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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Joe Wisenthal.

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Speaker 2: And I'm Tracy Alloway.

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Speaker 1: Tracy, we've been on the road a lot late.

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Speaker 2: I know it's been NonStop trips.

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Speaker 3: Let's see, we did Jackson Hole and then we went

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Speaker 3: to California at Huntington Beach and now we're in Austin, Texas,

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Speaker 3: your hometown.

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Speaker 1: Have you enjoyed Austin so far?

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Speaker 2: I love it?

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Speaker 3: Okay, I mean, I'm not gonna lie. Large parts of it.

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Speaker 3: Do you remind me of Dallas? But controversial opinion, but

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Speaker 3: it has its own thing, going to like amazing bars, restaurants, shops.

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Speaker 3: We went Cowboy boot shopping at Alan Boots. We've had

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Speaker 3: some amazing tex mex really excellent barbecue at Terry Black's.

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Speaker 3: It's been good.

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Speaker 1: Yeah, we were in Jackson Hole and we did a

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Speaker 1: lot of episodes in Jackson Hall, but a lot of

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Speaker 1: them were sort of like these sort of like longer

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Speaker 1: running like academic questions that a lot of the episodes

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Speaker 1: that we did, we didn't really do too much there

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Speaker 1: on Like okay, but like what's happening right now in

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Speaker 1: the economy with like monetary policy, the impact of the

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Speaker 1: FED rate hikes things like that, even though that's sort

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Speaker 1: of on a lot of people's much.

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Speaker 2: Yeah.

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Speaker 3: Funnily enough, at a macroeconomic conference, the real economy wasn't

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Speaker 3: the first topic of conversation. Although that's a little bit

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Speaker 3: unfair because they did talk about supply chains and things

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Speaker 3: like that.

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Speaker 2: But you're right.

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Speaker 3: We haven't done a current state of the Economy episode

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Speaker 3: for a while, although we've touched on it in various ways.

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Speaker 3: One of the more recent ones was when we spoke

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Speaker 3: to Wayne Dahl from oak Tree about the credit market,

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Speaker 3: and a big topic of conversation in there was why

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Speaker 3: haven't we seen more of an impact from this historic

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Speaker 3: pace of rate hikes on the real economy.

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Speaker 1: Yeah, it feels like this is still this looming question

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Speaker 1: and until until we have a sort of better idea

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Speaker 1: of what's going on here, I think there's like a

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Speaker 1: sense of unease. And even add Jackson Hole at Powell's speech,

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Speaker 1: even with the improvement in inflation from last year, there

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Speaker 1: is this still underlying sense of unease, which is partly

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Speaker 1: driven by the fact that we've seen improvement, but it's

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Speaker 1: like we can't quite explain why because drawing that line

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Speaker 1: between the rate hikes to the improvement and h inflation

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Speaker 1: is hard to draw. You would expect that, okay, if

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Speaker 1: unemployment had been rising significantly. It's like, okay, well we

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Speaker 1: could tell the traditional monetary policy story Ship's curve is alive,

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Speaker 1: and well, yes, we can't quite tell that story. And

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Speaker 1: then maybe it has something to do with the terming

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Speaker 1: out of the debt that we talked about, Wayne Dahl.

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Speaker 1: And then if that's the case, well what does that

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Speaker 1: mean then, like are we still going to feel the impact?

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Speaker 1: So it's like there's improvement, but it's like there's sense

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Speaker 1: of unease underneath.

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Speaker 3: Absolutely, But the most simple explanation for what's been going

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Speaker 3: on is, yes, we had a massive terming out of

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Speaker 3: debt on the corporate side and arguably on some individual

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Speaker 3: as well, homeowners for instance, and that's provided a cushion,

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Speaker 3: you know, between twenty twenty one, twenty twenty twenty two

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Speaker 3: and where we are now. But it can only last

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Speaker 3: for so long, and you're sort of getting back to

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Speaker 3: the traditional long and variable lags argument, like, yeah, maybe

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Speaker 3: this is just the longest lag that we've seen in many,

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Speaker 3: many years.

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Speaker 1: So we did actually have this conversation at Jackson Hole.

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Speaker 1: We just didn't get it on the record.

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Speaker 2: We just oh, yeah, you're right.

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Speaker 1: We did actually talk about all this at Jacksonville. We

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Speaker 1: just never recorded an episode. But the person who we

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Speaker 1: spoke to in Jackson Hole in Wyoming last month happens

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Speaker 1: to be based here in Austin, Texas. So we are like,

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Speaker 1: in a way, we're going to like pick up the

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Speaker 1: jackson Hole series with someone who happens to be here

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Speaker 1: in Texas.

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Speaker 3: I like how we've gone to Austin to record an

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Speaker 3: episode with someone we talked to in Wyoming.

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Speaker 1: So I'm very excited we're going to explore these topics

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Speaker 1: and more for them. I'm very excited about our guests.

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Speaker 1: Second time, I believe her appearance on Odd Lads, We're

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Speaker 1: going to be speaking with Julia Coronado. She is the founder, CEO,

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Speaker 1: and president of Macro Policy Perspectives. She is also a

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Speaker 1: clinical assistant professor at the University of Texas on business

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Speaker 1: and economics. So, Julia, thank you so much for joining us.

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Speaker 4: It is my absolute pleasure to be here with you.

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Speaker 1: Really simple question to actually to start.

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Speaker 3: Wait, Can I just say Julia is the first All

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Speaker 3: Thoughts guest who has ever brought us breakfast tacos.

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Speaker 1: Hey, which, now, if you're listening and you want to

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Speaker 1: come on odd lots, this is now the expectation.

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Speaker 2: Yeah, bring food, bring breakfast tacos.

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Speaker 1: But Julia, so great to show you actually did real quick.

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Speaker 1: What do you do at Macro Policy Perspectives?

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Speaker 4: So Macro Policy Perspectives is a macro forecasting firm. So

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Speaker 4: we work mostly with money managers, people that are managing portfolios,

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Speaker 4: and we provide them a perspective on the US economy.

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Speaker 4: We're US focused, but globally oriented and very markets oriented,

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Speaker 4: so we work with money managers to help them understand

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Speaker 4: this crazy world.

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Speaker 1: So speaking of crazy world, and we'll get to all

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Speaker 1: the dead stuff. Tercy and I the other night were

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Speaker 1: we actually spoke to a group of students here at

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Speaker 1: the Business school at Macombs and weird chatting about various

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Speaker 1: things and what of the students said something interesting. They're like, oh,

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Speaker 1: you know, they're talking about CMBs and they're like, oh,

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Speaker 1: you know, it's hard to know what's in some of

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Speaker 1: the they're very smart case they said, hard to know

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Speaker 1: what are in some of these assets that people are buying,

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Speaker 1: and what if you're buying stuff that's like Austin, downtown

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Speaker 1: Austin real estate and there's huge vacancies. Isn't that true?

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Speaker 1: It seems like this town is booming, is actually underneath

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Speaker 1: the facade here in Austin like some problems brewing.

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Speaker 4: It depends. There's a debate. The commercial real estate crowd

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Speaker 4: is inherently optimistic glass half hole type of people. I

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Speaker 4: think you have to be to take that kind of risk.

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Speaker 4: And they've been printing money for a decade, right Austin

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Speaker 4: has been booming. All of the developments exceed expectations and

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Speaker 4: so it's been a great run. But yes, there is

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Speaker 4: an overhang. So you see the cranes all around you,

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Speaker 4: but a lot of these buildings are empty. So we

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Speaker 4: have very high vacancy rates, very high rates of sub leasing,

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Speaker 4: which is another indication that you know, Google or Meta

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Speaker 4: builds a building, but then they don't need it and

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Speaker 4: so they sublease a lot of the space. And depending

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Speaker 4: on how you look at it, that the estimates of

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Speaker 4: the pipeline under construction as a percent of the existing

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Speaker 4: inventory is by far the highest in the nation and

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Speaker 4: at record highs by many measures. So we've got a

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Speaker 4: lot of supply both in offices and in multifamily that

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Speaker 4: are coming to market in the next twelve to eighteen

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Speaker 4: months and rates are high, vacancies are high. Probably the

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Speaker 4: assumptions that went into these projects at the beginning are

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Speaker 4: not going to materialize. So the question is does that

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Speaker 4: mean just reduced profits or does that mean outright defaults,

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Speaker 4: delinquencies and some distress.

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Speaker 3: Right, this was going to be my next question, which

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Speaker 3: is how does distress in commercial real estate actually feed

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Speaker 3: through into the wider economy because you see different types

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Speaker 3: of arguments. You know, you see a more optimistic scenario,

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Speaker 3: which is, well, yes there are pockets of stress, but

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Speaker 3: not everything is dire at the moment. Yes, downtown offices

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Speaker 3: are probably the most affected, but you know, maybe a

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Speaker 3: multi use building in the suburbs with doctors' offices and

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Speaker 3: little shops like probably not as huge a deal. And

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Speaker 3: then the dire scenario that you see every once in

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Speaker 3: a while is that we are going to get a

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Speaker 3: bunch of defaults eventually and that will impact the banks

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Speaker 3: presumably and they're going to have to cut back on lending.

