New Inflation Warnings from Fed; Could Iran War Raise Prices AND Cause Recession?

Okay, we're live. Again, Friday. It's my favorite time of the week to do a live show with

Catherine. I'm still subbing in for JVL though, so it's temporary. But welcome to the pod

or the live show. I suppose we need a name for this. We were talking about this a little

bit before you came on. We don't have a name for this show. So if people want to suggest

some sort of name, do so in the comments. I threw out Darkfest, but people didn't think

that was particularly a compelling show name. You see, Darkfest? Yeah, Darkfest, because

we're darkened out. But the other one was money. Okay, yeah, I'm okay with Darkfest,

but I don't know that it's specific enough. It's like, yeah, there are lots of varieties

of dorks out there. I mean, there are like national security dorks and law dorks.

And yeah, but not not everyone can do the combination of musical theater and economics

like you. And that is like the twin pillars of darkness. The other one is money matters,

but I was told that several people have this as a show title. So we can't use that.

So to our listeners out there, this is a weekly show or breaking down what's going on with

the economy. And we need a name. Give us a name in the comments. I'm joined by Catherine Rampel,

author of receipts. Everyone should be reading that already. I'm Sam Stein, managing

out at the bulwark. Thank you for joining us. We're going to talk predominantly about Catherine's

newsletter, which came out last night. I guess I'll just tee it up and sort of, maybe you did it,

too, but give people a sort of sense of how this all came together. So sometimes when I drive to work

in the morning to get to the office, make phone calls to some of the newsletter writers to just go

over things that, you know, story is basically. And yesterday, I'm driving, I call Catherine up,

and I was like, Catherine, what's the absolute apocalyptic worst case scenario for how the war

will impact the economy? And don't just say like 30,000 foot takeaways, but like, how would it

actually happen? And so you then proceeded to talk for about 15 minutes straight, and it really

chilled me to the bone. And then we decided, yeah, let's make a newsletter out of this. So why don't

you explain, maybe take 15 minutes or whatever you want? What would look, what would be the worst

case outcome of the Iran War on the economy? Would the caveat, of course, that this is not a

prediction? This is just something we are outlining. Yeah, I really want to emphasize that this is

going to be pretty humorous. I am not saying this is what will happen or what even is likely to happen,

but it is a for it is a possible outcome. There is a non-zero probability, I would say, that this is

the outcome. And the the outcome that we are describing is basically a global recession, maybe even a

global depression. I didn't use that term in the newsletter, but that's a possibility. It's

probably a far from possibility, but it is something that could happen. And the reason it could happen

is because we have this massive oil shock, but it's also kind of an everything shock in oil crisis

and in everything crisis, in that there is a lot of stuff that goes through the straight of

promos that is now blocked, not just that, but you have these sort of catastrophic attacks now on

infrastructure in the region. So it's not only about reopening the straight shall we say, it's also

about potentially rebuilding billions of dollars worth of infrastructure. You know, once the

infrastructure is gone, it is gone. And it'll take a while to rebuild, for example, the largest

LNG plant in the world, which is in Qatar, which just got bombed by Iran. Israel bombed the

largest natural gas field in the world, which is that that portion of it is owned by Iran.

And it's a little bit, you know, early to say like how much damage was there, but those natural

resources, those refineries and processing centers, those are gone when they're gone. And they

can't easily be rebuilt. And so you have problems with the supply chain there. And some of that,

I think people can wrap their heads around because they're already buying gasoline or diesel,

or they're seeing airline prices go up because jet fuel has almost or maybe it actually has doubled

since I last checked over the past month. It's up a lot, airline prices are up a lot. So like the

obvious things that are made from fuel are affected, but lots of other less obvious things, fertilizer,

a lot of fertilizer comes from the Middle East and can't go through that straight. Some of that

is made from the byproducts of natural gas and oil. Lots of other things are made through processing

those crude natural resources. So there's a lot of stuff that is not just blocked, but maybe destroyed

forever, or at least the infrastructure is destroyed forever. And that's going to lead to higher

prices. Again, the higher price piece I think people are aware of, the maybe less obvious thing is

how you could have both higher prices and a recession. And in fact, historically most of the time

when we have had a big oil shock, we have fallen into recession. The reason why

is that oil is what economists call inelastic. When prices go up, when prices of oil and fuel,

let's say go up, it's not like people can easily scale back how much they buy of it, right?

You can still need gasoline to get to work. You still need gasoline to drive your kids to school.

If you're a truck driver moving goods around the country, you know, you still need diesel, etc.

So what happens is people end up spending way more on fuel, and that is money that they cannot

spend on other things. The stat that I used in the newsletter was that $300 million a day

are being spent, an additional $300 million a day, are being spent on gasoline by consumers.

I actually saw after that published that the number, if you do, I guess gasoline and diesel,

diesel is now over $5 a gallon nationwide, that it's like an extra half a trillion dollars per day

that is being spent on fuel. Yeah, it's a lot. And it's annoying for consumers, it's annoying for

truck drivers, yada, yada, yada, it's also really bad for the rest of the economy because it's like

when consumers are spending $300 million a day on gas, they're not spending it on other goods

services. Okay, so we're talking about the consumer side here. Okay, mostly.

