Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio. Hi,
Speaker 1: I'm Barry ridh Holts. Welcome to the podcast. This week
Speaker 1: I had an absolutely fascinating conversation with Dan Albert. He
Speaker 1: is the founder of Westwood Capital and author of the
Speaker 1: book The Age of Oversupply. Dan is really a fascinating guy.
Speaker 1: He's done a lot of really interesting things in his career,
Speaker 1: including putting together one of the very first structured financial
Speaker 1: commercial products. Most of the structured commercial back mortgage guaranteed papers,
Speaker 1: the cmos that you've seen were residential mortgages. Dan worked
Speaker 1: with first a group of distressed assets and then a
Speaker 1: group of commercial assets, and that was fairly early in
Speaker 1: the world of structured products. He also put out one
Speaker 1: of the very first reads that ever existed. He's an
Speaker 1: expert on everything from UH structuring credit and debt to
Speaker 1: putting out um new products getting them through the process.
Speaker 1: Really a fascinating conversation about what's happened over the past
Speaker 1: couple of years and why this is not a temporary phenomena,
Speaker 1: why it's structural and nature. We talked about central banks
Speaker 1: around the world and what they should and shouldn't have done,
Speaker 1: as well as discuss the lack of fiscal response, which
Speaker 1: is part of the ongoing um fairly mediocre recovery that
Speaker 1: we've seen since the financial crisis ended in O nine.
Speaker 1: I find Dan would be just a very informative and
Speaker 1: intelligent guy who can talk about a number of subjects
Speaker 1: quite articulately. And it was really a fascinating conversation. If
Speaker 1: you're listening to this part of the conversation, you're probably
Speaker 1: listening to the full podcast. And we went for a
Speaker 1: little over an hour, and before I forget, I have
Speaker 1: to start thanking some of the people who helped put
Speaker 1: this together. Dan was very generous with his time. My
Speaker 1: engineer is Charlie Vollmer, and the head of research who
Speaker 1: really did a deep dive on this is Michael bat Nick.
Speaker 1: And without any further ado, here's my conversation with Dan Albert.
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: My guest this week is Dan Albert. He is the
Speaker 1: founder of Westwood Capital. He is also an expert on
Speaker 1: structured finance and distressed companies, and he is the author
Speaker 1: of the book The Age of Oversupply. Dan, Welcome to
Speaker 1: the show. Good, Thanks so much for coming in. So
Speaker 1: you we're gonna get a little wonky today. We're gonna
Speaker 1: go in the weeds at a certain point. But let's
Speaker 1: just start with your background. Tell us a little bit
Speaker 1: about how you found your way into distressed companies and
Speaker 1: structured finance. Well, I think investment aching as a whole.
Speaker 1: I had a fairly unusual beginning. Um during the early
Speaker 1: nineteen eighties. I was in the real estate syndication business,
Speaker 1: which was very much tax driven at the time. It
Speaker 1: was sort of taking candy from babies, really couldn't help
Speaker 1: but make money. All that change very very suddenly in
Speaker 1: n six were the U. S. Government tried to pull
Speaker 1: off the old trick of pulling the tablecloth out without
Speaker 1: disturbing the dishes, and of course the whole renovation to
Speaker 1: a lot of parts of the tax code and a
Speaker 1: lot of formerly um let's call it tax focused investment
Speaker 1: themes suddenly went on right and uh. And that of
Speaker 1: course precipitated the S and L crisis because of the
Speaker 1: loans that those banks had made, and then ultimately created
Speaker 1: the real estate recession, which spread like wildfire around the country,
Speaker 1: starting in Texas and moving from the east coast to
Speaker 1: the West coast. Ultimately by prices felt pretty substantially, I
Speaker 1: mean it was. It was a great training ground for
Speaker 1: the period of time that came the last ten years.
Speaker 1: So even though they had told us that real estate
Speaker 1: had never fallen in price previously, well, well, of course
Speaker 1: that was residential real estate this time around the first
Speaker 1: commercials commercial. But what what happened after that is I
Speaker 1: was very lucky enough to be able to take over
Speaker 1: the real estate investment banking franchise at Oppenheimer and Company UH,
Speaker 1: and in that capacity was able to create some new
Speaker 1: products in in the middle of what was really a
Speaker 1: total real estate depression, not even a recession. So let's
Speaker 1: talk about some of those products. One of the innovations
Speaker 1: that you created, and I don't want to misstate or
Speaker 1: overstate this, but essentially you took a pool of distressed
Speaker 1: assets and was that the first securitized pool we did
Speaker 1: distress commercial, We did the first rated UH commercial mortgage
Speaker 1: backed securities. Before that, the only mortgage backed securities out
Speaker 1: there were pools of residential mortgages. Nobody could quite get
Speaker 1: their head wrapped around the concept of of their being
Speaker 1: commercial mortgages that could actually be diversified enough to take
Speaker 1: a rating. UH. And what we were able to do
Speaker 1: is convince at that time my recollections, correct Standard and
Speaker 1: Poors and Fitch UH to develop a methodology for rating
Speaker 1: pools of commercial mortgages. It was a little easy because
Speaker 1: in that very first trade we were buying a large
Speaker 1: pool of mortgages a significant discount from Xerox Credit. I remember,
Speaker 1: and at that time Zero's Credit had been told by
Speaker 1: the rating agencies they had to divest of all of
Speaker 1: their non copy or related businesses because they were investing
Speaker 1: in UH. They had loans in aviation and real estate
Speaker 1: and everything that you can imagine, and that led to UH,
Speaker 1: They're they're being forced effectively to fire sales massets which
Speaker 1: we bought, which were actually performing assets at the time UM.
Speaker 1: And we were able to securitize those in the first pool.
Speaker 1: And then that was different UH and and and very
Speaker 1: good because we were able to deal with a pool
Speaker 1: where we had multiple borrowers, which is not terribly characteristic
Speaker 1: of commercial real estate London. So so essentially the first
Speaker 1: commercial securitized mortgage back paper. In other words, hundreds thousands
Speaker 1: of different loans in one problem. No, no, no, I mean,
Speaker 1: you don't get the advantage of having hundreds and thousands
Speaker 1: in commercial real estate, do you. I mean, obviously during
Speaker 1: the bubble we had large, large pools, but you know,
Speaker 1: typically in this particular case, I think they were like
Speaker 1: sixty somewhat loans, but it's still a big distribution as much,
Speaker 1: there was a decent distribution to it. Uh. Subsequently, we
Speaker 1: did UH a year later, actually this was a year later,
Speaker 1: we did the first a single borrower pool where basically
Speaker 1: all of the assets where assets of a single company. Uh.
Speaker 1: They were obviously put into bankruptcy remode structures, but at
Speaker 1: the end of the day, we were able to overcome
Speaker 1: this issue of well, if you have a single company
Speaker 1: controlling all the assets, they can just throw the keys back.
Speaker 1: And again these were done at fairly low loan to
Speaker 1: value ratios. When you look at what happened in the
Speaker 1: CMBs business during the two thousands, it is almost night
Speaker 1: and day compared to what we were doing in the
Speaker 1: early days. So collateralized mortgage backed securities then, and then
Speaker 1: of course you you saw this demand for yield developed
Speaker 1: as rates continued to fall from the nineteen eighties. Obviously
Speaker 1: we had a spike in the beginning of my career
Speaker 1: in nineteen eighty two or we had double digit treasury
Speaker 1: rights and certainly double digit inflation, and then we saw
Speaker 1: rates gradually decline, and so by the time you got
Speaker 1: into the early nineties and ninety three you saw an
Speaker 1: enormous clamoring for yield. People still had an inflation mentality.
Speaker 1: They still thought that inflation was coined. Oh god, it
Speaker 1: spiked interestingly and if now this, I'm really flying by
Speaker 1: the seat of my pants, because but it was at
Speaker 1: one no no, no, no, no, no, no, no, there
Speaker 1: it was. It was in the high single digits, low
Speaker 1: double digits. But I do remember ninety three, I think
Speaker 1: it was we had a spike UH and that cost
Speaker 1: a little bit of a bobble um. But anyway, we
Speaker 1: did we did a portfolio in connection with the next
Speaker 1: iteration of this business. We did the second UH read
Speaker 1: that came out. The first rate was a company called
Speaker 1: Kimko was done by Meryl, and we did one called
Speaker 1: Kransco about a few months later, and used structured debt
Speaker 1: as the leverage because again the debt market was very
Speaker 1: much bolloxed up still UH, and we were able to
Speaker 1: do that through the capital markets, which was very which
Speaker 1: was very creative at the time, pulling off a simultaneous
Speaker 1: issue of a CMBs offering an anequity offering. No one
Speaker 1: has done that before, so that's really fascinating. And since
Speaker 1: that time there's been a tremendous growth of both collateralized
Speaker 1: mortgages and reads. So you were there at at very
Speaker 1: early in the process. So in the last thirty seconds
Speaker 1: we have in this segment, um what's more complex dealing
Speaker 1: with reats or dealing with far more complex to do
Speaker 1: what I did next, which is started an investment bank
Speaker 1: of your own and run it for the last twenty years.
