Big Inflation and Baby Bubbles

Episode Summary

Executive Summary: The episode centers on November CPI and the outlook for inflation, arguing that headline inflation likely peaked as energy prices fall and supply-chain pressures ease, while rents remain a longer-lived source of inflation. The second half debates whether stocks, housing, and crypto are bubbles; the hosts conclude stocks are a baby bubble, housing is overvalued but not yet a national bubble, and crypto is a clear bubble.

Main Topics: November CPI and inflation peak (Priority: 5/5): The hosts review the CPI print, emphasizing that energy was the biggest driver and that November likely marked the high point for inflation pressures. Core inflation remains elevated, but they expect improvement as oil and gasoline prices retreat. Energy and supply-chain disinflation (Priority: 5/5): They break inflation into energy and supply-constrained goods (vehicles, audio/video, furniture, etc.), arguing these categories explain most of the gap above target and should become disinflationary over the next year. Rents, housing shortages, and stickier inflation (Priority: 5/5): The discussion highlights rent inflation as the main persistent upside risk, driven by strong demand, limited housing supply, low vacancy rates, and CPI measurement lags through owners’ equivalent rent. Wages, productivity, and the inflation outlook (Priority: 4/5): They argue wage growth is concentrated at the bottom of the distribution and should slow as labor force participation recovers. Rising productivity is also expected to ease unit labor cost pressure. Bubble framework and asset valuation (Priority: 4/5): The hosts define a bubble using overvaluation, speculation, and leverage, while acknowledging that models can identify mispricing but not the exact moment of a burst. Asset-market assessment: stocks, housing, crypto (Priority: 5/5): Stocks are judged a baby bubble, housing overvalued but not yet a bubble nationally, and crypto a strong bubble candidate given weak fundamentals, speculation, and likely leverage.

Key Arguments: Headline inflation appears to have peaked because energy prices have already rolled over and gasoline prices are set to fall further. Core inflation is still high, but much of the excess over target is explained by energy and supply-chain-disrupted goods. Rent inflation is likely to persist because housing supply is tight, demand is strong, and CPI captures rents with a lag. Wage growth has been strongest in low-wage sectors hit hardest by the pandemic; as those workers return, wage pressure should moderate. Productivity growth is improving, which should help keep unit labor costs from fueling sustained inflation. Asset bubbles require overvaluation plus speculation; leverage increases the risk that a correction becomes systemic. Stocks are expensive relative to earnings and interest rates, but leverage/speculation make them more bubble-like than before. Housing is stretched on price-to-income and price-to-rent measures, but high demand, limited supply, and tighter mortgage standards argue against calling it a full bubble yet. Crypto lacks a clear fundamental anchor, is highly speculative, and likely includes leverage, making it the clearest bubble of the three asset classes.

Data Points: Headline CPI inflation (YoY, November): 6.8% - Highest since the early 1980s; discussed as likely peak inflation reading Core CPI inflation (MoM, November): 0.5% - Inflation excluding food and energy remained hot Core CPI inflation (YoY): ~5% - Underlying inflation still well above target Excess inflation above target: 4.5 percentage points - Using 7% inflation versus a 2.5% target Energy contribution to excess inflation: 2.5 percentage points - Estimated contribution from gasoline, heating, and related energy costs Supply-chain-constrained components contribution: 1.8 percentage points - Estimate for new/used vehicles and other supply-constrained categories Core CPI annualized over past two years: 3.3% - Used to show inflation remains above the Fed’s desired level after adjusting for base effects Core CPI year-over-year over past two years (alternative framing): 2.3% annualized - Referenced as a base-effects-adjusted measure from Nov. 2019 to Nov. 2021 Retail gasoline price at Wawa: $3.56/gallon - Local example cited during the discussion of falling gas prices National average gasoline price: ~$3.35/gallon - Used to illustrate recent easing in gasoline prices West Texas Intermediate oil price: ~$70/barrel - Lower oil prices cited as a reason gasoline should fall further Rent CPI change: 3.0% - Change in rents paid by renters as measured in CPI Owners’ equivalent rent change: 3.5% - Imputed shelter cost for homeowners in CPI Q4 GDP tracking estimate: 8.7% annualized - Used to support a rebound in productivity growth Job growth pace: ~500,000 per month - Strong labor market growth, though not accelerating University of Michigan 5-year inflation expectations: 3.0% - Longer-term consumer inflation expectations remained stable University of Michigan 1-year inflation expectations: 4.9% - Short-term expectations were elevated but unchanged Initial jobless claims (latest weekly print): 188,000 - Lowest since the 1960s; cited as distorted by seasonal factors 4-week moving average of initial jobless claims: 219,000 - Presented as a cleaner read on labor-market conditions S&P 500 level: 4,696 - Discussed as near record highs and clearly elevated Equity market overvaluation estimate: ~15% - Model-based estimate of stock overvaluation given low rates and earnings Broker-dealer margin debt: ~$600 billion - Used as evidence of speculative leverage in equities Margin debt pre-pandemic level: ~$300 billion - Shows how sharply leverage has risen recently Housing price growth in MSAs: 80% of metros above 10% YoY; 25% above 20% YoY - Used to show broad and extreme housing price appreciation Mortgage debt growth: ~9% YoY - Indicates accelerating leverage in housing finance Home mortgage debt growth earlier reference: ~5% YoY - Comparison point for current mortgage debt acceleration Long-term crypto price reference: Bitcoin around $50,000 - Illustrates extreme valuation and volatility in crypto markets

Pivotal Quotes: "I think November is likely the worst of the inflationary pressures we're going to experience now." — Ryan: Assessment of CPI trend and the expectation that inflation has peaked "It’s a baby bubble." — Mark Zandi: Final characterization of the stock market after discussing overvaluation, speculation, and leverage "This is like the poster child of a bubble." — Ryan: Comment on crypto markets after discussing lack of clear fundamental value

Implications: Inflation should ease as energy and supply-chain pressures fade, but housing rents may keep core inflation sticky. Investors should watch leverage and speculation in stocks and crypto, while housing risks look more localized than systemic for now.