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Speaker 3: So how are you viewing like the actual impact of

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Speaker 3: cre distress.

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Speaker 4: That is extraordinarily difficult to get a clear idea of

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Speaker 4: or put good parameters around because CRE is inherently idiosyncratic.

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Speaker 4: Every project is different. The financing of each of these

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Speaker 4: projects come in layers and are you know, sourced differently,

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Speaker 4: so it's really hard to get kind of a macro

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Speaker 4: framing of how much potential distress. You know, I would

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Speaker 4: categorize the banking channel is one that could go nonlinear

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Speaker 4: in the sense that you know, it could we could

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Speaker 4: see more bank failures, or it could be just a

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Speaker 4: macroeconomic channel of a headwind. Right right now, the unemployment

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Speaker 4: rate in Texas is underperforming. It's risen more than the

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Speaker 4: national average. That's unusual for Texas. Some of that is

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Speaker 4: the tech layoffs, which are part of what's behind some

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Speaker 4: of the vacancies. So as these projects roll off, you're

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Speaker 4: going to see less jobs. You know, people in the

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Speaker 4: real estate industry and the construction industry are seeing layoffs here.

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Speaker 4: Maybe not everywhere, but certainly here. So you'll just see

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Speaker 4: some regular old garden variety economic headwinds. Even if it's not,

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Speaker 4: you know, some sort of crisis, it's it's yet to

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Speaker 4: be felt. And therein are the legs and monetary policy.

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Speaker 1: So I want to get into obviously this whole legs debate.

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Speaker 1: But before we do, you know, you mentioned the developers

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Speaker 1: of various sorts in Austin have been printing money, and

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Speaker 1: you mentioned all the cranes. We don't really see many

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Speaker 1: cranes in New York because I guess it's a city

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Speaker 1: you forgot how to build for various reasons.

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Speaker 4: Well.

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Speaker 2: Also, even if they're there, they're up pretty high high.

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Speaker 1: Right because the one thing they do build out those

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Speaker 1: like super tall buildings for.

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Speaker 4: The tall skinny cigarette skin.

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Speaker 1: Yeah, but Austin is not alone. I mean, like this

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Speaker 1: is is this a broader sun Belt story? And can

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Speaker 1: you talk about like how much of these developments have

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Speaker 1: a sort of speci Okay, we're like we're building this

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Speaker 1: for Google or we're building this for whatever versus we're

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Speaker 1: building this and it's the sun Belt and someone is

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Speaker 1: eventually going to rent, rent it, but we'll build it

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Speaker 1: without even knowing how.

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Speaker 4: Yeah, there is a lot more build it and they

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Speaker 4: will come activity in the sun Belt that doesn't exist

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Speaker 4: in New York. In New York, before you build a

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Speaker 4: Hudson Yards, you've got several anchor tenants lined up. That

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Speaker 4: is not the case here you can actually a lot

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Speaker 4: of these developments. You know, the Google and the Meta

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Speaker 4: buildings are an exception, but there are a lot of

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Speaker 4: developments around town that are built on spec And is

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Speaker 4: it broader than Austin. Yes, there's a number of cities.

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Speaker 4: Austin is by far got the biggest overhang, but Dallas

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Speaker 4: has a pretty big overhang. Denver, Boise. There are a

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Speaker 4: number of the sun Belt boom towns, the COVID boom

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Speaker 4: towns in the West where you can build where it's

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Speaker 4: relatively more straightforward to get from concept to groundbreaking. And

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Speaker 4: I would say it is a sun Belt slash COVID

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Speaker 4: boomtown phenomenon, mostly in the West and the South and

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Speaker 4: the southeast.

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Speaker 3: Can we get Jackson Holish for a moment, But you know,

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Speaker 3: going back to the way monetary policy is supposed to work.

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Speaker 3: When you hike interest rates, you are supposed to be

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Speaker 3: deterring some speculative frothy activity. So in a sense, how

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Speaker 3: expected is this development for policy makers? I mean, you

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Speaker 3: were in Wyoming, you were talking to loads of people.

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Speaker 3: When you talk to them about what's going on in

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Speaker 3: the Sunbelt, construction maybe slowing in places like Austin, what

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Speaker 3: do they say and what do they think?

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Speaker 4: That's a great framing. There's a range of views obviously,

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Speaker 4: and yes, this is an intended channel to the extent

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Speaker 4: that people took risks that turn out not to be

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Speaker 4: you know, viable, or have a lower rate of return

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Speaker 4: than they anticipate. That's just, you know, that's life in

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Speaker 4: the big city, right. It's just part of taking risk

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Speaker 4: is you realize sometimes some losses as well as some gains.

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Speaker 4: So this is an intended channel of policy. The debate

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Speaker 4: is more around have we seen all that we've seen

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Speaker 4: and therefore we need to do more to slow the economy?

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Speaker 4: Or are a lot of the effects of this still

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Speaker 4: do they still lie ahead of us? And I think

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Speaker 4: that's where there's a range of views. I really respect

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Speaker 4: and like to hear the views of Chris Waller, Governor Waller,

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Speaker 4: but he tends to be of the view that, you know,

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Speaker 4: the lags are shorter because of forward guidance, because the

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Speaker 4: FED is very transparent, that markets react almost instantaneously well

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Speaker 4: before they actually raise rates, and therefore it's all priced in.

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Speaker 4: I think if we think about a credit channel, and

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Speaker 4: it's something we didn't really have last time, right, the

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Speaker 4: credit channel was crisis. We didn't have this elongated kind

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Speaker 4: of tighter credit. How does it feed through into the economy.

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Speaker 4: And because of the refunding that you touched on with

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Speaker 4: your other episode, the lags are probably longer. And this

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Speaker 4: is something that if you talk to European central bankers,

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Speaker 4: they think of the legs as being longer because of

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Speaker 4: fixed rate financing and more of that, and that it's

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Speaker 4: going to take some time for financing to roll over

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Speaker 4: and to feel the effects and employment and activity, and

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Speaker 4: so you have to know that what you've done already

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Speaker 4: is going to keep being a restraining force going forward.

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Speaker 4: So I'm more in the lags are longer camp because

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Speaker 4: of this than the lags are all behind us Camp, Joe.

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Speaker 3: This kind of reminds me of some of the discussion

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Speaker 3: around inflation, just the idea that it's been decades since

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Speaker 3: anyone has really had to deal with higher inflation and

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Speaker 3: we're not sure how.

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Speaker 2: To deal with it.

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Speaker 3: This idea that like, well, maybe it's been decades since

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Speaker 3: we've had a sharp change in monetary policy propagated out

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Speaker 3: into the economy, and we don't really get how it works.

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Speaker 3: And the last example was so extreme in two thousand

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Speaker 3: and eight.

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Speaker 1: I love the way you put that, which is that

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Speaker 1: we think of two thousand and eight as a credit crisis. Yes,

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Speaker 1: but the actual mechanism by which the economy slowed down

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Speaker 1: was not per se the contraction of credit. But oh

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Speaker 1: my god, the world is falling apart, and everyone just

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Speaker 1: slams the breakout once. They slam the breakout hiring, they

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Speaker 1: slam the break on new development, etc. Which is not

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Speaker 1: really what people have in mind, this idea that we're

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Speaker 1: just going to pull back on credit and slow things down. Right,

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Speaker 1: this is the key dynamic we want to talk about.

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Speaker 1: But you know, the realized disinflation that we've seen so far.

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Speaker 1: So at one point, I think we're looking around nine percent.

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Speaker 1: Maybe we're closer like three something percent now, But as

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Speaker 1: I said in the intro, no one really knows why exactly,

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Speaker 1: and unemployment didn't rise like the way many economists would expect.

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Speaker 1: What's your story basically for the last twelve months of

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Speaker 1: fairly nice disinflation.

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Speaker 4: So we are big believers in sector analysis micro to macro. Right,

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Speaker 4: so what's going on looks sector bi sector, what's going

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Speaker 4: on in the dynamics of you know, how concentrated is

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Speaker 4: a sector, how are the profits panning out, how is

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Speaker 4: consumer price sensitivity in that sector? And then building you know,

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Speaker 4: running the top down macro models, but also building that

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Speaker 4: outlook from the bottom up and the bottom up is

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Speaker 4: you know, on the one hand, it led us to

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Speaker 4: be falsely in the transitory camp early, but then we

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Speaker 4: pivoted because the reason it failed was we had more

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Speaker 4: supply chain frictions, We had more waves of COVID, we

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Speaker 4: had Malaysian chip factory shutdowns, we had all kinds.

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Speaker 2: Of Russia, Ukraine, Russia, Ukraine.

