Feb. 27, 2023

Inflation: The Hope Parade

This week,we’re going to be discussing - read arguing - if the price is right. We’re back to that topic of inflation, where Will has been a self-proclaimed dove over recent months. Well the doves need to fly off as the hawks are coming into land - the hope parade needs a serenade. Prices are up and, in Richard's view, they’re staying up.

This week,we’re going to be discussing - read arguing - if the price is right. We’re back to that topic of inflation, where Will has been a self-proclaimed dove over recent months. Well the doves need to fly off as the hawks are coming into land - the hope parade needs a serenade. Prices are up and, in Richard's view, they’re staying up.


[00:00:00] Will Page: Welcome to Bubble Trouble, the conversations between independent analyst Richard Kramer, that's him, and the economist and author Will Page, that's me. And this is what we do. We lay out the inconvenient truth about how the business and financial markets really work.

As we approach the anniversary of our most popular podcast, that being NFTs Are Not For Me, let's remind you of our new [inaudible 00:00:23]. If there's a bubble that burst, we picked it first. This week we're gonna be, read arguing, if the price is right. That's right, we're back to that topic of inflation, where I've been a bit of a self-proclaimed dove on the recent months. Ah, don't worry. Meh. Things'll get back to normal. Well, the doves need to fly off, because the hawk's coming to land. Because Richard Kramer's gonna be attacking the [inaudible 00:00:45] claiming that [inaudible 00:00:47].

In Richard's view, prices are up, and in his view, they're staying up. So we're gonna get back to that in a moment.

[00:00:53] Richard Kramer: Okay Will, let me set out my stall. I have been observing a few things in the market of late where people really want to believe things are gonna get better. They never imagine that they're gonna get worse. It's kind of the opposite of that Kahneman and Tversky famous behavioral psychology work about our tendency to be risk-averse and to value the avoidance of loss more than we value a statistically equal potential for gain.

And everyone now wants to talk about a soft landing, being on a track for a second half recovery, and so on. And we all want to look past the tough times that we know we're in and assume better times are coming. But it feels to me a little bit like we're whistling past the graveyard on so many issues, whether it's climate, war, job losses, and so forth. And I've gotta ask you, you've been more optimistic about the economy and about the long-term impact of inflation. So, while we're getting started here, can you tell me some nice bedtime stories that end happily ever after by the time we get into coordinated economic growth in the second half of the year?

[00:01:58] Will Page: Well, you talked about those double-digit inflation figures sailing off into the sunset. Is that the type of plot line you're looking for?

[00:02:04] Richard Kramer: Indeed. The ones which say, "Well, 9.1 going to 9.0, it's not getting any worse. Isn't that great?"

[00:02:11] Will Page: [laughs].

[00:02:11] Richard Kramer: Even though it's still up 9% versus last year.

[00:02:14] Will Page: Well, this is ... The ... My stance is quite nuanced, but I do believe that we're not dealing with inflation, we're dealing with an energy price shock. It's the supply side shock that hit the economy, that set us into a tailspin. And supply side shocks wear off. You're seeing energy prices hit record lows, the FT headline last weekend there. I do believe that shocks wear off, and this transition mechanism, there's gonna be a hangover for sure, but I, I'm confident that we get back to normal and I am confident in the psychology, this is the important part, the psychology that we're gonna get back to normal.

[00:02:48] Richard Kramer: So, I would dispute that because what I haven't yet seen show up in my utility bill is the lower energy prices that supposedly are allowing windfall profits for the utilities and the energy companies. Now, we all had a lovely time harking back to when things were so much cheaper. I mean, I remember when I was in college what the cost of a bagel and an orange juice, uh, nevermind that there, at that point, there was only one brand of orange juice. And there are loads of costs, and college tuition in the US is one good example, that have risen just far faster than that inflation bundle you like to criticize. And the thing is, I can't help feeling that we're getting new price plateaus.

So our utility bills go up a lot, and then they stay up. The prices go up more from there, so tell me how we're going to reverse this terrible inflation that we've all seen?

[00:03:38] Will Page: Let's just not forget a point of history here, when you're saying prices used to be so low, that's fair comment Richard. But they were also so low because inflation was so low. We did have a long period where inflation was rock bottom. We had a long period where interest rates were negative in real terms, to try and get inflation back off the floor. So, let me push back on that point in terms of maybe what we've got is a combination of an energy price shock, which sends numbers off into the stratosphere, plus a correction effect, which is they were too low, I repeat, T-double-O too low for T-double-O too long, and now what we're seeing is prices getting back to where they should've been after all. It's a big hypothetical, but let me run that one past you.