Yeah, mostly, let's pause for a second with respect to the infrastructure. You're telling me

you can't just maghiver it, like a little duct tape and paper clips and put the plants back together.

Is that, are you sure? I mean, you know, you know,

you're probably going to have lots of talents, so I wouldn't put it past you. Give them another job.

All right, so we're talking about the consumer side. And look, I think it's pretty obvious to people.

It's like, okay, well, if I'm spending, you know, $50 to $100 more a week now because gas,

and I'm already at the margins, I'm not going to go out and buy, you know, some other good that I

maybe would have because I just don't have the disposable income. I'm not going to go out and eat,

for instance, I'll try to find food. And yeah, food prices are going up, by the way.

And yeah, food prices are going up, which brings them to the diesel, because that is not,

that doesn't strike me as non-elastic, right? Like if you're a business and you have to

ship things on trucks and the cost of shipping things on trucks is going up, what do you do with

your goods? You obviously, or maybe you don't, price them higher. I mean, how, if you're a business,

how do you respond to that? I think you try to eat some of the cost and try to pass on some of the

cost to the extent that your consumers, your customers will tolerate it, but your customers

are going to really pissed off at you. You know, that you already see lawmakers, well, both

here, politicians both here and in Europe, frankly, who are accusing companies of price scouting.

I saw that. I saw that. It gave me flashbacks to 2022, 2023.

I know. I know. People don't understand supply and demand. So it's like, oh, those greedy companies.

Josh Hawley actually had something today, yesterday, where he was producing fertilizer companies

of price scouting. And it's, you know, this is like hot dog meme, hot dog man meme come to life,

because why are fertilizer prices rising? It's because of both Trump's tariffs, which helps drive

them up, both on fertilizer, some of which he exempted from tariffs, but the inputs to fertilizer,

much of which he's still tariff. And then again, something like, I don't know, 20, 30% of the

world's Urea, which is a fertile, a critical nitrogen fertilizer component, comes through the

straight of hormones. So there are like lots of supply chain problems that are driving up fertilizer

costs. And now that's going to make its way into the cost of fertilizer, which will make its way

into the cost of food. So it's not just about the trucks that are driving the food around.

And so companies are wary about getting a target on their back because they're raising prices.

And so they will try to the extent that they can to limit prices. But, you know, it's some,

I don't know what the margins are in the fertilizer business. I know in some of these other

businesses, they're pretty thin. Like gas stations actually generally have very low margins.

For some of them gasoline, I believe is also even a loss leader.

No, they want people to come into the storm by shaking gross reason stuff.

Yeah, I mean, I don't know. I'm getting a little over my skis here because I don't know about

all of the economics of, you know, gas stations. But in any event, there's not like always,

there's not a fat margin that they can just, you know, trim all the time to deal with these

higher costs. So some of the costs will be passing along to consumers and it'll be in the form

of higher prices. And the problem is there are going to be a lot of prices that go up.

Food, energy, generic drugs may get more expensive because there are a lot of these chemicals

that are made, again, I believe from the byproducts of oil. Isn't truth, isn't toothpaste like one of

these products? It's toothpaste. There are a lot of these, anything that has plastic and then a

lot of like other consumer packaged goods like hygiene really like toothpaste shampoo. There's

some like polymers. I don't know. I'm not a chemical engineer, but there's some input that goes

into them that is a petrochemical that you never really think of that will be affected. So there

are a lot of downstream things that will be affected. Prices will go up. Consumers are ultimately

going to have to eat that cost. And then that means that they can't spend money on other things

that they would be spending money on. And so the result is if they can't spend money on

stuff, then the businesses that they would be patronizing lose some revenue. They're going to have

to figure out, well, maybe we can't expand. Maybe we have to cut our head count. We have to lay off

people. People that they lay off, then can't spend money. And this is exactly the kind of vicious

cycle that is like the textbook example of what leads to a recession. And this is why you often

have recessions when you have an energy shock. Because again, people can't avoid dealing with

those high costs. And so you have these ripple effects throughout the economy.

Well, and also let me just say two couple things here. One is if people are listening to this

in the here a little jingle, Calvin's cats somewhere in this room. And it may or may not attack

the live stream at any point. I've been on a few of these recorded ones.

Sorry, I keep forgetting. That's okay. The cat. The cat cares. No, the cat cares about the fuel

crisis as much as we do and clearly is bothered by it. Two is I will say Trump is, I mean, if you

need any example of why fuel prices have this holistic effect in the economy, just listen to Donald

Trump prior to the election in the early months of office. I mean, he's not as entire, but most of his

platform around lowering the cost of goods was essentially getting your fuel cost cut in half.

I mean, there's a campaign promise. And his rationale was if you just do that across the board,

you're going to see costs go down because it's so universal and everything. I mean,

I think he mentioned multiple times the cost of donuts going down because of fuel, whatever.

