Speaker 1: Well as we begin the fourth quarter of the year,
Speaker 1: if you want to look at it in quarters, and
Speaker 1: of course it's supposed to be the first quarter of
Speaker 1: America's fiscal year, but we have a government shutdown since
Speaker 1: we can't agree on those things. I always want to
Speaker 1: bring back somebody who makes I think makes the most
Speaker 1: amount of sense about what's happening in this economy and
Speaker 1: how much of this uncertainty can feel certain down the road.
Speaker 1: It's of course Mark Zandi from Moody's Analytics. Mark, good
Speaker 1: to see you, Chuck, good to be with you.
Speaker 2: Thanks for the opportunity.
Speaker 1: So I have been describing the economy this way. If
Speaker 1: you have money, have some savings, and have the ability
Speaker 1: to invest, it got to be is going okay for you.
Speaker 1: But if you don't, this is a scary economy. I
Speaker 1: confess that's a simple, simplified way of putting it. But
Speaker 1: that's what it looks like to me as a lay person.
Speaker 1: What kind of is that too simplified of a description
Speaker 1: or how would you do?
Speaker 3: No, I think that's pretty apt. I think if you're
Speaker 3: in the top part of the income and wealth distribution,
Speaker 3: let's say, the top third of the distribution, you're doing fine.
Speaker 3: You got a job, you're getting a pay increase, get
Speaker 3: a bonus, you own your own home, you own some stocks,
Speaker 3: and of course stocks are on a tear, and you
Speaker 3: you don't really owe anything. You might I might have
Speaker 3: a mortgage, but you probably locked in back during the pandemic,
Speaker 3: so you've got a three three and a half four
Speaker 3: percent mortgage rate. So you're making more on your money
Speaker 3: market account than on your you're paying on your mortgage.
Speaker 3: So yeah, you're sitting pretty If you're in the bottom
Speaker 3: two thirds of the distribution of income, certainly the bottom third,
Speaker 3: it's a struggle. You know, you probably have a job,
Speaker 3: but unemployment is starting to not hire her, and you
Speaker 3: don't want to lose your job because it's getting increasingly
Speaker 3: hard to find another one. Hiring rates are very low.
Speaker 3: You don't you know, you really don't own very much.
Speaker 3: If you're in the middle part of the distribution, probably
Speaker 3: own a home, but if you're in the bottom part,
Speaker 3: you don't, and you owe on credit cards auto. If
Speaker 3: you're in the bottom third, you're probably on student loan debt,
Speaker 3: so so it is more of a struggle. So I
Speaker 3: think that way thinking about the economy and whether it's
Speaker 3: working for people works is very apt. Yes, I agree.
Speaker 1: So you know it's interesting because this creates sort of
Speaker 1: I think political challenges more now for the Trump administration.
Speaker 1: You know, you know the Biden administration, and it was Biden,
Speaker 1: and I've always thought it was a bit almost because
Speaker 1: he spent most of his professional life where the economy
Speaker 1: was judged. A good economy was based on whether there
Speaker 1: were jobs being created. A bad economy is when there weren't.
Speaker 1: And I do think Donald Trump looks at a good
Speaker 1: economy is when the stock market does well. A bad
Speaker 1: economy is when it doesn't. And like, ultimately both ideas
Speaker 1: the hey can I afford this economy? Right? Can I
Speaker 1: live in this economy? You know, it's one thing to
Speaker 1: have a job. Can you afford participating in the economy
Speaker 1: with your job? It's one thing if the stock market's
Speaker 1: doing well, but do you have the money to actually
Speaker 1: benefit from that? So I do see that as political.
Speaker 1: But let's start with what you have to do, which
Speaker 1: is trying to forecast, trying to understand what the economy is.
Speaker 1: There's all these little tea leaves. I was reading about
Speaker 1: the other day that people are pulling back on big
Speaker 1: home renovations and they're now doing smaller ones. People are
Speaker 1: pulling back on big trips, so they're doing maybe road
Speaker 1: trips that while you're starting to see these little signs
Speaker 1: of a pullback consumer pullback, and it's not yet reflective
Speaker 1: anywhere else, not quite reflected in GDP. Yet, how important
Speaker 1: are those little indicators to you? And what ones do
Speaker 1: you look at, especially now that government data has been paused.
Speaker 3: Well, yeah, I mean I pay attention to the anecdotal
Speaker 3: information in the kind of the little pieces of information
Speaker 3: here and there that you get from different sources, but
Speaker 3: I ultimately rely on the the data, the aggregate data.
Speaker 3: I mean, you can get fooled by you know, the
Speaker 3: economy is a big elephant, right, and depending on which
Speaker 3: part of the elephant you touch, you get a very
Speaker 3: different picture. So that you know, if I'm in one
Speaker 3: part of the country or another, that will influence people's thinking.
Speaker 3: If I'm in one talking to one industry or another
Speaker 3: that influences people thinking. If I'm at the top part
Speaker 3: of the distribution of income or the bottom, that influences
Speaker 3: people thinking. So I try to be careful not to
Speaker 3: get caught up too much in the anecdotes in those
Speaker 3: little straws as you as you put it, look at
Speaker 3: the aggregate data and you know, there and for me,
Speaker 3: at the end of the day, it's still about jobs.
Speaker 3: And you know, are we creating jobs or they good
Speaker 3: paying jobs as a pay enough that people can have
Speaker 3: forward to you know, purchase the things that they need
Speaker 3: and that they want. And there it feels like the
Speaker 3: economy is kind of a struggle, a bit of a
Speaker 3: struggle of you know, in aggregate we're not creating many
Speaker 3: jobs at all, but jobs we are being created are
Speaker 3: you know, in a very few industries like healthcare. It
Speaker 3: just doesn't feel like it's working for you know, a
Speaker 3: lot of Americans. So we're not in recession. We're growing.
Speaker 2: GDP is positive, but it just feels kind of punk.
Speaker 2: That might be the word to use.
Speaker 1: So if we see the general consensus apparently is a
Speaker 1: thirty to forty chance of a recession next year, Yeah,
Speaker 1: how should folks interpret a prediction like that?
Speaker 3: Well, the most likely scenarios we kind of navigate through
Speaker 3: without an actual downturn, so the economy produces enough job
Speaker 3: so that unemployment really doesn't take off. Here, We're okay,
Speaker 3: it's not it may not be, but we're okay.
