The Rate Hikes Are Coming

Prof G Markets

Scott Galloway and Ed Elson discuss the current U.S. macroeconomic landscape, focusing on rising oil prices, persistent inflation, and the likelihood

Key takeaways

• Inflation has caused a 40% cumulative price increase since January 2020, outpacing wage growth and effectively reducing the standard of living for most Americans.
• Rising oil prices—over $107 per barrel—are driving inflation across essential goods like diesel, corn, wheat, and cotton, with significant wealth transfer from consumers to energy producers and landowners in regions like the Permian Basin.

Main topics

• U.S. inflation and its economic impact
• Oil prices and geopolitical tensions (Iran conflict)

Notable quotes

"Countries don't cease to exist because they're invaded. They cease to exist because they go broke."

"This is a decline in the standard of living for the majority of Americans. Or the consumer American households have taken a pay cut that they did not vote for."

Conclusion

The episode concludes with a consensus that interest rate hikes are likely in 2027, driven by inflation and

Transcript preview

Speaker 4 (0:01) I'm Ina Garten. On my new podcast, Happy Hour with Ina, I'm inviting really interesting guests to join me for a drink and a fun conversation at my kitchen table in New York City. I'll be getting personal with chefs, actors, comedians, musicians, and writers I admire. So grab a snack, pull up a chair, and join us. Subscribe to Happy Hour with Ina on YouTube or wherever you get your podcasts. New episodes will be available every Wednesday starting September 16th. Megan Rapinoe here. This week on Why Are You Like This, I'm talking with Vice President Kamala Harris. We talk about her thoughts on public service, how D.C. has shaped her, and we find out if she's planning to run for president in 2028. Check out the latest episode of Why Are You Like This wherever you get your podcasts and on YouTube. Speaker 8 (0:59) Today is number 95. That's the percentage of finance students who identify as straight. The most of any college major. True story. I had my ex-wife decided we should have an open relationship and the rules were we could have sex with anybody and we would never see each other again. Speaker 7 (1:26) How Speaker 8 (1:27) are you, Ed? Doing very well. How are you? I'm doing well. It's a Speaker 3 (1:30) beautiful day here in London. I'm unfortunately heading out again on Sunday to the West Coast for my first Regents meeting, which I'm excited about. Speaker 8 (1:40) Yeah, maybe explain a little bit the situation there. Oh, Ed, I don't like to talk about that stuff. I wish you hadn't brought it up. I wish you hadn't brought it up. No, we're talking about all kinds of interesting stuff. What are the Regents? What is that? The regents are the board of directors that oversee the University of California. And what I didn't realize, and most people don't realize, is that it's a $54 billion enterprise and about $35 billion of it is the hospital system. Basically, the University of California could be fairly called a hospital system or healthcare system that offers classes. I did not know that. I did not know that either. It's also the greatest economic elevator in history, which is why I'm excited to be on. It takes more people from the lowest quintile to the top quintile, I think, than... Well, maybe Cal State, but it's, you know, he's saved my ass. Saved my ass, Ed. Are Speaker 6 (2:29) there any other famous people on that board? Speaker 8 (2:32) Who's the Speaker 6 (2:32) company? Speaker 3 (2:33) Not famous, but much more credible. Well, the governor is on the board, the lieutenant governor, Eleni Tsikopoulos. It's kind of a full circle moment. My friend Eleni and I were friends in business school, and she's on the board as lieutenant governor. Oh, wow. But it's a bunch of very impressive people who, quite frankly, are just more... credentialed and substantive. Speaker 8 (2:53) Although I am pissed off. Let's bring this back to me. All the media was Governor Newsom appoints podcaster to Board of UC Regents. Would you describe me as a podcaster? That kind of upset me. What would you prefer to be known as, Professor? Well, I don't know. I've done a few other things other than podcasting. I know you've done a lot of things, but that is what you are right now. I'm an academic and an entrepreneur, but anyways. Speaker 3 (3:17) You asked who else is on the board. It's a bunch of people from the finance industry. It's everyone from the vice chairman of UTA, one of the largest talent agencies, to business people, to healthcare professionals, and a lot of the chancellors. I mean, they're technically the CEOs, the chancellors, so they're not on the board. They're reporting to the board. But it is an enormous board. I think it's 24 or 26 people. Speaker 8 (3:42) Anyways, I'm headed out to UCLA for my first regents meeting. What are you doing this