Now that leads me to the third question, which is another one where it's not about non-elasticity,

which is the price of airline travel has gone up. I know this because I'm supposed to take

a couple trips. We've been looking at the markets. It's clear that the price of flying is just

going up, up, up. And they're making bets on future fuel costs. I obviously it's too early now,

but I have to imagine that for anyone who is planning travel, this is going to be in the back of their

mind. And that down the road, we're going to see a lot less. We've already seen a lot less tourism

in travel because of restrictive immigration policies. People just not wanting to come to America

for a variety of reasons, but that this might also really have an impact on commerce

around tourism. And I don't know how long it takes to get into the system, but you have to

imagine that that's going to play. Oh, it's already happening. There have been a bunch of new

stories about like I think SAS airlines canceled like a thousand flights. I forget what the numbers.

It was a huge number of flights because part of my it easy, but what is SAS? I've never even

put it that way. It's a. I got to get up. I'm sure that they're in one of the like sky team

or one of those alliances, but I don't know which one. Anyway, so there are a bunch of airlines that

have already canceled flights, raised prices. Like I said, jet fuel prices are already way up.

That's like publicly available data. I don't know if we I think I forgot to get it lined up before

this live pod, but but yeah, those prices are already up and so airlines are already adjusting

their prices. And to be fair, like that's going to affect not just the US, the tourism thing that

you were mentioning before was about people not coming to the US or not wanting to come to the US

or not being able to come to the US. That'll happen around the world. Not to mention that like

the Middle East has been trying, you know, a lot of these countries like Qatar have been trying

to attract a lot more tourism in recent years and show that they can play with with, you know,

they're on in the same league as all of these other rich countries. And they're. I'm not traveling

to Qatar any time. Exactly. No doubt about it. Qatar or Dubai or wherever, like all of these places

where they're hit for they're hurt for all the reasons. So the big economic shock there,

regardless. Let me pull up the let me pull up a chart. I'm going to have it ready to go.

This is the 18 month average for a retail price. This is regular gas. If you notice, there's a line

on the far right that is daunting. Yeah, like that is a daunting daunting line. I mean, I'm not a

historical expert on the price of gasoline, but this has to be, I mean, maybe the 70s when

when we were having difficulties with Iran back then, but like this or may, no, no, because in COVID,

it fell precipitated. Actually, yeah, COVID fell, but actually when Russia invaded

Crane, this happened. Yeah, there was a big spike then too. I so I think it's at its highest level

since 2022, if I remember correctly. And maybe a bit lower than that, you know, when you adjust

for inflation, but it's still that there's the rapidity. Actually, neither the, yeah, the

rapidity of like how quickly basically prices like this is still very striking. Like the level

itself is bad, but also just how quickly it climbed. You were talking about how Donald Trump

was promising lower gas prices and actually lower gas prices were one of the few bright spots.

Right. You can see it right there. Yeah, it went from three three 10 to under two around

275 and yeah, it was coming down. Yeah, it was coming down. And then you can see like it starts

tracking upward, you know, from like late January on. And my guess is that's partly because we were

sending worships and stuff to the Middle East. And so there some of that was being priced in,

maybe other stuff was going on too, but there had been inklings that there might be some kind.

There was a risk of a disruption and then the disruption happens and prices spike.

And like I said, that's not getting better as ships or ships carrying fuel are being set on fire

and the refineries are getting bombed. Iran has, I mentioned that Iran had struck a major

LNG processing facility in Qatar. They also struck, I believe, an oil refinery in Israel.

And they've targeted a bunch of other refineries and processing facilities around the Middle East.

Yeah, thank you for this. So this shows like a lot of the major infrastructure that has been

targeted. And you know, not all that suffered the same amount of damage. But again, like this is

just cataclysmic. This is going to re-opening the street is not going to fix the problem.

Some of these things may take years to rebuild. All right, well, we have to do an ad read because

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Actually, I can bring this back to the conversation too. One of the metaphors I have often heard

used to explain what's going on with the straight-of-form ooze. Is it a pocket hose? No, it's a regular

hose. There's a kink in the hose. That's why they need a pocket hose. There's a kink in the hose.

That is keeping the oil from flowing. Now we're getting to the point where it's not just a kink

in the hose, but big holes blown in the hose. But if they had a pocket hose, if the straight-of-form ooze

were instead a pocket hose, you wouldn't have a kink and maybe we would have peace on Earth as well.

Well, this is the second most enane metaphor possible. The other one was from New Gingrich,

where he was like, did you see this? He shared some sort of satirical story where he's like,

let's just drop thermonuclear bombs and- Oh, I don't think that was a metaphor. You think that was

a metaphor? Maybe he thought it was a real plan. New Gingrich has crazy ideas. He wanted to-

I ever reading something he wrote years ago where he wanted to put mirrors in space so that we could

have lighting in the parts of the world that were dark at night, something like that. I don't know.

He has all sorts of cookies. He's outside the box, for sure.

All right, so back to the topic, which is humorism. We're in Iran for the foreseeable future.

I guess the question, and we'll get to Jay Powell in a second, but before we get there, just to

tidy this up, it's not like you can- and we're talking about this, but it's not like you can just

flip a switch, right? It's not just the infrastructure. Let's say the infrastructure were

not damaged, right? Let's say we just had to figure out how to open the straightforward moves.