Speaker 1: But so kind of like the first I felt like
Speaker 1: the economy in twenty oh one to twenty oh two
Speaker 1: where it was a mild recession but we kind of
Speaker 1: got through it.
Speaker 3: Yeah, that that's that's right. But you know the risks
Speaker 3: are to the downside, right, I mean, you know, if
Speaker 3: if things turn out different than that kind of that
Speaker 3: economy we just described, it's going to turn out worse,
Speaker 3: not better. You know, just to give a little bit
Speaker 3: more context, kind of in a typical economy, the probability
Speaker 3: recession would be fifteen percent.
Speaker 2: We tend to have a recession once every six seven, eight.
Speaker 1: Years, so every year, if there was no you would
Speaker 1: you would say, well, you have to put it at
Speaker 1: fifteen percent. But that's just because that's the way it
Speaker 1: is all the time.
Speaker 3: That's just it's so called unconditional probability. I mean, on average,
Speaker 3: you get a recession every seven years there for fifteen percent.
Speaker 3: So if you're a thirty percent forty percent, well, you.
Speaker 2: Know that's on the high side. It's not over fifty that.
Speaker 3: I'll take it, but you know, thirty forty is uncomfortably high.
Speaker 1: You know.
Speaker 3: The other way to think about. It might be nothing
Speaker 3: else can go wrong, right, the economy is punk, It's
Speaker 3: it's vulnerable to anything that might go off the rails here.
Speaker 2: And it doesn't have to be a big thing.
Speaker 3: It could be a small thing because the economy as
Speaker 3: as vonible as it is.
Speaker 1: What has been the impact of what feels because you know, look,
Speaker 1: the DOGE cuts get a lot of attention, but there's
Speaker 1: a real pullback on government jobs on the state and
Speaker 1: local level because there's a lot of federal money is
Speaker 1: no longer going to state and local, right, A lot
Speaker 1: of we had a lot of COVID. You know, it's funny,
Speaker 1: we lived almost a decade, decade, decade and a half.
Speaker 1: First the Great Recession sort of triggered federal help for
Speaker 1: state and local, and then COVID created more help for
Speaker 1: state and local. And you know, I look at a
Speaker 1: California which is going to struggle for the first time
Speaker 1: with a budget deficit that they got to figure out,
Speaker 1: they got to do. They're going to do something really hard.
Speaker 1: I think a lot of states, I think there's going
Speaker 1: to be a a lot of sort of chickens coming
Speaker 1: home to roost in a lot of states who have
Speaker 1: these constitutional amendments that actually have to balance our budget.
Speaker 1: What is that risk factor of contraction of government workers
Speaker 1: and how much could that trigger a recession.
Speaker 2: Well, we're certainly seeing a lot of job loss at
Speaker 2: the federal level.
Speaker 3: I mean, the number of federal government employees down about
Speaker 3: one hundred thousand since the beginning of the year. So
Speaker 3: we are making the numbers up, but you know, rough
Speaker 3: word magnitude, we had three million federal government workers at
Speaker 3: the start of the year. We're now at two nine
Speaker 3: and we've probably got another one hundred k to go.
Speaker 1: Now, some people will hear that, say that doesn't seem
Speaker 1: like much two point eight to three. I mean, you
Speaker 1: round it up. It's still three million, right, Like, I mean,
Speaker 1: you know what I mean, Like, why is that a lot?
Speaker 3: Well, in the context of federal government never relays off.
Speaker 2: It's always in the reliable source of jobs.
Speaker 3: And historically, you know, it's been around three million for
Speaker 3: as long as I can remember. So losing one hundred
Speaker 3: k and losing another one hundred k in a short
Speaker 3: period of time six twelve months, you know, that's meaningful. Certainly.
Speaker 2: You know, obviously for the broad DC area.
Speaker 1: And regional economy, you can feel it right, Yeah.
Speaker 3: That broad metropolitan area is in a recession.
Speaker 2: There's no doubt about that.
Speaker 3: Now if if you're right, and I think you know,
Speaker 3: you make a good point that you know, federal government
Speaker 3: support the state in local first states and then local
Speaker 3: governments is now starting to wane. And you saw a
Speaker 3: tremendous amount of support in the in the pandemic.
Speaker 1: A lot of teachers got raises from that money, right,
Speaker 1: Like it was just a lot of public officials with cops, firefighters, teachers,
Speaker 1: you know, the stuff politicians feel good about. Hey, look
Speaker 1: we gave our teachers a raise, we gave our cops
Speaker 1: and firefighters are raised.
Speaker 3: Well. A bunch of other states they cut taxes, right,
Speaker 3: but you know they now that that's that's an issue
Speaker 3: because they're not getting that support from the federal government
Speaker 3: and likely not to going far and now they have
Speaker 3: a diminished tax base and so that's complicating things for them.
Speaker 3: So yeah, the state local then there are a lot
Speaker 3: more folks working in state and local government then and
Speaker 3: then in the federal government, and that if that sector
Speaker 3: is now not adding to payrolls and ultimately starting to
Speaker 3: reduce payrolls, and that becomes an even bigger deal. So yeah,
Speaker 3: it's a it's just uh, you know, the labor market
Speaker 3: has gone flat here. It's not creating any jobs. The
Speaker 3: only sectors that's creating jobs is healthcare, and everything else
Speaker 3: is a little bit adding a little bit, or hurt
Speaker 3: reducing a little bit.
Speaker 2: Government is reducing a little bit.
Speaker 1: At this point, all right, let's talk about AI. Yeah,
Speaker 1: how is A How are is AI having an impact
Speaker 1: on the job market yet?
Speaker 3: Uh?
Speaker 2: Yeah, there's some evidence.
Speaker 3: You know, I mentioned the hiring rate, the fact that
Speaker 3: if you look at the number of people getting hired
Speaker 3: relatives of the workforce, it's about as low as it
Speaker 3: gets when you're in the middle of a recession. We're
Speaker 3: not in recession because businesses aren't laying off, but they're
Speaker 3: not hiring. And one reason they may not be hiring
Speaker 3: is related to AI. You know, businesses are thinking, oh,
Speaker 3: you know, do I really need to go out and
Speaker 3: hire those folks because artificial intelligence will be able to
Speaker 3: empower my existing workforce to do those do that work,
Speaker 3: and I don't.
