Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Nathan Sheets, and he comes to us
Speaker 1: by way of Pigum Fixed Income, a giant institutional shop.
Speaker 1: Their fixed income department alone seven hundred and forty three
Speaker 1: billion dollars in fixed income assets UM. Nathan has a
Speaker 1: unique background. He served in the Treasury Department. He was
Speaker 1: with the Federal Reserve for um eighteen or so years.
Speaker 1: He worked at City and then Prudential, and now he's
Speaker 1: been at Pigum for a while. He is uniquely situated
Speaker 1: to comment about, and analyze and discuss monetary policy, state
Speaker 1: of the economy, how best to analyze employment inflation, what
Speaker 1: it means for interest rates, what that means for fixed
Speaker 1: income investments. Uh. It really is a fascinating conversation filled
Speaker 1: with wonky goodness. So if you are at all remotely
Speaker 1: interested in any of those things, and you know I'm
Speaker 1: interested in all of those things, you will find this
Speaker 1: to be an utterly fascinating discussion. So, with no further ado,
Speaker 1: my conversation with Pijum Fixed Incomes Nathan Sheets. This is
Speaker 1: Master's in Business with Barry Ridholts on Bloomberg Radio. My
Speaker 1: special guest this week is Nathan Sheets. He is the
Speaker 1: chief economist and head of Global macro economic Research at
Speaker 1: PIJUM Fixed Income, which manages seven hundred and forty three
Speaker 1: billion dollars in assets. Previously, he was the Under Secretary
Speaker 1: of the Treasury for International Affairs UH. Prior to that,
Speaker 1: he worked at US Treasury Department, as well as the
Speaker 1: Federal Reserve, where he served as director of the Division
Speaker 1: International Finance. Previously he was at City Group. Did I
Speaker 1: get that right or room? How far off? Was? I
Speaker 1: think you nailed it all right? Nathan Sheets, Welcome to Bloomberg.
Speaker 1: Pleasure to be here. Thank you. So you have a
Speaker 1: fascinating background. You were now you're currently at PEJAM Fixed Income.
Speaker 1: Previously you were prudential at City Group, the U. S
Speaker 1: Treasury and the Federal Reserve. Was was this the plan?
Speaker 1: Was this the career path you had mapped out for yourself.
Speaker 1: I think it would have been impossible to foresee how
Speaker 1: things would evolve, But coming out of grad school, I
Speaker 1: did want a career in practical economics. I wanted to
Speaker 1: take the theory that I had learned and applied in
Speaker 1: a way that it might actually make a difference in
Speaker 1: in the lives of people. And hence all this public
Speaker 1: service at the Treasury Department and the Federal Reserves I envisioned.
Speaker 1: I envisioned public service. My first job was was at
Speaker 1: the Federal Reserve. But uh, I'm also you know, I
Speaker 1: think a practically minded guy, at least as practically as
Speaker 1: you can be and still be an economist, and I
Speaker 1: was interested in applying these kinds of principles in a
Speaker 1: in a private sector context as well. So I couldn't
Speaker 1: have predicted the path or how things would evolve. I've
Speaker 1: been very fortunate in the opportunities that I've had, but uh,
Speaker 1: I did very much want to do qualitatively these kinds
Speaker 1: of things. So so you come out of your PhD program,
Speaker 1: you say, I'm not going to go into academia, but
Speaker 1: the next best best thing is the Federal Reserve, who
Speaker 1: typically hires PhDs as researchers. What what was your first
Speaker 1: job at the Fed? Like the Federal Reserve, for me,
Speaker 1: especially in those first years, was a vigorous post doc.
Speaker 1: It allowed me to take, uh the theory and as
Speaker 1: I said, apply it in practical ways to real world issues.
Speaker 1: So my first assignment was to follow Rush UH and
Speaker 1: some of the other transitioning economies Poland, Hungary and so forth.
Speaker 1: I in the in the mid ninety nineties when they
Speaker 1: were transitioning from a centrally planned system into market based economies,
Speaker 1: and it was it was very exciting to see the
Speaker 1: interplay between politics and policy and economics and sociology through
Speaker 1: through that period. So Russia continues to struggle with corruption
Speaker 1: on its path to capitalism. Some of the outer block
Speaker 1: form of Soviet countries are doing much better. What's that
Speaker 1: transition like and are they still heading in the right direction.
Speaker 1: What we're finding is that the countries that had some
Speaker 1: tradition of capitalism are doing quite well. Most of those.
Speaker 1: Most of those are the Central Europeans. The Czech Republic
Speaker 1: is doing very well, Slovakia is is doing well. UH.
Speaker 1: Kind of the next wrong. You've got countries like like
Speaker 1: Gary and Romania, maybe not quite as well as as
Speaker 1: the Czech Republic and in the Slovak Republic, but they're
Speaker 1: they're proceeding. Uh. Russia, as you say, UH continues to struggle,
Speaker 1: and frankly, I think history will have a judgment as
Speaker 1: to whether we had opportunities there to help the Russians
Speaker 1: more effectively than we actually did. And then many of
Speaker 1: the UH former Soviet republics continue to struggle. They have
Speaker 1: very low levels of per capity income, and UH have
Speaker 1: a significant distance yet to go before they're really part
Speaker 1: of the global economy. Since your early days at the FED,
Speaker 1: the global monetary system has really evolved, some of it,
Speaker 1: certainly in response to the Great Financial Crisis. Where do
Speaker 1: you see the future of monetary policy UM from from
Speaker 1: your perspective at Pigium today. During the twenty five years
Speaker 1: when I've been a professional economist, the global economic and
Speaker 1: monetary system has absorbed two very large shocks or changes.
Speaker 1: I'd say the first one has been the ongoing integration
Speaker 1: of China. From a structural standpoint. Uh, the addition of
Speaker 1: one in a quarter billion Chinese into the global economy
Speaker 1: has been UH significant, and we're still dealing with the
Speaker 1: implications of that. Deflationary or inflationary or at times both.
Speaker 1: I think so far more deflationary or disinflationary that uh,
Speaker 1: most of those folks had lower wages than Western workers,
Speaker 1: and I think that's put downward pressure on wages throughout
Speaker 1: the world over the last twenty or twenty five years.
Speaker 1: And the second issue. You mentioned that second major issue
Speaker 1: is the global financial crisis, so China. The big actual issue,
Speaker 1: the global financial crisis, is the big cyclical issue. But
Speaker 1: the bottom line, and as it pertains to the international
Speaker 1: monetary system in particular, is that notwithstanding these two big shocks,
Speaker 1: the role of the dollar and the centrality of US
Speaker 1: markets has remained largely intact. The dollars still by far
Speaker 1: the world's leading reserve currency, the US financial markets are
Speaker 1: essentially unrivaled in the world. That that in many ways
Speaker 1: the world is more multipolar, but not so much in finance.
Speaker 1: Let's talk a little bit about your role at the
Speaker 1: Federal Reserve. How did you start, what did that evolve into,
Speaker 1: and how closely did you end up working with the
Speaker 1: board and its chairman so UH. I was at the
Speaker 1: Fed for eighteen years. UH. During the entirety of the time,
Speaker 1: I was in the Division of International Finance. UH. During
Speaker 1: the first fourteen of those years, I held a variety
Speaker 1: of roles. I mentioned Russia, and I was falling emerging
Speaker 1: markets in Japan and so forth. During the last four
Speaker 1: which started in two thousand and seven, I was the
Speaker 1: director of the International Finance Division as the global financial
Speaker 1: crisis emerged, and had the opportunity and the responsibility to
Speaker 1: work closely with Ben Bernanke and the Board and and
Speaker 1: and others and trying to respond to that that terrible
Speaker 1: set of economic conditions. So there's been a lot of
Speaker 1: revisionist Dick history. If you remember um early on in
Speaker 1: the in the financial crisis, the FED is going to
Speaker 1: be the ruin of all of us. They're gonna cause
Speaker 1: hyper inflation, They're going to destroy the dollar. They should
Speaker 1: just stand down. What sort of great do you give
Speaker 1: the Federal Reserve for the job they did both before, during,
Speaker 1: and after the financial crisis? So I'm probably a little biased. Uh,
Speaker 1: I would give the FED, I don't know, a B
Speaker 1: for a pre crisis. And I think the criticism there
Speaker 1: is not about monetary policy, which I think was about right.
