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Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.

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Speaker 1: This week on the podcast, I have an extra special guest.

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Speaker 1: His name is Nathan Sheets, and he comes to us

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Speaker 1: by way of Pigum Fixed Income, a giant institutional shop.

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Speaker 1: Their fixed income department alone seven hundred and forty three

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Speaker 1: billion dollars in fixed income assets UM. Nathan has a

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Speaker 1: unique background. He served in the Treasury Department. He was

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Speaker 1: with the Federal Reserve for um eighteen or so years.

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Speaker 1: He worked at City and then Prudential, and now he's

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Speaker 1: been at Pigum for a while. He is uniquely situated

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Speaker 1: to comment about, and analyze and discuss monetary policy, state

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Speaker 1: of the economy, how best to analyze employment inflation, what

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Speaker 1: it means for interest rates, what that means for fixed

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Speaker 1: income investments. Uh. It really is a fascinating conversation filled

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Speaker 1: with wonky goodness. So if you are at all remotely

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Speaker 1: interested in any of those things, and you know I'm

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Speaker 1: interested in all of those things, you will find this

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Speaker 1: to be an utterly fascinating discussion. So, with no further ado,

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Speaker 1: my conversation with Pijum Fixed Incomes Nathan Sheets. This is

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Speaker 1: Master's in Business with Barry Ridholts on Bloomberg Radio. My

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Speaker 1: special guest this week is Nathan Sheets. He is the

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Speaker 1: chief economist and head of Global macro economic Research at

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Speaker 1: PIJUM Fixed Income, which manages seven hundred and forty three

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Speaker 1: billion dollars in assets. Previously, he was the Under Secretary

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Speaker 1: of the Treasury for International Affairs UH. Prior to that,

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Speaker 1: he worked at US Treasury Department, as well as the

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Speaker 1: Federal Reserve, where he served as director of the Division

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Speaker 1: International Finance. Previously he was at City Group. Did I

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Speaker 1: get that right or room? How far off? Was? I

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Speaker 1: think you nailed it all right? Nathan Sheets, Welcome to Bloomberg.

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Speaker 1: Pleasure to be here. Thank you. So you have a

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Speaker 1: fascinating background. You were now you're currently at PEJAM Fixed Income.

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Speaker 1: Previously you were prudential at City Group, the U. S

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Speaker 1: Treasury and the Federal Reserve. Was was this the plan?

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Speaker 1: Was this the career path you had mapped out for yourself.

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Speaker 1: I think it would have been impossible to foresee how

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Speaker 1: things would evolve, But coming out of grad school, I

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Speaker 1: did want a career in practical economics. I wanted to

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Speaker 1: take the theory that I had learned and applied in

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Speaker 1: a way that it might actually make a difference in

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Speaker 1: in the lives of people. And hence all this public

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Speaker 1: service at the Treasury Department and the Federal Reserves I envisioned.

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Speaker 1: I envisioned public service. My first job was was at

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Speaker 1: the Federal Reserve. But uh, I'm also you know, I

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Speaker 1: think a practically minded guy, at least as practically as

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Speaker 1: you can be and still be an economist, and I

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Speaker 1: was interested in applying these kinds of principles in a

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Speaker 1: in a private sector context as well. So I couldn't

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Speaker 1: have predicted the path or how things would evolve. I've

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Speaker 1: been very fortunate in the opportunities that I've had, but uh,

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Speaker 1: I did very much want to do qualitatively these kinds

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Speaker 1: of things. So so you come out of your PhD program,

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Speaker 1: you say, I'm not going to go into academia, but

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Speaker 1: the next best best thing is the Federal Reserve, who

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Speaker 1: typically hires PhDs as researchers. What what was your first

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Speaker 1: job at the Fed? Like the Federal Reserve, for me,

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Speaker 1: especially in those first years, was a vigorous post doc.

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Speaker 1: It allowed me to take, uh the theory and as

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Speaker 1: I said, apply it in practical ways to real world issues.

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Speaker 1: So my first assignment was to follow Rush UH and

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Speaker 1: some of the other transitioning economies Poland, Hungary and so forth.

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Speaker 1: I in the in the mid ninety nineties when they

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Speaker 1: were transitioning from a centrally planned system into market based economies,

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Speaker 1: and it was it was very exciting to see the

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Speaker 1: interplay between politics and policy and economics and sociology through

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Speaker 1: through that period. So Russia continues to struggle with corruption

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Speaker 1: on its path to capitalism. Some of the outer block

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Speaker 1: form of Soviet countries are doing much better. What's that

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Speaker 1: transition like and are they still heading in the right direction.

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Speaker 1: What we're finding is that the countries that had some

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Speaker 1: tradition of capitalism are doing quite well. Most of those.

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Speaker 1: Most of those are the Central Europeans. The Czech Republic

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Speaker 1: is doing very well, Slovakia is is doing well. UH.

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Speaker 1: Kind of the next wrong. You've got countries like like

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Speaker 1: Gary and Romania, maybe not quite as well as as

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Speaker 1: the Czech Republic and in the Slovak Republic, but they're

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Speaker 1: they're proceeding. Uh. Russia, as you say, UH continues to struggle,

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Speaker 1: and frankly, I think history will have a judgment as

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Speaker 1: to whether we had opportunities there to help the Russians

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Speaker 1: more effectively than we actually did. And then many of

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Speaker 1: the UH former Soviet republics continue to struggle. They have

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Speaker 1: very low levels of per capity income, and UH have

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Speaker 1: a significant distance yet to go before they're really part

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Speaker 1: of the global economy. Since your early days at the FED,

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Speaker 1: the global monetary system has really evolved, some of it,

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Speaker 1: certainly in response to the Great Financial Crisis. Where do

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Speaker 1: you see the future of monetary policy UM from from

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Speaker 1: your perspective at Pigium today. During the twenty five years

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Speaker 1: when I've been a professional economist, the global economic and

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Speaker 1: monetary system has absorbed two very large shocks or changes.

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Speaker 1: I'd say the first one has been the ongoing integration

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Speaker 1: of China. From a structural standpoint. Uh, the addition of

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Speaker 1: one in a quarter billion Chinese into the global economy

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Speaker 1: has been UH significant, and we're still dealing with the

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Speaker 1: implications of that. Deflationary or inflationary or at times both.

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Speaker 1: I think so far more deflationary or disinflationary that uh,

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Speaker 1: most of those folks had lower wages than Western workers,

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Speaker 1: and I think that's put downward pressure on wages throughout

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Speaker 1: the world over the last twenty or twenty five years.

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Speaker 1: And the second issue. You mentioned that second major issue

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Speaker 1: is the global financial crisis, so China. The big actual issue,

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Speaker 1: the global financial crisis, is the big cyclical issue. But

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Speaker 1: the bottom line, and as it pertains to the international

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Speaker 1: monetary system in particular, is that notwithstanding these two big shocks,

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Speaker 1: the role of the dollar and the centrality of US

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Speaker 1: markets has remained largely intact. The dollars still by far

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Speaker 1: the world's leading reserve currency, the US financial markets are

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Speaker 1: essentially unrivaled in the world. That that in many ways

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Speaker 1: the world is more multipolar, but not so much in finance.

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Speaker 1: Let's talk a little bit about your role at the

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Speaker 1: Federal Reserve. How did you start, what did that evolve into,

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Speaker 1: and how closely did you end up working with the

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Speaker 1: board and its chairman so UH. I was at the

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Speaker 1: Fed for eighteen years. UH. During the entirety of the time,

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Speaker 1: I was in the Division of International Finance. UH. During

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Speaker 1: the first fourteen of those years, I held a variety

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Speaker 1: of roles. I mentioned Russia, and I was falling emerging

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Speaker 1: markets in Japan and so forth. During the last four

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Speaker 1: which started in two thousand and seven, I was the

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Speaker 1: director of the International Finance Division as the global financial

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Speaker 1: crisis emerged, and had the opportunity and the responsibility to

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Speaker 1: work closely with Ben Bernanke and the Board and and

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Speaker 1: and others and trying to respond to that that terrible

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Speaker 1: set of economic conditions. So there's been a lot of

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Speaker 1: revisionist Dick history. If you remember um early on in

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Speaker 1: the in the financial crisis, the FED is going to

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Speaker 1: be the ruin of all of us. They're gonna cause

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Speaker 1: hyper inflation, They're going to destroy the dollar. They should

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Speaker 1: just stand down. What sort of great do you give

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Speaker 1: the Federal Reserve for the job they did both before, during,

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Speaker 1: and after the financial crisis? So I'm probably a little biased. Uh,

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Speaker 1: I would give the FED, I don't know, a B

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Speaker 1: for a pre crisis. And I think the criticism there

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Speaker 1: is not about monetary policy, which I think was about right.

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Speaker 1: But the FED didn't do what it could have done

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Speaker 1: in the regulatory space and allowed imbalances in the financial system.

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Speaker 1: Relic and his work for sure, exactly exactly, and the

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Speaker 1: FED was not unique, the FED was not alone. But

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Speaker 1: I don't see I can give the Fed more than

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Speaker 1: a B. Now during the heat of the crisis. UH,

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Speaker 1: A vigorous response was absolutely necessary. As we were sitting

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Speaker 1: in the Fed's building and those terrible facts were emerging. UH.

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Speaker 1: It reminded me a bit of the Jack Nicholson line,

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Speaker 1: you can't handle the truth. The truth was terrible, and

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Speaker 1: UH Bernankee and guide here and then UH pulse and

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Speaker 1: at the Treasury. They just worked through this and they

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Speaker 1: had a set of a set of responses. I would

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Speaker 1: give the FED an A for that period. Lehman obviously

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Speaker 1: failed and no one saw the consequences of that. I

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Speaker 1: think they were going to let somebody fail at some point.

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Speaker 1: That's why I don't give them an UH an A plus.

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Speaker 1: And then, frankly, since the financial crisis, I think the

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Speaker 1: FED again has done a pretty good job keeping keeping

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Speaker 1: inflation expectations well anchored and supporting UH growth in the

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Speaker 1: US economy. When you look around the world, you know,

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Speaker 1: we can't say things are growing gangbusters in the United States,

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Speaker 1: but we're doing better than Europe and Japan and UH

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Speaker 1: and many others. So let me push back a little bit.

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Speaker 1: I don't think we're all that far apart, and in fact,

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Speaker 1: I think revisionist history helps the fed's decision with Lehman

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Speaker 1: Brothers because subsequently learned that Lehman Brothers had a negative

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Speaker 1: net worth of minus a hundred and fifty billion dollars.

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Speaker 1: Nobody could have taken Lehman Brothers on ps. Dick Folds

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Speaker 1: turned down Warren Buffett when they needed some capital six

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Speaker 1: months before they collapsed. At what point I just picture

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Speaker 1: these meetings at the FED where someone says, this idiot

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Speaker 1: said no to Buffett, how can we possibly bail him out?

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Speaker 1: It's but here's where I disagree with you. So in

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Speaker 1: the period leading up to the crisis, we're we're totally

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Speaker 1: in sync about people like Ed Graham should have been

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Speaker 1: listened to. He understood the regulatory lapses that were being

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Speaker 1: taken advantage of by the private sector. But dear Lord,

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Speaker 1: we had federal reserve rates um under two percent for

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Speaker 1: three years and at one percent for a year. That

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Speaker 1: really kicked off a giant inflationary spiral. I think Greenspan

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Speaker 1: was far too accommodative post nine eleven. He was emotionally

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Speaker 1: shaken up and did not normalize rates fast enough. I

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Speaker 1: have heard people make the same complaints post crisis. The

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Speaker 1: FED has not normalized rates fast enough. In each case,

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Speaker 1: it both instances led to um income inequality and political instability.

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Speaker 1: How far off is that criticism? So? UH, when I

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Speaker 1: think about what a different path of policy rates might

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Speaker 1: have looked like, I suppose you compare it to a

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Speaker 1: benchmark like the Tailor rule. The FED was a little

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Speaker 1: bit softer than the Tailor rule. But in my mind,

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Speaker 1: the misses are a couple of rate hikes and a

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Speaker 1: little bit in timing. It doesn't seem like, even if

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Speaker 1: we think there should have been a more vigorous UH

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Speaker 1: monetary policy response, that the difference between what they did

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Speaker 1: and what one might envision was large enough to explain

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Speaker 1: the imbalances UH and problems that erupted in the economy.

