Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal.
Speaker 2: And I'm Tracy Alloway.
Speaker 1: Tracy, we've been on the road a lot late.
Speaker 2: I know it's been NonStop trips.
Speaker 3: Let's see, we did Jackson Hole and then we went
Speaker 3: to California at Huntington Beach and now we're in Austin, Texas,
Speaker 3: your hometown.
Speaker 1: Have you enjoyed Austin so far?
Speaker 2: I love it?
Speaker 3: Okay, I mean, I'm not gonna lie. Large parts of it.
Speaker 3: Do you remind me of Dallas? But controversial opinion, but
Speaker 3: it has its own thing, going to like amazing bars, restaurants, shops.
Speaker 3: We went Cowboy boot shopping at Alan Boots. We've had
Speaker 3: some amazing tex mex really excellent barbecue at Terry Black's.
Speaker 3: It's been good.
Speaker 1: Yeah, we were in Jackson Hole and we did a
Speaker 1: lot of episodes in Jackson Hall, but a lot of
Speaker 1: them were sort of like these sort of like longer
Speaker 1: running like academic questions that a lot of the episodes
Speaker 1: that we did, we didn't really do too much there
Speaker 1: on Like okay, but like what's happening right now in
Speaker 1: the economy with like monetary policy, the impact of the
Speaker 1: FED rate hikes things like that, even though that's sort
Speaker 1: of on a lot of people's much.
Speaker 2: Yeah.
Speaker 3: Funnily enough, at a macroeconomic conference, the real economy wasn't
Speaker 3: the first topic of conversation. Although that's a little bit
Speaker 3: unfair because they did talk about supply chains and things
Speaker 3: like that.
Speaker 2: But you're right.
Speaker 3: We haven't done a current state of the Economy episode
Speaker 3: for a while, although we've touched on it in various ways.
Speaker 3: One of the more recent ones was when we spoke
Speaker 3: to Wayne Dahl from oak Tree about the credit market,
Speaker 3: and a big topic of conversation in there was why
Speaker 3: haven't we seen more of an impact from this historic
Speaker 3: pace of rate hikes on the real economy.
Speaker 1: Yeah, it feels like this is still this looming question
Speaker 1: and until until we have a sort of better idea
Speaker 1: of what's going on here, I think there's like a
Speaker 1: sense of unease. And even add Jackson Hole at Powell's speech,
Speaker 1: even with the improvement in inflation from last year, there
Speaker 1: is this still underlying sense of unease, which is partly
Speaker 1: driven by the fact that we've seen improvement, but it's
Speaker 1: like we can't quite explain why because drawing that line
Speaker 1: between the rate hikes to the improvement and h inflation
Speaker 1: is hard to draw. You would expect that, okay, if
Speaker 1: unemployment had been rising significantly. It's like, okay, well we
Speaker 1: could tell the traditional monetary policy story Ship's curve is alive,
Speaker 1: and well, yes, we can't quite tell that story. And
Speaker 1: then maybe it has something to do with the terming
Speaker 1: out of the debt that we talked about, Wayne Dahl.
Speaker 1: And then if that's the case, well what does that
Speaker 1: mean then, like are we still going to feel the impact?
Speaker 1: So it's like there's improvement, but it's like there's sense
Speaker 1: of unease underneath.
Speaker 3: Absolutely, But the most simple explanation for what's been going
Speaker 3: on is, yes, we had a massive terming out of
Speaker 3: debt on the corporate side and arguably on some individual
Speaker 3: as well, homeowners for instance, and that's provided a cushion,
Speaker 3: you know, between twenty twenty one, twenty twenty twenty two
Speaker 3: and where we are now. But it can only last
Speaker 3: for so long, and you're sort of getting back to
Speaker 3: the traditional long and variable lags argument, like, yeah, maybe
Speaker 3: this is just the longest lag that we've seen in many,
Speaker 3: many years.
Speaker 1: So we did actually have this conversation at Jackson Hole.
Speaker 1: We just didn't get it on the record.
Speaker 2: We just oh, yeah, you're right.
Speaker 1: We did actually talk about all this at Jacksonville. We
Speaker 1: just never recorded an episode. But the person who we
Speaker 1: spoke to in Jackson Hole in Wyoming last month happens
Speaker 1: to be based here in Austin, Texas. So we are like,
Speaker 1: in a way, we're going to like pick up the
Speaker 1: jackson Hole series with someone who happens to be here
Speaker 1: in Texas.
Speaker 3: I like how we've gone to Austin to record an
Speaker 3: episode with someone we talked to in Wyoming.
Speaker 1: So I'm very excited we're going to explore these topics
Speaker 1: and more for them. I'm very excited about our guests.
Speaker 1: Second time, I believe her appearance on Odd Lads, We're
Speaker 1: going to be speaking with Julia Coronado. She is the founder, CEO,
Speaker 1: and president of Macro Policy Perspectives. She is also a
Speaker 1: clinical assistant professor at the University of Texas on business
Speaker 1: and economics. So, Julia, thank you so much for joining us.
Speaker 4: It is my absolute pleasure to be here with you.
Speaker 1: Really simple question to actually to start.
Speaker 3: Wait, Can I just say Julia is the first All
Speaker 3: Thoughts guest who has ever brought us breakfast tacos.
Speaker 1: Hey, which, now, if you're listening and you want to
Speaker 1: come on odd lots, this is now the expectation.
Speaker 2: Yeah, bring food, bring breakfast tacos.
Speaker 1: But Julia, so great to show you actually did real quick.
Speaker 1: What do you do at Macro Policy Perspectives?
Speaker 4: So Macro Policy Perspectives is a macro forecasting firm. So
Speaker 4: we work mostly with money managers, people that are managing portfolios,
Speaker 4: and we provide them a perspective on the US economy.
Speaker 4: We're US focused, but globally oriented and very markets oriented,
Speaker 4: so we work with money managers to help them understand
Speaker 4: this crazy world.
