Unknown: 0:16

The content of this podcast is for informational purposes only and should not be construed as financial or investment advice. The views and opinions expressed in this podcast are those of the hosts and their guests. They do not necessarily reflect the position of any associated employers or organizations.

Adam Rice: 0:34

Hello, everybody, and welcome to episode number 20 of the applied MMT podcast. This is a little wrap up episode of 2023, where Doug Ryan and I are going to discuss what we learned what surprised us what didn't surprise us, and then also what we expect in the year ahead. 2024. So I think to kick us off, we do have a few things we want to talk about. Ryan, do you want to you want to start? Sure.

Ryan Benincasa: 1:00

Thanks, Adam. Yeah, so I think, obviously, it's been an exciting year, I think, you know, we've been, in a lot of ways vindicated for, you know, some of the predictions that that we had. And and when you and I started talking, you know, a little a little over a year ago, we were kind of saying, Yeah, you know, is the right rate hikes, kind of makes sense that they will be actually stimulative of the economy and supporting economic growth. And, lo and behold, we've we've had literally one of the strongest economies in terms of GDP growth. You know, that that probably anyone here has ever seen at least in their adult life, you know, robust job growth, unemployment at sub 4%. I think one of the most impressive, I remember, we were talking about a year ago, I think I tweeted this out at one point where I said, you know, my big prediction for 2023 was higher government spending, so higher deficit and lower inflation. And I think impossible,

Adam Rice: 2:16

it right, it's

Ryan Benincasa: 2:16

impossible, right? And, like, I'm not, I'm not totally up to date, on the numbers last I checked, the deficit was up, you know, somewhere in the range of 40, to 50%, versus where it was in 2022. And inflation has just been falling, you know, inflation as it's defined in the consumer, as, you know, CPI has been falling like a rock basically. So I really think that in and of itself, and when you get into these arguments of, oh, well, you know, inflation was because of, you know, the government spending its work well, okay. So why when, when the government cut its deficit by a trillion dollars in 2022, we had the highest inflation in 40 years. And when it, you know, in 2023, the deficit was, was up by, you know, 40 or 50%. And inflation fell rock, like a rock. So, it's just, to me that it's just so it's so vindicating of, of, you know, the, the, the framework that that we're that we're using, and, and, you know, it really shows, I think that that we're onto something here, and I'm really excited about what's to come in 2024.

Unknown: 3:42

I concur. That's it, that's it, and podcast.

Ryan Benincasa: 3:49

Okay, that's a wrap folks.

