WEBVTT - Nathan Sheets Discusses Fixed Income (Podcast) 0:00:02.240 --> 0:00:06.840 This is Master's in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.880 --> 0:00:10.960 This week on the podcast, I have an extra special guest. 0:00:11.480 --> 0:00:14.040 His name is Nathan Sheets, and he comes to us 0:00:14.080 --> 0:00:18.920 by way of Pigum Fixed Income, a giant institutional shop. 0:00:19.040 --> 0:00:22.520 Their fixed income department alone seven hundred and forty three 0:00:22.720 --> 0:00:27.280 billion dollars in fixed income assets UM. Nathan has a 0:00:27.360 --> 0:00:30.880 unique background. He served in the Treasury Department. He was 0:00:31.000 --> 0:00:35.240 with the Federal Reserve for um eighteen or so years. 0:00:35.280 --> 0:00:37.840 He worked at City and then Prudential, and now he's 0:00:37.840 --> 0:00:43.440 been at Pigum for a while. He is uniquely situated 0:00:43.479 --> 0:00:50.160 to comment about, and analyze and discuss monetary policy, state 0:00:50.159 --> 0:00:55.160 of the economy, how best to analyze employment inflation, what 0:00:55.200 --> 0:00:58.160 it means for interest rates, what that means for fixed 0:00:58.160 --> 0:01:04.080 income investments. Uh. It really is a fascinating conversation filled 0:01:04.160 --> 0:01:07.400 with wonky goodness. So if you are at all remotely 0:01:07.600 --> 0:01:10.520 interested in any of those things, and you know I'm 0:01:10.560 --> 0:01:13.399 interested in all of those things, you will find this 0:01:13.480 --> 0:01:17.279 to be an utterly fascinating discussion. So, with no further ado, 0:01:17.880 --> 0:01:25.000 my conversation with Pijum Fixed Incomes Nathan Sheets. This is 0:01:25.160 --> 0:01:30.120 Master's in Business with Barry Ridholts on Bloomberg Radio. My 0:01:30.440 --> 0:01:33.840 special guest this week is Nathan Sheets. He is the 0:01:33.920 --> 0:01:38.839 chief economist and head of Global macro economic Research at 0:01:39.360 --> 0:01:43.440 PIJUM Fixed Income, which manages seven hundred and forty three 0:01:43.480 --> 0:01:47.840 billion dollars in assets. Previously, he was the Under Secretary 0:01:47.920 --> 0:01:51.800 of the Treasury for International Affairs UH. Prior to that, 0:01:51.960 --> 0:01:55.600 he worked at US Treasury Department, as well as the 0:01:55.640 --> 0:01:59.880 Federal Reserve, where he served as director of the Division 0:02:00.080 --> 0:02:04.480 International Finance. Previously he was at City Group. Did I 0:02:04.480 --> 0:02:06.440 get that right or room? How far off? Was? I 0:02:06.840 --> 0:02:10.720 think you nailed it all right? Nathan Sheets, Welcome to Bloomberg. 0:02:10.919 --> 0:02:13.480 Pleasure to be here. Thank you. So you have a 0:02:13.480 --> 0:02:17.680 fascinating background. You were now you're currently at PEJAM Fixed Income. 0:02:17.840 --> 0:02:22.079 Previously you were prudential at City Group, the U. S 0:02:22.160 --> 0:02:26.000 Treasury and the Federal Reserve. Was was this the plan? 0:02:26.200 --> 0:02:28.480 Was this the career path you had mapped out for yourself. 0:02:28.919 --> 0:02:32.600 I think it would have been impossible to foresee how 0:02:32.680 --> 0:02:36.079 things would evolve, But coming out of grad school, I 0:02:36.120 --> 0:02:40.800 did want a career in practical economics. I wanted to 0:02:40.840 --> 0:02:44.240 take the theory that I had learned and applied in 0:02:44.280 --> 0:02:47.919 a way that it might actually make a difference in 0:02:47.919 --> 0:02:50.480 in the lives of people. And hence all this public 0:02:50.560 --> 0:02:53.679 service at the Treasury Department and the Federal Reserves I envisioned. 