Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: Welcome to the podcast. This is Barry Ridholts and this
Speaker 1: week I am thrilled to have a friend as a guest.
Speaker 1: His name is Laxman Arthur Sean. He is the head
Speaker 1: of the Economic Cycle Research Institute, better known as Eckery.
Speaker 1: They're the group that helps to date recessions all around
Speaker 1: the world, as well as running their own analytics shop.
Speaker 1: Up until recently, they've had a literally flawless track record.
Speaker 1: Not a lot of people in economics can say that
Speaker 1: at some point over the past few years they thought
Speaker 1: we were at risk of an imminent recession, and what
Speaker 1: ended up happening is QUEI either three or four came
Speaker 1: along and that pretty much avoided what they thought was
Speaker 1: the next recession. There was a big New York Time
Speaker 1: piece about them a few years ago, which traditionally is
Speaker 1: the kiss of death. To quote our guests from a
Speaker 1: month ago, Paul Krugman. He who the gods wished to
Speaker 1: destroy they first put on the cover of Business Week.
Speaker 1: So perhaps a deep New York Times profile is roughly
Speaker 1: the equivalent of that. I find him to be a
Speaker 1: really interesting guy. I've known him for quite a number
Speaker 1: of years. Our offices used to be literally block away
Speaker 1: from each other. We would go to lunch pretty regularly
Speaker 1: and chat about what was going on during the Great
Speaker 1: Financial Crisis, what we both thought should happen, why what
Speaker 1: the government was doing was either good or bad, or
Speaker 1: might help or might not help, and just a really
Speaker 1: really interesting guy, very data driven, sticks to his guns.
Speaker 1: This is somewhat of an unusual period in time, and
Speaker 1: I think that at the reason they saw a recession
Speaker 1: coming and it didn't happen was I don't believe their
Speaker 1: model fully incorporates the impact of what Qui was actually doing.
Speaker 1: It was relatively unprecedented at the time. It's hard to
Speaker 1: build that into a model. You know, invaders come from Mars.
Speaker 1: What does that do to your your holiday spending forecast?
Speaker 1: And the answer is it throws it off a bit.
Speaker 1: That's that's their view of quantitative easing and what it
Speaker 1: did to the model. But generally speaking, they're really insightful.
Speaker 1: They're leading Economic index is excellent. It's done a really
Speaker 1: good job about describing when the economy is actually getting
Speaker 1: better or worse. Doesn't have to be a full blown recession.
Speaker 1: Or a full blown robust expansion. They just have a
Speaker 1: nice set of metrics, and I find him to be
Speaker 1: a really interesting guy who a lot of this subject
Speaker 1: matter can get really wonky, can get really deep, but
Speaker 1: he does a lovely job explaining in planing lish all
Speaker 1: the things that are going on in the economy, what
Speaker 1: we need to be aware of, what the relationship for
Speaker 1: you traders out there, what the relationship between the economy
Speaker 1: and the market is. It's really not what everybody thinks
Speaker 1: it is. It's a much shorter leading indicator, and very
Speaker 1: often by the time a recession is over, the market
Speaker 1: has already moved forward and is positive. It's it's quite fascinating,
Speaker 1: uh to look at that relationship and how different it
Speaker 1: is from lots of our expectations. I really enjoy his
Speaker 1: his discussions on what's been going around globally. They have
Speaker 1: a really huge database. They provide a lot of information
Speaker 1: to corporate America, to multinational companies, and to governments around
Speaker 1: the world. They're really a key player in econometric data.
Speaker 1: Without any further ado, here's my conversation with Lachman A. Shan.
Speaker 1: This is Masters in Business with Barry rid holts On
Speaker 1: Bloomberg Radio. I'm pleased to bring a friend of mine
Speaker 1: on the show. You probably, if you follow economic data,
Speaker 1: have heard of him and his company, or you might
Speaker 1: have seen him in somewhere in the financial circuit um.
Speaker 1: He's really a fascinating guy, into some fascinating work, and
Speaker 1: I think you're gonna enjoy this. Welcome to the show,
Speaker 1: Laxman than of the Economic Cycle Research Institute, better known
Speaker 1: as Eckery. You got it what well? Well said? Well pronounced?
Speaker 1: I know some mouthful Listen. I've spent my whole childhood
Speaker 1: having people RILs, so I always try and get people's
Speaker 1: names more or less close. There you go, there you go.
Speaker 1: Well it's well, you know, thanks a lot for having
Speaker 1: me on. I'm looking forward to the conversation. So I
Speaker 1: think the first place that a member of the public
Speaker 1: might have become familiar with you was this fantastic profile
Speaker 1: that the New York Times did of you, um about
Speaker 1: two years ago. Is that about right eleven something like somewhere.
Speaker 1: They couldn't have been more complimentary, they couldn't have been nicer.
Speaker 1: And some people call that the kiss of death. And
Speaker 1: as they do that, you're marked. The famous Paul Krugman
Speaker 1: quote from Business Week is whom he whom the gods
Speaker 1: seek to destroy, they first put on the cover of
Speaker 1: Business Week. So this is a version of that um.
Speaker 1: But what the Times mentioned that was so fascinating is,
Speaker 1: unlike the traditional economists out there, the way your firm
Speaker 1: looks at the economy anticipates recessions, intictrates recovery. Not only
Speaker 1: is it a very different approach, it has a vastly
Speaker 1: superior track record. And essentially you're study is of the
Speaker 1: business cycle, hence the name economic cycle. Yeah, so tell
Speaker 1: us a little bit about what your farm does. That's
Speaker 1: we study recessions and recoveries. Okay, so that's what I've
Speaker 1: done for all of my professional career. I started in
Speaker 1: the nineteen with ression, right, a fairly mis um. People
Speaker 1: were a little freaked out back then. Remember Japan was
Speaker 1: going to take over the world and they bought thirty
Speaker 1: Rockefeller Center. They bought and that was it. They're gonna
Speaker 1: buy the United States and move it back to town. Yeah.
Speaker 1: Bill Clinton won the that presidential election with its the
Speaker 1: economy stupid, even though the recovery was starting, had already begun,
Speaker 1: but are was so anemic. That's where that double dip
Speaker 1: recession talk first game and all of that, and um,
Speaker 1: that's that's where I kind of broke my teeth on
Speaker 1: looking at recessions and recoveries with Jeffrey Moore up at
Speaker 1: Columbia University. So let's talk for a moment about Jeffrey Moore,
Speaker 1: because I think most people know the name for a
Speaker 1: different Jeffrey guy who wrote the book Crossing the Chasm.
Speaker 1: This is not that. This is Jeffrey Jeffrey Simore. So
Speaker 1: I love some of the stuff about about his bio. First,
Speaker 1: he essentially is the guy who I don't know if
Speaker 1: you want to use the word discover or invented, invented
Speaker 1: the idea of leading economic indicator right right. The Wall
Speaker 1: Street Journal called him uh the father of leading indicators.
Speaker 1: And to put it in perspective, Dr Moore UH was
Speaker 1: the protege of Wesley Mitchell and Arthur Burns, earlier business
Speaker 1: cycle researchers. Wesley Mitchell Burns eventually became Fed CHAMPI kam
Speaker 1: fed chairman under Nixon in the nixt administration. Now, um,
Speaker 1: but earlier Wesley Mitchell UH in the early part of
Speaker 1: the last century. UH in the twenties helped to form
Speaker 1: the National euro of Economic Research, and this is where
Speaker 1: so known as the nb ER, which is the organization
Speaker 1: that currently has a committee that officially dates dates the
Speaker 1: beginning and end of recessions. But it always wasn't always
Speaker 1: a committee, wasn't. No, no is Dr Moore. He he
Speaker 1: used to say, he'd quipped that he would have lunch
Speaker 1: with himself. I've a meeting with himself over lunch and
Speaker 1: decide the dates. And so he's literally the guy who,
Speaker 1: prior to the current incarnation of the NBR officially I said,
Speaker 1: this is a recession. It began here in an end
Speaker 1: of their correct Like, that's a lot of power. And yeah,
Speaker 1: the shaded areas on your charts, when did they start
Speaker 1: an end? Dr Moore picked him all until set them right.
Speaker 1: So it's so so Mitchell figured out what was a
Speaker 1: business cycle and that was a huge thing to figure out,
Speaker 1: huge insight, huge insight. He started to do work UM
Speaker 1: when More was working under him on leading indicators of
Speaker 1: revivals because there were a lot of depressions and More
Speaker 1: after Um World War two took up that work again
Speaker 1: and refined it to leading indicators of revival and recession.
Speaker 1: That's your first set of leading indicators. He worked with
Speaker 1: a man named Julius Shiskin at the Commerce Department to
Speaker 1: invent the idea of the statistics for a composite index.
Speaker 1: They put the leading indicators in the composite index together,
Speaker 1: those two ideas, and there's your original index of leading
Speaker 1: economic Indicators, which they then gave to the Commerce Department. Fascinating.
Speaker 1: We're talking with Lakshman than of Eckery about basically the
Speaker 1: history of dating recessions, both of those so from nineteen
Speaker 1: forty nine for the post war period up until it's
Speaker 1: it's Dr Moore. After that they put in he retired.
Speaker 1: He retires and he's head of the committee, the Business
Speaker 1: Cycle Dating Committee. So how do you start working with
Speaker 1: Doc to more UH? He when he retires from the
Speaker 1: National Bureau UH where he was director, he starts forecasting
Speaker 1: and he and he creates a research firm called the
Speaker 1: Center for International Business Cycle Research, which originally was at
Speaker 1: Rutgers and it moved very quickly over to UH Columbia
Speaker 1: Business School, where Mitchell and Burns had also taught, and
Speaker 1: that's where it was housed from the early eighties through
Speaker 1: the mid nineties. And I began working with Dr Moore.
Speaker 1: Right there, Let's let's make this really simple. Let's break
Speaker 1: this down. What exactly is a recession? No, recession is
Speaker 1: really at the heart of how a market economy works,
Speaker 1: where it alternates between up swings and down swings and growth,
Speaker 1: and some of those down swings, uh turn into recessions.
Speaker 1: You actually contract and in other words, when the economy
Speaker 1: is no longer growing, no longer flat, is actually getting
Speaker 1: small and actually shrinking. So you might you might have
Speaker 1: the overall economy expand three percent, and then it will
Speaker 1: slow to two percent or one percent and hopefully re accelerate.
Speaker 1: And sometimes it does, sometimes it doesn't, and sometimes you know,
Speaker 1: in the in the recessions, it goes negative. Now I've
Speaker 1: heard you give a very specific I don't want to
Speaker 1: call it technical definition, but really your your textbook definition.
Speaker 1: Describe what that is. Well, this is going back to
Speaker 1: generations Zachary's the third generation of this research, going back
Speaker 1: to Wesley Mitchell who helped to find what a recession is.
Speaker 1: It's a pronounced, pervasive and persistent decline in output, employment, income,
Speaker 1: and sales. So when you say pronounced, persistent and pervasive,
Speaker 1: pronounced means it's significant, it's noticeable, persistent. Is it last
Speaker 1: for a while. It has to last really about two
Speaker 1: quarters at least. And pervasive is it's in most, if
Speaker 1: not all, corners of the right. It can't just be
Speaker 1: something hitting one spot of the accoun on me. It's
Speaker 1: going to spread across and kind of infect So you
Speaker 1: so cycles. You can have a vicious cycle, which is
Speaker 1: a recession. It's snowballs, you know, because if let's say
Speaker 1: production goes down, employment goes down, the income goes down,
Speaker 1: you can't buy that much. Sales go down and that
Speaker 1: kicks production down. So that's paradox of thrift. You get this.
Speaker 1: My saving is otherwise would be your income. So if
Speaker 1: I stop spending, you got it. Suddenly we have and
Speaker 1: once everybody puts their while it's away, we get a
Speaker 1: vicious The vicious cycle. Now that can also turn virtuous
Speaker 1: and at times that you don't expect, like in two
Speaker 1: thousand and nine, uh, where it kind of runs its
Speaker 1: course to the downside fever breaks, and the fever breaks
Speaker 1: you have some pent up demand. Uh, and you can
Speaker 1: actually see it the vicious cycle turned virtuous where an
Speaker 1: unexpected kind of sales leads to catches production is short,
Speaker 1: and then you have to gear up and higher and
Speaker 1: incomes and then you can work. You suddenly have a
Speaker 1: virtual cycle. So the business cycle in a free market.
