Market Risks and Equity Melt Up

**SPEAKER_1** (0:02)
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**Tom Keene** (0:27)
Darda of Roth joins us right now.
I want you to walk through, Michael, the impact of back-to-back quarters of Boom Economy nominal GDP. I talked to everybody at Jackson Hole about the world of Michael Darda. What does it mean to have a boom nominal GDP?

**Michael Darda** (0:47)
Thanks for having me on, Tom. Yeah, these numbers are quite something. If we look at the private final sales, so it's nominal GDP for the private sector focusing on consumption and investment, we actually ran it just above a 9% pace in Q2.
The tracking estimates for the third quarter are very high, so inflation is expected to come down into the mid-2s. But it looks like we could print another huge quarter for real final sales, even above 4%, so that would get you to about 7%.
So if that's truly the underlying pace, then the Fed is way behind the curve and needs to tighten monetary policy. But there's a crucial caveat here. We're not really seeing that momentum in the nominal or money income proxies, they've been much steadier, and we've seen a decline in real income growth because of the energy shock. But bond market inflation expectations that are forward looking are not priced for a 7-9% nominal economy. So I think the fourth quarter of this year is going to be the tell. And we'll see whether the Fed raises rates before that. It looks like they're locked and loaded.

**Tom Keene** (2:12)
So the critical distinction here, Michael, from your work with Jude Wyninski years ago is how ex-post is the Warsh Fed? I mean, to me, the answer is with all the blather, all the Michael McKee analysis, they're going to wait and wait and wait and wait and be massively ex-post. Am I wrong?

**Michael Darda** (2:32)
Well, that is one criticism that the economy is heating up and if the Fed is sitting there, you essentially have a passive easing of monetary policy and then they're going to have to catch up later on and that could create volatility that threatens the business cycle.
But we're really not getting that from credit markets, Tom. If you look at inflation expectations, even with energy prices running back up towards the highs of the year, we're seeing inflation expectations at the 5 and 10-year horizons just sitting there, just above 2, consistent with price stability. And futures markets are only pricing in a few rate hikes from here. And that's not indicative of the Fed being way off sides, for example, like it was coming into 2022, when the break-even markets on a forward-looking basis were running away from the Fed. Nominal growth was running away from the Fed. We were in a huge V-shape recovery, and the Fed was, you know, lock, stock and barrel focused on the previous business cycle, which was utterly irrelevant. That's not taking shape today.

**Paul Sweeney** (3:40)
What did you make, Michael, from Fed Chairman Warsh's comments and performance at Jackson Hole last week?

**Michael Darda** (3:46)
Well, Paul, you probably also noticed that he started his talk with an analogy about taking hikes with different monetary luminaries. There was a Donald Cohen hike, which was one that would potentially take you to the brink of death. And then the Bernanke hike, which was much more leisurely. I mean, markets, the subtlety wasn't lost on the market. And so, you had those Fed tightening expectations push back up over 50%.
We're well above that now. And it could simply be that the consensus of the committee has shifted under the feet of the new chairman. And is he going to take a vote where he's outvoted by the rest of the committee?

**Tom Keene** (4:36)
Yeah, thank you.

**Michael Darda** (4:36)
They're ready to raise policy rates? I don't think so.

**Tom Keene** (4:39)
Oh, I so agree with what you just said, and I can't say it. Michael Darda with the Roth Capital, red and green in the screen here, the VIX 15.36. Okay, Paul, this is John from Atlantic Highlands.
Do you know where that is?

**Michael Darda** (4:55)
Oh, sure.

**Paul Sweeney** (4:55)
That's highfalutin.

**Tom Keene** (4:56)
It's like, was that fancy?

**Michael Darda** (4:58)
Yeah.

**Tom Keene** (4:59)
Tom, are you trying to look like Grizzly Adams?

**SPEAKER_1** (5:01)
Oh, good call.

**Tom Keene** (5:02)
No, I'm trying to look like Michael Darda. For those of you who are reading, Darda's rocking the Labor Day beard too.