Today's number 218.

That's how many dB of sound a pistol

shrimp produces when it snaps its claw.

That makes it one of the loudest animals

in the world, even louder than Alex

Jones.

Welcome to Profy Markets. I'm Edson. It

is January 14th. Let's check in on

yesterday's market vitals. Major indices

fell from recent highs. Treasury yields

declined after the latest inflation

report. More on that later. Oil prices

rose on Trump's comments on Iran. We'll

get to those in a moment. And finally,

JP Morgan shares dropped 4% after fourth

quarter investment banking fees missed

expectations. Okay, what else is

happening?

President Trump announced a 25% tariff

on any country doing business with Iran.

Trump wrote that the order is quote

effective immediately and that the

decision is final and conclusive.

However, the White House has not yet

explained how the tariffs would be

enacted or by what authority. It appears

the move is a response to the Iranian

government's violent crackdown on

protesters, which has resulted in

thousands of civilian deaths. In a

Tuesday morning truth social post,

President Trump said he has canled talks

with Iranian officials. And he's urged

Iranians to quote, "Keep protesting and

take over your institutions." The

protest began in late December as

inflation and Iran's collapsing

currency, the real made everyday goods

unaffordable. They've since gained

momentum, morphing into wider

demonstrations against the Iranian

regime. Okay, here to explain the

economic situation in Iran and what

these tariffs might mean for the

country, we're speaking with Maurice

Obsfeld, former chief economist for the

International Monetary Fund and senior

fellow at the Petersonen Institute for

International Economics. Maurice, thank

you for joining us again on Profy

Markets. Pleasure.

>> We've seen this crackdown from the

Iranian regime. Uh then we see the

tariffs announced from Trump. Just as a

beginner, uh what is actually happening

in Iran? What are these protests about?

And what is the economic situation over

there?

>> Well, the economic situation has

obviously been grim for many years with

uh ongoing sanctions. When Trump came

into office, he rescended uh some of the

very mild waiverss that Biden had issued

in order to promote uh nuclear talks and

so that intensified the pressure. Uh

furthermore, we've seen the Iranian

regime

weakened geopolitically

over the course of the year with uh

Israeli and US strikes with the

evisceration of Iran's proxies abroad

and that too has harmed the economic

situation. Uh so as a result of that uh

you know what we've seen is the

government basically trying to pay its

bills by printing money that sparked

inflation. It sparked a huge uh

depreciation

of the uh Iranian currency a huge I

should say an accelerating depreciation.

So over uh the last year the currency

fell by more than 80%. It fell by around

16% in December alone. Uh last year's

inflation rate we believe was above 50%.

Uh this year it's bound to be higher. So

all of this is spilled over into

frustration in the streets starting with

um economic demonstrations but then

building up into a much wider

conflration that spread across the

country including uh outside of the main

urban areas and reflecting a lot of

frustration with the uh with the regime

with the uh corruption that people see

with the uh uh trampling of basic

freedoms. And uh uh it looks like uh

this is much more significant than the

2022 demonstrations and probably the the

most severe um threat to the regime uh

uh internally uh since uh uh its

beginning in 1979.

>> It seemed like everything reached a

tipping point in December or at least

last month and last few weeks or so. Um

seems like a lot of this is economic.

The the hyperinflation you mentioned

also the collapse of the currency. What

triggered the uh this out outburst that

we've seen in the past month or so.

>> It seems to be really uh tied to the

currency and the effect on inflation and

what that's doing to just the the uh the

cost of living. Uh there's also been

severe infrastructure crises uh which I

think are also contributing. Uh the

crisis over water availability has

really been a severe a severe problem

and that uh you know historically

throughout the uh the Middle East

throughout the earth um uh droughts uh

uh shortages of water lead to severe

social dislocation. So it's not not

really surprising that all this is

coming to a a head and the country the

regime have both been under extreme

economic and geopolitical pressure and

sudden sometimes you just see these

explosions you know some smaller

demonstration can uh can metastasize uh

not unlike what we saw in uh on a much

larger scale in Eastern Europe in 1989.

Uh again there were pent-up economic

frustrations, pent up frustrations about

corruption and uh then uh you uh get an

explosion.

