WEBVTT - P&L: The Biggest Risk Is a Trade War, Nick Sargen Says 0:00:04.760 --> 0:00:08.080 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.119 --> 0:00:11.200 Along with my co host Lisa Abramowitz. Each day we 0:00:11.280 --> 0:00:14.480 bring you the most important, noteworthy, and useful interviews for 0:00:14.520 --> 0:00:16.560 you and your money, whether you're at the grocery store 0:00:16.800 --> 0:00:19.960 or the trading floor. Find the Bloomberg P L Podcast 0:00:20.000 --> 0:00:30.400 on iTunes, SoundCloud and at Bloomberg dot com. It is 0:00:30.440 --> 0:00:33.440 time for me to talk about my favorite subject, potential 0:00:33.720 --> 0:00:37.160 market catastrophes. I really like to sort of think about 0:00:37.280 --> 0:00:40.200 the potential iterations of what could unfold. Somebody once said 0:00:40.200 --> 0:00:42.960 to me, you should should have start something called catastrophe corner. 0:00:43.000 --> 0:00:44.839 But here with me to to sort of join me 0:00:44.880 --> 0:00:48.360 in my catastrophe corner is Nick Sargeant, chief economist at 0:00:48.360 --> 0:00:51.640 Fort Washington investment advisor and author of the new book 0:00:51.760 --> 0:00:55.600 Global Shocks. One of the things that you take a 0:00:55.640 --> 0:00:57.840 look at, that you are looking at right now is 0:00:58.040 --> 0:01:01.480 whether Donald Trump, the next president of the United States, 0:01:01.800 --> 0:01:04.800 will be a global stock. So will he be? UM? 0:01:04.800 --> 0:01:07.480 And I think the answer is to be determined. UM. 0:01:07.520 --> 0:01:12.920 I think his policies have the potential to be transformative 0:01:13.000 --> 0:01:16.319 as Ronald Reagan's work. So what do I mean by that? UM? 0:01:16.600 --> 0:01:20.880 Big tax cuts, but also you don't have spending under control. 0:01:21.400 --> 0:01:24.800 So the good news the market likes tax cuts deregulation. 0:01:25.000 --> 0:01:29.880 The bad news is outsized budget deficits. And the biggest 0:01:29.920 --> 0:01:33.160 difference though in the Reagan era was interest rates. He 0:01:33.200 --> 0:01:37.000 inherited record high rates thanks to him and the Fed, 0:01:37.319 --> 0:01:41.800 they brought down inflation, so um interest bond yields declined, 0:01:42.600 --> 0:01:46.600 but after adjusting for inflation, they actually rose in real terms. 0:01:46.640 --> 0:01:49.639 So the difference today with Trump is easy inheriting record 0:01:49.720 --> 0:01:53.120 low rates. And so what I see is the potential 0:01:53.320 --> 0:01:58.279 for significantly higher bond yields and a super strong dollar, 0:01:58.680 --> 0:02:02.360 which will make it harder for him to contain trade. Well, 0:02:02.480 --> 0:02:05.040 here's here's what I'm wondering. I mean, the market is 0:02:05.080 --> 0:02:07.520 pricing in a lot of hypotheticals right now. It's been 0:02:07.600 --> 0:02:10.320 very hard to sort of understand the moves and sort 0:02:10.360 --> 0:02:13.040 of whether they are long term or very short term. 0:02:13.120 --> 0:02:16.720 Knee jerk. As we were talking about offline, how much 0:02:16.760 --> 0:02:19.760 control does does President elect Trump really have? I mean, 0:02:19.800 --> 0:02:23.560 can't the market get ahead of him before he does anything? Oh? Absolutely? 0:02:23.720 --> 0:02:27.480 And that's why I say, you know, I think right now, um, 0:02:27.520 --> 0:02:32.200 when I ask the direction of the moves. Um, it 0:02:32.240 --> 0:02:33.880 was a surprise outcome for me, So I have to 0:02:34.040 --> 0:02:36.480 scrap what I had written before and said, well, wait 0:02:36.520 --> 0:02:38.400 a minute, Um, if this is the case, what would 0:02:38.400 --> 0:02:41.480 I expect. The easy call for me was higher bond yields, 0:02:41.880 --> 0:02:45.520 stronger dollar, I said, stock market people are gonna like 0:02:45.800 --> 0:02:48.760 tax cuts, so I can see that going up. But 0:02:49.240 --> 0:02:52.000 what you know, to your point, what I think they're 0:02:52.000 --> 0:02:57.040 not thinking is second round effects. Uh, we've had six 0:02:57.120 --> 0:03:02.960 consecutive quarters of profits declining or flat. So if he 0:03:03.000 --> 0:03:06.760 can't turn that around