Speaker 1: Is this an experiment? Like my sense is businesses are
Speaker 1: trying to see if they can use AI to replace
Speaker 1: humans and then they're good and then if they don't,
Speaker 1: they'll go and hire. But if they can, then just
Speaker 1: then exponentially grow.
Speaker 3: Yeah. Absolutely, Yeah, I think you know, AI has captured
Speaker 3: the imagination, you know, particularly of the senior leaders management
Speaker 3: of many large multinational corporations around the country. In fact,
Speaker 3: they're selling themselves as AI companies increasingly because stock prices
Speaker 3: are as high as they are juiced by the promise
Speaker 3: of artificial intelligence creating all this wealth and genering a
Speaker 3: lot of economic growth that they are now saying, we
Speaker 3: are AI. Therefore we have to make AI work for
Speaker 3: our businesses, and so they're asking their existing workforce to
Speaker 3: figure that out. And you're right, I mean, so far,
Speaker 3: you know, there's some success stories, but there's a lot
Speaker 3: of failures as well, and must have to see how
Speaker 3: this plays out, and some companies will have to backtrack
Speaker 3: at some point.
Speaker 2: But I think ultimately, you know, businesses will figure it out.
Speaker 3: In new companies when they form, they're going to optimize
Speaker 3: around the AI technology, just like they did the Internet,
Speaker 3: and so it will diffuse throughout the economy and it
Speaker 3: will have more of an impact on the labor market
Speaker 3: going forward, particularly certain occupations in certain industries that are
Speaker 3: more likely to be affected by the use of AI.
Speaker 1: Yeah, politically, I think AI job the fear of AI
Speaker 1: job displacement, I think is going to be a big
Speaker 1: issue in twenty eight, But not until twenty eight, right,
Speaker 1: Like I think we're I don't think we're there yet
Speaker 1: on that.
Speaker 3: But when.
Speaker 1: Is there? You know, all these data center investments, all
Speaker 1: this money that's going into this AI expansion is there.
Speaker 1: It's not creating new jobs. It's just computer power.
Speaker 3: No, no, so far, it's more about it's not about jobs.
Speaker 2: It's not creating jobs. It's more about GDP and.
Speaker 1: It's creating wealth, creating revenue. It's creating wealth. It's we're
Speaker 1: really good at manufacturing money right now.
Speaker 3: Well, here is an amazing thing. And this goes back
Speaker 3: to where we started when we're talking about the folks
Speaker 3: in the top part of the distribution of the wealth
Speaker 3: distribution and wealth. The value of all US publicly traded
Speaker 3: stocks is up ten trillion dollars in one year, so.
Speaker 2: It's sixty seven trillion dollars today. It was fifty seven
Speaker 2: trillion dollars a year ago. Trillion dollars.
Speaker 3: And of course, if you own stocks, and particularly the
Speaker 3: AI stocks, you're feeling pretty good, and that's what's kind
Speaker 3: of driving the economic training. So the real impact of
Speaker 3: AI so far, it's not about jobs. It's more about
Speaker 3: wealth and GDP and not the more. In fact, if anything,
Speaker 3: it's reduced to employment and the tech sector and some
Speaker 3: of the other sectors that are that we just talked about.
Speaker 1: So give me some historical parallels. We had this kind
Speaker 1: of investment in tech in the nineties, turn of the century.
Speaker 1: We had this kind of investment in the industrial Age.
Speaker 1: We had this kind of investment in the build out
Speaker 1: of the suburbs after the after World War Two? Is
Speaker 1: this a bubble? And it certainly looks bubblish, and yet
Speaker 1: it's amazing to me only Jamie Diamond seems to be
Speaker 1: the the only one in that world that seems to
Speaker 1: be concerned that this could could all be a bubble.
Speaker 1: How would you you know? Is this something you can
Speaker 1: forecast or you don't know if it's a bubble until
Speaker 1: after it pops?
Speaker 3: Well, uh, And I'm hearing more voices kind of variations
Speaker 3: on that theme. And I think it's appropriate that the
Speaker 3: you know, the stock market, stock investors uh in aar
Speaker 3: kind of getting over their skis. You know, they they're
Speaker 3: there's this is real. These companies are joggernauts. They're you know,
Speaker 3: they're they're they're making massive investments and they're generating.
Speaker 2: A lot of revenue.
Speaker 3: Uh. But uh that is also generating a lot of
Speaker 3: euphoria around the prospects uh that these companies, uh, you know,
Speaker 3: are are generating and it's driving up their stock price.
Speaker 3: So you can have a situation and I think we
Speaker 3: do very similar to what happened back in Y two
Speaker 3: K and the Internet bubble and in previous huge technology
Speaker 3: periods of technological advance, where investors kind of get ahead
Speaker 3: of the story. You know, they they discount all the
Speaker 3: good news and then some and then some, and then
Speaker 3: once that happens, uh, you get speculation. That's when investors
Speaker 3: in stocks and other assets buy that stock or that
Speaker 3: asset simply because they think they can sell it at
Speaker 3: a higher price down the road. That's it. They're not
Speaker 3: they're not doing they're not thinking about, you know, what's
Speaker 3: where the value comes from. You know, will this be
Speaker 3: more valuable in the future, simply the euphoria speculation And
Speaker 3: you know, I don't know that we're quite there yet,
Speaker 3: Chuck that I that's what I would call a bubble
Speaker 3: when you get that kind of speculative fervor.
Speaker 2: But it feels like that's the direction of travel here, right.
Speaker 3: And in fact that you know, when I look, I love,
Speaker 3: like most economists and people in the markets, I'm looking
Speaker 3: at the stock market four or five six times a day,
Speaker 3: you know, I go see what's going on. And usually
Speaker 3: when I see green on the screen, that's mean stock
Speaker 3: prices are up. I feel good now I'm feeling when
Speaker 3: I see green, I'm getting more nervous about it.
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Speaker 1: Their fee is free unless they win. I'm not quite
Speaker 1: at retirement thinking about retirement, but you know so I'm
Speaker 1: still kind of and at the same time, yeah, you're like, geez,
Speaker 1: I know, I know there's going to be a correction.
Speaker 1: How massive is it?
Speaker 3: Right?
