Inflation Is Coming: Ed Burton & Mark Loehr on the Fed's July 30th Inflection Point

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Hunter here.

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Today we wanna do something a little different on the podcast.

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I wanna re-share conversation Mark Lear, the CEO of Open Exchange, had with Professor Burton the day after the July 30th Fed meeting.

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Professor Burton's a regular voice on this show, and Mark's his former student of 45 years, so those two go deep fast.

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The short version, Professor Burton thinks worst is Fed set rates below the market and now has to print its way out of it.

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And that money supply is the inflation story nobody's talking about.

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They called it an inflection point.

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Give it a listen.

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Inflation is coming.

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Hello, everyone.

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I am Mark Lear, the CEO of Open Exchange, and I'm so fortunate to kind of be joined by Ed Burton, who has been my professor, um, coworker, and friend for forty-five plus years.

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And we talk a lot about economic policy because he was my Econ 101 professor and my Econ 312 professor.

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Uh, it was Ed that actually got me to go to Wall Street because he really taught me about options theory right as the Cboe was getting developed in 1975.

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And, uh, we've just stayed in touch every time we see some major announcement come out about what we think is gonna happen.

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Ed has probably taught more undergraduates than any professor in economics history because both at Cornell and then at UVA, he's had the, the 101 class and the other bigger classes.

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Um, and he's been doing it for, uh, forty-eight years now.

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And he has a cadre that he takes out to lunch and dinner, and he just, he brings everybody along and keeps the culture alive.

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Um, b-but my dad taught at Cornell U, and, uh, that's the reason I was there.

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And so both Ed and my dad taught at Cornell.

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And my dad always said that, "One of the things you need to do, Mark, is document the inflection points of life, the inflection points of life, and put them down as they happen so you can remember what's happened."

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And Ed, you and I both think history was made a bit yesterday in, in the realm of economics and policy.

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And we just simply wanna document why our thoughts are the day after it happened.

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Not just people's reaction like the Fed did this or that, but the way that you think about monetary policy and what Kevin Warsh did or did not do yesterday in terms of, uh, setting that up.

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So, uh, why don't you just say hello, and then the first question I'm going to have for you is, the Fed versus the market, who sets the rates? Well, let me begin by saying I've actually been a professor for 58 years, if you can imagine that.

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Um, taught my first class in, 19, 68, and I've been a professor ever since.

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Uh, I'll probably never retire.

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Uh, it's...

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Who would ever leave a job like, like that? Uh, so, um, it's great that we've been able to keep, keep our friendship going all these years, and I really thank all the people from Open Exchange for being part of this.

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Um, I think there are two broad principles about- monetary policy, at least regarding what causes inflation.

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Uh, one is that inflation is, uh, the percentage change in the price level, which means it's essentially the price of money inverted.

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So what you're really tackling is the price of money.

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And if you were tackling the question of the price of peanuts, what would you do? You'd look at the supply and demand for peanuts.

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So that's the first fundamental principle.

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But if you're gonna try to find out why some price is moving at some percentage, you'd wanna think about the supply and demand of that particular thing.

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Uh, the second principle is a principle taken from finance, and that's the principle of arbitrage, that things that are similar should trade at similar prices.

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Now, if you understand those two principles, it becomes pretty easy to predict a lot of things about money and about inflation.

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And I think, uh, what first got me interested in this, I did teach macro once in a while.

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I think I even taught you, Mark.

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But I never wrote, papers in macroeconomics.

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And in 2020, I, quite accidentally, and it wasn't a planned thing, I wrote a popular article that was published in April of 2020, and I thought it was non-controversial.

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I thought it was pretty obvious.

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What happened was the Trump administration announced that they were gonna spend several trillion dollars, uh, fighting COVID, uh, in relief, and immediately the central bank, announced that they would monetize it.

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They would come in and buy that debt.

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And, uh, that struck me as being clearly inflationary.

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So I wrote an article and published it in April 2020 thinking, "This is not controversial."

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If they dramatically increase the supply of something, then I would assume its value would drop if other things weren't going up similarly.

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Because the only thing going up in 2020, at least at the time this was all going on, was the money supply.

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Everything else was being constrained by policy.

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So if you say basically you can't increase output of anything but one thing, and that one thing over the next 16 months was increased by 50%, it seems like a simple prediction that it would lose value.

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I thought of that as uncontroversial But at the time, I had not read the macro literature, that academics have been publishing, uh, recently, 'cause it wasn't my field.

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So I started reading it, and when I read it, I discovered that all the papers on inflation either assumed the money supply didn't matter at all.

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It wasn't even in the paper.

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You'd read a paper about inflation by the leading, uh, academics on inflation, and the money supply wasn't even in, in there.

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Well, what that means is you could double it every 15 minutes, and they're saying it wouldn't have any impact on anything.

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Uh, if you leave it out, then it can go to any value and not matter.

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So it turned out, and I, no, I didn't hear anyone else calling for inflation, and as late as August of, uh, 2021, which is fif- s- 16 months almost after I published this article, there was still no one calling, uh, for inflation to take place.

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And Powell met in Jackson Hole at his annual meeting, and he said inflation wasn't really a serious problem.