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Speaker 4: These frictions and challenges sand in the gears that kept inflation. Meanwhile,

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Speaker 4: also like very strong demand support, very in price and

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Speaker 4: sensitive demand. When we look out at the dynamics so far,

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Speaker 4: me of it. Yes, when you look at cars, for example,

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Speaker 4: which has been such a key part of the inflation

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Speaker 4: and now it's been a key part of the disinflation,

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Speaker 4: it's both a macro story higher rates, lower demand for cars,

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Speaker 4: more price sensitive demand for cars, but also improving supply chains,

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Speaker 4: improving inventories, available chips. So it's both, you know, a

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Speaker 4: supply and a policy story tangled up together, hard to disentangle,

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Speaker 4: but you know, it's definitely a key part of the disinflation.

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Speaker 4: And if you don't think in those terms, if you're

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Speaker 4: just thinking, okay, economic growth equals inflation, which is kind

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Speaker 4: of what Powell did at the press conference, then you're

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Speaker 4: going to be untrusting. You're going to be skeptical, part

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Speaker 4: of which is perfectly healthy, but also maybe too skeptical.

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Speaker 4: They're extreme. They have very pessimistic inflation assumptions for the

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Speaker 4: remainder of the year in their forecast. They you know,

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Speaker 4: definitely seem to be leaning on we maybe need to

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Speaker 4: do more, and we see a lot of good things

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Speaker 4: happening in inflation dynamics. One of the things we look at,

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Speaker 4: for example, is the diffusion how many prices are increasing

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Speaker 4: versus decreasing. That tells you if you look at the seventies,

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Speaker 4: that was one hundred percent, every single price was going

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Speaker 4: up every single month, quarter year, All wages were going up.

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Speaker 4: That's not what's happening now. Some prices are falling, airfares

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Speaker 4: go up and down depending on consumer demand. Capacity There

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Speaker 4: has totally normalized auto sales similarly up and down. So

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Speaker 4: I think we're seeing a much more dynamic healthy pricing dynamic,

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Speaker 4: which gives us more optimism that these lower this lower

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Speaker 4: regime can have some staying power and you don't need

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Speaker 4: to hammer the economy. I mean, we had several cycles

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Speaker 4: over the last thirty years where we had growth and

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Speaker 4: no inflation, but because because of the PTSD from the pandemic,

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Speaker 4: there's this equating of growth with inflation almost amongst and

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Speaker 4: what's what was surprising about the meeting, the September FOMC

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Speaker 4: meeting to me was how unanimous it seems to be.

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Speaker 4: Everybody's forecasts kind of showed a higher funds rate, and

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Speaker 4: everybody raised their twenty twenty four inflation forecast, or a

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Speaker 4: lot of people did. There isn't a lot of sectoral

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Speaker 4: inflationists on the FOMC, and I think that gives them

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Speaker 4: a very rigid view of how things are playing out.

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Speaker 3: This was going to be exactly my next question. Actually,

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Speaker 3: you mentioned Powell's speech, which was very macro and sort

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Speaker 3: of traditional FOMC speech ish, but Christine Legard of the

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Speaker 3: UCB gave basically the opposite speech, talking about like we

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Speaker 3: are in this weird period where it feels like the

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Speaker 3: real economy of supply chain can straints U fiscal is

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Speaker 3: more in control than monetary policy, and it poses new

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Speaker 3: challenges to economists. How well equipped do you think economists

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Speaker 3: are to start looking at, you know, individual industries or

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Speaker 3: looking at specific sectors as you just pointed out, versus

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Speaker 3: the sort of macroeconomic theory that many of them have

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Speaker 3: been trained on.

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Speaker 4: There's a lot of good economists, ourselves included, I would say,

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Speaker 4: that are doing this kind of work. So Alan Dettmeister

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Speaker 4: at UBS, Gonda Armana at Employee America, Oh, Mayr Sharif,

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Speaker 4: Mike Knskall at Rose.

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Speaker 2: I love that most of these are thoughts.

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Speaker 4: Yeah, we've we should have definitely should yeah, yeah, the

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Speaker 4: who's who have? But there's and you know, we we

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Speaker 4: engage in this conversation, in this debate, you know, in

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Speaker 4: social media, and there's lots of great exchanges and analysis.

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Speaker 4: The sellers inflation, your your point about the ECB is

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Speaker 4: a great one. Seller's inflation. Let's set aside the loaded

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Speaker 4: term greedflation, but the idea of profits.

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Speaker 3: We have purposely avoided saying greedflation. We tried to coin

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Speaker 3: the term excuse flation, which did some people have been

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Speaker 3: using it. But yeah, I think sellers sellers inflation and.

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Speaker 4: Yeah, let inflation. And if you look at say Lagarde's

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Speaker 4: press conference, she breaks down what's been happening in inflation

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Speaker 4: in terms of what's driven by the labor market and

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Speaker 4: what's driven by profits, Like as a matter of accounting,

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Speaker 4: you know, there's plenty of ECB officials that are sort

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Speaker 4: of well versed in Yes, there's the labor market, and

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Speaker 4: then there's the product side, there's the profit side, the

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Speaker 4: industry side. It has to do with concentration and common shocks,

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Speaker 4: et cetera. So it's not like it's a radical theory.

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Speaker 4: It's not like there's no workout there. It's just like

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Speaker 4: there's nobody on the FMC that embraces this, you know,

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Speaker 4: very you know, overtly.

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Speaker 3: Uh.

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Speaker 4: And so again, I just think there's a common framework

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Speaker 4: at the FETE that is, you know, it's an important framework.

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Speaker 4: It's a useful framework, but it's not the only framework,

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Speaker 4: and you need to have I would say it's better

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Speaker 4: to have as many possible perspectives and points of view

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Speaker 4: to understand these dynamics. You know, inflation went up more

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Speaker 4: than even the macro models suggested, and at a timing

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Speaker 4: that does not align with the macro models. So when

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Speaker 4: you have an error on your model as a forecaster,

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Speaker 4: you look forward and think, hmm, that error might reverse

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Speaker 4: at some point, I might get downside surprises standard forecasting.

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Speaker 4: I'm not saying anything radical now. Of course, it's not

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Speaker 4: the Central Bank's job to err on the side of

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Speaker 4: optimism when they're above their target. But you know, you

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Speaker 4: can talk. I don't understand, like Powell had several opportunities

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Speaker 4: at the press conference. There was three or four questions.

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Speaker 2: Actually.

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Speaker 4: Craig Torres of Bloomberg asked an excellent question about the

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Speaker 4: nuances of higher rates and supply side lead inflation in

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Speaker 4: real estate, and Powell just won't go there. He just

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Speaker 4: doesn't want to go to the supply side and talk

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Speaker 4: about those. I mean he did, to be fair, he

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Speaker 4: did say we understood that fading pandemic frictions are part

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Speaker 4: of the story. But again, I think they just are

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Speaker 4: very shell shocked by what they've been through in the

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Speaker 4: last couple of years and are still airing on the

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Speaker 4: pessimistic side.

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Speaker 1: You know, one other thing in that regards speech, specifically

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Speaker 1: that you mentioned this idea of like the price and

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Speaker 1: sensitive demand and the big source of that is the

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Speaker 1: investment that's happening in like green transition and energy infrastructure,

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Speaker 1: and that's going to have it regardless of we could

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Speaker 1: have a recession. Yeah, you could have a boom. But

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Speaker 1: we know governments are going to spend a lot on

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Speaker 1: this and they're going to subsidize a lot and of

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Speaker 1: course we talk about that all the time on odd lots,

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Speaker 1: and yeah, this is an interesting dynamic. There's a lot

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Speaker 1: of spending that's going to happen regardless of where we

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Speaker 1: are in the cycle. I want to get deeper in

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Speaker 1: to the lags debate because I have this like sort

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Speaker 1: of like weird sympathy for the priced in. Everything's always

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Speaker 1: everything's always priced in.

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Speaker 4: Yeah, that's what we saw after the FMC means right,

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Speaker 4: a pced in.

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Speaker 1: Day one, So and so like okay, that's the Waller

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Speaker 1: view as you characterize it, Like why isn't it all

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Speaker 1: price it? What is the case for? Like why like

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Speaker 1: all right, even if we know that raid hikes are coming,

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Speaker 1: they telegraph it. We're in an age of very aggressively

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Speaker 1: clear forward guidance. The dots didn't used to exist. That's

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Speaker 1: a modern innovation in central banking. So like, let's talk theoretically,

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Speaker 1: and then like, let's get more concrete, like what is

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Speaker 1: the case for why it wouldn't all just be priced

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Speaker 1: in and why people don't adjust their behavior the moment

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Speaker 1: the central banks give their indication of where rates are going.

