Wall Street Lets Out Sigh of Relief, Uncertainties Persist

Mike Maharrey: Greetings. I'm Mike Maharrey, a reporter and analyst here with Money Metals, and I am talking today with Dr. Peter Earle. He's the senior economist at the American Institute for Economic Research, and Pete covers monetary policy, financial markets, and many other things over at AIER. How you doing today, Pete?

Pete Earle: Great, great, Mike, thanks for having me.

Mike Maharrey: Well, I really appreciate you taking a little time and I'm looking forward to getting your input and insight on some of the things that are going on out there right now. It seems like we're living in crazy days, and of course on Monday we had this kind of a market meltdown, although everybody seems to have forgotten about it by now just a couple of days later. But a big part of that narrative was that the Fed waited too long to cut interest rates. We got a bad jobs report last Friday and everybody kind of freaked out and now all of a sudden, I guess, the soft landing is out. Do you think that the market was kind of overreacting or was it maybe a premonition?

Pete Earle: Yeah, it really wasn't that big of a deal. It was the biggest decline percentage-wise since 2022, which really isn't that long. Equity valuations have been really pumped up and beyond that the breadth of the market advance was really tiny. Less than a month ago, the median US stock price was flatter, slightly down, year-to-date, and most of the rise in the indices was due to the so-called MAG 7, Apple, Amazon, Alphabet, of course that's Google, Microsoft, Meta, Nvidia, and Tesla. And more recently we saw that the earnings of those six... the earnings of six of those rather... weren't that great. We still have to wait to hear from Nvidia near the end of the month, but when the only seven stocks that are holding the market up have bad earnings, you expect for there to be some kind of feedback mechanism. Now you mentioned also, we also had a string of really lousy economic data, especially regarding U.S. labor markets.

Last week we had initial and continuing claims higher than expected, so that's initial claims and continuing claims for unemployment. The JOLTS report showed falling quits and falling job openings. So when companies have say 50 job openings and they cut them to say 45 or 40, and when employees stop quitting, both of those mean that there's a weakening in the labor market. Quits falling because it means that people don't think that there's a high likelihood of finding a new job if they leave the current one. We also had the ISM, that's the Institute for Supply Management, the manufacturing numbers were atrocious. And then of course we had the crowning achievement, or really the straw that broke the proverbial camel's back was on Friday, the Bureau of Labor Statistics report showed that a nearly half percentage increase in underemployment and the U-3, which is total employment, rose from 4.1 to 4.3%.

That was not just a bigger than expected increase, but it triggered the Sahm rule. And last month I wrote an article in which I indicated that the Sahm rule had been triggered to one decimal place, so I was a little bit ahead of this, but the [inaudible 00:03:24] number confirmed it. Now, when the Sahm rule is triggered, it overwhelmingly means that the U.S. has already entered a recession. Since 1950 there have been 11 recessions, each of which were predicted or indicated by the Sahm rule. At this point I've got to mention, there were two false positives in 1959 and 1969, but the 1959 Sahm rule signal had a recession started six months later. So it's a very strong indication, and with unemployment and all that sort of thing, I think we're going to see unemployment rise over the next six to 12 months.

And I would just add one final thing to that. If we add all this about weakening employment and the stock market and all that to the growing possibility... It seems that the market thinks the Fed has kept rates too high for too long, ongoing conflict between Israel and Iran, Russia and Ukraine, Houthi, Hezbollah, provocation between China and Taiwan, and an election which is almost guaranteed to be contentious and maybe even generate civil unrest like we saw in the summer of 2020... I think an eight and a half percent drop in the stock market was actually pretty under appreciative of the factors facing the U.S. economy right now. And I didn't even mention the stock market crash in Japan.

Mike Maharrey: Right, right, and that's a whole other ball to whack. I thought it was interesting, I'm really interested how the monetary policy plays into a lot of what's going on, of course in Japan we had a rate hike, which I didn't realize that was only the second rate hike since 2007, which is kind of insane. But you mentioned... now my mind just went blank... Sahm. She was actually on CNBC and talking about how we need to normalize interest rates. And I was kind of thinking about this, and I'm kind of the opinion, I'm really curious if you're in agreement with me here or if I'm off base, which is entirely possible, but I almost feel like that this is more normal from a historical standpoint than what we've really had since 2007, 2008, where we were at zero for nearly a decade. What's kind of your take on the whole interest rate thing?