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It was transitory And it was pretty clear inflation was roaring along by that time, and it seemed obvious to me why.

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And he presented 20 pages of statistics about what causes inflation, and guess what wasn't any of that? The money supply or demand for money.

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It's as almost as if you're trying to figure out why are peanut prices going crazy, and the one thing you don't even wanna think about is the supply and demand for peanuts.

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Well, suppose when you look at peanuts and you notice their price is falling, you also notice the supply went up 50%, while all the other commodities went up 2%.

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Wouldn't you think that might be the reason? But strangely enough, the academic literature didn't point in that direction.

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So I gave a paper on this topic in, uh, Melbourne, Australia at the International Economics Associations in the following year.

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And I discovered, and I was, uh, contended with all the major macro people at that meeting, and, uh, according to them, money supply does play some kind of a r- role, but not a very important role in inflation.

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Um, and I pointed out that, well, you know, the central bank in '20 and '21 bought $7 trillion worth of government securities.

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Now, that's about what we spend every year as a nation.

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So I asked them, "Why do we tax anybody?" If money supply doesn't affect the price level, then there's no downside.

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Why don't we just ask the central bank to print $7 trillion and pay all our bills, and we can give everybody 100% tax break if, if you believe that.

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Um, so you can see that I became a little unpopular at some of these macro meetings, but it seemed to be obvious that supply and demand would tell you right away that if you increase the supply of anything a lot when other things aren't being increased, its relative price is gonna fall.

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And so if you're worried about inflation, we've never had inflation in the US, and w- there's never been inflation anywhere in the world documented, ever, not in England, not in Europe, not in China anywhere, unless there was very substantial money growth.

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There are no examples.

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Now, we do have some examples of sustan- substantial money growth that did not appear to result in inflation.

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Japan from 1985 to 2000, and the US from 2009 to '19 But there are no examples of inflation without money growth.

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There are none.

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The '70s, which was the major inflationary period in the US, had dramatic growth in the money supply, and I think most people concluded that was one of the main causes of the inflation, if not the main cause, cause.

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Uh, and when Volcker came in, that was the first thing he addressed, was, um, an effort to slow the money growth rate, and he succeeded in doing that.

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And Paul Volcker, who was appointed by Jimmy Carter in 1977, reappointed by Ronald Reagan in 1981, really broke the back of that inflation by tackling the large, uh, growth rates of the money supply, slowing it down, and inflation more or less disappeared from the American economy for the next, uh, two decades.

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I would always rate Volcker as far and away my favorite Fed chairman.

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I think he saw the problem, tackled it, and went after it, but he kind of saw it like I did.

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Now, the second big principle about understanding these markets, the arbitrage principle, means that if you have two securities that are pretty similar, they better trade at the same price.

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That's the principle behind investment banking.

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That's why they do comparables analysis when they do IPOs and things like that.

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If you wanna know how to price something, go find something that's quite similar, that has a market price.

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So the pr- arbitrage principle permeates literally everything in finance, and you can prove almost all the fundamental theorems of finance by simply making that assumption.

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The so-called no arbitrage principle is a very famous assumption in all of finance theory.

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So I thought that would be obvious also.

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Now let me give you an application of that, which came up yesterday.

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Five days ago, the entire Treasury securities market yielded more than three and three-quarters throughout the curve, even in the bill market.

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Even bills that were coming off, uh, in two days.

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The entire bill market and, uh, note market was above 375 That is the top of the Fed range.

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Mm.

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It was the top of the Fed range at that time.

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So if, as Kevin Warsh said, he wanted to be neutral and let the market control rates, then he had to recognize that the market rate for overnight lending was actually around 380 at the time of the meeting.

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And if it's 380, you have to raise the range.

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If you keep the range down at 375, you're putting your lending...

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Effectively, the central bank is agreeing to lend at three and three quarters or less.

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You're putting that under the market.

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That's not the market price.

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That's like saying, uh, you know, you can't buy a car that's more than, costs more than $40,000.

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You're gonna create all kinds of other problems when you do that, and that's exactly what the market reaction was.

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Because there are- So, so, so let me, let, let me, let me give an example for people.

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Uh, my wife is shopping for a new mortgage, right? She's go- trying to figure out what mortgage rate she wants to do.

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The market, and what the market is saying is for the two-year at the moment is 385, but the Fed is saying, "Oh, you can borrow at 365."

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Everybody's gonna say, "Oh yeah, please, thank you very much."

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And the Fed has to go print money so that, that they can allow people to do it at 365.

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So that, that collapse of that arbitrage between the two-month bill that you saw from 390 down to 385 down to 375.

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And to your point, the Fed at the moment is buying people, really printing paper at, at 365, trying to stay in the middle of the range so they don't in- they, they don't indicate that they've misguided people.

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Uh, it's the arbitrage is so simple for anybody buying a mortgage right now, that you're gonna go to the bank that is gonna give you 365.

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Yeah, uh, the market wants to be at 380, and it's gonna continue to wanna be at 380 for a while.

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And to keep it below 380, to enforce that 375, they- the Fed, uh, has a reverse repo facility where they will say, "Hey, Mark, you wanna buy the two month? Come to me.

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I'll finance it at 365."

