1 00:00:10,840 --> 00:00:15,120 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:15,440 --> 00:00:22,040 Speaker 1: I'm Joe Wisenthal, and unfortunately Tracy Alloway, my co host, 3 00:00:22,239 --> 00:00:26,000 Speaker 1: is off this week. So I'm of course extremely sad 4 00:00:26,040 --> 00:00:30,240 Speaker 1: about that, but I'm very excited about my guest today, 5 00:00:30,560 --> 00:00:33,480 Speaker 1: and so it kind of makes up for Tracy being 6 00:00:33,520 --> 00:00:37,560 Speaker 1: gone previously. He's a previous guest on an earlier Odd 7 00:00:37,600 --> 00:00:41,120 Speaker 1: Lots episode. Today, I'm going to be speaking with screenavas 8 00:00:41,159 --> 00:00:43,839 Speaker 1: two of a Dante. He is the director of research 9 00:00:43,960 --> 00:00:49,520 Speaker 1: at the Jerome Levy Forecasting Center. Fascinating person to talk 10 00:00:49,640 --> 00:00:53,360 Speaker 1: to about all kinds of things economics and markets and 11 00:00:53,479 --> 00:00:58,840 Speaker 1: global macro. He's a fascinating voice on Twitter, knows so 12 00:00:58,960 --> 00:01:01,960 Speaker 1: much about everything, and I just I'm very excited about 13 00:01:01,960 --> 00:01:05,959 Speaker 1: having a wide ranging discussion about the economy, about the 14 00:01:06,080 --> 00:01:11,520 Speaker 1: unique approach that he brings to analyzing it and applications 15 00:01:11,600 --> 00:01:15,240 Speaker 1: of that to markets, and I'm just very much looking 16 00:01:15,280 --> 00:01:17,679 Speaker 1: forward to talking to a screen of us. Thank you 17 00:01:17,760 --> 00:01:19,760 Speaker 1: very much for joining us. Oh, thank you Joe for 18 00:01:19,800 --> 00:01:22,759 Speaker 1: the very kind introduction. Yeah, no, I'm not being I'm 19 00:01:22,760 --> 00:01:26,600 Speaker 1: not being sarcastic or facetious or anything like. One of 20 00:01:26,600 --> 00:01:29,920 Speaker 1: my favorite people to talk to and to follow your work. 21 00:01:30,480 --> 00:01:33,080 Speaker 1: Tell me just before we get started for people not 22 00:01:33,160 --> 00:01:37,280 Speaker 1: familiar with the Jerome Levy Forecasting Center or your background, 23 00:01:37,640 --> 00:01:39,720 Speaker 1: I mentioned that I think you do bring a sort 24 00:01:39,760 --> 00:01:44,440 Speaker 1: of unique perspective to the analysis of markets and economics. 25 00:01:44,440 --> 00:01:47,480 Speaker 1: But what is sort of the main base that you 26 00:01:47,600 --> 00:01:52,320 Speaker 1: operate from Ideologically? Yeah, so, um, we are we use 27 00:01:52,400 --> 00:01:56,560 Speaker 1: what's called the profits perspective, which basically is comes from 28 00:01:56,600 --> 00:02:00,600 Speaker 1: the idea that for the capitalist economy, profits are central. 29 00:02:00,800 --> 00:02:03,760 Speaker 1: They are what motivates businesses to hire and to invest. 30 00:02:04,320 --> 00:02:08,480 Speaker 1: And so how do we look at how do we 31 00:02:08,520 --> 00:02:11,400 Speaker 1: forecast where profits are in the aggregate, where they are 32 00:02:11,400 --> 00:02:15,040 Speaker 1: going because they're central to the direction of the economy. 33 00:02:15,240 --> 00:02:17,760 Speaker 1: Why is this unusual? Because I think if you were 34 00:02:17,840 --> 00:02:20,920 Speaker 1: to say, oh, the capitalist system is all about where 35 00:02:20,919 --> 00:02:22,920 Speaker 1: the profit is, I think a lot of people would 36 00:02:22,919 --> 00:02:26,239 Speaker 1: hear that and say, well, yeah, of course that's capitalism, 37 00:02:26,360 --> 00:02:29,240 Speaker 1: that makes total sense. So what is it that makes 38 00:02:29,440 --> 00:02:33,560 Speaker 1: that a unique approach at all? But most of the 39 00:02:33,600 --> 00:02:35,920 Speaker 1: time you're absolutely right. But most of the time, if 40 00:02:35,960 --> 00:02:39,240 Speaker 1: you look at people forecasting the economy, they are looking 41 00:02:39,280 --> 00:02:42,680 Speaker 1: at it from a real economy perspective where they're trying 42 00:02:42,680 --> 00:02:48,160 Speaker 1: to forecast consumption plus investment, plus government spending plus net exports, 43 00:02:48,320 --> 00:02:51,720 Speaker 1: and they're looking at aggregate output gap and things like that. 44 00:02:51,760 --> 00:02:54,800 Speaker 1: You know, rarely a would see profits being in the 45 00:02:54,840 --> 00:02:57,440 Speaker 1: aggregate sense. The people who are interested in profits and 46 00:02:57,520 --> 00:03:01,040 Speaker 1: learnings are the macro strategy is and you know, the 47 00:03:01,160 --> 00:03:03,359 Speaker 1: top down strategists and the bottom up people. Of course, 48 00:03:03,360 --> 00:03:06,120 Speaker 1: we're putting up profits from company perspective and then adding 49 00:03:06,120 --> 00:03:08,680 Speaker 1: it top but you rarely able to see people talking 50 00:03:08,720 --> 00:03:13,560 Speaker 1: about forecasting earnings in the aggregate and what that means. Right, 51 00:03:13,639 --> 00:03:16,640 Speaker 1: So you get company analysts and of course they're very 52 00:03:16,680 --> 00:03:19,960 Speaker 1: focused on earnings and earnings for share and growth. And 53 00:03:20,000 --> 00:03:23,160 Speaker 1: then you get macro strategists who, as you say, talk 54 00:03:23,240 --> 00:03:26,760 Speaker 1: about interest rates in the output gap, the FED and 55 00:03:27,520 --> 00:03:30,040 Speaker 1: trade and all this stuff. But what you don't get 56 00:03:30,240 --> 00:03:32,799 Speaker 1: is people looking at it from a big picture perspective, 57 00:03:33,320 --> 00:03:36,280 Speaker 1: looking at those overall profit flows. Is what you're saying, 58 00:03:36,360 --> 00:03:40,880 Speaker 1: Absolutely got it. And tell me about your background. I mean, 59 00:03:40,920 --> 00:03:44,640 Speaker 1: you have a PhD in economics. One one thing I 60 00:03:44,640 --> 00:03:47,640 Speaker 1: find interesting about following your stuff is I feel like 61 00:03:47,680 --> 00:03:49,600 Speaker 1: there's a lot of people who have that who have 62 00:03:49,680 --> 00:03:54,000 Speaker 1: trouble bridging economics to markets. So you have theoreticians and 63 00:03:54,040 --> 00:03:58,040 Speaker 1: you have people who talk about sorry economics and the abstract, 64 00:03:58,480 --> 00:04:01,760 Speaker 1: but they tend not to be you often don't think 65 00:04:01,760 --> 00:04:06,760 Speaker 1: of them as necessarily applying that to the study of markets, 66 00:04:06,760 --> 00:04:09,560 Speaker 1: and they actually make trades and investments. Tell us about 67 00:04:09,560 --> 00:04:12,400 Speaker 1: how you your background and how you bridge that. There's 68 00:04:12,440 --> 00:04:16,960 Speaker 1: two practices. So before before I came to I came 69 00:04:17,000 --> 00:04:19,320 Speaker 1: to do my PhD, I actually worked in banking in 70 00:04:19,320 --> 00:04:23,080 Speaker 1: India and it was actually not a conventional bank. Back then, 71 00:04:23,120 --> 00:04:26,120 Speaker 1: India had what is called Industrial Credit Bank, so it 72 00:04:26,160 --> 00:04:31,120 Speaker 1: was more geared towards financing long term project loans. And 73 00:04:31,240 --> 00:04:35,080 Speaker 1: it so happened I joined when India embarked on one 74 00:04:35,080 --> 00:04:39,320 Speaker 1: of its major liberalization programs in that was the start 75 00:04:39,360 --> 00:04:42,039 Speaker 1: of my career. So it was a huge deal. When 76 00:04:42,080 --> 00:04:44,760 Speaker 1: I came in, there was an enormous turmoil