Cochrane on China, Chris on Crude
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Welcome to Inside Economics. I'm Mark Zandi, Chief Economist of Moody's Analytics, and this is going to be a great podcast. A lot of fun because it's going to be just colleagues, my two trusty co-hosts, Chris Dridis and Marissa DiNatale. Hi, guys. Hi, Mark. We were waiting a long time to start this podcast because of our colleague, Dr. Cochran, Steve Cochran. Steve is joining us. Hey, Steve.

Hey, Mark, you know, some of us are slow learners here. So anyway, that's not you, Steve. Okay, I'll take it. That's that may be Chris Dorides, but that's definitely not you. Maybe technology. Yeah. Anyway, I'm going to be on my best behavior. And we got Chris Lafakis too. Hey, Chris.

Hey, Mark. How are you? Thanks for having me. I'm okay. I'm a little punchy, as you can tell. It's all in good fun. Not really. It hasn't been good fun. But it's all good now because I'm on with you guys. And this is a special podcast in part because we've got the two of you on. And Chris, we're going to be talking with you about what's going on in the Middle East and the effect on oil prices and kind of do a primer on what it all means for the US economy. And I'm going to be talking to you about what's going on in the Middle East and the

And then, Steve, you know, it's so good to have you on. You know, this is, I guess, your swan song, right? You're retiring in a couple weeks. Pretty much, yeah. End of June, I'll be on my way to other things. Yeah. And I think your first stop is going to be some lake in Slovenia or something, right? You know me very well. I'm always going to find a place to swim. And Lake Bled, there's no place better in the entire world, I'll tell you. Is that right? Really, really. You swim. Wow.

from the edge of the lake to an island, then hike up to the castle that's on the island, get a great view, go back down to the bottom of the castle, back to the lake, swim back to the lake's edge. It's fantastic. Is the water warm or do you wear a water suit? A wetsuit? No, no, no wetsuits required. I'm open next month. Right. Well, it's so good to have you on. We'll come back in a second, but we do want to talk about, because

You've been with – you're 007, as I understand it, the seventh employee of Regional Financial Associates, the precursor to economy.com, to the precursor to Moody's Analytics, the precursor to Moody's. And you're the seventh person to join the firm that Carl I and Paul Guttman started many years ago.

And you've been, so you've been with us for 35 years, 34. Now you're adding some age. 33 years. 32. 32 years. 32 years. Right. And you ran the regional group for many, many years, which was kind of our bread and butter for, you know, uh, for a long time. Yeah. And then you went off to Asia and really established our, our, uh, business out in Asia. And, uh,

And thank you for all of that. I really appreciate that. So, so a couple of questions for me and then maybe from the other guys too. Do you have any advice for me? You know, the, the old guy in the, in the room, what would you, what would you say to me? Oh, advice for you? Yeah. Just me personally. It's all about me, you know, Steve. All right. Well, actually, so I was thinking about the advice that I give everyone. Okay. That comes on board.

And it's all about you'll do fine as long as you know how to manage up. And that took me a while to figure out how to do that with you.

What does that mean? Managing up. Mark, you don't know what managing up means. Then we have to teach you a little bit here. Managing up is learning how to manage your boss. Oh, okay. So you've been managing me for 32 years and I don't even know it. That's masterful. Pretty good, huh? That's masterful. I didn't even know I was being managed. So cool. Yeah.

So I always tell the story. In fact, you talk about having, you mentioned earlier, you're going to have dinner with your son tonight. I went backpacking this weekend with my son for Father's Day. Had a great time. And he gave us a lot of time to chat. And he was talking about work and kind of the difficulties one could face sometimes, including working with his boss. And I said, Mark, I learned something a long, long time ago. In fact, if I remember right,

It was in week three of my employment at Regional Financial Associates. And I can remember having a list, a to-do list that was a mile long and thinking, I'm never going to make it here. This is not good. That sounds familiar. Yeah, right. So I went to you, brought you my list, and I

And I said, and I was really, I was ready to just, you know, tell you all the difficulties I was having. And he didn't even let me talk.

You just looked at my list and said, oh, do, you know, this, this, this. Forget about the rest. When you get those done, come back and talk to me again. We'll figure out the rest of it. Oh, wow. And it was like, holy cow, what a weight off my shoulders. And that's when I learned about managing up that when there's issues, don't stew about it. Don't hide. Don't, you know.