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So what happened yesterday is, of course, everybody came in and bought the two month, planning to repo it back to the Fed at 365 or 375 for a clean arbitrage for two months.

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So- Well, so- slow down there.

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Slow down there.

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How much trades every day at that, at that rate structure? How many trillions of dollars? Uh, well, the repo market, uh, is, is different every day.

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But, you know, it's interesting.

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When people talk about Fed policy, they always talk about the federal funds market.

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But the actual market that counts is the repo market.

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Uh, every Fed watcher knows that.

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Uh, there are very few trades in the federal funds market.

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It's a, it's kind of almost nonexistent market.

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It's the repo market.

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It's the largest securities market in the world.

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It trades a multiple of what trades on the New York Stock Exchange, but it's not very well understood.

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But the Fed itself is in that market, and the way the Fed, quote, "controls interest rates" is by offering to finance people at a certain rate, and they've been offering to finance people at 365 for the last, uh, five meetings.

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Uh, 375 is the top of the range, but they don't say we'll offer to lend at 375, 'cause that's the top of the range.

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They don't wanna scare people, so they use 365.

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Uh, but they do some trades at 370.

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That, I, um, I track that pretty closely, what, you know, what they do with their reverse repo facility.

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Interesting enough, their repos- Are not on the asset side of the balance sheet.

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When- so when people talk about the s- the Fed balance sheet, what I'm saying is irrelevant to the size of the Fed balance sheet.

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That stuff is stuffed over on the liability side.

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When you look at the Fed balance sheet, look at the liability side, and you'll see the repos netted out over on the liability side.

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Uh, when they do actual purchases of Treasury bills, which they do, and of other things, which they did, that shows up on the balance sheet.

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So the size of the balance sheet is not the only real determinant of, of their impact.

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They can just simply do it by offering to finance Treasury bills that you- Okay.

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So, so, so let's break this down.

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Um, a trillion dollars, you know, I think 14 trillion trades a day.

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A trillion dollars at, you know, five basis points is gonna be $5 billion over the course of a year, right? That they're kind of handing the arbitrageurs in, in terms of trying to force rates down.

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Do I have that- Yeah in the right Yeah.

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Yeah.

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The problem, n- and they know that.

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They're not confused about that.

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There's a desk in New York, the New York, uh, desk that trades for the Federal Reserve.

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It's the Federal Reserve's own trading operation, and you can be sure every bill trader understands this.

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There's a, uh...

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It's not, this is not lost on people.

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Uh, people in the bill market understand this.

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You, what you don't know, it's like asking suppose I wanted Tesla to go from 300 to 400 by buying it.

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Suppose I'm the Fed, and for some reason I like Elon Musk, and I wanna bid his stock up.

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I don't know how much stock I'd have to buy.

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You don't know that in advance, and the Fed's in the same situation.

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When they're trying to enforce a, a target range, they don't know how much it's gonna take.

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But the one thing you do know, if there's pressure up, which there is right now, a lot of pressure in the debt market moving rates up, they're gonna have to expand the money supply a lot in order to hold this range.

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So the one clear prediction Um, you can make is that the money supply is gonna grow pretty substantially between now and September.

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Uh, who knows what they're gonna do in September, but the mon- they're- 'cause they're gonna be defending this range.

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This is not the right price for repos.

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Should be about 380, 385.

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And so, so, so, uh, so Eddie has predicted kind of the Fed actions over the last 20, um, events bar- mostly by looking at exactly where the rates were and knowing that the Fed would zone in exactly there.

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This is the first time that the Fed has come in and set a rate below where the market is, which means that they're going to have to be creating a lot of money supply to keep the rates at that 375 or lower, or, or have trouble, right? And so Eddie and I have been talking last night about how much we think the money supply is going to grow over the...

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Really, the next time we're gonna see it for sure, Eddie, is what, a month from now? Um, or they do it weekly.

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But, but the, let's just say it goes from 23.3

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to 24.3,

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you know, in a month.

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It's gonna...

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Talk about that dynamic, and then talk about the lag between growth of money supply and inflation, and how markets interpret that.

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We have some hints at that, Mark, because, uh, for the last 13 weeks the Fed has been defending the current range.

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There's been a huge amount of pressure on the current range before we got to this past Wednesday.

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And we know how much the money supply grew.

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It grew a full 3% in the last 13 weeks.

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Now, think about that for a moment.

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3% in 13 weeks.

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That's 13% annualized.

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Now, the, while that was growing 3%, commodity production and other things in the economy grew one third of a percent.

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So the money supply grew nine times as fast as the growth in all other, uh, goods and services in the economy.

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So that a simple statement says you're gonna, that's gonna cause more inflation.

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Price level's gonna adjust because the level of real mon- money balances is way too high.

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Um, so that gives you a clue that you may end up with the same kind of numbers, uh, over the next two months.

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I'm not...

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It's hard to predict these kind of numbers, but the one thing you know is that the money supply is gonna grow f- a lot faster than the rest of the economy.

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And now at the moment, the total money supply growth to this point, and today is July the 30th, is about 5%.

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That doesn't sound like a big number, but if you analyze it, it's getting close to 10%.

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It's around roughly eight and a half, 9%.