and also 77 00:04:44,880 --> 00:04:48,479 Speaker 1: enormous excitement. So you know, I could see from ground 78 00:04:48,560 --> 00:04:51,720 Speaker 1: up in a way that that you know, banking, finance, 79 00:04:51,760 --> 00:04:54,039 Speaker 1: you know, balance sheets, those things are are very, very 80 00:04:54,040 --> 00:04:56,960 Speaker 1: central to how the economy operates. And it's very different 81 00:04:57,000 --> 00:05:01,080 Speaker 1: from the theoretical models of economists. But you know, there 82 00:05:01,160 --> 00:05:03,960 Speaker 1: is obviously something to learn from the theoretical models of 83 00:05:03,960 --> 00:05:06,559 Speaker 1: economics as well, so I was able to bridge that gap. 84 00:05:07,839 --> 00:05:11,320 Speaker 1: The other for Twitter's thing is I went to Washoe 85 00:05:11,360 --> 00:05:15,160 Speaker 1: Washington University, where Himan Minsky used to be there. By 86 00:05:15,160 --> 00:05:17,960 Speaker 1: the time I went there, he had already left, and 87 00:05:18,560 --> 00:05:21,520 Speaker 1: he had mentored Steve Fazzari, who happened to be one 88 00:05:21,520 --> 00:05:24,279 Speaker 1: of my advisors and who I am still in touch with, 89 00:05:24,920 --> 00:05:26,960 Speaker 1: and he's one of our advisors here at the Levy 90 00:05:27,000 --> 00:05:33,479 Speaker 1: Forecasting Center. So I also got the Minsky perspective. And coincidentally, 91 00:05:33,520 --> 00:05:37,039 Speaker 1: Minsky also was very involved in banking. He was a 92 00:05:37,080 --> 00:05:41,880 Speaker 1: director of Mark Twain Bank for um twenty years. I think, so, 93 00:05:42,120 --> 00:05:45,240 Speaker 1: you know, I think the understanding of finance and banking 94 00:05:45,600 --> 00:05:49,320 Speaker 1: as being very central to the functioning of the economy 95 00:05:49,520 --> 00:05:53,640 Speaker 1: is what helps me bridge the gap between financial markets 96 00:05:53,720 --> 00:05:58,680 Speaker 1: and between the theoretical economics. Yeah, I love this idea 97 00:05:58,920 --> 00:06:02,640 Speaker 1: that I think are people might have some concept of 98 00:06:02,640 --> 00:06:05,279 Speaker 1: what a bank does, but I love this idea that 99 00:06:05,960 --> 00:06:08,359 Speaker 1: as you put it, both in your own experience and 100 00:06:08,400 --> 00:06:12,880 Speaker 1: in minsky is experience actually working for a bank and 101 00:06:12,960 --> 00:06:16,760 Speaker 1: really seeing what a bank it does. It's incredibly helpful 102 00:06:16,839 --> 00:06:22,200 Speaker 1: and something that a lot of people just don't appreciate. Yes, yes, absolutely, 103 00:06:22,320 --> 00:06:26,080 Speaker 1: and and you know, many many people are are very 104 00:06:26,080 --> 00:06:29,839 Speaker 1: proudly proud that they're ignorant about banking. Many economists they 105 00:06:29,839 --> 00:06:31,240 Speaker 1: think that you don't need to understand any of that. 106 00:06:31,279 --> 00:06:33,240 Speaker 1: All you need to understand is money and that's it. 107 00:06:33,320 --> 00:06:35,360 Speaker 1: And I don't understand how they can understand money if 108 00:06:35,360 --> 00:06:38,640 Speaker 1: they don't understand banking. Well, what is the main thing 109 00:06:38,720 --> 00:06:41,120 Speaker 1: you learned when working at a bank that most economists 110 00:06:41,160 --> 00:06:45,880 Speaker 1: don't get? So the critical thing about when you when 111 00:06:45,880 --> 00:06:48,720 Speaker 1: you work in a bank, you realize that banks are 112 00:06:48,839 --> 00:06:54,360 Speaker 1: driven by expectations of credit losses. And in that scheme, 113 00:06:54,520 --> 00:06:58,479 Speaker 1: you know, the interst rate mechanism is not so important 114 00:06:59,120 --> 00:07:03,440 Speaker 1: for the capital spending decisions of businesses. You know, when 115 00:07:03,480 --> 00:07:06,159 Speaker 1: you actually go down to the trenches and you are 116 00:07:06,640 --> 00:07:09,560 Speaker 1: looking at a project loan and you're trying to make 117 00:07:09,840 --> 00:07:14,440 Speaker 1: various scenarios, you realize that the interest rate is swamped 118 00:07:14,480 --> 00:07:18,280 Speaker 1: by all other factors. You know, the difference between scenarios 119 00:07:18,360 --> 00:07:22,760 Speaker 1: is so huge that interstrates is a very very very tiny, 120 00:07:23,360 --> 00:07:28,000 Speaker 1: um insignificant factor. More important, from the business perspective, they 121 00:07:28,000 --> 00:07:30,320 Speaker 1: don't really care that much about the cost of capital. 122 00:07:30,320 --> 00:07:32,720 Speaker 1: Their hurdle rates are so much higher than the cost 123 00:07:32,760 --> 00:07:36,000 Speaker 1: of capital that most of the time the decisions are 124 00:07:36,040 --> 00:07:40,280 Speaker 1: strategic and hardly based on the calculus. Okay, the interstrate 125 00:07:40,320 --> 00:07:41,800 Speaker 1: is half a person lower, so I'm going to invest 126 00:07:41,800 --> 00:07:45,160 Speaker 1: in this project. That's not how the world operates. I 127 00:07:45,240 --> 00:07:49,040 Speaker 1: noticed this. Uh, you know, when you read through regional 128 00:07:49,200 --> 00:07:54,080 Speaker 1: FED manufacturing reports or other surveys of business leaders, it's 129 00:07:54,120 --> 00:07:58,000 Speaker 1: just incredible how rarely they bring up interest rate as 130 00:07:58,040 --> 00:08:01,840 Speaker 1: an important aspect their business decision. So you read about 131 00:08:01,880 --> 00:08:07,600 Speaker 1: all kinds of things, sometimes regulatory trade, commodity prices, other 132 00:08:07,680 --> 00:08:10,760 Speaker 1: aspects of the global economy, and it seems to me 133 00:08:11,240 --> 00:08:14,160 Speaker 1: that you know, we spend an incredible amount of time 134 00:08:14,600 --> 00:08:17,960 Speaker 1: on the centrality of say the Federal Reserve, and are 135 00:08:18,000 --> 00:08:20,440 Speaker 1: they going to hike four times or three times this 136 00:08:20,520 --> 00:08:23,640 Speaker 1: year or how many times next year? And there just 137 00:08:23,680 --> 00:08:26,640 Speaker 1: seems to be a remarkable lack of interest in that 138 00:08:27,040 --> 00:08:31,360 Speaker 1: when you actually just read what business leaders are saying. Yes, 139 00:08:31,640 --> 00:08:34,240 Speaker 1: And in fact, I think the Federal Reserve itself has 140 00:08:34,240 --> 00:08:39,680 Speaker 1: a paper which is a survey of business uh hurdle rates, 141 00:08:40,000 --> 00:08:43,800 Speaker 1: and over twenty years they've they've shown that hurdle rates 142 00:08:43,800 --> 00:08:47,080 Speaker 1: have not changed much at all for capital spending decisions. 143 00:08:47,120 --> 00:08:48,959 Speaker 1: But as you know if you've seen interstrates come down 144 00:08:49,040 --> 00:08:52,160 Speaker 1: a lot in these twenty years, right, So yes, I 145 00:08:52,160 --> 00:08:55,000 Speaker 1: mean it's not not at all relevant in the conventional 146 00:08:55,040 --> 00:08:59,040 Speaker 1: way that it's modeled in economics. But of course monetary 147 00:08:59,040 --> 00:09:03,000 Speaker 1: policy is very set and it operates more through balance 148 00:09:03,080 --> 00:09:08,200 Speaker 1: sheets and through balance sheet effects. But it right. So 149 00:09:08,280 --> 00:09:11,280 Speaker 1: we think of people think of the interest rate that 150 00:09:11,320 --> 00:09:14,440 Speaker 1: the Fed controls is some sort of dial where they 151 00:09:14,440 --> 00:09:16,640 Speaker 1: could turn it down or up to get the economy 152 00:09:16,720 --> 00:09:22,400 Speaker 1: hotter or cooler. But it's really just one lever among many, 153 00:09:22,559 --> 00:09:25,000 Speaker 1: and it's a minor one. And the idea that they 154 00:09:25,040 --> 00:09:28,719 Speaker 1: have this much control is something you learn is overstated. 