Speaker 1: This is in every free market. As you've seen uh
Speaker 1: formally planned economies like India or China loosen up and
Speaker 1: become more free market oriented, you're seeing those cycles present themselves,
Speaker 1: uh in a in a in a more traditional way
Speaker 1: as we've seen in the developed world, and we're certainly
Speaker 1: seeing that in China these days. That they're formally to
Speaker 1: a double digit growth rate is now five or six percent,
Speaker 1: which would be great in the United States, but their
Speaker 1: economy is what half a third of our kind, it's
Speaker 1: really much smaller on an absolute basis. You'll have you'll
Speaker 1: have the you'll have these economies, and especially in the
Speaker 1: post World War two period Western Europe, Japan, where they
Speaker 1: get very high trend growth because they're rebuilding in all
Speaker 1: of these things, and so they'll still have cycles in growth,
Speaker 1: but it will be around a higher trend. What we're
Speaker 1: seeing now, which is quite interesting from the cyclical bantage
Speaker 1: point for that cyclical framework, is that the developed economies,
Speaker 1: their trend growth is so low that the cycle, which
Speaker 1: is endogenous. It's part of how a free market works.
Speaker 1: Each downturn you have an easier chance to go negative.
Speaker 1: So let's that brings up a really fascinating point. What
Speaker 1: is it that actually causes a recession? And I want
Speaker 1: to put that into a little context. I've been hearing
Speaker 1: people for the past three years four years say, hey,
Speaker 1: where at stoll speed? Like as if there's an airplane
Speaker 1: and I engine slows down a little more, you lose
Speaker 1: list and you crash. Where it's stall speed? Where risk
Speaker 1: of recession? How come some slowdowns never really turned the
Speaker 1: recession and other slowdowns there's some sort of external shocks
Speaker 1: some economies, weather and others. It's like a drum that
Speaker 1: caused them to tip over great point, and I think
Speaker 1: it's really the reason we exist. I mean and and
Speaker 1: I want to contrast it a bit with more mainstream economics.
Speaker 1: But but first let me answer your question directly. A
Speaker 1: key finding of generations of work. I'm talking decades of
Speaker 1: work where the third generation now is that recession is
Speaker 1: not simply caused by an external shock, you know, like
Speaker 1: an oil shock or the FED did something or whatever.
Speaker 1: Sometimes those things happen and there's no, even though some
Speaker 1: of these are really big external shocks like Katrina. Katrina
Speaker 1: could have been but recession because the recession our research shows,
Speaker 1: and this is I'm looking over a lot of time,
Speaker 1: many centuries, almost a century in some cases, and many
Speaker 1: different economies around the world, and what we find is
Speaker 1: the free market has this indog in, this cyclicality to
Speaker 1: it where it wants to accelerates and decelerates. Now that's
Speaker 1: going on. That's the nature of a free market at
Speaker 1: its very essence. Now, shocks are always happening. If a
Speaker 1: shock occurs when there's a cycle downturn, the vulnerability is there.
Speaker 1: When when we when we have this the leading indicators
Speaker 1: of the indicators of the cycle turning down, we like
Speaker 1: to we describe it as a window of vulnerability opening.
Speaker 1: And at that time, if there's a shock, very easy
Speaker 1: for it to be recessionary more vulnerable, that more vulnerable.
Speaker 1: It's like you have your compromise immune system and if
Speaker 1: there's a shock boom, you're in trouble. On the other hand,
Speaker 1: if you're in an upswing and you have a shock,
Speaker 1: for example, uh Pearl Harbor, we had a big upswing
Speaker 1: going on in the indicators and it's pretty massive shock.
Speaker 1: But the nine eleven of its day just even in
Speaker 1: some ways, it's bigger, right in some ways, and and
Speaker 1: and and but definitely a nine eleven of its day
Speaker 1: and and boom economy cruises right through it. And people
Speaker 1: tend to associate recessions with the nearby shock. Nine eleven
Speaker 1: is a great example that occurred half a year after
Speaker 1: the recession was underway. The recession was a month or
Speaker 1: two away from ending. Yeah, that much closer to the end.
Speaker 1: But but everybody, you know, immediately their muscle memory brings
Speaker 1: you to nine eleven and that recession. And I constantly
Speaker 1: A'm saying to people, how can nine eleven in September
Speaker 1: have caused a recession that began the previous March? Correct?
Speaker 1: Correct in the same thing with Lehman, that's eight months
Speaker 1: after the recession began, for example, That's right. So that's
Speaker 1: let's talk about that September two thousand and eight. And
Speaker 1: the recession was dated December two thousand and seven, two
Speaker 1: thousand seven. So by the time Lehman and then A. I. G.
Speaker 1: And everything else came along, we were already You're very vulnerable, right,
Speaker 1: You're at a place where you're that's eight nine months.
Speaker 1: So the way so from our again, from our fairly
Speaker 1: unique perspective, right, and not a lot of people talk
Speaker 1: from a from a cycle perspective, but from that perspective,
Speaker 1: we're in this cyclical downturn already and then you have
Speaker 1: a huge financial shock and it makes a bad recession,
Speaker 1: the Great Recession. Today, I've been speaking with Lakshman, Arthur
Speaker 1: Sean and and discussing various ways of looking at business
Speaker 1: cycles and recessions, and obviously Bloomberg being a financial channel.
Speaker 1: One of the questions that everyone wants to know, what's
Speaker 1: the relationship between the stock market and the economy and
Speaker 1: how to recessions fit into that site. Sure, well, I
Speaker 1: mean stocks are key, key, key metrics in a free
Speaker 1: market economy, right, It's all about what these equities are
Speaker 1: worth in some sense, and in these market prices. So
Speaker 1: market prices are UH an area you can go to
Speaker 1: UH to see where you are in the cycle. Sometimes
Speaker 1: are coincidence, sometimes they're leading. The stock prices are a
Speaker 1: short leading indicator of the economy. They are part of
Speaker 1: the original indicators that more developed back in the late
Speaker 1: fifties and um, as I said, they they're they're a
Speaker 1: short leading indicator. There. Let me let me stop you there,
Speaker 1: because I've heard repeated endlessly. Oh, the stock mark gives
Speaker 1: you years warning before recession. You're implying that's not true. No, no, no,
Speaker 1: it's not. It's a short leader is maybe five six
Speaker 1: months average lead, and then hidden inside the word average
Speaker 1: is some variability. So there may have been a case
Speaker 1: here and there where it had a long lead, but
Speaker 1: I wouldn't classify it as a long leader, something that
Speaker 1: led by three or four quarters. It's it's more likely
Speaker 1: to be one or two quarters. Uh. And uh, it
Speaker 1: might be a little bit longer lead at the peak
Speaker 1: and a little shorter lead at the trough. But on
Speaker 1: its own, it's a very imperfect indicator that it's not
Speaker 1: a holy grail. Neither is even the leading index. Uh.
Speaker 1: But one of the things you do when you put
Speaker 1: leading indicators from different areas, different sources together into a
Speaker 1: leading index, you get some confirmation. And so Uh. The
Speaker 1: stock prices are one piece of the puzzle in a
Speaker 1: set of short leading indicators that were created half a
Speaker 1: century ago. So are some of the other short leading indicators. Oh,
Speaker 1: you could you could look at things from the labor market,
Speaker 1: things from capital investment, things from interest rates, uh, some
Speaker 1: some sensitive commodity prices, um, some survey data which wasn't
Speaker 1: available half a century ago. So these are different types
Speaker 1: of short leading indicators. Uh. Some come from government, some
Speaker 1: come from market prices, some come from private surveys. This
Speaker 1: is you're diversifying your risk among your indicators here. Um.
Speaker 1: But the the thing that people should know is any
Speaker 1: one of these indicators is highly fallible even together. It's
Speaker 1: not a holy grail, but it's certainly better than relying
Speaker 1: on any single input. Absolutely. I can't tell you how
Speaker 1: many times I've responded to people who are saying, because
Speaker 1: of this factor, here's what's Hey, Listen, the market's much
Speaker 1: more complex than that. The economy can't be depicted in
Speaker 1: in a single variable. You need a multiple, a multiple
Speaker 1: variate in order to come up with any sort of
Speaker 1: not at all and so and so. Um. We've been
Speaker 1: doing a lot of work in a half a century, right.
Speaker 1: So in that time, we've i'm of a long leading indicators,
Speaker 1: leading indicators of different sectors of the economy, of employment,
Speaker 1: of inflation. And this larger array of leading indicators is
Speaker 1: what we actually use not anyone leading UH index. And
Speaker 1: also what's happened is that, um, the l e I
Speaker 1: of course has been privatized, has been taken out of
Speaker 1: the public sector, and you know, most people are more comfortable,
Speaker 1: most economists are much more comfortable with econometric models and
Speaker 1: estimations and extrapolations, and a lot of that has actually
Speaker 1: started to appear inside the l e I numbers that
Speaker 1: you're getting, So inside some of those components are extrapolated
Speaker 1: econometric forecast, which is really kind of antithetical to the
Speaker 1: whole idea. Less less than optimal in other words, is
Speaker 1: when you're you're trying to fit the thing and then
Speaker 1: it's it's it's no different to see what we do
Speaker 1: have a model within a model. The idea is to
Speaker 1: use the data to well inputs into your model so
Speaker 1: you get a clean output. Yeah, that's what we do
Speaker 1: is we don't use models. So a pure cyclical UH
Speaker 1: framework won't even use an econometric type model anywhere in
Speaker 1: its presentation. You're monitoring specific, very very limited cyclical indicators.
Speaker 1: And here what's happening is, oh, this component isn't ready
Speaker 1: to let me estimate it, and that is a totally
Speaker 1: another that's a different ball game. That's what you see
Speaker 1: every day when someone doesn't estimate off of a model,
Speaker 1: and and most of those estimates are pretty uh, you know,
Speaker 1: you get what medio garbage in garbage you said it,
Speaker 1: I'm being polite. That's the g rated all right, all right,
Speaker 1: So we have a minute left in this segment. When
Speaker 1: we come back, I want to talk a little bit
Speaker 1: about policy and politics. But one of the things that
Speaker 1: we think of when we think about the market and
Speaker 1: the economy is I have two thousand sticks out in
Speaker 1: my head. And maybe it's a bad example because of
Speaker 1: the bubble and the tech bus, but I remember earnings
Speaker 1: misses starting long before the recession began. And perhaps that's
Speaker 1: how the market picks this up long before the recession.
Speaker 1: Is efficient. I think the market, the market left to
Speaker 1: its own devices, is a is a you know, a
Speaker 1: risk management tool. Um. But and here's just give you
Speaker 1: the statistics in in in in three three out of
Speaker 1: the last fifteen recessions, you saw, uh, the market go
Speaker 1: up even when there was a recession. It's a couple
Speaker 1: of times you've seen it disconnect. And the one that's
Speaker 1: very interesting is that roaring twenties where it disconnected completely,
Speaker 1: but it ended badly. This week, I'm sitting with Laxman
Speaker 1: Acuthan of Eckery Economic Cycle Research, and we've been talking
Speaker 1: about the relationship between the stock market and the economy.
Speaker 1: I want to bring something up that's policy related that
Speaker 1: I recall you writing. I don't remember it was oh
Speaker 1: seven or oh eight, but you had written a piece
Speaker 1: and published it somewhere where you essentially said, hey, there's
Speaker 1: a recession coming, but there's also a last chance to
Speaker 1: avoid this recession. And if Congress acts, you could miss
Speaker 1: this recession. It absolutely does it was. There was a
Speaker 1: brief window of opportunity in two thousand and seven, uh
Speaker 1: where uh there was literally no inventory on the shelves.