Speaker 1: But the FED didn't do what it could have done
Speaker 1: in the regulatory space and allowed imbalances in the financial system.
Speaker 1: Relic and his work for sure, exactly exactly, and the
Speaker 1: FED was not unique, the FED was not alone. But
Speaker 1: I don't see I can give the Fed more than
Speaker 1: a B. Now during the heat of the crisis. UH,
Speaker 1: A vigorous response was absolutely necessary. As we were sitting
Speaker 1: in the Fed's building and those terrible facts were emerging. UH.
Speaker 1: It reminded me a bit of the Jack Nicholson line,
Speaker 1: you can't handle the truth. The truth was terrible, and
Speaker 1: UH Bernankee and guide here and then UH pulse and
Speaker 1: at the Treasury. They just worked through this and they
Speaker 1: had a set of a set of responses. I would
Speaker 1: give the FED an A for that period. Lehman obviously
Speaker 1: failed and no one saw the consequences of that. I
Speaker 1: think they were going to let somebody fail at some point.
Speaker 1: That's why I don't give them an UH an A plus.
Speaker 1: And then, frankly, since the financial crisis, I think the
Speaker 1: FED again has done a pretty good job keeping keeping
Speaker 1: inflation expectations well anchored and supporting UH growth in the
Speaker 1: US economy. When you look around the world, you know,
Speaker 1: we can't say things are growing gangbusters in the United States,
Speaker 1: but we're doing better than Europe and Japan and UH
Speaker 1: and many others. So let me push back a little bit.
Speaker 1: I don't think we're all that far apart, and in fact,
Speaker 1: I think revisionist history helps the fed's decision with Lehman
Speaker 1: Brothers because subsequently learned that Lehman Brothers had a negative
Speaker 1: net worth of minus a hundred and fifty billion dollars.
Speaker 1: Nobody could have taken Lehman Brothers on ps. Dick Folds
Speaker 1: turned down Warren Buffett when they needed some capital six
Speaker 1: months before they collapsed. At what point I just picture
Speaker 1: these meetings at the FED where someone says, this idiot
Speaker 1: said no to Buffett, how can we possibly bail him out?
Speaker 1: It's but here's where I disagree with you. So in
Speaker 1: the period leading up to the crisis, we're we're totally
Speaker 1: in sync about people like Ed Graham should have been
Speaker 1: listened to. He understood the regulatory lapses that were being
Speaker 1: taken advantage of by the private sector. But dear Lord,
Speaker 1: we had federal reserve rates um under two percent for
Speaker 1: three years and at one percent for a year. That
Speaker 1: really kicked off a giant inflationary spiral. I think Greenspan
Speaker 1: was far too accommodative post nine eleven. He was emotionally
Speaker 1: shaken up and did not normalize rates fast enough. I
Speaker 1: have heard people make the same complaints post crisis. The
Speaker 1: FED has not normalized rates fast enough. In each case,
Speaker 1: it both instances led to um income inequality and political instability.
Speaker 1: How far off is that criticism? So? UH, when I
Speaker 1: think about what a different path of policy rates might
Speaker 1: have looked like, I suppose you compare it to a
Speaker 1: benchmark like the Tailor rule. The FED was a little
Speaker 1: bit softer than the Tailor rule. But in my mind,
Speaker 1: the misses are a couple of rate hikes and a
Speaker 1: little bit in timing. It doesn't seem like, even if
Speaker 1: we think there should have been a more vigorous UH
Speaker 1: monetary policy response, that the difference between what they did
Speaker 1: and what one might envision was large enough to explain
Speaker 1: the imbalances UH and problems that erupted in the economy.
Speaker 1: My feeling really is that the mistakes were on the
Speaker 1: regulatory side, on the government side, in board rooms, amongst managers,
Speaker 1: amongst traders. I mean, there's a lot of blame to
Speaker 1: go around for the global faviss but I just don't
Speaker 1: think that the misses for monetary policy we're big enough
Speaker 1: to get really on the scoreboard relative those other mistakes.
Speaker 1: So let's let's play a counter factual game. Some people
Speaker 1: wanted the FED to do nothing during the crisis. Hey,
Speaker 1: it's Congress's responsibility. What would the world have looked like
Speaker 1: if the FED said we'd like to create uh um
Speaker 1: either QWI years up, but really it's up to the
Speaker 1: Senate in the House, we're gonna do nothing and follow
Speaker 1: their lead. What would the world have looked like then?
Speaker 1: So as it was, we saw the unemployment rate rise
Speaker 1: to ten percent. I honestly believe that if the Fed
Speaker 1: had done nothing and had just waited for Congress, we
Speaker 1: could have seen the unemployment rate twice that hot. That
Speaker 1: would have been more like what happened during the Great Depression.
Speaker 1: And h I think that if the FETE had been
Speaker 1: hands off, if they had said, that's not our responsibility,
Speaker 1: that uh, we could have had Great Depression two point
Speaker 1: oh right. And as it was, as it said, it
Speaker 1: was unimaginably terrible, but it could have been even worse. Um,
Speaker 1: I don't I don't disagree with that at all. Um.
Speaker 1: Lots of folks got the implications of KWIE wrong. Very famously.
Speaker 1: A number of people had a letter in the Wolf
Speaker 1: Street Journal to Ben Bernecki that said, I want to
Speaker 1: say this was, Hey, your quantitative easing is again, We're
Speaker 1: gonna see hyper inflation. We're going to see the collapse
Speaker 1: of the dollar. You're destroying the economy. And in fact
Speaker 1: none of the sort happened. Why did people get quantitative
Speaker 1: easing so long? Was it the fundamental understanding of economics?
Speaker 1: Was it bias or or we just haven't lived through
Speaker 1: anything like that? What excuses can these folks legitimately offered
Speaker 1: for being so wrong? So as the FED pursued quantitative easing,
Speaker 1: they were really pushing out the frontier of monetary policy
Speaker 1: and Fed, the markets and the rest of the world
Speaker 1: didn't know the full implications of what they were doing,
Speaker 1: and I think that's what kicked off some of these
Speaker 1: concerns and anxieties that you described. But I think that UH,
Speaker 1: Ben Bernanke and Jenny Yellen have been very effective at
Speaker 1: having their economic dashboard, and I would say at the
Speaker 1: center of that dashboard has been inflation expectations, where if
Speaker 1: they have one objective, it's to make sure that inflation
Speaker 1: expectations stay well anchored around two percent. And these various
Speaker 1: policies that the FED pursued, quantitative easing and the like,
Speaker 1: have pushed up UH inflation expectation sans some to keep
Speaker 1: them well anchored, but there hasn't been any overshooting. Let's
Speaker 1: talk a little bit about your current role. It seems
Speaker 1: like your backgrounds UH in international finance at the Treasury
Speaker 1: and everything you've done at the Federal Reserve pretty perfect
Speaker 1: preparation for being a head of research at a at
Speaker 1: a big fixed income shop. I feel like I learned
Speaker 1: global macro at the Fed and the Treasury during my
Speaker 1: time at City. I learned how to talk to investors
Speaker 1: about markets, and I'm able to draw on that background
Speaker 1: on a daily basis in my work at at PGAM
Speaker 1: Fixed Income. The new dimension is being closer to the
Speaker 1: portfolio allocation process and closer to the portfolio managers and
Speaker 1: getting a better sense of the real considerations that go
Speaker 1: into that decision of should we buy or sell a
Speaker 1: given asset. So your clients are essentially all big institutions, UM,
Speaker 1: how often do you get to interact with UH investors
Speaker 1: from these other institutions and and what are they concerned
Speaker 1: about today? So UH, the interaction with with our clients
Speaker 1: is frequent, UH and intensive. I travel extensively across the
Speaker 1: United States and also globally. We have lots of clients
Speaker 1: in Europe, Japan, Asia, and elsewhere. In terms of issues,
Speaker 1: I would say the short term issue that clients are
Speaker 1: the most interested in is how much steam does this
Speaker 1: expansion have left? Are we looking at a recession around
Speaker 1: the corner. It's been running for a while, We've been
Speaker 1: hearing warnings about that for two or three years. Exactly
Speaker 1: is this late cycle or not? The longer term issue
Speaker 1: that they're the most focused on is debt and demographics.