Unknown: 3:52

I think that's where to put this, you know, recently, most recent market update, we had over at applied mmt.com, where if you're an active trader, active investor, you can get access to all the tools that we've built. And then those market updates come out twice a week, and the various blog blog posts that we have, explaining the broader macro economy, by one plug, by the way, I'll stop after that. I recently said, To kick things off, in the update that, that 2023 has really been, to me, the most exemplary year of what applied MMT means. And, and, and Ryan, to kind of piggyback off what you're saying, it's, it's so important to understand where our fiscal is at, in kind of a general kind of cycle of, of where the spending is at, and then also how fiscal impacts the broader macro economy and why looking at what the Fed is doing and looking at where things like being credit are at looking at where money supply is defined by m two is at all of that is noise when the main driver not even necessarily noise, it might not be noise, all of that is derivative of the main driver of the macro economy, particularly the financial macro economy. And that is where fiscal is that as you were saying, what one of the tools that we've developed that I think is, is probably the best if you're just looking for and tweet this out from time to time, so if you go on my Twitter, you'll See this about every month, I'll update it up. If I can remember, I'll even tweet it out before this podcast goes live. But what I look at is the cumulative deficit spending over time. So I take this right from the monthly Treasury statement, I accumulate it, right. So it's a cumulative deficit spending. And I look at the change year over year of that. And we've had three periods where we went negative and deficit spending. In other words, we went positive and in a surplus, right, we were effectively running a surplus in real terms, for a period of time, the three times in my adult lifetime that that happened was the few years running up to 2000, the six months running up to 2008. And then the few months running up to 2022, those three times or three times we've had I don't think I need to explain anyone, where the three largest drawdowns have been again, at least in my adult lifetime, and two thousand.com bubble, great financial crisis, and then the pullback of 2022. And things reversed course in 2022, at the end of 2022. And I know just like, just like, you guys, were at that point, we hadn't teamed up yet. But I know just like you guys, were in October, November, I'm starting to, you know, do some back the back of the envelope calculations, I'm like, kind of if they get to the target where they want with interest rates at five, five and a half percent. And you multiply that out, and you look at the current trend where they're at, it's gonna be over a trillion dollars in additional deficit spending, that's going to take place in 2023. Now, when that happened with COVID, stimulus checks, we all know what happened, right? What What stops that from reoccurring? What Why isn't that going to reoccur? And of course, the answer we got at the time was, well, rich people don't spend money. I say rich people, because they're the main benefactor of higher interest rates, people who are able to save in bonds, they don't spend money, but I think they do. I think one they obviously they did. And in to even if they don't, prices are more expensive. And there's going to be the demand for higher wages, right. So you actually kind of juice up economic activity. And that's exactly what we saw. And I think I think it's very easy to look at potential risks without necessarily taking the entire, you know, the bringing it all the way through to the end to the conclusion of of kind of how the entire circuit the cycle works and realize, yeah, things might get more expensive, because because interest rates make things higher interest rates make things more expensive. But there's also the additional interest income that's coming from that to support that higher that higher price structure. And that's exactly what we saw play out. And so, again, at least in terms of to what we're looking at, from an applied MMT standpoint, right, we want to know where our markets headed. We want to know where our financial assets are. Right? Are there some things that we, you know, it's more difficult to predict? Do I know what the Feds going to do tomorrow? No, that's their decision, you know, only the Fed knows, can we make educated guesses? Yes. But when it comes to where our financial markets going, MMT and the applied MMT approach is superior by lightyears and understanding what's driving markets. And again, it is I literally had a guy reach out to me, and he's like, Doug, what's the what's the catch here? Like you signed up for? He signed up for, for our service, you know, at the start at 2323. And it was effectively, you know, this is almost too good to be true. What's going on here? Well, we found ourselves in the sweet spot of a fiscally a fiscal dominance situation of 2023. And markets followed the fiscal path in lockstep. And so I think that was the big victory for kind of the applied MMT approach this year. And, you know, to a certain extent, the nice thing is that no one's caught on yet. We're like it, it's, we're still, we still are able to kind of play this exploit because people still think, you know, we've lost our minds, but obviously, we we have the receipts, and we made the calls that no one else was making at the end of 2022. And put it out there and and had been absolutely vindicated. So yeah, I'll stop there with that victory lap. Adam, I know one of the questions he had, and I'll let you ask it right after that as well. What maybe What didn't we get right? So why don't you Why don't you tee that one up? And we'll go from there.

Adam Rice: 9:31

Yeah, so before we get into what we got wrong, there's one thing I wanted to ask you guys about, and that's the effect the rate hikes had on bank lending and bank credit. Did the rate hikes have the effect on bank credit that the Fed intended?

Ryan Benincasa: 9:45

Well, well, that what that really indicates so so, you know, people will talk about bank credit as you know, the critical factor in driving economic growth and it is and that's true. It but it can be divided, you know, it can be thought of in in different kind of subcategories. So, if you look at let me pull up the Fred website. Um, If you look at, like total bank credit in 20, so bank credit, all commercial banks. I'm just looking here. Yeah. So it actually did declined year on year. Or, like, if not even a slowdown in the right, it's actually lower. It's like, thanks. And

Unknown: 10:41

credit for 2023 was down about 200 billion by my account at this. Yeah, yep.

