Mark Blyth and Nicolò Fraccaroli - Inflation

Summary

Podcast Summary: A Book with Legs

Episode: Mark Blyth and Nicolò Fraccaroli – Inflation
Date: October 20, 2025
Host: Cole Smead (Smead Capital Management)
Guest: Mark Blyth (Professor, Brown University)

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Episode Overview

This episode of A Book with Legs dives deeply into inflation: how it works, why it happens, and—crucially—who wins and loses when prices rise. Cole Smead interviews Mark Blyth, co-author (with Nicolò Fraccaroli) of Inflation: A Guide for Users and Losers. Blyth challenges orthodoxies about inflation’s causes (is it always a “monetary phenomenon”?) and debates common policy interventions, using historical, political, and social lenses. The conversation is lively, skeptical, and packed with practical insights for investors and anyone trying to make sense of today's shifting economic landscape.

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Key Discussion Points & Insights

1. Why Write About Inflation Now? (01:45–03:58)

• Blyth shares that the book started almost by accident—his postdoc (Fraccaroli) suggested it just as inflation was taking off post-COVID, and they realized traditional explanations didn’t fit the current moment.
• Historically, inflation has distributional impacts, benefitting asset holders (the rich) and hurting those with less (the poor and indebted). This insight parallels their prior work on austerity's regressive effects.

Quote:
“When you jack up interest rates to cure inflation, people who have interest-bearing assets at the top are going to make out, people at the bottom...are more likely to be made unemployed by the slowdown. They're the ones that carry the can.”
—Mark Blyth [02:30]

2. Understanding Inflation & Deflation (03:58–05:50)

• Inflation isn’t merely price increases; it’s a sustained increase across the board, especially in consumer goods.
• Blyth emphasizes the difference between the rate of change and the level of prices: economists care about the rate; the public cares about the level.

Quote:
“We’re looking at the delta, the rate of change. They’re looking at the absolute level. And if that absolute level keeps going up … there’s no wonder people don’t believe them.”
—Mark Blyth [05:10]

3. Measurement Complexities & Distributional Impacts (07:37–10:21)

• Measurement is hard, especially in an era of rapid product evolution and substitution.
• Official “core” inflation strips out food and energy—items most relevant to lower-income households. As a result, inflation feels much higher to those on lower incomes.
• John Authers’ work found the “real” inflation rate for lower-income Americans during some periods was closer to 10%.

Quote:
“Our surprise was how much you actually—not just can shelter from it—how much you can profit by it.”
—Mark Blyth [10:08]

4. Core vs. Headline Inflation: Who Cares? (10:25–11:17)

• Core inflation is meaningful for policy-makers searching for “signals” but less relevant for the daily lived experience of ordinary people, for whom food and energy matter most.

Quote:
“The further down the income distribution you go the more you care about the non-core items...there's a different experience of inflation.”
—Mark Blyth [11:04]

5. Rethinking Causes: Supply Shocks & the 1970s (11:25–15:21)

• Discussion of Alan Blinder’s reinterpretation of 1970s inflation as mainly driven by supply shocks (oil, commodities) rather than runaway demand or wage-push.
• Blyth was surprised to find mainstream economists (like Blinder) challenging the orthodox “monetary” explanation.

6. Fiscal Policy and Inflation (15:21–16:39)

• The line between fiscal and monetary policy is increasingly blurry post-2008; both are tools to manage aggregate demand, and central banks/fiscal authorities are more intertwined than ever.

7. Housing, Owner-Equivalent Rent, and Inflation Metrics (16:39–20:27)

• Owner-equivalent rent (OER) is a clumsy proxy meant to capture the experience of homeowners—should it be “consumption” if you’re building an asset?
• OER can distort official inflation statistics, leaving renters much more exposed to true cost increases.

8. Interest Rates as a Blunt Tool (21:40–26:15)

• Blyth challenges the hero-worship of Paul Volcker: while his rate hikes tamed inflation, they hit hardest after many inflation drivers had already receded. Perhaps mass unemployment was avoidable.
• Today’s global flows make “bond vigilantes” much less powerful than in the past.

Quote:
“You might be the bond vigilante who wants to come and...send that signal. There’s a lot of other people you got to convince. So I don’t think it works quite that way now.”
—Mark Blyth [25:31]

9. Inflation & Taxes: Winners and Losers (26:15–28:42)

• Inflation can push people into higher nominal tax brackets while eroding real income—governments may benefit (“inflation is defaulting softly, one heartbeat at a time”).
• Following WWII, the US used modest inflation (and financial repression) to shrink its debt-to-GDP ratio.

10. Price Controls, Subsidies, and Policy Trade-Offs (31:21–36:46)

• Price controls rarely work as neat solutions—real-world responses often undermine their intent (e.g., shortages, misallocation).
• Well-targeted subsidies (as Spain did with energy transport for vulnerable groups) can mitigate impacts without distorting prices for all.
• Regulation (price controls of a sort) is everywhere—energy, healthcare, telecom—so blanket arguments against controls miss this reality.

Quote:
“The entire medical market is made up. There’s no market—it’s all negotiated prices. So...we need to learn from places where [controls] work and not do dumb shit. Right?”
—Mark Blyth [34:07]

11. Windfall Taxes & Systemic Incentives (36:46–45:38)

• Windfall taxes can be justified where profits are due to pure luck rather than skill or investment—e.g., oil company surges in wartime.
• The structure of the banking sector and deposit markets differs sharply between countries, influencing how inflation and rate changes are felt.

Quote:
“A lot of things that happen is just luck and we ascribe it to skill and that’s why we don’t want you to touch it.”
—Mark Blyth [40:01]

12. Too Much Money? The Limits of the ‘Monetary Phenomenon’ Argument (46:15–51:13)

• Stimulus checks likely contributed to US inflation, but estimating the size is tough. Much “stimulus” paid down debts, muting its inflationary effect.
• Monetarist explanations fall short for recent episodes, and hyperinflation almost always signals deeper structural collapse, not simply printing too much money.

13. Perpetual Deficits & the Recession Question (53:10–55:57)

• Despite dire warnings about deficits, as long as the US issues the global reserve asset (Treasuries), the mechanics allow for perma-deficits. If the public sector is in deficit, the private sector has a surplus.
• Balancing the budget when the economy is weak only widens the pain.

14. Global Dollar System, Alternatives, and Geopolitics (55:57–58:11)

• The dominance of the US dollar is under pressure. Central banks (like Germany’s and China's) are diversifying with gold; crypto and BRICS alternatives are being explored, though nothing matches the dollar’s stability.

15. Micro vs. Macro: Can Anyone Really See the Next Crisis? (60:28–64:20)

• Central banks are often “looking in the wrong place”—focusing on labor markets or money supply when the real risks are elsewhere (extended supply chains, geopolitics).
• Micro-actors (arbitrageurs) cannot solve systemic problems, while macro-actors (central banks) often miss systemic fragilities.

16. A Multi-Factor Model for Inflation & the Cycles of Capitalism (64:20–73:56)

• Inflationary periods often follow long cycles: gold standard (deflation), Bretton Woods (inflation), neoliberal era (asset price booms, inequality).
• Today’s mix of demographics (aging, low fertility), de-globalization, and climate/supply shocks suggest inflation will persist higher than seen in recent decades.
• Real wealth cycles require periodically “recharging” the real economy via periods favoring labor and producers over mere asset holders.

Quote:
“These things do sort of pivot over 40-year cycles. They exhaust themselves...The bug in the software for [Bretton Woods] was constantly rising inflation. And then we solved the inflation problem...But what that did…was leverage in the banking system and asset inequality and we’re going to correct for it.”
—Mark Blyth [73:10]

17. Demographics, Technology, and the Future of Inflation (74:04–78:15)

• Demography now points toward inflation: fewer young workers, aging societies, less immigration, and the exhaustion of prior deflationary forces (China’s rise, internet’s capital efficiency).
• Future technological solutions (like AI and robotics) require huge capital outlays, which are inflationary.

Quote:
“If value variable 1 [number of workers] goes down, variable 2 [hours worked] has to go up … If you’re not going to work any longer hours, the solution is robots or immigrants.”
—Mark Blyth, paraphrasing Mike Green [76:55]

18. Energy & the Next Inflationary Spike (78:15–81:20)

• Oil investment is lagging; US supply faces constraints, while other countries are increasing their output.
• Two forces compete: widespread adoption of renewables (lower demand for oil) vs. continued population and economic growth (higher demand).
• Blyth predicts a longer-term oil price crash as renewables gain ground; Smead (host) is skeptical, sees continued demand supporting prices.

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Notable Quotes & Memorable Moments

• “Inflation cures debt. As a finance friend of mine put it once, inflation is defaulting softly, one heartbeat at a time.” —Mark Blyth [27:54]
• “We need to have a look in the mirror. We do [price controls] all the time and we need to learn from places where we do it, where it kind of works, and then not do dumb shit.” —Mark Blyth [34:07]
• “[Windfall profits] ...it was pure. Nobody did anything to make this happen. ...The confusion between luck and skill. Right. A lot of things that happen is just luck and we ascribe it to skill...” —Mark Blyth [40:01]
• “If the public sector is running a deficit, that has to show up as a private sector surplus. And if the private sector has a surplus, they're going to spend it or they're going to save it.” —Mark Blyth [53:49]
• “Demographics...now argue inflation, not deflation.” —Cole Smead [74:39]

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Timestamps for Important Segments

• Why write about inflation? — 01:45–03:58
• Defining inflation/deflation — 03:58–05:50
• Measurement & distributional issues — 07:37–10:21
• Core inflation’s relevance — 10:25–11:17
• Rethinking the 1970s “monetary” view — 11:25–15:21
• Fiscal vs. monetary policy — 15:21–16:39
• Housing & inflation metrics — 16:39–20:27
• Interest rates as a blunt tool — 21:40–26:15
• How inflation quietly benefits governments — 26:15–28:42
• Price controls & subsidies pros/cons — 31:21–36:46
• Windfall taxes — why and when? — 36:46–45:38
• Too much money argument & Latin America — 46:15–51:13
• Deficits & recession-hunting — 53:10–55:57
• Dollar system, alternatives, geopolitics — 55:57–58:11
• Micro vs. macro vision of crises — 60:28–64:20
• Cycles of inflation, capitalism and asset returns — 64:20–73:56
• Demography, technology, and inflation’s future — 74:04–78:15
• Oil & energy’s role in future inflation — 78:15–81:20

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Conclusion & Closing Reflections

The episode encourages listeners to move beyond one-factor explanations of inflation. Instead, inflation remains a “multi-factor model,” shaped by demographics, geopolitics, policy choices, and shocks to real resources and supply. Crucially, every policy response—and every inflation episode—creates new winners and losers. Understanding those distributional dynamics is a key to investing, policy-making, and simply surviving the next cycle.

