Disinflation, demographics, Doge
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When comes to economics and elections, it's really simple. It's just how ordinary people seeing and affect their daily lives and the lives of their communities that economic questions dominate all other economic questions that dominates taxes IT dominate the budgetary st. That which is only warm, Carry about the budget texts that, although was obviously really important .

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pushkin. Eight in couple a month ago, we thought we had inflation beaten or we wrong.

very likely.

That is depressing, but today's show will not be depressing. We're going to talk about disinflation demographics and doge the big three days hanging over the american economy and american markets right now. I am rob armstrong, and this is unhedged the markets in finance podcast from the financial times and push him.

We are coming to you from fabulous, gold plated, air conditioned and extremely comfortable unhedged world headquarters in new york city. Joining me today is the brains behind the whole thing. Aten writer, my partner in crime on the unhedged newsletter, welcome.

aten. Certainly the brains.

but you type fast. No, you're the brains. So, and we have three important american things to talk about today, all three of them, as that happens, start d there.

Disinflation, is this really happening? demographics. Is that going to a sink american economic growth over the next twenty five years? And doge, the new government department, that is, I don't know, department.

certainly not a department. But IT has the .

name of what IT has, dose the department of government efficiency, which is going to save the us. Treasury market or so some people hope. Let's start with disinflation ain. That's I have before me a chart of CPI inflation, excluding the notoriously valuable food and energy categories.

IT seems like we've had about four months where C, P, I, inflation, depending on how you look at IT, is not going the direction that one would wanted to go. It's not shooting up, but man IT IT doesn't look great. What what's going on here?

yes. So if you just look at core C, P, I, which as you had volatile food energy IT went up from three point two five, three point three. That's a small jump, yeah but that's kind of the third months and row that we are having not a great directional changes in C P.

I. And the goal here is two percent right? Yeah the goal, however you cut IT, it's two percent.

Yeah, that's core CPI. If you include the food and the energy, remember that oil really cheap right now. IT still went up. So I went up from two point four percent in september to two point six percent. So either way, you slice IT or not really going the .

right direction. IT has been a montreal of the last two years in markets and economic circles. To say the path of inflation downward to target is was always going to be unsteady.

IT was gonna weave and wind up and down a bit. This is actually a tiny bit worrisome. How long this has been going on now? Are there particular components of inflation that are proving troublesom .

in september that was kind of all across the board this month, there were some funky readings we got from housing. Those might be too courts in the data as opposed to some real change in shelter costs. That being said, we like to use one month, three months and six month moving averages of annualize change. So just to tick through those one month went down a little bit, which is good, but three months went up, yeah and three months went up because the last three months have actually been above what our goal had been. Where is we had a couple good months in the summer, so six months down.

I guess the optimist says we know housing inflation, which is the third of the basket is gonna, keep coming down. This is the old story where the way the government measures IT housing inflation is very lighting indicator. But if we look at new leases, we do see that dic inflation has firmly taken hold. Am I getting this right so that the optimist says that will come through fully and will bring us down another however many basis points?

Yeah and we had children are coming down hugely from August to september. But you know there's some other weird things in the housing market that is kind of hard to understand right now. So for example, a lot of the home builders have a lot of supply, but they have essentially stop building because they're not enough demand.

yes. So there's a fundamental thing not working in the market where Prices, which are supose to come to meet demand are not coming to meet demand um and whether that homebuilders ers waiting for inflation and mortals come down yeah or something else. But either way, we can say that across the board, there is some inflation going in food and other products that look like they might be here to stay. Yeah, especially if we keep on the same rate cutting trotere's or we had thought we would be on you.

Only energies is really saving energy.

We should be very grateful that OPEC plus can't get IT stuff together.

as they say, the stupid dest car tel in the hist of the world.

I mean, it's a fundamental game, theoretical problem, right? You have the really rich ones, or ones like iraq right now, oil Price through low for a lot of. So of course, the coroners are gona keep on going for oil because they .

have they need the money ah.

but then once they do that, IT keeps the Price lower. Yeah, that of course sadi arabias annoyed.

But in any case, I would say this puts j power in the fed in inaugural spot because a new president has just been elected. I don't know if you caught that aid, have you fall the news anyway? So they cut fifty, right? And then at the last meeting they did twenty five, right. So if they now look at these inflation numbers and say maybe less pause at the next meeting in december, they are going to look hopelessly partisan like, oh, trump gets in and now we want to slow the economy I mean.

to be fair, they cut right after the election so troubles is are already theoretically .

ally coming in yeah last but I don't know.

It's going to be a prickly one for them. So is the market is of two minutes right now. It's a half and half cut that on five basis point cut in december versus no cut at all. That being said, jap pol just the other day said, quote, the economy is not sending any signal that we need to be in a hurry to lower rates. Well, he might not go for IT.

So we'll come back to that in another show before very long, you can be sure. Let's start to demographics. I was really struck by a piece that came out earlier this week by jim reads team, a joy to bank, that kind of looked at the last twenty five years of asset returns.

