1 00:00:11,920 --> 00:00:16,200 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:16,320 --> 00:00:22,840 Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, obviously, we're 3 00:00:22,880 --> 00:00:25,520 Speaker 1: in a moment in which there's a lot of debate 4 00:00:25,600 --> 00:00:29,760 Speaker 1: about whether we're headed for an imminent recession, maybe in 5 00:00:29,800 --> 00:00:34,479 Speaker 1: the next few months or maybe in the next year. Right. 6 00:00:35,080 --> 00:00:38,040 Speaker 1: I think we're recording in the week that Jamie Diamond 7 00:00:38,159 --> 00:00:41,239 Speaker 1: was talking about how we're definitely heading for a recession. 8 00:00:41,400 --> 00:00:44,880 Speaker 1: The only question is timing, which is kind of always true, 9 00:00:45,040 --> 00:00:48,080 Speaker 1: I guess, but it definitely feels like the chorus of 10 00:00:48,240 --> 00:00:52,640 Speaker 1: people talking about a potential recession is getting louder. Yeah, 11 00:00:52,680 --> 00:00:56,600 Speaker 1: between the trade war, the curve and version which as 12 00:00:56,640 --> 00:01:00,520 Speaker 1: of right now is actually uninverted. Uh, some we data 13 00:01:00,680 --> 00:01:06,080 Speaker 1: in the US. Uh, there's clearly we're back on recession watch. 14 00:01:06,200 --> 00:01:09,880 Speaker 1: There's no real doubt about that. But as you point out, 15 00:01:10,200 --> 00:01:13,080 Speaker 1: we're always heading for recession, and Jamie Diamond point out, 16 00:01:13,760 --> 00:01:16,000 Speaker 1: it's only it's only a matter of time. At some 17 00:01:16,040 --> 00:01:18,680 Speaker 1: point we'll have another one. So to say we're headed 18 00:01:18,720 --> 00:01:21,560 Speaker 1: for one but we don't know why, it's kind of obvious, right, 19 00:01:21,560 --> 00:01:24,320 Speaker 1: And I think we're still in the longest economic recovery 20 00:01:24,480 --> 00:01:27,880 Speaker 1: on on record now, right, So we're kind of do 21 00:01:28,240 --> 00:01:32,400 Speaker 1: for something to happen. But I think there's a more 22 00:01:32,440 --> 00:01:38,640 Speaker 1: perhaps interesting and consequential question for investors in the economy 23 00:01:38,840 --> 00:01:45,600 Speaker 1: than merely when will the recession happen? What's that? Well, 24 00:01:45,840 --> 00:01:49,320 Speaker 1: I think the bigger question is when the recession hits, 25 00:01:49,360 --> 00:01:52,480 Speaker 1: what's it going to look like? Because we've been scarred 26 00:01:52,640 --> 00:01:57,680 Speaker 1: recently or recent recessions have all been pretty brutal in 27 00:01:57,760 --> 00:02:00,920 Speaker 1: some sense. So if you think about the recession that 28 00:02:00,960 --> 00:02:04,200 Speaker 1: started in two thousand seven, the financial crisis that was horrible, 29 00:02:05,200 --> 00:02:09,440 Speaker 1: the recession that came after the dot com boom, it 30 00:02:09,480 --> 00:02:12,640 Speaker 1: wasn't really devastating overall, and it was kind of quick, 31 00:02:12,680 --> 00:02:15,520 Speaker 1: but you know, it was a tremendous loss of wealth 32 00:02:15,600 --> 00:02:18,880 Speaker 1: due to the crash in the stock market. And prior 33 00:02:18,919 --> 00:02:22,880 Speaker 1: to that, we had a recession, uh, following the savings 34 00:02:22,919 --> 00:02:26,680 Speaker 1: and loan crisis. So we don't have we don't seem 35 00:02:26,760 --> 00:02:30,200 Speaker 1: to have these sort of old style recessions anymore. They 36 00:02:30,240 --> 00:02:37,320 Speaker 1: always seem to be accompanied by something big in systemic Well, 37 00:02:37,480 --> 00:02:41,400 Speaker 1: people who talk about recession now do seem sort of 38 00:02:41,440 --> 00:02:44,160 Speaker 1: oddly hopeful that the next one is going to be 39 00:02:44,200 --> 00:02:46,880 Speaker 1: what they call a shallow recession. Right. You hear people 40 00:02:46,919 --> 00:02:49,119 Speaker 1: who talk about it every once in a while and say, 41 00:02:49,360 --> 00:02:52,880 Speaker 1: just because it's a recession, that doesn't mean it's going 42 00:02:52,919 --> 00:02:56,000 Speaker 1: to be like two thousand eight all over again. We 43 00:02:56,040 --> 00:03:00,000 Speaker 1: can have a contraction in economic growth without a huge 44 00:03:00,280 --> 00:03:03,680 Speaker 1: crisis in the financial sector. But I think what you're 45 00:03:03,680 --> 00:03:06,840 Speaker 1: getting at is whether or not that's true, and whether 46 00:03:06,960 --> 00:03:10,720 Speaker 1: the examples of recession slash financial crises that we've seen 47 00:03:10,800 --> 00:03:15,480 Speaker 1: over the nearest past decades suggests that that maybe that 48 00:03:15,520 --> 00:03:18,360 Speaker 1: can't happen anymore. Yeah, this really is the big question. 49 00:03:18,400 --> 00:03:22,000 Speaker 1: Like we don't want to be too um, I guess 50 00:03:22,040 --> 00:03:25,000 Speaker 1: scarred by recent events to say, oh, every recession now 51 00:03:25,080 --> 00:03:28,160 Speaker 1: is going to be a crisis. But on the other hand, 52 00:03:28,680 --> 00:03:31,440 Speaker 1: we don't want to dismiss the fact that, uh, the 53 00:03:31,480 --> 00:03:34,240 Speaker 1: sort of old business cycles is we know them have 54 00:03:34,480 --> 00:03:38,800 Speaker 1: given way to financial market cycles, and that sort of 55 00:03:38,920 --> 00:03:41,240 Speaker 1: is seemed to seeming to be the main driver, and 56 00:03:41,240 --> 00:03:44,640 Speaker 1: in fact, you know, there's not novel concept. Jerome Powell 57 00:03:44,760 --> 00:03:47,920 Speaker 1: at Jackson Hole two summers ago kind of said the 58 00:03:47,960 --> 00:03:52,240 Speaker 1: same thing that whereas the FED on our traditional models 59 00:03:52,480 --> 00:03:57,360 Speaker 1: think about trade offs of inflation and jobs and the 60 00:03:57,480 --> 00:04:00,960 Speaker 1: sort of very sort of standard view of the economy 61 00:04:01,000 --> 00:04:04,320 Speaker 1: overheating and then slowing down. The real game in town 62 00:04:04,920 --> 00:04:08,000 Speaker 1: is what happens with asset prices and how it declined. 63 00:04:08,000 --> 00:04:12,600 Speaker 1: An asset prices uh spills over into real economic activity. Right, 64 00:04:12,640 --> 00:04:16,160 Speaker 1: So if you think that the economy has become financialized, 65 00:04:16,200 --> 00:04:19,160 Speaker 1: which a lot of people do seem to think nowadays, 66 00:04:19,200 --> 00:04:22,520 Speaker 1: then it would stand to reason that when we get recessions, 67 00:04:22,520 --> 00:04:26,440 Speaker 1: they're going to be financialized as well. I like this topic, joke. 68 00:04:26,720 --> 00:04:29,000 Speaker 1: I like this topic too, and we have the perfect 69 00:04:29,640 --> 00:04:32,560 Speaker 1: guest for it today. Today we're going to be speaking 70 00:04:32,600 --> 00:04:37,280 Speaker 1: with David Levy. He is the chairman of the Jerome 71 00:04:37,360 --> 00:04:40,560 Speaker 1: Levy Forecasting Center, and you recently came out with a 72 00:04:40,640 --> 00:04:45,160 Speaker 1: very interesting report called Bubble or Nothing, and it talks 73 00:04:45,200 --> 00:04:49,200 Speaker 1: about how the private sector swelling balance sheets compel increasingly 74 00:04:49,320 --> 00:04:53,960 Speaker 1: risky financial behavior and it really addresses the role, the 75 00:04:54,080 --> 00:05:00,400 Speaker 1: growing role that financial assets themselves play in the economy 76 00:05:00,440 --> 00:05:04,280 Speaker 1: and in economic cycle. And so maybe in this conversation 77 00:05:04,400 --> 00:05:07,359 Speaker 1: we'll get an answer to can we have old fashioned 78 00:05:07,400 --> 00:05:12,279 Speaker 1: recessions or we doomed to have big crises or many 79 00:05:12,400 --> 00:05:15,800 Speaker 1: crises that are a result in swings and prices. So 80 00:05:15,839 --> 00:05:18,800 Speaker 1: without further Ado, I want to bring in David Leaving. 81 00:05:19,400 --> 00:05:22,200 Speaker 1: Thank you Joe, and Hi Tracy, and thanks for both 82 00:05:22,200 --> 00:05:25,520 Speaker 1: of you for having me here. These podcasts are just 83 00:05:25,560 --> 00:05:29,840 Speaker 1: such a refreshing change from the SoundBite world. We spend 84 00:05:29,839 --> 00:05:33,440 Speaker 1: too much time and I'm really excited to think this 85 00:05:33,480 --> 00:05:35,720 Speaker 1: is a great topic. Hand you on TV a couple 86 00:05:35,760 --> 00:05:38,599 Speaker 1: of weeks ago and we talked for like six minutes, 87 00:05:38,680 --> 00:05:40,160 Speaker 1: but it's so deep. I was like, we gotta have 88 00:05:40,240 --> 00:05:42,240 Speaker 1: them back and actually do something really deep because it's 89 00:05:42,279 --> 00:05:46,119 Speaker 1: such an important topic. But just to start off, would 90 00:05:46,160 --> 00:05:49,560 Speaker 1: you say that our sort of characterization of the evolving 91 00:05:49,640 --> 00:05:52,200 Speaker 1: nature of recessions is correct. Whereas in the old days 92 00:05:52,720 --> 00:05:56,840 Speaker 1: you think about the economy overheating, maybe factories built too 93 00:05:56,880 --> 00:06:00,160 Speaker 1: many widgets, there wasn't demand for widgets, the factory had 94 00:06:00,200 --> 00:06:03,000 Speaker 1: to lay off some workers for a few quarters. They 95 00:06:03,080 --> 00:06:05,800 Speaker 1: draw down the inventory of widgets than they build up 96 00:06:05,880 --> 00:06:08,760 Speaker 1: them up and everything is back again. That just doesn't 97 00:06:08,760 --> 00:06:11,000 Speaker 1: seem to be the way cycles work. I agree very 98 00:06:11,040 --> 00:06:13,120 Speaker 1: much with with with the thrust. What you're saying, I'm 99 00:06:13,120 --> 00:06:15,200 Speaker 1: going to try to paraphrase a little bit by saying 100 00:06:15,640 --> 00:06:19,760 Speaker 1: what has changed is that as private sector balance sheets 101 00:06:19,760 --> 00:06:23,200 Speaker 1: have become larger and larger relative to GDP, relative to 102 00:06:23,320 --> 00:06:26,920 Speaker 1: personal income and in which sector are we're looking at. Uh, 103 00:06:27,080 --> 00:06:31,760 Speaker 1: they have increasingly dominated the cycle. So things like balance 104 00:06:31,760 --> 00:06:35,159 Speaker 1: sheet effects such as wealth effects when the stock marker 105 00:06:35,240 --> 00:06:38,520 Speaker 1: goes up or down a lot, major refinancing effects when 106 00:06:38,520 --> 00:06:40,800 Speaker 1: there's vast amounts of debt they get refinanced at lower 107 00:06:40,880 --> 00:06:43,960 Speaker 1: rates and people pull cash. These things have started to 108 00:06:43,960 --> 00:06:47,320 Speaker 1: play a much bigger role. But also, you know, it's 109 00:06:47,320 --> 00:06:50,680 Speaker 1: important to realize balance sheets have been involved in the economy. 