Speaker 1: Hello, and welcome to another episode of the Thoughts Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe. WI isn't thal So, Joe,
Speaker 1: you know all those economic recovery shape letters that everyone's
Speaker 1: talking about. Yes, W V U, L lowercase v M,
Speaker 1: the square root sign. OK, I've seen them all. There's
Speaker 1: some really esoteric ones out there. So what do you
Speaker 1: think is the most sort of parish out of all
Speaker 1: those shapes or letters or symbols or whatever. That's a
Speaker 1: good question. I mean probably I guess the L or
Speaker 1: the U something like that. I mean anything that doesn't
Speaker 1: isn't premised on there being some sort of snap by. Also,
Speaker 1: maybe just the eye just as straight letter down, they
Speaker 1: just never never comes back. I suppose that's a possibility
Speaker 1: to that people don't talk about. I'm glad you said
Speaker 1: I so, I actually hadn't heard that many people talking
Speaker 1: about this letter. But yes, there is an eye shaped
Speaker 1: economic recovery which is a straight line going down. So
Speaker 1: it's really not an economic recovery at all. And um,
Speaker 1: it's probably the most parish of all the forecast. And
Speaker 1: the person we're going to speak to today is someone
Speaker 1: who has written about that. I possibility yes, so, um,
Speaker 1: I'm looking forward to our talk today. It's someone who's
Speaker 1: going to be very well known to our audience who
Speaker 1: in the past, and I don't even know if it's
Speaker 1: rightly or wrongly. I'm not even sure where he uh
Speaker 1: if he always embraced the nickname, but nonetheless his nickname
Speaker 1: doctor Doom became many people would have heard it during
Speaker 1: the last crisis. Yeah, and I think as soon as
Speaker 1: you say the name doctor Doom, everyone knows who we're
Speaker 1: going to be talking about. But it's Neureal Rubini, the
Speaker 1: chairman of Rubini Macro Associates, and he's known well, he's
Speaker 1: known for forecasting the previous financial crisis back in two
Speaker 1: thousand eight, but he's also known for pretty bearish prognostications.
Speaker 1: And uh, it's been very parish of late, has it not.
Speaker 1: Things have not been great, So I guess I would
Speaker 1: say that that is a safe call. Alright, understatement of
Speaker 1: the year. Okay, Well, without further ado, then let's bring
Speaker 1: on neur Real Rubini. Neurial, it's so great to have you,
Speaker 1: thanks so much for coming on the show. Great to
Speaker 1: being with you today. It's a pleasure, so Neurial, Joe
Speaker 1: and I were sort of joking just then, But you
Speaker 1: do have the Doctor Doom moniker. Do you feel I
Speaker 1: guess vindicated isn't the right word given current events, But
Speaker 1: do you feel that you are living up to that
Speaker 1: doom reputation? Well, usually I say that I'm doctor really
Speaker 1: is not Dr Doom. If you look at the last decades,
Speaker 1: I have not been negative all the time. Whether a
Speaker 1: risk of episodes, I pointed them out. When there was
Speaker 1: economic and market recovery, I pointed it out as well.
Speaker 1: So it's not as if I'm permanently at perma bear.
Speaker 1: I think that would be a mischaracterization of my views. Um,
Speaker 1: so call me Dr Realists. Something I'm curious about is,
Speaker 1: you know, we see these economists forecast right now. They're like, okay,
Speaker 1: Q two GDP is going to plunge, and then maybe
Speaker 1: we'll have a small recovery in Q three, and then
Speaker 1: maybe we'll have a real bust recovery keyboard, whatever it is,
Speaker 1: How do you go about the process of making a
Speaker 1: recovery forecast? How does anyone while separating them that recovery
Speaker 1: from the policy response, Because of course we got the
Speaker 1: Cars Act at the end of March, and that probably
Speaker 1: helps slow down the crash somewhat, But it seems hard
Speaker 1: to make any sort of forecas usked about Q four
Speaker 1: or Q one of next year without having of you
Speaker 1: on how robust uh the policy response from both the
Speaker 1: Fed and fiscal authorities will continue to be throughout the
Speaker 1: course of this year. Well, usually when there is a recession,
Speaker 1: it's very hard to make a forecast about the length
Speaker 1: of it, and the shape of the recovery by definition,
Speaker 1: is a change in regime, and even traditional economic forecasting
Speaker 1: models essentially break down because those models don't tend to
Speaker 1: predict recessions. So once you are in a recession or
Speaker 1: financial crisis, you have to ask yourself in a more
Speaker 1: i would say qualitative way rather than a quantitative one,
Speaker 1: what is going to be in the shape of the
Speaker 1: economic recovery. So, for example, you know, I wrote a
Speaker 1: recent paper with my global economic outlook with my research colleagues,
Speaker 1: and we argued that there are three scenarios. One is
Speaker 1: what we call the greater recession will be more like
Speaker 1: a YOU shape coovery. Second one is a downside scenario
Speaker 1: quality depression as shaped. And then there is a upside
Speaker 1: scenario of a V shape recovery. Now, markets for the
Speaker 1: last few weeks, especially US equities, seem to be pricing
Speaker 1: a V shaped recovery in that paper, and a lot
Speaker 1: of time to go on every point of it. But
Speaker 1: we present about fourteen separate factors why we believe that
Speaker 1: the recover is going to be YOU shaped rather than
Speaker 1: V shaped. Now, those predictions are not based on a
Speaker 1: formal econometric models, because by definition those forecasting models are
Speaker 1: useless when we are in the depth of recession. But
Speaker 1: you're trying to understand what's going to be the economic
Speaker 1: dynamic of the behavior of the private sector, households and corporates,
Speaker 1: what's going to be the policy response, And of course
Speaker 1: any prediction you make on the shape of the recovery
Speaker 1: of economies and markets depends on the policy response. We
Speaker 1: know a lot of the policy response, how strong it
Speaker 1: has been in the United States, are strong, but not
Speaker 1: as strong in Europe and Japan more constraining emerging markets.