Speaker 1: So speaking of crazy world, and we'll get to all
Speaker 1: the dead stuff. Tercy and I the other night were
Speaker 1: we actually spoke to a group of students here at
Speaker 1: the Business school at Macombs and weird chatting about various
Speaker 1: things and what of the students said something interesting. They're like, oh,
Speaker 1: you know, they're talking about CMBs and they're like, oh,
Speaker 1: you know, it's hard to know what's in some of
Speaker 1: the they're very smart case they said, hard to know
Speaker 1: what are in some of these assets that people are buying,
Speaker 1: and what if you're buying stuff that's like Austin, downtown
Speaker 1: Austin real estate and there's huge vacancies. Isn't that true?
Speaker 1: It seems like this town is booming, is actually underneath
Speaker 1: the facade here in Austin like some problems brewing.
Speaker 4: It depends. There's a debate. The commercial real estate crowd
Speaker 4: is inherently optimistic glass half hole type of people. I
Speaker 4: think you have to be to take that kind of risk.
Speaker 4: And they've been printing money for a decade, right Austin
Speaker 4: has been booming. All of the developments exceed expectations and
Speaker 4: so it's been a great run. But yes, there is
Speaker 4: an overhang. So you see the cranes all around you,
Speaker 4: but a lot of these buildings are empty. So we
Speaker 4: have very high vacancy rates, very high rates of sub leasing,
Speaker 4: which is another indication that you know, Google or Meta
Speaker 4: builds a building, but then they don't need it and
Speaker 4: so they sublease a lot of the space. And depending
Speaker 4: on how you look at it, that the estimates of
Speaker 4: the pipeline under construction as a percent of the existing
Speaker 4: inventory is by far the highest in the nation and
Speaker 4: at record highs by many measures. So we've got a
Speaker 4: lot of supply both in offices and in multifamily that
Speaker 4: are coming to market in the next twelve to eighteen
Speaker 4: months and rates are high, vacancies are high. Probably the
Speaker 4: assumptions that went into these projects at the beginning are
Speaker 4: not going to materialize. So the question is does that
Speaker 4: mean just reduced profits or does that mean outright defaults,
Speaker 4: delinquencies and some distress.
Speaker 3: Right, this was going to be my next question, which
Speaker 3: is how does distress in commercial real estate actually feed
Speaker 3: through into the wider economy because you see different types
Speaker 3: of arguments. You know, you see a more optimistic scenario,
Speaker 3: which is, well, yes there are pockets of stress, but
Speaker 3: not everything is dire at the moment. Yes, downtown offices
Speaker 3: are probably the most affected, but you know, maybe a
Speaker 3: multi use building in the suburbs with doctors' offices and
Speaker 3: little shops like probably not as huge a deal. And
Speaker 3: then the dire scenario that you see every once in
Speaker 3: a while is that we are going to get a
Speaker 3: bunch of defaults eventually and that will impact the banks
Speaker 3: presumably and they're going to have to cut back on lending.
Speaker 3: So how are you viewing like the actual impact of
Speaker 3: cre distress.
Speaker 4: That is extraordinarily difficult to get a clear idea of
Speaker 4: or put good parameters around because CRE is inherently idiosyncratic.
Speaker 4: Every project is different. The financing of each of these
Speaker 4: projects come in layers and are you know, sourced differently,
Speaker 4: so it's really hard to get kind of a macro
Speaker 4: framing of how much potential distress. You know, I would
Speaker 4: categorize the banking channel is one that could go nonlinear
Speaker 4: in the sense that you know, it could we could
Speaker 4: see more bank failures, or it could be just a
Speaker 4: macroeconomic channel of a headwind. Right right now, the unemployment
Speaker 4: rate in Texas is underperforming. It's risen more than the
Speaker 4: national average. That's unusual for Texas. Some of that is
Speaker 4: the tech layoffs, which are part of what's behind some
Speaker 4: of the vacancies. So as these projects roll off, you're
Speaker 4: going to see less jobs. You know, people in the
Speaker 4: real estate industry and the construction industry are seeing layoffs here.
Speaker 4: Maybe not everywhere, but certainly here. So you'll just see
Speaker 4: some regular old garden variety economic headwinds. Even if it's not,
Speaker 4: you know, some sort of crisis, it's it's yet to
Speaker 4: be felt. And therein are the legs and monetary policy.
Speaker 1: So I want to get into obviously this whole legs debate.
Speaker 1: But before we do, you know, you mentioned the developers
Speaker 1: of various sorts in Austin have been printing money, and
Speaker 1: you mentioned all the cranes. We don't really see many
Speaker 1: cranes in New York because I guess it's a city
Speaker 1: you forgot how to build for various reasons.
Speaker 4: Well.
Speaker 2: Also, even if they're there, they're up pretty high high.
Speaker 1: Right because the one thing they do build out those
Speaker 1: like super tall buildings for.
Speaker 4: The tall skinny cigarette skin.
Speaker 1: Yeah, but Austin is not alone. I mean, like this
Speaker 1: is is this a broader sun Belt story? And can
Speaker 1: you talk about like how much of these developments have
Speaker 1: a sort of speci Okay, we're like we're building this
Speaker 1: for Google or we're building this for whatever versus we're
Speaker 1: building this and it's the sun Belt and someone is
Speaker 1: eventually going to rent, rent it, but we'll build it
Speaker 1: without even knowing how.
Speaker 4: Yeah, there is a lot more build it and they
Speaker 4: will come activity in the sun Belt that doesn't exist
Speaker 4: in New York. In New York, before you build a
Speaker 4: Hudson Yards, you've got several anchor tenants lined up. That
Speaker 4: is not the case here you can actually a lot
Speaker 4: of these developments. You know, the Google and the Meta
Speaker 4: buildings are an exception, but there are a lot of
Speaker 4: developments around town that are built on spec And is
Speaker 4: it broader than Austin. Yes, there's a number of cities.
Speaker 4: Austin is by far got the biggest overhang, but Dallas
Speaker 4: has a pretty big overhang. Denver, Boise. There are a
Speaker 4: number of the sun Belt boom towns, the COVID boom
Speaker 4: towns in the West where you can build where it's
Speaker 4: relatively more straightforward to get from concept to groundbreaking. And
Speaker 4: I would say it is a sun Belt slash COVID
Speaker 4: boomtown phenomenon, mostly in the West and the South and
Speaker 4: the southeast.
Speaker 3: Can we get Jackson Holish for a moment, But you know,
Speaker 3: going back to the way monetary policy is supposed to work.