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Speaker 1: My feeling really is that the mistakes were on the

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Speaker 1: regulatory side, on the government side, in board rooms, amongst managers,

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Speaker 1: amongst traders. I mean, there's a lot of blame to

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Speaker 1: go around for the global faviss but I just don't

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Speaker 1: think that the misses for monetary policy we're big enough

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Speaker 1: to get really on the scoreboard relative those other mistakes.

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Speaker 1: So let's let's play a counter factual game. Some people

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Speaker 1: wanted the FED to do nothing during the crisis. Hey,

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Speaker 1: it's Congress's responsibility. What would the world have looked like

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Speaker 1: if the FED said we'd like to create uh um

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Speaker 1: either QWI years up, but really it's up to the

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Speaker 1: Senate in the House, we're gonna do nothing and follow

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Speaker 1: their lead. What would the world have looked like then?

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Speaker 1: So as it was, we saw the unemployment rate rise

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Speaker 1: to ten percent. I honestly believe that if the Fed

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Speaker 1: had done nothing and had just waited for Congress, we

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Speaker 1: could have seen the unemployment rate twice that hot. That

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Speaker 1: would have been more like what happened during the Great Depression.

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Speaker 1: And h I think that if the FETE had been

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Speaker 1: hands off, if they had said, that's not our responsibility,

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Speaker 1: that uh, we could have had Great Depression two point

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Speaker 1: oh right. And as it was, as it said, it

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Speaker 1: was unimaginably terrible, but it could have been even worse. Um,

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Speaker 1: I don't I don't disagree with that at all. Um.

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Speaker 1: Lots of folks got the implications of KWIE wrong. Very famously.

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Speaker 1: A number of people had a letter in the Wolf

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Speaker 1: Street Journal to Ben Bernecki that said, I want to

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Speaker 1: say this was, Hey, your quantitative easing is again, We're

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Speaker 1: gonna see hyper inflation. We're going to see the collapse

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Speaker 1: of the dollar. You're destroying the economy. And in fact

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Speaker 1: none of the sort happened. Why did people get quantitative

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Speaker 1: easing so long? Was it the fundamental understanding of economics?

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Speaker 1: Was it bias or or we just haven't lived through

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Speaker 1: anything like that? What excuses can these folks legitimately offered

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Speaker 1: for being so wrong? So as the FED pursued quantitative easing,

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Speaker 1: they were really pushing out the frontier of monetary policy

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Speaker 1: and Fed, the markets and the rest of the world

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Speaker 1: didn't know the full implications of what they were doing,

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Speaker 1: and I think that's what kicked off some of these

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Speaker 1: concerns and anxieties that you described. But I think that UH,

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Speaker 1: Ben Bernanke and Jenny Yellen have been very effective at

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Speaker 1: having their economic dashboard, and I would say at the

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Speaker 1: center of that dashboard has been inflation expectations, where if

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Speaker 1: they have one objective, it's to make sure that inflation

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Speaker 1: expectations stay well anchored around two percent. And these various

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Speaker 1: policies that the FED pursued, quantitative easing and the like,

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Speaker 1: have pushed up UH inflation expectation sans some to keep

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Speaker 1: them well anchored, but there hasn't been any overshooting. Let's

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Speaker 1: talk a little bit about your current role. It seems

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Speaker 1: like your backgrounds UH in international finance at the Treasury

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Speaker 1: and everything you've done at the Federal Reserve pretty perfect

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Speaker 1: preparation for being a head of research at a at

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Speaker 1: a big fixed income shop. I feel like I learned

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Speaker 1: global macro at the Fed and the Treasury during my

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Speaker 1: time at City. I learned how to talk to investors

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Speaker 1: about markets, and I'm able to draw on that background

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Speaker 1: on a daily basis in my work at at PGAM

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Speaker 1: Fixed Income. The new dimension is being closer to the

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Speaker 1: portfolio allocation process and closer to the portfolio managers and

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Speaker 1: getting a better sense of the real considerations that go

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Speaker 1: into that decision of should we buy or sell a

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Speaker 1: given asset. So your clients are essentially all big institutions, UM,

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Speaker 1: how often do you get to interact with UH investors

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Speaker 1: from these other institutions and and what are they concerned

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Speaker 1: about today? So UH, the interaction with with our clients

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Speaker 1: is frequent, UH and intensive. I travel extensively across the

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Speaker 1: United States and also globally. We have lots of clients

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Speaker 1: in Europe, Japan, Asia, and elsewhere. In terms of issues,

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Speaker 1: I would say the short term issue that clients are

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Speaker 1: the most interested in is how much steam does this

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Speaker 1: expansion have left? Are we looking at a recession around

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Speaker 1: the corner. It's been running for a while, We've been

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Speaker 1: hearing warnings about that for two or three years. Exactly

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Speaker 1: is this late cycle or not? The longer term issue

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Speaker 1: that they're the most focused on is debt and demographics.

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Speaker 1: What what does this kind of ad verse cocktail mean

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Speaker 1: for our long term performance? So so let's talk about

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Speaker 1: the first one about the length of the cycle. I

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Speaker 1: have long since complained that most economists are using the

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Speaker 1: wrong data set. It's not recessions, it's post credit crisis

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Speaker 1: recoveries that they should be looking at, and they seem

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Speaker 1: to be very different than the ordinary balance sheet recession.

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Speaker 1: Explained that if you would yes, so uh a decade

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Speaker 1: or so ago, uh Ken Rogoff and Carmen Reinhardt did

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Speaker 1: some very interesting work where they looked at decades and

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Speaker 1: decades of recessions and compared those that are driven by

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Speaker 1: banking crises to those recessions that arise for other reasons.

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Speaker 1: And what they found was that the recoveries from those

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Speaker 1: banking crises were systematically slower, and that the slower pace

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Speaker 1: of growth persisted for up to a decade. And when

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Speaker 1: you look at the US experien ariants, it seems to

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Speaker 1: be match Reinhardt and rogue Off almost almost almost precisely.

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Speaker 1: It really is is quite extraordinary. Now, the one thing

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Speaker 1: I would say that's on the other side of the

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Speaker 1: ledger is that this has been slower as they predicted,

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Speaker 1: but this has also been a uh an extraordinarily persistent expansion,

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Speaker 1: where by July it will be the longest expansion in

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Speaker 1: in US history. So it's been slower but also longer lived.

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Speaker 1: So some people have given Reinhardt and rogue Off a

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Speaker 1: little pushbacked um, this time is different. Eight Centuries of

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Speaker 1: Financial Folly was the book they wrote post crisis. But

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Speaker 1: what a lot of folks do not recall is that

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Speaker 1: in December two thousand and seven they put out a

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Speaker 1: white paper that looked at five crises. I want to

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Speaker 1: say it was US, Mexico, Sweden, Japan one other that

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Speaker 1: escapes my my recollection. So before or like literally as

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Speaker 1: the market peaked, they put out a paper that said says,

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Speaker 1: here's how financial crises are different and why the recoveries

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Speaker 1: are different, also very prescient. Very few people really paid

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Speaker 1: a lot of attention to that, but they were dead on,

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Speaker 1: weren't they. They really were, you know, I'd say five

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Speaker 1: years ago there was a debate as to what was

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Speaker 1: going on, why was growth slower? And I think all

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Speaker 1: the other explanations have kind of melted away and we

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Speaker 1: just have to accept the fact this was deep. It

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Speaker 1: hit our financial sector. There are significant headwinds to to

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Speaker 1: to bank credit and lending, and probably also scars in

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Speaker 1: terms of of of demand for credit in the corporate sector,

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Speaker 1: which is translated not only into somewhat tighter credit conditions

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Speaker 1: than would have prevailed, but also Uh, corporates have been

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Speaker 1: hesitant to invest, and all of that has been a slower,

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Speaker 1: slower recovery. You mentioned the longer term concerns of your

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Speaker 1: institutional clients are the nation of debt and demographics. I'm

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Speaker 1: assuming they mean sovereign debt or is it also corporate debt?

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Speaker 1: How do those two play together? I would say, Uh,

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Speaker 1: primarily it's sovereign debt, with an asterisk that the private

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Speaker 1: debt in China is very high. Is it really private debt?

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Speaker 1: Isn't it kinda sort of like what we did with

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Speaker 1: Fannie and Freddie. Isn't there the full faith and credit

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Speaker 1: of the Chinese government behind that private debt? Or am

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Speaker 1: I overstating that in the first instance, it's it's private debt.

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Speaker 1: But your point, you know, doesn't the Chinese government implicitly

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Speaker 1: guarantee uh most of the debt in China? Is absolutely right,

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Speaker 1: and so maybe you just think about that as a

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Speaker 1: different form of of of of public debt um. But

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Speaker 1: then the question is, as these debt levels rise, and

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Speaker 1: as we know in the future, there are gonna be

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Speaker 1: a fewer workers and uh fewer taxpayers, And how do

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Speaker 1: these things interact with the each other. What are those

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Speaker 1: tax rates uh in twenty or thirty years gonna look

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Speaker 1: like uh in order to in order to make payment

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Speaker 1: to even service this debt I? And will those tax

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Speaker 1: rates have adverse implications for incentives to work? Alternatively, will

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Speaker 1: will an older society be less prone to to to

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Speaker 1: want to take risks and engage an entrepreneurship than a

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Speaker 1: younger one, And if so, then that might mean you

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Speaker 1: have a slur productivity growth. There are a number of

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Speaker 1: concerns where these issues of dabt and Demographics Interact. I'm

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Speaker 1: Barry rit Helts. You're listening to Masters in Business on

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Speaker 1: Bloomberg Radio. My special guest today is Nathan Sheets. He

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Speaker 1: is the chief economist and head of Global macroeconomic research

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Speaker 1: at Pigeon Fixed Income, which manages seven hundred and forty

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Speaker 1: three billion dollars in fixed income assets. Let's talk a

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Speaker 1: little bit about the economic cycle and where we are.

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Speaker 1: It's big in a decade since the Great Financial Crisis,

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Speaker 1: we're still a sub three percent economy, maybe even a

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Speaker 1: sub two percent economy now that the highs of the

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Speaker 1: tax cuts seem to have faded. What's our growth outlook

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Speaker 1: over the next couple of years and and why have

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Speaker 1: we been so muddled over the past few years. So

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Speaker 1: my baseline would be the growth this year is a

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Speaker 1: little bit over two percent, and the growth next year

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Speaker 1: as fiscal stimulus rolls off, will be a little bit

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Speaker 1: under two percent. But two percent is kind of trend

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Speaker 1: and that's not terrible. Mature economy compared again to many

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Speaker 1: of our international competitive that looks that looks pretty good.

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Speaker 1: Now underneath it, there's a really a rather deep and

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Speaker 1: important question, and that is that it feels like in

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Speaker 1: the economic data suggest the productivity growth has slowed significantly

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Speaker 1: over the last say, enter twenty years. And and the

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Speaker 1: question is, on the one hand, we see these data

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Speaker 1: pointing to UH slower productivity. On the other hand, it

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Speaker 1: feels like the world we're living in is a wash.

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Speaker 1: And new technologies miniaturization and and machine learning and artificial

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Speaker 1: intelligence and genomics and on and on and on, And

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Speaker 1: the big question is when and if, but when do

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Speaker 1: all of those those UH developments find their way into

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Speaker 1: the national income accounts and into productivity girls. So so

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Speaker 1: here's my pushback on this. And and people have told

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Speaker 1: me that, well, you're in a sector that is very

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Speaker 1: dependent on technology, so you're seeing productivity. But we were

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Speaker 1: once a heavy manufacturing economy. We're now a service economy,

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Speaker 1: which means every person in that value chain is using technology,

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Speaker 1: is using computers and mobile one everything else. How much

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Speaker 1: of that lack of so therefore there's a ton of

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Speaker 1: productivity growth, at least I see it. So how much

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Speaker 1: of that lack of productivity gains is really a measurement issue,

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Speaker 1: not a lack of productivity issue. So this is something

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Speaker 1: that I've explored. I've rebalanced the U S sectors and said,

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Speaker 1: suppose that we had less services and more manufacturing more

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Speaker 1: like what we had ten or twenty years ago, what

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Speaker 1: would productivity look like? And it would still be down.