Speaker 1: So an economic forecast, of course makes also predictions about
Speaker 1: the policy pat monetary policy, fiscal policy, credit policy, regulatory
Speaker 1: policy in this case of course help policy, because we
Speaker 1: have to decide how fast or how slowly to reopen
Speaker 1: and you feed that one into your essentially model in
Speaker 1: terms of predicting the shape of the recovery. So certainly
Speaker 1: the shape of the recovery is not independent from the
Speaker 1: policy response, and you can make sense of that policy response.
Speaker 1: We we're already front loaded in one month in terms
Speaker 1: of unconventional amountary fiscal policy. What it took about three
Speaker 1: years during the global financial crisis to occur. The entire
Speaker 1: tool kit of unconventional tools that affect created between two
Speaker 1: thousand and seven thousand and nine have been redeployed in
Speaker 1: less than amounts because were there and they were available,
Speaker 1: and they made the decision of of going in front
Speaker 1: clothing and they created even new ones, like, for example,
Speaker 1: purchasing corporate bonds is something that the fact did not
Speaker 1: do during the global financial crisis, And not only the
Speaker 1: started to purchase high grade investment grade, but they've also
Speaker 1: now gone into willingness to purchase hid something they might
Speaker 1: do is very risky, but changes completely, for example, the
Speaker 1: dynamic of the recovery of spread products, including corporate bonds
Speaker 1: high grade than yield. I want to dig into the
Speaker 1: central pink response, but before we do, if we zoom
Speaker 1: in on the US and talk about your forecast, which
Speaker 1: is this U shaped recovery sort of length the road
Speaker 1: back to economic health. What do you think is the
Speaker 1: biggest factor in driving that scenario. Is it health policy
Speaker 1: or is it economic and monetary policy? I guess another
Speaker 1: way of asking that question is whether or not economic
Speaker 1: and monetary policy can fully offset the impact of the coronavirus. Well,
Speaker 1: I do take the policy respond as being very aggressive
Speaker 1: both monetary credit and physical and that everything else equal
Speaker 1: is positive for making sure that this recession is only
Speaker 1: two quarters Q and and Q two and then there
Speaker 1: is a recovery. But I think that there are many
Speaker 1: factors that lead me to essentially express the view that
Speaker 1: my baseline said sixty percent probability is a U shaped recovery,
Speaker 1: and I signed only a twenty percent probability to the
Speaker 1: V shaped recovery of the economy. The markets is a
Speaker 1: different story. I think the main factors that would point
Speaker 1: out are that on the health side, we know there's
Speaker 1: going to be a second wave. The second wave could
Speaker 1: occur already in July and August, depending on how fast
Speaker 1: we reopen, and there is a temptation to reopen to
Speaker 1: fast Cyconly, there will be another second wave or a
Speaker 1: third wave in the winter when we are not going
Speaker 1: to get a vaccine, and when the cold weather comes back,
Speaker 1: we're gonna have it again. How severe is going to be,
Speaker 1: we don't know, but we don't we know there's not
Speaker 1: gonna be a vaccine by then, and depending on how
Speaker 1: much we flattered the curve, it could be severe or
Speaker 1: less severe. But I think that the fundamental reason why
Speaker 1: I believe it's going to be you is that you
Speaker 1: have two critical agents in the economy in the private sector,
Speaker 1: households and corporations, and both of them are going to
Speaker 1: be stressed. The household sector is going to be in
Speaker 1: a situation which is effectively millions of people that have
Speaker 1: lost jobs. Even when there is a reopening, many of
Speaker 1: them are not going to regain their jobs, or if
Speaker 1: there again, their jobs are going to be part time jobs,
Speaker 1: in formal workers, gig workers, contractors, so their income generation
Speaker 1: is going to be much weaker. So you have consumers
Speaker 1: that are one shell shocked, two they're still scared of
Speaker 1: the virus. Three their income challenged for their asset crashed.
Speaker 1: Five their burden with a huge amount of that mortgages,
Speaker 1: auto loans, student loans, consumer loans, credit cards, and anybody
Speaker 1: sensible should be more precautionary in their consumption and saving behavior. Right,
Speaker 1: there will be a massive increase in a precautionary savings
Speaker 1: for any level of income. And your income is going
Speaker 1: to be certain lower than before. So you have lower income,
Speaker 1: you spend less, you save more. Why do you save
Speaker 1: more because you know of us households allegedly have less
Speaker 1: than four hundred dollars of cash in the case of
Speaker 1: an emergency. So after what has happened, with the risk
Speaker 1: of another shock coming from the corona, you're losing your job,
Speaker 1: not regaining it. Better safe rather than sorry. So I
Speaker 1: expect that the savings rate of the household sector is
Speaker 1: going to be sharply up, and the investment of the
Speaker 1: household sector, what's investment for household is purchases of homes
Speaker 1: is going to be sharply down. Moved you own to
Speaker 1: buy a home, you know, even with the lower mortgage rates,
Speaker 1: and your credit score is going to be worse. So
Speaker 1: you have higher saving your lower investment for households. Same
Speaker 1: story for the corporate sector. The corporate sector, as we know,
Speaker 1: was highly leveraged, leverage rational we have not seen in
Speaker 1: the last forty years. For the corporate sector. This is
Speaker 1: an accident waiting to happen, and every corporate will have
Speaker 1: to survive reduce leverage. How you survive by reducing leverage
Speaker 1: by cutting costs, labor costs and other costs. So you
Speaker 1: have to increase your saving rate and you have to
Speaker 1: cut on your capax option value of waiting. Right, there's
Speaker 1: a lot of capacity. You don't know how recovery is
Speaker 1: going to be, so you're gonna have an increasing savings
Speaker 1: of the corporate reduction of capax. So the financial balances
Speaker 1: of both households and corporates is the difference between their
Speaker 1: savings and the investment. And they're going to improve improve
Speaker 1: because they have to save more and they have to
Speaker 1: cut spending on capax on residential While that's individually rational
Speaker 1: in equilibrium, higher saving and lower investment means that depressed
Speaker 1: economic recovery, even if the physical authority and even the
Speaker 1: monitory authority are doing monitoring physical stamuls. So you have
Speaker 1: one positive coming from the policy, but the deleveraging thes
Speaker 1: to curve in the private sector leads you to this thing. Now,
Speaker 1: during the global financial crisis, the households were highly leveraged,
Speaker 1: and that this deleveraging. But the corporates were not as
Speaker 1: leverage this time around. With high leverage of corporate and
Speaker 1: high leverage of households, so both of them have to
Speaker 1: be leveraged by increasing savings reducing investment. That's a recipe
Speaker 1: for a you shaped recovery. There are many other factors,
Speaker 1: but that's a key argument. But why it's going to
Speaker 1: be a you rather than a V And I think
Speaker 1: it makes a compelling argument when you talk about sort
Speaker 1: of the quasitive behavioral ramifications of this. So households will
Speaker 1: have just watched their incomes vanish at a shocking speed,
Speaker 1: same with corporate revenues. Are there other periods in the past,
Speaker 1: either specific economic events in US or global history, that
Speaker 1: show how sudden shocks to the economy leave lasting changes
Speaker 1: in business or household inclination to in to spend well.