“Simple rules in my opinion are simply stupid. I think we should focus our time understanding who the winners and losers are.”
—Cole Smead [81:36]

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For further reading, check out Mark Blyth and Nicolò Fraccaroli’s book, “Inflation: A Guide for Users and Losers.”

Transcript

[A]

You're listening to A Book with Legs, a podcast presented by Smead Capital Management. At Smead Capital Management, we advise investors who play the long game. You can learn [e-mail] or by calling your financial advisor.

[B]

Welcome to A Book with Legs podcast. I'm Cole Smead, CEO and Portfolio Manager here at Smead Capital Management. At our firm, we are readers and we believe in the power of books to help shape informed investors. In this podcast we speak to great authors about their writings the late, great Charlie Munger prescribed using multiple mental models and analysis. We analyze their work through the lens of business markets and people. In this episode we will discuss what seems to be a fact of life, in my opinion, in the 2000s. Mark Blyth is joining us to discuss his newly co authored book is a guide for users and losers. Little background on Mark for our audience. Mark is the William Rhodes professor of International Economics at Brown University. He is also a director for the Rhodes center for International Economics and Finance at the Watson Institute for International Public Affairs. He has published other books, to name a few. This includes the History of Dangerous Ideas and also another title I had for him was Angry Nomics. He he has other published books outside that. Just a note, Mark received his BA from Strathclyde University and a master's and a doctorate from Columbia. Mark, thanks for joining me today.

[C]

That was the best summary bio anyone's ever done.

[B]

Oh, that's really nice.

[C]

Cool.

[B]

I'll have to disappoint you at some point then.

[C]

Yes, exactly.

[B]

So you know, obviously you and Niccolo, you know, co authored this together. You guys are obviously have ties to Brown, which is assumably why you came together in this project. But I just want to ask, you know, what caused you to work on this with Niccolo? And you know, why this project? Why this story?

[C]

Yeah, exactly. I mean, it's actually kind of a great story because Nicola was my postdoc and we managed to smuggle him in and I mean before the COVID shutdown, right? We just got him in the country because he's Italian. And then, you know, six months later the inflation starts to kick off and Nico comes walking into my office and goes, we should write a book on inflation. And I'm like, why would you want to do that? Of all the things we could do. And I mean, isn't this the most understood phenomenon in the world, right? Always and everywhere, a monetary phenomena, we know what's going on. Like bleh. And he goes, well yeah, but I mean, have a think about it. I Mean, first of all, we both did books on the austerity period in Europe and what we said was that there's an income of distribution effect here. Like the people at the top benefit and the people from bailouts and the people at the bottom are the ones that carry the can. Right. First through consumption and secondly through debt. Yeah. Okay, what's your point? Well, isn't it obvious that the same applies to inflation? When you jack up interest rates to cure inflation, people who have interest bearing assets at the top are going to make out people at the bottom who pay much more for their credit and are more likely to be made unemployed by the slowdown. They're the ones that carry the car. And I'm like, okay, keep going, keep going. What have we got here? Right. Well, the second one is related to that. We all suffer from inflation, obviously. That's true. We don't. Right. And interestingly, if you think about what people are saying about inflation now, it's beginning to pick up. It's totally not the Milton Friedman story. What we're getting is a bit of government spending, the Biden thing. But that doesn't explain why Germany's got it. That's because they lost their gas station. Right. Then there's the whole thing of is it the 1970s, is it the 1940s? People seem to be genuinely confused about what's going on. Okay. So we started to have a think about it. We started with the different ways that people talk about inflation in that current moment, the different inflation narratives, and then it just kind of rolled from there. We didn't have an axe to grind. We, we had no, you know, we didn't know where we're going. We weren't out to prove or disprove something. It was like it just kind of snowballed and became really interesting because of that.

[B]

I agree. It's very interesting book and I love the position that you guys talk about a lot of these subjects. Let's just kind of start off really simple. Is inflation just when prices go up and is deflation just when prices go down?

[C]

In a simple sense, yes. But it's a sustained rise in the level of all prices. Right. So when people talk about house price inflation, it's not an inflation. It's just one asset class has been bid up because of a lack of supply. When you talk about asset inflation, well, yes, all assets have gone up, but there's reasons for that. And lots of other prices aren't going up. Health care in America is a great one. Right? I mean, 20% of GDP by some estimates. It has no prices, it's all negotiated. We have no idea if it's going up or not. So inflation is the rise in the level of oil prices related to consumption in particular. So it's goods that you consume that's an important part of it. Deflation on the other side of that. Yep. Sustained drop in the level of oil prices, which has its own pernicious effects but are quite different.

[B]

Sure. You also point out in your book that the speed and pace of this is a very important. It's right. It's like the change and then there's the rate of change, if you will.

[C]

Exactly, exactly. And what people focus on, what real normal people, not economists, focus on, is the level of prices. Right. Part of the reason people are so annoyed is because the level of oil prices has been going up and never seems to go down. Whereas we basically come out and say, yes, but the level of inflation is going down. And they're standing at the grocery store going, what are you talking about? So we're looking at the delta, the rate of change. They're looking at the absolute level. And if that absolute level keeps going up, particularly in things that they care about or have to pay, whether it's food, fuel, education, et cetera. Anybody who's saying that like, yeah, it's leveling off at 2%, we're back on target. There's no wonder that people don't believe them.

[B]

Sure. I don't have this in my notes, but I want to throw this out to you to see if you've read the book. Have you ever read Superabundance by Marion Tupi and Gail Pooley by chance?

[C]

No, I haven't. I know of it and I haven't read it.

[B]

Okay. I say that because, like we're talking about policy that affects the short term, the near term and possibly longer periods, obviously. But one of the things I always remind people is the arc of history is that we flourish in humanity and what they do. Really interesting subject, not for our discussion today, but they look at time prices, right? They take a wage in 1950 versus the loaf of bread then and compare that to the loaf of bread and the average wage or the blue collar wage, whatever that is. And what you'll see is over time, in time, prices, everything declines 90 plus percent with two major exceptions. You mentioned one of them health care, I should say non elective health care. And then secondly is education. So I say that because like, you know, we didn't have an iPhone in 1970 and we would not even a billionaire could have that. So the products and services and the problems we deal in today are the best ever.

[C]

Quality. Quality. Deflation is incredibly important. Quality. This is towards the end of the book, whether we want to get into it or not. That's why I bring up the example of the Golf gti.

[B]

Yeah. Oh, I told, I told you about that. That GTA is you. To your point that it's never been better, but we might not like it. It's like beggar thy neighbor. Oh, my buddy's got a nicer car over there. It's kind of a. It's like a me versus them discussion that doesn't really get at the heart of the inflation discussion, which what we're going to talk about today.

[C]

All right, so let's keep going.

[B]

So, you know, so you talked about consumers, worker workers or laborers? Because consumers and laborers could be different and also businesses. What are the decisions in this group that economics thinks a lot about? You talk about consumer. There's a lot of talk about consumer, but the consumer could be a laborer or not.

[C]

Yeah, I mean, essentially what we do in the first part of the book is we just say, okay, how do you make sausages? So we just went to the three big central banks, bank of England, the Fed and the ECB Europeans and said, how do these guys basically track this stuff? So just to talk about the Fed, for example, they take 80,000 items and look at what happens to them every month. Now, again, to your point about sort of like an iPhone in 1970, you're doing basically long time series chains with huge substitution issues.

[B]

Correct?

[C]

Right. You've got structural breaks all over the place. This is a hard thing to do. And one of the consequences of that, you want to focus just on what people consume. Well, that gets tough immediately today because are we consuming digital services right now? Because Riverside is notionally free. Right. And you're not charging anyone for your podcast, but it is obviously linked to the firm. Right. So how do we put that in? What's the hedonic shift that you do for that one? This is more than CDs versus like cloud storage. Right. Even in the simpler stuff, the Fed goes through all sorts of contortions for rents for this whole notion of owner equivalent rents. How do you basically price housing? And without getting too much into the weeds of that, basically the apartments that you rent in a downtown are totally different from a single house in the suburb. So you're trying to figure out what a single family home that doesn't exist in a place would rent for if you actually had it. Now, again, we're not poking fun at this or pointing to the limits to say these guys suck and they don't know what they're doing. This is really the best faith effort that anyone can get into it. But, man, it's hard. Now, to me, the most interesting part of this was it came out just after the book and I wish I'd thought of doing it. John Otters, the superb financial journal, great author from Bloomberg. Yep. Oh, yeah, brilliant. He figured out. He went, okay, so here's the thing that the Fed does. It normalizes the time series by basically getting rid of the outliers. The outliers are called this stuff that's seasonally adjusted, etc. The volatile items you want to get to core inflation. Well, it turns out what those seasonal items are are things like food, fuel. How is it like big things that people actually consume? You're kind of like downweighting that. So what he did was he stripped out all the other stuff and just looked at the volatile items which people consume a lot of, particularly people in the bottom and the income distribution, and he was like, oh, my God, if you do this, they're absolutely right. Their inflation rate is around 10%. Right. That's what they're personally feeling because it's a measure of consumption. So to go back to your point. Right. Yeah. Not all consumers are workers, etc. Right. Yeah. But everybody consumes. Sure. Right. And at the bottom end, more of your income goes. So inflation really does hurt you more at the bottom than it does at the top. Our surprise was how much you actually not just can shelter from it, how much you can profit by it.

[B]

Agree. And since I'm in the business of profiting from it, that's why I enjoyed your.

[C]

That's right.

[B]

Yeah. So. So I want to come back. You mentioned something on core. So I'm going to. You know, again, this is what I thought about in your book because I think you would agree to this certain extent. But I just want to test the theory. Is core inflation really relevant or is it actually just energy prices are relevant.