Just go talk to your manager and they will almost always, I would say, be understanding and help you through it. And that was certainly the case.

And I think that event three weeks into my employment was key to my 32 years at Moody's. Oh, wow. That's a great story. So, Marissa, have you tried that on me too, that same thing with your list thing? I don't remember that. I'm sure at some point I have. I also remember the day that I started 20 years ago. Wow. Having...

all these things that were already overdue. Actually, I should say Steve was my boss. So Steve was my first boss when I started 20 years ago. And I remember having a list of like, "Praisey" and "Florida" to write. And it was like, "Oh, these were due like two weeks ago." And I did the same thing. I kind of said, "Okay, you have to tell me like, what do I actually need to do in the next week, right?"

Because everything's high priority, right? So you really need that guidance. So he did the same thing. He went through the list and said, prioritize. I'm sure that he did. Yeah, I'm sure. Because I think I looked at that and was like, what?

So I learned from Mark. Mark was there to go. Okay, yeah, passing it down. Somehow it all works out, you know? It does. You've been with us 32 years, Marissa 20-something years, Mr. LaFacus, how many years? 19 years. 19 years? And Marissa was my first boss. No. Yeah. Did you do the listening with her? No, I didn't do the listening with her. She said, you're two weeks overdue on all your crazy stuff.

You got to do it all, man. Get down and get working. All by fire, baby. And Chris DeRees, you've been with us how many years now? 16. 16 years. 16, 17, yeah. And do you do the list thing as well? Would people come to you with their list and you prioritize? Yeah.

Yeah, but I'm taking notes because I haven't learned this lesson. I don't think I ever came to you with my list. You know what? It feels like you get everything done. What is that all about?

That's real management there, Steve. I don't even know what's on his list. Yeah, exactly. Just don't bother. That's the secret. Don't disclose the list. Well, it's good to have you guys. So one more thing, Steve, before we get into the meat of the matter, and hopefully the listener is enjoying this conversation. I'm not sure. I mean, we're going down memory lane here, but what is your –

the forecast you're most proud of and the forecast you're least proud of? That's a hard question, but do you have that in mind? If you don't, no worries. I just was curious. I think I can relate it all to our forecasts when COVID first came out. Of course, we were all in the dark, right? What's COVID, right? But one thing we learned, this is when I was in Singapore, so I was focusing on Asia, focusing on the forecasts out there.

And we learned very, very quickly that the government policymakers out there were ready for COVID. Ready because they'd gone through the SARS epidemic back in 2003, 2004, right? So there were stockpiles of antivirus medication. They had plans to put together emergency hospital units to care for the sick.

And moreover, most of the countries in Asia gave very clear guidance to what was going on. So we felt like, oh, we've got this. I mean, as long as the governments do what they say they're going to do, it's going to be tough. It's going to be, you know, six months of, you know, maybe a recession, very, very weak economic activity. But they're going to come back.

And I think we got that pretty well and our forecasts were pretty accurate. We missed it in a few countries like the Philippines that just shut down forever, it seemed, and didn't come back. But everywhere else, I think we nailed the timing and even the amplitude of the cycle pretty well. So I'm actually pretty proud of that. Now, we were lucky. Of course, we had some guidance from policymakers in the region earlier.

And they were, again, expressing that policy pretty well. And they executed quite well, particularly, you know, Japan, even China in the beginning, Taiwan, Korea, Singapore and such.

Now, the worst forecast was related, and it was China. Not that we didn't get the quick turnaround in China. Of course, China turned around quicker than anybody. They were really focused about the COVID in Wuhan province or in Wuhan.

And once they came out of that, the economy opened up and they were doing fine. But what we didn't realize was how China was going to mismanage the rebound of COVID and do that hard shutdown across all the major metropolitan areas in China, keep everybody in their housing units forever at same level.

until they finally had the blank paper revolution. Do you remember that, Mark? I do. And, you know, finally the policymakers said, okay, time to open up. So we had about a year where we were missing it because we just didn't know what was going to happen in China and the rules and regulations were just so vague and uncertain.

So that was probably our most difficult time where we missed the forecast. But in the rest of Asia, I think we got it pretty well. So all in all, I'm pretty pleased with how we got through that period of time in our forecasting. It's interesting, you know, forecast errors, it feels like now that you say it,

in the context of China and the pandemic, it feels like our forecast errors are mostly around just misjudging policymakers and what they're going to do. Certainly in the current context. Yeah. You know, it's like,

Because sometimes they do things that you go, really? You're doing what exactly? Why are you doing that? And as economists, you kind of think it's all about the economy. They're going to do that. Whatever they do is going to be through that prism. And often it's not. And when it's not, that's when the forecasts are wrong. It feels like there's a common source of error, forecast error. I wonder if AI could pick that up. What do you think, guys? AI can solve that problem? I don't think so.