Speaker 1: The difference between this recession and all the other ones
Speaker 1: is that even the Global Financial Crisis, even the Great
Speaker 1: Depression were slow motion train wreck. It took three years
Speaker 1: for output to fall this match for an employmenty to
Speaker 1: go these up, for stock market to fall, fift for
Speaker 1: credit spreads to rise you know at you know, double
Speaker 1: digit levels and so on and so on. This kind
Speaker 1: of a shock instead is like an asteroid hitting Planet
Speaker 1: Heard and not just one country but the entire world
Speaker 1: and shutting down economic activities. So we have never had
Speaker 1: this experiment. We've had experiments, of course, of asolated cases.
Speaker 1: There is a hurricane, you know, in Puerto Rico or
Speaker 1: in somewhere in the Caribbean, or a major natural disaster.
Speaker 1: Of course you have that shock limited to that particular
Speaker 1: you know, region of the world or town or whatever,
Speaker 1: and you have those dynamics of course of a massive
Speaker 1: shock that this economic and financial and otherwise. But this
Speaker 1: is something that's pretty much Planet Heard, so it's very different.
Speaker 1: But even if it's different, you can make inferences intelligently
Speaker 1: based on economic behavior and the dynamic of what's happening
Speaker 1: to income, to jobs and so on. They're gonna lead
Speaker 1: you to understand what's the shape of the recovery. I mean,
Speaker 1: there was already after the global financials, an example, a
Speaker 1: tendency for firms not to hire full time workers with
Speaker 1: full benefits right those jobs were gradually going away. Was
Speaker 1: all gig workers, part time workers, contractors, freelancers, our workers,
Speaker 1: and so on and so on. Given the shock has occurred,
Speaker 1: right now, we know that twenty six billion Americans have
Speaker 1: lost their jobs. Probably at the peak is going to
Speaker 1: be more like thirty five million people. These people are
Speaker 1: not going to get their jobs back. I mean, I
Speaker 1: live in New York City. Take anybody who worked in
Speaker 1: a restaurant or in hospitality and so on. Even when
Speaker 1: you reopen a restaurant, you'll be back in in rent
Speaker 1: by three months, four months. You have to pay back.
Speaker 1: They're not going to cancel it. You'll have to have
Speaker 1: every other table empty for security. And these restaurants live
Speaker 1: on a margin of you know, five time percent. There
Speaker 1: is no way half of the old restaurants in New
Speaker 1: York are gonna be gone for good. Half of the
Speaker 1: retail stores in New York and will be gone for good.
Speaker 1: Even if there is a reopening of these things, the
Speaker 1: opening means nothing. There was an article yesterday in the
Speaker 1: Financial Time saying that they reopened all the shops in Berlin.
Speaker 1: By the way, in Germany they heat too. Income has
Speaker 1: been much less because we're not firing everybody. That this
Speaker 1: system of sharing, right, so you have not had mass unemployment.
Speaker 1: So the stores are open and nobody's going there because
Speaker 1: everybody's scared and everybody's worried about their future. It was
Speaker 1: gonna buy a car, who's gonna buy a home, Who's
Speaker 1: gonna take a vacation, Who's gonna go on an airplane,
Speaker 1: who's gonna take a cruise? I mean, these are changes
Speaker 1: that regardless of where they opened. A close a store,
Speaker 1: or an airplane or a cruise ship are going to
Speaker 1: change behavior. The issue is not whether we reopen, but
Speaker 1: once we're reopened, whether they're gonna show up. In my view,
Speaker 1: most people are not gonna show up. What does that
Speaker 1: imply for inflation? Because on the one hand, you have
Speaker 1: people who are probably saving more and spending less you
Speaker 1: put it. But on the other hand, you have central
Speaker 1: banks who are sort of throwing the kitchen sink and
Speaker 1: everything right now, and some people are even talking about
Speaker 1: debt monetization. So how do you see net net inflation
Speaker 1: shaping up? Well, last November, before this crisis even was
Speaker 1: on the horizon, I wrote a long paper saying, if
Speaker 1: and when the next recession will occur, monetary and physical
Speaker 1: policy is going to become even more unconventional and I said, effectively,
Speaker 1: we're gonna have a monetization of large physical deficits, what
Speaker 1: people call otherwise modern monetary theory melicopter drop of money
Speaker 1: or people's kew ee, or the new euphemism that people
Speaker 1: like Bernanco Stan Fisher uses coordination of monetary physical policies.
