Speaker 1: With us around the table on place to say Gary
Speaker 1: Cowed morning.
Speaker 2: Gary, Good morning, John. Thanks.
Speaker 1: I reflecting on our conversations we used to have many
Speaker 1: years ago when you were in front of the White
Speaker 1: House and you use this term the threes, Are we
Speaker 1: going back to the threes? Is that what you think
Speaker 1: we're going back to?
Speaker 3: It feels like we're going back to the threes, you know,
Speaker 3: in the threes. For those that don't remember me standing
Speaker 3: in front of the White House talking about the threes,
Speaker 3: I was talking about three percent GDP, three percent unemployment
Speaker 3: and three percent wage growth. That was sort of the
Speaker 3: sweet spot that we were trying to achieve at the time,
Speaker 3: and we thought that was a really good solid place
Speaker 3: for the United States economy to be, and that was
Speaker 3: sort of the goal. That was sort of the middle
Speaker 3: of the target that we were trying to hit, you know,
Speaker 3: month after month, as we were talking on those fridays
Speaker 3: after we released job data.
Speaker 1: What I've noticed from you is that we seem to
Speaker 1: have forgotten what normalists.
Speaker 2: Well, we totally forgot what You've.
Speaker 1: Been around for a long time. You've seen many cycles
Speaker 1: what is normal.
Speaker 3: So this is a campaign I'm on in many respects
Speaker 3: that we have forgot what normalists.
Speaker 2: So to go back to what normal.
Speaker 3: Is have to go back to the post two thousand
Speaker 3: and eight financial crisis, because since two thousand and eight,
Speaker 3: you know, the FED has been the overwhelming dominant feature
Speaker 3: of financial markets. So prior to two thousand and eight,
Speaker 3: you know, FED meetings were important, but we didn't live
Speaker 3: in die off FED meetings. In fact, I'm old enough
Speaker 3: to remember when money supply was what drove markets. Now
Speaker 3: I'm really dating myself on money supply there. But then
Speaker 3: we get to two thousand and eight and the FED
Speaker 3: goes into the whole policy of zero interest rates and
Speaker 3: quantitative easy, followed by many other central banks around the world.
Speaker 3: And as the FED goes into the zero interest rate
Speaker 3: policy and they continue to build a bigger and bigger
Speaker 3: balance sheet, they become the dominant factor in financial markets.
Speaker 3: Not just in the fixed think of markets, not just
Speaker 3: in the rate markets. But when you literally have zero
Speaker 3: rates in return, you're literally forcing people out into the
Speaker 3: risk spectrum. So you bring many, many other asset classes
Speaker 3: that have historically not been appealing to people, You bring
Speaker 3: them into play. Because the search for return, the search
Speaker 3: for yield, you go farther out on the respector so,
Speaker 3: we lived through the two thousand and eighth period all
Speaker 3: the way up to basically, I would say COVID with
Speaker 3: this zero interest rate policy. People looking for alternative assets,
Speaker 3: looking for yield, searching for it in unusual places.
Speaker 2: We come into the COVID period.
Speaker 3: And sort of the Fed stays in their zero interest
Speaker 3: rate policy because they have no idea, really what's happening.
Speaker 3: I'm not sure that that's a mistake. You know, when
Speaker 3: you don't know what's happening, don't make a change. And
Speaker 3: then all of a sudden, we get into the we'll
Speaker 3: call it the Biden administration, and we've gone through five
Speaker 3: stimulus packages in the United States, and all of a sudden,
Speaker 3: we've got us consumers with the best balance sheet they've
Speaker 3: had in their life, enormous amount of disposable income, the
Speaker 3: ability to finally go out and spend it after not
Speaker 3: having the ability for almost two years to spend anything
Speaker 3: that Like I said, you can't buy it at the
Speaker 3: grocery store, FedEx or UPS or the United States Mail
Speaker 3: Service can't deliver to you can't buy it. We now
Speaker 3: have the ability to go out and spend that money
Speaker 3: and lo and behold, we end up in a highly
Speaker 3: inflationary cycle. So the FED goes from this zero interest
Speaker 3: rate trying to drive economic growth, trying to drive inflation.
Speaker 3: And I always remind my best friends, you know, if
Speaker 3: you would have picked up any newspaper prior to two thousand,
Speaker 3: in that two thousand and eight to two thousand and
Speaker 3: twenty period, the FED headline would have been can the
Speaker 3: Fed ever create inflation again?
