Mindy Jensen: Today we are bringing on J Scott to get an update on high inflation and the overall health of the economy and what this means for you as an investor. Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me as always is my stays current co-host, Scott Trench.
Scott Trench: Thanks, Mindy. I am so excited to track my macros today here with J Scott. We’re welcoming him back for what, like the fifth or sixth time here on the BiggerPockets Money Podcast, this time to talk about the macro picture and the news cycle. So J, welcome to the BiggerPockets Money Podcast.
J Scott: Thanks for having me back. I think it’s been a little while, but thrilled to be back.
Scott Trench: Yeah, it’s probably been like almost two years, I think, at this point. You know, I just think it’s wonderful how I think you’re financially independent. You would describe yourself as financially independent. Is that right, J?
J Scott: I would describe myself as I could be financially independent. If, yes, yes, I guess yes is the right answer. I don’t think I will ever give up working or trying to achieve more. I’m a very competitive person, and so I think of money very much — for me, it’s a game that I love playing, and I like winning, not just to accumulate more money, but just to be able to give back.
Mindy Jensen: But you don’t have to work in order to eat.
J Scott: That is correct.
Mindy Jensen: So you are financially independent, you’re just not retired early.
J Scott: Although if you’ve been to restaurants recently, that’s starting to change. I might have to work the rest of my life to eat if I want to eat out these days.
Mindy Jensen: Pauper J Scott, welcome to the podcast.
Scott Trench: What I think is interesting is that, you know, people choose to do all these different things with their early financial freedom, work-optional lifestyle, whatever you want to call it here. And what it seems like you like to do is you like to pick fights with strangers on the internet via Facebook posts. And I think it’s wonderful the way you do it because the other day you got accused in the same thread of being a leftist and a MAGA cult member. So that’s why I’m so excited to talk to you today, because you will anger everyone with what you attempted as an objective analysis of all of our biases here. But I think that’s hilarious, and I love that. I had some choice words for the people who thought that you were either one of those things in that particular thread.
Scott Trench: Is that right though?
J Scott: Is that right?
Scott Trench: Is that your goal, is to pick fights with strangers on the internet these days?
J Scott: It’s not my goal, but for some reason we do what we’re good at, and that’s what I’m good at. And to be honest, if you were to dig into my politics, you would find that in a lot of ways I’m very left, and in a lot of ways, especially fiscally speaking, I’m very right. My issue isn’t so much that people have left and right ideologies, it’s that people are inflexible and they align themselves with one side and ignore the other. And I think it’s important that we have to recognize that there are good ideas on both sides, and there’s nothing wrong with being a blend.
Scott Trench: Love it. I think that’s the right lens to bring to a lot of politics. I wish more people did that in this country and had their own views on things rather than parroting MAGA or parroting woke, whatever it is. But I think you have a great blend of this, and that’s why I’m so excited to talk to you today. Your Facebook feed — everyone listening to this should go and follow J Scott on Facebook, by the way. I do, and I love to chime in there, and I love watching the real dolts respond to his posts on there. You know, one day it’s energy prices, one day it’s inflation, one day it’s the Treasury, one day it’s this policy in Iran, these types of things. Is there an underlying framework that drives your analysis or what you discuss on macro news? Like, what do you think is important?
J Scott: Are the important variables in understanding the macroeconomy? Yeah, I’m a big believer that if you want to be successful as an investor, if you want to be successful as a business owner, if you just want to be successful in general with your money, it’s important to understand macro conditions, macro context, understand how things in the fiscal world relate to each other. And so my goal, whether it’s my Facebook posts or whether it’s my newsletter where I write about economics, is essentially to try and connect pieces. I talk a lot about interest rates. I talk a lot about monetary policy. I talk a lot about, these days, energy supply chains, energy constraints, inflation — basically all the things that are kind of interplaying together that impact us as, again, investors, business owners, and just regular people that need to invest our 401(k) or invest our savings. I love the saying, “time in the market beats timing the market.” And I don’t like the idea of trying to figure out the best investment at any given point and moving your money around too often. Another saying I’m a big fan of is, “money is like soap — the more you handle it, the less of it you have.” We pay a lot of money in transaction costs. So I don’t ever want people to say, okay, J’s saying the economy is changing, I need to move my investments from X to Y. But instead, I want people to understand that there are long-term implications of what’s going on in the economy today — things that are happening today are going to impact us over the next five, ten, fifteen years. And we need to be thinking about our investments, we need to be thinking about our portfolios on that larger scale.
Scott Trench: When I think about the variables again that drive the economy, I think there’s like — it’s employment, there’s inflation, there’s interest rates, there’s the value of the broad market index, there’s corporate profit — there’s all these different variables. And the way I think about it, and this is kind of a novice or amateur look at it, and I’d love your feedback, but as long as these variables are within some semblance of a normal range, they’re kind of watch-’em variables. But when they move far out of those ranges, one of those can become the dominant driver of the news or economic outcomes for the country at any given time. Is that a reasonable way to interpret it, or how would you correct that?
J Scott: No, I think that’s reasonable, and I would be even a little bit more specific. I mean, over 100 years ago, back in 1913, Congress basically created the Fed, the Federal Reserve. And then in the 1970s, we made it very clear what the charter was for the Federal Reserve, what its purpose of existence was. And we basically said the Federal Reserve exists for two reasons. One, price stability — basically making sure that inflation didn’t go too high or too low. And two, maximum employment — basically ensuring that the growth rate of the economy was nice and smooth and on an upwards trajectory. And so I like to think that the reason that the Fed exists is because those are the two things that are most important when it comes to the economy, when it comes to Americans, when it comes to basically us as a nation economically continuing to grow. And so the lens that I like to look at things when I’m looking at the economy is that lens: where is growth headed and where is inflation headed? Because, again, if that’s the most important thing for the Fed to make sure this country stays on track, it should also be the most important thing for us as individual investors and business owners.
Scott Trench: So is that where you like to start — with what the Fed’s doing? What is the Fed doing? Can you give us an update and what’s been going on and how that’s been impacting things?