0:02:53.720 --> 0:02:58.080 I envisioned public service. My first job was was at 0:02:58.120 --> 0:03:01.880 the Federal Reserve. But uh, I'm also you know, I 0:03:01.919 --> 0:03:04.680 think a practically minded guy, at least as practically as 0:03:04.680 --> 0:03:06.920 you can be and still be an economist, and I 0:03:06.960 --> 0:03:10.440 was interested in applying these kinds of principles in a 0:03:10.720 --> 0:03:14.079 in a private sector context as well. So I couldn't 0:03:14.080 --> 0:03:17.919 have predicted the path or how things would evolve. I've 0:03:17.960 --> 0:03:21.760 been very fortunate in the opportunities that I've had, but uh, 0:03:21.800 --> 0:03:25.800 I did very much want to do qualitatively these kinds 0:03:25.840 --> 0:03:28.760 of things. So so you come out of your PhD program, 0:03:28.880 --> 0:03:32.239 you say, I'm not going to go into academia, but 0:03:32.400 --> 0:03:35.760 the next best best thing is the Federal Reserve, who 0:03:35.800 --> 0:03:39.480 typically hires PhDs as researchers. What what was your first 0:03:39.560 --> 0:03:43.680 job at the Fed? Like the Federal Reserve, for me, 0:03:43.960 --> 0:03:47.880 especially in those first years, was a vigorous post doc. 0:03:48.520 --> 0:03:52.640 It allowed me to take, uh the theory and as 0:03:52.640 --> 0:03:56.080 I said, apply it in practical ways to real world issues. 0:03:56.360 --> 0:04:00.640 So my first assignment was to follow Rush UH and 0:04:00.920 --> 0:04:04.480 some of the other transitioning economies Poland, Hungary and so forth. 0:04:04.960 --> 0:04:08.520 I in the in the mid ninety nineties when they 0:04:08.520 --> 0:04:13.720 were transitioning from a centrally planned system into market based economies, 0:04:14.040 --> 0:04:17.680 and it was it was very exciting to see the 0:04:17.720 --> 0:04:24.200 interplay between politics and policy and economics and sociology through 0:04:24.440 --> 0:04:28.680 through that period. So Russia continues to struggle with corruption 0:04:28.839 --> 0:04:32.359 on its path to capitalism. Some of the outer block 0:04:32.480 --> 0:04:35.720 form of Soviet countries are doing much better. What's that 0:04:35.839 --> 0:04:38.600 transition like and are they still heading in the right direction. 0:04:39.120 --> 0:04:43.200 What we're finding is that the countries that had some 0:04:43.400 --> 0:04:49.200 tradition of capitalism are doing quite well. Most of those. 0:04:49.400 --> 0:04:52.839 Most of those are the Central Europeans. The Czech Republic 0:04:52.960 --> 0:04:57.040 is doing very well, Slovakia is is doing well. UH. 0:04:57.120 --> 0:04:59.720 Kind of the next wrong. You've got countries like like 0:05:00.080 --> 0:05:04.239 Gary and Romania, maybe not quite as well as as 0:05:04.560 --> 0:05:07.520 the Czech Republic and in the Slovak Republic, but they're 0:05:07.560 --> 0:05:12.640 they're proceeding. Uh. Russia, as you say, UH continues to struggle, 0:05:12.800 --> 0:05:15.600 and frankly, I think history will have a judgment as 0:05:15.640 --> 0:05:19.760 to whether we had opportunities there to help the Russians 0:05:19.800 --> 0:05:23.040 more effectively than we actually did. And then many of 0:05:23.120 --> 0:05:28.200 the UH former Soviet republics continue to struggle. They have 0:05:28.360 --> 0:05:32.279 very low levels of per capity income, and UH have 0:05:32.520 --> 0:05:35.480 a significant distance yet to go before they're really part 0:05:35.480 --> 0:05:39.480 of the global economy. Since your early days at the FED, 0:05:39.720 --> 0:05:44.279 the global monetary system has really evolved, some of it, 0:05:44.400 --> 0:05:47.640 certainly in response to the Great Financial Crisis. Where do 0:05:47.720 --> 0:05:53.120 you see the future of monetary policy UM from from 0:05:53.120 --> 0:05:57.880 your perspective at Pigium today. During the twenty five years 0:05:57.920 --> 0:06:02.880 when I've been a professional economist, the global economic and 0:06:02.920 --> 0:06:10.560 monetary system has absorbed two very large shocks or changes. 0:06:11.080 --> 0:06:14.600 I'd say the first one has been the ongoing integration 0:06:14.640 --> 0:06:21.680 of China. From a structural standpoint. Uh, the addition of 0:06:21.839 --> 0:06:26.240 one in a quarter billion Chinese into the global economy 0:06:26.279 --> 0:06:29.640 has been UH significant, and we're still dealing with the 0:06:29.680 --> 0:06:34.880 implications of that. Deflationary or inflationary or at times both. 0:06:35.080 --> 0:06:42.159 I think so far more deflationary or disinflationary that uh, 0:06:42.360 --> 0:06:46.400 most of those folks had lower wages than Western workers, 0:06:46.480 --> 0:06:49.960 and I think that's put downward pressure on wages throughout 0:06:50.000 --> 0:06:52.680 the world over the last twenty or twenty five years. 