Speaker 2: So now we're back in.
Speaker 3: This highly inflated period, and the FED goes from you know,
Speaker 3: quantitative ease and to quantitative tightening, to zero interust rate
Speaker 3: policies to fifty basis points sort of month in and
Speaker 3: month out. So we have been through this fifteen plus
Speaker 3: year cycle of what I would call abnormal. On top
Speaker 3: of that, we end up with this inverted yield curve.
Speaker 3: Because everyone's convinced the Fed's raising rates. The FED has
Speaker 3: to slow down the economy. We have to see job degradation,
Speaker 3: so we have to go into recession. I think the
Speaker 3: missing component there was how strong personal balance sheets were.
Speaker 2: Don't go into recession.
Speaker 3: We still have an inverted yield curve, which I don't
Speaker 3: think is normal.
Speaker 2: So I think now for.
Speaker 3: The first time, in this fifteen year period, we're getting
Speaker 3: to position where we're starting, and we're just at the
Speaker 3: very beginning of heading back towards normal and what normal
Speaker 3: would be, and so reminding people a little bit what
Speaker 3: normal looks like. It's going back to the three three three.
Speaker 3: But historically we have a positively shaped yield curve in
Speaker 3: the United States, we have a risk premium historically. If
Speaker 3: you look at ten year yields, the ten year average
Speaker 3: yield in the United States, you can either put in
Speaker 3: the vulgar fed or you can take out the vulgar fed.
Speaker 3: With the vulgar fed, it's it's it's four point six
Speaker 3: percent without its four point three percent.
Speaker 4: If you put aside all of this right, if you
Speaker 4: take a look at the FED and say, okay, it's
Speaker 4: on the back table, you start to look at the economy.
Speaker 1: It looks pretty good.
Speaker 4: It doesn't look like we're going.
Speaker 2: Into recession a great. Why do people feel so bad?
Speaker 3: Here's why people feel bad. Like the inflation number or
Speaker 3: the inflation data is the most peculiar data we have
Speaker 3: in the United States. We count inflation either month over
Speaker 3: month or year over year. We don't zero baseline it
Speaker 3: anywhere and so when we talk about inflation, we say
Speaker 3: how much inflation do we have over last month? And
Speaker 3: if we had inflation month over month, it means what
Speaker 3: you paid last month this year and what you're paying
Speaker 3: this month is higher. If we have inflation year over year,
Speaker 3: same thing. So we've seen the compounding effect of a
Speaker 3: three percent inflation year, a nine percent in place year,
Speaker 3: a three percent all that adds up to twenty plus percent.
Speaker 3: So when you're a consumer today, you're a hard working consumer. Today,
Speaker 3: your basket of groceries is twenty plus percent more than
Speaker 3: you think it should be worth and what it was
Speaker 3: worth two years ago. So the compounding effect of inflation,
Speaker 3: because we don't have a zero baseline basket, is really
Speaker 3: what's affecting people's mentality. The second part of the equation
Speaker 3: is people are working harder. They're working more jobs to
Speaker 3: be able to buy what they want to buy. The
Speaker 3: savings from the pandemic is gone.
Speaker 2: It's not all gone.
Speaker 3: There's still a lot of it sitting in treasury and
Speaker 3: money market.
Speaker 2: But if you look at the.
Speaker 3: Financial position of many Americans that went from high consumer
Speaker 3: debt going into the pandemic, then they went from consumer
Speaker 3: debt being wiped out. They went to high savings right
Speaker 3: because they were sort of forced in. They've actually spent
Speaker 3: all that money back. They're back the way they started.
Speaker 3: They're back at consumer debt. So they do care a
Speaker 3: lot about the inflation and they care about their purchasing power.
Speaker 3: And we are talking about wages today exceeding inflation, but
Speaker 3: that's on a sort of spot market basis. We haven't
Speaker 3: talked about it over a one year or a.
Speaker 2: Two year basis.
Speaker 4: You know, I got to say, I wonder how messy
Speaker 4: the data is as well. And if you were still
Speaker 4: the head of the Economic Council advising the president, how
Speaker 4: would you communicate the idea that we're seeing churn, massive
Speaker 4: churn in response to technological advancement. Something about eBay laying
Speaker 4: off nine percent of its staff because it needs to
Speaker 4: upgrade certain things, or SAP in Germany. You're seeing this
Speaker 4: again and again. How much is that featuring into the
Speaker 4: messiness of the data.