So then we see this violent violent

crackdown from the Iranian regime uh

civilians

murdered uh many have died

um and then in response tariffs. It

seems like that has been the response

from from Trump. He's talked about the

violence that we're seeing and he said

and in addition we're putting this 25%

tariff on Iran and also anyone who does

any form of business with Iran. What do

we know about the tariff? What do you

make of this policy?

>> Well, the the administration is also

supposedly considering military options

and not clear what those are, but um you

know the tariff has been the allpurpose

Trumpian response to uh everything he

doesn't like. So uh to some degree I

think they get discounted by the markets

and uh even by some of the targets at

this point. You know the tariffs are um

supposed to uh fall on US imports from

countries that quote unquote do business

with Iran. The major uh trading partners

for Iran are uh China first and

foremost, but also uh the UAE, uh

Turkey, Iraq, and you know, we have

substantial trade with both Turkey and

the UAE. We've been negotiating trade

deals with those countries as with

China. We depend on Turkey as a regional

uh and NATO ally. we we uh depend on the

UAE as a geopolitical ally in the Middle

East. So, um the betting is probably

that um either these countries will cut

off trade with Iran, pressuring the

regime, which I I very much doubt that

can happen in a short time horizon, or

that uh these countries will pressure

the Iranian regime to um go easy on the

protesters, which I also think is not

not very likely to happen. The Iranian

regime is fighting for its life. So I

see these as as being uh mostly

performative. You know the countries

know at this point, everyone knows at

this point that there are deals to be

made. The use of tariffs for um

posturing is a uh standard part of

Trump's toolbox. So uh you know at this

point we have to see what what is

exactly imposed, what is involved and uh

uh what what ends up sticking. But I

don't think it's going to have much

impact on the situation in the ground in

Iran. uh the regime is not looking at

these and saying, you know, oh my god,

uh we better negotiate or go easy on

demonstrators. I think they're much more

worried about uh the um uh military

threats that uh that US could deploy.

>> Yeah, it seems that as you say tariffs

are a form of threat and then also

military action are a form of threat. to

use those three those two uh threats in

the same sentence seems a little bit

pointless. One of them is far more

severe than the other. I I assume that

that the tariffs are therefore just kind

of pointless in that sense.

>> Well, they're more severe, but they also

uh inflict self harm on the United

States. They implicate um trade deals

that are that are, you know, sort of

under in progress. I mean, you make a

deal with Turkey, say you negotiate for

many months, and then suddenly you say,

"Well, actually, you know, we're not

going to respect that deal because, you

know, we need to um, you know, because

you're you're trading with Iran, and

Iran is being horrible to its people."

But, you know, it was known that Turkey

was trading with Iran. This isn't news

to anyone. So, you know, the governments

that have made trade deals can rightly

say, "Okay, well, you know, why why

didn't you bring this up in the first

place?"

>> We'll keep following this. I'm sure

we'll probably have you back on to keep

discussing this. Um, what do you think

happens next if you had to make

predictions about how this will start to

play out at this point?

>> Well, as I said, I don't I don't think

that the tariffs are really going to be

a material factor in all this. I think I

think the the the big uncertainty is uh

if and when uh the Trump administration

will um uh use some sort of military

intervention and what that will be and

you know what sort of destabilizing

effects it can have have on the ground

and whether it'll bring the regime

around or just induce them to attack

American assets that are that are nearby

which some in the um Iranian hierarchy

very much would to do. You know, Trump

has clearly been flexing his military

muscles on the global stage and seems

somewhat intoxicated with that. So, it

wouldn't surprise me to see some sort of

military strike. Uh, you know, the

question is, does a does a one-time

action as opposed to some sort of

sustained military pressure actually

have a big effect on the situation

there? Uh, sustained military pressure

would raise uh questions by Trump's uh

MAGA base in the US about what is he

doing?

>> Is there anything that we could predict

about what will happen in markets if we

see some sort of military action? Do you

think that this would be a particularly

explosive event for markets? Or perhaps

it's already kind of assumed that we're

going to get violent. It could affect

oil prices. Oil prices have already

factored that in to some extent. I don't

see um big regional geopolitical

spillovers. Uh you know, Russia, China

are not going to come to Iran's defense

in this situation. They'll make noises

about it. So, uh I think I think it

would probably end up being a fairly

contained

um event. You know, the question is

would it would it would it actually make

things better in a sustained way, bring

down the regime? And if the regime is

brought down uh then uh what's the plan

for the day after and I don't think

there's a plan for the day after. This

could become uh you know middle middle

east is already um a fragile place and

there are unintended consequences from

uh you know dropping matches onto the

tinder.