0:06:52.680 --> 0:06:55.680 And the second issue. You mentioned that second major issue 0:06:55.880 --> 0:07:00.920 is the global financial crisis, so China. The big actual issue, 0:07:01.279 --> 0:07:05.520 the global financial crisis, is the big cyclical issue. But 0:07:05.640 --> 0:07:09.120 the bottom line, and as it pertains to the international 0:07:09.160 --> 0:07:14.960 monetary system in particular, is that notwithstanding these two big shocks, 0:07:15.400 --> 0:07:18.920 the role of the dollar and the centrality of US 0:07:19.040 --> 0:07:24.480 markets has remained largely intact. The dollars still by far 0:07:24.640 --> 0:07:28.920 the world's leading reserve currency, the US financial markets are 0:07:29.080 --> 0:07:33.920 essentially unrivaled in the world. That that in many ways 0:07:33.960 --> 0:07:37.320 the world is more multipolar, but not so much in finance. 0:07:37.800 --> 0:07:40.720 Let's talk a little bit about your role at the 0:07:40.800 --> 0:07:45.600 Federal Reserve. How did you start, what did that evolve into, 0:07:45.760 --> 0:07:48.080 and how closely did you end up working with the 0:07:48.160 --> 0:07:52.640 board and its chairman so UH. I was at the 0:07:52.640 --> 0:07:57.040 Fed for eighteen years. UH. During the entirety of the time, 0:07:57.200 --> 0:08:01.640 I was in the Division of International Finance. UH. During 0:08:01.640 --> 0:08:04.120 the first fourteen of those years, I held a variety 0:08:04.120 --> 0:08:07.080 of roles. I mentioned Russia, and I was falling emerging 0:08:07.160 --> 0:08:10.560 markets in Japan and so forth. During the last four 0:08:11.400 --> 0:08:14.120 which started in two thousand and seven, I was the 0:08:14.160 --> 0:08:18.840 director of the International Finance Division as the global financial 0:08:18.960 --> 0:08:24.800 crisis emerged, and had the opportunity and the responsibility to 0:08:24.840 --> 0:08:28.920 work closely with Ben Bernanke and the Board and and 0:08:28.920 --> 0:08:32.400 and others and trying to respond to that that terrible 0:08:32.480 --> 0:08:36.079 set of economic conditions. So there's been a lot of 0:08:36.120 --> 0:08:41.440 revisionist Dick history. If you remember um early on in 0:08:41.480 --> 0:08:46.120 the in the financial crisis, the FED is going to 0:08:46.200 --> 0:08:48.400 be the ruin of all of us. They're gonna cause 0:08:48.480 --> 0:08:52.080 hyper inflation, They're going to destroy the dollar. They should 0:08:52.080 --> 0:08:54.920 just stand down. What sort of great do you give 0:08:54.960 --> 0:08:59.760 the Federal Reserve for the job they did both before, during, 0:09:00.000 --> 0:09:06.040 and after the financial crisis? So I'm probably a little biased. Uh, 0:09:06.400 --> 0:09:09.199 I would give the FED, I don't know, a B 0:09:10.040 --> 0:09:14.360 for a pre crisis. And I think the criticism there 0:09:14.559 --> 0:09:17.480 is not about monetary policy, which I think was about right. 0:09:17.880 --> 0:09:20.720 But the FED didn't do what it could have done 0:09:21.400 --> 0:09:25.760 in the regulatory space and allowed imbalances in the financial system. 0:09:25.920 --> 0:09:29.640 Relic and his work for sure, exactly exactly, and the 0:09:29.640 --> 0:09:32.600 FED was not unique, the FED was not alone. But 0:09:32.760 --> 0:09:35.200 I don't see I can give the Fed more than 0:09:35.240 --> 0:09:40.360 a B. Now during the heat of the crisis. UH, 0:09:40.400 --> 0:09:45.120 A vigorous response was absolutely necessary. As we were sitting 0:09:45.120 --> 0:09:49.600 in the Fed's building and those terrible facts were emerging. UH. 0:09:49.640 --> 0:09:52.840 It reminded me a bit of the Jack Nicholson line, 0:09:53.280 --> 0:09:57.520 you can't handle the truth. The truth was terrible, and 0:09:57.760 --> 0:10:01.760 UH Bernankee and guide here and then UH pulse and 0:10:01.840 --> 0:10:04.400 at the Treasury. They just worked through this and they 0:10:04.400 --> 0:10:06.960 had a set of a set of responses. I would 0:10:06.960 --> 0:10:11.959 give the FED an A for that period. Lehman obviously 0:10:12.320 --> 0:10:16.160 failed and no one saw the consequences of that. I 0:10:16.240 --> 0:10:18.760 think they were going to let somebody fail at some point. 