[C]

Oh, that's a really good one. Relevant for the bank. Yes. Because you are doing your best to basically find the signal in 80,000 and you have to weigh accordingly.

[B]

Sure. But if you think about food, the food.

[C]

Right. Relevant for. No, relevant for people. Right. That's a really good question. I've never thought of it that way, but I would have to say that my own analysis would be that the further down the income Distribution you go the more you care about the non core items as John suggested. And that suggests that there's a different experience of inflation as you get across the income decision.

[B]

Well, I agree because if you look at food, it's not the wheat in the bread that costs a lot, it's moving the bread that costs a lot.

[C]

Right.

[B]

It's the distribution. If you will Blinder later in your book. I'm going to jump ahead a little bit. Alan Blinder argues that the inflation that Volcker destroyed wasn't his interest rates, it was the change of energy and food prices. Which means in my opinion it was just energy prices.

[C]

And for the 70s in particular, you can make a case that energy prices and related supply shocks related to that really were core drivers of inflation. So yeah, I would agree with that one. Again, this is one of the surprises just to jump ahead to this sort of stuff. I didn't wake up one Tuesday and say let's rewrite the history of the 70s, right.

[B]

Yeah.

[C]

What happened was, you know Michael Green, investor.

[B]

Yeah. Asset management. Yeah, yeah.

[C]

Brilliant. Super smart guy. Right. And he sent me a piece by Blinder just at the start of the pandemic and I read it and I went, oh, that's interesting. Here's a guy who's like the king of orthodox central banking sets of prince or whatever and it, it turns out he's got this whole series of papers basically challenging the standard reading in the 1970s that it wasn't in fact kind of an endogenous cost push, inflation coming from labor, et cetera, that may have been there, but it was really just a whole series of supply shocks that lasted a decade, each of which on their own would have petered out much like the experience of what we had in the 2000s. But because they all came along at once, they kind of added into each other, amplified each other, distorted it. And the reading that we got from that was like it was the government spent too much and labor was too strong, which I don't disagree with is at best part of the story. And that was the real surprise from the Blinder papers. I was like, God, I never thought about that way. And it was Mike Green that started me that way.

[B]

Well yeah, I think about it is like we know it's. And you do a good job of this, you and Nicola in your book. It's a multi factor model, we all know that.

[C]

Yeah.

[B]

But where's the R squared most powerful among the factors to your point?

[C]

So that goes back to your question about, you know, is it Basically energy prices. And you know, I haven't actually addressed that directly in the book or in the prep for the show, so I don't want to pull something.

[B]

Sure, no, no, I'm asking. That might be the zeitgeist we think about the most maybe 10 years from now. Right, right.

[C]

No, it could be. Absolutely. I mean, think about it this way, very simple one, right? So you can look for all the causes of inflation you want in different places. But the European one's really easy to understand, right? They lost Russia and it took them a year to find Qatar on a map. In the meantime, they diverted LNG cargoes from all over LNG spot guys killed them and that was a huge input cost and then they basically had to take emergency measures to hold it down. That's that. It's a dead simple story. And what happened in the 70s, a lot of stuff like that happened, like the 74 oil price, the 79 oil price increase. So, you know, these things are important. The way that the central banking community tends to think about supply shocks is we look through supply shocks and that implies that that's just noise and the signal is elsewhere and that signal could be many places probably. But the really interesting mechanism, and this is something else we got into, we didn't expect to get into, is it's the whole de anchoring of expectations. Now on the one side, I mean, this is common sense, right? If people begin to expect things to go up, they'll start taking actions and then things will go up. Right? Yeah, Fancy name for it is intertemporal substitution. And what we found out was that there's a lot of models that assume this, but very few that demonstrate it. And also the whole sort of like we're all hanging out waiting for central bank signals. I mean, maybe particularly in finance, financial sector, where interest rates really, really matter for people moving large amounts of cash around. But for normal punters, they can't tell you what a central bank does. So, you know, how are they actually cluing into like the anchoring of expectations? You start to go in the end of the basement of this stuff and you start to go, hang on a minute, what's going on here?

[B]

I agree. Let me ask you, how should we think about fiscal policy alongside inflation or deflation?

[C]

To me, it's where you draw the line. Let's say take example from Britain just now, right, people are getting a bit bent out of shape about quantitative tightening because they bought bonds high and now they're selling them low because the interest rates flipped the bank's making a loss. Central banks don't make a loss in their own currency. They just don't. They have a balance sheet, but it's not a balance sheet that has a constraint. So that's just rubbish. The second one is the treasury indemnified the bank for its Covid losses, even if it was a real loss. They have an indemnity from the treasury, so it doesn't matter if that's the case. The distinction between fiscal and monetary really depends on. I declare that this is monetary because it's got something to do with money and interest rates. And I declare this is fiscal because it's got something to do with the government spending stuff. Right. Beyond that, I'm not sure these days how useful it is. Particularly because, and this is a consequence of 2008, et cetera, we've given up on fiscal to the extent that we run permanent deficits to juice the private sector. And we kind of say to the central bank, you, lots have got this Right. Okay, we're off.

[B]

Yeah.

[C]

And that's it.

[B]

So you mentioned owner equivalent rent, but I just want to touch it real quick just to make sure our audience, you know, totally gets at what you picked up and put down there. So, you know, housing price and rent are always an interesting discussion. Inflation, you know, I think the question is, should it be included? Should it not? If it's included, should it be the way we done it? Should we go out to Zillow in the case of America or Canada and say, what is the open market pricing telling us in transactions and listings? Or how should we adapt or think about that? And I'll add one other way of thinking about this that you maybe could touch on if you're a home that's going to go up on sale and inflation in apartments is running at 6%. That's what you dream of. If your home going up for sale and inflation among apartments is running at one. You don't want that.

[C]

Yeah, 100%. So the section of the book, and this is probably my favorite subtitle in that book or subheading is do you eat houses? Because ultimately, if we're dealing with questions of consumption, then do we eat houses? And of course the answer is you don't. Well, yes and no, because if you think about it, you do consume rent. Rent is an act of consumption because you don't own the house. But when you pay back the mortgage, what you're doing is building an asset. Now, they are functionally equivalent and both of them are basically handing money to a Financial intermediary. One's called a landlord and one's called a mortgager. But you treat these things as very different. In part, the justification is because the rental sector is where people who are more likely to feel the effects of inflation live. Right. And if I've paid off my mortgage and I've got a house and interest rates go up, well, jolly good for me, right? Everything's fine. I've got a hedge that's appreciating in value. So the way that the Fed looks at this is we want a picture of the whole market rather than just the Zillow data. They could totally do now casting the Zillow data and that actually might be as accurate. But historically, because they didn't have Zillow data until a couple of years ago, what you tended to do is try and get a picture of the whole market by trying to figure out owner equivalent rent. There's a really good question as to whether the candle is worth the game or the game is worth the candle. I never remember what that expression is. Right. But whether it's actually worth it to do this because it is really distorting and you should just go with the Zillow data.

[B]

Sure.

[C]

It's an open question. I don't really have an answer to it. This is kind of like just a response to your question and to your.

[B]

Point, it might be the question for who are we talking about? Right. If you're talking about consumers or even like people below 50, we had way more inflation 20 to 22 than we even stated because housing is bigger for them. But I also think about it in light of like, I get back to this age old debate with people like, you hear this all the time where it's like you'd be an idiot to buy a house, you know, because of the cost, et cetera. But as I point out to people, let's say, let's say inflation's gonna run at 3%. And that's like my hypothetical model, okay? In 24 years I will be in the waxing or I'll be in the waning part of my mortgage where I have 30 or 35% of it left to pay off versus 24 years later, I have doubled my rent payment. Now which one do I like better? And the answer is obviously the first, not the latter. Okay? And no one says that because actually a mortgage is a way to fix in your prior costs. And just as you point out in the book, you want to bet on inflation after that.

[C]

Yeah, that's right. It's exactly right. So that's a real. Basically it's juicing the real return to the asset. As the price of the asset increases, the rent increases at the same time in a rental property. But you can't capture that. You don't get any of that. That goes elsewhere. Correct. And that's really the difference. It's the return to the asset. In that case, who's controlling the return.

[B]

Hi, I'm Cole Smead, CEO and portfolio Manager here at Smead Capital Management and host of this podcast. If you enjoy this podcast, I'd like to invite you to check out smeedcap.com at our firm. We are stock market investors. We advise investors who play the long game with a discipline that has proven success over long periods of time. Learn more about our [e-mail] Past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges and expenses. Read and consider it carefully before investing. Smead Funds distributed by Smead Funds Distributors llc. Not affiliated so short term interest rates are a blunt tool, as has often been said, to fix inflation. Is it foolish to think that this alone is the best tool? In other words, like, you know, all of, like all my economics class, it's like, you know, here's the short end of the curve, here's the Fed Open Market Committee, here's what they're there to do. Look at this great God called Volcker. But it's blunting, it has broad effects. And the question is, did it get at the policy need?

[C]

So this goes back to that sort of alternative, let's call it the blinder reading in the 1970s. And I'm quite, I didn't really go out to sort of proselytize this, but it just seems to make sense. Right. So the traditional picture, of course, is that, you know, 78 Carter points Volcker Inflation's out of control. We're beginning to talk about inflation not as some kind of hydraulic phenomena, but as a problem of expectations. And the idea is that first of all through basically control the money supply, which doesn't really work. It's basically just rationing bank reserves so you can shove up interest rates, right?

[B]

Yep.