You've done this saying that it goes up like a rocket and down like a feather, but

explain why that is the case and how that will add to the uncertainty and humorism around long-term

economic impacts of this war. Yeah, so the rockets and feathers things, this is not my metaphor.

I forget who eventually came up with it. This is a well-known phenomenon in commodity markets,

but particularly in oil, that when prices go up, they tend to rise very quickly, and then they come

down much more slowly, and that's partly for gas stations, they are anticipating that the cost

of replenishing their inventory is going to get really, really high soon, and they don't want to

be in the red so that they like not exactly preemptively raise their prices, but they raise

prices. Their reaction to higher oil prices is very fast, and then they raise gas prices pretty

quickly, even maybe before they're actually having to pay for those costs, because like maybe they

have gas already on site, and they haven't run through. Then they are much slower to cut prices in

part because they're a little risk averse, they're waiting to see what their competitors do.

There are a bunch of different theories about why this is the case, but this is the well-known

phenomenon that happens, and I remember when Joe Biden was president, he and his chief economic

advisor were like on TV, ranting about the rockets and the feathers, and saying like, well,

they should be more like rockets on the way down, and I was like, that's just not how it works,

like we've seen this pattern before. So yeah, so it would be slow, no matter what,

and of course, even without the infrastructure damage, it's going to take some time for things to

move through the strait. Who knows how long Iran will continue to threaten things in the strait?

Right. Donald Trump will say, well, we've defeated them 100%, we've destroyed their military

capability 100%, but it's probably not that hard to just send a drone out and threaten

ships that are thinking, ships tankers that are thinking about coming through with highly flammable

cargo. So yeah, I mean, it's going to be bad no matter what, and then you layer on top of it,

this new escalation that makes things look much more dire. Okay, so let's play Jay Powell,

still Fed Chairman, we'll see when they get around to confirming his replacement. Here he was

talking, I believe it was yesterday, just sort of about the macro picture Wednesday, sorry,

macro picture. So two days ago, macro picture of the economy, let's play Jay.

I think good number of people in the committee are concerned about it, it's just the very,

very low level of job creation. If you adjust what has been the trend job creation over the past,

let's say six months, if you adjust that for what we think our staff thinks is the overstatement

due to overcounting, effectively there's zero net job creation in the private sector.

But actually, that looks like that's about what the economy needs in terms of dealing with very,

very low non-existent really growth in the labor force, which of course we've never had in our

history. So I read that or I listened to that and I thought to myself, okay, he's addressing a

couple things here. One is that we've basically had zero migration into the country, we've actually

seen people leave the country, we've had these immigration raids, we've had firing of public sector

employees for the past year, although that's turning around a little bit. So he's saying, okay,

well, we don't have job growth because we don't have as many workers. So maybe it's not so cataclysmic

babies are saying this is just the new status quo. At the same time, though, when there's no net job

creation and there's, you know, a few opportunities for people to get jobs if they want one,

that does seem to add to the downward drag on the macroeconomic picture, which on top of higher

prices seems like a very bad combination. Yeah, so he's saying basically, there might be people who

think we should cut rates. I can think of one of them. There might be. Yeah. Who think we should

cut rates because the economy is struggling. We've had no job creation over the past six months,

but he's saying, well, it's a little bit hard to interpret what that means. Have we had no job

creation over the past six months because the economy sucks or because there are no workers who

are available. And so the, you know, employers aren't really trying to hire people and there aren't

trying, there aren't that many people trying to get hired either. What do we know about the data

around employers? What do we know about the data around employers looking for workers? Because

that would seem to be important in this context. So both hiring and firing are very low. We're in

this really low churn moment right now, which means if you have a job, it's probably okay for now,

right? Like the chances that you will get fired or laid off, I should say, are pretty low. But if

you are among the unlucky people who have been laid off, your chances of finding a new job

are pretty slim. So it's like the, the, the share of people who are unemployed overall, to be

unemployed, it means you're actively looking for work. It's crept up a little bit. It's not super

high. But among those who are unemployed, they're much more likely to be long term unemployed than

is usually the case. So it's like people get stuck in this current kind of rut, not because of

their own doing, but it's because we're in this sort of low churn environment. And that's partly

because there's so much uncertainty. And there has been so much uncertainty that Donald Trump

himself has foisted upon the economy through tariffs, through regulatory changes, through threats

to rule of law, etc. All of those things make it so that businesses are just like afraid of making

decisions in either direction. They're afraid of expanding. They're afraid of shrinking. So we're

in this sort of unsteady stasis right now. You see that in the job market and you see that

elsewhere in the economy. And I'm not economist, obviously. But it seems to me like one of the

outcomes of this would be more stagnant wage growth. You have people who can't leave jobs

because there aren't jobs open for them. And so employers don't have any pressure to try to

increase wages. Employees don't have any incentive to go look for jobs with higher wages. You're

just sort of stuck. And so if you have basically no or limited opportunity for wage growth,

you have limited opportunity for more disposal income, then you add on top of that.

Goods getting hard because of the things that we just discussed and you're in a bad spot.