weekend? Speaker 6 (3:48) This weekend, let's see, it's my girlfriend's birthday, or it was yesterday. So we had dinner, but then we're going to celebrate with friends, which will be very fun. We'll have a little party. And then I go to another wedding. It's probably like my 100th wedding of Speaker 8 (4:04) the year, it feels like. So I'm being serious here. You know what the best gift you can give anyone for their wedding is? What's that? get ridiculously fucked up and have an amazing time, a visible, amazing time at their wedding. That's all they want. They want a total party. When you go to someone's wedding, the best gift you can give them is to dance, be social, Speaker 3 (4:27) just have an amazing, that is all the bride and groom want. They want to have the best party. They want to be talking about what an epic party it was. for years. And the best thing you can do for the bride and groom is just Speaker 6 (4:42) have Speaker 3 (4:42) an amazing time. Speaker 6 (4:43) Yeah, that's right. Collaborative effort. Totally agree. We got to host a party sometime, Scott. You and I, I Speaker 8 (4:50) think we know what we're doing. See, the problem is I don't like to hang out with you guys because I'm worried you'll be disappointed and nobody needs to see me having a good time. So, yeah. Do you notice how Catherine and I, at a very distinct early hour, Peace out. Yeah, I have noticed that. At every event. Speaker 6 (5:08) Yeah. Speaker 8 (5:08) I think you're too worried about it, Speaker 6 (5:10) though. My personal take. But who knows? Maybe... Well, you haven't seen me fucked up, Ed. Speaker 8 (5:16) Yeah. I don't know. You don't know where the devil goes to drink that holy water. Anyways, should we talk about AI? Yeah. Speaker 2 (5:26) We got Speaker 8 (5:27) a lot Speaker 6 (5:27) to talk about. We got to talk about AI. We got to talk about oil, inflation. interest rates, the Federal Reserve, we got to talk about Apple, John Turner, say foldable iPhone. We have a lot to talk about, so let's get into it. Speaker 1 (5:45) The war Speaker 2 (5:47) with Iran has entered its seventh month and the conflict is escalating yet again. Last week, oil hit $107 Speaker 6 (5:55) per barrel for the first time since May. The spike came after the U.S. destroyed five Iranian oil tankers in retaliation for attempted strikes on a Navy warship. Meanwhile, Speaker 2 (6:07) concerns about persistent inflation fueled a global bond sell-off. The U.S. 30-year yield reached its highest level since 2007. So, Scott, we always have to talk about this because it really is what's driving the markets. I mean, oil, Brent crude breaching $105. We had Labor Day gas prices at their highest levels in American history. Diesel prices have hit. a record high that impacts the rest of the economy because diesel is essential for freight and fertilizer and much more. Here are some price increases that we have seen since the start of the war. Corn prices are up 16%. Wheat prices are up 23%. Cotton, 32%. Rice, 49%. Diesel, 57%. So prices are rising everywhere. We're getting better signals as to what the inflation picture actually is, but that is now being... priced in because we're seeing that bond yields are rising even further despite Scott Besson's attempts to suppress them. Your thoughts on the macro picture, oil, inflation are now rising yields. Speaker 3 (7:18) Countries don't cease to exist because they're invaded. They cease to exist because they go broke. And the way they go broke is through inflation where their purchasing power just falls and they can no longer borrow money. And they essentially enter into this kind of downward spiral. And the inflation in the United States is pretty dramatic. It's a 40 % cumulative price increase since January of 2020. That's crazy. I mean, that was when COVID started. The majority of Americans have not seen a 40 % increase in their earnings and their wages to compensate. So essentially, this is a decline in the standard of living for the majority of Americans. Or the consumer American households have taken a pay cut that they did not vote for. Their bankruptcy number is the real tell. Corporate bankruptcy is up 12%, which is the greatest in over a decade. And it's concentrated across small and medium-sized businesses, which don't have the ability to hedge floating rate debt. They're kind of the shock absorbers for inflation or monetary policy. And they've been, the chassis has been broken, if you will, or it's just snapped. Whenever you have something like this, you do have winners and losers. This arguably is a transfer of wealth from people at the pump to homeowners in Odessa, Texas that have seen their home prices up 77%, Exxon, Saudi Aramco, Chevron. There are a lot of Americans making a lot of money off of higher energy prices. We are a net exporter of energy and the largest producer. But it, again, transfer of wealth from everyone at the pump. Almost every product incurs a price