Pete Earle: Yeah, sure. I mean, for most of history, interest rates we're determined on the market, on the loan market, the demand for loans and the availability of funds. And just like the reign of the dollar or public education, central banking is a very new innovation. It's really a very new innovation. I'm in my mid-fifties so I remember being a kid interest rates were always between 6 and 9%. So this idea that we would never have rates that would naturally fall to say zero or 2% or negative, I guess it could happen, but it's hard to imagine how. I don't think Claudia Sahm would be calling for markets to drive rates, but to the extent that she might be saying that keeping rates at 5% or at least that interest rates staying in this range are more normal than any other time in the last 20 years, she's absolutely right.

Mike Maharrey: To be clear, she's saying that they need to be normalized, meaning lower, and I'm kind of pushing back … I'm pushing back against that a little bit.

Pete Earle: Yeah, so Sahm has been very, very dovish, and she's a very kind of low interest rate and interventionist person. That's why I said if that's what she meant. Clearly that's not what she meant and I could not disagree more. I think what we need right now is for rates to reflect supply and demand, and the best way to do that would be to let them float on the market. Now, there's a big debate right now over whether rates are too high or too low, and that has to do with the estimate of the natural rate of interest. That's a hugely contentious and really wonky academic debate, which I've only waded into a little bit. I am a monetary policy and financial markets economist, but you could come up with two very different conclusions. And earlier this year, I certainly did.

The first three months of 2024, we had disinflation slowing and utterly stopping in many of the prices throughout the economy. And for that reason I thought it had become very clear that the Fed didn't raise rates enough. Now we have a situation where we have unemployment rising rapidly, and the argument is that the Fed has waited too long to cut rates. I would say this, one of the things I think is one of the most underappreciated elements of the economy right now, and in particular monetary policy, is that the last time the Federal Reserve used these tools in earnest, in other words raising interest rates and lowering them substantially to address high inflation, I'm not talking about the sort of tweaks that they did in the early nineties and things like that. I mean the last time that they raised rates to fight a rapidly rising general price level, was in the late seventies, early eighties when I was a kid, 79, 80, 81, that time period.

And at that time, the U.S. had an extremely different economy than it has today. Back then we still had a mostly manufacturing-based economy, a goods-based economy with a lot of industry and that sort of thing. And the Fed is using those same tools now 40 years later in a service-based, highly financialized economy. So we don't know yet, and they don't know yet, what the lag times are, what the effects are, that sort of thing, so it's very difficult to say right now if within the realm of accepting Fed policy as the way to go, which I don't, if they're too high or too low, it's very hard to say.

Mike Maharrey: Right. It's interesting too, you keep hearing from Powell and Company that we're data dependent, data dependent, data dependent, which kind of makes me nervous. And I'm not an economist. I have a decent economic background. I'm a journalist by training, but even I understand that data tends to lag. So if you're being data dependent, aren't you always going to be behind the curve?

Pete Earle: Yeah, so Milton Friedman spoke about long and variable lags. The thing is that the variability and the length of the lags are going to be different even if you have the exact same economy at two different points in history because of different consumers and different purchasing patterns, different demands for money, different labor, all that sort of thing. I am saying that even more so, the economy we have right now is very different than the last one the Fed used. And so all of the studies they may have, all the data that they may be using to determine whether their policies are successful or not, are likely to be... I mean, they think they've got an N of eight, I think this is an N of one. I think that this will be used in the future for better or worse, probably worse, to dictate policy in the future. But right now this is really the maiden voyage of the Federal Reserve toolbox in the, again, the highly financialized service-based economy.

So yeah, I mean certainly I'll be the last one to say that I think rates are too high or too low because a few months back I thought they were too low. Now I guess there's a possibility they're too high. We could really cut through all of this nonsense and just let rates be determined on the market, but that probably isn't going to happen anytime soon

Mike Maharrey: As much as you and I would like to see that happen.

Pete Earle: Yes.

Mike Maharrey: Kind of going back to the economy, the second quarter GDP looked pretty good from what everybody seems to say.

Pete Earle: Sure.

Mike Maharrey: I mean, kind of what's your big picture view of the economy. I mean, are we in a recession? Are we inching towards a recession? Or is everything fine and we're still on the soft landing path as the conventional wisdom would tell us?

Pete Earle: So I would start by saying I think that the U.S. is currently in or on the threshold of a recession. Now that could be a severe or a mild recession, but I do think we're at the threshold of recession if we're not already in one. Fiscal stimulus has accounted for a substantial amount of the economic growth we've seen in the last 18 to 21 months.