overnight, and if suddenly I wake 0:03:06.880 --> 0:03:10.920 up and I've got significantly higher bond deals to me, 0:03:11.680 --> 0:03:14.919 the market then is vulnerable to a correction. And how 0:03:14.960 --> 0:03:17.399 long do we see? How long does the market give 0:03:17.440 --> 0:03:20.359 Trump to see? You know, as Leasa pointed out, all 0:03:20.360 --> 0:03:22.280 of us is rhetoric right now. We don't know what's 0:03:22.280 --> 0:03:24.519 going to happen, So how long until we make those 0:03:24.600 --> 0:03:27.800 judgments or do we just kind of you know, bet here, 0:03:27.840 --> 0:03:31.000 bet here, bet here, kind of hedge against everything. Yeah, 0:03:31.040 --> 0:03:34.000 that's great question. I don't have the answer, but here's 0:03:34.040 --> 0:03:37.840 what I'm looking for. You don't have anything right now. 0:03:37.880 --> 0:03:42.000 Everything's clay, it's putty. It can be changed. The most 0:03:42.040 --> 0:03:45.480 important decision is going to be who's his secretary of Treasury. 0:03:45.640 --> 0:03:48.840 What is his secretary of the Treasury say, because on 0:03:48.960 --> 0:03:51.200 his campaign, which I heard and I was in New York, 0:03:52.160 --> 0:03:58.360 he's talking massive tax cuts and spending increases, and I'm 0:03:58.400 --> 0:04:00.839 sure every advisor, I'm sure con Ris is going to say, 0:04:00.960 --> 0:04:04.560 Mr President, with all due respect, he can't do that, 0:04:04.920 --> 0:04:07.440 and so then he may scale back. So I would 0:04:07.480 --> 0:04:11.080 say to you, I want to see a plan in place, 0:04:11.600 --> 0:04:14.280 and you're not going to see that until you've got 0:04:14.320 --> 0:04:16.840 the new Secretary of the Treasury to work with him. 0:04:17.000 --> 0:04:19.720 So in the meantime, I think we're in limbo land. Well, 0:04:19.760 --> 0:04:21.560 when you talk about a global shock, I want to 0:04:21.560 --> 0:04:24.840 go back to your book. Uh, what is the sort 0:04:24.880 --> 0:04:27.800 of transmission mechanism here? Because the last one it was 0:04:27.800 --> 0:04:30.400 the financial sector. What is it going to be this time? 0:04:30.880 --> 0:04:35.120 You know, they all play out differently. Most people this time, 0:04:35.160 --> 0:04:39.200 even before Trump would say, is the bond market a bubble? 0:04:39.320 --> 0:04:42.839 You know we have these record low interest rates. Um, 0:04:42.880 --> 0:04:47.039 I'm an economist. I say that can't continue forever. So 0:04:47.279 --> 0:04:50.320 you know you were anticipating could there be some development, 0:04:50.360 --> 0:04:54.440 could it be higher inflation, stronger growth, whatever, um. But 0:04:54.480 --> 0:04:56.960 I would say, Lisa, if that was what I was 0:04:57.040 --> 0:05:00.200 talking about, then I would say, you know what, that's 0:05:00.240 --> 0:05:02.960 going to be a sell off. But I don't put 0:05:03.000 --> 0:05:06.560 it in the category of catastrophe of crisis. So what 0:05:06.600 --> 0:05:11.000 I'm basically saying is, to me, the thing I'm most 0:05:11.080 --> 0:05:14.280 concerned about is the potential for a trade war that 0:05:14.480 --> 0:05:18.240 is not priced into the market. Now again, hold on 0:05:18.279 --> 0:05:20.680 a second. You said it's not priced into the into 0:05:20.720 --> 0:05:22.320 the market. What would you have to see for a 0:05:22.360 --> 0:05:24.800 trade war to be price into the market. I think again, 0:05:24.920 --> 0:05:27.960 what people are waiting to see with Donald Trump? He's 0:05:28.000 --> 0:05:31.479 a self described negotiator. So is he going to talk 0:05:31.600 --> 0:05:36.400 tough with Mexico with China and then say I want 0:05:36.440 --> 0:05:39.120 to scare them and I'm going to get better concessions 0:05:39.120 --> 0:05:42.760 out of them. If that were the case, I'd be okay. 0:05:42.800 --> 0:05:46.200 But if we get to the point where he takes action, 0:05:46.720 --> 0:05:50.520 whether or NAFTA, whether um, whether um, you know, on 0:05:50.600 --> 0:05:53.840 the RMB, declaring it, you know, manipulative currency and I'm 0:05:53.839 --> 0:05:57.559 going to impose tariffs, that's when the market would react. 