Speaker 1: You just talked about ten trillion dollars. That means we
Speaker 1: could lose five trillion dollars of wealth and still be
Speaker 1: up five trillion dollars. But if we lose ive trillion
Speaker 1: dollars in wealth in the next six months, people are
Speaker 1: going to panic.
Speaker 3: Yeah exactly, you got it just right. So, I you know,
Speaker 3: this might be a little nerdy, but you know, to
Speaker 3: measure this to your question, are we in a bubble?
Speaker 3: The tried and true way of kind of looking at
Speaker 3: that is the so called price earnings multiple. Take take
Speaker 3: take the stock prices, look at it relative to the
Speaker 3: earnings of the companies that you know.
Speaker 1: I love doing that. Pallidteer is like one hundred and
Speaker 1: fifty times earning, but like Google is still only nineteen
Speaker 1: times earnings.
Speaker 3: You know, you're a pee wow, that's impressive.
Speaker 1: You know, I'm not an economist, but too yeah.
Speaker 3: Yeah, Well anyway, so if I look at I have
Speaker 3: an what I call the economy wide price earnings multiple.
Speaker 2: That's the Wilsher five thousand.
Speaker 3: It's the value of all stocks, all stocks, divided by
Speaker 3: economy wide after tax corporate earnings. So that's the Ice
Speaker 3: Mobile on average since nineteen sixteen. That's as far back
Speaker 3: as I can calculate it. And I'm making this up roughly,
Speaker 3: so it's I'm rounding it's ten. That's the multiples. Ten
Speaker 3: ten times stock prices are ten times earnings. Right now
Speaker 3: today it's almost twenty twenty. There's one other time in
Speaker 3: that historical period when it's been higher y two k.
Speaker 2: It was twenty four so and of course we're still
Speaker 2: going higher here.
Speaker 3: So I don't know this so called mean reversion. You know,
Speaker 3: it feels like to me, we're getting we're overvalued, we're
Speaker 3: bordering on frothy and speculative. If stock prices continue to rise,
Speaker 3: then you know.
Speaker 2: I ring some alarm bells. I do think we're going
Speaker 2: to see a correction at some point here.
Speaker 1: I think what's odd about this is that a lot
Speaker 1: of folks assume tariffs would slow down the growth of
Speaker 1: our economy, right, would certainly hurt traditional companies because of
Speaker 1: rising costs, you know, and all of those things. And
Speaker 1: so here we are in this weird environment where tariffs
Speaker 1: are having some impact, certainly on the consumer and certainly
Speaker 1: on some businesses. But because this AI part is an
Speaker 1: investment type of thing, it is it tied to the tariff.
Speaker 1: And in some ways Trump is has sort of compartment,
Speaker 1: you know, has protected that space from his protectionist policies.
Speaker 1: So how would you view that the impact of the
Speaker 1: tariffs it? You know, every time I've noticed this with
Speaker 1: a lot, every time we look at it, it's like, yeah,
Speaker 1: it's coming, but it's not here yet. Yeah it's coming,
Speaker 1: but it's not here yet. Where are we now?
Speaker 2: The thing is, there's a lot of cross cards here, right.
Speaker 3: We just talked about the tailwind, and that's AI, and
Speaker 3: that's a powerful tailwind. You know, all the data centers,
Speaker 3: all the investment in.
Speaker 2: The electric electrical power, electric.
Speaker 3: Power, all the wealth that's being generated, that's driving consumer
Speaker 3: spending of those folks that own the stocks, the you know,
Speaker 3: the high end network, the individuals. About half the growth
Speaker 3: in the economy is just AI. Right, So I'll give
Speaker 3: you to give you a number GDP growth that's the
Speaker 3: value all the things that we produce is two percent
Speaker 3: year over year two percent. If not for AI, it
Speaker 3: would be growing one percent. And that that's that's terraces.
Speaker 3: If you're growing one percent, that's not a recession. But
Speaker 3: if that's really uncomfortable.
Speaker 1: Keep it up with your inflation at that point.
Speaker 3: Yeah, So the terriffts are doing damage to the economy.
Speaker 3: It's just that, you know, the the fallout is being
Speaker 3: masked to a significant degory by this powerful tail end
Speaker 3: of AI that's really come into its own over the
Speaker 3: last six, nine, twelve months.
Speaker 1: So this is it's so look at some point AI
Speaker 1: investment plateaus, right, and the terror stick So that that's
Speaker 1: where this is headed.
Speaker 3: Right, Well, I mean if the terraces rise and level
Speaker 3: off and stop rising at some point where you know,
Speaker 3: the me just to that.
Speaker 2: So you know, both those things could iron you know,
Speaker 2: kind of offset each.
Speaker 3: Other, so we could increasingly. This is the consensus view
Speaker 3: in my view that we you know, it's going to
Speaker 3: feel uncomfortable at times, but we're going to be able
Speaker 3: to avoid recession because of that AI tailwind that we're enjoying.
Speaker 3: But having said that, you know, the economy is soft,
Speaker 3: the job market is punk. You know, we're not seeing
Speaker 3: any job growth whatsoever. We are vulnerable to you know, again,
Speaker 3: whatever else might not stick to script, and there's certainly
Speaker 3: a lot of things that might not sticks stick to script.
Speaker 1: Here a few, a few. I want to hit two
Speaker 1: other topics here to sort of understand gold. Yeah, whenever gold,
Speaker 1: I've sort of in my head, you know, when I
Speaker 1: see gold go higher, that's bad news for the American economy.
Speaker 1: It always gets me nervous. Yet this is a case
Speaker 1: where everything's going up gold too. Yeah, that's unusual.
Speaker 3: No, it is as I mean, uh, And this goes
Speaker 3: back to the question of are we in a bubble
Speaker 3: and speculation in the fact that we're seeing prices rise
Speaker 3: for all kinds of assets at the same time adds
Speaker 3: to the concern that this is you know broader that
Speaker 3: you know, a bubble is developing, and gold prices are
Speaker 3: at record highs where we're four thousand dollars an ounce
Speaker 3: for the first time, silver prices, obviously, crypto prices. Actually,
Speaker 3: interestingly enough, the only asset for which that's not this
Speaker 3: is not the case is real estate.
Speaker 1: Right if you've looked, well, that was going to be
Speaker 1: my next topic, which is sort of it is that's
Speaker 1: a strange aspect that people that that real estate is
Speaker 1: not seen as a safe harbor, but gold still is.