Speaker 1: So what's clear that once a recession occurs, policymaker cannot
Speaker 1: sit there doing nothing, pretending they don't have the policy bullets.
Speaker 1: And we're seeing it. We've had now budget deficit in
Speaker 1: the US are going to be twenty of GDP, and
Speaker 1: the FACT is saying unlimited qui. And this morning the
Speaker 1: BJ is saying unlimited qui, and the c B is
Speaker 1: not yet saying unlimited qui, but they're gonna soon be
Speaker 1: a unlimited Q. So you have massive monetization of physical deficits.
Speaker 1: So we're going even more unconventional now. In the short run,
Speaker 1: this shock is a recessionary and is leading to deflation
Speaker 1: because while there is a supply shock, the shock to
Speaker 1: agree with the man is bigger. And then you have
Speaker 1: a massive slack in goods market, tons of capacity machines
Speaker 1: that are not working, and tons of people, tens of
Speaker 1: millions who are not working, so that is deflationary in
Speaker 1: the short run, and therefore monetizing physical deficit prevents one
Speaker 1: economic depression to prevent a deflation from setting in. However,
Speaker 1: the point that I've made in that paper and is
Speaker 1: repeated now is that over time, I fear that the
Speaker 1: one of the medium term consequences of these crisis is
Speaker 1: gonna be permanent negative supply shocks. We're gonna have more
Speaker 1: the globalization. We're gonna have more decap litween US and China,
Speaker 1: with more melchanization of global supply chains because they're not
Speaker 1: safe if they're all conspted on on. China will have
Speaker 1: more fragmentation of the global economy with more populist parties
Speaker 1: in power say I'm going to protect my workers, my firms.
Speaker 1: So more protection is more tariffs, more restriction to trade
Speaker 1: in goods, in services, in capital, in labor, in technology
Speaker 1: and data and information. That's a negative supply shock that
Speaker 1: over time reduces potential growth and reduces actual output. It's
Speaker 1: like the negative all shocks that we had in the nineties, seventies,
Speaker 1: seventies seventy nine. Think of it as a negative supply
Speaker 1: shock that reduces potential growth and increases cost of production.
Speaker 1: Now what happened in the seventh is when we're did
Speaker 1: to all shocks, we monetize them. Monetary policy was done
Speaker 1: a curve and we physicalize them. But the extent, by
Speaker 1: the way of those physical stabulus and monetary stabulus was
Speaker 1: limited compared to today, where we're running budget deficit of
Speaker 1: twenty of GDP and we're fully monetizing with QUI. At
Speaker 1: that time you were just behind the curve in terms
Speaker 1: of monetary policy. You're not that negative policy rate's let
Speaker 1: along QUI. So the extent of the monethor and physical
Speaker 1: stabulus is ten order of magnitude bigger than the seventies. Now,
Speaker 1: you throw monetize physical deficits in an economy where over
Speaker 1: time you have negative supply shocks, and then you end
Speaker 1: up with not stagged deflation like today's stagnation and deflation
Speaker 1: when you get with stagflation that occurred in the seventies,
Speaker 1: where effectively, when you monetize physical deaths were negative supply shock,
Speaker 1: you get inflation and recession over time. Now, this is
Speaker 1: not a story for two thousand and twenty. It may
Speaker 1: not even be a story for two thousand and twenty one.
Speaker 1: But I do believe that the policies over the medium
Speaker 1: term are going to lead us back to start the nation.
Speaker 1: And once you're in start deflation, then you're in a
Speaker 1: nightmare because you have a negative growth and you have inflation.
Speaker 1: When you have started deflation, recession and deflation, it's easy.
Speaker 1: You have to stimulate the column to get you out
Speaker 1: of a recession and out of a deflation, So you
Speaker 1: need to do montor physical stimulus. Once you have inflation
Speaker 1: together with economic stagnation, then you have a problem because
Speaker 1: you can of these monetary policy if you care about inflation.
Speaker 1: So we're gonna get there, but it's gonna take two
Speaker 1: or three years. So we've basically seen for decades now arguably,
Speaker 1: so it's the very early eighties and Vulcar era, the
Speaker 1: sort of gradual opening up of the global economy, expanding supply,
Speaker 1: liberalizing policy, etcetera. And this is the moment to something
Speaker 1: that it reverses all those trends about forty years to
Speaker 1: some extent. What this this virus and the aftermath will
Speaker 1: will finally be the reversal of the nerview. Well, the
Speaker 1: reversal started to occur after the global financial crisis, because
Speaker 1: the era of hyper globalization started either in nineteen seventy
Speaker 1: nine when then shall being opened up China, or nineteen
Speaker 1: eighty nine, when, of course the Berlin Wall collapse and
Speaker 1: the Outer Court and collapse and the opening up of Russia,
Speaker 1: Soviet Union and Eastern Central Europe. So we had four
Speaker 1: decades of globalization, more trading goods, in services, in capital
Speaker 1: and labor, technology, data information, you name it. We reach
Speaker 1: peak globalization in my view, already ten years ago because
Speaker 1: after the global financial crisis there was a slowdown of
Speaker 1: global trade. There was the beginning of protectionist policies or
Speaker 1: inward oriented policies. So peak globalization probably already ten years ago.
Speaker 1: By certainly these crisis implies much more diglobalization, much more
Speaker 1: decoupling within US and China. The cold world is going
Speaker 1: to become colder than two city trap is gonna get
Speaker 1: worse whatever, total balkanization of global supply chains first in
Speaker 1: technology than manufacturing, than in services. You know, you cannot
Speaker 1: rely anymore on China. You have to reach shore. And
Speaker 1: by the way, if you reach shore economic activity, you're
Speaker 1: not going to create jobs because you're restoring economic activity
Speaker 1: from places where costs are low, say China and Asia,
Speaker 1: two places where labor costs are high. So it's gonna
Speaker 1: lead either to use more gig workers and pay them nothing,
Speaker 1: or to use machines. So the process of automation and
Speaker 1: robotization is going to accelerate, so we'll have more activity
Speaker 1: in the US is going to help. Capital is gonna
Speaker 1: still screw labor like it has for the last decades.