J Scott: Yeah, and I’m happy to talk about that, but I like to think of it just kind of the opposite. I think of the Fed as being the reactionary piece. The analogy that I’ve used in the past is, if you imagine those really long fire engines where there’s a guy in front driving the fire engine, but the really long ones have the guy in the back and he’s kind of controlling the back wheels to make sure that the engine doesn’t go off the road — that’s the Fed. The economy is flying ahead, and the Fed is kind of sitting in the back, kind of steering to make sure we don’t go off the rails. They’re the ones that are reactionary. And so the Fed doesn’t necessarily control the economy. They have some influence over the economy, but more so they are reacting to what the economy is doing. And so if you look at what the Fed’s doing today, we’ve seen quite a bit of a — I don’t want to say a 180 over the last few months, but certainly maybe a 90- or 120-degree turn. They basically went from, hey, interest rates should be lower, we need to basically stimulate the economy more because inflation was coming under control as of a year and a half, two years ago. But since, I guess we could say February, March, when the war in Ukraine started, we’ve started to see some disturbing trends with inflation and also with economic growth. And I think the Fed is getting a little bit concerned that their first mandate, or one of their two mandates, which is price stability — basically ensuring that prices don’t go up too fast — is a threat to this country. And we’ve all seen it. We’ve seen energy prices go up, and energy prices impact prices of most other things. And so what the Fed has done to try and counteract that inflation is they’ve raised interest rates. And we can talk about why that is and whether that’s the optimal strategy. But long story short, the Fed has had to raise interest rates to try and get inflation under control. And they did it last week, they did it in September, and they’ve indicated that there’s a reasonable chance that they’re going to do it two or three more times over the next year. And so, again, us as investors, as business owners, interest rates are important because ultimately that impacts our borrowing costs. When interest rates go up, it costs more to buy a car, it costs more to get a business loan, it costs more to get a mortgage on a house or an investment property. And so what we’re seeing from the Fed is the Fed is starting to get a little concerned about inflation, which is very interesting given that the Fed has done a really good job over the last year or two to try and settle our fears and tell us, hey, don’t worry, inflation’s under control, we might be doing just the opposite — we might be lowering interest rates. But I think they’re now admitting that things are somewhat out of their control and running away.
Scott Trench: Terms apply.
Mindy Jensen: Is the rate hike really going to have much of an effect on the inflationary period that we’re in right now? As I understand it, inflation is being caused by rising fuel costs, which is coming directly from the war in Ukraine, and that’s not going to change until the war in Ukraine ends or we get some sort of peace deal that actually sticks.
J Scott: Yeah, and that’s — it’s a really good point, and it’s a great question to ask. The Fed doesn’t control, obviously, oil prices, so raising interest rates isn’t going to lower oil prices. But here’s the problem. I mentioned earlier that the Fed has two mandates, two things they try and do. They care about price stability — making sure prices don’t go up too high — and economic growth, they want the nation to keep growing. Higher energy costs impact both of those things. Higher energy costs are a risk to both of those mandates by the Fed. And so even though the Fed can’t directly fix the problem — again, high energy costs — there are things that the Fed can do to mitigate that problem. Basically, there are things they can do that are not an optimal solution, but it’s better than just sitting around and not doing anything. And specifically, that’s raising interest rates. And the reason why raising interest rates can have an effect is because when interest rates are higher, people tend to spend less money. If you know that buying a house, you’re going to have to get a mortgage at 7.5% versus 6%, if you know that buying a car, you’re going to have to get a car loan at 6% versus 4%, or your credit card — if you’re not paying off your credit card every month, if your credit card’s 18% versus 12% — you’re going to spend less money. And when people spend less money, they use less energy. And when they use less energy, there’s less demand for energy, and energy prices come down. And so what the Fed is hoping to do, again, they can’t bring energy prices down directly, but what they’re hoping to do is to create what’s called demand destruction. They’re hoping to slow down spending by American consumers, and less spending means less need for energy. Less need for energy means less demand. Less demand means lower prices. And so, again, it’s not an optimal solution by the Fed, but it’s really the only thing they can do right now to try and get inflation under control.
Mindy Jensen: So maybe regular people aren’t consuming as much energy or won’t be consuming as much energy in the future, but there’s still the cost of the energy to get the goods to the stores that you’re going to get to anyway. Like, I’m thinking grocery stores — people aren’t going to stop eating because groceries are too expensive. They’re just going to buy the lower-priced groceries, but it still costs diesel gas to get that truck to the grocery store.
J Scott: Yeah, and that’s where we have to kind of differentiate between commodities, necessities, things people are going to buy whether prices are high or low. People are going to go to the grocery store and they’re going to buy food regardless of whether food has gone up 10% this month or this year or not. But then there are plenty of other things that are more discretionary. People aren’t necessarily going to fly as much when jet fuel prices are super high and airline costs are high. People are just going to sit back and say, okay, instead of flying to Europe for my trip, we’re just going to go get a hotel down the street and the kids can play in the pool at the hotel. Or other things — buying automobiles, buying luxury goods — those are all the sorts of things that Americans don’t need to spend money on. And if it gets more expensive to buy those things, they’re going to cut back, they’re going to save a little bit more. And if interest rates go up — the other part about interest rates going up, not only does borrowing cost go up, but if interest rates go up, savings rates tend to go up. You get a little bit more money from your bank if you keep money in savings. And so there’s more of this incentive not to spend money on discretionary things. But again, as you pointed out, people are still going to buy gas to get to work. They’re still going to buy clothes to wear to work. They’re still going to buy food to put on the table. They’re still going to pay their electricity bill because they need to heat their house. And so a lot of things aren’t going to go away. But even at the higher end, the luxury goods and the discretionary goods, those are going to come down, and that’ll have a significant impact on energy demand overall, and maybe growth of the economy as well.