0:05:57.640 --> 0:06:01.120 So it's actions speak louder than words. With the market react, Oh, 0:06:01.240 --> 0:06:06.239 Martin would sell off the scary you know. UM, here's 0:06:06.240 --> 0:06:10.279 again what I think is interesting. I listened to Donald Trump, 0:06:10.520 --> 0:06:13.560 and UM, I understand his his domestic policies on the 0:06:13.680 --> 0:06:17.360 on the international policies. He comes from the school of 0:06:17.400 --> 0:06:20.680 thinking called mercantil is. Um, if you have a trade deficit, 0:06:20.839 --> 0:06:23.440 it's bad. If you have a trade surplus, it's good. 0:06:23.720 --> 0:06:26.720 That's the story. There winners, there's losers. And so what 0:06:26.880 --> 0:06:30.320 I'm saying that concerns me is the type of policies 0:06:30.640 --> 0:06:32.520 that we're pursuing because we saw it on the Reagan 0:06:33.000 --> 0:06:36.960 will expand the trade deficit, but will blame the foreigner 0:06:37.080 --> 0:06:39.160 for it. Nick Sargeant, thank you so much for being 0:06:39.160 --> 0:06:51.000 with us. Nick Sargeant, chief Economist. Right now, I'm looking 0:06:51.040 --> 0:06:53.719 at a thirty year treasury yield that is at the 0:06:53.920 --> 0:06:58.760 highest since December of last year. It has exceeded three 0:06:59.480 --> 0:07:02.840 once again, this is the big question, and here we 0:07:02.960 --> 0:07:06.000 have Lacey Hunt to answer at Lacy Hunt is chief 0:07:06.040 --> 0:07:11.200 economist at Hoisington's Investment management company. UM, is a long 0:07:11.240 --> 0:07:14.480 bond is that I'll just gonna keep rising here. Well, 0:07:14.640 --> 0:07:18.320 anything that happened over the short run. Um. But my 0:07:18.400 --> 0:07:21.680 view is that rates can go up for any number 0:07:21.680 --> 0:07:24.360 of variety of reasons, just as we've seen in a 0:07:24.440 --> 0:07:28.000 very vicious fashion over the over the day since the 0:07:28.080 --> 0:07:31.920 end of the election. But the economy is too fundamentally 0:07:31.960 --> 0:07:34.200 weak for the rates to stay up well, I mean, 0:07:34.520 --> 0:07:37.840 so here, what's the big thinking behind uh the significant 0:07:37.920 --> 0:07:41.160 rise in rates is basically that people are expecting that 0:07:41.360 --> 0:07:45.880 a combination of President elect Trump's trade policies along with 0:07:46.040 --> 0:07:50.960 his infrastructure spending will spur market increases in consumer prices 0:07:50.960 --> 0:07:54.320 that will force the Fed to raise rates UH faster 0:07:54.400 --> 0:07:57.320 than they had expected. That people are pricing in UM. 0:07:57.360 --> 0:08:00.160 It would also lead to people to demand how our 0:08:00.240 --> 0:08:03.040 yields just to compensate them to offset the inflation risk? 0:08:03.680 --> 0:08:05.600 Is that what's going on here is this selling from 0:08:05.600 --> 0:08:09.680 foreign investors. I don't Foreign investors don't hold long bonds. 0:08:10.280 --> 0:08:12.920 If you look at the treasuries study of the foreign 0:08:12.960 --> 0:08:17.760 ownership of the treasuries UM, foreign investors only have six 0:08:17.800 --> 0:08:20.520 percent of their holdings and ten year securities are longer. 0:08:20.920 --> 0:08:23.640 They own a lot of short paper builds in two 0:08:23.760 --> 0:08:27.240 year notes, three year notes, that's their holdings are. Yeah, 0:08:27.600 --> 0:08:30.320 the long bond is a domestic market has been always 0:08:30.720 --> 0:08:33.240 and the and the one the foreign investors that hold 0:08:34.200 --> 0:08:38.240 the tenure in older paper are the big European insurance 0:08:38.280 --> 0:08:41.640 companies who have dollar based liabilities, then they're they're not 0:08:41.720 --> 0:08:45.480 hot players. Um, what we've seen in here is a 0:08:45.480 --> 0:08:50.120 massive rush to judgment. And there is a presumption that 0:08:50.160 --> 0:08:56.280 sounds biblical that biblical times we're seeing a rush to 0:08:56.400 --> 0:08:59.520 judgment in the treasure market. What is that judgment? What 0:08:59.600 --> 0:09:02.319 we've seen that we've seen this before. When when when 0:09:02.360 --> 0:09:05.920 President Obama and bailed his one trillion dollar stimulus that 0:09:06.000 --> 0:09:08.600 was assumed to be highly inflationary is going to lead 0:09:08.600 --> 0:09:13.080 to a boom, fond yells would rise, the dollar would collapse. UM, 0:09:13.120 --> 0:09:17.400 when quantitative easing one was announced, UH saw the same pattern. 