It's going to be a while. It could be a while, yeah. Yeah, yeah. Well, as I said earlier, we're going to get back to Crystal Fackus here in just a few minutes to talk about oil and what's going on in the Middle East. But since we have you, you know, this –

trade war, particularly between China and the US, how are you thinking about this? I mean, it feels like the Chinese have gone tit for tat here. Whatever the US does, they follow in some form or another. They've not given an inch, and it doesn't feel like they're going to give an inch. But is that how you see it? Is that how things are playing out here? Is that how it's going to continue to play out? I don't know.

I do think that's going to be how it plays out as long as they can manage it. Of course, there are some weaknesses in the economy in China, but I think they are going to play hardball with the US. And I think it's going to be a long, long haul. I don't think we're getting through this. The 90-day cooling period ends in mid-August, and I'm sure it's going to go way past that. It's interesting.

When the London talks ended, and I'm forgetting now, it was about a week ago, right? And I get up Monday morning to scour the press to see what's going on. And the closest I could get to any real information, Commerce Secretary Howard Lutnick, he's mentioned to the press, he said, oh, the two largest economies have reached a handshake for a framework. And I'm thinking, wow.

handshake for a framework. That's what they got out of, what, 48 almost solid hours of negotiation. This is not going well. And indeed, you know, the press in China, they quoted Vice Premier Hu Lifeng, who said, the U.S. and China should strengthen consensus and maintain communication. That was the word coming out of China. So,

That tells me that we've got a long, long way to go. Coming out of those negotiations, they pulled back on some of the retaliation, right? China's going to export rare earths materials to a certain extent. The US is going to continue exporting AI-related software, jet engines, things like that. But no one's even begun talking about tariffs yet. And we're halfway through this negotiating period.

And so I think it's going to be a long road ahead of us. A lot of uncertainty still to come. I think the effective tariffs the U.S. has on Chinese goods now is around 40 percent. There's a 55 percent number of people are bandying about, but that's

That's too high. Yeah. It's not the effective price after you consider all the carve-outs and everything else. So it's about 40%, which is high. That's exactly right. And very high. Right. Yeah. It feels like that's where it's going to settle. Is that right? Or do you think it's going to come in at all? Actually, I think it'll come here because- You do? Yeah. I do think so because I think-

The US certainly wants to get a few things out of China. I think most importantly is getting a little more strict on the export of the components that are used to make fentanyl. But this is still a huge problem in the US, the drug crisis. And if China could effectively

a government, which is difficult because the export is often through crime syndicates and such. But if somehow they can monitor this and reduce the amount of fentanyl coming into the US, then the US might say, okay, we'll reduce some of these. Actually, there's a, I believe it's a 20% tariff that's related just to fentanyl. And that's one place that they could pull it in. And now that would still leave China with 20% tariffs, which is

10 percentage points higher than the sort of baseline 10% that the Trump administration is talking about all around the world.

I think one way or another, I do expect that China will come out of this with a higher tariff rate on China than on just about every other country in the world. I can't even remember coming into all this, what was the tariff rate? Was it 10? It was about 10%. That's right. And right now it's 40. In your sense is when things kind of settle down the road here, it'll settle in around 20. That's kind of, yeah. Yeah.

I think so, if indeed they settle at 10 for the rest of the world, and that's uncertain as well, right? Right. But then what that means in the future, that if China's 20 and the rest of the world is 10,

And probably this whole business of a China plus one strategy of trying to still produce in China but have your supply chains also go through other countries may well be what's in the future for us. Which again is nothing new, right? I mean, this is no change from where we were back in Trump 1.0 when Vietnam became a production base for so many companies out of China and also other places like Korea and such.

So we may see more of that going forward as well. Yeah. And of course, the decoupling between China and U.S. is more than just trade. It feels like we're decoupling on every dimension, you know, on student visas, on investment, on immigration, on capital flows. You know, everything feels like it's kind of breaking apart here. Is that a fair characterization? Is that going to continue? I think it's fair, although there are

Words again coming out from the administration that, oh, no, no, we'd love to have Chinese students still come to the U.S. But that's not with I mean, the rhetoric is going both ways right now on that. I don't know where that's going to land.