Speaker 1: It was just a little bit of a weirdness in
Speaker 1: the inventory cycle, and at that moment some cash in
Speaker 1: consumers pockets would have spurred a temporary I'm not saying
Speaker 1: I would have solved anything long term, but a temporary
Speaker 1: restocking and staved off the recession that began in December
Speaker 1: of two thousand and seven. But thanks to the way
Speaker 1: that you know, DC works, the Bush Pelosi Bernankee fiscal
Speaker 1: stimulus that they did actually vote through, which was what
Speaker 1: like a hundred and fifty, right, I mean that was
Speaker 1: those the three checks. These are checks in the mail, right,
Speaker 1: But they didn't they didn't arrive until two thousand and eight,
Speaker 1: and then towards the summer and and the summer and
Speaker 1: and the recession was already on the way. So it
Speaker 1: I think in principle, if there's these little tactical moments,
Speaker 1: you might be able to kind of throw a monkey
Speaker 1: wrench inside of that vicious cycle just for a second.
Speaker 1: You're not going to get rid of it, but you
Speaker 1: could maybe stave it off so that you're ready for
Speaker 1: or a little bit better prepared, instead of what we
Speaker 1: had here, which was basically a debacle. And and uh,
Speaker 1: I don't you know, it's hard to you know, I
Speaker 1: guess it could have been worse, but um, the but
Speaker 1: it's interesting in half, But it is kind of interesting
Speaker 1: back in that back then an adorable number, isn't it cute?
Speaker 1: But that was back in the day when it was
Speaker 1: a really big number, and it sank like a stone.
Speaker 1: Nobody even remembers it. And you and you see, you know,
Speaker 1: these numbers they get so large that you don't know
Speaker 1: what they mean. But they you know, it sounds like
Speaker 1: it could have plugged a hole somewhere in a budget
Speaker 1: we had. We had Jim Channis on a few weeks
Speaker 1: when we were discussing his histories, and short Salary identifies
Speaker 1: broad the first company he had identified cooking the books,
Speaker 1: and and very famously short it was Baldwin, which was
Speaker 1: a piano manufacturer that became an insurance company. And when
Speaker 1: they went belly up, and this is the late eighties
Speaker 1: early nineties, um, it was the biggest bankruptcy in history.
Speaker 1: And it was nine billion dollars. And I'm like, oh,
Speaker 1: that's adorable dollars. That's nothing, but a hundred and fifty
Speaker 1: billion dollars in seven o eight was was still real money.
Speaker 1: And remember, you know Washington is famous for gridlock. But
Speaker 1: here you had again Bush and and bernanke Republican who's
Speaker 1: effectively a bypart, and they all went at this fiscal
Speaker 1: thing to get it done. I think that they saw
Speaker 1: some writing on the wall. But even with that kind
Speaker 1: of consensus, it's just too slow. So the idea that
Speaker 1: I think in theory Congress might be able to say,
Speaker 1: but in practice it's almost impossible to get ahead of
Speaker 1: the cycle, especially these days where it's all so so.
Speaker 1: What you're effectively saying much different than than what I've
Speaker 1: been reading from some of the more extreme elements of
Speaker 1: the political spectrum, is that you can engage in a
Speaker 1: form of stimulus allah John Maynard Keynes and actually have
Speaker 1: a net impact on the economy. I think, in very
Speaker 1: unique circumstances that may be able to happen. But I
Speaker 1: would actually at the same time, let me, let's let's
Speaker 1: stop right there. So let's look at two recent policy
Speaker 1: actions that have and we're going to keep it by partisan,
Speaker 1: but there's a lot of politics behind both of this.
Speaker 1: One was the stimulus in two thousand nine, and the
Speaker 1: second was the sequester in two thousand thirteen. Each of
Speaker 1: those were big chunks of money. Theoretically, do those two
Speaker 1: things do for the economy? The stimulus you really want
Speaker 1: to know? I think so sure that. So keep in
Speaker 1: mind the stimulus really kind of a half estates hit. Well,
Speaker 1: that's what I was gonna say. It's it's really kind
Speaker 1: of half arsked because remember it is unemployment extension, and
Speaker 1: some of it is temporary type cut, and not a
Speaker 1: lot of it was what we think of like Eisenhower
Speaker 1: in the interstate highway system was really a big, bad
Speaker 1: stimulus that worked. Wonders goes to thesis. Now, Um, okay,
Speaker 1: so you have a cycle and the cycle doesn't care
Speaker 1: about the politics that's happening. It's this endogenous cycle in
Speaker 1: a free market where we're going to have an ebb
Speaker 1: and flow in our activity. And we had a nasty downturn.
Speaker 1: Uh And by um, the spring of two thousand and nine,
Speaker 1: the recession is still going on. Uh. In Davos in
Speaker 1: April at that not in Davos, it was twenty meeting
Speaker 1: in London. They were um talking about depression in April. Uh.
Speaker 1: But the leading indicators had all turned up sharply so
Speaker 1: that we were forecasting an end of recession by the
Speaker 1: middle of oh nine. Uh. And I'm pretty sure the
Speaker 1: stimulus was still kind of cooking its through. Yeah. So,
Speaker 1: but so in other words, I'm saying the recession U ending.
Speaker 1: See these things end right. Session was already that stimulus
Speaker 1: is already too late to make much of an impact.
Speaker 1: These are the facts. And two hundred and twenty two
Speaker 1: years we've had forty seven recessions. The Fed's been around
Speaker 1: for maybe half of those um so um. They've been
Speaker 1: around when there have been a lot of recessions, so
Speaker 1: they haven't been able to get rid of them, or
Speaker 1: maybe they contributed to some I don't know. You know,
Speaker 1: we could argue that took okay. So so the point
Speaker 1: is is, like, you know, this is the condition of
Speaker 1: the environment we're in that it has this cycle going
Speaker 1: up and down, and so if things get really bad.
Speaker 1: I am a very empathetic, sympathetic person. I am not
Speaker 1: saying everybody should just be like in bubble. You know,
Speaker 1: I'm not going there. And I understand I understand everybody
Speaker 1: from both sides of the policy spectrum. They're trying to
Speaker 1: figure out how to make things better and they have suggestions.
Speaker 1: But the but the idea that you can go so
Speaker 1: far as to get rid of the business cycle is
Speaker 1: one that has been promoted many times and it's failed
Speaker 1: many time and time again. Irving Fisher And so we're
Speaker 1: speaking with Lakshman Than of the Economic Cycle Research Institute
Speaker 1: about recessions and the impact of policies. So people have
Speaker 1: been calling, at least they used to before the collapse,
Speaker 1: the Greenspan era as the great moderation we seem to
Speaker 1: have less recessions, less frequently, they were shallower. How do
Speaker 1: you look at that and how what does that mean
Speaker 1: going forward? I think it's very interesting. This is at
Speaker 1: the core of something that's been concerning us since two
Speaker 1: thousand and eight. And uh we we call it the
Speaker 1: yo Yo years were we've entered our Yoyo years, which
Speaker 1: is a period of weaker growth and more frequent recessions.
Speaker 1: In the Greenspan years are related to that in a way,
Speaker 1: they masked it. Trend growth in the United States, no
Speaker 1: matter how you slice it has been getting weaker and
Speaker 1: weaker since the mid seventies. The pace of each recovery
Speaker 1: since the seventies has been getting weaker and weaker. It's
Speaker 1: stairs stepping down now in the in the nineties, which
Speaker 1: was which had relatively low trend growth compared to earlier decades.
Speaker 1: As long as it's an extended, a long business cycle,
Speaker 1: you don't matter. You don't mind that much. And and
Speaker 1: and here the volatility of the cycle comes in. So
Speaker 1: we have a relatively moderate cycle, not big swings, gentle swings,
Speaker 1: but our altitude is low, so it feels okay. And
Speaker 1: in fact, that was a very impressive on many statistical
Speaker 1: accounts expansion. The problem is if the volatility returns and
Speaker 1: you're altitude level at that little level, you're in big trouble.
Speaker 1: And so let's take a look at Europe or the
Speaker 1: UK after the Great Recession. Uh, they all recovered for
Speaker 1: a little bit, and then they went back into recession,
Speaker 1: and then they recovered again, and now they're all actually
Speaker 1: turning down a little bit. So they're seeing more frequent
Speaker 1: recessions in Europe right now. Already it's not even a
Speaker 1: forecast anymore that this. Look at Japan in in in
Speaker 1: twenty one years, well, in twenty one years, they've had
Speaker 1: six recessions, They've had albonomics. They've almost shot everything they
Speaker 1: can shoot at at the economy. The structural stuff is
Speaker 1: a little their their version of QUI is what three
Speaker 1: times six times hours. I think they're inversion, you know,
Speaker 1: it's issue number ten now or something like that. And
Speaker 1: this was a really big one, the one that they
Speaker 1: did recently. And they're already slowing there in their third
Speaker 1: decade of of weak growth. And Japan famously has been
Speaker 1: fighting deflation. Europe is very clearly having some price problems
Speaker 1: just in relation, and actually the US is too. I
Speaker 1: think that we're not that exceptional. I think in this regard,
Speaker 1: I know, dare I say, hey, I'm I'm a true
Speaker 1: American here, but I'm but but I'm saying that that
Speaker 1: on this cyclical count of slow trend growth we are
Speaker 1: we need to face up to what's going on. Larry
Speaker 1: Summers at the end of last year went out and
Speaker 1: talked about secular stagnation and nobody wanted to hear it.
Speaker 1: I still want to hear you still don't know. It's
Speaker 1: not I don't want to hear anything from him. But
Speaker 1: this isn't But this isn't fun to hear. PIMCO has
Speaker 1: been talking about the new normal. These are all different
Speaker 1: angles on this issue. Now. Is this a function of
Speaker 1: where a more mature economy and therefore we're going to
Speaker 1: have slower growth. Is it a function of the aging
Speaker 1: of the baby boomers, globalization sending some jobs overseas? What
Speaker 1: is it that credit issues, big, deleveraging big? Well, I
Speaker 1: think the deleveraging actually is it's a contributing factor, but
Speaker 1: I don't think it's causing it. So what I'm saying is,
Speaker 1: when de leveraging is over, this problem doesn't go away.
Speaker 1: I want to talk now in this segment where we
Speaker 1: don't have any time limitations and we could just open
Speaker 1: up our top button chill out a little bit. So
Speaker 1: I you and I know each other for a long time,
Speaker 1: we go to lunch on a regular basis. I'm very
Speaker 1: familiar with your work. I want to talk a little
Speaker 1: bit about your track record, which for the most part
Speaker 1: has been excellent. But you've been getting some grief lately
Speaker 1: about the call in that Hey, the US has at
Speaker 1: an increasing risk of a recession, so there's a lot
Speaker 1: of different things I want to come back to and discuss.
Speaker 1: You know, anyone in the public eye gets grief from
Speaker 1: a variety of people. How do you deal with that
Speaker 1: sort of stuff? First? And then let's talk a little
Speaker 1: bit about the actual call and what you guys said
Speaker 1: and where you're going from from there. And again we
Speaker 1: mentioned during the broadcast section section that the New York
Speaker 1: Times gave you this phenomenal profile that talked about essentially
Speaker 1: said you had a perfect forecasting, right, which is right,
Speaker 1: that's the kiss of death. They never piss off the
Speaker 1: trade and Gods my head trade or always used to
Speaker 1: say anytime you were on a roll. It's like man,
Speaker 1: you are living dangerous, like just shut up and stay
Speaker 1: below the radar. So it's almost as if a profile
Speaker 1: like that guarantees the next call is going to mean revert.
Speaker 1: But talk a little bit about how do you deal
Speaker 1: with just the people. You know, it's so easy for
Speaker 1: people to dismiss somebody out of hand. It would be
Speaker 1: really it would be really tough. I mean this, It
Speaker 1: takes a certain type of person to do this. First off.
Speaker 1: I mean I and I guess I have some of
Speaker 1: those abilities. And I don't think skin small brain. Is
Speaker 1: that what you're saying, you know, to a degree, I probably,
Speaker 1: But but I think what it is is having a framework.
Speaker 1: And I mean Jeffrey Moore, my mentor, Dr Jeffrey H.
Speaker 1: Moore was um an interesting guy, uh for the same reason.
Speaker 1: I don't purport to be as bright as he was.
