Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: Today on the podcast, I have Stephen Roach, and I
Speaker 1: can't begin to tell you what a master class in
Speaker 1: both economics and investing this was. You should be familiar
Speaker 1: with Roach. He was the chief economist at Morgan Stanley
Speaker 1: for twenty one years. He was there for over three
Speaker 1: decades before he moved on to becoming chairman of Morgan
Speaker 1: Stanley Asia. This was just an tour to force discussion
Speaker 1: on everything from the role of Federal Reserve to the
Speaker 1: way we measure productivity, to how markets should impact you're
Speaker 1: thinking about everything from economics to valuation and investing. Uh. Absolutely, Uh,
Speaker 1: I can't say enough. I'm gushing. I expect you're going
Speaker 1: to find this to be just uh ninety minutes that
Speaker 1: are gonna fly by. So rather than have me continue
Speaker 1: to babble, let me just jump right into it without
Speaker 1: any further ado. Our conversation with Yale and Morgan Stanley's
Speaker 1: Steven Roach. This is Masters in Business with Barry Ridholts
Speaker 1: on Bloomberg Radio. My special guest today is Stephen Roach.
Speaker 1: You probably know him from his years as the chief
Speaker 1: economist for Morgan Stanley. A quick background on on Mr Roach,
Speaker 1: Professor Roach, Dr Roach, Can I call you Dr Roach?
Speaker 1: Calling anything you want? Barry? Alrighty and um. He began
Speaker 1: his career as a research fellow at the Brookings Institute
Speaker 1: before becoming a researcher for the Federal Reserve, where he
Speaker 1: worked for seven years. Uh. Not only was he chief
Speaker 1: economist at Morgan Stanley, he eventually rose to the title
Speaker 1: of Chairman Morgan Stanley Asia, where he was for five years.
Speaker 1: He's written a number of books, Unbalanced, Codependency of America
Speaker 1: and China, as well as The Next Asia, Opportunities and
Speaker 1: Challenges for a New Globalization. He is presently a senior
Speaker 1: lecturer at the Yale School of Management and a Senior
Speaker 1: fellow at Yale's Jackson Institute for Global Affairs. Stephen Roach,
Speaker 1: Welcome to Bloomberg. Pleasure to be so. I was excited
Speaker 1: to talk to you for so many reasons. Your your
Speaker 1: background is tremendous, and you were at Morgan Stanley for
Speaker 1: thirty years, including a huge swath of that as the
Speaker 1: chief economist, and you worked with a number of legendary
Speaker 1: people before becoming a legend yourself. You worked with Byron
Speaker 1: Ween as well as Barton Biggs. What was it like
Speaker 1: during that era, Actually, Barry, you know, those are the
Speaker 1: as far as I'm concerned, that was the golden age
Speaker 1: of Wall Street macro research. Uh. We really had an
Speaker 1: extraordinary period, not just in the economy and in the markets,
Speaker 1: but in building UM. Morgan Stanley I think into the
Speaker 1: pre eminent leader in um sort of macro analysis of
Speaker 1: markets and economies, and Byron Barton and I sort of
Speaker 1: spearheaded that they did it from the market strategy point
Speaker 1: of view, um, I did it from the economics point
Speaker 1: of view. Barton of course, straddled both the market and
Speaker 1: the economic realm because he always had some really uh
Speaker 1: uh you know, quite penetrating and deep insights into the
Speaker 1: macro underpinnings of the markets that he was following. And um,
Speaker 1: you know, and Byron had his own knack of looking
Speaker 1: at the market through the lens of his out of
Speaker 1: consensus ten surprises, and and and we we all worked
Speaker 1: very very closely together. We traveled the world together. We
Speaker 1: provoked each other, we debated each other. Um. Every once
Speaker 1: in a while, we even agreed with each other. Uh,
Speaker 1: but most of all we had fun. Uh. It was
Speaker 1: an extraordinary period. The bulk of this period was the
Speaker 1: nineteen eighties and nineteen nineties. It was a huge boom
Speaker 1: going on both in the bond market and the stock market.
Speaker 1: How does that era of prosperity impact the growth of
Speaker 1: a firm, a little unknown firm like Morgan Stanley. Well,
Speaker 1: you know, Morgan Stanley was historically, you know, mainly an
Speaker 1: investment banking firm that you know, in the nineteen seventies
Speaker 1: made a commitment to really uh go into a broad
Speaker 1: based institutional origination and distribution business, adding equities, um, then
Speaker 1: when I came in the early eighties, adding government securities,
Speaker 1: becoming a primary dealer, and then really starting to build
Speaker 1: out a uh a full blown a fixed income uh business.
Speaker 1: And so Morgan Stanley wanted to ride the wave of
Speaker 1: the institutionalization and the internationalization of the global securities business.
Speaker 1: And really, I think was one of the first firms
Speaker 1: to successfully transition transform itself from a narrow, pre eminent
Speaker 1: investment bank into a broad based international securities firm. So,
Speaker 1: given how everything has become so balkanized, you have boutiques rising,
Speaker 1: you have hedge funds and private equity and venture capital,
Speaker 1: would it be possible in the modern era for that
Speaker 1: same story to take place. Could another Morgan Stanley rise
Speaker 1: or is that just a bygone era and we're not
Speaker 1: going to see that sort of huge conglomerate coming to
Speaker 1: the fore again. It's hard to say. I mean, you know,
Speaker 1: the environment has changed from a macroeconomic perspective. I mean,
Speaker 1: back in the late seventies early eighties, when this whole
Speaker 1: magic began, you know, we had double digit inflation, double
Speaker 1: digit interest rates, and and once we put policies in
Speaker 1: place to address that, then you know, we we began
Speaker 1: a you know, extraordinary twenty five year ballmarket with interest
Speaker 1: rates going one way. That journey is complete, and now
Speaker 1: you know, there's a big debate as to whether or not,
Speaker 1: you know, it's gonna go the other way. I'm suspicious
Speaker 1: of that. But to to get that kind of break
Speaker 1: from the markets, and then to get the same type
Speaker 1: of break from the globalization of of of cross border
Speaker 1: capital flows and the development of a whole new complex
Speaker 1: of of products that are addressed to uh uh, to
Speaker 1: deal with these twin forces of disinflation and globalization, I
Speaker 1: don't think you can recapture that. But that doesn't mean
Speaker 1: some other combination. Couldn't UH, you know, come up and
Speaker 1: and and offer a different business model that UM is
Speaker 1: potentially just as attractive as the one that Morgan Stanley
Speaker 1: presented in our early nine You're listening to Masters in
Speaker 1: Business on Bloomberg Radio. My special guest today Yale lecturer
Speaker 1: and former Morgan Stanley chief economist Stephen Roach, and we
Speaker 1: were just talking about UH, the f O m C
Speaker 1: and the most recent UH end of zero interest rate
Speaker 1: policy in the beginning of what some people have been
Speaker 1: calling lift off. Let me let me ask a very
Speaker 1: broad question. So unemployment since the crisis has been cut
Speaker 1: in half. We were ten percent, were now more or
Speaker 1: less at five percent. C p I is barely two.
Speaker 1: So the question is what have the FED been waiting for? Well,
Speaker 1: the Fed, I think harbor is the mistaken belief that
Speaker 1: UM UH monetary policy, whether it's traditional using UM their
Speaker 1: federal funds rate or non traditional using quantitative easing, holds
Speaker 1: the key to economic recovery whole is the key to
Speaker 1: controlling inflation, holds the key to controlling UH risk taking
Speaker 1: and and and driving global economic activity. I think UM,
Speaker 1: you know, a lot of those assumptions probably are close
Speaker 1: to being right, but just as many, if not more,
Speaker 1: of them are are really wrong. So let me push
Speaker 1: back on you on that a little bit, because between
Speaker 1: Ben Bernanke's The Courage to Act is his recent book
Speaker 1: and the circuit he's been doing talking about it. One
Speaker 1: of the things he has said is we didn't want
Speaker 1: to be as aggressive as we were, but we had
Speaker 1: no choice since Congress was paralyzed, there was an austerity movement,
Speaker 1: and the traditional post recession Kinzie stimulus was not available.
Speaker 1: Do you buy that or what do he's You know,
Speaker 1: he's talking his book literally and figured figuratively. Yes, um.
Speaker 1: And you know he has an uncanny knack for starting
Speaker 1: history when it's most convenient for him to explain, um uh,
Speaker 1: the efficacy of the Federal Reserves Rescue Act during the crisis.
Speaker 1: What he fails to really own up to in Greenspan
Speaker 1: is the same way is the critical role of FED
Speaker 1: played in getting us into this mess. Um. I commend
Speaker 1: Ben Bernanky for his heroic actions in the depth of
Speaker 1: a crisis, but by advocating a monetary policy that was
Speaker 1: extraordinarily easy um and the pre crisis years, by steadfastly
Speaker 1: maintaining as an academic and then as a central banker
Speaker 1: that monetary policy should play no role whatsoever in containing
Speaker 1: or controlling asset or credit bubbles. I think he let
Speaker 1: us down a path that almost blew up the system.
