1 00:00:00,200 --> 00:00:03,160 Speaker 1: It's been a wild ride for investors in the US 2 00:00:03,279 --> 00:00:06,560 Speaker 1: stock market these past couple of months. First it plummeted 3 00:00:06,559 --> 00:00:10,560 Speaker 1: in February over fears of rising interest rates. Then President 4 00:00:10,560 --> 00:00:14,120 Speaker 1: Trump gave investors even more heartburned by threatening China with 5 00:00:14,160 --> 00:00:17,759 Speaker 1: a trade war and attacking Amazon over its deal with 6 00:00:17,800 --> 00:00:21,240 Speaker 1: the postal Service. Yet, for all the chaos on Wall Street, 7 00:00:21,600 --> 00:00:24,520 Speaker 1: Main Street seems to be doing fine. So is the 8 00:00:24,560 --> 00:00:28,280 Speaker 1: stock market signaling trouble for the economy or will this 9 00:00:28,360 --> 00:00:41,720 Speaker 1: storm blow over? Welcome to Benchmark. I'm Scott Landman, economics 10 00:00:41,840 --> 00:00:45,200 Speaker 1: editor with Bloomberg News in Washington, And I'm Daniel Moss, 11 00:00:45,280 --> 00:00:49,840 Speaker 1: economics editor and Roger at Bloomberg View in New York. So, Dan, 12 00:00:50,159 --> 00:00:53,280 Speaker 1: how many times have you been in this situation? You're 13 00:00:53,280 --> 00:00:56,080 Speaker 1: talking with a new acquaintance at a cocktail party. You 14 00:00:56,120 --> 00:00:58,760 Speaker 1: tell them that you write about the economy, and the 15 00:00:58,800 --> 00:01:02,080 Speaker 1: first questions they ask are, so, what's going on with 16 00:01:02,120 --> 00:01:05,240 Speaker 1: the market lately? And what should I do with my money? Well, 17 00:01:05,400 --> 00:01:09,400 Speaker 1: the first part happens a lot. I generally quickly respond 18 00:01:09,520 --> 00:01:12,080 Speaker 1: by saying, which market do you mean? Do you mean 19 00:01:12,120 --> 00:01:15,319 Speaker 1: the stock market? They give me a blank look. I say, well, 20 00:01:15,800 --> 00:01:18,080 Speaker 1: you could have been talking about bonds or f f X. 21 00:01:18,560 --> 00:01:21,800 Speaker 1: The mere fact that the market is shorthand for stocks 22 00:01:21,920 --> 00:01:25,000 Speaker 1: actually says a lot. And it's usually that they think 23 00:01:25,080 --> 00:01:27,920 Speaker 1: that the market is the economy, that the stock market 24 00:01:28,000 --> 00:01:30,360 Speaker 1: is basically the economy. If you cover the economy, well 25 00:01:30,680 --> 00:01:33,520 Speaker 1: you must be covering the stock market, right then, Yes, 26 00:01:33,600 --> 00:01:37,160 Speaker 1: to break it down and then describe how the market 27 00:01:37,280 --> 00:01:41,080 Speaker 1: on a day to day basis, let alone an hourly basis, 28 00:01:41,240 --> 00:01:46,840 Speaker 1: does not necessarily reflect the broader macro economy. Well, by 29 00:01:46,880 --> 00:01:49,520 Speaker 1: that time eyes that were rolling have well and truly 30 00:01:49,600 --> 00:01:54,000 Speaker 1: rolled out the cocktail party. Well, anyway, there are some 31 00:01:54,040 --> 00:01:56,200 Speaker 1: ways that the stock market is the economy. There's some 32 00:01:56,240 --> 00:01:58,800 Speaker 1: ways that it's not. And today we're going to talk 33 00:01:58,800 --> 00:02:02,640 Speaker 1: about that a little. As these two worlds collide on Benchmark. 34 00:02:03,040 --> 00:02:06,160 Speaker 1: Let's bring in our guest. Jim Paulson is chief investment 35 00:02:06,240 --> 00:02:09,720 Speaker 1: strategist at the Loose Old Group, an independent financial research 36 00:02:09,800 --> 00:02:13,520 Speaker 1: firm in Minneapolis. He also previously worked for twenty years 37 00:02:13,520 --> 00:02:17,040 Speaker 1: at Wells Capital Management, part of Wales Fargo, and is 38 00:02:17,040 --> 00:02:20,400 Speaker 1: a trained economist. Jim, thanks for joining us on Benchmark. 39 00:02:20,840 --> 00:02:24,280 Speaker 1: Thanks for Scott, Jim. What sets you apart from a 40 00:02:24,320 --> 00:02:27,680 Speaker 1: lot of people who talk about the markets ups and downs. 41 00:02:27,800 --> 00:02:30,840 Speaker 1: Is that you come to it with an economics background. 42 00:02:31,200 --> 00:02:34,720 Speaker 1: You have a doctorate in economics. How does this training 43 00:02:34,760 --> 00:02:38,640 Speaker 1: in this field color your approach to analysis and commentary 44 00:02:38,760 --> 00:02:41,799 Speaker 1: on the stock market? Well, I think it always has 45 00:02:41,840 --> 00:02:44,640 Speaker 1: probably more of a you know, a ten or twenty 46 00:02:45,040 --> 00:02:47,720 Speaker 1: feet few more times than not than a bottom up 47 00:02:47,760 --> 00:02:52,720 Speaker 1: company view. Probably always have had that till But I 48 00:02:52,720 --> 00:02:55,440 Speaker 1: would say a couple of the biggest things is an 49 00:02:55,560 --> 00:03:01,239 Speaker 1: appreciation of the workings of capitalism, not only driving the economy, 50 00:03:01,280 --> 00:03:05,600 Speaker 1: but also the markets and and and truly more maybe 51 00:03:05,600 --> 00:03:10,519 Speaker 1: an appreciation for it's individuals that make it home and 52 00:03:10,520 --> 00:03:13,680 Speaker 1: and it's truly greet and fear and animal spirits or 53 00:03:13,680 --> 00:03:17,079 Speaker 1: the lack thereof and and you can say those terms, 54 00:03:17,080 --> 00:03:21,000 Speaker 1: but in reality and the management of money, they often 55 00:03:21,080 --> 00:03:25,040 Speaker 1: become extremely important. We can get lost in all the 56 00:03:25,040 --> 00:03:31,760 Speaker 1: minutia of of FED meetings or or quantitative formulas for 57 00:03:31,919 --> 00:03:34,120 Speaker 1: this or that, But at the end of the day, 58 00:03:34,360 --> 00:03:36,480 Speaker 1: it really the most important thing, and a lot of 59 00:03:36,520 --> 00:03:39,240 Speaker 1: the time is where is the psyche of the players? 