Speaker 1: I'm barry. It helps. You're listening to Masters in Business
Speaker 1: on Bloomberg Radio. My guest today is Dan Albert, founding
Speaker 1: partner of Westwood Capital. Building your own investment bank, which
Speaker 1: is something that we don't see happen all that much
Speaker 1: these days. Back in the eighties or so, was it
Speaker 1: late eighties, mid nineties, you built grown bank left Oppenheimer
Speaker 1: and I will say that that the only way we
Speaker 1: could have possibly done what we did. And this is
Speaker 1: where you come face to face with technology. I mean,
Speaker 1: when I started working in we had typist pools right.
Speaker 1: Uh So, so as a pre girl, that literally what
Speaker 1: I was thinking. But the the you know, by the
Speaker 1: time year old around, we we actually had the beginnings
Speaker 1: of email. Not quite I think I was still using
Speaker 1: an A O L dial up account, but certainly we
Speaker 1: we had a computing environment in which we did not
Speaker 1: need the kind of back office that you would have
Speaker 1: needed ten years before. And so we were able to
Speaker 1: to start a company with relatively small amount of capital.
Speaker 1: Uh and and as a true old style investment bank,
Speaker 1: taking our roller dex and matching it against people who
Speaker 1: need money. Uh and and that that has been our
Speaker 1: business for twenty years now. Of course, we've expanded considerably
Speaker 1: since uh In we we began to branch out into Asia.
Speaker 1: We opened an office in Tokyo and in two thousand
Speaker 1: we've now we're now covering all of Pacific Asia. And
Speaker 1: thanks to my good friends at City Bank for destroying
Speaker 1: their business, we were able to um we were able
Speaker 1: to bring on board the entire Latin American structured finance
Speaker 1: team from from City Bank, and uh they've been a
Speaker 1: great addition to our firm and and have have been
Speaker 1: there ever since. So how do you go for from
Speaker 1: a guy who's structuring products for either come austual real
Speaker 1: estate or or reads to building a bank, who who
Speaker 1: is the there's always a mentor behind that sort of thing,
Speaker 1: who helped guide you through that process. I guess it's
Speaker 1: funny because it had nothing to do with what happened
Speaker 1: in ninety five. But back in nineties and eighties seven,
Speaker 1: I was working for a guy in the in the
Speaker 1: real estate syndication industry before I left for Oppenheimer, and
Speaker 1: he took me aside one day and he said, Dan,
Speaker 1: you're never going to be happy until you have your
Speaker 1: own shop. Turns around, it turns out he was right,
Speaker 1: and uh, and yes, I had a great time. I
Speaker 1: had learned a ton in at Oppenheimer during the some
Speaker 1: really great years. We had terrific bankers, we had terrific people.
Speaker 1: But by nine five I was done and had the opportunity,
Speaker 1: had a little capital, and had a couple of partners. Uh,
Speaker 1: and we're able to strike out. And quite frankly, it
Speaker 1: all comes from realizing from whence you get your business right.
Speaker 1: If you are very capital dependent, if you're a trader,
Speaker 1: you don't have a choice. You need a large platform
Speaker 1: with capital but if you're using your creative powers in
Speaker 1: terms of being able to design solutions for people that
Speaker 1: haven't been used before, which quite frankly was what we
Speaker 1: did for the first ten years of our business, uh,
Speaker 1: and have a decent roll at X in decent context UM,
Speaker 1: then eventually you realize that you don't need the the
Speaker 1: overlay of the larger institution, so you could be a
Speaker 1: little more nimble. And it's really just a matter of
Speaker 1: putting the right peg in the right hole. Plus, I
Speaker 1: don't know who ever taught me this, uh, this phrase,
Speaker 1: but sometime way back when somebody told me keep it small,
Speaker 1: keep it all and uh, and that became that became
Speaker 1: my guideline for guide words. But you guys aren't really
Speaker 1: all that small. Well, you know, we've we've grown, but
Speaker 1: but still we we managed to do this on a
Speaker 1: platform that is reasonably sized. We don't keep a ton
Speaker 1: of capital in the business because we don't need it. Uh,
Speaker 1: and we we operate um as a practical matter and
Speaker 1: you know about say the world. So now let's talk
Speaker 1: a little bit about your expertise in in complex um,
Speaker 1: real estate structures and and other things. We just came
Speaker 1: out of a crisis where residential mortgages were the underlying
Speaker 1: problem and structured residential mortgages was really the bull's eye.
Speaker 1: How did that happen? And how do we avoid having
Speaker 1: that happening? Yeah, it's interesting. So again by way of background,
Speaker 1: I'll go back into what happened recently. So suddenly I
Speaker 1: find myself an author and economist. Where I had taken
Speaker 1: my my degree and in those subjects and and stuck
Speaker 1: them in a drawer for most of my where you
Speaker 1: going to the University of Pennsylvania, and I graduated with
Speaker 1: a degree in public policy which incorporated economics and business
Speaker 1: and a whole bunch of other stuff. Um, But when
Speaker 1: I when I saw in March of what was going
Speaker 1: on to volts in the mortgage industry that was already
Speaker 1: past the peak in both volume and price. We've already
Speaker 1: but you know, and you were, You were there at
Speaker 1: the time for sure. But there were a few of us,
Speaker 1: if you recall, who were actually writing and speaking and
Speaker 1: and formulating. Literally we all knew each other. Right, you
Speaker 1: could count it on practically one hand. I can't. Every
Speaker 1: now and then I'll pull up one of the old criticisms,
Speaker 1: how many subprime mortgages. Do you think this there are
Speaker 1: that it's going to actually impact Well, how big is
Speaker 1: a you know, I'm alignant to him or relative to
Speaker 1: a man's body weight? Size isn't what does it. It's
Speaker 1: that leverage point of affecting everything. It turned out it
Speaker 1: was pretty sizable. Top. Well, we were talking during the break,
Speaker 1: we were talking about structured finance. And if you put,
Speaker 1: you know, bad meat into a sausage maker, what you
Speaker 1: get out the other side is bad sausage. How much
Speaker 1: bad debt was there, how much bad paper was there
Speaker 1: that substantly got structured and structured in structure. Well, you know,
Speaker 1: so you you you saw an industry that from the
Speaker 1: beginning of the decade two thousand until its peak, had
Speaker 1: grown from about five point some odd trillion dollars and
Speaker 1: outstanding mortgages to almost eleven in seven short years. So
Speaker 1: it was it was an outstanding balloon of of credit. Uh.
Speaker 1: And then you also saw five trillion to eleven trillion
Speaker 1: eleven and change. And if you look at total debt
Speaker 1: in the United States, it actually grew from about twenty
Speaker 1: six trillion to fifty two doubled there as well. So
Speaker 1: you know it wasn't just housing, it was it was
Speaker 1: across the board. We were in this massive debt bubble um.
Speaker 1: But what what happened is you you you had to
Speaker 1: ask yourself the question. And in fact you were at
Speaker 1: a luncheon that I was at at the Harvard Club
Speaker 1: with with Neurie L. Rabini. I believe you were there.
Speaker 1: My recollection is that you were. Um where I first
Speaker 1: articulated this, which is, you know, at some point you
Speaker 1: have to follow the money and uh. And I had
Speaker 1: always believed obviously for the first six months, I was
Speaker 1: just stunned with what was going on, uh in the
Speaker 1: markets and what was going on. Obviously could see the
Speaker 1: impendent collapse. Made a few bucks, making a couple of
Speaker 1: good trades, but but nothing on this on the on
Speaker 1: the score of a port Paulson or somebody like that,
Speaker 1: not not Michael Barry money, yeah exactly. But but started
Speaker 1: to write and that was really the changes that I
Speaker 1: I felt that I had something I wanted to say. Uh.
Speaker 1: This was an industry that I had been involved in
Speaker 1: creating at least one st class if not more of
Speaker 1: and uh. And I felt that the rating agencies in
Speaker 1: particular had dropped the ball that the people on the
Speaker 1: bike side didn't know what they were buying. Uh. And
Speaker 1: the people who were putting these these packages together, we're
Speaker 1: we're committing how I fraught, So they didn't care what
Speaker 1: it was. Right. My guest today is Dan Alpert of
Speaker 1: Westwood Capital. He's the author of the Age of Oversupply.
Speaker 1: And let me pull out a quote from the book
Speaker 1: that I really liked. You said, the greatest challenge facing
Speaker 1: the global economy is the oversupply of labor, productive capacity,
Speaker 1: and capital relative to the demand for all three. Explain that, well,
Speaker 1: this all goes back really to something that we all
Speaker 1: lived through, or most of us who aren't children, and
Speaker 1: that is that we saw the collapse of the socialist world,
Speaker 1: the emergence of these very very large countries with tons
Speaker 1: of people into bed Idea, all of Eastern Europe and
Speaker 1: even you can count Vietnam. So so you're talking about
Speaker 1: three and a half billion people. If you put this
Speaker 1: in perspective, Uh, the developed world, the so called developed world, Japan, US, Canada,
Speaker 1: Western Europe is eight million people. So you have three
Speaker 1: and a half billion people who show up and they
Speaker 1: decide one day they want to eat our lunch and
Speaker 1: play by our rules. Uh. And of course part of
Speaker 1: that is that there will link to work very cheaply.
