WEBVTT - Joel Stern Says Fed Raising Rates Will Cause a Recession(Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters.

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<v Speaker 1>I'm Charlie Pallet. Equities end of the day, a little changed.

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<v Speaker 1>SMP five hundred index advancing one point on this Monday,

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<v Speaker 1>up point one percent to two thousand fifty eight. NAZ

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<v Speaker 1>Stack up fourteen points, a gain of three tenths of

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<v Speaker 1>one percent. The down Jones Industrial Abridge down thirty four points,

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<v Speaker 1>a drop of two tenths of one percent. Ten You're

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<v Speaker 1>up eight thirty seconds, the old one point seven four percent.

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<v Speaker 1>Gold down thirty dollars, the ounce to twelve sixty three,

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<v Speaker 1>the drop of two point four percent. Nimex crude was

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<v Speaker 1>down two point eight percent. West Texas Intermediate following a

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<v Speaker 1>dollar twenty five to forty three dollars and forty one cents.

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<v Speaker 1>I'm Charlie Pallett, and that's a Bloomberg Business Flash. You're

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<v Speaker 1>listening to Taking Style with Kathleen and Pim Fox Bloomberg Radio.

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<v Speaker 1>What will the Federal Reserve do? What will the US

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<v Speaker 1>economy do? What should it be doing? What you should

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<v Speaker 1>be doing with your money. All these questions and more

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<v Speaker 1>I'm gonna put to my next guest, Joel Stern. He

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<v Speaker 1>is the chairman the chief executive of Stern Value Management,

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<v Speaker 1>and just as a note, I believe that we can

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<v Speaker 1>describe him as a pioneer in a shareholder value and

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<v Speaker 1>linking financial economics with corporate performance and corporate valuation. Joel Stern,

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<v Speaker 1>thank you very much for coming. It's always a pleasure.

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<v Speaker 1>So I started by, I mean, everyone wants to know

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<v Speaker 1>if they if they knew, you know, wouldn't really be

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<v Speaker 1>much fun, right, I mean if everybody had the same opinion.

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<v Speaker 1>But tell me what your thoughts are about the U

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<v Speaker 1>s economy. And I know you travel a great deal,

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<v Speaker 1>so you have some perspective the US economy and the

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<v Speaker 1>federal reserves place in it. Okay, the United States economy

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<v Speaker 1>has been growing out about half of what its potential is.

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<v Speaker 1>It should be growing at close to four percent a

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<v Speaker 1>year now. When we had the recession back in seven

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<v Speaker 1>and eight and ending and nine, the drop was so substantial,

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<v Speaker 1>so negative. We have to revert back to macroeconomic theory.

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<v Speaker 1>What does it tell us? It says the faster you fall,

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<v Speaker 1>the faster you come. Out, but that didn't happen this time,

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<v Speaker 1>and people were puzzled. The late Gary Becker, who was

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<v Speaker 1>a very close friend and a Nobel Prize winner at

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<v Speaker 1>the University of Chicago, he said that the major reason

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<v Speaker 1>why the growth rate was so small was because of

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<v Speaker 1>the reregulation of the US economy. In other words, let

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<v Speaker 1>me use my my terminology for it. The determining factor

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<v Speaker 1>is what is the return on total capital going to be.

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<v Speaker 1>You invest in a new project, you need to be

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<v Speaker 1>sure in your mind or reasonably sure that the rate

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<v Speaker 1>of return earned on capital employed will be greater than

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<v Speaker 1>the required rate of return based on the risk of

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<v Speaker 1>the investment. That's the whole key to this thing. Now,

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<v Speaker 1>if the risks go up because government comes along and says, oh,

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<v Speaker 1>we're gonna aggregate or revoke your property rights, essentially, that's

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<v Speaker 1>what's happening. That increases the risk of making a decision.

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<v Speaker 1>And what if that crowds out good worthwhile investments that

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<v Speaker 1>are job creators and that strengthen the dollar and do

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<v Speaker 1>all kinds of good things for the U. S economy.

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<v Speaker 1>When that happens, then the growth rate falls to about

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<v Speaker 1>where it has been. And what's amazing is that whenever

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<v Speaker 1>the President or other members of ex happening to talk

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<v Speaker 1>about the economy, they always look for the snippet that's

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<v Speaker 1>doing very well, but they don't tell us about all

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<v Speaker 1>of the people who have dropped out of the workforce

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<v Speaker 1>because they are discouraged. They've been unable to find the

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<v Speaker 1>work they want. Also, some people who accounted as working

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<v Speaker 1>are working at jobs they don't really like and they

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<v Speaker 1>don't want to have, and they would want to take

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<v Speaker 1>the jobs that were would be the strong growth jobs,

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<v Speaker 1>and they're just not available to them. So that's one thing.