But I do think this idea of decoupling, particularly on investment, is really going to happen unless there is, again, a change in US policy. The US wants everyone to invest in the US and put in manufacturing in the US and supply the US economy and even others from the US, except when it comes to China. And in a way, I think

China would be willing to invest in the U.S. if they didn't face all sorts of roadblocks from U.S. policy. And in a sense, it follows the Japanese model of 30, 40 years ago when Japan was the feared economy that was going to take over the world.

And then Japan began investing in the U.S. economy and forces manufacturing, particularly in the automobile industry. But they just invested in U.S. steel in western Pennsylvania and oil.

Yeah, I think China would be very, very happy to follow some of that pattern that the Japanese set in place. But the US, I don't think US policymakers are in any mood to have that happen at all. It's very odd. So then, you know, you ask yourself, what's the purpose? What does the US really want out of this US-China negotiation? It's hard to say. Yeah.

Yeah, just rare earths. And I think that's not much more than that. So that then leads to kind of one other question, and that is China, Taiwan. You know, if we're decoupling and our interests are diverging,

It just feels like the odds of something going off the rails, including China being more militant with respect to Taiwan, just feels like a higher probability scenario. How high a probability is it? I mean, is it still completely a tail risk, or do you think it's even on the radar screen?

Well, I'd have to say it's on the radar screen. It's not a complete tail risk. Certainly, the Chinese military is preparing for that. There are all sorts of military exercises all around Taiwan, all around the South China Sea that, you know, are...

set up to be, to make the military ready for that. And there is a lot of talk that, you know, the end of President Xi's term is in 2027. Of course, it's not going to be the end of his presidency, but it's the end of his, the five-year term. And that that would be a goal for him before, you know, and when he's up for renomination, if you will, for another term that he could proudly say, well, I was the unifier. I did with no other leader, no other post-war leader

could do. So I worry a lot about that. I think if there is going to be any way of voiding it, it comes from constant communication between the US and China in particular, but even all of the other economies around the region. I think if the US and China stop talking to each other

then we may very well have trouble. From that point of view, I think the London talks, even though they were just about trade and a very, very small piece of the whole issue of trade, it didn't, again, it didn't even cover tariffs. But if this is the beginning of high-level talks where we had, you know, cabinet secretaries here and high-level policymakers from China talking to each other,

And that can continue. Well, that's probably the best way to avoid that. Can it happen? I don't know. I don't know if anybody wants to predict, but I would say that would be the highest priority from a security point of view is just keep talking between the two powers. Good luck with that. We'll see. It doesn't feel like that's going to happen. Okay. Well, thanks, Steve. And

It's been a great 32 years. I want to really thank you for everything you've done and all the hard work and your success is really at your feet. So thank you very much. You're very welcome. It's been a dream job. I can't think of any other career that would have given me as much as this has. And this team that I work with and working with you, I mean, I retire.

I'm leaving my family, sort of. Hopefully we won't leave everything behind, but this is like my family away from my family. It's great. Yeah. Well, happy swimming. So let's go across the world and let's turn to the Middle East. And we're fortunate to have Chris Lefakis who focuses on energy markets and particularly oil market.

And Chris, it feels a little, this is now Monday, what is it, June the 16th.

kind of late in the afternoon and things are happening pretty quickly here, but it feels like we're kind of in a better place than we were last Friday. Is that, does that sound right to you? I think we are in a better place because we have more information and we also have a potential olive branch or desire for de-escalation that

That's one thing that sent oil prices lower on this Monday is news that Iran had communicated through intermediaries that it is seeking a ceasefire with Israel. And oil prices have fallen a little bit on account of that. I think in the immediate aftermath of

you know, the Israeli strikes, and this was on Thursday evening when I sat down to write my first take economic analysis. It was very, there were three major risks to the oil market. The first was that the Strait of Hormuz would be closed by Iranian naval vessels or ships would be harassed. And that's the lowest probability, but the most damaging.