Speaker 1: And so what I want from a central banker is
Speaker 1: a much more disciplined approach to focusing on financial stability
Speaker 1: rather than just targeting an inflation rate which never seems
Speaker 1: to budget, which it's consistently below the FEDS expectations and
Speaker 1: has been so for close to eight years now. So
Speaker 1: you mentioned green Span. Let's let's talk about the central
Speaker 1: banker formerly known as the Maestro. His reputation took a
Speaker 1: giant hit following the crisis, deservedly so or not? Yeah,
Speaker 1: absolutely so? I think, um again, he he was sort
Speaker 1: of a uh, you know, had a one way view
Speaker 1: of market disruptions. The so called green Span put whenever
Speaker 1: the market's got into trouble, just you know, um, turn
Speaker 1: on the fire hose and and inject more liquidity and
Speaker 1: let it slash around and the system will take care
Speaker 1: of itself. And that works brilliantly until one day it doesn't. Uh,
Speaker 1: And that doesn't was when um, you know, there was
Speaker 1: this catastrophic near collapse of the system in the fall
Speaker 1: of sparked by Lehman Brothers. Green Span never believed that
Speaker 1: we could have uh systemic risk coming from any bubble,
Speaker 1: while it was a dot com bubble, whether it was
Speaker 1: the housing bubble, whether it was a credit bubble. He
Speaker 1: all believed that these were testaments to the oh, you know,
Speaker 1: the brilliance of you know, the market based system, consistent
Speaker 1: with his uh you know uh and rand libertarian view
Speaker 1: of the world that markets always no best in central
Speaker 1: banks should never interfere with the wisdom and brilliance of markets,
Speaker 1: Which is sort of bizarre because I just want to
Speaker 1: clarify something. So two thousand eight Lehman brother Long Term
Speaker 1: Capital Management. Um. The fascinating thing about Greenspan is here's
Speaker 1: a guy who who is proselytizing, let the market sorted
Speaker 1: out hands for off limit the amount of regulation we had.
Speaker 1: Yet every time there was a twitch, he was there
Speaker 1: too intervene in the markets. It seems somewhat um hypocritical.
Speaker 1: Well that I think hypocriticals putting it too kindly. I
Speaker 1: think I think I was afraid you're gonna say that's
Speaker 1: too strong in the world. No, I think I think that,
Speaker 1: um what what the FED didn't And I don't want
Speaker 1: to single out Alan Greenspan, because we had a system
Speaker 1: Barry that would have created another Alan Greenspan, if if if,
Speaker 1: if he wasn't around. We were struggling with economic growth
Speaker 1: as a nation. Uh really beginning in the nineteen seventies.
Speaker 1: Uh and um then we had you know, devastating high inflation.
Speaker 1: Paul Provoker came in and and really broke the back
Speaker 1: of that inflation. But you know, the economy was still
Speaker 1: laboring under a lot of pressures, especially in its ability
Speaker 1: to generate income for average American or middle class workers.
Speaker 1: And so the Central Bank, under the guidance of Alan
Speaker 1: Greenspan for eighteen and a half years, relied much more
Speaker 1: on financial engineering to create asset bubbles to generate so
Speaker 1: called extra purchasing power to grow the economy beyond the
Speaker 1: fundamentals of the earnings that we were able to squeeze
Speaker 1: out of hard work UM and productivity related pay increases.
Speaker 1: And this disconnect between the UM, the underlying income generation
Speaker 1: that comes from employment, and the income that could be
Speaker 1: extracted from asset and credit bubbles let us down, I
Speaker 1: think a very treacherous path and you know, I think
Speaker 1: that's the the dilima that Janet Yelling faces today is
Speaker 1: how to uh put the economy back on a sounder basis,
Speaker 1: more supported by the fundamentals of wage on labor income
Speaker 1: generation than by the excesses of asset appreciation. So so,
Speaker 1: we had the dot com bubble in two thousand, we
Speaker 1: had the housing and credit bubble in oh five, oh six,
Speaker 1: we had a subsequent commodities boom and bust. Are we
Speaker 1: in uh we at risk at another bubble now? Or
Speaker 1: things on the right track? And part of that comes
Speaker 1: from the slope to to and a half percent growth now?
Speaker 1: I like, I think that um uh, there's there there's
Speaker 1: risks that we're gonna end up with another type of
Speaker 1: financial accident. Uh. We you know, we're still at a period,
Speaker 1: historically unprecedented period of rock bottom interest rates. I mean,
Speaker 1: you know, big deal. You know, the federal funds rights
Speaker 1: now at basis points. But not only have we taken
Speaker 1: interest rates to the so called zero bound, uh, and
Speaker 1: not just in the US, but in you know, Europe,
Speaker 1: uh and in Japan. But the balance sheets of central
Speaker 1: banks are so swollen that there continues to be a
Speaker 1: lot of excess liquidity slashing around the world, and that's
Speaker 1: where the risk lies in terms of the next potential crisis.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: special guest today is Stephen Roach. He was the chief
Speaker 1: economist at Morgan Stanley, where he toiled for more than
Speaker 1: thirty years before becoming Amen of Morgan Stanley Asia. He
Speaker 1: is currently a lecturer at Yale University. And earlier we
Speaker 1: were talking about the impact of the FED and some
Speaker 1: of the bigger mistakes that Alan Greenspan and other FED
Speaker 1: members had made. Why is it, I'll start you out
Speaker 1: with a big one. Why is it that the FED
Speaker 1: specifically and most of the world's economists missed that big
Speaker 1: crisis in O eight oh nine? How come no one
Speaker 1: really saw it coming in advance? Well, I think, uh,
Speaker 1: it's it's it's like an how come investors, you know,
Speaker 1: don't see bear markets when when a trend is spectacularly
Speaker 1: in favor of your position, whether it's an investor or
Speaker 1: a policymaker, you know, you don't want to ever shall
Speaker 1: be the one who shouts there's a fire in the room.
Speaker 1: You overstay, You're welcome. The Federal Reserve uh, was was
Speaker 1: steeped in the hubris of what it loudly proclaimed as
Speaker 1: the Great Moderation. They had cracked the back of inflation.
Speaker 1: They had gotten the economy to perform very well. Unemployment
Speaker 1: was low, and sure, you know, asset markets were frothy
Speaker 1: in their view, but this wasn't a big, big risk
Speaker 1: after all of green Spain argued, we can't have a
Speaker 1: nationwide housing bubble. We could have problems in Las Vegas
Speaker 1: or Florida, but not for the country as a whole.
Speaker 1: We can't have a dot com bubble, he argued earlier.
Speaker 1: I mean, after all, these are new companies that are
Speaker 1: gonna drive us to a new frontier on productivity. And
Speaker 1: let's not be critical of some prime mortgages, he argued,
Speaker 1: because that's providing housing finance to a swath of the
Speaker 1: population that needed shelter. And so, you know, it went
Speaker 1: on and on on. The music just kept playing. Uh
Speaker 1: and um. Nobody wanted to be left holding the bag
Speaker 1: until they realized suddenly that maybe it wasn't quite as
Speaker 1: pretty as they thought, and it was too late by then. Bury.
Speaker 1: Let me push back a little bit, because we know
Speaker 1: that investors from a psychological standpoint, they have a vested
Speaker 1: interest in bull markets continuing, and they always overstay their
Speaker 1: welcome and they never want to believe that markets go
Speaker 1: up and down. But the FED are supposed to be
Speaker 1: the professional watchmen who are there for, amongst other things,
Speaker 1: to look for these aberrations and to identify when policy
Speaker 1: is too loose or too tighten is going to cause
Speaker 1: a problem for the FED to behave Like any mom
Speaker 1: and pop investor who makes bad decisions based on a
Speaker 1: variety of behavioral eras, seems like they really weren't doing
Speaker 1: what they were supposed to do. Well, you know, I
Speaker 1: hate to uh uh disagree with you on that, but
Speaker 1: but I think I think we ended up. Despite the
Speaker 1: fact that we extol the virtues of the FED as
Speaker 1: being politically independent, they're not politically independent. They're part of
Speaker 1: the body polyp that wants to squeeze more growth out
Speaker 1: of the system than the system can deliver on the
Speaker 1: basis of fundamentals. And so you know, if you read
Speaker 1: that alone, seems very reckless. Well, basically, it's like driving
Speaker 1: a car that shouldn't go more than a hundred miles
Speaker 1: an hour. At a hundred and fifty you're gonna run
Speaker 1: into drug They were part of the Washington consensus that
Speaker 1: really was disturbed by the lack of fundamentally supported economic growth.
Speaker 1: So if a central bank could deliver growth beyond the
Speaker 1: fundamentals by excess liquidity, low interest rates, asset and credit bubbles,
Speaker 1: who who who was the Congress to be critical of that?
Speaker 1: And Greenspan ultimately ended up, you know, in his UH memoirs,
Speaker 1: writing towards the very end buried in the back UH
Speaker 1: that he says, I regret to say that the political
Speaker 1: independence of the FIT is not carved in stone, admitting that,
Speaker 1: you know, he was very much a part of the
Speaker 1: political process that guided and shaped UH Congress, the President
Speaker 1: event UH and the so called tough minded independent central bank.
Speaker 1: Because I look back on America's Central Bank, UM, and
Speaker 1: I started my career there, as you indicated in the intro, UM,
Speaker 1: I regret to say I only see one independent chairman,
Speaker 1: and that was politically independent sharing that was Paul Vulkan.