60 00:03:39,920 --> 00:03:43,720 Speaker 1: Are they more tilted at the moment towards fear and 61 00:03:43,840 --> 00:03:47,680 Speaker 1: that's affecting how they're behaving. Both economically and in the markets, 62 00:03:47,880 --> 00:03:51,920 Speaker 1: or are they more fearful of missing out? Are they're 63 00:03:52,120 --> 00:03:56,600 Speaker 1: driven more by greed? And I think that's a something 64 00:03:56,680 --> 00:04:00,080 Speaker 1: you get after studying economics a lot of things. But 65 00:04:00,120 --> 00:04:02,160 Speaker 1: I think one thing is left in me and has 66 00:04:02,160 --> 00:04:05,760 Speaker 1: maybe been reinforced in my day to day experiences. Is 67 00:04:05,800 --> 00:04:09,080 Speaker 1: it really is about the human element. We try to 68 00:04:09,120 --> 00:04:11,560 Speaker 1: make economics of science, but at the end of the day, 69 00:04:11,600 --> 00:04:14,880 Speaker 1: it's still an art. You're also not in New York 70 00:04:15,400 --> 00:04:19,120 Speaker 1: or another major financial sense. You're in Minneapolis, not a 71 00:04:19,200 --> 00:04:22,719 Speaker 1: knock on Minneapolis. It does give you a different perspective. 72 00:04:22,760 --> 00:04:26,800 Speaker 1: I also wonder whether your studies at Iowa State, as 73 00:04:26,839 --> 00:04:31,960 Speaker 1: opposed to say, Harvard, Princeton, Stanford, give you some special 74 00:04:32,000 --> 00:04:35,080 Speaker 1: insight as well. You know, I'm not sure because I 75 00:04:35,200 --> 00:04:39,760 Speaker 1: never had the alternative experience. I guess to directly compare 76 00:04:39,800 --> 00:04:41,920 Speaker 1: the two, I think at the end of the day, 77 00:04:42,040 --> 00:04:45,760 Speaker 1: it's probably both an advantage in a detriment to grow 78 00:04:45,880 --> 00:04:49,200 Speaker 1: up and be educated in the Middle West as opposed 79 00:04:49,200 --> 00:04:50,720 Speaker 1: to the East Coast. I think it's good and bad 80 00:04:50,760 --> 00:04:54,000 Speaker 1: about it. If there is one thing that I guess, 81 00:04:54,160 --> 00:04:57,560 Speaker 1: I think I guess a couple of things, but technology, 82 00:04:57,960 --> 00:05:00,719 Speaker 1: I'm fairly, I'm as connected as an anyone that sits 83 00:05:00,800 --> 00:05:03,839 Speaker 1: right in Manhattan every day. It's because much to people 84 00:05:03,880 --> 00:05:05,880 Speaker 1: in New York or Boston or l A that I 85 00:05:05,960 --> 00:05:10,400 Speaker 1: do here and in the Midwest, and there's certainly isn't 86 00:05:10,400 --> 00:05:12,720 Speaker 1: a lack of ability to look at things as much 87 00:05:12,720 --> 00:05:16,159 Speaker 1: as anyone anyone else anywhere else. But I do think 88 00:05:16,800 --> 00:05:18,840 Speaker 1: what it does, more than anything is give you a 89 00:05:18,920 --> 00:05:23,440 Speaker 1: different track to managing money. You have maybe a high 90 00:05:23,520 --> 00:05:26,760 Speaker 1: proportion of the individuals involved in this industry that follow 91 00:05:26,839 --> 00:05:30,880 Speaker 1: a very similar track, and to some extent, coming from 92 00:05:30,920 --> 00:05:34,880 Speaker 1: a completely different track to get where we are, maybe 93 00:05:34,920 --> 00:05:37,679 Speaker 1: brings a completely different perspective to how you do things, 94 00:05:38,160 --> 00:05:41,320 Speaker 1: rather than just learning what everyone else did and copying 95 00:05:41,320 --> 00:05:44,080 Speaker 1: it along the way. And I think there's some truth 96 00:05:44,080 --> 00:05:46,760 Speaker 1: in that. But as I say, that can be a 97 00:05:46,839 --> 00:05:50,440 Speaker 1: great thing. Creativity and a unique path can be very profitable, 98 00:05:50,839 --> 00:05:53,040 Speaker 1: but it can also sometimes run you right off a 99 00:05:53,040 --> 00:05:55,920 Speaker 1: cliff when you're doing it your own way, so to speak. 100 00:05:56,240 --> 00:05:58,720 Speaker 1: So again it's a it's an advantage and a detriment. 