The second would be sanctions levied against Iran to deny it export revenue. And the third was that there would be, in fact, strikes, Israeli airstrikes on Iranian oil and gas infrastructure itself. And we have some answers on all three accounts. The U.S. is still seeking a deal.

negotiated solution, although the incentives remain varying for both Iran and Israel. I think that the Strait of Hormuz possibility has declined even more because Iran is having trouble controlling its own airspace. And so it would be difficult to kind of enforce an embargo

not to mention the USS Nimitz aircraft carriers moving into the Persian Gulf from the South China Sea. And you would think that U.S. carriers and destroyers would ensure that shipping lanes remain open. And then in terms of the sanctions, I mean, the U.S. is still

hoping that it can negotiate a deal. That's what the White House is saying right now. And so with the U.S. kind of wanting a deal and Iran kind of wanting a deal, that's taken a little bit of an edge off of oil prices. They've risen by 9% in the immediate hours after the attacks. And now we're only up 5% from where we were prior to the attacks.

Yeah, so it looks like oil prices are up, West Texas Intermediate Brent, by about $10 a barrel. We were kind of sitting around $60 a barrel before this all got going. And now, even with today's actions on Monday the 16th, where it feels like it's around $70, that's WTI, $10 a barrel. Is that about right?

Well, I guess it depends on kind of when do you start measuring. So if, you know, it's five bucks if you say, well, the day before the attack. Okay. Oh, so it's only five bucks have been put into the price. Yeah, because prices have fallen. But it's about five bucks that's been added to the price of oil. Right. Okay. All right. So right now it's not that, I mean, five bucks-

It moves five bucks in normal times in a week. So right now it doesn't feel like it's a big deal. No, five bucks is certainly something that we can handle. Where you get into the really, really bad scenarios is if you lose the entirety of Iranian exports overnight or if you get the Strait of Hormuz closed, which just feels like such a low probability because it would be very, very difficult for Iran

Iran to enforce. It would be blockading a lot of oil exports from OPEC

countries within OPEC that it's a part of. And then also, you know, the US Navy is quite strong and you would think that they would, because of their actions against Houthis, they were harassing merchant vessels, you would think that they would ensure the free flow of cargo in the Strait of Hormuz as well. So that's the most damaging possibility, but I would put that at a sub 5% probability.

And just for context, my understanding is that the Iranians, they export, what, a million and a half, two million barrels a day, something like that? That's right. And the world consumes, produces just over 100 million barrels per day, and the Saudis alone have extra capacity to produce oil that's

4 million barrels a day, you know, roughly. Is that, does that all, those numbers all sound right to you? So if, if all of Iranian oil were curtailed, which is not going to happen, but let's say it did, that's one and a half, 2% at most of global output in the, in the Saudis could, you know, if things, prices really started to rise, the Saudis could step into the void here pretty, pretty quickly. Is that fair? Yeah.

Very fair. Very fair. Yes. So excess capacity. We're not going to play the game today, but if we were going to play the game, my number would have been 5.3, of course, million barrels per day. That's an excess capacity. I know what it is. I know what it is. Oh, I knew that. That includes the UAE too, though, doesn't it? It does. Yes, it does. It does. Okay.

And OPEC has been signaling that it wants to bring these barrels back online. We cut production in 2022 to boost prices. And there's been surprising cooperation among the cartel to keep excess capacity at above average levels, you know, in the average market.

In the average oil market, you'll have excess capacity that's around three and a half, four million barrels per day. And we've been north of that for almost three years, which is a very long period of time, unprecedented if you go back 20 or 30 years. But they would like to bring that production back online. And they've already said in December we were going to bring it back online. And in the OPEC meetings that we've had in recent months,

OPEC has reaffirmed a trajectory of 411,000 barrel per day increase in volumes in April, May, and June.

Effectively, what that would mean if they followed the script would be 800K barrels per day of an effective increase in production that would take effect as of July. And so that's going to fill a lot of the hole from Iranian exports if it comes to that, if it comes to that. Now, Israel has hit a major fuel depot in Tehran, a major refinery in Tehran, and the South Pars gas

gas field, which Iran shares with Qatar, that's the largest gas field in the world.

But it hasn't hit the actual oil production facilities. And again, we're speaking as of Monday afternoon. So obviously, you know, you don't need sanctions if the fields can't produce any oil. As of now, the capacity to export remains intact. Feels like then this is something to watch. It's a risk. But at this point, it feels contained. But maybe we should spend a few minutes just –

providing a bit of a primer on what higher oil prices mean for, now here we're looking at through the prism of the US economy, what does it mean for the US economy

You know, what are the channels and, you know, what are the numbers? So let's say oil goes up 10 bucks. Say we're at 60 and now we're at 70 and we stayed at 70, that $10 barrel increase. You know, how does that feed flow through to the economy and what are some of the numbers to give that context?