Speaker 1: None better. So the first rule of economics I learned
Speaker 1: is there's no free lunch. Are you suggesting the FETE
Speaker 1: policy for the better part of three or four decades
Speaker 1: has been a free lunch policy. Well, yeah, I think
Speaker 1: that's not a bad image. I mean, again, if you
Speaker 1: have a central bank that at the first sign of
Speaker 1: trouble in the market is going to uh flush the
Speaker 1: system with liquidity, as the so called Greenspan put repeatedly did,
Speaker 1: maybe it's not a free lunch, but it's certainly a
Speaker 1: highly subsidized uh longstanding banquet meal. All right, So, in
Speaker 1: our last minute of this segment, rather than me being
Speaker 1: critical about the feed and economists, tell me what is
Speaker 1: it that economists do right but don't get enough credit for? Well,
Speaker 1: I I think economists are good uh at UM having
Speaker 1: a disciplined analytical thought process to identify the tensions that
Speaker 1: build in a system. That want to take a system
Speaker 1: that moves away from UH stability or equilibrium into a
Speaker 1: UM a place that needs a correction. And so when
Speaker 1: I was doing it on Wall Street, I always focused
Speaker 1: on these disequilibrium UH tensions and how they might be
Speaker 1: resolved through a correction in the economy or policy. And
Speaker 1: every once in a while I'd even wander, usually mistakenly,
Speaker 1: into the realm of how they'd be corrected by markets.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio My
Speaker 1: special guest today is Stephen Roach. He is a professor
Speaker 1: at Yale UH former chief strategist, chief economist actually at
Speaker 1: Morgan Stanley, where he worked for thirty years, former chairman
Speaker 1: of Morgan Stanley a Asia. Let's talk a little bit
Speaker 1: about Asia, because long ahead of the curve, you decided
Speaker 1: that Asia was a place where global growth was going
Speaker 1: to come from, and then essentially set up Morgan Stanley's
Speaker 1: shop up there. How did that whole thing come about, Well, Barry,
Speaker 1: I was running Morgan Stanley's Global economics team UM beginning
Speaker 1: in the early nineteen nineties, and UM we had a
Speaker 1: great team. Actually, we were ranked the number one global
Speaker 1: team by II Institutional Investor. And then along came the
Speaker 1: Asian Financial crisis, and our forecast was in shambles, the
Speaker 1: number one when it ranked team. We had the worst
Speaker 1: forecast of anybody on Wall Street. So this was a
Speaker 1: great source of personal humiliation to me. So I had
Speaker 1: been to China, you know, a few times. I had
Speaker 1: a hunch that China might hold the key to the
Speaker 1: endgame of this crisis. And right around the middle of
Speaker 1: ninety seven, when the Taibot was devalued, I started going
Speaker 1: to China once every other month to figure out if
Speaker 1: China would be the next shoe to fall as many believe,
Speaker 1: and UM it quickly became evident to me that China
Speaker 1: was cut from a very different cloth, and I started
Speaker 1: doing a lot of research on China. Then I hired
Speaker 1: a brilliant young economist, Andy Say, to analyze UM China.
Speaker 1: But Andy was UH pretty green at that point and
Speaker 1: and and really had a hard time UM coming up
Speaker 1: with the types of answers that I thought would be
Speaker 1: helpful to our team. So I I went off on
Speaker 1: my own, got hooked on China uh and never turned
Speaker 1: back and wrote I remember UM my first public article
Speaker 1: in the Financial Times UM and UM uh probably the
Speaker 1: spring of that. Not only would China put a floor
Speaker 1: on the crisis, but it would emerge from the the
Speaker 1: Asian financial crisis as the new leader of the region,
Speaker 1: quickly supplanting Japan and you know more not a very
Speaker 1: controversial old statement today now, but back that was a
Speaker 1: radical shift, wasn't it. Well? It it got me sort
Speaker 1: of excommunicated from Morgan Stanley's uh Japanese centric institutional client
Speaker 1: based in Asia, and you know, my Chinese relationships that
Speaker 1: I was developing. Were actually embarrassed by they they thought
Speaker 1: that that I was going a little bit too far.
Speaker 1: But you know, it always helps, you know, and whether
Speaker 1: it's Wall Street or Hollywood, to be in the right
Speaker 1: place at the right time. And China took off, uh,
Speaker 1: right after the Asian financial crisis, hasn't looked back since
Speaker 1: then until right about now when the growth rate is slowing.
Speaker 1: This is causing a big debate. Japan has struggled. Uh.
Speaker 1: Two and a half lost decades later, is is is
Speaker 1: still going nowhere despite the hype and promise of the
Speaker 1: so called abeomics, UH policy proposals and UH. You know,
Speaker 1: I I've been deeply involved and written books and now
Speaker 1: teach classes at Yale on on Asia on China on
Speaker 1: the lessons of Japan ever since. And it's really been
Speaker 1: a very rewarding part of my own personal journey. And
Speaker 1: you lived in China for three plus years. What was
Speaker 1: that experience like? Well, I was a chairman of Morgan
Speaker 1: Stanley Asia. The office was in Hong Kong, UH, where
Speaker 1: I had an apartment that I spent about one day
Speaker 1: a week at I was on the road constantly. I
Speaker 1: spent about half my time uh in the mainland, and
Speaker 1: it enabled me to deepen my connections to officials, um,
Speaker 1: business leaders, academics in China. I traveled all over the country.
Speaker 1: On what cities did you go to in China? Well,
Speaker 1: you know, what are the standouts? I mean, I know
Speaker 1: you're gonna say Beijing, Well, yeah, idea. I did the
Speaker 1: usuals Beijing, Shanghai, shen Jin, Dalian, uh, Nanjing. UM spent
Speaker 1: a lot of time in Chongqing. Uh. You know the
Speaker 1: biggest urban city in in in the world, Shian Uh
Speaker 1: you name it, uh, changshaw uh Cheng. Do see the
Speaker 1: pandas there? Uh and uh you know China is um
Speaker 1: uh more than just Beijing uh and uh Shanghai. You know,
Speaker 1: There's there's a lot that's going on outside of this
Speaker 1: thriving coastal region of the country that you really have
Speaker 1: to know. And and I was privileged to be able
Speaker 1: to see a lot of that. Did you pick up
Speaker 1: any Mandarin or can you get by on English? Everywhere
Speaker 1: I I studied Mandarin. I had tutors um and um.
Speaker 1: You know, a couple of things along the way told
Speaker 1: me that UM, I had no reason to do that.
Speaker 1: I tried out my Mandarin a few times and meetings
Speaker 1: with senior officials that I was very uh close to,
Speaker 1: and they would usually stop me and say, you know,
Speaker 1: do us a favor. Uh, we understand you a lot
Speaker 1: better stick. And then the final um uh uh embarrassment
Speaker 1: came when I was invited actually to give a commencement
Speaker 1: a speech at Nanjing University, one of China's leading universities,
Speaker 1: and I knew enough not to try to do the
Speaker 1: speech in Mandarin, but I wanted to close with a brilliant,
Speaker 1: astute Chinese proverb and delivered in Mandarin. Uh. And I'm
Speaker 1: pretty comfortable at public speaking uh. And I'd rehearsed this
Speaker 1: line maybe seventy five times, and I'd had a tutor
Speaker 1: to help me with the tones, and so it came
Speaker 1: time to just read it. All I was gonna do
Speaker 1: is read it. And I look up and I see
Speaker 1: thousands of students in caps and gowns, and I forgot
Speaker 1: everything I had learned, and so I did it, you know, fanatically,
Speaker 1: and no one blinked. Into this day, I'm convinced that
Speaker 1: no one knew I was even speaking in Chinese at
Speaker 1: the time. So that's when I said, Okay, I'm done.
Speaker 1: I don't. I don't no more Mandarin, and pretty much
Speaker 1: you could get get by with English just about anywhere,
Speaker 1: get by with it. But you know, um quite to
Speaker 1: see if I have a regret, you know that that
Speaker 1: is a regret of not learning mens and not being
Speaker 1: able from time to time to you know, to to
Speaker 1: speak comfortably in the language of my host country. I
Speaker 1: think that's that. That's something I always tell young people
Speaker 1: when they're thinking about their own career choices. So a
Speaker 1: question that I've always been fascinated by any time I
Speaker 1: speak with someone who's lived overseas for a while. Uh,
Speaker 1: what is it that we in the US misunderstand most
Speaker 1: about China? And then vice versa? What are what misconceptions
Speaker 1: of the Chinese have about Americans that seem to be
Speaker 1: long lasting. Well, that's a great question, and um uh
Speaker 1: you know, the first part of it, um is is
Speaker 1: something that really hit me over the head when I
Speaker 1: read a book actually in nineth publish by now retired
Speaker 1: Yale professor and Jonathan Spence called The Chance Great Continent,
Speaker 1: where he examined forensically, uh, Western views of China going
Speaker 1: back to Marco Polos thirteenth century journals right through Nixon
Speaker 1: and Kissinger, and the bottom line of of Spence's um
Speaker 1: you know extraordinary work, was that the West, especially those
Speaker 1: of us in the US, would always see China through
Speaker 1: the same lens that we saw ourselves, rather than through
Speaker 1: the experiences UH through from the Chinese perspective, example being
Speaker 1: Marco Polo's journals UH in the thirteenth century. UH never
Speaker 1: once mentioned that the Chinese women bound their feet and
Speaker 1: referred constantly to the canals that we went through ancient
Speaker 1: pay King, when in fact there were no canals in
Speaker 1: ancient painting. The canals were in his native Venice, and
Speaker 1: on and on through um more current historical figures. You know,
Speaker 1: Nixon Uh sitting down with mout s tongue and saying, oh,
Speaker 1: we're both from small towns. You know, You're from Changshaw
Speaker 1: and from York Blinda. We have a lot in common
Speaker 1: and maybe not, you know. And so when we look
Speaker 1: today at China through the lens of some of our
Speaker 1: dead issues are housing bubbles. You know, we're looking into
Speaker 1: the thing that China has got the same types of
Speaker 1: problems that we have, and they don't. They're there. It's
Speaker 1: a very different um UH framework and set of issues
Speaker 1: that they're grappling with in their system at a very
Speaker 1: different stage of economic development. So let's talk about that
Speaker 1: for a second. They have a billion seven people, many
Speaker 1: of whom have a billion four billion, four many of
Speaker 1: whom are coming from a very a grarian lifestyle, small towns,
Speaker 1: farming villages, moving all these people to a industrialized um economy,
Speaker 1: moving them into these cities. You know, sixty minutes did
Speaker 1: that big piece on the ghost cities, But are those
Speaker 1: that's an example preparation for changes coming forward. That's a
Speaker 1: complete example of of what I just said. We look
Speaker 1: at unoccupied housing a a bubble waiting to burst. The
Speaker 1: first ghost city that I saw in China was in
Speaker 1: the second half of the nineteen nineties at place called
Speaker 1: Shanghai Pudong, was the largest urban development in the history
Speaker 1: of the world at the time. It's now fully occupied
Speaker 1: by five and a half million people China. That's like
Speaker 1: a Manhattan, practically almost built. China moves between fifteen and
Speaker 1: twenty million people a year from the countryside to the city.