Speaker 1: But he was able uh in academia, which can be
Speaker 1: a pretty rough environment. You know, you can get stabbed
Speaker 1: in the back there often. And and he went against
Speaker 1: the grain in terms of forecasting, and he did not
Speaker 1: uh go into the model building econometrics, and he instead
Speaker 1: stayed with the monitoring of cyclical indicators and developing that
Speaker 1: type of research which was not in fashion in academia.
Speaker 1: And that framework that we have there is what I'm
Speaker 1: taking advantage of today at Equery, with all of our
Speaker 1: research group. I mean, just to be clear, there's a
Speaker 1: lot of people behind me. This is not all my work.
Speaker 1: I have a huge it's a full floor. You have
Speaker 1: a couple of dozen people, are you yeah, and they
Speaker 1: are focused, Like you know, we're all really impressed with
Speaker 1: this cyclical framework of monitoring the indicators and the we
Speaker 1: actually don't even consider ourselves forecasters. We we we consider
Speaker 1: ourselves monitors. Were monitoring very limited and with an eye
Speaker 1: and uh, we're we're watching these indicators. And so when
Speaker 1: I say to you, here's what they're saying, um, it
Speaker 1: may even go against my gut instinct, but I have
Speaker 1: a lot of respect for the framework. And that is
Speaker 1: why sometimes I think I can stand in a room
Speaker 1: where everybody disagrees and say, well, here's what I think.
Speaker 1: Here's what the framework is. It's not about it's not
Speaker 1: about what some guy whispered to me in a corner somewhere,
Speaker 1: you know, who supposedly knows something. It's rather it's what
Speaker 1: the framework of objective indicators are saying are they moving
Speaker 1: in a pronounced, pervasive, in persistent way one way or
Speaker 1: the other, And then it's my job to kind of
Speaker 1: figure out the story around that, trying to explain it.
Speaker 1: So let's put this into a little context. Here we
Speaker 1: are in which just came off a quarter that either
Speaker 1: was really weak or actually contractually contracted slightly. Although now
Speaker 1: we're in the second quarter, the data looks much better.
Speaker 1: I think a lot of the weather related issues in
Speaker 1: Q one just deferred certain purchases, deferred certain activities to
Speaker 1: Q two. So as bad as Q one looks, Q
Speaker 1: two looks that much better. But how do we look
Speaker 1: at the past couple of years? How would you describe? Sure? Sure? Sure? Well, um,
Speaker 1: I think in twenty you know, when we look backwards, Uh,
Speaker 1: time will tell if we were technically correct on our
Speaker 1: recession call. Yeah, it looks like there was a Uh,
Speaker 1: the epicenter of the weakness of the downturn will be
Speaker 1: in the fourth quarter of and in the first quarter
Speaker 1: of where you have annualized GDP growth for that half
Speaker 1: a year at a fraction of barely positive. And if
Speaker 1: you look underneath and see why what was the growth,
Speaker 1: it was a freak outsized contribution of agriculture, which never
Speaker 1: contributes to GDP. It surrounding aera typically, and it made
Speaker 1: up the bulk of that growth. So the rest of
Speaker 1: the economy was not in action during that time, right,
Speaker 1: So essentially flat for two quoters or not? There no negative? See,
Speaker 1: I mean it was the agriculture that made it just
Speaker 1: skate a little bit of it. And now would that
Speaker 1: be considered No, I mean the revisions are still coming.
Speaker 1: These revisions are not over. So, but let's use the
Speaker 1: three piece. So it was persistent? Does two quarters two
Speaker 1: quarters is persistent? Yeah, you could have. You could have
Speaker 1: a short recession and then throughout the entire economy except
Speaker 1: for agriculture apparently, so it was nearly Well, agriculture is
Speaker 1: not I mean non farm is where we focus. I
Speaker 1: mean the farm industry is not a big component typically
Speaker 1: of this economy. So and then what I pronounced, was
Speaker 1: it a deep No, it would have been mild. It
Speaker 1: was not. That was not that was not a deep.
Speaker 1: That was not a deep if so, at most it
Speaker 1: was possibly a short mild recession. Correct. That absolutely breakes
Speaker 1: perfect sense to me. But you've gone on television. I've
Speaker 1: seen you on bloom. But I've seen you in CNBC.
Speaker 1: You've gotten back and forth with Joe Karnan about and
Speaker 1: I thought you did an admirable job. I think keep
Speaker 1: blaming what you're trying to explain in a thirty seconds
Speaker 1: sound bite. But how do you deal with that sort
Speaker 1: of nonsense when people are just I think one of
Speaker 1: the things is binary. People are buying recession, yes or no. Well,
Speaker 1: I think people equate recession with the end of the world,
Speaker 1: and I just always a losing it. I don't, you know,
Speaker 1: I don't. I think a recession, as bad as it
Speaker 1: can be for for for people who are near the
Speaker 1: collateral damage, they can be very cathartic. I mean, there's
Speaker 1: reasons for recessions, you know, there's It does squeeze out
Speaker 1: your excesses and sets you and it will properly set
Speaker 1: you up for growth in the current environment. One could
Speaker 1: argue that all of this recession denial, or all of
Speaker 1: the policies designed to kind of like dot by hook
Speaker 1: or by crook to pull some demand from next quarter
Speaker 1: into this quarter, actually is keeping trying to subvert that process,
Speaker 1: which is actually a very healthy process for a market economy. Um.
Speaker 1: You know, people point to the UK and say, oh,
Speaker 1: look it's growing well, austerity works well or whatever. They
Speaker 1: have some argument right, Actually they had to recessions which
Speaker 1: really squeeze a lot of stuff out and set them
Speaker 1: up for some growth. Now, I'm sorry to say that
Speaker 1: that'll that'll fade a little bit at some point. But
Speaker 1: still these recessions do set you up for more sustained growth.
Speaker 1: And when you have a policy which is just so
Speaker 1: limited to pulling next quarter into this quarter, low inch
Speaker 1: or traits some some tax break if you keep pulling
Speaker 1: demand from the from next quarter into this quarter, from
Speaker 1: the future into now what's left of the future. That
Speaker 1: that's reminds me of a country song, how can I
Speaker 1: miss you if you won't go away? So how could
Speaker 1: you get How did you ever find that pent up demand?
Speaker 1: How could you squeeze out those excesses if you never
Speaker 1: let the cycle one its natural course? That's and that's
Speaker 1: and so the I I get, I get the arguments,
Speaker 1: and I think that there are reasonable arguments for extraordinary
Speaker 1: uh intervention uh at the depths of the Great recession.
Speaker 1: I get it. But that was a long time ago,
Speaker 1: wasn't that Number one? Yes, it was, and number Two,
Speaker 1: I think we all know the bottom line was that
Speaker 1: we have these banks festied with bad mortgages, and so
Speaker 1: if we had another bad recession, we would have wasted
Speaker 1: all bailout dollars when the banks would have collapsed again.
Speaker 1: Another I don't know if that's still the case. No, No,
Speaker 1: I mean another way of looking at it is, um
Speaker 1: you know, the FED takes rates to zero or close
Speaker 1: to them effectively, and then what are they supposed to
Speaker 1: do next? So that while they're pushing on a stream,
Speaker 1: but they don't want to admit that, so that they say, so,
Speaker 1: now we're gonna do the wealth effect. We're gonna make
Speaker 1: the house price go up, We're gonna make the stock
Speaker 1: price go up, and then you're gonna go out and
Speaker 1: spend right and the wealth of and you see that's broken.
Speaker 1: That that that hasn't happened. So let's talk about that,
Speaker 1: because that's a pet peeve of mine for two reasons.
Speaker 1: The first reason is, I think, and I've written about
Speaker 1: this extensively, I think the wealth effect is something that
Speaker 1: the FED gets completely wrong. And I have to go
Speaker 1: out to Jackson Hole one summer and would agree, we
Speaker 1: would agree with you from the evidence but when you
Speaker 1: look in so let's talk about a cycle for a second.
Speaker 1: When we look in a strong economic cycle. You mentioned
Speaker 1: the areas that you have in recovery. You have income gains,
Speaker 1: you have employment gains, you have manufacturing gains. What was
Speaker 1: the fourth one, income, manufacturing, retails als gales. So you
Speaker 1: had all these things that are going positively. Ellen, what
Speaker 1: a surprise. Lots of people are working, they're getting wage gains,
Speaker 1: they're going out and spending that money on houses, cars,
Speaker 1: and other consumer goods, both durable and non durable. Manufacturing
Speaker 1: and exports are working well. And oh, by the way,
Speaker 1: the stock market is doing really well on those circumstances. Hey,
Speaker 1: it looks like it looks like when the stock market
Speaker 1: goes up, everybody's really happy. But actually that's getting the
Speaker 1: causation backwards. The positive fundamental underlying factors that are rising
Speaker 1: or lifting all boats. That's the tail that's wagging the
Speaker 1: door of the stock market. Isn't what's making all these
Speaker 1: good things happen. All these good things are making the
Speaker 1: stock market, and that's where the FED gets it backwards. Well,
Speaker 1: typically it does work that way, and that's why in
Speaker 1: twelve out of the last fifteen downturns, you've seen the
Speaker 1: stock market react, and three of them they did the
Speaker 1: Roaring twenties. Didn't Now remember the Roaring twenties. I mean
Speaker 1: I don't. I wasn't born, but they say it sounds
Speaker 1: pretty uh you know they were people were pretty excited, right,
Speaker 1: and so they had they had a recession. They had
Speaker 1: those crazy dance, they had the crazy dance, they had
Speaker 1: all kinds of not no booze, what I mean, you
Speaker 1: can imagine, uh, you know, if there was no disrespect
Speaker 1: to Jim Kramer here, but if there was a Jim
Speaker 1: Kramer there, he would have been saying bye bye bye,
Speaker 1: right that at that moment. And and so here we
Speaker 1: have a recession. It's a it's a full blown pronounce
Speaker 1: pervasive position whatever in all the indicators from twenty seven.
Speaker 1: Stock market goes up. Wow, that's amazing. Okay, recession ends
Speaker 1: now the fundamentals are back, uh in in play, and
Speaker 1: you got another two years of market games not too shaty.
Speaker 1: And then it all ends badly because well, given those numbers,
Speaker 1: no surprise. Well, and it was built. There was some
Speaker 1: there was some, there was some New York active other things.
Speaker 1: There was different kinds of consumer financing was coming in
Speaker 1: all kinds of average. Okay, so that's we're not that.
Speaker 1: But what it what that shows you is that what's
Speaker 1: going on now has happened before. Okay, this it's it's
Speaker 1: not like everything's broken and it doesn't make any sense
Speaker 1: this this can happen, But it does suggest that, um,
Speaker 1: that feeling that you have that it might not end well, um,
Speaker 1: you know there's some precedent for that. Uh. And I
Speaker 1: can't say, uh that tomorrow is going to be bad
Speaker 1: or whatever, but you know, ultimately, if we don't have
Speaker 1: uh stronger economic growth on a sustained basis, that disconnect
Speaker 1: between some of the expectations and the fundamentals may have
Speaker 1: to get reconciled. So that brings us back to your
Speaker 1: previous comment that you end up with you end up
Speaker 1: with a situation where you have more frequent recessions even
Speaker 1: though they're more shallow. And so is that what we know,
Speaker 1: they're not necessarily more they don't have to be more shallow.
Speaker 1: So in UH remember Japan, UH seventeen years ago on
Speaker 1: April one, raised it's UH tax, and this past April one,
Speaker 1: they raised their tax against sales tax and um, it
Speaker 1: didn't work out well because at the time either well
Speaker 1: currently it doesn't seem to be working out too well.
Speaker 1: And last time didn't they just print like a five
Speaker 1: point nine percent GDP or something crazy like in anticipation
Speaker 1: of the tax. So if you're so everybody's front running,
Speaker 1: the new Q two is going to be a jerk
Speaker 1: back the other way. So when does the tax take effect?