[00:04:20] Richard Kramer: Well, certainly the argument behind that says 0% interest rates for a decade or more were a great handout to the wealthy people who could afford to borrow money at 0%, and created greater income inequality, but certainly when I look at underlying components of inflation, I don't think it's just energy prices. I mean, certainly you look at wages in the UK and literally every public sector worker of all stripes, from healthcare workers to train drivers to all sorts of other, uh, staff, are striking because they have seen real terms decreases in their wages. They're not keeping up with inflation. Match that with the Great Resignation, with people coming out of the labor force, and you have another big fra- factor in inflation, which is the cost of labor.

And we know minimum wages have gone up in the US, in the UK, elsewhere, and we know that people are withholding their labor 'cause they simply aren't able to make enough with the hours that they work, to keep up with this inflation. So I don't think it's just energy prices, I think there are a lot of other inputs there that are driving that inflation up, and I don't expect that I'm gonna be getting a giant refund from my electricity or gas supplier later this autumn.

[00:05:38] Will Page: What did you say about this nation's electricity and energy companies? They're a great stock to hold because you get your money back after they've ripped you off as a consumer [laughs].

[00:05:45] Richard Kramer: Exactly.

[00:05:46] Will Page: Well, I think you ... I- I'll concede. I think you've got some great points here, but let me push back on one of them, which is if you think about public sector wages, so yes, we have a energy price shock, that's kicked off a bout of inflation, but we also have rising public sector wages and the strikes. But that's deserved, right? Uh. You can't get it any other way. You can't get those wages up without the fear of inflation, and we can get into an inflation spiral debate, but if all you worry about is inflation, then you're right to worry about this. But if you worry about equality and incomes for public sector workers, it broadens the kind of angst horizon here, and a lot of this inflation could be seen as a case of [inaudible 00:06:26], B, well-deserved and C, a force for good. That is, "Sorry, we're gonna have a bit of inflation. But I'm correcting a lot of other bad points I can get worried about in the process."

[00:06:36] Richard Kramer: But if, if the entire asset stock of a nation, or of the Page family, is things like real estate and the money you have in the bank, and it's simply not keeping up, unless you've found a bank that gives you a 9% interest rate, with inflation, then you are gradually, sorry Will, getting poorer in real terms. And if that happens at a societal level, that's a bitter pill to swallow. Now, you may say we're getting poor in real terms after never having had it so good for a decade, but we didn't think back in the midst of that decade a- and realize how good we were having it, we're just feeling the moment.

Now, I agree the energy underpins a lot of other sectors, so industrials and agriculture and even tech, powering data centers and servers, are impacted by energy prices, but I really think that is only of many sources of inflationary pressure. And this comes down to something I want to pick up on later, which is the psychology of inflation. When you feel that pound in your pocket or dollar in your pocket is just not going as far anymore, and you don't feel as wealthy, don't you feel that it's going to constrain people's behavior somewhat?

[00:07:46] Will Page: Well, on the psychology of inflation, we are citing here the work of Robert Lucas, the Nobel Laureate from Chicago University, who won the Nobel Prize for his work on rational expectations. But the real winner of course was his wife who divorced him after he won the prize, because she had the rational expectations that she was, he was gonna win, and cashed out 50% of a million-pound prize fund. So, credit due to both people in that food chain. I think, yeah, the psychology is gonna be an interesting one. I'm not quite sure that with all the technical advancements that we're dealing with, be it our smartphones, be it our apps, be it our price transparency and websites, whether the psychology plays the same way that was taught in the textbooks 20 years ago. I think we've moved on from that.

Flipping it over a little bit, is there another psychological sort of angle to this which ... Is this governments inflating away their own debt stocks, dare I suggest a conspiracy theory here?

[00:08:37] Richard Kramer: Well, you've been pushing that one for a while, and I won't push back on it because I think it's clever and Machiavellian and probably too clever for a lot of the folks at the treasury or the fed, but let's think this through.

[00:08:48] Will Page: [laughs].

[00:08:48] Richard Kramer: I think the, I think too often we miss out on what's happening on the ground, and I remember going to your local corner shop after one of our morning runs and seeing that the price of butter had gone up from £1.99 to £2.39. And we don't really notice it when it's £2.39 and that's not a lot for a week's worth of butter, but that's 20% increase in prices. And when you start looking at that on the weekly shop or a basket of goods that your ordinary consumers are buying, I can't help but think that's going to have a material impact on behavior. Now, we don't see it because what is around us is prosperous Central London, but that doesn't necessarily reflect the whole of the UK.