Speaker 1: What what does this kind of ad verse cocktail mean
Speaker 1: for our long term performance? So so let's talk about
Speaker 1: the first one about the length of the cycle. I
Speaker 1: have long since complained that most economists are using the
Speaker 1: wrong data set. It's not recessions, it's post credit crisis
Speaker 1: recoveries that they should be looking at, and they seem
Speaker 1: to be very different than the ordinary balance sheet recession.
Speaker 1: Explained that if you would yes, so uh a decade
Speaker 1: or so ago, uh Ken Rogoff and Carmen Reinhardt did
Speaker 1: some very interesting work where they looked at decades and
Speaker 1: decades of recessions and compared those that are driven by
Speaker 1: banking crises to those recessions that arise for other reasons.
Speaker 1: And what they found was that the recoveries from those
Speaker 1: banking crises were systematically slower, and that the slower pace
Speaker 1: of growth persisted for up to a decade. And when
Speaker 1: you look at the US experien ariants, it seems to
Speaker 1: be match Reinhardt and rogue Off almost almost almost precisely.
Speaker 1: It really is is quite extraordinary. Now, the one thing
Speaker 1: I would say that's on the other side of the
Speaker 1: ledger is that this has been slower as they predicted,
Speaker 1: but this has also been a uh an extraordinarily persistent expansion,
Speaker 1: where by July it will be the longest expansion in
Speaker 1: in US history. So it's been slower but also longer lived.
Speaker 1: So some people have given Reinhardt and rogue Off a
Speaker 1: little pushbacked um, this time is different. Eight Centuries of
Speaker 1: Financial Folly was the book they wrote post crisis. But
Speaker 1: what a lot of folks do not recall is that
Speaker 1: in December two thousand and seven they put out a
Speaker 1: white paper that looked at five crises. I want to
Speaker 1: say it was US, Mexico, Sweden, Japan one other that
Speaker 1: escapes my my recollection. So before or like literally as
Speaker 1: the market peaked, they put out a paper that said says,
Speaker 1: here's how financial crises are different and why the recoveries
Speaker 1: are different, also very prescient. Very few people really paid
Speaker 1: a lot of attention to that, but they were dead on,
Speaker 1: weren't they. They really were, you know, I'd say five
Speaker 1: years ago there was a debate as to what was
Speaker 1: going on, why was growth slower? And I think all
Speaker 1: the other explanations have kind of melted away and we
Speaker 1: just have to accept the fact this was deep. It
Speaker 1: hit our financial sector. There are significant headwinds to to
Speaker 1: to bank credit and lending, and probably also scars in
Speaker 1: terms of of of demand for credit in the corporate sector,
Speaker 1: which is translated not only into somewhat tighter credit conditions
Speaker 1: than would have prevailed, but also Uh, corporates have been
Speaker 1: hesitant to invest, and all of that has been a slower,
Speaker 1: slower recovery. You mentioned the longer term concerns of your
Speaker 1: institutional clients are the nation of debt and demographics. I'm
Speaker 1: assuming they mean sovereign debt or is it also corporate debt?
Speaker 1: How do those two play together? I would say, Uh,
Speaker 1: primarily it's sovereign debt, with an asterisk that the private
Speaker 1: debt in China is very high. Is it really private debt?
Speaker 1: Isn't it kinda sort of like what we did with
Speaker 1: Fannie and Freddie. Isn't there the full faith and credit
Speaker 1: of the Chinese government behind that private debt? Or am
Speaker 1: I overstating that in the first instance, it's it's private debt.
Speaker 1: But your point, you know, doesn't the Chinese government implicitly
Speaker 1: guarantee uh most of the debt in China? Is absolutely right,
Speaker 1: and so maybe you just think about that as a
Speaker 1: different form of of of of public debt um. But
Speaker 1: then the question is, as these debt levels rise, and
Speaker 1: as we know in the future, there are gonna be
Speaker 1: a fewer workers and uh fewer taxpayers, And how do
Speaker 1: these things interact with the each other. What are those
Speaker 1: tax rates uh in twenty or thirty years gonna look
Speaker 1: like uh in order to in order to make payment
Speaker 1: to even service this debt I? And will those tax
Speaker 1: rates have adverse implications for incentives to work? Alternatively, will
Speaker 1: will an older society be less prone to to to
Speaker 1: want to take risks and engage an entrepreneurship than a
Speaker 1: younger one, And if so, then that might mean you
Speaker 1: have a slur productivity growth. There are a number of
Speaker 1: concerns where these issues of dabt and Demographics Interact. I'm
Speaker 1: Barry rit Helts. You're listening to Masters in Business on
Speaker 1: Bloomberg Radio. My special guest today is Nathan Sheets. He
Speaker 1: is the chief economist and head of Global macroeconomic research
Speaker 1: at Pigeon Fixed Income, which manages seven hundred and forty
Speaker 1: three billion dollars in fixed income assets. Let's talk a
Speaker 1: little bit about the economic cycle and where we are.
Speaker 1: It's big in a decade since the Great Financial Crisis,
Speaker 1: we're still a sub three percent economy, maybe even a
Speaker 1: sub two percent economy now that the highs of the
Speaker 1: tax cuts seem to have faded. What's our growth outlook
Speaker 1: over the next couple of years and and why have
Speaker 1: we been so muddled over the past few years. So
Speaker 1: my baseline would be the growth this year is a
Speaker 1: little bit over two percent, and the growth next year
Speaker 1: as fiscal stimulus rolls off, will be a little bit
Speaker 1: under two percent. But two percent is kind of trend
Speaker 1: and that's not terrible. Mature economy compared again to many
Speaker 1: of our international competitive that looks that looks pretty good.
Speaker 1: Now underneath it, there's a really a rather deep and
Speaker 1: important question, and that is that it feels like in
Speaker 1: the economic data suggest the productivity growth has slowed significantly
Speaker 1: over the last say, enter twenty years. And and the
Speaker 1: question is, on the one hand, we see these data
Speaker 1: pointing to UH slower productivity. On the other hand, it
Speaker 1: feels like the world we're living in is a wash.
Speaker 1: And new technologies miniaturization and and machine learning and artificial
Speaker 1: intelligence and genomics and on and on and on, And
Speaker 1: the big question is when and if, but when do
Speaker 1: all of those those UH developments find their way into
Speaker 1: the national income accounts and into productivity girls. So so
Speaker 1: here's my pushback on this. And and people have told
Speaker 1: me that, well, you're in a sector that is very
Speaker 1: dependent on technology, so you're seeing productivity. But we were
Speaker 1: once a heavy manufacturing economy. We're now a service economy,
Speaker 1: which means every person in that value chain is using technology,
Speaker 1: is using computers and mobile one everything else. How much
Speaker 1: of that lack of so therefore there's a ton of
Speaker 1: productivity growth, at least I see it. So how much
Speaker 1: of that lack of productivity gains is really a measurement issue,
Speaker 1: not a lack of productivity issue. So this is something
Speaker 1: that I've explored. I've rebalanced the U S sectors and said,
Speaker 1: suppose that we had less services and more manufacturing more
Speaker 1: like what we had ten or twenty years ago, what
Speaker 1: would productivity look like? And it would still be down.
Speaker 1: So it doesn't seem like it's the services rebalancing that's
Speaker 1: driving it, but that that that could certainly certainly be
Speaker 1: part of it. I think another point that's important is
Speaker 1: there is some evidence that's what's happened so far is
Speaker 1: that the leading firms in various industries have adopted a
Speaker 1: lot of these new technologies. But these new technologies have
Speaker 1: not yet diffused them themselves deeply into various sectors, largely
Speaker 1: reflecting the investment as remain kind of lackluster. That a
Speaker 1: lot of this new technology, how are you going to
Speaker 1: get it as a firm? You're gonna get it by
Speaker 1: investing in firms have been hesitant to to put their
Speaker 1: resources on the table. Let's talk a little bit about
Speaker 1: full employment and what it should look like. We've been
Speaker 1: hovering around four percent for a while. Shouldn't we be
Speaker 1: seeing greater wage gains or is international competition tamping that down?