Speaker 3: Yeah, And I think the thing about gold is it's
Speaker 3: got in these one of these asset classes that were stocks,
Speaker 3: commodities like gold and crypto have its own kind of
Speaker 3: idiosyncratic aspects to.
Speaker 2: It as well.
Speaker 3: In the case of gold, you know, it really has
Speaker 3: got to boost when Russia invaded Ukraine in the US
Speaker 3: froze Russians. Those are dollar reserves or dollar assets sitting
Speaker 3: in bank accounts around the world, and the US froze
Speaker 3: those assets, those dollar assets, and so countries around the
Speaker 3: world with those dollars assets begin to wonder, well, maybe
Speaker 3: they'll do that to me if they don't like something
Speaker 3: I'm doing. Therefore, I'm going to diversify away from dollars
Speaker 3: into let's say gold. So central banks around the world
Speaker 3: are now, you know, big investors in gold. The other
Speaker 3: thing is there's some you know, concerns about the safe
Speaker 3: haven status of the US right in the context of
Speaker 3: the trade and teriff wars and kind of the repositioning
Speaker 3: in the US and the global economy and the financial
Speaker 3: system by the Trump administration. I think global investors are
Speaker 3: asking themselves, is the US really the place you want
Speaker 3: to go to put your money when times are tough?
Speaker 3: And if that, if you question that, then you know,
Speaker 3: you buy something like gold, you know, as a hedge.
Speaker 3: And then the final potential reason for what's going on
Speaker 3: in the gold mark is inflation. So you know, there's
Speaker 3: inflation has been a problem since the pandemic, the Russian
Speaker 3: War and the impact that head on energy and command
Speaker 3: prices push up inflation even more. And there's a lot
Speaker 3: of discussion. Concern about FED independence is that theors are
Speaker 3: going to remain an independent going forward, and if not,
Speaker 3: does that mean the Fed's going to keep breaks too
Speaker 3: low for too long? And juice up inflation. And if so,
Speaker 3: if you're worried about inflation here, going down the road here,
Speaker 3: you're going to buy something like gold. So you know,
Speaker 3: there's a lot of things coming together there, I think,
Speaker 3: pushing up demand for that commodity.
Speaker 1: What is the risk to our economy if we're not
Speaker 1: a safe haven.
Speaker 3: Well, it means it means higher interest rates, all else
Speaker 3: being equal. I mean, you know, especially in most times,
Speaker 3: that that's not that big. It's a deal. I mean,
Speaker 3: we benefit from that, but it's really a big deal
Speaker 3: when things aren't going well, when the world has a crisis,
Speaker 3: when we have a pandemic or a global financial crisis,
Speaker 3: or something goes off the rail somewhere, money comes from
Speaker 3: all over the world comes flowing into the United States,
Speaker 3: and it really cushions the blow of that shock on
Speaker 3: our economy and it helps us navigate through and we
Speaker 3: kind of lead the way for the rest of the world.
Speaker 3: That's going to be harder to do if, in fact,
Speaker 3: investors don't view us as that safe harbor or is
Speaker 3: that safe haven, and the money doesn't come flowing in
Speaker 3: in the next crisis, and we have to pay more
Speaker 3: for capital, higher interest rates and that's certainly a corrosive
Speaker 3: on our ability to invest and to do all the
Speaker 3: things that we want to do.
Speaker 1: Yeah, I just sort of like to how to connected
Speaker 1: to the average person, Why should I care for not
Speaker 1: a safe haven? What you're saying is, well, if you
Speaker 1: like lower interest rates on your credit card debt, if
Speaker 1: you like a lower interest rate on your mortgage, this
Speaker 1: is why you want the rest of the world feeling
Speaker 1: America is a safe harbor.
Speaker 3: Or your small business and you need to borrow money
Speaker 3: to expand your business or hire, or even if you're
Speaker 3: a large multinational and you need to go out and
Speaker 3: borrow money to invest in let's say, those data centers.
Speaker 3: I mean, it's just going to be a lot more
Speaker 3: costly to do it. And most times this generally going
Speaker 3: to be more of a corrosive on the economy. It's
Speaker 3: not a cliff of that. It's not like all of
Speaker 3: a sudden you go off a cliff because the safe
Speaker 3: haven status is under question. It's more of a weight
Speaker 3: on the economy that over time diminishes the economy's ability
Speaker 3: to do what we've done historically, and that's kind of
Speaker 3: lead the global economy.
Speaker 1: I don't know if this is sort of outside your field.
Speaker 1: But how do you assess energy costs because it does
Speaker 1: seem as if that's becoming a right. We're seeing rising
Speaker 1: electricity bills all over the country. Is this you know,
Speaker 1: how much of this is we haven't diversified our grid enough.
Speaker 1: How much of this is there's more of these AI companies,
Speaker 1: more demand on the grid itself, and we're having to
Speaker 1: do it. And is that easy to assess? And how
Speaker 1: do you factor that? Because you know, when when when
Speaker 1: energy costs rise, that impacts everybody. Right, that's just a
Speaker 1: giant sort of slow down on the economy, and that
Speaker 1: feels like something that that we're not really it's happening,
Speaker 1: and we haven't really focused on on how that could
Speaker 1: be a real sort of governor on our economic growth.
Speaker 3: Yeah, well, if you're talking about electricity, the cost of electricity,
Speaker 3: and that's going up just like everything else, demand and supply.
Speaker 3: On the demand side, you know, all these data centers
Speaker 3: scarf up a lot of electricity to be able to
Speaker 3: run the servers and do the AI calculations, So that's
Speaker 3: juicing up demand. And on the supply side of the
Speaker 3: electric power market, it's slow to respond, particularly in the
Speaker 3: context of you know, policy changes under President Trump, where
Speaker 3: he's moved away from clean energy, you know, moved away
Speaker 3: from soular.
Speaker 1: Just the shift itself slows us down. It doesn't like,
Speaker 1: you know, I'm not we're not weighing in on whether
Speaker 1: Biden's right or Trump's right. The transition itself slows us down.
Speaker 2: Absolutely.
Speaker 3: Now there's a lot of discussion going to nuclear and
Speaker 3: that's the direction we're going to head here, but that
Speaker 3: takes time. It's a lot of time, a lot of time.