155 00:09:29,160 --> 00:09:32,320 Speaker 1: I want you know, before we did this, while we 156 00:09:32,320 --> 00:09:34,920 Speaker 1: were before we schedule this podcast, you had a really 157 00:09:34,960 --> 00:09:38,640 Speaker 1: interesting thread on Twitter, and I would encourage everyone who's 158 00:09:38,679 --> 00:09:42,880 Speaker 1: listening to follow you, and you talked about um things 159 00:09:42,960 --> 00:09:45,720 Speaker 1: that we've learned in the post crisis era, that the 160 00:09:46,080 --> 00:09:49,720 Speaker 1: that the post Kaynsians have gotten right. And of course 161 00:09:49,960 --> 00:09:53,760 Speaker 1: Himan Minsky, who you mentioned, is associated with the post 162 00:09:53,840 --> 00:09:59,200 Speaker 1: Kaynesian school of economics. What is post Kaynesianism people have 163 00:09:59,240 --> 00:10:00,800 Speaker 1: been talking about it's more but if you have to 164 00:10:00,840 --> 00:10:04,400 Speaker 1: sort of describe the school of economics, what is the 165 00:10:04,520 --> 00:10:08,240 Speaker 1: central idea? Okay, so the post can scene is a 166 00:10:08,440 --> 00:10:10,880 Speaker 1: really big tent and there are so many people disagree 167 00:10:10,880 --> 00:10:13,800 Speaker 1: about what the basic fundamentals are. But from a purely 168 00:10:14,000 --> 00:10:18,480 Speaker 1: practitioner's point of view, and there is relevant for financial markets. 169 00:10:18,920 --> 00:10:21,160 Speaker 1: I think here is where I I distill it and 170 00:10:21,160 --> 00:10:23,880 Speaker 1: I use it for myself. The way I organize my 171 00:10:23,920 --> 00:10:27,720 Speaker 1: thoughts is the economy is it's a financial economy at 172 00:10:27,720 --> 00:10:32,079 Speaker 1: the end of the day, and money, credit and balance 173 00:10:32,080 --> 00:10:35,360 Speaker 1: sheets matter. You cannot treat it like a barter economy 174 00:10:35,440 --> 00:10:38,360 Speaker 1: and then add on money and credit and money and 175 00:10:38,400 --> 00:10:42,520 Speaker 1: credit are endogenous to the system. The second critical point, 176 00:10:42,559 --> 00:10:44,600 Speaker 1: which I think all post can scenes agree is that 177 00:10:44,679 --> 00:10:48,320 Speaker 1: demand matters, and demand matters not just in the short run. 178 00:10:49,360 --> 00:10:52,160 Speaker 1: Most of the time the economy is operating in a 179 00:10:52,240 --> 00:10:57,160 Speaker 1: slack so the demand constraint is a binding constraint. And 180 00:10:57,200 --> 00:10:59,360 Speaker 1: the number three things, which I would say again is 181 00:10:59,440 --> 00:11:03,560 Speaker 1: also critical that most post concents would agree, is that 182 00:11:04,120 --> 00:11:09,880 Speaker 1: the investment and saving decisions are separated, and saving does not. Therefore, 183 00:11:10,960 --> 00:11:14,000 Speaker 1: the act of saving does not automatically create investment. On 184 00:11:14,040 --> 00:11:18,760 Speaker 1: the other hand, because money and credit are endigenous, investment 185 00:11:18,880 --> 00:11:21,920 Speaker 1: creates its own saving, and because most of the time 186 00:11:21,920 --> 00:11:24,360 Speaker 1: we are operating in a slack investment creates its own saving. 187 00:11:24,559 --> 00:11:26,680 Speaker 1: And I think the last point, which is a more 188 00:11:26,840 --> 00:11:30,000 Speaker 1: minsky in point, but I think most post concients would 189 00:11:30,000 --> 00:11:33,800 Speaker 1: agree with, also is that there is a tendency towards 190 00:11:33,840 --> 00:11:39,760 Speaker 1: instability and of the capitalist economy, and fiscal deficits and 191 00:11:39,840 --> 00:11:45,320 Speaker 1: government debt are stabilizing mechanisms, whereas very rapid rise in 192 00:11:45,360 --> 00:11:49,880 Speaker 1: private debt as a destabilizing right. So one we're calls 193 00:11:50,000 --> 00:11:52,800 Speaker 1: during the two thousand and two thousand nine financial crisis. 194 00:11:52,840 --> 00:11:56,040 Speaker 1: Obviously there is a school of thought that said the 195 00:11:56,120 --> 00:11:58,880 Speaker 1: government just needs to get out of the way and 196 00:11:59,280 --> 00:12:02,720 Speaker 1: market will find a clearing price at which the assets 197 00:12:02,760 --> 00:12:05,600 Speaker 1: are truly valued. And then once we find this price 198 00:12:05,640 --> 00:12:08,720 Speaker 1: and the economy can grow healthy from there. And Minsky 199 00:12:08,800 --> 00:12:11,320 Speaker 1: and the other post Kansians would say that there is 200 00:12:11,360 --> 00:12:15,559 Speaker 1: no natural stabilizing effect in the economy and that ultimately 201 00:12:15,720 --> 00:12:20,160 Speaker 1: what is needed is large government deficits and as the 202 00:12:20,160 --> 00:12:22,400 Speaker 1: government to play a substantial role in the economy, and 203 00:12:22,440 --> 00:12:27,800 Speaker 1: that that ultimately would be the stabilizing force. The just 204 00:12:27,880 --> 00:12:31,200 Speaker 1: going back to your experience in banking, I wanted to 205 00:12:31,600 --> 00:12:35,120 Speaker 1: hit back on this point about how savings doesn't lead 206 00:12:35,120 --> 00:12:38,719 Speaker 1: to investment, because I think most people probably have that. 207 00:12:38,800 --> 00:12:41,160 Speaker 1: It's a wonderful life vision of what a bank is, 208 00:12:41,280 --> 00:12:44,439 Speaker 1: where you put money in a bank and then the 209 00:12:44,480 --> 00:12:46,520 Speaker 1: banker can look at all the money in the vault 210 00:12:46,520 --> 00:12:49,280 Speaker 1: and say, okay, I have this much to lend out. 211 00:12:49,840 --> 00:12:53,600 Speaker 1: But as you point out, that's really not the mechanism 212 00:12:53,800 --> 00:12:56,920 Speaker 1: at all. It's completely misleading in terms of the constraints 213 00:12:57,000 --> 00:13:00,040 Speaker 1: on where investment comes from, the decisions, and whether a 214 00:13:00,080 --> 00:13:03,719 Speaker 1: bank will make a lean in the first place. Right, So, 215 00:13:03,760 --> 00:13:05,480 Speaker 1: if you think about it, I mean, if you look 216 00:13:05,520 --> 00:13:08,079 Speaker 1: go to the principles of macro and the first thing 217 00:13:08,120 --> 00:13:10,160 Speaker 1: that when they go to money and banking, they will 218 00:13:10,200 --> 00:13:13,120 Speaker 1: teach you that, Okay, somebody comes and brings a hundred 219 00:13:13,120 --> 00:13:17,040 Speaker 1: dollars and deposits in the bank, and through the deposit multiplier, 220 00:13:17,120 --> 00:13:20,200 Speaker 1: now that gets into new loans vila and we have 221 00:13:20,760 --> 00:13:24,120 Speaker 1: credit increasing. The question is where did the original hundred 222 00:13:24,120 --> 00:13:28,120 Speaker 1: dollars come from? You know, they never asked that question, 223 00:13:28,120 --> 00:13:30,280 Speaker 1: where did it come from? Is it? Did we? Who 224 00:13:30,360 --> 00:13:33,720 Speaker 1: who give you the hundred dollars? We're talking about money here, 225 00:13:33,760 --> 00:13:36,840 Speaker 1: It's not my act of saving did not create hundred dollars, 226 00:13:36,880 --> 00:13:40,200 Speaker 1: you know. So that's