Speaker 1: If you had told me where the unemployment rate was,
Speaker 1: I would have guessed that wage growth would be more rapid.
Speaker 1: So I think this is uh, this is a puzzle.
Speaker 1: It's such surprise when I look at the economy. Why
Speaker 1: do I think is going on? Yep? I think technology
Speaker 1: is probably holding down wage growth. Certainly globalization is holding
Speaker 1: down wage growth. I think another key element, as I've mentioned,
Speaker 1: is that inflation X bytations are well anchored. And so
Speaker 1: if you really think that inflation is only going to
Speaker 1: be two percent and your boss offers you one and
Speaker 1: a half percent raise, you know, is it worth it
Speaker 1: to get to get agitated? And then that interacts with
Speaker 1: another key factor in the US labor market is we
Speaker 1: have very little collective bargaining. I was going to ask
Speaker 1: you about that. The unions are a fraction of what
Speaker 1: they were before. What does that do to the bargaining
Speaker 1: power of of individual employees, even highly sought after STEM employees. Yeah,
Speaker 1: so it means if you want to raise, you've got
Speaker 1: to go slam your fist down on your boss's desk
Speaker 1: and say, boss, I want to raise. And that's an
Speaker 1: uncomfortable conversation that if inflation was taking off, I think
Speaker 1: people would probably feel more comfortable having it. Now. I'd
Speaker 1: say the good news for American workers is we are
Speaker 1: seeing some acceleration way each gains are now over three
Speaker 1: which is less than I would have expected, but it's
Speaker 1: a little bit higher. And more importantly, we're also starting
Speaker 1: to see increased churn in the labor market, so people
Speaker 1: are leaving jobs and there are lots of jobs posted.
Speaker 1: And the way you get a raise in the US
Speaker 1: is to get an outside offer, and then you go
Speaker 1: to your boss and say, boss, they want more money,
Speaker 1: and the guy across the street is giving me a
Speaker 1: ten percent race. Quite interesting. So here we are, we're
Speaker 1: running bigger deficits than we ever had at this point,
Speaker 1: which is a bigger driver for the economy. Is it
Speaker 1: the fiscal policy or is it monetary policy? So I'll
Speaker 1: still give the nod to monetary policy as as being
Speaker 1: more important, but fiscal is increasingly giving it a run
Speaker 1: for its money, so to speak. Uh. In the short term,
Speaker 1: we've seen the power of fiscal policy in providing stimulus
Speaker 1: and and and supporting growth. In the long run, we
Speaker 1: have these very difficult issues of debt and deficits and
Speaker 1: how to manage those and what the implied tax rates
Speaker 1: are going to be. So uh, fiscal policy is becoming
Speaker 1: increasingly important. It really strikes me as we think of
Speaker 1: these two pillars of macro policy, how different they are
Speaker 1: in the way they're formulated. Do you have technocrats doing
Speaker 1: monetary policy and you have a very messy political process
Speaker 1: with with with fiscal You're being too kind, So, um,
Speaker 1: let's talk about what's been in the news a ton lately.
Speaker 1: Monetary theory has been making the rounds that essentially says,
Speaker 1: you know, you can run deficits, it's not the worst
Speaker 1: thing in the world. Look at Japan. Their demographics are terrible,
Speaker 1: They're running giant deficits relative to GDP, and their economy
Speaker 1: is moving along just fine. How do you respond to
Speaker 1: those claims? So my feeling is that modern monetary theory
Speaker 1: is dangerous. But also, and this is why it's particularly dangerous,
Speaker 1: is there is a grain of truth in it. We
Speaker 1: don't know what the limits are as to how much
Speaker 1: death the United States as a reserve currency can have.
Speaker 1: As you say, Japan has very high levels of public
Speaker 1: dat relative to GDP or over two of GDP. Uh
Speaker 1: And is there a good economic case that some economists
Speaker 1: have recently made when rates are very low to borrow
Speaker 1: and and do infrastructure there might have very high rates
Speaker 1: of return. So all of those things are true. But
Speaker 1: at the same time, to say there's really no constraints
Speaker 1: on fiscal policy, I consider it just not prudent. It's
Speaker 1: driving too close to the edge of the cliff. We
Speaker 1: don't know exactly where that edge is, but I sure
Speaker 1: don't want to find out. See what what you're supposed
Speaker 1: to do is lie and say these tax cuts will
Speaker 1: pay for themselves elves and then run giant deficits and
Speaker 1: by the time people figure it out, you've already retired
Speaker 1: to the bomb is in, You're you're out of office.
Speaker 1: That that, I think is the key, the key secret
Speaker 1: there um. But there is some truth to the fact
Speaker 1: that whether you're looking at monetary theory from the left
Speaker 1: or the right, and the same with fiscal theory, neither party,
Speaker 1: neither ideological wing UM has a monopoly on not running deficits.
Speaker 1: They both seem to run deficits. Although I have to
Speaker 1: give the Clinton administration a little credit for UM actually
Speaker 1: running a surplus one year, but the Obama administration and
Speaker 1: the Bush administration, they and now the Trump administration, they've
Speaker 1: all been running deficits. And I think the I think
Speaker 1: the point here is the right hates taxes, the left
Speaker 1: love spending and guess what both of those mean somewhat
Speaker 1: higher deficits. Where do we get fiscal restraint? We get
Speaker 1: fiscal restraint from the center, and uh, the political center,
Speaker 1: especially at present, is very hollowed out. So so let's
Speaker 1: talk a little bit about the center in terms of
Speaker 1: the nexus between the markets and the economy. Because the
Speaker 1: old joke is um economists have predicted nine of the
Speaker 1: previous four recessions. But in reality, when the economy begins
Speaker 1: to slow and when profits begin to get curtailed, you know,
Speaker 1: the market just happens to pick it up a little
Speaker 1: faster than the economic data because it's reported so much sooner.
Speaker 1: What what's that relationship between economics and and equity prices?
Speaker 1: So there's all sorts of theory about how uh equity
Speaker 1: prices are current expected value of future profits and uh,
Speaker 1: you know, all of those things are important. What we're
Speaker 1: expecting for for profitability, what we're expecting for rates, what
Speaker 1: we're expecting for growth. But the mapping is a very
Speaker 1: very noisy one. I'd love to be able to say, uh,
Speaker 1: if you give me the economy, I know the markets,
Speaker 1: but i'd also need to know a sentiment uh, and
Speaker 1: a lot of sociological and psychological elements. UH. So I
Speaker 1: would say macro is part of the story, but the
Speaker 1: best market commentators, the best strategists, deeply understand something in
Speaker 1: addition to the macro theory. So you you touched on sentiment.
Speaker 1: There you teed up my next question perfectly. How does
Speaker 1: sentiment vary over the course of a market cycle? How
Speaker 1: important are things like small business sentiment, consumer sentiment? Which
Speaker 1: does that drive the economy or does the economy drive sentiment?
Speaker 1: I think that the answer is both. That as sentiment
Speaker 1: uh deteriorates, that drags down the economy, But then as
Speaker 1: the economy gets worse, sentiment will respond to that. So
Speaker 1: it's very much a symbiotic self reinforcing uh kind of relationship.
Speaker 1: But UH, you know, if you press me, what's the
Speaker 1: first mover? I think sentiment typically moves before the economic data.
Speaker 1: We have been speaking with Nathan Sheets. He is the
Speaker 1: chief economist at PJIM Fixed Income. If you enjoy this conversation,
Speaker 1: we'll be sure to come back for the podcast extras,
Speaker 1: where we keep the tape rolling and continue discussing all
Speaker 1: Things Macro. You can find that wherever finer podcasts are
Speaker 1: sold Apple, iTunes, Stitcher, Overcast, Bloomberg dot com. We love
Speaker 1: your comments, feedback and suggestions right to us at m
Speaker 1: IB podcast at Bloomberg dot net. Check out my daily
Speaker 1: column on Bloomberg dot com slash Opinion. Follow me on
Speaker 1: Twitter at rit Halts. I'm Barry Hults. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast, Nathan.