0:10:18.960 --> 0:10:21.240 That's why I don't give them an UH an A plus. 0:10:21.480 --> 0:10:24.480 And then, frankly, since the financial crisis, I think the 0:10:24.520 --> 0:10:27.800 FED again has done a pretty good job keeping keeping 0:10:27.920 --> 0:10:33.320 inflation expectations well anchored and supporting UH growth in the 0:10:33.400 --> 0:10:35.800 US economy. When you look around the world, you know, 0:10:35.840 --> 0:10:38.840 we can't say things are growing gangbusters in the United States, 0:10:38.840 --> 0:10:42.360 but we're doing better than Europe and Japan and UH 0:10:42.400 --> 0:10:44.960 and many others. So let me push back a little bit. 0:10:45.520 --> 0:10:48.240 I don't think we're all that far apart, and in fact, 0:10:48.920 --> 0:10:52.320 I think revisionist history helps the fed's decision with Lehman 0:10:52.360 --> 0:10:56.480 Brothers because subsequently learned that Lehman Brothers had a negative 0:10:57.280 --> 0:10:59.880 net worth of minus a hundred and fifty billion dollars. 0:11:00.400 --> 0:11:04.199 Nobody could have taken Lehman Brothers on ps. Dick Folds 0:11:04.800 --> 0:11:08.800 turned down Warren Buffett when they needed some capital six 0:11:08.840 --> 0:11:12.640 months before they collapsed. At what point I just picture 0:11:12.720 --> 0:11:16.360 these meetings at the FED where someone says, this idiot 0:11:16.400 --> 0:11:18.880 said no to Buffett, how can we possibly bail him out? 0:11:18.920 --> 0:11:22.559 It's but here's where I disagree with you. So in 0:11:22.600 --> 0:11:28.160 the period leading up to the crisis, we're we're totally 0:11:28.200 --> 0:11:31.960 in sync about people like Ed Graham should have been 0:11:32.000 --> 0:11:35.840 listened to. He understood the regulatory lapses that were being 0:11:35.840 --> 0:11:39.440 taken advantage of by the private sector. But dear Lord, 0:11:39.559 --> 0:11:43.800 we had federal reserve rates um under two percent for 0:11:44.000 --> 0:11:46.960 three years and at one percent for a year. That 0:11:47.080 --> 0:11:50.760 really kicked off a giant inflationary spiral. I think Greenspan 0:11:51.440 --> 0:11:55.600 was far too accommodative post nine eleven. He was emotionally 0:11:55.640 --> 0:11:59.800 shaken up and did not normalize rates fast enough. I 0:11:59.840 --> 0:12:03.800 have heard people make the same complaints post crisis. The 0:12:03.880 --> 0:12:07.640 FED has not normalized rates fast enough. In each case, 0:12:07.679 --> 0:12:13.520 it both instances led to um income inequality and political instability. 0:12:13.760 --> 0:12:18.559 How far off is that criticism? So? UH, when I 0:12:18.600 --> 0:12:23.520 think about what a different path of policy rates might 0:12:23.520 --> 0:12:25.880 have looked like, I suppose you compare it to a 0:12:25.880 --> 0:12:30.000 benchmark like the Tailor rule. The FED was a little 0:12:30.000 --> 0:12:33.360 bit softer than the Tailor rule. But in my mind, 0:12:33.480 --> 0:12:36.480 the misses are a couple of rate hikes and a 0:12:36.520 --> 0:12:39.760 little bit in timing. It doesn't seem like, even if 0:12:39.800 --> 0:12:43.960 we think there should have been a more vigorous UH 0:12:44.240 --> 0:12:48.560 monetary policy response, that the difference between what they did 0:12:48.720 --> 0:12:52.240 and what one might envision was large enough to explain 0:12:52.280 --> 0:12:56.359 the imbalances UH and problems that erupted in the economy. 0:12:56.679 --> 0:13:00.600 My feeling really is that the mistakes were on the 0:13:00.640 --> 0:13:06.119 regulatory side, on the government side, in board rooms, amongst managers, 0:13:06.160 --> 0:13:08.200 amongst traders. I mean, there's a lot of blame to 0:13:08.240 --> 0:13:11.480 go around for the global faviss but I just don't 0:13:11.480 --> 0:13:14.840 think that the misses for monetary policy we're big enough 0:13:14.880 --> 0:13:18.800 to get really on the scoreboard relative those other mistakes. 