increase because it came to you using diesel fuel, right? So you have, again, you have wealth transfer from diesel-dependent families, school buses, drive-thrus, to landowners sitting on the Permian Basin. And Trump trading oil stocks while overseeing the policy, you know, it's gone from a conflict of interest to a business model. He's got, I think, a register of almost $5 million in gains during a war. He's prosecuting incompetently. And then he just puts out a thing saying he doesn't actually care about the money he's making or price increases. So this is a regressive tax dressed up as a foreign policy story. It'll be very interesting to see if Warsh decides to go for the kind of profile and courage. and say, I'm immune, I cannot be replaced, and tries to, or does in fact, raise rates. But $100 oil has all sorts of unintended consequences. Speaker 2 (10:02) And it does seem increasingly like he will raise rates. I mean, if we just look at the odds of a September rate hike, which we will get the answer to this week, it is now up to 65 % on Kalshi. Go back to June, the odds of that happening were 15%. And then, of course, we're seeing it reflected in yields, which are, I mean, the rise in yields this week and the week before and the week before that is stunning. I mean, the bond markets are literally screaming right now. The 30-year yield hit 5.35%, which is the highest level since 2007. And the 10-year has breached 4.9%. And this is all despite the fact that Besant is... tripling or did triple the bond buyback program to $6 billion. He's made all these efforts to try to get yields down. Didn't work. Bond investors said, no, this still isn't working for us. And I think they're paying attention to multiple things. Of course, the oil, the length of the Iran war, but probably most important is this unsustainable debt that we clearly are showing no signs of even caring about or taking seriously. National debt surpassed $40 trillion. Our fiscal deficit this year under Trump is on track for $2 trillion. We now pay $1.25 trillion in interest payments, more than we spend on national defense. That's expected to double as a percentage of our federal revenue over the next decade. So eventually we're going to be spending more on interest than anything else. I think that is what investors, the bond investors, are so worried about, and rightly so. And then in the middle of that, Trump at his Trumpapalooza. this midterm convention, which no one really tuned into and which they were giving out free tickets for people to attend. He says, in fact, I've got Speaker 6 (11:49) a clip. I'll just play a few. This is what he says. Speaker 1 (11:52) If the Republicans win the House of Representatives and the United States Senate, both of them, because of our economic... Speaker 1 (12:01) tremendous economic success. Like in history, we've never had anything like what's happening. But because of our tremendous strength and success economically, I will issue a dividend to every adult citizen in the United States of America for $5,000. Speaker 6 (12:25) $5,000 to every U.S. adult, a bribe to vote Republican at the midterms, which would cost the United States $1.35 trillion, which we would add onto our existing $2 trillion deficit. This is just, I don't have the words for it. Well, Speaker 8 (12:46) let's go, let's talk about need and let's talk about the math. Speaker 3 (12:49) If there's a group of Americans that need a one-time payment, It's not adult Americans, 10 % of which live in poverty. It's kids under the age of 18, which are excluded from his proposed program, 15 % of which live in poverty. And quite frankly, it's just unacceptable that one in seven kids and one in five households have food insecure kids. That's just not acceptable in the world's wealthiest country in history. First off, he's placing the need in the wrong place. Now, having said this, this is just fucking stupid and it's never going to happen because of the math. $1.4 trillion, obviously no plan whatsoever to pay for it. So it would be, if it were to get through, which it won't, it would be deficit spending. So this is what this is. This is the equivalent of the government saying to you, say you decide to get married in the next year and have a kid. This is... The government giving you a credit card that's preloaded with $5,000, but if you spend $1, should you decide to accept this credit card, when your kid is 18, he or she is saddled with $13,000 in non-negotiable, non-dischargeable debt that stays with them the rest of their lives, regardless of whether you die or not. Would you accept that credit card? Now, smart people would say no. Unfortunately, I think the American public, who we all like to think is super smart and honorable and nice, has been really stupid around our deficits. At some point, the American public needs to take responsibility for electing leaders, Democrats and Republicans, who have been fiscally reckless and