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Speaker 4: Yeah. The way I think about it is I break

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Speaker 4: it into two channels. There's the capital markets channel, and

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Speaker 4: then there's the credit channel. Okay, and the capital markets

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Speaker 4: channel exactly as you describe. The FED telegraphs its intentions,

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Speaker 4: it's perspective on the balance of risks, and capital markets

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Speaker 4: price it in. But there's the credit channel side where

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Speaker 4: you've got this you know, fixed rate financing for a

435
00:24:11,440 --> 00:24:15,959
Speaker 4: couple of years, and you've got time, and there's legitimate

436
00:24:16,080 --> 00:24:18,600
Speaker 4: uncertainty about where we're going to be in a year,

437
00:24:18,800 --> 00:24:22,920
Speaker 4: in two years, and if you are you know, again,

438
00:24:23,119 --> 00:24:25,840
Speaker 4: commercial real estate is a perfect example because they are

439
00:24:26,560 --> 00:24:29,359
Speaker 4: you know, glass half full kind of people. And there's

440
00:24:29,400 --> 00:24:32,000
Speaker 4: been a real conversation and you know, I talk to

441
00:24:32,040 --> 00:24:34,680
Speaker 4: a lot of people in the real estate industry. There's

442
00:24:34,720 --> 00:24:36,760
Speaker 4: a real sense that you know, if we hold on

443
00:24:36,920 --> 00:24:40,520
Speaker 4: long enough, rates are going to go back down. Uh,

444
00:24:40,880 --> 00:24:43,920
Speaker 4: And so I'm not going to mark my losses. I'm

445
00:24:43,920 --> 00:24:46,159
Speaker 4: not going to scale back my project. I'm going to

446
00:24:46,200 --> 00:24:49,000
Speaker 4: maybe slow walk that project and not be in a

447
00:24:49,080 --> 00:24:52,159
Speaker 4: hurry because I think and if I come to market

448
00:24:52,200 --> 00:24:54,720
Speaker 4: in a year or two years and I need to

449
00:24:54,840 --> 00:24:58,320
Speaker 4: roll over my financing, I'll get better terms then. And

450
00:24:58,320 --> 00:25:01,760
Speaker 4: that's not irrational, but it does mean that you know

451
00:25:01,920 --> 00:25:06,000
Speaker 4: if they're wrong, which you know, the market has moved.

452
00:25:06,040 --> 00:25:08,720
Speaker 4: One of the things that's happened since the last FMC

453
00:25:08,920 --> 00:25:13,280
Speaker 4: meeting in July is that markets did move to higher

454
00:25:13,280 --> 00:25:16,760
Speaker 4: for longer pricing. Real rates are up fifty basis points,

455
00:25:17,400 --> 00:25:21,399
Speaker 4: and so we have yet to feel the effect of

456
00:25:21,680 --> 00:25:25,720
Speaker 4: that last leg of increase in real rates. It just happened,

457
00:25:27,119 --> 00:25:29,879
Speaker 4: and that was a change in psychology in the market,

458
00:25:29,920 --> 00:25:35,040
Speaker 4: the market realizing, hmm, maybe higher for longer is where

459
00:25:35,119 --> 00:25:38,320
Speaker 4: we're going, in which case we need to reprice things

460
00:25:38,640 --> 00:25:40,560
Speaker 4: in which case, And then you look at the impact

461
00:25:40,560 --> 00:25:44,920
Speaker 4: of that. We've seen mortgage applications roll over. We've seen

462
00:25:45,119 --> 00:25:49,359
Speaker 4: car analysts lower their forecasts for the remainder of the

463
00:25:49,440 --> 00:25:52,440
Speaker 4: year because there's less pent up demand at these interest rates.

464
00:25:52,480 --> 00:25:55,639
Speaker 4: So all these leading indicators are saying, yeah, there's going

465
00:25:55,720 --> 00:25:57,720
Speaker 4: to be an effect from that last leg up in

466
00:25:57,720 --> 00:26:01,679
Speaker 4: interest rates, and and the Fed raised it's twenty twenty

467
00:26:01,680 --> 00:26:05,200
Speaker 4: four forecast, not lowered it. So the conviction they have

468
00:26:05,400 --> 00:26:09,960
Speaker 4: on extrapolating the recent good performance into twenty twenty four

469
00:26:10,119 --> 00:26:10,960
Speaker 4: was surprising to me.

470
00:26:11,880 --> 00:26:14,960
Speaker 1: It's not lost on me. When you think about commercial

471
00:26:14,960 --> 00:26:17,439
Speaker 1: real estate developers. It just the sort of like sheer

472
00:26:17,480 --> 00:26:20,160
Speaker 1: belief that it'll be find yes that the two most

473
00:26:20,240 --> 00:26:22,919
Speaker 1: famous developers, and I think I may have stolen this

474
00:26:23,000 --> 00:26:25,640
Speaker 1: observation from someone, the two most famous commercial real estate

475
00:26:25,720 --> 00:26:28,800
Speaker 1: developers that everyone knows are Donald Trump and Adam Newman,

476
00:26:29,119 --> 00:26:31,280
Speaker 1: which sort of gives you a sense of maybe like

477
00:26:31,320 --> 00:26:33,600
Speaker 1: the sort of mindset of a lot of the people dealing.

478
00:26:33,680 --> 00:26:37,920
Speaker 3: Those are the poster children for commercial real estate optimistes.

479
00:26:37,520 --> 00:26:39,760
Speaker 1: The sheer case, the sheer belief in winning.

480
00:26:39,920 --> 00:26:43,920
Speaker 3: I realized we've been talking a lot about corporates. Can

481
00:26:43,960 --> 00:26:46,600
Speaker 3: we talk maybe a little bit more about household talent

482
00:26:46,640 --> 00:26:50,280
Speaker 3: sheets because this is the other area of uncertainty, and

483
00:26:50,320 --> 00:26:52,560
Speaker 3: there is a lot of debate at the moment over

484
00:26:52,720 --> 00:26:55,640
Speaker 3: how healthy the consumer actually is. And you see these

485
00:26:55,760 --> 00:26:59,040
Speaker 3: charts of outstanding credit card debt, you know, going up

486
00:26:59,080 --> 00:27:03,320
Speaker 3: to records, and people panicking that people are going to

487
00:27:03,359 --> 00:27:05,800
Speaker 3: struggle to pay some of this back as interest rates

488
00:27:05,800 --> 00:27:08,520
Speaker 3: go higher. But on the other hand, there's plenty of

489
00:27:08,520 --> 00:27:12,960
Speaker 3: discourse that says individual balance sheets are basically in the

490
00:27:12,960 --> 00:27:15,679
Speaker 3: best shape they've been in a very long time. So

491
00:27:15,720 --> 00:27:17,679
Speaker 3: how are you viewing that particular debate.

492
00:27:18,000 --> 00:27:21,520
Speaker 4: Yeah, yeah, So, first of all, the credit card debt

493
00:27:21,520 --> 00:27:24,560
Speaker 4: at record highs. You never look at nominal debt. You

494
00:27:24,680 --> 00:27:27,080
Speaker 4: always scale it by income. The flow of funds for

495
00:27:27,200 --> 00:27:30,640
Speaker 4: Q two just came out. Debt to income is right

496
00:27:30,680 --> 00:27:33,720
Speaker 4: back down. So if you look at including credit card

497
00:27:33,760 --> 00:27:37,520
Speaker 4: debt as a percent of income came down. So I

498
00:27:37,640 --> 00:27:43,320
Speaker 4: don't look at households as and see a picture of oh,

499
00:27:43,320 --> 00:27:46,480
Speaker 4: they're binging on debt or they're leaning on debt because

500
00:27:46,480 --> 00:27:50,880
Speaker 4: they can't finance their spending with income. I do think

501
00:27:50,920 --> 00:27:53,840
Speaker 4: household balance sheets are in fantastic shape. We came into

502
00:27:53,880 --> 00:27:57,159
Speaker 4: this tightening cycle in the best shape ever, both in

503
00:27:57,240 --> 00:28:01,800
Speaker 4: terms of net worth but also in terms of delinquencies

504
00:28:01,840 --> 00:28:05,320
Speaker 4: on all categories of consumer loans. It was the first

505
00:28:05,359 --> 00:28:10,480
Speaker 4: recession where we actually lowered delinquencies through the recession, through

506
00:28:10,520 --> 00:28:13,040
Speaker 4: all of that fiscal support. People used it to pay

507
00:28:13,080 --> 00:28:15,399
Speaker 4: their auto loans, they used it to pay their credit cards,

508
00:28:15,440 --> 00:28:18,879
Speaker 4: So we didn't have the delinquencies we typically have with

509
00:28:19,040 --> 00:28:22,200
Speaker 4: job losses. That was part of the idea, and so

510
00:28:22,600 --> 00:28:24,679
Speaker 4: I think there's a bit of a haves and have

511
00:28:24,840 --> 00:28:29,320
Speaker 4: nots in the consumer world. If you look at delinquencies,

512
00:28:29,640 --> 00:28:33,280
Speaker 4: they're coming up off the lows across categories. Auto delinquencies,

513
00:28:33,320 --> 00:28:37,520
Speaker 4: credit card delinquencies, mortgage delinquencies are still very low. But

514
00:28:38,000 --> 00:28:41,959
Speaker 4: so you've got you know, lower income consumers who have

515
00:28:42,120 --> 00:28:45,680
Speaker 4: been hit by the rental inflation versus homeowners who got

516
00:28:45,720 --> 00:28:47,680
Speaker 4: to refinance to record low morgage rates.