0:13:18.840 --> 0:13:23.559 So let's let's play a counter factual game. Some people 0:13:23.640 --> 0:13:27.240 wanted the FED to do nothing during the crisis. Hey, 0:13:27.280 --> 0:13:31.240 it's Congress's responsibility. What would the world have looked like 0:13:31.320 --> 0:13:35.840 if the FED said we'd like to create uh um 0:13:36.200 --> 0:13:39.559 either QWI years up, but really it's up to the 0:13:39.600 --> 0:13:42.040 Senate in the House, we're gonna do nothing and follow 0:13:42.080 --> 0:13:44.520 their lead. What would the world have looked like then? 0:13:45.360 --> 0:13:48.839 So as it was, we saw the unemployment rate rise 0:13:49.000 --> 0:13:52.840 to ten percent. I honestly believe that if the Fed 0:13:52.960 --> 0:13:57.120 had done nothing and had just waited for Congress, we 0:13:57.160 --> 0:14:01.760 could have seen the unemployment rate twice that hot. That 0:14:01.800 --> 0:14:04.760 would have been more like what happened during the Great Depression. 0:14:05.320 --> 0:14:07.920 And h I think that if the FETE had been 0:14:08.000 --> 0:14:11.520 hands off, if they had said, that's not our responsibility, 0:14:11.559 --> 0:14:15.560 that uh, we could have had Great Depression two point 0:14:15.600 --> 0:14:18.080 oh right. And as it was, as it said, it 0:14:18.120 --> 0:14:22.200 was unimaginably terrible, but it could have been even worse. Um, 0:14:22.320 --> 0:14:26.080 I don't I don't disagree with that at all. Um. 0:14:26.240 --> 0:14:30.800 Lots of folks got the implications of KWIE wrong. Very famously. 0:14:30.840 --> 0:14:33.280 A number of people had a letter in the Wolf 0:14:33.280 --> 0:14:36.480 Street Journal to Ben Bernecki that said, I want to 0:14:36.520 --> 0:14:42.080 say this was, Hey, your quantitative easing is again, We're 0:14:42.080 --> 0:14:44.760 gonna see hyper inflation. We're going to see the collapse 0:14:44.800 --> 0:14:48.600 of the dollar. You're destroying the economy. And in fact 0:14:49.400 --> 0:14:54.400 none of the sort happened. Why did people get quantitative 0:14:54.480 --> 0:14:58.960 easing so long? Was it the fundamental understanding of economics? 0:14:59.080 --> 0:15:01.960 Was it bias or or we just haven't lived through 0:15:01.960 --> 0:15:05.760 anything like that? What excuses can these folks legitimately offered 0:15:05.840 --> 0:15:11.160 for being so wrong? So as the FED pursued quantitative easing, 0:15:11.560 --> 0:15:16.800 they were really pushing out the frontier of monetary policy 0:15:16.880 --> 0:15:19.600 and Fed, the markets and the rest of the world 0:15:20.000 --> 0:15:24.080 didn't know the full implications of what they were doing, 0:15:24.360 --> 0:15:26.400 and I think that's what kicked off some of these 0:15:26.440 --> 0:15:30.880 concerns and anxieties that you described. But I think that UH, 0:15:30.920 --> 0:15:34.840 Ben Bernanke and Jenny Yellen have been very effective at 0:15:34.880 --> 0:15:38.480 having their economic dashboard, and I would say at the 0:15:38.560 --> 0:15:43.200 center of that dashboard has been inflation expectations, where if 0:15:43.240 --> 0:15:46.960 they have one objective, it's to make sure that inflation 0:15:48.160 --> 0:15:53.080 expectations stay well anchored around two percent. And these various 0:15:53.120 --> 0:15:56.240 policies that the FED pursued, quantitative easing and the like, 0:15:56.760 --> 0:16:01.680 have pushed up UH inflation expectation sans some to keep 0:16:01.720 --> 0:16:05.280 them well anchored, but there hasn't been any overshooting. Let's 0:16:05.360 --> 0:16:09.680 talk a little bit about your current role. It seems 0:16:09.760 --> 0:16:14.880 like your backgrounds UH in international finance at the Treasury 0:16:14.880 --> 0:16:19.240 and everything you've done at the Federal Reserve pretty perfect 0:16:19.400 --> 0:16:22.840 preparation for being a head of research at a at 0:16:22.840 --> 0:16:26.360 a big fixed income shop. I feel like I learned 0:16:26.440 --> 0:16:31.400 global macro at the Fed and the Treasury during my 0:16:31.480 --> 0:16:34.119 time at City. I learned how to talk to investors 0:16:34.160 --> 0:16:37.920 about markets, and I'm able to draw on that background 0:16:38.040 --> 0:16:41.400 on a daily basis in my work at at PGAM 0:16:41.480 --> 0:16:46.120 Fixed Income. The new dimension is being closer to the 0:16:46.240 --> 0:16:51.040 portfolio allocation process