Capitalist Investor

Are We Repeating 1970s Re-Inflation? Ep. 292

• Strategic Wealth Partners

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In the latest episode of Capitalist Investor, hosts Derek, Tony, and Luke gathered to dissect some timely and critical topics impacting the economic landscape. From the concept of re-inflation to the political motivations behind recent Federal Reserve decisions, this episode was packed with insights. Here are the five hot topics discussed:
1. Re-inflation and Its Implications
One of the central themes of the episode was the notion of reinflation. Unlike inflation or deflation, reinflation refers to the resurgence of inflation after a period of reduction. Luke explained that following the recent 50 basis point rate cut by the Federal Reserve, bond yields unexpectedly rose, hinting at potential reinflationary pressures. This scenario is reminiscent of the 1970s when efforts to control inflation were temporarily successful, only for inflation to return stronger and drive up unemployment.
2. Federal Reserve's Rate Cut
The podcast dived deep into the surprising 50 basis point rate cut from the Federal Reserve. While many expected a 25 basis point reduction, the more significant cut sparked debates about the underlying reasons. While some speculated economic weakness, Luke suggested a more political motive, pointing to the nation's massive debt obligations. With $5 trillion in debt due this year and next, the rate cut could be a strategy to manage federal debt servicing costs, emphasizing the critical interplay between monetary policy and national debt management.
3. The Reality of Inflation
Diamond Hands D and Tony both weighed in on the persistent nature of inflation in the current economic climate. Despite efforts to curb it, inflation remains a constant challenge, manifesting in everyday expenses. The hosts discussed how continuous government spending exacerbates the problem, pointing out that neither political party has shown a strong commitment to reducing spending. This has contributed to ongoing deficits and inflationary pressures that affect all sectors of the economy.
4. Political Influence on Economic Policy
Luke's insight that the rate cut is tied to debt management rather than immediate economic health highlights the pervasive influence of politics on economic policy. By lowering rates, the government aims to make debt servicing more manageable, particularly under high defense spending. This scenario underscores the complex relationship between fiscal policies, national debt, and political agendas. The hosts emphasized that these issues transcend party lines, affecting the economic stability of the nation as a whole.
5. Consumer Behavior and Market Dynamics
Toward the end of the episode, the hosts touched on how changes in interest rates could affect consumer behavior and market dynamics. Tony mentioned that decreased savings rates might drive individuals to either invest in equities or increase spending, thereby fueling inflation. This ties back to the broader economic cycle where demand spikes can reduce supply, thus driving up prices. The conversation even ventured into lighter territory with a discussion about Costco's latest consumer offerings, which humorously highlighted how spending habits can be influenced by broader economic trends.
Conclusion
The latest episode of Capitalist Investor successfully tackled an array of pertinent economic issues, offering listeners a comprehensive look at current financial dynamics. From theoretical discussions on reinflation to practical considerations of consumer behavior, the hosts provided valuable insights that are sure to spark further conversation and analysis among their audience. Stay tuned for more enlightening discussions on future episodes!