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<v Speaker 1>The second thing I should tell you is that because

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<v Speaker 1>of the baggage, the excess baggage I carry as having

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<v Speaker 1>been a student at the University of Chicago in economics

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<v Speaker 1>and finance, I am a compulsive free market here. In

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<v Speaker 1>other words, I say to myself, what would things look

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<v Speaker 1>like if we simply had a wide open and free economy. Incidentally,

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<v Speaker 1>I'm even I even disagreed with Gary Gary Becker when

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<v Speaker 1>I said to him one day I'm against anti trust laws.

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<v Speaker 1>He said, why wouldn't that create monopolies? Not if we

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<v Speaker 1>have very open borders. Let's have no tarists, no import quotas,

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<v Speaker 1>no exports up todays. Be like whom not be like Mike.

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<v Speaker 1>Let's be like Singapore, Let's be like Hong Kong. Let's

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<v Speaker 1>be like places that are growing like crazy. And by

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<v Speaker 1>the way, for those people who believe in a larger

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<v Speaker 1>role for government, what they should do is examine how

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<v Speaker 1>well India has been doing, especially since Mr Modi became

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<v Speaker 1>the Prime minister. It's not that he's been freeing the economy.

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<v Speaker 1>He has simply been saying to himself, I'm not going

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<v Speaker 1>to let regulations stand in the way. The monopolies and

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<v Speaker 1>governments still exists. Unfortunately, they should be either privatized or

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<v Speaker 1>they should do what we did for the US Postal

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<v Speaker 1>Service in the nineties and put them on our e V,

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<v Speaker 1>a bonus system which will create tremendous innovation uh and

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<v Speaker 1>and and on cost cutting. I want to bring this

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<v Speaker 1>back though, to the June fourteen and fifteen meeting at

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<v Speaker 1>the Federal Reserve and the current level of interest rates.

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<v Speaker 1>What what did the economy tell you that the Federal

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<v Speaker 1>Reserve should do or not do? The reason why interest

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<v Speaker 1>rates are low and the reason there's no way to

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<v Speaker 1>escape this. In fact, the reason why interest rates are

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<v Speaker 1>low is because the economy is doing so poorly. Interest

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<v Speaker 1>rates would rise if real returns were rising at a

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<v Speaker 1>rapid rate, because what higher real interest rates do is

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<v Speaker 1>they signal the world that high rates of return on

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<v Speaker 1>capitol are being earned. In the United States, the fact

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<v Speaker 1>that we have low interest rates is a very sad tale.

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<v Speaker 1>By the way, you might say, oh, well, businesses benefit

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<v Speaker 1>because they pay low borrowing costs, But think about all

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<v Speaker 1>of the millions and millions of savers who are earning

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<v Speaker 1>next to nothing. Can I tell you a pretty quick story.

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<v Speaker 1>I was having my taxes done recently and I had

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<v Speaker 1>forgotten about my checking account at Citi Bank, and they said,

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<v Speaker 1>you forgot to give us the tax material. I said, no, no,

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<v Speaker 1>it won't make any difference. My total interest income for

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<v Speaker 1>last year was thirty seven dollars and forty two cents.

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<v Speaker 1>They will not care if we didn't report that, even

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<v Speaker 1>though they have it from the bank and we all left.

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<v Speaker 1>Isn't it sad? Hey? Not long ago I used to

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<v Speaker 1>have a very big numbers interest income. Not anymore. So.

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<v Speaker 1>The question is what should retired people do who cannot

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<v Speaker 1>earn a decent return on their savings. And it might

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<v Speaker 1>encourage them to make a mistake and put their money

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<v Speaker 1>into the share market. So what do you have a solution?

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<v Speaker 1>What do you think can you do it in ten seconds?

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<v Speaker 1>With the fellow reserves simply got to get out of

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<v Speaker 1>the way. They have to let infest rates be whatever

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<v Speaker 1>they would be. But you see right now they can't

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<v Speaker 1>afford to raise infest rates because it would caused the

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<v Speaker 1>economy to go right into recession. Thank you very much,

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<v Speaker 1>Joel Stern, Chairman, chief executive Stern Value Management, sharing his

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<v Speaker 1>thoughts about the economy and what needs to happen to

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<v Speaker 1>make it grow. You've been listening to taking Stock. I'm

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<v Speaker 1>pim Fox, My co host Katheen Hayes is on holiday,

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<v Speaker 1>and this is Bloomberg Radio. You're saying coming up, Bloomberg

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