and closer to the portfolio managers and 0:16:51.080 --> 0:16:54.760 getting a better sense of the real considerations that go 0:16:54.880 --> 0:16:57.560 into that decision of should we buy or sell a 0:16:57.600 --> 0:17:03.560 given asset. So your clients are essentially all big institutions, UM, 0:17:03.640 --> 0:17:07.960 how often do you get to interact with UH investors 0:17:08.000 --> 0:17:10.800 from these other institutions and and what are they concerned 0:17:10.800 --> 0:17:16.000 about today? So UH, the interaction with with our clients 0:17:15.680 --> 0:17:21.080 is frequent, UH and intensive. I travel extensively across the 0:17:21.160 --> 0:17:24.560 United States and also globally. We have lots of clients 0:17:24.600 --> 0:17:30.800 in Europe, Japan, Asia, and elsewhere. In terms of issues, 0:17:30.840 --> 0:17:34.479 I would say the short term issue that clients are 0:17:34.520 --> 0:17:38.520 the most interested in is how much steam does this 0:17:38.840 --> 0:17:43.240 expansion have left? Are we looking at a recession around 0:17:43.280 --> 0:17:45.840 the corner. It's been running for a while, We've been 0:17:45.880 --> 0:17:49.040 hearing warnings about that for two or three years. Exactly 0:17:49.080 --> 0:17:53.000 is this late cycle or not? The longer term issue 0:17:53.160 --> 0:17:57.639 that they're the most focused on is debt and demographics. 0:17:58.160 --> 0:18:02.000 What what does this kind of ad verse cocktail mean 0:18:02.160 --> 0:18:05.080 for our long term performance? So so let's talk about 0:18:05.200 --> 0:18:09.480 the first one about the length of the cycle. I 0:18:09.600 --> 0:18:13.320 have long since complained that most economists are using the 0:18:13.359 --> 0:18:17.800 wrong data set. It's not recessions, it's post credit crisis 0:18:18.119 --> 0:18:20.520 recoveries that they should be looking at, and they seem 0:18:20.600 --> 0:18:23.880 to be very different than the ordinary balance sheet recession. 0:18:24.240 --> 0:18:28.280 Explained that if you would yes, so uh a decade 0:18:28.400 --> 0:18:32.440 or so ago, uh Ken Rogoff and Carmen Reinhardt did 0:18:32.480 --> 0:18:35.639 some very interesting work where they looked at decades and 0:18:35.720 --> 0:18:40.400 decades of recessions and compared those that are driven by 0:18:40.560 --> 0:18:45.240 banking crises to those recessions that arise for other reasons. 0:18:45.560 --> 0:18:48.320 And what they found was that the recoveries from those 0:18:48.320 --> 0:18:55.000 banking crises were systematically slower, and that the slower pace 0:18:55.040 --> 0:18:58.560 of growth persisted for up to a decade. And when 0:18:58.560 --> 0:19:01.480 you look at the US experien ariants, it seems to 0:19:01.560 --> 0:19:07.080 be match Reinhardt and rogue Off almost almost almost precisely. 0:19:07.480 --> 0:19:10.959 It really is is quite extraordinary. Now, the one thing 0:19:11.000 --> 0:19:12.520 I would say that's on the other side of the 0:19:12.600 --> 0:19:16.800 ledger is that this has been slower as they predicted, 0:19:17.160 --> 0:19:23.240 but this has also been a uh an extraordinarily persistent expansion, 0:19:23.840 --> 0:19:28.119 where by July it will be the longest expansion in 0:19:28.119 --> 0:19:31.879 in US history. So it's been slower but also longer lived. 0:19:32.560 --> 0:19:35.600 So some people have given Reinhardt and rogue Off a 0:19:35.640 --> 0:19:39.040 little pushbacked um, this time is different. Eight Centuries of 0:19:39.080 --> 0:19:42.760 Financial Folly was the book they wrote post crisis. But 0:19:42.880 --> 0:19:46.119 what a lot of folks do not recall is that 0:19:46.200 --> 0:19:49.679 in December two thousand and seven they put out a 0:19:49.720 --> 0:19:52.240 white paper that looked at five crises. I want to 0:19:52.280 --> 0:19:56.840 say it was US, Mexico, Sweden, Japan one other that 0:19:57.000 --> 0:20:01.360 escapes my my recollection. So before or like literally as 0:20:01.400 --> 0:20:04.640 the market peaked, they put out a paper that said says, 0:20:04.760 --> 0:20:08.480 here's how financial crises are different and why the recoveries 0:20:08.480 --> 0:20:12.120 are different, also very prescient. Very few people