Speaker 1: April one? So all just now? Oh so so Q
Speaker 1: one was before the tax? Correct, So you bought your
Speaker 1: bicycle or your air conditioner before and then you didn't
Speaker 1: have to pay five percent more in tax? Is that
Speaker 1: what it is? It's five percent doubled that they doubled
Speaker 1: it practically right, So when trying to stimulate spending, why
Speaker 1: would you want to put a further dragon. I will
Speaker 1: not I will not try to explain the policies of
Speaker 1: these countries. I'm not I'm not a free market absolutist,
Speaker 1: but it's pretty clear. If you want more of something,
Speaker 1: tax it less. If you want less of something, tax
Speaker 1: it more. Well, And I would say from a cycle
Speaker 1: point of view where I can add something that that
Speaker 1: when the cycle is decelerating, you probably don't want to
Speaker 1: push it down further. You know, if I if I
Speaker 1: had to raise taxes at some point, I do it
Speaker 1: when the cycle was going up, not when I was
Speaker 1: going down as they did in seven. Now people think
Speaker 1: Japan has had deflation forever. Actually no, it didn't start
Speaker 1: till after this policy mistake where they raised taxes going
Speaker 1: into a downturn, and that recession that they had, uh
Speaker 1: was one of the nastiest, most severe recessions they've had,
Speaker 1: and it brought to that economy real persistent deflation. Now
Speaker 1: in Europe you're fighting disinflation. In the US, you're fighting disinflation.
Speaker 1: We're not a deflation. But although we have been seeing
Speaker 1: signs of an uptick in inflation, you've seen in in
Speaker 1: in in the stuff that normal people care about, which
Speaker 1: is food and energy. You know, you know, the cost
Speaker 1: of your iPad might go down a little bit, but
Speaker 1: the food and the energy part, uh, that is non discretionary. Uh,
Speaker 1: that part's going up. So the money that's left for
Speaker 1: discretionary spending, which is very cyclical, is smaller, and so
Speaker 1: the cyclical piece of your economy. Right when you look
Speaker 1: at the rebound, the so called rebound and retail sales
Speaker 1: that we had in the last print. You'll you'll notice
Speaker 1: that it's what people need. It's not what they want,
Speaker 1: but they're buying. And I think that kind of discribed
Speaker 1: stuff that describes what's going on. I mean, uh, and
Speaker 1: and when we talk about who who who can benefit
Speaker 1: from looking at cyclical risk. If you're on the business side, uh,
Speaker 1: if you're uh a discretionary type of business, your product
Speaker 1: is somewhat discretionary, very cyclical. You have to be very
Speaker 1: sensitive to the cycle. If you sell toilet paper, you know,
Speaker 1: even in a downturn, you're gonna sell toilet paper. So
Speaker 1: this raises an interesting question, not so much about toilet paper,
Speaker 1: but about who are the folks that use your research.
Speaker 1: Who are your you don't have to name names, but
Speaker 1: who are the sort of people who are your clients.
Speaker 1: It's really those who want to manage cyclical risks. So
Speaker 1: in broad strokes, you'll have that that that includes governments, industry, investors,
Speaker 1: all three so so so in in in in for investors. Uh,
Speaker 1: it's it's uh largely around an asset allocation decision because
Speaker 1: it's not a day trader stuff. Right, there's the day
Speaker 1: traders couldn't couldn't really care about our stuff. But but
Speaker 1: but are there any day traders left? I think I
Speaker 1: think that they're you know, stegasaurus and day traders are
Speaker 1: kind of there. You go about the same number of
Speaker 1: roaming the Yeah, I know. But if you want to
Speaker 1: look at what what region of the world, what country,
Speaker 1: stocks and bonds, real estate, commodities, those kinds of asset
Speaker 1: uh shifts and fourth, that's stuff that cycle indicators can
Speaker 1: tell you about the risk of things going one way
Speaker 1: or another. And when you look at businesses, the cyclical
Speaker 1: businesses where there's there's a discretionary spending component, those are
Speaker 1: the businesses that are really interested in managing cycle risk.
Speaker 1: Manufacturing is very interested in that, they're very cyclical. Uh
Speaker 1: so those kind of companies. And what about governments, do
Speaker 1: you guys actually date recessions for twenty one countries sounds
Speaker 1: like a strange Well, yeah, when does it become serious? So, well,
Speaker 1: twenty one countries, you're the arbiter of one recession being right.
Speaker 1: So for policymakers, I mean, I think, uh, certainly, um
Speaker 1: at the central bank level, there's a lot of interest.
Speaker 1: I think for longer term policymakers, like how do we
Speaker 1: get out of this mess. Uh, there's interest, but it's
Speaker 1: more on a theoretical level, because if we are in
Speaker 1: this low growth, more frequent recession, it does all kinds
Speaker 1: of things to your budget policy. Uh, you know, because
Speaker 1: you're going to have high on the you know, long
Speaker 1: term un employment's gonna be high, disability payments are gonna
Speaker 1: be high, all these other transfers are gonna be high.
Speaker 1: So your budget issues are are there, and there's no
Speaker 1: clear policy that is going to jerk your trend growth
Speaker 1: right up. Uh and so, and this isn't something that's
Speaker 1: simply about the US. We're seeing it in Europe, We're
Speaker 1: seeing it in Japan. This is a global phenomenon. This
Speaker 1: is a global phenomenon of more developed economies. And it
Speaker 1: may have demographics, it may have globalization. It's certainly I
Speaker 1: think productivity growth is an issue which has been pretty weak. Now.
Speaker 1: Is it weak because it's gained so much over the
Speaker 1: past thirty years, or is it just weak because companies
Speaker 1: aren't investing in capex and other such things that improve
Speaker 1: productivity the way they did ten years ago. Well, Um,
Speaker 1: probably a little bit of both. Probably a little bit
Speaker 1: of both. I mean, that's an interesting I was talking
Speaker 1: earlier this morning about the policies, you know, low interest
Speaker 1: rates or or a tax break on cap X. And
Speaker 1: it's interesting because you're essentially paying businesses to the extent
Speaker 1: they will invest to invest in something that will get
Speaker 1: rid of a job. You know, that's a lot of
Speaker 1: what they're that they've been doing. And when you look
Speaker 1: at businesses I you may have seen Larry Fink from
Speaker 1: black Rock wrote a letter to his peers, uh two
Speaker 1: months ago, and he said, please please please spot Star
Speaker 1: spendence your money, you know, and sitting on reckon amounts
Speaker 1: of cash but breaks them out and um. But the
Speaker 1: businesses are not that interested in doing it because the
Speaker 1: demand is, you know, lackluster. It's kind of black. One
Speaker 1: of the things we noticed really early to mid two
Speaker 1: thousands people call it business intelligence or other types of software.
Speaker 1: There's a a few dozen publicly traded companies, everything from
Speaker 1: salesforce to business objects as tons of them. And when
Speaker 1: you speak to the people who are fairly senior in
Speaker 1: those companies, they'll basically say, our whole presentation is to
Speaker 1: walk into any company and say this software is going
Speaker 1: to cost you twelve million dollars and the CEO CFO
Speaker 1: wants to kick him out of the room, and he says,
Speaker 1: before you throw me out, it's gonna save you thirty
Speaker 1: seven million dollars in the first two years alone, and
Speaker 1: if it doesn't, I'll refund the twelve million. Go on,
Speaker 1: I'm listening. Here's what it does, Here's how it makes
Speaker 1: you more efficient, here's how much staff you could lay off.
Speaker 1: Blah blah blah. So look, I know my office what
Speaker 1: we do with less than ten people. Ten forget twenty
Speaker 1: years ago. Ten years ago would have taken forty people.
Speaker 1: You know, there was a Dilbert comic of a year
Speaker 1: or two ago where the caption says that the job
Speaker 1: market is uh uh changing quicker than people can evolve.
Speaker 1: And that's kind of what we're in and it's displaced
Speaker 1: a lot of people who will not be able to work.
Speaker 1: And it's not even just in the U s. It's
Speaker 1: happening in Europe. It's happening to Triman. And you see,
Speaker 1: older people are having to work longer, and younger people
Speaker 1: are having a tougher time starting off in a good spot,
Speaker 1: and that impacts their entire career path for their life.
Speaker 1: So they begin Yeah, the the era if you graduate
Speaker 1: college in the midst of recession, your lifetime earnings are
Speaker 1: significantly lower than someone who graduates in the midst of
Speaker 1: a boom. Luck of the draw just absolutely has nothing
Speaker 1: to do with the skill set. So we also noticed
Speaker 1: with creating a lot of tech jobs, with creating a
Speaker 1: lot of energy jobs, but we're also creating a lot
Speaker 1: of low wage jobs. So it's restaurant workers, it's employees.
Speaker 1: The energy jobs are high paying, mining and energy and
Speaker 1: these and dirt there, and and they don't play how
Speaker 1: many people. I mean, yeah, if you can get them,
Speaker 1: they're they're they're interesting and high paying. To North Dakota
Speaker 1: where the unemployment rate is zero. But there's but there's
Speaker 1: not and it's not going to move the dial on
Speaker 1: the big numbers. And what you see is average hourly earnings.
Speaker 1: It's going up, ticking up slowly. Uh, And that sounds
Speaker 1: pretty good, right, But it's it's heavily weighted with it's
Speaker 1: a fat head long tail. But it's actually not even
Speaker 1: true if I mean, it's true that it's going up,
Speaker 1: but it's going up for a statistically poor reason. The
Speaker 1: reason that's going up is because the pace at which
Speaker 1: your hours are being reduced, and is go is they're
Speaker 1: being reduced faster than your wage is being reduced. So
Speaker 1: people are working less but getting paid more per hour. Yeah,
Speaker 1: you know, they're both going down. You're getting you're working
Speaker 1: less hours and you're getting paid less, but the hours
Speaker 1: are falling faster than your pay. So your average hourly
Speaker 1: earnings go up, but NETT income going down. Yeah, and
Speaker 1: that's really the only thing that matters. And you're saving.
Speaker 1: People are diving into their savings and it's down at
Speaker 1: a low, low level. And when you go to credit,
Speaker 1: the kind of credit you can at is um You
Speaker 1: can get stuff that's collateralized like a car loan, uh
Speaker 1: and you might even have to stretch it out over
Speaker 1: seven years. You can get a mortgage, but they'd rather
Speaker 1: sell a house to somebody who's paying cash. And a
Speaker 1: lot of people do pay cash. Just by the way.
Speaker 1: There's just something And I've been back and forth with
Speaker 1: Johnathan Miller about this today. Something came out today. I
Speaker 1: sent it to him. Coasted struck me as wrong. Of
Speaker 1: the homes purchased in Manhattan ap purchased with cash. Seems
Speaker 1: like that number just seems way high. It might be
Speaker 1: condos but still it's a huge point. I mean, whether
Speaker 1: whether the numbers wrong. That's the general thrust of that
Speaker 1: is cashes can the cash can go out and buy,
Speaker 1: but but most people don't. You know, most people have
Speaker 1: to They can't afford to buy a house outright. And
Speaker 1: and so it's either speculative business or just wealthy people
Speaker 1: who are doing it are wealthy global people who are
Speaker 1: doing it. The Chinese are trying to get the money
Speaker 1: out of China because they said, we're going to slow
Speaker 1: this thing down, so you get your money out. And
Speaker 1: it's either London, New York, kirk California, Vancouver. You there.
Speaker 1: These they call them see through towers. Not like in
Speaker 1: the nineteen eighties where it was a pejorative term in
Speaker 1: Dallas when the energy boom busted and they had all
Speaker 1: these buildings that were unrented. They have these hot, gorgeous
Speaker 1: luxury high rise apartment buildings fully sold out, almost no
Speaker 1: one living there, a vertical ghost. It's an asset and
Speaker 1: if they have to it's a lifeboat. If they have
Speaker 1: to get out, they have a place to live for
Speaker 1: a student loan, government government guaranteed student loan. And you've
Speaker 1: seen the growth there has been pretty helpless. Right, So,
Speaker 1: but when you go to just regular consumer credit or
Speaker 1: other kinds of loans, or you know, if you've got
Speaker 1: if you go through the motions, I think someone putting down,
Speaker 1: they gotta put down for a house, and it's it's
Speaker 1: not terribly easy to get the mortgage. You gotta go
Speaker 1: through a lot of stuff together. Plus you have the
Speaker 1: return of p m I, you have the return of
Speaker 1: mortgage insurance. I'm hearing some people, and again I know
Speaker 1: enough people in the real estate industry that this is anecdotal,
Speaker 1: but interesting, um, and we we know the plural of
Speaker 1: anecdote isn't data. However, when you hear someone say they're
Speaker 1: putting down and therefore they don't have to put any
Speaker 1: sort of mortgage insurance, and then by the time they're
Speaker 1: done with closing costs and this and that, you know,
Speaker 1: you're kind of on the border of getting a proof
Speaker 1: for this. We want you to have mortgage insurance anyway,
Speaker 1: if you want us to underwrite the mortgage. So now,
Speaker 1: in Canada, which had a huge housing boom but didn't
Speaker 1: have a bus like we did, mortgage insurance is fairly
Speaker 1: mandatory and unless you put it used to be down.