Ryan Benincasa: 10:46

Yeah. Yeah. 200. So is that 17 and a half trillion, down to 17. Point 3 trillion. So that's 200. So that's bankrupt. But if you go back, and you look at loans and leases in bank credit, that's actually up. So that's, you know, as a hair under 12 trillion in, you know, are right around 12 trillion, I guess, in the last year, and now it's at, you know, like, 12, and a quarter trillion around there. So. So that's, that's loans and leases. So bank lending, has, has been growing, what what's been what's down, and the reason why the toll bank credit number is down is because of secure is because securities. So let's see securities in bank credit, all commercial banks. So if we look at that, right. Yeah, so that's, you know, that was at like five and a half trillion last year, and now it's right around 5 trillion, so it's down by about half a trillion. So now, I'm not sure. I don't think that that gets marked to market, but I could be wrong. But the bottom line is, if banks banks, when banks sell securities, they're to to if they sell securities to non bank, Finance, Financial Institutions, that actually, if that is indicated in or expressed as a decline in total bank credit, right, because it's true, the amount of securities that the bank owns, is, is now less, at the same time, the amount of deposits is also less. So when we think about so. So what that really is, is it's a form of bank deleveraging. Right, they are, if you think of bank's balance sheet, and it's left it, you know, its total assets, or its capital, as a percent of total assets. Well, and we discussed this earlier this year, if the bank sells a security, you know, it has to are, you know, both to a non finite to essentially a non financial institution, if banks are selling securities, to non bank, financial institutions, both securities and deposits go down. And so, the capital position of the bank as a percent of its total assets goes up. Right. So, it's, it's, it's in that sense, it's deleveraging. So, yeah, if if, you know, a bank is selling securities to a hedge fund, you know, now the, the asset, the securities on the hedge funds, asset and the, you know, but instead of a deposit, like liability, it's it's, you know, the hedge funds, partners capital, or what have you as the offsetting accounting entry? So, so I think that's what were a lot of people, you know, you'll see these headlines of like, the posits are fleeing and it's like, Well, okay, that's kind of true, that's true, but that's also misleading. It sounds like there's money like evaporating from the financial system, but it's really that that that the structure of the financial liabilities of the liabilities of our financial institutions is changed the structure and the composition is changing. It's going from more deposits to more, you know, shares of or you know, the the equity of money market funds goes up or you know, the partners capital of hedge funds goes up to offset the decline in deposits. Now, that has important implications on financial stability because deposits enjoy, you know, most of them at least, are federally guaranteed. Other forms of, of financial of liabilities are are not guaranteed, right? You're the equity that you have in a a hedge fund is not guaranteed by the federal government. And but you know, that's supposed to be longer term. Money for people, right? So that's not something that, you know, you necessarily need are going to demand tomorrow. So as long as there's not like a run on the on, you know, all and all those, you know, non bank financial institutions, you know, you can, things can work out fine. But when you get these sorts of panics, then you can run into problems. But that's really, but But that's why, you know, you can have an economy where, you know, the economy can be strong, despite the fact that bank credit has declined, which I think has really caught a lot of people by surprise.