a fundamental question in reality what 227 00:13:40,320 --> 00:13:43,400 Speaker 1: actually happens, and which by now pretty much everybody agrees, 228 00:13:43,440 --> 00:13:45,319 Speaker 1: and in fact the Bank of England has been on 229 00:13:45,360 --> 00:13:49,440 Speaker 1: this drumbeat for a while now. Is that when banks, 230 00:13:49,840 --> 00:13:51,480 Speaker 1: when you go to the bang, when a company goes 231 00:13:51,520 --> 00:13:55,000 Speaker 1: to the bank for a loan, and the bank evaluates 232 00:13:55,000 --> 00:13:57,320 Speaker 1: a loan and makes the credit, it does not go 233 00:13:57,920 --> 00:14:01,600 Speaker 1: for looking for deposits, and then when the bank creates 234 00:14:01,600 --> 00:14:04,160 Speaker 1: a credit, it automatically creates a deposit in the company's 235 00:14:04,240 --> 00:14:06,480 Speaker 1: name for that amount of The company then uses that 236 00:14:06,559 --> 00:14:09,800 Speaker 1: loan the deposit to make whatever it wants to purchase, 237 00:14:09,840 --> 00:14:12,920 Speaker 1: the capital spending on other things, which then that money 238 00:14:12,920 --> 00:14:16,000 Speaker 1: then goes to somebody else's bank account, which then becomes 239 00:14:16,640 --> 00:14:20,520 Speaker 1: their deposit. So the money doesn't get extinguished that way. 240 00:14:20,720 --> 00:14:23,600 Speaker 1: So so it's precisely the opposite rather than and you 241 00:14:23,640 --> 00:14:26,520 Speaker 1: said this already, but just to restate that, rather than 242 00:14:26,640 --> 00:14:31,120 Speaker 1: someone saving then creating the money available for a new loan, 243 00:14:31,800 --> 00:14:35,360 Speaker 1: it's that the loan creates the money and then that 244 00:14:35,480 --> 00:14:38,400 Speaker 1: becomes savings, either in the form of the company or 245 00:14:38,440 --> 00:14:40,880 Speaker 1: more likely if they're going to make an investment in 246 00:14:41,040 --> 00:14:46,359 Speaker 1: the income of whoever that company is spending that money on. Yes, absolutely, 247 00:14:47,600 --> 00:14:50,760 Speaker 1: I want to get to in a moment how we 248 00:14:50,800 --> 00:14:53,400 Speaker 1: can apply some of these ideas to the market in 249 00:14:53,440 --> 00:14:57,120 Speaker 1: the economy right now. But before we do, one area 250 00:14:57,200 --> 00:14:59,960 Speaker 1: I really impersonally curious on that I feel like I 251 00:15:00,040 --> 00:15:04,080 Speaker 1: don't have a great understanding of is inflation. And I 252 00:15:04,080 --> 00:15:07,720 Speaker 1: think one of the things that you said, and we've 253 00:15:07,760 --> 00:15:10,600 Speaker 1: sort of touched on this in our discussion already, is 254 00:15:11,000 --> 00:15:15,760 Speaker 1: you know, the central bank's ability to generate inflation. It's 255 00:15:15,840 --> 00:15:19,880 Speaker 1: massively overstated. We just see it empirically in the post 256 00:15:19,880 --> 00:15:24,160 Speaker 1: crisis era, all these banks completely unable to hit inflation 257 00:15:24,240 --> 00:15:29,520 Speaker 1: targets despite desperate attempts and all kinds of innovations. What 258 00:15:29,760 --> 00:15:32,920 Speaker 1: is this sort of what is the post Canzian view 259 00:15:33,080 --> 00:15:36,480 Speaker 1: of where inflation comes from? Because it appears that the 260 00:15:36,520 --> 00:15:39,880 Speaker 1: mainstream doesn't have many good answers right now, I'm not 261 00:15:40,000 --> 00:15:43,360 Speaker 1: sure that post concients have necessarily a great answer. I 262 00:15:43,440 --> 00:15:45,720 Speaker 1: think because there are many many different people having different 263 00:15:45,800 --> 00:15:48,840 Speaker 1: views about inflation within the postcncient school, I think that's 264 00:15:48,880 --> 00:15:52,240 Speaker 1: one of the places where I think there is I 265 00:15:52,240 --> 00:15:54,440 Speaker 1: wouldn't say that there is a very strong answer that 266 00:15:54,480 --> 00:15:57,800 Speaker 1: explains every single phenomenon accept narratives, you know, which can 267 00:15:57,840 --> 00:16:02,280 Speaker 1: obviously be post talk. So I mean, in fact, my 268 00:16:02,280 --> 00:16:04,280 Speaker 1: own view of inflation, I would say, is a very 269 00:16:04,360 --> 00:16:06,920 Speaker 1: narrative one, and it is supposed to talk to some 270 00:16:07,040 --> 00:16:10,040 Speaker 1: extent because I think it is a complex phenomenon. I 271 00:16:10,080 --> 00:16:12,440 Speaker 1: think there is an economic aspect to it, but there's 272 00:16:12,480 --> 00:16:14,480 Speaker 1: also a political aspect to it, and which is what 273 00:16:14,600 --> 00:16:17,200 Speaker 1: makes it very difficult to analyze. You know, we can 274 00:16:17,280 --> 00:16:19,680 Speaker 1: understand that, you know, if there is as a slack 275 00:16:19,720 --> 00:16:24,440 Speaker 1: in an economy dwindles, eventually at some point, some inflationary 276 00:16:24,440 --> 00:16:26,600 Speaker 1: pressure is build up. But the fact that we can 277 00:16:26,640 --> 00:16:29,440 Speaker 1: already are hedging it by saying eventually at some point 278 00:16:29,760 --> 00:16:32,400 Speaker 1: tells you that it is a very complex phenomenon in 279 00:16:32,440 --> 00:16:35,600 Speaker 1: and of itself. On top of that, you do have 280 00:16:35,840 --> 00:16:41,280 Speaker 1: institutional context, whether there are unions and what do we 281 00:16:41,480 --> 00:16:43,960 Speaker 1: their bargaining power, what is a structure of the economy, 282 00:16:44,480 --> 00:16:48,200 Speaker 1: structure of competition, so so many other things get into 283 00:16:48,480 --> 00:16:54,760 Speaker 1: the mix that trying to mathematically try and forecast inflation 284 00:16:55,640 --> 00:16:58,840 Speaker 1: is a very very tough job. Yeah. I like that 285 00:16:59,040 --> 00:17:03,280 Speaker 1: UM mentioned that about slack because intuitively, I guess this 286 00:17:03,360 --> 00:17:06,679 Speaker 1: idea Okay, you're running low on resources, whether it's labor 287 00:17:06,880 --> 00:17:09,760 Speaker 1: or some other capital good, and that could drive up prices. 288 00:17:09,760 --> 00:17:12,320 Speaker 1: But on the other hand, I always thought like that's 289 00:17:12,320 --> 00:17:15,359 Speaker 1: what capitalism was for, which as well, if you're running 290 00:17:15,400 --> 00:17:18,920 Speaker 1: low on trucks or running low on some resource, then 291 00:17:18,960 --> 00:17:22,479 Speaker 1: you come up with some innovation to address that. So 292 00:17:22,520 --> 00:17:26,399 Speaker 1: it's not totally intuitive to me the the mainstream story 293 00:17:26,560 --> 00:17:30,040 Speaker 1: that lack of slack should be the major driver of inflation, 294 00:17:30,080 --> 00:17:33,399 Speaker 1: because you know, we're always trying to solve our slack problem. 