101 00:05:59,160 --> 00:06:01,680 Speaker 1: But I do think maybe the different path to get 102 00:06:01,720 --> 00:06:04,760 Speaker 1: what we all do every day certainly makes me look 103 00:06:04,800 --> 00:06:08,040 Speaker 1: at things differently. Whenever we have these kinds of big 104 00:06:08,080 --> 00:06:10,960 Speaker 1: swings in the stock market. Some people come out and say, 105 00:06:11,200 --> 00:06:13,279 Speaker 1: you know, the stock market is not the economy. The 106 00:06:13,279 --> 00:06:16,599 Speaker 1: economy is just fine, but it's really a bit more 107 00:06:16,760 --> 00:06:20,360 Speaker 1: complicated than that, right, Can you explain. Well, I've always 108 00:06:20,360 --> 00:06:23,559 Speaker 1: been of the been of the view that there's always 109 00:06:23,600 --> 00:06:27,320 Speaker 1: been widespread contention between Main Street and Wall Street. It's 110 00:06:27,320 --> 00:06:32,480 Speaker 1: a common media darling to write about that conflict, and 111 00:06:32,520 --> 00:06:35,160 Speaker 1: I think it exists because over time, I believe both 112 00:06:35,200 --> 00:06:38,800 Speaker 1: Main and Wall do just fine over over time, they 113 00:06:38,880 --> 00:06:42,679 Speaker 1: just rarely do find together. It is typically the case 114 00:06:43,160 --> 00:06:47,279 Speaker 1: that when it's really awful oftentimes on Main Street, it's 115 00:06:47,279 --> 00:06:50,200 Speaker 1: great on Wall and when it gets good on Main 116 00:06:50,279 --> 00:06:53,200 Speaker 1: and often gets more difficult on Wall Street. For example, 117 00:06:53,240 --> 00:06:57,880 Speaker 1: if you go back to the absolute best returns on 118 00:06:57,920 --> 00:07:01,920 Speaker 1: Wall Street have come end, the unemployment rate has been 119 00:07:01,960 --> 00:07:05,480 Speaker 1: in the highest quartile over the post war history. I 120 00:07:05,520 --> 00:07:08,320 Speaker 1: think returns as much as fift per annum when the 121 00:07:08,360 --> 00:07:11,640 Speaker 1: unemployment rates in the upper quartile and the worst returns 122 00:07:11,680 --> 00:07:14,560 Speaker 1: on in the stock market, and when you have the 123 00:07:14,600 --> 00:07:19,040 Speaker 1: lowest quartile unemployment rates. There is a truism that Wall 124 00:07:19,120 --> 00:07:23,040 Speaker 1: Street likes slack on me. Slack on me and allows 125 00:07:23,040 --> 00:07:26,880 Speaker 1: you to grow the economy without any negative consequence for 126 00:07:27,000 --> 00:07:31,080 Speaker 1: the financial assets, meaning interest rates can be loved. That's right, 127 00:07:31,160 --> 00:07:35,240 Speaker 1: meaning growth without any cause. You don't raise cost you 128 00:07:35,240 --> 00:07:38,560 Speaker 1: don't increase inflation which challenge valuations, you don't have any 129 00:07:38,600 --> 00:07:42,520 Speaker 1: need to raise rates. But once, once you reach full employment, 130 00:07:42,840 --> 00:07:47,200 Speaker 1: once you get to a positive output gap, then growth 131 00:07:47,280 --> 00:07:50,760 Speaker 1: has negative connotations as well as positive ones for both 132 00:07:50,760 --> 00:07:55,440 Speaker 1: stocks and bonds. So at any given moment, what often 133 00:07:55,480 --> 00:07:58,440 Speaker 1: seems like only one is participating. I mean, in two 134 00:07:58,480 --> 00:08:00,840 Speaker 1: thousand nine, when the stock mark it was roaring in 135 00:08:00,880 --> 00:08:02,600 Speaker 1: the second half of the year, we had some of 136 00:08:02,600 --> 00:08:06,560 Speaker 1: the highest unemployment rates post war history, and there was 137 00:08:06,720 --> 00:08:10,400 Speaker 1: widespread impression for years in the early in this recovery 138 00:08:10,520 --> 00:08:13,360 Speaker 1: that only Wall Street was really benefiting, no one on 139 00:08:13,480 --> 00:08:17,960 Speaker 1: me was. Whereas today Main Street looks about as good 140 00:08:17,960 --> 00:08:21,960 Speaker 1: as it ever has. We've got full employment, regular job creation, 141 00:08:22,120 --> 00:08:27,320 Speaker 1: good income growth, good profit growth, high confidence levels. And 142 00:08:27,320 --> 00:08:30,440 Speaker 1: and yet Wall Street has been struggling more of late 143 00:08:30,560 --> 00:08:33,679 Speaker 1: with the need to reset interest rates higher, with lowering 144 00:08:33,760 --> 00:08:37,440 Speaker 1: price earnings multiples, with dealing with higher inflation risk, with 145 00:08:37,559 --> 00:08:41,200 Speaker 1: dealing with the tightening feder reserve. And I don't think 146 00:08:41,280 --> 00:08:44,679 Speaker 1: that's uncommon at all. So over time they're both going 147 00:08:44,720 --> 00:08:49,200 Speaker 1: to benefit from GDP going higher, but often it's not 148 00:08:49,280 --> 00:08:51,880 Speaker 1: at the same time. Well, if things are so great 149 00:08:52,000 --> 00:08:55,880 Speaker 1: on main Street, Jim, this didn't just happen overnight, how 150 00:08:55,880 --> 00:09:02,120 Speaker 1: do you reconcile that with this support ought for populism 151 00:09:02,200 --> 00:09:06,240 Speaker 1: and for draining the swamp and breaking Washington, how do 152 00:09:06,280 --> 00:09:10,600 Speaker 1: you reconcile dissatisfaction with the status quo when status quo 153 00:09:10,679 --> 00:09:14,440 Speaker 1: was treating people pretty good late. Well, but I think 154 00:09:14,679 --> 00:09:18,959 Speaker 1: it wasn't long before that. You know, really, confidence levels 155 00:09:19,000 --> 00:09:24,880 Speaker 1: among consumers, among businesses, among investors really remained average or 156 00:09:24,880 --> 00:09:28,120 Speaker 1: below average by post war standards, really until after the 157 00:09:28,160 --> 00:09:32,199 Speaker 1: election in two thousand and sixteen. And if you look 158 00:09:32,240 --> 00:09:36,440 Speaker 1: at real median incomes until really two thousand fifteen at 159 00:09:36,440 --> 00:09:40,120 Speaker 1: the earliest, maybe even two thousand sixteen real median incomes, 160 00:09:40,200 --> 00:09:43,120 Speaker 1: that is the income of the of Main Street, if 161 00:09:43,160 --> 00:09:47,600 Speaker 1: you will, we're falling during most years of this recovery. 