[C]

You do this huge hike in rates and basically it pops the bubble. There's a lot of unemployment and devastation. It really sets people's expectations down by 84. It's not morning in America. Right. The alternative view goes something like this. Starting in 65, you've got a huge chunk of the US labor market, fighting the war in Vietnam with even more people supporting that, all being fought off the books, juicing the deficit. Then you have the incorporation of women and minorities at scale into the labor market for the first time. And they act as consumers, not 50 year old white guys. So they just push up demand, right? You've got failed harvests, you've got oil shocks, you've got commodity shocks, you got the end of the Bretton woods system, which basically means sort of the inflation problem that's being exported through US dollars really goes kind of like systemic. Other countries start to react to this, you get stagflation, et cetera. And at the end of all of this, Paul comes along and bangs up interest rates on that reading, what you had was a whole bunch of connected supply shocks, each of which would have dissipated, but they concatenated and amplified. And by blinders reading, by the time you get to 81 and you really jack this stuff up, it's kind of on its way out. So what Paul did was massive overkill and probably didn't need to do it. Now when I first came to that sort of conclusion through reading this stuff, I thought, well, is that right? I mean, it's a very, very different history, right? But then I thought about what happens next, right? You get this period of bas, basically relatively high interest rates while you're basically privatizing the banking system and integrating capital markets globally. And that spread is what everybody rides down until 2008. Then you built up a huge amount of leverage, bang. All goes to central banks. Then you go through the QE period, et cetera, et cetera. And at that point you've kind of made the central banks the monetary gods, right? They are what was the only game in town, I was going to say.

[B]

Or an omnipotent ship captain is how I think about it.

[C]

Omnipotent, Brilliant way of putting it. Exactly right. So then we're like, well you know, you guys have got this right? And ultimately they have two things. Short term interest rates raising lower the price of money, buy and sell assets, give it a fancy name, quantitative ease and quantitative tightening. So you know, they do what they do and you know, blah blah, blah. And then you know, we get to the next period of inflation. The next period of inflation is like literally Germany lost its gas station and America lost its parts supplier. Yeah, you can say you can look for like spikes in M2 because of COVID spending. But there was 30 countries hit by inflation, only one of them had the Biden stimulus check. So where do we go with that? That's not causal. So this whole thing has really just made me kind of like go, yeah, the Volcker story. There may be something more to it than that. Maybe the timing was off. Now if we do the counterfactual, that gets super interesting. What would have happened if he hadn't have done it? There wouldn't have been a big bust. There wouldn't have been a rise in unemployment. There wouldn't have been a structural shift in the United States business model, if you want to put it that way. It would have been a more gradual deflation. Would that have actually been sustainable? Would inflation have then picked up again if those expectations had to become unhedged? I don't think there's any way of knowing.

[B]

Well, I mean, as we know, the tenure is set by the market, supposedly.

[C]

Right?

[B]

Right. So wouldn't the market, or what we used to call the bond vigilantes just wake up one day and say, I'm not buying, I'm done, I'm tapping out. This is not the risk I want to take.

[C]

And I think back in the 70s and 80s you can do that because in a sense the bond vigilantes are much more powerful. But these days there's loads of other people in the market. There's basically dumb money from every pension fund in the world coming every month. That's looking for a safe place to hide. You've got every exporter in the world who doesn't want the dollar circulating the domestic economy, so they sterilize it by buying Treasuries. China sits on a trillion and a half at any given point in time simply because it's such a volume exporter. So there's so much buy pressure now in the treasury market that in a Sen. That gives it a bit of sort of like idiot proofing that like you might be the bond vigilante who wants to come and you know, make send that signal. There's a lot of other people you got to convince of that signal as well. So I don't think it works quite that way now.

[B]

Sure. Let's talk about taxes because you mentioned how even in taxes the government can pick a winner or loser situation based on how they want to calculate cpi, for example, can you explain how they might rig the system for themselves in taxes?

[C]

You're going to have to remind me of that bit of the book. That might have been one of those.

[B]

Passages I think you guys talked about harmonized CPI as the way to look at tax brackets, for example.

[C]

Yeah, that was just the 70s stuff about basically you get pushed into different tax brackets as your nominal income goes up because of inflation, but your real ability to pay back doesn't. I mean, that was one of the classic sort of complaints about inflation in the 1970s that really gelled with people. It's like they're getting shoved into different tax brackets. They're actually taking more, but in real terms, they have less rather than more. It's only in notional terms. They've got it. I mean, the bigger story here is sort of, does inflation actually benefit governments? So there's the whole sort of Fisher Channel of, like, it benefits debtors. There is the fact that the last time the United States had debt to GDP ratio like this is after World War II. And the way that they dealt with it was a healthy dose of financial repression. Capping interest rates.

[B]

Yeah. From 46 to 52. Yep.

[C]

Yeah. And even beyond that, way into the 60s, basically run a positive rate of inflation with a slightly higher rate of growth and then getting people like McChesney Martin to basically use the bond market as kind of a regulator for the economy. Taking money in and out of Q institutions in the 50s and the 60s, and by the time you get to 64, you're down to like 60% debt to GDP or something. Inflation cures debt. As a finance friend of mine put it once, inflation is defaulting softly, one.

[B]

Heartbeat at a time. I totally agree. It's also is not brilliant to your point, I mean, because when I study like the South Seas bubble. The South Seas bubble came out of getting rid of government payments, right? They took and swapped their annuities for the South Seas corporation. Okay. And so I point that out because to your point, if I'm the government and I made bad decisions in malinvestment, inflation is the easiest way out of my prior bad decisions.

[C]

Yeah, it is. You're absolutely right. I mean, the thing is, though, do they have the wherewithal and timing to do that? Because there's a timing problem with that. And then there's a kind of do I get lucky in my asset class question as well by doing that. That. I mean, in a sense, if they knew that they could do that, they would know the bust would come in. So the better thing to do would be to short the asset rather than take a long position and hope inflation cures it.

[B]

Well, or let me. This is just hitting my head right now. What gives people more hope? Depending on the paths I take. So, for example, you watch this wrenching inflation of the 70s, and if you go to People and say, hey, if we bring inflation down, financial assets would be worth a lot more and business will be worth more and we will prosper through trickle down economics. Well, you might say, gosh, this has been miserable. That seems like it's pretty hopeful. Okay, yeah. Now in today's position, you go to people and say, hey listen, here's the deal. We're gonna keep inflation low. Asset prices are gonna continue to rise. Cause to Mark Blythe's point, there's an idiot out there willing to always fund the treasury market for some reason, for some ungodly reason. And therefore, you know, we're gonna have this hopeful future of just being really rich. Well, if you're someone that doesn't have any assets, no, absolutely that's not very hopeful and that's not a big sea change compared to the past. So I also think of it as like what causes a big change that benefits most people? And the question is keeping status quo for what we've seen much of the last 20 years. Does that really help most people?

[C]

No. And that's it. I mean, you know the point about trickle down. One of my favorite papers from a few years ago is the Rand Corporation's paper. Not exactly a lefty think tank. Yeah, exactly. And they have this piece and it's got a brilliantly anodyne title. It's called something like Trends in income 1945-1980. Right. You can find it. And it's this kind of random forest model complex calculation that basically does a counterfactual and says if we had the economy of 1980 and didn't change anything, what would it have done to the income distribution? Now if we project it forward and what their estimate is that 36 trillion went up and practically nothing came down. Wow, 36 trillion, right. Now one of the ways that you see this is in stock buybacks. Now I know on a corporate balance sheet, perspective. Perspective is totally fine. It's neutral, whatever. Right? But if you're a company, you get the license to do investment in society because we don't get the government to do this. We've got loads of different companies to do this because you'll like failure. We like variation. They'll think of things we'll never think of. That's all the justification. If at the end of the day you've got a big moat and castle and you basically sit there and you can set prices as they can in many sectors and you don't innovate, you buy the competition just to keep keep the molten castle up and then you've got a huge cash pile and all you do is you buy back your shares because it juices earnings per share and that rewards the C suite. People downstream have every right to question that and every right to say that this is not how the system's meant to perform. We're all meant to benefit from this. And if we're not all benefiting from this, there's a problem and that's where we are in the world today.

[B]

Sure. I'm going to come back to that because I got another theory I'm going to throw to you, but let's. I want to go to your price controls. You talk a lot about price controls. You actually talk about them in some cases in a good light, so.

[C]

But some cases in a poor light. We're very even minded.

[B]

Correct, you're very even minded. So I guess, you know, how do you personally think about price controls? Where do you think the weight of data. In other words, you do point out that they do occasionally work. Yeah, but it seems to be that the preponderance of data argues against it because no one's that lucky often enough.

[C]

I think that's a fair thing. I'm not suggesting that we swap out interest rates wholly for price controls. Right. Part of the problem is another way you could do this is buffer stocks. And that sounds kind of like sanguine, apart from the fact you need to know what you're buying and then there's the opposite of the buy.

[B]

It's like the SPR is a buffer stock.

[C]

Exactly right. Exactly. So basically there's always a cost with it, even though it's just meant to be a buffer. Now to go to price controls, it's dead simple and you put it very well. I'd put it slightly different, which is the following ex ante right before the fact, it's really hard to know if this thing's going to work because people will react to it. The worst thing you can do in economics is take in policy, is take the keteris paribus clause seriously. Because the minute you try and do something, everybody changes their behavior. Nothing remains equal. So ex ante is hard to know if it's going to work. Even if it's well designed, ex post, even if it seems to work, you have an identification problem. You don't know if things went well because of that. It might have been other things that you're not paying attention to. And then you ascribe victory to the policy. Right. So this is a general thing with policies, not just price Controls. I'll just give two simple things the way to think about it. Right? Spain didn't try to control prices, but what it did, it said was we got 40% the income distribution that's getting hammered here. Spain's above middle income country by far as a developed economy, it's got a fairly a high income skew. What do we do for the 40% Spaniards that really are having trouble here? Well, we could do what Hungary did and basically say to the supermarkets, no more price rises. And Exactly. As any economist would tell you, there's no bread on the shelves, it's all being sold somewhere else. Right. They didn't do that. They basically said, how about we give you guys subsidies on electricity and public transport? Because we're not going to try and solve the inflation problem through a price control. We're going to just take what you're getting. Hey. And try and offset some of those costs by making these things cheaper in this moment, which is more of a.

[B]

Friedman argument because he thought you should always subsidize the consumer or the buyer, not the supply.

[C]

Yeah, I think I would wholly agree with that. I think that's a totally reasonable way of looking at it. Now, let's be fair to controls on the other side of this, right? This country is filled with price controls. Electricity markets, the levelized cost of electricity, regional differentiations. I mean, we have regulations controlling these things all the time. We have controls on what you can sell Internet services for. We have control. The entire medical market is made up. There's no market. It's all negotiated prices. So the idea that we don't do this and we never do this and it's anathema to what we do. No, we need to have a look in the mirror. We do this all the time and we need to learn from places where we do it, where it kind of works, and then not do dumb shit. Right. It's really that simple?