Scott Trench: You know, I think what’s interesting is I think we all agree that the Fed screwed up pretty bad in 2021. And then I think that people who have not been paying attention just kind of damned the Fed from there, right? But I would actually argue that the Fed handled things reasonably well from that period after that miss. Once they started raising rates, inflation has not been out of control. I mean, you’d have to be one of those people that argues the data is wrong in order to have that mentality. I think what was surprising to me, and I think to you as well, is I would’ve expected Trump to nominate somebody very dovish, somebody who was going to just lower interest rates and pump the economy, and he didn’t. He picked Kevin Warsh, who is not necessarily hawkish, but he’s been reacting to the economy the way that the Fed’s charter says he should react. And I think that surprised some people. Do you agree with my framing going back a few years, and is that how you view the situation?
J Scott: I actually think the Fed did a pretty good job. It’s easy to look in retrospect and say, hey, they should have done this, they should have done that. I don’t recall too many people back in 2021 saying, hey, we need to start raising interest rates today because inflation could start going up tomorrow. But certainly when you look back, it would’ve been the right thing to do. But at the end of the day, there were two big claims that were made: is inflation going to be transitory, and are we going to have a soft landing? And we could argue both of those, but I think to a large extent we achieved both of those. Now, what’s transitory? It wasn’t a month, it wasn’t two months, it was a year and a half, two years. I think a year and a half, two years is still relatively transitory. We never quite got down to the target that the Fed set, but we got down quickly and we approached that target. So you can argue that to some degree it was transitory. And then from a soft landing perspective, I think it’s hard to argue that we didn’t achieve a soft landing. Basically, we saw tremendous consistent GDP growth after 2022, after the Fed had hiked rates. We saw unemployment stay below 4%. We saw real wage growth turn positive again. We saw a lot of very positive economic indicators after the Fed hiked rates an historic amount, over 500 basis points, and we still saw really strong economic data for the next couple of years. So I think it’s safe to say that the Fed achieved their goal. Did they do everything perfectly? Absolutely not. But I think they did a great job, and I think they achieved their major goal. Now, in terms of Kevin Warsh, yeah, it’s actually funny because when he was nominated, a lot of us looked and said, hey, he’s historically throughout much of his career been more hawkish, meaning more aggressive on monetary policy, than a lot of people that I think Trump was considering. I think a lot of us were surprised that Trump considered somebody that seemed to be so open to doing things like raising rates and reducing the money supply in order to get the economy under control.
Scott Trench: And quantitative tightening — we’ll discuss that in another show. But yeah, that was his big thing, right?
J Scott: Exactly. Lowering the Fed balance sheet. On the other side of the coin, Warsh came in and basically said, hey, I don’t think we need to be hiking rates. I think there are other things we can do and other lenses through which we can look at the economy. Let’s think about AI and how AI is going to basically be deflationary, which is going to help us push rates down, and other things that will help us push rates down. So it sounds like he came in with this idea that I don’t want to raise rates, I don’t want to be super hawkish, but at the end of the day, his career has been about being a hawk, and he has proven over the last week or two that he’s willing to raise rates, and he’s probably willing to raise rates a couple more times. So I think it has been a little bit surprising for a lot of people, but I also think it’s been a good thing.
Scott Trench: Let’s bring this to today’s big issues, right? So this is a great history. Today’s, I think, the big story is the Fed’s raising rates, and it’s because inflation has not yet come down. And I think that that’s surprising to me. I would’ve thought over the last year or so that their stars were, generally speaking, going to align for inflation to come down for a couple of reasons, right? We had cheap energy prices. AI is coming in, should be a technology that helps people do more, better, faster, safer, cheaper, and happier in many different domains, and that should bring down costs, right? And then I think the other component to it is housing has not increased faster than inflation. Housing costs in real terms are not rising fast, and in some cases are falling across the country. And that’s a huge part of CPI, but that’s not showing up yet. And so these are the things that I think are really interesting: what is leading to inflation today and forcing the Fed to raise rates, because they obviously think it’s going to continue.
J Scott: When you look at inflation, there are kind of two ways to look at inflation, or two types of inflation. In technical terms, we call them cost-push inflation and demand-pull inflation. But basically what it means is some inflation is generated on the demand side. When people are making lots of money, when wages are going up, when the government might be printing money and using stimulus to flood the market with money, everybody’s flush with cash. What are they going to do? They’re going to go spend a lot of it. This happened after COVID. People were locked down for a year, year and a half. And once COVID opened up, people had saved a lot of money from all the checks that had been sent out, and people were desperate to get back to spending and traveling. And we saw tremendous demand back in 2021, 2022. And that’s what drove a lot of the inflation that we saw back in 2022 and 2023.
Scott Trench: Oh my God, the 4th of July in 2021. Oh my God. Everyone took their stimulus check, I think, in the entire neighborhood I lived in and dumped it into fireworks and said, I’m going to win this 4th of July. And that resulted in me winning. I won because I got to view all these spectacular shows. It was fantastic.
J Scott: I’m not going to rabbit hole on this, but if you look at the data around savings rates, there was more money saved during COVID than pretty much any time in modern history, and most of that savings went away within two years. So yes, people saved a lot of money and then went crazy once COVID ended. And so that was the inflation that we saw back in ’21, ’22 — or at least a lot of it, not all of it, but most of it was on the demand side, just consumers saying, hey, I’ve got all this money and I want to spend it, and businesses need to keep up with all that spending and all that demand. And the way they keep up with it is they build more factories and they hire more workers and they buy more inventory, and all that costs lots of money. So they pass those costs on to the consumer and prices go up. That’s kind of what we often see when the economy is going really strong, this demand-side inflation. What we’re seeing today is more of a supply-side inflation, specifically a supply-constraint inflation, because of all the things that are happening in the world — the Iran war, the Russia war, and some other things that are happening that are more niche and nuanced.
Scott Trench: What about tariffs?
J Scott: Tariffs are another one. And it’s funny, because with the wars going on, we don’t talk or think about tariffs as much, but tariffs are still having a big impact on inflation.
Scott Trench: I guess that’s an important question here. It’s going to tick people off.
Speaker 1: Too bad.
Scott Trench: It’s a question that’s important right now. How much of this is being caused directly by Donald Trump?
J Scott: I hate to get political, but I will say that economic policy over the last several administrations — let’s be clear, I’m going to put some of the blame on this administration.