Unknown: 16:12

I know, Ryan, that's one of the things I said, when I was writing down my notes for this episode, it we were we were, before we set up this episode, we were thinking, Okay, what do we get right? What did we get wrong? And then I also wrote down what did you know, I learned something, what did I learn this year, and that was the kind of the main thing that I learned. That was always a bit peculiar to me when I was looking over the data as if you'd look at just paying credit, and a change in bank credit year over year, one of the things that always kind of caught me by surprise is you notice after recessions, if you go back to the 2000 recession, particularly 2008, the great financial crisis, the peaking contraction year, over a year after the great financial crisis happened in 2010, for bank credit, not 2007 2008. And the question, the question I always had, and in the same thing, I mean, the low and bank credit contraction after the great after the.com bubble, and for all intents and purposes, 2022, we had a recession without unemployment. I mean, that's it, we really did. So 2022, exact same thing. And we're seeing this right now, the peak contraction happens a year or two after the quote unquote, recession year, right. And what dawned on me this year is it you have to look at the the other plane, you have to look at the other axis that's been measured here. And that is that fiscal axis, right. And what you end up seeing is because of automatic stabilizers, because also the government comes in during recessionary periods, and they spend like crazy, after 2022, it was neither of those is actually in fact, the Fed just hiking interest rates heading into 2022, that added to the fiscal situation, in all three of those instances, you have this massive rebound in fiscal spending that takes place, and it's that fiscal spending that is finding its way into the hedge funds, the money managers, the money, the money market funds, to then purchase help healthily D leverage the bank's balance sheet, so then the banks can have the capacity in the space to then have to have the next endogenous cycle play out, right. And so you know, the last three, again, the last three, what I'm gonna call recession, and what I mean, by a recessionary period, I'm defining that is a sudden increase in bank credit, followed by kind of a depressive contraction of bank credit, that leads to economic slowdown, I'm not defining it necessarily the way that you would define an inflation, you know, properly, from at least a business cycle perspective, you know, we had that play out. And then we had the cycle, you know, cycle kind of kick off again, and I think that's the most important thing is everyone again, that's why it went when I jumped in earlier, and I said, everyone was focused on some sort of derivative of government spending. If you focus on government spending, first, you'll know where you're at, if five years from now, four years from now, whenever the next cycle finally comes to completion, if we're seeing a sudden acceleration in bank credit, and government spending is starting to wane, right? Maybe we're in a situation where, from a year over year perspective, we're actually running a surplus, right? We're not actually growing in government spending, and you're seeing a sudden acceleration and being credit, that is when you need to start to get concerned that is where a 2000 to 2008 to 2022 can come out and strike is that situation because when that then credit cycle finally rolls over, and that is it, just that that system is Steve Kean and those who have worked on kind of the Minsky if whatever they call it, the Minsky cycle, the Minsky hypothesis, instability hypothesis show, that cycle will roll over by its own weight. And if and when it dies, if there is not enough fiscal to support the contraction, then you will get a recession in 2022 heading into 2023 throughout the year 2023. We've had fiscal dominance and so that the bank credit contraction was was unfolding, we saw growth and again, that's exactly what happened in 2009 into 2010. And exactly what happened when the.com Bubble finally, finally rolled over in 2023. Yeah, that's how things but I early this a few weeks ago, so it might not be as accurate as today but is it is today, but I in 2019 is the last pre pandemic year, right. And in the bullwhip effect that has occurred post pandemic, we had a growth of about 700 billion in bank credit and a growth of just under a trillion in in deficit spending. So we'll we'll call it one point, we'll call it 1.7 trillion total, between the two of them in 2023, we've had that contraction of about two 200 billion at the time, I had 242 billion, but we've had deficit spending at the time of 1.7 trillion, for a total of just about 1.5 trillion in terms of overall, you know, what we would see is the actual the better defined money growth, right? So 2019, and 2020, or not, or in 2023, are not too far off, when you finally sum everything together. And so it's very little surprise that when it was all said and done, everyone's looking at the effects of higher, higher rates on bank credit, and here we are no, no look at the fiscal first and then piece together the rest of the puzzle. And lo and behold, 2023 ends up being this stellar surprise years. So that was one of the things I learned, one of the things I learned was, pay attention to bank credit, but first understand where the fiscal cycle is, and you'll be able to, you'll be able to better ascertain what bank credit is actually telling you.

Adam Rice: 21:41

Very well said, Doug. Yeah, thank you guys. Sorry, Ron, was there something else you wanted to