[B]

Simple, yeah. This is gonna be a bigger picture question, but since you're talking about price controls and we did kind of make fun of monetary policy, I think a bigger question that we have to ask ourselves just as rational human beings, is can we control things? I only say it because I have two teenage daughters right now. And if control of teenage girls or young children is not possible, is it really possible for us to take these big markets and economies and produce some level of control over them?

[C]

So in a sense we have no choice but to try and do so because we have a political system and it's not reducible to democracy.

[B]

Sure, that's our job.

[C]

Authoritarian states as well. Yeah, it's basically our job is to make sure things don't get too out of whack. So in a sense you have to intervene. Right. At the same time, I'm a huge fan of Nassim Taleb's view of this, that this is Iortogenics, this is the cost of intervention. And the costs of intervention tend to be asymmetric, if not sort of like damrect, convex in unexpected ways. And you can intervene in certain ways and end up in a very different place from what you intend. Now, is that an argument against all intervention? Some people will make that argument quite cogently, but given the complexities of the world and given the demands that citizens place upon their governments, we don't have the luxury of ever doing that.

[B]

Sure.

[C]

So to me, the. I mean, this is a finance story as well. Well, I think the best rules in finance are broad, dumb, simple rules. Ones that are basically dead obvious. Like, you know, here's a leverage ratio cap, 15 to 1, go beyond. It'll find you. Simple as that. Now, it might not say that that's the best thing or this is whatever, right? But it's simple. Right. If you start doing like, well, you can have these tier one and these tier two, and this one counts. And this is a Basel. You seen the Basel regulations? It's like it's got a bit as bad as the tax code. Right. This is just a license to game shit out. So if you think of intervention as like micro tuning things, then yeah, I'm not a fan. If it's a case of like keeping the damn train on the rails with certain broad rules, I think that's kind of how markets and societies work.

[B]

Sure. Let's pivot to windfall taxes. The one thing I loved about your windfall tax discussion is it's more of an honest discussion about the effects of rising prices, which is, let's pick a loser. Let's pick a loser and we're just going to tax them because they're winning too much.

[C]

Yes.

[B]

Is that a fair way of thinking about windfall taxes?

[C]

I wouldn't call them losers, I would call them unfortunate winners. Right. So I'll give you two examples. Right.

[B]

Or punished winners maybe.

[C]

Yeah. But they're winners in a weird way. I mean, the whole rationale of windfall taxes is they didn't do anything to earn it. They were just in the right place at the right time. So therefore, if they are earning it, and that's actually covered at the cost of other members of your society, then you should redistribute the windfall, right? That becomes a lot. Not a lottery, it becomes a more general one. The word is escaping me. You get what I'm talking about? So let me give you an example of this. Right? So Saudi Arabia has a Premier league for football. Just stop there, right? They have Cristiano Ronaldo and every big player from five years ago playing in stadiums, which I'm sure people show up to, but nobody else seems to give a shit. And they're able to do this because of a windfall that basically oil prices went through the roof and they are this marginal producer, the swing producer. I mean, come on, it's just ridiculous. Right, here's an interesting one. We just managed to get this and put it in the book. Team of economists at Amherst. Yeah, Amherst basically did a profits calculation and basically just looked at it was like five year moving average of profits and basically what happens to the spike afterwards, Right. And you can calculate back out inflation, figure out whether. Realism, whatever. Anyway, according to this estimate, American oil companies basically got 220 billion above normal. Just call it above normal profits in the 2022. Just in 2022, right. So everything's 222-222-right?

[B]

Yeah.

[C]

No, think about the fact that the top 1% of America, 3.3 million people own 51% of all shares. Now let's think that that 220 billion of those oil companies is going to be. Probably half of it is going to go in share appreciation and dividends. Right? So 3.3 million people got 100 billion just by happening to own those shares. Just because oil prices went up, Just because we had a pandemic plus a war in Ukraine and we had to ship lng around the place. Pure windfall and more than offsets any inflationary cost that you would have if you're up there.

[B]

Well, by the way, I agree that's a windfall. I agree. Well, here's the funny part. It's crazy to say this 220 billion sounds big, but let's call a spade of spade. That group at the beginning of the pandemic was like 2% of the entire stock exchange. Right. So it's a big number, but relative to assets in general.

[C]

Yeah, that's right.

[B]

It's the smallest. The capitalization of those profits it had been in decades.

[C]

Absolutely. But the capitalization is less important than the story, I would say, than the fact that that huge amount of profit is then distributed amongst a very small group of people. Not because they're not good people. Not because they think it's bad. Right. But it's just. Cause it was a windfall. That's it. It was pure. Nobody did anything to make this happen. Right. If you turned around and said, I've invented super fuel, it's twice as efficient and it gives off no CO2 and you've got stock in it, you're a genius, I love you and you're doing everything for the world. Right. But if you just sat there and got lucky, you know, don't you know, I love this about Taleb's first book, Fooled by Randomness. The confusion between luck and skill. Right. A lot of things that happen is just luck and we ascribe it to skill and that's why we don't want you to touch it.

[B]

We hope you're enjoying the podcast. You know, we work hard putting together this show show, but we work even harder for our investors at Smead Capital Management. At smead, we believe in disciplined investing, which is why the SMEAD funds have a proven track record of long term outperformance. If you're an investor who plays the long game and want to invest in wonderful companies to build wealth, we invite you to visit smeedcap.com Past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including, including objectives, risks, charges and expenses. Read and consider it carefully before investing. SMEAD funds distributed by Smead Funds Distributors llc. Not affiliated on that subject. And I'm totally biased. We are folks. Just so you know, Mark, that we didn't touch the oil market for the 2010s because like to your point, they lost a lot of money in the 2010s. That's what no one says that would. The 220 doesn't get anywhere near the amount of money they wasted.

[C]

Oh, absolutely.

[B]

Right, Absolutely.

[C]

If you're a long term investor in that, you're just getting a little bit of payback. But as a windfall on that window. All right, let's shift it. Let's shift it to another one. Right.

[B]

I was going to say let's shift it to Italy because I love this and most people don't understand this at all because it's kind of like Munger says, you show me the incentive and I'll show you the outcome. And I think Italy does that.

[C]

Yeah. So basically it's another example of a windfall and Italy basically got on top of what happened everywhere. And most of our politicians were Asleep at the wheel. So everyone listening to this podcast knows that basically we don't do fractional reserve banking and we don't have loanable funds. You basically do endogenous money creation. Wholesale markets are important, blah, blah. It's a totally different world from what's in the textbook. Right. So with that in mind, right, how do these people make money? Well, there's meant to be this model that we still got in our heads whereby grandma shows up at the savings bank and then the savings bank is very clever and lends it out to an engineering firm. So they borrow at three, they lend at six and they get the three.

[B]

And we call that net interest margin, right?

[C]

Yes, net interest margin. And then you've got to basically give something back to grandma in order for grandma to put the deposit in or the whole machine breaks down. Right?

[B]

Yeah.

[C]

This is. You have depositors because it gives you a banking license and in many countries insurance. That's not where you get your cash. You just invent it from basically making local. Now with that in mind, what happens when central banks raise interest rates? Well, suddenly those banks become a lot more profitable. Are they passing that back to depositors? Absolutely not. They are taking the net interest margin to themselves. And the Italian government went, hang on a minute. Because Italy is a place that's got loads and loads of small savers. That's actually an incredibly important constituency. And they're all old, they all put tons of money in the banks and none of it's growing because the economy is incredibly sclerotic and interest rate have been on the floor for ages. So suddenly European central banks bank and things up to 4%. They're still getting the negative seven. No, not really, but you know what I mean. They're basically getting negative bupkis on their deposits. So the Italian government went along and calculated how much they made and said, you guys are going to pay us a tax. And the banks were like, what? Yeah, literally it's a windfall. We're going to take it and we're going to redistribute it back out to the people. You should be doing it because you're not passing on. Now the whole thing got held up in court and basically the banks kind of won and then everyone stopped caring. But it was an interesting examp of thinking how to think about windfalls.

[B]

Well, and also how models can't be applied. So for example, to your point, I'm gonna follow on that because I, and I'll give you an example. Like, I love this in your book because I, you know, like, I love being an American, but we obtusely use what happens here to many other places in the world and it doesn't apply. So in America, if we have a better deposit rate at one bank versus another, what do we do? We're loudmouth people. We tell everybody about it. Oh, by the way, we can get you an extra 50 basis points over here. God bless you. Come to our bank. But that's not how it works in Italy. In Italy, they do not advertise their deposit rates on the window because they're actually afraid of people moving deposits.

[C]

Correct.

[B]

So what does grandma have to do? To use your analogy, she has to go in and sit down with the banker and say, sir, I have been told by other people that deposit rates are higher for them. I'd like to renegotiate my deposit rate. And the person would say, great, what would you like? And they would tell them and they'd say, no, we're not going to give that to you.

[C]

Right.

[B]

And then she would have to move their deposits to someone that would give that to her. It's a negotiated deposit market versus an advertised and regulated. The UK regulates their deposits a lot more, for example. So naturally banks have to give a de minimis level that's higher. And that's what I love about this. As you go around the world, these frameworks are different and you can find profit arbitrages depending on where you go.

[C]

And also the structure of banks is so important. I mean, the Italian banking system still looks like it did in the Medici period to a large extent. Right.

[B]

It might have been better then, by the way.

[C]

It might be better then. Right. But then when you look at French banks, I mean, this is going back to my austerity, but one of the things I was looking at was essentially the American story was too big to fail. When you start to look at the asset footprint qua possible losses of European banks, they're two to three times the size. Three French banks at the time of the crisis were 245% of French GDP. And these people are that in the euro and don't have a printing press. Wow, that's too big to bail. I mean, literally, that's it. So the structure of these things can vary so much even within one monetary union.

[B]

So you mentioned a couple different factors that you kind of, you touch on. And these are like the factors of the multi factor model. And I think you really do a good job of explaining that. People get too fixated on one thing standalone. Okay, so you mentioned Too much money. Okay. Would you say that stimulus checks were a pretty good example of this?