Scott Trench: I’m going to put some of the blame — oh yeah, by the way, the second stimulus package from Biden was horrendous. Terrible, right? So this is not like a dump on Trump or a dump on — it’s like if you have an objective view of this stuff, I mean, that was preposterously stupid policy in my view, frankly. Just to preface that so we can now beat up Trump for some of his policies too.
J Scott: To be honest, one of the biggest stimulators of inflation is overprinting, is increasing the money supply. In fact, if you look at theoretical economics and economics from a pure point of view, the inflation of the money supply is the thing that ultimately, whether it’s 5 years, 10 years, 20 years down the road, is ultimately going to lead to inflation in prices. Basically, you’re devaluing the dollar. And so all the money that was printed in 2020, all the money that was printed between 2021 and 2025 during Biden, and now all the money that’s being printed in the second term under Trump, is going to cause tremendous inflation — not just near term, and maybe not even near term, because a lot of times that money printing doesn’t necessarily translate to short-term inflation. I mean, you remember Obama printed a ridiculous amount of money to get us out of the 2008 recession, and we saw historically low inflation for the next 10 years. But all that money that was printed back in 2009, ’10, ’11, ’12 will eventually catch up with us, just like the $20 trillion that’s been printed since 2020. So, yeah, that’s a big part of it. Now, in terms of whether Donald Trump is responsible for other parts, I think he is. I think a lot of his economic policy, while maybe having a goal that is admirable, or that a lot of people agree with — America First, not a huge fan of the slogan, but the whole idea of we need to take care of our country, we need to put on our own oxygen mask before we take care of everybody else — that’s a good thing. But I think the way he’s gone about it has been tremendously shortsighted, tremendously myopic. Tariffs, number one, have, in my opinion, been a horrible idea. We’ve used tariffs for 150 years in this country, but mostly we use what are called targeted tariffs. Basically, we say this particular industry needs to be protected. This particular industry is providing valuable services where we need to be manufacturing domestically. We need to be manufacturing pharmaceuticals here in the US. We need to have some oil and energy manufacturing and drilling here in the US — things that protect our national security. But then when you say, hey, we should tariff coffee for some reason — coffee we can’t make in the US — bananas, we don’t get a lot of bananas in the US. These are things that putting a tariff on them, all it does is lead to higher prices and bad will with our trading partners. And so I think this broad approach to tariffs has been not only inflationary, but I don’t think it’s going to achieve the goal it was set out to achieve. Then you have the two wars. You have the Ukraine war, which you certainly can’t blame Trump for. I would say you can’t blame Biden for. I think Putin’s the only guy you can blame for that. That’s been a huge factor in the energy crisis that we’re seeing today. And then the Iran war. The Iran war clearly has caused a lot of shortages in energy supply chains. And so, do you blame Donald Trump for the war in Iran? I’m not going to get political. Some people say it was necessary because he was protecting the US.
Scott Trench: I think that’s one of those ones where if you’re hardcore one way or the other, you just have this belief. I think if you’re fairly neutral on all these things, you can be like, I don’t know what a counterfactual Democratic administration would’ve done in the Iran situation. And so I don’t think you can take it for granted that there would’ve been a different outcome there.
J Scott: A hundred percent agree. But at the end of the day, the things that Donald Trump has done — and again, I’m not saying they were good or bad, but he did do these things, and these are the things that are leading to inflation — tariffs, the war in Ukraine, and immigration, to some degree, has led to higher prices on the supply side. When you kick people out who are picking crops in our fields and building our houses and building our commercial structures, the price of all those things goes up, it basically translates to higher prices throughout the supply chain.
Scott Trench: That’s one point where I’ll disagree with some of the analysis here. I think that the policy set of the administration, or the consequences of the events that have happened to the administration — if you want to call that the Iran war, for example — the result is energy prices are going up, and the result is that the prices of imported goods are going up. That’s the mechanical outcome of these items. Again, I would’ve thought AI and so many other things, just general improvements, efficiency gains, would’ve dropped the prices of things for the American consumer over the last couple years without those catalysts. But what I do think the Trump administration’s policy set seems to me to have clearly done is, relatively speaking, slowed the growth, or maybe even reduced, the real cost of housing in this country. Not for buyers with new mortgages, because of interest rates, but the actual price of housing is not going up. And rents, I think, have not grown faster than inflation for several years now. You have slower immigration, certainly, because of the new policies at the border and the almost total stoppage of illegal immigration into the country. And you have deportations that are going in at the same time. And that was on the back of a supply wave that was coming into the country for new construction. So I think that, relatively speaking at least, you can’t just say, hey, these policies are driving inflation across the entire CPI stack. Housing’s a third of CPI, and that at least seems to not be growing faster than inflation in the sense that it impacts many American consumers — people who live in housing, rent housing, or are purchasing it, at least without debt.
J Scott: I think that is an absolutely fair characterization. Again, when we talk about inflation, there’s the demand side, there’s the supply side, and immigration hits inflation negatively on the supply side. Basically, it drives up labor costs when you have fewer workers, especially when you have fewer workers in industries where a lot of Americans historically don’t want to be working. And so that reduction in supply leads to higher prices, leads to inflation. But as you mentioned, there’s also the demand side, and the fact that now there is less demand, because a lot of those people who otherwise would be buying housing and all the things that go along with housing, and all of the commodities that we were talking about earlier, if they’re now no longer in the country, that’s going to reduce demand, and that reduction in demand is ultimately going to push prices down. Yeah, I was focusing more on the supply side. I wasn’t thinking about the demand side, but it’s certainly a fair characterization to say that immigration policy has had a double-edged effect on inflation.
Scott Trench: One of the things I think — and I’ve been wrong on this for a while, right? I don’t know if I make particularly large moves necessarily on all these items — but one of the things I’m confused on is I would’ve expected that to translate to a lower… For example, shelter inflation is about 3.4% year over year, which is higher than the Fed’s 2% target. That’s because shelter inflation talks about the existing leases in place, right? Not the net new leases that are being signed today for the consumption of new housing. And so there’s a weird dynamic about how this metric is calculated inside the CPI index. And I guess my question is, surely that’s going to flip at some point, and then even if new leases are signed at higher rates, you can get the lag effect in the opposite direction undercutting inflation. Is that the right way to think about that?
