The Phillips curve, a common model in high school and college economics classes showing the inverse relationship between unemployment and inflation. The Phillips curve theory was published in 1958 by A.W Phillips, it was then reconstructed after stagflation in the 1970s (high unemployment and high inflation) caused economists to reconsider the theory that low unemployment=higher production=higher wages=higher demand=higher prices (inflation). Economists now consider the fact that supply-side shocks like a drought or famine can also cause inflation by raising prices while unemployment remains high. Today’s Phillips curve accounts for both supply-side and demand-side shocks.
In today’s world, America's president Trump seems to be stuck in the pre 1970s era of the Phillips curve and isn’t thinking of the damage supply-side shocks can have on prices. His mass implementation of a plethora of tariffs are lowering production because of higher costs for imported goods and thus companies are starting to raise prices on us consumers to account for higher production/supplies costs. At the same time as these tariffs raise prices they are also raising unemployment in import reliant industries such as the auto industry because of higher costs leading to job-cuts. As Trump's tariffs show up more in the economy in the coming months stagflation will become more prevalent and thus more dangerous to our economy. Just because Trump thinks tariffs are a good negotiating tool doesn’t mean they're the best one for our economy.
Equity Insights
↑Robinhood(HOOD): Robinhood is very good at capitalizing off of their younger investment audience of millennials and Gen Z who are new to investing. Their commission free 24/5 trading platform that includes crypto offerings is attractive to young people as it democratizes investing. Robinhood's new offering of tokenized stocks of private companies such as OpenAI and SpaceX is interesting to younger investors who don't yet know the logic of caveat emptor.
↑Alphabet(GOOGL): Alphabet subsidiary Google announced its newest phone, the Pixel 10, coming August 28th. People with knowledge in the market say its AI features are way ahead of Apples.
Theme of the Week
The United States central bank has a dual mandate which it adheres to. Firstly, it strives to stabilize prices and keep inflation in check. Secondly, it wants to keep unemployment at or below the natural rate (around 5%). But in times as recent as the 90s, then Fed chair Alan Greenspan was forced to question whether the Federal Reserve should have a third goal to follow, that being the goal of financial market stability. With the dotcom bubble of the early 2000s and the 1997 Asian crisis, the U.S stock market had some overpriced and unstable moments throughout the late 20th century. Greenspan needed to decide whether to implement policy that would lower the markets back to a stable position (which would be rather unpopular with investors) by raising interest rates, thus moving investors from stocks to bonds, or to let the markets work themselves out. Along with this the Fed is also a lender of last resort, meaning it can lend failing institutions and/or firms loans to keep them from damaging the economy by failing. They need to be careful though as to not create a moral hazard by saving firms that are incentivized to take risks knowing that they will be saved. The Fed needs to walk a fine line between being the hero and letting markets run their course.
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