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Speaker 1: So it doesn't seem like it's the services rebalancing that's

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Speaker 1: driving it, but that that that could certainly certainly be

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Speaker 1: part of it. I think another point that's important is

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Speaker 1: there is some evidence that's what's happened so far is

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Speaker 1: that the leading firms in various industries have adopted a

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Speaker 1: lot of these new technologies. But these new technologies have

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Speaker 1: not yet diffused them themselves deeply into various sectors, largely

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Speaker 1: reflecting the investment as remain kind of lackluster. That a

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Speaker 1: lot of this new technology, how are you going to

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Speaker 1: get it as a firm? You're gonna get it by

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Speaker 1: investing in firms have been hesitant to to put their

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Speaker 1: resources on the table. Let's talk a little bit about

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Speaker 1: full employment and what it should look like. We've been

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Speaker 1: hovering around four percent for a while. Shouldn't we be

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Speaker 1: seeing greater wage gains or is international competition tamping that down?

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Speaker 1: If you had told me where the unemployment rate was,

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Speaker 1: I would have guessed that wage growth would be more rapid.

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Speaker 1: So I think this is uh, this is a puzzle.

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Speaker 1: It's such surprise when I look at the economy. Why

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Speaker 1: do I think is going on? Yep? I think technology

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Speaker 1: is probably holding down wage growth. Certainly globalization is holding

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Speaker 1: down wage growth. I think another key element, as I've mentioned,

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Speaker 1: is that inflation X bytations are well anchored. And so

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Speaker 1: if you really think that inflation is only going to

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Speaker 1: be two percent and your boss offers you one and

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Speaker 1: a half percent raise, you know, is it worth it

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Speaker 1: to get to get agitated? And then that interacts with

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Speaker 1: another key factor in the US labor market is we

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Speaker 1: have very little collective bargaining. I was going to ask

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Speaker 1: you about that. The unions are a fraction of what

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Speaker 1: they were before. What does that do to the bargaining

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Speaker 1: power of of individual employees, even highly sought after STEM employees. Yeah,

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Speaker 1: so it means if you want to raise, you've got

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Speaker 1: to go slam your fist down on your boss's desk

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Speaker 1: and say, boss, I want to raise. And that's an

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Speaker 1: uncomfortable conversation that if inflation was taking off, I think

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Speaker 1: people would probably feel more comfortable having it. Now. I'd

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Speaker 1: say the good news for American workers is we are

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Speaker 1: seeing some acceleration way each gains are now over three

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Speaker 1: which is less than I would have expected, but it's

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Speaker 1: a little bit higher. And more importantly, we're also starting

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Speaker 1: to see increased churn in the labor market, so people

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Speaker 1: are leaving jobs and there are lots of jobs posted.

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Speaker 1: And the way you get a raise in the US

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Speaker 1: is to get an outside offer, and then you go

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Speaker 1: to your boss and say, boss, they want more money,

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Speaker 1: and the guy across the street is giving me a

431
00:28:23,680 --> 00:28:28,280
Speaker 1: ten percent race. Quite interesting. So here we are, we're

432
00:28:28,359 --> 00:28:31,639
Speaker 1: running bigger deficits than we ever had at this point,

433
00:28:32,160 --> 00:28:34,040
Speaker 1: which is a bigger driver for the economy. Is it

434
00:28:34,160 --> 00:28:37,800
Speaker 1: the fiscal policy or is it monetary policy? So I'll

435
00:28:37,800 --> 00:28:42,280
Speaker 1: still give the nod to monetary policy as as being

436
00:28:42,280 --> 00:28:47,080
Speaker 1: more important, but fiscal is increasingly giving it a run

437
00:28:47,120 --> 00:28:50,240
Speaker 1: for its money, so to speak. Uh. In the short term,

438
00:28:50,320 --> 00:28:54,560
Speaker 1: we've seen the power of fiscal policy in providing stimulus

439
00:28:54,600 --> 00:28:58,560
Speaker 1: and and and supporting growth. In the long run, we

440
00:28:58,640 --> 00:29:03,640
Speaker 1: have these very difficult issues of debt and deficits and

441
00:29:03,680 --> 00:29:06,840
Speaker 1: how to manage those and what the implied tax rates

442
00:29:06,840 --> 00:29:10,080
Speaker 1: are going to be. So uh, fiscal policy is becoming

443
00:29:10,680 --> 00:29:14,080
Speaker 1: increasingly important. It really strikes me as we think of

444
00:29:14,120 --> 00:29:18,360
Speaker 1: these two pillars of macro policy, how different they are

445
00:29:18,560 --> 00:29:21,480
Speaker 1: in the way they're formulated. Do you have technocrats doing

446
00:29:21,560 --> 00:29:25,320
Speaker 1: monetary policy and you have a very messy political process

447
00:29:25,920 --> 00:29:30,360
Speaker 1: with with with fiscal You're being too kind, So, um,

448
00:29:30,480 --> 00:29:33,760
Speaker 1: let's talk about what's been in the news a ton lately.

449
00:29:34,080 --> 00:29:40,000
Speaker 1: Monetary theory has been making the rounds that essentially says,

450
00:29:40,280 --> 00:29:42,680
Speaker 1: you know, you can run deficits, it's not the worst

451
00:29:42,680 --> 00:29:45,840
Speaker 1: thing in the world. Look at Japan. Their demographics are terrible,

452
00:29:45,840 --> 00:29:49,840
Speaker 1: They're running giant deficits relative to GDP, and their economy

453
00:29:49,960 --> 00:29:52,600
Speaker 1: is moving along just fine. How do you respond to

454
00:29:52,640 --> 00:29:59,760
Speaker 1: those claims? So my feeling is that modern monetary theory

455
00:29:59,800 --> 00:30:05,200
Speaker 1: is dangerous. But also, and this is why it's particularly dangerous,

456
00:30:05,360 --> 00:30:08,080
Speaker 1: is there is a grain of truth in it. We

457
00:30:08,160 --> 00:30:10,240
Speaker 1: don't know what the limits are as to how much

458
00:30:10,320 --> 00:30:13,080
Speaker 1: death the United States as a reserve currency can have.

459
00:30:13,520 --> 00:30:17,280
Speaker 1: As you say, Japan has very high levels of public

460
00:30:17,360 --> 00:30:23,600
Speaker 1: dat relative to GDP or over two of GDP. Uh

461
00:30:23,640 --> 00:30:27,320
Speaker 1: And is there a good economic case that some economists

462
00:30:27,320 --> 00:30:31,080
Speaker 1: have recently made when rates are very low to borrow

463
00:30:31,360 --> 00:30:34,360
Speaker 1: and and do infrastructure there might have very high rates

464
00:30:34,360 --> 00:30:38,040
Speaker 1: of return. So all of those things are true. But

465
00:30:38,080 --> 00:30:42,400
Speaker 1: at the same time, to say there's really no constraints

466
00:30:42,440 --> 00:30:46,080
Speaker 1: on fiscal policy, I consider it just not prudent. It's

467
00:30:46,160 --> 00:30:49,239
Speaker 1: driving too close to the edge of the cliff. We

468
00:30:49,320 --> 00:30:52,880
Speaker 1: don't know exactly where that edge is, but I sure

469
00:30:52,960 --> 00:30:55,880
Speaker 1: don't want to find out. See what what you're supposed

470
00:30:55,920 --> 00:30:59,200
Speaker 1: to do is lie and say these tax cuts will

471
00:30:59,200 --> 00:31:02,719
Speaker 1: pay for themselves elves and then run giant deficits and

472
00:31:02,760 --> 00:31:05,320
Speaker 1: by the time people figure it out, you've already retired

473
00:31:05,360 --> 00:31:07,800
Speaker 1: to the bomb is in, You're you're out of office.

474
00:31:07,840 --> 00:31:10,640
Speaker 1: That that, I think is the key, the key secret

475
00:31:10,680 --> 00:31:14,680
Speaker 1: there um. But there is some truth to the fact

476
00:31:14,720 --> 00:31:18,200
Speaker 1: that whether you're looking at monetary theory from the left

477
00:31:18,720 --> 00:31:23,840
Speaker 1: or the right, and the same with fiscal theory, neither party,

478
00:31:23,960 --> 00:31:30,400
Speaker 1: neither ideological wing UM has a monopoly on not running deficits.

479
00:31:30,440 --> 00:31:33,600
Speaker 1: They both seem to run deficits. Although I have to

480
00:31:33,600 --> 00:31:37,040
Speaker 1: give the Clinton administration a little credit for UM actually

481
00:31:37,120 --> 00:31:40,320
Speaker 1: running a surplus one year, but the Obama administration and

482
00:31:40,360 --> 00:31:44,000
Speaker 1: the Bush administration, they and now the Trump administration, they've

483
00:31:44,040 --> 00:31:46,640
Speaker 1: all been running deficits. And I think the I think

484
00:31:46,680 --> 00:31:52,560
Speaker 1: the point here is the right hates taxes, the left

485
00:31:52,960 --> 00:31:57,640
Speaker 1: love spending and guess what both of those mean somewhat

486
00:31:57,720 --> 00:32:02,040
Speaker 1: higher deficits. Where do we get fiscal restraint? We get

487
00:32:02,080 --> 00:32:06,600
Speaker 1: fiscal restraint from the center, and uh, the political center,

488
00:32:06,840 --> 00:32:12,560
Speaker 1: especially at present, is very hollowed out. So so let's

489
00:32:12,600 --> 00:32:16,040
Speaker 1: talk a little bit about the center in terms of

490
00:32:16,120 --> 00:32:20,880
Speaker 1: the nexus between the markets and the economy. Because the

491
00:32:20,920 --> 00:32:24,320
Speaker 1: old joke is um economists have predicted nine of the

492
00:32:24,320 --> 00:32:29,360
Speaker 1: previous four recessions. But in reality, when the economy begins

493
00:32:29,440 --> 00:32:33,200
Speaker 1: to slow and when profits begin to get curtailed, you know,

494
00:32:33,240 --> 00:32:35,200
Speaker 1: the market just happens to pick it up a little

495
00:32:35,240 --> 00:32:38,760
Speaker 1: faster than the economic data because it's reported so much sooner.

496
00:32:39,360 --> 00:32:45,320
Speaker 1: What what's that relationship between economics and and equity prices?

497
00:32:45,360 --> 00:32:51,240
Speaker 1: So there's all sorts of theory about how uh equity

498
00:32:51,320 --> 00:32:56,560
Speaker 1: prices are current expected value of future profits and uh,

499
00:32:56,840 --> 00:32:58,880
Speaker 1: you know, all of those things are important. What we're

500
00:32:58,880 --> 00:33:03,240
Speaker 1: expecting for for profitability, what we're expecting for rates, what

501
00:33:03,360 --> 00:33:08,160
Speaker 1: we're expecting for growth. But the mapping is a very

502
00:33:08,320 --> 00:33:12,320
Speaker 1: very noisy one. I'd love to be able to say, uh,

503
00:33:12,360 --> 00:33:15,360
Speaker 1: if you give me the economy, I know the markets,

504
00:33:15,360 --> 00:33:19,320
Speaker 1: but i'd also need to know a sentiment uh, and

505
00:33:19,360 --> 00:33:24,360
Speaker 1: a lot of sociological and psychological elements. UH. So I

506
00:33:24,400 --> 00:33:28,840
Speaker 1: would say macro is part of the story, but the

507
00:33:28,880 --> 00:33:35,080
Speaker 1: best market commentators, the best strategists, deeply understand something in

508
00:33:35,120 --> 00:33:39,280
Speaker 1: addition to the macro theory. So you you touched on sentiment.

509
00:33:39,360 --> 00:33:43,680
Speaker 1: There you teed up my next question perfectly. How does

510
00:33:43,920 --> 00:33:47,200
Speaker 1: sentiment vary over the course of a market cycle? How

511
00:33:47,240 --> 00:33:53,000
Speaker 1: important are things like small business sentiment, consumer sentiment? Which

512
00:33:53,200 --> 00:33:56,960
Speaker 1: does that drive the economy or does the economy drive sentiment?

513
00:33:57,840 --> 00:34:01,440
Speaker 1: I think that the answer is both. That as sentiment

514
00:34:01,880 --> 00:34:06,680
Speaker 1: uh deteriorates, that drags down the economy, But then as

515
00:34:06,720 --> 00:34:10,520
Speaker 1: the economy gets worse, sentiment will respond to that. So

516
00:34:10,600 --> 00:34:17,000
Speaker 1: it's very much a symbiotic self reinforcing uh kind of relationship.

517
00:34:18,160 --> 00:34:20,960
Speaker 1: But UH, you know, if you press me, what's the

518
00:34:21,000 --> 00:34:24,680
Speaker 1: first mover? I think sentiment typically moves before the economic data.

