fed can calibrate things exactly. Right. Calibrate, right. They haven’t been able to calibrate anything, right? Certainly, they can’t calibrate anything. Exactly. Right? What makes us think they’re going to be able to calibrate anything exactly right, this guy’s given him a huge benefit of the doubt. And they’ve gotten everything wrong all the way up until now for the last 100 years, and certainly for the last five years easily. But if we’re headed towards three and inflation expectations are going to three, very unlikely that’s where it all stops, and we’re going to blow right past that. And then we’re going to be looking at four or 5 or 6 or 7 percent inflation. We get into that kind of dreaded wage price spiral that really infected the economy back in the 70s. and 80s.  Paul Volcker had to ring out with very high interest rates, and obviously a very, very severe recession. So, you know, 3%, if you kind of land the plane right there, and it stays there. Okay, maybe that’s a reasonable debate. But that’s not what’s going to happen. We’re going to go right past that. And that’s what the Fed does not want to see happen. You know, I understand the concern about the wage price spiral, but you have to have the dry powder, so to speak, to support that, right. You know, if you don’t have an expanding monetary base or expanding, you can only grow wages so much before people have to say,  “we’re laying off workers or we can’t hire or the or we reached this resistance point in the economy”. What is the dry powder that could allow this to just keep going and building on top of itself? Well, I mean, economy strong. I mean, we’re growing year over year. Real GDP growth is 4%, the economy’s creating a half a million jobs, you know, each and every month unemployment is at 4% and falling. And we’ve got a lot of savings out there, you know, the so-called excess savings, the savings that was done above, which would have typically happened, if not for the pandemic, by my calculation, it’s $2.6 trillion. Which well over 10% of GDP, that’s a lot of dry powder. So, this economy can grow along here pretty quickly, the economy, I don’t believe, is at full employment.  We’ve got some latitude there, but we will blow past it. And if we do, then inflation will become, an endemic problem more of an issue as the Fed watch, press on the brakes even harder. Okay, so now I just want to put it in perspective, if the Fed is going to raise rates.  Now they’re talking about raising a quarter of a percent, a quarter, right? So, in a year, that’s 1%, like that doesn’t even make a dent in the seven and a half percent. And we’ve got inflationary stuff going on, we got supply chain issues, we got more Russia issues. And there’s a lot of assumptions like, okay, Russia is going to end everything’s going to go back to normal. No, inflation is here to stay. And it’s going to hurt the poor, it doesn’t hurt the wealthy, the wealthy have enough money to buy gas, the wealthy have enough money to spend $1.89 on a dozen eggs, they can spend $2.69 an extra $1, you know, doesn’t matter.  But the poor that 69cents, that 89 cents makes a difference, right? That’s the difference. It’s like it costs money. When your car goes $2.50 A gallon to fill up to $5 to fill up to what I think is going to go to 750 or maybe even $10 by the end of the year.  You’re going to see major, major problems with people that can’t afford those kinds of those kinds of spending. So, it’s impossible, right? This is all a charade. Here’s what they’re going to do. They’re going to act like they’re going to raise rates, they’re going to raise it a quarter of a point, the markets going to freak out, like, it’s been freaking out for the last six to weeks, right? It’s gone down, then they’re going to go, “oh, man, maybe we can’t raise the rates, or we’re going to find another excuse”. You know what Ukraine’s going on? We need to print some more money, so we can buy some more F 16. And send to Ukraine. We’re going to need to print some more money. So, we can spend it on Raytheon, Raytheon can send some send some of our javelins over there. Who’s paying for that? We are, right. Ukraine doesn’t have industry right now. They’re not making anything. So, we’re paying for it, your taxes are paying it. But you know what? Easy money is easy. Easy come, easy go. Sit next to a pile of money. You want to spend it? Interesting, right? So, I want you to use your own common sense when it comes to what you hear on TV right?  The inflation is seven and a half percent up to 25%. Right. Which means if you keep your money in the bank, you can buy 25% Less next year than you can this year. So, you can’t keep your money in the bank. You can’t keep your money in bonds, because bonds are crashing right now. And bond rates are going up a big deal. They’re going up they give you 2% To keep your money tied up. Right 2%. So, you got to put your money in stocks. You got to put your money in safe havens, because we don’t know what’s going to happen. There’s a lot of turmoil in the world right now with money. So, you got to put your money in gold and silver and Bitcoin, and whatever else will store that value.  Real estate’s good too. So, all I’m trying to say here is you are in control of your financial decisions. And you should know what the people are telling you whether it’s true or not. You get to make your own decision. Don’t just listen to me. I’m just a bald guy on a podcast, right? Go listen to a couple other bald guys on podcasts and make your own decision.

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