The peace was called something like the long term asset return study, and then speculated a bit about the next twenty five years. And the really striking thing that came out of this report was that a lot of america's outperformance in terms of G D P. Growth was because compared to other countries, we had a working age population that was growing relatively quickly, not super fast, but no percent or something a year. And that really set us apart. And if you take out the natural tail winter growth, that creates the difference between us and a germany or a france or a japan, although it's still there, still there for sure.

I mean, there, you know, questions. Take a option. The international .

age in america. But but the real growth rate difference, once you back out, the demographics is like ten basis points here, twenty six points here, thirty basis points here. So the punch line to all this, of course, is that in the next twenty five years, our working population is not gonna grow like I did in the last twenty five.

Yes, which is absolutely to. However, we are still going to be growing, you know, migration levels they were. Whereas our closest competitors going to a quote in the developed country is japan terminal. Yeah.

we're going to be shrinking much faster. Well, looking at this report from to to bank, and jim read has a lot of nice graphics of the expected demographic trends in different countries. And IT actually isn't europe that looks the worst.

Who will look the worst? China, korea, long khan, taiwan. These countries are going to be in serious demographic distress.

and they ve already entered into that. I mean, look at china's issues right now. So much that comes down to questions over the working of population, youth unemployment and you know the ability to actually more martial its workforce.

So if you wanted to make a scary story about the united states, despite its good relative demographic position, IT has a bad absolute demographic position. The change is going the wrong direction. We have very expensive assets in this country.

So that's that's A A bad place to start your next twenty years of asset returns with extremely expensive assets. And we have a load of debt. And as do you back points out, if you have a load of debt, the real returns on your bonds don't tend to be very good. So you're american sixty forty portfolio that returned in real term something over four percent over the twenty five years. I don't think eighteen I don't think you should plan on the earth next twenty five years returning yeah that you going to have any money to invest.

Probably no social security or at least not fully found the al security. My generations not looking like it's going to be.

do so you have to save more money. My generation did to get the same or work longer. again. Relative position of the united states compared to the rest the world, good compared to itself since two thousand and one thousand eight ninety nine. These good times are unlikely.

But that I think is interesting that the George PK uh. Report pointed out, as well as you pointed out in my place the other day, was that even that returns over the last twenty years have not been so good as they were as twenty years ago. The valuations were super high in one thousand and eight, two thousand. It's not like the american story he has been.

Follow us to begin with. Yeah so we've we've had an incredible run in like the teens. But the thing that brings the the returns down over the last corner century is that we started from such precipitated ously high valuations and experience we might repeat again now with the Price earnings ray show of the S M P twenty four, whatever is now.

So it's something to think about. Now what's think about this to me is there's only one solution to these problems. If you don't have a grown population, if you have a lot of debt and you have expensive assets to begin with, there is only one thing that can save you, which is the productivity ferry, who has to flutter her magical wings and land on the U.

S. Economy and mean that workers produce more per hour of work. So despite the demographic changes, you can produce more, which allows you to manage the debt load and allows asset Prices to rise so that you so production move up to the valuation that they have.

You'll produce things of higher value but already have high valuations. That seems that to be part of .

the equation, you know. But I mean, we've made a fair amount of fun of A I hype on the show. But the robots kindly need to show up over the next twenty years because that's productivity.

automation. Making each hour of work we put in produce more output is what we need. So we say to the robots, hurry up, robots. Whether they're made by elon mosque or as someone else, we want you to show up quickly, guys. And speaking of elon musk, let's talk about his new job.

How many company is running now and now? Government .

initiative? yes. Latest job is running the department of government efficiency.

which is named after his favorite ypo currency photos coin. And we should note that it's not just him. It's a vaca swim yes, ara cino mogul who ran for president ah and I would be remiss but not say that is in highly fishing, have two heads and initial yes, if you're really gna name at the department .

of government efficiency, I know. And there is an unavoidable irony and starting a new department in order to make government smaller. But we shouldn't make fun.

It's not a department. I and it's not a department. We have an unsustainable debt trajectory in this country. This I don't think you and I agree, and I think goes any argument. The deficit trajectory is bad and we are headed for larger and larger debt. And eventually that is going to awake in the bond vigilantes and you know they were unsustainable path here. So sometimes is going to be done.

Yeah I mean, I think there is an argument that amErica special and america, that doesn't matter. And I think there are people for both parties, they want to believe that. But you I think there is .

a speaking we want to believe.

we want to be, but there's a market consensus at least at least if we ve seen in other economies that too much dead .

is bad if your growth can deliver. yeah. So musk has been known to exaggerate.

I talking about two trillion dollars. Yeah, out of a six. Am I giving the right six trillion dollar U.

S. Federal budget? Twenty six point one? Okay.

was a little 点。 Let's just quickly run listeners through what's in that six trillion. And one of the .

big chunk s there. yeah. Well, start with things. He's probably not gonna touch perfect. So their social security, that's one point three trillion OK medicare, that's health insurance for the elderly said campaign said he won.