110 00:06:50,839 --> 00:06:53,640 Speaker 1: Their expansion is an essential part of how economies works. 111 00:06:53,960 --> 00:06:57,880 Speaker 1: Economy cannot generate profits without balance sheets expanding. This gets 112 00:06:57,880 --> 00:07:00,240 Speaker 1: into the flows of funds that give us profits. It's 113 00:07:00,400 --> 00:07:03,360 Speaker 1: what we call the sources of profits um. And it's 114 00:07:03,400 --> 00:07:07,320 Speaker 1: it's a process that is is perfectly natural and normal. 115 00:07:07,640 --> 00:07:11,760 Speaker 1: The problem is balance sheets having grown faster than income 116 00:07:11,880 --> 00:07:14,240 Speaker 1: for really since the end of World War two, a 117 00:07:14,320 --> 00:07:16,640 Speaker 1: little bit on and off, but but pretty much, uh, 118 00:07:16,840 --> 00:07:19,600 Speaker 1: most of the time. We've got to the point eventually 119 00:07:19,600 --> 00:07:22,200 Speaker 1: by the eighties where these balance sheet effects were starting 120 00:07:22,240 --> 00:07:26,680 Speaker 1: to be distorting, and that has become more and more extreme, 121 00:07:26,720 --> 00:07:28,640 Speaker 1: and that is why we see a lot of the 122 00:07:28,680 --> 00:07:31,640 Speaker 1: distorces It's why interest rates were forced down is by 123 00:07:31,640 --> 00:07:35,680 Speaker 1: the supporting these top heavy financially top heavy economies. It's 124 00:07:35,720 --> 00:07:39,080 Speaker 1: why rates of return were forced down. It's why, Uh, 125 00:07:39,200 --> 00:07:41,880 Speaker 1: there's a massive amouss of wealth that swings of which 126 00:07:41,880 --> 00:07:45,360 Speaker 1: are have huge influence on on people's behavior. And and 127 00:07:45,400 --> 00:07:47,920 Speaker 1: that's really, uh, the new world where and it's not 128 00:07:47,920 --> 00:07:50,400 Speaker 1: when we're gonna be in forever, but that is the 129 00:07:50,400 --> 00:07:54,800 Speaker 1: one we're in now. So, David, you're saying that these 130 00:07:55,040 --> 00:07:59,040 Speaker 1: big balance sheets basically mean that wealth has become more 131 00:07:59,400 --> 00:08:03,760 Speaker 1: important and sort of bigger relative to income, and that 132 00:08:03,800 --> 00:08:07,160 Speaker 1: means that wealth slash balance sheets have an outsized effect 133 00:08:07,160 --> 00:08:10,440 Speaker 1: on the economy. But how did we actually get to 134 00:08:10,640 --> 00:08:14,679 Speaker 1: that place? Why in the nineteen eighties did balance sheets 135 00:08:14,720 --> 00:08:16,720 Speaker 1: start growing in this way? If we go back to 136 00:08:16,840 --> 00:08:18,440 Speaker 1: the end of World War Two, we've just been through 137 00:08:18,760 --> 00:08:22,080 Speaker 1: fifteen years of depression and war, and balance sheets were 138 00:08:22,160 --> 00:08:25,080 Speaker 1: extremely low. There was no one had done much investing, 139 00:08:25,120 --> 00:08:27,480 Speaker 1: they hadn't been really been, They hadn't wanted to in 140 00:08:27,520 --> 00:08:31,440 Speaker 1: the depression, they hadn't been allowed to during the war. Uh, 141 00:08:31,480 --> 00:08:33,840 Speaker 1: there was a huge pent up cash. All the debt 142 00:08:33,840 --> 00:08:36,240 Speaker 1: had been pretty much paid off or going bad by then. 143 00:08:37,040 --> 00:08:38,840 Speaker 1: And at the end of the war, we had this 144 00:08:38,920 --> 00:08:43,520 Speaker 1: tremendous boom rebuilding, and this meant expanding balance sheets. We 145 00:08:43,559 --> 00:08:46,240 Speaker 1: had asset prices that were depressed by all the fears 146 00:08:46,679 --> 00:08:49,959 Speaker 1: brought about by depression and then war, and gradually people 147 00:08:50,000 --> 00:08:52,920 Speaker 1: became more comfortable, so we had a normalization that went 148 00:08:52,960 --> 00:08:55,720 Speaker 1: on maybe for up let's say into the seventies somewhere. 149 00:08:55,720 --> 00:08:58,480 Speaker 1: There's no way to draw a precise line, but the 150 00:08:58,520 --> 00:09:01,120 Speaker 1: problem is that there's a certain shore there and this 151 00:09:01,120 --> 00:09:03,719 Speaker 1: this this kept going. I don't have you know, we 152 00:09:03,760 --> 00:09:05,800 Speaker 1: don't try to explain exactly why it had to go. 153 00:09:05,960 --> 00:09:08,000 Speaker 1: We we could have a long discussion about that, and 154 00:09:08,000 --> 00:09:10,040 Speaker 1: there are a lot of reasons to believe that there 155 00:09:10,760 --> 00:09:12,640 Speaker 1: were some forces behind it. But the important thing is 156 00:09:12,840 --> 00:09:15,200 Speaker 1: we know what did happen. And once you get to 157 00:09:15,240 --> 00:09:19,640 Speaker 1: the point where you start to uh, balances are so 158 00:09:19,679 --> 00:09:21,760 Speaker 1: big that to support them, the FED is forced to 159 00:09:21,800 --> 00:09:25,280 Speaker 1: lower interest rates. That it's not you know, housing uh 160 00:09:25,480 --> 00:09:28,520 Speaker 1: just weakening or or or or car sales going down, 161 00:09:28,559 --> 00:09:31,480 Speaker 1: but it's actually you have an asset market that's having 162 00:09:31,520 --> 00:09:33,880 Speaker 1: a negative wealth effect or there are debt problems of 163 00:09:33,920 --> 00:09:37,000 Speaker 1: financial crisis that comes when interest rates go too high. 164 00:09:37,000 --> 00:09:40,480 Speaker 1: Those are the balances now start to take over interest rates. 165 00:09:40,640 --> 00:09:42,800 Speaker 1: I want to talk a little bit about the sort 166 00:09:42,800 --> 00:09:45,960 Speaker 1: of necessary FED response when asset prices go down. But 167 00:09:46,040 --> 00:09:48,679 Speaker 1: before we do, I just want to back up the 168 00:09:48,760 --> 00:09:52,640 Speaker 1: germ Levy Forecasting Center. You talked about how you use 169 00:09:53,040 --> 00:09:57,600 Speaker 1: a sort of sources of profit, sectoral balances or balance 170 00:09:57,640 --> 00:10:02,120 Speaker 1: sheet approach to under ending the economy. Can you just 171 00:10:02,200 --> 00:10:05,680 Speaker 1: sort of talk a little bit more about what makes 172 00:10:05,920 --> 00:10:10,679 Speaker 1: your approach to analyzing the economy distinct? Because when I 173 00:10:10,720 --> 00:10:13,880 Speaker 1: read a lot of like self side research, I typically 174 00:10:14,000 --> 00:10:17,599 Speaker 1: don't see a lot about sources of profits analysis. No, No, 175 00:10:17,840 --> 00:10:19,959 Speaker 1: this is this is There are more people starting to 176 00:10:19,960 --> 00:10:22,520 Speaker 1: pay attention to this. In fact, a piece which we 177 00:10:22,559 --> 00:10:24,960 Speaker 1: give out a complimentary I don't know if I mentioned 178 00:10:24,960 --> 00:10:28,080 Speaker 1: where profits come from. It's just an educational too. I 179 00:10:28,120 --> 00:10:30,400 Speaker 1: know is used by a number of big investment houses. 