Yeah, sure. So it's going to boost prices at the pump. That's the most notorious price in economics, I would argue, by roughly 25 cents per gallon. So $10 increase in the price of oil, 25 cents per gallon at the pump. Now, consumers spend money on not just gasoline, but other types of energy goods as well and energy services as

So when I say energy services, I'm talking about things like household heating and part of that is natural gas. Part of it is heating oil, which is derived from crude oil, electricity, which fossil fuels are used to produce. Other types of non-durable goods include diesel and kerosene, jet fuel, solar.

So everybody buys plane tickets. So that's an indirect channel would be through airfare increases that are tied towards oil price fluctuations. So if you add all of that up, what you're looking at is roughly 40 to $50 billion over the course of a year or every $10 increase in the price of oil. So if we go from 60 to 70, $10 barrel oil increases sustained, right?

It raises the cost of a gallon of regular oil and let it by a quarter, 25 cents. And that translates into as much as 50 billion in annual spending over the year, additional spending because of the higher cost of oil. Exactly. And it acts as an effective tax increase. That's money that people don't have to spend on other types of goods and services anymore.

And that comes out to about 0.15% of GDP. 15 basis points or 0.15 percentage points. That's correct. Yes, 15 basis points. I guess that's probably on the high side, right? Because that assumes...

that some consumers don't have other sources of cash or resources that they would come, that they would use to kind of just pay the higher price. It wouldn't affect their spending. Yeah, it's just a constant saving rate. Yeah, so that gives you kind of a sense of the magnitude. Okay. There's a question to you. What does that translate into spending per household over a year?

So the increase would be around 375 per household. That's for a $10 increase. But consumers spend close to 4,000 per year on gas. And that's just the level of spending. So these are all kind of negatives, right? These are all negative to growth. But we also produce a lot of oil here too, right? Yeah.

we do so won't the higher oil prices result in more at least in theory more investment in an increase in economic activity yes in certain parts of the country that produce uh oil so

Texas is number one, North Dakota, Oklahoma. Those are some kind of smaller players as well. But those types of regional economies would benefit. Now, the price, the current level of oil prices has fallen by quite a bit over the past two years. And we were anticipating a slowdown in investment and production in the U.S. as a result of lower prices. And in fact,

Some exploration production firms, E&P firms, have said that U.S. production has already peaked. U.S. oil production has already peaked. And that's in response to the OPEC signal that it wants to normalize production and the impact that it's had on prices. Demand has also been

a lot weaker than it was pre-COVID. We're only growing at around 700,000, 800,000 barrels per day in global demand. Almost all of that is in emerging economies, namely Southeast Asia. And part of that has been because of the proliferation of electric vehicles and less commuting, less miles driven, et cetera. Those have kind of

to conspire to sap gasoline demand. So we've had the situation of lower gasoline demand and OPEC wanting to normalize production that's kind of lowered prices from where they've been a couple of years ago. And that was going to be a major drag on the U.S. oil space. And now it's going to be less of a major drag if prices are higher, right? Because that's going to incent firms to maybe not cut their rigs and their well finishing quite as much.

Yeah. Kind of the way I think about it is the U.S. consumes and produces about the same amount of oil. So we're kind of net neutral. So prices go up, consumers of oil get hurt, producers of oil benefit. Ultimately, that all kind of washes out and it's like no effect. But-

That abstracts from timing that, you know, the consumer's feels affects first in this context, because in the current context, oil producers are pretty reluctant to invest because they're unsure of whether these prices are going to stay at 70 bucks a barrel. They may come right back in and they could get wrong footed. So you might not see the investment. So net net in the current context probably is a small negative, but, you know,

uh in the longer run you know maybe not that big a deal uh you know to the economy is that roughly fair yeah absolutely christian fact is chris derisa i saw your head shaking up and down you agree with that yeah in general in general i would say that you know we talked about inflation expectations last week ah right so right something to consider that the uh

The increases in those prices, they're felt broadly, and they could have some knockout effects if consumers believe that this is something that could continue or accelerate. I was doing a little work on oil and gasoline and inflation expectations, and I just calculated a simple correlation coefficient over the last decade between WTI, the price of West Texas Intermediate, and inflation.

inflation expectations as measured by five-year break-evens. And I excluded the period since the beginning of the year because that's affected by other factors. So I just basically last 10 years up to 2015. Guess what the correlation coefficient is of bond market expectations for five-year break-evens? 0.88. 0.88. Okay. That's much higher than I expected. And then I looked at

The cost of a gallon of regular unleaded vis-a-vis the one year ahead inflation expectations for consumers as measured by the U. Mish. Guess what that correlation coefficient was? 0.81. 0.81. Really? Yeah, right? Pretty significant. You're skeptical, Marissa. I just always find those University of Michigan inflation expectations to be kind of wild. Yeah.