295 00:17:33,480 --> 00:17:36,199 Speaker 1: I guess you could say that is absolutely correct. I mean, 296 00:17:36,200 --> 00:17:38,760 Speaker 1: your your point is very correct, and you know, see 297 00:17:38,800 --> 00:17:42,560 Speaker 1: that's that's where this inflation story becomes very complex. Is 298 00:17:42,920 --> 00:17:47,680 Speaker 1: that for a business to start deciding, Okay, this slack um, 299 00:17:47,920 --> 00:17:50,280 Speaker 1: this tight labor market is permanent and therefore I need 300 00:17:50,320 --> 00:17:54,240 Speaker 1: to address it by automation or trying to labor saving devices, 301 00:17:54,520 --> 00:17:56,680 Speaker 1: they need to be convinced that there is a rather 302 00:17:56,720 --> 00:18:00,520 Speaker 1: permanent state of affairs, right so, and then they need 303 00:18:00,520 --> 00:18:04,080 Speaker 1: to so so to be convinced, you need to have 304 00:18:04,200 --> 00:18:07,280 Speaker 1: a situation of tight labor markets for a for a 305 00:18:07,320 --> 00:18:10,560 Speaker 1: while before businesses decided to do that, especially if the 306 00:18:10,600 --> 00:18:14,200 Speaker 1: memory of having slack labor markets is is very strong, 307 00:18:14,359 --> 00:18:16,080 Speaker 1: which is what we have right now in the US, 308 00:18:16,160 --> 00:18:18,199 Speaker 1: right because the memory of slack labor markets over the 309 00:18:18,240 --> 00:18:22,600 Speaker 1: last ten years is so persistent that even when there 310 00:18:22,680 --> 00:18:25,520 Speaker 1: is tight labor markets, businesses are will not really believe 311 00:18:25,520 --> 00:18:28,479 Speaker 1: that there is a permanent state of affairs, and they 312 00:18:28,520 --> 00:18:31,119 Speaker 1: will try to resist pages. They will also not try 313 00:18:31,160 --> 00:18:33,679 Speaker 1: to You often hear businesses saying that there are not 314 00:18:34,000 --> 00:18:36,560 Speaker 1: qualified workers. Of course you're not going to be able 315 00:18:36,560 --> 00:18:38,960 Speaker 1: to get workers plug and play that you had the 316 00:18:38,960 --> 00:18:42,080 Speaker 1: opportunity and unemployment was eight percent, right, I mean, you 317 00:18:42,119 --> 00:18:44,399 Speaker 1: need to find workers who you need to train. But 318 00:18:45,080 --> 00:18:48,560 Speaker 1: the reluctance to train, which is an investment, is a 319 00:18:48,600 --> 00:18:51,760 Speaker 1: mindset that comes from the adaptive expectations of the last 320 00:18:51,760 --> 00:18:54,280 Speaker 1: ten years that I don't want to spend money on 321 00:18:54,320 --> 00:18:56,840 Speaker 1: training because you didn't you didn't have to do that 322 00:18:56,920 --> 00:19:00,479 Speaker 1: until now. I almost wonder if there's an analogy to banking. 323 00:19:00,520 --> 00:19:03,280 Speaker 1: It's like where where does the dollar come from? It 324 00:19:03,320 --> 00:19:06,640 Speaker 1: comes from investment, Where does a trained worker come from? 325 00:19:07,600 --> 00:19:09,439 Speaker 1: It's kind of similar. You might have you get, you 326 00:19:09,480 --> 00:19:12,920 Speaker 1: make the hiring first, and then the trained worker becomes 327 00:19:12,960 --> 00:19:16,119 Speaker 1: a second. Finally, I want to you know, one of 328 00:19:16,160 --> 00:19:20,400 Speaker 1: the debates that and it's become this massive political debate 329 00:19:20,520 --> 00:19:24,320 Speaker 1: and people don't know how to address it. Inequality. I'm 330 00:19:24,320 --> 00:19:27,679 Speaker 1: curious what what is your view or what is the 331 00:19:27,720 --> 00:19:32,760 Speaker 1: post Kynesian view on what the origins of wealth inequality 332 00:19:32,920 --> 00:19:37,160 Speaker 1: in the economy are. Well, wealth inequality has been there 333 00:19:37,200 --> 00:19:39,920 Speaker 1: for a long time. Let's focus on income inequality, which 334 00:19:39,960 --> 00:19:44,040 Speaker 1: is an easier thing to deal with. I think most 335 00:19:44,080 --> 00:19:47,600 Speaker 1: of the time, if you look at the economy, I mean, 336 00:19:47,680 --> 00:19:51,600 Speaker 1: growth and inequality are actually fairly very well correlated, I mean, 337 00:19:52,000 --> 00:19:55,520 Speaker 1: inversely correlated. When you have strong growth, inequality tends to decline. 338 00:19:56,960 --> 00:20:00,479 Speaker 1: And most of the time that's because strong growth trends 339 00:20:00,520 --> 00:20:05,119 Speaker 1: to drain the slack and does give workers some bargaining power, 340 00:20:05,200 --> 00:20:07,440 Speaker 1: you know, I mean you have seen some pages increasing, 341 00:20:07,480 --> 00:20:09,400 Speaker 1: you know, in the economy, and and it does give 342 00:20:09,720 --> 00:20:12,720 Speaker 1: workers some bargaining power. And that is that's especially the 343 00:20:12,760 --> 00:20:16,680 Speaker 1: workers who are most vulnerable, you know, the most marginally 344 00:20:16,680 --> 00:20:19,280 Speaker 1: attached type of workers. They are the ones who start 345 00:20:19,320 --> 00:20:22,960 Speaker 1: getting good raises relative to everybody else when you have 346 00:20:23,320 --> 00:20:27,159 Speaker 1: a strong economy. And if you go back to you know, 347 00:20:27,240 --> 00:20:30,439 Speaker 1: the golden period of capitalism according to post gain science, 348 00:20:30,440 --> 00:20:33,000 Speaker 1: which is not necessarily a pot everybody agrees on. From 349 00:20:33,800 --> 00:20:38,320 Speaker 1: seven to seventy three, the lower end of the the 350 00:20:38,359 --> 00:20:43,879 Speaker 1: economy actually got relatively high wage gains relative to the 351 00:20:43,960 --> 00:20:46,720 Speaker 1: opper end, especially the top twenty and so there was 352 00:20:46,760 --> 00:20:49,280 Speaker 1: what the economy is called the Great Compression, the biggest 353 00:20:49,280 --> 00:20:52,160 Speaker 1: decline inequality. But it was also a period of very 354 00:20:52,280 --> 00:20:54,639 Speaker 1: robust growth, I mean, the strongest twenty five years in 355 00:20:54,640 --> 00:20:58,760 Speaker 1: the entire history of developed markets. So I think growth 356 00:20:58,800 --> 00:21:02,600 Speaker 1: solves a lot of plems. I think that focus on inequality. 357 00:21:03,160 --> 00:21:06,080 Speaker 1: I'm not trying to dismiss inequality as an phenomenon that 358 00:21:06,080 --> 00:21:09,200 Speaker 1: shouldn't be addressed directly or indirectly, but I think if 359 00:21:09,240 --> 00:21:11,520 Speaker 1: we focus more on how can we get growth going, 360 00:21:12,040 --> 00:21:14,840 Speaker 1: I think a lot of the problems around inequality will 361 00:21:15,640 --> 00:21:18,880 Speaker 1: tend to meltivate. It doesn't mean it will completely go away, um, 362 00:21:19,000 --> 00:21:21,440 Speaker 1: and there may be other direct mechanisms we which we 363 00:21:21,600 --> 00:21:23,480 Speaker 1: may or may not want to address, and that depends 364 00:21:23,480 --> 00:21:27,440 Speaker 1: on one's political persuasion. But I think from a purely 365 00:21:28,520 --> 00:21:33,040 Speaker 1: objective analysis, if you're concerned about inequality, try to address 366 00:21:33,040 --> 00:21:36,040 Speaker 1: growth and a lot of the problems will go away. Well, 367 00:21:36,119 --> 00:21:39,400 Speaker 1: let's apply some of these ideas and So we've talked 368 00:21:39,440 --> 00:21:42,920 Speaker 1: about some basic concepts, this idea that the market or 369 00:21:43,000 --> 00:21:48,000 Speaker 1: the economy is not naturally self correcting, that interest rates 370 00:21:48,160 --> 00:21:52,760 Speaker 1: are pretty overrated as a major determinant of the economy 371 00:21:53,000 --> 00:21:57,119 Speaker 1: or business decisions, that the correct approach to see the 372 00:21:57,160 --> 00:22:00,640 Speaker 1: world is through the profits perspective, and so on. So 373 00:22:01,440 --> 00:22:05,280 Speaker 1: apply that now when you're thinking about markets these days, 374 00:22:06,080 --> 00:22:10,840 Speaker 1: what do you see as the interesting phenomenon or opportunities 375 00:22:11,080 --> 00:22:14,159 Speaker 1: based on this lens? Okay, so let's look at the 376 00:22:14,200 --> 00:22:17,200 Speaker 1: profits perspective as applied to the U. S. Economy, uh, 377 00:22:17,240 --> 00:22:19,960 Speaker 1: and then we'll look at the other other economies. So 378 00:22:20,600 --> 00:22:23,880 Speaker 1: here we were coming into two eighteen and we've got 379 00:22:23,880 --> 00:22:27,640 Speaker 1: a massive physical stimulus. It's not just the tax cut, 380 00:22:27,960 --> 00:22:32,240 Speaker 1: but also the sequesters removal of the sequester spending caps, 381 00:22:32,240 --> 00:22:34,480 Speaker 1: which is going to add about hundred fifty dollars in 382 00:22:34,600 --> 00:22:40,160 Speaker 1: spending UM. So the profits perspective tells you that the 383 00:22:40,160 --> 00:22:42,639 Speaker 1: flow of funds that go on to profits deficits is 384 00:22:42,680 --> 00:22:45,840 Speaker 1: one of them right now. Obviously there are adjusting mechanisms. 