Welcome back to Real Vision. I'm your

host Ash Bennington. Today, I'm joined

by Daniel Lacalle, chief economist at

Tressis. Daniel, great to have you back

with us on Real Vision.

>> Thank you so much. Always a pleasure to

be here.

>> Always a pleasure to have this

conversation with you. And boy, it is

the perfect day to have you on. The Fed

showed yesterday down in DC. Today, we

got US GDP. It's a miss. 1.5 actual,

prior 2.1, consensus was 2.3, consensus

range 1 to 2.8, a wide spread there. Uh

Daniel, one of the things I always

appreciate when you come on the show is

you always have a broad and

comprehensive view of all things

macroeconomic. Give us your view of

what's happening right now.

>> Uh yes, the the GDP figure is very

interesting because if you look at what

consensus was estimating, there was a

significant increase in government

spending, which unfortunately, as we all

know and it's pretty evident, uh

government spending adds to GDP, no? So,

interestingly, the miss in GDP comes

mostly because consensus had an increase

in government spending, and at the same

time, reality has shown a decrease in

government spending. So, it's actually

not really a miss. And if we look at it

with uh

with the trend expected for the third

quarter, I think that the United States

economy continues to show strong

consumption, very robust levels of

investment, and good exports. And the

impact in the second quarter of higher

imports and lower government spending is

basically what explains the the

difference from uh a consensus level

that was created with a very wide wide

uh spread. You've just said it, no? Some

people were expecting 1.7, 1.5. Other

people were expecting 2.8, no? Uh the

wild swing comes from government

spending and and imports. So, lower

government spending and a 1.5%

annualized growth doesn't look like

negative to me in any shape or form.

Think about it. The United States is the

only G7 economy that is growing at that

kind of rate in uh an environment in

which the US is actually lowering

government consumption, while Canada,

the UK, France, Germany, Italy, Japan,

they're all increasing government

consumption. So, the quality of private

GDP, which is what matters to to us and

should matter to everybody that analyzes

the economy, is actually much stronger,

no? So, I think in in in in essence,

what we should look at in this uh GDP

figure is

that the temporary factors that are

affecting economic growth are likely to

come back quite strongly in the third

and fourth quarter. And what I think is

basically that we need to be comparing

the United States with the rest of the

developed economies, and the picture in

those is very bleak.

>> Daniel, that is exactly why we love to

have you on and why it is such a great

time for you to come on and talk about

this. You touched on a few things there.

By the way, one of the few formulas I

remember uh from my college economics

class, C plus I plus G plus NX uh plus

minus net balancing factors are how you

get GDP. You talked about it there, but

dive into the internal dynamics of this

number. I mean, this is what is so great

about Real Vision. We get to do these

really deep deconstructs on this. Talk a

little bit first the point that you made

about consumption, uh by far the largest

factor in GDP, uh and the most

important. Talk a little bit about that

and break that out from the investment

and government component of GDP.

>> Yes, if we look at the US economy, the

level of consumption and investment

growth is pretty is pretty robust. We're

talking about an annualized growth that

exceeds the trend of the past 4 years

and that exceeds the trend of the past 5

years as well.

In terms of the of the actual figures

and the composition of that, obviously

in investment

technology is a significant factor. But

technology is not justifying the figures

of GDP. A lot of people are saying

the United States would be in a

recession if it wasn't for

AI investment. That is simply incorrect.