Speaker 1: So these trends are gonna get worse. But certainly is
Speaker 1: a world in which will have more restriction to everything,
Speaker 1: and even supply of safe supply chains of food are
Speaker 1: gonna be disrupted globally because every country says, hey, I
Speaker 1: want to keep my food for myself in case coronavirus
Speaker 1: comes back. Well, have restriction to exportation of food. Of course,
Speaker 1: we'll have restriction to exportation of pharma products and medical equipment.
Speaker 1: Everybody's gonna want to keep it for themselves. And we
Speaker 1: of course have given the tech war between US and China.
Speaker 1: The entire text sector is going to the couple, and
Speaker 1: we'll have a splinter night, and we'll have two completely
Speaker 1: system for tech and internet and five G and you
Speaker 1: name it going ahead. So there'll be massive Balkanization of
Speaker 1: the global economy. That's a massive negative supply shock the
Speaker 1: permanently reduces potential growth and is eventually given them North
Speaker 1: and fiscal policy stactulation ary over time. M hm. So,
Speaker 1: one of the things that always strikes me whenever I
Speaker 1: read your work or listen to you talk on TV
Speaker 1: or the radio or podcast like this UM is your
Speaker 1: sort of um specificity of your four cats, as well
Speaker 1: as your confidence in making them. I'm just wondering, in
Speaker 1: the current situation, is there anything that's surprised you or
Speaker 1: that you weren't expecting to happen. Well, initially, of course,
Speaker 1: the free fall in economic activity take took even me
Speaker 1: by surprise. You know, at the beginning was not a you,
Speaker 1: was not a V, was not even an L, was
Speaker 1: a I. Literally free fall. The collapse of output, employment, consumption, investment, export, imports,
Speaker 1: pretty much every component of AGGREITHM and aggree supply was
Speaker 1: like a free fall. And you know, even Morgan, Stanley,
Speaker 1: JP Morgan and Goldman sachs now saying into two the
Speaker 1: contractional output in US, for example, at the annual rate
Speaker 1: is gonna between thirty five and all rate right, So
Speaker 1: so everybody was taken one by the free fall because
Speaker 1: we're not seeing the shocks of this sort of sudden
Speaker 1: stop where everything shuts down. In any typical financial crisis
Speaker 1: or economic crisis, you have a you know, a build
Speaker 1: up of the economic downturn. But it's lawing gradual. As
Speaker 1: I said, what happened in the past, even in the
Speaker 1: Great Depression in three years or during the global financial crisis,
Speaker 1: this time around has according three three weeks. The other
Speaker 1: aspect that has been partially surprising but not totally surprising
Speaker 1: to me has been the policy response. But as I said,
Speaker 1: I wrote last November that when the next recession is
Speaker 1: going to occur, we're not going to do the typical
Speaker 1: zero rate negative rates. A little of que liadle of
Speaker 1: credit is a little of forward guidance. We're gonna go
Speaker 1: full Monty on helicopter drop of money. And by the way,
Speaker 1: what's the difference between having helicopter drop of money and
Speaker 1: full direct monetization of physical deficits and having large deficits
Speaker 1: plut QWI. The only difference between the two is when
Speaker 1: you do QUEI, you buy the bounds in the second
Speaker 1: diary market. Well, when you do direct monetization. You're buying
Speaker 1: them in the primary market, right, But that's a big lift.
Speaker 1: The impact on long rates and financial condition is exactly
Speaker 1: the same. Who cares whether you're buying the bonds, uh,
Speaker 1: you know, directly from the government or the government issues
Speaker 1: them and a week later, literally the fat purchases bonds
Speaker 1: at the rate of a d billions per week. It's
Speaker 1: just the same thing, just a big lift to say
Speaker 1: it's not direct modization, it is direct montization. You just
Speaker 1: wait a week rather waiting one hour. It's just the
Speaker 1: same thing. Right, let's call the call it euphemistically coordination
Speaker 1: of monetor in physical policy. It's a joke. Not coordinational
Speaker 1: amount of fiscal policy. It's fiscal dominance. And the Central
Speaker 1: Plank has no option, given the death of twenty GDP
Speaker 1: but fully to monetize it. Because if they were not
Speaker 1: monetizing them, you know ten, your treasuries would not be
Speaker 1: at zero point six. There will be a two or
Speaker 1: three percent that would happen. So there have no option
Speaker 1: with the death of GDP to fully buy the entire
Speaker 1: stock of new bonds issued by the treasury. That's what's
Speaker 1: happening in the US. That's what's happened in Japan, That's
Speaker 1: what's happened in Europe. That's just happening in all advanced economies. Now,
Speaker 1: emerging market is a different story. In emerging markets humanitize
Speaker 1: physical dias in to this extent, you end up in
Speaker 1: hyper inflation like Zimbabwe, like Argentina, like Venezuela. Luckily, in
Speaker 1: advanced economies, web some modicum of policy credibility left and
Speaker 1: we're not going to end up into high inflation or
Speaker 1: iper inflation. But over the next few years we may
Speaker 1: see inflation rise from the current very low levels to
Speaker 1: higher levels. That can happen in the presence of the
Speaker 1: globalization and the supply shots. Now I want to ask
Speaker 1: you a little bit about the sort of pre crisis here.
Speaker 1: You mentioned corporate leverage, was high household leverage as well,
Speaker 1: you know, after the last after the Great Financial Crisis,
Speaker 1: and you look back at two two sexes obvious all
Speaker 1: kinds of risks suppose related to housing. Was the economy
Speaker 1: inherently fragile pre crisis? I mean, we talked about this
Speaker 1: incredible crash, the speed of which literally everyone by surprise.