I was just several different places in The States and certainly you don't see it as much in, in New York City as you do in other smaller towns in the US, where the picture is not nearly as rosy. And I can't help but think this collective increase of prices, as quickly as it's happened, is something that is gonna have a material negative impact on consumer discretionary spend in the second half our this year. And again, for our listeners, it's about thinking how much money do you have t- cash at hand, how wealthy are you feeling? And when you see prices going up all around you, maybe you feel like it's getting tougher to keep up with the Joneses.

[00:10:15] Will Page: Yeah. I think f- your advice for our listeners is rock solid on the real economy, in terms of what do you cut back on and what do you reallocate from discretionary spend to compulsory spend? How do you readjust the family budget line, I guess? But let's move it back up to what our audiences really love to hear about financial markets. If your hawkish view is right, and if my long-term dovish view is wrong, and I am feeling a bit on shaky ground [laughs] based on the, the most recent run of figures, but let's say that you, give you the benefit of the doubt and the hawks win out here, what have the financial markets not priced in? And when I use the expression is, if you're right, what have the market's got wrong? And where they've got it wrong, where is the potential for Bubble Trouble going forward?

[00:10:59] Richard Kramer: Well, look, it, it's become clear that the central banks are having a very tough time steering these incredibly turbulent markets. You've got record debt in the US, you've got Japanese inflation accelerating, you've got German GDP shrinking in the fourth quarter, you've got all of these cross-currents looking into aspects of the markets that ...

[00:11:23] Will Page: And ...

[00:11:24] Richard Kramer: Yeah?

[00:11:25] Will Page: And, Richard-

[00:11:26] Richard Kramer: Yeah?

[00:11:26] Will Page: You've just got to remember, they've been impotent, if I use that word, they have been impotent for the best part of a decade and a half.

[00:11:33] Richard Kramer: Well, I wouldn't say-

[00:11:33] Will Page: The central banks have done nothing since 2019, other than pump QE into the market, even though it changed interest rates, even though it [inaudible 00:11:42] policies. They've literally sat on their hands, so you can't expect an activist central bank, to quote last week's episode, to come into force when it's been very inactive for well over a decade.

[00:11:52] Richard Kramer: See, I would completely disagree with that, Will, because I think they have been incredibly activist by leaving interest rates as low as they have for as long as they have.

[00:12:02] Will Page: [inaudible 00:12:02].

[00:12:02] Richard Kramer: And there are many observers who feel that Powell bottled in 2018 when Trump bullied him into not raising interest rates then, and that was the time to cool off the economy before the parabolic burst of tech stocks and other speculative instruments, SPAXX, NFTs, crypto, et cetera, that blew up from 2019 to 2021. And so I think it's wrong to say that those central banks have been impotent. They've been quite potent. What they've been quite potently doing is printing trillions of dollars of money, inflating the stock of money in the system without seeing the concurrent rise in consumer prices. Because there was always more funding for a direct to consumer brand to tap into, to offer you product below its cost of goods sold.

[00:12:56] Will Page: I heard you. So. Le- let's hear it out for our audience's benefit. If the hawks are right, where have the markets got it wrong?

[00:13:03] Richard Kramer: Well look, there is a wishful thinking trope that says we are going to see US interest rates go up to around 5%, hang our there for a little while, then nicely start to come down. And of course, that would spark the next wave of bubbles and so forth. But our long-standing contention has been that we're maybe halfway through this tech bear market, and as we talked about in last week's episode in restructurings, they go through three phases. And that first phase is getting rid of all the crazy flights of fancy projects or products your wife might've bought at some point. The second phase is measuring productivity and really getting down to put brass tax, and when companies talk about getting back to their core business or improving their efficiency or productivity, that's fine.

But the third phase is when you cut everything that's absolutely not necessary, but, to survive. And I think we're gonna plenty of companies in a higher interest rate environment, facing a range of inflationary pressures, hit those big survival questions by the time we get through the end of this year.

[00:14:12] Will Page: So, if you're holding stock in a company that specializes in company ...

[00:14:15] Richard Kramer: Hm.

[00:14:15] Will Page: ... off-sites, dump them now.

[00:14:18] Richard Kramer: Well, indeed. And you've seen all of these companies that went through restructurings cancel those company off-sites, cancel those big events.

