WEBVTT - Vanguard's Hard Pass on a `Soft Landing' 0:00:14.080 --> 0:00:17.520 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.600 --> 0:00:21.000 My name is Mike Reagan. I'm a senior editor at Bloomberg, and. 0:00:20.960 --> 0:00:23.919 I'm Katie Greifeld. I'm an anchor with Bloomberg Television and 0:00:23.960 --> 0:00:25.000 a cross auser reporter. 0:00:25.480 --> 0:00:28.000 And this week on the show, while the Federal Reserve 0:00:28.320 --> 0:00:32.360 raised borrowing costs again this week, taking their benchmark interest 0:00:32.440 --> 0:00:35.280 rate to a twenty two year high. At Mane on 0:00:35.320 --> 0:00:37.879 Wall Street, believe the Central Bank is either finished or 0:00:38.080 --> 0:00:42.440 very close to being finished this very aggressive rate hike cycle. 0:00:43.080 --> 0:00:45.760 But what about the recession that so many were convinced 0:00:45.760 --> 0:00:49.400 would result from the Central Bank's aggressive fight against inflation? 0:00:50.080 --> 0:00:53.840 Was that just misplaced pessimism or is the downturn still 0:00:53.880 --> 0:00:56.440 on its way. We'll get into it with our guest, 0:00:56.560 --> 0:00:59.840 who is an economist at a major investment firm. But 0:01:00.160 --> 0:01:02.640 first I got a question for you. Yeah hit me, 0:01:02.840 --> 0:01:05.280 And I know you went to college in the Philadelphia 0:01:05.319 --> 0:01:11.520 area at Haverford. I assume you sampled the cheese steaks 0:01:12.319 --> 0:01:14.959 in Philadelphia at some point, and you're. 0:01:14.920 --> 0:01:18.679 Preaching right, No, I've never had a cheese steak. I 0:01:18.720 --> 0:01:21.320 feel like I'm immediately killing our banter. Our top of 0:01:21.360 --> 0:01:23.360 the show banter. But I've never had a cheese steak. 0:01:23.600 --> 0:01:25.240 You've never had a cheese steak? 0:01:25.640 --> 0:01:26.679 No, It just. 0:01:27.920 --> 0:01:30.880 Something about the strips of meat never appealed to me. 0:01:31.000 --> 0:01:34.440 I do eat, I'm not a vegetarian, but just did 0:01:34.480 --> 0:01:35.440 not fill out my boat. 0:01:35.640 --> 0:01:38.959 Oh man, all right, all right, that's fair. So your 0:01:39.000 --> 0:01:42.680 answer is none of the above, Na, not applicable? 0:01:42.840 --> 0:01:44.759 I said, yes, what would have happened? 0:01:44.959 --> 0:01:48.560 My tradition here is to ask Philadelphia area guests what 0:01:48.680 --> 0:01:50.920 their favorite cheese steak joint is. And I'm going to 0:01:50.960 --> 0:01:54.360 tell you right now, Katie, If our guest this week 0:01:54.360 --> 0:01:56.560 actually is a cheese steak eater, I think I can 0:01:56.600 --> 0:01:59.760 guess what his favorite place is. And this after never 0:01:59.800 --> 0:02:03.640 have met him, never spoken to him. That's how good 0:02:03.640 --> 0:02:05.440 I am. All right, you ready? 0:02:05.520 --> 0:02:05.920 All right? 0:02:06.440 --> 0:02:07.040 I'm excited. 0:02:07.040 --> 0:02:09.240 Now let's bring him in. He is Joe Davis. He's 0:02:09.240 --> 0:02:12.640 the global chief economist and head of the Investment Strategy 0:02:12.680 --> 0:02:15.320 Group at Vanguard. Joe, welcome to the show. 0:02:15.600 --> 0:02:16.600 Oh thanks for having me. 0:02:16.639 --> 0:02:18.280 All right, Joe? Are you ready to be blown away? 0:02:18.560 --> 0:02:19.240 Yeah? Let's go. 0:02:19.639 --> 0:02:26.440 Your favorite cheesesteak joint is Larry's Steaks on fifty for 0:02:26.800 --> 0:02:30.200 fifty fourth I believe it is and city line on 0:02:30.280 --> 0:02:31.760 Hawk Hill? Am I right? 0:02:32.280 --> 0:02:34.160 Not bad? Not bad? 0:02:34.320 --> 0:02:34.799 Did I get? 0:02:34.800 --> 0:02:35.880 It's not my favorite? 0:02:35.880 --> 0:02:38.120 So I grew up outside of Philly, but I went 0:02:38.160 --> 0:02:42.280 to college in Philadelphia proper. So Larry's is a great one, 0:02:42.560 --> 0:02:46.720 particularly after midnight because being in college, they're there. 