Actually, if you do just a simple chart, you can kind of see it. You can see the relationship between the two. Interesting. Yeah. The level is wild. I guess over a long period of time. Yeah. Long period of time, 10 years. Yeah. Yeah, something like that. Anyway, so you're making a good point, Chris. You're saying-

When you add all the negatives and positives, again, in the current context, because we are focused on inflation and inflation expectations, this is more certainly any rise in oil prices is much more of a negative than a positive, and certainly in the immediate wake of the run-up in oil prices.

That's right. And you make a great point about timing, right? This is immediate, consumers see it. Maybe the benefits come later to the producers, but... And then of course, the winners and losers vary a lot across the country. Of course, the winners are the states you mentioned, Chris, Texas, North Dakota, Oklahoma, but the losers are more diffuse and lower income, particularly in the Southeast and then parts of the Mountain West. So you get very...

very different kind of economic effects depending on, you know, which,

demographic group you're looking at and where they are in the country, but interesting dynamics. Okay. So the upshot of this conversation is we got a lot of things going on. None of the, I don't see any upside to any of it, but it feels like the downside is kind of sort of limited at this point we need to watch. And that's kind of like what's going on in the Middle East is like that. And what's going on in US China is kind of like that. Is that

Guys disagree with that statement or take umbrage with it? Or is that kind of fair? Chris Lafakis? Yeah, I think that's pretty much on point. I mean, I think that we will increase our oil price forecast as a result of this, these actions, but not dramatically. And the price impact will fade over time because the supply side always takes a little bit longer to respond than the demand side. And so, and that goes back to what you were saying, Mark, about consumers feeling at first, right?

But over time, if you give producers enough time and a price signal, they will respond in kind and they will normalize supply and demand. And so whether that's through increased U.S. production or increased Saudi production, the prospects for Iran's market share of the global oil trade have diminished quite a bit over the past week, but there should be enough demand

oil out there for other countries like the U.S. and Saudi Arabia to make up for it. And Steve, same to you. Did I get that roughly right or am I being too sanguine? Well, my thought was, as you were making that statement, I think you're a little too sanguine on China, U.S., only because really, I think there's more

So you see how he's managing up because you were a little too sanguine, a little. He was saying, you moron. There's so many ways things could go wrong with China. And a lot of things can go wrong with the Israel war. It's almost like, well, we've been through this before. Yeah.

but, uh, the, the, the China, uh, a trade war, there's so many different levers that can be pulled and, uh, just trying to know where it's going to go. Got it. Got it. We're going to keep this podcast short because this is, this is weird because we're taping this Monday afternoon and we're doing that because we're all kind of traveling and can't kind of get our schedules lined up to do this on a typical Friday. So it's a little weird, a little different, a little weird, but hopefully you found it useful. And, um,

Questions. If you guys have questions, listeners have questions, fire them our way. It's always a lot of fun to take those questions and respond to them. So please feel free to do that. Chris, what's the email again they should use? I always forget. That's helpeconomyatmoody.com. Helpeconomyatmoody.com. Okay. Very good. And Marissa, any other ways they can get a hold of us? Carrier pigeon...

Smoke signal, right. And when you write a question, if you can make it succinct, that would be great. It has links to papers and presentations and probably not going to read it. So, yeah.

Oh, that's so funny. Question read. I think succinctness is important. Yeah. If you want to ask a question, make it a damn good question, please. Yeah. None of these bad questions. It's not going to take me an hour to read. It's a good question. Give it to notebook LM. Turn it into a podcast. Oh, no one listened to that. Take that back. Yeah.

Have you guys listened to the Notebook LM podcast? You haven't? Ooh. No. Pretty good. No, I keep meaning to do that. Yeah. Boring. They're a little boring. I say they're boring. Certainly compared to this one. Absolutely. Absolutely. Yeah. All right, dear listener, we're going to call this a podcast. Take care and we'll talk to you soon.