Ryan Benincasa: 21:47

add? Yeah, I would say, I've been surprised, again, you know, we're endeavoring to be, I think, intellectually honest, on this podcast. I would say I was surprised that inflation at least, as defined by CPI, fell as much and as quickly as it did. You know, I, I think the jury's still out, you know, they're seeing the consensus, based on recent moves in the bond markets and stuff, the consensus seems to be that, you know, the, the, the CPI inflation is over, you know, it's heading back to the Feds 2% Target, they're gonna start cutting rates. And I'm, I'm not fully convinced that the, that the markets, right, about about I mean, I, you know, I'm not trying to, you know, make a bet one way or another about, oh, how many, how many, and how large of cuts will the Fed do and 2024. But I just wouldn't be surprised to see, you know, price increases, be, you know, kind of a tick up and be a little bit stickier, maybe around the three or 4% range, you know, basically kind of gravitating towards that, that the, you know, the the Fed funds rate, like we've been expecting, so, that's something that, you know, I was surprised was, was surprised that inflation was going to come down meaningfully, but not as much as it has come down. I would also say that I was surprised at how much oil declined. I don't think I was certainly not expecting the United States to hit record oil production in 2023. And to be the largest exporter of oil in the world. So, you know, more than Saudi Arabia. And I think, and part of that, you know, I had read all this stuff about how, you know, the, the well, quality, and all these you know, and all these patches were going down, and, you know, the low hanging fruit has already been picked and, and, you know, they're, you know, it's only gonna get more expensive to, you know, extract oil, you know, the fracking revolution wasn't was nice, but now it's, it's, it's going to be, you know, it's going to be tougher. And, you know, we've seen oil really come down substantially this year, and I think that has played a big part in the overall CPI. Deflation that that that we've seen, and so yeah, so I think, you know, that's something that surprised me. I'll also say one other thing is I thought, I thought, you know, the stock market was was cheap. In the fourth quarter of 2022. I was expecting I thought A better place to be in terms of, you know, performance in 2023 would be in the economic, the more economically sensitive stocks. And that's mostly because, you know, there were, I mean, there were near unanimous calls for recession in 2023. And it seemed like that was really being baked into the price of, of more economically sensitive stocks. And so my thinking was, well, if they're, if I'm confident that there's not gonna be recession in 2023, which, which, which I was, then it seems like the best value, and potentially the best performers in 2020 will be, you know, the very, the very stocks that, you know, would supposedly be hurt the most in the recession, but would benefit the most in the recovery. So, that turned out to be wrong. I think it's kind of hilarious. That, you know, the best performing stuff this year has been like, you know, the super high beta, speculative, techy stuff, you know, like, like, like coin base, I think is up like five or six times this year, and Bitcoin is up, how much like a, like a double or a triple? You know, all this, like, very sort of Carvana Carvana is up. Now, that's its own idiosyncratic thing. But Carvanha is up. I think it's a 10 bagger this year. So, you know, and these were also we had heard for so long that all is a zero interest rate phenomenon. Right. Right. And we will I mean, come on, like, it's a car violence a 10 bagger like that. That was, you know, I'll humbly acknowledge that, that that was not my expectations for this year. But I think it also, in a way, sort of validates what we've been saying, which is that, you know, when the government runs a deficit, that increases the private sector surplus, and, you know, for a given stock of private sector surplus, you know, there's going to be a portion of that allocated towards equities. Right. And, you know, so when that surplus increases, the, you know, the funds flowing into equities tends to increase. And so, you know, this year, people decided that they want to put more money into those sort of high beta, you know, kind of more speculative, techy stuff. I mean, the NASDAQ, I think, is up, what, like, 40%, this year or something? So, and that's, and that's a theme that we saw throughout the 2010s. Right, it was it was the Ubers. It was the WeWorks, who, by the way, filed earlier this year. You know, it was these, you know, very speculative companies that everyone was saying, Oh, it's a zero interest rate phenomenon. Right. And what what we've, I think, argued, and I think we're kind of vindicated this year, is that no, we ran consistent deficits, budget deficits in the 2010s. And that added that, you know, helped build, you know, the financial surplus of the private sector. And then, you know, the, the, you know, based on the institutional structure based on, you know, decisions made at various levels of, you know, the whole capital markets, you know, institution, a lot of those funds flowed into speculative techy stuff. Yep. And, you know, this year was no different.

Adam Rice: 29:19

Right? You know, it's funny, just on the topic of this, this idea that, you know, it's low interest rates that create bubbles, and these bubbles aren't sustainable. And there's all this speculative lending going on. It's just, you know, you look, you look back at the hinge the history of the Fed funds rate, and June 2007, the rate was, you know, 5.25%. And then we and that was the Rob's that that was the housing bubble, and then you look at the previous bubble, and, you know, going into the year 2000, so, going into the.com, bubble rates for around like five and a half 6% All through the 90s. Right. So, why, you know, what leads people to believe that, you know, some interest rate above zero, you know, I mean rates were higher than they are now. So, in the late 90s, so,