I keep going. Yeah, I mean, yeah. So there's this term stagflation,

which is a sucky situation to be in. People watching who remember the 1970s will remember that it was

really unpleasant then as well. Stagflation is this portmanteau that's about inflation plus stagnation

or stagnation or recession or whatever. And so normally you don't have both things happening

at once, but when you do have them coinciding, it is very unfortunate not only because they're

too bad things at once, but also they are two problems that are difficult to solve simultaneously.

The thing that the Fed would do to solve one problem will make the other problem worse.

So with inflation, the usual remedy from the Fed's perspective is to raise interest rates.

For stagnation or recession, the usual remedy is to cut interest rates. So there's stuck in this

situation where like whatever they do, they're going to make something worse and everybody's going

to be mad at them about something. And then on top of all of that, you have Donald Trump

politicizing everything. So it's not just that like reasonable people can disagree about what is

the right path that they should take and what's the problem that they should be more worried about

given this very blunt instrument they have of interest rates. You also have Donald Trump, you know,

claiming that what the Fed is really just trying to sabotage Donald Trump and sabotage the

economy. And so that just makes all of this calculus much more difficult. Not to mention that Donald

Trump is or his DOJ has been criminally investigating Jay Powell, the Fed chair. And so, you know,

because he is clearly trying to pressure the Fed to cut interest rates when again, there's a lot

of uncertainty about whether that's the right move, particularly now that we've launched a war

that's going to raise prices or that has already raised prices. So there's a lot of stuff.

There's a lot of baggage going on. The Fed really does not want to be in the headlines there that

you're probably hearing jingling. That's a cat. Sorry. The Fed does not want to be in the headlines.

They don't they don't want to be part of the resistance. You know, I feel like there are a lot

of people who really want Jerome Powell to be the face of the resistance. And I think he just

wants to like keep his head down and do his job. And Trump has made that pretty much impossible.

So I think he's showing like tremendous political courage in standing up to Donald Trump. But I think

he would really rather not be in a situation where courage is necessary at all. He just wants to be

like a nerd who, you know, a technocrat who weighs a bunch of confusing data and tries to come up

with the best solution that he and his fellow monetary policy makers can make. So he's in this

difficult situation. The Fed's in this difficult situation. Donald Trump is is meanwhile like,

you know, trying to investigate Powell. Donald Trump has chosen the successor to Jay Powell,

who may or may not get confirmed because of this investigation that's going on.

And the other interesting thing actually that came out of that press conference on Wednesday

when Powell was talking about the job market and stuff like that was that he said he is going

to stick around even after his term as chair ends in May. And he's allowed to stick around for

another couple of years based on how these confirmations and stuff work. He's going to stick

around at least until the investigation into him is fully and unequivocally over and dropped and

he is cleared. And that's, I mean, a lot of things about this are unusual. Obviously the fact that

the DOJ is investigating Powell to begin with very unusual, but it almost never happens that Fed

chairs stay after their term as chair ends because like who wants to stick around after you've been

the boss, you know, do you really want to go back to being one of the, the peons on the, whatever,

the members on the Fed board. I shouldn't call them peons. They're all great, great public servants,

but you know what I mean? Like, talk about the, like, exact opposite of source gracing,

you just completely ruined your relationship with these Fed guns, but it's okay, go ahead.

No, I'm teasing. Me and your peons? Yeah, anyway, they're, I mean, they're not the boss. So,

they're not the leader. And it's just like an awkward situation to be in. The last time it happened

was in 1978 when Arthur Burns stuck around for like two months just to help with a transition.

It doesn't happen. Powell is, is staying and making a statement by staying again, a statement

that I'm sure he would rather not make. He said he would stay until the investigation is over and

maybe afterward. So we'll, I will just say you love love love the Arthur Burns anecdote. You've

snuck it into a couple newsletters at this point. I feel like it's your favorite little tit historical

tidbit to point to. I mean, it's not just Arthur Burns is the guy that nobody on the Fed wants to

be on many levels. He's a hero. He's a hero. He's a hero to this podcast to get a sense, to get,

to get a sense of how uncomfortable the situation is for the Fed. Here's Fedgov Chris Waller explaining

the shifting dynamics behind their decision making around interest rates. I believe this was on

CNBC. Two weeks ago when the jobs report came out and it was, you know, negative 92,000. I thought

that's it. I'm dissenting. I'm supporting a rate cut because at that time exactly it looked to

me like this was going to be a very short-lived spike in oil. No inflation issues looked through it.

Since that time, the Strait of Hormuz was closed. This is looking like it's going to be a much

more protected conflict and oil prices are going to stay high for a longer time. So that suggested

inflation was more of a concern than I was putting it. The second piece of information that came

out and Chair Powell talked about this a bit on the press conference was that we've seen a lot

of research recently that suggests that this year labor force growth is going to be zero or close

to zero. If that's the case, then you don't need any zero as the break even for net new jobs.

We got an appointment right not to change. Exactly. And then for the last three months,

it's average right around zero. So I'm kind of in this kind of odd spot where my brain understands

the math, but I can't get through my gut that this is okay. I mean, I got to say that's just such a

remarkably candid moment for someone who has looked at and rightfully so as an expert on economic

policy to be like, my brain can't compute what to do in this situation. And there's something

refreshing about the honesty. There's also something deeply chilling about the admission where

it's like, we might not have tools to address the current situation, which leads me to my question

for you. So obviously the Fed is one component here, right? Like they can raise interest rates,

they can cut interest rates. What they do, we've established, they don't even know.