0:02:47.160 --> 0:02:48.200 It's a good cheese. 0:02:49.120 --> 0:02:51.600 Joe Is, I believe you might be our first Hawk, 0:02:51.760 --> 0:02:54.440 our first Saint Joseph's University hawk on the show, which 0:02:54.720 --> 0:02:57.480 is exciting for me, my whole. I've one of six kids. 0:02:57.520 --> 0:03:00.239 Everyone in the family went to Saint jose but me. Yeah, yeah, 0:03:00.280 --> 0:03:00.840 it's crazy. 0:03:01.000 --> 0:03:02.960 Well, how is this so if you're from Philadelphia, you 0:03:02.960 --> 0:03:05.000 know a rivalry of Saint Jose's. 0:03:04.720 --> 0:03:06.320 Villanova r Oh, absolutely yeah. 0:03:06.600 --> 0:03:08.680 So that's where that's where my daughter's going next year. 0:03:08.680 --> 0:03:10.040 So we're gonna have some family tensions. 0:03:10.080 --> 0:03:12.840 Oh yeah, boy, you're at your let you're gonna let 0:03:12.880 --> 0:03:13.600 her back in the house. 0:03:13.680 --> 0:03:14.040 I don't know. 0:03:14.280 --> 0:03:15.920 My son's at Penn. So we got the whole. We 0:03:15.960 --> 0:03:19.080 have almost the entire Big Five. So yeah, long lived Pilly. 0:03:19.120 --> 0:03:21.600 Three fifths of the Big Five. Well, Joe, let's get 0:03:21.600 --> 0:03:23.720 down to business. Then, you know we have the fed 0:03:23.960 --> 0:03:27.280 uh statement and press conference today. You know, the vibe 0:03:27.280 --> 0:03:30.560 I'm getting is not too many surprises. You know, we 0:03:30.639 --> 0:03:34.239 got the quarter point rate increase, so the FED funds 0:03:34.240 --> 0:03:36.480 target's now five and a quarter to five and a 0:03:36.520 --> 0:03:40.440 half percent. Anything shock you today or surprise you at 0:03:40.480 --> 0:03:42.920 all about the statement or what Jerome Palell had to say. 0:03:43.080 --> 0:03:45.320 No, I mean, nothing's really surprised me, Mike. 0:03:45.360 --> 0:03:47.560 I mean again again, I think the big, open ended 0:03:47.640 --> 0:03:50.520 question is the same question that we were facing at 0:03:50.560 --> 0:03:53.080 the beginning of the year, and that really is how 0:03:53.160 --> 0:03:55.920 much work, if at all, there needs to be done 0:03:56.000 --> 0:03:59.000 from the Fed, which really brings to the heart really 0:03:59.000 --> 0:04:01.640 the essential question, which is how restrictive are they today? 0:04:01.680 --> 0:04:04.840 You hear Chairman pal saying they're restrictive. 0:04:04.360 --> 0:04:06.960 By any measure. The question is how much? Because if 0:04:07.000 --> 0:04:07.440 you can. 0:04:07.320 --> 0:04:09.560 Get a handle on that, then you know how much 0:04:10.280 --> 0:04:13.680 both inflation will fall and how much economic damage may 0:04:13.680 --> 0:04:16.160 be done over the next six or twelve months. So 0:04:16.360 --> 0:04:18.400 I think that's still the open question that we were 0:04:18.440 --> 0:04:19.440 facing the beginning of the year. 0:04:20.360 --> 0:04:22.800 Something else that I wanted to ask about, though, was 0:04:22.839 --> 0:04:26.719 the fact that just stepping back from you know, will 0:04:26.760 --> 0:04:29.160 they won't they? In terms of rate rises, it's been 0:04:29.200 --> 0:04:33.960 striking to me how there's been so relatively few descents 0:04:34.360 --> 0:04:37.039 on Chairman Palell's watch. This was another meeting that was 0:04:37.080 --> 0:04:41.039 completely unanimous, even though in their words and the FED 0:04:41.120 --> 0:04:44.760 speak that follows every big decision, there seems to be 0:04:44.920 --> 0:04:49.120 some disagreement. You never see that in the actual votes. 0:04:49.400 --> 0:04:51.479 I'm wondering if that's something you've noticed as well. 0:04:51.680 --> 0:04:54.320 That is a good point, Katie, I have noticed it. 0:04:54.480 --> 0:04:57.400 I think that if you know, going forward, we may 0:04:57.440 --> 0:05:01.760 see greater disagreement. Certainly there's probably more healthy disagreement in 0:05:01.800 --> 0:05:05.120 the actual discussions when they're making decisions rather than the statement. 