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But if they grow this thing 1% a month for the next couple of months, y- you may by that time see roughly 13% annualized, and if they keep it up, defending a bad rate, you could see 20% growth in the money supply in 2026.

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And I promise you, if you see 20% growth in the money supply, we're not talking about 3% inflation anymore.

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We're gonna be talking about nine, 10, 11, and we're gonna be talking about 30 years that have a, a 12 handle.

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Remember they once...

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I, I saw an auction at 14 handle back in 1981, and, and that thing went down 16 points.

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The highest yield in the 30-year Treasury market was 17.6%,

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and that occurred in, in 1981, in late 1981.

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December, I think, was the month that that happened They, they, because people think the money supply is irrelevant, they're not watching this variable.

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You didn't see Warsh even mention the money supply.

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It's almost as if I'm giving a lecture on peanuts.

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I'd like to talk to you about why peanuts are going down in value so much.

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Here's why it's going down in value.

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The used tire market has oversupply, or something like that.

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I mean, they kept talking about the labor market, and the investment spending, and this and that and the other.

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But the real cause of inflation is honestly just too much growth in the money supply relative to the demand, as replace the word money with any other product, and you would come to that conclusion.

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But somehow- So in 1974 to 1975, you know, monetarists were kind of the thing that I learned, and money supply were the thing that I zoned in on.

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Um, you know, and over the last...

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And then Volcker came in, and he showed that he needed to reduce money supply to, to fix inflation.

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How, how did the monetarists go out of favor, and why is it not in our dialogue today? Well, after the crash of 2008, uh, starting in 2009, uh, Fed Chairman Ben Bernanke...

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Uh, by the way, Warsh was on the board at that time.

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He was a- Correct governor in that And he opposed him on putting another 600 billion into the market.

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He, he's, he's, he's b- he's on both sides of this story.

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Yeah.

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They increased the money supply growth rate at 7% a year, and inflation did almost nothing much.

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It was 1.5%

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to 2% throughout that period from '09 to '19.

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And so everybody concluded that, oh, well, the money supply doesn't matter.

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So they went from, uh, slavish adherence to some simple money growth translates into inflation, which we know isn't exactly correct, um, um, in the data at least, uh, to the idea that money supply didn't even matter.

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Um, if you really honestly believe that, and they all say they do, but I come back to the same question, why do we tax anybody in America? Seems to me we can just print up 7 trillion a year, pay all our debts, pay off our Social Security problems.

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We can just do everything.

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It does matter.

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Money supply is the principal cause of inflation.

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And, uh, let, let me, let me give you a...

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what might have happened in COVID if they hadn't done what they did.

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Interest rates would have spiked.

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At the time they did all the Treasury offering, both in the Trump administration and Biden administrati- in administration, you would have had higher rates than you had.

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They didn't want that to happen, so they used the central bank to keep the rates from going there.

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But sooner or later, that causes inflation and drives rates up anyway.

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You're just postponing when you're gonna have the high rates.

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Now we're in an inflationary period, and if you start expanding the money supply like they're doing That inflation's gonna go higher, and then you're gonna see much higher rates across the board.

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So that's, uh, the sense in which this was an inflection point.

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I honestly didn't think that would happen.

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I took Warsh at his word.

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Warsh said, "I'd like to see the market determine rates, not the central bank."

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Well, if you really believe that- Yes, exactly when, when, when Wednesday came, the- You would have hiked the rates well, yeah, the market rate for the overnight lending was 38, 3.80,

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and he wanted to keep it below that.

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Yeah, yeah.

231
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But, um, by doing that- Let's go down, let's go down a little bit, teeny bit of history here on, uh, who to blame o- on the inflation coming out of COVID.

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And, and I, I do think that it crossed administrations, right? So the Trump administration certainly, uh, raised money supply a lot.

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Uh, but- Oh, yeah you know, the new, the new administration, uh, you know, it went from 15 to, to 19, and the new administration took it from 19 to 22.

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So you can't blame either o- on kind of how this worked.

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They- they're both guilty.

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Am I, am I sort of right on that? Y- you're 100% right.

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Uh, there are no angels in this whole discussion.

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And, you know, it was one of my really good friends who, who was- Yeah, yeah Biden's chief economist.

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Janet Yellen is a brilliant, brilliant economist.

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She's probably one of the best macro economists that w- ever been around.

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But for whatever reason, she said, quote, I'll quote her, uh, "We can go big.

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Rates are very low."

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Well, they're not gonna stay low when you go big.

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Um, I don't mean to be critical of Janet Yellen.

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She's a lot smarter person than I am, but I think she missed this one.

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Um, you know, I think- But, but that allowed them, that allowed them to put the trillion dollar spending budget into effect and be able to finance it Yeah, and I think the Trump administration was equally guilty by the way they went about it, because they put a lot of pressure on the central bank to bankroll- Yes.

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Yeah uh, the treasury offering.

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So there are no innocents here.

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And by the way, it's a global issue.

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You'll find that in other countries the central bank was used as...

251
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Let me say a word about the central bank, because I think people are confused about central banking.

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I- it might be of interest for those listening to know that America didn't have a central bank by and large in the 19th century.