162 00:09:47,720 --> 00:09:49,640 Speaker 1: So I would argue that it really wasn't until the 163 00:09:49,679 --> 00:09:53,720 Speaker 1: last couple of years that Main Street finally started to 164 00:09:53,720 --> 00:09:55,480 Speaker 1: pick up. You go back prior to the election. I'm 165 00:09:55,480 --> 00:09:57,760 Speaker 1: not sure the exact number, but you know, we had 166 00:09:57,760 --> 00:10:01,160 Speaker 1: an unemployment rate that was still probably close to six percent, 167 00:10:02,000 --> 00:10:04,319 Speaker 1: and we had sort of hit and miss job reports 168 00:10:04,360 --> 00:10:07,719 Speaker 1: and low confidence. And my point is I don't I 169 00:10:07,720 --> 00:10:10,480 Speaker 1: don't necessarily believe at all that the election of President 170 00:10:10,480 --> 00:10:14,560 Speaker 1: donlaland Trump led to everything good on main I think 171 00:10:14,679 --> 00:10:18,679 Speaker 1: Maine was, by coincidence, almost finally starting to pick up 172 00:10:19,400 --> 00:10:22,600 Speaker 1: and return to some semblance of post war normal just 173 00:10:22,840 --> 00:10:25,280 Speaker 1: prior to the election, and I think there was great 174 00:10:25,320 --> 00:10:28,959 Speaker 1: dissatisfaction with what went down. The idea of an economy 175 00:10:29,080 --> 00:10:33,560 Speaker 1: growing at a ridiculously slow two sort of real stall 176 00:10:33,600 --> 00:10:37,520 Speaker 1: speed growth rate, but the inability to really lower the 177 00:10:37,559 --> 00:10:42,120 Speaker 1: effective unemployment rate, leaving very low confidence amongst most private 178 00:10:42,160 --> 00:10:45,079 Speaker 1: players and really high degrees of fear that we were 179 00:10:45,240 --> 00:10:48,000 Speaker 1: just this close to the second coming of the Great Depression. 180 00:10:48,800 --> 00:10:51,880 Speaker 1: I think there was dissatisfaction in that. One of the 181 00:10:51,960 --> 00:10:55,040 Speaker 1: criticisms that I have of the way we handled the 182 00:10:55,040 --> 00:10:58,760 Speaker 1: o A crisis was I felt like every leader in 183 00:10:58,800 --> 00:11:05,200 Speaker 1: this country put all their energies into treating fundamentals, restoring 184 00:11:05,240 --> 00:11:08,719 Speaker 1: an income flow or improving a balance sheet, but they 185 00:11:08,760 --> 00:11:11,480 Speaker 1: lost focus of what is equally or maybe more important, 186 00:11:11,520 --> 00:11:14,880 Speaker 1: and that is treating confidence and indeed, in my book, 187 00:11:14,880 --> 00:11:21,680 Speaker 1: they destroyed confidence. The President, Treasury, had the Federal Reserve Chairman, 188 00:11:22,160 --> 00:11:26,079 Speaker 1: UH and public officials and government chronically and constantly went 189 00:11:26,120 --> 00:11:29,400 Speaker 1: to the microphone and told the American public, you better 190 00:11:29,480 --> 00:11:31,920 Speaker 1: be prepared because we're this close to the second coming 191 00:11:31,920 --> 00:11:36,040 Speaker 1: of the Great Depression. Their actions, the bizarre actions of 192 00:11:36,120 --> 00:11:38,960 Speaker 1: doing things like cash for clunkers and tarp on a 193 00:11:39,080 --> 00:11:42,920 Speaker 1: major way, giving banks that didn't even need capital capital 194 00:11:42,960 --> 00:11:46,880 Speaker 1: they were forced to take could practicing quantitative easy and 195 00:11:46,960 --> 00:11:50,640 Speaker 1: never before seeing approach. All of these screened that our 196 00:11:50,720 --> 00:11:53,800 Speaker 1: leaders were scared to death and they were doing frantically 197 00:11:53,840 --> 00:11:56,640 Speaker 1: anything they could to save the world. And I think 198 00:11:56,640 --> 00:12:00,800 Speaker 1: it put private players, businesses, consumers, and fasts into the 199 00:12:00,840 --> 00:12:06,760 Speaker 1: fetal position and chronically led to a very poor, growing economy. 200 00:12:06,840 --> 00:12:10,720 Speaker 1: I think it's finally broke just prior to Trump getting elected, 201 00:12:11,280 --> 00:12:14,240 Speaker 1: in part because the rest of the world adopted an 202 00:12:14,240 --> 00:12:17,640 Speaker 1: easing policy consistent across the globe and the whole global 203 00:12:17,679 --> 00:12:21,120 Speaker 1: economy synchronized. In part because it had been long enough 204 00:12:21,120 --> 00:12:24,920 Speaker 1: that fear finally started to erode. But my point was, 205 00:12:25,080 --> 00:12:28,040 Speaker 1: I think it was people were tired of the fear 206 00:12:28,080 --> 00:12:32,959 Speaker 1: based and sort of disappointing outsized recovery, and I think 207 00:12:33,000 --> 00:12:35,720 Speaker 1: that led to a change at the highest level of 208 00:12:35,800 --> 00:12:40,720 Speaker 1: leadership in the country. So now we do have a 209 00:12:40,720 --> 00:12:43,800 Speaker 1: fair amount of confidence back on mainstreat The unemployment rate 210 00:12:43,880 --> 00:12:47,680 Speaker 1: is at the lowest since two thousand. Most measures of 211 00:12:47,720 --> 00:12:50,880 Speaker 1: the economy show that things are in pretty good shape. 