Speaker 1: I think they lowered that to down. So and pretty
Speaker 1: much they have a highly regulated There are no exotic
Speaker 1: negative amorization interests, only mortgages. It's pretty straightforward. So, yeah,
Speaker 1: there's credit in the United States, but it's not certainly
Speaker 1: not loose credit. It's not easy to get a mortgage.
Speaker 1: And unless you have a high income and a good credit,
Speaker 1: raining and plenty of room you're not over extending yourself,
Speaker 1: You're gonna have a tough time getting a mortgage in
Speaker 1: the United States. And and so what's and so, so
Speaker 1: what's interesting, that's the kind of the lay of the land.
Speaker 1: And and what's interesting is that at the end of
Speaker 1: last year, we have the second half of last year,
Speaker 1: we have some growth in the second there is some
Speaker 1: lift happening to the economy, and we're looking for it
Speaker 1: to be pronounced, pervasive and persistent, and we want to
Speaker 1: put an end of that. Well, so we get pronounced
Speaker 1: and we get pervasive, we didn't get persistent. And the
Speaker 1: leading indicators forward looking indicators at the end of last
Speaker 1: year had all turned down before the weather got bad.
Speaker 1: The leading indicators of construction had turned down well before
Speaker 1: the weather got back. The leading indicators of home price
Speaker 1: inflation turned down even before the taper tantrum when Bernardi
Speaker 1: opened his mouth. So that was last June, the last spring. Yeah,
Speaker 1: it's a year ago. And so what what this is
Speaker 1: saying is that when we go back to what is
Speaker 1: a cycle, why is there one? It's it's part of
Speaker 1: the free market, that there were these indulge inous, cick
Speaker 1: local forces that had been rolling over before Bernanki opens
Speaker 1: his mouth, before the bad weather, and then uh, we
Speaker 1: get something like Q one. Now I'm not saying Q
Speaker 1: one GDP as weak as it was was um unrelated
Speaker 1: to weather. I think weather had a lot to do
Speaker 1: with it, obviously, and so we will get some bounce
Speaker 1: back from that. But but that I suspect is noise.
Speaker 1: I think the trend inside of that remains down. And
Speaker 1: when we look at the forward indicators, there's no imminent
Speaker 1: lift that's supposed that that's there. And so you look
Speaker 1: at um the thinking on the economy and there seems
Speaker 1: to be confusion. You know, there's there's there's still a
Speaker 1: relatively kind of optimistic we're gonna get escape philosophies on
Speaker 1: and so forth. But there are sarious signals like bond yields,
Speaker 1: for example, that are saying, you know, there's something happening.
Speaker 1: Maybe it's geopolitical stuff, maybe it's something else. We don't
Speaker 1: know exactly, but it doesn't fit this picture of everything's
Speaker 1: green light, no doubt about that. You mentioned Bernanke, who's
Speaker 1: no longer with the FED. What sort of relationship does
Speaker 1: eck Rey have with the Federal Reserve? Um, you know, nothing,
Speaker 1: uh that I can like officially speak of or anything
Speaker 1: like that. I what I can talk about is that, uh,
Speaker 1: earlier there was a there was a close personal relationship
Speaker 1: between my mentor, Jeffrey Moore and uh Sherman Greenspan uh
Speaker 1: And um, you know, Bernankey was probably aware of all
Speaker 1: of that. And I do know that, you know, the
Speaker 1: central banks are aware of our stuff, and in particular
Speaker 1: the future inflation gauge, right because they'd love to see
Speaker 1: some inflation right there looking they would love to see
Speaker 1: some inflation and anywhere Europe too. In Europe and these
Speaker 1: and these future inflation gauges for the Eurozone and for
Speaker 1: the US UM have been down, you know, week for
Speaker 1: an extended period of time. Recently, at the end of
Speaker 1: last year, the future inflation gates started to pick up
Speaker 1: a little bit, but it seems to have stalled out,
Speaker 1: which is kind of a concern. Do you ever look
Speaker 1: at things like the billion price project, that product billion
Speaker 1: price project at m I T where they're tracking all
Speaker 1: these online prices instead of relying on the BLS output
Speaker 1: or sure, sure and that's a that's a that's a
Speaker 1: very interesting way to get at where prices are now.
Speaker 1: Uh And we think that's very interesting. It's a coincident indicator.
Speaker 1: Uh not that doesn't really tell you anything about the future. So,
Speaker 1: but that's still a nice alternate data set. We look
Speaker 1: at the BLS data, we look p P I, c
Speaker 1: p I g GDP to flatter all of these items
Speaker 1: we're looking at, uh, all heavily modeled, with all sorts
Speaker 1: of all heavily model But what happens is over time
Speaker 1: they're going to get the cyclical direction right right, and
Speaker 1: just to ignore the markings on the vertical access and
Speaker 1: look at the line. Yeah, I don't, I don't, Yeah,
Speaker 1: I don't say that any one of these numbers is correct,
Speaker 1: you know, I I but but is this just came up,
Speaker 1: just came up this morning the Boskin Commission. A friend
Speaker 1: had tweeted on the his handle on Twitter as a
Speaker 1: Relevant Investor that his wife was complaining that lamb chops
Speaker 1: are now too expensive, and I said, hey, the Boston
Speaker 1: Commission said you could substitute chicken wings for that, and
Speaker 1: it's the same. There's no food inflation just because you've
Speaker 1: been priced out of one food and are substituting a
Speaker 1: cheaper food. You know, they're trying to take a any
Speaker 1: way to not show higher inflation back in the seventies
Speaker 1: and eighties, and today it's the opposite. Today they want
Speaker 1: to show something. I was talking with somebody who's writing
Speaker 1: an article in there, and they're basically, what are you
Speaker 1: going to believe the a stick or your lying eyes?
Speaker 1: I mean, you know if you're we all know we
Speaker 1: all are. But you also have to put that into perspective.
Speaker 1: We fill our cars with gasoline, and there are ten
Speaker 1: ft tall prices on each corner showing the sign of that.
Speaker 1: But you know I spend fifty dollars a week on gasoline.
Speaker 1: Is not by go back thirty years, fuel was nine
Speaker 1: percent of the family budget. Today even at at a
Speaker 1: hundred dollars a barrel, it's two and a half percent.
Speaker 1: So even though we see that we don't realize that
Speaker 1: could look in Europe it's twelve dollars a gallon, so
Speaker 1: that's a whole different story. But I think people's perspective
Speaker 1: on what they're spending money on. You don't really see
Speaker 1: what college costs, what healthcare costs until you write that
Speaker 1: check for how much. And that's gone up in a
Speaker 1: huge way, much bigger impact than what you buy every day,
Speaker 1: and has a disproportioned impact to you see, and and
Speaker 1: it goes back to needs and wants and and I
Speaker 1: think what may be happening is that you're right, the
Speaker 1: the energy components say at the gas tank is a
Speaker 1: smaller fraction of your family budget than it used to be.
Speaker 1: But what's happening is that you don't have a lot
Speaker 1: of money left over for discretionary spending at the end
Speaker 1: of the day. And that is making you either go
Speaker 1: into your savings or take out credit. And taking our credit,
Speaker 1: I mean the plan here is to get you to
Speaker 1: borrow morning more money, right, which as we see, so
Speaker 1: this is where you see where the policy um of
Speaker 1: I think denying what is happening is dangerous. Uh, we're
Speaker 1: not going back to three train growth anytime soon or never,
Speaker 1: just uh not next decade. Yeah, it looks like five
Speaker 1: ten years. It's not happening, right, And so if that
Speaker 1: is indeed true, and I think I can argue pretty
Speaker 1: strongly that it is, then shouldn't our policies consider that possibility?
Speaker 1: And we don't want to think about it. Here's a
Speaker 1: policies and I'm not listening, not now. The policy instead is, oh,
Speaker 1: you know, don't worry, don't freak out, to be happy,
Speaker 1: interest rates will stay low. And if you shut off
Speaker 1: and consume, and if you default, it was your fault,
Speaker 1: you know, And he said, it's a it's a kind
Speaker 1: of a weird set up here. Well, it is true,
Speaker 1: if you default, it's your fault, but you're the one
Speaker 1: to buying this in the first place when the policy
Speaker 1: is to borrow. Uh And um, I don't know how
Speaker 1: the whole student loan thing will get reconciled, but at
Speaker 1: some point that I'll have to the Elizabeth Warren proposal
Speaker 1: to say, hey, people, who are you know, we've bailed
Speaker 1: out banks, you have this trillions and student loans, why
Speaker 1: not reset that to the what we're currently lending. You'll
Speaker 1: you'll it'll be tremendously stimulative because suddenly all these students
Speaker 1: will be able to afford to move out of their
Speaker 1: parents base, or they'll buy another Apple product. Um they're
Speaker 1: buying that apple product anyway. The question is can we
Speaker 1: get them out of their parents based and the format
Speaker 1: how household formation get married? Have two point three kids
Speaker 1: by a half, buy a car, and that's how we'll
Speaker 1: get you know. The weird thing about the millennials, the
Speaker 1: group that I think are defined as being born between
Speaker 1: nine eight and two thousand, strictly in numbers, not necessarily
Speaker 1: in proportions, but in numbers, they're a bigger group than
Speaker 1: the baby Boomers were. Like, this is potentially a demographic
Speaker 1: cohort that can drive now the problems and their risk averse.
Speaker 1: They're underemployed, they're unemployed or unemployed. They're forming households at
Speaker 1: a much lower rate than the previous generation because their
Speaker 1: peer group is in the same situation. There's something kind
Speaker 1: of like I think, you know, in an earlier generation,
Speaker 1: if you lived at home, it's like what are you doing?
Speaker 1: You get right out right, and because your peers were,
Speaker 1: Now if your peers are at home, I can stay
Speaker 1: at home too. Right, there's a different slightly different in
Speaker 1: it's far less socially framed upon. Right, that's it's not
Speaker 1: stigmatized like it would have been with the generation. I'm
Speaker 1: not gonna get I'm not going to get the quote
Speaker 1: exactly right, but I'm gonna be able to paraphrase this.
Speaker 1: I want to go to the other end of the
Speaker 1: spectrum to retirees and uh. During Yellen's confirmation and may
Speaker 1: I think it was a Senate confirmation here, yes, and
Speaker 1: there was there was a senator from a retiree state,
Speaker 1: like an Arizona state, something like that. And so it's
Speaker 1: either McCain or whoever was McCain someone I don't yeah,
Speaker 1: as probably junior center. And so he says, you know,
Speaker 1: miss Yellen, UM, my constituents have done everything that they
Speaker 1: were supposed to do. They worked, they saved for their retirement. Uh,
Speaker 1: they worked out their budget, they set everything up, and
Speaker 1: your policies are crushing them because of the zero interest rates.
Speaker 1: Not so far from the truth. And she responds, and
Speaker 1: it was an amazing moment of I'm going to say
Speaker 1: cognitive dissonants where she says, well, you know, my policies
Speaker 1: or our I think Chairman Bernanke's policies that she was
Speaker 1: going saying she was going to continue, Um, you know,
Speaker 1: they shouldn't look at it that way. They should look
Speaker 1: at it, uh that these policies are giving them an
Speaker 1: economy that they can go, that they can go and
Speaker 1: find a job in so assuming they can. But it's
Speaker 1: I thought it was kind of funny that you're telling
Speaker 1: a retiree to go find a job and that's the plan.