Speaker 1: That's two New York cities a year. Uh. And so
Speaker 1: they don't wait uh to to build shelter and infrastructure
Speaker 1: for these people after they've arrived, which is the sort
Speaker 1: of the model of the urbanization model of India, which
Speaker 1: leads to urban squalor. But they build in anticipation of
Speaker 1: and ensure they will make mistakes. They will build in
Speaker 1: areas that ultimately will um uh not be as fully
Speaker 1: occupied as they would like. But in large part their
Speaker 1: high investment economy is built to anticipate the future sub
Speaker 1: squent flow of rural urban migration, which is gonna be
Speaker 1: you know, enormous. Continuing through, we've been speaking with Stephen Roach.
Speaker 1: He is the former chief economist for Morgan Stanley, currently
Speaker 1: a lecturer at Yale. If you would like to hear
Speaker 1: or see more writings of of Professor Roach. Where can
Speaker 1: people find uh your work other than Barnes and Noble
Speaker 1: and Amazon. Well, I do write a regular um column
Speaker 1: that's available on the Project Syndicate website monthly that has
Speaker 1: distributed to um UH newspapers all over the world in
Speaker 1: multiple languages. So you can check me out on the
Speaker 1: Project Syndicate website as well as your your local book deal.
Speaker 1: If you enjoyed this conversation, be sure and hang out
Speaker 1: and check out our podcast extras, where the tape keeps
Speaker 1: rolling and we continue discussing all these weighty matters. You
Speaker 1: can check out my daily column on Bloomberg View dot com.
Speaker 1: Follow me on Twitter at rid Haltz. I'm Barry rit
Speaker 1: Else you've been listening to Masters in Business on Bloomberg Radio,
Speaker 1: Welcome back to the podcast. Or for those of you
Speaker 1: who haven't left or on treadmills and cars, thanks for
Speaker 1: hanging around. Before I forget Stephen, let me thank you
Speaker 1: for doing this. I really appreciate your time so far.
Speaker 1: This has been absolutely fascinating and I know it's gonna
Speaker 1: continue to be fast. Um a little bit. Hey, there's
Speaker 1: nothing wrong wrong with a little hedge every now and then. Um,
Speaker 1: but I'm pretty confident it's going to continue to be outstanding.
Speaker 1: It's really depending on me not messing up you. I'm
Speaker 1: confident in So we missed. There's so many questions I
Speaker 1: wanted to get to and I didn't have a a
Speaker 1: chance to. Let's talk a little bit about the economy
Speaker 1: in general. What is the state of the labor market
Speaker 1: in the United States? And I'm gonna tea that up
Speaker 1: by saying unemployment at five point one percent depending on
Speaker 1: whose numbers where you date, the data we've created some
Speaker 1: way be me nine and eleven million new jobs since
Speaker 1: the end of the Great Recession GDP at two two
Speaker 1: and a half percent housing off it's lows. What's wrong
Speaker 1: with the US economy? Well, yeah, I don't believe the
Speaker 1: the official labor market statistics UM if well, if the
Speaker 1: unemployment rate is actually as low as UM the the
Speaker 1: official sort of five percent rating indications. Yeah, I believe
Speaker 1: in supply demand there there should be some wage inflation
Speaker 1: by now, um, and we've seen none zero And so
Speaker 1: there's there's a lot of UM, suspicious trends in things like, uh,
Speaker 1: the employment to population ratio, which is barely up off
Speaker 1: the bottom, the labor force participation rate which is still
Speaker 1: near that's been falling for all that's been falling um
Speaker 1: uh dramatically uh since the crisis. And I don't think
Speaker 1: that's an accident. A lot of serious academic work says that, oh,
Speaker 1: this is just a coincidence that's occurred, UM, reflecting you know,
Speaker 1: the demography of of aging workers who are now reaching
Speaker 1: the point in their lives where they are just opting
Speaker 1: out of labor force. I don't think these things happen
Speaker 1: by coincidence sparked by a crisis. So I think the
Speaker 1: long term job issues UM very structural in nature, meaning
Speaker 1: when you say structural automation, globalization and things like that.
Speaker 1: And and reflecting the fact that the demand, the demand
Speaker 1: side of the system, especially consumer demand UM is on
Speaker 1: a extraordinarily uh weak trajectory. So without demand UM and
Speaker 1: and and the numbers are pretty clear. We've had UM
Speaker 1: now uh seven and a half years of growth in
Speaker 1: real consumer spending, which is seven to present the economy UM.
Speaker 1: The the the annualized average adjusted for inflation is one
Speaker 1: point four uh. And you know the pre crisis trend
Speaker 1: is a number slightly north of three. And if you
Speaker 1: back out automobiles, which are booming, it's significantly worse than that. Well,
Speaker 1: this is a seven and a half year average, So
Speaker 1: you know, I think I don't want to back anything
Speaker 1: out of I just want to take the numbers. It
Speaker 1: stands consumer demand is weak and so when people forecast
Speaker 1: the future with an aim toward hiring or investing in
Speaker 1: planted equipment, they look at the past as a guide
Speaker 1: to where we're headed. Uh. And they're going, wait a second,
Speaker 1: in a slow demand environment, why am I going to hire.
Speaker 1: Why am I going to expand my productive facilities? And
Speaker 1: uh so this, you know, this sluggish labor market is
Speaker 1: very much a byproduct of the demand destruction that occurred,
Speaker 1: and it is still with us in the aftermath of
Speaker 1: this horrific crisis. So that goes back to something we
Speaker 1: just barely touched upon during the broadcast portion, which is
Speaker 1: the usual Keynesian stimulus that typically follows the recession was
Speaker 1: pretty much absent. And I know I'm going to get
Speaker 1: emails about the American Recovery Act, and it was eight
Speaker 1: hundred million dollars, but really two thirds of that was
Speaker 1: temporary tax cuts and temporary extension of unemployment policies. We
Speaker 1: didn't really get the trillion dollar stimulus that that we've
Speaker 1: seen in prior recessions. Is that a culprit in this
Speaker 1: soft recovery. Well, it's a big debate, as you say,
Speaker 1: and I think, um, it's it's appropriate to raise that question.
Speaker 1: I think though that um it's it's it's really an
Speaker 1: oversimplification to say that, you know, we had just done
Speaker 1: you know what Sat Paul Krugman said, everything would be fine. Um,
Speaker 1: we went through a Japanese style balance sheet, recession where UM,
Speaker 1: American homeowners, whether they were subprime or prime or not,
Speaker 1: levered their biggest asset and used the proceeds of that
Speaker 1: bet to fund both current consumption and saving. And they made,
Speaker 1: in general, a huge mistake. And so when that asset
Speaker 1: went underwater relative to the liabilities, they were stuck with
Speaker 1: a huge hole in their balance sheet and they needed
Speaker 1: to pay down debt and rebuild their saving and all
Speaker 1: the infrastructure spending in the world would not have repaired. UH,
Speaker 1: these bruised and battered balance sheets. We needed policies aimed
Speaker 1: at taking the excess debt off the system, UH and
Speaker 1: providing some long term incentives for individuals to save, and
Speaker 1: instead we got the opposite, zero interest rates. There's no
Speaker 1: incentive to save, and debt forgiveness is politically you know, incorrect. Um.
Speaker 1: Uh argument. So so right now we have still seven
Speaker 1: years later, we have a lot of homeowners still in
Speaker 1: the process of deleveraging. That accounts for a big chunk
Speaker 1: of the lack of consumer spending that you referred to.
Speaker 1: I have two questions for you. The first is, and
Speaker 1: you you alluded to, debt forgiveness isn't likely to work.
Speaker 1: What could the government have done or or the Federal
Speaker 1: Reserve had done to address that. And and the second
Speaker 1: part of that is really about the new normal. So
Speaker 1: so let's start with the first half. What could have
Speaker 1: been done about all this massive debt held on the
Speaker 1: books of of individuals and homeowners in particular, in order
Speaker 1: to get them back on a normal footing. Well, two
Speaker 1: things I would say, um uh that that are to
Speaker 1: that point. Number one, UH, what we learned from Japan
Speaker 1: is really relevant to um the US and summer um.