0:09:17.520 --> 0:09:22.640 Quantitative to markets presume that they understand the complexities of 0:09:22.640 --> 0:09:26.400 the macroeconomics. And the fact of the matter is that 0:09:26.720 --> 0:09:32.360 um that that deficit spending actually carries a negative multiplier, 0:09:32.400 --> 0:09:35.920 It contracts the economy, doesn't croyd. This is this is 0:09:35.960 --> 0:09:38.040 the big debate to me, and I'm so glad that 0:09:38.040 --> 0:09:40.720 you raised this because you know, people say this is 0:09:40.760 --> 0:09:43.199 going to finally ignite inflation. This is what we've been 0:09:43.240 --> 0:09:45.800 waiting for. We're waiting, We've been waiting for the fiscal stimulus, 0:09:46.040 --> 0:09:49.440 and then you have people like yourself who are telling me, yeah, 0:09:49.600 --> 0:09:53.280 deficit spending actually has the opposite effect. It hampers growth 0:09:53.320 --> 0:09:55.920 in the long run. So what's going to have to 0:09:56.000 --> 0:09:58.920 happen for markets to wake up to that reality? Or 0:09:59.200 --> 0:10:00.920 is that a controvers sial issue. I mean it is 0:10:00.960 --> 0:10:05.440 a controversial issue. Some people would disagree. Well, it's hard 0:10:05.480 --> 0:10:09.200 to know when the markets UH will focus on the 0:10:09.240 --> 0:10:11.719 long run fundamentals. That's why I don't try to do it. 0:10:12.280 --> 0:10:16.360 We had Poisington Management. We we look on we key 0:10:16.360 --> 0:10:19.400 our investments on the long run trend and inflation. And 0:10:19.480 --> 0:10:23.959 the most critical factor is to look at what's happening 0:10:24.000 --> 0:10:27.400 to the rate of growth and money supply and the 0:10:27.480 --> 0:10:31.200 velocity of money. They're equal partners in in this stance. 0:10:32.240 --> 0:10:36.440 And money supply growth has been right at its one 0:10:36.920 --> 0:10:40.440 year average, one years average. Nothing has happened there. But 0:10:40.440 --> 0:10:43.040 but the velocity of money has fallen to a six 0:10:43.160 --> 0:10:46.600 quarter low. It's only one point four four. It's the 0:10:46.640 --> 0:10:51.040 lowest UH in modern times really except for right after 0:10:51.080 --> 0:10:55.359 World War Two. Now, the velocity of money is influenced 0:10:55.360 --> 0:10:58.520 by a lot of factors, but the most important of 0:10:58.559 --> 0:11:03.480 which is the productivity of our debt, and the productivity 0:11:03.520 --> 0:11:08.000 of our debt is increasingly worse. Another, it's not doing 0:11:08.080 --> 0:11:10.040 enough with our debt to actually stimulate gross And give 0:11:10.040 --> 0:11:15.120 you a couple of numbers. From nineteen fifty one, one 0:11:15.160 --> 0:11:18.720 dollar and seventy cents of new debt generated one dollar 0:11:18.760 --> 0:11:24.199 of GDP. From from to two thousand, it took three 0:11:24.240 --> 0:11:27.200 dollars and thirty cents of debt to generate one dollar 0:11:27.240 --> 0:11:32.520 of GDP. Last year, last four quarters, I should say 0:11:32.800 --> 0:11:35.160 we took on two point two trallion dollars of debt. 0:11:36.000 --> 0:11:39.560 Our GDP was only a four fifty billion, So it 0:11:39.600 --> 0:11:43.560 took nearly five dollars of new debt to generate one 0:11:43.600 --> 0:11:48.000 dollar of GDP. Now, and why is that because because 0:11:48.080 --> 0:11:52.480 the debt is basically financing consumption, it's financing things that 0:11:52.559 --> 0:11:56.160 will not generate an income stream to repay principle and interest. Okay, well, 0:11:56.240 --> 0:11:58.680 let's let's talk about the number that I'm staying. We've stopped. 0:11:58.720 --> 0:12:02.160 You've got to let me finish here. The critical point is, 0:12:03.040 --> 0:12:07.079 in this rush to judgment, you've had a massive increase 0:12:07.200 --> 0:12:09.120 in the long term rates, not just in the United 0:12:09.120 --> 0:12:12.880 States but worldwide and even even a greater rising in 0:12:12.920 --> 0:12:16.800 the emerging markets. And this rate rise has occurred everywhere, 0:12:17.320 --> 0:12:19.680 and you've seen in a lot of countries where UH 0:12:19.760 --> 0:12:22.840 interest rates that were negative gone positive. And at the 0:12:22.880 --> 0:12:26.000 same time, there hasn't been a dramatic surge in the dollar. 