212 00:12:50,920 --> 00:12:54,440 Speaker 1: And yet we've been having these pretty crazy swings in 213 00:12:54,520 --> 00:12:58,560 Speaker 1: the stock market. And you know what we want to 214 00:12:58,600 --> 00:13:02,240 Speaker 1: know is what does that say about the direction of 215 00:13:02,480 --> 00:13:05,120 Speaker 1: Main Street. You were talking earlier about how they don't 216 00:13:05,120 --> 00:13:09,400 Speaker 1: necessarily move in sync with each other. Is this change 217 00:13:09,480 --> 00:13:14,040 Speaker 1: in the behavior on Wall Street? Uh, something that tells 218 00:13:14,120 --> 00:13:18,560 Speaker 1: us about the future coming from Main Street? Well, ultimately, 219 00:13:18,600 --> 00:13:22,439 Speaker 1: what hurts Wall will hurt Main and Wall is dealing with. 220 00:13:22,640 --> 00:13:24,880 Speaker 1: There was a great gig on Wall for quite a while. 221 00:13:25,440 --> 00:13:28,560 Speaker 1: You could grow the economy and never have any inflation 222 00:13:28,640 --> 00:13:32,800 Speaker 1: or cost increases in your business, never have to raise rates. 223 00:13:32,840 --> 00:13:35,520 Speaker 1: And if that's the case, you can you can keep 224 00:13:35,640 --> 00:13:38,079 Speaker 1: pushing the valuation in the stock market higher and higher. 225 00:13:38,120 --> 00:13:41,280 Speaker 1: There's nothing to bring it down. But suddenly, when the 226 00:13:41,280 --> 00:13:46,160 Speaker 1: world recovery synchronized and everyone started growing together. And this 227 00:13:46,280 --> 00:13:48,360 Speaker 1: came at a time when the US had returned to 228 00:13:48,400 --> 00:13:53,080 Speaker 1: full employment. It now has negative fallout in the form 229 00:13:53,160 --> 00:13:57,040 Speaker 1: of rising cost and rising inflation, which we're definitely seeing, 230 00:13:57,559 --> 00:14:00,680 Speaker 1: and that is necessitating the new eat for the Fed 231 00:14:00,720 --> 00:14:03,600 Speaker 1: to reset short rates and for bond vigilantes to reset 232 00:14:03,679 --> 00:14:07,360 Speaker 1: longer yields, and that is necessitating that we lower the 233 00:14:07,440 --> 00:14:11,360 Speaker 1: valuation of stocks as well. This here, to me, is 234 00:14:11,400 --> 00:14:16,160 Speaker 1: about the stock and bond market's both adjusting to a 235 00:14:16,280 --> 00:14:18,560 Speaker 1: new character in the economy where you are no longer 236 00:14:18,640 --> 00:14:22,080 Speaker 1: in a two percent growing economy with two percent inflation 237 00:14:22,240 --> 00:14:25,320 Speaker 1: and two percent yields. We're probably in a two and 238 00:14:25,360 --> 00:14:28,520 Speaker 1: a half growing economy, maybe two and three quarters that's 239 00:14:28,560 --> 00:14:32,280 Speaker 1: synchronized with the globe, and inflation is probably moving to three. 240 00:14:32,840 --> 00:14:35,120 Speaker 1: Wages are moving to three and a half, and that 241 00:14:35,160 --> 00:14:37,760 Speaker 1: means the tenure yield is probably headed to three and 242 00:14:37,840 --> 00:14:41,880 Speaker 1: a half as well, and that necessitates that you can't 243 00:14:41,920 --> 00:14:45,200 Speaker 1: trade the stock market over twenty times earnings anymore. You're 244 00:14:45,240 --> 00:14:48,120 Speaker 1: probably going to have to bring it down into the teens, 245 00:14:48,240 --> 00:14:52,880 Speaker 1: maybe seventeen times earnings to find a sustainable valuation that 246 00:14:52,920 --> 00:14:57,200 Speaker 1: can withstand an economy with three percent inflation. So I 247 00:14:57,200 --> 00:15:00,760 Speaker 1: think this is an adjustment for financial assets to the 248 00:15:00,800 --> 00:15:03,720 Speaker 1: new reality, and we might be able to do that 249 00:15:03,840 --> 00:15:08,000 Speaker 1: successfully and the economy and the stock market can continue on. 250 00:15:08,920 --> 00:15:11,640 Speaker 1: Or if inflation and indust rate pressures proved to be 251 00:15:11,680 --> 00:15:16,080 Speaker 1: more advanced and they have to both move higher than 252 00:15:16,400 --> 00:15:18,840 Speaker 1: maybe it could be the beginning of the end for 253 00:15:18,920 --> 00:15:22,800 Speaker 1: both the ball market and the recovery. Jim. As flawed 254 00:15:22,800 --> 00:15:26,720 Speaker 1: as this economic expansion has been, it's been running for 255 00:15:26,760 --> 00:15:30,920 Speaker 1: a while now. It's on track to become the longest ever. 256 00:15:31,680 --> 00:15:36,320 Speaker 1: Are you seeing any signs in your daily interactions that 257 00:15:36,480 --> 00:15:40,000 Speaker 1: things are starting to whine, things might be coming off 258 00:15:40,080 --> 00:15:44,120 Speaker 1: the boil, that the end could be inside. Yeah, Well, 259 00:15:44,120 --> 00:15:46,840 Speaker 1: this is a very calendar as you say, it's it's 260 00:15:46,880 --> 00:15:48,880 Speaker 1: a calendar old recovery and it's going to be the 261 00:15:48,920 --> 00:15:54,200 Speaker 1: oldest then. But it's in many ways character young. You know, 262 00:15:54,280 --> 00:15:58,520 Speaker 1: there's just such an odd recovery growing so slowly, never 263 00:15:58,600 --> 00:16:02,480 Speaker 1: generating any real and of baalistic behaviors. No one really. 