>> Okay. Maurice Obsfeld, former chief

economist for the International Monetary

Fund, senior fellow at the Peterson

Institute, International Economics.

Maurice, uh, as always, I appreciate

your time. Thank you.

>> It's been a pleasure, Ed. Thank you.

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We're back with Profy Markets.

December inflation data came in without

much of a shock, but costs remain high.

According to the consumer price index,

headline inflation held steady at 2.7%

year-over-year. That is unchanged from

November and in line with forecasts.

Meanwhile, core inflation rose2% month

over month and 2.6% year-over-year,

slightly below estimates. Still, food,

shelter, and energy prices increased in

December, up on the month and the year.

The big question, however, is is this

data even right? Because as we discussed

last week, the government shutdown did

impact the CPI report from November. And

then the question now is did it affect

this one too? Here to break down this

CPI report, we're speaking with Mark

Xandandy, chief economist at Moody's

Analytics. Mark, good to see you again

on Profy Markets.

>> Thanks, Eddie. It's good to be with you.

So my first question to you, we

discussed the previous CPI report and

you explained to us how the previous one

from November was flawed.

Um we've got a similar report, the sim

similar number, 2.7%. I guess my first

question to you is this report flawed as

well? that number is uh it's a

year-over-year growth rate and so it

reflects the problem the Bureau of Labor

Statistics had back in October when they

couldn't conduct the survey and as a as

a result they assumed no change in

prices for the vast majority of goods

and services that they that they include

in the CPI. So if you make an adjustment

like we've done like we did this last

month and we did this month to account

for that that problem inflation CPI

inflation is still 3% year-over-year.

Core CPI inflation excluding food and

energy is 2.9%. So you know once you

make the correction for what happened in

October inflation is still elevated and

persistently elevated. So, I feel like

this is a far larger story than what

we're seeing in the news right now where

people are just kind of taking these

numbers at face value. And what you're

telling us is you're running your own

analysis that is making up for the

adjustments that they missed in October,

which says that it's not 2.7%, it's 3%.

And considering this is one of the

biggest issues in the nation right now,

I think that this should be kind of more

of a big deal or at least people should

talk about it more. I guess tell us more

about how the report is flawed. Like we

saw we know that they were missing data

in October.

>> How does that affect both November and

December in in the CPI report? There was

no data in October. There was no survey

because the government was shut down. So

the what does the Bureau of Labor

Statistics do? They assume that prices

for the things that they can't measure

because there was no survey did not

change. You know, they're very

transparent. They said, I you know, I

have no idea what the number is because

I didn't conduct the survey. So it's

it's zero. So that mean and obviously

that's wrong. We we know that's not what

happened. We know that prices did

increase that there was some inflation

and so because of but because they

assumed no inflation in October you know

when you look at year-over-year after

October that's biased lower because of

that assumption. So you want to correct

for that and you know there's no slam

dunk this is the right way to do it but

we took a crack at it and you know based

on that work uh uh we found that

inflation's not 2.7% on on CPI inflation

it's 3%. And you know, I think most

people who really pay attention to this

stuff, not not the typical American,

they this would be pretty nerdy for them

to get down and dirty with this kind of

stuff. But for the folks that, you know,

live and die and breathe, you know,

what's going on in the financial system,

financial markets, bonds, uh, stock

market, what folks, the Federal Reserve,

you know, they know this and they're

making their own adjustments and they're

all coming up with the same thing we

are. It's inflation's about 3%. everyone

except for basically the person that

matters which is the president who was

>> on truth social saying we have a great

low inflation report and taking these

numbers at face value which seems like a

problem. I guess we can just put that

aside for now. My question you know we

had this flawed report for November, we

have the flawed report for December.

How long is this going to go on for, do

you think? How long are we going to be

dealing with these CPI reports that we

get from the BLS and which make these

headlines, but then we have to add this

asterisk and say it's not it's not quite

right.