Speaker 1: Japanese corporates were kept on artificial life support uh when
Speaker 1: they should have been allowed to go under, and that
Speaker 1: clogged the system. And so the zombies, the walking dead
Speaker 1: ended up creating a massive congestion throughout the entire system
Speaker 1: of viable companies as well as failed companies. We've had
Speaker 1: a similar zombie congestion in the United States where the
Speaker 1: homeowners were under water that access um uh, supply of
Speaker 1: of homes and overhang of debt created a price instruction
Speaker 1: for all the homeowners in general. So we had a
Speaker 1: nationwide collapse in our housing markets sparked by one small
Speaker 1: piece of it, the subprime piece. Secondly, I reject the
Speaker 1: notion that we could not have dealt with with debt forgiveness.
Speaker 1: We just needed a more reasonable approach where everybody's skin
Speaker 1: was in the game. That the government provided some subsidy
Speaker 1: to over extended Americans. The banks took right as they
Speaker 1: didn't want to do that because we hurt their earnings. Uh.
Speaker 1: And um that that individuals would accept some responsibility for
Speaker 1: their own reckless borrowing by moving from non recourse to
Speaker 1: recourse learning. So if you reset their mortgage at a
Speaker 1: market clearing rate and they and they failed to make
Speaker 1: good on that payment, they wouldn't just lose the house,
Speaker 1: they'd lose all their other assets. So we needed a
Speaker 1: you know, a political consensus to go about addressing this
Speaker 1: excess dead problem. Of course, political consensus is an oxymoron
Speaker 1: in a in a system that is so dysfunctional as
Speaker 1: the great American democracy is. So so let me ask
Speaker 1: an even broader question. Uh, We're a number of people
Speaker 1: have described the new normal, but the counter to that
Speaker 1: has been the Reinhardt and Role gelf book Eight Centuries
Speaker 1: of Financial Folly. Were ran Heart and Rogelf right that
Speaker 1: following a huge financial crisis, you have a decade of
Speaker 1: subpar growth and subpar job creation and poor consumer spending.
Speaker 1: This isn't a new normal. This is the old post
Speaker 1: crisis environment. Yeah, I think I couldn't have said it better.
Speaker 1: Very Um, there's nothing normal about what we're going through
Speaker 1: right now. Normal means you know, relax, you know, this
Speaker 1: is the way it's gonna be. And and it sort
Speaker 1: of has a connotation of of of tranquility acceptance that, um,
Speaker 1: this is the way things are supposed to go when
Speaker 1: you nearly blow up the system and you then spend
Speaker 1: seemingly an ordinate amount of time in repairing the damage
Speaker 1: that was done when the system was being blown up.
Speaker 1: That is much more consistent with the post crisis payback
Speaker 1: of the work of Ryan Hart and Rogua Golf and others.
Speaker 1: And you know, I give a Carmen, Ryan Arton, Knrogue
Speaker 1: of a huge amount of credit for assembling it. But
Speaker 1: by no means is this a unique theory that should
Speaker 1: just be associated with their own work. There are plenty
Speaker 1: of other people that have looked at this. One of
Speaker 1: my favorites is actually in the mural economist or Richard
Speaker 1: kop who looked at them the aftermath of the balance
Speaker 1: sheet recession UH in Japan, and came up with a
Speaker 1: very similar but you know, also very uh provocative analytical
Speaker 1: construct of this debt rejection syndrome that falls in the
Speaker 1: aftermath of this um UH debt induced crisis that Japan
Speaker 1: went through. And I think it's very appropriate to analyze
Speaker 1: the US and other debt um UH induced crises with
Speaker 1: with that same type of approach. So some of the
Speaker 1: arguments that I've read about why Japan could not have
Speaker 1: done a full on, why they had no choices, their
Speaker 1: concept of of kiritsu where all these companies are vertically integrated,
Speaker 1: and the great example was Mitsubishi. So the Bank of
Speaker 1: Mitsubishi is laden with all this real estate debt, but
Speaker 1: then there is Mitsubishi realty on top of that, and
Speaker 1: then Mitsubishi having manufacturing, and Mitsubishi Automobiles and Mitsubishi Air
Speaker 1: and all these other companies, including the Bank of Mitsubishi
Speaker 1: stacked the brokerage firm of Mitsubishi stopped on top of that.
Speaker 1: Could Japan have done a full on um sweden UH
Speaker 1: type debt reduction and move forward or had did their
Speaker 1: structure paint them into a corner? Well, you know, this
Speaker 1: is a great topic. Actually, I teach a course UH
Speaker 1: I've been teaching for five years. We'll teach it again
Speaker 1: next semester called the Lessons of Japan, and you're you're
Speaker 1: more than welcome to again apply to Yale Barry and
Speaker 1: we'll see you know, I can get you an accelerated
Speaker 1: um UH process to examine your credentials and you can
Speaker 1: take the course and send my nephew to order the class.
Speaker 1: But but look, um, Japan had this interlocking Caratsu system.
Speaker 1: You're entirely right, but they made serious policy mistakes as
Speaker 1: well by leaving that they could offset the end appreciation
Speaker 1: that came out of the Plaza cord with extraordinary monetary stimulus,
Speaker 1: and that created the bubbles um property and UH and
Speaker 1: equities that, when they burst, then brought this corrective system
Speaker 1: UH to its knees. And it was not until the
Speaker 1: late nineteen nineties when they first started to recapitalize the
Speaker 1: banks and the Japanese corporations that were caught up in
Speaker 1: this web, that the system began to stabilize. And they've
Speaker 1: had a lot of problems since then as well. But
Speaker 1: the structure that they used, which was very successful in
Speaker 1: driving economic growth post World War two fifties sixties, seventies
Speaker 1: and early eighties, UM became you know, serious part of
Speaker 1: the problem. And and that's UM certainly a lesson they
Speaker 1: ultimately had to face. So let's talk a little bit
Speaker 1: about albonomics and what's going on in Japan today. The
Speaker 1: the US has officially and that it's policy of zerp
Speaker 1: qu is winding down. Meanwhile in Japan there a couple
Speaker 1: of years out of phase with US, and they've ramped
Speaker 1: up their QUI and they continue to have zero interest
Speaker 1: rate policy. What what do you think is going to
Speaker 1: happen uh in Japan with their economy and their monetary policy. Well,
Speaker 1: just one slight correction. You say, you us KIWI is
Speaker 1: winding down. I mean we're not. The feed is not
Speaker 1: shrinking it's balance sheet. It's moved the federal funds rate
Speaker 1: above zero by you know a' measily twenty five basis points.
Speaker 1: But the balance sheet, Uh, the size of the assets
Speaker 1: are still four and a half trillion and online. But
Speaker 1: isn't that going to naturally run down? I think it's
Speaker 1: a seven year maturity duration. App believe it when I
Speaker 1: see it, all right, So I'm assuming when they say
Speaker 1: we're just gonna let this run off that that they're
Speaker 1: telling the truth you think they're going to contain. I'm suspicious.
Speaker 1: I'm very suspicious. Let's anyway, your question was about Japan. Japan.
Speaker 1: Uh anomics has three arrows. Recently he has added a
Speaker 1: few more arrows because the first three weren't apparently strong
Speaker 1: enough or sharp enough. And but but the third arrow
Speaker 1: is the one that is ultimately going to hold the
Speaker 1: key to Japan, and that's the structural reform required to
Speaker 1: boost productivity. Japan is an aging population, and it's not
Speaker 1: just getting older, it's now shrinking. Uh. And when when
Speaker 1: your population, you're working age population shrinks, your your output
Speaker 1: is going to go down. Unless you can compensate um
Speaker 1: for that with higher productivity. You need the structural reforms
Speaker 1: to do that. And you know, there's a whole agenda
Speaker 1: of structural issues, especially in the labor market, the immigration
Speaker 1: policies that have not yet been dealt with because it's
Speaker 1: politically difficult to do in this still LDP one party
Speaker 1: dominated system, and UM that puts more onus on the
Speaker 1: fiscal and monetary arrows. The first two arrows UH to
Speaker 1: offset the inability to really deliver on the structural reform front.
Speaker 1: So I take it you're not especially bullish on Japan
Speaker 1: going forward. I think in until you're unless Japan really
Speaker 1: addresses this productivity issue. And by the way, productivity is
Speaker 1: now weak um from most countries in the world, including
Speaker 1: our own in the United States. UM that you can't
Speaker 1: offset that through financial engineering sparked by you know, quantitative
Speaker 1: easing or or zero interest rates. That's such an important
Speaker 1: lesson and it's one that again we we just don't
Speaker 1: have the discipline or the political stamina to to to address.