517
00:28:47,720 --> 00:28:49,680
Speaker 2: I feel like this is really the lynchpin.

518
00:28:49,960 --> 00:28:53,760
Speaker 4: Yeah, there's a real bifurcation, and and who's feeling the

519
00:28:53,760 --> 00:28:57,120
Speaker 4: effects of the higher rates. Most people that have to buy,

520
00:28:57,240 --> 00:29:00,440
Speaker 4: you know, or the higher used car prices are going

521
00:29:00,480 --> 00:29:04,680
Speaker 4: to be more moderate income consumers, so I think, and

522
00:29:04,680 --> 00:29:07,120
Speaker 4: that's the other thing that we've been seeing too, is

523
00:29:07,440 --> 00:29:10,920
Speaker 4: the labor market is still like level wise, very healthy,

524
00:29:11,440 --> 00:29:15,920
Speaker 4: but the slowing in job growth is quite pronounced. And

525
00:29:16,000 --> 00:29:18,360
Speaker 4: so you know, we've been in the soft landing camp

526
00:29:18,600 --> 00:29:21,800
Speaker 4: all along. We never have been forecasting a recession. I

527
00:29:21,880 --> 00:29:25,960
Speaker 4: actually see the recession nods as just as high, or

528
00:29:26,000 --> 00:29:29,240
Speaker 4: even maybe a little bit higher, because the labor market

529
00:29:29,240 --> 00:29:33,480
Speaker 4: looks like it's closer to it's not just going great guns.

530
00:29:33,040 --> 00:29:37,000
Speaker 4: The sectors that are hiring have narrowed, the pace of

531
00:29:37,120 --> 00:29:41,320
Speaker 4: hiring has slowed. Wage growth is slowing, so the nominal

532
00:29:41,320 --> 00:29:44,280
Speaker 4: income growth being generated by the labor market has slowed

533
00:29:44,360 --> 00:29:47,840
Speaker 4: quite a bit. Delinquencies, so again it looks more like

534
00:29:48,240 --> 00:29:52,280
Speaker 4: a cyclical shift, but it's only amongst a certain segment

535
00:29:52,280 --> 00:30:06,200
Speaker 4: of consumers.

536
00:30:08,640 --> 00:30:11,440
Speaker 1: Well, so this gets to the question. So the Fed,

537
00:30:11,600 --> 00:30:14,200
Speaker 1: we don't know if they're done raising rates, but what

538
00:30:14,240 --> 00:30:17,800
Speaker 1: they are doing, or what they are indicating, is they're

539
00:30:17,800 --> 00:30:21,920
Speaker 1: telling the market that cuts are not forthcoming, correct, and

540
00:30:22,080 --> 00:30:23,800
Speaker 1: that is a defect of tightening, or it is a

541
00:30:23,960 --> 00:30:27,040
Speaker 1: form of us maybe second derivative tightening or something. And

542
00:30:27,120 --> 00:30:29,400
Speaker 1: so if you look at their twenty twenty four dots,

543
00:30:29,680 --> 00:30:32,440
Speaker 1: they're coming up and basically telling the market if you

544
00:30:32,480 --> 00:30:35,160
Speaker 1: think they are cuts, they're probably not. And so let's

545
00:30:35,160 --> 00:30:37,120
Speaker 1: set this. You say, the recession odgs are ticking up

546
00:30:37,120 --> 00:30:40,160
Speaker 1: a little bit because that nominal income the way labor

547
00:30:40,200 --> 00:30:43,000
Speaker 1: market is slowing. It's not seeing mass layoffs or anything

548
00:30:43,000 --> 00:30:45,480
Speaker 1: like that now, but there's some slowing. Wage growth is

549
00:30:45,520 --> 00:30:49,000
Speaker 1: probably slowing a little bit. The inflation dynamics you think

550
00:30:49,120 --> 00:30:52,280
Speaker 1: are improving meaningfully in a way that can be sustained.

551
00:30:52,680 --> 00:30:56,160
Speaker 1: The FED doesn't appreciate perhaps that they can be sustained.

552
00:30:56,160 --> 00:30:58,640
Speaker 1: The dots are coming up, so talk to us about

553
00:30:58,760 --> 00:31:02,160
Speaker 1: that risk that the FED is still sort of pessimistic

554
00:31:02,200 --> 00:31:06,080
Speaker 1: about inflation dynamics. It's sort of engaged in a modest

555
00:31:06,120 --> 00:31:10,160
Speaker 1: tightening still by raising those outdots, and in a backdrop

556
00:31:10,200 --> 00:31:12,960
Speaker 1: of a time when the recession risk is ticking.

557
00:31:12,720 --> 00:31:15,680
Speaker 4: Up, it still is a very healthy economy. I mean,

558
00:31:15,720 --> 00:31:18,800
Speaker 4: the fact that the corporate side of the world has

559
00:31:18,800 --> 00:31:23,560
Speaker 4: gotten more optimistic is probably helps labor market resiliency in

560
00:31:23,640 --> 00:31:27,160
Speaker 4: terms of preventing further layoffs. But I think you know,

561
00:31:27,280 --> 00:31:31,080
Speaker 4: if you're extrapolating off of the Q three GDP tracking,

562
00:31:31,440 --> 00:31:34,280
Speaker 4: then you're probably going to see some disappointments down the road.

563
00:31:34,360 --> 00:31:37,120
Speaker 4: Right the growth has ebbed and flowed. You know what

564
00:31:37,160 --> 00:31:40,040
Speaker 4: I see is if I look at the consumer consumer

565
00:31:40,080 --> 00:31:44,560
Speaker 4: spending sort of dropped to trend early last year, and

566
00:31:44,600 --> 00:31:47,840
Speaker 4: then the quarterly numbers bounce up and down just depending

567
00:31:47,840 --> 00:31:50,560
Speaker 4: on where that spending falls and kind of ebbs and flows.

568
00:31:51,720 --> 00:31:54,680
Speaker 4: So you know, whatever Q three is tracking, that's not

569
00:31:54,800 --> 00:31:57,600
Speaker 4: the run rate. Right now, we're in for some slower

570
00:31:57,680 --> 00:32:01,200
Speaker 4: patches of data, and that could be more worrisome and

571
00:32:01,720 --> 00:32:05,280
Speaker 4: sort of. But there's two things that keep us in

572
00:32:05,320 --> 00:32:08,040
Speaker 4: the resiliency camp. One is we do believe that inflation

573
00:32:08,160 --> 00:32:11,000
Speaker 4: is coming down more sustainably. That is a tailwind for

574
00:32:11,080 --> 00:32:15,800
Speaker 4: consumers that gives them more purchasing power. The energy shock

575
00:32:15,920 --> 00:32:18,760
Speaker 4: is a complicating story to that. That could that's gonna

576
00:32:18,840 --> 00:32:22,160
Speaker 4: hurt purchasing power in the next few months. But the

577
00:32:22,200 --> 00:32:26,680
Speaker 4: Fed also has AMMO. If things get really rocky, they

578
00:32:26,760 --> 00:32:29,360
Speaker 4: can cut rates, and we are in a world where

579
00:32:29,360 --> 00:32:31,800
Speaker 4: there's a credit channel, so you might get a response

580
00:32:31,840 --> 00:32:35,000
Speaker 4: in housing. Look at housing housing world right over. Rates

581
00:32:35,040 --> 00:32:39,520
Speaker 4: went down because of the recession call expectations early in

582
00:32:39,520 --> 00:32:42,480
Speaker 4: the year. Then they've come back up and you've seen

583
00:32:42,560 --> 00:32:46,320
Speaker 4: housing demand EBB and flow with that. So there is

584
00:32:46,440 --> 00:32:49,920
Speaker 4: a lever at their disposal which is effective that they

585
00:32:50,000 --> 00:32:52,920
Speaker 4: can go to. Of course, the bar is much higher

586
00:32:52,960 --> 00:32:56,000
Speaker 4: when you're coming at the inflation target from above. They're

587
00:32:56,120 --> 00:32:59,120
Speaker 4: very skeptical, but you know, if we could hit a

588
00:32:59,200 --> 00:33:01,880
Speaker 4: soft patch and then they could respond and that could

589
00:33:01,960 --> 00:33:03,720
Speaker 4: keep us back on track.

590
00:33:04,240 --> 00:33:06,800
Speaker 3: This might be an unfair question to ask an economist,

591
00:33:06,880 --> 00:33:10,320
Speaker 3: but you are also a clinical Associate Professor of Finance.