Speaker 1: Obviously they have far lower standards of living and far
Speaker 1: little costs of living. So that digitaliant global labor arbitrage.
Speaker 1: It's it's a giant global labor glut. And the glut
Speaker 1: is one of these ones in a history of mankind
Speaker 1: kind of things. I mean, whoever thought you would shut
Speaker 1: down the development of the world for some of the
Speaker 1: world's people behind the iron curtain and the bamboo curtain
Speaker 1: and say, and then one day something with those curtains
Speaker 1: and they all show back up. We're we're going to
Speaker 1: come back out into the So that so that that
Speaker 1: creates this massive instability. It created, in my argument, the
Speaker 1: bubble itself because we saw something we've never seen in
Speaker 1: the history of mankind, which is something economists call reverse
Speaker 1: capital flows, where we see money coming from poor countries
Speaker 1: to rich countries, when the Chinese buy our bonds, when
Speaker 1: other countries buy our bonds, um and and we've never
Speaker 1: seen that in the history of the world before either
Speaker 1: um And. So what that creates is as an environment
Speaker 1: where you have enormous amount of capital trying to find
Speaker 1: their way into into sovereign debt of developed countries. Interest
Speaker 1: rates of course then decline because you have an overabundance
Speaker 1: of demand for for bonds. UM, you have an excess
Speaker 1: supply of labor relative to total demand because as you know,
Speaker 1: the Chinese and the Indians, while they're producing, they're not
Speaker 1: consuming what they should be at least what they should
Speaker 1: be in order to create equilibrium UM and UH. And
Speaker 1: then you have the the issue of of uh, way
Speaker 1: too much stuff being made. And we can see that
Speaker 1: now as we saw infrastructure and other investment being made
Speaker 1: in China and other countries has now outstripped rational demand
Speaker 1: for the product that they make. I mean, look at
Speaker 1: the steel industry for example. Are you talking like those cities, well,
Speaker 1: domestically yes, But I think what's even more important is
Speaker 1: looking at at at the production of manufactured products. And
Speaker 1: steel is probably the best example. You saw an environment
Speaker 1: in which people were building steel panets willy nilly and
Speaker 1: anticipation of not only the a structure demand in China,
Speaker 1: but also large demand growth globally. And of course that
Speaker 1: demand growth was haha, driven by a massive amount of
Speaker 1: debt that was being creative when you created, when you
Speaker 1: took when you took away the debt, you took away
Speaker 1: all that demand. Let's talk about over supply in the
Speaker 1: United States. One of my favorite examples is the total
Speaker 1: square footage of shopping malls, which is massive. And you
Speaker 1: go into just about any reasonable sized town in or
Speaker 1: city in America and there are two malls. There's the
Speaker 1: new good mall, and then there's the old dilapidated mall,
Speaker 1: which is half empty, self correcting by the fact that
Speaker 1: those old malls are now shutting down and becoming ghost properties.
Speaker 1: UM that that that type of of of over abundance.
Speaker 1: You have to again go back to the beginning of
Speaker 1: which is how was it fueled? Right? How did you
Speaker 1: get those extra malls? And the answer is there was
Speaker 1: a There was a huge amount of capital that was
Speaker 1: chasing yield, and as yield drops, real estate becomes, at
Speaker 1: least on surface, an attractive investment because you can leverage
Speaker 1: it with cheaper and cheaper money. UH. And of course
Speaker 1: that's an entire fallacy and and one of the problems
Speaker 1: with the period through which we're living right now, not
Speaker 1: just in UH the US, but globally is the zero
Speaker 1: interest rate environment that all large central banks are pursuing
Speaker 1: uh in in the developed countries, is creating a price dislocation.
Speaker 1: We really don't know what the value of anything is
Speaker 1: on a on a going forward basis. I can't tell
Speaker 1: you that the house that you bought last week for
Speaker 1: half a million dollars is really worth half a million
Speaker 1: because you bought it with money that was so cheap
Speaker 1: relative to what normal would be. And of course we
Speaker 1: really don't know what normal is going to be a guest,
Speaker 1: So shouldn't the market eventually correct that? Because I've been
Speaker 1: hearing similar arguments from a lot of people for a while.
Speaker 1: We have market prices, except the market prices are distorted
Speaker 1: by the Fed. Now we have the Fed end in queue,
Speaker 1: or at least in theory, ending que They ended quee,
Speaker 1: whether or not they can reverse zero interest rate policy. Right,
Speaker 1: so we're twenty five basis points. There are some people
Speaker 1: who think that by the time the year is over
Speaker 1: will be closer to one percent FED funds rate, which
Speaker 1: is still historically extraordinarily low. Is that theoretically possible? Can
Speaker 1: the Fed? A lot of people claim the Feds boxed
Speaker 1: in what's your perspective on the Fed? The Fed is
Speaker 1: boxing itself, and I don't believe they'll be able to
Speaker 1: raise rates other than a token basis point rise just
Speaker 1: to say, look, we've got control over the tiller. But
Speaker 1: as a practical matter, the wave of price softness that's
Speaker 1: not just here in the United States but elsewhere h
Speaker 1: is really telling the story for them. Well, my guest
Speaker 1: today is Dan Albert. He is the founder and managing
Speaker 1: partner of Westwood Capital. He is also the author of
Speaker 1: the Age of Oversupply. And we've been talking about UH
Speaker 1: three and a half billion new on on entrance into
Speaker 1: the labor pool, which is part of the reason why
Speaker 1: we haven't seen any increase in wages. So let's talk
Speaker 1: a little bit about what's going on around the world.
Speaker 1: We have three central banks, the US Federal Reserve, the
Speaker 1: European Central Bank, and the Bank of Japan, and they
Speaker 1: all seem to be So don't leave the Bank of
Speaker 1: England at it. This will be insulted, is the Bank
Speaker 1: of How big a player these days is the Bank
Speaker 1: of England relative to the Trilateral But what's fascinating to
Speaker 1: me about those three banks is they all seem to
Speaker 1: be in a different phase. The US done with QUI
Speaker 1: and talking about raising rates. The Bank of Japan in
Speaker 1: the middle of their qui and relative to the size
Speaker 1: of their economy actually bigger than the U s que
Speaker 1: And now the European actually announcing I think we're gonna
Speaker 1: have to do something because this austerity thing has been working.
Speaker 1: So how do we find ourselves in this situation with
Speaker 1: bankers all lot of phase with each other? Well, I
Speaker 1: don't see it really is being out of days. Uh,
Speaker 1: They're they're all basically pursuing the same policy, whether you
Speaker 1: go from zero interest rate policy to actual quantitative easing.
Speaker 1: It's it's just two versions of the same same soup.
Speaker 1: The the the upshot though, is that what's been going
Speaker 1: on since the Great Recession is we have been literally
Speaker 1: seeing the hot potato of inadequate demand being passed back
Speaker 1: and forth among regions. And it's very interesting how that happens.
Speaker 1: It happens due to uh, policy, it happens due to
Speaker 1: labor markets. Uh, it happens due to fiscal issues and
Speaker 1: government fiscal issues. Um. But nevertheless, you know, we were
Speaker 1: looking at a period only a few years ago where
Speaker 1: Europe was, you know, before the European crisis. They were
Speaker 1: sitting there saying Oh, we're fine, We're great, right uh.
Speaker 1: And it was the US that was that was in trouble. Uh.
Speaker 1: And suddenly we find ourselves with the correcting of the
Speaker 1: realities or reaching of the realities of what was really
Speaker 1: going on with Europe, which was this mass of or
Speaker 1: cancelous policy out of Germany. Um and and and we
Speaker 1: saw the problem are up there that was very similar
Speaker 1: in nature, just fractioned into eighteen different countries, with all
Speaker 1: each with their own little story, but still pretty much
Speaker 1: the same overall one monetary policy. Yeah crazy, yeah, but
Speaker 1: but the uh so we saw them uh suffer and
Speaker 1: and then of course as they began to suffer, Japanese
Speaker 1: tried Albonomics and albynamics gave them a little booze for
Speaker 1: a period of time, ultimately failed. Um and so failed
Speaker 1: did they introduced that big sales tax. Sales tax was stupid,
Speaker 1: but arrescued whatever growth they had going. But but but
Speaker 1: as a practical matter, uh, you know, the effectiveness of
Speaker 1: Albanomics was basically tanking the currency, right, and they did
Speaker 1: that more or less by jaw boning it's expectations based
Speaker 1: tanking of the currency. Yes, they did quei and they
Speaker 1: did all the things that would engender that. But as
Speaker 1: practical matter, well, their their interest rates were low already
Speaker 1: right up until yesterday. We're recording this on a Wednesday,
Speaker 1: up until yesterday, lowest rates in the world until Germany
Speaker 1: managed to bypass them. Right. So so you you you know,
Speaker 1: you had Japan sitting there with for the most part,
Speaker 1: a surplus for most of the period of time, current
Speaker 1: account and trade surplus. Uh, simply because they were in
Speaker 1: a period of almost continuous deflation, right, mild deflation, not
Speaker 1: not not severe deflation. Um. And you know what they
Speaker 1: experienced and what was what was really putting them on
Speaker 1: the ropes is they saw their currency appreciate through the roof.