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Andrew Jackson, in a fit of rage, fired Nicholas Biddle and got rid of the American bank, and he didn't like Alexander Hamilton very much, who was the guy who, uh, led the US to have a national bank, and Jackson got rid of it in, uh, I think 182- 1828 or 1832.

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I don't remember the exact year.

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But for the balance of the, uh, 19th century, we didn't have a central bank, and we were the only major country in the world that didn't.

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Germany had a central bank.

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England had the Bank of England.

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Everybody had a central bank.

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And, and we had a devastating war that, uh, destroyed a good part of the country and killed a lot of Americans.

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And a- after that war was over, uh, by the time we got to, to, uh, 2000, or I'm sorry, 1913, we were the dusty economy in the world.

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Now how did that happen? And if you think about it, no, there was no central bank at all.

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None.

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And states had their own banking and whatnot.

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And by the way, the price level fell by about a third.

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People think somehow deflation causes economies to be bad.

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Can't prove it by what happened to the, in the US in the 19th century.

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So we get to 2000, or 1913, and that's when the Federal Reserve Act was passed, and the sole purpose of the Federal Reserve Act was not to do all this stuff we're watching.

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It was to replace JP Morgan.

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JP Morgan had handled every financial panic, and people got tired of a banker huddling all these people together and being the lender of last resort.

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So they created the Federal Reserve to be a lender of last resort.

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Because the reason you have collapses like the Great Depression and the reason you had the 2008, and you have all these things, is people run out of liquidity.

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It's not that assets just fall away.

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They can't pay their bills.

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That's what bankruptcy's all about.

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It's not what the value of the assets may or may not be.

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It's that you just can't make the next payment, and that's, that's really ultimately what leads to these crashes.

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So they created the Federal Reserve to come in and lend against collateral.

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That was the idea.

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They'd come in and lend against this collateral when the markets were just collapsing all around you, and stabilize the economy so it can recover.

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Now, its first big test was the Great Depression, and guess what it did It looked the other way.

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And nowadays, it thinks it's, uh, competing for TV time.

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Central bank, uh, the people that run the central bank are now folk heroes and kind of, uh, movie star types, but it was never intended that way.

283
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And I like- You know, and JP, JP Morgan's still around, and, and they did a Bear Stearns acquisition in May 30th, 2008, right? In, in about- Right four days, basically.

284
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So, so now, uh, we've sort of gone full circle.

285
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The banks, the central banking is supposed to be now a counter-cyclical thing.

286
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It was never intended that way, and it's had a destabilizing effect.

287
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I mean, who caused the inflation that we're dealing with? The Federal Reserve caused it.

288
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It wasn't caused because of a war, or the price of oil, or supply shocks, or all the reasons that Warsh even referred to yesterday.

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It's just caused by too much money growth.

290
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Um- So I think we've played our story out relative to, we believe monetary theory is, is still critical, while the market does not.

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We believe that money is a supply-demand situation that has an impact on inflation, not necessarily immediately, but, but inevitably.

292
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And we believe that, that Warsh misplayed this particular opportunity to show the markets that he understood, um, that he's a participant in rates, but not a leader in rates, and now he's committed himself to print a shit ton of money, um, in terms of the balance sheet that has a, um, a future effect kind of on inflation, and he missed, he missed, he missed a trade.

293
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He missed a trade.

294
00:30:44,730.2298782 --> 00:30:49,828.2328782
So, um- A couple of few questions for you to finish out here.

295
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How do you think the market saw it? How does this play out? How do we track the results? So let's, let's start with how did-- how do you think the market responded to what you and I saw yesterday? Well, what would you expect, uh, to happen? What you'd expect to happen is inflation fears would raise yields in the 10-year and the 30-year.

296
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Guess what? That's exactly what happened.

297
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Even if economists don't think, uh, increased money supply causes inflation, it doesn't really matter.

298
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If it does cause inflation, then you're gonna see an uptick in 10-year yields and 30-year yields, regardless of what anybody thinks.

299
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Markets work regardless of how knowledgeable any of us happen to be.

300
00:31:33,528.2318782 --> 00:31:40,128.2328782
Um, what else would you expect? You would expect arbitrage to pull in the bill market, and so that's exactly what happened.

301
00:31:40,138.2328782 --> 00:31:47,758.2298782
The short end came dramatically down in yield, and the long end shocked everyone by going up.

302
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But it's just building in a larger inflation premium in the 10-year and the 30-year.

303
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You're gonna see the, you're gonna see the mortgage rates go above seven here very quickly.

304
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Yes.

305
00:31:57,458.2288782 --> 00:32:02,898.2278782
And there'll be a lot of gnashing of teeth, but what happened yesterday is completely predictable.

306
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Now, the stock market is a different game.

307
00:32:04,358.2338782 --> 00:32:04,678.2318782
I have...

308
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Stock market's unpredictable.

309
00:32:06,798.2338782 --> 00:32:07,98.2308782
I don't know.

310
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Who knows? That thing may rally a lot or decline.

311
00:32:10,848.2278782 --> 00:32:14,468.2298782
But the debt market is more, uh, much more simple proposition.

312
00:32:15,48.2328782 --> 00:32:29,758.2318782
If you look at the amount of, um, debt hitting the market from the national government, from state and local governments, from the hyperscalers on, on what's going on there, you've got enormous pressure on rates going up.