Speaker 3: When you hike interest rates, you are supposed to be
Speaker 3: deterring some speculative frothy activity. So in a sense, how
Speaker 3: expected is this development for policy makers? I mean, you
Speaker 3: were in Wyoming, you were talking to loads of people.
Speaker 3: When you talk to them about what's going on in
Speaker 3: the Sunbelt, construction maybe slowing in places like Austin, what
Speaker 3: do they say and what do they think?
Speaker 4: That's a great framing. There's a range of views obviously,
Speaker 4: and yes, this is an intended channel to the extent
Speaker 4: that people took risks that turn out not to be
Speaker 4: you know, viable, or have a lower rate of return
Speaker 4: than they anticipate. That's just, you know, that's life in
Speaker 4: the big city, right. It's just part of taking risk
Speaker 4: is you realize sometimes some losses as well as some gains.
Speaker 4: So this is an intended channel of policy. The debate
Speaker 4: is more around have we seen all that we've seen
Speaker 4: and therefore we need to do more to slow the economy?
Speaker 4: Or are a lot of the effects of this still
Speaker 4: do they still lie ahead of us? And I think
Speaker 4: that's where there's a range of views. I really respect
Speaker 4: and like to hear the views of Chris Waller, Governor Waller,
Speaker 4: but he tends to be of the view that, you know,
Speaker 4: the lags are shorter because of forward guidance, because the
Speaker 4: FED is very transparent, that markets react almost instantaneously well
Speaker 4: before they actually raise rates, and therefore it's all priced in.
Speaker 4: I think if we think about a credit channel, and
Speaker 4: it's something we didn't really have last time, right, the
Speaker 4: credit channel was crisis. We didn't have this elongated kind
Speaker 4: of tighter credit. How does it feed through into the economy.
Speaker 4: And because of the refunding that you touched on with
Speaker 4: your other episode, the lags are probably longer. And this
Speaker 4: is something that if you talk to European central bankers,
Speaker 4: they think of the legs as being longer because of
Speaker 4: fixed rate financing and more of that, and that it's
Speaker 4: going to take some time for financing to roll over
Speaker 4: and to feel the effects and employment and activity, and
Speaker 4: so you have to know that what you've done already
Speaker 4: is going to keep being a restraining force going forward.
Speaker 4: So I'm more in the lags are longer camp because
Speaker 4: of this than the lags are all behind us Camp, Joe.
Speaker 3: This kind of reminds me of some of the discussion
Speaker 3: around inflation, just the idea that it's been decades since
Speaker 3: anyone has really had to deal with higher inflation and
Speaker 3: we're not sure how.
Speaker 2: To deal with it.
Speaker 3: This idea that like, well, maybe it's been decades since
Speaker 3: we've had a sharp change in monetary policy propagated out
Speaker 3: into the economy, and we don't really get how it works.
Speaker 3: And the last example was so extreme in two thousand
Speaker 3: and eight.
Speaker 1: I love the way you put that, which is that
Speaker 1: we think of two thousand and eight as a credit crisis. Yes,
Speaker 1: but the actual mechanism by which the economy slowed down
Speaker 1: was not per se the contraction of credit. But oh
Speaker 1: my god, the world is falling apart, and everyone just
Speaker 1: slams the breakout once. They slam the breakout hiring, they
Speaker 1: slam the break on new development, etc. Which is not
Speaker 1: really what people have in mind, this idea that we're
Speaker 1: just going to pull back on credit and slow things down. Right,
Speaker 1: this is the key dynamic we want to talk about.
Speaker 1: But you know, the realized disinflation that we've seen so far.
Speaker 1: So at one point, I think we're looking around nine percent.
Speaker 1: Maybe we're closer like three something percent now, But as
Speaker 1: I said in the intro, no one really knows why exactly,
Speaker 1: and unemployment didn't rise like the way many economists would expect.
Speaker 1: What's your story basically for the last twelve months of
Speaker 1: fairly nice disinflation.
Speaker 4: So we are big believers in sector analysis micro to macro. Right,
Speaker 4: so what's going on looks sector bi sector, what's going
Speaker 4: on in the dynamics of you know, how concentrated is
Speaker 4: a sector, how are the profits panning out, how is
Speaker 4: consumer price sensitivity in that sector? And then building you know,
Speaker 4: running the top down macro models, but also building that
Speaker 4: outlook from the bottom up and the bottom up is
Speaker 4: you know, on the one hand, it led us to
Speaker 4: be falsely in the transitory camp early, but then we
Speaker 4: pivoted because the reason it failed was we had more
Speaker 4: supply chain frictions, We had more waves of COVID, we
Speaker 4: had Malaysian chip factory shutdowns, we had all kinds.
Speaker 2: Of Russia, Ukraine, Russia, Ukraine.
Speaker 4: These frictions and challenges sand in the gears that kept inflation. Meanwhile,
Speaker 4: also like very strong demand support, very in price and
Speaker 4: sensitive demand. When we look out at the dynamics so far,
Speaker 4: me of it. Yes, when you look at cars, for example,
Speaker 4: which has been such a key part of the inflation
Speaker 4: and now it's been a key part of the disinflation,
Speaker 4: it's both a macro story higher rates, lower demand for cars,
Speaker 4: more price sensitive demand for cars, but also improving supply chains,
Speaker 4: improving inventories, available chips. So it's both, you know, a
Speaker 4: supply and a policy story tangled up together, hard to disentangle,
Speaker 4: but you know, it's definitely a key part of the disinflation.
Speaker 4: And if you don't think in those terms, if you're
Speaker 4: just thinking, okay, economic growth equals inflation, which is kind
Speaker 4: of what Powell did at the press conference, then you're
Speaker 4: going to be untrusting. You're going to be skeptical, part
Speaker 4: of which is perfectly healthy, but also maybe too skeptical.
Speaker 4: They're extreme. They have very pessimistic inflation assumptions for the
Speaker 4: remainder of the year in their forecast. They you know,
Speaker 4: definitely seem to be leaning on we maybe need to
Speaker 4: do more, and we see a lot of good things
Speaker 4: happening in inflation dynamics. One of the things we look at,
Speaker 4: for example, is the diffusion how many prices are increasing
Speaker 4: versus decreasing. That tells you if you look at the seventies,
Speaker 4: that was one hundred percent, every single price was going
Speaker 4: up every single month, quarter year, All wages were going up.