264 00:16:02,480 --> 00:16:05,200 Speaker 1: We didn't have any major lending or borrowing cycle. We've 265 00:16:05,200 --> 00:16:08,920 Speaker 1: never had a massive nationwide housing cycle. We've never had 266 00:16:08,920 --> 00:16:12,840 Speaker 1: a major capital spending a cycle. We've yet to have 267 00:16:13,080 --> 00:16:17,680 Speaker 1: a significant tightening by policy officials. We have just started 268 00:16:17,680 --> 00:16:22,320 Speaker 1: a period of excessive or or strong confidence in many 269 00:16:22,320 --> 00:16:26,520 Speaker 1: ways the economy to me, you know, by character standards, 270 00:16:26,560 --> 00:16:29,000 Speaker 1: you know, might be in year three or four rather 271 00:16:29,040 --> 00:16:31,840 Speaker 1: than in year nine. The problem I see is the 272 00:16:31,920 --> 00:16:35,160 Speaker 1: financial markets look a lot older than the recovery does. 273 00:16:36,080 --> 00:16:39,320 Speaker 1: I don't see. To me, what is the primary cause 274 00:16:39,320 --> 00:16:44,040 Speaker 1: of recession is confidence. Too much confidence. Confidence leads you 275 00:16:44,120 --> 00:16:49,240 Speaker 1: and me to undertake overly, aggressive, risky, out over our 276 00:16:49,280 --> 00:16:52,760 Speaker 1: skis types of behaviors, whether that be in our economics 277 00:16:52,800 --> 00:16:56,280 Speaker 1: or whether it be in the markets, our our own financials. 278 00:16:56,320 --> 00:16:59,040 Speaker 1: And it is those excesses then then must be purged 279 00:16:59,040 --> 00:17:02,520 Speaker 1: with the recession. Those are hard to find today because 280 00:17:02,520 --> 00:17:06,159 Speaker 1: we've never had enough confidence in this recovery to do 281 00:17:06,280 --> 00:17:09,960 Speaker 1: stupid things. Um, we might be starting that process, but 282 00:17:10,040 --> 00:17:13,760 Speaker 1: we're just probably starting. The problem I have and what 283 00:17:13,920 --> 00:17:16,080 Speaker 1: keeps me awake at night when we think about this 284 00:17:16,160 --> 00:17:21,200 Speaker 1: recovery is that this recovery has been so odd and 285 00:17:21,280 --> 00:17:24,040 Speaker 1: to get go. It is truly an outlier recovery of 286 00:17:24,040 --> 00:17:27,400 Speaker 1: the post war era. It grew slower than any other 287 00:17:27,520 --> 00:17:30,960 Speaker 1: by a wide margin. It did it without virtually no 288 00:17:31,119 --> 00:17:35,520 Speaker 1: productivity whatsoever, no debt usage. I could go on and on. 289 00:17:35,960 --> 00:17:40,720 Speaker 1: He certainly have totally altered the financial industry's approach from 290 00:17:40,760 --> 00:17:43,680 Speaker 1: what it used to be. That if we had such 291 00:17:43,720 --> 00:17:47,119 Speaker 1: an odd recovery, could we have an odd thing that 292 00:17:47,280 --> 00:17:50,760 Speaker 1: causes the next recession? That is, could the traditional things 293 00:17:50,800 --> 00:17:54,200 Speaker 1: that you and I monitor for recession risk not really 294 00:17:54,240 --> 00:17:58,960 Speaker 1: be worthwhile in this recovery. Maybe it's something entirely different 295 00:17:59,000 --> 00:18:01,560 Speaker 1: that's going to bring this next recession, if only because 296 00:18:01,640 --> 00:18:05,600 Speaker 1: the recovery has been so odd and unconventional. I don't 297 00:18:05,600 --> 00:18:07,920 Speaker 1: know what to do with that, but it scares me 298 00:18:08,480 --> 00:18:12,000 Speaker 1: if a surprising recession came out of left field tomorrow, 299 00:18:12,320 --> 00:18:15,480 Speaker 1: would it really be that surprising given how surprising and 300 00:18:15,480 --> 00:18:19,200 Speaker 1: odd this whole recover's been. Speaking of which, Jim, two 301 00:18:19,240 --> 00:18:22,160 Speaker 1: things come to mind when you talk about this. We've 302 00:18:22,200 --> 00:18:26,439 Speaker 1: had a fiscal stimulus in the form of a major 303 00:18:26,560 --> 00:18:31,000 Speaker 1: tax cut law as well as a budget law passed 304 00:18:31,000 --> 00:18:35,960 Speaker 1: by Congress have the effect of effectively boosting spending, boosting 305 00:18:35,960 --> 00:18:38,640 Speaker 1: stimulus in the economy at a time when the economy 306 00:18:38,680 --> 00:18:41,320 Speaker 1: is relatively strong. On top of that, we're in the 307 00:18:41,320 --> 00:18:45,320 Speaker 1: middle of all sorts of trade threats and counter threats 308 00:18:45,359 --> 00:18:50,120 Speaker 1: over tariffs fifty billion here, hundred billion here, hundred billion there. 