There are other potential economic policies that can be done through both Congress and I suppose

obviously, well, I suppose. And through the presidency, right? I mean, he's got these,

you know, he's trying to reapply these tariffs through different authorities.

Just give us a sense of the tool show. Let's assume that the humor situation, a version of it is

on the horizon, if not here already. And maybe it's not going to be global recession,

but maybe it's going to be something close. You're sitting in the White House. What do you have at

your disposal to try to maybe jar something loose here? So we are assuming that there, we have

a functional government, first of all, which I think is a big assumption. But let's say

we do and Congress can pass stuff and they have good judgment. There aren't actually that many

tools that are helpful because the kinds of things that you would do during a recession,

you know, to stimulate the economy, that might spend a lot of money, spend a lot of money,

cut taxes, things like that. We did cut taxes. And actually, they're talking about more tax cuts

for capital gains. Those things may worsen inflation as well, particularly if they're like

broad based. I think you have a stronger argument for low income people, you know, maybe spend

a large portion of their disposable income on basic necessities like fuel. I think you

can make a stronger argument for that. But if you're just going to do like a broad based

subsidy for gas purchases, which, you know, we've actually seen places in Europe, for example,

cut fuel taxes and gas tax holidays. Let's do it. Gas tax holidays. You could do that. But again,

you're just going to drive prices up even more because some of that that tax cut is going to get

captured by the companies. So it's really hard. And you know, just stop for a second. Yeah.

Just stop you for a second. Because Trump's done a few things. So among other things, he's

temporarily the way the Jones Act, which is that you have to transport all this fuel on US ships

and things like that. And the idea is, well, we can maybe get lower cost more ships,

super transport. Yeah. I think that's it. I think probably we should get rid of the Jones Act

altogether. I'm well, I would welcome suspending it. He has also ease sanctions on Russian oil.

And I think he might be easing sanctions. I mean, rainy oil. I'd always like in the net. Okay.

Yeah. Well, it wasn't at least suggested it was under consideration yesterday. I don't.

I may have missed a development. I don't know. A bit of a curious decision when you're at war

with Iran. And you're trying to choke them off. But you know, I guess there's, I don't know,

some logic to it. I don't ask me what it is. These seem like into your point. It just seems like

temporary band, like little band-aids on a gaping wound. And

well, I guess I come back to the tariffs. Okay. Hear me out. That's the one thing that

Trump could just say, you know, for the time being, global economy is kind of in a rut.

I'm going to not re-institute these tariffs. We that have some sort of larger impact. It feels

like that's the one real big thing at his disposal. Only he can do, well, he could do, right?

It could just tomorrow say, you know what? I'm going to abide by the Supreme Court case.

Yeah. I mean, he could have taken that boot off of the country's neck.

Sure. But now we're in a different spot. Okay. Yes. I think the problem is that would be a

tacit admission that they are bad for the economy and bad for prices.

Good point. Yeah.

Trump cannot, which was obvious from the beginning. Right. It is that miscalculation,

if you want to call it that, or misunderstanding of how tariffs work was costly last year.

It feels more costly today when you have all of these other, I don't know, vulnerabilities,

let's say, in the economy. And I just don't know that he's going to do it. He has, I mean,

I guess, let me rethink that. There have been times when he has rolled back tariffs on,

I think there were some produce tariffs. I'm trying to remember what it was. But there were

like some tariffs on Mexico that I think he rolled back because there were complaints about affordability.

So I guess they've done it to some extent. I don't even know if he's aware that some of these

changes are happening. It may just be that his various underlings make the decisions for him.

And he's, you know, he can still I disagree with that with tariffs. He seems acutely invested in

what's happening. That's like one of his most like emotionally, yeah, but there were like

economic policies. But there are lots of exemptions to the tariffs that are basically being done

like politically connected people who have meetings with commerce secretary Howard Lutnik and then

miraculously their tariffs are like that are relieved. So and maybe he knows what's going on

and maybe he doesn't. I don't think of Donald Trump as like a details guy, you know, fair enough.

So who knows. But yes, that would be certainly helpful. Other kinds of things that might be

helpful. I don't know like don't deport the agricultural labor force. They're stopping that they

said. They're done with mass deportations according to Trump. Listen, we're we're that's another

example of like he says one thing and he has no idea what his underlings are doing.

Fair enough. So it's been a pretty bleak 41 minutes, but it gets bleaker because we've just kind of

talked only about the impacts of what's happening in Iran with respect to our domestic economy. But

there are two other major components that are not related directly to the war that are kind of

hovering over us like a weight on a thread that at any moment it could drop and crush us.