Unknown: 30:07

think about this for a minute, we had we had 0% interest rates for effectively a decade, right, we'll call it 10 years from the great financial crisis to COVID. Right. And so, supposedly, though 0% interest rates created the bubble of all bubbles, right? Like, I mean, how many how many Twitter accounts are out there that, you know, I have bubble in their name to reference the fact that the Bernanke bubble blowing bubble Bernanke, the QE bubble, the QE bubble, the bubble desert bubble, right. So this is the mother of all bubbles, and then everything bubble. And then if there's a thing that should prick the bubble, it would be a sudden imposition of about 50% unemployment and a complete shutdown of the global economy. And so 2020 comes along, and we have a sudden imposition of 50% unemployment and global shutdown for six months, right? Where are we today? We are not picking up the pieces of a bubble burst. We are once again blowing the next bubble. Yeah, to get it right. I mean, it's the same chorus, that I've heard my entire adult life, about this bubble blowing situation. And if there was ever an event that would pop a bubble, and shatter it and shatter the myth of fiat currency and shatter the myth of big government spending and shatter all of these myths, it hadn't had been 2020. And yet, here we are. I have a whole monologue about how stupid it is that we are still in this position, and why Can anyone understand this, and how exploitive we can still be because of this. And I really don't want to change the minds of others because I keep getting massive returns, while they keep scratching their heads and selling selling products, to, to hedge for the bubble of all bubbles when it finally burst by gold and Bitcoin, but I'll save that monologue for later I want to I want to, I want to revert back to you know what we got wrong. And, and, and, Ryan, we, you know, we're prepping before and we laughed, I'm like, Yeah, oil and inflation are the two things that I just, I really thought would be different. Let me explain to you. Okay. I also want to put this in a little bit perspective, right? So 2023, you know, it's, we're sitting here in December 2022. And I'm like, Yeah, I really think 2023 is going to be paying your year, but maybe how could I be wrong. And the two ways that I could be wrong is if if inflation in 2023 really took off a lot harder than expected, if inflation was a lot hotter than expected, and oil picked up right. So not only not only was inflation, higher than expected, but like, everything just got so expensive, that you couldn't see the transmission of that additional interest income, find its way into the private sector fast enough to support this sudden rise, right? In that instance, because we always when we build our tools, we look at the flow of deficit spending, the flow of deficit spending is always relative. In real terms, right, we have to define it in real terms. And this is why the 1970s, even though we had nominal deficits, in real terms, we had we had surpluses in the 1970s. And so I thought this could be a potential by the end of 2023. Where, you know, when we look at our cumulative deficit spending, that we're actually seeing a contraction year over year in real terms, that that was my concern that we might hit that. And so if I had a concern in 2023, it was that Yeah, I actually think we might see inflation higher in oil higher. And the reason that inflation would get higher is because actually the mechanisms that that I think people naturally understand things get more expensive when interest rates go higher loans cost more money. But the you know, kind of the MMT insight is you're also getting the additional interest income to support that price structure. So to see the contraction that we saw was a bit surprising. But it's one of those things where I'll take it right, because my bet wasn't on inflation. My bet was on stocks instability in 2023. Right. So for me, I was okay with that. I also thought that producers of oil producers of commodities would take advantage of the situation. And I know there's a lot of, you know, greed, inflation and whatnot. And, and, you know, we can couch whatever political discussion we need to but I don't bemoan anyone, when prices are going higher, and the economy is going hot to say, hey, maybe we can charge more here, right? I need to pay more for my groceries. Right? I have higher overhead costs. So it's natural to say, Yeah,

Ryan Benincasa: 34:21

my loans cost more. Yeah, exactly.

Unknown: 34:23

All my loans cost more, right. It's natural. Yeah, it's natural to say I need a higher, you know, I need more income. And I thought the Saudis I thought the main oil producers would see the exact same thing and say, Well, wait a second, Joe Biden, you know, back in March of 2023, you told me to, you know, try and crush oil prices. So I did, we might have a recession I was eating, you know, we were going to help out. And now we're not having to recite recession. In fact, things are way better than we expected. So Screw you, I'm going to raise prices. You know, that's kind of how I thought things would play out. But I'm happy they didn't I like again, it was one of those things where I'm glad with how things played out. With that being said that risks still is there for 2020 for it, in fact, I mean, I you will get here in just a second, but I think that is the 2024 possibility. One last thing I want to say before we go there is I also think another thing I learned and this is particularly true for those who look at you Economic data, who try and kind of do the econometric thing. One thing that the post COVID era has, has shown us and you need to be very careful of when you're looking at data, and particularly trying to measure flows is the bullwhip effect that we've seen now play out in, in data. And what I mean by this is so many people when you have a sudden shock to the system, and you get this, this reverberation that takes place in data, you know, the vast majority of the data that we track, we track in some form or change in the year prior, we had this massive shock in 2020. And we're still seeing the reverberations. And then, and then subsequent response to 2021, and 2022. And we're still seeing the reverberation of that, right? We had massive tax rate in 2022. We had inflation spike up in 2022, inflation crashed down in 2023. So we're still seeing this. So when you're looking at data, you need to be extra careful to understand what preceded the data that you're looking at, to understand that the full dynamics of what are playing out. And again, good lesson learn, especially if you're looking at things like paying credit or mtwo. And, you know, you're you're paying attention to the tweet that I got, this has never happened before, except for the worst recessions of our lifetime. Well, you need to put it in context. So again, a kind of an another thing learn but and I'm, I'm gonna kick it back to you. I know we're running. We're getting close to the end here. And I know we at least wanted to talk about 2024. So yeah,