Speaker 4: That's not what's happening now. Some prices are falling, airfares
Speaker 4: go up and down depending on consumer demand. Capacity There
Speaker 4: has totally normalized auto sales similarly up and down. So
Speaker 4: I think we're seeing a much more dynamic healthy pricing dynamic,
Speaker 4: which gives us more optimism that these lower this lower
Speaker 4: regime can have some staying power and you don't need
Speaker 4: to hammer the economy. I mean, we had several cycles
Speaker 4: over the last thirty years where we had growth and
Speaker 4: no inflation, but because because of the PTSD from the pandemic,
Speaker 4: there's this equating of growth with inflation almost amongst and
Speaker 4: what's what was surprising about the meeting, the September FOMC
Speaker 4: meeting to me was how unanimous it seems to be.
Speaker 4: Everybody's forecasts kind of showed a higher funds rate, and
Speaker 4: everybody raised their twenty twenty four inflation forecast, or a
Speaker 4: lot of people did. There isn't a lot of sectoral
Speaker 4: inflationists on the FOMC, and I think that gives them
Speaker 4: a very rigid view of how things are playing out.
Speaker 3: This was going to be exactly my next question. Actually,
Speaker 3: you mentioned Powell's speech, which was very macro and sort
Speaker 3: of traditional FOMC speech ish, but Christine Legard of the
Speaker 3: UCB gave basically the opposite speech, talking about like we
Speaker 3: are in this weird period where it feels like the
Speaker 3: real economy of supply chain can straints U fiscal is
Speaker 3: more in control than monetary policy, and it poses new
Speaker 3: challenges to economists. How well equipped do you think economists
Speaker 3: are to start looking at, you know, individual industries or
Speaker 3: looking at specific sectors as you just pointed out, versus
Speaker 3: the sort of macroeconomic theory that many of them have
Speaker 3: been trained on.
Speaker 4: There's a lot of good economists, ourselves included, I would say,
Speaker 4: that are doing this kind of work. So Alan Dettmeister
Speaker 4: at UBS, Gonda Armana at Employee America, Oh, Mayr Sharif,
Speaker 4: Mike Knskall at Rose.
Speaker 2: I love that most of these are thoughts.
Speaker 4: Yeah, we've we should have definitely should yeah, yeah, the
Speaker 4: who's who have? But there's and you know, we we
Speaker 4: engage in this conversation, in this debate, you know, in
Speaker 4: social media, and there's lots of great exchanges and analysis.
Speaker 4: The sellers inflation, your your point about the ECB is
Speaker 4: a great one. Seller's inflation. Let's set aside the loaded
Speaker 4: term greedflation, but the idea of profits.
Speaker 3: We have purposely avoided saying greedflation. We tried to coin
Speaker 3: the term excuse flation, which did some people have been
Speaker 3: using it. But yeah, I think sellers sellers inflation and.
Speaker 4: Yeah, let inflation. And if you look at say Lagarde's
Speaker 4: press conference, she breaks down what's been happening in inflation
Speaker 4: in terms of what's driven by the labor market and
Speaker 4: what's driven by profits, Like as a matter of accounting,
Speaker 4: you know, there's plenty of ECB officials that are sort
Speaker 4: of well versed in Yes, there's the labor market, and
Speaker 4: then there's the product side, there's the profit side, the
Speaker 4: industry side. It has to do with concentration and common shocks,
Speaker 4: et cetera. So it's not like it's a radical theory.
Speaker 4: It's not like there's no workout there. It's just like
Speaker 4: there's nobody on the FMC that embraces this, you know,
Speaker 4: very you know, overtly.
Speaker 3: Uh.
Speaker 4: And so again, I just think there's a common framework
Speaker 4: at the FETE that is, you know, it's an important framework.
Speaker 4: It's a useful framework, but it's not the only framework,
Speaker 4: and you need to have I would say it's better
Speaker 4: to have as many possible perspectives and points of view
Speaker 4: to understand these dynamics. You know, inflation went up more
Speaker 4: than even the macro models suggested, and at a timing
Speaker 4: that does not align with the macro models. So when
Speaker 4: you have an error on your model as a forecaster,
Speaker 4: you look forward and think, hmm, that error might reverse
Speaker 4: at some point, I might get downside surprises standard forecasting.
Speaker 4: I'm not saying anything radical now. Of course, it's not
Speaker 4: the Central Bank's job to err on the side of
Speaker 4: optimism when they're above their target. But you know, you
Speaker 4: can talk. I don't understand, like Powell had several opportunities
Speaker 4: at the press conference. There was three or four questions.
Speaker 2: Actually.
Speaker 4: Craig Torres of Bloomberg asked an excellent question about the
Speaker 4: nuances of higher rates and supply side lead inflation in
Speaker 4: real estate, and Powell just won't go there. He just
Speaker 4: doesn't want to go to the supply side and talk
Speaker 4: about those. I mean he did, to be fair, he
Speaker 4: did say we understood that fading pandemic frictions are part
Speaker 4: of the story. But again, I think they just are
Speaker 4: very shell shocked by what they've been through in the
Speaker 4: last couple of years and are still airing on the
Speaker 4: pessimistic side.
Speaker 1: You know, one other thing in that regards speech, specifically
Speaker 1: that you mentioned this idea of like the price and
Speaker 1: sensitive demand and the big source of that is the
Speaker 1: investment that's happening in like green transition and energy infrastructure,
Speaker 1: and that's going to have it regardless of we could
Speaker 1: have a recession. Yeah, you could have a boom. But
Speaker 1: we know governments are going to spend a lot on
Speaker 1: this and they're going to subsidize a lot and of
Speaker 1: course we talk about that all the time on odd lots,
Speaker 1: and yeah, this is an interesting dynamic. There's a lot
Speaker 1: of spending that's going to happen regardless of where we
Speaker 1: are in the cycle. I want to get deeper in
Speaker 1: to the lags debate because I have this like sort
Speaker 1: of like weird sympathy for the priced in. Everything's always
Speaker 1: everything's always priced in.
Speaker 4: Yeah, that's what we saw after the FMC means right,
Speaker 4: a pced in.