0:05:05.279 --> 0:05:08.200 But I think I think they've been I think Chairman 0:05:08.240 --> 0:05:10.640 has been able to navigate that with more of the 0:05:11.080 --> 0:05:14.520 first appause, you know, the last meeting and now being 0:05:14.560 --> 0:05:17.680 a more data dependent phrase because you do have you know, 0:05:17.760 --> 0:05:20.240 a healthy spectrum of those wanting to go a little 0:05:20.279 --> 0:05:22.920 bit further and those thinking on the FED that they've 0:05:22.960 --> 0:05:25.479 done enough. So I think that's also a somewhat of 0:05:25.480 --> 0:05:28.240 a testament to his leadership being able to navigate that. 0:05:28.440 --> 0:05:31.200 But I think from here on out, I think that 0:05:31.560 --> 0:05:34.520 the probability of having you know, some modest descent could rise. 0:05:35.160 --> 0:05:38.320 Do you think at all that it sort of muddles 0:05:38.360 --> 0:05:41.680 the message coming from the FED that there has been 0:05:42.240 --> 0:05:45.279 unanimous votes up until this point. And the reason I 0:05:45.279 --> 0:05:48.640 asked is because I was listening to Andrew Hollenhorst from 0:05:48.720 --> 0:05:54.279 City on ATV immediately after the decision, before the press 0:05:54.320 --> 0:05:59.520 or after the decision, saying that basically they sacrifice clarity 0:06:00.240 --> 0:06:03.640 in having a completely unanimous vote, especially after what we 0:06:03.680 --> 0:06:06.440 saw in June where they decided to skip but they 0:06:06.480 --> 0:06:10.560 signaled more raises to come. Is that something that that 0:06:10.640 --> 0:06:13.480 irks you at all, something that muddels their message? Or 0:06:14.200 --> 0:06:15.640 are they pretty loud and clear here? 0:06:16.240 --> 0:06:18.480 No, I mean I think they're closer to loud and clear. 0:06:18.480 --> 0:06:21.000 I mean I think reason why we probably haven't seen 0:06:21.040 --> 0:06:25.479 as much of a descent or open aired sort of 0:06:25.520 --> 0:06:28.520 dialogue is because inflation is still well buff target. Yes, 0:06:28.520 --> 0:06:31.800 it has come down, you know, the more recent data 0:06:32.080 --> 0:06:34.400 is lower than what it was a year ago. But 0:06:34.680 --> 0:06:37.240 I think that that they're still off on their core mandate, 0:06:37.279 --> 0:06:41.080 which is why we're seeing still coalestion coalescing around the 0:06:41.120 --> 0:06:43.640 final decision. I think again, as we get closer to 0:06:43.720 --> 0:06:46.400 two percent, could be a ways off, but as closer 0:06:46.480 --> 0:06:48.760 we get a two percent inflation I think you could 0:06:48.839 --> 0:06:51.600 see more healthy debate, including on. 0:06:51.560 --> 0:06:54.320 The voting, you know, Joe, I think one of the 0:06:54.360 --> 0:06:58.800 remarks that caught some people by surprise was when Jerome 0:06:58.880 --> 0:07:02.359 Palce said he doesn't see the economy getting back to 0:07:02.440 --> 0:07:07.200 that two percent target until twenty twenty five, so you know, 0:07:07.360 --> 0:07:10.360 another year and change, you know, five quarters or so. 0:07:10.920 --> 0:07:12.920 Does that make sense? You know, we've seen such an 0:07:12.960 --> 0:07:15.920 aggressive drop from you know, what was the peak in 0:07:16.000 --> 0:07:19.800 headline CPI like nine to three in the last print. 0:07:20.120 --> 0:07:21.920 Does it make sense that it would take that much 0:07:22.000 --> 0:07:23.840 longer to get to two? 0:07:24.360 --> 0:07:24.480 You know? 0:07:24.640 --> 0:07:26.400 Is it a is it a story of base effects 0:07:26.480 --> 0:07:29.520 that you know, now we're comparing year over year to 0:07:30.000 --> 0:07:32.400 inflation that had already cooled off. How are you thinking 0:07:32.440 --> 0:07:35.280 about how long it'll take to get to that two percent? 