Speaker 1: Thank you so much for doing this. I'm really enjoying
Speaker 1: this conversation. You are right in the wonky sweet spot
Speaker 1: of of some of my favorite peas. I want to
Speaker 1: circle back to the financial crisis and some of the
Speaker 1: issues related to that. But you were discussing um wages
Speaker 1: not going up as fast as anyone would have suspected
Speaker 1: relative to full employment, and I have a theory I
Speaker 1: want to run by you. Employees have seen substantial wage gains,
Speaker 1: but they're not seeing it in dollars. They're seeing it
Speaker 1: in giant increases in healthcare costs going up eight nine
Speaker 1: percent a year. If you're paying for healthcare as an employer,
Speaker 1: and what it is five or ten percent, maybe even
Speaker 1: more for some employees of the healthcare is one of
Speaker 1: the biggest inflationary inputs. We see how much of that
Speaker 1: is dollars that otherwise might have gone to salary increases.
Speaker 1: I think the answer to that is is substantial amount
Speaker 1: could have gone into salary increases, and as you say,
Speaker 1: for many employees, healthcare is a very substantial part UH
Speaker 1: of their overall compensation. Now we do have broader measures
Speaker 1: of compensation that would include healthcare and other benefits, and
Speaker 1: they also have been going up somewhat more slowly than
Speaker 1: we would have expected. So very much true that it's
Speaker 1: an enormous cost, an enormous source of of of overhead
Speaker 1: for US firms that makes it less attractive to hire
Speaker 1: in the United States, But that alone doesn't explain this
Speaker 1: UH puzzle as to why wage growth hasn't time. I'm
Speaker 1: looking at that from a competitive standpoint of US manufacturers
Speaker 1: versus Germany, US manufacturers versus Japan. Given we what are
Speaker 1: They're like three or four hundred Democratic people in the
Speaker 1: presidential race already, and almost all of them are talking
Speaker 1: about some variation of universal healthcare. I would think the
Speaker 1: corporate sector would jump all over this and say, please
Speaker 1: take this off our backs. Why is it our responsibility?
Speaker 1: And I don't necessarily agree with this, but how has
Speaker 1: corporate America evolved to be responsible for healthcare and not
Speaker 1: the government? It seems so bizarre. It's uh, it's an
Speaker 1: interesting historical feature the way our labor market is evolved,
Speaker 1: as you said, in many other major economies in Europe
Speaker 1: and in Canada and elsewhere. Uh, it's dealt with very differently.
Speaker 1: I And it is a it is a drag on
Speaker 1: on wages and a responsibility that the corporate sector bears.
Speaker 1: And I think you're right. For someone to come and say,
Speaker 1: don't worry about that would be very welcome. Now, the
Speaker 1: flip side of that is it means the burden of
Speaker 1: paying for it gets gets transferred, and so the German
Speaker 1: corporates uh don't have to deal with it. But the
Speaker 1: overall level of taxation in Germany is much higher, so
Speaker 1: the government is larger relative to GDP nolunch. That's right,
Speaker 1: there's a piper to be paid someplace. Makes a lot
Speaker 1: of sense. One would wonder, um if salary were higher
Speaker 1: and corporate earnings were higher, but the tax burden would
Speaker 1: be higher as well. Exactly could could be kind of intriguing.
Speaker 1: So so let's bring it back to the pre financial
Speaker 1: crisis era. And I didn't want to push back too
Speaker 1: much during the broadcast portion, but I have to push
Speaker 1: back on And some of this is clearly with the
Speaker 1: benefit of hindsight. But I could go back and look
Speaker 1: at what I was writing in a one oh two
Speaker 1: oh three, and I could see, Gee, these rates seem
Speaker 1: to be really low. Green Span seems to be wildly
Speaker 1: overreacting to both the mild, to both the mild post
Speaker 1: dot com recession. All things considered, it wasn't that bad.
Speaker 1: And towards the end of that recession, September eleventh happened,
Speaker 1: and there that also seemed to engender a pretty substantial overreaction.
Speaker 1: In terms of monetary policy, I look at everything that
Speaker 1: was priced in either credit or dollars as just spiraling up.
Speaker 1: Gold went from four hundred to over a thousand. Home
Speaker 1: prices doubled in some parts of the country. Um, all
Speaker 1: the commodities spiraled up. The dollar actually did UM really
Speaker 1: take a pretty healthy whack it. It suffered. So you
Speaker 1: and I completely agree that the FED missed their opportunity
Speaker 1: in terms of acting as a regulator for the banking industry,
Speaker 1: but how much of that big spiral can trace its
Speaker 1: way back to rates under green Span? So I think
Speaker 1: that say that dot Com recession compared to what we
Speaker 1: had at the time of the Great Recession later in
Speaker 1: that decade, that dot Com recession did seem pretty mild.
Speaker 1: But when we were living through it, I don't think
Speaker 1: any of us would have described it that way, especially
Speaker 1: with NASDAC falling from and the FED did respond to that,
Speaker 1: and when one broke out. I remember being inside the building.
Speaker 1: People were very concerned about what that might mean for sentiment,
Speaker 1: which we've talked about and the economy exactly people inside
Speaker 1: the FED, so there were reactions to that, and then
Speaker 1: I think Greenspan was also worried about trying to make
Speaker 1: sure that inflation expectations stayed anchored and didn't start to fall.
Speaker 1: But your comments evoke another kind of criticism of the
Speaker 1: feeds policies through that period, and that is how aggress
Speaker 1: should monetary policy be in responding to perceived imbalances in
Speaker 1: financial markets? And uh, the Greenspan FED was loath to
Speaker 1: do that, and at the time, the argument was, we
Speaker 1: don't know where the tops are. We don't know what's
Speaker 1: the bubble? And instead of trying to kill things preemptively,
Speaker 1: it's better to clean them up after the fact. We
Speaker 1: learned that central banks do need to think hard about
Speaker 1: financial stability and whether asset markets are overvalued. And I
Speaker 1: think that many central banks now have an implicit mandate.
Speaker 1: It's not part of their explicit responsibilities, but an implicit
Speaker 1: mandate to ensure financial stability. And they spent a lot
Speaker 1: of resources doing that now. So it's not just full
Speaker 1: employment and keeping inflation contained. It's oh, and now you
Speaker 1: guys are responsible for the markets. So I always pushed
Speaker 1: back to the green Spans of fans on we are
Speaker 1: loath to intervene in the markets because of all people,
Speaker 1: green Span probably intervened in the markets more than any
Speaker 1: FED chair and memory. So forget that the eighty seven
Speaker 1: crash happened right after he began. It's like every new
Speaker 1: FED chief gets a baptism of fire, and he did
Speaker 1: what he always has does, is he cut rates. But
Speaker 1: I recall very specifically when doing some research for Bailout Nation,
Speaker 1: it was either in ninety or ninety one. I'm not positive.
Speaker 1: Early nineties. In between meetings green Span without the Board
Speaker 1: of governors lowered rates on his own in response to
Speaker 1: something going on in the markets, and the Board was
Speaker 1: so offended that they clipped his wings and prevented that
Speaker 1: from happening. They passed a rule that said the Fed
Speaker 1: chief can only raise the low rates with the approval
Speaker 1: of the Board. So I've heard that argument that, well,
Speaker 1: green Span was loath to do it except when he
Speaker 1: did it, and he did it quite frequently. Am I
Speaker 1: wildly off Am I just a green Span basher? Or
Speaker 1: is that a fair criticism? Well? I think that there
Speaker 1: were some instances like seven and after one where the
Speaker 1: Federal Reserve saw risks to market functioning and the capacity
Speaker 1: of markets to operate, and in response to that, the
Speaker 1: FED did respond very very vigorously. Now that said, uh,
Speaker 1: you know, the FED was aware of what was happening
Speaker 1: in financial markets. And I think that what I should
Speaker 1: say precisely is that the FED under green Span was
Speaker 1: was hesitant to try to say, a given markets in
Speaker 1: a bubble, let's go and prick that bubble. That's really
Speaker 1: the core of the green Span doctrine. We don't know
Speaker 1: a bubble. We're not sure, we could be surprised. We
Speaker 1: don't have good tools to do it. Let's do it
Speaker 1: on the other side. And I do think that's been roundly,
Speaker 1: roundly rejected at this point by central banks. Quite quite fascinating.
Speaker 1: The other issue that has come up about the Federal Reserve.
Speaker 1: By the way, I think that last issue about um
Speaker 1: rates being too low, too long. Here's my hindsight bias.