519
00:34:24,960 --> 00:34:27,799
Speaker 1: We have been speaking with Nathan Sheets. He is the

520
00:34:27,880 --> 00:34:32,839
Speaker 1: chief economist at PJIM Fixed Income. If you enjoy this conversation,

521
00:34:32,920 --> 00:34:35,400
Speaker 1: we'll be sure to come back for the podcast extras,

522
00:34:35,600 --> 00:34:38,719
Speaker 1: where we keep the tape rolling and continue discussing all

523
00:34:38,800 --> 00:34:42,879
Speaker 1: Things Macro. You can find that wherever finer podcasts are

524
00:34:42,880 --> 00:34:48,399
Speaker 1: sold Apple, iTunes, Stitcher, Overcast, Bloomberg dot com. We love

525
00:34:48,440 --> 00:34:53,320
Speaker 1: your comments, feedback and suggestions right to us at m

526
00:34:53,480 --> 00:34:57,960
Speaker 1: IB podcast at Bloomberg dot net. Check out my daily

527
00:34:58,040 --> 00:35:01,799
Speaker 1: column on Bloomberg dot com slash Opinion. Follow me on

528
00:35:01,840 --> 00:35:05,680
Speaker 1: Twitter at rit Halts. I'm Barry Hults. You're listening to

529
00:35:05,760 --> 00:35:14,560
Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast, Nathan.

530
00:35:14,600 --> 00:35:16,880
Speaker 1: Thank you so much for doing this. I'm really enjoying

531
00:35:16,880 --> 00:35:20,640
Speaker 1: this conversation. You are right in the wonky sweet spot

532
00:35:21,200 --> 00:35:25,800
Speaker 1: of of some of my favorite peas. I want to

533
00:35:25,840 --> 00:35:28,440
Speaker 1: circle back to the financial crisis and some of the

534
00:35:28,480 --> 00:35:34,360
Speaker 1: issues related to that. But you were discussing um wages

535
00:35:34,440 --> 00:35:37,080
Speaker 1: not going up as fast as anyone would have suspected

536
00:35:38,239 --> 00:35:40,600
Speaker 1: relative to full employment, and I have a theory I

537
00:35:40,600 --> 00:35:46,680
Speaker 1: want to run by you. Employees have seen substantial wage gains,

538
00:35:47,040 --> 00:35:50,080
Speaker 1: but they're not seeing it in dollars. They're seeing it

539
00:35:50,200 --> 00:35:54,520
Speaker 1: in giant increases in healthcare costs going up eight nine

540
00:35:54,840 --> 00:35:58,600
Speaker 1: percent a year. If you're paying for healthcare as an employer,

541
00:35:59,120 --> 00:36:02,399
Speaker 1: and what it is five or ten percent, maybe even

542
00:36:02,440 --> 00:36:06,319
Speaker 1: more for some employees of the healthcare is one of

543
00:36:06,320 --> 00:36:10,200
Speaker 1: the biggest inflationary inputs. We see how much of that

544
00:36:10,560 --> 00:36:14,360
Speaker 1: is dollars that otherwise might have gone to salary increases.

545
00:36:15,320 --> 00:36:19,920
Speaker 1: I think the answer to that is is substantial amount

546
00:36:20,000 --> 00:36:22,840
Speaker 1: could have gone into salary increases, and as you say,

547
00:36:23,400 --> 00:36:29,280
Speaker 1: for many employees, healthcare is a very substantial part UH

548
00:36:29,320 --> 00:36:34,280
Speaker 1: of their overall compensation. Now we do have broader measures

549
00:36:34,320 --> 00:36:38,839
Speaker 1: of compensation that would include healthcare and other benefits, and

550
00:36:38,880 --> 00:36:41,799
Speaker 1: they also have been going up somewhat more slowly than

551
00:36:41,840 --> 00:36:46,239
Speaker 1: we would have expected. So very much true that it's

552
00:36:46,239 --> 00:36:50,560
Speaker 1: an enormous cost, an enormous source of of of overhead

553
00:36:50,600 --> 00:36:53,719
Speaker 1: for US firms that makes it less attractive to hire

554
00:36:53,760 --> 00:36:57,239
Speaker 1: in the United States, But that alone doesn't explain this

555
00:36:57,760 --> 00:37:00,440
Speaker 1: UH puzzle as to why wage growth hasn't time. I'm

556
00:37:00,880 --> 00:37:05,640
Speaker 1: looking at that from a competitive standpoint of US manufacturers

557
00:37:05,760 --> 00:37:10,319
Speaker 1: versus Germany, US manufacturers versus Japan. Given we what are

558
00:37:10,320 --> 00:37:13,920
Speaker 1: They're like three or four hundred Democratic people in the

559
00:37:13,960 --> 00:37:16,960
Speaker 1: presidential race already, and almost all of them are talking

560
00:37:16,960 --> 00:37:21,000
Speaker 1: about some variation of universal healthcare. I would think the

561
00:37:21,080 --> 00:37:24,360
Speaker 1: corporate sector would jump all over this and say, please

562
00:37:24,880 --> 00:37:28,120
Speaker 1: take this off our backs. Why is it our responsibility?

563
00:37:28,520 --> 00:37:31,480
Speaker 1: And I don't necessarily agree with this, but how has

564
00:37:31,800 --> 00:37:36,359
Speaker 1: corporate America evolved to be responsible for healthcare and not

565
00:37:36,520 --> 00:37:40,279
Speaker 1: the government? It seems so bizarre. It's uh, it's an

566
00:37:40,320 --> 00:37:43,640
Speaker 1: interesting historical feature the way our labor market is evolved,

567
00:37:43,880 --> 00:37:47,560
Speaker 1: as you said, in many other major economies in Europe

568
00:37:47,640 --> 00:37:51,960
Speaker 1: and in Canada and elsewhere. Uh, it's dealt with very differently.

569
00:37:52,600 --> 00:37:57,480
Speaker 1: I And it is a it is a drag on

570
00:37:57,480 --> 00:38:02,480
Speaker 1: on wages and a responsibility that the corporate sector bears.

571
00:38:02,680 --> 00:38:05,839
Speaker 1: And I think you're right. For someone to come and say,

572
00:38:05,880 --> 00:38:09,400
Speaker 1: don't worry about that would be very welcome. Now, the

573
00:38:09,400 --> 00:38:12,840
Speaker 1: flip side of that is it means the burden of

574
00:38:12,920 --> 00:38:16,320
Speaker 1: paying for it gets gets transferred, and so the German

575
00:38:16,360 --> 00:38:19,560
Speaker 1: corporates uh don't have to deal with it. But the

576
00:38:19,640 --> 00:38:23,200
Speaker 1: overall level of taxation in Germany is much higher, so

577
00:38:23,239 --> 00:38:26,560
Speaker 1: the government is larger relative to GDP nolunch. That's right,

578
00:38:26,600 --> 00:38:29,120
Speaker 1: there's a piper to be paid someplace. Makes a lot

579
00:38:29,200 --> 00:38:33,200
Speaker 1: of sense. One would wonder, um if salary were higher

580
00:38:33,239 --> 00:38:36,319
Speaker 1: and corporate earnings were higher, but the tax burden would

581
00:38:36,360 --> 00:38:39,759
Speaker 1: be higher as well. Exactly could could be kind of intriguing.

582
00:38:40,160 --> 00:38:43,200
Speaker 1: So so let's bring it back to the pre financial

583
00:38:43,280 --> 00:38:46,279
Speaker 1: crisis era. And I didn't want to push back too

584
00:38:46,360 --> 00:38:49,640
Speaker 1: much during the broadcast portion, but I have to push

585
00:38:49,640 --> 00:38:53,200
Speaker 1: back on And some of this is clearly with the

586
00:38:53,200 --> 00:38:56,080
Speaker 1: benefit of hindsight. But I could go back and look

587
00:38:56,120 --> 00:38:58,319
Speaker 1: at what I was writing in a one oh two

588
00:38:58,320 --> 00:39:01,719
Speaker 1: oh three, and I could see, Gee, these rates seem

589
00:39:01,800 --> 00:39:04,960
Speaker 1: to be really low. Green Span seems to be wildly

590
00:39:05,120 --> 00:39:13,080
Speaker 1: overreacting to both the mild, to both the mild post

591
00:39:13,160 --> 00:39:17,040
Speaker 1: dot com recession. All things considered, it wasn't that bad.

592
00:39:17,480 --> 00:39:20,760
Speaker 1: And towards the end of that recession, September eleventh happened,

593
00:39:21,120 --> 00:39:26,080
Speaker 1: and there that also seemed to engender a pretty substantial overreaction.

594
00:39:26,120 --> 00:39:29,759
Speaker 1: In terms of monetary policy, I look at everything that

595
00:39:29,840 --> 00:39:34,759
Speaker 1: was priced in either credit or dollars as just spiraling up.

596
00:39:34,920 --> 00:39:38,439
Speaker 1: Gold went from four hundred to over a thousand. Home

597
00:39:38,520 --> 00:39:42,520
Speaker 1: prices doubled in some parts of the country. Um, all

598
00:39:42,560 --> 00:39:47,600
Speaker 1: the commodities spiraled up. The dollar actually did UM really

599
00:39:47,640 --> 00:39:52,040
Speaker 1: take a pretty healthy whack it. It suffered. So you

600
00:39:52,080 --> 00:39:55,480
Speaker 1: and I completely agree that the FED missed their opportunity

601
00:39:55,480 --> 00:39:59,360
Speaker 1: in terms of acting as a regulator for the banking industry,

602
00:40:00,480 --> 00:40:03,040
Speaker 1: but how much of that big spiral can trace its

603
00:40:03,080 --> 00:40:07,600
Speaker 1: way back to rates under green Span? So I think

604
00:40:07,600 --> 00:40:11,680
Speaker 1: that say that dot Com recession compared to what we

605
00:40:11,760 --> 00:40:15,319
Speaker 1: had at the time of the Great Recession later in

606
00:40:15,360 --> 00:40:18,720
Speaker 1: that decade, that dot Com recession did seem pretty mild.

607
00:40:18,719 --> 00:40:20,560
Speaker 1: But when we were living through it, I don't think

608
00:40:20,600 --> 00:40:23,160
Speaker 1: any of us would have described it that way, especially

609
00:40:23,160 --> 00:40:28,040
Speaker 1: with NASDAC falling from and the FED did respond to that,

610
00:40:28,200 --> 00:40:32,200
Speaker 1: and when one broke out. I remember being inside the building.

611
00:40:32,320 --> 00:40:35,440
Speaker 1: People were very concerned about what that might mean for sentiment,

612
00:40:35,520 --> 00:40:39,360
Speaker 1: which we've talked about and the economy exactly people inside

613
00:40:39,360 --> 00:40:42,640
Speaker 1: the FED, so there were reactions to that, and then

614
00:40:42,640 --> 00:40:46,239
Speaker 1: I think Greenspan was also worried about trying to make

615
00:40:46,280 --> 00:40:51,040
Speaker 1: sure that inflation expectations stayed anchored and didn't start to fall.

616
00:40:51,360 --> 00:40:56,319
Speaker 1: But your comments evoke another kind of criticism of the

617
00:40:56,320 --> 00:41:00,480
Speaker 1: feeds policies through that period, and that is how aggress

618
00:41:00,880 --> 00:41:07,160
Speaker 1: should monetary policy be in responding to perceived imbalances in

619
00:41:07,360 --> 00:41:13,360
Speaker 1: financial markets? And uh, the Greenspan FED was loath to

620
00:41:13,480 --> 00:41:16,719
Speaker 1: do that, and at the time, the argument was, we

621
00:41:16,760 --> 00:41:19,400
Speaker 1: don't know where the tops are. We don't know what's

622
00:41:19,400 --> 00:41:22,400
Speaker 1: the bubble? And instead of trying to kill things preemptively,

623
00:41:22,480 --> 00:41:25,839
Speaker 1: it's better to clean them up after the fact. We

624
00:41:25,960 --> 00:41:29,800
Speaker 1: learned that central banks do need to think hard about

625
00:41:29,840 --> 00:41:35,000
Speaker 1: financial stability and whether asset markets are overvalued. And I

626
00:41:35,040 --> 00:41:40,440
Speaker 1: think that many central banks now have an implicit mandate.