309 00:18:50,160 --> 00:18:54,240 Speaker 1: Maybe you start talking about real money. How much do 310 00:18:54,400 --> 00:18:57,800 Speaker 1: those kinds of policy issues loom in your mind when 311 00:18:57,840 --> 00:19:00,840 Speaker 1: you think about these kinds of recession risks that might 312 00:19:00,880 --> 00:19:04,440 Speaker 1: not normally be on the radar. The first one quite 313 00:19:04,440 --> 00:19:06,720 Speaker 1: a bit, the second one not much. In other words, 314 00:19:07,320 --> 00:19:12,320 Speaker 1: I thought, passing a major fiscal stimulative package this late 315 00:19:12,440 --> 00:19:15,440 Speaker 1: and an economic recovery that had already returned to full employment, 316 00:19:15,480 --> 00:19:19,360 Speaker 1: that was already dealing with rising cost pressures to some degree, 317 00:19:19,480 --> 00:19:22,359 Speaker 1: and that was already facing a FED that was starting 318 00:19:22,359 --> 00:19:24,920 Speaker 1: to tighten, it was just ridiculous. I I just think 319 00:19:24,920 --> 00:19:29,240 Speaker 1: it's indefensible, beyond anything but politics. It makes no sense 320 00:19:29,320 --> 00:19:33,080 Speaker 1: to bring a huge stimulative package to an economy which 321 00:19:33,119 --> 00:19:36,640 Speaker 1: really doesn't need stimulus, and indeed, one policy leg the 322 00:19:36,680 --> 00:19:40,440 Speaker 1: FED is already trying to reduce it. To me, if 323 00:19:40,520 --> 00:19:44,920 Speaker 1: it is successful in the sense of actually stimulating, all 324 00:19:44,960 --> 00:19:47,680 Speaker 1: it will do will hasten the coming of the next 325 00:19:47,960 --> 00:19:51,439 Speaker 1: recession because it will speed up inflation and cost push, 326 00:19:51,880 --> 00:19:53,560 Speaker 1: and it will speed up the need for the FED 327 00:19:53,600 --> 00:19:56,520 Speaker 1: and bond vigilance to tighten, and will speed up the 328 00:19:56,560 --> 00:19:59,160 Speaker 1: inversion of the yield curve and ultimately bring the next 329 00:19:59,160 --> 00:20:04,240 Speaker 1: recession quicker. That one I don't understand. I'm less worried 330 00:20:04,280 --> 00:20:07,960 Speaker 1: about the trade issues. UM sure. I mean, if you 331 00:20:08,040 --> 00:20:11,159 Speaker 1: take trade wars to limit, it's a horrible thing. We 332 00:20:11,280 --> 00:20:16,280 Speaker 1: we've experienced of that, We've certainly seen historically. UM But 333 00:20:16,359 --> 00:20:19,200 Speaker 1: I think the odds of that are low. And I 334 00:20:19,280 --> 00:20:25,080 Speaker 1: concur that for the last years, we allowed all these 335 00:20:25,119 --> 00:20:27,480 Speaker 1: little no name countries around the world to cheat and 336 00:20:27,520 --> 00:20:31,840 Speaker 1: pillar as it regards international economic rules, because we wanted 337 00:20:31,880 --> 00:20:35,600 Speaker 1: them to learn about capitalism and get their economies up 338 00:20:35,600 --> 00:20:39,639 Speaker 1: and running on a fully self functioning capitalist way, and 339 00:20:39,720 --> 00:20:42,840 Speaker 1: so we allowed them to set their currencies at ridiculously 340 00:20:42,880 --> 00:20:45,240 Speaker 1: low levels. We allowed them to treat their employees like 341 00:20:45,320 --> 00:20:48,600 Speaker 1: slave with no cost of labor. In essence, we allow 342 00:20:48,720 --> 00:20:52,399 Speaker 1: them to pollute their riverbeds and and their air without 343 00:20:52,560 --> 00:20:55,560 Speaker 1: any need to take account of those externalities. And then 344 00:20:56,280 --> 00:20:59,439 Speaker 1: we allow them to very unfairly compete with US and 345 00:20:59,520 --> 00:21:02,560 Speaker 1: other develop up countries. That was fine, because we did 346 00:21:02,600 --> 00:21:05,399 Speaker 1: a wonderful thing. We built a brand new economic world 347 00:21:05,440 --> 00:21:08,960 Speaker 1: that didn't exist thirty years ago, that has young demographics 348 00:21:08,960 --> 00:21:12,600 Speaker 1: and a lot faster growth rate profile than us old 349 00:21:12,600 --> 00:21:16,399 Speaker 1: fogies in the developed world will have. We need them 350 00:21:16,560 --> 00:21:20,320 Speaker 1: in the future to subsidize our our slower growth rate 351 00:21:20,440 --> 00:21:23,120 Speaker 1: going forward. If it took thirty years to build them out, 352 00:21:23,119 --> 00:21:26,800 Speaker 1: it's worth it. But it's time now to do a 353 00:21:26,880 --> 00:21:29,879 Speaker 1: bait and switch on these little new name emerging economies 354 00:21:29,880 --> 00:21:32,440 Speaker 1: and say, look, that's great now, but now it's time 355 00:21:32,480 --> 00:21:36,000 Speaker 1: to play by fair rules. And we need to everyone 356 00:21:36,440 --> 00:21:38,439 Speaker 1: played by the same rules across the globe, and we 357 00:21:38,480 --> 00:21:41,200 Speaker 1: need to start enforcing it. I'm not sure that the 358 00:21:41,240 --> 00:21:44,159 Speaker 1: Trump approach is the best approach, the blunt force, in 359 00:21:44,240 --> 00:21:47,159 Speaker 1: your face approach, but you know what, it's going to 360 00:21:47,320 --> 00:21:49,119 Speaker 1: have to be done one way or the other over 361 00:21:49,200 --> 00:21:52,879 Speaker 1: the next ten to twenty years, because ultimately, for the 362 00:21:52,920 --> 