really paid 0:20:12.160 --> 0:20:14.480 a lot of attention to that, but they were dead on, 0:20:14.600 --> 0:20:17.920 weren't they. They really were, you know, I'd say five 0:20:18.000 --> 0:20:19.960 years ago there was a debate as to what was 0:20:20.000 --> 0:20:22.600 going on, why was growth slower? And I think all 0:20:22.680 --> 0:20:25.800 the other explanations have kind of melted away and we 0:20:25.880 --> 0:20:28.840 just have to accept the fact this was deep. It 0:20:29.000 --> 0:20:33.840 hit our financial sector. There are significant headwinds to to 0:20:33.840 --> 0:20:38.320 to bank credit and lending, and probably also scars in 0:20:38.480 --> 0:20:41.800 terms of of of demand for credit in the corporate sector, 0:20:42.119 --> 0:20:46.359 which is translated not only into somewhat tighter credit conditions 0:20:46.359 --> 0:20:50.320 than would have prevailed, but also Uh, corporates have been 0:20:50.320 --> 0:20:53.400 hesitant to invest, and all of that has been a slower, 0:20:53.520 --> 0:20:57.160 slower recovery. You mentioned the longer term concerns of your 0:20:57.160 --> 0:21:02.680 institutional clients are the nation of debt and demographics. I'm 0:21:02.680 --> 0:21:05.640 assuming they mean sovereign debt or is it also corporate debt? 0:21:06.119 --> 0:21:09.479 How do those two play together? I would say, Uh, 0:21:09.520 --> 0:21:13.600 primarily it's sovereign debt, with an asterisk that the private 0:21:13.640 --> 0:21:18.400 debt in China is very high. Is it really private debt? 0:21:18.480 --> 0:21:21.119 Isn't it kinda sort of like what we did with 0:21:21.160 --> 0:21:23.560 Fannie and Freddie. Isn't there the full faith and credit 0:21:23.600 --> 0:21:26.239 of the Chinese government behind that private debt? Or am 0:21:26.240 --> 0:21:29.960 I overstating that in the first instance, it's it's private debt. 0:21:30.000 --> 0:21:33.920 But your point, you know, doesn't the Chinese government implicitly 0:21:34.160 --> 0:21:39.200 guarantee uh most of the debt in China? Is absolutely right, 0:21:39.359 --> 0:21:41.199 and so maybe you just think about that as a 0:21:41.240 --> 0:21:45.960 different form of of of of public debt um. But 0:21:46.040 --> 0:21:49.680 then the question is, as these debt levels rise, and 0:21:49.720 --> 0:21:52.920 as we know in the future, there are gonna be 0:21:53.320 --> 0:21:58.520 a fewer workers and uh fewer taxpayers, And how do 0:21:58.640 --> 0:22:01.040 these things interact with the each other. What are those 0:22:01.080 --> 0:22:04.359 tax rates uh in twenty or thirty years gonna look 0:22:04.440 --> 0:22:07.880 like uh in order to in order to make payment 0:22:08.119 --> 0:22:12.080 to even service this debt I? And will those tax 0:22:12.200 --> 0:22:18.359 rates have adverse implications for incentives to work? Alternatively, will 0:22:18.880 --> 0:22:24.040 will an older society be less prone to to to 0:22:24.119 --> 0:22:27.600 want to take risks and engage an entrepreneurship than a 0:22:27.680 --> 0:22:30.000 younger one, And if so, then that might mean you 0:22:30.080 --> 0:22:32.679 have a slur productivity growth. There are a number of 0:22:32.720 --> 0:22:37.800 concerns where these issues of dabt and Demographics Interact. I'm 0:22:37.800 --> 0:22:40.440 Barry rit Helts. You're listening to Masters in Business on 0:22:40.520 --> 0:22:44.320 Bloomberg Radio. My special guest today is Nathan Sheets. He 0:22:44.480 --> 0:22:48.040 is the chief economist and head of Global macroeconomic research 0:22:48.520 --> 0:22:51.840 at Pigeon Fixed Income, which manages seven hundred and forty 0:22:51.880 --> 0:22:56.040 three billion dollars in fixed income assets. Let's talk a 0:22:56.080 --> 0:22:59.000 little bit about the economic cycle and where we are. 0:22:59.600 --> 0:23:02.480 It's big in a decade since the Great Financial Crisis, 0:23:02.600 --> 0:23:07.919 we're still a sub three percent economy, maybe even a 0:23:07.920 --> 0:23:11.680 sub two percent economy now that the highs of the 0:23:12.720 --> 0:23:17.160 tax cuts seem to have faded. What's our growth outlook 0:23:17.880 --> 0:23:20.320 over the next couple of years and and why have 0:23:20.480 --> 0:23:23.720 we been so