627
00:41:40,440 --> 00:41:43,960
Speaker 1: It's not part of their explicit responsibilities, but an implicit

628
00:41:44,000 --> 00:41:46,839
Speaker 1: mandate to ensure financial stability. And they spent a lot

629
00:41:46,880 --> 00:41:50,000
Speaker 1: of resources doing that now. So it's not just full

630
00:41:50,280 --> 00:41:54,319
Speaker 1: employment and keeping inflation contained. It's oh, and now you

631
00:41:54,320 --> 00:41:57,600
Speaker 1: guys are responsible for the markets. So I always pushed

632
00:41:57,719 --> 00:42:01,000
Speaker 1: back to the green Spans of fans on we are

633
00:42:01,080 --> 00:42:05,760
Speaker 1: loath to intervene in the markets because of all people,

634
00:42:06,719 --> 00:42:11,720
Speaker 1: green Span probably intervened in the markets more than any

635
00:42:11,760 --> 00:42:15,720
Speaker 1: FED chair and memory. So forget that the eighty seven

636
00:42:15,760 --> 00:42:19,040
Speaker 1: crash happened right after he began. It's like every new

637
00:42:19,080 --> 00:42:22,360
Speaker 1: FED chief gets a baptism of fire, and he did

638
00:42:22,640 --> 00:42:25,520
Speaker 1: what he always has does, is he cut rates. But

639
00:42:25,760 --> 00:42:29,760
Speaker 1: I recall very specifically when doing some research for Bailout Nation,

640
00:42:30,239 --> 00:42:33,400
Speaker 1: it was either in ninety or ninety one. I'm not positive.

641
00:42:33,560 --> 00:42:39,439
Speaker 1: Early nineties. In between meetings green Span without the Board

642
00:42:39,480 --> 00:42:42,400
Speaker 1: of governors lowered rates on his own in response to

643
00:42:42,440 --> 00:42:45,360
Speaker 1: something going on in the markets, and the Board was

644
00:42:45,400 --> 00:42:48,480
Speaker 1: so offended that they clipped his wings and prevented that

645
00:42:48,520 --> 00:42:51,719
Speaker 1: from happening. They passed a rule that said the Fed

646
00:42:51,760 --> 00:42:55,239
Speaker 1: chief can only raise the low rates with the approval

647
00:42:55,400 --> 00:42:59,160
Speaker 1: of the Board. So I've heard that argument that, well,

648
00:42:59,320 --> 00:43:02,799
Speaker 1: green Span was loath to do it except when he

649
00:43:02,840 --> 00:43:05,560
Speaker 1: did it, and he did it quite frequently. Am I

650
00:43:05,680 --> 00:43:08,520
Speaker 1: wildly off Am I just a green Span basher? Or

651
00:43:08,560 --> 00:43:11,319
Speaker 1: is that a fair criticism? Well? I think that there

652
00:43:11,360 --> 00:43:18,279
Speaker 1: were some instances like seven and after one where the

653
00:43:18,360 --> 00:43:24,320
Speaker 1: Federal Reserve saw risks to market functioning and the capacity

654
00:43:24,400 --> 00:43:27,480
Speaker 1: of markets to operate, and in response to that, the

655
00:43:27,480 --> 00:43:33,200
Speaker 1: FED did respond very very vigorously. Now that said, uh,

656
00:43:33,360 --> 00:43:36,520
Speaker 1: you know, the FED was aware of what was happening

657
00:43:36,520 --> 00:43:39,359
Speaker 1: in financial markets. And I think that what I should

658
00:43:39,400 --> 00:43:43,120
Speaker 1: say precisely is that the FED under green Span was

659
00:43:43,120 --> 00:43:47,080
Speaker 1: was hesitant to try to say, a given markets in

660
00:43:47,160 --> 00:43:51,240
Speaker 1: a bubble, let's go and prick that bubble. That's really

661
00:43:51,320 --> 00:43:54,200
Speaker 1: the core of the green Span doctrine. We don't know

662
00:43:54,280 --> 00:43:57,920
Speaker 1: a bubble. We're not sure, we could be surprised. We

663
00:43:58,000 --> 00:43:59,839
Speaker 1: don't have good tools to do it. Let's do it

664
00:43:59,840 --> 00:44:02,320
Speaker 1: on the other side. And I do think that's been roundly,

665
00:44:02,560 --> 00:44:07,080
Speaker 1: roundly rejected at this point by central banks. Quite quite fascinating.

666
00:44:07,239 --> 00:44:11,240
Speaker 1: The other issue that has come up about the Federal Reserve.

667
00:44:11,760 --> 00:44:14,200
Speaker 1: By the way, I think that last issue about um

668
00:44:14,680 --> 00:44:18,400
Speaker 1: rates being too low, too long. Here's my hindsight bias.

669
00:44:18,920 --> 00:44:20,759
Speaker 1: What I'm about to say, and I will admit this

670
00:44:20,840 --> 00:44:24,960
Speaker 1: is hindsin bias. At the time I flagged those ultra

671
00:44:25,080 --> 00:44:29,120
Speaker 1: low rates as inflationary. With the benefit of hindsight, I

672
00:44:29,160 --> 00:44:32,600
Speaker 1: wish the Fed would have said, either Post nine eleven

673
00:44:32,760 --> 00:44:37,640
Speaker 1: or some other one off emergency, Hey, this is an emergency.

674
00:44:37,800 --> 00:44:40,920
Speaker 1: We are for six months gonna take rates down. I

675
00:44:40,920 --> 00:44:43,800
Speaker 1: think that cut rates fifty basis points. We're gonna implement

676
00:44:43,880 --> 00:44:47,480
Speaker 1: a fifty basis point rate cut and in six months

677
00:44:47,520 --> 00:44:49,439
Speaker 1: half of it will go away, and and in nine

678
00:44:49,440 --> 00:44:51,440
Speaker 1: months the other half of it will go away. So

679
00:44:51,520 --> 00:44:55,120
Speaker 1: that there would have prevented that while we're afraid, there

680
00:44:55,120 --> 00:44:58,560
Speaker 1: were no expectations of of a r raise, and it's

681
00:44:58,560 --> 00:45:00,520
Speaker 1: going to be problematic if it would have be built

682
00:45:00,520 --> 00:45:04,360
Speaker 1: into this is an emergency action, but it will automatically unwind.

683
00:45:05,120 --> 00:45:07,759
Speaker 1: I think they would have been better off again pure

684
00:45:07,840 --> 00:45:10,920
Speaker 1: hindsight bias, and and I think that that is a

685
00:45:11,000 --> 00:45:16,680
Speaker 1: very creative form of forward guidance which the FAD has experimented,

686
00:45:16,719 --> 00:45:20,680
Speaker 1: particularly under Brankie, experimented with a lot of different forms

687
00:45:20,719 --> 00:45:24,480
Speaker 1: of forward guidance. Uh. Typically it's been more of the

688
00:45:24,520 --> 00:45:27,640
Speaker 1: form will keep rates where they are and not pre

689
00:45:27,760 --> 00:45:32,040
Speaker 1: committing to future rate hikes. But it wouldn't surprise me

690
00:45:32,120 --> 00:45:35,040
Speaker 1: at some point in the future to see some central

691
00:45:35,040 --> 00:45:39,920
Speaker 1: bank around the world implement a policy that had the

692
00:45:40,000 --> 00:45:42,719
Speaker 1: kind of forward guidance you just described. Look, we're responding

693
00:45:42,760 --> 00:45:47,320
Speaker 1: to what we believe is an extraordinary circumstance. We expect

694
00:45:47,360 --> 00:45:51,560
Speaker 1: that it's going to go away, and as our expectations

695
00:45:51,560 --> 00:45:55,920
Speaker 1: are confirmed, then we very well maybe hiking rates look

696
00:45:56,320 --> 00:46:00,400
Speaker 1: for emerging market central bank good stuff in the future.

697
00:46:00,680 --> 00:46:04,000
Speaker 1: So you bring up Bernanke and what he did during

698
00:46:04,080 --> 00:46:08,359
Speaker 1: his tenures, Chairman, I'm not in this camp, but some

699
00:46:08,440 --> 00:46:12,480
Speaker 1: people have criticized him as too transparent. Back in the

700
00:46:12,520 --> 00:46:15,319
Speaker 1: early days, you never knew what the Fed did. You

701
00:46:15,320 --> 00:46:17,720
Speaker 1: would see the reaction in the bond market. Oh, bonds

702
00:46:17,760 --> 00:46:20,319
Speaker 1: are tacking up. The Fed might have raised rates. They

703
00:46:20,360 --> 00:46:23,440
Speaker 1: did have a meaning This week has the Federal Reserve

704
00:46:23,560 --> 00:46:28,360
Speaker 1: become too transparent. This is this is a very important question,

705
00:46:28,400 --> 00:46:32,200
Speaker 1: and it's it's corollary is doesn't FED talk too much?

706
00:46:32,840 --> 00:46:38,160
Speaker 1: And a concrete question is, uh, you know, through every

707
00:46:38,200 --> 00:46:42,480
Speaker 1: f long C cycle, we hear a variety of voices

708
00:46:42,719 --> 00:46:46,759
Speaker 1: from Federal Reserve policymakers. All the Reserve Bank presents are

709
00:46:46,840 --> 00:46:50,640
Speaker 1: talking various members of the board and so forth. And

710
00:46:50,719 --> 00:46:55,680
Speaker 1: does that give markets more information? Does that allow investors

711
00:46:55,719 --> 00:46:59,480
Speaker 1: to make better decisions and better understand what the Federal

712
00:46:59,520 --> 00:47:02,400
Speaker 1: Reserve going to do? And if you press me, I

713
00:47:02,400 --> 00:47:08,799
Speaker 1: guess I'd say, on balance, yes, that transparency and and

714
00:47:09,200 --> 00:47:14,560
Speaker 1: perspectives are helpful. But it's also important that the FED

715
00:47:14,840 --> 00:47:18,880
Speaker 1: not talked so much that it's saying things it's not

716
00:47:18,920 --> 00:47:21,799
Speaker 1: really sure about. What people want to hear from the

717
00:47:21,840 --> 00:47:25,800
Speaker 1: FED is what is its reaction function? Meaning as various

718
00:47:25,840 --> 00:47:29,440
Speaker 1: economic events evolved, how is it going to respond? What

719
00:47:29,560 --> 00:47:32,279
Speaker 1: does it expect about the future? And I think this

720
00:47:32,360 --> 00:47:35,400
Speaker 1: is one of the risks with having press conferences after

721
00:47:35,480 --> 00:47:38,800
Speaker 1: every meeting, that there may be times when j Pal

722
00:47:39,160 --> 00:47:42,000
Speaker 1: is going to have to say something just because the

723
00:47:42,080 --> 00:47:47,240
Speaker 1: question is asked, not because it's part of his preferred

724
00:47:47,480 --> 00:47:53,120
Speaker 1: proactive communication strategy h quite quite interesting. The the whole

725
00:47:53,160 --> 00:47:56,480
Speaker 1: idea of we're data driven and we're gonna wait and

726
00:47:56,480 --> 00:47:59,480
Speaker 1: see what the economic data looks like. Is that a

727
00:47:59,560 --> 00:48:03,560
Speaker 1: fair approach or is that still too squishing an ambiguous.

728
00:48:03,640 --> 00:48:06,840
Speaker 1: So I think that that is a very fair approach.

729
00:48:07,040 --> 00:48:09,440
Speaker 1: I think more or less that's what central banks have

730
00:48:09,560 --> 00:48:16,000
Speaker 1: been saying for for generations. The the problem with it

731
00:48:16,080 --> 00:48:22,480
Speaker 1: is markets urn for something more concrete, and if the

732
00:48:22,520 --> 00:48:25,200
Speaker 1: FAD says, you know, we'll just see where the data

733
00:48:25,280 --> 00:48:27,600
Speaker 1: take us, then the next question is, well, where do

734
00:48:27,640 --> 00:48:30,200
Speaker 1: you think the data are going to take us? And

735
00:48:30,600 --> 00:48:35,080
Speaker 1: uh so markets, markets are gonna want more. But ultimately

736
00:48:35,200 --> 00:48:38,200
Speaker 1: the FAD does have to be data dependent that even

737
00:48:38,239 --> 00:48:41,000
Speaker 1: if they say, you know, we're going to be flat,

738
00:48:41,480 --> 00:48:44,919
Speaker 1: if ultimately the economy surprises on the upside, they're gonna

739
00:48:44,920 --> 00:48:47,920
Speaker 1: have to hike, and if the economy surprises on the downside,

740
00:48:47,920 --> 00:48:50,680
Speaker 1: they're gonna have to cut. And for them not to

741
00:48:50,800 --> 00:48:53,920
Speaker 1: act in the future because of something they said in

742
00:48:53,920 --> 00:48:57,480
Speaker 1: the past, would I think not be not not be

743
00:48:57,560 --> 00:49:00,880
Speaker 1: good policy. So so let's talk about out the post

744
00:49:00,920 --> 00:49:06,360
Speaker 1: crisis era. I was surprised at at lower for longer.