180 00:10:30,400 --> 00:10:33,160 Speaker 1: They've started to get interested in it. It was introduced 181 00:10:33,200 --> 00:10:36,800 Speaker 1: to the discipline UH in the nineteen thirties by UH. 182 00:10:37,640 --> 00:10:41,520 Speaker 1: To most people an obscure Polish economist who was a 183 00:10:41,559 --> 00:10:45,040 Speaker 1: contemporary of Canes at at Cambridge, but it was that 184 00:10:45,120 --> 00:10:47,920 Speaker 1: was Michael Koletsky. But he had a very left wing 185 00:10:48,000 --> 00:10:49,720 Speaker 1: view of about a lot of things. There's nothing left 186 00:10:49,720 --> 00:10:53,840 Speaker 1: wing about the profits identity. Profits identity of profits equation 187 00:10:54,440 --> 00:10:57,360 Speaker 1: is just a cousin of the very well known savor 188 00:10:57,440 --> 00:11:02,400 Speaker 1: investment identity. You just rearrange the terms because business saving 189 00:11:03,120 --> 00:11:05,520 Speaker 1: is profits after taxes and dividend, so you can turn 190 00:11:05,600 --> 00:11:08,720 Speaker 1: it into a profits equation and that is a much 191 00:11:09,080 --> 00:11:12,600 Speaker 1: better causal way to understand what happens in the econic 192 00:11:12,960 --> 00:11:16,760 Speaker 1: when investment takes place and people decide not to save 193 00:11:16,800 --> 00:11:20,040 Speaker 1: too much. A lot of that the wealth created investment 194 00:11:20,080 --> 00:11:23,440 Speaker 1: that isn't saved by households or governments ends up necessarily 195 00:11:23,480 --> 00:11:27,400 Speaker 1: flowing to business and it becomes profits. So this way 196 00:11:27,400 --> 00:11:30,400 Speaker 1: of thinking, it naturally ties into finance. You don't look 197 00:11:30,440 --> 00:11:33,439 Speaker 1: at real concept. You're looking at financial flows because of 198 00:11:33,440 --> 00:11:36,520 Speaker 1: the importance of investment or saving flows. It ties into 199 00:11:36,520 --> 00:11:40,200 Speaker 1: balancing changes in a very direct way. Just to say, 200 00:11:40,200 --> 00:11:42,319 Speaker 1: how does this different? There are people who are told 201 00:11:42,400 --> 00:11:46,320 Speaker 1: you mentioned sectoral um analysis, where people there's a there's 202 00:11:46,360 --> 00:11:48,960 Speaker 1: a strong tendency among a lot of people to say 203 00:11:49,000 --> 00:11:52,199 Speaker 1: to look at the private sector as a whole, look 204 00:11:52,200 --> 00:11:55,120 Speaker 1: at what is the net balance the private sector. I 205 00:11:55,160 --> 00:11:59,520 Speaker 1: believe it is absolutely essential to separate the corporate sector 206 00:11:59,640 --> 00:12:04,800 Speaker 1: from households because if if household saving goes down, that's 207 00:12:04,800 --> 00:12:08,199 Speaker 1: good for profits, Yet the total may not change. The 208 00:12:08,320 --> 00:12:11,800 Speaker 1: households save and profits go down the total maybe you 209 00:12:11,800 --> 00:12:14,120 Speaker 1: know you're missing critical asset because business is going to 210 00:12:14,200 --> 00:12:18,319 Speaker 1: make the decisions about employment, about investment, and so forth 211 00:12:18,800 --> 00:12:21,720 Speaker 1: when it comes to you know, you argue that basically 212 00:12:21,720 --> 00:12:26,520 Speaker 1: the rising value of assets relative to income pushes down 213 00:12:26,559 --> 00:12:29,520 Speaker 1: interest rates over the long run. Can you walk us 214 00:12:29,520 --> 00:12:31,800 Speaker 1: through why exactly that happens? Is it because of the 215 00:12:31,840 --> 00:12:35,480 Speaker 1: central bank is forced to lower rates to support an 216 00:12:35,559 --> 00:12:39,920 Speaker 1: increasingly financialized economy every time there's a sign of trouble, 217 00:12:40,040 --> 00:12:43,000 Speaker 1: Or is it because the actual rising value of assets 218 00:12:43,040 --> 00:12:47,400 Speaker 1: somehow exerts some sort of force on interest rates itself. Um, 219 00:12:47,480 --> 00:12:50,200 Speaker 1: it's it's it's really what it compels the central bank 220 00:12:50,240 --> 00:12:54,320 Speaker 1: to do. You know, the general story told by probably 221 00:12:54,360 --> 00:12:56,240 Speaker 1: the majority of economists for many years. I don't know 222 00:12:56,280 --> 00:12:59,000 Speaker 1: if it's still people still even be interested. It was 223 00:12:59,080 --> 00:13:02,120 Speaker 1: that the reason interest rates came down under the eighties 224 00:13:02,120 --> 00:13:06,000 Speaker 1: and nineties was because of falling inflation expectations. The Fed 225 00:13:06,360 --> 00:13:11,000 Speaker 1: succeeded in lowering people's expectations, Therefore there was less inflation 226 00:13:11,080 --> 00:13:13,400 Speaker 1: interest rates didn't have to be as high. If we 227 00:13:13,440 --> 00:13:16,559 Speaker 1: look at when the FED made decisions, it was they 228 00:13:16,640 --> 00:13:21,080 Speaker 1: always were raising rates until the when they thought the 229 00:13:21,080 --> 00:13:23,600 Speaker 1: economy was strong and there an inflation was harder they 230 00:13:23,600 --> 00:13:26,200 Speaker 1: wanted to be and they all but they stopped and 231 00:13:26,240 --> 00:13:29,920 Speaker 1: reversed when the economy got into trouble and increasingly that 232 00:13:30,040 --> 00:13:33,600 Speaker 1: trouble was financially related. Now, but the real interesting part 233 00:13:33,679 --> 00:13:36,000 Speaker 1: is what happens when you get into a recession or 234 00:13:36,040 --> 00:13:39,640 Speaker 1: financial crisis. Each time the Fed had to lower rates 235 00:13:39,760 --> 00:13:44,200 Speaker 1: further in order to UH stabilize financial problems. If we 236 00:13:44,240 --> 00:13:47,320 Speaker 1: go back to the UH ninety nineties, when we had 237 00:13:47,360 --> 00:13:51,760 Speaker 1: the underwinding of the commercial real estate bubble, we had 238 00:13:51,800 --> 00:13:56,160 Speaker 1: bicoastal housing bubbles. We also had we had a lot 239 00:13:56,200 --> 00:14:00,440 Speaker 1: of LBO excesses, We were still working through the problems 240 00:14:00,440 --> 00:14:03,360 Speaker 1: from the savings and loan system, and we had a 241 00:14:03,400 --> 00:14:05,640 Speaker 1: lot of of fall out, a lot of balance sheet 242 00:14:05,640 --> 00:14:08,720 Speaker 1: problems over capacity, things that led the Fed to to 243 00:14:08,880 --> 00:14:11,400 Speaker 1: cut rates and not just through the recession, but to 244 00:14:11,400 --> 00:14:15,400 Speaker 1: continue to cut them for another almost another two years 245 00:14:16,160 --> 00:14:19,160 Speaker 1: before the economy finally showed some life. If we go 246 00:14:19,680 --> 00:14:21,800 Speaker 1: back to them going to the next cycle, when the 247 00:14:21,840 --> 00:14:24,520 Speaker 1: tech bubble burst. Instead of going down to three percent 248 00:14:24,640 --> 00:14:26,240 Speaker 1: with the FED funds right, the FED had to go 249 00:14:26,240 --> 00:14:28,800 Speaker 1: all the way down to one percent, again, continuing to 250 00:14:28,840 --> 00:14:32,320 Speaker 1: cut after the recession ended because the economy wasn't responded, 251 00:14:32,320 --> 00:14:36,080 Speaker 1: because the balancie problems, and in the latest case, it 252 00:14:36,160 --> 00:14:37,800 Speaker 1: was clear that they were going to have to go lower. 253 00:14:37,840 --> 00:14:39,520 Speaker 1: And I say it was clear when I When I 254 00:14:39,560 --> 00:14:41,640 Speaker 1: say that, I mean we went out and I did 255 00:14:41,680 --> 00:14:43,600 Speaker 1: something never done before and probably will never do again. 256 00:14:43,640 --> 00:14:45,600 Speaker 1: I started a small hedge fund to do nothing but 257 00:14:46,080 --> 00:14:48,800 Speaker 1: play the the eventual collapse in interest rate, because you 258 00:14:49,120 --> 00:14:50,960 Speaker 1: the FED would have to go to the floor. Now 259 00:14:51,040 --> 00:14:53,280 Speaker 1: we are timing wasn't perfect. Fortunately we ended up doing 260 00:14:53,400 --> 00:14:56,080 Speaker 1: very well. But we I don't want to make sound 261 00:14:56,160 --> 00:14:59,200 Speaker 1: like I'm too clever, because we we We certainly didn't 262 00:14:59,200 --> 00:15:02,120 Speaker 1: do you know time everything thinks lasted loaning, we thought. 263 00:15:02,280 --> 00:15:04,600 Speaker 1: But the point is it was clear that the next 264 00:15:04,640 --> 00:15:06,760 Speaker 1: time there would be even more debt, there would be 265 00:15:06,760 --> 00:15:10,240 Speaker 1: even more asset value of losing it that the FED 266 00:15:10,240 --> 00:15:12,920 Speaker 1: would and the consequences will require even lower rates, And 267 00:15:12,920 --> 00:15:14,840 Speaker 1: the FED was going to run out of room, and 268 00:15:14,880 --> 00:15:16,960 Speaker 1: therefore we had The FED had to keep rates low 269 00:15:17,000 --> 00:15:21,880 Speaker 1: for a long time. So sometimes when the stock market 270 00:15:21,920 --> 00:15:26,920 Speaker 1: starts to fall and suddenly the chatter picks up among 271 00:15:27,080 --> 00:15:30,440 Speaker 1: various ef I see people about rate cuts, and people say, ah, 272 00:15:30,480 --> 00:15:33,200 Speaker 1: there's a FED put under the market and the Federal 273 00:15:33,280 --> 00:15:35,920 Speaker 1: he cares about asset prices, and kind of what you're 274 00:15:35,960 --> 00:15:39,240 Speaker 1: saying is like, that's not even a conspiracy, that's not 275 00:15:39,320 --> 00:15:41,680 Speaker 1: even that's just how the world has to work these 276 00:15:41,760 --> 00:15:44,280 Speaker 1: days with unfortunately or fortunately, and we don't have to 277 00:15:44,360 --> 00:15:47,240 Speaker 1: make any judgments per se. But that is just kind 278 00:15:47,240 --> 00:15:51,760 Speaker 1: of like the required mechanical operations because the consequences of 279 00:15:51,760 --> 00:15:55,000 Speaker 1: falling asset prices in a world of gigantic balance sheets 280 00:15:55,440 --> 00:15:57,920 Speaker 1: more or less leaves the FED. We have to remember 281 00:15:57,960 --> 00:16:00,640 Speaker 1: the FED is is in a in a politic environment. 