592
00:33:10,480 --> 00:33:13,160
Speaker 3: I believe, yeah, so maybe you can answer this. But

593
00:33:13,600 --> 00:33:17,400
Speaker 3: one of the puzzling things in markets recently has been

594
00:33:17,560 --> 00:33:21,880
Speaker 3: the very low spreads or risk premiums on corporate bonds. Right,

595
00:33:22,680 --> 00:33:26,040
Speaker 3: even as you see all the concern about everything we've

596
00:33:26,040 --> 00:33:28,320
Speaker 3: been talking about in this discussion, one way I can

597
00:33:28,360 --> 00:33:31,440
Speaker 3: think of justifying it is that maybe markets still think,

598
00:33:31,680 --> 00:33:35,520
Speaker 3: you know, if rates continue to go up, eventually something

599
00:33:35,760 --> 00:33:39,000
Speaker 3: might break and then the FED comes in and cuts,

600
00:33:39,080 --> 00:33:41,440
Speaker 3: and so the interest rate problem kind of goes away

601
00:33:41,480 --> 00:33:44,600
Speaker 3: again for a lot of companies. Is that a reasonable

602
00:33:44,720 --> 00:33:49,080
Speaker 3: explanation or how would you explain persistently low spreads in

603
00:33:49,120 --> 00:33:49,880
Speaker 3: the credit market.

604
00:33:50,200 --> 00:33:53,040
Speaker 4: You know, that's a great question. I think you're. One

605
00:33:53,040 --> 00:33:55,840
Speaker 4: of your prior guests talked about how a lot of

606
00:33:55,880 --> 00:33:59,240
Speaker 4: the weak hands got squeezed out during the trade wars. Yes,

607
00:33:59,320 --> 00:34:02,800
Speaker 4: this is true, and I thought that was a very

608
00:34:02,800 --> 00:34:06,520
Speaker 4: interesting point because a lot of the sort of riskiest

609
00:34:06,600 --> 00:34:09,319
Speaker 4: businesses were in the energy sector, and a lot of

610
00:34:09,360 --> 00:34:13,279
Speaker 4: those already felt their recession before the recession, and so

611
00:34:13,400 --> 00:34:18,880
Speaker 4: we have sort of a higher credit quality landscape. The

612
00:34:18,960 --> 00:34:22,840
Speaker 4: other area of pronounced weakness is in the tech sector,

613
00:34:23,440 --> 00:34:28,480
Speaker 4: and they're just not that debt exposed, right, their valuation exposed.

614
00:34:28,560 --> 00:34:32,160
Speaker 4: Their valuations are much more volatile. That's where all the

615
00:34:32,200 --> 00:34:35,880
Speaker 4: speculation goes when people are optimistic or pessimistic, but it

616
00:34:35,920 --> 00:34:41,120
Speaker 4: doesn't necessarily translate into credit spreads. So it is perplexing

617
00:34:41,200 --> 00:34:44,320
Speaker 4: that it's still so solid in terms of a global

618
00:34:44,480 --> 00:34:48,040
Speaker 4: capital flows perspective. One question I've been asking sort of

619
00:34:48,840 --> 00:34:55,680
Speaker 4: more globally oriented people is we know that less money

620
00:34:55,719 --> 00:34:58,200
Speaker 4: is going into China, where does that money go?

621
00:34:58,440 --> 00:34:59,080
Speaker 2: That's a good point.

622
00:34:59,160 --> 00:35:03,279
Speaker 4: Yeah, is it possible that developed markets are experiencing a

623
00:35:03,320 --> 00:35:06,160
Speaker 4: little bit more of a tailwind from money that has

624
00:35:06,200 --> 00:35:10,360
Speaker 4: to be reallocated to the US or other countries? And

625
00:35:10,400 --> 00:35:12,440
Speaker 4: I think the answer is possibly yes. You know, you

626
00:35:12,480 --> 00:35:16,040
Speaker 4: think about what does it mean this sort of structural

627
00:35:16,080 --> 00:35:18,480
Speaker 4: shift in China. One of the things we think, well,

628
00:35:18,560 --> 00:35:20,880
Speaker 4: China has been the source of the excess savings glut.

629
00:35:20,960 --> 00:35:24,400
Speaker 4: Maybe that you know, takes away the subsidy to you know,

630
00:35:25,360 --> 00:35:29,200
Speaker 4: treasury yields to some extent, but it might mean more

631
00:35:29,360 --> 00:35:34,080
Speaker 4: asset allocation from global investors into the US and other

632
00:35:34,120 --> 00:35:37,640
Speaker 4: asset classes. So I'm not an expert on that, but

633
00:35:37,719 --> 00:35:41,080
Speaker 4: I'm I'm you know, that's something I'm trying to learn

634
00:35:41,160 --> 00:35:42,560
Speaker 4: more about and think more about.

635
00:35:42,640 --> 00:35:44,120
Speaker 2: Yeah, that's interesting, going.

636
00:35:43,960 --> 00:35:48,760
Speaker 1: Back to that Reguard speech and the price and sensitive demand.

637
00:35:48,840 --> 00:35:51,600
Speaker 1: I mean, the other thing that's going on now is

638
00:35:51,920 --> 00:35:54,319
Speaker 1: we're like the era of big fiscal and it's like

639
00:35:54,360 --> 00:35:56,680
Speaker 1: the opposite of the twenty tens, where the twenty tens

640
00:35:56,680 --> 00:36:01,239
Speaker 1: A got that's pretty in retrospect of stimulus right off

641
00:36:01,280 --> 00:36:02,560
Speaker 1: the bat in like two thousand and nine. Then it

642
00:36:02,600 --> 00:36:06,160
Speaker 1: died pretty quickly after the Republicans won the House of

643
00:36:06,200 --> 00:36:08,839
Speaker 1: twenty ten that sort of took further fiscal expansion off

644
00:36:08,840 --> 00:36:11,759
Speaker 1: the table. We're in an area where people are talking

645
00:36:11,800 --> 00:36:14,600
Speaker 1: about structural deficits for a long time to come, for

646
00:36:14,680 --> 00:36:19,759
Speaker 1: various reasons, including the Inflation Reduction Act, which is I

647
00:36:19,800 --> 00:36:23,200
Speaker 1: suspect a lot of like high multipliers spending because it's

648
00:36:23,360 --> 00:36:27,000
Speaker 1: construction and factories and all this stuff that goes into

649
00:36:27,040 --> 00:36:29,839
Speaker 1: a lot of pocketbooks of sort of construction workers, et cetera.

650
00:36:30,200 --> 00:36:33,960
Speaker 1: How are you thinking about like the persistent macro impact

651
00:36:34,160 --> 00:36:36,400
Speaker 1: of the era of high deficits.

652
00:36:36,480 --> 00:36:39,800
Speaker 4: Yeah, yeah, so I'm really glad we got here because

653
00:36:40,600 --> 00:36:44,600
Speaker 4: that's another area where I think the narrative is is

654
00:36:44,600 --> 00:36:47,480
Speaker 4: is skewed. So the narrative tends to be we just

655
00:36:47,600 --> 00:36:53,840
Speaker 4: equate deficits with inflation, and there's a lot of you know,

656
00:36:53,880 --> 00:36:57,080
Speaker 4: the fiscal shaming coming back out. But if you look

657
00:36:57,239 --> 00:37:01,680
Speaker 4: at what we're spending money on, you know, during the pandemic, yes,

658
00:37:01,719 --> 00:37:04,920
Speaker 4: it was all just giving money to consumers to spend.

659
00:37:05,239 --> 00:37:09,200
Speaker 4: This is all giving money to builders to build. And

660
00:37:09,400 --> 00:37:13,000
Speaker 4: Texas is We've had this conversation, I believe Joe and

661
00:37:13,120 --> 00:37:16,280
Speaker 4: Jackson Hall, which was, if you look at what's happening

662
00:37:16,320 --> 00:37:21,080
Speaker 4: in Texas, we are in the middle of a renewables boom,

663
00:37:22,080 --> 00:37:28,080
Speaker 4: and that is arguably disinflationary because we've had the hottest

664
00:37:28,080 --> 00:37:30,920
Speaker 4: summer on record. And let me tell you, anybody that

665
00:37:31,040 --> 00:37:33,440
Speaker 4: lives has lived in Texas for the last two summers

666
00:37:33,520 --> 00:37:37,960
Speaker 4: knows that we are in an existential change and we're

667
00:37:38,000 --> 00:37:42,040
Speaker 4: going to need more capacity and we, thank goodness, have

668
00:37:42,080 --> 00:37:45,120
Speaker 4: that capacity. So I was like, somewhere in July, I'm like,

669
00:37:45,160 --> 00:37:48,879
Speaker 4: why are we not like experiencing a crisis like we did,

670
00:37:49,160 --> 00:37:51,879
Speaker 4: you know, during the winter of twenty twenty one. And

671
00:37:52,000 --> 00:37:54,320
Speaker 4: I looked at some of the data from URKOT and

672
00:37:54,360 --> 00:37:58,920
Speaker 4: the generation capacity, and well, we've just been growing, you know,

673
00:37:59,320 --> 00:38:04,879
Speaker 4: handover in terms of wind solar. All the new capacity

674
00:38:05,160 --> 00:38:09,480
Speaker 4: is in the renewables, thank goodness, and let's do the counterfactory.

675
00:38:09,520 --> 00:38:11,319
Speaker 4: I kind of tried to ask this question at Jackson.

676
00:38:11,440 --> 00:38:14,160
Speaker 4: I'm not sure it came through. When we think about

677
00:38:14,160 --> 00:38:17,839
Speaker 4: fiscal we need to think about why we're doing it right.