Speaker 1: You had the end go you know, below eighty and
Speaker 1: and that was which is this is a couple of
Speaker 1: years ago, a couple of years ago, and that was
Speaker 1: stiming their their exports, and uh, suddenly their trade deficit
Speaker 1: was was vanished, a trade surplus was vanishing. Uh. And
Speaker 1: uh it really has nothing due to anything more than
Speaker 1: the fact that, Uh, what you have to ask yourself,
Speaker 1: why did the currency of a country that was the
Speaker 1: most heavily indebted country in the world and had it
Speaker 1: was experiencing deflation, no nominal growth, right, why was its
Speaker 1: currency appreciating? And quite frankly, the only answer is, and
Speaker 1: you know, I put it in simplistic terms, that a
Speaker 1: grain of rice just costs less en in in in
Speaker 1: end terms, right if the if the end, If you're
Speaker 1: if you're having consistent year over year deflation and the
Speaker 1: price of the goods that are manufactured or produced in
Speaker 1: Japan drop in end terms, well then they're worth more
Speaker 1: by definition in dollar terms, all currencies are relative, right,
Speaker 1: All currencies a relative, so so they so so the
Speaker 1: currency appreciated, which you wouldn't sort of put in the
Speaker 1: same but when you look at it from the perspective
Speaker 1: of the grain of rice, but the energy expanded to
Speaker 1: produce this grain of rice is more or less the
Speaker 1: same or from year to year, so it's closting less.
Speaker 1: It means the measuring stick actually has to be getting
Speaker 1: a little bit exactly. So, so we saw this happen,
Speaker 1: which is also something that economists would not have expected.
Speaker 1: Um and uh, and that created a huge amount of
Speaker 1: pain because you saw the trade surplus evaporate and then um,
Speaker 1: you already had no upward pressure on wages. In fact,
Speaker 1: wages had deflated along with with goods and services. The
Speaker 1: the way they tried to reverse that was to try
Speaker 1: to talk down the end and they did successfully. You
Speaker 1: talk it down quite a bit. Uh. And so what
Speaker 1: what you then had is an environment in which you
Speaker 1: would think that you could create inflation, right because they
Speaker 1: still have to import oil, it would cost more, blah
Speaker 1: blah blah. But here's the magic to all of this.
Speaker 1: And this applies in the United States, it applies in Europe,
Speaker 1: applies throughout the world. In the age of oversupply. Unless
Speaker 1: you can move wages, you cannot create inflation. We're experiencing
Speaker 1: this right now in the United States. Europe has been
Speaker 1: experiencing it for years, Japan has been experiencing it for decades,
Speaker 1: and we're now seeing if you start looking at what's
Speaker 1: going on in China, some very worrisome signs. I mean,
Speaker 1: their last inflation print. This is a country that's growing,
Speaker 1: depending on who you believe, five to seven percent a year.
Speaker 1: And we saw we saw an inflation print there of
Speaker 1: one point four percent year over year last month or
Speaker 1: maybe one point five of my memories. So essentially their
Speaker 1: wages aren't growing. The well prices certainly aren't growing. Wages
Speaker 1: have continued to grow, but at some point people are
Speaker 1: going to shrug their shoulders and say, why do I
Speaker 1: need to pay anymore for labor? Because their costs are
Speaker 1: not the costs being incurred by the families are not rising.
Speaker 1: So you said something before. I want to come back
Speaker 1: around too, because I find it really fascinating you had
Speaker 1: said they're the natural demand just didn't exist. And we've
Speaker 1: been talking about monetary policy, which is playing interest rates
Speaker 1: and it's a supply side concept. Monetary policy. What you're doing. Uh,
Speaker 1: you know, montery policy has in this in this context,
Speaker 1: has several stages, right. Uh. One is you try to
Speaker 1: make sure that you create solvency and liquidity in the
Speaker 1: banking systems so their banks don't shut down. So they
Speaker 1: did that right by lowering rates and by by pursuing QUWI.
Speaker 1: Then you try to make it very, very attractive to borrow.
Speaker 1: But in order to want to borrow, you need a
Speaker 1: need for new capacity and need for new production and
Speaker 1: equipment what have you. If that doesn't work, you go
Speaker 1: to your third step, which is you make risk free assets,
Speaker 1: bonds and what have you so ridiculously unattractive to people
Speaker 1: because the interest rates are so low that you force
Speaker 1: people into risk assets. That's the monetary side, that's supply
Speaker 1: side monitorism. And then if that doesn't work, you count
Speaker 1: on the wealth effect, which which to create increased asset
Speaker 1: prices and and make a few people with money actually
Speaker 1: able to There's there's a lot of math behind the
Speaker 1: wealth effect that basically suggests that it's more correlation than causation.
Speaker 1: When when you look at when you look at all
Speaker 1: these things going up, people weren't spending because they felt
Speaker 1: wealthier people were earning more money and therefore spending more.
Speaker 1: And therefore, I think a lot of of the FED
Speaker 1: research on this gets it exact back exactly backwards. But
Speaker 1: let's go back to the demand side of the equation.
Speaker 1: So we have a huge amount of FED driven monetary
Speaker 1: policy during the central banks, not right, all central banks
Speaker 1: during the crisis, after the crisis, but in the United
Speaker 1: States and to some degree Europe, actually a greater degree Europe,
Speaker 1: the fiscal response is non existent. Oh it's not just
Speaker 1: Europe in the United States, it's Europe, the UK, United States,
Speaker 1: Japan's across the board. But China seems to be spending money,
Speaker 1: you know, left and right, speed els and cities, and
Speaker 1: they're sitting on a three point seven trillion dollar foreign
Speaker 1: currency reserve. Why not know they're They're bigger problem is
Speaker 1: they they've now exceeded the demand for the facilities that
Speaker 1: they're building. Um, so you're you're now building for the future,
Speaker 1: so to speak, and there's a limit to how much
Speaker 1: you can do with that. So you're old enough, you're
Speaker 1: more or less my age that you could recall in
Speaker 1: Soviet Russia, they would have a factory where they get
Speaker 1: raw materials come in one end and what would roll
Speaker 1: out the other end, or jeeps and tanks, and then
Speaker 1: they would take those to another factory where they would
Speaker 1: take it apart and send the components back to the
Speaker 1: first factory. Is China at a point where they're not
Speaker 1: not quite because they're they're consumer economy. While it's not
Speaker 1: adequately consuming relative to production, their consumer economy is growing. Uh.
Speaker 1: And I don't see that as being a problem because
Speaker 1: obviously China is dumping off it's very high quality products,
Speaker 1: and the quality of their products in terms of where
Speaker 1: they are and the value added chain is going up
Speaker 1: every year, so they're dumping those products abroad. Uh. And
Speaker 1: that's what's causing the problem. Right, So that's part of
Speaker 1: the oversupplies, part of the chief Chinese labor making high quality.
Speaker 1: But getting back to the fiscal issue, right, you have
Speaker 1: you have uh, these the countries all pursuing monetary policy
Speaker 1: was there, as I say, is a supply side remedy,
Speaker 1: and not pursuing demand side remedies, which would be fiscal spending.
Speaker 1: In fact, they've cut if you're in Europe, cut dramatically back,
Speaker 1: and in the US with our sequester, cut dramatically back.
Speaker 1: During the period immediately prior to ABBE in Japan, the
Speaker 1: Japanese abandoned heavy fiscal spending because they started to worry
Speaker 1: about the same thing, they're debt to GDP ratio, so
Speaker 1: they stopped spending right And in the UK you saw
Speaker 1: a conservative fiscal policy as well. This policy of austerity,
Speaker 1: whether it's within a region or globally, is a huge
Speaker 1: problem in the age of oversupply. What you're effectively doing
Speaker 1: is you're trying to solve a demand side problem with
Speaker 1: supply side remedies. And it's like throwing fire on throwing
Speaker 1: gas on a fire. It's it's ridiculous. So are you
Speaker 1: saying that after all this time, John Mayner and Keynes
Speaker 1: turned out to be right, and we're ignoring lessons that
Speaker 1: we're learned almost a century ago. I don't know how
Speaker 1: anyone could conclude otherwise. Thank you Dan for spending so
Speaker 1: much time with us. Today, I've been speaking with Dan
Speaker 1: Albert of Westward Capital UH. Dan is the author of
Speaker 1: the Age of Oversupply. What's your Twitter handle? Dan at
Speaker 1: Daniel Albert at Daniel Albert. If you enjoy these conversations,
Speaker 1: you can listen to Dan and I continue chatting about
Speaker 1: everything from the Fed, two Keynes to austerity. UH. That's
Speaker 1: available on Bloomberg dot com as well as on iTunes,
Speaker 1: where all of our prior conversations have been archived. You
Speaker 1: can follow my daily column on Bloomberg View dot com
Speaker 1: and at Ridults dot com, which is the Big Picture,
Speaker 1: or follow me on Twitter at Ridhults. I'm Barry Rihults.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. Welcome
Speaker 1: back to the show. This is the podcast portion of
Speaker 1: the show, which is a little more loose and freewheeling
Speaker 1: and m Dan and I have taken our ties off
Speaker 1: and basically loosened it loosened it up. Um let's continue
Speaker 1: where we left off. We stopped on the broadcast portion
Speaker 1: about something that I think is really fascinating and it
Speaker 1: never ceases to amaze me that people argue about this.