Speaker 1: Day one, So and so like okay, that's the Waller
Speaker 1: view as you characterize it, Like why isn't it all
Speaker 1: price it? What is the case for? Like why like
Speaker 1: all right, even if we know that raid hikes are coming,
Speaker 1: they telegraph it. We're in an age of very aggressively
Speaker 1: clear forward guidance. The dots didn't used to exist. That's
Speaker 1: a modern innovation in central banking. So like, let's talk theoretically,
Speaker 1: and then like, let's get more concrete, like what is
Speaker 1: the case for why it wouldn't all just be priced
Speaker 1: in and why people don't adjust their behavior the moment
Speaker 1: the central banks give their indication of where rates are going.
Speaker 4: Yeah. The way I think about it is I break
Speaker 4: it into two channels. There's the capital markets channel, and
Speaker 4: then there's the credit channel. Okay, and the capital markets
Speaker 4: channel exactly as you describe. The FED telegraphs its intentions,
Speaker 4: it's perspective on the balance of risks, and capital markets
Speaker 4: price it in. But there's the credit channel side where
Speaker 4: you've got this you know, fixed rate financing for a
Speaker 4: couple of years, and you've got time, and there's legitimate
Speaker 4: uncertainty about where we're going to be in a year,
Speaker 4: in two years, and if you are you know, again,
Speaker 4: commercial real estate is a perfect example because they are
Speaker 4: you know, glass half full kind of people. And there's
Speaker 4: been a real conversation and you know, I talk to
Speaker 4: a lot of people in the real estate industry. There's
Speaker 4: a real sense that you know, if we hold on
Speaker 4: long enough, rates are going to go back down. Uh,
Speaker 4: And so I'm not going to mark my losses. I'm
Speaker 4: not going to scale back my project. I'm going to
Speaker 4: maybe slow walk that project and not be in a
Speaker 4: hurry because I think and if I come to market
Speaker 4: in a year or two years and I need to
Speaker 4: roll over my financing, I'll get better terms then. And
Speaker 4: that's not irrational, but it does mean that you know
Speaker 4: if they're wrong, which you know, the market has moved.
Speaker 4: One of the things that's happened since the last FMC
Speaker 4: meeting in July is that markets did move to higher
Speaker 4: for longer pricing. Real rates are up fifty basis points,
Speaker 4: and so we have yet to feel the effect of
Speaker 4: that last leg of increase in real rates. It just happened,
Speaker 4: and that was a change in psychology in the market,
Speaker 4: the market realizing, hmm, maybe higher for longer is where
Speaker 4: we're going, in which case we need to reprice things
Speaker 4: in which case, And then you look at the impact
Speaker 4: of that. We've seen mortgage applications roll over. We've seen
Speaker 4: car analysts lower their forecasts for the remainder of the
Speaker 4: year because there's less pent up demand at these interest rates.
Speaker 4: So all these leading indicators are saying, yeah, there's going
Speaker 4: to be an effect from that last leg up in
Speaker 4: interest rates, and and the Fed raised it's twenty twenty
Speaker 4: four forecast, not lowered it. So the conviction they have
Speaker 4: on extrapolating the recent good performance into twenty twenty four
Speaker 4: was surprising to me.
Speaker 1: It's not lost on me. When you think about commercial
Speaker 1: real estate developers. It just the sort of like sheer
Speaker 1: belief that it'll be find yes that the two most
Speaker 1: famous developers, and I think I may have stolen this
Speaker 1: observation from someone, the two most famous commercial real estate
Speaker 1: developers that everyone knows are Donald Trump and Adam Newman,
Speaker 1: which sort of gives you a sense of maybe like
Speaker 1: the sort of mindset of a lot of the people dealing.
Speaker 3: Those are the poster children for commercial real estate optimistes.
Speaker 1: The sheer case, the sheer belief in winning.
Speaker 3: I realized we've been talking a lot about corporates. Can
Speaker 3: we talk maybe a little bit more about household talent
Speaker 3: sheets because this is the other area of uncertainty, and
Speaker 3: there is a lot of debate at the moment over
Speaker 3: how healthy the consumer actually is. And you see these
Speaker 3: charts of outstanding credit card debt, you know, going up
Speaker 3: to records, and people panicking that people are going to
Speaker 3: struggle to pay some of this back as interest rates
Speaker 3: go higher. But on the other hand, there's plenty of
Speaker 3: discourse that says individual balance sheets are basically in the
Speaker 3: best shape they've been in a very long time. So
Speaker 3: how are you viewing that particular debate.
Speaker 4: Yeah, yeah, So, first of all, the credit card debt
Speaker 4: at record highs. You never look at nominal debt. You
Speaker 4: always scale it by income. The flow of funds for
Speaker 4: Q two just came out. Debt to income is right
Speaker 4: back down. So if you look at including credit card
Speaker 4: debt as a percent of income came down. So I
Speaker 4: don't look at households as and see a picture of oh,
Speaker 4: they're binging on debt or they're leaning on debt because
Speaker 4: they can't finance their spending with income. I do think
Speaker 4: household balance sheets are in fantastic shape. We came into
Speaker 4: this tightening cycle in the best shape ever, both in
Speaker 4: terms of net worth but also in terms of delinquencies
Speaker 4: on all categories of consumer loans. It was the first
Speaker 4: recession where we actually lowered delinquencies through the recession, through
Speaker 4: all of that fiscal support. People used it to pay
Speaker 4: their auto loans, they used it to pay their credit cards,
Speaker 4: So we didn't have the delinquencies we typically have with
Speaker 4: job losses. That was part of the idea, and so
Speaker 4: I think there's a bit of a haves and have
Speaker 4: nots in the consumer world. If you look at delinquencies,
Speaker 4: they're coming up off the lows across categories. Auto delinquencies,
Speaker 4: credit card delinquencies, mortgage delinquencies are still very low. But
Speaker 4: so you've got you know, lower income consumers who have
Speaker 4: been hit by the rental inflation versus homeowners who got
Speaker 4: to refinance to record low morgage rates.
Speaker 2: I feel like this is really the lynchpin.