Hello and welcome to this episode of the Capitalist Investor. As always, you have me, Diamond Hands d. You got the whole squad here today. Cool hand Luke, Tony the tiger. What's going on, boys? What up? Well, hey, we're gonna talk a little bit about inflation. Maybe a little reinflation every week, maybe, yeah. Compare it to the, the seventies, a little bit of. To talk about reinflation. I think that's the key word there. We always talk about inflation or deflation, whatever it be, but we're going to talk about something called reinflation because of the events that happened last week. So 50 basis point rate cut. Majority on the street were expecting 25 basis points, even though the market was, I think after a couple of days pricing and more odds on the 50. But a lot of people were shocked we got a full 50. And now there's concerns if there's economic turmoil or why they did that. But what's interesting is 50 basis point rate cut, like one of the biggest rate cuts we've had in a couple of decades. Most of the time you go 25, not 50. Bond yields are actually up since they cut rates. How it should happen is when there's an interest rate cut from the Fed funds, rate yield should adjust accordingly and go down as well, because the Fed funds rate went down. So the open market was pricing in this rate cut ahead of time. But why is it we went from like 3.6 on the ten year to like 3.8 now? So it's up 20 basis points since the rate cut. Why are we up? And the only reason I can think about that, the yields are up, not down, is that the market's pricing in that inflationary pressures might be rearing its head back around the corner, down the road, or might there's a higher risk of reinflation where we go back from 2%, maybe up to four or 5%, just like we did in the 1970s when the Federal Reserve thought inflation was beat. They took the pedal off the metal and they lowered interest rates, and the next thing you know, inflation came back, roaring back, and then unemployment ticked up. We had a stagflation environment. So is that a risk, you guys think? Yeah, I think it's absolutely a risk. You know, I think. I think when, you know, we talk about this all the time, when there's so many, you know, outside levers being pulled, it can mess with the natural markets that we talk so much about, it certainly doesn't feel like inflation has gone away. When you go out there and you buy stuff, we're talking permanently here. It's not going anywhere. So you just got to get used to it. But I think the thing you also have to simultaneously worry about is did the Fed decide to do 50 basis points solely to get more in line with the actual inflation out there, or did they do it because they see economic weakness coming up? That is my concern. After all this is sorted out and everyone's talking about this perfect soft landing that we're going to have for a long time. I've said, hey, that's almost an impossibility to have happened. It's never happened. That's why. But that's why it's so strange right now. Why are we doing this? Why are we doing that? It could just be that we are witnessing a soft landing because no one's ever seen it before. I will tell you what's happening. In my opinion. I truly believe this is nothing to do with the economy. This is nothing to do with the election or politics or it has something to do with politics because government is politics. I said this on one of my parents last week. The reason why the Federal Reserve lowered rates is because of the debt wall coming about. So we had $5 trillion in debt due this year in federal government. We have $5 trillion due next year. We have another $3 trillion due in 2026. So you have this huge debt wall coming about. The government needs to finance that debt at lower rates. They cannot finance it at these higher rates because of one reason, defense spending. Right now, the interest payments on our debt compared to GDP is higher than our defense spending compared to GDP. Whenever that happens in history, the nation essentially implodes like that. Is that right? There is like no nation has ever come out ahead and in a good spot when that happens and we are there. So they need to lower the interest on the debt, the payments on their debt, and refinance it at lower rates. So that way we get back to defense spending above the interest payments on our debt. That is why, in my opinion, they have lowered rates. And it is political, but not because Democrats, Republicans, because everything's political, because the government dictates our life. Yeah. And spends unlimited money. You know, that's, and we've talked about that a bunch on this podcast. But, you know, and we talked about it a couple episodes ago, you know, with Elon coming in as the, supposedly the, you know, price control czar or whatever Trump was calling him, whatever he says, I really like that guy. He's making those Ev's. But yeah, you know, it's, there's a lot of issues out there. And what is not going to fix those issues is the unlimited government spending that frankly, no one seems to have any interest in stopping the spending. Trump was already president for four years. He certainly had no interest in cutting spending on anything. Well, Mark said like best, like yesterday on Martha McCallan show, like, I thought his appearance was phenomenal on there. Just talking about how we don't have a revenue problem, we have a spending problem. Right. You know, we, we have 6.5, whatever trillion coming in and then we spend $8.5 trillion deficit. We had four, 4 trillion come in and we spent six. Yeah, it's ridiculous. Like $2 trillion deficits. Whether you're republican or Democrat, we have $2 trillion deficits for. Wow, what's the stat since? Was it Bush or was it before Bush? Who was before Bush was Bush? George. George W. Bush. My Bush. I never got Clinton. Was it Clinton? So I think it was Clinton. Maybe we haven't had a budget surplus somewhere about Bush and Clinton area. We have not a surplus in our Clinton. Clinton had one. Yeah. So it was Clinton. Yeah, it was Clinton. So I mean, it's. In two decades, in over two decades we haven't had like a budget surplus. I mean, this is not, again, this is not. Most people think politics is designed to put us against each other. Red and blue. Okay? This is a government problem, not a Republican Democrat problem. Yeah, they're both. That ship is sail, though. You're not convincing anyone of that anymore. I don't know why people don't see it. The whole inflationary thing, though. It just, you know, whenever I hear interest rates go up, that means the bond asset went down. That's all I could. That's the only correlation I can ever make. And if the bond asset went down, that means it is being sold. Right. And if it's being sold there, people are either taking that money and putting it to work in the market or they're spending it. And that's possibly because one of the other reasons why rate cuts can be inflationary is that once you start squeezing the, the savings rate, people are like, well, why save money? I'm not making any clients emailing me that the rates on some of their savings account went from five to 4.5 or after the rate cut. Yeah. So they're like, hey, let's put some more money to work because, you know. I'm not making my 5% anymore. Whatever. And so people are either gonna save it and put it into equities or they're going to spend it they're like, hey, if I'm not gonna, might as well go ramp up my house, you know, go put some windows in, go buy some tvs, go buy a new car. Like, things like that. So that is the inflationary. As demand spikes, supply lowers, creating inflation. That's the premise behind it. Now, again, every, this whole, you know, our economy is a very slow moving animal. You know, this 50 basis might not really rear its ugly head for, you know, it could. It could be a year easily. So we'll see. Speaking of spending money, I was scrolling. Did you see Costco has a new 98 inch television? No. Guess how much it is. Four. Yeah, it was. It was like 3200. It's really not bad because tvs, back when I was growing up, yeah. When flat screens first came out, they were like four grand just for 48 inch flat screen because they were the newest technology. Yeah, but you can get an 80 inch for $800. Do you need those extra twelve inches or whatever? I don't know. I just never seen one. Are they still selling gold bars at Costco? Yeah, absolutely. Okay. I'll take every inch I can get. All right. On that note, we will get out of here. Thanks for listening. This week. 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