745
00:49:06,400 --> 00:49:09,640
Speaker 1: I was surprised that at the length of time that

746
00:49:09,719 --> 00:49:15,040
Speaker 1: we seem to have been on emergency footing, how fast

747
00:49:15,640 --> 00:49:21,120
Speaker 1: should the FED return to a more normalized rate regime.

748
00:49:21,239 --> 00:49:24,640
Speaker 1: Are we there yet? Are we halfway there yet? Um?

749
00:49:24,800 --> 00:49:27,600
Speaker 1: Some people have said they're behind the curve. The President

750
00:49:27,680 --> 00:49:31,520
Speaker 1: is saying they're choking off economic expansion. Where where are we?

751
00:49:31,600 --> 00:49:34,719
Speaker 1: Two and a half percent, by by any measure, that's

752
00:49:34,760 --> 00:49:38,640
Speaker 1: still fairly accommodative, isn't it. So? I think the Fed

753
00:49:38,880 --> 00:49:44,319
Speaker 1: has has handled the rate hikes quite skillfully. This has

754
00:49:44,400 --> 00:49:49,239
Speaker 1: been perhaps the slowest tightening cycle in the history of

755
00:49:49,320 --> 00:49:54,440
Speaker 1: central banking. We've moved. We've moved a quarter percentage point

756
00:49:54,600 --> 00:49:59,680
Speaker 1: every quarter, so a one percentage point a year. Back

757
00:49:59,680 --> 00:50:02,719
Speaker 1: in the days of Greenspan, they were going twenty five

758
00:50:02,760 --> 00:50:05,000
Speaker 1: basis points every meeting, and they thought they had go.

759
00:50:05,120 --> 00:50:07,680
Speaker 1: We're going as slow as they could. That's still twice

760
00:50:07,719 --> 00:50:11,200
Speaker 1: as fast. So the Fed has gone has gone very gradually,

761
00:50:11,680 --> 00:50:14,680
Speaker 1: and they're now at a place where you know, they

762
00:50:14,719 --> 00:50:19,200
Speaker 1: think neutral is two and a half three something like that,

763
00:50:19,360 --> 00:50:23,080
Speaker 1: where they're on the lip of of of a neutral policy,

764
00:50:23,160 --> 00:50:25,840
Speaker 1: and that gives them the lauxery of being able to

765
00:50:25,920 --> 00:50:29,080
Speaker 1: watch and wait and see how some of these various

766
00:50:29,239 --> 00:50:34,120
Speaker 1: risks unfold, does China do better? Does Europe pick up?

767
00:50:34,640 --> 00:50:38,440
Speaker 1: What happens with the trade war and so forth. So

768
00:50:39,640 --> 00:50:44,319
Speaker 1: if we look at inflation today also about two two

769
00:50:44,320 --> 00:50:47,440
Speaker 1: and a half percent, is that the there are a

770
00:50:47,440 --> 00:50:50,879
Speaker 1: million economic inputs, but is that you know, the two

771
00:50:50,920 --> 00:50:54,799
Speaker 1: d dakapo is that the one that really matters? And

772
00:50:54,840 --> 00:50:58,759
Speaker 1: if inflation stays around two, the FED doesn't feel any

773
00:50:58,840 --> 00:51:02,880
Speaker 1: urgency to move off of these low rates. I think, uh,

774
00:51:03,239 --> 00:51:07,279
Speaker 1: in this circumstance with rates policy rates around two and

775
00:51:07,320 --> 00:51:10,520
Speaker 1: a half percent, that they probably are going to need

776
00:51:10,600 --> 00:51:16,000
Speaker 1: to see inflation at or probably a little bit above

777
00:51:16,080 --> 00:51:19,720
Speaker 1: two percent before they seriously start thinking about more rate hikes.

778
00:51:20,239 --> 00:51:22,360
Speaker 1: The flip side is, I think the other variable that

779
00:51:22,360 --> 00:51:26,040
Speaker 1: they're going to continue to watch closely is the unemployment rate.

780
00:51:26,760 --> 00:51:30,680
Speaker 1: And I think that as long as the labor market

781
00:51:31,400 --> 00:51:36,480
Speaker 1: looks looks tight and the unemployment rate is falling, they're

782
00:51:36,520 --> 00:51:38,480
Speaker 1: not going to think that they need to they need

783
00:51:38,520 --> 00:51:42,160
Speaker 1: to cut rates either. I think would require an increase,

784
00:51:42,200 --> 00:51:45,400
Speaker 1: a marked increase in the unemployment rate before the fad

785
00:51:45,440 --> 00:51:48,480
Speaker 1: would throw it into reverse. Now we've seen some modest

786
00:51:48,520 --> 00:51:51,880
Speaker 1: increases the unemployment rate, but for the good reason meaning

787
00:51:52,480 --> 00:51:55,160
Speaker 1: people who had left the labor force, we're coming back

788
00:51:55,200 --> 00:51:58,320
Speaker 1: into it. And suddenly there's more people in that pool.

789
00:51:58,360 --> 00:52:01,040
Speaker 1: And it looks it's not that are losing their jobs,

790
00:52:01,120 --> 00:52:04,160
Speaker 1: is that more people are looking for their jobs. Obviously

791
00:52:04,200 --> 00:52:07,359
Speaker 1: the FED understands that nuance. Are we going to continue

792
00:52:07,360 --> 00:52:10,440
Speaker 1: to pull or let me rephrase that, what's it going

793
00:52:10,480 --> 00:52:12,960
Speaker 1: to take to continue pulling more and more of these

794
00:52:13,000 --> 00:52:17,880
Speaker 1: discouraged workers back into the labor pool. The increase in

795
00:52:17,960 --> 00:52:21,160
Speaker 1: labor force participation that we've seen of late is an

796
00:52:21,200 --> 00:52:26,960
Speaker 1: extremely constructive development. There's been more slack on the edges

797
00:52:27,000 --> 00:52:29,480
Speaker 1: of the labor market than I would have expected, and

798
00:52:29,480 --> 00:52:32,440
Speaker 1: then most economists would have expected. And I think what

799
00:52:32,480 --> 00:52:35,840
Speaker 1: it's going to take to for this process to continue

800
00:52:36,320 --> 00:52:39,359
Speaker 1: is for the US economy to continue to grow at

801
00:52:39,360 --> 00:52:43,360
Speaker 1: a solid pace and for us to see some further

802
00:52:43,600 --> 00:52:47,879
Speaker 1: upside pressure on wages as we see that additional uh,

803
00:52:48,200 --> 00:52:51,960
Speaker 1: those additional wage gains, that's gonna be very attractive to

804
00:52:52,040 --> 00:52:54,319
Speaker 1: workers on the sidelines and getting them back in the

805
00:52:54,360 --> 00:52:56,680
Speaker 1: labor force. And once these folks are back in the

806
00:52:56,760 --> 00:53:00,600
Speaker 1: labor force, they're developing skills and abilities, they're gonna help

807
00:53:00,719 --> 00:53:04,160
Speaker 1: drive the economy through the years I had, so, so

808
00:53:04,280 --> 00:53:07,680
Speaker 1: let me wax wonky a little bit. You brought up

809
00:53:07,760 --> 00:53:13,560
Speaker 1: the tailor rule earlier. Has the tailor rule lost its power?

810
00:53:13,760 --> 00:53:17,960
Speaker 1: Is it? Is it expired? And explain it before before

811
00:53:17,960 --> 00:53:21,040
Speaker 1: we go too far into the weeds. So the tailor

812
00:53:21,200 --> 00:53:27,440
Speaker 1: rule basically says that in setting monetary policy, the Federal

813
00:53:27,520 --> 00:53:31,879
Speaker 1: Reserve should look at the unemployment rate relative to some

814
00:53:32,760 --> 00:53:37,560
Speaker 1: UH equilibrium or some trend rate of unemployment, and it

815
00:53:37,600 --> 00:53:40,520
Speaker 1: should also look at the inflation rate relative to its

816
00:53:40,560 --> 00:53:45,440
Speaker 1: two percent target UH. And if if if inflation is

817
00:53:45,520 --> 00:53:48,560
Speaker 1: low and unemployment is high, then the tailor rule would

818
00:53:48,600 --> 00:53:52,719
Speaker 1: suggest you should have a very easy monetary policy. And

819
00:53:52,960 --> 00:53:57,080
Speaker 1: I do think it's fair to say that UH many

820
00:53:57,280 --> 00:54:02,040
Speaker 1: central banks around the world how sued policies in recent

821
00:54:02,160 --> 00:54:05,359
Speaker 1: years that are much softer than what the tailor rule

822
00:54:05,400 --> 00:54:08,240
Speaker 1: would suggest. But even so, I think if you talk

823
00:54:08,320 --> 00:54:11,640
Speaker 1: to those central bankers that say, yeah, we're not really

824
00:54:11,640 --> 00:54:15,040
Speaker 1: following the Taylor rule right now, but we like having

825
00:54:15,080 --> 00:54:19,040
Speaker 1: it as a point of departure, it really gets into

826
00:54:19,040 --> 00:54:23,400
Speaker 1: this powerful question of how far should you push theory?

827
00:54:23,520 --> 00:54:27,520
Speaker 1: And it's it's good as a theoretical construct, but then

828
00:54:27,560 --> 00:54:29,360
Speaker 1: from there we realize that there are a number of

829
00:54:29,360 --> 00:54:32,879
Speaker 1: headwinds and other challenges our economy space that explain why

830
00:54:32,920 --> 00:54:35,120
Speaker 1: we should be off it. But it's a good benchmark. Still,

831
00:54:35,600 --> 00:54:38,080
Speaker 1: every cycle is different. If you try and apply the

832
00:54:38,120 --> 00:54:40,840
Speaker 1: same rules to different cycles, you may not be happy

833
00:54:40,840 --> 00:54:44,319
Speaker 1: with the results. And that's the problem in economics is

834
00:54:44,760 --> 00:54:48,480
Speaker 1: in in thinking about our recommendations. We are driven by

835
00:54:48,560 --> 00:54:51,840
Speaker 1: what the data say, but the data only cover the past,

836
00:54:52,440 --> 00:54:54,720
Speaker 1: which then makes trying to figure out what the next

837
00:54:54,760 --> 00:54:57,480
Speaker 1: one is gonna look like really hard, it says Yogi

838
00:54:57,520 --> 00:55:01,560
Speaker 1: Berras said, Forecasting is really hard, especially when it's about

839
00:55:01,600 --> 00:55:05,439
Speaker 1: the future. That summarizes my life is an economist per

840
00:55:05,600 --> 00:55:09,160
Speaker 1: perfect way to sum it up. So I know only

841
00:55:09,200 --> 00:55:12,319
Speaker 1: have you for a finite amount of time, and I

842
00:55:12,400 --> 00:55:15,520
Speaker 1: want to get to my favorite questions that I asked

843
00:55:16,200 --> 00:55:21,560
Speaker 1: um every guest. Let's let's start with the first one.

844
00:55:22,560 --> 00:55:25,960
Speaker 1: Tell us the most important thing that people don't know

845
00:55:26,200 --> 00:55:30,600
Speaker 1: about your background. So I would say, uh, it's that

846
00:55:30,680 --> 00:55:36,240
Speaker 1: I just kind of uh wandered my way into economics

847
00:55:36,280 --> 00:55:40,160
Speaker 1: and uh international economics. When I was in college, I

848
00:55:40,160 --> 00:55:42,080
Speaker 1: couldn't decide whether I was gonna be a lawyer or

849
00:55:42,120 --> 00:55:44,880
Speaker 1: go into business or being economists. They took all the exams,

850
00:55:45,200 --> 00:55:48,399
Speaker 1: all the interest exams, and finally decided, well, I'll do economics.

851
00:55:48,880 --> 00:55:51,799
Speaker 1: And then in grad school, Uh, I didn't know what

852
00:55:51,840 --> 00:55:55,160
Speaker 1: I wanted to do, kind of looked around and international

853
00:55:55,160 --> 00:55:59,080
Speaker 1: economics was an area where the faculty at m I

854
00:55:59,080 --> 00:56:02,719
Speaker 1: T was great, but there weren't very many students my year.