Speaker 1: But the problem that we've been suffering for for all
Speaker 1: this time is a lack of organic demand. We had
Speaker 1: a huge credit bubble. You know, when you have a
Speaker 1: regular bubble, what you're left with afterwards is cheap infrastructure.
Speaker 1: So think back to the nineties old the dark fiber
Speaker 1: that was laid at Media Fiber and global crossing it
Speaker 1: so they all go belly up, and because you can
Speaker 1: buy that stuff for pennies on the dollar, you end
Speaker 1: up with YouTube and Facebook and Google Maps and Uber
Speaker 1: and all these bandwidth intensive applications that you couldn't have
Speaker 1: done in the nineties because they just weren't the pipes
Speaker 1: for it. And if even if you had the pipes,
Speaker 1: that were really expensive, following the end of a credit bubble,
Speaker 1: you're left with nothing but debt that crimps demand. People
Speaker 1: are de leveraging even if they want to spend, they
Speaker 1: can't get credit. Isn't it obvious that we need some
Speaker 1: sort of temporary boost to demands and we're just not
Speaker 1: seeing it from the congressional side, from the fiscal side. Yeah,
Speaker 1: I think your your point is well taken. We have
Speaker 1: a classic Irving Fisher style debt deflation, right and where
Speaker 1: everybody's trying to pay down debt. People have seen their
Speaker 1: assets fall below the value of the debt that they've
Speaker 1: taken on. You have to remember that even today, with
Speaker 1: the price recovery that we've seen in the US housing market,
Speaker 1: we still have ten million homes that are not you
Speaker 1: know that are they're either underwater or just slightly above water. Uh,
Speaker 1: and those people are still stuck in those homes. Those
Speaker 1: homes can't trade. It's part of the reason, by the way,
Speaker 1: that home prices actually accelerated as fast as they did
Speaker 1: simply because a lot of homes can't trade. Jonathan Miller
Speaker 1: talks about the perversion of all these homes with either
Speaker 1: no equity or low equity or negative equity, and that
Speaker 1: perversely causes home prizes to rise. Very strange because you've
Speaker 1: artificially prempt the supply potential sellable homes. Um But but
Speaker 1: that's a you know, that's a unique function of the
Speaker 1: US residential real estate markets. Something you don't see elsewhere
Speaker 1: because the structure isn't the same. But um, when you
Speaker 1: look at what's going on in on the demand side,
Speaker 1: you have to conclude that we've done pretty much everything
Speaker 1: possible to avoid addressing that problem. Because if you think
Speaker 1: it's just a debt deflation and what we've been through
Speaker 1: is a severe downturn on a cyclical basis, and I
Speaker 1: think a large portion of both pundits and UH Chicago
Speaker 1: style economists believe this. They really believe that what we've
Speaker 1: incurred is a is a severe downtick in the business cycle.
Speaker 1: Of course, in order to believe that, you have to
Speaker 1: believe there is such a thing this is a cycle.
Speaker 1: I'm not so sure of that. Um. But but regardless,
Speaker 1: what we have other folks out there who start to
Speaker 1: understand that this is actually a much broader secular problem.
Speaker 1: It's not just a secular problem within the borders of
Speaker 1: the United States or any other global It's a global
Speaker 1: secular problem, in my opinion, caused by the oversupply of labor,
Speaker 1: productive capacity, and capital. Right, So, how much of this
Speaker 1: is a function of demographics? You have you have an
Speaker 1: aging population in Japan with with no immigration or practically
Speaker 1: no immigration and a very low birth rate. You look
Speaker 1: throughout most of Europe, really low birth rates. United States
Speaker 1: is one of the best developed country birth rates and
Speaker 1: even birth rate we're not we're now falling the you
Speaker 1: know where we actually fell below replacement, which is a
Speaker 1: little bit disconcerting when you look at where that replacement
Speaker 1: was coming from. Was coming from a very small group
Speaker 1: of recent immigrants, mostly mostly Hispanic uh and they have
Speaker 1: now sort of become higher income and more developed than
Speaker 1: hence they're having for your children. But the that's the
Speaker 1: nature of the demographic trends is right, and you don't
Speaker 1: get a lot. You don't get a lot of immigration
Speaker 1: when you have no job. So it creates another problem.
Speaker 1: There was a brief period and I want to say,
Speaker 1: oh eight oh nine where the border problem disappeared because
Speaker 1: nobody was coming to right. We had we actually had
Speaker 1: reverse for for I think fifteen months, we had reverse
Speaker 1: migration to Mexico, which is our biggest source of immigration.
Speaker 1: So you have a big problem in that in that context,
Speaker 1: but when you point at the demographic argument, excuse me,
Speaker 1: it's very tempting because you have this incredible obvious correlation, right,
Speaker 1: You see that the developed world, that even China is
Speaker 1: getting a older and it's very tempting to say that
Speaker 1: that's the cause of all the problems. You go one
Speaker 1: iteration away, you go one iteration away, and what you
Speaker 1: what you find is that look at, for example, US
Speaker 1: labor force participation, there has been some obvious demographic decline
Speaker 1: that's been going on since well before the Great Recession. Yeah, well,
Speaker 1: I mean it really was the early two thousands when
Speaker 1: you look at the stats. But but yeah, it was that.
Speaker 1: It was that period of time and you saw the
Speaker 1: labor force participation rates start to decline slightly, but it
Speaker 1: fell off a cliff after the Great Recession. This is
Speaker 1: not the same factor. The This slope and that slope
Speaker 1: I'm using my hands are not the same slope. There's
Speaker 1: been something else going of a far broader secular phenomenon.
Speaker 1: Add to that the fact that when you talk about
Speaker 1: aging populations and don't talk in the same sentence or
Speaker 1: at least the following sentence about technology. Technology, of course,
Speaker 1: has always been regarded as a sort of enemy of labor,
Speaker 1: at least in terms of its initial introduction, right, and
Speaker 1: then eventually we have people freed to do other things.
Speaker 1: Sometimes more creative things in our society has become better, etcetera, etcetera.
Speaker 1: But I don't know anyone that can look at the
Speaker 1: demographic phenomenon that are going on in developed countries and
Speaker 1: ignore the fact that we just don't need as many
Speaker 1: people to do the same jobs that we did before.
Speaker 1: We have a technology issue we and and believe me,
Speaker 1: that's not being that is more than that's more than
Speaker 1: offsetting the decline in working population, right, and so that
Speaker 1: creates oversupply of labor in and of itself. We have
Speaker 1: a global phenomena that has always been the case. I mean,
Speaker 1: there's nothing new about technology. We have a debt deflation
Speaker 1: right where you have an inadequacy of demand because people
Speaker 1: are paying off that, and then you have this global
Speaker 1: oversupply of labor that has basically made it very un
Speaker 1: a track active for people to employ individuals in developed countries.
Speaker 1: Let me, I mentioned this, It comes up every few weeks.
Speaker 1: So we were running a small office that we launched
Speaker 1: a less than eighteen months ago, and everything we do
Speaker 1: has a very heavy software technology component, whether it's the
Speaker 1: financial planning side, whether it's the software to rebalance you
Speaker 1: know years ago, if you want to rebalance a multi
Speaker 1: factor portfolio. You had five guys and and Green Eye
Speaker 1: Eye advisors working a week to figure out, right, here's
Speaker 1: what we need to do in order to capture some
Speaker 1: tax losses. And you know we'll harvest. Now you push
Speaker 1: a button, it's done. And so what we end up
Speaker 1: doing with seven people, whether it's producing content or managing
Speaker 1: portfolios or just communicating with clients and staying on top
Speaker 1: of stuff ten years ago would have taken fifteen people
Speaker 1: to do, and twenty five years ago would have taken
Speaker 1: forty people to do. And it's amazing that. You know,
Speaker 1: every time we think about adding a body, the first
Speaker 1: question is, well, isn't there a software I can get
Speaker 1: from grand to do this instead of paying someone eight
Speaker 1: dollars a year. It's astonished. Just look at the clerical
Speaker 1: head count. You're talking about the stando pool that the
Speaker 1: girls in type everybody does their own typing today, and
Speaker 1: and and telecommunications is not something you need staff for.
Speaker 1: I mean, you look at the decline in support staff
Speaker 1: necessary to run even a large institution, and it's it's
Speaker 1: it's astronomical. It's it's there's no doubt about it. And
Speaker 1: then on top of everything else. There are all these
Speaker 1: companies that have become niche specialists where they use their software.
Speaker 1: So you used to have a bookkeeper, on accountant, on staff.
Speaker 1: We use a company to handle an outside company. They
Speaker 1: charge us like a hundred dollars a person a month
Speaker 1: to basically you all of the payroll, the tax, the
Speaker 1: state compliance, the UH disability. There's a whole run of
Speaker 1: things that you run a business that you used to
Speaker 1: have a staff to do that's gone. Bringing this all
Speaker 1: back into the macro context, right, So now you have
Speaker 1: these three phenomenon. You have the continued UH development of technology.