385 00:22:45,840 --> 00:22:49,159 Speaker 1: If the government spends more around a bigger deficit, the 386 00:22:49,200 --> 00:22:52,919 Speaker 1: other sectors might be contracting that to some extent. You know, 387 00:22:52,960 --> 00:22:56,240 Speaker 1: the perfect Ricardian equivalences. If the government runs a deficit, 388 00:22:56,560 --> 00:22:59,520 Speaker 1: the private sector completely saves it. In real world, that 389 00:22:59,560 --> 00:23:03,280 Speaker 1: never happens. So what you see instead is a big 390 00:23:03,400 --> 00:23:06,280 Speaker 1: rise in profits. That's why we've been beating the drama 391 00:23:06,400 --> 00:23:08,679 Speaker 1: on saying that profits are going to be really strong 392 00:23:08,720 --> 00:23:10,600 Speaker 1: in the U. S economy, and you know they were. 393 00:23:10,920 --> 00:23:13,440 Speaker 1: Not only was the first quarter strong, which people expected 394 00:23:13,440 --> 00:23:16,560 Speaker 1: because we got the tax cart, but the second quarter, 395 00:23:16,760 --> 00:23:19,280 Speaker 1: which has taken a lot of people by surprise, has 396 00:23:19,320 --> 00:23:22,959 Speaker 1: been even stronger. And that's because the sequest of spending 397 00:23:23,000 --> 00:23:25,840 Speaker 1: caps were removed, and they it took time for the 398 00:23:25,920 --> 00:23:30,720 Speaker 1: spending to build up. So that's one direct application and 399 00:23:30,800 --> 00:23:33,960 Speaker 1: the other one, which when we look at emerging markets, 400 00:23:33,960 --> 00:23:36,359 Speaker 1: which we identified is one of the issues of the 401 00:23:36,359 --> 00:23:41,280 Speaker 1: emerging markets a structural issue, is that if you think 402 00:23:41,320 --> 00:23:44,400 Speaker 1: about what drove the emerging market boom of the two 403 00:23:44,400 --> 00:23:48,200 Speaker 1: thousands and what happened to them since then, is they 404 00:23:48,240 --> 00:23:53,520 Speaker 1: had their current accounts, were balances were expanding, improving because 405 00:23:53,520 --> 00:23:56,000 Speaker 1: they were growing their exports share in the developed markets 406 00:23:56,000 --> 00:23:59,840 Speaker 1: thanks to outsourcing and things like that. Um and because 407 00:24:00,040 --> 00:24:03,480 Speaker 1: they were running such high exports, they were also investing 408 00:24:03,680 --> 00:24:07,880 Speaker 1: in the capacity to cater to those exports. So if 409 00:24:07,880 --> 00:24:11,600 Speaker 1: you think about both investments, so the current account balances 410 00:24:11,800 --> 00:24:17,240 Speaker 1: is a direct increase in profits the investment. If you 411 00:24:17,240 --> 00:24:19,719 Speaker 1: think about what an investment is, investment for the company 412 00:24:19,760 --> 00:24:22,240 Speaker 1: that is making the investment is a balance sheet transaction, 413 00:24:23,560 --> 00:24:25,840 Speaker 1: whereas for the company that is selling the capital good 414 00:24:25,880 --> 00:24:29,720 Speaker 1: its revenue and profits. So the investment is generally leads 415 00:24:29,760 --> 00:24:32,920 Speaker 1: to higher aggregate profits. So they were having the best 416 00:24:32,960 --> 00:24:37,680 Speaker 1: of both worlds. Since the crisis, developed market growth obviously 417 00:24:37,720 --> 00:24:42,480 Speaker 1: has been structurally weaker, and the imaging markets have also 418 00:24:42,520 --> 00:24:47,000 Speaker 1: saturated their export potential in the developed markets, So since 419 00:24:47,080 --> 00:24:50,880 Speaker 1: then they have had to move more towards the domestic 420 00:24:50,880 --> 00:24:55,320 Speaker 1: demand led growth, which means that they have to now 421 00:24:55,880 --> 00:24:59,920 Speaker 1: create profits domestically in some sense. Right, So an investment 422 00:25:00,359 --> 00:25:04,280 Speaker 1: that is geared towards domestic demand, now think about what's 423 00:25:04,320 --> 00:25:07,360 Speaker 1: happening when you are trying to create domestic final demand. 424 00:25:07,880 --> 00:25:11,080 Speaker 1: You have to then create the credit in your own economy. Now, 425 00:25:11,080 --> 00:25:13,320 Speaker 1: many of them do not have a financial sector that 426 00:25:13,400 --> 00:25:17,080 Speaker 1: is sophisticated enough to deliver credit in the responsible way 427 00:25:17,080 --> 00:25:20,119 Speaker 1: over long periods of time. And initially they were very 428 00:25:20,160 --> 00:25:23,480 Speaker 1: successful from two thousand ten to two thousand thirteen in fact, 429 00:25:23,920 --> 00:25:26,320 Speaker 1: but the effects were already starting to show by two 430 00:25:26,320 --> 00:25:29,600 Speaker 1: thousand thirteen. And you know, one perfect example is India, 431 00:25:29,640 --> 00:25:31,520 Speaker 1: but Brazil is also another one. And India is still 432 00:25:31,560 --> 00:25:34,840 Speaker 1: dealing with the excess and bad lending that was done 433 00:25:34,920 --> 00:25:39,720 Speaker 1: during those years. And once that model was was exposed, 434 00:25:40,160 --> 00:25:42,760 Speaker 1: what they have now been floundering with is to figure 435 00:25:42,760 --> 00:25:44,360 Speaker 1: out how to grow. And they have not been able 436 00:25:44,400 --> 00:25:48,080 Speaker 1: to grow, So they're back to the old iron constraint, 437 00:25:48,520 --> 00:25:51,399 Speaker 1: which is that they can grow only fast as their 438 00:25:51,480 --> 00:25:55,480 Speaker 1: exports grow, which is basically another post incient insight. It's 439 00:25:55,520 --> 00:25:58,920 Speaker 1: called third World's law. Basically, it says that the b 440 00:25:59,080 --> 00:26:01,959 Speaker 1: OP constraint your your you can't grow much faster than 441 00:26:01,960 --> 00:26:05,680 Speaker 1: your exports because if you do, then your imports start 442 00:26:05,760 --> 00:26:09,480 Speaker 1: growing and your current account starts to worsen, and then 443 00:26:09,800 --> 00:26:12,720 Speaker 1: you come unto some kind of currency pressure and capital flight. 