Speaker 1: So here's that weird. Here's the more articulate way she
Speaker 1: should have said that, Hey, listen, we're confronted. Let me
Speaker 1: let me put it this way. Imagine if someone pushes
Speaker 1: a button and everybody who testifies in Congress has to
Speaker 1: tell the truth, just hypothet So it's like that Jim
Speaker 1: Carrey movie that's which is, which is utterly hilarious. But
Speaker 1: imagine if you could push the truth button and Yellen says,
Speaker 1: I'm completely empathetic to the people in your state. However,
Speaker 1: you have to understand, this economy is hanging on by
Speaker 1: its fingernails. You have a Congress that refuses to do
Speaker 1: what we normally do after recession, which is stimulated. In fact,
Speaker 1: if this economy would have if this Congress would have
Speaker 1: did what the Congress in No. One oh two did,
Speaker 1: then we'd have a two and a half percent g
Speaker 1: d P and a five unemployment rate. Instead, government, state, local,
Speaker 1: and federal are a drag on the economy because they're
Speaker 1: laying off huge numbers of policemen, firemen, teachers, etcetera. So
Speaker 1: that's the first truth I have to share with you,
Speaker 1: And the second truth I have to share with you
Speaker 1: is we're the only game in town. And if we
Speaker 1: stop quee, at least this is what I believe, she believes.
Speaker 1: If we stop que, you idiots keep telling me that
Speaker 1: que doesn't work and the policies of failure. Hey, if
Speaker 1: I stop this, we're back in a recession. Home prices plummet,
Speaker 1: rates normalize, Banks that have their books laden with bed
Speaker 1: mortgages start not only going, but we end up back
Speaker 1: in a great recession again. Well, you guys are not
Speaker 1: gonna be able to fix this. You don't know that
Speaker 1: it would be a I would. I would. I'm just
Speaker 1: telling you the truth. She would say, Hey, do you
Speaker 1: want us to let Bank America City, Meryl Goldman? You
Speaker 1: want us to let those guys go back again? Because
Speaker 1: you guys spend a trillion dollars and it's a false
Speaker 1: set up to even think that we can avoid recessions.
Speaker 1: I think that's part of bad framing here. And if
Speaker 1: we want to go down the road of like different scenarios,
Speaker 1: what might have happened? I I sometimes wonder, um, what
Speaker 1: if the Great Recession was greater? So my you know,
Speaker 1: look I'm talking my book now you know my view was, Hey,
Speaker 1: the right thing to do is down the street. We
Speaker 1: have that nice building with the vertical columns. It's called
Speaker 1: the bankruptcy Court. And I don't care if you Goldman
Speaker 1: Saxon Leman with Mancamara City Group what we ended up
Speaker 1: doing for GM prepackaged bankruptcy where the government is providing
Speaker 1: the dead rim possess shan finance, the dip finance, that's
Speaker 1: the that's tearing off the band aid. Maybe the Dow
Speaker 1: wouldn't have found a bottom at six and change. Maybe
Speaker 1: the six six six bottom in the SMP would have
Speaker 1: been five five five or four for four. Picture if
Speaker 1: that sets you up for better, but then you're much healthier.
Speaker 1: My favorite example is you take the bank American Merrill
Speaker 1: Lynch Countrywide Company, which is one company you basically say
Speaker 1: to to Countrywide, you'r to that whole group. Your your bankrupt.
Speaker 1: So we're gonna spin out Merrill Lynch as a free
Speaker 1: standing debt free investment bank. We're gonna spin out Countrywide
Speaker 1: as a free standing debt free no bad mortgages zombies. Right,
Speaker 1: We're gonna take Bank of America. We're gonna take all
Speaker 1: of your shareholders and wipe them out. We're gonna take
Speaker 1: your bond holders and give them a giant haircut, so
Speaker 1: the bonds are worth fifteen cents on the dollar. We're
Speaker 1: gonna take all the what people are calling toxic assets,
Speaker 1: but really it's toxic prices. These assets at tens on
Speaker 1: the dollar have upside. We're gonna spin that out and
Speaker 1: sell it to the public. Then we take Bank America
Speaker 1: and we spin them out as a free standing, clean bank.
Speaker 1: And if we do that, bank after bank after bank,
Speaker 1: it's a lot of turmoil, it's a lot of fear,
Speaker 1: but it's over. At the end of two thousand and nine,
Speaker 1: you have a healthy economy with a healthy banking system
Speaker 1: and the possibility of normal, not fed manipulated growth. But
Speaker 1: politically that was especially when you again, I'm gonna I'm
Speaker 1: gonna when you have a surgical screw up, you don't
Speaker 1: send the guys in to fix it who were operating
Speaker 1: on the patient. So taking taking Larry Summers and taking
Speaker 1: Tim Geithner, who were two of many key players who
Speaker 1: helped create the crisis, putting these guys back in charge,
Speaker 1: there's not going to be an emission of, hey, we
Speaker 1: really screwed up. With greater recessions, a great recession, among
Speaker 1: other things, may have resulted in a more wholesale change
Speaker 1: in Washington, Chad. You see, because it takes a lot
Speaker 1: like people explore, explain that. Because I'm on the same
Speaker 1: page as you are. I mean, look at the you know,
Speaker 1: you know, because then you're going to say, I I
Speaker 1: don't want you to try to fix it. I want
Speaker 1: someone new. Right, That's right. Not only do I not
Speaker 1: want you to fix it, you and your party, you,
Speaker 1: the Republicans, you, the Democrats, you're both out. We're gonna
Speaker 1: try something new. And by the way, this idea of
Speaker 1: finance being economy, let once these guys go belly up,
Speaker 1: that reverts back to its historical me. It was wildly outsized.
Speaker 1: We had financialized our economy. The process of definancializing the
Speaker 1: economy was interrupted by the bailoff, you know, and and
Speaker 1: you know, again taking that really big picture over a
Speaker 1: couple of centuries, forty seven recessions in twenty and twenty
Speaker 1: two years. Some of them were bad, uh, some of
Speaker 1: them were mild, but we've survived them. Which what is
Speaker 1: this notion, This is what I would really push back
Speaker 1: against this, What is this notion that we can do
Speaker 1: all kinds of crazy things in in in, in in,
Speaker 1: in the name of avoiding recession. That is a silly
Speaker 1: That is a really silly thing for policymakers to actually do,
Speaker 1: because the price you're paying relates to significant components of
Speaker 1: the future, and we're feeling it that now, I think
Speaker 1: petically reduced growth. People feel that and look at you
Speaker 1: can look around at other major developed economies and you
Speaker 1: look at Europe and they're they're sick in many ways,
Speaker 1: and you look at Japan and they're sick in many ways.
Speaker 1: And do we really want to do the same thing?
Speaker 1: I mean, can we consider something else? Well, this is
Speaker 1: what happens when you have a finance sector that's very
Speaker 1: fragile and you have a banking sector. So the good
Speaker 1: news is and you could tell me if this isn't
Speaker 1: any of the data. Five years later, we have an
Speaker 1: economy that, uh, in theory, a lot of the bad
Speaker 1: housing has been bought by private equity because they've been
Speaker 1: able to borrow money for practically free. So you have
Speaker 1: thirty five billion dollars and PE funds that are have
Speaker 1: become the new home flippers right there buying renting them.
Speaker 1: And then in a way a period of time, you
Speaker 1: have banks that have been slowly shedding all these mortgages
Speaker 1: and all these foreclosures and bank old real estate. But
Speaker 1: you have this, but we don't really know what the
Speaker 1: data is because they don't have to disclose it. You
Speaker 1: know that this is true, and yeah, you know, interest
Speaker 1: rates are very important component of the free market. And
Speaker 1: when when you interfear and and and put your on
Speaker 1: the skin manage control. Look, isn't that even the opposite
Speaker 1: of what a free market is? By the way, that
Speaker 1: that was that was always the great paradox about Alan Greenspan,
Speaker 1: the ultimate randy and free marketer, who refused to take
Speaker 1: his hand off the wheel. Here you go, so so here,
Speaker 1: you know, you might argue, under certain emergency moments you
Speaker 1: have to do things. But at what point is the
Speaker 1: emergency over? And when do we get to see what
Speaker 1: it feels like without the pain medicine and what where
Speaker 1: we really are because that ten years after the Christ,
Speaker 1: that is an important thing to understand. What does it
Speaker 1: feel like to stand on your leg? You're not gonna
Speaker 1: know that until that's my my I don't do forecast.
Speaker 1: The one prediction i'mill in a way make is you're
Speaker 1: probably not going to see that one of two things happen.
Speaker 1: Either ten years elapse or someone named Paul as their
Speaker 1: last name becomes elected president. So if Ron Paul ran
Speaker 1: In Pole becomes president, and I'm by the way, I'm
Speaker 1: I'm right, I'm wishy washing on both of them, although
Speaker 1: I find Ron Pole to be a fascinating dude. But
Speaker 1: but when you get someone who's going to step in
Speaker 1: and say, hey, I'm a libertarian and I don't believe
Speaker 1: the government should be interfering in the free market. Therefore
Speaker 1: I'm going to have the FED stand down, and if
Speaker 1: we go into a recession, it'll be cleansing, it'll be Catharctic,
Speaker 1: and the economy we will, we we will. It's not
Speaker 1: even if the idea that you're not going to go
Speaker 1: into recession is just far. It will happen. And I
Speaker 1: would feel much better if I was on the policy
Speaker 1: and responsible for policy, or just even as an American,
Speaker 1: if we had an interest rate to cut when we
Speaker 1: went into when we went into being able to cut
Speaker 1: rates rates high enough that you could on a tactical
Speaker 1: basis reduce an interest rate from the central bank because
Speaker 1: the fiscal side can move that quickly. Now I know,
Speaker 1: it's like the emergency. In case of emergency, break glass
Speaker 1: glass is broken there. So I look, we're not Japan.
Speaker 1: Japan is so different than us, where we we have
Speaker 1: a lot of things going for us that they don't.
Speaker 1: But when you look at them and they're into their
Speaker 1: third lost decade, I don't even think people understand that
Speaker 1: they are generations their twenties, five, four or five years
Speaker 1: into this thing, right, So, um, here they are, and uh,
Speaker 1: they own a ton of their treasury market, of their
Speaker 1: treasury their own the j the Japanese treasury market is
Speaker 1: the second largest treasuring market and the Bank of Japan
Speaker 1: owns most of it. Uh, lending money to themselves. Yeah,
Speaker 1: at least they know what it is looking for. This
Speaker 1: is and that's even kind of a weird concept if
Speaker 1: you think too hard about it. My my, again, my
Speaker 1: anti FED friends would say, isn't that what the Federal
Speaker 1: Reserve is doing? They all start they are and I
Speaker 1: you know, if you start to think too much about
Speaker 1: it, it it gets bothersome. But but let's think too much
Speaker 1: about it just yet. And and just one one. It
Speaker 1: was a couple of weeks ago there was no private
Speaker 1: bid for a j GB for a day and a half.
Speaker 1: That's unbelievable. That's a problem. Well like point six, Now,
Speaker 1: what if they get what if they get what they
Speaker 1: wish for an interest rates go up, they'll be able
Speaker 1: to sell more debt, but they're ongoing debt is going
Speaker 1: to be more. So this is one of the reasons
Speaker 1: why I think you really do need to believe the
Speaker 1: FED in the US that they want to get out
Speaker 1: of this game, and that they're serious about getting out
Speaker 1: of it, and that the plan is that the economy
Speaker 1: needs to reach escape velocity soon. And I'm afraid on
Speaker 1: that last part escape pelocity isn't happening. So so let's
Speaker 1: put you in charge of policy for a moment. Let's
Speaker 1: have a hypothetical play. You're in charge of policy. What
Speaker 1: do you do all policy? You're you're philosopher king, what
Speaker 1: do you do? Yeah? You know, I would, I would,
Speaker 1: I would be less scared of a recession. Uh. And
Speaker 1: uh so that's bullet point number one. Recessions are going
Speaker 1: to happen. To learn to expect it, deal with it,
Speaker 1: and don't be freaked out by it. Don't be freaked
Speaker 1: out by it, don't. Uh, the world we all always turns,
Speaker 1: So we all always turns. I mean, there there are
Speaker 1: lots of policy challenges that we have, but the main
Speaker 1: one is that our trend growth uh is so low.