Speaker 1: Does that mean that the economy must have had weak foundations?
Speaker 1: Going into this or is it just like we turned
Speaker 1: off the economy due to public health risk and this
Speaker 1: is what was going to happen. How much does the
Speaker 1: current crisis sort of indict the stability of the pre
Speaker 1: crisis ecount, Well, there were plenty of fragilities even before
Speaker 1: this crisis occurred, you know, after the global financial crisis,
Speaker 1: in spite of the talk about the great deleveraging, very
Speaker 1: little deleveraging occurred because, of course, as we know, public
Speaker 1: deficits and that wrote significantly both in advanced economies and
Speaker 1: emerging markets, and also private debts remain high or they increased.
Speaker 1: In the case of the U S. There was partial
Speaker 1: deleveraging of the household sector, but the de leveraging did
Speaker 1: not occur through massive increase in savings. Occurred only because
Speaker 1: lots of people defaulted on their mortgages and personal loans
Speaker 1: and eventually that that were used. But there was a
Speaker 1: massive real leveraging of the corporate sector, right whether it
Speaker 1: was you know, clos leverage loans, massive issuance of junk bones,
Speaker 1: a trillion dollar of fallen angels in a high grade
Speaker 1: they're not going to be done graded. All these share
Speaker 1: buy backs that implied a complete change in the capital
Speaker 1: structure of most firms with less equity and more capital
Speaker 1: is a way of boosting earnings per share and evaluation.
Speaker 1: So the levels of corporate debt and people have been
Speaker 1: writing it for the last year. Even the FED recently
Speaker 1: was saying, we're worried about the build up of corporate debt.
Speaker 1: So this is an accident waiting to happen because the
Speaker 1: corporate were leverage like never before in history. You know,
Speaker 1: my colleague at alt Man who's the expert of corporate default,
Speaker 1: and the writting about years about the build up of
Speaker 1: corporate debt and lots of other people did. And in
Speaker 1: the case of the household sector, the death levels were
Speaker 1: not much lower, They did not increase, but they were
Speaker 1: may and iye. What change was that during the last decade,
Speaker 1: private and public debts were higher. Domestic and foreign debts
Speaker 1: were higher. In the private sector, debts of houses of corporates,
Speaker 1: even of the shadow banking system were higher. But given
Speaker 1: near zero policy rates and given very low long rates,
Speaker 1: that servicing ratios were very low. Right, that ratio were
Speaker 1: not low. What made the system sustainable was that we
Speaker 1: had zero rates, if not negative and were long. Rates
Speaker 1: were extremely low all over the world in advanced economies,
Speaker 1: and therefore there was a false sense of security because
Speaker 1: that servicing ratio where a historical law. But you know,
Speaker 1: once the crisis occurs and credit spread blow up, even
Speaker 1: if safe assets like treasury boons and gerbis can go
Speaker 1: even lower, if the spreads for corporate debt or household
Speaker 1: or credit cards or r m B s S or
Speaker 1: you name it go through the roof, then you can
Speaker 1: have had that crisis even with the yield on safe
Speaker 1: bonds being close to zero, if not negative, because it's
Speaker 1: credit spreads are blowing up. And that's what is happening
Speaker 1: right now now this time around. One of the new
Speaker 1: changes is happening is that not only at the V
Speaker 1: shaped recovery of US acuity, the other V shaped recovery
Speaker 1: has occurd for developed markets. Spread products are n BSS,
Speaker 1: money bonds, high yield, high grade and so on. What
Speaker 1: explains it. It explains it the fact that the FED,
Speaker 1: the CB, and now the BOJ have decided to vary
Speaker 1: aggressively by not just government bonds but also to buy
Speaker 1: corporate bonds. Now the bo J and e c B
Speaker 1: were already buying for the last few years corporate bonds.
Speaker 1: But say the d J today announced they're gonna triple
Speaker 1: the amount of corporate bonds and commercial paper that are buying.
Speaker 1: But for the freed is a new to buy corporate bonds,
Speaker 1: and as long as they're buying a high grade investment grade,
Speaker 1: it was okay. But once they decided to go and
Speaker 1: buy even fallen angels that have been downgraded from three
Speaker 1: or B minals to somewhere in the double B range,
Speaker 1: and when they decided to buy even how yield, the
Speaker 1: f tfs that the FAT is going into totally uncharted
Speaker 1: and dangerous territory because you're really buying stuff that is
Speaker 1: highly risky first of all, and you're creating a huge
Speaker 1: amount of moral hazard, and you're not allowing the necessary
Speaker 1: the leveraging that has to occur among leverage firms. They're
Speaker 1: gonna kick the count down the road if you're aggressively
Speaker 1: trying to narrow the spreads, especially for our yield. So
Speaker 1: to me, that's a mistake is again making sure that
Speaker 1: zombie companies, zombie financial institutions, zombie households are gonna stay
Speaker 1: alive on life support where they should be allowed to
Speaker 1: default and restructure, and they both financial and operational restructurally,
Speaker 1: so we're gonna pay the price for that particular policy.
Speaker 1: I think that everything else the FAT is doing maybe right,
Speaker 1: but moving into the space of buying a highly risky
Speaker 1: junk bonds, I think it's crazy. It's utterly crazy. Just
Speaker 1: on the policy question. Is that the one thing that
Speaker 1: you would do differently if if you were in charge
Speaker 1: of the policy response here. So for instance, if you were,
Speaker 1: you know, either in the US administration or Chairman of
Speaker 1: the third or something like that, what would you be
Speaker 1: doing in response to the economic downturn that we're seeing. Well,
Speaker 1: as I said, the idea that you're gonna run large
Speaker 1: budget deficit, that you're gonna monetize them, it's the right
Speaker 1: response in the short run. I worry about the overrang
Speaker 1: of the balance sheet of central banks, and they're not
Speaker 1: gonna be able to run them down because if they
Speaker 1: run them down, there is a dead crisis. Think of it.