>> Well, Ed, I think you're going to have

to keep inviting me back for until next

October because it will be bi numbers

will be biased lower until we kind of do

a round trip here and get to the other

side. So, next October. But even then,

you got the problem on the other side.

uh because then it'll be biased too high

because these numbers we're looking at

today are too low. So, you know, the to

work all this out of the data probably

takes several years. So, but you know,

right now it matters most because we're

most worried about uh inflation and in

the context of the tariffs and policy

and fed policy and interest rates and

everything else. So, I think for the

next year, that's when it really

matters. uh that in in uh this this will

be the case, you know, all the way

through next October.

>> If we were to just look at these numbers

that we did see in the report and now

that we've gotten all of the gigantic

asterisks out of the way, let's just

sort of look at the numbers. One thing

that was striking to me at least, uh

energy up 2.6% 6% year-over-year. But

there's some nuance here. Gasoline

prices down three and a half%.

Electricity prices up 6.7% nearly 7%

increase

>> in electricity uh prices. This jumped

out to our research team. I guess our

question is is that data centers? Is

that AI?

>> Do we have any uh AI?

>> Straight up AI. I mean the demand for

electricity from data centers is

enormous. It's putting a lot of pressure

on the electric power grid and

generation and uh the prices are are

rising very very rapidly. Uh the other

thing that happened last month though

was natural gas prices also jumped

because it was cold in uh many parts of

the country and home heating was uh you

know important and that that pushed up

the price of natural gas. So that also

contributed but the cost of like we

buckle up. I mean uh this is not going

away. the data center uh phenomena is

just in early innings and so we're going

to see a lot of demand from these uh AI

data centers and that's going to juice

up uh electricity prices. Now, of

course, the power companies, you know,

they know all this and they're working

hard to bring on new capacity. So, you

know, I I I suspect a year or two, three

down the road, this will abate, but for

the next year or so, I think we should

all, you know, just uh be prepared for

higher electricity prices.

>> So, we've got higher electricity prices.

We should expect them to go up because I

mean this AI train isn't isn't stopping

anytime soon. We've got 3% inflation

based on the adjustments that you've

made for what we didn't see in October.

Fed's target is 2%. Meanwhile, there is

now a criminal investigation into the

Federal Reserve about a building, but

most people agree this is really about

reducing interest rates even further.

What do you make of what happened this

week between Trump and Powell and what

does this mean for inflation going

forward? None of it's good. I don't see

any upside here. It's all downside, all

shades of gray and you know, darkness.

Uh I mean, you know, we know that a

cornerstone of a well functioning market

economy like our own is a independent

central bank and indep independent Fed.

We know this from history. I mean, our

own history. you know, go because you

hear it on the Nixon tapes, the

conversations between President Nixon

back in the early 70s and his friend who

was chair of the Federal Reserve, Arthur

Burns, at the time, and they kept rates

lower than they would have otherwise in

an effort to juice up the economy in the

leadup to the 1972 election. And by so

doing, they laid the stage for the

inflation that followed. And it was a

terrible period of hyperinflation that

ultimately ended in, you know, Paul

Vulker coming in slamming the economy

with higher interest rates and pushing

the economy into a deep recession. Uh

there's a lot of other factors involved

in that inflation in that very dark

time. But you know, one key factor was

the loss of Fed independence. And you

know, we we have experience overseas as

well. other countries like Argentina,

Turkey, you know, even the British, the

UK, you know, not only until recently

the Bank of England was not independent

and you could see it in their inflation

statistics, their inflation numbers are

higher. So that's that's the that's the

uh outcome of a Fed or a central bank

that loses independence that is the

predisposition is going to be of the

executive branch is to keep rates low to

try to keep the economy moving and

strong leading into an election and

overdoing it and and the result will be

inflation. So that's the that's kind of

the direction of travel here and so why

this is such a disconcerting thing. Uh

and uh you know hopefully the Fed can

maintain some semblance of independence

going forward.

>> Do you think it will? I mean I think one

thing that has been interesting has been

the market's reaction where we haven't

seen that much of a reaction. Um and we

were having this debate in our episode

yesterday about why that is. Maybe it's

because we've kind of seen the strength

of the Fed. uh in Jerome Powell's video.