Medicare is what on .

top that's about eight hundred billion together.

That's a little over two budget.

There is this other bucket that's like government pensions and deposit insurance, five hundred billion they can touch IT.

So now we're at two point five.

can't touch two point five, two point elean. Yeah, there's net interest on the U. S.

S. det. Touch, definitely touch that. That's about seven hundred billion.

okay. So now we're at half the budget, roughly speaking, right? We're over three now. Am I am I doing the math? We're over three now OK.

And then there is the military. Theoretically, trump s as isolationist, but at least in the first term, there wasn't that many cuts in the defense budget. And so that's a little under a trillion and eight hundred million.

So now what's our total of stuff we've talked about that is hard to touch.

Total stuff we talked about that hard to touch is about four point two trillions.

That leaves two trillion in the budget. So if i'm doing my math correctly, musk has promised to cut everything else completely to zero the state department highways.

So there's the non defenced things. So there's highway street part in the agencies, the deep state quah, but a lot of those are programs people rely on and or expect. So highways, roads, they talk about cutting department education, department education.

Doesn't that big of the staff there really sending out checks to school? The tricks your kid is has special leads and doesn't get the money they want. They might face some backlash.

yeah. So that's what they want to cut there. And then the rest of IT is again also kind of track and orders are medicated and other incomes security program, right? Medicated is held.

Insurance for the poor will help in the incomes.

Current programs like you know child and other tax credits which have been in out of the law, there's unemployment benefits, there is the food snap programs. So if they want to cut out to trillions and you're going to have to be cutting things that people really want yeah and things that a lot of people really relied.

yeah I mean, that would be something if they ve got a quarter that much, they took five hundred billion or two hundred billion out of the U. S. budget.

But it's not that easy. A lot of these things are auto trying in law, so they would have to go through congress. Part of the reason we have high spending in almost every economy congress wants to please, there are constituent if you're not going to get every congresswomen .

to start slashing the budget. Republicans, he dies enough, but a few republican defectors, yeah.

you know, you have, you can get IT done. Very slim majority, even in the house. Yes, and the senate has a sizable majority, but still you need the house and the senate to pass anything.

Yeah, they are going to use some novel legal strategies to get around this, but it's unclear what they can actually do. Well, the other way to think about this is from personal though, right, like the federal civilian employee workforce, that's not contractors, that's not military. So about two point two million people, like A A bit over three hundred billion dollars to pay every year yeah, say you make all those robots. Yeah you're still not anyone here.

exactly. You can literally disappear all the federal employees and release them with three robots. And you're not talking about the numbers they're talking about.

And we should know that like a lot of people who try to do these things in the past and there's been so many government efficiency initiative panel and other names, usually there are part of the government. This one is not, which is its own interesting legal quad mire. But it's not simple to slash down the budget. We haven't had a baLanced budget in over twenty five years.

So they take away from this is if you are an investor in U. S. Treasuries and you are worried that treasury yields are gonna rise, meaning that the treasury Prices themselves are gonna fall, and you are hoping that dosh will prevent that by making the government more efficient. You are probably smoking dope, as my mother would say. Is that, is that the right take away?

I mean, there are things that will change this administration for sure. As far as stopping adding to the deficit and cutting two trillion dollars out of the budget.

I would put any money. I ouldn't, I don't five hundred billion, but not never mind, all right on that thought. We will be right back with long and short.

I could see even higher deficits in mixed government, something that a lot of investors are counting on to restrain washington. But I think those investors are forgetting how easy IT is for washington to do deals where one side gets its deficit increases in exchange for the other side getting theirs.

To hear more about the implications of fiscal policy on the economy and financial markets, subscribe to p gms, the outthinking investor in your favorite podcast, APP.

Welcome back listeners. This is long and short, the part of show where we go, long stuff we like and short stuff we don't like. Eight, ten. Are you long or short something?

I am long. The turkish economy, turkey had conventional. That's bold. It's bold. Turkey had unconventional monetary policy for a long time. They switched about a year ago to more conventual monetary policy.

more women. Insane, insane.

yeah. They wouldn't raise rates. Even inflation was like eighty percent. anyway. IT seems to be working.

The little is doing pretty well that might be from Carry trading. But still inflation is starting to come down, although it's definitely not beat. So I think things are on the right path. They still have some hurdles. But turkey looking good.

I am long is another d which is disney. Disney has had a hard time with the transition to streaming. We've talked about IT on the show before they report a good quarter last week, and I think they are finally figuring out how to be disney in a world that is about streaming video.

And the characters are great. The brands are great. They just have to get this distribution thing figured out. And I have the feeling they are starting to get there. So I am slightly tentatively long disney on that animated note.

We'll be back in your feed on thursday and don't forget send me your questions about markets and finance. Robert dot armstrong, F T. 点 com。

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