[00:14:26] Will Page: Yeah.

[00:14:26] Richard Kramer: And indeed, if you're holding shares in a company that does human resources management software, that they, companies buy based on the number of employees they have, well, let's face it, you've seen all those lay-offs across the tech sector. And the huge in- explosion of headcount in all these sectors, not just in tech but also in energy, might get rewound. And all the ancillary services that go with it as well as the spending it creates, is gonna wind down as well. And I think that is, is the shock that the market would rather not think about, 'cause it's pretty unpleasant, but that's the final cleansing phase, if you will, of a bear market, where there's capitulation and people realize the worse might actually come to bear.

[00:15:13] Will Page: One last question before we take it to the break is, the bond market. Now, the markets are something the I get, but I don't quite get. I get they're scared of inflation and we've got inflation. I also get that they like interest rates and we're now getting some interest rates. So, the bond market's come back to life. Now, what do you see, if the hawks are right, what do you see for the bond market going forward?

[00:15:35] Richard Kramer: Well, when you think about what a bond is, it's certainty and predictability. So, if you have a five-year bond that pays you 5% a year, you know pretty well what you're going to get. But if inflation is rising at 10%, well, the bond is only making up half the difference of the inflation eroding the value of your money. If you go back five or six years ago, the Germans and the Swiss were issuing 50-year bonds with negative interest rates.

[00:16:04] Will Page: That's nuts.

[00:16:05] Richard Kramer: Because people thought that the value of the Swiss Franc was sufficient, that you would, it would hold up better against other currencies because they'd be able to collect tax receipts more efficiently in Switzerland. And that country would be, because it's smaller and wealthier, more stable than a lot of the other currencies, that you would say, "I would buy a bond that I know is going to be worth less in 50% years than I'm paying for it now, and I'm gonna get, I'm gonna pay to hold it, but that's going to be a better outcome than buying a bond that might go up 3%, but in a currency that's facing 9% inflation, so I'm losing two-thirds of the value."

So, the bond market is all about predictability and certainty, and the equities market is obviously not, because companies' performance can vary dramatically and stocks can go up and down much more than bond yields are likely to vary. So, if you're having a very uncertain second half of the year, and markets are very nervous about equities and their prospects, and you have rising interest rates, that would suggest that the bond market does relatively well because people just want safety and predictability, and are less willing to gamble on equities where that recovery that we're all waiting for, coming out of recession before we've properly entered into it, is more uncertain.

[00:17:28] Will Page: To weather the storm, basically. To weather the storm.

[00:17:30] Richard Kramer: Indeed.

[00:17:31] Will Page: Well, let's wrap it up with part one, but I just want to call back up that slight dispute we had about whether our central banks were potent or impotent. You're arguing that by doing nothing, it actually makes you quite active. Reminds me of that famous Mario Draghi point, during the heart of the global financial crisis, the head of the European Central Bank, where he said, "I'll do whatever it takes other shore up the Euro," and then proceeded to do nothing. But by saying that he'd do whatever it takes, was enough for the market to know that you don't need to do anything, just tell me you'll do whatever it takes. But he actually proceed to do nothing, so he was potent and impotent in the same way. So you have a schizophrenic central banker.

So that wraps it up for part one. Back in part two, where I want to try and get the doves back at the table. But we'll be back for that, more in a moment.

[00:18:23] Richard Kramer: Welcome back to part two of Bubble Trouble. We're talking through the hawks and the doves, and inflation, a word we can't seem to get away from these days. It's all over the front pages of our newspapers, and we can't seem to move in the UK without talking about the cost of living crisis. And I want to go down the rabbit hole a little bit with someone who I think is a bit of a connoisseur of these inflation statistics, Mr. Will Page, and hear his view. He is gonna tell us what it's like when the doves cry about inflation not ...

[00:18:55] Will Page: [laughs].

[00:18:55] Richard Kramer: ... being high enough.

[00:18:56] Will Page: Yeah. I-

[00:18:57] Richard Kramer: Will?

[00:18:58] Will Page: To get the doves back at the table here, so the hawks don't scare them off, I want to flag two headlines. Just, just loosely talk around this, but one, I just picked this one up from the internet, a headline which said 'Remote Working is Costing Manhattan More Than $12 Billion Dollars a Year.' And a third headline came from Bloomberg, which is ...

[00:19:16] Richard Kramer: Hm.