678
00:38:18,000 --> 00:38:20,560
Speaker 4: Why are we doing it? It's not just random, Oh,

679
00:38:20,640 --> 00:38:22,560
Speaker 4: let's just spend a lot of money and let's just

680
00:38:22,640 --> 00:38:24,680
Speaker 4: run big deficits. Why are we doing it well? First,

681
00:38:24,719 --> 00:38:26,600
Speaker 4: we did it because we were in a global pandemic

682
00:38:27,040 --> 00:38:31,080
Speaker 4: and we successfully achieved a much stronger recovery. Secondly, now

683
00:38:31,120 --> 00:38:34,600
Speaker 4: we're doing it, and Christine Legard explicitly talked about this

684
00:38:34,680 --> 00:38:37,759
Speaker 4: in her speech, You're going to have to expect the

685
00:38:37,800 --> 00:38:39,880
Speaker 4: government to play a bigger role when we're in an

686
00:38:39,960 --> 00:38:43,400
Speaker 4: energy transition because nobody else can engineer that. The private

687
00:38:43,400 --> 00:38:46,320
Speaker 4: sector won't do it by itself, So the government steps

688
00:38:46,360 --> 00:38:50,879
Speaker 4: in and provides these incentives and it's working. I mean,

689
00:38:50,920 --> 00:38:54,160
Speaker 4: it's a story that's hopeful to me that we are

690
00:38:54,680 --> 00:38:59,040
Speaker 4: getting the capacity we need. It's in renewables. And what

691
00:38:59,080 --> 00:39:01,640
Speaker 4: would have happened if you look back to twenty twenty one,

692
00:39:01,680 --> 00:39:04,480
Speaker 4: the grid failure in Texas was another friction that brought

693
00:39:04,600 --> 00:39:08,479
Speaker 4: chip supply shortage made it worse. Right, we had chip

694
00:39:08,520 --> 00:39:11,839
Speaker 4: factories here that were affected. What would have happened if

695
00:39:11,880 --> 00:39:15,640
Speaker 4: we would have didn't have this capacity this summer? You know,

696
00:39:15,680 --> 00:39:18,160
Speaker 4: what would have gone down? What kind of capacity, what

697
00:39:18,280 --> 00:39:20,360
Speaker 4: kind of production would have gone down? We have we

698
00:39:20,440 --> 00:39:23,600
Speaker 4: have surge pricing in Texas. Prices for sure would have

699
00:39:23,640 --> 00:39:28,280
Speaker 4: gone up more than they did because of the presence

700
00:39:28,280 --> 00:39:33,640
Speaker 4: of renewables. So you know, arguably that's been disinflationary already

701
00:39:33,719 --> 00:39:36,879
Speaker 4: for Texas consumers. And I think we need to think

702
00:39:36,920 --> 00:39:39,880
Speaker 4: more expansively about what are we doing, What are we

703
00:39:39,960 --> 00:39:44,200
Speaker 4: getting for this money. It's not all just you know,

704
00:39:44,239 --> 00:39:46,879
Speaker 4: going straight into demand, it's going into capacity.

705
00:39:47,120 --> 00:39:50,360
Speaker 3: Well, this was also Biden's argument in the very early

706
00:39:50,440 --> 00:39:54,640
Speaker 3: innings of the IRA, His whole you know, spiel for

707
00:39:54,719 --> 00:39:57,560
Speaker 3: it was that, well, we have these supply constraints, and

708
00:39:57,600 --> 00:39:59,440
Speaker 3: we have these choke points in the economy, and so

709
00:39:59,520 --> 00:40:03,160
Speaker 3: we spent now to solve those, and ultimately that becomes

710
00:40:03,160 --> 00:40:07,360
Speaker 3: a disinflationary impulse and the solution to our inflationary problems.

711
00:40:07,760 --> 00:40:10,200
Speaker 3: I want to ask just one last question, going back

712
00:40:10,239 --> 00:40:13,400
Speaker 3: to the long and variable lags idea, what are you

713
00:40:13,520 --> 00:40:18,320
Speaker 3: watching out for for signs of interest rates really beginning

714
00:40:18,360 --> 00:40:22,480
Speaker 3: to bite in potentially problematic or systemic ways. I know

715
00:40:22,520 --> 00:40:25,160
Speaker 3: we talked about commercial real estate, but like, what are

716
00:40:25,239 --> 00:40:27,759
Speaker 3: specific things people should be looking out for.

717
00:40:28,040 --> 00:40:30,680
Speaker 4: It's kind of hard to pinpoint. I mean, the SVB

718
00:40:30,800 --> 00:40:33,279
Speaker 4: example is a perfect example of you know, you just

719
00:40:33,600 --> 00:40:36,840
Speaker 4: don't always see it coming. That's still a possible shock.

720
00:40:37,640 --> 00:40:41,160
Speaker 4: If you look at the FDIC's latest quarterly report, those

721
00:40:41,440 --> 00:40:44,919
Speaker 4: securities and loan losses are just as big, yeah, if

722
00:40:44,960 --> 00:40:52,160
Speaker 4: not bigger, because just went up, so their portfolios are

723
00:40:52,200 --> 00:40:56,400
Speaker 4: even further underwater. So it's there's still it's a tough

724
00:40:56,520 --> 00:40:59,719
Speaker 4: road for particularly mid size and smaller banks that are

725
00:40:59,719 --> 00:41:03,960
Speaker 4: making money on bread and butter economic financing, not you know,

726
00:41:04,000 --> 00:41:07,160
Speaker 4: the capital markets businesses that the big banks have to offset.

727
00:41:08,360 --> 00:41:11,680
Speaker 4: So I think still watching the credit channel and the

728
00:41:11,680 --> 00:41:18,200
Speaker 4: credit flows. Credit flows have slowed and are tighter the

729
00:41:18,280 --> 00:41:21,440
Speaker 4: time the financing terms are tighter, and so you know,

730
00:41:21,560 --> 00:41:25,399
Speaker 4: I think that that can affect the economy, not necessarily

731
00:41:25,640 --> 00:41:28,880
Speaker 4: in a crisis like way, but definitely slow continue to

732
00:41:28,920 --> 00:41:32,480
Speaker 4: slow things down. Big picture, we've had a generational interest

733
00:41:32,560 --> 00:41:36,320
Speaker 4: rate shock after you know, years at the zero lower bound,

734
00:41:36,560 --> 00:41:39,880
Speaker 4: where is all the leverage in our economy to zero rates.

735
00:41:40,480 --> 00:41:47,680
Speaker 4: Tech has been a surprising area of sensitivity to monetary policy. Right,

736
00:41:47,719 --> 00:41:52,040
Speaker 4: they're not indebted, but their valuations sure are sensitive to

737
00:41:52,200 --> 00:41:56,640
Speaker 4: QE versus QT versus you know, fed hawkish fed dubvish.

738
00:41:57,200 --> 00:41:59,200
Speaker 4: It could be that there's a wave of you know,

739
00:41:59,239 --> 00:42:01,720
Speaker 4: there's been some really if lately. Maybe we get further

740
00:42:01,800 --> 00:42:05,719
Speaker 4: correction there because it turns out that that was when

741
00:42:05,760 --> 00:42:09,480
Speaker 4: you when you don't have just good old plane safe yields,

742
00:42:10,000 --> 00:42:14,480
Speaker 4: you start speculating more on things like software and uh,

743
00:42:14,960 --> 00:42:18,360
Speaker 4: crypto and crypto is another one that can keep going.

744
00:42:18,400 --> 00:42:21,960
Speaker 4: There's some some leverage in that system that could spill

745
00:42:22,040 --> 00:42:25,160
Speaker 4: over to the broader financing system. So there's a number

746
00:42:25,160 --> 00:42:29,120
Speaker 4: of areas that we could see Titan in ways that

747
00:42:29,160 --> 00:42:33,560
Speaker 4: aren't just a gradual linear march. It sort of happens

748
00:42:33,600 --> 00:42:35,719
Speaker 4: all of a sudden when people just can't roll over

749
00:42:35,760 --> 00:42:36,720
Speaker 4: their funding anymore.

750
00:42:37,160 --> 00:42:41,080
Speaker 1: Julia Coronado macro policy perspectives. I'm so glad we had

751
00:42:41,080 --> 00:42:43,839
Speaker 1: this conversation. We were able to make it happen after

752
00:42:43,880 --> 00:42:44,960
Speaker 1: we didn't get the chance of it.

753
00:42:45,160 --> 00:42:45,759
Speaker 4: Now we can have.

754
00:42:47,200 --> 00:42:52,920
Speaker 1: Yeah, thank you so much for my pleasure. To thank

755
00:42:52,960 --> 00:43:03,440
Speaker 1: you for the talker. That was such a good conversation.