282 00:16:00,760 --> 00:16:03,560 Speaker 1: And uh, I remember my father, who was in this 283 00:16:03,600 --> 00:16:07,360 Speaker 1: business before me. Uh met with William at Chesty Martin 284 00:16:07,440 --> 00:16:09,960 Speaker 1: and when he was in the FED chair, and he said, look, 285 00:16:10,240 --> 00:16:12,560 Speaker 1: as long as the White House and the Congress disagree 286 00:16:12,720 --> 00:16:14,600 Speaker 1: about what we should do, we can do anything we want. 287 00:16:15,440 --> 00:16:19,120 Speaker 1: Implication being obviously, if everybody thinks you're not doing enough, 288 00:16:19,200 --> 00:16:21,800 Speaker 1: you better do something. When if we think back to 289 00:16:21,960 --> 00:16:25,320 Speaker 1: earlier in this this expansion, why why were people pushing 290 00:16:25,360 --> 00:16:27,600 Speaker 1: for for zero race, Why were they pushing for qui? 291 00:16:27,640 --> 00:16:30,240 Speaker 1: Why were they pushing for more? Because the economy was 292 00:16:30,320 --> 00:16:33,600 Speaker 1: not behavior in a satisfactory way and people were We 293 00:16:34,120 --> 00:16:36,440 Speaker 1: had fiscal stimus, but it wasn't enough and people were 294 00:16:36,480 --> 00:16:39,000 Speaker 1: reluctant to use more. So the pressure was on the FED, 295 00:16:39,040 --> 00:16:42,720 Speaker 1: and the FED was their Their objective is helped get 296 00:16:42,760 --> 00:16:44,720 Speaker 1: the economy going, so that's what they tried to do. 297 00:16:45,040 --> 00:16:48,160 Speaker 1: The problem is the FED, really and I'm really sympathetic 298 00:16:48,200 --> 00:16:51,400 Speaker 1: to the FED because they really face an impossible task. 299 00:16:51,440 --> 00:16:53,880 Speaker 1: Although I'm not sure they always realize it, or all 300 00:16:54,160 --> 00:16:56,560 Speaker 1: all members of the of the Open Market Committee always 301 00:16:56,600 --> 00:16:58,960 Speaker 1: realized it. And that is that on the one hand, 302 00:16:59,480 --> 00:17:01,520 Speaker 1: you know they in order to get the economy going, 303 00:17:01,560 --> 00:17:05,240 Speaker 1: you need to have balance sheets expand rapidly, especially when 304 00:17:05,240 --> 00:17:07,960 Speaker 1: they're already this big, and we can talk about why 305 00:17:07,960 --> 00:17:11,280 Speaker 1: that is. But at the same time, in doing that, 306 00:17:11,320 --> 00:17:14,080 Speaker 1: they're making the balance she's even bigger, creating more pressures 307 00:17:14,600 --> 00:17:17,280 Speaker 1: that are gonna make things worse. We see this very acutely. 308 00:17:17,359 --> 00:17:19,880 Speaker 1: We happened in a very rapid time in China where 309 00:17:19,880 --> 00:17:23,399 Speaker 1: we saw they would constantly turn to opening the credits 310 00:17:23,440 --> 00:17:26,399 Speaker 1: big it's af tremendous debt growth as the economy started 311 00:17:26,400 --> 00:17:28,439 Speaker 1: to need boost here and there. Uh, and then they 312 00:17:28,480 --> 00:17:31,760 Speaker 1: began to realize they were creating something that was completely unsustainable. 313 00:17:32,040 --> 00:17:33,760 Speaker 1: And now they've been back and forth trying to figure 314 00:17:33,760 --> 00:17:36,200 Speaker 1: out how do they stimulate the economy but not create 315 00:17:36,240 --> 00:17:38,119 Speaker 1: too big a bubble, and they're they're not doing a 316 00:17:38,160 --> 00:18:00,840 Speaker 1: really great job of it. So our negative yields on 317 00:18:01,280 --> 00:18:06,360 Speaker 1: debts or securities are those the ultimate expression of this 318 00:18:06,560 --> 00:18:09,480 Speaker 1: lower interest rate dynamic that you're describing, Because when you 319 00:18:09,480 --> 00:18:12,720 Speaker 1: think about negative yielding debt, that's something where the only 320 00:18:12,760 --> 00:18:15,479 Speaker 1: way you're really making money is either through you know, 321 00:18:15,560 --> 00:18:19,080 Speaker 1: some sort of currency hedging or conversion, or by selling 322 00:18:19,080 --> 00:18:22,479 Speaker 1: it onto someone else, in which case it's capital gains 323 00:18:22,840 --> 00:18:26,520 Speaker 1: and not income. So is that basically what the world 324 00:18:26,560 --> 00:18:28,320 Speaker 1: is going to look like if if we keep going 325 00:18:28,320 --> 00:18:31,439 Speaker 1: down this road. Let's start to first talking about the 326 00:18:31,480 --> 00:18:34,399 Speaker 1: negative policy rates, because that that has huge impact. That 327 00:18:34,520 --> 00:18:40,080 Speaker 1: is critical to having negative yields on bonds. If you 328 00:18:40,280 --> 00:18:43,640 Speaker 1: are going to lower interest rates and negative rates, now 329 00:18:44,560 --> 00:18:47,880 Speaker 1: you create a situation where depositors ultimately can be either 330 00:18:47,920 --> 00:18:50,639 Speaker 1: paying fees on their checking accounts or they're can be 331 00:18:50,640 --> 00:18:54,359 Speaker 1: paying negative interests themselves. Uh, And certainly for large depositors, 332 00:18:54,359 --> 00:18:57,119 Speaker 1: this becomes a big issue. So at some point they say, 333 00:18:57,200 --> 00:18:59,440 Speaker 1: all right, uh, or even if we're not being charged 334 00:18:59,440 --> 00:19:01,760 Speaker 1: a feast, now, if these negative rates become more negative, 335 00:19:01,960 --> 00:19:04,560 Speaker 1: we will be. So let's lock in a negative rate. 336 00:19:04,600 --> 00:19:06,679 Speaker 1: So at least we won't we know how much we're losing. 337 00:19:06,680 --> 00:19:09,800 Speaker 1: We won't lose as much as we might lose if 338 00:19:09,800 --> 00:19:13,680 Speaker 1: something else happens. So the expectation of negative short term 339 00:19:13,720 --> 00:19:17,120 Speaker 1: interest rates is critical to having negative views and bonds. 340 00:19:17,160 --> 00:19:18,919 Speaker 1: If you look at the Great Suppression US, we had 341 00:19:18,920 --> 00:19:23,840 Speaker 1: deflation everything else. Yields did not go negative. The couple 342 00:19:23,880 --> 00:19:27,080 Speaker 1: of tining caveats in that which were special circumstances did 343 00:19:27,119 --> 00:19:31,400 Speaker 1: not go negative. Un bonds because people wouldn't take less 344 00:19:31,400 --> 00:19:34,920 Speaker 1: than zero. They've just hold cash otherwise. So the title 345 00:19:35,000 --> 00:19:37,960 Speaker 1: of your of this paper and you talk about is 346 00:19:38,000 --> 00:19:42,080 Speaker 1: bubble or Nothing. The paper details how private sector swelling 347 00:19:42,080 --> 00:19:46,879 Speaker 1: balance sheet compel increasingly risky financial behavior. So private sector 348 00:19:46,960 --> 00:19:51,720 Speaker 1: actors are aware, either directly or implicitly, that we live 349 00:19:51,720 --> 00:19:54,840 Speaker 1: in this balance sheet denominated world in which the only 350 00:19:54,880 --> 00:19:57,800 Speaker 1: thing that sort of drives the cycle is the direction 351 00:19:58,040 --> 00:20:02,560 Speaker 1: that asset prices are going in How does that change 352 00:20:02,600 --> 00:20:06,960 Speaker 1: the behavior of households and firms when we when this 353 00:20:07,080 --> 00:20:09,359 Speaker 1: is what drives the cycle, and how does it compel 354 00:20:09,720 --> 00:20:13,359 Speaker 1: increasingly risky behavior? All right, we we identify nine ways 355 00:20:13,880 --> 00:20:18,399 Speaker 1: where in which the expansion of balance sheet ratios has 356 00:20:18,400 --> 00:20:20,960 Speaker 1: a higher debt to income and higher asset to income 357 00:20:21,040 --> 00:20:24,960 Speaker 1: ratios actually change parameters in the economy that affect decisions. 358 00:20:25,000 --> 00:20:27,520 Speaker 1: But I'll give you a very graphic illustration of what 359 00:20:27,600 --> 00:20:30,200 Speaker 1: it looks like. First, uh I won't take you throw 360 00:20:30,240 --> 00:20:33,160 Speaker 1: on nine. Don't worry, but the the don't check out 361 00:20:33,160 --> 00:20:35,960 Speaker 1: the paper if you're listening. We've tried in the In 362 00:20:36,000 --> 00:20:39,680 Speaker 1: the paper data from the uh I forget the of 363 00:20:39,680 --> 00:20:44,879 Speaker 1: the organization, which the Pension Fund Association, and they show 364 00:20:45,040 --> 00:20:50,040 Speaker 1: that the average target, that is what what the manager 365 00:20:50,160 --> 00:20:52,920 Speaker 1: of that fund is supposed to be achieving on an 366 00:20:52,960 --> 00:20:56,639 Speaker 1: average over the years, was just about just over eight percent. 367 00:20:57,400 --> 00:21:00,000 Speaker 1: At that point, you could get almost a percent, about 368 00:21:00,000 --> 00:21:03,359 Speaker 1: seven point eight percent on a thirty year Treasury didn't 369 00:21:03,359 --> 00:21:05,600 Speaker 1: have to be very imaginative, taken a lot of risk 370 00:21:05,680 --> 00:21:10,000 Speaker 1: in order to hit his target. Now, twenty years later, 371 00:21:10,040 --> 00:21:14,040 Speaker 1: two thousand twelve, that target had barely moved was down 372 00:21:14,080 --> 00:21:16,879 Speaker 1: slightly still about eight percent, Yet the yield on the 373 00:21:16,880 --> 00:21:22,520 Speaker 1: third year bond was so Now how is he he 374 00:21:22,560 --> 00:21:24,760 Speaker 1: can't just say, well, we'll buy some corporate or investment 375 00:21:24,960 --> 00:21:26,959 Speaker 1: a little bit higher yield. Now now he has to 376 00:21:26,960 --> 00:21:29,560 Speaker 1: they have to think of a whole different set of choices. 