Speaker 3: You know, we always have mess with data, you know,
Speaker 3: we're always we never really get totally totally clean data.
Speaker 3: You know, we could talk about all the revisions to
Speaker 3: the unemployment data. You know, it's a survey data, and
Speaker 3: then they go, they go and revise the data from
Speaker 3: a month and two months ago, and sometimes the revisions
Speaker 3: are bigger.
Speaker 2: Than the actual data. But we of course fixate.
Speaker 3: On the data on that Friday, and then a month
Speaker 3: later we say, oh, that data was completely wrong. So
Speaker 3: if you're in the world of looking for the clean,
Speaker 3: pure answer, our economic data doesn't give you really clean,
Speaker 3: pure answers on a real time basis. If you look
Speaker 3: at the data over a cycle and over a period,
Speaker 3: it gets very clean over time. I think you've got
Speaker 3: to look at the data on a longer period of trend.
Speaker 2: That's why a lot of people like like I look
Speaker 2: at the Jultry report.
Speaker 3: I think jolts is really interesting to me because it
Speaker 3: shows job openings, amount of people looking.
Speaker 2: But like what's in there.
Speaker 3: There's some really interesting numbers in there. It shows you
Speaker 3: how many people quit their job. Quits to me is
Speaker 3: like one of the important numbers. People only quit their
Speaker 3: job when they feel like there's a better job out there,
Speaker 3: So it's a pure measure of what people's psychology on
Speaker 3: the market is. When the quit rate goes up, it
Speaker 3: means I believe I can get a better job, better paying,
Speaker 3: better quality of life.
Speaker 2: And I'm not worried about quitting.
Speaker 3: When the quick rate goes down, people are saying, Okay,
Speaker 3: the job market's not very good. I should be happy
Speaker 3: with the job I have. I don't love it, but
Speaker 3: I should be happy happy with the job I have.
Speaker 2: So there's data out there.
Speaker 3: If you put it all together, I think you can
Speaker 3: create a pretty clean picture for yourself.
Speaker 1: Unlike this administration. Gary would actually communicate Ramo that would
Speaker 1: be the answer to that, but we won't get into
Speaker 1: that now. With us around a table for some final thoughts,
Speaker 1: Gary cond Gary, I know you don't want to talk
Speaker 1: about a horse Rice. We won't do that, But I
Speaker 1: do want to talk about policy. Sure, tax cuts, Tarrists.
Speaker 1: Let's start with tax cuts. Haven't you been talked about
Speaker 1: You and I caught up yesterday, and I have to say,
Speaker 1: I haven't talked about the tax cuts and all the
Speaker 1: money that starts to come back into the country for
Speaker 1: the best part of six years or something like that.
Speaker 1: How relevant are yesterday's tax cuts to today's economy.
Speaker 3: Well, the twenty seventeen tax cuts, and I think they're
Speaker 3: really important. So this is back on the theme of normalization.
Speaker 3: So since we really got the tax cuts through that
Speaker 3: were signed December twenty second of twenty seventeen. We sort
Speaker 3: of had eighteen nineteen. We had two normalized years. Eighteen
Speaker 3: was sort of an implementation year, and we saw some
Speaker 3: really amazing things start happening.
Speaker 2: We saw real repatriation.
Speaker 3: Of foreign overseas money, so trillion and a half dollars
Speaker 3: come back in the United States because in the old
Speaker 3: tax system, corporations because leave their money offshore and they
Speaker 3: didn't have to pay US taxes, so they brought it back.
Speaker 3: We deemed that money to have brought back, so we
Speaker 3: taxed it.
Speaker 2: It got brought back.
Speaker 3: I think when you see what's going on as the
Speaker 3: manufacturing boom in the United States right now, which started
Speaker 3: in that period of time, a lot of that has
Speaker 3: to do with this repatriated money. Historically, when companies couldn't
Speaker 3: bring their money back, they had to invest it overseas.
Speaker 3: They built manufacturing overseas, they invested in property, plant and equipment.
Speaker 3: Now that they're being tax no matter whether they bring
Speaker 3: it back or not, they're bringing it back, they're paying
Speaker 3: the tax.
Speaker 2: And they're investing.
Speaker 3: So you've seen the creation of manufacturing in the United States.
Speaker 3: This started in twenty eighteen and nineteen as companies started
Speaker 3: bringing back their repatriated money. You've also seen the growth
Speaker 3: that we've seen in consumption. You've seen the growth in the.
Speaker 2: Middle class is ability to spend money.