Speaker 4: Yeah, there's a real bifurcation, and and who's feeling the
Speaker 4: effects of the higher rates. Most people that have to buy,
Speaker 4: you know, or the higher used car prices are going
Speaker 4: to be more moderate income consumers, so I think, and
Speaker 4: that's the other thing that we've been seeing too, is
Speaker 4: the labor market is still like level wise, very healthy,
Speaker 4: but the slowing in job growth is quite pronounced. And
Speaker 4: so you know, we've been in the soft landing camp
Speaker 4: all along. We never have been forecasting a recession. I
Speaker 4: actually see the recession nods as just as high, or
Speaker 4: even maybe a little bit higher, because the labor market
Speaker 4: looks like it's closer to it's not just going great guns.
Speaker 4: The sectors that are hiring have narrowed, the pace of
Speaker 4: hiring has slowed. Wage growth is slowing, so the nominal
Speaker 4: income growth being generated by the labor market has slowed
Speaker 4: quite a bit. Delinquencies, so again it looks more like
Speaker 4: a cyclical shift, but it's only amongst a certain segment
Speaker 4: of consumers.
Speaker 1: Well, so this gets to the question. So the Fed,
Speaker 1: we don't know if they're done raising rates, but what
Speaker 1: they are doing, or what they are indicating, is they're
Speaker 1: telling the market that cuts are not forthcoming, correct, and
Speaker 1: that is a defect of tightening, or it is a
Speaker 1: form of us maybe second derivative tightening or something. And
Speaker 1: so if you look at their twenty twenty four dots,
Speaker 1: they're coming up and basically telling the market if you
Speaker 1: think they are cuts, they're probably not. And so let's
Speaker 1: set this. You say, the recession odgs are ticking up
Speaker 1: a little bit because that nominal income the way labor
Speaker 1: market is slowing. It's not seeing mass layoffs or anything
Speaker 1: like that now, but there's some slowing. Wage growth is
Speaker 1: probably slowing a little bit. The inflation dynamics you think
Speaker 1: are improving meaningfully in a way that can be sustained.
Speaker 1: The FED doesn't appreciate perhaps that they can be sustained.
Speaker 1: The dots are coming up, so talk to us about
Speaker 1: that risk that the FED is still sort of pessimistic
Speaker 1: about inflation dynamics. It's sort of engaged in a modest
Speaker 1: tightening still by raising those outdots, and in a backdrop
Speaker 1: of a time when the recession risk is ticking.
Speaker 4: Up, it still is a very healthy economy. I mean,
Speaker 4: the fact that the corporate side of the world has
Speaker 4: gotten more optimistic is probably helps labor market resiliency in
Speaker 4: terms of preventing further layoffs. But I think you know,
Speaker 4: if you're extrapolating off of the Q three GDP tracking,
Speaker 4: then you're probably going to see some disappointments down the road.
Speaker 4: Right the growth has ebbed and flowed. You know what
Speaker 4: I see is if I look at the consumer consumer
Speaker 4: spending sort of dropped to trend early last year, and
Speaker 4: then the quarterly numbers bounce up and down just depending
Speaker 4: on where that spending falls and kind of ebbs and flows.
Speaker 4: So you know, whatever Q three is tracking, that's not
Speaker 4: the run rate. Right now, we're in for some slower
Speaker 4: patches of data, and that could be more worrisome and
Speaker 4: sort of. But there's two things that keep us in
Speaker 4: the resiliency camp. One is we do believe that inflation
Speaker 4: is coming down more sustainably. That is a tailwind for
Speaker 4: consumers that gives them more purchasing power. The energy shock
Speaker 4: is a complicating story to that. That could that's gonna
Speaker 4: hurt purchasing power in the next few months. But the
Speaker 4: Fed also has AMMO. If things get really rocky, they
Speaker 4: can cut rates, and we are in a world where
Speaker 4: there's a credit channel, so you might get a response
Speaker 4: in housing. Look at housing housing world right over. Rates
Speaker 4: went down because of the recession call expectations early in
Speaker 4: the year. Then they've come back up and you've seen
Speaker 4: housing demand EBB and flow with that. So there is
Speaker 4: a lever at their disposal which is effective that they
Speaker 4: can go to. Of course, the bar is much higher
Speaker 4: when you're coming at the inflation target from above. They're
Speaker 4: very skeptical, but you know, if we could hit a
Speaker 4: soft patch and then they could respond and that could
Speaker 4: keep us back on track.
Speaker 3: This might be an unfair question to ask an economist,
Speaker 3: but you are also a clinical Associate Professor of Finance.
Speaker 3: I believe, yeah, so maybe you can answer this. But
Speaker 3: one of the puzzling things in markets recently has been
Speaker 3: the very low spreads or risk premiums on corporate bonds. Right,
Speaker 3: even as you see all the concern about everything we've
Speaker 3: been talking about in this discussion, one way I can
Speaker 3: think of justifying it is that maybe markets still think,
Speaker 3: you know, if rates continue to go up, eventually something
Speaker 3: might break and then the FED comes in and cuts,
Speaker 3: and so the interest rate problem kind of goes away
Speaker 3: again for a lot of companies. Is that a reasonable
Speaker 3: explanation or how would you explain persistently low spreads in
Speaker 3: the credit market.
Speaker 4: You know, that's a great question. I think you're. One
Speaker 4: of your prior guests talked about how a lot of
Speaker 4: the weak hands got squeezed out during the trade wars. Yes,
Speaker 4: this is true, and I thought that was a very
Speaker 4: interesting point because a lot of the sort of riskiest
Speaker 4: businesses were in the energy sector, and a lot of
Speaker 4: those already felt their recession before the recession, and so
Speaker 4: we have sort of a higher credit quality landscape. The
Speaker 4: other area of pronounced weakness is in the tech sector,
Speaker 4: and they're just not that debt exposed, right, their valuation exposed.
Speaker 4: Their valuations are much more volatile. That's where all the
Speaker 4: speculation goes when people are optimistic or pessimistic, but it
Speaker 4: doesn't necessarily translate into credit spreads. So it is perplexing
Speaker 4: that it's still so solid in terms of a global
Speaker 4: capital flows perspective. One question I've been asking sort of
Speaker 4: more globally oriented people is we know that less money
Speaker 4: is going into China, where does that money go?
Speaker 2: That's a good point.