Mike Maharrey: I was going to ask about that.

Pete Earle: Yeah, yeah, and that's really laid bare if you look at where jobs have been created. A lot of the jobs that have been created over the last few years are local, state, federal government, welfare and social services, and healthcare. I want to be very careful what I say here. The latter most of those, healthcare, certainly adds value to our lives and it contributes in a somewhat roundabout way toward productivity. But these are not areas that contribute to real economic growth and increased output. So we've still got inflation rising. Depending upon the measurement you use, whether you use the Fed's preferred measure, which is the Personal Consumption Expenditure Index or the CPI, or AIER's measure, the everyday price index, inflation is still rising at a rate that's higher than the Fed's target range.

And prices of food, energy, shelter, mortgage rates, credit card rates, you name it, are high and they're continuing to go higher. So consumers are just about out of the game. They have a really low savings rate. We're getting less discretionary spending. And so I think for a number of reasons that if the U.S. economy is not currently in a recession we're really close to one. And I also, if you don't mind, I just want to add a side question about this topic because I think of this every time we talk about this. The book definition of a recession is two consecutive quarters of contracting output, right? Two negative GDP readings essentially.

Mike Maharrey: Except for the last time it happened.

Pete Earle: Right, so now that's called a technical recession and that's a good segue to what I'm about to say because imagine... So yeah, the first two quarters of 2022 we had declining GDP. We had two quarters of consecutive negative growth. That should be a recession, but we're not allowed to call it that because we didn't have some of the other factors. Okay, it's a technical recession. I think it was a recession or at least what a recession looks like after all the sort of crazy policies and weird stimulus and all the effects we've had because of the Covid response. But imagine the following, imagine if the U.S. economy were shuffling along for, let's say, a few years, quarter after quarter, the GDP growing at one-tenth of a percentage point, 0.1%. That's not a recession.

It sure would feel like one, right? Let's go even more extreme. If the economy grew at 0% and then felt the negative 2% and then rose to 0%, then felt negative 2%, that also doesn't meet the basic definition of a recession. So my point is that in particular, but not only, in the wake of the unconventional and really unprecedented policy actions we saw during Covid, lockdowns, shutdowns, stay-at-home orders, massive monetary expansion, physical stimuli, in addition to so many others, I think we should be ready to see an economic downturn for what it is rather than how it conforms to some textbook definition. And so that's what I'm saying. I'm saying make recessions felt again, not a subject of definition. I want to be clear, I don't want a recession. But I'm saying I'm willing to believe that if the economy grows 1.1% and then 0.8%, we could very well be in a recession even though it doesn't meet the definition.

Mike Maharrey: Yeah, I think that's a really good point and it's interesting to look at what normal people are saying. I saw an article today about, I think it might've been from a Disney official, I honestly didn't read it that closely, but the gist of it was people are spending less time in the park, they're spending less money. You see all of these signs where the average consumer is clearly under pressure.

Pete Earle: They're absolutely strained. You have record numbers of people with two part-time jobs, one full-time, one part-time. And the thing is, whenever I see those numbers in the BLS report that says, let's say 3 million people in America have two full-time jobs, it's more like 10 million because a lot of those jobs are going to be off the books. So we're only seeing the tip of the iceberg in statistics. But yeah, I mean, it's hard for me to imagine how consumers would be this strained and us not be essentially in some sort of recession. And again, I think very slow growth, again, growing at 0.1 or 0.2 or even 0.5% quarter after quarter sure would feel like a recession.

Mike Maharrey: Right, especially with prices still increasing even above that Fed target rate. Do you happen to know what the AIER inflation measure is right now? I was curious to what you guys are kind of calculating.

Pete Earle: Since I'm in charge of it and I maintain it and calculate it, I should have it right on the top of my head, but I don't. What I would say is that on the way up we saw inflation rising faster in a lot of areas. What I do is I take 24 of the most purchased items in the CPI, food, those sorts of things, we don't do energy, we don't do... so it's like a core measure, we don't do energy, we do a little bit of food, so semi-core. But what we found is that on the way up, inflation was a few hundred basis points higher than what the CPI was saying and now it's been falling at about the same rate. What I will say is this, what stuck out in my mind is that I believe it was June or July, I think June of 2022, where CPI reached its peak year-over-year number of 9%, the AIER everyday price index that month was rising at 14% year-over-year.

