Citi’s Matt King on Why Inflation Isn’t Transitory and the Fed May Induce a Recession

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

Joe, doesn't it feel like supply chains are everywhere at the moment?

Joe Weisenthal (0:23)

You know what, yeah, so we're recording this November 1st. I saw like three or four, maybe five supply chain related Halloween costumes, like on Instagram this weekend.

No, I don't think like kids themselves are excited about dressing up as something supply chain related, but it definitely seems like for a certain group of adults, that was like a very like humorous, like, you know, spooky thing this year.

Tracy Alloway (0:46)

Yeah, I saw a pumpkin that had supply chains carved into it, which I thought was phenomenally spooky. But I mean, it is true that this is the issue that everyone is trying to wrap their heads around at the moment. And to be honest, I feel like it's not something that most economists have necessarily, or most macro analysts have necessarily had to think about in detail before. Like, obviously everyone talks about inflation. People think about what's driving that, although I still maintain that we actually don't have a really good idea of how inflation works.

But I don't think anyone, you know, in preparing to be a macro investor or a macro trader or a macro analyst, I don't think anyone ever sat down and thought, well, I really need to, you know, start understanding how like, drayage works at the ports.

Joe Weisenthal (1:36)

No, definitely, definitely not. And I mean, I think that's spot on. And I think there's like two things that I've been thinking about. It's like, one is like in normal times, whatever that means, like the supply chain is invisible to people, right? Like maybe you see trucks, but besides that, it's like the product is on the shelf. So it's kind of like a bad sign that people are like talking and thinking about this, because normally it's like, you know, you're just expected to just work and the stuff shows up.

And most stuff is still showing up. But the other thing is like, I think like, you know, by and large, from an economist perspective, it's like, there's like such incredibly like complex systems that it almost feels like, you know, you had that great piece on the blog about like sawdust and the price of milk, and there's all, you know, a little part here goes missing and that causes some other industry to miss a thing, et cetera. Like, it does not feel like economics, as we talk about it typically, is particularly like equipped to like really like wrap your head around this, at least like, you know, by and large, this is not like part of most economist toolkit.

Tracy Alloway (2:38)

Totally. And of course, the discussion about supply chains and how that feeds into prices and whether or not all of that is transitory, it's happening against this broader backdrop of just mass uncertainty about where we are in the economic cycle, what central banks are going to do.

And of course, you mentioned we're recording this on November 1st, and it is an absolutely massive week coming up from central banks. We have a meeting for the Bank of England and the Federal Reserve, and they're going to have to figure out how they're dealing with these inflation pressures, whether or not they're going to push back against markets pricing in more hawkish moves. We just had some massive, massive moves in the bond market just last week with everyone sort of pricing in rate hikes much, much faster than I think most central banks would want them to. So it just feels like this really complicated time from a macro perspective.

Joe Weisenthal (3:34)

Incredibly complicated. One thing that's really striking right now is that the job market feels very disconnected from perceptions of the economy. The job market is booming in the sense that there's tons of job openings, wages are going really fast.

In the post great financial crisis period, the job market was the economy. That was really the only thing that mattered was the pace of job creation. Now, we have all these surveys of consumers and they're like, yeah, the job market is great. We still think the economy stinks. That is a very new thing. The other thing, and this is what we'll get into, is from a central bank perspective, right? The economist sort of mantra is like, okay, still like it's transitory. And that doesn't mean it's gonna go away right away. But by and large, this is related to reopening kinks and people shifting consumption from services to goods and all that stuff and all that's fine.