0:07:36.440 --> 0:07:37.800 Well, I think it will take some time. 0:07:37.840 --> 0:07:39.320 I think that's you know, I think that was a 0:07:39.360 --> 0:07:41.240 subtle but a very important point is actually it's one 0:07:41.280 --> 0:07:44.520 of the most important comments I thought that was made today, Mike, 0:07:44.560 --> 0:07:48.200 and that you know, there's there's our own research and projections, 0:07:48.680 --> 0:07:52.360 the Federal reserves projections as well as academic analysis, including 0:07:52.360 --> 0:07:55.520 from former chairman Ben Bernanke all point to that to 0:07:55.560 --> 0:07:59.360 the same outcome, which is inflation and remaining elevated, meaning. 0:07:59.120 --> 0:08:01.520 Above two percent for some time. 0:08:01.720 --> 0:08:04.360 The primary reason for that is the tightness in the 0:08:04.400 --> 0:08:07.880 labor market, and so you know, I think that's where 0:08:07.960 --> 0:08:09.840 you know, and we have been of the view I've 0:08:09.840 --> 0:08:12.280 been have had strong conviction for some time that we 0:08:12.280 --> 0:08:15.160 were going to need to see some material cooling in 0:08:15.160 --> 0:08:17.880 the labor market to get to two percent in any 0:08:17.920 --> 0:08:21.160 near term horizon, because it is in the wage dynamics. 0:08:22.240 --> 0:08:25.160 And so I don't I think the market has slowly, 0:08:25.200 --> 0:08:27.160 the bond market has slowly come to grips with that 0:08:27.280 --> 0:08:30.280 starting to price out cuts. Right if recall at the 0:08:30.280 --> 0:08:32.319 beginning of the year there was you know, high conviction 0:08:32.360 --> 0:08:34.319 in the bond market there would be significant easy and 0:08:34.360 --> 0:08:37.160 almost at this point right now. And so I think 0:08:37.200 --> 0:08:40.319 even those comments today, I still think point to the 0:08:40.320 --> 0:08:43.000 fact that you know, it's going to take some labor 0:08:43.040 --> 0:08:46.679 market weakness to get to that last yard at as 0:08:46.760 --> 0:08:50.160 many call it, from three percent trend inflation down to two, 0:08:50.679 --> 0:08:54.680 which brings up another I think important debate that words 0:08:54.800 --> 0:08:57.640 matter with respect to this narrative around the soft landing. 0:08:57.679 --> 0:08:59.880 But perhaps you know, I'll say that for another question. 0:09:00.160 --> 0:09:01.840 Before we get there, and I do want to get there, 0:09:01.920 --> 0:09:04.080 I want to talk a little bit more about what 0:09:04.080 --> 0:09:06.079 you're saying about wages in the fact that we need 0:09:06.080 --> 0:09:08.720 to see some cooling in the labor market to get 0:09:09.080 --> 0:09:12.440 back to target. Is that because there's evidence of a 0:09:12.760 --> 0:09:15.000 wage price spiral at this point? 0:09:15.360 --> 0:09:17.200 Well, I think, kay, I think there was clearly that 0:09:17.320 --> 0:09:21.600 last year you had wage pressures that were significant six 0:09:21.679 --> 0:09:25.120 seven percent. You had labor market turnover that was as 0:09:25.160 --> 0:09:27.640 high as a generation. Again, we all knew some of 0:09:27.640 --> 0:09:32.439 that was somewhat temporary. But I think where I come out, 0:09:32.559 --> 0:09:34.920 there's not a wage price spiral. But the fact is 0:09:34.960 --> 0:09:38.800 the labor market is imbalanced, and we've grown. You know, 0:09:38.840 --> 0:09:41.960 there's measures that many point to the vacancy to unemployment rate. 0:09:42.440 --> 0:09:45.160 You know that ratio one is in balanced number of 0:09:45.200 --> 0:09:49.440 vacancies equal number of unemployed Americans. We've grown that data 0:09:49.559 --> 0:09:52.079 actually back to as far back as World War One, 0:09:52.160 --> 0:09:56.360 so one hundred years, which gave us early insight during 0:09:56.400 --> 0:09:58.839 the throes of COVID that we're going to have some 0:09:59.440 --> 0:10:03.080 wage based inflation pressures. That ratio now has come down, 0:10:03.160 --> 0:10:06.559 that's good news, but we're starting to enter the territory 