So we definitely saw that the average consumer of whom I and you are one, were paying way more than the indices said. I don't allege to that any sort of conspiracy, but I am going to say that more people need to know that the CPI no longer represents a basket of goods. It represents goods throughout the economy, and for that reason in many cases the average person, the everyday person, the everyday citizen, is doing much worse than what the statistics actually say.

Mike Maharrey: Did you happen to see the video by the guy on TikTok who bought the same basket of items from Walmart? He had his list.

Pete Earle: No, but that sounds amazing. Oh, yeah, I want to see that now.

Mike Maharrey: Yeah, he had a list from, I think it was 2019 or 2020, and he just bought that exact same list, and it was about, I want to say it was a 400% increase. It was insane. Or maybe it was a $400 increase. I can't remember off the top of my head.

Pete Earle: So the number that we come to when we use the same numbers is like 25%, but I have a feeling that it's vastly higher than that, more like 50%.

Mike Maharrey: I actually might be able to pull up what it was.

Pete Earle: Yeah, I'm interested.

Mike Maharrey: Let's see. This doesn't make for a good podcast audio, but maybe we'll edit it. Maybe we'll edit it. Here it is.

Pete Earle: If I had known I would've sang or told a few jokes in the interim.

Mike Maharrey: Okay, so it was in 2022 that he ordered the list originally. It was 45 items, it cost $127 when he ordered them two years ago. And then the same basket of items, and this was a couple of months ago, was $414. So it was a 226% increase.

Pete Earle: Yeah, see, and that's what I mean. Using the CPI, I mean even the CPI is not a really great look, 25%, but several hundred percent that's the kind of difference that changes lives.

Mike Maharrey: Yeah, and it's enraging when you hear people like Paul Krugman saying, "Well, people out there are just disconnected from reality and they're complaining about things that they shouldn't be complaining about." A bad dude. Anyway, so let's kind of do a little bit of a pivot because you're an advocate of sound money.

Pete Earle: I am.

Mike Maharrey: In fact, you've written a book on sound money. And I'm curious, do you think that we can ever get back to anything remotely resembling a sound money system or are we doomed to exist under fiat from now to eternity?

Pete Earle: So I'm going to give you the kind of confusing answer. Yes, both, but I'll explain it and then you'll hear what I mean. So my view is that we eventually will see a return to sound money, not because anyone really wants one in government, but because eventually there's no way forward. Absent the requirement to do so, governments are not going to stop debasing currencies. We'll use the dollar because that's our local money but they're not going to stop debasing the dollar until it's no longer accepted or the economy's in complete collapse. At that point, it will suddenly become very fashionable to advocate for sound money in order to stay in power and keep the cycle rotating again. And then I also believe, I mean this is probably long after you and I are gone, but I believe that there will be a return to sound money, and then at some point they'll start debasing the money again.

So Nixon said right before he closed the gold window in 1971, he said he was temporarily closing the gold window, and maybe he knew or thought he was lying, but he wasn't because something will come in the future. It may be gold, silver, those are the most likely because they're familiar, maybe something we haven't seen before like nickel or another metal. But once the United States removed the final tenuous link to gold in August of 1971, the clock began ticking toward the return to a commodity backing not only for the dollar but every other currency on earth sooner or later. Actually, you probably have seen that I've done a lot of writing, one of my big topics in the last few years has been de-dollarization. We see bits of that sort of return to a sound foundation for money, sound money, with what's happening in the young but really robust de-dollarization movement, which has embraced everything from gold to Bitcoin or stablecoins and even some commodity TIK, trading in kind, that sort of thing.

So I think it's only a matter of time that it happens. But unfortunately, I think that things probably have to get pretty bad and for there to be no way forward for governments to aggregate power to themselves before that happens, I think things have to pretty much slow down or collapse before they embrace that. And then that'll be the cool thing. Whereas now, they sort of brag or they represent how elastic their currencies are, there will eventually... as hard as it is to contemplate... be a kind of a rush towards harder currencies and harder than now currencies or whatever.

Mike Maharrey: Do you think those kind of political considerations are kind of what's driving, I don't know if you would call it a sound money movement, but there's definitely a kind of a pivot towards gold in Africa. You've got Zimbabwe in particular with a pseudo gold-backed currency and several other African countries are talking about stockpiling gold. Is that kind of the political situation to work? Like we've got to do something, we've dug this hole so deep maybe this will work?