And you address those later in your newsletter. One of them is the AI bubble. So let's talk about

that for a second. How bubbleish are we really right now? How bubbleish are we? So if you look at

the S&P 500, which is supposed to be a broad based index of all of the stocks in the US,

something like 40% of the value of the S&P 500 is in 10 companies right now. And those are all

AI connected companies. So there's a so basically this is a sign that there's a lot of concentration

in financial markets in AI. It's true in the real economy too. That if you look at what's happened

with GDP growth, I forget what the fraction is, but it is some huge fraction of GDP growth in

the past year is related to investments in AI related stuff. So that would be data centers or

software, things like that. So you know, there's a lot of a lot of economic activity, financial

activity riding on this sector. And maybe that's okay. It is true that AI is going to be very

disruptive in reshape, huge portions of the economy. Maybe it makes sense that a huge portion

of economic growth is happening because of investment in this technology. But the problem is there's

probably a lot of bad money chasing after good. Like somebody is going to come out the winner here.

You know, somebody is going to have the, you know, large language model, the chat GPT type service

or clawed or whatever that is just like epsilon better than everybody else. And you know,

which means that the aid of the other companies are just screwed. They're screwed. They're probably

going to like pull their investment at some point. And then what happens to all of this investment,

you know, all of these other things in the economy that are contingent on that. So you know,

that's not about the war. It's not even, it's not like mostly about Donald Trump. I mean, I think

Donald Trump, his administration has been very favorable to AI certainly and, you know,

keeping sort of a hands-off regulatory position. But it's not really a Trump story. It is a fear

that like if this much of the economy is propped up by this one sector and that sector collapses

what happens to the rest of the economy, then you also have the other thing, which you are

alluding to, which is what's happening in private credit markets, which is like a whole other

can of worms than I'll just talk about briefly. But it's a corner of the financial sector that

where there's been all this like lending that's going on that's not super regulated. And a bunch of

those loans have gone belly up. And there is a fear that because it hasn't been regulated, because

there hasn't been a lot of oversight, like we don't really know what the systemic risks are.

And again, that's not real, it's not related to Iran. There's some regulatory stuff that

intersects with Donald Trump's approach. But the idea is that like all three of these factors,

you know, the war, the AI bubble and private credit, they can feed on each other even though

they're independent. Like you could have one big company that goes belly up that, you know,

spooks financial markets and then all of these investors are like looking around like why is

my portfolio 50% in AI? Well, this is the question I had for you on the phone yesterday, which I don't

think we adequately answered, which is to some degree, some of the investments in both the US

economy and AI are coming from some of these sovereign wealth funds that are in the middle.

Oh, yeah, we didn't talk about that. Yeah, that are in the Middle East that are now in the midst

of this war that now have to attend to the fact that their energy infrastructure has just been hit

and that they have to, you know, obviously spend to rebuild it. And also they may not be happy,

particularly with what's happened because of Donald Trump's foreign policy. It's impossible to

predict what they're going to do with those investments, but that does seem to be one of those

pegs that if you pull it out, it comes very problematic too. Yeah. And candidly, I don't know enough

about like where the different Jenga blocks are, the pegs or whatever the metaphor is, you know,

to know like where the vulnerabilities are, but it's certainly not helpful given that you have all

of these other kind of weak spots in the economy. You know, if the, if the Saudi sovereign wealth

fund pulls financing from a private credit market fund that's already like having other investors

say, hey, maybe this investment is not so safe because of all these other things have blown up.

Like these things can, can feed on each other and to put in another way, to put in another way,

it doesn't collapse like a pocket hose. Nice and tidy. It doesn't fit in pocket. Yes.

I just want pocket hose to know. I mean this. I love pocket hoses. This is a second ad read for free.

Get a pocket hose. Those things collapse really well. All right. Sorry. Go ahead.

Yes. This is an undesirable collapse as opposed to a desirable shrinking of of a useful gardening

product. So yeah. So there's again, as I said at the beginning, I am not saying this is what

will happen. This is not a prediction. Yeah, but the way you're talking, you're talking about it

and I'm listening to you and I'm like, yeah, this actually doesn't seem so far fetch, right?

Like I'm not, don't put a percentage on it happening, but it doesn't seem that far fetched to me.

Yeah. And I think you can get really unlucky and you can have all of these things go off simultaneously

or they can trigger each other, like I said. And the other thing that makes me very nervous is that

I have zero confidence in the ability of our current political leadership to do anything about it.

Like you asked me what would be those, what would be the tools that they have available to deal with

any of these things? Like even if there were good tools, would you trust anyone in this boneheaded

administration to like have sound judgment? Like the very fact that they are keeping the tariffs

in place. And in fact, they are loving new tariffs suggests that they just, they have their

priorities out of whack. They're incompetent. I don't know what it is, but they can't solve really,

really boring, easy problems instead. They're creating new problems. And we have terrible relationships

with all of our allies right now, whose help we need not just for military and national

security reasons, but probably also to coordinate if there is a global response. Like think about

how much global coordination there was in response to the financial crisis. Or for that matter,

you know, there were financial risks that were related to COVID as well, like the Treasury market

had serious problems that the Fed basically saved us from, but in coordination with their

counterparts abroad. And Trump is screwing up all of those relationships. So it's not only that

I'm worried about the problems. I'm also worried about our capacity to address any of those problems.