444 00:26:13,640 --> 00:26:16,720 Speaker 1: How do you analyze the potential impact of a trade 445 00:26:16,720 --> 00:26:20,520 Speaker 1: war from the profit's perspective? Okay, so most of the 446 00:26:20,560 --> 00:26:24,400 Speaker 1: time people are looking at trade as Okay, exports are 447 00:26:24,520 --> 00:26:28,200 Speaker 1: exposit of GDP, how much will exports fall and broad 448 00:26:28,240 --> 00:26:30,600 Speaker 1: impact can it have on the economy? And most of 449 00:26:30,600 --> 00:26:32,720 Speaker 1: the time, the analysis will be it will be very minor, 450 00:26:32,840 --> 00:26:34,719 Speaker 1: or you know, half a percentage point, which is not 451 00:26:34,840 --> 00:26:40,480 Speaker 1: insignificant but not recessionary. But also tied to those exports 452 00:26:41,080 --> 00:26:46,360 Speaker 1: are the financial structures and more important, the investment right 453 00:26:46,800 --> 00:26:48,439 Speaker 1: that is tied to the exports. This may not be 454 00:26:48,520 --> 00:26:50,800 Speaker 1: huge for the US, but it's certainly huge for countries 455 00:26:50,840 --> 00:26:56,080 Speaker 1: like Mexico, Korea, China, India, countries that are have much 456 00:26:56,080 --> 00:26:59,040 Speaker 1: more open trade. The US is a relatively closed economy 457 00:26:59,080 --> 00:27:01,600 Speaker 1: in that sense, not because we have tremendous trade barriers, 458 00:27:01,640 --> 00:27:05,560 Speaker 1: but because our domestic economy is huge. And so in 459 00:27:05,600 --> 00:27:10,080 Speaker 1: those places, if you look at look at all the 460 00:27:10,160 --> 00:27:13,200 Speaker 1: investment that is behind those export industries, now all those 461 00:27:13,240 --> 00:27:17,600 Speaker 1: investments look shaky, and all the financial structures behind those investments, 462 00:27:17,640 --> 00:27:20,359 Speaker 1: whether it is equity or debt, now look also started 463 00:27:20,440 --> 00:27:24,840 Speaker 1: looking shaky. Right, So then people will now be reluctant 464 00:27:24,880 --> 00:27:27,680 Speaker 1: to make further investments in in export capacity, for sure, 465 00:27:27,800 --> 00:27:30,359 Speaker 1: but they also will be not so sure that the 466 00:27:30,440 --> 00:27:34,440 Speaker 1: demand will be there for the domestic investment because all 467 00:27:34,440 --> 00:27:37,960 Speaker 1: the people employed in the export industry, their incomes are 468 00:27:38,000 --> 00:27:43,080 Speaker 1: insecure now. And number two, you don't know what the 469 00:27:43,160 --> 00:27:46,560 Speaker 1: final trade arrangement is going to be until then there's 470 00:27:46,560 --> 00:27:49,080 Speaker 1: going to be uncertainty about where should I locate my 471 00:27:49,119 --> 00:27:52,240 Speaker 1: supply chain, what is going to be that tariff structure, 472 00:27:52,760 --> 00:27:56,760 Speaker 1: you know, So those things are going to constrain investment. 473 00:27:57,160 --> 00:28:01,200 Speaker 1: So the decline in investment is a much bigger deal, 474 00:28:01,359 --> 00:28:04,679 Speaker 1: which we cannot really We can try to have some 475 00:28:04,760 --> 00:28:07,879 Speaker 1: bounds on how much can investment can get affected, but 476 00:28:08,160 --> 00:28:11,159 Speaker 1: ultimately it depends on animal spirits and there is also 477 00:28:11,920 --> 00:28:14,879 Speaker 1: feedback loop. You know, the more worst investment does, the 478 00:28:14,920 --> 00:28:19,119 Speaker 1: worst economy does. And so the key insight here is 479 00:28:19,160 --> 00:28:22,879 Speaker 1: that everybody knows that if trade barriers go up, that 480 00:28:23,000 --> 00:28:25,600 Speaker 1: you could look at a country like Mexico and it's 481 00:28:25,640 --> 00:28:27,240 Speaker 1: like this is not going to be good for them, 482 00:28:27,720 --> 00:28:30,639 Speaker 1: But that if we're just looking at the share of 483 00:28:30,720 --> 00:28:33,760 Speaker 1: exports as a percentage of GDP or so forth, we're 484 00:28:33,840 --> 00:28:37,720 Speaker 1: missing a big aspect, which is all of the income 485 00:28:37,760 --> 00:28:40,920 Speaker 1: that they would get from people building factories in Mexico 486 00:28:41,000 --> 00:28:43,080 Speaker 1: with the idea of exports, and then the sort of 487 00:28:43,280 --> 00:28:45,640 Speaker 1: all the knock on effects from that lack of income 488 00:28:45,680 --> 00:28:49,800 Speaker 1: and the job instability and so forth. Absolutely, now what 489 00:28:50,040 --> 00:28:53,760 Speaker 1: is you know right now? Obviously this year probably for 490 00:28:53,840 --> 00:28:57,960 Speaker 1: a few different reasons. We've seen selling in emerging markets 491 00:28:58,320 --> 00:29:01,760 Speaker 1: pretty ugly year for AM again going back to this 492 00:29:01,840 --> 00:29:05,960 Speaker 1: idea that there's no natural stability mechanism in the economy. 493 00:29:06,000 --> 00:29:08,320 Speaker 1: They're not just going to bounce back for the shake 494 00:29:08,360 --> 00:29:12,240 Speaker 1: of bouncing back. Are there any flows in place or 495 00:29:12,280 --> 00:29:18,480 Speaker 1: any countervailing um countervailing forces in place that will mitigate 496 00:29:18,520 --> 00:29:21,280 Speaker 1: that at some point? Well, you know, I mean, I 497 00:29:21,320 --> 00:29:24,360 Speaker 1: think they're not. I mean, except in places where there 498 00:29:24,440 --> 00:29:27,520 Speaker 1: is real risk of political instability. I think they will 499 00:29:27,560 --> 00:29:30,360 Speaker 1: eventually find some some bottom. I mean, the emerging markets. 500 00:29:30,400 --> 00:29:33,240 Speaker 1: One of the things that they have. The board itself 501 00:29:33,320 --> 00:29:34,880 Speaker 1: was coined in the eighties, you know, And the reason 502 00:29:34,960 --> 00:29:37,400 Speaker 1: why it was coined is people saw some glimmer of 503 00:29:37,400 --> 00:29:40,760 Speaker 1: hope even amidst all those Latin American crisis and everything, 504 00:29:41,120 --> 00:29:43,880 Speaker 1: and and some of those are actually true in the 505 00:29:43,920 --> 00:29:46,360 Speaker 1: sense that I've seen it in my lifetime. Lifetimes with 506 00:29:46,400 --> 00:29:49,120 Speaker 1: India is that there has been an emergence. Part of 507 00:29:49,160 --> 00:29:53,200 Speaker 1: the reason is you have shed the socialist practices and 508 00:29:54,280 --> 00:29:56,640 Speaker 1: generally the workforce has become educated. You know, there are 509 00:29:56,640 --> 00:29:58,320 Speaker 1: a lot of good things that have happened in the 510 00:29:58,360 --> 00:30:02,040 Speaker 1: long run, So there is there is obviously a place 511 00:30:02,040 --> 00:30:04,120 Speaker 1: where they will settle, and I don't know where that is, 512 00:30:04,560 --> 00:30:08,000 Speaker 1: but I do think that to make the next transition 513 00:30:08,600 --> 00:30:12,200 Speaker 1: to a higher growth again there they need to be 514 00:30:12,240 --> 00:30:15,400 Speaker 1: able to find a way to have a domestic financial 515 00:30:15,480 --> 00:30:19,440 Speaker 1: system that is sophisticated enough to be able to deliver 516 00:30:19,520 --> 00:30:24,719 Speaker 1: credit domestically. And that's a harder challenge than doing some 517 00:30:24,920 --> 00:30:27,800 Speaker 1: cyclical rebalancing, you know. That's that's the problem. I mean, 518 00:30:27,800 --> 00:30:30,040 Speaker 1: the previous challenge they addressed as soon as after the 519 00:30:30,040 --> 00:30:33,600 Speaker 1: Asian crisis. They figured out, look, we can't depend on I, 520 00:30:33,800 --> 00:30:36,760 Speaker 1: m F and all these two to give us reserves 521 00:30:36,760 --> 00:30:39,120 Speaker 1: when we need them. We need to have a huge buffer, 522 00:30:39,200 --> 00:30:41,560 Speaker 1: and they went about building the buffers, and every emerging 523 00:30:41,560 --> 00:30:45,719 Speaker 1: market economy today has pretty much large buffers, so they 524 00:30:45,720 --> 00:30:49,280 Speaker 1: don't have the conventional currency crisis. So they solve that problem. 