Speaker 1: You have UH the the debt deflation, and then you
Speaker 1: have this oversupply of labor globally. And these things are secular.
Speaker 1: The the not going away anytime. There's no there's no
Speaker 1: there's no business cycle for technology. As you have plateaus,
Speaker 1: but technology continues to progress, right, That's been going on
Speaker 1: for thousands of years and it's only accelerated, right, um
Speaker 1: with with the the debt deflation is classically secular. Right,
Speaker 1: It's not a you can say it's cyclical because we
Speaker 1: had a bubble, right, But until we're able to remove
Speaker 1: that impediment, it's a secular impediment, and it's a decade
Speaker 1: or longer. It's not we have to actually get to that.
Speaker 1: I mean, where you realize that while people point to
Speaker 1: debt to GDP figures or debt to all sorts of
Speaker 1: even debt to income UM because and certainly debt service
Speaker 1: UH costs have have decreased enormously but nominally from the
Speaker 1: point of the bubble to today, total debt outstanding UH
Speaker 1: in households in the United States has fallen by four percent,
Speaker 1: not a whole lot. Yeah, and and so so you're
Speaker 1: you're you're not talking about this enormous retrenchment where suddenly
Speaker 1: you've written off half the debt or something like that.
Speaker 1: And of course you see the same problem in Europe.
Speaker 1: The problem in Europe is different from country to country.
Speaker 1: Spain has massive household debt, Greece has massive government. That
Speaker 1: doesn't really matter how they took the money. Ultimately, they
Speaker 1: took the money, generally to pay to their own people,
Speaker 1: whether it was lending it to them or paying them
Speaker 1: wages for jobs that they shouldn't have paid for. But
Speaker 1: it doesn't really matter how they took the money. They
Speaker 1: ultimately took the money from mostly other European lenders who
Speaker 1: received that money received that money by through the enormous
Speaker 1: influx of demand for their government bonds. So let me
Speaker 1: bring this back to an earlier conversation we had about
Speaker 1: some criticism, and you've been a pretty vocal critic about
Speaker 1: the Federal Reserve and all the central I'm not a
Speaker 1: critic of the Federal Reserve. In fact, thank God for
Speaker 1: the Federal Depression. So what did the so I was
Speaker 1: gonna turn this on you? What did the Fed do? Right? Well,
Speaker 1: they stepped in early and hard. And what Bernanke did
Speaker 1: obviously as a student of the depression, as he came
Speaker 1: in and he he realized the emergent nature of the situation,
Speaker 1: and he he did what was prescribed by the years
Speaker 1: of study and research that he's done, which is to
Speaker 1: flood the markets with enormous amounts of liquidity uh and
Speaker 1: and bail out institutions. But of course, when you really
Speaker 1: go back and understand the role of a central bank,
Speaker 1: you have to reflect back onto its lender of last
Speaker 1: resort function, which is really why central banks were created
Speaker 1: to begin with, the whole notion of stopping bank runs.
Speaker 1: So banks have a bank to borrow from Uh. And
Speaker 1: it wasn't that supposed to be at um punitive rates
Speaker 1: to institutions of of good credit market actually market rates
Speaker 1: markets of good right, badge, My is a going to
Speaker 1: be terrible, But that's not really what we did. We
Speaker 1: lent money at very low rates to companies that were
Speaker 1: essentially bankrupt and against assets that were questionable value. So uh,
Speaker 1: if anything, it did not follow Badget's prescription. Uh. And
Speaker 1: we ended up with with the situation with with the
Speaker 1: situation in which we created enormous you talk about moral
Speaker 1: hazard for the shop owners or whatever I mean, moral
Speaker 1: hazard that we created for banking institutions will be with
Speaker 1: us now for for decades generations. Uh and and and
Speaker 1: we may, in order to reverse that, have to let
Speaker 1: a huge bank fail at some point. And letting Lehman
Speaker 1: go down, by that wasn't sufficient. Well, that wasn't the
Speaker 1: warning Colude, or should have been. It was ironically counterproductive.
Speaker 1: So by letting Lehman go down, which of course they
Speaker 1: felt they had to do, that created such an enormous
Speaker 1: financial crisis that their conclusion was, what, we can't lose
Speaker 1: anyone else. What they did instead of uh, nationalizing, which
Speaker 1: is what you know when I was I was actually
Speaker 1: sitting a few feet from this very room in which
Speaker 1: we're talking on Charlie Rose back in twenty nine and
Speaker 1: uh and you know, those were the days in which everybody,
Speaker 1: half the people out there were talking about nationalizing them.
Speaker 1: I thought that's the way to go, and and and
Speaker 1: one of the benefits of nationalization. There are many many detriments,
Speaker 1: and I'm glad to a certain extent we didn't do
Speaker 1: some of that. But the notion of allowing managements to
Speaker 1: continue on in management after they've blown it so badly
Speaker 1: is really the worst of moral hazards that can create.
Speaker 1: So the benefit of nationalization, I can't believe it's and
Speaker 1: was talking about it in abstract theoretical terms, is that
Speaker 1: you wipe out the shareholders who had made ill advised
Speaker 1: investments and deserved to be wiped out. The government provides
Speaker 1: dead or in possession financing the them in Warren Buffett
Speaker 1: are the only people who could afford to an even
Speaker 1: who was questionable if Warren could have bailed out everybody
Speaker 1: or provided piece once called Warren Buffett walks into a bar,
Speaker 1: and it was about Warren Buffett not having any money
Speaker 1: in his wallet. So he decided he'd write an IOU
Speaker 1: on a napkin, right, And I was trying to explain
Speaker 1: the notion of of of currency and who wouldn't take
Speaker 1: that currency? Anybody would take Warren Buffett's napkin. And first
Speaker 1: of all, you would never even cash in. You want
Speaker 1: that napkin, you put that outside, assuming it's not for
Speaker 1: seven figures, right, that's exactly right. So so you you
Speaker 1: wipe about the shareholders. You give the bond holders, who
Speaker 1: then become the main creditors of the institution a haircut,
Speaker 1: but you really hit the nail on the head. You
Speaker 1: also clear out that top level of management. They're all fired,
Speaker 1: and then the next level of people below them hopefully
Speaker 1: learn Oh, by the way, if you drive the bank
Speaker 1: into insolvency, you're gonna get fired. You don't get your bonus,
Speaker 1: your stock is worthless. But you also don't retain the
Speaker 1: bondholders as bondholders. You make them owners. They become equity owners.
Speaker 1: There's a classic and in fact, what's going on right
Speaker 1: now in Europe. You can look at what vera Focus
Speaker 1: is doing in Greece. He's trying to pull off a
Speaker 1: classic dead equity swap, right, he's got all this dead
Speaker 1: outstanding that he can't pay, and he's basically running around
Speaker 1: Europe right now telling the finance ministers of Europe, look,
Speaker 1: here's what we'll do if we come out of this
Speaker 1: and our GDP rises will give you a piece of it,
Speaker 1: but we're not gonna owe you this money anymore. Well,
Speaker 1: why doesn't he even take us a further step and say,
Speaker 1: you know what, we're out, We're done, we're defaulting, We're
Speaker 1: out of the euro, We're on the Drachma. And if
Speaker 1: the drachma plummet's great, we'll sell a lot of yogurt
Speaker 1: and have a lot of touris force only that they can.
Speaker 1: They have yogurt and olive oil, but they don't have
Speaker 1: a lot of hard exports. And one of the problems
Speaker 1: with exiting for them, I mean, if if it were
Speaker 1: Spain or Italy, you're talking about easy Italy, it'll be easy,
Speaker 1: but Greeten be easy, but it be easier easier for
Speaker 1: the for the exiting country. The problem in h in Greece,
Speaker 1: as you have a country that doesn't make matter very much. Now,
Speaker 1: in theory, if they exited and they had a redenominated
Speaker 1: currency and paid their taxes. Yeah, they would, They would
Speaker 1: attract investment because people would want to use their labor pool,
Speaker 1: which would be very cheap to use um and and
Speaker 1: hopefully that would work itself out, but it's still be
Speaker 1: massively painful and within Greece itself, public opinion is not
Speaker 1: supportive of that. So it's very hard to get a
Speaker 1: consensus for for gregsit as they call it, the gregs.
Speaker 1: So so back to the earlier conversation, Lord Keynes wrote
Speaker 1: about this and it was pretty forceful and pretty persuasive
Speaker 1: and pretty clear um. But there is a subset of
Speaker 1: people who are just knee jerk opponents of any philosophical
Speaker 1: spending by the government. Their philosophical opponents of hey, there's
Speaker 1: a massive decrease in demand on a temporary basis, let's
Speaker 1: have the government step in and we'll refurbish the roads,
Speaker 1: and we'll shore up our defenses in our electrical grid
Speaker 1: and our ports in and our chemical plants is planting.