313
00:32:30,308.2268782 --> 00:32:33,608.2318782
Now, let me ask a question or answer a question you didn't ask.

314
00:32:34,208.2288782 --> 00:32:38,380.2328782
What could turn this around in the short run? Here's what could turn it around.

315
00:32:38,920.2328782 --> 00:32:46,890.2318782
If the hyperscalers, if the, a feeling comes into the market that maybe a lot of this capital spending is not, is gonna have to slow down.

316
00:32:47,370.2318782 --> 00:32:57,660.2318782
If you begin to see a back, a backing off of the capital spending that you're currently seeing by Google, and Meta, and all these other hyperscalers, that can lead to a recession.

317
00:32:57,660.2318782 --> 00:32:59,780.2328782
The, the probably the most significant area- That's fair.

318
00:32:59,820.2318782 --> 00:33:00,340.2328782
That's fair.

319
00:33:00,730.2318782 --> 00:33:02,990.2328782
Yeah is, is the capital spending.

320
00:33:02,990.2328782 --> 00:33:04,360.2318782
Watch, keep your eye on that.

321
00:33:04,690.2328782 --> 00:33:05,670.2318782
If the capital spend...

322
00:33:05,670.2328782 --> 00:33:08,110.2328782
But there's no sign the capital spending is gonna slow down.

323
00:33:08,110.2328782 --> 00:33:19,550.2318782
So if, if you had to make a prediction, I think the prediction is you're gonna see higher rates and higher inflation, and the only exception could be if the economy were to weaken because of a weakening in cap spending.

324
00:33:19,650.2298782 --> 00:33:21,290.2328782
But the economy at the moment's quite strong.

325
00:33:21,750.2328782 --> 00:33:44,750.2348782
There's no indication- Would, would, would, would you, would you think that maybe the hyperscalers would be slow to admit they're slowing down because they don't want to show the others? So do you think we might get a delayed response on that, "I'm slowing down"? You run into the question, why are you slowing down? That's not the question you wanna get asked if you're Meta or Google or something.

326
00:33:44,750.2348782 --> 00:33:45,300.2278782
Yeah, right.

327
00:33:45,350.2348782 --> 00:33:45,730.2348782
Right.

328
00:33:46,250.2288782 --> 00:33:47,950.2338782
Yeah, you don't wanna have that question.

329
00:33:48,570.2278782 --> 00:33:59,160.2338782
Um, but all of you, um, e- almost everyone who would be listening to this uses these products on a regular basis.

330
00:33:59,200.2328782 --> 00:34:01,360.2338782
These, um, I use- Claude.

331
00:34:01,940.2308782 --> 00:34:03,500.2308782
Claude Chat ChatGPT, Claude.

332
00:34:03,500.2308782 --> 00:34:04,900.2288782
I use Claude to write programs.

333
00:34:04,900.2298782 --> 00:34:09,830.2308782
In fact, I have a program that tracks Fed pre-fund market on a daily basis.

334
00:34:10,230.2318782 --> 00:34:11,360.2328782
Claude wrote it for me.

335
00:34:11,610.2288782 --> 00:34:11,960.2338782
Thank you, Claude.

336
00:34:12,680.2288782 --> 00:34:13,770.2308782
I use Perplexity.

337
00:34:13,820.2278782 --> 00:34:14,570.2308782
I use Grok.

338
00:34:14,570.2308782 --> 00:34:17,10.2318782
I use Deep, uh, DeepSeek, Gemini.

339
00:34:17,10.2318782 --> 00:34:22,730.2288782
I use them all regularly, but what you know if you use these things is they make a lot of mistakes.

340
00:34:22,980.2318782 --> 00:34:31,480.2278782
Um- I know um, and so that, that gives you a little bit of pause, um- Yeah, yeah.

341
00:34:31,860.2288782 --> 00:34:37,286.2328782
Uh, uh, I have to ask you, what's your favorite? It depends on the application.

342
00:34:37,366.2328782 --> 00:34:39,326.2328782
Uh, well, I li- I'm a programmer.

343
00:34:39,396.2328782 --> 00:34:41,426.2328782
I can program in six or seven languages.

344
00:34:41,856.2328782 --> 00:34:47,516.2328782
And when I have something I wanna do now, if it's the research, there's no substitute for me for Claude.

345
00:34:47,556.2318782 --> 00:34:50,296.2328782
I just go to Claude and say, "Here's what I need."

346
00:34:50,296.2328782 --> 00:35:00,756.2318782
Now, for other purposes, like when I'm preparing lectures, one of the things when you're preparing a lecture is I think it's more meaningful to students if you tell them how big these markets are.

347
00:35:00,766.2328782 --> 00:35:12,526.2318782
I mean, how, how many repos trade every day? How m- how big is the stock exchange volume? Well, if you wanna do that, go to Google's, go to, uh, Google Slides, and they'll do all that for you.

348
00:35:12,606.2328782 --> 00:35:17,526.2328782
And not only that, you can convert a Google Slides program to PowerPoint if you want.

349
00:35:17,646.2308782 --> 00:35:18,436.2298782
And I do that.