[C]

The best estimate that we were able to find in the research on this was it could have contributed a third of the inflation that the United States felt. But the error bars on the estimates were so wide it could have went from negative 1 to from 1/3 to minus 0.1. So you don't know. Right, right. Common sense tells you it does. Except you have to think about two things. These checks were given at a time when we shut down a very, very large proportion of the labor market in an economy where lots of people live paycheck to paycheck. So what did they do? They ran up their credit cards. So what we did was we went to the New York Fed Survey of Consumer Finances and just found the issue where the paychecks were spent and what did they spend on a huge amount of that was the largest increase ever in credit card receivable. So they paid down their debt, which is inherently non stimulatory. So even if the money was in principle stimulatory, and we can argue about the context in which it was paid, calling it stimulus checks was dumb. They should have just called it emergency cash or whatever. Right. But nonetheless, you take that money and then you put it on a credit card, you spend it. Absolutely. Particularly in a moment when supplies are constrained, probably going to have an inflation effect. But the act of paying back the credit card first of all destroys money. But secondly is not inflation. So you got to work hard to make that one work. Now, again, let me say this. I mean, a lot of monetarists are very cross with me. I was surprised so many of them are still around. It's a 70s argument.

[B]

Right, sorry. That's a deep economics humor that I'm bringing there and listening to you on.

[C]

The timing. Right. But I mean, again, that sort of model, to go back to what we're saying, really relies on kind of deposit funding, it relies on loanable funds, it relies on the central bank pushing money into the system, Kind of. None of which actually applies to the way that we really do these things anymore. But do I think that money on its own can cause inflation? Yes. Are there examples throughout history where governments have just went, yes, of course. Right. But when you look through even the big cases of hyperinflation, that's not what the hyperinflation is. Everything is broken and the last thing you've got is the printing press. So you might as well go for it. Right. It's not. Cause it's A sign that you're already dead. Right? That's pretty much it. And the classic case on this Latin America, can you find evidence of populous spending insane amounts of money and vote buying and no economy blowing up? Absolutely right. Look no further than Venezuela. But the Argentine case is super interesting because a very simple way of telling the Argentine case is there was Peron. Peron steps into the breach after the 30s when everything goes to shit. And basically it does so because they're dependent on exports. Exports collapse in the 30s, they try and rebuild in the 50s. They've also got to industrialize simultaneously, obviously, because labor is part of the Peronis coalition. You can't do the East Asian trick and essentially suppress wages to build savings to do the capital imports. You become very much dependent on foreign people's money. And then when that starts to go awry, you just print money and you try and build favors that way. I think so much of that is true. Malay in Argentina is a reaction to, if you will, the denouement and end and collapse of that system. So 100% sign me up. Right. But there's another one that goes like this. You export six things of value and import 20,000 things you need that you don't make. Your exchange rate is a proxy for a commodity or a basket of commodities. When that's doing well, you don't have a current account constraint and you can import what the hell you like and your bond market's great and everybody loves it, but like all commodities, you end up making too much of it and demand shifts and you get the other side of the cycle. Your exchange rate collapses. In real terms. You can't import everything that you need now at the same price. Moreover, nobody wants your currency anymore. They want dollars. So that spread's got to be filled in. So either you say to your population, no drugs, no food, no fun, we're just going to set this one out. Or you're on the printing presses and that's what you do. So what's driving it here? There's a phrase that we picked up from a Fed thing from years ago, which is it's always and everywhere a monetary phenomena. Ballistics are always and everywhere. No, shootings are always in everywhere. A ballistic phenomenon. It bullets are involved, but it doesn't tell you about the direction of causality or who got shot or why. And I think that that Latin American model really shows absolutely buckets of populist money involved in this. Yes. Are they running the print vest? Yes, but it's because they're Latin America. And they're structurally dependent on exports, have a soft currency and have a volatile exchange rate.

[B]

Sure. Because the other thing that you know, again, back to your stimulus check. So I can't get over this. And I keep. I've been coming, We've been coming to this data point since the bottom in 09. If I look back at household debt service ratios, Right. So separate from government right here in America. So we know our government's levered. We know that looks problematic. You got Neil Ferguson out there arguing we're spending more on interest costs and defense spending. Not a good picture for America. Okay. And I agree with Neil on that. But that's the government's problem. Right. They could be the loser and I could still win. Maybe. Right. So if you look at the household debt service ratio, we're not at the lowest we've ever been. That was actually peak, peak pandemic. Right. It was the lowest we ever got on that when the stimulus checks are going out. Cause it brought it even lower to your point. Cause we paid off debt, but it's still one of the lowest levels since 1980. And I always point out to people, yeah, yeah. I mean that, that helped us. But what it does is it buys time. It buys time to the next recession. I mean, so let me throw out another idea to you. Just think of this year. I just think of this year a lot. And this kind of is kind of a question on the too much money argument. We have never, outside of a war, done this kind of spending in deficit, you know, 7% for four to five years. We're into this. Okay. And so I hear. I mean, the dumbest thing. And Mark, I just, I love your writing and your Nicola, your thoughts on this because you're. A lot of times you're stepping back and saying, wait, like, let's not be in the weeds on this. Can we step back for one second? Does this make any sense to an average person and. Or is it just total, like economics hubbub? Right. And so what doesn't make sense to me is I feel like Wall Street's primary obsession is not to find the next bear market in stocks or assets because they suck at that already. We know that. But it's to sit around and be like, where's the recession coming? We're recession hunting. We're going to. Oh, that might be a recession. Oh, no, it's not. Never mind.

[C]

Right.

[B]

And we've been doing that for four to five years. Right. Like 22. We were supposed to have recession. Where did it go? And the answer is it scurried off because ultimately I would invert it. Munger says always invert. Can't. Can we go back in any point in history and find a period where in the American economy the government was spending 7% of GDP in deficit and we went into a recession? Normally we use that in deep recessions.

[C]

Yeah. To get out of. Absolutely.

[B]

So it's like, it's like dumb sports recession hunting. You're never going to be successful at it. It's like fly fishing for me. It's just not going to work. Is that a fair way of looking at this?

[C]

I think it's a fair way of looking at it. I mean a very simple way to look at this. You want to be as simple as possible. And I'm not a card carrying MMT person by any means, but they make a simple point. If the public sector is running a deficit, that has to show up as a private sector surplus. And if the private sector has a surplus, they're going to spend it or they're going to save it. It doesn't look like they're saving it, it looks like they're spending it. If you then add to that a skewed income distribution, then what you' filling in for the lack of demand generated at the bottom or wage growth at the bottom with essentially consumption at the top. So this is why we have these consumer reports that basically say the top 20% of American consumers are powering 80% of the economy because that's where the money is. So I think yeah, it's a very simple story. And the counterfactual is right. Okay, so if you were to balance the budget, what would happen? Well, I guess that that would mean that there would then be, or if you're a vertical reversed it. There would be less of a private sector surplus, which would mean that demand generated in the private sector would fall, which would mean that if the government's saving at the same time, the economy would shrink. Now that might then lead to a focus on reducing spending and so on and so forth. And that might in the long term lead to lower debt. But the experience of the 2010s in Europe was if you have 100 over 100 and it's 100% debt to GDP and you cut your GDP by 20% through saving, your debt to GDP ratio just went up to 120. So there's no easy answer on this one. And once you get kind of addicted to the perma deficit, it's hard to wean off that. Now if you're the us you're printing a global savings asset. There's an insatiable demand for Treasury.

[B]

You have a license to print that. Other people don't.

[C]

Yeah. You don't have a current constraint. Right. But the interesting thing about the Trump administration for me, me is they are aware of this. This is what they think has hollowed out American capacity for manufacturing, amongst other things, and they really want to do something about it. And this is why you see, like Marin and others talking about maybe we should have a transactions tax on foreign holdership of dollar assets. Yeah. We still believe in a strong dollar. No, you don't. You actually want it down. Because if you want money exporting, you want to cheap.

[B]

No one's saying that, though. I mean, to your point.

[C]

Nobody's saying that.

[B]

Right. There's two places the markets are pricing that in 2000 places a the dollar. I agree with you. And by we're hearing from investors, they're starting to ask the question of like, hey, do you provide a, a hedge share class for US assets? Why? Because they're beginning to think of that in their mind. That's one. But secondly is, you know, markets are trying to make profits on this policy and the other way you could see that is gold.

[C]

Yeah. And you do see that. I mean, admittedly, from my reading of this, a lot of this is even more interesting is basically German and Chinese central banks going, give me the gold, give me the gold. So if it's a lot of demand, it's there rather than sort of in the investor space. They're more likely to buy an ETF of the thing rather than the real thing. The physical shipments of gold in the past two years to central banks are actually quite spectacular. So, yeah, there is that. This is also the builder of crypto. This is the interest in stablecoins, which is kind of weird because if you want to do a Treasury market market, then why would it be stable and an alternative to the Treasury?

[B]

Because that's already stable. That makes no sense.

[C]

Yeah, exactly. And also if it's unstable, then why would that be the hedge that you're using to issue the coin? Right, but park that for a minute. But absolutely, people are looking to domestic investors, international investors, but also countries are looking to disintermediate and get out of the system. Because think about, let's say you're the Russians, right? So in the newspaper today in the ft, the Germans have decided that seeing as they're the ones that are bankrolling most of the expenditure for Ukraine, they're Basically going to seize the profits of Russian assets and use that to fund it.

[B]

Sure.

[C]

You've just ended any attempt by the euro to become a global currency. Because what you've just told everyone right there is it's your money, but we can steal it. Well, why would I want to do that? Now if you've done that to the euro. Right. We've got a government here that basically is telling the treasury market, maybe you should just swap everything for a console with a low interest in exchange for military protection. Are you serious? People are looking for alternatives. Absolutely. And then you got the whole BRICS thing. Right. Trying to build a digital bridge, et cetera. Yeah, there's all this stuff going on.

[B]

Well, I mean, even the drug dealers know what the currency you want to hold is. I mean, that's the crazy part to this, is they don't want euros. That's for sure.

[C]

Right? Absolutely.