If you look at the

total impact or annualized level of AI

investment, it does not even get to 0.5%

of

of of growth, no? So, the the level of

consumption is true that is slowing

down, but in real terms and in terms of

the of the trend, it is actually pretty

good considering a very important factor

as well, which is rates, no? We can't

forget that yesterday the Fed kept rates

untouched and that means that for a very

prolonged period of time, the United

States has had

rates that are above the neutral level

and we cannot forget that when rates are

above the neutral level, there is a very

significant impact for small and medium

enterprises and for families. So, the

fact that consumption is not suffering

and investment is not suffering is

important also put in the context of

elevated rates. Furthermore, we must

also remember a lot of people when we

talk about rates, a A of people say,

"Oh, but who cares about 25 basis points

here or there?" That's a very market

comment. No, very very market

participant comment. Think about it from

the perspective of a small or medium

enterprise. 25 basis points means

that the average

rate at which a small or medium

enterprise is getting credit these days

in the United States moves between 6% to

12%. Furthermore, if the Fed decides to

hike rates or keep rates, a lot of banks

don't even give access to credit to

small and medium enterprises because

they prefer to hoard treasuries, which

currently is

a big risk for for the productive

economy. So, now let's put it all

together,

and let's see how consumption is

stronger despite high rates, investment

is strong despite elevated rates, and at

the same time something that would

destroy hundreds of thousands of jobs

like keeping rates above the neutral

level, according to the Federal Reserve

of Atlanta,

the

one year of keeping 100 basis points

above the neutral level would cost the

US economy around 1 million jobs. So, we

should be basically destroying jobs in

the United States right now if it was

for the current rate environment. So,

that tells you a lot about the strength,

now, of the of the US economy and

investment. And also, an important part

of the

of the improvement comes from the

manufacturing sector. Manufacturing

sector has been in expansion for a for a

quite a significant period, and that is

something that was certainly not in

consensus estimates. A lot of people

said that tariffs, trade wars, etc.

would not

make the manufacturing sector improve

and reality is that it's proven to be.

So,

I'm not saying that everything is rosy,

but it's very common to read everything

about the US economy on a negative basis

and when we see

the very same day how consensus goes all

crazy and of about how good the GDP of

Germany was at a 0.2%

hmm

because it was better than 0.1%

estimated. Oh my god, is that we're

getting we're getting we're getting too

used to the idea that the the stagnant

economies

are doing well and and we keep looking

at the US data from a negative

perspective. And I think that the US

data is not phenomenal, it's not the

an absolute

rocket, but certainly is much better

than Japan than Germany, than France. In

In particularly in those two elements

that you mentioned in consumption and

investment. Very very significant

difference compared to for example

Canada and the UK, which should be which

usually if you remember historically

investment in Canada and the United

States used to go almost in tandem. That

doesn't happen anymore, no?

>> Well, I am so eager to unpack some of

these other economies around the world

particularly in Europe where you spend

so much of your time

and I'm I'm really curious to get to

that and you've teased it at the end of

your last two answers, but but I want to

continue down just because we are in

such a US focus in terms of the data

that we've gotten here, the

conversations that have been had here in

New York and across the country about

some of the economic data and the Fed

meeting yesterday. The Fed holding at 3

and 1/2 to 3.75

basis points out

percentage points on interest rates 350

to 375 in a basis point basis. I want to

talk a little bit about inflation US CPI

running significantly ahead of target at

3 and 1/2% the vast majority of that

being energy. You talked a little bit

about rates and what that means for the

economy in terms of the balance of the

always the other perpetual balance of

terror that the Fed has to deal with in

their dual mandate with maximum

employment and stable prices. Talk a

little bit about the other side of the

ledger the inflation side of the ledger

how you think about price pressure in

relation to growth.

>> Yeah, I think that the the level of

inflation is concerning because it is

above what we would consider the normal

rate of inflation. But we also have to

remember that the latest core inflation

figure was the lowest since March 2021.

So I think that

the energy component cannot be the

driver of what the Fed decides to do or

not to do because it doesn't make any

sense to hike rates or to keep rates

elevated when there is absolutely no

sign in the economy of an overheated

economy. Yeah,

the reason why you hike rates is because

you're concerned people are taking way

too much credit that there's way too

much excessive in the economy etc. None

of that is happening.

Industrial utilization the level of

utilization in the economy is perfectly

in line with what would be growth

a stable growth but not overheated

economy. So think about this.

Hiking rates because of an external

energy factor is makes absolutely no

sense and we saw it in 2022.