Speaker 3: There's these smaller nuclear facilities that you can get online
Speaker 3: more quickly, but they're small. You need big nuclear plants
Speaker 3: to be able to generate the power that we need,
Speaker 3: and that's just going to take time. So I would
Speaker 3: I would buckle in here on the like that we're
Speaker 3: going to be paid.
Speaker 2: More for electricity.
Speaker 3: The fortunate thing though, is oil prices, which obviously you know,
Speaker 3: we still draw many people still drive of gas powered cars.
Speaker 2: That's down, right, that's sixty sixty five bucks of barrowl that.
Speaker 1: But why if that's down, why isn't that having some
Speaker 1: impact on our electric bills? Because usually when the price
Speaker 1: of oil goes up, the price of every all energy
Speaker 1: goes up.
Speaker 3: Well, I mean, no, electric electric power is very little
Speaker 3: of it's oil powered. You know, there's natural gas, but
Speaker 3: natural gas prices.
Speaker 2: Are relatively low.
Speaker 3: It's still relatively low because we we produce a lot
Speaker 3: of natural gas here and it's hard to export to
Speaker 3: the rest of the world, although we're trying. But most
Speaker 3: of it is natural gas or you know, renewable solar
Speaker 3: wind and to a lesser degree nuclear and calls becoming
Speaker 3: less of an issue. But oil is a very very
Speaker 3: small piece of the gotcha, of the what's used to
Speaker 3: power electric power plants?
Speaker 1: Gotcha? So let's talk about real estate. There was an
Speaker 1: interesting little one of the million newsletters I read every morning.
Speaker 1: So I'm not going to sit here talking at right,
Speaker 1: there's so many of them, but one notice that it's like,
Speaker 1: so the the talking point of why real estate investment
Speaker 1: has been slow as well, inventory is low, but it's
Speaker 1: still one would assume if you're if if there are
Speaker 1: investors looking for safe havens, why are they only going
Speaker 1: to crypto and gold. Why aren't they going to real estate,
Speaker 1: which has traditionally been a pretty good inflation buffer.
Speaker 3: Well, there's the there's the residential side, which you mentioned
Speaker 3: the single family housing. And then there's the commercial real estate,
Speaker 3: and that's where generally have gone. It'so cre commercial office properties,
Speaker 3: you know, retail malls some of the time.
Speaker 1: Amazing what the price of some of these beautiful office
Speaker 1: buildings are going for it at the oh. I mean,
Speaker 1: if you ever want to own an office building, right,
Speaker 1: do they have a deal for you.
Speaker 3: Yeah. And I think a couple of things happened to
Speaker 3: commercial real estate. One is interest rates. When interest rates,
Speaker 3: real estate is very interest rate sensitive, much more than
Speaker 3: any other asset. And so when interest rates rose, when
Speaker 3: the FED jacked up interest rates to cool things off
Speaker 3: back you know a few years ago in twenty two
Speaker 3: and twenty three going into twenty four, that caused the
Speaker 3: prices to come down for almost all CRI. And then
Speaker 3: each property type had its own kind of story. And
Speaker 3: you mentioned office Obviously there it's remote work, and the
Speaker 3: demand for office space, you know, got crushed. But you know,
Speaker 3: other property types also got have their own stories. Like
Speaker 3: in the multi family sector, that's not about demand, that's
Speaker 3: more about supply. That's where builders were got ahead of
Speaker 3: themselves and put up a lot of these huge luxury
Speaker 3: apartment towers. While there's a lot of demand. There was
Speaker 3: just too much supply, and that's that's caused rents and
Speaker 3: prices to come in. So commercial real estate has kind
Speaker 3: of operated on its own independent dynamic, and it's been
Speaker 3: much more affected by the run up in interest rates
Speaker 3: than the other asset classes. On housing, you know that
Speaker 3: that's generally there's some investment in single family rental, but
Speaker 3: mostly that's you and I, you know, Merrick households buying
Speaker 3: those homes and there the market has struggled in terms
Speaker 3: of sales because of the so called interest rate lock
Speaker 3: you know, ways for very low back in the pandemic,
Speaker 3: people got mortgages at you know, three three, two and
Speaker 3: a half three.
Speaker 1: I'd love to sell my house, but I don't know
Speaker 1: what I get into. Yeah, exactly, I mean, you know,
Speaker 1: I mean that's a real thing. It's like you will
Speaker 1: make Yeah, It's like, boy, I don't want to pay
Speaker 1: that high interest rate in my mortgage. I've got this
Speaker 1: great low interest rate, right.
Speaker 3: Yeah, So if you have a three percent mortgage in
Speaker 3: existing mortgage rates now over six percent, are you really
Speaker 3: going to make that trade?
Speaker 2: And the insurance most people are, you.
Speaker 3: Know, at least not yet.
Speaker 1: So what could let's stick with housing, what what could
Speaker 1: what could government do besides lowering interest rates? So let's
Speaker 1: set interest rates aside? What else could government be doing
Speaker 1: to just improve the affordability of the housing market.
Speaker 3: Yeah, it's done a little bit of work here, I've
Speaker 3: got the paper out was a few colleagues. You could
Speaker 3: google Zandy affordable housing crisis, and this.
Speaker 1: Is a This is for what it's worth. When you
Speaker 1: talk to members of Congress and they say, what issue
Speaker 1: do we and the press not bring up enough? But
Speaker 1: your constituents talk about all the time, it's this issue one, right, Yeah.
Speaker 3: Yeah. In this paper, what we did we tried to
Speaker 3: estimate the balance between supply and demand for housing, both
Speaker 3: on the rental side and on the home ownership side,
Speaker 3: at a census tract level, so at a very detailed
Speaker 3: little geography so you can and it's very interesting, you see.
Speaker 3: And then we cut the data in lots of different ways,
Speaker 3: one of which is around price points, you know, different,
Speaker 3: just different is it for the for high end consumers
Speaker 3: kind of workforce or low income And what we found
Speaker 3: is no surprise. I just mentioned it. At the high
Speaker 3: end of the rental market, it's oversupplied. You got too
Speaker 3: many big luxury condo towers in d C and Philly.
Speaker 2: Chicago, San Francisco. That kind of thing builders got ahead
Speaker 2: of themselves.