[B]

Hey, I want to give a big shout out to everyone who's been working so hard on this, this show. You know, we recently hit the top 10 in investing podcasts on Apple Podcasts and even number one in the business category in several countries. As you may know, this show is brought to you by Smead Capital Management. Smead Capital Management understands how frustrating and illogical the stock market can be. If you are searching for funds with a proven track record, give the SMEAD funds a look. Or better yet, reach [e-mail] and don't forget to mention you're a fan of the page podcast. Past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges and expenses. Read and consider it carefully before investing SMEAD funds distributed by Smead Funds Distributors llc. Not affiliated. I want to pivot the discussion a little bit, you know, and I will say this to our listeners. I'm not going to go into your hyperinflation definitions, but they're really good. And I just like walking through history and asking what's similar, what's different? Things like that. Also, like, you talk about how the Japanese model of cheap labor high savings that worked in other parts of Asia failed miserably in Latin America. So let's go to the Queen. The Queen asked after 08 09, why didn't we see this coming? That was her question. Okay, now isn't the kind of point that we can't in aggregate, but in small groups, profit can be made from seeing things like, for example, you know, you know, the Fed just Lowered short term rates. And so people look and say, well, that's weird. Why is the Treasury 10 year treasury upticking and why are mortgages upticking? And like I tell people, it's not what happens wins, it's the expectations of what happens. Because there were arbitrageurs and profit seekers who were already anticipating that move months in advance that had already priced in such a way that once they got their profits they needed to get out. And what does that do? They have to give up some profit for liquidity and therefore rates moved higher marginally. That's the nature of markets.

[C]

Yep, that's it. But.

[B]

But not everyone can make that money because you would have to anticipate that and put capital at risk.

[C]

Right.

[B]

Can we get it right ever? Is the question.

[C]

All right, but what was your original question though?

[B]

In aggregate, in other words, like we're trying to make these cases that like, you know, the central bank in aggregate for society.

[C]

Oh, right. Can they see it coming? Yeah, yeah, yeah, absolutely. Sorry, I know where we're going. Right, yeah. So I would, I would put this as a micro macro split, right. Which are always more analytic than real. But like, allow me the indulgence. Right. So can we expect them to see what? Right. Can we expect people who are micro focused profit seekers to have a macro view of a system and even if they did act upon it, given the incentives and given what they do. Right, yeah, 2008. No. Right. But here's the question. The entire central edifice of modern central banking independence is based upon, trust us, we've got this right. We are uniquely qualified to see the world as it is. We have our star, we have y star, we have ustar, we have the astrology that allows us to set these models up. We know the speed limits in the economy. We can tell you when you're heading for inflation, we can tell you what an excessive deficit looks like. We understand the whole thing. Great. In that case, why didn't you see it coming? And the argument. And the answer is, because in a sense they were looking in the wrong place. They were looking at labor markets because that's where they always look for inflationary forces. And we spend a bit of time saying that hasn't happened for a long time because we destroyed trade unions and we internationalized capital and supply chains so they simply have no push force to do that type of stuff anymore. Right. And if you stop looking at the labor market, where else do you look? You look towards money. So governments don't spend money, Politicians shouldn't Spend money. Politicians are time inconsistent. If you leave them alone for five minutes, they'll spend you into impeccable community. The Germans have been balancing the budget for the past 12 years and it's basically meant that the economy is falling apart through a lack of investment. So no on this stuff. Basically no. So our sort of thing was. Well, you couldn't see it coming because you were focused on labor markets and money. What about just big things like you've extended all these supply chains that are equivalent to a financial crisis screw up, which was the financial crisis grew up in a way was you're a British bank that lends mortgages, you go into the repo market and you're borrowing overnight and you're refunding, financing this mortgage every day for 30 years on a mortgage. Right. So you're making an assumption that there's infinite perfect non volatile liquidity available at any given point in time. That is a hell of a bet when you phrase it that way. Right. When you build out global supply chains, you're basically making a bet that geopolitics has disappeared, everyone always likes each other and there's no such thing as exogenous shock. That's a hell of a bet as well, isn't it?

[B]

I agree. What they have in common to your point, the reason why they are the same is cause if I go out and seek liquidity today and it's there, great. It didn't require any time and the price for little time is low.

[C]

Right.

[B]

But if it takes me 30 days, the price is going to be higher because the marginal buyer for 30 days later that says I'll do it means I'm paying more money. Same thing's true in supply chains. The more time it takes, the higher the cost.

[C]

Exactly. Now arbitrage is going to exploit that on the one side. But to go back to central banks in this example, this is why they are so important. Because apart from having that rise and lower the price of money buy and sell assets, there is one more thing they've got going for them. The price insensitivity of the buyer. They don't have to care because they've got the keys to the print and press. That's why they are genuinely the only outside money in the system. And that's actually where the real power lies, in that side. And that's something we really don't focus on and off.

[B]

Sure. So I'm going to. I think I got two, two kind of, kind of final questions that I want to walk you through. And I want to set up a scenario because I, I, you know, we talked about this before and I'm just, I'm totally consumed by this right now. And by the way, I am a profiteur, I am an arbitrageur. I want to make money on this. And my biggest concern is, you know, I'm like, like I've said numerous times in my audience, like I'm your classic right wing, evangelical, you know, type of person politically. And I believe in a lot of the economics I've learned, but my job is pragmatically to make money. That's plain and simple what my job is. Okay. And so let me just kind of give a backdrop and if there's any of this that you disagree, but I'm gonna start with 20 to 22, because I think it's a very prescriptive period of time to think about for even some of the circumstances and factors at play now with some differences. Okay, so, so we talked a little bit about there's a lot of largesse coming into the economy tied to the government then. There still is now.

[C]

Okay.

[B]

What we had going on then is we actually did have some people leave the labor force. I'll call those boomers. But what we had was these imbalances in supply chains. We don't have those today. But really there was a near term demand for labor to get things done coming out of the pandemic. And in the overnight period, you just go, you couldn't replace people that weren't there. Right.

[C]

Yeah.

[B]

Now we could do that over time. By 22, 23, we began to, but we also, differently than today, we had millions of people coming across the US border. And the reason why I point that out is because if I look back at the data, if I look back at the Federal Reserve bank of Atlanta data, for example, they do a great job of breaking out the wage quintiles. Right. And you'll see the highest wage gross growth during the 20 to 22 period was actually the lowest wage.

[C]

Yeah, the bottom.

[B]

It was the bottom. Which means that the raw commodity of just someone showing up to use their time to, you know, serve someone, you know, for entry wages was actually our scarcest need or biggest need, our scarcest asset at that time in the wage market. Okay. So, so like I just think about all the factors. Low short term rates, strong economic growth on the back of government stimulus, et cetera. Okay. Now in real terms, from 20 to 22, stocks lost money. Real. Okay. Now let's fast forward to today. So what we've seen since then has been lower inflation, labor markets have backed off. Oh, by the way, the thing I didn't mention on 2022, housing was very strong during then. You know, we've kind of seen the inverse of that. Cooler housing, not bad, but cooler. You've seen labor back off in prices, you've seen inflation back off. And in comparison, real stock returns are higher.

[C]

Right.

[B]

Okay. Now when Mirren to your point is saying, no, we should be shorter, like low, shorter rates should be lower. And they say, you know, they keep on with this idea of like we want Main street to win. Well, in my mind there's two ways that Main street or what I'll call the bottom three income quintiles win is that labor inflation runs hot. Secondly, housing inflation runs hot because most of the wealth of the bottom three income quintiles is more often than not tied to their house. There's many Americans, there's a good portion of America that the day they retire, their biggest asset is their house. Okay. And I think what most people in the stock market is forget that there's people like that.

[C]

Yeah, that's certainly true.

[B]

Okay, so here's why I say it. I think we're gonna wake up in a world where the short end of the curve's 2 1/2 to 3%. I think we're gonna wake up in a world where in two years we're gonna have 4% inflation. That might be small, but again that I think it's 4%. It's kind of a number I think about. The question is what's the market deciding on the 10 year? I would say it has as much to do with how much people lost or won in the stock market at that point point to determine whether they like bonds or not ultimately. But let's just say it's five. Okay. And then the other question would be like you're in a hot housing economy with hot labor inflation. What's the price of a mortgage? Now back to fractional banking. If the government is lending to me at 2 and a half to 3% normal spreads on mortgages, the 30 year story says 1 and a half percent, 10 year to 30 year fixed. Today it's been more like 200 to 250 basis points more on the 250 side. I don't think there's a chance in God's name that long term with short term rates are 2 and a half, 3% that you're going to find banks sitting out at 7% on mortgages because in fractional banking that's too much. Margin. Right. If I can borrow it two and a half or three, and I give you a mortgage market seven, I mean, that's better than asset management, right?

[C]

Absolutely.

[B]

Okay. So I say that because I can actually see a world where what Mirin's advocating for is. And I'm gonna get, I'm gonna. I totally thought about this during our discussion. It's two pedals of a bike, okay. In some eras we do the let's keep inflation low and let's keep asset prices higher because we want to create a lot of surety around capital.

[C]

Right.

[B]

But if we go too far on that one pedal, the bike's gonna stall out because it loses momentum. So the second pedal of the bike is, okay, we've done that for a while in a long time time. We now have to reinvest that capital back into income and thus the real economy to make sure that at a later date, when we come back to the capital pedal, people believe in the system that we're using.

[C]

That's pretty long sighted stuff. I mean, I, I would like to think people would take that type of view.

[B]

I'm not saying they are. I'm not saying they are.

[C]

Yeah.

[B]

I'm saying that that's the natural. Buffett talked a lot about 64 to 81 as a very unique period. That's where the real economy, according to Buffett, won. And all I'm really saying is it's going to be something closer to 64 to 81 because you need that to fire the next era of assets many years later.

[C]

Yeah. Whether it's deliberately to fire the assets or not. I mean, there's an open question. I agree with Vet pretty much all you said there. Right. I would look at slightly different factors. One would be sort of like, well, who's sitting the 10 year? Because you still have those fiscal pressures we spoke about. We still have a lot of people who are investors saying, I'd like to have an alternative. If credible alternatives do pop up over time, technologically or geopolitically, that affects this one. I'm not quite clear why. If they're at 3, if you got 4% inflation, 2.3, 2.45, the mortgage would be 7. Like, why wouldn't the mortgage be 5?