0:12:26.960 --> 0:12:30.880 Dollar is it a fourth junior high unprecedentedly high? Well, 0:12:31.440 --> 0:12:37.120 the surgeon long term rates UH encourages more saving, less spending, 0:12:37.679 --> 0:12:42.360 that puts downward pressure on velocity that is already declining precipitously. 0:12:43.240 --> 0:12:47.480 In addition, the surge and the dollar will serve to 0:12:48.600 --> 0:12:51.480 bring into the United States a wide range of lower 0:12:51.520 --> 0:12:55.880 costs goods, and it will cost domestic firms profits when 0:12:55.880 --> 0:12:58.840 they convert their foreign earnings back into dollars. It will 0:12:58.880 --> 0:13:01.959 cost them market are at home and abroad. And so 0:13:02.080 --> 0:13:05.280 the events of the last several days are our giant 0:13:06.200 --> 0:13:10.320 constraining action that will put both downward pressure on the 0:13:10.400 --> 0:13:13.800 radar growth and money and ready the growth and velocity. 0:13:13.960 --> 0:13:17.320 And so in essence, what we've seen is there has 0:13:17.400 --> 0:13:22.920 been a massive market tightening of monetary conditions. Massive and 0:13:23.000 --> 0:13:25.800 so when the tax cut takes effect, if it does 0:13:25.880 --> 0:13:28.640 take effect in a timely manner, that's something we really 0:13:28.640 --> 0:13:32.680 don't know. It's quite possible that the markets have already 0:13:32.720 --> 0:13:36.360 negated its effectiveness. And if you go back and look 0:13:36.440 --> 0:13:42.360 at the at the Reagan tax cuts, UM, the conditions 0:13:42.360 --> 0:13:45.600 were a lot different, a lot a lot different. First 0:13:45.600 --> 0:13:48.959 of all, debt, government debt was fifty GDP, not a 0:13:49.080 --> 0:13:54.280 hundred and seven. And we had favorable demographics. We have 0:13:54.480 --> 0:13:58.640 very unfavorable to the birthrates the lowest spend. We have 0:13:58.920 --> 0:14:02.280 a huge percentage our households uh in the of our 0:14:02.400 --> 0:14:07.640 of our youngsters in court living at home. The demographics 0:14:07.640 --> 0:14:13.679 are not good. And also when Reagan tax cuts took effect, UM, 0:14:13.880 --> 0:14:17.920 monetary policy was working in tandem. Monetary policy has to 0:14:17.960 --> 0:14:22.920 be supportive, not adversarial. And and that's that's the markets 0:14:22.920 --> 0:14:26.600 have made sure that the beginning is very adversarial. Lacy Hunt, 0:14:26.600 --> 0:14:28.080 thank you so much for being with us. Lacy Hunt, 0:14:28.120 --> 0:14:31.680 chief economist at Hoysington's Investment Management. Looking at the long bond, 0:14:31.880 --> 0:14:36.760 it is down almost seven percent so far in November. 0:14:36.760 --> 0:14:39.440 I'm Lisa Brown Boys here with Shelley Banjo, my co 0:14:39.520 --> 0:14:51.960 host Pim Fox on vacation. This is per blah blah blah. 0:14:52.040 --> 0:14:56.040 That's how a renowned economist summed up the state of 0:14:56.280 --> 0:14:59.640 macro economics. I'm Lisa Brown Boys I'm here with my 0:14:59.760 --> 0:15:03.720 co host for the day, Shelley Banjo pim Fox. My 0:15:03.960 --> 0:15:07.000 co host is on vacation and we'll be back in 0:15:07.040 --> 0:15:10.000 about a week. So, Shelly, this story caught my eye. 0:15:10.120 --> 0:15:12.840 I thought that it was so interesting because it just 0:15:13.000 --> 0:15:17.840 highlights some of the frankly what people say behind closed 0:15:17.840 --> 0:15:21.520 doors or in private conversations, which is macro economics have 0:15:21.560 --> 0:15:23.840 gotten has gotten it so wrong, And then one of 0:15:23.880 --> 0:15:27.320 their own came out and said it very publicly. Uh, 0:15:27.400 --> 0:15:28.800 I want to bring in one of the authors of 0:15:28.840 --> 0:15:33.080 this story, Craig TORUS Economy and Federal Reserve reporter at Bloomberg. 