irresponsible. George Washington to George Bush, $7 trillion in deficits. George Bush to Trump, too, another $33 trillion. in deficits. The Democrats have been better or less bad, I should say, than the Republicans. On average, Republicans have added 2.8 % of GDP per year to the debt, and Democrats have added 2.1%. So they're less bad. But voters keep voting for the guy with the bumper sticker that says the following, we can go to war while cutting your taxes. And it has become standard operating procedure that the only thing that passes for bipartisan cooperation is Wait, we want to cut taxes. Wait, we want to spend more, said Republicans and Democrats respectively. I know, let's do both and have future generations pay this off. So while this idea is ridiculous, irresponsible, if I can't intimidate you into not coming to the polls, if you're non-white and I scare you with eyes to the polls, I'm going to try and bribe you with a payment if we win. While that is ridiculous and will not happen. Speaker 8 (15:30) The thing that bums me out the most, Ed, is the American public keeps signing up Speaker 3 (15:34) for this shit. And even on the Democratic side, there isn't a single Democratic candidate for president, Rahm Emanuel sort of nibbling around the edges, but not really, who has actually had the stones to put up a chart, a pie chart, present something resembling a presentation with graphs that says, OK. We spend $7 trillion. We take in $5 trillion. This is how over eight years we are going to begin to address it. Nobody wants to say to a public, I'm sorry, you can't have Dr. Pepper and Swizzlers, I'm trying to think of what is the worst candy in the world, and not have dinner and stay up till 2 a.m. snapping with your friends. And you don't have to go to school tomorrow. No one. No one is having anything resembling an adult conversation with the children that are the American voting public right now. What Democratic candidate for president has even dared to outline a policy that says, all right, we're doing away. We're going to level up capital gains with ordinary income. We're going to fund the IRS and go after that $750 billion in tax gap. We are going to eliminate 40 to 60 % of the $2.25 trillion in loopholes and givebacks that largely benefit corporations and wealthy individuals. And we are going to lower Medicaid eligibility by two years every year for 10 years as a means of getting more purchasing power and bringing down our healthcare costs. And we're going to means test Social Security. And within eight years, the deficit is going to grow less fast than GDP growth. There is a reasonable path here. There is... We have fucked this up. We can unfuck it. Not that long ago, during Clinton and Gore, we were taking in more money than we're spending. This is possible. But again, leaders and elected leaders and candidates respond to a populace. So just as Michelle Obama said when asked about running for president, the American public isn't ready for a female president, it doesn't appear that the American public is ready for an adult conversation around responsible fiscal management. At the same Speaker 6 (17:45) time, though, in defense of the American public, they have been lied to by largely by Republicans. I mean, there is a there is this idea that the Republicans are fiscally conservative. And in a lot of cases, that is part of their platform. It was part of Trump's platform. that he wanted to be fiscally conservative. He was going to get spending under control. He was going to balance the budget. As I always say, that was the statement that received the largest applause in his congressional address last year. And he did the exact opposite. So to be fair to the American people, Speaker 2 (18:19) they were told a lie. Now, where I start to blame the American people is when they continue to... eat up those lies and continue to believe that Trump is this guy who he says he is. He clearly isn't. He has lied too many times. At a certain point, you need to be keeping track of these things and keeping score and recognizing, okay, this guy is talking out of his ass with every single speech he gives. I'm not buying it anymore. So to anyone who still believes that Trump is the fiscal conservative or who still believes that the Republicans are the fiscal conservatives. To those people, I now do blame you. I blame you now. I don't blame you from before. because I understand that you were lied to and that we had this little bit of a psyop that was negotiated and figured out by the Republican Party and then by Trump. But at this point, the evidence is very, very clear. And if you want the example, if you want the example of people realizing this, then yes, take a look at the bond markets. Take a look at U.S. treasuries, which, by the way, long-dated U.S. treasuries have now posted their worst decade in more than 100 years. And if we look at... the inflationary debt spiral, which is clearly getting out