Adam Rice: 36:41

for sure. So I think with 24, and we talked about this a little bit in our, our last episode with Riddick. But, you know, now that the inflation, the official inflation numbers are coming down, the economy is still strong, it's gonna be interesting. Oil is down, it's gonna be interesting to see. And like, you're kind of seeing this chorus, at least on Twitter and the media about how all the soft landing has been achieved. It's gonna be interesting to see what how the Fed responds to that. So is the Fed going to cut rates? You know, are they going to try to try to bring rates down back to the quote unquote, normal? And will that have the intended effect? Right, like, Will? Because, you know, what we've been saying, and obviously, we've discussed this a lot over the past year is that the higher rates are causing fiscal fiscal activity, they're stimulating the economy via the interest income channel. And if the Fed were to kind of turn that spigot off, or at least reduce that, that fiscal spigot, what effect is that going to have an economy? And is that is that a risk for the economy at large? What do you guys think about that?

Ryan Benincasa: 37:47

I think it's definitely a risk

Adam Rice: 37:49

you care to elaborate on?

Ryan Benincasa: 37:53

Yeah, I think, you know, if the Fed thinks that, you know, if the Fed starts cutting rates, and then you know, the economic numbers start to come in a little bit weaker than expected, I think they're gonna keep cutting rates. And so you can kind of right, it's like this, they think they're acting counter-cyclically, and they end up acting procyclical, it's definitely a risk. There's also a risk that, you know, prices don't come down that as much as or it doesn't, you know, that they are around that if CPI is growing at three to 4%, the Fed might say, hey, we need to keep, we need to keep raising rates, because we want to get it down to two. And, you know, you could get something that goes the other way, right, in terms of so I think the best thing the Fed can do, is honestly, like, I feel like we're still kind of coming out of a crazy period. I will think like they should maybe just like, if you're gonna cut, maybe cut a little bit, but but don't try to do anything too crazy. Right, and just sort of let things let the chips fall as they may, so to speak. And, and, you know, hopefully we can have kind of a less, less less price volatility, right, the idea that the Fed is pursuing price stability by raising the cost of funds by 500 basis points, to me is absurd. Like, how is that in any way shape or form consistent with price stability? Oh, oh, the cost of the cost to, to you know, lease a car is, is 50% higher and that's that's

Adam Rice: 40:04

right. That's really good. That's fine.

Ryan Benincasa: 40:09

So, but but I'm cautiously optimistic, I think a year ago Oh, there was a big dislocation between the narrative and what was, you know, what was very clearly going to take place. I mean, other spending, not related to interest paid on on, you know, Treasury securities and reserves. There were other line items that were no bills passed the inflation Reduction Act infrastructure Act, the chips act, you know, the cost of living adjustments in Social Security, all that was was signaling, you know, additional new fiscal stimulus, while at the same time, oil prices were coming down. And that is a functionally a tax cut on the on the consumer so that it was just like, all those tailwinds coupled with the extreme negative sentiment, to me made the 2022 call an easy call. I don't see this period as being as easy of a call. Because there's less of a, there's less kind of, you know, immediate tailwinds. And, and there's less of a disconnect between the narrative and, and the and the reality. So, but I, you know, the deficit I think averaged around 20, you know, three to 4% of GDP per year in 2013, to 2019. And we didn't have a recession. And like Douglas has been saying, you know, there's it's very rare to get, you know, this sort of real slowdown in both fiscal and bank credit. It only happens, you know, a handful of times and, you know, I don't really see any sort of catalyst for for that for why that would happen in 2024, unless the Fed basically drops rates to zero. So yeah, so I'm cautiously optimistic. It's not as not as effusively. Bullish as it was in 2022. But looking at 2023, but, but still still feel pretty good about things.

Adam Rice: 42:41

Doug, anything to add there?