00:21:56,520 Speaker 1: world to work economically, we need for the developed world 363 00:21:56,600 --> 00:22:02,480 Speaker 1: slower growing, demographically challenged economies to become trade surplus countries 364 00:22:02,560 --> 00:22:07,119 Speaker 1: and for the fast growing, emerging demographically charged countries to 365 00:22:07,240 --> 00:22:10,760 Speaker 1: become trade deficit countries. And ultimately that's going to require 366 00:22:10,960 --> 00:22:14,880 Speaker 1: fair rules for trade. So I think, in some regard 367 00:22:15,000 --> 00:22:17,359 Speaker 1: as risky as it isn't the short term, it's maybe 368 00:22:17,400 --> 00:22:21,360 Speaker 1: a very good result longer term, Jim, what happens when 369 00:22:21,440 --> 00:22:26,720 Speaker 1: some of those little known name countries actually have to 370 00:22:26,840 --> 00:22:31,679 Speaker 1: confront demographic challenges of their own well, and that will 371 00:22:31,800 --> 00:22:35,840 Speaker 1: certainly occur. I mean, the poster child for the emerging story, 372 00:22:36,040 --> 00:22:40,919 Speaker 1: China has worse demographics than most of the developed world, 373 00:22:41,600 --> 00:22:43,640 Speaker 1: and they're going to face that they have been able 374 00:22:43,640 --> 00:22:47,160 Speaker 1: to grow at the pace they've grown primarily because they 375 00:22:47,160 --> 00:22:51,919 Speaker 1: had effective effectively, they had so many unemployed resources are 376 00:22:52,000 --> 00:22:55,199 Speaker 1: under utilized resources that they could grow very rapidly with 377 00:22:55,280 --> 00:22:59,960 Speaker 1: the existing population base. Once those are employed, their underlying 378 00:23:00,040 --> 00:23:04,520 Speaker 1: demographic situation population grows is really miserable. So I think 379 00:23:04,520 --> 00:23:06,800 Speaker 1: they're going to fall out of a leadership role in 380 00:23:06,840 --> 00:23:09,560 Speaker 1: the economic story. I don't think they're going to crash 381 00:23:09,600 --> 00:23:11,680 Speaker 1: and burn, but I don't think they're going to be 382 00:23:11,720 --> 00:23:13,239 Speaker 1: the leader. I think that's going to be taken up 383 00:23:13,240 --> 00:23:17,720 Speaker 1: by other countries within the emerging world that have better 384 00:23:18,200 --> 00:23:22,280 Speaker 1: underlying demographics that they can fall back to for sustainable growth. 385 00:23:22,800 --> 00:23:27,520 Speaker 1: But I do think that the developed world. Power in 386 00:23:27,520 --> 00:23:31,560 Speaker 1: the world goes where economics is and and ultimately all 387 00:23:31,680 --> 00:23:34,200 Speaker 1: forms of power, whether that be political or military or 388 00:23:34,200 --> 00:23:37,919 Speaker 1: anything else, follows where economics power goes, and and the 389 00:23:38,040 --> 00:23:40,360 Speaker 1: U s and the developed world is losing that slowly, 390 00:23:41,040 --> 00:23:44,000 Speaker 1: and it's going to be picked up more by comerging world. 391 00:23:44,000 --> 00:23:46,800 Speaker 1: Countries over the next fifty years, and I don't think 392 00:23:46,880 --> 00:23:49,240 Speaker 1: that's going to be reversed, and rather than fight it, 393 00:23:49,640 --> 00:23:51,800 Speaker 1: I think we need to embrace it and make sure 394 00:23:51,960 --> 00:23:55,400 Speaker 1: that we still have a voice at the table, both 395 00:23:55,440 --> 00:23:59,560 Speaker 1: politically as well as just economically. Um in that, in 396 00:23:59,600 --> 00:24:02,360 Speaker 1: that or in New World Order. Well, Jim, I don't 397 00:24:02,359 --> 00:24:04,120 Speaker 1: think we were planning to get into one of our 398 00:24:04,200 --> 00:24:08,119 Speaker 1: discussions of global demographics and economics on this episode, but 399 00:24:08,400 --> 00:24:10,480 Speaker 1: I'm glad we were able to have it. So thank 400 00:24:10,480 --> 00:24:12,840 Speaker 1: you so much for joining us today, do you you bet? 401 00:24:12,840 --> 00:24:18,800 Speaker 1: Thanks for having me appreciate it. Benchmark will be back 402 00:24:18,840 --> 00:24:21,080 Speaker 1: next week. Until then, you can find us on the 403 00:24:21,080 --> 00:24:24,800 Speaker 1: Bloomberg terminal, Bloomberg dot com, our Bloomberg app, and podcast 404 00:24:24,880 --> 00:24:29,080 Speaker 1: destinations such as Apple Podcast, Spotify, or wherever you listen. 405 00:24:29,480 --> 00:24:32,480 Speaker 1: Please also take the time to review the show on iTunes. 406 00:24:32,800 --> 00:24:36,000 Speaker 1: When people post reviews, it helps others discover the podcast. 407 00:24:36,359 --> 00:24:38,960 Speaker 1: You can also check us out on Twitter, follow me 408 00:24:39,200 --> 00:24:44,720 Speaker 1: at stott Landman Dan You're at Moss Underscore Echo, and 409 00:24:44,880 --> 00:24:47,560 Speaker 1: Jim's firm is at at l e U T h 410 00:24:47,680 --> 00:24:51,600 Speaker 1: O l D Group. Benchmark is produced by Topor Foreheads, 411 00:24:51,720 --> 00:24:55,399 Speaker 1: the head of Bloomberg podcasts is Francesca Levy. Thanks for listening, 412 00:24:55,560 --> 00:25:04,240 Speaker 1: See you next time. My Pat the my spo.