0:10:06.600 --> 0:10:09.680 the ratio is right now, one point five vacancies to 0:10:09.960 --> 0:10:13.000 a unemployment of one, So one point five is above one. 0:10:13.040 --> 0:10:17.640 It's imbalance demand exceed supply. We're starting to enter the 0:10:17.720 --> 0:10:21.360 territory where any further drop in vacancies starts to be 0:10:21.400 --> 0:10:25.560 associated with a modest increase in unemployment. That's important because 0:10:25.559 --> 0:10:28.360 that suggests that and there hasn't been an exception to 0:10:28.400 --> 0:10:30.600 that for one hundred years. So if we're right, we 0:10:30.600 --> 0:10:32.720 should see some further weakness in the labor market. If 0:10:32.760 --> 0:10:35.360 we do not, then that opens up a different door, 0:10:35.400 --> 0:10:39.199 which means inflation may be stickier than we think, and 0:10:39.320 --> 0:10:40.720 that would be a surprise to the market. 0:10:47.520 --> 0:10:49.959 I did want to wrap in this conversation we're having 0:10:50.280 --> 0:10:53.960 on the labor market to current events that we're seeing 0:10:53.960 --> 0:10:57.559 in the economy, especially when we're seeing all these labor negotiations. 0:10:57.640 --> 0:11:00.880 We saw a big win for labor un unions this 0:11:01.000 --> 0:11:05.240 week with the Teamsters versus UPS, and actually the Teamsters 0:11:05.360 --> 0:11:08.760 chief was on Bloomberg Television after that saying that now 0:11:08.800 --> 0:11:13.760 they're taking the name at Amazon, and I'm wondering how 0:11:15.080 --> 0:11:19.720 you're viewing that, whether those are one off scenarios where 0:11:20.000 --> 0:11:23.199 you know, maybe that segment that was involved, that union 0:11:23.200 --> 0:11:26.280 that was involved gets a price hike. How that is 0:11:26.320 --> 0:11:30.000 fitting into your overall view on the labor market right now? 0:11:30.240 --> 0:11:32.080 Well, you know, I think you know, if you talk 0:11:32.120 --> 0:11:35.439 to friends and colleagues, as even a Boston as an employer, 0:11:35.720 --> 0:11:37.400 you know, you can feel the tightness in the labor 0:11:37.440 --> 0:11:40.120 market when you're looking for applicants. It's in the data, 0:11:40.240 --> 0:11:43.160 it's in common experience. It's not as tight as a 0:11:43.240 --> 0:11:47.120 year ago. Last year seemed like a really a frenzy 0:11:47.320 --> 0:11:50.920 where demand just was was was drassicala ecceede supply. Labor 0:11:50.920 --> 0:11:54.599 turnovers come down. We know, job you know wage increases 0:11:54.640 --> 0:11:56.559 are double the rate when you leave a company for 0:11:56.600 --> 0:11:58.679 a new job then when you stay at the existing ones, 0:11:58.760 --> 0:12:02.640 So is labor turnovers come down. The wage growth is cooled, 0:12:03.080 --> 0:12:05.840 and again this is good news for consumers. But the 0:12:05.920 --> 0:12:09.080 fact is we still have an imbalanced labor market. Now 0:12:09.480 --> 0:12:11.800 that's why the biggest reason why the Fed took rates 0:12:11.800 --> 0:12:14.880 from zero to five percent, right, It's just that there 0:12:14.920 --> 0:12:17.319 was that debate a year ago, your member, between Waller 0:12:17.480 --> 0:12:21.239 and Summers and others and some calling that immaculate disinflation, 0:12:21.440 --> 0:12:24.200 meaning you could have that ratio which at one point 0:12:24.240 --> 0:12:27.760 was two vacancies to one unemployed. You could fall most 0:12:27.800 --> 0:12:32.640 magically to one. I'm just saying that that's that's historically unprecedented. 