756
00:43:03,680 --> 00:43:05,600
Speaker 1: So much in there. I just want to say, before

757
00:43:05,640 --> 00:43:09,759
Speaker 1: I forget, not all tech speculation is like some of

758
00:43:09,760 --> 00:43:11,880
Speaker 1: it amounts to something. And I know this because I

759
00:43:11,880 --> 00:43:14,600
Speaker 1: took my first self driving car drive home last night,

760
00:43:14,920 --> 00:43:18,480
Speaker 1: So some tech investment actually becomes real. It is so amazing.

761
00:43:18,480 --> 00:43:19,320
Speaker 2: This is the problem.

762
00:43:19,480 --> 00:43:22,760
Speaker 3: You've gone to Austin, you've written around in self driving cars,

763
00:43:22,880 --> 00:43:26,719
Speaker 3: and then you went to like the fund manager who

764
00:43:26,800 --> 00:43:30,840
Speaker 3: is the ultimate like espouser of the efficient market hypothesis theory,

765
00:43:30,960 --> 00:43:33,759
Speaker 3: and now you're just feeling really good about everything. You're like,

766
00:43:33,800 --> 00:43:37,760
Speaker 3: it's all priced in. Tech is great, the future is bright.

767
00:43:38,239 --> 00:43:39,880
Speaker 3: Let's eat more tacos.

768
00:43:40,200 --> 00:43:40,439
Speaker 4: Yeah.

769
00:43:40,480 --> 00:43:42,920
Speaker 1: You know what I really liked though, that I thought

770
00:43:43,000 --> 00:43:49,000
Speaker 1: was extremely helpful is Julia's demarcation of the credit channel

771
00:43:49,239 --> 00:43:52,799
Speaker 1: versus the assets yes, or the capital markets channel. And

772
00:43:52,840 --> 00:43:55,400
Speaker 1: that was so helpful for me in terms of thinking

773
00:43:55,400 --> 00:43:57,920
Speaker 1: about like, yeah, like stocks due price in you know,

774
00:43:58,000 --> 00:44:01,200
Speaker 1: the dots for twenty twenty four come up and then

775
00:44:01,280 --> 00:44:03,680
Speaker 1: stocks go down or whatever it is, and then this

776
00:44:03,760 --> 00:44:07,000
Speaker 1: idea that credit is just never going to work automatically

777
00:44:07,120 --> 00:44:10,680
Speaker 1: like that, And there's lengths of credit, and there's different opinions,

778
00:44:10,719 --> 00:44:13,600
Speaker 1: and people can hold out and restructure, et cetera. And

779
00:44:13,640 --> 00:44:17,600
Speaker 1: so the idea that credit market will respond automatically in

780
00:44:17,640 --> 00:44:20,759
Speaker 1: the same way like asset valuations will, it's like a

781
00:44:20,800 --> 00:44:23,360
Speaker 1: really helpful way to sort of, at least in my mind,

782
00:44:23,880 --> 00:44:25,200
Speaker 1: resolve some of these tensions.

783
00:44:25,280 --> 00:44:27,560
Speaker 2: Absolutely, So two things stood out to me.

784
00:44:27,719 --> 00:44:32,160
Speaker 3: One was the point that fiscal stimulus doesn't our fiscal

785
00:44:32,200 --> 00:44:35,960
Speaker 3: spending doesn't always have to be inflationary. And I know

786
00:44:36,080 --> 00:44:38,680
Speaker 3: this was actually a big talking point. Again I pointed

787
00:44:38,760 --> 00:44:41,040
Speaker 3: out at the beginning of the IRA this was the

788
00:44:41,280 --> 00:44:44,279
Speaker 3: selling point from Biden, but I think it's it kind

789
00:44:44,320 --> 00:44:47,040
Speaker 3: of got lost in the ether with all the discussion

790
00:44:47,160 --> 00:44:50,080
Speaker 3: and drama around the debt ceiling and things like that.

791
00:44:50,200 --> 00:44:52,719
Speaker 2: But we have seen some glimmers of that. You know,

792
00:44:52,800 --> 00:44:53,720
Speaker 2: there were.

793
00:44:53,640 --> 00:44:57,920
Speaker 3: Fiscal attempts to solve the backlogs at the port for instance,

794
00:44:58,400 --> 00:45:00,680
Speaker 3: which seemed to have helped a little bit. And then

795
00:45:00,719 --> 00:45:02,239
Speaker 3: the other thing that stood out to me was the

796
00:45:02,280 --> 00:45:06,200
Speaker 3: contrast between the two thousand and eight monetary policy changes

797
00:45:06,560 --> 00:45:09,560
Speaker 3: versus now. Yeah, and I think this is really key

798
00:45:09,600 --> 00:45:12,280
Speaker 3: and maybe like one of the reasons why policy makers

799
00:45:12,280 --> 00:45:13,319
Speaker 3: are struggling at this.

800
00:45:13,360 --> 00:45:14,040
Speaker 2: Moment in time.

801
00:45:14,200 --> 00:45:18,600
Speaker 3: We have not had a huge dramatic shift in monetary policy,

802
00:45:19,560 --> 00:45:21,680
Speaker 3: you know, for a long time, but not in the

803
00:45:21,719 --> 00:45:24,600
Speaker 3: shape that we have it currently, where it's a series

804
00:45:24,640 --> 00:45:27,640
Speaker 3: of hikes. In two thousand and eight, as Julia pointed out,

805
00:45:27,680 --> 00:45:29,160
Speaker 3: it was it was crisis.

806
00:45:29,280 --> 00:45:31,799
Speaker 1: That was a really good point. Like the idea of like, well,

807
00:45:31,840 --> 00:45:35,239
Speaker 1: what is a credit channel constraint is like something that

808
00:45:35,280 --> 00:45:38,960
Speaker 1: we haven't really experienced as well, and we're seeing glimmers

809
00:45:39,000 --> 00:45:41,960
Speaker 1: of it. We saw it actually play out in housing

810
00:45:42,040 --> 00:45:45,040
Speaker 1: at the end of twenty twenty two. Maybe again now

811
00:45:45,120 --> 00:45:47,880
Speaker 1: with mortgage rates roughly seven and a half percent. I

812
00:45:47,920 --> 00:45:50,640
Speaker 1: think the home builders have come down. Home builder optimism

813
00:45:50,719 --> 00:45:54,360
Speaker 1: has declined, so we're like seeing that dynamic again. Also,

814
00:45:54,920 --> 00:45:59,440
Speaker 1: you know parentheses here. It is sort of an underappreciated point.

815
00:45:59,480 --> 00:46:02,279
Speaker 1: As Julia pointed out, monetary policy can now work in

816
00:46:02,280 --> 00:46:04,840
Speaker 1: the other direction. When we were at ZERP, there was

817
00:46:04,920 --> 00:46:07,680
Speaker 1: not really much that the Fed could do to stimulate, right.

818
00:46:07,719 --> 00:46:09,680
Speaker 1: I mean, they could like do borcui, but I think

819
00:46:09,760 --> 00:46:13,120
Speaker 1: always the efficacy of that is always sort of debatable.

820
00:46:13,400 --> 00:46:15,520
Speaker 1: They can cut rates now, which is a really interesting

821
00:46:15,560 --> 00:46:17,520
Speaker 1: dynamic and probably get some juice out of those raid

822
00:46:17,600 --> 00:46:19,520
Speaker 1: cuts in the way that we haven't experienced in a

823
00:46:19,520 --> 00:46:19,960
Speaker 1: long time.

824
00:46:20,080 --> 00:46:21,960
Speaker 2: Absolutely, shall we leave it there?

825
00:46:22,040 --> 00:46:22,680
Speaker 1: Let's leave it there.

826
00:46:23,120 --> 00:46:26,000
Speaker 3: This has been another episode of the Odd Thoughts podcast.

827
00:46:26,080 --> 00:46:28,919
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy.

828
00:46:28,600 --> 00:46:31,640
Speaker 1: Alloway and I'm Joe Wisenthal. You can follow me at

829
00:46:31,640 --> 00:46:35,400
Speaker 1: the Stalwart. Follow our guest Julia Coronado, She's at jc

830
00:46:35,680 --> 00:46:40,319
Speaker 1: Underscore Econ. Follow our producers Carmen Rodriguez at Carmen Arman

831
00:46:40,440 --> 00:46:43,960
Speaker 1: and dash El Bennett at dashbot Big thanks to Moses

832
00:46:43,960 --> 00:46:47,080
Speaker 1: Ondam for his help. Follow all of the Bloomberg podcasts

833
00:46:47,160 --> 00:46:50,560
Speaker 1: under the handle at podcasts, and for more Oddlods content,

834
00:46:50,640 --> 00:46:53,440
Speaker 1: go to Bloomberg dot com slash oudlots, where we post

835
00:46:53,480 --> 00:46:56,080
Speaker 1: all the transcripts of our interviews. We have a blog,

836
00:46:56,560 --> 00:46:59,400
Speaker 1: a newsletter, and you can chat about all these topics.

837
00:46:59,400 --> 00:47:03,040
Speaker 1: Twenty four Seve Van's fellow listeners in our discord discord

838
00:47:03,120 --> 00:47:04,359
Speaker 1: dot gg slash ap