J Scott: It is, but I think it gets a little bit more complicated than that. Keep in mind that a lot of rent growth, growth in housing, is directly related to real wage growth. If people aren’t making more money in real terms, it’s hard to pay more for housing. People have choices in housing. It’s not like going out and buying food or buying gas. There’s a lot of flexibility in the housing that you get. People can move back home, people can take in roommates. And so real wage growth plays a big factor there. The other thing that plays a big factor for anybody that’s in the industry — and this is getting probably a little bit more nuanced and niche than a lot of people care about — but if you think about it, as a landlord myself, if I’m going to bring a new tenant in, I qualify that tenant. And one of the qualifications I look for is, I want to see that they have at least three times their rent in income every month. So if I’m charging $2,000 a month for the rental, they need to have $6,000 a month in income to qualify. So basically, their rent can be no more than a third of their total income. If it is, they don’t qualify. Well, as of a few months ago — and I haven’t seen the data in the last 6 months, so this is a little bit stale — but as of 6 months ago, the average American that was renting was putting 31% of their income towards rent. And so they’re pushing up on that 33% qualification target. If rent goes up too quickly, well, people won’t qualify. And when people don’t qualify, landlords like me have to lower the rent because we don’t have enough customers, or we start taking less-qualified renters, which a lot of us don’t want to do. And so there are some other nuances in the housing world that are limiting income growth and rent growth that are unrelated directly to inflation.
Scott Trench: J, I’m going to show you a chart that I think makes everyone mad.
J Scott: I like charts that make everyone mad.
Scott Trench: This makes everyone mad. This is employed full-time median usual weekly real inflation-adjusted earnings for all wage and salary earners. So median, not average. And what you see here is, since 2014, you’ve seen real wages grow at a very strong clip through Obama, Trump 1, Biden, and Trump 2 administrations. And people just — they don’t believe it. They don’t like it, it doesn’t register, because the narrative in 2014, 2015, 2016 was real wages have been flat for 20 years. True, that was true at that point in time, but it is no longer true, right? You have to be one of the people who says, I don’t believe government data in a general sense, in order to refute this, and then I can’t have an argument with you. Okay? If we don’t agree on the data, you can make up whatever you want and say that that’s not true. If we say that the Federal Reserve’s data on inflation and wages is accurate, then you have extremely strong wage growth. The median American is making much more than they were in 1980, or whenever, as far back as the data goes. What do you make of this in relation to what you were just arguing?
J Scott: So if you look at that data back in 2021, 2022-ish, we see that in adjusted dollars, real median wages were around $360 per week. Today they’re closer to $380. So what is that? That’s about a 5%, maybe a 5.1% increase in real wages from 2022 to 2026. Four years. Now, obviously compounding changes things a little bit, but you divide that 5.1% by 4 years, and basically we’re seeing about a 1.2%, 1.3% real wage growth per year. Now, you look at housing and rental growth — historically, we’ve seen 2% to 3% rental growth in housing per year. So yes, people are making more money, but not necessarily enough money to continue to push rental housing income up as much as it’s been going up historically over the last 40, 50, 60 years. And so that’s part of the issue. It’s not so much that people aren’t making as much money, it’s not so much that rents aren’t going up a little bit, but we’re not hitting the same historical averages that we have historically hit.
Scott Trench: Yeah, fair enough.
J Scott: The thing to keep in mind, and I was heading in this direction and we kind of got sidetracked, is that for the most part, inflation was coming down over the last year, year and a half, until the war in Iran. We saw that core CPI—basically CPI, if you take out food and energy, the two most volatile parts of the economy—was down near the Fed target. Here’s another thing that I think is really important for listeners. We always talk about this Fed target of 2%. We want 2% growth. Why is it 2% and not 2.5% or 3% or 5% or 1%? If you look over the last 120 years, inflation has run on average about 3.1%. And so this Fed target of 2%, it’s a perfectly good number. That’s the number they want. But if we see inflation at 3%, it doesn’t make sense to freak out and say that’s way too high. Historically, over the last, again, 120 years, inflation has been closer to 3.1%, 3.2%. And so it’s not uncommon to see higher inflation. Now, the Fed set this 2% target back in 2012, I think, or ’13 or ’14. And the reason they originally set that 2% target was because, as I mentioned earlier, when we came out of the 2008 recession, we saw historically low inflation. So 2012 to basically 2021, we saw very, very little inflation in this country, and that scared the Fed. Having too little inflation can be just as bad for the economy as having too much inflation. And so when that 2% target was set, inflation was closer to 1%, and the Fed was trying to get inflation up to 2%. I suspect that if they were to reset that target today, it would probably be 2.5% to 3%. They’re not doing that, I’m guessing, for political reasons. But again, 3% is historically average inflation, and we were below that as of about 6 or 8 months ago. And even by a lot of measures, we’re pretty close to that today. So even though we are well above that 2% target, to say that we are well above historic inflation levels is actually incorrect.
Mindy Jensen: Jay, why does inflation feel like such a big deal right now? Why does it feel so high when it’s actually in line with the historical norm?