The first because the the impact of the

energy shock tends to be very short and

very abrupt. And therefore, taking

measures such as interest rates to

combat inflation driven by the energy

component makes absolutely no sense. To

start with because obviously, the first

thing is that the Fed doesn't print

barrels of oil. So, that's the most

important thing. Is that by hiking

rates, you're going to do absolutely

nothing on the geopolitical risk premium

attached to oil prices, no? The second

thing obviously is that

the Fed has a dual mandate. It's not

just stable prices, but it's also the

employment level. And the fact that

employment is relatively strong and

certainly stronger than the G8

economies, but

significantly weaker than it should be

for an economy that is

growing, likely to be growing in 2026 at

2.1, 2.2%.

Uh certainly should tell the Fed that

policy is

uh on the wrong side right now, no?

Because you're keeping elevated rates

because inflation is above the target,

but at the same time, the Fed is keeping

all the mechanisms that maintain

excessive indebtedness from the

government perspective.

And by and at least now, the Fed has an

ally in the government and fiscal policy

can help with uh inflation. And I think

that this is an important factor. So,

think about this. Hiking rates would do

absolutely nothing to oil prices.

Second, hiking rates would make families

and business suffer. On the one hand,

the temporary inflationary factor of

energy prices plus

higher cost of credit. So, it would be

devastating for families and businesses.

And third, and most important, is that

the Fed cannot be using a policy tool

that constantly resorts only to interest

rates. Because

the main factor that is driving the

current persistent inflation comes

precisely from a Fed that ignored the

massive increase in money supply,

government spending, and deficit

spending of 2021 to 2024. In fact, the

Fed is now dealing with the consequences

of being completely wrong in 2020 when

they said that inflation and energy

prices were not existent, and that was

completely untrue. Then they said that

inflation was transitory, and it wasn't.

And then they said that it was largely

transitory, and then kept a very, very

loose policy while the government was

spending like drunken sailors. And then

started to hike rates precisely when

consumers were suffering the most from

the inflation created by massive

government spending. So, the Fed can the

Fed needs to be a little bit more data

dependent and less narrative dependent.

And it certainly needs to look at what

the tools that they're going to

implement are going to do to the actual

drivers of persistent inflation.

Persistent inflation is a problem in all

developed economies, particularly in the

UK.

And

we need to understand that it comes from

maintaining and elevating the massive

money printing, which comes from

government spending, now? Um now the Fed

needs to work on the employment side and

be less about uh interest rates and more

about managing the balance sheet more

prudently, i.e. being more diligent

about reducing the balance sheet. Think

about this. What Jerome Powell did and

the Fed did while he was in charge

made absolutely no sense. So, you

basically hike rates and then at the

same time delay the reduction in the

balance sheet of the Fed and keep all of

those liquidity tools that allowed

between '21 and '24 for the government

to massively increase government

spending to the tune of $2 trillion

above what's what was an extraordinary

expenditure of the COVID period. So, all

those elements together need to be taken

into account. Inflation is not something

that you uh that you're able to reduce

if you're not taking de- decisive action

to curb government spending and to curb

government deficits. Therefore, what we

find ourselves in a situation right now

in which central banks are basically

pushing all of the tools that they have

of monetary policy on the

shoulders of families, businesses, and

the private sector while the um public

sector in the developed economies is

simply ignoring all of the signs of

inflation, of lack of confidence in

sovereign debt, and the

challenges that they have on the

economic, fiscal, and obviously on the

inflationary front. Governments have

completely ignored, hm, all of the

warning signs. There is the that that

that show that there's a that there's a

massive reduction in the in the

confidence in the currency that they

issue and the and the

proof is that you see how the yen is at

40-year lows with

with a country that is not in a crisis,

no?

>> Before you go, that was just the

preview. The full conversation goes much

deeper. What's really driving markets,

where the risks are, and how the best

investors are positioning. That's what

we do at Real Vision. We connect the

dots before they become obvious. So,

don't stop here. Watch the full episode

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