855
00:56:03,160 --> 00:56:04,840
Speaker 1: So I went there because I said, oh, I'll have

856
00:56:04,920 --> 00:56:09,640
Speaker 1: less competition getting a job, and uh, everything everything worked

857
00:56:09,680 --> 00:56:12,439
Speaker 1: out well. I was very, very fortunate to fall into

858
00:56:12,480 --> 00:56:15,680
Speaker 1: international which I really have enjoyed and and M I t.

859
00:56:15,920 --> 00:56:20,440
Speaker 1: S economics department is just a murderers row of rock stars.

860
00:56:20,440 --> 00:56:22,719
Speaker 1: When you were there, who were some of the the

861
00:56:22,840 --> 00:56:25,160
Speaker 1: names that that you got to work with, either as

862
00:56:25,200 --> 00:56:29,160
Speaker 1: mentors or just professors. The three key folks that I

863
00:56:29,200 --> 00:56:34,400
Speaker 1: interacted with were Stan Fisher, Rudy dorn Bush, who passed

864
00:56:34,440 --> 00:56:37,560
Speaker 1: away some years ago but was really big and thinking

865
00:56:37,600 --> 00:56:40,240
Speaker 1: about how do we apply economics in the real world?

866
00:56:40,640 --> 00:56:45,200
Speaker 1: And Olivier Blanchard, who is extremely brilliant and fertile mind.

867
00:56:45,280 --> 00:56:48,160
Speaker 1: And every time I talked to him, I learned something new.

868
00:56:48,880 --> 00:56:51,600
Speaker 1: Any other mentors you want to mention who helped guide

869
00:56:51,719 --> 00:56:55,000
Speaker 1: either your academic or professional career? Well? When I arrived

870
00:56:55,000 --> 00:56:57,440
Speaker 1: at the Federal Reserve. I'd say two folks they had

871
00:56:57,480 --> 00:57:00,720
Speaker 1: a big impact on me. One was a Federal Reserve

872
00:57:00,800 --> 00:57:05,240
Speaker 1: governor who your listeners have probably heard of named Larry Meyer,

873
00:57:05,680 --> 00:57:10,839
Speaker 1: who Larry was was interested in taking a very empirical

874
00:57:10,920 --> 00:57:15,920
Speaker 1: view and using that to analyze where the global economy

875
00:57:16,040 --> 00:57:19,320
Speaker 1: was headed. And another chap was my boss. His name

876
00:57:19,320 --> 00:57:24,040
Speaker 1: was Ted Truman, and Ted was intense and focused on

877
00:57:24,200 --> 00:57:28,520
Speaker 1: how do we get the right answer and best serve policymakers.

878
00:57:28,720 --> 00:57:32,160
Speaker 1: So I'd say those two individuals had a big impact

879
00:57:32,160 --> 00:57:35,280
Speaker 1: on my early career. So you're now working at PGIM

880
00:57:35,480 --> 00:57:40,040
Speaker 1: Fixed Income, which is a giant fond shop. What investors

881
00:57:40,080 --> 00:57:44,120
Speaker 1: influenced your way of looking at the world of interest

882
00:57:44,200 --> 00:57:48,760
Speaker 1: rates and UH inflation and everything else that goes into investment.

883
00:57:49,360 --> 00:57:52,200
Speaker 1: I would say that the investors that are having the

884
00:57:52,680 --> 00:57:56,760
Speaker 1: most impact on my perspectives are frankly the ones that

885
00:57:56,800 --> 00:58:01,240
Speaker 1: I'm working with now and UH. A number of these

886
00:58:01,280 --> 00:58:04,880
Speaker 1: folks are what I would describe them as is very

887
00:58:04,920 --> 00:58:09,160
Speaker 1: balanced in their worldviews. They're getting all the information they

888
00:58:09,200 --> 00:58:12,720
Speaker 1: can and they're responding to it in a way it said, okay,

889
00:58:12,720 --> 00:58:15,680
Speaker 1: we'll move a little here. Relative values a little more attractive.

890
00:58:15,680 --> 00:58:18,720
Speaker 1: We're gonna move there. They're never off balanced, They're responding

891
00:58:18,760 --> 00:58:22,720
Speaker 1: to what the world's uh throwing at them and uh

892
00:58:22,840 --> 00:58:28,040
Speaker 1: and seeking the best returns, always always in comparing one

893
00:58:28,080 --> 00:58:31,040
Speaker 1: asset to the other. So let's look about books. What

894
00:58:31,160 --> 00:58:35,120
Speaker 1: are some of your favorite books, fiction, non fiction, economics

895
00:58:35,120 --> 00:58:37,720
Speaker 1: related or not. What do you like to read? Well,

896
00:58:37,760 --> 00:58:44,320
Speaker 1: I am a heavy reader of biographies. I really enjoy

897
00:58:44,480 --> 00:58:50,000
Speaker 1: uh learning what others have gone through in their lives

898
00:58:50,080 --> 00:58:52,640
Speaker 1: and there in their in their career paths and the like.

899
00:58:53,560 --> 00:58:58,480
Speaker 1: I'd say along those lines, my favorite writer is is

900
00:58:58,560 --> 00:59:06,360
Speaker 1: probably Ron Turno written some absolutely brilliant economic biographies, uh,

901
00:59:06,400 --> 00:59:09,280
Speaker 1: and I think it's very very best was his biography

902
00:59:09,400 --> 00:59:13,320
Speaker 1: on Alexander Hamilton's, which, as you read it, it really

903
00:59:13,440 --> 00:59:18,280
Speaker 1: is quite extraordinary that challenges that Hamilton's was facing and

904
00:59:18,360 --> 00:59:22,440
Speaker 1: helping Washington and others set up the Republic, and how

905
00:59:22,840 --> 00:59:28,080
Speaker 1: we face in various ways, very similar challenges. And I

906
00:59:28,080 --> 00:59:30,240
Speaker 1: think the Churnell just brings all of that to life

907
00:59:30,520 --> 00:59:33,160
Speaker 1: and makes it very rich in fertile in helping us think, well,

908
00:59:33,280 --> 00:59:36,080
Speaker 1: how how would how would Hamilton's respond to a global

909
00:59:36,120 --> 00:59:40,520
Speaker 1: financial crisis? How would Hamilton's responded to a European deck crisis,

910
00:59:40,880 --> 00:59:43,200
Speaker 1: plus running the whole thing in hip hop lyrics. That

911
00:59:43,280 --> 00:59:45,600
Speaker 1: was really that that that was the extra moe but

912
00:59:45,600 --> 00:59:50,600
Speaker 1: but true story. That's where Lynn Manuel Miranda discovered Hamilton's

913
00:59:50,680 --> 00:59:55,040
Speaker 1: was Charnou's book. It's an astonishing that book has astonishing legs.

914
00:59:55,440 --> 00:59:58,960
Speaker 1: Um give us some other books that you enjoy, So

915
00:59:59,240 --> 01:00:04,600
Speaker 1: I would say, uh, just continuing, I've read uh wonderful

916
01:00:04,760 --> 01:00:12,120
Speaker 1: biographies of Woodrow Wilson. Uh are progressive and are and

917
01:00:12,280 --> 01:00:17,120
Speaker 1: notably a progressive who was arguing for free trade because

918
01:00:17,120 --> 01:00:20,920
Speaker 1: it would bring down prices for the masses. It's really

919
01:00:20,920 --> 01:00:24,960
Speaker 1: extraordinary the way the free trade debate has evolved over

920
01:00:25,000 --> 01:00:27,760
Speaker 1: the last hundred years or devolved as the case maybe.

921
01:00:28,520 --> 01:00:32,400
Speaker 1: UH read continuing in that kind of time and history.

922
01:00:33,000 --> 01:00:38,560
Speaker 1: Love to read about Teddy Roosevelt, brilliant, brilliant individual, but

923
01:00:38,800 --> 01:00:42,400
Speaker 1: in addition really focused on getting things done. Who wrote

924
01:00:42,440 --> 01:00:44,440
Speaker 1: the Roosevelt bio? Because there are a ton of them?

925
01:00:44,440 --> 01:00:49,800
Speaker 1: Which one did you like? You nailed me? I don't remember,

926
01:00:50,000 --> 01:00:52,440
Speaker 1: so emailed to me and I'll add it to the

927
01:00:52,480 --> 01:00:55,640
Speaker 1: info on this because there there are the problem with

928
01:00:55,680 --> 01:00:58,640
Speaker 1: a lot of these bios is that there are so

929
01:00:58,680 --> 01:01:03,120
Speaker 1: many of them. Yes, a friend recommended a Genghis Khan bio.

930
01:01:03,400 --> 01:01:06,200
Speaker 1: This book is great, so I ordered on Amazon and

931
01:01:06,280 --> 01:01:09,919
Speaker 1: I say to him, this was a great book, thanks

932
01:01:09,960 --> 01:01:12,240
Speaker 1: for recommending it. And he looks at the book he goes, no, no,

933
01:01:12,320 --> 01:01:15,720
Speaker 1: that's the wrong one. I'm like, dude, a thousand pages

934
01:01:15,720 --> 01:01:18,479
Speaker 1: of Genghis Khan. I'm good. I don't need to read

935
01:01:18,560 --> 01:01:21,760
Speaker 1: the second one. Have you gotten around to reading mcculla's

936
01:01:22,040 --> 01:01:24,480
Speaker 1: Right Brothers book? No, I thought about it though I

937
01:01:24,560 --> 01:01:28,680
Speaker 1: read it on vacations. It was just fascinating, like, you

938
01:01:28,760 --> 01:01:32,439
Speaker 1: have no idea, or let me rephrase that, I had

939
01:01:32,480 --> 01:01:38,240
Speaker 1: no idea who they were and how they became effectively

940
01:01:38,400 --> 01:01:42,680
Speaker 1: the inventors of flight. It was if you like biography,

941
01:01:42,920 --> 01:01:48,320
Speaker 1: especially you know early twentieth century, it's fascinating. They Hawk

942
01:01:48,440 --> 01:01:54,000
Speaker 1: last sung. Yeah, it's really interesting. So they were They

943
01:01:54,120 --> 01:01:59,440
Speaker 1: weren't from Kitty Hawk. Wrville had from right, that's right.

944
01:01:59,520 --> 01:02:02,840
Speaker 1: And they had tagged somebody in the National Weather Service

945
01:02:02,920 --> 01:02:06,400
Speaker 1: to say, where are their steady winds of ten to

946
01:02:06,440 --> 01:02:11,120
Speaker 1: fifteen miles an hour, preferably not too rocky, And they

947
01:02:11,120 --> 01:02:13,120
Speaker 1: gave him a couple of things and and Kitty Hook

948
01:02:13,360 --> 01:02:16,680
Speaker 1: checked out as so, now you could get to Kitty

949
01:02:16,720 --> 01:02:20,080
Speaker 1: Hook really easily. Back then it was an ordeal. It

950
01:02:20,200 --> 01:02:23,160
Speaker 1: was a train and then a boat and then a

951
01:02:23,240 --> 01:02:27,440
Speaker 1: giant trek to get there. If you like bio biographies,

952
01:02:27,440 --> 01:02:30,400
Speaker 1: you're gonna love this book. That's my record. I can

953
01:02:30,400 --> 01:02:32,720
Speaker 1: give you other books to now give you one more. Okay,

954
01:02:32,800 --> 01:02:34,920
Speaker 1: let me let me give you another one. I think

955
01:02:35,040 --> 01:02:39,080
Speaker 1: one of the most readable and interesting books that I've

956
01:02:39,080 --> 01:02:43,080
Speaker 1: been exposed to is Outliers by Malcolm glad Sure, and

957
01:02:43,280 --> 01:02:47,240
Speaker 1: that that book has a very interesting argument in it

958
01:02:47,440 --> 01:02:50,480
Speaker 1: which resonates with me now because my son is going

959
01:02:50,520 --> 01:02:54,160
Speaker 1: through the college admission process and he shows where the

960
01:02:54,240 --> 01:02:58,360
Speaker 1: Nobel Prizes and chemistry got their undergrad degrees, and they

961
01:02:58,400 --> 01:03:02,600
Speaker 1: are all solid in institutions, but they all didn't go

962
01:03:02,680 --> 01:03:05,200
Speaker 1: to M I T or Princeton. It is all over

963
01:03:05,240 --> 01:03:09,600
Speaker 1: the map. I'm glad. Will then makes the argument that

964
01:03:09,600 --> 01:03:12,960
Speaker 1: that had they all gone to M I T, then

965
01:03:13,160 --> 01:03:16,840
Speaker 1: most of them would not be Nobel laureates in chemistry.