0:15:34.080 --> 0:15:36.240 What kind of response have you gotten from this story, 0:15:36.280 --> 0:15:41.600 Craig Ey, Lisa, Hi, Shelley. It's funny, but economists love it. 0:15:43.160 --> 0:15:46.080 Why they like to sort of bend at each other 0:15:46.320 --> 0:15:48.360 because it's just like what you said, right, They all 0:15:48.440 --> 0:15:51.440 knew that the house was burning down, and and but 0:15:51.760 --> 0:15:54.680 nobody really wanted to say it. So walk us through 0:15:54.720 --> 0:15:59.840 the sort of what made Paul Romer, who was had 0:15:59.880 --> 0:16:02.760 a in as the World banks next chief economist when 0:16:02.760 --> 0:16:04.720 he wrote this paper? Why did he write this paper 0:16:04.720 --> 0:16:07.680 that essentially tore down macro economics. So he said he 0:16:07.800 --> 0:16:09.920 had a like a space and a journal that he 0:16:09.960 --> 0:16:13.520 had to fill and um, so he's going to write something. 0:16:14.120 --> 0:16:19.160 And then he saw a movie about scientology, and so 0:16:19.200 --> 0:16:21.920 it started to make him think, well, you know, maybe 0:16:22.040 --> 0:16:24.760 macro is a bit of a personality quote as well. 0:16:25.240 --> 0:16:28.720 With all these schools of economists, you know, um, the 0:16:28.840 --> 0:16:32.520 Robert Lucas school of Rational expectations and real business cycle 0:16:32.600 --> 0:16:36.320 theory versus the Kynesians, and then he started to think, 0:16:37.120 --> 0:16:40.600 you know, these guys are so busy arguing among themselves 0:16:40.640 --> 0:16:44.920 and devising these big, intricate mathematical models that they've entered 0:16:44.960 --> 0:16:48.560 what he calls post real economics. Love that that's the 0:16:48.600 --> 0:16:53.800 best description ever. Um. You know, this story reminds me 0:16:53.920 --> 0:16:55.720 of back when I went to business school and the 0:16:55.760 --> 0:16:59.320 people who were started rewriting a macro economics books after 0:16:59.400 --> 0:17:03.440 two tho Nate, they were doing full rewrites of textbooks. 0:17:03.440 --> 0:17:05.480 I mean, what happened to that? What? What didn't this 0:17:05.560 --> 0:17:07.960 debate kind of unfold in two thousand and eight? Why 0:17:08.040 --> 0:17:11.520 the why the big shock now with this with this um, 0:17:11.560 --> 0:17:16.960 you know, rummer scandal. So what economists didn't really have 0:17:17.280 --> 0:17:21.520 in those models were things like financial markets, and I 0:17:21.560 --> 0:17:23.760 think so, uh, you know, I spent a year in 0:17:23.840 --> 0:17:27.720 business school too, and actually this idea of Robert Lucas 0:17:28.200 --> 0:17:32.400 Nobel Prize winning economists from University of Chicago was very powerful. 0:17:32.480 --> 0:17:37.080 It said, whatever government does, it kind of is ineffective 0:17:37.119 --> 0:17:43.280 because consumers anticipated and um and they adjust and businesses anticipated. 0:17:44.040 --> 0:17:49.439 But if you think about ordinary life, um uh, you know, 0:17:49.640 --> 0:17:53.639 often as rational as we are, we we make mistakes. 0:17:54.119 --> 0:17:57.320 And one area where you could see this is um 0:17:58.440 --> 0:18:00.560 a book I read and I like a lot called 0:18:00.560 --> 0:18:05.119 Deep Survival, which studies how accidents occur. Let's take a 0:18:05.119 --> 0:18:08.719 group of climbers in Yosemite and they say, you know, 0:18:09.119 --> 0:18:10.919 it's a beautiful day, we're going to go up the 0:18:10.920 --> 0:18:15.040 wall of El Capitan, and the weather forecast is perfect. 0:18:15.160 --> 0:18:19.320 But then something changes, like well they didn't really research 0:18:19.400 --> 0:18:23.080 the weather enough, their expectations were flawed or the weather 0:18:23.160 --> 0:18:25.200 model was flawed, and then they get trapped up there 0:18:25.240 --> 0:18:28.959 and they're in serious trouble. So you could say, you know, 0:18:29.119 --> 0:18:33.359 whatever it is, subprime or the kind of odd things 0:18:33.400 --> 0:18:37.199 that happen in human behavior. Those models don't incorporate that 0:18:37.240 --> 0:18:40.680 at all. They don't plan for them, and you get 0:18:40.720 --> 0:18:43.920 these explosions that are completely unexpected. Well, and I love 0:18:44.040 --> 0:18:47.200 the line that you quoted of his paper, assume a 0:18:47.200 --> 0:18:49.560 assumed b blah blah blah, and so we have proven 0:18:49.600 --> 0:18:52.440 that p is true. Um, you know, on one hand, 0:18:52.440 --> 0:18:54.800 it's comical. And as you said, you know, people kind 0:18:54.800 --> 0:18:57.399 of evolve been talking about this, uh, you know, not 0:18:58.200 --> 0:19:00.880 in private, right, in private conversation. But this, really BAC 0:19:00.960 --> 0:19:03.159 economics have has a much broader effect. I mean, if 0:19:03.200 --> 0:19:05.160 you think about the Federal Reserve or other central banks, 0:19:05.160 --> 0:19:07.600 I mean they base a lot of their policies on 0:19:07.760 --> 0:19:11.200 macroeconomic theory. Right. That's why I think this is interesting. 0:19:11.280 --> 0:19:13.520 Is right now this year is a matter of fact, 0:19:13.560 --> 0:19:17.880 we're seeing none other than Janet Yellen start to talk 0:19:17.960 --> 0:19:22.280 about the flaws of what economists call representative agent models. 0:19:22.320 --> 0:19:26.280 So in these models, they have household a and business 0:19:26.400 --> 0:19:31.040 be and those households representative households and business. You know, 0:19:31.200 --> 0:19:35.439 representative business will always respond to a price or an 0:19:35.440 --> 0:19:38.480 interest rate in this way. And what she said in 0:19:38.520 --> 0:19:41.440 October at a Boston Fed conferences, we need to look 0:19:42.119 --> 0:19:46.760 underneath the hood and ask ourselves are various cohorts are 0:19:46.840 --> 0:19:50.920 young people responding that way, our savers responding, how are 0:19:50.960 --> 0:19:53.639 they responding? I think that's very healthy. You mean to 0:19:53.680 --> 0:19:57.440 actually think about facts and and maybe it's cross check 0:19:57.480 --> 0:20:00.960 it with reality. Um Craig torres thank you so much 0:20:01.119 --> 0:20:03.720 for speaking with a S. Creig Touris Economy and Federal 0:20:03.760 --> 0:20:07.119 Reserve reporter for Bloomberg coming to us from Washington, d C. 0:20:07.359 --> 0:20:19.520 About blah blah blah Black Friday. We're getting closer, so 0:20:19.560 --> 0:20:21.520 we need to talk about it, all about it, which 0:20:21.760 --> 0:20:24.280 we expect. With us, we have Tom McKee, CEO of 0:20:24.320 --> 0:20:28.000 the International Council of Shopping Centers. You know what's gonna happen. 0:20:28.040 --> 0:20:30.560 What's gonna happen? Are we gonna be talking on the 0:20:30.560 --> 0:20:33.159 Monday after the Saturday after Black Friday that it was 0:20:33.200 --> 0:20:35.359 the best ever and that it saved the retail sector? 0:20:35.520 --> 0:20:39.080 Always the best ever? I wish I knew everything that 0:20:39.119 --> 0:20:40.639 was going to happen, but I do think we'll be 0:20:40.680 --> 0:20:43.200 talking the following Monday and saying it was a very 0:20:43.240 --> 0:20:47.760 good Black Friday and holiday weekend. We just recently did 0:20:47.760 --> 0:20:50.080 a survey. We expect about a hundred and fifty million 0:20:50.080 --> 0:20:54.040 Americans to go shopping over the Thanksgiving Day holiday, which 0:20:54.080 --> 0:20:56.840 is you know, which is clearly strong. Uh you know, 0:20:56.880 --> 0:21:01.040 Black Friday is kind of instituted in our American psyche. 0:21:01.040 --> 0:21:03.119 I think is A is a big part of the 0:21:03.160 --> 0:21:09.040 holiday weekend. Our survey Consumer Survey I indicated that holiday 0:21:09.080 --> 0:21:12.359 sales overall will increase about three point three. They're going 0:21:12.400 --> 0:21:18.200 to be winners and losers. Retail is a fiercely competitive business. Actually, 0:21:18.359 --> 0:21:21.040 I think that I think the retailers that will win 0:21:22.000 --> 0:21:23.920 are really I'm not gonna give your names, but I 0:21:23.960 --> 0:21:26.800 think it's I think omni channel retailers will win. I 0:21:26.840 --> 0:21:29.920 think what's happening in retail, and which is often kind 0:21:29.920 --> 0:21:31.840 of an untold story. And I know, Shelly, you cover 0:21:31.920 --> 0:21:35.040 the industry a lot, is you know, we tend to 0:21:35.080 --> 0:21:38.879 position