Speaker 4: Yeah, is it possible that developed markets are experiencing a
Speaker 4: little bit more of a tailwind from money that has
Speaker 4: to be reallocated to the US or other countries? And
Speaker 4: I think the answer is possibly yes. You know, you
Speaker 4: think about what does it mean this sort of structural
Speaker 4: shift in China. One of the things we think, well,
Speaker 4: China has been the source of the excess savings glut.
Speaker 4: Maybe that you know, takes away the subsidy to you know,
Speaker 4: treasury yields to some extent, but it might mean more
Speaker 4: asset allocation from global investors into the US and other
Speaker 4: asset classes. So I'm not an expert on that, but
Speaker 4: I'm I'm you know, that's something I'm trying to learn
Speaker 4: more about and think more about.
Speaker 2: Yeah, that's interesting, going.
Speaker 1: Back to that Reguard speech and the price and sensitive demand.
Speaker 1: I mean, the other thing that's going on now is
Speaker 1: we're like the era of big fiscal and it's like
Speaker 1: the opposite of the twenty tens, where the twenty tens
Speaker 1: A got that's pretty in retrospect of stimulus right off
Speaker 1: the bat in like two thousand and nine. Then it
Speaker 1: died pretty quickly after the Republicans won the House of
Speaker 1: twenty ten that sort of took further fiscal expansion off
Speaker 1: the table. We're in an area where people are talking
Speaker 1: about structural deficits for a long time to come, for
Speaker 1: various reasons, including the Inflation Reduction Act, which is I
Speaker 1: suspect a lot of like high multipliers spending because it's
Speaker 1: construction and factories and all this stuff that goes into
Speaker 1: a lot of pocketbooks of sort of construction workers, et cetera.
Speaker 1: How are you thinking about like the persistent macro impact
Speaker 1: of the era of high deficits.
Speaker 4: Yeah, yeah, so I'm really glad we got here because
Speaker 4: that's another area where I think the narrative is is
Speaker 4: is skewed. So the narrative tends to be we just
Speaker 4: equate deficits with inflation, and there's a lot of you know,
Speaker 4: the fiscal shaming coming back out. But if you look
Speaker 4: at what we're spending money on, you know, during the pandemic, yes,
Speaker 4: it was all just giving money to consumers to spend.
Speaker 4: This is all giving money to builders to build. And
Speaker 4: Texas is We've had this conversation, I believe Joe and
Speaker 4: Jackson Hall, which was, if you look at what's happening
Speaker 4: in Texas, we are in the middle of a renewables boom,
Speaker 4: and that is arguably disinflationary because we've had the hottest
Speaker 4: summer on record. And let me tell you, anybody that
Speaker 4: lives has lived in Texas for the last two summers
Speaker 4: knows that we are in an existential change and we're
Speaker 4: going to need more capacity and we, thank goodness, have
Speaker 4: that capacity. So I was like, somewhere in July, I'm like,
Speaker 4: why are we not like experiencing a crisis like we did,
Speaker 4: you know, during the winter of twenty twenty one. And
Speaker 4: I looked at some of the data from URKOT and
Speaker 4: the generation capacity, and well, we've just been growing, you know,
Speaker 4: handover in terms of wind solar. All the new capacity
Speaker 4: is in the renewables, thank goodness, and let's do the counterfactory.
Speaker 4: I kind of tried to ask this question at Jackson.
Speaker 4: I'm not sure it came through. When we think about
Speaker 4: fiscal we need to think about why we're doing it right.
Speaker 4: Why are we doing it? It's not just random, Oh,
Speaker 4: let's just spend a lot of money and let's just
Speaker 4: run big deficits. Why are we doing it well? First,
Speaker 4: we did it because we were in a global pandemic
Speaker 4: and we successfully achieved a much stronger recovery. Secondly, now
Speaker 4: we're doing it, and Christine Legard explicitly talked about this
Speaker 4: in her speech, You're going to have to expect the
Speaker 4: government to play a bigger role when we're in an
Speaker 4: energy transition because nobody else can engineer that. The private
Speaker 4: sector won't do it by itself, So the government steps
Speaker 4: in and provides these incentives and it's working. I mean,
Speaker 4: it's a story that's hopeful to me that we are
Speaker 4: getting the capacity we need. It's in renewables. And what
Speaker 4: would have happened if you look back to twenty twenty one,
Speaker 4: the grid failure in Texas was another friction that brought
Speaker 4: chip supply shortage made it worse. Right, we had chip
Speaker 4: factories here that were affected. What would have happened if
Speaker 4: we would have didn't have this capacity this summer? You know,
Speaker 4: what would have gone down? What kind of capacity, what
Speaker 4: kind of production would have gone down? We have we
Speaker 4: have surge pricing in Texas. Prices for sure would have
Speaker 4: gone up more than they did because of the presence
Speaker 4: of renewables. So you know, arguably that's been disinflationary already
Speaker 4: for Texas consumers. And I think we need to think
Speaker 4: more expansively about what are we doing, What are we
Speaker 4: getting for this money. It's not all just you know,
Speaker 4: going straight into demand, it's going into capacity.
Speaker 3: Well, this was also Biden's argument in the very early
Speaker 3: innings of the IRA, His whole you know, spiel for
Speaker 3: it was that, well, we have these supply constraints, and
Speaker 3: we have these choke points in the economy, and so
Speaker 3: we spent now to solve those, and ultimately that becomes
Speaker 3: a disinflationary impulse and the solution to our inflationary problems.
Speaker 3: I want to ask just one last question, going back
Speaker 3: to the long and variable lags idea, what are you
Speaker 3: watching out for for signs of interest rates really beginning
Speaker 3: to bite in potentially problematic or systemic ways. I know
Speaker 3: we talked about commercial real estate, but like, what are
Speaker 3: specific things people should be looking out for.
Speaker 4: It's kind of hard to pinpoint. I mean, the SVB
Speaker 4: example is a perfect example of you know, you just
Speaker 4: don't always see it coming. That's still a possible shock.
Speaker 4: If you look at the FDIC's latest quarterly report, those
Speaker 4: securities and loan losses are just as big, yeah, if
Speaker 4: not bigger, because just went up, so their portfolios are
Speaker 4: even further underwater. So it's there's still it's a tough
Speaker 4: road for particularly mid size and smaller banks that are
Speaker 4: making money on bread and butter economic financing, not you know,
Speaker 4: the capital markets businesses that the big banks have to offset.