[00:19:16] Will Page: ... 'Three in Four Londoners Would Quit Instead of Giving Up Working From Home.' Let's just unpack these two stories. If inflation is, as Milton Friedman told us, the famous University of Chicago professor, just a monetary phenomenon, and if indeed you go all the way back to David Hume and just assume that if you increase money supply, you increase prices and that's it. That's all you have to do to get inflation down. You ...

[00:19:39] Richard Kramer: Right.

[00:19:39] Will Page: So we have a kind of, a very simplified view of how inflation works, which is money. If remote working has sucked $12 billion dollars out of Manhattan a year, that has to have sucked a lot of inflation out of Manhattan a year. A lot of that'll be displaced to the suburbs, some of that might be lost in the ether, but it's got to effect inflation statistics. And I just come at you, the hawk Kramer, and say where do you really think these inflation statistics have factoring in working from home or working from anywhere, given the huge wedge of costs that it's canceled out of people's household budgets?

[00:20:22] Richard Kramer: Will, I will ... Having walked around Manhattan the week before last, I will tell you, not only do you see a lot of empty retail storefronts, but the likelihood is that those real estate developers that own those properties have not rented them out at far lower prices because they don't want the whole value of their building to be downgraded, because their rental yields are so much lower. So I would think that if that $12 billion dollars a year has been sucked out of Manhattan, that it hasn't magically popped up in commuter towns all around New York. It simply isn't being reflected yet in numbers.

And if we really all continue to work from home, there has to be a lot of overvalued commercial real estate that either has been freshly finished or is still on the drawing board in city centers, that's simply not going to get utilized at the same pace that we saw before the pandemic. So I'm not sure if we have just kicked the can down the road and avoided recognizing some of these holes in the economy, or if that $12 billion that didn't get spent in Manhattan really got ...

[00:21:46] Will Page: [laughs].

[00:21:46] Richard Kramer: ... sprinkled around like fairy dust to every commuter belt down.

[00:21:50] Will Page: I want to come at this again, but I think in that answer you may have just put a big flag on the play in terms of future Bubble Troubles and real estate, that is when do you hold and when do you fold in your real estate prices? And when do you drop them to get occupants in and when do you hold them to not devalue your property? And there may be something happening there, and I'm seeing it in London, I'm seeing it in other cities as well, a lot of real estate is empty purely on that hold-not-fold strategy. And this if this work from home, work from anywhere ...

[00:22:17] Richard Kramer: Hm.

[00:22:18] Will Page: ... thing is gonna become a permanent feature in our lives, well, you can't hold forever, correct? At some point you're gonna have to call it in.

[00:22:24] Richard Kramer: Absolutely. And we've already seen now for I think four or five months, and we'd love to have your chief economist friend from Redfin back on, because there's clearly been a big change in the US housing market since we last spoke to her. You've seen a four or five month slide in house prices, and this was a principal source of really one of the largest asset classes in the world, residential real estate, we all need a house to live in, and it's been a major source of income and personal wealth growth around the world.

And if all of these new build properties that have gone up in cities like London and New York are no longer keeping their resale value, they aren't safe deposit boxes for offshore investors anymore, and they start to come into the market at greatly reduced prices, even the banks which right now are desperate to lend money out are not going to be able to find takers for these, for these sort of falling knife assets in that real estate class. And I think you see that happening already in the US housing market, where housing starts are down, house prices are down, and transactions are way down.

And so where is this money going? Where is this extra $12 billion going? Because if it was going on Hudson Valley Real Estate, well, hasn't that rolled over as well?

[00:23:50] Will Page: Yeah. And I don't want to paraphrase Daryl's work, or even try to pretend to be as clear and precise in her language, but I did hear her recently talk about a policy in Seattle to get occupants back into those houses.

[00:24:03] Richard Kramer: Yeah.

[00:24:03] Will Page: Like it, they ... I think they're looking at it as a use it or lose it clause. You've got all this empty property, I know what the game is, you're holding up prices, no one's paying, and we've got a housing crisis, so let's get people back into those houses. And almost looking at government intervention solutions there. Let's go to my second headline real quick, which is 'Three in Four Londoners Would Quit' quit, quit, 'Instead of Giving Up Working From Home.'

This raises other issues too. I wonder whether one of the reasons why they're, you know, suggesting they'd quit is because they don't like the cost of coming into the office. And if they don't like the cost, they don't like that inflation that, uh, CPI basket here in the UK is measuring, which is the normal world, because they like the inflation rate that they're living, which is the real world. They're in the suburbs, they've got their own places, they're not paying £6,000 a year in train fares and all that stuff.