muddled over the past few years. So 0:23:23.840 --> 0:23:26.639 my baseline would be the growth this year is a 0:23:26.680 --> 0:23:29.480 little bit over two percent, and the growth next year 0:23:29.520 --> 0:23:32.320 as fiscal stimulus rolls off, will be a little bit 0:23:32.400 --> 0:23:35.720 under two percent. But two percent is kind of trend 0:23:36.119 --> 0:23:40.920 and that's not terrible. Mature economy compared again to many 0:23:40.960 --> 0:23:45.400 of our international competitive that looks that looks pretty good. 0:23:45.760 --> 0:23:49.359 Now underneath it, there's a really a rather deep and 0:23:49.480 --> 0:23:52.960 important question, and that is that it feels like in 0:23:53.000 --> 0:23:58.399 the economic data suggest the productivity growth has slowed significantly 0:23:58.440 --> 0:24:02.320 over the last say, enter twenty years. And and the 0:24:02.440 --> 0:24:05.080 question is, on the one hand, we see these data 0:24:05.200 --> 0:24:09.560 pointing to UH slower productivity. On the other hand, it 0:24:09.680 --> 0:24:13.000 feels like the world we're living in is a wash. 0:24:13.080 --> 0:24:18.920 And new technologies miniaturization and and machine learning and artificial 0:24:18.960 --> 0:24:22.439 intelligence and genomics and on and on and on, And 0:24:22.520 --> 0:24:27.600 the big question is when and if, but when do 0:24:27.800 --> 0:24:33.080 all of those those UH developments find their way into 0:24:33.680 --> 0:24:36.840 the national income accounts and into productivity girls. So so 0:24:36.960 --> 0:24:39.680 here's my pushback on this. And and people have told 0:24:39.680 --> 0:24:43.400 me that, well, you're in a sector that is very 0:24:43.440 --> 0:24:47.360 dependent on technology, so you're seeing productivity. But we were 0:24:47.440 --> 0:24:52.080 once a heavy manufacturing economy. We're now a service economy, 0:24:52.160 --> 0:24:58.520 which means every person in that value chain is using technology, 0:24:58.600 --> 0:25:02.200 is using computers and mobile one everything else. How much 0:25:02.240 --> 0:25:04.520 of that lack of so therefore there's a ton of 0:25:04.560 --> 0:25:07.840 productivity growth, at least I see it. So how much 0:25:07.880 --> 0:25:12.240 of that lack of productivity gains is really a measurement issue, 0:25:12.359 --> 0:25:15.520 not a lack of productivity issue. So this is something 0:25:15.560 --> 0:25:20.960 that I've explored. I've rebalanced the U S sectors and said, 0:25:21.040 --> 0:25:25.840 suppose that we had less services and more manufacturing more 0:25:25.960 --> 0:25:28.080 like what we had ten or twenty years ago, what 0:25:28.160 --> 0:25:31.800 would productivity look like? And it would still be down. 0:25:32.280 --> 0:25:36.720 So it doesn't seem like it's the services rebalancing that's 0:25:36.760 --> 0:25:40.119 driving it, but that that that could certainly certainly be 0:25:40.200 --> 0:25:44.280 part of it. I think another point that's important is 0:25:44.320 --> 0:25:47.760 there is some evidence that's what's happened so far is 0:25:47.800 --> 0:25:51.639 that the leading firms in various industries have adopted a 0:25:51.680 --> 0:25:55.280 lot of these new technologies. But these new technologies have 0:25:55.359 --> 0:26:02.440 not yet diffused them themselves deeply into various sectors, largely 0:26:02.480 --> 0:26:06.280 reflecting the investment as remain kind of lackluster. That a 0:26:06.320 --> 0:26:08.080 lot of this new technology, how are you going to 0:26:08.160 --> 0:26:10.400 get it as a firm? You're gonna get it by 0:26:10.400 --> 0:26:13.240 investing in firms have been hesitant to to put their 0:26:13.240 --> 0:26:16.560 resources on the table. Let's talk a little bit about 0:26:16.600 --> 0:26:19.480 full employment and what it should look like. We've been 0:26:20.280 --> 0:26:23.760 hovering around four percent for a while. Shouldn't we be 0:26:23.800 --> 0:26:30.560 seeing greater wage gains or is international competition tamping that down? 0:26:32.040 --> 0:26:34.280 If you had told me where the unemployment rate was, 0:26:34.600 --> 0:26:37.959 I would have guessed that wage growth would be more rapid. 0:26:38.359 --> 0:26:40.880