377 00:21:30,080 --> 00:21:34,000 Speaker 1: There was quoting the I. M. F Uh making statement 378 00:21:34,040 --> 00:21:36,600 Speaker 1: that we're having a problem with low interest rates because 379 00:21:36,640 --> 00:21:40,520 Speaker 1: too many people are investing in in items, in assets 380 00:21:40,560 --> 00:21:43,119 Speaker 1: that are too risky or too a liquid and this 381 00:21:43,160 --> 00:21:45,520 Speaker 1: is going to lead to problems. This is exactly the 382 00:21:45,560 --> 00:21:48,560 Speaker 1: dilemma that comes from balancing. Now again, we talked a 383 00:21:48,600 --> 00:21:51,520 Speaker 1: little bit about interest racing forced down as balances get 384 00:21:51,520 --> 00:21:54,720 Speaker 1: bigger and bigger, that the crises forced the Fed to 385 00:21:54,800 --> 00:21:59,320 Speaker 1: lower rates to keep things stable. And we all also 386 00:21:59,400 --> 00:22:01,680 Speaker 1: one of the things that happens as as as rates 387 00:22:01,680 --> 00:22:04,160 Speaker 1: go lower, asset prices go higher. But what's the flip 388 00:22:04,240 --> 00:22:08,080 Speaker 1: side of that low operating rates of return? If you 389 00:22:08,119 --> 00:22:10,879 Speaker 1: have a low operator rates return, the rent on the 390 00:22:10,960 --> 00:22:13,080 Speaker 1: building relative to the cost of building is low. The 391 00:22:13,560 --> 00:22:16,080 Speaker 1: the dividends are stocks are you know, at a low rate. 392 00:22:16,359 --> 00:22:20,399 Speaker 1: If you're looking to invest for conservatively for income, and 393 00:22:20,440 --> 00:22:22,880 Speaker 1: maybe you'd have a little bit of blue chip equities 394 00:22:22,920 --> 00:22:26,520 Speaker 1: paying paying UH dividends in the past with some investment 395 00:22:26,520 --> 00:22:28,439 Speaker 1: create bonds. Now you can't do it that where you 396 00:22:28,440 --> 00:22:30,960 Speaker 1: have to depend more on capital gains. So one of 397 00:22:31,000 --> 00:22:32,679 Speaker 1: the things this does is it puts a lot of 398 00:22:32,680 --> 00:22:36,919 Speaker 1: people investing in equities who really want UH steady income. 399 00:22:36,960 --> 00:22:38,560 Speaker 1: And that's I think the origin of a lot of 400 00:22:38,600 --> 00:22:43,480 Speaker 1: the pressure on on business managers to meet their quarterly 401 00:22:43,520 --> 00:22:46,600 Speaker 1: objective for earnings and to put the emphasis there rather 402 00:22:46,640 --> 00:22:49,880 Speaker 1: than what is good strategically for the long run. Right, 403 00:22:49,920 --> 00:22:53,280 Speaker 1: I have a question how do people and I guess 404 00:22:53,280 --> 00:22:58,399 Speaker 1: companies actually convert capital gains into you know, wealth or 405 00:22:58,480 --> 00:23:03,720 Speaker 1: income or something they can use well for companies. First 406 00:23:03,720 --> 00:23:06,000 Speaker 1: of all, companies will will sometimes have capital gates if 407 00:23:06,040 --> 00:23:09,040 Speaker 1: they sell assets. In fact, it it's UH if we 408 00:23:09,080 --> 00:23:12,360 Speaker 1: look at the period UH starting the nine we we've 409 00:23:12,400 --> 00:23:16,000 Speaker 1: seen a lot of major capital gains by businesses that 410 00:23:16,000 --> 00:23:19,000 Speaker 1: they've they've it's been a significant part of profits based 411 00:23:19,040 --> 00:23:21,720 Speaker 1: on I r S data over over the decades. But 412 00:23:22,160 --> 00:23:24,320 Speaker 1: you know, the most important capital gains are really the 413 00:23:24,320 --> 00:23:27,720 Speaker 1: ones that are secured by the household sector. UH. And 414 00:23:27,880 --> 00:23:30,880 Speaker 1: because how and and those capital gains have become larger 415 00:23:31,160 --> 00:23:34,240 Speaker 1: and larger relative to income. We've also seen bigger and 416 00:23:34,280 --> 00:23:38,280 Speaker 1: bigger cyclical swings in in the in assets, so that 417 00:23:38,320 --> 00:23:41,600 Speaker 1: in other ways, the the the gains the wealth gain 418 00:23:41,760 --> 00:23:45,880 Speaker 1: of relative to your income over a business cycle has 419 00:23:45,920 --> 00:23:48,040 Speaker 1: become greater than it was in the past. And your 420 00:23:48,040 --> 00:23:51,840 Speaker 1: wealth losses during the recession crisis have also become greater. 421 00:23:51,920 --> 00:23:55,160 Speaker 1: So now you know we have another form of instability 422 00:23:55,160 --> 00:23:59,399 Speaker 1: that that's that's uh imposed itself. But wealth effects also 423 00:23:59,440 --> 00:24:04,119 Speaker 1: affect colleges and private private endowed entities where they have 424 00:24:04,200 --> 00:24:06,560 Speaker 1: their own investments, where they have their own capital games, 425 00:24:06,600 --> 00:24:09,800 Speaker 1: but also their donations are largely going to reflect the 426 00:24:09,840 --> 00:24:15,680 Speaker 1: capital gains of of of So yeah, So on that note, 427 00:24:15,800 --> 00:24:21,160 Speaker 1: how does asset price inflation um actually impact the balance sheet? 428 00:24:21,200 --> 00:24:24,399 Speaker 1: And I'm actually thinking about corporates here, but there's been 429 00:24:24,440 --> 00:24:28,040 Speaker 1: a lot of talk that that corporates borrowing from the 430 00:24:28,080 --> 00:24:32,720 Speaker 1: bond market to fund dividend payouts and also share buybacks 431 00:24:32,800 --> 00:24:36,359 Speaker 1: has inflated the value of equities. Is that something that 432 00:24:36,400 --> 00:24:39,119 Speaker 1: you would buy into based on your thesis here, well, so, 433 00:24:39,240 --> 00:24:42,480 Speaker 1: I mean that it was clearly happening the way that 434 00:24:42,560 --> 00:24:45,560 Speaker 1: we see actually on the corporation's own balance sheet in 435 00:24:45,600 --> 00:24:50,280 Speaker 1: terms of its own assets. Uh. That we see um 436 00:24:50,600 --> 00:24:54,560 Speaker 1: asset inflation is usually in the form of goodwill, which 437 00:24:54,600 --> 00:24:57,439 Speaker 1: comes about when they take over. They do a takeover. 438 00:24:57,520 --> 00:25:01,040 Speaker 1: They they buy a company whose book value is five 439 00:25:01,760 --> 00:25:04,920 Speaker 1: dollars and they pay two billion. Well, the access goes 440 00:25:04,960 --> 00:25:08,840 Speaker 1: on as book value, uh sorry, as good will. The 441 00:25:08,920 --> 00:25:11,920 Speaker 1: most acute places where we see these the acid of 442 00:25:12,160 --> 00:25:15,640 Speaker 1: appreciation is I think in the household sector. It's also 443 00:25:15,720 --> 00:25:18,960 Speaker 1: in in in the real estate commercial real estate sector, 444 00:25:19,680 --> 00:25:22,440 Speaker 1: depending again which would cycle we're in. So let's get 445 00:25:22,440 --> 00:25:25,440 Speaker 1: back to the original question. I mean, I remember like 446 00:25:25,640 --> 00:25:28,800 Speaker 1: the first few years after the financial crisis two dozen 447 00:25:28,960 --> 00:25:32,440 Speaker 1: ten or so, and my thinking, and arguably I would 448 00:25:32,440 --> 00:25:34,640 Speaker 1: still say it is it's like, wow, that was really bad. 449 00:25:34,680 --> 00:25:37,680 Speaker 1: But these things come along maybe twice in a century 450 00:25:37,800 --> 00:25:41,840 Speaker 1: or once in a century, and then typically recessions are 451 00:25:42,000 --> 00:25:45,119 Speaker 1: nothing like that. But we set up the whole discussion 452 00:25:45,160 --> 00:25:48,040 Speaker 1: of like, well, can we actually just have this sort 453 00:25:48,080 --> 00:25:52,720 Speaker 1: of shallow, short, not that bad recessions where there's not 454 00:25:52,800 --> 00:25:56,760 Speaker 1: really a financial crisis and employment only rises a modest 455 00:25:56,800 --> 00:26:02,040 Speaker 1: degree given what you've said, and ignoring about whether we're 456 00:26:02,040 --> 00:26:04,240 Speaker 1: going to be in recession this year, next year or 457 00:26:04,240 --> 00:26:07,720 Speaker 1: the year after that, because that seems hard to predict. 458 00:26:09,160 --> 00:26:11,760 Speaker 1: How bad could it be? And are we naive to 459 00:26:11,880 --> 00:26:13,560 Speaker 1: think that it could just be like a good old 460 00:26:13,560 --> 00:26:18,159 Speaker 1: fashioned recession. Well, you know, moving from the principles that 461 00:26:18,240 --> 00:26:21,040 Speaker 1: are illustrating this paper to put on a hat as 462 00:26:21,280 --> 00:26:24,359 Speaker 1: my day, my normal day job, which is analyzing and 463 00:26:24,440 --> 00:26:26,920 Speaker 1: forecasting the economy and looking at the world and trying 464 00:26:26,920 --> 00:26:30,320 Speaker 1: to give opinions about it. What we see is in 465 00:26:30,359 --> 00:26:34,480 Speaker 1: the United States. The United States was the epicenter of 466 00:26:34,480 --> 00:26:36,919 Speaker 1: the last financial crisis. It was our housing bubble and 467 00:26:36,920 --> 00:26:42,679 Speaker 1: the enormous um mortgage finance derivative monster sausage machine that 468 00:26:42,720 --> 00:26:46,320 Speaker 1: we we generated and that had global implications. They were reflections. 