Speaker 1: What I'm about to say, and I will admit this
Speaker 1: is hindsin bias. At the time I flagged those ultra
Speaker 1: low rates as inflationary. With the benefit of hindsight, I
Speaker 1: wish the Fed would have said, either Post nine eleven
Speaker 1: or some other one off emergency, Hey, this is an emergency.
Speaker 1: We are for six months gonna take rates down. I
Speaker 1: think that cut rates fifty basis points. We're gonna implement
Speaker 1: a fifty basis point rate cut and in six months
Speaker 1: half of it will go away, and and in nine
Speaker 1: months the other half of it will go away. So
Speaker 1: that there would have prevented that while we're afraid, there
Speaker 1: were no expectations of of a r raise, and it's
Speaker 1: going to be problematic if it would have be built
Speaker 1: into this is an emergency action, but it will automatically unwind.
Speaker 1: I think they would have been better off again pure
Speaker 1: hindsight bias, and and I think that that is a
Speaker 1: very creative form of forward guidance which the FAD has experimented,
Speaker 1: particularly under Brankie, experimented with a lot of different forms
Speaker 1: of forward guidance. Uh. Typically it's been more of the
Speaker 1: form will keep rates where they are and not pre
Speaker 1: committing to future rate hikes. But it wouldn't surprise me
Speaker 1: at some point in the future to see some central
Speaker 1: bank around the world implement a policy that had the
Speaker 1: kind of forward guidance you just described. Look, we're responding
Speaker 1: to what we believe is an extraordinary circumstance. We expect
Speaker 1: that it's going to go away, and as our expectations
Speaker 1: are confirmed, then we very well maybe hiking rates look
Speaker 1: for emerging market central bank good stuff in the future.
Speaker 1: So you bring up Bernanke and what he did during
Speaker 1: his tenures, Chairman, I'm not in this camp, but some
Speaker 1: people have criticized him as too transparent. Back in the
Speaker 1: early days, you never knew what the Fed did. You
Speaker 1: would see the reaction in the bond market. Oh, bonds
Speaker 1: are tacking up. The Fed might have raised rates. They
Speaker 1: did have a meaning This week has the Federal Reserve
Speaker 1: become too transparent. This is this is a very important question,
Speaker 1: and it's it's corollary is doesn't FED talk too much?
Speaker 1: And a concrete question is, uh, you know, through every
Speaker 1: f long C cycle, we hear a variety of voices
Speaker 1: from Federal Reserve policymakers. All the Reserve Bank presents are
Speaker 1: talking various members of the board and so forth. And
Speaker 1: does that give markets more information? Does that allow investors
Speaker 1: to make better decisions and better understand what the Federal
Speaker 1: Reserve going to do? And if you press me, I
Speaker 1: guess I'd say, on balance, yes, that transparency and and
Speaker 1: perspectives are helpful. But it's also important that the FED
Speaker 1: not talked so much that it's saying things it's not
Speaker 1: really sure about. What people want to hear from the
Speaker 1: FED is what is its reaction function? Meaning as various
Speaker 1: economic events evolved, how is it going to respond? What
Speaker 1: does it expect about the future? And I think this
Speaker 1: is one of the risks with having press conferences after
Speaker 1: every meeting, that there may be times when j Pal
Speaker 1: is going to have to say something just because the
Speaker 1: question is asked, not because it's part of his preferred
Speaker 1: proactive communication strategy h quite quite interesting. The the whole
Speaker 1: idea of we're data driven and we're gonna wait and
Speaker 1: see what the economic data looks like. Is that a
Speaker 1: fair approach or is that still too squishing an ambiguous.
Speaker 1: So I think that that is a very fair approach.
Speaker 1: I think more or less that's what central banks have
Speaker 1: been saying for for generations. The the problem with it
Speaker 1: is markets urn for something more concrete, and if the
Speaker 1: FAD says, you know, we'll just see where the data
Speaker 1: take us, then the next question is, well, where do
Speaker 1: you think the data are going to take us? And
Speaker 1: uh so markets, markets are gonna want more. But ultimately
Speaker 1: the FAD does have to be data dependent that even
Speaker 1: if they say, you know, we're going to be flat,
Speaker 1: if ultimately the economy surprises on the upside, they're gonna
Speaker 1: have to hike, and if the economy surprises on the downside,
Speaker 1: they're gonna have to cut. And for them not to
Speaker 1: act in the future because of something they said in
Speaker 1: the past, would I think not be not not be
Speaker 1: good policy. So so let's talk about out the post
Speaker 1: crisis era. I was surprised at at lower for longer.
Speaker 1: I was surprised that at the length of time that
Speaker 1: we seem to have been on emergency footing, how fast
Speaker 1: should the FED return to a more normalized rate regime.
Speaker 1: Are we there yet? Are we halfway there yet? Um?
Speaker 1: Some people have said they're behind the curve. The President
Speaker 1: is saying they're choking off economic expansion. Where where are we?
Speaker 1: Two and a half percent, by by any measure, that's
Speaker 1: still fairly accommodative, isn't it. So? I think the Fed
Speaker 1: has has handled the rate hikes quite skillfully. This has
Speaker 1: been perhaps the slowest tightening cycle in the history of
Speaker 1: central banking. We've moved. We've moved a quarter percentage point
Speaker 1: every quarter, so a one percentage point a year. Back
Speaker 1: in the days of Greenspan, they were going twenty five
Speaker 1: basis points every meeting, and they thought they had go.
Speaker 1: We're going as slow as they could. That's still twice
Speaker 1: as fast. So the Fed has gone has gone very gradually,
Speaker 1: and they're now at a place where you know, they
Speaker 1: think neutral is two and a half three something like that,
Speaker 1: where they're on the lip of of of a neutral policy,
Speaker 1: and that gives them the lauxery of being able to
Speaker 1: watch and wait and see how some of these various
Speaker 1: risks unfold, does China do better? Does Europe pick up?
Speaker 1: What happens with the trade war and so forth. So
Speaker 1: if we look at inflation today also about two two
Speaker 1: and a half percent, is that the there are a
Speaker 1: million economic inputs, but is that you know, the two
Speaker 1: d dakapo is that the one that really matters? And
Speaker 1: if inflation stays around two, the FED doesn't feel any
Speaker 1: urgency to move off of these low rates. I think, uh,
Speaker 1: in this circumstance with rates policy rates around two and
Speaker 1: a half percent, that they probably are going to need
Speaker 1: to see inflation at or probably a little bit above
Speaker 1: two percent before they seriously start thinking about more rate hikes.
Speaker 1: The flip side is, I think the other variable that
Speaker 1: they're going to continue to watch closely is the unemployment rate.
Speaker 1: And I think that as long as the labor market
Speaker 1: looks looks tight and the unemployment rate is falling, they're
Speaker 1: not going to think that they need to they need
Speaker 1: to cut rates either. I think would require an increase,
Speaker 1: a marked increase in the unemployment rate before the fad
Speaker 1: would throw it into reverse. Now we've seen some modest
Speaker 1: increases the unemployment rate, but for the good reason meaning
Speaker 1: people who had left the labor force, we're coming back
Speaker 1: into it. And suddenly there's more people in that pool.
Speaker 1: And it looks it's not that are losing their jobs,
Speaker 1: is that more people are looking for their jobs. Obviously
Speaker 1: the FED understands that nuance. Are we going to continue
Speaker 1: to pull or let me rephrase that, what's it going
Speaker 1: to take to continue pulling more and more of these
Speaker 1: discouraged workers back into the labor pool. The increase in
Speaker 1: labor force participation that we've seen of late is an
Speaker 1: extremely constructive development. There's been more slack on the edges
Speaker 1: of the labor market than I would have expected, and
Speaker 1: then most economists would have expected. And I think what
Speaker 1: it's going to take to for this process to continue
Speaker 1: is for the US economy to continue to grow at
Speaker 1: a solid pace and for us to see some further
Speaker 1: upside pressure on wages as we see that additional uh,
Speaker 1: those additional wage gains, that's gonna be very attractive to
Speaker 1: workers on the sidelines and getting them back in the
Speaker 1: labor force. And once these folks are back in the
Speaker 1: labor force, they're developing skills and abilities, they're gonna help
Speaker 1: drive the economy through the years I had, so, so
Speaker 1: let me wax wonky a little bit. You brought up
Speaker 1: the tailor rule earlier. Has the tailor rule lost its power?