350
00:35:18,496.2328782 --> 00:35:21,926.2328782
And so now I prepare and actually update slides.

351
00:35:21,926.2328782 --> 00:35:24,366.2318782
I'm preparing a whole new set of slides for this coming fall.

352
00:35:24,366.2318782 --> 00:35:30,226.2308782
I've got, uh, nearly 300 kids signed up for my, uh, fall course in finance.

353
00:35:30,226.2318782 --> 00:35:30,826.2308782
This is a 400...

354
00:35:30,826.2308782 --> 00:35:33,476.2318782
It's the largest 400 level course in the University of Virginia.

355
00:35:34,326.2308782 --> 00:35:36,526.2328782
Um, and I've taught it for a long time.

356
00:35:37,206.2318782 --> 00:35:42,396.2328782
But I'm using, uh, Google Slides to prepare the lectures because they can get all the latest stuff.

357
00:35:42,746.2288782 --> 00:35:52,666.2318782
I can ask Google Slides, "Draw me a, um, chart that shows where, um, uh, the Fed funds rate has been for the last 25 years."

358
00:35:52,866.2318782 --> 00:36:07,630.2328782
And boom, instantly it's there, and it's in a form I can use Um, if I'm doing sort of pure research, I might use Perplexity for every day asking, um, what's the best TV monitor I can buy or something.

359
00:36:07,630.2328782 --> 00:36:10,700.2328782
I might ask ChatGPT, and I might ask somebody else.

360
00:36:10,730.2328782 --> 00:36:15,180.2318782
I mean, I, I use these things like crazy, but I don't spend a lot of money.

361
00:36:15,220.2318782 --> 00:36:19,600.2318782
I pay $200 a year for Claude, 'cause I love Claude.

362
00:36:19,620.2318782 --> 00:36:20,880.2318782
It's great programming.

363
00:36:21,30.2318782 --> 00:36:21,660.2318782
It's very good.

364
00:36:21,860.2318782 --> 00:36:22,510.2318782
Really good.

365
00:36:23,180.2318782 --> 00:36:30,250.2328782
And I, um, am play- uh, I use the Super version of, um, well, not Super, but the Pro version of ChatGPT.

366
00:36:30,940.2318782 --> 00:36:34,900.2328782
Um, and the rest of them, mm, are free, basically.

367
00:36:35,540.2298782 --> 00:36:37,700.2308782
Um- And so, okay, so the kids coming in.

368
00:36:37,790.2298782 --> 00:36:46,410.2338782
Like, how, how are the kids doing on, on AI and what they're using, and getting ready for class, and questions they wanna raise their hand for? And how...

369
00:36:46,560.2308782 --> 00:36:53,330.2328782
Are they less interactive today than they were five years ago, or do they wanna be down in the front row with Professor Edwin T.

370
00:36:53,330.2328782 --> 00:37:06,850.2298782
Burton? Like, how, what, what's the dynamic of the, of the kids in the class of, of really being engaged? You know, that's such an interesting question, because AI is out there, and liter- there's no one who doesn't use it to some extent.

371
00:37:07,550.2318782 --> 00:37:09,760.2308782
But my best students use it kinda like I do.

372
00:37:09,860.2298782 --> 00:37:18,560.2308782
Uh, first of all, my best students can program in, typically in Python and Java, and they can even program in HTML, design their own websites.

373
00:37:19,50.2318782 --> 00:37:21,960.2298782
Um, if you can't program, you really can't use Claude.

374
00:37:21,990.2348782 --> 00:37:28,530.2308782
You need a certain minimum understanding of how to program, because you're basically the systems engineer when you use Claude.

375
00:37:28,530.2308782 --> 00:37:30,310.2298782
You have to explain to Claude what to do.

376
00:37:30,310.2348782 --> 00:37:33,40.2298782
It's not gonna just produce something unless you talk to it.

377
00:37:34,80.2308782 --> 00:37:37,950.2338782
Um, and my, my good students, they use it for programming.

378
00:37:37,970.2308782 --> 00:37:39,100.2338782
They use it kinda like I do.

379
00:37:39,120.2318782 --> 00:37:40,900.2308782
They, they use all of them.

380
00:37:41,480.2328782 --> 00:37:44,390.2278782
Now, I have a freshman seminar that's limited to 10 kids.

381
00:37:44,390.2288782 --> 00:37:46,30.2328782
You would love the kids in that seminar.

382
00:37:46,570.2288782 --> 00:37:50,410.2278782
These kids are so I'm the dumbest person in the room when I walk in.

383
00:37:50,670.2278782 --> 00:37:53,500.2288782
These kids are so much smarter than I am, I can't believe it.

384
00:37:54,330.2308782 --> 00:37:59,590.2328782
And, um, and there I make them, uh, get a topic that's interesting to them.

385
00:37:59,590.2328782 --> 00:38:07,174.2328782
It might be something like- Will, uh, the current leader in Argentina manage to get the reforms done, or will he fail? Oh, boy.

386
00:38:07,184.2328782 --> 00:38:07,394.2328782
Yeah.

387
00:38:07,454.2328782 --> 00:38:07,874.2328782
Oh, boy.