Now, two things here. One, those people working from home I think have a different measure of inflation from those of us who are commuting and working in the cities. And two ... Which is a dovish perspective by the way. And secondly, if you were to bid them back into the city, you might need to raise their wages even more, which itself could become inflationary. So there's two to tango here. So firstly, what do you think about the argument that people who are working from home are looking at a completely different measure of inflation from the rest of us?

[00:25:20] Richard Kramer: Well, look, we all have a range of input costs in our lives, whether it's setting up a home office, having a commute, having a job which requires us to travel around a lot. And it's clear that so many of those ancillary costs to any of those setups have gone up. If you stay at home, you've still gotta go to the grocery store and buy lunch for yourself, and prices in the supermarkets we know have gone up. The cost of running your electricity to power your computer all day, that's gone up. So it's not like there's somewhere to hide from economy-wide inflation that we're seeing.

[00:26:00] Will Page: But, to their credit, when they do their numbers and they say, "My monthly shopping bill's gone up by let's say £40 but I'm saving £6,000 a year in train fares," it's inconsequential to what they've managed to cut out.

[00:26:14] Richard Kramer: Yeah. I tend to think the vast majority of people don't do their monthly budgets like that. They don't calculate it, they don't think about it. They bring money in and they spend money, oftentimes spending more money than they've got, and you see now mountains of credit card debt both in the UK and in the US.

[00:26:30] Will Page: Yeah, it is a concern.

[00:26:30] Richard Kramer: And it's a big question, with rising interest rates, whether this is going to be, become a more serious problem over time.

[00:26:38] Will Page: Let me flip it over to a macroeconomic policy. If-

[00:26:41] Richard Kramer: Hm.

[00:26:41] Will Page: If we're gonna get back to a new normal, a normal world, back when I studying economics, we used to talk about these things called tailor rules.

[00:26:48] Richard Kramer: Yeah.

[00:26:48] Will Page: Which simply said if you've got two and a half percent inflation and you've got two and a half percent economic growth, then inflation growth gets to you to your base rate for the central banks, 6%, 5%, and then the banks lend at 6% and that's your cost of your mortgage.

[00:27:03] Richard Kramer: Hm.

[00:27:03] Will Page: I mean, it's super simple and straightforward, but it kind of worked. Because the macroeconomic framework works. You know, everything made sense. Now, nothing makes sense. Now inflation's ...

[00:27:13] Richard Kramer: Right.

[00:27:13] Will Page: ... way over here, interest rates are way over there. We don't really know what's going on with economic growth, but do you think there's gonna be a role for tailor rule logic in the future, or was that just when everything was just so easy to explain and we're not gonna see that again?

[00:27:25] Richard Kramer: Well, so if we go back to one of the great debates about whether you need a purgative recession or not to clear out all the excesses of the economy, your tailor rule would say let's say the US is gonna grow 2% this year, and they're having inflation of 8%, well, we ought to have a 10% interest rate. And you want to see the equity markets panic, throw out a 10% interest rate, and watch people scurry. So I guess the question now is do you see central bankers that will dare to take the Paul Volcker approach and clear out the excess of the economy with very high interest rates for a short period of time?

[00:28:05] Will Page: Grand. And then I-

[00:28:06] Richard Kramer: No, I mean, that's a question for you, buddy. Don't ... It's not grand. There, there you are, the inflation hawk. You think it's gonna come down. You don't think we need the purgative recession, you don't think things are gonna be bad. We'll have a happy soft landing. Tell me, what if that doesn't work out? What do you do?

[00:28:22] Will Page: The worry I guess is [inaudible 00:28:23] scenarios of just a contracting economy and raising interest rates. And that's a tricky one.

[00:28:29] Richard Kramer: And it's hard to look at the current state of the UK and not expect it to be a contracting economy for the next 12 or 18 months.

[00:28:38] Will Page: And that's where you get your labor market disputes, 'cause you just can't afford to real terms price increases being demoted by the market. You need prices to correct everyone.

[00:28:46] Richard Kramer: Right.

[00:28:47] Will Page: But there's not, [laughs] there's not many other views at the table to help work out that scenario.

[00:28:52] Richard Kramer: Look, let me, uh, let me put a question to you. Your advising lots of companies not in the sort of snake oil consulting firm type of way of giving them pretty charts that were given to the last seven companies they advised, but ...

[00:29:04] Will Page: [laughs].