J Scott: I think a lot of it is because we saw this huge spike back in 2022. That’s the first half of it. Keep in mind, inflation compounds. It doesn’t ever go away. When it went up 9% or whatever it was for the year back in 2022, those prices basically stayed elevated through today, and they’ll stay elevated through next year and the year after and 10 years from now. It’s just like the inflation we saw back in the 1970s. We saw elevated inflation in the 1970s and that stuck with us and will continue to stick with us forever. And so the large spike in inflation back in 2022 is playing a large role. The second piece is that the type of inflation, or the catalyst for the inflation that we’re seeing today, is energy. It’s specifically energy. Gas costs are going up, diesel costs are going up, jet fuel’s going up, because the price and availability of crude oil is constrained. When we have energy price increases, that hits everything. When the price of eggs went up a couple years ago, it was easy enough to say, okay, just don’t eat eggs for a couple months while that comes down. Price of beef is through the roof today. Great, eat chicken instead for the next couple months or the next year until the price of beef comes down and stabilizes. But when the price of fuel goes up, it impacts everything, every part of the economy. It has a direct impact on our driving costs, just transportation, because gas is more expensive. It has a direct impact on what we pay in electricity costs. I mean, my electricity bill went over $500 this past month, which is just crazy. And so those are the direct impacts. Then there are the indirect impacts. Basically, you want to take a flight to go on vacation, travel for work, and because jet fuel is more expensive, now you’re paying more for your airline ticket. Then there’s these secondary effects, which is everything needs to be transported. When you buy an ear of corn that got imported from wherever corn gets imported from, basically somebody had to pay the cost to ship that corn. I guess not corn, because that’s probably made domestically, but let’s talk about coffee. When you get coffee imported from South America, somebody has to put that on a boat. Somebody has to pay the fuel cost of getting that boat from there to here, and that ends up driving up the cost of our food and every other good that we buy. And so energy just kind of hits every part of the economy. We can’t avoid it. We can’t say, I’m going to avoid that one particular product or two particular products that went up in cost, because when energy is the cost of the inflation or the catalyst for the inflation, everything gets hit.
Mindy Jensen: So is the energy sector the place I should be putting my money?
J Scott: I don’t want to give investing advice here. I would say that six months ago, energy was definitely the place to put your money. Is it still the place? I don’t know. It may be too late, maybe it’s not. I don’t know the answer to that question, but certainly six months ago it was the right place.
Scott Trench: You only pay for what you actually need when you need it. I think the oil situation’s so fascinating because, yes, Iran’s cut off for now, but pick your words to describe what happened in Venezuela, but that’s going to give the US access to 65 billion barrels of oil. The US total domestic oil reserve is 46 billion barrels. Now, there’s a pipeline. It’ll take time. That’s all unrefined. That’s all sitting there. There’s a big process and investment that has to go into actually realizing that. Who knows how the future will play out? But there’s a real reason to believe, I think, that the current situation in Iran could continue indefinitely, and that will spike prices for one to three more years, and they will eventually come down because of these other factors. By the way, if that opens back up and this Venezuela oil deal comes through, you could have actually very low oil prices in three to five years. So, you know, that’s why a lot of people exclude, to your point, energy and food costs from leading inflation indicators, because they can move so volatilely based on geopolitical factors here. So I think that’s a really interesting component there. Then all of a sudden you have lower energy costs, now you have a deflationary impact. You stack AI in there and you stack the lag in the housing environment. I mean, those are the things that I think are really interesting about this. I think CPI is overstated to some degree because of that lagging effect of housing CPI.
J Scott: Absolutely, no argument. Going back to what you were saying about Venezuela, the interesting thing there is a lot of that oil is trapped, difficult to get access to. The most common numbers that I’m hearing are that it would cost $70 to $80 a barrel just to get it out of the ground. So unless we’re expecting crude oil to stay above $70 or $80 a barrel, it may not be cost efficient to be drilling in Venezuela. But today we’re at $90, $100 a barrel. And so $70, $80 a barrel is looking very, very attractive. So it really depends on what the whole oil situation and what the market and the supply chain looks like next year, the year after, and five years from now. It’s very possible that could be a huge boon for the industry, or it’s also possible that it may not make a big difference if oil prices come back down to $50, $60 a barrel.
Scott Trench: I just think it’s fascinating. What do you do if you’re the Fed here? I mean, they said, we’re going to raise rates. I think that the leading indicators in the near term, you have to do that. No one can predict the future, but you can really make a case that there could be significant deflation or disinflation over the next several years because of some of these factors. And you could argue that inflation’s here to stay for other structural reasons. It’s like, who the heck knows and all this stuff? But right now, the Fed is clearly pricing in, or adjusting interest rates to soften inflation.
J Scott: Here’s my takeaway for anybody out there that’s thinking about this from a longer-term perspective. Energy supply shocks tend to be short-term. Now, short-term—obviously we’re at six months now, could be a year, could be two years, could be three years, I don’t know—but relatively short-term in the context of economic time periods. The question is, do the impacts of those supply shocks outlast the actual supply shocks? So it’s possible—I think it’s unlikely, but it’s possible—that if the Iran war ended tomorrow, the Ukraine war ended tomorrow, that in 6 to 12 months we can basically see oil back to where it was a year or two ago. Now the question is, are there structural changes that have occurred since those wars started that are going to stay with us far longer? For example, inflation. For example, interest rates. I mean, the Fed’s hiking rates. Just because oil comes back down doesn’t necessarily mean that interest rates are going to come back down. We’ve seen crazy stuff happen with, again, printing money, stimulus, the money supply. We’re not going to just start pulling money out of the money supply because a couple wars end. And so the question isn’t so much, is the energy supply shock going to get absorbed and go away at some point? It is. It almost certainly is. It’s just a question of whether all the things that it caused in the meantime are going to stay with us for another two years, five years, or 20 years. And that’s the hard question to answer.
Scott Trench: Fun stuff. Okay, so we’ve talked about inflation, we’ve talked about interest rates and the Fed driving from the back seat here. We’ve talked about energy.
J Scott: I don’t think we’ve talked about interest rates. We’ve talked about the Fed raising their interest rate, but the important thing for us as investors is we don’t care about the federal funds rate. We don’t care about that one rate out of all the other rates that the Fed happens to control. We care about all the rates that the market controls. We care about the 10-year Treasury rate and the 20-year Treasury rate and the 5-year Treasury rate and the 2-year Treasury rate, the things that impact our credit card rates and our commercial borrowing rates and our HELOC rates and our mortgage rates and our business credit rates.
Scott Trench: All right, Jay, so tell us not just about the federal funds rate, but about borrowing costs.