Unknown: 42:44

All right, here we go. Here we go. Let's let's think about let's think about it this way, too, right? Because, you know, from my perspective, I'm an investor, I'm a trader, I want to I want to make the right bet for 2024. Right? If you said, Doug, you're gonna wake up whenever January 2, probably the first day markets are open you to make your one bet? How's it gonna play out? Right? You're not allowed to take your chips off the table until until December 31? Of 2024? What is it going to look like? And here's how I would go. And again, two things really drive markets and two things drive the economy as a whole fiscal and the endogenous or the bank credit cycle, right. So here's my call, I think we're going to continue to see fiscal growth, but it's going to be at a slightly slower pace than we saw in 2023. In terms of that, the change in the change of growth of fiscal, that means then, that bank credit needs to start expanding and that big credit is going to expand, or the endogenous cycle will grow at a faster rate, which would be too hard in 2022, because we actually saw a contraction or than 2023 expects you saw contraction. So with those two things in mind that we're going to see an expansion on both fronts, one is going to be slower than the other relative to where it was in 2023. That being fiscal, that means by the end of 2004, I think we will see markets higher, and probably pretty strongly higher. I think we will also see here that here are the phone calls, I think we're gonna see inflation higher, I think we're gonna see things like oil higher. And then I ultimately think we're going to end up seeing the Feds fund rate higher at the end of 2024 than it is currently right now, which is like what at five

Ryan Benincasa: 44:19

500 Or five 525 contrarian call my friend.

Unknown: 44:22

Here's here's how we get there. And here's how I'm completely wrong. Now, I can be completely wrong about the second half, but still be right about the first half. I think that is very possible. Here's how we're gonna get there, though. We are in a race to march 20. On March 20, that is when the Fed has indicated they will likely make their first cut. What we need to see up until March 20. Is economic data continue to come in hotter than expected inflation data continue to come in hotter than expected in the employment situation to continue to look stronger than expected. We will have three prints January, February and March before the Fed have all of that sort of data the Fed looks at before the Fed will make their decision in in March. If we see three months of hotter than expected data of surprising the Upstate data base and the Feds stated policy. Now they could change their policy they could say up we've got it wrong. We were listening to this applied MMT podcast they convinced us that we have it wrong, but based on their stated policy right now, they will raise interest rates, which we know from 2023. Raising interest rates only perpetuates the growth cycle, because of everything we've talked about so far. So my guess is by March, they're not going to be cutting, they might even be indicating that maybe within a month or two of the May, I think there's a May and June meeting in there or something like that, that by summer 2024, they might actually have to increase, right? So in other words, we don't get a decrease ever, we never get a cut. And if that ends up taking place, we will get the Echo Boom of inflation in 2024. With out a doubt, now we will have very chaotic markets, right? We will have time periods like August, September, October, where we get a 10 15% pull down. And then we will have periods like November heading into December where we get just this massive rip where you know, all that's left is the tears of bears, wondering what just hit them right? So we will have that sort of chaotic dynamic, but it will end up being higher at the end of 2024. How does this go wrong? How does this entire picture go wrong? It goes wrong, because we just don't get surprises to the upside of surprises to the upside of data in the first three months of 2024. And the Fed does cut. That's a possibility. Now here's the thing. If the Fed does cut, it's not game over for markets at that point. But we should start to expect slower growth in a reinforcing cycle of disinflationary of a disinflationary environment, we would probably repeat the 2020 10 to 2019 cycle all over again, it would probably look somewhat similar to that, it's hard to get a major fiscal contraction at this point, there's just so much fiscal spending between defense between social security, obviously, until they get back to zero, there's still going to be additional interest income coming out from the from the higher interest rates, the American population is continuing to only be more dependent on the healthcare system than ever before. So healthcare spending will expand the fiscal will be fine. But I do think the overall impact of that would be if the Fed does cut, it'll be more anemic growth, more akin to what we saw in the 2010s. That is a pathway. That is that is very possible, come back in six months, if you know if that's how it is, and we'll update the you know, based on based on those components, we'll update our outlook. But again, down the line fiscal growth, I think we'll see continued growth slower than expected think growth will actually see an increase in the speed at which it's expanding markets, higher inflation, higher oil, higher rates higher at the end of 2024. If I lock it in, that's where I lock it in. Thankfully, I don't we can be data dependent and actually use our models and use our discretion day in and day out to position them the best we can but if you had to lock me in with a roulette battle, bounces around finally slides into its number. That's where I'd get locked in at. Awesome.

Adam Rice: 48:03

I love it. Doug. Thank you everybody for listening and enjoy the holidays and happy new Year. We will see you in January.