Speaker 1: Even the FED started quantitative tightening in two thousand and seventeen,
Speaker 1: but in the fourth quarter of eighteen, when you adjust
Speaker 1: the minor blip, you know, stock markinging down big dealing
Speaker 1: you four after going by January one, Power said Okay,
Speaker 1: I was kidding. I'm not going to continue quty and
Speaker 1: I'm not gonna raise rates until are gonna stop. And
Speaker 1: then three months later he said, okay, we're gonna start
Speaker 1: cutting rates and we're gonna start doing new ripples, a
Speaker 1: new open market operations to increase the balance sheet. So
Speaker 1: well before even this crisis occurred, the Fed realized we
Speaker 1: cannot run down the balance sheet. They try to do it.
Speaker 1: Then the market shop in Q four of eighteen, and
Speaker 1: what happened last year led them to just change and
Speaker 1: completely increase the balance sheet even before this crisis occurred.
Speaker 1: And now that the crisis occurred, the balance sheet is
Speaker 1: gonna not double, but probably triple. And there's not even
Speaker 1: a sense of whether we're gonna start when we're gonna
Speaker 1: even start raising policy of it's above zero, let alone
Speaker 1: run down the balance sheet. In the case of Europe,
Speaker 1: they quantity of tightening never started. They stopped quei and
Speaker 1: now they've resumed it. In the case of Japan, they
Speaker 1: never stopped their quei qui always continued, and now they're
Speaker 1: ramping it up to infinite ap out right, whatever it takes,
Speaker 1: like the FED has done so these balance sheets are
Speaker 1: never gonna go down, and eventually that type of a
Speaker 1: financial overhang initially leads to asset inflation and asset bubbles.
Speaker 1: Then eventually it leads also to good inflation. Did not
Speaker 1: happen during the last decade because during the last decade,
Speaker 1: with positive supply shocks, with continuation of globalization and technology
Speaker 1: in the next decade whatever reversal of globalization, and that
Speaker 1: the even restriction to what technology can do, because while
Speaker 1: technology is gonna continue to grow, there will be massive
Speaker 1: restriction to the diffusion of technology because of national security technology.
Speaker 1: The TACH sector is going to become a critical component
Speaker 1: of the national security industrial complex and it's going to
Speaker 1: be restricted. So we'll have two major forces gonna lead
Speaker 1: to negative supply shocks rather than positive one. At the time,
Speaker 1: we're doing monetization and physicalization of death icit in an
Speaker 1: order of magnitude of the three or four times bigger
Speaker 1: than what we did after the global financial crisis. That
Speaker 1: eventually leads to asset and credit bubbles and then a
Speaker 1: buston and crush, and it leads even to starculation over time. Again,
Speaker 1: it's not a prediction for this year and next year.
Speaker 1: But for the medium term. My view, by the way,
Speaker 1: is that this decade there will be a coming global depression.
Speaker 1: This is not the short term prediction for two thousand
Speaker 1: and twenty, but I believe there are at least ten
Speaker 1: forces that gonna lead to the coming great depression of
Speaker 1: the two thousand and twenties, not two and two and twenties.
Speaker 1: The coming decade, there will be a global depression in
Speaker 1: the global economy because there are forces and trends and
Speaker 1: risks and imbalances that they were created but the global
Speaker 1: financial crisis they were never resolved. Another outcome this time
Speaker 1: around with a vengeance, and all of these ten negative
Speaker 1: trends are being exacerbated by the coronavirus crisis. I don't
Speaker 1: know if I have time to discuss all of them.
Speaker 1: I'm writing a new book about the subject, about the
Speaker 1: common depression of passion in twenties. But there is essentially
Speaker 1: ten global forces are going to lead us to a
Speaker 1: great depression in the next second. That's my view. So
Speaker 1: in the short run, we avoid that great depression this year.
Speaker 1: My baseline is a U shaped recovery, is not a depression.
Speaker 1: But over time I believe we're gonna face a great depression, Norrio.
Speaker 1: You're certainly living up to your doctor doom Moniker there.
Speaker 1: But I have one final question. So, prior to the crisis,
Speaker 1: one good thing is that we truly had something that
Speaker 1: resembled some wage growth. We had very low unemployment, the
Speaker 1: spread between say, the unemployment in this country among educated
Speaker 1: white people versus minority group different minority groups that started
Speaker 1: to come in. Genuinely positive things that were coming about
Speaker 1: through the long expansion obliterated overnight. What would be a
Speaker 1: model towards getting back to that point that would be
Speaker 1: more sustainable? In your view, if what we so was
Speaker 1: all these sort of un unresolved imbalances, how can we
Speaker 1: get how can we return to what seemed like some
Speaker 1: very positive societal trends in a way that doesn't involve
Speaker 1: and lost bubbles. Well, you know, I would take partial
Speaker 1: issue with your characterization of how well was the situation
Speaker 1: of labor, because you know, the share of labor had
Speaker 1: been falling for a decade and was falling. The share
Speaker 1: of profits was rising in GDP. That's why you had
Speaker 1: outside returns. And yes, people had jobs, but most of
Speaker 1: these jobs were low wages. Yeah, wage gold was picking
Speaker 1: up slightly but was not really robust, and many people
Speaker 1: had jobs that had essentially no benefits because many of
Speaker 1: them became gig workers or part time workers, or contractors
Speaker 1: or freelancers or hourly workers and so on and so on.
Speaker 1: You know, forty percent of Americans did not have more
Speaker 1: than four hundred dollars savings in case of an emergency.
Speaker 1: So those people that were left behind. And they said
Speaker 1: Trump was talking about an American carnage when he was elected.