[B]

Oh, I agree, I agree. The spreads will come in. And by the way, think of what that does to housing. We're like, wait, I mean, I'm back right in 5%. I agree with you.

[C]

So basically I'm juicing the housing market again. Correct. The other thing is, you know. Yeah. The housing residual on wealth is definitely there, but when you get to the bottom 20%, nobody has it. I mean, it really starts around the 35th percentile.

[B]

Well, I agree, but here's the funny.

[C]

Part of getting housing.

[B]

I agree, but so here's the funny part. Phil Graham's book, the Myth of American Equity Quality, he says that if you go, this is crazy to say, this is like how blessed I feel to be an American. If you look at the lowest income quintiles house, it's actually nicer than the average house in the uk.

[C]

I mean, also just in terms of the quality of building. Correct? I think that's true. Right. But, you know, but in terms of actual home ownership, I mean, we are down. We're back to where we were in 2008. It's high, but it's only 54% or something like that that actually own house houses. So, you know, half the country actually rents. So I mean, that story's true. So it's a bit like saying the following, right? If you've got a car, it's probably a better car than that guy's car, because we both have cars. We're doing an intracar comparison, Right. If I've got Uber and you've got a car and you're saying my car, it's just irrelevant, Right? So yine on that one. I mean, I don't dispute your picture where you're getting to. I mean, I looked at different factors on it, but I don't speed it. I can totally see a world of like 4, 3 on growth, 4 on inflation, and then 6, 5 on mortgages. Now, if you do that, Interestingly, you're saying 64 to 81. I did it slightly differently, but it's more or less ballpark. I think that's what we had then.

[B]

I agree. And it wasn't the most possible time. I could beat the timeframes.

[C]

I agree.

[B]

By the market.

[C]

That's it.

[B]

Relative returns of stocks, really any ended in 66.

[C]

Yeah, totally.

[B]

Right. So they made higher highs, but not in real terms.

[C]

Yeah, no, absolutely no. And it was an inverse. It was the other side of the pedal. Right. And yeah, I mean, I think over. So, I mean, I look at it this way. You can do that story on a macro level with basically the rise and fall of the gold standard and then the rise and fall of Bretton woods, and what we're seeing now is the rise and fall of what you might call neoliberal globalization. Only that's a hell of a mouthful and I can't a find better descriptor. But these things do sort of pivot over 40 year cycles. They exhaust themselves. Correct. The bug in the software as I've described it before in agronomics of the gold standard was systemic deflation, basically constantly falling prices. The bug in the software for the Bretton woods system was constantly rising inflation. And then we solved the inflation problem again, this time with central bank rather than gold. But what that did, the bug in the software was leverage in the banking system and asset inequality and we're going to correct for it. So in that I think we're exactly on the same page.

[B]

Atone for it. Atone for it. We have to atone.

[C]

Well, see, I'm a lapse Catholic, I can't do atonement. It brings me back to many memories.

[B]

Lapsed Catholic is the term one of my colleagues uses. So that's funny, you use that. So I'm going to throw two things. You talk about demographics I think are way understated in the policy realm. Like I think they're, you know, we were going to have deflation because there were 25% less Gen Xers than boom, for example, in America. That's deflationary. Now that was then also globalization, right. That caused deflation. Now if I use those two factors and you guys touch on this, I think those two factors argue inflation now, not deflation.

[C]

That's exactly. So at the end of the book what we do is we mentioned the Golf gti. So I'll just let the listeners know why. So my favorite car, in many ways one of the first cars ever had. And the 1978 model cost in $78, about $10,000 if you buy the new one today, the engine's twice as powerful, it's got abs, a computer, the whole lot. I mean it's a far superior car. And in $1976 it's a third cheaper. Why? Because everybody else makes these cars as well now. And it's called competition. It drives down prices, it increases supply, it does all the things. That's why we think capitalism is the system that dominates the world, because that's is what it it does. The problem with it is if you have constant deflation across all sectors, then you end up squeezing labor beyond to maintain profits and then the whole thing goes to hell in a handbasket, which was the gold standard story. Right. So there's inherent deflationary tendencies, good ones in the system. But on the other side you got what was demography was the baby boomers X as you mentioned. Right. But a Simple one was 500 million Chinese workers joined the labor force in an integrated supply chain that had massive deflationary effects on prices and wages. Everywhere else samples that's done, they're no longer a low cost economy and there's nobody else waiting in the wings that can perform that function. Nor with 4.0 manufacturing, do you need that. So that's gone 100%. Right. The other one we mentioned is climate change. You already get the numbers on this. The Potsdam Institute for Climate Research has done a lot of work on, on this. They already estimate that basically about a third of the inflation that we're seeing showing up every season across Europe and so on and so forth is basically the Po Valley drying out as Spain has basically drained 30% of its aquifers. So strawberries could be in Britain year round. These sorts of like, let's say supply shocks will become more common. So there's these two things fighting against each other. One is kind of the inherent deflationary tendencies of competitive carbon and the other one's demography, climate change and you could add other supply pressures to that.

[B]

So let's see two things off that we have the west not having babies.

[C]

Yeah, absolutely.

[B]

Do you have any hot takes on? Because I would say that means no new labor coming into the workforce relative to the size of the economy.

[C]

Particularly if you no longer want immigrants, you've got a problem. Let me do a Mike Green thing here for me because I was the first person ever heard of. This is how you basically I'll just do it. It's wonderful. He goes, what's an economy? It's the number of people, the number of hours worked and the quality and quantity of capital they work with. That's it. So if value, if variable 1 goes down, variable 2 has to go up and if you're not going to work any longer hours, the solution is robots or immigrants. It's that simple. Simple. So how do you want to play it? I think it's just a great way of framing the problem well now.

[B]

But there's also one other factor in capital. Let's use the deflation of the Internet era with Chinese and also Chinese workers. And also really the demographic change.

[C]

Yep.

[B]

The Internet era was dominated by software which requires very little investment and produced a big return.

[C]

Yep.

[B]

If AI is going to play that robotic opportunity. Opportunity. What do we know? It requires massive investment, massive capex and.

[C]

We don't even know what the OPEX is going to be.

[B]

Which argues that means the incremental return in that economy to automate is actually far more expensive than the past, which.

[C]

Is why it has to be super concentrated and one firm has to win, which is why you get the capex build out.

[B]

We've got, well, except that there's like eight of them competing with billions, hundreds of billions of dollars as of the state. So I, it's, it's, it's, I mean it's super fascinating. I agree. Okay, last question. Oil investment looks like it's literally going off a cliff here in the United States. And the marginal supplier right now is effectively countries that don't have to do much to bring on, you know, oil over the next six to 12 months, but they're using all their excess capacity.

[C]

Yeah.

[B]

Is our next big inflation pressure like the past just going to end up being energy prices?

[C]

It depends. You've got two forces. One is people no longer need oil. Pakistan's given up on gas firing, its grid. You've got a micro build out that has basically shut down large parts of the Pakistani grid because we were slated for Qatar's LNG and they sold it to Europe and they said, screw you guys, we're going to take Chinese panels. This is also what's happening in Africa, it's happening in southern India. One part of the world is basically saying, you know what? Oil is a huge balance of payments constraint, a pain in the ass, we're done with it. Don't want to do it. We'll just take the panels, please. Right. And then you got the other side of it, which is primarily us saying, if you don't want to get tariffed, why don't you buy 100 billion of our carbon exports? Right. So you've got carbon lock in on the other side and it's these two forces competing together that's going to dominate the next decade. Now one final thought on this one. Right, who else is coming online? Argentina, Guyana, Brazil, Indonesia. We are going to have so much of this stuff at the same time that you will basically hit peak oil for gasoline at least in the 2000 and 30s. What has to happen is a massive price crash in oil. So short term, yeah, you may see some kind of price pressures. Longer term, that baby is going to go down.

[B]

We couldn't disagree more on that, I'm.

[C]

Sure, but that's my view.

[B]

Well, no, I don't agree, but here's my rough math. I'll give you a really simple way, you know, humans are going to flourish. I truly believe in that. The future is born. We need about a million barrels a day each of the next 10 years. So in 10 years you'll be doing 10 more million barrels. And even with those things coming online, they don't meet that. They get at best about 70% of the 10 million barrels. Which way? 10 million barrels a lot. We're the largest producer in the world at 9 million barrels a day. And so I just say that because you're right, we have to grow supply. But this is the smallest supply growth.

[C]

Ever, ever of the last 20 years. And yeah, absolutely. Over the past seven year, eight years plus. I mean you get to the point where you know your North Decor and Fracker can survive at about 55, but if it goes down below that, then you're in trouble.

[B]

I agree. In the Dallas Fed survey, someone said, yeah, there's abundant oil. We're just running out of the $60 stuff.

[C]

Yeah, exactly. And I think that there's actually, it's not a price floor, it's a kind of price less that I think that the incremental effect, particularly of foreign buyers turning away over the next several years really will make that edge a lot steeper. So we're running an experiment. We'll see which one of us is right.

[B]

I agree. Well, let's see. Mark, I've had a ton of fun. You know, I just got to say and by the way, it sucks that Niccolo going to join me because I'm sure your accent plus his would have been a lot better.

[C]

It would have been truly cosmopolitan.

[B]

It would make me feel smarter. Your book Inflation A Guide for Users and Losers should remind our audience that understanding inflation is like we're talking about. It's a multi factor model. Simple rules in my opinion are simply stupid. I think we should focus our time understanding who the winners and losers are. And your book does a wonderful job of this. This can change faster also than we think over a five to ten year period. If you enjoyed this podcast, go to Apple, Spotify, YouTube or wherever you listen to A Book with Legs Pocket podcast. Give us review and tell others about the books and great authors like Mark Blythe and Nicolo that we have the opportunity to understand and study the world with and through for our tribe. If you'd like. If you have a great book that you'd like to recommend, email podcastmeecap.com that's podcastmeedcap.com you can also send your suggestions to us on X. Our handle is meedcap. Thank you for joining us for A Book with Legs podcast. We look forward to the next episode episode.

[A]

Thank you for listening to A Book with Legs A podcast brought to you by Smead Capital Management. The material provided in this podcast is for informational use only and should not be construed as investment advice. You can learn more about Smead Capital Management and its [e-mail] or by calling your financial advisor.