388
00:38:08,374.2328782 --> 00:38:08,664.2328782
Wow.

389
00:38:09,164.2328782 --> 00:38:10,124.2328782
That ki- that kind of question.

390
00:38:10,514.2328782 --> 00:38:18,664.2328782
And I ask them to show what all the top six AI agents think is the answer in their presentation and in a paper they have to write.

391
00:38:19,64.2328782 --> 00:38:25,544.2318782
But then I ask them to, "What is your opinion as opposed to what these AI people are? Now, you've looked at everything AI had to say.

392
00:38:25,544.2328782 --> 00:38:26,474.2328782
You worked on it.

393
00:38:26,494.2318782 --> 00:38:32,114.2318782
What do you think?" And they have to, uh, write a paper that way, and the paper's limited.

394
00:38:32,794.2328782 --> 00:38:35,794.2318782
You'll think this is not much, but it's limited to five pages.

395
00:38:35,864.2328782 --> 00:38:38,604.2328782
I don't want a 30-page paper on this.

396
00:38:39,194.2308782 --> 00:38:43,394.2328782
I want the best five pages one can write, and I want it well-written.

397
00:38:43,864.2328782 --> 00:38:46,124.2308782
If there's as much as one typo in it...

398
00:38:46,814.2328782 --> 00:38:48,184.2308782
And they, they have to write it.

399
00:38:48,394.2308782 --> 00:38:49,394.2328782
The Claude can't write it.

400
00:38:49,944.2308782 --> 00:38:50,894.2328782
No, they have to write it.

401
00:38:50,914.2318782 --> 00:38:51,254.2318782
Yeah.

402
00:38:51,354.2298782 --> 00:38:51,734.2298782
Okay.

403
00:38:51,874.2308782 --> 00:38:52,104.2308782
Yep.

404
00:38:52,694.2308782 --> 00:38:54,204.2308782
Uh, these kids are the best.

405
00:38:54,354.2298782 --> 00:39:00,924.2308782
You know, it's half of the kids in the class every semester are Jefferson Scholars, and all the top students, they apply for this.

406
00:39:01,584.2298782 --> 00:39:02,874.2308782
It's an amazing group of students.

407
00:39:03,224.2328782 --> 00:39:05,954.2328782
I'll say this, there's nothing like being a university professor.

408
00:39:06,684.2278782 --> 00:39:10,514.2338782
That is the best life in the world, which is why I've never retired.

409
00:39:10,524.2318782 --> 00:39:35,394.2328782
I've been a professor 58 years, and I hope to make 68 You know, it's, uh, for the people listening, if-- you just can't imagine for me in London, I don't know what time it was, to call Eddy up right after the Fed announcement and be able to talk live about what I'm seeing in my business, what he's seeing in his business, and have this, this person who's so intimate.

410
00:39:35,804.2318782 --> 00:39:51,334.2318782
And then we just really believe that there was something, this was an inflection point relative to what we're just trying to accomplish and relative to what that really means for markets that is different than they're gonna see on CNBC or the Wall Street Journal.

411
00:39:51,804.2338782 --> 00:39:59,744.2328782
And I don't really, and we don't really expect a lot of people to watch this tomorrow, but we do think that we wanted to document this.

412
00:39:59,974.2318782 --> 00:40:22,14.2298782
'Cause we think over time that we're stating a position about how markets work, how they work functionally and politically, and we wanted to put that in a form that you all can look at either through a transcript or through the video and, and get to know us both better and, and mostly to really celebrate a friendship between Ed Burton and Mark Blair.

413
00:40:23,504.2308782 --> 00:40:26,464.2338782
Anything to add, Eddy? Uh, not much, Mark.

414
00:40:26,464.2338782 --> 00:40:27,334.2338782
You're the best.

415
00:40:27,334.2338782 --> 00:40:34,154.2318782
Uh, let me mention to those watching that Mark is the proud owner of four years of winning the Psi Chi 500 at Cornell.

416
00:40:34,834.2318782 --> 00:40:36,704.2318782
I bet many, many of you don't know that.

417
00:40:36,734.2338782 --> 00:40:41,724.2308782
That's a race that, uh, I think it's how many miles? You go up and down hills and drink Schlitz Malts.

418
00:40:42,714.2298782 --> 00:40:48,714.2338782
And I can remember you training for that back in, uh when was it? The, the late '70s.

419
00:40:49,184.2308782 --> 00:40:50,324.2328782
You were my training partner.

420
00:40:53,674.2288782 --> 00:40:58,94.2278782
But it's great- Yeah to do this, and I, uh, Mark, I appreciate you organizing this.

421
00:40:58,644.2298782 --> 00:40:59,74.2298782
Terrific.

422
00:40:59,114.2308782 --> 00:40:59,434.2308782
Great.

423
00:40:59,444.2328782 --> 00:41:00,434.2298782
Thanks for all your thoughts.

424
00:41:00,434.2308782 --> 00:41:04,524.2288782
And, and audience, thanks for listening, and we'll, we'll get feedback from all of you down the road.

425
00:41:04,774.2268782 --> 00:41:05,534.2318782
Thank you so much.

426
00:41:05,744.2278782 --> 00:41:06,564.2278782
Eddy, talk to you soon.