469 00:26:46,320 --> 00:26:48,800 Speaker 1: There were bubbles in other countries, but we were the 470 00:26:49,359 --> 00:26:52,480 Speaker 1: center of it this time around. Uh, the United States 471 00:26:52,520 --> 00:26:57,399 Speaker 1: is arguably no worse off and in some ways better 472 00:26:57,440 --> 00:26:59,520 Speaker 1: off than it was going to the last secho. But 473 00:26:59,560 --> 00:27:02,080 Speaker 1: the rest the world is in much worse condition. And 474 00:27:02,119 --> 00:27:04,800 Speaker 1: I would say if we had there's no perfect analogy, 475 00:27:04,840 --> 00:27:07,280 Speaker 1: but if I had to pick one thing to say 476 00:27:07,320 --> 00:27:10,280 Speaker 1: it's this is this sector's housing bubble, I would say 477 00:27:10,520 --> 00:27:14,159 Speaker 1: it is the emerging market sector. The emerging market sector 478 00:27:14,320 --> 00:27:18,320 Speaker 1: has basically their their their boom over the past generation 479 00:27:18,480 --> 00:27:22,440 Speaker 1: was largely based on tremendous growth and exports uh and 480 00:27:22,520 --> 00:27:26,600 Speaker 1: also tremendous investment in their exporting capacity and infrastructures to 481 00:27:26,600 --> 00:27:31,120 Speaker 1: support it. These countries were doing wonderful until they got 482 00:27:31,119 --> 00:27:32,720 Speaker 1: to be too big a part of the global economy 483 00:27:32,760 --> 00:27:35,679 Speaker 1: and the developed market economies started to slow down, and 484 00:27:35,800 --> 00:27:38,439 Speaker 1: suddenly they couldn't keep doing this. So we've seen their 485 00:27:38,440 --> 00:27:42,760 Speaker 1: investment weakening, their exports weakening, and increasingly they've they've been 486 00:27:43,119 --> 00:27:48,960 Speaker 1: depending on incurring debt and basically being kept kept afloat 487 00:27:49,000 --> 00:27:51,720 Speaker 1: by the tremendous search for yield that keeps money flowing 488 00:27:51,720 --> 00:27:54,919 Speaker 1: into risky places. So we think in the next recession 489 00:27:55,160 --> 00:27:59,040 Speaker 1: there could be serious problems in emerging markets, flights of capital, 490 00:27:59,280 --> 00:28:01,640 Speaker 1: and its gonna be a real nasty mess. I think 491 00:28:01,760 --> 00:28:04,560 Speaker 1: that will affect the world. So you say that in 492 00:28:04,640 --> 00:28:08,000 Speaker 1: your view that you know, perhaps the best analogy to 493 00:28:08,280 --> 00:28:11,159 Speaker 1: the housing bubble is what's going on in e M. 494 00:28:11,320 --> 00:28:14,959 Speaker 1: One difference that really jumps out to me, however, is 495 00:28:15,000 --> 00:28:22,240 Speaker 1: that people were bullish and enthusiastic about housing. Certainly still 496 00:28:22,240 --> 00:28:24,800 Speaker 1: in two thousands six, maybe even it's still two thousands 497 00:28:24,840 --> 00:28:27,840 Speaker 1: seven and then suddenly the entire edifice surrounding house they 498 00:28:27,960 --> 00:28:32,520 Speaker 1: finance seemed to collapse overnight. Whereas with e M, e 499 00:28:32,680 --> 00:28:36,919 Speaker 1: M sets have been under performing world markets for I 500 00:28:36,920 --> 00:28:38,479 Speaker 1: don't know, close to a decade now. I think they 501 00:28:38,560 --> 00:28:42,360 Speaker 1: peaked relative to global markets and have been under performing. 502 00:28:42,720 --> 00:28:46,840 Speaker 1: It's extremely hard to find an e M bowl anywhere 503 00:28:46,920 --> 00:28:49,680 Speaker 1: right now. They'll always say, you look at specific countries 504 00:28:49,840 --> 00:28:52,520 Speaker 1: or you know, come up with some other thing, they say, 505 00:28:52,760 --> 00:28:56,320 Speaker 1: and so should this be I don't know, give us 506 00:28:56,320 --> 00:28:58,880 Speaker 1: a modicum of comfort. I mean, I'm not looking for comfort, 507 00:28:59,160 --> 00:29:03,240 Speaker 1: but is it one that there is not a particularly 508 00:29:03,280 --> 00:29:06,040 Speaker 1: high consensus that these countries are in great It's clearly 509 00:29:06,040 --> 00:29:08,440 Speaker 1: not a perfect parallel. But I would say that what 510 00:29:08,640 --> 00:29:11,720 Speaker 1: we've had in in terms of the underperformance, but we 511 00:29:11,760 --> 00:29:17,120 Speaker 1: had the US, UH and Europe, the US with severe problems, 512 00:29:17,200 --> 00:29:20,200 Speaker 1: and then the the the rest of the world. I sorry, 513 00:29:20,200 --> 00:29:23,440 Speaker 1: Europe in particular with its crisis that it came out 514 00:29:23,440 --> 00:29:27,719 Speaker 1: of at least largely came out of UM. So we 515 00:29:27,760 --> 00:29:31,720 Speaker 1: had very rapid recoveries from those things UH and and 516 00:29:31,720 --> 00:29:34,640 Speaker 1: and the long term problems I mentioned start to become 517 00:29:34,680 --> 00:29:36,920 Speaker 1: more and more evident and weigh in the profit growth 518 00:29:36,920 --> 00:29:39,160 Speaker 1: of those countries. So but I would maintain that there 519 00:29:39,240 --> 00:29:41,920 Speaker 1: is still I mean, even even now there are plenty 520 00:29:41,920 --> 00:29:43,840 Speaker 1: of people saying this is the time to rotate it 521 00:29:43,880 --> 00:29:47,320 Speaker 1: to the MS just because they've underperformed. Uh. But the 522 00:29:47,640 --> 00:29:49,680 Speaker 1: main place where the excesses, I would say, is the 523 00:29:49,800 --> 00:29:52,479 Speaker 1: dead side, the number, the amount of death that's you know, 524 00:29:52,520 --> 00:29:56,120 Speaker 1: the spreads are are still historically quite narrow as if 525 00:29:56,160 --> 00:29:58,160 Speaker 1: there wasn't that much risk there. And yet there's another 526 00:29:58,560 --> 00:30:02,320 Speaker 1: private sector hard money that mostly concerns you you mean 527 00:30:02,520 --> 00:30:07,360 Speaker 1: the uh, the m private sector, private sector, and there's 528 00:30:07,440 --> 00:30:10,240 Speaker 1: but there's also there's also a government. These governments because 529 00:30:10,280 --> 00:30:11,720 Speaker 1: of the condition a lot of them being able to 530 00:30:11,800 --> 00:30:14,520 Speaker 1: run deficit spending that they wouldn't be able to otherwise 531 00:30:14,560 --> 00:30:17,280 Speaker 1: without worry about capital flight or having to raise interest 532 00:30:17,360 --> 00:30:20,160 Speaker 1: rates or anything else. But also it's I want to emphasize. Look, 533 00:30:20,200 --> 00:30:22,760 Speaker 1: we look at Europe. Their their debt ratio did not 534 00:30:22,920 --> 00:30:25,080 Speaker 1: come down the way ours did in the last and 535 00:30:25,400 --> 00:30:27,480 Speaker 1: it's higher than ours. So we look at Canada, they 536 00:30:27,480 --> 00:30:32,520 Speaker 1: have the highest debt income ratio in the in the 537 00:30:32,800 --> 00:30:36,600 Speaker 1: in the world. China very close, Australia close, South Korea 538 00:30:36,640 --> 00:30:38,080 Speaker 1: is close, you know, so we have a lot of 539 00:30:38,120 --> 00:30:40,560 Speaker 1: countries that have excessive balance sheets in one way or 540 00:30:40,560 --> 00:30:43,640 Speaker 1: the other. It's it's more mixed. It's not like in 541 00:30:43,680 --> 00:30:46,040 Speaker 1: some sense the housing bubble in the US was like 542 00:30:46,080 --> 00:30:48,240 Speaker 1: it was a kind of a pinnacle. But but there 543 00:30:48,240 --> 00:30:50,960 Speaker 1: are plenty of problems and and the thing is the 544 00:30:51,000 --> 00:30:55,240 Speaker 1: United States has the institutions to u contain the damage, 545 00:30:55,280 --> 00:30:59,120 Speaker 1: to stabilize this banking system when we have a crisis. 546 00:30:59,560 --> 00:31:03,920 Speaker 1: Actually our currency strengthens, that's not it'll be a very 547 00:31:03,920 --> 00:31:06,360 Speaker 1: different situation I think for merging markets. And that's that's 548 00:31:06,400 --> 00:31:11,160 Speaker 1: why that's concerned. I have a step back question. I 549 00:31:11,200 --> 00:31:14,440 Speaker 1: guess our Our previous guest on odd lots was Richard 550 00:31:14,520 --> 00:31:18,320 Speaker 1: Coup from the Nomura Research Institute, and he's famous for 551 00:31:18,440 --> 00:31:21,200 Speaker 1: coming up with the balance sheet recession idea, which is 552 00:31:21,240 --> 00:31:25,880 Speaker 1: that basically, after you know, we get big recessions, it's very, 553 00:31:25,960 --> 00:31:28,880 Speaker 1: very hard to get the private sector to lend again. 554 00:31:29,040 --> 00:31:31,520 Speaker 1: People are sort of scarred by the experience, and even 555 00:31:31,560 --> 00:31:35,160 Speaker 1: if interest rates go lower, they're not necessarily willing to 556 00:31:35,240 --> 00:31:38,520 Speaker 1: go out and borrow. But you're sort of saying the 557 00:31:38,520 --> 00:31:41,880 Speaker 1: opposite here. You're sort of saying that the reflexive reaction 558 00:31:42,240 --> 00:31:46,000 Speaker 1: um is to continuously go out and expand your balance sheet. 