0:12:32.720 --> 0:12:35.000 You can drop from two to about one point five 0:12:35.080 --> 0:12:38.200 maybe one point three, which we're we're tracking along that pace. 0:12:38.280 --> 0:12:41.800 At that point, it becomes that that sort of that 0:12:41.880 --> 0:12:45.079 line becomes a little kinked, and so any further drop 0:12:45.080 --> 0:12:47.839 in vacancies to get a better balance in labor market, 0:12:47.880 --> 0:12:50.680 which gets to the wage pressures being a little bit less, 0:12:50.760 --> 0:12:54.160 you know, intense, you start to see a rise in unemployment, 0:12:54.280 --> 0:12:56.800 and so there's no getting around that trade off at 0:12:56.840 --> 0:12:59.640 some point. And that I think the soft that the 0:12:59.679 --> 0:13:01.880 soft landing crowd has to come as to grips with 0:13:02.160 --> 0:13:05.800 is that is it theoretically possible, Sure, but it would 0:13:05.800 --> 0:13:09.559 actually require decent good luck and further labor supply coming 0:13:09.600 --> 0:13:12.679 out of the woodwork for us to magically balance the 0:13:12.760 --> 0:13:13.679 labor market. 0:13:13.440 --> 0:13:14.360 Over the next six months. 0:13:14.640 --> 0:13:17.760 Well, Joe, let's talk about that soft landing notion. I mean, 0:13:17.840 --> 0:13:22.439 it seems like it's getting a bigger and bigger sort 0:13:22.679 --> 0:13:26.720 of constituency among economists. One of the interesting things Pal 0:13:26.840 --> 0:13:30.360 said today was that the FED staff is no longer 0:13:30.400 --> 0:13:34.040 forecasting a recession. The IMF this week raised its its 0:13:34.120 --> 0:13:38.240 growth forecast for next year. And at Bloomberg, you know, 0:13:38.360 --> 0:13:41.840 obviously we do a lot of surveys of economists. They've 0:13:41.880 --> 0:13:45.400 boosted their GDP estimates for the second and third quarters. 0:13:45.480 --> 0:13:48.920 According to that survey, consensus is there's about a sixty 0:13:49.000 --> 0:13:52.959 percent chance of a recession within the next twelve months. 0:13:53.200 --> 0:13:55.920 I'm curious what how you're handicapping it, you know, is 0:13:55.960 --> 0:13:59.160 that sixty percent sound high to you? Load to you? 0:13:59.320 --> 0:14:01.800 Is it? Is it more of a sure thing than that? 0:14:01.960 --> 0:14:03.040 How are you thinking about? 0:14:03.240 --> 0:14:04.960 So I'll give you my answer. I also give you 0:14:05.000 --> 0:14:08.200 which it's semantics, but it's actually a very important one 0:14:08.960 --> 0:14:12.520 and that is actually many of the forecasts out there, 0:14:12.840 --> 0:14:16.240 although they seem dramatically bipolar, either if there's a recession 0:14:16.280 --> 0:14:20.240 camp or there's a soft landing camp, right, they're actually 0:14:20.240 --> 0:14:24.240 the forecasts, including the FED, including vanguards you know, are 0:14:24.320 --> 0:14:27.960 forecast and many from you know, many many economist firms. 0:14:28.000 --> 0:14:30.760 They're actually more similar than different. There's just there's this 0:14:30.960 --> 0:14:33.160 there's been this bipolar sort of oh we're in the 0:14:33.200 --> 0:14:34.080 recession camp or not? 0:14:34.600 --> 0:14:35.400 Why say that? 0:14:35.520 --> 0:14:38.880 Is almost everyone has a rise in the unemployment rate 0:14:39.360 --> 0:14:41.760 of at least thirty or forty basis points, so going 0:14:41.800 --> 0:14:43.520 above four percent over the next year. 0:14:43.600 --> 0:14:44.000 Right. 0:14:44.640 --> 0:14:47.720 Well, historically that that that has been one hundred percent 0:14:47.760 --> 0:14:51.440 associated with a recession, now not necessarily deep in magnitude, 0:14:51.440 --> 0:14:53.880 but a recession that, by the way, is the Federal 0:14:53.920 --> 0:14:57.280 Reserves forecast. So the Federal Reserve, I mean semantically, they 0:14:57.400 --> 0:15:01.560 they're on record saying no, no recession, but by that metric, 0:15:01.640 --> 0:15:06.080 it actually it would it is a recession because you 0:15:06.160 --> 0:15:10.440 have very modest job losses. Now GDP could be you know, 0:15:10.600 --> 0:15:13.480 zero point five percent, one percent next year. That's closer 0:15:13.520 --> 0:15:16.640 to our projections one percent. You know, here's the quiz 0:15:16.680 --> 0:15:18.960 in two thousand and one, which has been our central 0:15:19.080 --> 0:15:22.440 tendency