Speaker 1: We like to think of that the japan Japanese is
Speaker 1: being long term strategic thinkers. But by jumping on the
Speaker 1: Kiwi bandwagon and uh and and really trying to do
Speaker 1: much more in terms of Kiwi than than than even
Speaker 1: we did. You know, that tells me that uh, they're
Speaker 1: they're even betting more on these untested, unconventional policies, uh
Speaker 1: than um the U S did. So in terms of
Speaker 1: structural reform, they need to increase their birth rate, perhaps
Speaker 1: bring in some young migrant workers who can who can
Speaker 1: fill their factories. Is that actually gonna happen? Well, you know, uh,
Speaker 1: longstandings assessment of the cultural um characteristics of a relatively
Speaker 1: closed Japanese society would argue against that. And so you
Speaker 1: know that that that is a disconcerting conclusion. But again,
Speaker 1: when you're when you're working age population is shrinking, you
Speaker 1: either need more workers I you know, um, more more women,
Speaker 1: more younger people, or foreign workers, or you need to
Speaker 1: squeeze more out of the current workforce through productivity. When
Speaker 1: you rule those options out, uh, you know, the implications
Speaker 1: become relatively dire. The game is over before you begin
Speaker 1: under those second makes it really hard. So let's talk
Speaker 1: about productivity a little bit. We One of the things
Speaker 1: that we noticed in the nineties and and two thousands
Speaker 1: is that all these fantastic productivity gains that we were
Speaker 1: all experiencing in our day to day life, thanks primarily
Speaker 1: to technology and telecommunications and software, weren't really showing up
Speaker 1: in the data. In fact, the joke was, you know,
Speaker 1: productivity gains are everywhere except the data. How much of
Speaker 1: the productivity issue is a measurement problem? And how much
Speaker 1: of this is really a function that we're as productive
Speaker 1: as we're going to be and it's not going to
Speaker 1: get any better. Look, it's a great issue, and actually
Speaker 1: I'm proud to say that was one of the issues
Speaker 1: that I really was involved in as a Wall Street economists. Um,
Speaker 1: there are there are very few you know in Wall Street,
Speaker 1: you know, the economics profession. It was always looking at
Speaker 1: the next fed move, the next take in the market,
Speaker 1: so there was very little appreciation for these deeper themes.
Speaker 1: But I I worked continuously on this theme in the
Speaker 1: late nineties and early two thousand's, and UM, you know,
Speaker 1: I think that the productivity mystique, UM, as we shifted
Speaker 1: more into the services based knowledge economy, became a really
Speaker 1: important issue. And eventually, uh, we did move into a
Speaker 1: period where the gains picked up, but now they seem
Speaker 1: to have stalled out. Uh. And you have to ask yourself, um,
Speaker 1: uh was that period from the mid nineties to the
Speaker 1: mid two thousand's was that just an aberration? Did we
Speaker 1: just moved from one technology platform to another. We're now
Speaker 1: at this new platform and we're finding it just as
Speaker 1: hard to deliver on the productivity front going forward as
Speaker 1: we did. Um. You know in the two decades before that,
Speaker 1: you mentioned measurement problems. I'll tell you a big measurement
Speaker 1: problem that I continue to worry about, and that is
Speaker 1: not that we're understating output, but um that we're really
Speaker 1: um understating labor input courtesy of your all right, well,
Speaker 1: think you think about it. You know, you have a
Speaker 1: cell phone or a BlackBerry or whatever. You have a laptop,
Speaker 1: and so you know you're you're probably online, maybe not
Speaker 1: because you're like you're well arrested maybe seven okay, but
Speaker 1: but your work and you're you're basically available all day long.
Speaker 1: The U S. Bureau of Labor Statistics when they report
Speaker 1: your work day, they're telling, um, uh, you know the
Speaker 1: productivity calculus that you're working probably about forty hours maybe
Speaker 1: thirty five hours a week. And that's certainly true of
Speaker 1: financial services, an industry that I know a lot about, uh,
Speaker 1: And nothing can be further from the truth. And what
Speaker 1: that says is my understating work time. You're overstating the
Speaker 1: amount of output per understated work time, and you're getting
Speaker 1: credit for being more productive when in fact, all you're
Speaker 1: doing is working longer. Productivity Berry is not about working longer.
Speaker 1: It's about generating more output per unit of work time.
Speaker 1: And I I've done a lot of work on this,
Speaker 1: and I've looked at some of the data they go
Speaker 1: into it and I think that's a big unanswered question
Speaker 1: in seven technology laden era that we're in. So so
Speaker 1: are we not as productive as we think? Or are
Speaker 1: we just working so much more? United States is notorious
Speaker 1: for having amongst the longest work week, and that's just
Speaker 1: what's reported. Are we just working more hours and and
Speaker 1: it looks like an increase in productivity where it's really
Speaker 1: just more labor less leisure time. And I think that's
Speaker 1: that's what we're doing. I think we are definitely working longer, uh,
Speaker 1: and our productivity as a result is being overstated, not understated.
Speaker 1: So let's talk a little bit about commodities, which we
Speaker 1: really haven't discussed um And that naturally leads to a
Speaker 1: conversation about the dollar. When when we look at the
Speaker 1: collapse of commodity price as oil is cut in half,
Speaker 1: iron ore, steel, old, the manufactured copper, to say the
Speaker 1: least all seem to be under pressure. How much of
Speaker 1: this is attributed to the strong dollar and how much
Speaker 1: of this is attributed to falling global demand? Well, you know,
Speaker 1: the the dollar obviously is um a part of that.
Speaker 1: But I think, you know, the dollar maybe a symptom
Speaker 1: rather than a real cause here, UM. I I look
Speaker 1: at this commodity cycle, the supercycle on the upside and
Speaker 1: the collapse on the downside, as something that is largely
Speaker 1: made in China. Really, China UH has just ended a
Speaker 1: thirty year period of the most spectacular UH growth at
Speaker 1: a large development economy has ever experienced. This was a
Speaker 1: manufacturing lad commodity intensive growth binge. China's UH. You know,
Speaker 1: it's it's primary fuel sources coal, but it's demand for
Speaker 1: oil account for the total growth in global oil demand
Speaker 1: over the last ten years. It's a share of base metals.
Speaker 1: China's the most metal intensive economy in in in the world.
Speaker 1: And China is moving right now transitioning not just to
Speaker 1: slower GDP growth, but to commodity lights services growth. So
Speaker 1: in making the move from commodity intensive manufacturing to commodity
Speaker 1: lights services and taking the GDP down from ten to
Speaker 1: pick your number six or seven. UM, it's a double
Speaker 1: lammy because of the production side. The supply side of
Speaker 1: commodity markets is in denial over the shortfall of Chinese
Speaker 1: demand and the shift to UM commodity led services. And
Speaker 1: I think that's a huge factor that's really unappreciated. The
Speaker 1: cliche I've heard repeatedly, and I've never been able to
Speaker 1: verify the data. Is that in the past three years,
Speaker 1: or in a three year period that ended not long ago,
Speaker 1: China consumes more cements than the United States did last century. Yeah,
Speaker 1: I don't know if that's exactly right, but but but
Speaker 1: China's share of the global cement market is about that.
Speaker 1: That's an extraordinary and and they've got, you know, just
Speaker 1: years of decades to go in terms of cement intensive
Speaker 1: infrastructure construction to um provide the shelter and the roads
Speaker 1: and the bridges and the facilities required of the prospective
Speaker 1: urbanization that is still out there. So let's talk a
Speaker 1: little bit about emerging markets in general. But you just
Speaker 1: said something that I have to follow up on. They
Speaker 1: seem to make infrastructure building maintenance a huge priority. We
Speaker 1: don't really seem to do that anymore. You notice, have
Speaker 1: you been on the FDR. I have been screaming about
Speaker 1: this for a decade. I personally believe that anytime someone
Speaker 1: gets a flat tire or breaks an axle, the bill
Speaker 1: should go to Grover Norquist. But that's just my personal bias.
Speaker 1: Are we ever going to get on the same page,
Speaker 1: as you know, we invented the idea of an interstate
Speaker 1: highway system, mobile phones, the Internet. How is it that
Speaker 1: we've developed these phenomenal economic platforms for growth United States
Speaker 1: and then kind of let them fall into a period
Speaker 1: of under investment, shall we say? Look, yeah, I'm I'm
Speaker 1: an economist. You know, I actually have a PhD in
Speaker 1: economics UM. And one of the things you're taught, you know,
Speaker 1: way back even when I studied it, is if you
Speaker 1: don't say you can't invest our national savings rate, which
Speaker 1: is the sum total of savings of our businesses, our
Speaker 1: households in the government sector, which is always indeficit. If
Speaker 1: you strip out the depreciation UH that needs to be
Speaker 1: funded through our growth savings to replace our warnut capital stock,
Speaker 1: there basically isn't any barrier. Well, now we're about three percent,
Speaker 1: which is, you know, well below our long term average,
Speaker 1: which is closer to eight. And so when you don't save,
Speaker 1: where do you get the wherewithal to invest in the
Speaker 1: infrastructure UM and even invest in human capital, let alone
Speaker 1: the new capacity we will need to compete in this
Speaker 1: globalized world. And no one focuses on the saving imperatives
Speaker 1: of the United States. But I would write about it
Speaker 1: from my Wall Street days or even in my Yale days,
Speaker 1: and I get attacked, you know in um, you know
Speaker 1: by illustrious um uh luminary some of who have Nobel
Speaker 1: prizes that we even have beards who write for the
Speaker 1: New York Times, And they said, don't listen to him.
Speaker 1: We should never save. You know, saving is um what
Speaker 1: got us into trouble uh in the nineteen thirties. And
Speaker 1: I beg to differ. I think if a nation that
Speaker 1: doesn't save well ultimately squander the seed corner of economic growth,
Speaker 1: maybe we don't need to boost our savings rate immediately
Speaker 1: and sharply, but we need to think about a long
Speaker 1: term strategy of having the wherewithal the fund what we
Speaker 1: need for our competitive survival. So let's talk a little
Speaker 1: bit about emerging markets. And by the way, those of
Speaker 1: you listening should just rewind this conversation three minutes and
Speaker 1: listen to that again, because that was an absolutely um
Speaker 1: brilliant and sightful exposition on on what America is currently
Speaker 1: doing wrong and why we have found ourselves in a
Speaker 1: competitive disadvantage. But let's change gears and go to emerging markets.