Pete Earle: So some of it has to do with de-dollarization. There are a number of nations that are trying to get away from dollar use. And not only de-dollarization, but de-pounding if you will, de-euroing, a lot of nations want to get away from the really major currency blocks out there. Another thing is that a lot of third world nations, a lot of developing nations, took on a ton of debt when interest rates were low and rates rising to a mere 5% or whatever it is nationwide, I don't know what the worldwide average interest rate is but it's a lot higher than it was say four years ago, and for that reason a lot of these developing nations are saying we really need to shore up our finances or we're going to collapse for the nth time. I do think a lot of this is happening.

Plus there were two generations of people, I'm old enough to remember it as a kid in my very early teen and pre-teen years, but there's two generations now that have never seen inflation, and I think that can also drive change as well. There are certainly some Gen Zs and some millennials who are going to look at the current situation and say, "Wow, I can't live like this." You hear a lot about young people not being able to buy houses, but also not being able to buy the very stuff of day-to-day existence. So that's going to drive a lot of thinking back toward the sound money movement, I think, over time as well. Plus they all know Bitcoin and that doesn't hurt.

Mike Maharrey: Yeah. It's interesting because I did an article not too long ago about the fact that millennials are the most aggressive gold investors.

Pete Earle: Yes, they are.

Mike Maharrey: And intuitively you think, well, it's the boomers and us Xers but it's actually millennials and even my kids' age are looking at that kind of stuff.

Pete Earle: Yeah, I have kids too and they're in that late teens to early twenties area, and they're not only interested in gold and crypto as a monetary hedge, but they're also very, very keen on preparing for their futures because I think they picked up by osmosis a lot of concerns about the future of social security and all that. So I'm pretty proud of what those younger folks are moving toward. It makes what I do fulfilling to see that maybe of the 100 or 1000 articles I write, something actually out there hits somebody and sticks.

Mike Maharrey: Yeah, yeah, absolutely. So I'm going to get you out of here in a second, but I want to ask an unrelated question, just kind of a fun question I like to ask folks. What are you reading right now that's not work-related, if anything?

Pete Earle: Yeah, gosh. I mean most of what I'm reading right now is work-related. I'm reading Guido Hulsmann's book, Abundance, Generosity, and the State. It's an economics book. I just finished a biography of Benny Binion, the founder of the Binion's Casino in Las Vegas, I thought was very interesting, kind of an old school speculator. I cannot remember the name right now but I also read the story, it's interesting because he just passed, the story about James Simons called The Man Who Solved the Market, which is very interesting book. I also recently, I've come to the view that there are some books that you should read... I never have enough time to read all I want to read. I have a pile of books that and a box of books actually that's been following me around since before I started my PhD... but I believe that there are some books that you should read every 10 years because as you get older they mean something different.

And I'm slowly coming to that list of books myself. They involve everything from Melville to things by Cormac McCarthy and things like that. So my rotating book list, which roughly this cycle is about a decade, and then I have just a pile of books that I probably will never make it to the bottom of. What I do try to do is I try to intersperse two work-related or financial-related or economic books to one non-related book because they don't want to become hidebound, and life is about more than just numbers and economics. So I try to do a two-to-one ratio, but I cheat a lot. I read the first chapters of a lot of books and then put them down and get back to them later.

Mike Maharrey: Yeah, I do the same. I've heard it said that it's healthy to have more books than you can ever read because it's a reminder that there are a lot of things we don't know. So I kind of like it better in that terms.

Pete Earle: For me, this sounds like a very negative way to say it but for me it's a march in the darkness. I'm constantly finding out how little I know even with economics and finance, but beyond that so much, and it's a, what do you call it, learning and education whether formal or informal is a meal for a lifetime.

Mike Maharrey: Yeah, absolutely. So where can folks follow your work and check out what's going on over at your institute and stuff like that?

Pete Earle: So I'm at the American Institute for Economic Research. We're located in Great Barrington, Massachusetts. We're a nonprofit that's been around since 1933, so we are one of the oldest nonprofits dedicated to sound money in the country. My writing is there. You can look for Peter C. Earle. I'm also on Twitter @Peter_C_Earle. And my articles also sometimes appear on LinkedIn. They appear on Zero Hedge, Seeking Alpha, places like that.

Mike Maharrey: Excellent. Well, we'll point people in that direction. I really do appreciate you taking time out of your busy day to chat and I appreciate your insights, and we'd love to have you back on at some point in the future as things continue to unfold and evolve. I'm sure we can sit here and talk for hours about all of the stuff that's going on, but I appreciate the insights that you've offered today. So thank you so much.

Pete Earle: Thanks, Mike. Thanks for the opportunity.