Speaker 1: Is it? Is it expired? And explain it before before
Speaker 1: we go too far into the weeds. So the tailor
Speaker 1: rule basically says that in setting monetary policy, the Federal
Speaker 1: Reserve should look at the unemployment rate relative to some
Speaker 1: UH equilibrium or some trend rate of unemployment, and it
Speaker 1: should also look at the inflation rate relative to its
Speaker 1: two percent target UH. And if if if inflation is
Speaker 1: low and unemployment is high, then the tailor rule would
Speaker 1: suggest you should have a very easy monetary policy. And
Speaker 1: I do think it's fair to say that UH many
Speaker 1: central banks around the world how sued policies in recent
Speaker 1: years that are much softer than what the tailor rule
Speaker 1: would suggest. But even so, I think if you talk
Speaker 1: to those central bankers that say, yeah, we're not really
Speaker 1: following the Taylor rule right now, but we like having
Speaker 1: it as a point of departure, it really gets into
Speaker 1: this powerful question of how far should you push theory?
Speaker 1: And it's it's good as a theoretical construct, but then
Speaker 1: from there we realize that there are a number of
Speaker 1: headwinds and other challenges our economy space that explain why
Speaker 1: we should be off it. But it's a good benchmark. Still,
Speaker 1: every cycle is different. If you try and apply the
Speaker 1: same rules to different cycles, you may not be happy
Speaker 1: with the results. And that's the problem in economics is
Speaker 1: in in thinking about our recommendations. We are driven by
Speaker 1: what the data say, but the data only cover the past,
Speaker 1: which then makes trying to figure out what the next
Speaker 1: one is gonna look like really hard, it says Yogi
Speaker 1: Berras said, Forecasting is really hard, especially when it's about
Speaker 1: the future. That summarizes my life is an economist per
Speaker 1: perfect way to sum it up. So I know only
Speaker 1: have you for a finite amount of time, and I
Speaker 1: want to get to my favorite questions that I asked
Speaker 1: um every guest. Let's let's start with the first one.
Speaker 1: Tell us the most important thing that people don't know
Speaker 1: about your background. So I would say, uh, it's that
Speaker 1: I just kind of uh wandered my way into economics
Speaker 1: and uh international economics. When I was in college, I
Speaker 1: couldn't decide whether I was gonna be a lawyer or
Speaker 1: go into business or being economists. They took all the exams,
Speaker 1: all the interest exams, and finally decided, well, I'll do economics.
Speaker 1: And then in grad school, Uh, I didn't know what
Speaker 1: I wanted to do, kind of looked around and international
Speaker 1: economics was an area where the faculty at m I
Speaker 1: T was great, but there weren't very many students my year.
Speaker 1: So I went there because I said, oh, I'll have
Speaker 1: less competition getting a job, and uh, everything everything worked
Speaker 1: out well. I was very, very fortunate to fall into
Speaker 1: international which I really have enjoyed and and M I t.
Speaker 1: S economics department is just a murderers row of rock stars.
Speaker 1: When you were there, who were some of the the
Speaker 1: names that that you got to work with, either as
Speaker 1: mentors or just professors. The three key folks that I
Speaker 1: interacted with were Stan Fisher, Rudy dorn Bush, who passed
Speaker 1: away some years ago but was really big and thinking
Speaker 1: about how do we apply economics in the real world?
Speaker 1: And Olivier Blanchard, who is extremely brilliant and fertile mind.
Speaker 1: And every time I talked to him, I learned something new.
Speaker 1: Any other mentors you want to mention who helped guide
Speaker 1: either your academic or professional career? Well? When I arrived
Speaker 1: at the Federal Reserve. I'd say two folks they had
Speaker 1: a big impact on me. One was a Federal Reserve
Speaker 1: governor who your listeners have probably heard of named Larry Meyer,
Speaker 1: who Larry was was interested in taking a very empirical
Speaker 1: view and using that to analyze where the global economy
Speaker 1: was headed. And another chap was my boss. His name
Speaker 1: was Ted Truman, and Ted was intense and focused on
Speaker 1: how do we get the right answer and best serve policymakers.
Speaker 1: So I'd say those two individuals had a big impact
Speaker 1: on my early career. So you're now working at PGIM
Speaker 1: Fixed Income, which is a giant fond shop. What investors
Speaker 1: influenced your way of looking at the world of interest
Speaker 1: rates and UH inflation and everything else that goes into investment.
Speaker 1: I would say that the investors that are having the
Speaker 1: most impact on my perspectives are frankly the ones that
Speaker 1: I'm working with now and UH. A number of these
Speaker 1: folks are what I would describe them as is very
Speaker 1: balanced in their worldviews. They're getting all the information they
Speaker 1: can and they're responding to it in a way it said, okay,
Speaker 1: we'll move a little here. Relative values a little more attractive.
Speaker 1: We're gonna move there. They're never off balanced, They're responding
Speaker 1: to what the world's uh throwing at them and uh
Speaker 1: and seeking the best returns, always always in comparing one
Speaker 1: asset to the other. So let's look about books. What
Speaker 1: are some of your favorite books, fiction, non fiction, economics
Speaker 1: related or not. What do you like to read? Well,
Speaker 1: I am a heavy reader of biographies. I really enjoy
Speaker 1: uh learning what others have gone through in their lives
Speaker 1: and there in their in their career paths and the like.
Speaker 1: I'd say along those lines, my favorite writer is is
Speaker 1: probably Ron Turno written some absolutely brilliant economic biographies, uh,
Speaker 1: and I think it's very very best was his biography
Speaker 1: on Alexander Hamilton's, which, as you read it, it really
Speaker 1: is quite extraordinary that challenges that Hamilton's was facing and
Speaker 1: helping Washington and others set up the Republic, and how
Speaker 1: we face in various ways, very similar challenges. And I
Speaker 1: think the Churnell just brings all of that to life
Speaker 1: and makes it very rich in fertile in helping us think, well,
Speaker 1: how how would how would Hamilton's respond to a global
Speaker 1: financial crisis? How would Hamilton's responded to a European deck crisis,
Speaker 1: plus running the whole thing in hip hop lyrics. That
Speaker 1: was really that that that was the extra moe but
Speaker 1: but true story. That's where Lynn Manuel Miranda discovered Hamilton's
Speaker 1: was Charnou's book. It's an astonishing that book has astonishing legs.
Speaker 1: Um give us some other books that you enjoy, So
Speaker 1: I would say, uh, just continuing, I've read uh wonderful
Speaker 1: biographies of Woodrow Wilson. Uh are progressive and are and
Speaker 1: notably a progressive who was arguing for free trade because
Speaker 1: it would bring down prices for the masses. It's really
Speaker 1: extraordinary the way the free trade debate has evolved over
Speaker 1: the last hundred years or devolved as the case maybe.
Speaker 1: UH read continuing in that kind of time and history.
Speaker 1: Love to read about Teddy Roosevelt, brilliant, brilliant individual, but
Speaker 1: in addition really focused on getting things done. Who wrote
Speaker 1: the Roosevelt bio? Because there are a ton of them?
Speaker 1: Which one did you like? You nailed me? I don't remember,
Speaker 1: so emailed to me and I'll add it to the
Speaker 1: info on this because there there are the problem with
Speaker 1: a lot of these bios is that there are so
Speaker 1: many of them. Yes, a friend recommended a Genghis Khan bio.
Speaker 1: This book is great, so I ordered on Amazon and
Speaker 1: I say to him, this was a great book, thanks
Speaker 1: for recommending it. And he looks at the book he goes, no, no,
Speaker 1: that's the wrong one. I'm like, dude, a thousand pages
Speaker 1: of Genghis Khan. I'm good. I don't need to read
Speaker 1: the second one. Have you gotten around to reading mcculla's
Speaker 1: Right Brothers book? No, I thought about it though I
Speaker 1: read it on vacations. It was just fascinating, like, you
Speaker 1: have no idea, or let me rephrase that, I had
Speaker 1: no idea who they were and how they became effectively
Speaker 1: the inventors of flight. It was if you like biography,
Speaker 1: especially you know early twentieth century, it's fascinating. They Hawk
Speaker 1: last sung. Yeah, it's really interesting. So they were They
Speaker 1: weren't from Kitty Hawk. Wrville had from right, that's right.