Speaker 1: Do we do anything about that? Or is it just
Speaker 1: a fact of life that we have to Except you
Speaker 1: you have to think about productivity. What what can we
Speaker 1: do to improve productives? I'm open for suggestions on that.
Speaker 1: But but but here you're probably talking about it destroyed
Speaker 1: Facebook and productivity goes up. You're probably talking about different
Speaker 1: ideas around uh, infrastructure and education and things of this nature.
Speaker 1: But and I'm not an expert on either of those,
Speaker 1: but those are areas where those are productivity enhancing type.
Speaker 1: Um the policy east that you want to be thinking about.
Speaker 1: And give me an example of a productivity enhancing policy. Well,
Speaker 1: let's just say that some of the infrastructure worked better. Listen,
Speaker 1: you're talking, you're preaching to the every day when you
Speaker 1: go into the office, someone's like, oh my gosh, I
Speaker 1: was stuck for We're here in New York City and
Speaker 1: you know, I was stuck in the subway for twenty
Speaker 1: minutes because X Y Z happens. See, I only take
Speaker 1: the seven. There is the best of But a couple
Speaker 1: of years ago, I was in Troy complete. That's that's
Speaker 1: an infrastructure example. They completely renovated this line and the
Speaker 1: trains come like anyone who runs for seven is an
Speaker 1: idiot because they seem to come every two and a
Speaker 1: half minutes. And I'm not a productivity enhancing you genormous.
Speaker 1: You can rely on it. It's there. You you see
Speaker 1: the trainer. You know I'm walking down the stairs. The
Speaker 1: doors are open. I don't run to the doors closed.
Speaker 1: They there's a term called pre walking. You walk to
Speaker 1: the spot on the platform that's gonna let you off
Speaker 1: at where you want to be in and your exit
Speaker 1: stoff profess and they're different for every stop. So people
Speaker 1: don't all bunch up. It's not this. There's some really
Speaker 1: fascinating people outright, civic engineering. There's a lot of fascinating things.
Speaker 1: So the pre walking is, so I've this happened this morning.
Speaker 1: I walked down the stairs and as I'm walking down
Speaker 1: the stairs to the seven, as the subway doors start
Speaker 1: to close, people are running and I'm just think to myself, Idget's,
Speaker 1: you know, just morons. And by the time I walk
Speaker 1: halfway down the platform to where I know when I
Speaker 1: get into is gonna let me out by the stairs,
Speaker 1: we're gonna get out in Grand Central, the other train
Speaker 1: is already pulling into the platform. They come like three there,
Speaker 1: three during rush hour three minutes. It's it might as
Speaker 1: well be a giant conveyor belt. That's a that's a
Speaker 1: a good example. Um, but these things, you know, I
Speaker 1: don't think there's any one silver bullet here. Uh. And
Speaker 1: and only the other component is if you have this
Speaker 1: this theoretical preemptive fed policy where if they're ahead of
Speaker 1: the cycle, not behind it, uh, then they could act countercyclically.
Speaker 1: When there's a run up in the cycle, they could
Speaker 1: tamp it down, and there's a downturn, they can cut
Speaker 1: off the bottom a little bit, smooth out and smooth
Speaker 1: the volatility a little bit towards all. Oh, the Great moderation, right. Um, Now,
Speaker 1: the problem with the Great Moderation is that, uh, if
Speaker 1: you look at it closely, Um, the best explanation is
Speaker 1: we were lucky. It's not it's not that the FED
Speaker 1: did anything particularly helpful. And and when you look at
Speaker 1: FED policy over time, you find that they're very reactive.
Speaker 1: Including the most recent cycle, they were late to the game,
Speaker 1: uh and totally and then they've been they've been trying
Speaker 1: to make up for it in size. And that's actually
Speaker 1: pro cyclical because if you're hind the highs are higher
Speaker 1: behind the curve. If you think about an engineering kind
Speaker 1: of thing, and these the way it feeds back, it
Speaker 1: actually makes the cycle bigger. And they're behind it in
Speaker 1: a big way. Remember subprime was contained you see. So
Speaker 1: this also bugs me a little bit because you know
Speaker 1: at some point, uh, that volatility comes back, and that
Speaker 1: when you're at low altitude, uh, makes makes for a
Speaker 1: bumpy ride. And uh, we don't even have interest rates
Speaker 1: anywhere where you can lower them. So this is why
Speaker 1: I have some anxiety. So if we were an aircraft
Speaker 1: and Q one comes along, we're essentially scraping our belly
Speaker 1: along the top of the wheat fields. If we're lucky,
Speaker 1: maybe even you know. And and when we look at
Speaker 1: the statistics on the United States and on Europe and
Speaker 1: on an on Japan in particular, uh, the patterns are
Speaker 1: basically the same. Uh. You know we I know that
Speaker 1: people year look across the pond at Connell, Europe and
Speaker 1: we say, yeah, you guys got problems, Yeah you have
Speaker 1: some inflation issues. But actually we're a mirror image of that. Uh.
Speaker 1: And both of us are actually kind of following a
Speaker 1: track that Japan uh is They're in front of us
Speaker 1: on it. And so I don't think we can really
Speaker 1: reasonably claim that we're different here. So back to the
Speaker 1: original question, what would benevolent dictator Lachman do? Well, one thing,
Speaker 1: the first thing you said was be a little more
Speaker 1: anticipatory and not as reactive. Well, the second thing I'm
Speaker 1: hearing is, if you're gonna spend spend on productivity enhancing
Speaker 1: things like infrastructure, roads, bridges, cell systems, internet, go down
Speaker 1: the whole the whole run, what is that? What else
Speaker 1: is left for us to do to get back on track?
Speaker 1: I would, and I expect an op ed from you
Speaker 1: on this one of these days, how to fix the
Speaker 1: US economy free easy steps. I think I think my
Speaker 1: it's are best spent on gonna make risk, But but
Speaker 1: are you going to actually make me? I will write
Speaker 1: this how to fix the Economy and threesy steps. So
Speaker 1: the first thing, uh, except that recessions are inviable, right,
Speaker 1: you can't. Second thing is be a little more anticipatory,
Speaker 1: not quite as reactive well, which they've been trying to
Speaker 1: do in theory. They can't. They just can't do it.
Speaker 1: I'm not gonna hold They're not gonna hold my breath
Speaker 1: on that, because because basically they're all economists, right, they
Speaker 1: all got these models, and models at their very root
Speaker 1: do not forecast recessions because they extrapolate things. So what
Speaker 1: they're saying is, oh, look at grew a couple of
Speaker 1: percent last quarter, is gonna go a couple of percent
Speaker 1: next quarter. Although fair to the economists, they have forecasts
Speaker 1: twelve of the past two recessions. So there you go.
Speaker 1: I have to give them that. So so the second
Speaker 1: so we have the enhanced productivity through infrastructure to not
Speaker 1: this void recessions at all costs but accepted as a
Speaker 1: natural part of the cycle. Right. This is really on
Speaker 1: the fiscal side. It's less of the central bank issue, right,
Speaker 1: which is why the truth telling Janet Yellen said, hey man,
Speaker 1: this is up to you guys. You guys have left
Speaker 1: this on. This is the big this is the big
Speaker 1: switcheroo that happened. Okay, you have the great recession and
Speaker 1: then you have the central bank come in and say, oh,
Speaker 1: it's not structural. There's no, no, nothing to see here.
Speaker 1: It's not structural. It's all cyclical. We'll take care of it.
Speaker 1: And five years later they're like, you know, maybe maybe
Speaker 1: it is structural, and actually it is. It probably very
Speaker 1: likely is structural, in which case it's not a central
Speaker 1: bank issue in the first place. It's really a policy issue.
Speaker 1: And this is where the discussion should be in Washington
Speaker 1: about what's going on with trend growth because, by the way,
Speaker 1: look at Europe in Japan and this is the world
Speaker 1: we live in and what are we going to do
Speaker 1: about So another another column I haven't written is but
Speaker 1: is in the back of my head, and we've talked
Speaker 1: about it before, is on that exact point. And if
Speaker 1: I want the most controversial headline I could get, by
Speaker 1: the way, people don't realize this. When you submit a
Speaker 1: column to Bloomberg of the Washington Post in New York Times,
Speaker 1: you give them a proposed headline, but an editor actually
Speaker 1: writes that you don't get to so every now and
Speaker 1: then I'm like, hey, that's a really good headline, And
Speaker 1: then there are other times were like, no, that's not
Speaker 1: at all what I mean, and you're gonna close trouble
Speaker 1: with that. But um so having a good editor is
Speaker 1: really really important. But what the headline that just pruss
Speaker 1: my cranium was how the Federal Reserve supports the Tea Party,
Speaker 1: And essentially the Federal Reserve could have said, as you suggested, Hey,
Speaker 1: recessions are inevitable. This is a fiscal not a monetary issue.
Speaker 1: This is not a this is a structural issue that
Speaker 1: we are not involved. So I'm not gonna We're not
Speaker 1: gonna do anything because it's non cyclical and it's up
Speaker 1: to you. And if you guys don't do anything, stuff
Speaker 1: is gonna get really bad. But the self correcting mechanism
Speaker 1: is you idiots get thrown out of office and someone
Speaker 1: else will come in and fix it. So so in
Speaker 1: a really again, these are the unintended consequences. Earlier, I
Speaker 1: said the FED bailout prevented the ongoing definancialization of the economy.
Speaker 1: Now I'm saying the FED bailout the FED monetary policy
Speaker 1: instead of fiscal policy is keeping people elected who under North.
Speaker 1: Look when things get bad, President, senators, congressmen, governors, they
Speaker 1: all get thrown out, all right. Next is what this
Speaker 1: is where I was going with Maybe the Great Recession
Speaker 1: wasn't great enough. That's why I wanted to bring you
Speaker 1: back to and then and then Barry also in so
Speaker 1: it's in March and April of two thousand and nine
Speaker 1: that we're forecasting our recovery. Now, if you were asking me,
Speaker 1: do we need emergency Central bank intervention towards the end
Speaker 1: of O nine or into I don't think I could
Speaker 1: have argued for it. Oh okay, but what do you
Speaker 1: know later weight fine, but but but but but but
Speaker 1: but when you're on the other side, when you've gone
Speaker 1: through and you're the why why we still already? So
Speaker 1: that would have been a moment to back off. If
Speaker 1: we had to, we could have come back. You always
Speaker 1: reserve the right to come back, But at that moment
Speaker 1: you've got the cycle going. The other way. But here,
Speaker 1: if you're reactive, you're not forward looking, which is what
Speaker 1: the system is, then you don't see that and you
Speaker 1: miss the opportunity. And I think that's a really great
Speaker 1: not to end on. So locksman, this has been really fascinating.
Speaker 1: I'm gonna start calling you a lot, and um what
Speaker 1: will end up doing. The broadcast part will go up
Speaker 1: on I don't know the queue yet when it's released,
Speaker 1: but I'll send you some infos. So here's what I'm
Speaker 1: gonna do. Here's what I'm gonna start doing when each
Speaker 1: of these go to broadcasts. So I'm gonna put up
Speaker 1: a page about this. By the way, I didn't get
Speaker 1: to mention you wrote a book eating Beating the business side,
Speaker 1: the business cycle, So I'll put up a link to
Speaker 1: that on Amazon. I'll put up so we'll have that
Speaker 1: explains the framework that we use. I'll link back to
Speaker 1: Eckery you guys, and and full disclosure, you've published in
Speaker 1: my blog the Big Picture every time, and then you'll
Speaker 1: do a longer form article and we'll we'll post it there.
Speaker 1: But you put out on your side are a couple
Speaker 1: of regular charts that get up there. Absolutely there's the
Speaker 1: weekly leading index there, the future inflation gauges there. The
Speaker 1: business cycle dates are all there for one economies around
Speaker 1: the world, so including all the bricks, and that's all
Speaker 1: at business cycle dot com. Thanks so much for coming,
Speaker 1: Thank you, Barry, thanks for having me. You're listening to
Speaker 1: Masters in Business with Berry rid Holts on Bloomberg Radio.