J Scott: So those are the rates that the Fed doesn’t control. And what we’re starting to realize more and more over the last, especially the last few weeks, is that the Fed not only doesn’t control those rates, they’ve lost influence over those rates. It used to be that everybody knew that the Fed didn’t control those rates, but there were things that they could do to influence those rates. They could kind of put pressure to move them up, move them down. But what we’re seeing now is those rates are kind of out of the hands of the Fed. The 10-year Treasury rate—and I don’t know when this is going to be released, but the day that this is being recorded, the 10-year Treasury rate, which is the thing that impacts mortgage rates the most, hit a high since July of 2007. And basically mortgage rates are likely to go over 7.5% over the next couple of days. And so those are rates that the Fed is trying, and the Treasury is trying, to control. They’re buying a lot of long-term bonds to try and bring those rates down, but it’s not working. And so what we’ve seen is that there are a lot of structural issues in the economy—too much money printing, not enough demand for certain types of bonds, concerns over inflation, concerns over geopolitical risks, concerns over government—that are driving rates up, that again may be out of the control of the Fed and the Treasury at this point and are kind of at the whims of the market. And until the central government, the executive branch, Congress really starts to give investors confidence that they have everything under control, we could see rates go even higher and stay higher for longer.
Scott Trench: I got to challenge one thing in here, because I don’t think it’s accurate, which is the money printing piece. I hear that around the internet a lot, and I think that that’s an accurate description if you zoom in on the period from 2019 to 2022. But I think that if you go from 2022 to the present, I don’t think that you can describe that period as a large increase in the money supply, at least as M2 is defined. Would you mind clarifying what you mean by money printing, at least in the last two or three years?
J Scott: So yes, what we saw from 2022 to 2024, basically the M2 money supply, which is kind of the currency that flows—the physical currency that flows through the economy—that went down essentially for the first time in history. I guess it kind of ticked down a quarter percent, a half percent here and there, but it went down significantly for the first time in history. I don’t expect that to happen again. At the same time, the Fed expanded its balance sheet. Basically, the Fed, which almost literally does print money, expanded its balance sheet up from like $2 trillion to $9 trillion. And so there’s a lot of money that’s been flowing through banks directly out to consumers through stimulus and through the M2 money supply. Even though the money supply hasn’t grown nearly as quickly over the last few years because it dropped for a couple years there, we’ve still seen a large growth in the amount of available capital and available credit. And available capital and credit, ultimately, whether it’s through the money supply or through bank reserves that get loaned out, is what impacts long-term inflation. And so I think, yeah, we helped ourselves for a couple of years by lowering the M2, by lowering the money supply. You can see it right there in the graph that you just put up. There’s about two years where the M2 went down. But if you look throughout history, that’s the only time in history that that happened. And we’ve been on a nice upward trajectory for the last couple of years since then. And I don’t expect that’s going to abate. Not to mention, we’re probably looking at, other than 2020 and 2021, the highest deficit in history this year, national deficit. I don’t see that coming down next year based on what we’re talking about. It could even go up next year. So we’re running $2 trillion deficits. Things are out of control. And remember, it’s not only what’s physically happening. It’s not only the fact that we’re printing lots of money that’s causing our interest to go up, interest on the debt to go up, but it’s also concern and just the perspective and the expectations that investors have. Interest rates aren’t going up and borrowing rates aren’t going up necessarily because M2 is directly going up. It’s going up because investors are terrified about what’s going on in the economy and they’re demanding higher returns on bonds. And when they demand higher returns on bonds, that’s when interest rates go up. And so investors are concerned. Investors feel like things are getting away from us. Things are getting out of control. The money supply is going up too fast. The deficits are going up too fast. We’re destroying relationships with our trading partners. We’re starting wars, and there are other wars that we’re not starting but are happening. And there’s just so much stuff going on that’s a risk long-term to our economy that investors are saying, if I’m going to put my money into US Treasury bonds, if I’m going to loan the government money for 5 or 10 or 20 years, I need better returns, because I’m not as confident that I’m going to keep getting those returns for the next 5, 10, 20 years as I was a few years ago.
Scott Trench: Jay, so I just did the math here, because the money supply thing—I’m about a year out of date on this actually, now that I’m looking at it—but yeah, the money supply grew about 5 to 6%, 5.5 to 6%, August 2024 to August 2025. So that is fairly fast. However, from last year, August—you know, you could argue that it didn’t grow at all for almost three years because of that one-time dip there. And so that’s where I was like, is money printing out of control? Well, in the last year, you can argue that’s reaccelerated in there. But I think some people make a very dangerous and very bad analysis of the money supply, and say it’s like out of control all the time. And that leads you to some really crazy investment theses out there. But yes, this last year it has been accelerating. That’s real. But I also think that’s something to watch. It has not been crazy in the context of the last three or four years. It has had crazy moments in that time period. I think that’s an important discussion point. I think, yeah, you’re right, it is—they are printing money.
J Scott: And keep in mind, the amount of money we printed in the last year, that was during a strong economy. By most measures, what we’ve seen in the economy over the last year is a pretty strong economy. Is it the greatest economy in history? Absolutely not. But we haven’t been in a technical recession. A lot of indicators would tell us that we’re nowhere near a recession, and we’ve printed that much money in a strong economy. Imagine what happens when we actually go into a real recession, especially if it’s a big recession. What’s going to happen with money printing and stimulus at that point? We’re going to see basically what we saw in 2020. We’re going to see what we saw in 2008, ’09, and ’10. So things could get a lot worse when the economy eventually falls back into recession, which it will do eventually.
Scott Trench: Let’s wrap up what we’ve just covered here. We’ve got inflation pacing ahead of where we had hoped, and that’s forcing the Fed to react by raising the federal funds rate. That’s having an impact across the economy in terms of borrowing costs in a general sense. We’re seeing the money supply, depending on which view—over the last year, it started to accelerate. Over the last three years, it’s been pretty mild in terms of total growth. And over the last 6 or 7 years, it’s been explosive because of the COVID situation in there. We have all of these factors that are impacting CPI, and it’s kind of a wild guess how it’s going to play out over the next two to three years. But for the foreseeable future, it seems like the Fed and economists broadly agree that inflation is going to be a little bit more sticky than we had hoped. And all that’s kind of impacting what’s going on in the economy. We didn’t get to jobs this time, so I’ll have to talk about those on a future podcast. But Jay, it’s been an absolute privilege chatting with you here, and I will continue to follow your Facebook posts. We’ll bring you back next month if you’re willing to talk about some of the things we didn’t get to this month and any changes that develop.