Maybe it means that the the Fed truly is

independent. Maybe because the the

investigation isn't that serious. Maybe

because the markets just don't seem to

care anymore. It's some sort of taco

effect. But does it genuinely worry you

from an inflation perspective? Do you

think that realistically

this will actually lead to worse

inflation given what has happened in the

past 48 hours? No, not yet. I think

that's why investors are still kind of

sitting on their hands waiting to see

because there's a lot of things that are

going to transpire here in the next few

weeks, few months. You know, one

obviously is the president's going to

nominate a new chair to the Federal

Reserve. Chair Pal uh his term is up as

chair uh in May. Who who's that person?

You know, we we need to know that.

There's a Lisa Cook case. Lisa Cook is

on the board. You know, she's been

charged with mortgage fraud. president

has tried to fire her. She sued saying

you can't do that. So that's now in

front of the Supreme Court. That's a

that's a huge decision. If the Supreme

Court says that the what the president

did is okay, then then he's going to

fire lots of folks and presumably and

we're going to see, you know, a change

to that pretty fast. But let's see what

the Supreme Court does. You know, if you

listen to the kind of the back and forth

when they were adjudicating this a few

few month couple months ago, sound like

the Supreme Court was going to figure

out a way to allow not allow the

president to do that. But we'll just

see. We'll see what Chair Pal does. I

mean, he will roll off as Fed chair in

May, but his term as a Fed member

doesn't end, I think, until the end of

2027. So, he could stay. Let's see what

he does. So, I think, you know,

investors are saying, "Let's see how

this plays out here." Uh, let's see. And

you know, I do think at the end of the

day, if the Fed does start, it feels

like the Fed is losing independence and

is setting policy based on politics and

not what's good for the economy, bond

investors will ultimately say enough

already. Uh, and you will see long-term

interest rates rise and that would be a

problem, I think, for the economy.

>> All right, Mark Zandy, chief economist

at Moody's Analytics. Mark, always love

having you.

>> Thanks. I really appreciate the

opportunity. Take care. Now, another

month, another inflation report, and for

the second time, the numbers are wrong.

Now, if you listen to the show a lot,

you know that I hate when people make

this argument. When the data comes out

and someone on the left or the right

says, "No, no, you can't trust the

number. The number's wrong." Because the

people who report those numbers, the

people at the BLS, they're lying. I hate

this argument because it is a lazy

argument, and it's almost never true.

The people at the BLS are not lying. As

we've discussed before, if there's any

reason why the numbers are wrong, it's

that there was an actual data problem,

some irregularity in the survey, some

problem in the reporting that made the

numbers flawed. And if that is the case,

well, it's important then that you show

me your evidence. Show me why you

believe in this very bold claim that the

US government's data is incorrect. In

other words, this is no small statement.

And yet, in this case, it is actually

true. And it all goes back once again to

that stupid month of October when the

government shut down all of its

operations, including its ability to go

out and measure prices, which means they

literally didn't collect the data. And

more importantly, they didn't adjust for

that data. Instead, they simply assumed,

as Maul told us, that prices just remain

the same. probably because it was the

least political assumption they could

make. But we all know, of course, that

that isn't true. Prices always change.

And this is a real problem because it

didn't just affect the October report.

It also affects multiple reports after

that. The October numbers impact the

November numbers which impact the

December numbers and so on and so forth.

And then the question becomes at what

point is the data going to be correct?

And the answer appears to be according

to Mark next year. next October. But the

more important point stands and that is

prices didn't rise 2.7% year-over-year,

which by the way is already very high.

There is a downward bias in the data,

which means that prices rose more than

that. And this is where third party data

is really helpful. And thankfully, we

have it right here in front of us,

courtesy of Mark. The true number is 3%

year-over-year. In other words, before

Liberation Day, before the tariffs, we

had 2.3% inflation. After Liberation

Day, after the tariffs, we now have 3%

inflation. There is no question what

tariffs have done to prices in America.

Prices have gone up and they have gone

up a lot. The president will try to say

the opposite has happened. In fact,

that's the claim he made yesterday

morning. But you can either investigate

these numbers in detail as we have just

done as Mark has done or you can simply

go to the grocery store. Either way, you

will conclude inflation is only getting

worse. Thanks for listening to Profit

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