[00:29:05] Richard Kramer: ... really doing ...

[00:29:06] Will Page: I will, I will [inaudible 00:29:06].

[00:29:06] Richard Kramer: ... real economic modeling with them, and getting them to think about consumption and where spend is going. How do you get these companies to factor in the impacts of inflation, both the practicals ones which are the money in people's wallets after they spend on necessities, and the psychological ones that say, "Geez, I've seen prices go up for everything and am I less, less well than before?"

[00:29:30] Will Page: Well, there's an interesting way of playing around here, which is called the, the Domino effect, which is during a recession, Domino's sells more pizzas. The anchor being you cut back on going out for restaurants, and stock up on pizzas for sitting and watching movies on Netflix. More cost-efficient way of achieving the same goal, A, eating, and B, [inaudible 00:29:48]. I think Estee Lauder talked about this with lipstick as well, like affordable luxuries during tough times, I think there's a lot of that to be done.

Now, one area that I'm spending a lot of time in just now is live music, and I'm pretty strong on that sector going forward. Have they got issues with inflation? Absolutely. The cost of putting to show is up. The cost of hiring labor to run those shows, up. Everything is up. But can you wrap all that up in a ticket price and still maintain your margins? It seems so, and it seems that what I think people are beginning to do is peel back on going on short breaks abroad to Europe, here in the UK for example, and pump up in going to shows instead.

So they've got that Domino's effect, and that, that's what you're looking for there, is people still want entertainment. They want to entertain much more affordable, so what's the trade-off? What's the conjoin?

[00:30:37] Richard Kramer: Hm.

[00:30:37] Will Page: What's the balancing act people are performing. And I, I think there's strong evidence to suggest that the demand to go and see a show is great than ever before. Uh. The value of the British live music industry was bigger in 2022 than it was in 2019 when the world was normal. That's how hard it bounced back. But if they're doing that, and there's a tougher constraint on spending, who takes the weight? Who takes the cut? And I think it's those luxury trips abroad, I think it's those things that you read in the FT Weekend magazine, which you now stare at but don't actually activate in terms of your [inaudible 00:31:06]. So I think tho- those trade-offs are, are what companies need to work out for. It-

[00:31:10] Richard Kramer: But if you're gonna allocate spending to some experience, it's gotta be something unique, right? So that's the point ...

[00:31:18] Will Page: Mm-hmm.

[00:31:18] Richard Kramer: ... of your seeing your favorite band play in a venue near your house. It's something that's so unique, you're willing to pay, what are these ticket prices? £2, £300 for these concerts in, in stadiums?

[00:31:31] Will Page: Def Leppard sold out Wembley Stadium at that price. Can you believe that?

[00:31:35] Richard Kramer: Yeah.

[00:31:36] Will Page: Def Leppard in 2023.

[00:31:38] Richard Kramer: Yeah, and that's to, to, to 50 or 70,000 people wanting that unique one-off experience. And it means that much to them.

[00:31:43] Will Page: Mm-hmm.

[00:31:43] Richard Kramer: Now, will we have the same pool of people with that disposable income to spend in a year's time? I think that's gonna be a really interesting question to come back and look at.

[00:31:53] Will Page: And the, the other thing I'd bolt onto that real quickly is the ease to which you can manage your spending habits. And on the radio the, the other day, I think I was listening to Jazz FM with radio adverts, I think it was Barclays Bank was advertising a new feature which makes it much easier to manage your direct debits, really promoting that all you had to do was swipe left to unsubscribe from all that stuff that you don't need to spend money on.

I thought that was really interesting. That's just the bank offering a facility, but what they were doing was, you know, planting a powder keg under all these subscription models which are cashing in and have been doing do for the best part of decade. So if the country makes it easier to unsubscribe, we'll see churn effects with subscription services, and of course Netflix will be the number one candidate here, happening in the UK, perhaps more so than anywhere else, 'cause bank's making it so easy.

It's like, like TikTok. You just swipe, don't want to pay for Netflix anymore, and they take care of business. So that's a really interesting dynamic to look out for with inflation and the spending squeeze hitting our economy.

[00:32:52] Richard Kramer: But if you swipe right, if you swipe the other way, can you resubscribe straight away? Because that's whole process of signing up of subscriptions is so painful. And-

[00:33:03] Will Page: Yeah.

[00:33:03] Richard Kramer: If you could make that whole-

[00:33:04] Will Page: It's asymmetric.