Speaker 3: Really interestingly, Chuck, you know, at the very lower end
Speaker 3: of the of the market, it's it's not overly undersupplied,
Speaker 3: it's kind of well balanced. And that's because there's a
Speaker 3: lot of tax subsidy already provided for low income rental,
Speaker 3: like light tech that's low income housing tax credit. The
Speaker 3: real shortage is actually for what I call workforce housing
Speaker 3: rental and for home ownerships. Those are for kind of
Speaker 3: teachers and firemen and you know, kind of middle class
Speaker 3: people are making seventy five eighty K a year on
Speaker 3: a household basis, you know, nationwide, that's where the real
Speaker 3: shortage is. And so that's where policymakers really have not focused.
Speaker 3: They've been focused on the low end. They really need
Speaker 3: to focus on the middle part of the market. And
Speaker 3: there I would argue if we had some tax subsidy
Speaker 3: like a light tech for workforce rental, that would be
Speaker 3: very helpful.
Speaker 1: Is this so how sensitive is that issue by wealth
Speaker 1: of county? Right? So I take a look at like
Speaker 1: you know, you go to around in and around San Jose. Frankly,
Speaker 1: in and around d C. Right Montgomery County or Lincoln County,
Speaker 1: where the service where the service industry folks, your teachers,
Speaker 1: your firefighters, your police officers can't necessarily afford to live
Speaker 1: in the county that they were right, because the cost
Speaker 1: of single family homes are so high. This is true
Speaker 1: in and around Silicon Valley, This is true in close
Speaker 1: in parts of LA and New York, et cetera. It
Speaker 1: seems like that's a unique that's a challenge that's very specific.
Speaker 1: But is this Is this also an issue in and
Speaker 1: around Louisville, right in and around Wichita.
Speaker 3: Yeah, it's coast to coast, and it's market to market,
Speaker 3: and even in those you know, very wealthy areas of
Speaker 3: the country, there are you can see there are you know,
Speaker 3: real pockets of problem of shortages in certain segments of
Speaker 3: the market. So it is coast to coast and it's
Speaker 3: very very local. Yet it's not That's one of the
Speaker 3: reason why it's a hard thing for policymakers to address.
Speaker 3: It's not like I can do something at a thorough
Speaker 3: government level wave of magic wand and solve the problem.
Speaker 3: It's really a lot of you know, trying to understand
Speaker 3: individual markets at a local level and trying to figure
Speaker 3: out what the best strategy is to restless and of
Speaker 3: course underlying all of this is zoning and permitting. Chris.
Speaker 3: Feral government has nothing to say about that and won't
Speaker 3: because the political you know, ramifications trying to address that
Speaker 3: would be you know, overwhelming.
Speaker 2: It's something as possible.
Speaker 3: So it makes it very difficult for government, federal government,
Speaker 3: for the federal government to really address this head on
Speaker 3: in a grand ways. It's got to be done, you know,
Speaker 3: helping local governments try to figure out, you know, what
Speaker 3: they need and where they need it and give them
Speaker 3: the resources to help them do it.
Speaker 1: So in some ways it's incentivizing local governments to change there.
Speaker 3: Yeah, yeah, again, I'd go back to you know, there's
Speaker 3: light tech is low income housing tax right, much maligned,
Speaker 3: no one really likes it, but it's tried and true,
Speaker 3: it's kind of works.
Speaker 2: Let's I take that and run with that and to
Speaker 2: just kind of tweak it and make it work for
Speaker 2: workforce rental.
Speaker 1: That gets me as something else that I think is
Speaker 1: is and maybe this is just a hallmark of the
Speaker 1: twenty first century, but how much would our economy benefit
Speaker 1: from domestic migration? You know, we we and is that
Speaker 1: it it seems as if we move less domestically and
Speaker 1: we did. You know, hey, if I can't find a
Speaker 1: job here, I'm going to travel to another state to
Speaker 1: go get work, or I'm gonna I can't afford a
Speaker 1: house here, I'm going to move somewhere else. And we've seen,
Speaker 1: you know, there was a little COVID migration. Obviously Florida
Speaker 1: experienced that Miami in particular, but that was kind of
Speaker 1: high end and it really is messed with inflation in
Speaker 1: Miami uniquely. But you know, I've always thought one of
Speaker 1: our one of our problems is that we and why
Speaker 1: we're we were so living in our silos, is that
Speaker 1: we don't have the domestic migration that we actually did
Speaker 1: have a lot of in the fifties or did have
Speaker 1: a lot of in the thirties. Is that measurable?
Speaker 3: Yeah, yeah, it's an excellent point. You know, we get
Speaker 3: had Moodies all the credit files and country every month,
Speaker 3: you know, on anonymized and we can see address changes,
Speaker 3: so I can tell you exactly how many people are
Speaker 3: moving from Chicago to Miami and back in a given month,
Speaker 3: and you're absolutely right.
Speaker 2: You know, over the last few decades we've become a
Speaker 2: much less mobile.
Speaker 1: I used the U haul thing. By the way you
Speaker 1: haul light height always throws that out, and you know
Speaker 1: that's a lay person like me, the U haul rental thing.
Speaker 1: It's interesting to me, and it does seem I.
Speaker 2: Should go look at that. I can't looked at that
Speaker 2: in a while because I've been looking at this this crediphile.
Speaker 1: Do you have better data please? Kind of it's really good.
Speaker 3: You know, because I am kind of nerdy. I love
Speaker 3: looking at that data. And you know, one of the
Speaker 3: reasons why we're not moving as much is because just
Speaker 3: raging when you get older.
Speaker 2: You tend to move less when you're young, switching jobs.
Speaker 1: And so we're just an aging population. That's one explanation.
Speaker 3: Yeah, And the other is I think goes back to
Speaker 3: the income and wealth distribution. If you're lower income, middle
Speaker 3: income and you live in of the country that got
Speaker 3: nailed with the loss of manufacturing, you know, the economy
Speaker 3: is just not very dynamic. House prices have not risen
Speaker 3: at all. They may have actually even declined in some
Speaker 3: of those communities. You just can't you can't and then
Speaker 3: you've seen the house prices rise. We're on the coast, and.
Speaker 1: You can't afford to move.
Speaker 2: You literally can't, literally can't afford to move.
Speaker 3: There's just no possible way you're going to be able
Speaker 3: to do that. So you're kind of stuck. Even if
Speaker 3: you wanted to move to get that to that job
Speaker 3: that's sitting in Miami.
