GM107: What If AI Actually Pushes Interest Rates Higher? ft. Matt Klein

Matt Klein (0:01)

So, it's a really bad equilibrium that they find themselves stuck in. And that's a legacy of having several hyperinflation episodes in the past few decades.

They haven't had any since then, but I think that's a big explanation for that. We're not there. Hopefully, we won't be. I mean, that is a potential situation to be wary of, but I don't think we're anywhere near that right now.

SPEAKER_2 (0:24)

Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict.

In each episode, we go deep with some of the world's most thoughtful minds in investing, economics and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence.

Alan Dunne (0:57)

Welcome back to Top Traders Unplugged. My name is Alan Dunne and today I'm delighted to be joined by Matt Klein. Matt is the author of the Overshoot Research Publication. He's previously been a journalist at The Economist, Bloomberg Barons and at FT Alpha Bill.

He's the author with Michael Pettis of Trade Wars or Class Wars, and he's a previous guest here from Top Traders Unplugged. Matt, great to see you. How are you doing?

Matt Klein (1:23)

Very good. Thank you for having me, Alan.

Alan Dunne (1:25)

Great to have you back. As I say, you were a previous guest from, I think it was the start of last year. So if people want to go back and hear about your backstory, they can check it out there. But obviously, things have evolved a lot since the last 18 months, I guess. I guess most notably with the Fed in particular, and as we're just recording a week after Jackson Hole, maybe that's a good place to jump off from.

I mean, what were your impressions of Kevin Warsh at Jackson Hole?

Matt Klein (1:57)

I thought the speech itself was very reasonable. I think it's also important context of what, I think when he went in, there were a lot of understandable concerns about what the nomination process was, how he got the job, what were the criteria that were used to pick him in the first place, and the concern, I think, not unreasonably that given the criticism that had been levied at by President Trump and by a lot of other people in this administration, that they were going for someone who would essentially be a hack, who would just do whatever they want and get interest rates down.

Initially, he didn't really do a lot to assuage those concerns. I think the announcement in particular of the Productivity and Jobs Task Force was the one that stuck out. Well, a lot of the task forces that had been announced a few months ago, all seemed like very reasonable subjects with very credible people. That one had some red flags on what they're maybe trying to get a foregone conclusion there. Before being nominated, he'd been saying that the advent of AI-related technologies would inherently be deflationary and create the scope for lower interest rates. So there's a concern again, trying to predetermine the answer. I think it was very encouraging that Jackson Hole, unlike at his first Fred Press Conference, he I think did a lot to address some of those concerns. First of all, being very clear about what the inflation target actually was.

His first press conference, he was a little vague about whether the inflation target actually was what they'd said before, whether it be something different. Also very clear that they would need to do something to get the actual inflation to get to where the target is. That there is a gap there. He was, I think, it was encouraging that I think his analysis of the sort of current economic situation is actually very similar to what I'm saying for a while, which is that, look, the job market seems pretty good on the whole, pretty stable. Businesses are investing, consumers are spending, and inflation is not obviously decelerating past a certain point. I mean, obviously, if you're comparing it to, say, the first half of 2022, we've made a lot of progress, but there hasn't really been a lot of progress in the past three years. And I think a lot of Fed officials had been slow to realize that, because they were hoping, I think, that whatever had occurred in 2021 and 2022 would just eventually unwind, and it hasn't happened yet. And I think they're now starting to realize maybe there's something more fundamental and they will need to adjust policy. So I think that's one of the big takeaways I think we got from that speech, which I think is constructive. We'll see what happens the next few Fed meetings, but the market pricing reaction was pretty clear. The assumption, OK, maybe the Fed is going to raise short-term rates a little bit more from here.