559 00:31:46,440 --> 00:31:48,560 Speaker 1: Why why do you think how do you account for 560 00:31:48,600 --> 00:31:52,240 Speaker 1: that difference? Well, first of all, let's talk about who 561 00:31:52,360 --> 00:31:56,360 Speaker 1: who's expanding their balance sheets. We're not seeing businesses go 562 00:31:56,400 --> 00:31:59,800 Speaker 1: out to invest to expand capacity. The economy is not 563 00:32:00,040 --> 00:32:03,400 Speaker 1: really the private sector is not investing in the profit 564 00:32:03,440 --> 00:32:07,080 Speaker 1: sources are staying depressed. Where the money is being borrowed 565 00:32:08,240 --> 00:32:10,760 Speaker 1: is in the financial sector, in people are trying to 566 00:32:10,840 --> 00:32:13,920 Speaker 1: leverage positions to try to get more returns. I mean, 567 00:32:13,960 --> 00:32:16,480 Speaker 1: there's always you know, there's borrowing in parts of the 568 00:32:16,520 --> 00:32:19,680 Speaker 1: world going on their emerging markets. There their corporations who 569 00:32:19,680 --> 00:32:21,959 Speaker 1: are in trouble who would be cutting back, but they 570 00:32:22,040 --> 00:32:24,880 Speaker 1: keep borrowing to keep themselves afloat. Let me also just 571 00:32:24,880 --> 00:32:27,480 Speaker 1: say generally, because you know Richard who really did a 572 00:32:27,520 --> 00:32:31,600 Speaker 1: brilliant thing. I mean, coming from a conventional background, uh, 573 00:32:31,640 --> 00:32:36,040 Speaker 1: he looked at the situation and in Japan and said, 574 00:32:36,080 --> 00:32:37,920 Speaker 1: wait a minute, there's something going on here that that 575 00:32:38,080 --> 00:32:41,560 Speaker 1: is not being accounted for. And he very properly identified 576 00:32:41,840 --> 00:32:46,240 Speaker 1: the bubble in as having created over extended balance sheets 577 00:32:46,280 --> 00:32:48,960 Speaker 1: and the process of bringing those balance sheets down was 578 00:32:49,000 --> 00:32:51,280 Speaker 1: having all kinds of economic as well as just pure 579 00:32:51,320 --> 00:32:55,480 Speaker 1: financial market of effects and a lot of his policy prescriptions. 580 00:32:55,520 --> 00:32:59,560 Speaker 1: I I agree with that perfectly but large extent, but 581 00:32:59,840 --> 00:33:01,840 Speaker 1: some point of thing that the balance sheets play a 582 00:33:01,920 --> 00:33:04,880 Speaker 1: role in their expansion to contraction, plays a role in 583 00:33:04,920 --> 00:33:08,120 Speaker 1: the economy throughout history, and that the balance sheets have 584 00:33:08,160 --> 00:33:10,680 Speaker 1: had there's a long story here. This growth and balance 585 00:33:10,720 --> 00:33:14,560 Speaker 1: sheets relative to income has made it possible, not only 586 00:33:14,600 --> 00:33:17,760 Speaker 1: made it possible we get the point where we have 587 00:33:17,840 --> 00:33:20,360 Speaker 1: these bubbles, but it started to generate its own pressures 588 00:33:20,920 --> 00:33:23,160 Speaker 1: once you get to certain points of great, bigger and 589 00:33:23,200 --> 00:33:27,160 Speaker 1: bigger bubbles each time until the whole thing breaks down. So, 590 00:33:28,240 --> 00:33:32,320 Speaker 1: whether it's Richard Coop, many of the sort of MMT 591 00:33:32,920 --> 00:33:39,640 Speaker 1: post Caynesians, Leftish economics types, and increasingly mainstream New Canesian 592 00:33:39,720 --> 00:33:45,040 Speaker 1: types like Larry Summers, there is this growing consensus that well, 593 00:33:45,160 --> 00:33:48,000 Speaker 1: to break this cycle that you described of lower and 594 00:33:48,120 --> 00:33:52,320 Speaker 1: lower rates and more and more bloated private sector balance 595 00:33:52,360 --> 00:33:56,000 Speaker 1: sheets and mediocre growth, what we really need is for 596 00:33:56,080 --> 00:33:59,479 Speaker 1: all the developed market UH governments to step up and 597 00:33:59,520 --> 00:34:03,880 Speaker 1: do true fiscal stimulus, really unleashed fiscal firepower. And of 598 00:34:03,880 --> 00:34:08,040 Speaker 1: course we know that it's politically difficult because of politics, 599 00:34:08,080 --> 00:34:11,319 Speaker 1: but in theory that's what could break this cycle? Is that? 600 00:34:11,920 --> 00:34:14,280 Speaker 1: Do you agree with that? Is that? Ultimately what breaks 601 00:34:14,440 --> 00:34:18,000 Speaker 1: what could break this cycle of larger and larger, riskier 602 00:34:18,040 --> 00:34:20,920 Speaker 1: balance She's is if essentially more and more of the 603 00:34:20,960 --> 00:34:23,000 Speaker 1: debt we're not at the household sector, not at the 604 00:34:23,000 --> 00:34:28,000 Speaker 1: corporate sector, not in financial leverage, but in direct government spending, 605 00:34:28,080 --> 00:34:31,200 Speaker 1: which is largely risk free, so that the debt swapped 606 00:34:31,239 --> 00:34:34,800 Speaker 1: from risky private debt to largely risk free government sector 607 00:34:34,880 --> 00:34:38,839 Speaker 1: debt um which is basically a safe asset. And if 608 00:34:38,880 --> 00:34:42,920 Speaker 1: that were done in a concerted, large scale, sustained manner, 609 00:34:43,320 --> 00:34:46,440 Speaker 1: would that break this sort of the bubble or nothing cycle. 610 00:34:47,440 --> 00:34:50,319 Speaker 1: Here's the tricky part about it. The tricky part is 611 00:34:50,440 --> 00:34:52,879 Speaker 1: if if, if you're the vision is that we get 612 00:34:52,880 --> 00:34:55,880 Speaker 1: the whole global economy to be growing in a lovely 613 00:34:55,920 --> 00:34:59,960 Speaker 1: manner supported by fiscal policy, and somehow these balancy successes 614 00:35:00,000 --> 00:35:03,080 Speaker 1: will just fade away. No, they won't. You don't. As 615 00:35:03,120 --> 00:35:05,400 Speaker 1: long as the economy as proceress, people are going to 616 00:35:05,480 --> 00:35:07,600 Speaker 1: try to figure out how do we get higher returns. 617 00:35:07,880 --> 00:35:09,399 Speaker 1: And if they're not there now, one of the things 618 00:35:09,400 --> 00:35:11,960 Speaker 1: that happens if you raise interest rates, you tend to 619 00:35:11,960 --> 00:35:14,480 Speaker 1: bring the asse advice down, but the negative wealth effects 620 00:35:14,480 --> 00:35:17,840 Speaker 1: will be very powerful. The reality is governments are reactive. 621 00:35:17,920 --> 00:35:21,319 Speaker 1: They're not you know, they're not gonna come up with 622 00:35:21,360 --> 00:35:24,560 Speaker 1: a you know, a great, great move ahead of time. 623 00:35:24,800 --> 00:35:27,360 Speaker 1: And I think what what we're likely to see is 624 00:35:27,400 --> 00:35:30,920 Speaker 1: in the next recession we will see reliance on fiscal 625 00:35:31,040 --> 00:35:35,279 Speaker 1: stimulus too, and hopefully associated with with long term investment 626 00:35:35,360 --> 00:35:39,280 Speaker 1: and doing things that government has been neglecting in many places. Anyway, 627 00:35:39,760 --> 00:35:42,120 Speaker 1: we have a whole lot of technology trend changes to make. 628 00:35:42,160 --> 00:35:44,960 Speaker 1: We have to adapt to changes in how we use 629 00:35:45,000 --> 00:35:48,439 Speaker 1: and create energy. So there's a lot of positive things 630 00:35:48,440 --> 00:35:50,520 Speaker 1: that can lead to to a boom down the down 631 00:35:50,520 --> 00:35:54,000 Speaker 1: the road. But I think you cannot escape the fact 632 00:35:54,040 --> 00:35:57,000 Speaker 1: that the correction it's gonna it's not gonna be easy. 633 00:35:57,040 --> 00:35:59,040 Speaker 1: People don't like to have their wealth go down. And 634 00:35:59,080 --> 00:36:02,839 Speaker 1: in some sense, you know, we have created a fantasy 635 00:36:02,880 --> 00:36:07,520 Speaker 1: with with with a great market enthusiasm and extremely low 636 00:36:07,560 --> 00:36:12,440 Speaker 1: interest rates that somehow assets have an enormous value relative 637 00:36:12,440 --> 00:36:14,879 Speaker 1: to the income they produce, which is just not really 638 00:36:14,880 --> 00:36:18,600 Speaker 1: going to be sustainable. No, look, we're not This is 639 00:36:18,600 --> 00:36:19,719 Speaker 1: not the end of the world. But I you know, 640 00:36:19,800 --> 00:36:22,280 Speaker 1: I think we're gonna go through some some bumpy cycles, 641 00:36:22,320 --> 00:36:23,959 Speaker 1: and and there will be I think I am worried 642 00:36:23,960 --> 00:36:26,200 Speaker 1: about certain parts of the world that do not have 643 00:36:26,239 --> 00:36:30,279 Speaker 1: the ability to to stabilize themselves. But but I think 644 00:36:30,320 --> 00:36:34,040 Speaker 1: for the for the US, um hopefully we won't go 645 00:36:34,120 --> 00:36:36,719 Speaker 1: through a recessions bad as the last one, but they're 646 00:36:36,760 --> 00:36:40,760 Speaker 1: gonna be some bumps. So just just to be clear, though, 647 00:36:41,360 --> 00:36:45,360 Speaker 1: can we ever go back to a ninety and fifties 648 00:36:45,400 --> 00:36:50,200 Speaker 1: world in which the economy cycles are not driven by 649 00:36:50,400 --> 00:36:53,880 Speaker 1: asset prices but are driven by income and production. I 650 00:36:53,960 --> 00:36:57,480 Speaker 1: think I think we we are are, in all probability 651 00:36:57,480 --> 00:36:59,800 Speaker 1: headed exactly to that, but I think we have to 652 00:36:59,840 --> 00:37:03,439 Speaker 1: go through the corrector process. That corrected process means that 653 00:37:03,640 --> 00:37:05,640 Speaker 1: we need to go through up here where asset prices 654 00:37:05,680 --> 00:37:08,839 Speaker 1: are going to come down. Home prices have to come down. 655 00:37:09,000 --> 00:37:12,439 Speaker 1: You know, if you look at Robert Schiller's UH chart 656 00:37:12,520 --> 00:37:15,880 Speaker 1: on on the very long term UH real home prices, 657 00:37:15,920 --> 00:37:18,440 Speaker 1: you see that we had a lot of stability for 658 00:37:18,440 --> 00:37:21,440 Speaker 1: for throughout history. This enormous spike in the last cycle, 659 00:37:21,840 --> 00:37:24,400 Speaker 1: we came down just back to the old highs, and 660 00:37:24,440 --> 00:37:26,279 Speaker 1: we went up, not as big as spike, but they're 661 00:37:26,280 --> 00:37:28,960 Speaker 1: still just too high. We need to adjust that equity 662 00:37:28,960 --> 00:37:31,880 Speaker 1: evaluations have to be adjusted. That's gonna be difficult. But 663 