525 00:30:49,320 --> 00:30:51,680 Speaker 1: But now they have to make the next big leap, 526 00:30:51,960 --> 00:30:55,760 Speaker 1: which is to have a financial system that is capable 527 00:30:56,120 --> 00:30:59,800 Speaker 1: of delivering credit in a in a responsible way. Not 528 00:30:59,840 --> 00:31:02,560 Speaker 1: that we have covered ourselves in glory, but remember we 529 00:31:02,600 --> 00:31:05,280 Speaker 1: had the biggest financial crisism since the depression, and ten 530 00:31:05,360 --> 00:31:07,560 Speaker 1: years down the road, we are the strongest economy in 531 00:31:07,560 --> 00:31:12,080 Speaker 1: the world. Now, how much of that you mentioned India 532 00:31:12,280 --> 00:31:15,000 Speaker 1: and other countries in which you just sort of see 533 00:31:15,000 --> 00:31:19,320 Speaker 1: an improvement in education and better policies. When you think 534 00:31:19,360 --> 00:31:24,680 Speaker 1: about the maturation of an emerging market financial system, how 535 00:31:24,800 --> 00:31:28,440 Speaker 1: linked are those two things in terms of this sort 536 00:31:28,440 --> 00:31:34,280 Speaker 1: of basic human development being necessary for the emergence of 537 00:31:34,480 --> 00:31:39,320 Speaker 1: a stable and sound and expanding, strong financial system. But 538 00:31:39,440 --> 00:31:41,440 Speaker 1: that's a very good question. I actually never thought of 539 00:31:41,440 --> 00:31:44,120 Speaker 1: it that way, but that's an excellent question. I do 540 00:31:44,240 --> 00:31:49,160 Speaker 1: think that ultimately, if you to have a sophisticated financial system, 541 00:31:49,240 --> 00:31:53,080 Speaker 1: you have to have a large domestic investor pace that 542 00:31:53,280 --> 00:31:56,520 Speaker 1: is invested mostly in financial assets. So if you look 543 00:31:56,560 --> 00:32:00,200 Speaker 1: at the US, most people's saving. A lot of people 544 00:32:00,200 --> 00:32:02,920 Speaker 1: may not have any saving, but most people saving is 545 00:32:03,160 --> 00:32:05,920 Speaker 1: in the form of financial assets. Aside from their home 546 00:32:06,280 --> 00:32:08,280 Speaker 1: right aside from real estate. Most of it is in 547 00:32:08,400 --> 00:32:11,480 Speaker 1: the form of UM. Therefore, oh one K plans or 548 00:32:11,560 --> 00:32:15,640 Speaker 1: c d s and you know, UM their mutual funds 549 00:32:15,720 --> 00:32:18,080 Speaker 1: or whatever it is. Right, So you have a very 550 00:32:18,160 --> 00:32:23,560 Speaker 1: large domestic investor base and domestic financial base for financial 551 00:32:23,560 --> 00:32:28,400 Speaker 1: instruments UM. Most emerging markets, that's not the case because 552 00:32:28,440 --> 00:32:31,520 Speaker 1: it's cash economy and most people their investments are either 553 00:32:31,720 --> 00:32:37,160 Speaker 1: in the real estate or they are in gold in 554 00:32:37,240 --> 00:32:39,480 Speaker 1: India like for instance. You know, those kind of things. 555 00:32:40,240 --> 00:32:43,760 Speaker 1: And even the real estate in the developed markets is 556 00:32:43,760 --> 00:32:46,640 Speaker 1: actually financialized because if you look at the amount of 557 00:32:46,680 --> 00:32:49,960 Speaker 1: credit behind the real estate and the mortgage markets, that's 558 00:32:50,000 --> 00:32:51,760 Speaker 1: not the case in the developed markets. Most people are 559 00:32:51,760 --> 00:32:55,560 Speaker 1: on real estate outright, so there's not a sophisticated financial 560 00:32:55,560 --> 00:32:59,320 Speaker 1: market behind the real estate. So once you create a 561 00:32:59,480 --> 00:33:04,560 Speaker 1: large domestic financial base, you automatically then create demand for 562 00:33:05,040 --> 00:33:10,400 Speaker 1: the domestic sovereign debt, which then becomes the safe acet 563 00:33:10,440 --> 00:33:14,480 Speaker 1: in that currency. That's what allows then the government to 564 00:33:14,560 --> 00:33:17,400 Speaker 1: do counter cyclical fiscal policy, you know, the all the 565 00:33:17,480 --> 00:33:20,800 Speaker 1: m empty stuff, which doesn't work in most emerging markets 566 00:33:20,840 --> 00:33:23,120 Speaker 1: because the government debt is not considered as a safe 567 00:33:23,120 --> 00:33:26,840 Speaker 1: acet because there's not a big domestic financial base. There's 568 00:33:26,880 --> 00:33:29,600 Speaker 1: no manufacturing it overnight. It just sort of needs to 569 00:33:29,640 --> 00:33:34,840 Speaker 1: build up organically over time. Yes. Absolutely. Before we wrap up, 570 00:33:35,000 --> 00:33:37,360 Speaker 1: I want to go back to the US real quickly. 571 00:33:37,480 --> 00:33:41,440 Speaker 1: You mentioned that, contrary to the expectations of many, Q 572 00:33:41,600 --> 00:33:45,200 Speaker 1: two earnings have been phenomenal. Once again, Q one wasn't 573 00:33:45,280 --> 00:33:51,400 Speaker 1: just a one off. Do you expect further sustained strong earnings, 574 00:33:51,720 --> 00:33:55,800 Speaker 1: strong profits in the US going forward. I think through 575 00:33:55,840 --> 00:33:58,400 Speaker 1: the end of the year probably, I mean, I don't 576 00:33:58,400 --> 00:34:00,880 Speaker 1: want to look too far out. Profits look fairly solid. 577 00:34:02,120 --> 00:34:03,520 Speaker 1: I mean I don't think that would have maintained the 578 00:34:03,520 --> 00:34:06,720 Speaker 1: second quarter piece. You know what your basis, but they 579 00:34:06,960 --> 00:34:10,480 Speaker 1: are still going to be very strong, all right, Screens. 580 00:34:10,600 --> 00:34:13,320 Speaker 1: I really enjoy talking to you. I learned a lot there, 581 00:34:13,400 --> 00:34:17,120 Speaker 1: and there's just I really like the your ability to 582 00:34:17,160 --> 00:34:19,680 Speaker 1: sort of take these big theoretical ideas and make them 583 00:34:19,719 --> 00:34:23,120 Speaker 1: incredibly concrete, and there aren't many people who can do 584 00:34:23,160 --> 00:34:26,120 Speaker 1: that and also actually apply them to market. So appreciate 585 00:34:26,120 --> 00:34:41,320 Speaker 1: you coming on. Thank you so much. Well, here's again 586 00:34:41,320 --> 00:34:44,080 Speaker 1: where I would typically banter with Tracy and ask her 587 00:34:44,200 --> 00:34:46,799 Speaker 1: what she liked about the conversation, but I would just 588 00:34:46,840 --> 00:34:51,000 Speaker 1: say that I liked the whole thing, and uh, that's 589 00:34:51,000 --> 00:34:53,839 Speaker 1: about it. So this has been another episode of the 590 00:34:53,880 --> 00:34:57,600 Speaker 1: Odd Lots podcast. I'm Joe Wisenthal. You can follow me 591 00:34:57,800 --> 00:35:01,239 Speaker 1: on Twitter at the Stalwart. You can follow Tracy on 592 00:35:01,280 --> 00:35:07,200 Speaker 1: Twitter at Tracy Alloway and definitely follows Srinavas on Twitter. 593 00:35:07,640 --> 00:35:09,800 Speaker 1: He's I honestly think he's one of the best people 594 00:35:09,960 --> 00:35:12,880 Speaker 1: on there. And also one of the most underfollowed given 595 00:35:12,960 --> 00:35:16,479 Speaker 1: all the pearls of insight that he regularly has every day. 596 00:35:16,840 --> 00:35:20,560 Speaker 1: Follow him at T three T E A s R I, 597 00:35:21,360 --> 00:35:25,920 Speaker 1: and follow our producer on Twitter tofur Foreheads at foreheads 598 00:35:26,040 --> 00:35:30,400 Speaker 1: t as well as the Bloomberg head of podcast, Francesco Levy. 599 00:35:30,560 --> 00:35:33,840 Speaker 1: She's on Twitter at Francesca Today. Thanks for listening.