Speaker 1: There's not of almost free money right now. If based
Speaker 1: on what's going on in the Bloomberg terminal right now,
Speaker 1: and since I don't have it up in front of me,
Speaker 1: my guess is that the ten year Treasury bill, probably
Speaker 1: treasury bond probably cost closed it around. And uh, the
Speaker 1: that those rates, you can pretty much go out and
Speaker 1: build whatever you want and actually be in the money
Speaker 1: on the trade. And here's why. If I have a bridge,
Speaker 1: I know I'm going to have to rebuild twenty years
Speaker 1: from now. I know that either by obsolescence or by
Speaker 1: increased volume that it needs to carry, or for whatever reason,
Speaker 1: I know I wouldn't need to rebuild it or expand it.
Speaker 1: And I take that work and I present value it
Speaker 1: to today. And I do that work today, creating massive
Speaker 1: amounts of economic stimulus. And it costs me one to
Speaker 1: borrow one five As of the time we're recording, the
Speaker 1: market rallied at the end even cheaper it was. It's
Speaker 1: even cheaper. So it cost me, you know that that
Speaker 1: kind of an interest rate. It's a little higher for
Speaker 1: twenty years, but still very very low. Uh and uh
Speaker 1: and you have, uh that kind of borrowing costs in
Speaker 1: order to present value the work, you know you're gonna
Speaker 1: have to spend the money anyway. So you do it today,
Speaker 1: you create massive influx of both primary benefits in terms
Speaker 1: of paying workers wages, secondary benefits in terms of paying
Speaker 1: to procure uh, steal and what have you that you need,
Speaker 1: creates other jobs and then of course terch arey benefits
Speaker 1: because all those people spend all that money or a
Speaker 1: lot of it, and you create a platform for goods
Speaker 1: and services to move some upward pressure on wages, and
Speaker 1: you cure the problem. Now this is really a critical
Speaker 1: issue here. We have an addition to all of the
Speaker 1: other problems that we have. We have an enormous amount
Speaker 1: of polarization of wealth and income. So we have people
Speaker 1: who are sitting on enormous amounts of money, who are
Speaker 1: putting that money in treasuries I mean anywhere that they're
Speaker 1: not going to lose it, and sometimes in cash uh.
Speaker 1: And those people have no desire to reinvest because there's
Speaker 1: no demand for private sector goods that's not being satisfied
Speaker 1: by a cheaper source outside the country. UH. And so
Speaker 1: you ask yourself, well, here we have the ability to
Speaker 1: round trip some of this money. After all, they're buying bonds.
Speaker 1: The Chinese are buying our bonds. Everybody else is buying
Speaker 1: our bonds, which is why interest rates are at the
Speaker 1: level that they're at. And all we're missing is the
Speaker 1: connecting piece which is what's known by which was economists
Speaker 1: called the collective agent. Right, if I'm depending on Barry
Speaker 1: Ridholts to make an investment decision, I pretty much know
Speaker 1: what Barry Ridholts is going to invest in right now,
Speaker 1: and I certainly know your point of view. Uh, And
Speaker 1: I know that you're not going to step in and
Speaker 1: build a giant plant that doesn't need to be built
Speaker 1: because you have cheaper sources of labor elsewhere. You're not stupid,
Speaker 1: and and so you're going to sit on your money. Uh.
Speaker 1: It is only US as a country, as a nation
Speaker 1: collectively that can decide to do otherwise, not by taking
Speaker 1: your money. You can keep your money, but we're very
Speaker 1: happy to take your not taking your use your money
Speaker 1: where it's being parked in those treasury bills and put
Speaker 1: it to productive use. And by the way, all of
Speaker 1: the people that buy our bonds outside of the United
Speaker 1: States who depend on us demand to sell their goods
Speaker 1: and some of their services. Those people would kiss us
Speaker 1: on the you know what in Macy's window. If we
Speaker 1: actually use that kind of money for for for infrastructure building,
Speaker 1: created additional jobs in the United States, which would ultimately
Speaker 1: create additional demand for for their building for their goods
Speaker 1: and services. So in other words, it becomes a giant
Speaker 1: economic stimulus that a cruise to the benefit of everybody,
Speaker 1: and I get to ride on roads that don't destroy
Speaker 1: the suspension system of my car. Well that that is
Speaker 1: actually very interesting, uh thing you mentioned because the the
Speaker 1: that's the fourth benefit of infrastructure constructing actually create greater
Speaker 1: efficiency in the economy. Not only greater efficiency, but at
Speaker 1: one point in time, now I'm gonna wax a little philosophical,
Speaker 1: at one point in time we actually had an infrastructure
Speaker 1: that wasn't embarrassing when when you have clients or or
Speaker 1: colleagues flying from London and passed through JFK and say
Speaker 1: I got off the jet and I was a little confused.
Speaker 1: I thought I was in Zimbabwe. And the answer is no, no,
Speaker 1: you are con fuse. Zimbabwe has a nice new airport.
Speaker 1: So that sort of stuff is is to me is
Speaker 1: just where is the I understand the philosophical debate. I
Speaker 1: understand the drowned the beast drowned, the baby in the
Speaker 1: in the bathtub argument. Even though I don't agree with
Speaker 1: government the baby being government. I don't agree with that argument,
Speaker 1: but I understand it But what I don't understand is
Speaker 1: where is your pride of ownership? This is your country.
Speaker 1: You drive around you look, you and I both criss
Speaker 1: crossed the country. I was just in Seattle. I got
Speaker 1: a trip coming up to San Francisco. I'm gonna be
Speaker 1: in Miami. I'm gonna be in you probably. But here's
Speaker 1: here's it's astonishing if you, if you really think it through.
Speaker 1: What is driving that argument. Let's driving that argument in
Speaker 1: the simplistic sense is that those people who are making
Speaker 1: it believe that they will one day have to pay
Speaker 1: that money back. And what I'm saying is that they're
Speaker 1: never going to be in a situation where they're gonna
Speaker 1: let the bridge fall into the river. How do we
Speaker 1: know that's the case. How long did it? Literally the
Speaker 1: Capital Dome was collapsing, and the Congress for five years
Speaker 1: refused to authorize One thing I know about it. One
Speaker 1: thing I know about infrastructure is that if it starts
Speaker 1: costing businesses too much money to ship their goods and
Speaker 1: don't get workers because the bridges are out the answers,
Speaker 1: bloody hell, they're going to get the consensus. So we're
Speaker 1: gonna do it late and expensive instead of early and cheap. Yeah,
Speaker 1: I mean, and and in an environment in which the
Speaker 1: cost of of of recycling money. And I think that's
Speaker 1: the way you have to look at it. This the
Speaker 1: sovereign debt rate is at the level it is because
Speaker 1: we are not recycling money. We've actually created a blockage
Speaker 1: in where money is supposed to flow. We've created this,
Speaker 1: this this black hole of of sovereign debt where people
Speaker 1: are parking their money. That is not too different than
Speaker 1: holding bundles of cash. If you look at the cash
Speaker 1: in your wallet, you'll see it says federal reserve note.
Speaker 1: But it's a special magical kind of federal reserve note.
Speaker 1: It doesn't pay intest zero interest, so it's a zero
Speaker 1: interest pot. Well, if you're issuing a short term debt
Speaker 1: at twenty two basis points, it's not much different than cash.
Speaker 1: And you mentioned the longer twenty year thirty year we're at,
Speaker 1: So if the ten year was that, so the thirty year,
Speaker 1: according to my Bloomberg app is a two spot three four.
Speaker 1: That's insane. That's that's about as close to free money
Speaker 1: over long periods of time you're gonna get. And again,
Speaker 1: you pay you you you look at it as a
Speaker 1: at some point, as a cash substitute, you might as
Speaker 1: well take the interest. It ain't much, but you might
Speaker 1: as well take it knowing that the guy on the
Speaker 1: other end of that bond owns a printing press and
Speaker 1: is always going to be able to repay you. The
Speaker 1: idea of the inflationistas out there saying, but you're gonna
Speaker 1: lose purchasing power. Era of we have the most incredible
Speaker 1: environment in the world where we have all these people
Speaker 1: running around shouting about the potent ential for inflation because
Speaker 1: we flooded the world with cash, and and in fact
Speaker 1: inflation is dropping like a stone and the dollar is appreciating.
Speaker 1: So it's very, very hard for me to understand where
Speaker 1: the big disconnect is. And quite frankly, I do think
Speaker 1: it does rest in one place. It does it. It
Speaker 1: is a It is a thirty year argument that we've
Speaker 1: been having, actually more like going close to forty between
Speaker 1: people who really don't like government and people who really
Speaker 1: believe in something called the efficient market hypothesis. And these people,
Speaker 1: during the nineteen eighties, the Reagan years, took control of
Speaker 1: government and changed people actually did things that I would
Speaker 1: argue in the least uh and certainly. I have friends
Speaker 1: who believe this as well, who were in the Reaguan administration,
Speaker 1: and the first Reagulan administration, cutting the tax on income
Speaker 1: above a thousand dollars a year from seventy to fifty
Speaker 1: was probably the right. That's a huge behavioral change in
Speaker 1: response to that giant tax. Right, so so so and that,
Speaker 1: but from right, they didn't cut it down to where
Speaker 1: we are today, and and and the second thing they
Speaker 1: did is that they did deregulate some of the guild
Speaker 1: industries like financial services. What they did in the first
Speaker 1: term Reagan was was was reasonable. What came after was
Speaker 1: was was absurd. One of the things, you know, Bruce
Speaker 1: Bartlett is a great guy to listen to. Love his stuff.