Speaker 1: And they had tagged somebody in the National Weather Service
Speaker 1: to say, where are their steady winds of ten to
Speaker 1: fifteen miles an hour, preferably not too rocky, And they
Speaker 1: gave him a couple of things and and Kitty Hook
Speaker 1: checked out as so, now you could get to Kitty
Speaker 1: Hook really easily. Back then it was an ordeal. It
Speaker 1: was a train and then a boat and then a
Speaker 1: giant trek to get there. If you like bio biographies,
Speaker 1: you're gonna love this book. That's my record. I can
Speaker 1: give you other books to now give you one more. Okay,
Speaker 1: let me let me give you another one. I think
Speaker 1: one of the most readable and interesting books that I've
Speaker 1: been exposed to is Outliers by Malcolm glad Sure, and
Speaker 1: that that book has a very interesting argument in it
Speaker 1: which resonates with me now because my son is going
Speaker 1: through the college admission process and he shows where the
Speaker 1: Nobel Prizes and chemistry got their undergrad degrees, and they
Speaker 1: are all solid in institutions, but they all didn't go
Speaker 1: to M I T or Princeton. It is all over
Speaker 1: the map. I'm glad. Will then makes the argument that
Speaker 1: that had they all gone to M I T, then
Speaker 1: most of them would not be Nobel laureates in chemistry.
Speaker 1: That there would have been someone else or someone's else
Speaker 1: in their uh in their intradoctory and early training that
Speaker 1: would have been better chemistry, and it would have discouraged
Speaker 1: them in their career in their trajectory of ultimately great creativity.
Speaker 1: So that you know where you go to school, uh matters,
Speaker 1: But what really matters is how much your work once
Speaker 1: you're there makes perfect sense to me. Um, So let's
Speaker 1: talk a little bit about a time you failed and
Speaker 1: what you learned from the experience. So, uh, this is
Speaker 1: my time at the U. S Treasury. I was part
Speaker 1: of the team on the administration that was managing US
Speaker 1: policy regarding China's proposed Asian Infrastructure and Investment Bank, the
Speaker 1: aii B. We had concerns about this institution, that it
Speaker 1: would not pursue good standards in its lending, and consistent
Speaker 1: with that, we expressed our concerns and lack of enthusiasm. Uh.
Speaker 1: Two countries across the world, but as you know, the
Speaker 1: Brits the UK joined the ai i B, and soon
Speaker 1: thereafter dozens of other countries joined. What do I learn
Speaker 1: from from this? I think I learned two things. One
Speaker 1: important policy implication is China's rise is gonna happen. There
Speaker 1: really is not a lot that we can do about it.
Speaker 1: We can slow it down, or we can support them
Speaker 1: and have it accelerated, but they're gonna rise. And I
Speaker 1: think the big question is once they've risen, are they
Speaker 1: going to look at at us as being their friend
Speaker 1: or their foe. Secondly, and this may be more in
Speaker 1: a personal basis, but I learned from that experience. When
Speaker 1: you have a message, it's got to be simple. And
Speaker 1: we had a we had a very sophisticated position that
Speaker 1: I think had a lot of analytoltical rigor associated with it,
Speaker 1: but I needed a thousand words to explain it to nuances.
Speaker 1: For most most positions when you go through life, you
Speaker 1: need to be able to put them on a bumper sticker. Really,
Speaker 1: if it if it's if it's more complicated than that,
Speaker 1: people's eyes start to glaze over. Even how to boil
Speaker 1: it down, Even in complex diplomatic trade negotiations, you still
Speaker 1: have to dumb it down to a bumper sticks I
Speaker 1: think you gotta. I think you've got to get it
Speaker 1: on a bumper sticker. So this administration has, you know,
Speaker 1: and I think they probably they have answered the question
Speaker 1: what are we trying to achieve? We're trying to break
Speaker 1: down barriers in China and make it fairer for US
Speaker 1: firms UH to to operate there. So if you could
Speaker 1: go back in time, and rejigger your message back when
Speaker 1: you were at Treasury. What would that look like if
Speaker 1: it was reduced to a bumper stick. Well, I think
Speaker 1: we would have had to do uh further uh further
Speaker 1: argumentation inside the administration and say are we for it
Speaker 1: or we against it? Because we were we were closer
Speaker 1: to being against it. It was perceived as being fully
Speaker 1: against what we really weren't. But we have to decide
Speaker 1: are we for it against it? And I think probably
Speaker 1: a clean position would have been look, for a number
Speaker 1: of reasons, we're not going to join, mainly political reasons.
Speaker 1: We're not going to join. We have these concerns, but
Speaker 1: you make your own decision. That would have been a
Speaker 1: cleaner position. Quite interesting. So what do you do for fun?
Speaker 1: What do you do to stay mentally or physically active
Speaker 1: when you're outside of the office. So for fun, I
Speaker 1: have four kids that keep me keep me fully engaged
Speaker 1: and energized. I'm also very active in my church congregation
Speaker 1: and uh. In terms of staying physically fit, about a
Speaker 1: year ago, I came to the conclusion that I needed
Speaker 1: to do more in that department. And since I've spent
Speaker 1: a lot of time on the treadmill, which actually have
Speaker 1: come to enjoy and found to be a place where
Speaker 1: I can reflect and and unwind. Quite interesting. So if
Speaker 1: a millennial or um a recent college grad came to
Speaker 1: you and said they were interested in a career in
Speaker 1: um economics or finance, what sort of advice would you
Speaker 1: give them? My my number one, UH piece of advice
Speaker 1: is find something that you are passionate about. When I
Speaker 1: talked to to graduates and people early in their careers,
Speaker 1: sometimes I feel like they're trying to turn themselves into
Speaker 1: the perfect candidate, the candidate that everyone will want to hire.
Speaker 1: That's not what I want to see. I want them
Speaker 1: to come in and tell me this is what I
Speaker 1: really care about. And uh, if they really care about it,
Speaker 1: if they're passionate about it them, they are going to
Speaker 1: be successful in these In these these these careers, particularly
Speaker 1: in finance and and policy, there are gonna be a
Speaker 1: lot of weekends, They're gonna be a lot of late nins.
Speaker 1: And if you don't fundamentally love what you're doing, it's
Speaker 1: going to drive you to distraction. You're not gonna be
Speaker 1: as a factor. Find why you love and what you
Speaker 1: care about. And our final question, what is it that
Speaker 1: you know today about macroeconomics, monetary policy, fixed income investing
Speaker 1: that you wish you knew thirty years or so ago
Speaker 1: when you were first getting started. So I think that
Speaker 1: the biggest thing I've learned is as one goes through
Speaker 1: these cycles. And this is true as an investor, uh,
Speaker 1: it's true as a policymaker. You have to have faith
Speaker 1: your instincts. You know, at the end of the day,
Speaker 1: all the analytics are great, bring them to bear, but
Speaker 1: I think ultimately, at the end of the day we
Speaker 1: have to we have to trust our guts and trust
Speaker 1: our instincts. Quite quite intriguing. We have been speaking with
Speaker 1: Nathan Sheets. He is the chief economist at PEJAM Fixed Income.
Speaker 1: If you enjoyed this conversation, we'll look up an inch
Speaker 1: or down an inch on Apple iTunes and you could
Speaker 1: see any of the other two hundred and thirty nine
Speaker 1: such prior conversations that we've had. Um you can find
Speaker 1: that Apple iTunes, Overcast, Stitcher, Bloomberg dot com, wherever your
Speaker 1: finer podcasts are located. We love your comments, feedback and
Speaker 1: suggestions right to us at m IB podcast at Bloomberg
Speaker 1: dot net. Please go to Apple iTunes and give us
Speaker 1: a delightful five star review. I would be remiss if
Speaker 1: I did not thank the Cracks staff that helps put
Speaker 1: this conversation together each week. Taylor is our booker, Attica
Speaker 1: val Brun is our project manager. Michael Batnick is our
Speaker 1: head of research. I'm Barry Ritolts. You've been listening to
Speaker 1: Masters in Business on Bloomberg Radio.