Speaker 1: I think for most people there is still an American carnage.
Speaker 1: You know, there are eighty tho people today every year
Speaker 1: in the US they die from an opioid overdose. And
Speaker 1: that number is not fallen as following by an epsilon.
Speaker 1: Why do they die of this stuff because they are
Speaker 1: totally socially economically desperate. That what leads to the opioid
Speaker 1: academic you're looking at any measure of social kind of
Speaker 1: success or whatever not, it still is. It is an
Speaker 1: American carnage. People have jobs, but they are you know
Speaker 1: then burger flipping jobs, the lower jobs, the temporary jobs
Speaker 1: that have no benefits, having millions of younger millennials having
Speaker 1: to do three or four times for different gig jobs
Speaker 1: and not being paid enough and not having any benefits
Speaker 1: is no is no kind of panasia of any sort,
Speaker 1: So I do believe it. Actually, the situation for labor
Speaker 1: was extremely fragile. Of course, after a decade of a recovery,
Speaker 1: you had an employment rate gone from ten percent to
Speaker 1: three point five. We created twenty two billion jobs, but
Speaker 1: guess not in four weeks the entire jobs have been
Speaker 1: created in ten years that are gone twenty six million,
Speaker 1: and I think it's gonna be thirty five. And ask yourself,
Speaker 1: if you took a decade, ten years of an anemic
Speaker 1: recovery with something happening, for creating twenty two million jobs,
Speaker 1: how many years is gonna take us to essentially reduced
Speaker 1: unemployment rate from thirty six million new people without jobs
Speaker 1: back to normal. It's gonna take a decade, it's gonna
Speaker 1: take two decades. What's gonna take? So honestly, labor is screwed,
Speaker 1: was always screwed, is now screwed more than before, and
Speaker 1: it's gonna be a nightmare. Okay, Well, on that um
Speaker 1: optimistic note, I think we're gonna leave it therenurial. Thank
Speaker 1: you so much for coming on, and I know, you
Speaker 1: call yourself d your realist, but you're painting a pretty
Speaker 1: uh pretty depressing picture of the future. But thank you
Speaker 1: you appreciate it. I'm all I'm wrong. I feel I'm
Speaker 1: gonna be right. I won't play. Thanks for that was great.
Speaker 1: Thank you so Joe. I'm just trying to think all
Speaker 1: the all the ground we just covered. We had a
Speaker 1: great depression, food shortages, the end of globalization, a new
Speaker 1: Cold war, uh, stagflation, you go on. But like pretty
Speaker 1: much every bad scenario was touched upon. So that was
Speaker 1: fun Yeah, you know, it's funny because like I you know,
Speaker 1: when I set it up the intro when we were talking,
Speaker 1: I was like, oh, they called doctor Doom, but I'm
Speaker 1: not sure if he really is a doctor Doom. Maybe
Speaker 1: that was just sort of like I think people called him.
Speaker 1: He's very negative, like he really you know. What the
Speaker 1: interesting thing is is that, um, you know, there's a
Speaker 1: lot of like there's sort of like perma beare uh
Speaker 1: types out there, Like there's other people. In fact, I
Speaker 1: think there's like ten people at the nickname doctor Doom,
Speaker 1: but a lot of them are like they sort of
Speaker 1: like hardcore gold types. He's not really one of them
Speaker 1: so much. No, No, actually, yeah, we should have asked him.
Speaker 1: I guess we should have asked him where he'd be
Speaker 1: putting his money at this point in time. I would
Speaker 1: have been interested in that. But but it was really
Speaker 1: fascinating to hear him talk about a permanent behavioral change
Speaker 1: for people and consumers. Well, it's also sort of interesting too,
Speaker 1: because there is a lot of talk about permanent behavioral change,
Speaker 1: and it's worth sort of disentangling what is the permanent
Speaker 1: behavioral change due to the health crisis. So, Okay, maybe
Speaker 1: some people are gonna avoid different kinds of leisure, or
Speaker 1: they're you know, they're gonna want more space between them
Speaker 1: and the next person that arrests run versus the permanent
Speaker 1: behavioral change that results from saying your income vanish in
Speaker 1: a minute or visiting the revenue vanish in a minute.
Speaker 1: So it'll be interroding because there's really two sorts of
Speaker 1: things that are simultaneously unprecedented in this crisis that could
Speaker 1: leave lasting scars. Yeah, I guess we'll have to have
Speaker 1: a Rubini on in well a couple of years to
Speaker 1: to talk about those changes and also see whether or
Speaker 1: not that that stagflation idea has come to fruition. The
Speaker 1: stagflation thing is particularly interesting because you do get more
Speaker 1: people who had never really been believers in the inflation
Speaker 1: thesis starting to come around, essentially because of some version
Speaker 1: of the permanent change of the supply global trade landscape
Speaker 1: that he described. It feels like if there is going
Speaker 1: to be a moment where some of the inflation predictions
Speaker 1: could start to come to fruition, it's that combination of
Speaker 1: deglobalization and aggressive stimulus that could theoretically do it. Yeah,
Speaker 1: definitely an interesting one to watch. All right, Uh, shall
Speaker 1: we leave it there? Let's leave it there? All right, Well,
Speaker 1: this has been another depressing episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway. Uh, and I'm Joe Wisn't all. You can
Speaker 1: follow me on Twitter at a Stalwart. And you should
Speaker 1: follow our guest on Twitter. Nuriel Roubini. He's at Neuriel.
Speaker 1: Be sure to follow our producer on Twitter, Laura Carlson.
Speaker 1: She's at Laura M. Carlson. Follow the Bloomberg head of podcast,
Speaker 1: Francesco Leavi at Francesca Today, as well as all the
Speaker 1: Bloomberg podcasts, Onto the handle at podcasts, Thanks for listening.
Speaker 1: T