Speaker 3: Hard working individuals got a real tax cut, and that's
Speaker 3: why I think people have missed the economic picture of
Speaker 3: the United States so badly. Everyone calling for this recession
Speaker 3: over the last year and a half, I don't think
Speaker 3: they understood the additional consumptive powers that the tax cuts created.
Speaker 3: We put real additional disposable income into people's pockets, and
Speaker 3: we did it on purpose. We made some very conscientious
Speaker 3: decisions to make sure that we were delivering real taxable
Speaker 3: returns or less tax to the hardest working individuals in America.
Speaker 3: And it takes time for that to feed through the system.
Speaker 3: It doesn't happen year one and then we go through COVID,
Speaker 3: So you get all these unnatural, dominous and now we're
Speaker 3: back that what I say is more normal behavior. People
Speaker 3: are understanding what their taxable income is. You know, we're
Speaker 3: some of the programs that we put in twenty seventeen
Speaker 3: have expired, and I'm happy to say that we're seeing
Speaker 3: some bipartisan legislation to reinstate some of those programs.
Speaker 2: There's a bill going through the House right now to.
Speaker 3: Reinstate some of the child tax credits along with accelerated
Speaker 3: appreciation and the write off of R and D credits.
Speaker 3: We think both sides of that equation they were in
Speaker 3: the original tax bill.
Speaker 2: We think they're both important.
Speaker 3: You know, you're taking care of both sides of the equation.
Speaker 3: We have to take care of hard working families with children,
Speaker 3: and we have to incentivize companies to continue to do
Speaker 3: R and D and continue to invest in the country.
Speaker 4: There are those individual tax Customer twenty seventeen are set
Speaker 4: to be expired.
Speaker 1: As you say, that helps individuals and taxes.
Speaker 4: But if you have a ten percent tariff wall around
Speaker 4: the United States, it's a massive tax on consumers.
Speaker 2: It is.
Speaker 3: So Look, the tariff wall is something that needs to
Speaker 3: be discussed. I know it's a potential. It's being discussed
Speaker 3: out there, and it's an idea. It's something that's being
Speaker 3: used to potentially pay for the.
Speaker 2: Future tax plan. When it negated.
Speaker 3: It's like, I think we shouldn't get too far ahead
Speaker 3: of ourselves right now. As you said, the personal side
Speaker 3: of the tax reform package terminates in twenty twenty five,
Speaker 3: there will be enormous amount of discussion to what happens
Speaker 3: between now and twenty twenty five. It will be important
Speaker 3: to what the makeup of Congress looks like, to what
Speaker 3: you are able to do, what you're not willing to do.
Speaker 3: Are you going to be able to do this through reconciliation?
Speaker 3: Are you going to be able to do through normal order?
Speaker 3: Are you going to be able to do with a
Speaker 3: simple majority? To do that, that means the Republicans would
Speaker 3: have to control the House, the Senate, in the White House,
Speaker 3: if you've got to split Congress, or maybe the Democrats
Speaker 3: control all three. If you're doing it through reconciliation, you're
Speaker 3: going to be able to do it through one set
Speaker 3: of policies.
Speaker 2: If you do it through.
Speaker 3: Regular order, you're going to have to have a much
Speaker 3: more of a compromise on what goes on here. So
Speaker 3: I think that the ideas that are being talked about
Speaker 3: right now are concepts. And this is what's interesting about
Speaker 3: the electro process in the United States, And I think
Speaker 3: this is why it's important.
Speaker 2: This is a time where where.
Speaker 3: Potential candidates and incumbents and we actually have a couple
Speaker 3: of incumbents running. They get to tell us about their
Speaker 3: ideas of how they want to run the government.
Speaker 2: And these are ideas.
Speaker 3: If you look at the history, there are concepts, and
Speaker 3: they're starting places, they're not necessarily ending places.
Speaker 1: Premos go thoughts, I know when Lass go thoughts.
Speaker 4: Oh no, I just to me the idea. So many
Speaker 4: people have come on and said, we're taking it seriously.
Speaker 4: If Trump says something, we're starting seriously. And Gary Cone
Speaker 4: is saying.
Speaker 1: Eh, maybe not.
Speaker 4: You know, you got to look at the whole process. Unfortunately,
Speaker 4: we're out of time, but we'll have to get you
Speaker 4: back to talk about that.
Speaker 1: Gary's going to see you. Thanks Morna, Thank you, sir
Speaker 1: Gary Khan.