Speaker 1: We have a tendency to lump em into one group. Remember,
Speaker 1: very famously Goldman Sacks came out with the brick acronym.
Speaker 1: But really I heard they just closed the bricks, didn't
Speaker 1: do it. But stop and think about Brazil, Russia, India, China.
Speaker 1: You couldn't pick four more disparate and different entities that
Speaker 1: don't have a whole lot in common. Do we make
Speaker 1: a mistake lumping all of the emerging markets into one basket? Yeah? Absolutely.
Speaker 1: I mean, you know, with all due respect for Goldman
Speaker 1: SACS and I have great respect for them as a
Speaker 1: very powerful financial institution, but bricks was hype. It was marketing.
Speaker 1: You know, they came up with a clever acronym at
Speaker 1: a time when you know, four large emerging economies were
Speaker 1: uh seemingly on the cusp of a major breakthrough. If
Speaker 1: you pick apart the bricks, the only real growth that came,
Speaker 1: of course was in the Sea China. The b the
Speaker 1: r UH and the I were pathetic in terms of
Speaker 1: really delivering dynamic economic growth. We we do lump them
Speaker 1: all together. You know, a couple of the bricks were
Speaker 1: commodity producers. A couple of them like China and India,
Speaker 1: where commodity consumers. Uh, there are different points in their
Speaker 1: development journey. They have different political systems, they have different needs,
Speaker 1: different strategies. UH. And UM. You know, maybe this shakeout
Speaker 1: in e M that's been going on for several years
Speaker 1: is about moving away from this single minded uh sort
Speaker 1: of homogenization of emerging markets and getting back to the
Speaker 1: fundamentals of really being able to understand individual economies and companies,
Speaker 1: whether they're in emerging markets or developed markets, uh, and
Speaker 1: what their opportunities are. So let me let me change
Speaker 1: stuff up on you. Before I get to my my
Speaker 1: favorite questions. I asked all my guests, I have to
Speaker 1: bring something up that David Rosenberg, who was essentially your
Speaker 1: counterpart at Morgan Stanley who is now back up in Canada,
Speaker 1: said something is a political refugee. A lot of respect
Speaker 1: for you. David had said one of the most profound
Speaker 1: insights he developed as an economist was when he moved
Speaker 1: from the cell side, where you're making forecasts and letting
Speaker 1: the chips full where they may to the by side,
Speaker 1: where the questions that come from clients and fund managers are, well,
Speaker 1: how much conviction do you have in that forecast? And
Speaker 1: if you're wrong what's your plan be? And that was
Speaker 1: something that never came up. Uh from the south side.
Speaker 1: Have you ever had a similar perspective looking at the
Speaker 1: different rules economists. Yeah, I say, I think that's a
Speaker 1: fair point. But but you know, I I was amazed.
Speaker 1: I mean, I maybe I just David had a more
Speaker 1: sheltered life when he was toiling in Maryland. But when
Speaker 1: I first started going out on the road Morgan Stanley
Speaker 1: in the nine, I would go into these conference rooms
Speaker 1: of these legendary investors and you know, I'd give him
Speaker 1: my baseline case. And one guy, actually um had a
Speaker 1: sign in the middle of his conference room where we
Speaker 1: listened to salth side presidents, get to your point within
Speaker 1: five minutes. If you don't with this meeting is over.
Speaker 1: So within five minutes I had to lay out my
Speaker 1: base case. And then then you know, I would stop
Speaker 1: and he and others would say, Okay, you know, good case.
Speaker 1: How could you be wrong? And when I first heard
Speaker 1: that question, I go, like, you gotta be kidding me.
Speaker 1: You know, I can't be wrong. You know, I came
Speaker 1: from the fit, and then I realized, you know, it's
Speaker 1: because actually what you know, they wanted to test, they
Speaker 1: want to test your conviction. And so I got that
Speaker 1: um uh that that pressure repeatedly uh in my cell
Speaker 1: side years on Wall Street. And I think it's a
Speaker 1: great question. You've got you've you've got to you know,
Speaker 1: own both sides of the debate. In fact, the most
Speaker 1: successful course that I teach at Yale right now is
Speaker 1: called the macro Debate, where I co teach it with
Speaker 1: a you know, a theoretical economist from the Yale Econ
Speaker 1: department who has never been in the real world. His
Speaker 1: name Alex Sabinski. He's Russian, he's brilliant, he's a great
Speaker 1: friend of mine. But he's the theorist. I'm the market practitioner,
Speaker 1: and we debate everything. And and when I first hit
Speaker 1: him with this idea, you know, we had a huge
Speaker 1: fight in one of the Yale um uh sort of
Speaker 1: a college dining rooms, because I challenged him on the
Speaker 1: other side of his one of his theoretical models, and
Speaker 1: he was, uh, just not used to being challenged and
Speaker 1: thinking about the other side of the debate, and so
Speaker 1: you know, we had this big fight. A lot of
Speaker 1: students thought that, you know, it was cool to see this,
Speaker 1: you know, this new guy fighting with one of their
Speaker 1: theoretical giants, and so we turned it into a course
Speaker 1: in the university supported UM and we've taught this course
Speaker 1: UM now for five years and it is it's possibly
Speaker 1: the highest ranked undergraduate e concourse at Yale because we've
Speaker 1: taught the students that not you don't want to just
Speaker 1: UM go out with a stylized, theoretically driven view of macro.
Speaker 1: You've got to debate both sides of these burning issues.
Speaker 1: And we do that in the classroom UH, and we
Speaker 1: give them a lot of assignments and exams UH to
Speaker 1: test them and their ability and the tools they developed
Speaker 1: to understand this. And so I think that um uh
Speaker 1: IS has got to be an important feature of the
Speaker 1: Wall Street debate as well. It's got a flavor of
Speaker 1: mood court where you have to be able to argue
Speaker 1: both sides of the case because you really can't understand
Speaker 1: something unless you know your your counterparty's strengths and your
Speaker 1: own weaknesses. And and then you have to be you
Speaker 1: have to have enough hu million now that you know,
Speaker 1: you may have a brilliant idea or insight, but you
Speaker 1: know many times you're you're just gonna, you know, fall
Speaker 1: in your face and be proven dead wrong. If you
Speaker 1: don't have the framework and the knowledge of what's on
Speaker 1: the other side of it, you don't know how to
Speaker 1: pick yourself back up and and and and go back
Speaker 1: as a credible analyst, economist or strategist again. So so
Speaker 1: let's go back to your early days at both the
Speaker 1: FED and Brookings and Morgan Stanley, who were some of
Speaker 1: your early mentors. Well, um, you know, that's that's a
Speaker 1: good question. Is I look back on, uh, you know, mentorship.
Speaker 1: I mean, I certainly when I was at the FED, Um,
Speaker 1: I was was was intimidated and ultimately influenced by by
Speaker 1: two major figures. UM one Arthur Burns. He was the
Speaker 1: chairman of the FED UH in the nineties seventies, and
Speaker 1: um you know, God rest his soul, did a terrible
Speaker 1: job as a central banker and really failed to appreciate
Speaker 1: the role that monetary policy could play in fostering high inflation.
Speaker 1: So I learned a lot from that experience, which I
Speaker 1: subsequently would refer to as a politicization of of the FED.
Speaker 1: And I think there's some of that that is very
Speaker 1: much present, um uh, you know in the greenspan uh
Speaker 1: and and bernanke Aris and hopefully will be dealt with
Speaker 1: effectively by Janet Yellen, who I have enormous respect for. UM.
Speaker 1: I also learned a lot from from Paul Wolker, who
Speaker 1: basically came in and said, here's why Arthur Burns is wrong,
Speaker 1: and here's what it's going to take to ring inflation
Speaker 1: out of the system. That they were both very formative
Speaker 1: in my early experience when I went into Wall Street.
Speaker 1: If I look back on, you know, all the individuals
Speaker 1: that influenced me the most, UM, I'd have to say
Speaker 1: it was it was my my dear and sadly departed friend,
Speaker 1: Barton Biggs. Barton Um was not only I think a
Speaker 1: great investor, but he was able to marry his macro
Speaker 1: insights with his views on markets and and we were
Speaker 1: closely together. And he was tough. Um. You know, he
Speaker 1: was a gentle soul of many respects, but he was
Speaker 1: also intellectually rigorous and tough and always demanding that when
Speaker 1: I came out with some crazy theory on productivity or
Speaker 1: debt or China or whatever it was, that I market
Speaker 1: to market, try to understand what the market was discounting
Speaker 1: with respect to my trends, and then to be stronger
Speaker 1: weak and emphasizing my trend not on the basis of
Speaker 1: my quote brilliant unquote analysis, but on the basis of
Speaker 1: how far the market was willing to go in believing
Speaker 1: or disbelieving. And so he connected me as a macro
Speaker 1: thinker to the markets discounting mechanism. And that's not something
Speaker 1: that you learn uh in PhD program in UH in
Speaker 1: grad school. Something you learned really by by living and
Speaker 1: breathing the markets. And and Barton was absolutely superbic. Then
Speaker 1: you've you've been in the financial industry more or less
Speaker 1: for thirty almost forty years. What has changed for the
Speaker 1: better and for the worst since you began? Well, you know,
Speaker 1: we started out this conversation by and by saying I
Speaker 1: was just lucky to be in the right place at
Speaker 1: the right time. You know, it was the golden age
Speaker 1: of Wall Street research, especially at Morgan Stanley. We we
Speaker 1: could be very entrepreneurial in the way we developed research products.