of what's the most closest reference point for a 0:15:22.560 --> 0:15:26.440 very mild recession, which is our baseline two thousand and one, 0:15:26.520 --> 0:15:30.320 GDP never fell on an annual basis Really, yeah, we 0:15:30.400 --> 0:15:31.440 had unemployment rise. 0:15:31.560 --> 0:15:31.760 Yeah. 0:15:31.800 --> 0:15:35.120 No. In fact, many recessions do not have GDP fall 0:15:35.280 --> 0:15:39.280 in the calendar year with which they occur. Again, except 0:15:39.360 --> 0:15:42.880 GFC and nineteen eighty two and all those deep ones 0:15:43.080 --> 0:15:46.440 clearly fall. So again, we haven't changed our view on 0:15:46.520 --> 0:15:48.680 that the data has been a little bit stronger than expected. 0:15:48.720 --> 0:15:51.320 But ultimately our view has been you can't have your cake, 0:15:51.320 --> 0:15:54.360 you need it too, which means to get inflation down 0:15:54.400 --> 0:15:56.960 to that last yard of two percent, you have to 0:15:57.000 --> 0:15:59.760 see a modest weakening in the labor market, which means, 0:15:59.760 --> 0:16:03.000 on pointing rate's going to rise, although hopefully not Drasticgo 0:16:03.120 --> 0:16:05.160 let's say let's say four and a half percent over 0:16:05.200 --> 0:16:09.080 the next year. Well, that's one hundred basis point rise, right, 0:16:09.160 --> 0:16:12.680 So by definition, that is a recession. Now, anyone who 0:16:12.840 --> 0:16:15.520 thinks that that's a soft landing is spitting in the 0:16:15.520 --> 0:16:17.760 face of one hundred and fifty years of history. I'm 0:16:17.760 --> 0:16:20.600 just saying that that's categorically wrong. Now, I think what 0:16:20.680 --> 0:16:23.560 the soft landing camp really is is there's actually no 0:16:23.640 --> 0:16:27.680 landing at all, meaning there's no rise in unemployment. Now 0:16:27.680 --> 0:16:30.880 I would assign the probability of that of roughly fifteen percent. 0:16:30.960 --> 0:16:33.120 I mean, that would be both good luck on the 0:16:33.160 --> 0:16:35.520 supply side. We still have an increase in labor force 0:16:35.560 --> 0:16:38.560 participation rate for example. Right, we got better news there, 0:16:39.520 --> 0:16:42.200 and you would have the federal reserve really calibrated just 0:16:42.280 --> 0:16:44.200 the right way. The five and a half percent fed 0:16:44.240 --> 0:16:48.000 funds with core coming down, it's enough to have non 0:16:48.080 --> 0:16:50.720 farm payrolls over the next year come in I don't know, 0:16:50.800 --> 0:16:54.800 let's say one hundred thousand, just enough to have a 0:16:54.920 --> 0:16:57.520 rise on point rate, but you don't have job losses 0:16:57.560 --> 0:16:59.760 where you start to really you know, start to see 0:16:59.800 --> 0:17:04.200 set am weaken further. Effectively, that's an environment where businesses 0:17:04.320 --> 0:17:07.520 do not really have job cuts, they effectively they just 0:17:07.640 --> 0:17:08.720 pause on hiring. 0:17:09.240 --> 0:17:11.760 That is that, in my mind, is what the soft 0:17:11.880 --> 0:17:12.800 landing really is. 0:17:13.520 --> 0:17:16.119 And and so that's where I think, you know, from 0:17:16.160 --> 0:17:18.439 an economists perspective, that may sound a little bit like 0:17:18.920 --> 0:17:21.880 you know, splitting hairs, but it's actually important. So our view, 0:17:21.960 --> 0:17:25.080 we say that is a low probability, so the odds 0:17:25.080 --> 0:17:29.160 of recession are higher than sixty percent, but we're not calling, 0:17:29.680 --> 0:17:32.400 you know, like for a deep recession. It's been it's 0:17:32.480 --> 0:17:37.280 fairly mild and closest examples two thousand and one, so 0:17:37.320 --> 0:17:40.160 hopefully that's helpful. I just see this disconnect between those 0:17:40.160 --> 0:17:42.320 saying we're going to avoid recession, yet they have an 0:17:42.400 --> 0:17:44.800 unemployment rate rise in of one hundred basis points. It's 0:17:44.880 --> 0:17:47.320 just I