966
01:03:16,880 --> 01:03:19,640
Speaker 1: That there would have been someone else or someone's else

967
01:03:19,760 --> 01:03:23,680
Speaker 1: in their uh in their intradoctory and early training that

968
01:03:23,720 --> 01:03:27,200
Speaker 1: would have been better chemistry, and it would have discouraged

969
01:03:27,280 --> 01:03:32,520
Speaker 1: them in their career in their trajectory of ultimately great creativity.

970
01:03:32,680 --> 01:03:37,920
Speaker 1: So that you know where you go to school, uh matters,

971
01:03:38,000 --> 01:03:41,520
Speaker 1: But what really matters is how much your work once

972
01:03:41,560 --> 01:03:46,160
Speaker 1: you're there makes perfect sense to me. Um, So let's

973
01:03:46,200 --> 01:03:48,520
Speaker 1: talk a little bit about a time you failed and

974
01:03:48,600 --> 01:03:53,800
Speaker 1: what you learned from the experience. So, uh, this is

975
01:03:53,800 --> 01:03:56,959
Speaker 1: my time at the U. S Treasury. I was part

976
01:03:57,000 --> 01:04:02,520
Speaker 1: of the team on the administration that was managing US

977
01:04:02,600 --> 01:04:09,200
Speaker 1: policy regarding China's proposed Asian Infrastructure and Investment Bank, the

978
01:04:09,280 --> 01:04:13,840
Speaker 1: aii B. We had concerns about this institution, that it

979
01:04:13,880 --> 01:04:18,760
Speaker 1: would not pursue good standards in its lending, and consistent

980
01:04:18,800 --> 01:04:23,280
Speaker 1: with that, we expressed our concerns and lack of enthusiasm. Uh.

981
01:04:23,400 --> 01:04:27,200
Speaker 1: Two countries across the world, but as you know, the

982
01:04:27,280 --> 01:04:31,800
Speaker 1: Brits the UK joined the ai i B, and soon

983
01:04:31,800 --> 01:04:35,760
Speaker 1: thereafter dozens of other countries joined. What do I learn

984
01:04:35,880 --> 01:04:38,520
Speaker 1: from from this? I think I learned two things. One

985
01:04:39,000 --> 01:04:44,760
Speaker 1: important policy implication is China's rise is gonna happen. There

986
01:04:44,880 --> 01:04:46,920
Speaker 1: really is not a lot that we can do about it.

987
01:04:46,960 --> 01:04:50,360
Speaker 1: We can slow it down, or we can support them

988
01:04:50,520 --> 01:04:53,440
Speaker 1: and have it accelerated, but they're gonna rise. And I

989
01:04:53,440 --> 01:04:56,840
Speaker 1: think the big question is once they've risen, are they

990
01:04:56,840 --> 01:04:59,560
Speaker 1: going to look at at us as being their friend

991
01:05:00,240 --> 01:05:03,160
Speaker 1: or their foe. Secondly, and this may be more in

992
01:05:03,240 --> 01:05:07,280
Speaker 1: a personal basis, but I learned from that experience. When

993
01:05:07,280 --> 01:05:10,440
Speaker 1: you have a message, it's got to be simple. And

994
01:05:10,480 --> 01:05:13,240
Speaker 1: we had a we had a very sophisticated position that

995
01:05:13,320 --> 01:05:17,160
Speaker 1: I think had a lot of analytoltical rigor associated with it,

996
01:05:17,320 --> 01:05:20,520
Speaker 1: but I needed a thousand words to explain it to nuances.

997
01:05:20,560 --> 01:05:24,280
Speaker 1: For most most positions when you go through life, you

998
01:05:24,320 --> 01:05:26,600
Speaker 1: need to be able to put them on a bumper sticker. Really,

999
01:05:26,840 --> 01:05:29,280
Speaker 1: if it if it's if it's more complicated than that,

1000
01:05:29,840 --> 01:05:33,080
Speaker 1: people's eyes start to glaze over. Even how to boil

1001
01:05:33,120 --> 01:05:37,680
Speaker 1: it down, Even in complex diplomatic trade negotiations, you still

1002
01:05:37,720 --> 01:05:39,600
Speaker 1: have to dumb it down to a bumper sticks I

1003
01:05:39,680 --> 01:05:41,640
Speaker 1: think you gotta. I think you've got to get it

1004
01:05:41,640 --> 01:05:45,200
Speaker 1: on a bumper sticker. So this administration has, you know,

1005
01:05:45,400 --> 01:05:47,640
Speaker 1: and I think they probably they have answered the question

1006
01:05:47,680 --> 01:05:50,680
Speaker 1: what are we trying to achieve? We're trying to break

1007
01:05:50,720 --> 01:05:54,080
Speaker 1: down barriers in China and make it fairer for US

1008
01:05:54,200 --> 01:05:57,360
Speaker 1: firms UH to to operate there. So if you could

1009
01:05:57,360 --> 01:06:01,240
Speaker 1: go back in time, and rejigger your message back when

1010
01:06:01,240 --> 01:06:04,360
Speaker 1: you were at Treasury. What would that look like if

1011
01:06:04,400 --> 01:06:06,919
Speaker 1: it was reduced to a bumper stick. Well, I think

1012
01:06:06,960 --> 01:06:10,880
Speaker 1: we would have had to do uh further uh further

1013
01:06:11,800 --> 01:06:15,720
Speaker 1: argumentation inside the administration and say are we for it

1014
01:06:15,840 --> 01:06:19,120
Speaker 1: or we against it? Because we were we were closer

1015
01:06:19,160 --> 01:06:21,480
Speaker 1: to being against it. It was perceived as being fully

1016
01:06:21,520 --> 01:06:24,800
Speaker 1: against what we really weren't. But we have to decide

1017
01:06:24,800 --> 01:06:27,000
Speaker 1: are we for it against it? And I think probably

1018
01:06:27,040 --> 01:06:29,520
Speaker 1: a clean position would have been look, for a number

1019
01:06:29,560 --> 01:06:33,000
Speaker 1: of reasons, we're not going to join, mainly political reasons.

1020
01:06:33,040 --> 01:06:35,440
Speaker 1: We're not going to join. We have these concerns, but

1021
01:06:35,480 --> 01:06:37,400
Speaker 1: you make your own decision. That would have been a

1022
01:06:37,400 --> 01:06:40,760
Speaker 1: cleaner position. Quite interesting. So what do you do for fun?

1023
01:06:40,840 --> 01:06:43,800
Speaker 1: What do you do to stay mentally or physically active

1024
01:06:43,840 --> 01:06:47,520
Speaker 1: when you're outside of the office. So for fun, I

1025
01:06:47,560 --> 01:06:51,680
Speaker 1: have four kids that keep me keep me fully engaged

1026
01:06:51,760 --> 01:06:58,080
Speaker 1: and energized. I'm also very active in my church congregation

1027
01:06:58,720 --> 01:07:03,840
Speaker 1: and uh. In terms of staying physically fit, about a

1028
01:07:03,920 --> 01:07:05,959
Speaker 1: year ago, I came to the conclusion that I needed

1029
01:07:06,000 --> 01:07:08,880
Speaker 1: to do more in that department. And since I've spent

1030
01:07:09,000 --> 01:07:12,320
Speaker 1: a lot of time on the treadmill, which actually have

1031
01:07:12,480 --> 01:07:15,919
Speaker 1: come to enjoy and found to be a place where

1032
01:07:15,920 --> 01:07:21,600
Speaker 1: I can reflect and and unwind. Quite interesting. So if

1033
01:07:21,680 --> 01:07:25,240
Speaker 1: a millennial or um a recent college grad came to

1034
01:07:25,280 --> 01:07:28,920
Speaker 1: you and said they were interested in a career in

1035
01:07:29,760 --> 01:07:33,000
Speaker 1: um economics or finance, what sort of advice would you

1036
01:07:33,000 --> 01:07:38,400
Speaker 1: give them? My my number one, UH piece of advice

1037
01:07:38,920 --> 01:07:43,160
Speaker 1: is find something that you are passionate about. When I

1038
01:07:43,200 --> 01:07:46,920
Speaker 1: talked to to graduates and people early in their careers,

1039
01:07:47,200 --> 01:07:50,800
Speaker 1: sometimes I feel like they're trying to turn themselves into

1040
01:07:51,240 --> 01:07:55,400
Speaker 1: the perfect candidate, the candidate that everyone will want to hire.

1041
01:07:55,760 --> 01:07:58,000
Speaker 1: That's not what I want to see. I want them

1042
01:07:58,000 --> 01:08:00,120
Speaker 1: to come in and tell me this is what I

1043
01:08:00,160 --> 01:08:04,440
Speaker 1: really care about. And uh, if they really care about it,

1044
01:08:04,440 --> 01:08:07,160
Speaker 1: if they're passionate about it them, they are going to

1045
01:08:07,240 --> 01:08:12,280
Speaker 1: be successful in these In these these these careers, particularly

1046
01:08:12,280 --> 01:08:15,520
Speaker 1: in finance and and policy, there are gonna be a

1047
01:08:15,520 --> 01:08:18,120
Speaker 1: lot of weekends, They're gonna be a lot of late nins.

1048
01:08:18,520 --> 01:08:22,840
Speaker 1: And if you don't fundamentally love what you're doing, it's

1049
01:08:22,880 --> 01:08:25,760
Speaker 1: going to drive you to distraction. You're not gonna be

1050
01:08:25,760 --> 01:08:28,320
Speaker 1: as a factor. Find why you love and what you

1051
01:08:28,439 --> 01:08:31,880
Speaker 1: care about. And our final question, what is it that

1052
01:08:31,920 --> 01:08:38,200
Speaker 1: you know today about macroeconomics, monetary policy, fixed income investing

1053
01:08:38,479 --> 01:08:41,519
Speaker 1: that you wish you knew thirty years or so ago

1054
01:08:41,600 --> 01:08:45,679
Speaker 1: when you were first getting started. So I think that

1055
01:08:45,800 --> 01:08:51,800
Speaker 1: the biggest thing I've learned is as one goes through

1056
01:08:51,840 --> 01:08:55,680
Speaker 1: these cycles. And this is true as an investor, uh,

1057
01:08:55,840 --> 01:08:59,840
Speaker 1: it's true as a policymaker. You have to have faith

1058
01:09:00,040 --> 01:09:02,880
Speaker 1: your instincts. You know, at the end of the day,

1059
01:09:03,040 --> 01:09:06,320
Speaker 1: all the analytics are great, bring them to bear, but

1060
01:09:06,600 --> 01:09:08,519
Speaker 1: I think ultimately, at the end of the day we

1061
01:09:08,560 --> 01:09:10,759
Speaker 1: have to we have to trust our guts and trust

1062
01:09:10,800 --> 01:09:15,320
Speaker 1: our instincts. Quite quite intriguing. We have been speaking with

1063
01:09:15,439 --> 01:09:19,559
Speaker 1: Nathan Sheets. He is the chief economist at PEJAM Fixed Income.

1064
01:09:20,120 --> 01:09:22,920
Speaker 1: If you enjoyed this conversation, we'll look up an inch

1065
01:09:23,040 --> 01:09:25,599
Speaker 1: or down an inch on Apple iTunes and you could

1066
01:09:25,640 --> 01:09:28,759
Speaker 1: see any of the other two hundred and thirty nine

1067
01:09:29,280 --> 01:09:33,599
Speaker 1: such prior conversations that we've had. Um you can find

1068
01:09:33,600 --> 01:09:38,720
Speaker 1: that Apple iTunes, Overcast, Stitcher, Bloomberg dot com, wherever your

1069
01:09:38,800 --> 01:09:43,000
Speaker 1: finer podcasts are located. We love your comments, feedback and

1070
01:09:43,120 --> 01:09:47,160
Speaker 1: suggestions right to us at m IB podcast at Bloomberg

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Speaker 1: dot net. Please go to Apple iTunes and give us

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Speaker 1: a delightful five star review. I would be remiss if

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Speaker 1: I did not thank the Cracks staff that helps put

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Speaker 1: this conversation together each week. Taylor is our booker, Attica

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Speaker 1: val Brun is our project manager. Michael Batnick is our

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Speaker 1: head of research. I'm Barry Ritolts. You've been listening to

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Speaker 1: Masters in Business on Bloomberg Radio.