Speaker 4: So I think still watching the credit channel and the
Speaker 4: credit flows. Credit flows have slowed and are tighter the
Speaker 4: time the financing terms are tighter, and so you know,
Speaker 4: I think that that can affect the economy, not necessarily
Speaker 4: in a crisis like way, but definitely slow continue to
Speaker 4: slow things down. Big picture, we've had a generational interest
Speaker 4: rate shock after you know, years at the zero lower bound,
Speaker 4: where is all the leverage in our economy to zero rates.
Speaker 4: Tech has been a surprising area of sensitivity to monetary policy. Right,
Speaker 4: they're not indebted, but their valuations sure are sensitive to
Speaker 4: QE versus QT versus you know, fed hawkish fed dubvish.
Speaker 4: It could be that there's a wave of you know,
Speaker 4: there's been some really if lately. Maybe we get further
Speaker 4: correction there because it turns out that that was when
Speaker 4: you when you don't have just good old plane safe yields,
Speaker 4: you start speculating more on things like software and uh,
Speaker 4: crypto and crypto is another one that can keep going.
Speaker 4: There's some some leverage in that system that could spill
Speaker 4: over to the broader financing system. So there's a number
Speaker 4: of areas that we could see Titan in ways that
Speaker 4: aren't just a gradual linear march. It sort of happens
Speaker 4: all of a sudden when people just can't roll over
Speaker 4: their funding anymore.
Speaker 1: Julia Coronado macro policy perspectives. I'm so glad we had
Speaker 1: this conversation. We were able to make it happen after
Speaker 1: we didn't get the chance of it.
Speaker 4: Now we can have.
Speaker 1: Yeah, thank you so much for my pleasure. To thank
Speaker 1: you for the talker. That was such a good conversation.
Speaker 1: So much in there. I just want to say, before
Speaker 1: I forget, not all tech speculation is like some of
Speaker 1: it amounts to something. And I know this because I
Speaker 1: took my first self driving car drive home last night,
Speaker 1: So some tech investment actually becomes real. It is so amazing.
Speaker 2: This is the problem.
Speaker 3: You've gone to Austin, you've written around in self driving cars,
Speaker 3: and then you went to like the fund manager who
Speaker 3: is the ultimate like espouser of the efficient market hypothesis theory,
Speaker 3: and now you're just feeling really good about everything. You're like,
Speaker 3: it's all priced in. Tech is great, the future is bright.
Speaker 3: Let's eat more tacos.
Speaker 4: Yeah.
Speaker 1: You know what I really liked though, that I thought
Speaker 1: was extremely helpful is Julia's demarcation of the credit channel
Speaker 1: versus the assets yes, or the capital markets channel. And
Speaker 1: that was so helpful for me in terms of thinking
Speaker 1: about like, yeah, like stocks due price in you know,
Speaker 1: the dots for twenty twenty four come up and then
Speaker 1: stocks go down or whatever it is, and then this
Speaker 1: idea that credit is just never going to work automatically
Speaker 1: like that, And there's lengths of credit, and there's different opinions,
Speaker 1: and people can hold out and restructure, et cetera. And
Speaker 1: so the idea that credit market will respond automatically in
Speaker 1: the same way like asset valuations will, it's like a
Speaker 1: really helpful way to sort of, at least in my mind,
Speaker 1: resolve some of these tensions.
Speaker 2: Absolutely, So two things stood out to me.
Speaker 3: One was the point that fiscal stimulus doesn't our fiscal
Speaker 3: spending doesn't always have to be inflationary. And I know
Speaker 3: this was actually a big talking point. Again I pointed
Speaker 3: out at the beginning of the IRA this was the
Speaker 3: selling point from Biden, but I think it's it kind
Speaker 3: of got lost in the ether with all the discussion
Speaker 3: and drama around the debt ceiling and things like that.
Speaker 2: But we have seen some glimmers of that. You know,
Speaker 2: there were.
Speaker 3: Fiscal attempts to solve the backlogs at the port for instance,
Speaker 3: which seemed to have helped a little bit. And then
Speaker 3: the other thing that stood out to me was the
Speaker 3: contrast between the two thousand and eight monetary policy changes
Speaker 3: versus now. Yeah, and I think this is really key
Speaker 3: and maybe like one of the reasons why policy makers
Speaker 3: are struggling at this.
Speaker 2: Moment in time.
Speaker 3: We have not had a huge dramatic shift in monetary policy,
Speaker 3: you know, for a long time, but not in the
Speaker 3: shape that we have it currently, where it's a series
Speaker 3: of hikes. In two thousand and eight, as Julia pointed out,
Speaker 3: it was it was crisis.
Speaker 1: That was a really good point. Like the idea of like, well,
Speaker 1: what is a credit channel constraint is like something that
Speaker 1: we haven't really experienced as well, and we're seeing glimmers
Speaker 1: of it. We saw it actually play out in housing
Speaker 1: at the end of twenty twenty two. Maybe again now
Speaker 1: with mortgage rates roughly seven and a half percent. I
Speaker 1: think the home builders have come down. Home builder optimism
Speaker 1: has declined, so we're like seeing that dynamic again. Also,
Speaker 1: you know parentheses here. It is sort of an underappreciated point.
Speaker 1: As Julia pointed out, monetary policy can now work in
Speaker 1: the other direction. When we were at ZERP, there was
Speaker 1: not really much that the Fed could do to stimulate, right.
Speaker 1: I mean, they could like do borcui, but I think
Speaker 1: always the efficacy of that is always sort of debatable.
Speaker 1: They can cut rates now, which is a really interesting
Speaker 1: dynamic and probably get some juice out of those raid
Speaker 1: cuts in the way that we haven't experienced in a
Speaker 1: long time.
Speaker 2: Absolutely, shall we leave it there?
Speaker 1: Let's leave it there.
Speaker 3: This has been another episode of the Odd Thoughts podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy.
Speaker 1: Alloway and I'm Joe Wisenthal. You can follow me at
Speaker 1: the Stalwart. Follow our guest Julia Coronado, She's at jc
Speaker 1: Underscore Econ. Follow our producers Carmen Rodriguez at Carmen Arman
Speaker 1: and dash El Bennett at dashbot Big thanks to Moses
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