just don't think that's possible to have those 0:17:47.320 --> 0:17:48.640 two outcomes at the same time. 0:17:49.000 --> 0:17:51.560 Joe, there's a lot to dig into there, But I 0:17:51.600 --> 0:17:53.840 want to return to a point you made that to 0:17:53.880 --> 0:17:57.080 get to the last yard, to get back to two percent, 0:17:57.800 --> 0:18:00.600 sort of The plain question I have is whether or 0:18:00.640 --> 0:18:03.800 not that's worth it. Is it worth it to get 0:18:04.080 --> 0:18:07.280 to two percent and tip the economy into a recession 0:18:07.359 --> 0:18:10.800 versus accepting, you know, maybe a higher inflation rate of 0:18:10.920 --> 0:18:12.000 two and a half percent. 0:18:12.359 --> 0:18:15.240 Again, it's a fair question, Katie. I've heard that dialogue. 0:18:15.240 --> 0:18:18.280 I've been in research meetings with Federal Reserve officials. That 0:18:18.320 --> 0:18:22.760 conversation has been had. I hear that argument. I just 0:18:22.800 --> 0:18:25.359 think it's risky. Could it work? 0:18:25.560 --> 0:18:25.840 Yes? 0:18:26.040 --> 0:18:28.120 I mean, why die on the hill for two point 0:18:28.200 --> 0:18:29.480 seven percent core inflection? 0:18:29.680 --> 0:18:29.880 Right? 0:18:30.640 --> 0:18:33.040 The only risk to that is what happened in nineteen 0:18:33.119 --> 0:18:35.680 sixty seven, And that's actually the. 0:18:35.640 --> 0:18:38.240 One year where the yield curve inverted, yet we didn't 0:18:38.240 --> 0:18:39.119 have a recession. 0:18:39.960 --> 0:18:42.760 People call it a soft landing, But as I've written 0:18:42.760 --> 0:18:46.359 to our own clients and Vanguard, what happened two years 0:18:46.400 --> 0:18:50.119 later was actually a deeper recession and inflation came back. 0:18:50.920 --> 0:18:52.879 Now that's not our baseline, But why I bring up 0:18:52.960 --> 0:18:55.919 nineteen sixty seven is comes back to that indicator I 0:18:55.960 --> 0:19:01.600 mentioned before, the vacancy's unemployment ratio. In nineteen six, conditions 0:19:01.640 --> 0:19:04.600 were very similar as now. The Federal Reserve cut rakes 0:19:04.680 --> 0:19:07.240 because of some a little bit of credit pressures in 0:19:07.240 --> 0:19:09.639 the banking sector. Now again, the Federal Reserve is not 0:19:09.680 --> 0:19:12.800 cutting rates today. Within a year, though, that vacancy on 0:19:12.800 --> 0:19:16.320 appointment ratio it cooled down but always remained well above one. 0:19:16.840 --> 0:19:19.320 It started to rise again closer back to two, which 0:19:19.359 --> 0:19:20.960 is where we were at the beginning of the year, 0:19:21.800 --> 0:19:24.480 And so the Federal Reserve had to switch course dramatically 0:19:24.520 --> 0:19:26.400 and actually had to take rates. They were at five 0:19:26.440 --> 0:19:28.560 and a half, They took them down to three. By 0:19:28.560 --> 0:19:30.719 the end of sixty nine are up to nine percent, 0:19:30.880 --> 0:19:35.560 and a deep recession followed. Why so, like you could 0:19:35.680 --> 0:19:38.520 let inflation kind of hover at two and a half 0:19:39.040 --> 0:19:42.040 two point seven, I would be looking at that point 0:19:42.200 --> 0:19:45.600 if that was the decision, where's that vacancy the unappointment. 0:19:45.200 --> 0:19:47.200 Ratio is it? Is it good? 0:19:47.359 --> 0:19:49.480 It is it around one, which is like the true 0:19:49.520 --> 0:19:52.760 sooft landing, or is it going back up closer to 0:19:52.840 --> 0:19:55.480 the two ratio than we had to beginning of the year. 0:19:55.800 --> 0:19:58.040 If that is the case, then I would be screaming 0:19:58.200 --> 0:20:01.360 for higher rates because we have seen that play out before. 0:20:02.000 --> 0:20:03.919 So I would put a caveat, like, if you're going 0:20:03.960 --> 0:20:07.600 to pursue that policy and let inflation hover around three percent, 0:20:08.320 --> 0:20:13.160 really keep a close eye on the imbalance or balance 0:20:13.200 --> 0:20:16.320