And yeah, God, now you're making me channel my interview. I was trying to say like this is,

this is not the, I'm sure that there are upside risks too. You know, maybe there are great things

that can happen from AI. And I, I dearly hope that is the case. But right now it's, it's at least

very easy to see some of the downside risks. And those are big. And we could get unlucky.

Just going to read one comment from the, from the comment sections. It's from hunted for blood.

No, this is about me. Don't worry. 100 for blood says, this is just a direct quote. Sam's interrupting

has gotten so bad that he's now interrupting ad reads for free. Question mark explanation

and I just wanted for blood to, to know that I hear you and I understand and I'm working on it.

This is, I've been talking with my therapist about my propensity for interruptions. It stems back

to some sort of childhood trauma. Being a middle child, I never got a word in at home. So now I feel

like I have to interrupt all the time. But I understand it's a problem for the viewer experience.

And I will work on that one last thing here. I think you're just so excited. I mean,

this is why I am over this. So you're like, you want to get in on the action. I guess I guess.

All right. Let's, let's, someone's now asking if I have ADHD. I do not. I'm not diagnosed for ADHD.

Someone's saying we forgive you. Thank you. I appreciate that. Okay. Gonna end on a, not a positive

note, but sort of a side dish. You, you, you found a chart, particularly depressing chart. Nothing

to do with the economy. But it does have to do with how our federal workforce is feeling about

their current employer. Why don't you explain what we're looking at right here? Yeah. So actually,

this is my chart, but the data is from the Partnership for Public Service, which is a noble organization

and nonprofit that its whole mission is how to improve the civil service, how to get, you know,

attract better people into the civil service, how to reward talent, how to develop talent,

all of that kind of stuff. So as you can imagine, they have been concerned about what's happened

both because of Doge and subsequently in the, the hollowing out and purging of the, the federal

civil service. They also manage an annual survey and have for many years where they asked people

at all the different major agencies and departments a bunch of questions about like, you know,

how, how do they basically about morale? You know, like, do you feel like you're, you have a

mission? Do you feel like, you know, management is good stuff like that? And they'd usually do it

in coordination with the federal government this year, the Trump administration canceled the

survey, so they just went ahead and did it on their own. And one of the questions was about,

do you agree that your organization's political leaders maintain high standards of integrity?

They ask it not just about the political leaders, but like do you think your co-workers, your

immediate bosses, etc. These are the really damning results for the question about your political

leaders. Every branch or every department, rather, department and agency, it was only a very

small share of people who responded and said that they think that their political leaders have

integrity. So like, I'm just pulling things out randomly. Department of the Navy, only 13.6%

say that they think that they're political. And that's on the high end. And then you have places

like HHS, you know, only 4%, 4.2% think that their leaders have integrity. And you can make similar

yeah, you can make similar charts for other questions that they fielded about, you know, can you

trust them? I'm looking for state department here. Where is it? Oh my god, 4.2% at state. Yeah,

it's it's bad. At the CFPB consumer financial protection bureau, it's zero. But in fairness,

I think the CFPB, yeah, they've been trying to shut it down. I asked the the Partition of Public

Service, which again puts together this survey every year, how many people actually responded

from the CFPB and they said it was 63. So it's like not a high sample size, but again, they've also

fired everyone. So I don't know how big the sample size could reasonably be. But yeah,

this is concerning. Like who would have expected otherwise, I guess, like you wouldn't expect that

these these agencies that have been told by Russ vote that the the job of the administration is

to put them in trauma to put the the civil servants in trauma, like that they would say anything

other than they think everything sucks. But I still think it's a useful data point.

Well, yeah, it's a useful data point. I mean, these people are, you know, they're carrying out

the functions of government for us. People, they're faceless bureaucrats, obviously, but they matter

to everyone's lives. And if they are depressed and demotivated at work, maybe that's what the

administration wants. But it means that your life is not going to be tangibly better because they

are implementing the policies of the United States of America. It's brutal. It's awful. Yeah.

And actually one thing that I didn't show there was there's another question about

how confident are you that if you report law breaking or suspected law breaking that you

won't be retaliated against. And the shares of that are very low, including in the military,

which again, not super surprising, given that we have like a defense secretary who defended

more criminals in the past and was happy when they got pardoned. So very troubling times. It's

not just about like, oh, you know, these, these civil servants have frowny faces all the time.

It's also that like government can be, our government will be maybe doing illegal things and

they're all afraid to report it. That's, that's pretty bad. Well, this whole conversation was pretty

bad. Sorry. So fits. No, no worries. Okay. Thank you. We'll talk about musical theater and it'll

be fun. Yeah. Maybe we're still looking for a name for the show. I'm looking at these comments.

There's a few good ones. We're going to kick them around. Hopefully in the near future we'll have

an actual name for the show. But for now, it is what it is. It's a good conversation. Catherine,

thank you so much for doing this. I appreciate it. I'm happy to fill in for JVL. Tune in everyone

next week, 1230 ish is when we do this on Friday. And hopefully we have a little bit more,

I know optimism for you by then. We'll see. Till then. Work on it. Take care everybody. Subscribe

to the Bullwork. It's the greatest website on the internet. It's where we get great conversations

like this. Talk to you soon.