the industry in bricks and mortars versus online, and 0:21:38.920 --> 0:21:41.679 I think that's really kind of an antiquated, uh you 0:21:41.680 --> 0:21:44.320 know comparison. I think what's really happening is technology is 0:21:44.359 --> 0:21:46.880 being integrated into shopping, just like it's been integrated into 0:21:46.880 --> 0:21:49.800 every part of American life. And I think those retailers 0:21:49.840 --> 0:21:53.040 that have an integrated omni channel experience over the long 0:21:53.119 --> 0:21:55.360 run will do much better. In fact, you know, our 0:21:55.359 --> 0:21:59.560 surveys would indicate that the vast majority people will shop 0:21:59.600 --> 0:22:03.040 at omni channel retailers. An omni channel of course, being 0:22:03.200 --> 0:22:06.920 both digital and people that retailers that have a presence 0:22:07.000 --> 0:22:08.800 online and in the physical space. And I think what 0:22:08.920 --> 0:22:11.879 you're another, I think untold story is a lot of 0:22:11.920 --> 0:22:15.119 online only retailers are moving into the physical space, and 0:22:15.160 --> 0:22:18.920 so that will create additional demand. Even Amazon, you know, 0:22:19.040 --> 0:22:21.959 is announcing opening up two thousand grocery stores, etcetera. So 0:22:22.640 --> 0:22:27.560 when was when was the survey conducted? Was this pre election? Now? 0:22:27.640 --> 0:22:30.760 The Black Friday survey was was posted? Was post election? 0:22:30.960 --> 0:22:33.919 And so did you the kind was three? Was pre election? 0:22:34.040 --> 0:22:37.359 Did you guys see anything that surprised you that came 0:22:37.400 --> 0:22:41.120 from any kind of election showing up there? No, I mean, 0:22:41.160 --> 0:22:43.200 I don't think I could attribute any of the findings 0:22:43.240 --> 0:22:46.040 directly to the election. I think, obviously, you know, there's 0:22:46.040 --> 0:22:48.960 a level of uncertainty that's been removed from the economy 0:22:49.000 --> 0:22:52.520 and from consumer psyche relative the conclusion the election. But 0:22:52.680 --> 0:22:54.760 as you know, I mean, last month's retail sales were 0:22:55.000 --> 0:22:57.760 pretty strong, uh, and that happened in the midst of 0:22:57.800 --> 0:23:00.280 the election season. So I think just generally a king 0:23:00.359 --> 0:23:03.760 we're in an environment where you know, incomes have improved, 0:23:03.800 --> 0:23:06.240 the job markets improved. Obviously all of us want the 0:23:06.280 --> 0:23:08.919 economy be stronger, but I think we are in a 0:23:08.920 --> 0:23:11.600 better place today than we were a year ago. Tom, 0:23:11.640 --> 0:23:13.640 What am I going to get for the holidays? I mean, 0:23:13.680 --> 0:23:16.119 what are people buying? Are they going to be buying? Uh, 0:23:16.200 --> 0:23:20.679 you know, clothes? Are they buying? Uh? They buying new blenders, 0:23:20.720 --> 0:23:23.880 they buying juicers? Like what they want? It's the holidays, right, 0:23:23.920 --> 0:23:27.200 So I think that, you know, if you look at historically, 0:23:27.280 --> 0:23:29.359 and I think our survey results would align with what 0:23:29.480 --> 0:23:32.560 historically happens. And electronics are always popular. Toys are always popular. 0:23:32.600 --> 0:23:36.160 I mean it's holidays. Apparel is going to be popular 0:23:36.200 --> 0:23:39.439 because it is always popular. Gift Cards are also, you know, 0:23:39.520 --> 0:23:43.000 a big expenditure during the holiday season because people give 0:23:43.000 --> 0:23:45.520 gifts and they don't exactly what are lazy. They don't 0:23:45.520 --> 0:23:48.480 want to actually have to pick anything out for somebody else. 0:23:48.560 --> 0:23:53.760 They just exactly say time you go return it. I mean, 0:23:53.840 --> 0:23:57.400 come on, I don't know you or Picky, I understand that, 0:23:57.440 --> 0:23:59.919 but as the mother of two young children, the idea 0:24:00.040 --> 0:24:02.160 of then you're not going to give your kids gift cards. 0:24:02.160 --> 0:24:05.239 You're getting by them. They would love they would love that. 0:24:05.480 --> 0:24:09.159 So it has the importance of Black Friday diminished over time? 0:24:09.800 --> 0:24:13.840