00:37:31,920 --> 00:37:33,640 Speaker 1: by the time we come out of this and this 664 00:37:33,760 --> 00:37:36,560 Speaker 1: long period of week investment, the need to reinvest, the 665 00:37:36,600 --> 00:37:39,600 Speaker 1: new technologies, the pressures, I think we're we're gonna, We're 666 00:37:39,600 --> 00:37:42,280 Speaker 1: gonna come out of it, you know, but we probably 667 00:37:42,280 --> 00:37:44,040 Speaker 1: have to be a little bit like the phoenix. We 668 00:37:44,040 --> 00:37:46,279 Speaker 1: may have to catch fire a little bit before we 669 00:37:46,280 --> 00:37:48,720 Speaker 1: we we we re birth. But not that's that's probably 670 00:37:48,719 --> 00:37:51,120 Speaker 1: the right analogy. That's too extreme. I think in Japan, 671 00:37:51,160 --> 00:37:53,439 Speaker 1: although it took them longer and they didn't do everything right, 672 00:37:53,840 --> 00:37:56,359 Speaker 1: they did avoid a great depression, and I think they've 673 00:37:56,360 --> 00:37:59,080 Speaker 1: they've healed a lot of their problems. What's your one 674 00:37:59,120 --> 00:38:04,040 Speaker 1: recommendation to either politicians or policymakers about how to handle 675 00:38:04,160 --> 00:38:07,920 Speaker 1: the big balance sheet issue and actually manage us into 676 00:38:07,960 --> 00:38:10,400 Speaker 1: a place that is more similar to, you know, the 677 00:38:10,480 --> 00:38:14,440 Speaker 1: nineteen fifties style of recession. Well, number one, there's no easy, 678 00:38:14,520 --> 00:38:17,719 Speaker 1: clear roadmap, but here are four very quick rules. Number One, 679 00:38:17,760 --> 00:38:20,400 Speaker 1: when you need to stimulate the economy, rely more on 680 00:38:20,440 --> 00:38:24,160 Speaker 1: fiscal policy, hopefully for public investment. Number two, don't let 681 00:38:24,200 --> 00:38:26,319 Speaker 1: the banking system break down. I think most of them 682 00:38:26,320 --> 00:38:29,040 Speaker 1: get that, but but keep it functions. You can, you know, 683 00:38:29,400 --> 00:38:32,799 Speaker 1: make the manage, the stockholders and the manager. You can 684 00:38:32,800 --> 00:38:36,760 Speaker 1: punish them, but keep the banking system functioning. Number three 685 00:38:37,080 --> 00:38:40,640 Speaker 1: is encourage orderly working out of problems when they're there. 686 00:38:41,440 --> 00:38:45,160 Speaker 1: Resolution Trust Corporation for the same as loans a great example. 687 00:38:45,200 --> 00:38:47,440 Speaker 1: And the final one is try to avoid and this 688 00:38:47,520 --> 00:38:50,800 Speaker 1: is the real tricky when doing things like extreme monetary 689 00:38:50,840 --> 00:38:54,839 Speaker 1: policies that that might lead to reinflating asset bubbles at 690 00:38:54,880 --> 00:38:56,560 Speaker 1: a time you don't really want to be doing that. 691 00:38:57,400 --> 00:39:01,239 Speaker 1: David Levy, this was a fascinating in conversation, and even 692 00:39:01,239 --> 00:39:03,319 Speaker 1: though it's kind of depressing because you would have hoped 693 00:39:03,360 --> 00:39:06,040 Speaker 1: that maybe two thousand two nine would have been that 694 00:39:06,160 --> 00:39:09,520 Speaker 1: Phoenix moment, I am. I do appreciate that you left 695 00:39:09,600 --> 00:39:11,400 Speaker 1: us on a little bit of hope that we're not 696 00:39:11,440 --> 00:39:13,480 Speaker 1: all going to die. I think of the next generation, 697 00:39:13,560 --> 00:39:16,160 Speaker 1: we're gonna see wonderful revival. I could go a whole 698 00:39:16,280 --> 00:39:18,200 Speaker 1: laundry list of reasons why I think the US has 699 00:39:18,239 --> 00:39:22,359 Speaker 1: got a very bright future. Uh, manufacturing coming back, all 700 00:39:22,440 --> 00:39:25,640 Speaker 1: sorts of things having nothing, a trend that's already begun 701 00:39:25,719 --> 00:39:29,040 Speaker 1: actually long ago. So it's not it's not all doom 702 00:39:29,080 --> 00:39:31,839 Speaker 1: in globe but but but but the time for being 703 00:39:31,840 --> 00:39:34,440 Speaker 1: a little cautious. Definitely. All right, Well, I really appreciate 704 00:39:34,440 --> 00:39:37,920 Speaker 1: you joining on. I highly recommend everyone read your report, 705 00:39:38,320 --> 00:39:39,959 Speaker 1: or if you don't read it, just check out the charts. 706 00:39:40,000 --> 00:39:59,759 Speaker 1: They're great. Thank you very much, Thank you, Joe. Thanks David, Joe. 707 00:39:59,760 --> 00:40:03,719 Speaker 1: I've on that conversation really really fascinating, not least because 708 00:40:04,440 --> 00:40:07,200 Speaker 1: I personally have been thinking a lot about the financialization 709 00:40:07,320 --> 00:40:09,799 Speaker 1: of the economy, though I think about it mostly in 710 00:40:09,840 --> 00:40:12,799 Speaker 1: relation to corporates and UM I sort of alluded to 711 00:40:12,800 --> 00:40:14,640 Speaker 1: it in the conversation, but M and A and buy 712 00:40:14,680 --> 00:40:18,839 Speaker 1: backs and how that's interacted with asset valuations. But I 713 00:40:18,920 --> 00:40:25,320 Speaker 1: really liked David's separate separation of corporate versus household versus 714 00:40:25,360 --> 00:40:28,239 Speaker 1: government leverage, Like we tend to think of leverage as 715 00:40:28,280 --> 00:40:32,000 Speaker 1: this one big, cohesive concept, but it actually has different 716 00:40:32,040 --> 00:40:35,880 Speaker 1: effects on the economy. Of course. Yeah, I think financial 717 00:40:35,880 --> 00:40:38,879 Speaker 1: media can often get extremely lazy about using the word debt, 718 00:40:38,960 --> 00:40:40,560 Speaker 1: and it's like, oh, there's a lot of debt out 719 00:40:40,600 --> 00:40:45,480 Speaker 1: there without we are the financial media, No, not using 720 00:40:46,200 --> 00:40:49,400 Speaker 1: other people, but other people. And it is really important 721 00:40:49,440 --> 00:40:54,400 Speaker 1: to distinguish between different kinds of debt, what's risky, what's productive, 722 00:40:54,520 --> 00:40:57,000 Speaker 1: what is going to be a burden on the economy. 723 00:40:57,360 --> 00:40:59,560 Speaker 1: And I just want to say, like I really, I 724 00:40:59,560 --> 00:41:02,120 Speaker 1: don't think we intended it, but some of these last 725 00:41:02,160 --> 00:41:06,080 Speaker 1: few episodes, I'm really into this balance sheet theme because 726 00:41:06,120 --> 00:41:09,840 Speaker 1: we're of course talking to Michael Pettis and the structure 727 00:41:10,040 --> 00:41:14,080 Speaker 1: of Chinese balance sheets, Richard Coude talking about the balance 728 00:41:14,120 --> 00:41:16,960 Speaker 1: sheet recession where he sees it today, and then obviously 729 00:41:17,000 --> 00:41:22,320 Speaker 1: getting more granular with David about different aspects of private 730 00:41:22,320 --> 00:41:25,840 Speaker 1: sector balance sheets and this sort of ever inflating bubble. 731 00:41:26,480 --> 00:41:29,520 Speaker 1: This feels like a really meadia topic and one that 732 00:41:29,680 --> 00:41:33,640 Speaker 1: the mainstream UH is only now just starting to really 733 00:41:33,920 --> 00:41:36,799 Speaker 1: come around and appreciate it. And like I said, you know, 734 00:41:36,840 --> 00:41:39,440 Speaker 1: it's not totally outside the main stream. I think Jerome 735 00:41:39,480 --> 00:41:41,520 Speaker 1: Powell hit on a couple of these things, and Jackson 736 00:41:41,520 --> 00:41:43,799 Speaker 1: the whole a couple of years ago. But I'm I'm 737 00:41:43,880 --> 00:41:46,160 Speaker 1: bullish on this is the topic. Well, a lot of 738 00:41:46,200 --> 00:41:49,560 Speaker 1: these ideas sort of exist in the public sphere. I mean, 739 00:41:49,640 --> 00:41:52,359 Speaker 1: David mentioned the I m F Report talking about you know, 740 00:41:52,600 --> 00:41:55,879 Speaker 1: risky practices UH spurred on by low interest rates. They're 741 00:41:55,880 --> 00:41:58,960 Speaker 1: all sort of out there. But what's nice about David's 742 00:41:59,000 --> 00:42:01,000 Speaker 1: paper and his these this is that it all kind 743 00:42:01,040 --> 00:42:04,359 Speaker 1: of pulls it together in a really tangible way. And 744 00:42:04,400 --> 00:42:08,440 Speaker 1: we've actually inadvertently created a balance sheet series, which is 745 00:42:08,520 --> 00:42:11,800 Speaker 1: quite cool. We have we have three three's a trend, 746 00:42:11,920 --> 00:42:15,760 Speaker 1: yea trend. Alright, on that note, Alright, this has been 747 00:42:15,800 --> 00:42:19,400 Speaker 1: another episode of the Odd Thoughts podcast. I'm Tracy Alloway. 748 00:42:19,480 --> 00:42:22,360 Speaker 1: You can follow me on Twitter at Tracy Alloway, and 749 00:42:22,400 --> 00:42:25,239 Speaker 1: I'm Joe Wisenthal. You could follow me on Twitter at 750 00:42:25,239 --> 00:42:29,080 Speaker 1: the Stalwart. And you should definitely check out David's paper, 751 00:42:29,680 --> 00:42:33,360 Speaker 1: The Bubble or Nothing, how private sector swelling balance sheets 752 00:42:33,360 --> 00:42:39,120 Speaker 1: compelling increasingly risky financial behavior, really fascinating stuff. And be 753 00:42:39,239 --> 00:42:42,799 Speaker 1: sure to follow our producer on Twitter, Laura Carlson at 754 00:42:42,880 --> 00:42:47,279 Speaker 1: Laura M. Carlson and all the Bloomberg podcasts under the 755 00:42:47,360 --> 00:42:50,280 Speaker 1: handle at podcasts. Thanks for listening,