[00:33:05] Richard Kramer: If you could make it easier, that, to jump on and off the train, maybe that's something more people would take advantage of. Now, Netflix is unusual because they've always made it very easy to pause or cancel your subscription. But again, getting signed up at the on-ramp has always been a painful process for all sorts of consumer services.

[00:33:23] Will Page: Yes, indeed.

[00:33:24] Richard Kramer: Look, I want us to move to smoke signals. And I think each of us have to give one, where we think ...

[00:33:30] Will Page: Okay.

[00:33:30] Richard Kramer: ... this inflation train is going. One thing we can say that if the doves were wrong and inflation bites harder and longer, and another thing that people need to know if the hawks were right all along and we get wages and prices coming back down to earth and we're, we, it all feels more normal by the time we get to the second half of this year. Why don't you go first?

[00:33:51] Will Page: I, I think that the smoke signal for me which suggests, which makes me believe in my dovish view on inflation and economic outlook, is when people talk about the 1970s. And I hear it on the state program, I hear Eloquent Economist talking about it, it's like we're not in the 1970's. Labor market doesn't function like the 1970's. Those textbooks don't apply to ma- uh, an, a modern economy in 2023. The economy's much more open, it's much more dynamic. There's much more labor migration. It's just much more tuned to getting things back to normal. I think those rigidities, a very geeky economic word to drop at the end of a podcast ...

[00:34:31] Richard Kramer: Mm-hmm.

[00:34:31] Will Page: ... but those rigidities that existed back then don't exist any more, and that's why I believe that things are going to get back to normal a lot sooner than the pessimists would hold out for. That's my case for the doves, but I got a hawk flying in here smoking something different.

[00:34:45] Richard Kramer: Yeah. I guess, several issues I think are coming to the fore at once. There is a, a deeply dysfunctional and neutered political leadership in many countries. You have big elections coming up next year, and there's gonna be a lot of hesitation, pausing, uncertainty into those election seasons, both in the UK and in the US. You see consumer discretionary spend is gonna be tightened for the masses. You cannot turn on Radio 4 every morning without hearing one or another variant of the cost of living crisis story. And it's heartbreaking in so many different ways. The Mayor of London has just approved free school meals for every pupil.

Some people are criticizing that, amazingly, and not realizing what it's like for the students who have to get the free meals to be sat next to the students who don't. And we can't stop hearing about this and I have to think that it has a long term impact. You have to remember, the media constantly reflects the unreal economy and brings us the next big thing in the lives of the rich and famous, and I think we are going to have to reckon with all of these pent-up inequalities and inefficiencies in the economy that have led to this staggering rise in inflation. And it's not gonna go away any more than Vladimir Putin is about to turn around his tanks and march back out of Ukraine and we'll all be beck to the new normal in the world of energy prices.

[00:36:11] Will Page: Reasons to be cheerful, Richard, reasons to be cheerful.

[00:36:13] Richard Kramer: Thank you. Sorry I'm a Doctor Doom here, but, but I wouldn't want people to think that when you hear all of this highly promotional commentary by the financial markets, which would love nothing better than to have a soft landing, or a mild recession, that just sounds like-

[00:36:31] Will Page: Back to [inaudible 00:36:31].

[00:36:31] Richard Kramer: Yeah. That's, and of course that's spoken by highly paid professionals who don't have to face the frontline pressures that nurses or train drivers or any of these other categories of folks going out on strike do, because they've seen inflation eat away their real wage growth in the last years. And I think there is a bill to pay in consumer discretionary spend that will trickle through the entire economy.

[00:36:57] Will Page: Interesting.

[00:36:57] Richard Kramer: Look,, I don't want to bum everyone out at the end of our latest podcast, but we want to be realistic. I think there's a bubble to be burst in the hopeful economic forecasting between now and the end of the year, and I would love to be proved wrong, that we sail through this, the world is at peace and inflation is under control without having to have 10 or 15% interest rates a la Paul Volcker in the, uh, in the 80's it was, Will.

[00:37:22] Will Page: Hm.

[00:37:22] Richard Kramer: So, with that, we'll bring this episode to a close. We're gonna be coming back in the next couple weeks to focus on some other hot topics and bubbles brewing in the tech market, and in areas like AI, which you can't seem go very far without hearing about, and lots of other topics. We'll be back next week with myself, Richard Kramer, and my cohost Will Page. And this is Bubble Trouble.

If you're new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts. Bubble Trouble is produced by Eric Nuzum, Jesse Baker, Julia Nat at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Will Page and I will see you next time.