Speaker 1: We really had a clean slate. And you know, thirty
Speaker 1: five forty years later, UH, there's a lot of people
Speaker 1: out there competing for um uh sort of airspace and time,
Speaker 1: and you know, you have these Internet enabled distribution systems
Speaker 1: push research out seven to everybody. I think the marketplace
Speaker 1: for ideas has become much more commoditized, and um, the
Speaker 1: perspective has shortened. There's you know, like I look at
Speaker 1: what happened, um, you know in the markets this week.
Speaker 1: I mean, you know, the only issue people cared about
Speaker 1: was whether the FED was going to finally and the
Speaker 1: zero interest rate regime and moved by twenty five basis points. UM.
Speaker 1: I think, um, uh you know, it's a very myopic
Speaker 1: view of the world. I think there's very little that's
Speaker 1: done right now in developing these deeper thematic insights. It's
Speaker 1: really gonna guide shape and reshape the investment climate, the
Speaker 1: economic climate, uh, and the policy regime over longer periods
Speaker 1: of time. So I think, um, you know, we were
Speaker 1: lucky to be able to focus on some of these
Speaker 1: long term themes and debate them, sometimes seemingly endlessly. Uh.
Speaker 1: And I think the the cell side is now drawn
Speaker 1: into a much more short term um uh time arizon
Speaker 1: that moves away from these um broader themes. I imagine
Speaker 1: Barton Biggs would have looked at this week and said
Speaker 1: FED fun futures are at probability of of a quarter
Speaker 1: point INCREASEY would have waved it off and said, this
Speaker 1: is already in the price, let's talk about what's going
Speaker 1: to happen in the future. I think that's absolutely right.
Speaker 1: Um uh. You know. Once Barton's greatest gift I think
Speaker 1: was this uncanny sense of knowing when the market was
Speaker 1: discounting a macro trend. And as soon as that uh
Speaker 1: he concluded that the trend was in the market, he
Speaker 1: wanted to move on to something else makes makes a
Speaker 1: whole lot of sense, and so he and and and Byron,
Speaker 1: to his credit, understood that through his um contrarian ten
Speaker 1: surprises approach. He also felt, um, I think have influenced
Speaker 1: by Barton, although Byron would never want to admit that publicly. Uh,
Speaker 1: that it was really important to understand what was in
Speaker 1: the market before you made um uh an out of
Speaker 1: consensus bet for the future. So Byron was a guest
Speaker 1: here a couple of months ago. What I what, I
Speaker 1: really and he still travels extensively, which is amazing. What
Speaker 1: I loved. I'm not a big fan of forecast, but
Speaker 1: I find his tense surprises to be brilliant because instead
Speaker 1: of forecasting what's going to happen and being wrong. The
Speaker 1: forecast attempt is, hey, here are some unexpected surprises, and
Speaker 1: it was just a brilliant twist on the usual. Well,
Speaker 1: but it's the same I, you know, it's the same concept.
Speaker 1: And I agree, you know, I I like I used to.
Speaker 1: I spent twenty one years with Byron. We traveled the
Speaker 1: world together, We were you know, I was as close
Speaker 1: with him as I uh, I was with you know,
Speaker 1: my own siblings aren't spent more time with him, and
Speaker 1: he spent more time with me than we did with
Speaker 1: our own spouses. Um. And so I I would you
Speaker 1: be shoulder or shoulder with him as he would articulate
Speaker 1: his ten surprises, and I would you know, lay out
Speaker 1: some you know, macro views that were either consistent or
Speaker 1: inconsistent with that. Sometimes we agreed, sometimes we didn't. Uh.
Speaker 1: We debated a lot, we challenged each other a lot.
Speaker 1: But he his focus again was in in maintaining the
Speaker 1: view that I make big money as an investor when
Speaker 1: I bet against something that is not in the market,
Speaker 1: rather than when I bet on something that's in the market.
Speaker 1: So this goes back to the Barton bigs insight that
Speaker 1: you need to really focus most of all on what
Speaker 1: the market is discounting and to be able to identify
Speaker 1: those anomalies, those trends, those opportunities, those risks that are
Speaker 1: not in the price. And when you can do that, uh,
Speaker 1: you really add value to the thought process that guides
Speaker 1: in shapes markets prospectively rather than looking back through that
Speaker 1: rear view mirror. So our last two questions, UM, you
Speaker 1: work with a lot of millennials, a lot of students.
Speaker 1: What sort of advice would you give a student of
Speaker 1: yours who comes to you and says, I'm thinking about
Speaker 1: going into finance as a career. I get a lot
Speaker 1: of those students all the time, and you know, despite
Speaker 1: the post crisis shake out of Wall Street, UM, I'm
Speaker 1: still shocked about a large number of students who want
Speaker 1: to go down, uh that road. And I always tell them, look,
Speaker 1: try it out for a few years. You know you're
Speaker 1: gonna get if you're an undergrad, go to work for
Speaker 1: a Goldman, Sachs, Morgan, Stanley or whatever for a few years,
Speaker 1: and then after two to three years take stock. You've
Speaker 1: you've you've been on a trading desk, you've been an analyst.
Speaker 1: Does this give you the satisfaction you want going forward,
Speaker 1: and then take a pause, take a break, do something
Speaker 1: else after two to three years, after you've done your
Speaker 1: first stint, uh, you know in Wall Street, and that's
Speaker 1: something else, could be going back to grad school or
Speaker 1: getting a job, you know, in an industry that actually
Speaker 1: makes things opposed to promote ideas. And then compare those
Speaker 1: next two to three years or your first two to
Speaker 1: three years, and you'll have a better judgment as to
Speaker 1: what you want to do in the future. But don't
Speaker 1: just monolithically get your degree from a great school like
Speaker 1: Yale where I teach UM, and then just assume that
Speaker 1: you figured out that Wall Street or finance is your future.
Speaker 1: It still pays very well, there's great opportunity there, but
Speaker 1: there's more. As millennials will tell you, and I actually
Speaker 1: study millennials a lot in my coursework. UM. Millennials are
Speaker 1: very nonconforming. They want something else out of life than
Speaker 1: what you and I did when we were first starting out,
Speaker 1: and so uh, life satisfaction is really important to them,
Speaker 1: and they need to challenge those aspirations with the actual
Speaker 1: experiences that they're getting rather than what something looks good
Speaker 1: on paper. And our final question what is it that
Speaker 1: you know about investing today that you wish you knew
Speaker 1: forty years ago when you were beginning. I think, UM,
Speaker 1: the most important thing is is going back to this
Speaker 1: discipline of having an enormous respect for the markets to
Speaker 1: anticipate uh these seemingly brilliant macro economic insights that I
Speaker 1: and others can come up with, and UH connecting markets
Speaker 1: to the discernment uh the understanding of macro trends. That's
Speaker 1: a big challenge a lot of investors. I remember when
Speaker 1: I first started out in the business. UM, I met
Speaker 1: this guy at at Fidelity. I had no idea who
Speaker 1: he was. I was so green. His name was Peter Link,
Speaker 1: and uh, you know, he was very polite. You know.
Speaker 1: I remember someone gave me a list of people to call,
Speaker 1: so I called, you know, I called him up and
Speaker 1: I introduced myself and he asked me, said, you know,
Speaker 1: what what do I do? And I said, well, you know,
Speaker 1: I'm recently on Wall Street. I came from the Federal Reserve.
Speaker 1: I four asked the economy. He says, so you do
Speaker 1: economics and I said, you know, I said, well do
Speaker 1: me A favorite says UM. I really enjoyed talking again,
Speaker 1: but don't ever call me again because I don't I
Speaker 1: don't really have any use for economists. He was very polite, uh.
Speaker 1: And then he wrote about this in one of his
Speaker 1: books about he didn't unfortunately he didn't mention me by name,
Speaker 1: but he said, you know, if you're just he has
Speaker 1: a line with something. You know, if you're spending ten
Speaker 1: minutes a year thinking about economics, you've wasted nine of them. Uh.
Speaker 1: And I took personal exception of that as a young kid,
Speaker 1: and it's been my goal ever since I'm not no
Speaker 1: longer a young kid to um make make this connection
Speaker 1: between markets uh and macro because I think if you
Speaker 1: get that connection right, and it's rare, the macro thinker
Speaker 1: they can do it, you can really add value to
Speaker 1: the process. And I wish I understood that better uh
Speaker 1: thirty five years ago uh than I did today. It
Speaker 1: takes a long time to understand and accept that. Stephen Roach,
Speaker 1: this has been absolutely fascinating. Thank you so much for
Speaker 1: being so generous with your time. UH. If you've enjoyed
Speaker 1: this conversation, look up an inch or down an inch
Speaker 1: on Apple iTunes and you could see the other seventy
Speaker 1: plus uh. Interviews we've done. Uh. Feel free to check
Speaker 1: out my daily column on Bloomberg View dot com or
Speaker 1: follow me on Twitter at rid Halts. I would be
Speaker 1: remiss if I did not thank my producer, Charlie Bohmer
Speaker 1: and my head of research, um, Michael bat Nick. I'm
Speaker 1: Barry Ridholts. You've been listening to Masters in Business on
Speaker 1: Bloomberg Radio.