J Scott: Would love it. Thanks, guys.
Mindy Jensen: Jay, at the very beginning of the episode, you mentioned a newsletter. How can people sign up for that?
J Scott: Oh yeah, yeah, I appreciate you asking. If you go to jscott.com, the letter J, S-C-O-T-T dot com, that will link you out to everything I do, including the newsletter that I send out a couple of times a week.
Mindy Jensen: All right, Jay, I super appreciate your time. Again, anybody listening, if you want more of Jay’s hot takes on the economy, they are not weighted politically. They are really just— this is what’s happening in the state of the world right now. Follow him. He is J Scott on Facebook.
Scott Trench: I just want to chime in that I think J Scott’s Facebook feed is political because it has to be. You cannot comment on the Iran war or oil prices or the effect of tariffs and inflation and those types of things without having some evaluation of the political policy and how that is impacting real-world outcomes and how it might impact real-world outcomes in the future. So I will just say this is inherently political. We’re going to cover it to some degree on a monthly basis and try to not bring a hardcore left or MAGA viewpoint into the situation, but there will be a political belief and bias that underpins this analysis to some degree. Is that fair, Jay?
J Scott: Absolutely. And I like to say, if you’re not pissing off both sides, you’re doing something wrong.
Mindy Jensen: That’s what I was trying to say, Jay. You’re not coming at this from like, oh, as a left-leaning person, as a right-leaning person. You’re coming at it from the middle. You’re talking about a topic that is a political topic, but you’re not coming at it from the point of view one side or the other. You’re making everybody angry.
J Scott: I’m making everybody angry. That’s my goal.
Mindy Jensen: Jay, thank you so much for your time, and we’ll talk to you soon.
J Scott: Thanks, guys.
Mindy Jensen: All right, Scott, that was J Scott. It is always fantastic to talk to him. I love the way his mind works, and I really love his takes on what’s going on in the economy. I can’t tell you how much about oil prices and oil in general that I have learned just by following him on Facebook.
Scott Trench: I think it’s fantastic. I think it’s really hard for some people because you get people who really believe in Donald Trump as a leader and individual, and you’ve got really people who really detest the guy. Once you have that, it’s really hard to then change your brain from, here’s my opinion of Donald Trump and my vote for or against this man, and then here’s the impact of the policy that is being implemented by the administration and how that’s going to impact the economy in a general sense. That’s really going to warp your viewpoint there. It does for all of us. It does for me. It does for Jay. It does for you, I’m sure. That’s the challenge, is how do you actually think about these items in an intelligible way? I think if you believe that the vast majority of policies from the Biden administration are good for the economy and the vast majority of the Trump administration are bad, or vice versa, you’ve got a really big problem, because there’s probably some split on those policies that are going to have different impacts. It’s about what those impacts are and how they impact different pieces of the economy. I think that that’s really challenging for people. I’m going to try my best to do that. Jay’s going to try to do his best for that. You’re going to try to do your best for that, but you’re not going to get it right. But it’s important enough to attempt to discuss. So that’s how we’re going to approach it here. We’re not going to come back to it too often, but once a month, a couple times a quarter maybe, we’ll chat about what’s going on in the macro economy and try to make sense of it.
Mindy Jensen: Yeah, I think it’s just helpful to have this viewpoint kind of explaining in more understandable terms what’s going on. So I look forward to having Jay back soon. Scott, so what does this mean to investors?
Scott Trench: I have no idea. I don’t know how you react to today’s economy news, right? Like, what do you do in the context of today’s environment? I think that there’s a case for Boglehead-style investing. You guys know what I’m doing. I kind of segment out a lot of this noise and I say, I don’t know what the inflation or the interest rates are going to do here, but I do have a hard time believing that at today’s valuations that I can get acceptable returns from this. So I told you about my change to the equal weight index and some factor tilts along with my real estate holdings. Perhaps that’s a comfort or bias that I bring because I’m a real estate investor. The answer is real estate. That’s something I’ve got to ask myself about. But I don’t know what the answer is in today’s economy. I’d love to hear what other people are doing. And I think most people, or many people, many wise people are probably going to say, I’m doing the same thing I’ve always done. Keep buying. I don’t know what it brings. What are you doing, Mindy?
Mindy Jensen: Carl and I are moving more money out of individual stocks and into index funds, still tech weighted.
Scott Trench: Buy index funds is, you know, an answer I think that a lot of people will return to, and it’s kind of hard to argue with. I will say, here’s one thing you can do, which is control your expenses. That’s the number one thing you can control. And I think that with rising interest rates, what does the Fed want you to do? They want you to stop spending. They want to drive demand down. That’s a great answer to reacting to the Fed, right? If they’re driving rates up, it’s a great time to really think, I’m going to go line by line through my budget, and I’m going to look for ways to cut waste. And I’m going to continue that process indefinitely here. That’s always a best practice, but perhaps it’s even more important now. That’s something I’ve been doing. I might go through that even more rigorously lately than I usually am about just the controls over day-to-day spending. I wrote this on one of Jay’s posts. I said, you know what, if I’m going to go out to eat, more and more I find myself at Chipotle. Maybe somebody else will find this funny. Yeah, he laughed at it. I was like, you know, Chipotle, the price has not seemed to inflate the same way that prices have at restaurants. There’s none of this ridiculous, give me a 20% tip, you know, for a takeout item that is at other restaurants. And so I find myself just tending to wait more there than other fast food joints. So I don’t know, I think the right answer is just keep your spending under control. Inflation’s rising, respond by protecting it with greater control of your spending.
Mindy Jensen: That’s a good point, Scott. And as a Chipotle shareholder, I thank you. As always, you can find all of our awesome podcast partners at biggerpocketsmoney.com/fipro. That’s biggerpocketsmoney.com/fipro. Should we get out of here, Scott?
Scott Trench: Let’s do it.
Mindy Jensen: That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench. I am Mindy Jensen saying happy trails, humpback whales.
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