Speaker 2: Or wherever it is, you just can't do it. And
Speaker 2: and that's really cut down the mobility.
Speaker 3: I will say though, that's one of that has historically
Speaker 3: been one of the unique characteristics of the US economy
Speaker 3: compared to anywhere else in the world. You know, very
Speaker 3: few exceptions to that. And it's that mobility that has
Speaker 3: allowed the US economy to adjust to shocks, because, as
Speaker 3: you say, if you lose a job over here, you
Speaker 3: can pick up and move to take a job over there.
Speaker 1: But that that.
Speaker 3: Flexibility, it's still there. We're still much more flexible mobile
Speaker 3: than let's say Europe or right, you know, other parts
Speaker 3: of the Asia, other parts of the world, but much
Speaker 3: less so. So we're not you know, we don't benefit
Speaker 3: to the same degrees we did thirty forty fifty years
Speaker 3: ago from that from that mobility.
Speaker 1: All right, let me get you out of here on
Speaker 1: on this which is is our how much is our
Speaker 1: economy at risk due to domestic politics and how much
Speaker 1: of it is with more global forces?
Speaker 3: I'd say follows the above.
Speaker 1: But you know, you know, I think it's clear you
Speaker 1: can't really disentangle.
Speaker 3: Yeah, I mean, look, I think it's pretty clear that
Speaker 3: our politics are fractured, and you know, probably goes back to.
Speaker 1: Was that worth a point of GDP? Probably a better
Speaker 1: politics or a more functional political system, we probably would
Speaker 1: have a healthier overall economy.
Speaker 3: How could it not be the case? I mean, just
Speaker 3: take a look at what's happening now with the government shutdown, right,
Speaker 3: I mean, yeah, there's no upside do that.
Speaker 2: There's nothing but downside, and it diminishes our.
Speaker 1: Large I have no, there's nothing in the constitution that
Speaker 1: says government has to shut down if there's appropriations dispute.
Speaker 1: It tries me crazy that we've just decided collectively this
Speaker 1: is how we should function.
Speaker 3: Yeah, there you go. And then you know, but of
Speaker 3: course that this goes to our ability to respond to
Speaker 3: the challenges that we face, and there are many challenges
Speaker 3: both domestic and you know, globally that what's going on globally.
Speaker 3: There's a tremendous challenges there, and we can't address them
Speaker 3: if we're as politically fractured as we are. So I
Speaker 3: think that's you know, again, I want to say, it's
Speaker 3: not a cliff event. I kind of think of there
Speaker 3: are corrosives and there's cliff events. This is not a
Speaker 3: cliff event. It's not like we're going to go off
Speaker 3: the cliff here. But it's one of those things that
Speaker 3: kind of undermines the economy's ability to grow a longer run.
Speaker 3: And you know, you don't really feel it in a
Speaker 3: given year, but when you look back over a decade
Speaker 3: or two, you go, oh my gosh, you can see it.
Speaker 2: You can see it, and you can feel well.
Speaker 1: The reason I asked about the international versus the domestic.
Speaker 1: I mean, look, I think we all understand the domestic,
Speaker 1: but I look out of China. Is that a healthy
Speaker 1: economy or not? If you thought employment is near twenty percent,
Speaker 1: how's that a healthy economy?
Speaker 2: Now they got their we got their own problems.
Speaker 1: I mean, could that lead to contagion globally? I mean,
Speaker 1: there's such a big economy, how could it not well?
Speaker 3: I mean I think it's one of those things where
Speaker 3: they can keep it together for an extended period, right.
Speaker 1: I mean because of their system of government.
Speaker 3: Their system of government, I mean, it's very autocratic. I
Speaker 3: don't think it works well in terms of in terms
Speaker 3: of long term economic growth, but they can keep things
Speaker 3: going for a long time and you.
Speaker 2: Know, paper over a lot of a lot of mistakes,
Speaker 2: and you know that's what they're doing right now.
Speaker 3: So you know, I'm not bullish on China long run,
Speaker 3: but I'm not bearish in the near term.
Speaker 2: I don't think that's something that's going to fall apart
Speaker 2: anytime soon.
Speaker 1: All Right, So if I have you back here after
Speaker 1: the first of January, you think we're probably going to
Speaker 1: be in the same levels of risk, more likely than not,
Speaker 1: just sort of sitting in this same sort of elevated
Speaker 1: but not there in a recession.
Speaker 2: Yeah, I think that'll be the case, junk.
Speaker 3: I mean, I do think that if we look out
Speaker 3: a year from now towards the second half of next year,
Speaker 3: you know, we might start to see a lift because
Speaker 3: at that point we're on the other side of the tariffs,
Speaker 3: the immigration policy, and you've got lower interest rates. The
Speaker 3: FED is going to be cutting interest rates. And you
Speaker 3: know there's a lot of fiscal so called fiscal stimulus
Speaker 3: in that one.
Speaker 2: Big beautiful bill that got passed.
Speaker 3: You know, there's a lot of cutting, but that comes later,
Speaker 3: you know, next year, telling the tax cuts and so
Speaker 3: people are going to get bigger refund checks.
Speaker 1: Good, So you think there could be another that in
Speaker 1: some ways we maybe we might have a leaky, hot
Speaker 1: air balloon, but there's gonna be more more air pumped
Speaker 1: into it.
Speaker 2: That's great, I think of putting it. Yeah, that's a
Speaker 2: great metaphor. It's exactly what's going to happen. So, you know,
Speaker 2: I think the economy is going to be most vulnerable
Speaker 2: in the next six to nine months.
Speaker 3: On the other side of that, then I think it'll
Speaker 3: get some juice from the fiscal monetary stimul sets in train.
Speaker 1: Here, all right, Mark Sany Always great to hear from you.
Speaker 3: Yeah, thanks, Chuck, Thanks, thanks for all the wide ranging questions.
Speaker 3: Always appreciate it.
Speaker 1: Well, I you know, you you humor me well and
Speaker 1: at the same time, you're pretty good about putting this
Speaker 1: stuff in English, and I do. I mean there you go.
Speaker 2: Pretty good, pretty good, Chuck, pretty good.
Speaker 1: Well, you know you can't ever say great, right, right,
Speaker 1: I never give five stars. Right, I'm a four point
Speaker 1: nine guy.
Speaker 2: Now I hear you. Thanks Mar,