Speaker 1: He's got a new book coming out. His new book,
Speaker 1: by the way, he has the working title this is
Speaker 1: right up your enemy. It's called what the Right Gets Wrong. Yeah. Well,
Speaker 1: and again it's very with the reason. And this is
Speaker 1: what I'm coming back to. The reason the right gets
Speaker 1: it wrong is because of the underlying product that they
Speaker 1: were able to sell to the electorate. And it has
Speaker 1: nothing to do really with economic growth other than the
Speaker 1: fact that they have this theory, right this this curve
Speaker 1: right that they say is going to produce greater growth
Speaker 1: at at at lower tax rates. But it's lower tax
Speaker 1: rates themselves that they're able to sell. And they became
Speaker 1: very good at selling this product. And in fact, I
Speaker 1: didn't need to understand anything about economics in order to
Speaker 1: stand in front of the American people, or in the UK,
Speaker 1: or in Canada or anywhere and tell people we're going
Speaker 1: to cut your taxes, which is popular. Who votes against
Speaker 1: we're going to cut your tap? No, No, I'd rather
Speaker 1: have you increased my taxes. At least a smart person
Speaker 1: will remain neutral. But everybody likes that message, and it's
Speaker 1: an easy way to get elected. And so you have
Speaker 1: this red state blue state division really fundamentally over that issue.
Speaker 1: It is the actual way in which small government theory
Speaker 1: or Jeffersonian jackson Ian theory metastasizes into this complete shutdown
Speaker 1: of the political system in the United The immediate question,
Speaker 1: the immediate response to anybody who says we're gonna cut
Speaker 1: your taxes, the answer has to be okay, So now
Speaker 1: I appreciate your offering up an unfunded tax cut, because
Speaker 1: taxes pay for spending. How are you going to pay
Speaker 1: for that. What spending are you gonna cut to offset that?
Speaker 1: And by the way, this isn't a left right argument.
Speaker 1: You could say the same argument to people who want
Speaker 1: to increase spending, which is, if you're gonna increase spending,
Speaker 1: what taxes are you gonna raise to pay for it?
Speaker 1: And so anytime someone says in Kansas and Governor Brownbeck
Speaker 1: is now the have become the poster child for this.
Speaker 1: All right, you slashed business taxes and you cut personal taxes,
Speaker 1: and now the theory says they're supposed to be an
Speaker 1: uptick in revenue. But it's years of this and by
Speaker 1: the way, he got reelected book called What's the Matter
Speaker 1: with Kansas? Right? Well that was long before he got
Speaker 1: into office. But here we are. And so the question is,
Speaker 1: if you're slash taxes, Hey, listen, I'm in a top
Speaker 1: tax bracket. I'm very happy to pay less taxes. But
Speaker 1: I want to know what I'm giving up if I'm
Speaker 1: paying less taxes. I could tell you right now. I
Speaker 1: know I've given up infrastructure. I know that the gas.
Speaker 1: This is my pet peeve is the guess tax is
Speaker 1: locked at levels it's been since we've had big inflation
Speaker 1: over the ensuing fifteen twenty years before the deflationary period,
Speaker 1: and all these things built in the fifties and sixties
Speaker 1: and seventies are crumbling. I was just in in Belgium.
Speaker 1: They're apologizing about all the roadwork, their roads before their repair,
Speaker 1: our head and shoulders above hours, and everybody forgets. In
Speaker 1: the fifties and sixties, after the Eisenhower administration, the United
Speaker 1: States infrastructure was the envy of the world. And now
Speaker 1: we've fallen to the bottom of the developed world. And
Speaker 1: I don't it's astonishing to me that this is even
Speaker 1: a debate. You want to drive on a highway, you
Speaker 1: gotta pay for it. And if that means adjusting the
Speaker 1: gas tax from I think it's nineteen cents now to
Speaker 1: the cost of living to inflation. Even though there's low inflation,
Speaker 1: you still have to have some increase in spending to
Speaker 1: maintain these roads. I mean. The the the irony, of course,
Speaker 1: is that you again talking about the blockage aspect that
Speaker 1: I was saying before. Uh you you have this huge
Speaker 1: amount of what i'll call stranded capital that is sitting
Speaker 1: there not being employed for productive use. Uh So, not
Speaker 1: only is this not just a question of of tax
Speaker 1: versus spend. It's also a question of why shouldn't we
Speaker 1: be in a situation where we are deficit spending, borrowing
Speaker 1: money that costs almost nothing to do things we know
Speaker 1: we need to do. Eventually, you're gonna have to do it, yeah,
Speaker 1: buying ourselves. You build a bridge, you get a hundred
Speaker 1: years out of it, right, we have bridged fifty years anyway,
Speaker 1: a long time. Uh So. So we have bridges all
Speaker 1: over this country that are so old they're falling apart,
Speaker 1: require enormous amount of maintenance each year, which is an
Speaker 1: which is also cost borne by government. Um. And by
Speaker 1: replacing them, we can get all of these great benefits
Speaker 1: and unblocked this capital that's being stranded uh in in
Speaker 1: sovereign obligations. It's it's it's actually kind of collective lunacy.
Speaker 1: It is, so I would love to keep you here
Speaker 1: for hours. Let me hit you on one last subject
Speaker 1: related to the blockage, which is velocity of money. It's
Speaker 1: something that we don't hear about that often. But if
Speaker 1: we want to get a little wonky and get into
Speaker 1: the weeds, why have we seen money just not circulating well?
Speaker 1: And I don't mean cash, I mean actual what we
Speaker 1: used to call M two and M three. Why is
Speaker 1: the money supply just kind of sitting on the Fed's
Speaker 1: balance sheet and not coursing through um our our economy. Well,
Speaker 1: the simple answer is there's no demand for money. There's
Speaker 1: no demand for money because there's no demand for new infrastructure.
Speaker 1: There's no demand for new infrastructure's no no way of
Speaker 1: creating it. There's no demand for new plants, there's no
Speaker 1: demand for new equipment. If they're going to be built,
Speaker 1: they're likely to be built outside the United States where
Speaker 1: labor is cheaper. Um. So the demand for capital side
Speaker 1: is really the sort of bigger answer. But then you
Speaker 1: look at what's gone on in the field of economics.
Speaker 1: You know, when Milton Friedman blessed his heart was creating
Speaker 1: monetary theory, or at least expounding upon monetary theory. In
Speaker 1: his heyday, all of his equations held the velocity of
Speaker 1: money constant, and uh and and and what we've proven
Speaker 1: in this great recession and thereafter is that the velocity
Speaker 1: of money is anything but constant. Again, it's the view
Speaker 1: of an economics of shortage versus in economics of oversupply.
Speaker 1: You have a condition going back as long as we
Speaker 1: can remember in modern economic thought, that's probably about a
Speaker 1: hundred years even before getting back to the people who
Speaker 1: are sitting there with with agricultural economies. Um, but you
Speaker 1: you look at sort of the post industrial revolution of
Speaker 1: view of econ of economics, it was always governed by
Speaker 1: something that quite frankly was inherited from the agricultural view,
Speaker 1: which is that most of economics is about shortage. There's
Speaker 1: always a shortage of supply relative to demand. That's a
Speaker 1: grarian in its nature. And it's a grarian its nature, right,
Speaker 1: So you you you then then sort of ramp forward
Speaker 1: into this completely different environment, which, by the way, I
Speaker 1: would argue, probably would not have have happened. And he
Speaker 1: is in fact, in the broad scheme of things temporary. Um,
Speaker 1: if you didn't have this massive uh situational change in
Speaker 1: by by having all of these post socialist economies suddenly emerged,
Speaker 1: I mean you, I like to that's what really opened
Speaker 1: the floodgates. Suddenly you had the Berlin Wall and the
Speaker 1: Chinaman incident. You had massive industrial policy in China, you
Speaker 1: had UH democracy flowing in and and markets flowing into
Speaker 1: Eastern Europe, and and this was this was a situation
Speaker 1: that we really cannot repair other than by looking to
Speaker 1: mechanisms that are not oriented towards this underlying premise of
Speaker 1: their always being shortage. We live in the age of oversupply.
Speaker 1: So I'm gonna leave it at that note. For for
Speaker 1: the anti Keys and Keynsians and the tax coders, if
Speaker 1: they want to send you hate mail, what's the best
Speaker 1: way to get ahold of you? Either on Twitter or
Speaker 1: eldert at Daniel Albert And of course you can always
Speaker 1: go to my blog on econom Monitor. Uh and uh,
Speaker 1: please pulled two cents Dan Albert's two cents at econom
Speaker 1: monitor dot com. Uh and uh, you know the the
Speaker 1: I'm a fellow with the Century Foundation, so I could
Speaker 1: be found there as well. So you're you're easy to
Speaker 1: track down to to send angry letters to. So I've
Speaker 1: been speaking to Dan Albert of Westward Capital, author of
Speaker 1: the Age of Oversupply. Thanks so much for joining us.
Speaker 1: I'm Barry Riholts. You've been listening to Masters in Business
Speaker 1: on Bloomberg Radio. H