Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Master's in
Speaker 1: Business with Barry red Holts on Bloomberg Radio.
Speaker 2: On this week's podcast, I sit down with Lakshman Achuthan.
Speaker 2: He is the co founder of EKRI, the Economic Cycle
Speaker 2: Research Institute. I've known Blacksman for I don't know, fifteen years,
Speaker 2: almost twenty years, and I've always found his take on
Speaker 2: the world of economics and recessions and inflation and employment
Speaker 2: just fascinating and unique and different from what everybody else does.
Speaker 2: It is very specifically data driven, based on a model
Speaker 2: that was originally co developed by Professor Jeffrey Moore, And
Speaker 2: I don't know how else to describe it other than
Speaker 2: you're looking at a data You're looking at leading indicators
Speaker 2: of different lengths as well as coincidental indicators, and you're
Speaker 2: trying to figure out when cycles turn. Hey, anybody can
Speaker 2: predict the trends, just stay with it until it ends,
Speaker 2: but catching the turns is much more challenging. They've put
Speaker 2: together a tremendous track record over the past thirty years,
Speaker 2: better than just about everybody. Nobody's perfect, but they've gotten
Speaker 2: more of the turns and more of the major cycle
Speaker 2: turns than anybody else, and that's why their research is
Speaker 2: read by not just big investment houses and companies, but
Speaker 2: sovereign banks and governments around the world. I thought this
Speaker 2: conversation was absolutely fascinating, and I think you will also
Speaker 2: with no further ado, my discussion with Lakshman at your
Speaker 2: thon Lasman. Welcome back to Bloomberg.
Speaker 1: Well, it's wonderful to be back in congratulations on this series.
Speaker 2: Over all these years, ten years you were in the
Speaker 2: first year's shows, which I have to be honest, are
Speaker 2: pretty unlistenable. I go back and listen to them and
Speaker 2: you could tell them just like a poppy dog caffeine
Speaker 2: and adrenaline. But thank you so much for coming back,
Speaker 2: and we'll do this the right way this time. So
Speaker 2: let's start out with a little bit of your backgrounds.
Speaker 2: I had already graduated college. In grad school, you were
Speaker 2: doing some work at Columbia with Geoffrey Moore. Tell us
Speaker 2: a little bit about the sort of research projects you
Speaker 2: were doing back in the nineteen nineties.
Speaker 1: Right, So thank you and pleasure to be here with you,
Speaker 1: and thanks for the question. I had the good fortune
Speaker 1: or interesting timing of starting with doctor Moore right when
Speaker 1: the nineteen ninety ninety one recession was happening. So it's
Speaker 1: very interesting and what my whole life's work is around
Speaker 1: business cycles. So this was extremely interesting to see in
Speaker 1: real time rather than reading it in a history book.
Speaker 1: And what I found so interesting about his work was
Speaker 1: it was applied economics and it brought some cohesiveness to
Speaker 1: the way economies work around the world, free market oriented economies.
Speaker 1: Because I'd done some earlier traveling around Europe, I saw
Speaker 1: all these different economies and different currencies, and I wondered,
Speaker 1: how does this all fit together? And he had kind
Speaker 1: of a framework for it, the makings of one, which
Speaker 1: I found very interesting. One key thing we were doing
Speaker 1: back then was how or if cycles are transmitted internationally.
Speaker 2: That was a big aspect of what sort of cycles
Speaker 2: business cycles? How are business cycles transmitted from country to country?
Speaker 1: Yeah, so if Europe goes into recession, what's the impact
Speaker 1: on the US or vice versa, and or Japan or
Speaker 1: these were all the big economies then, and how do
Speaker 1: they get transmitted? What are the impacts we have? How
Speaker 1: does it? You know, what cycles are there that we
Speaker 1: all are participating in around the world, and which ones
Speaker 1: are slightly more local to specific economy, so that's a
Speaker 1: big issue.
Speaker 2: Can we assume trade is a big impact into those
Speaker 2: as a transmission mechanism or is it more nuanced than that.
Speaker 2: It's always more nuanced.
Speaker 1: But trade is a big one. Trade is a big one.
Speaker 1: Markets are a big one, and a lot of people
Speaker 1: take their queue from what's going on in the US.
Speaker 1: So there's an outsized impact of the US market globally,
Speaker 1: even in local economies around the world. And it's very
Speaker 1: much in the goods and trades area, where we've all
Speaker 1: taken little spots in the manufacturing floor, and so we're
Speaker 1: linked that way, and for better or worse, can impact us.
Speaker 1: And meanwhile, our domestic economies may be doing something different.
Speaker 2: So everybody thinks of the dollar as our exorbitant privilege,
Speaker 2: but you're implying US stock markets are really a giant
Speaker 2: exorbitant privilege to the US. It is part of what
Speaker 2: drives the global economy.
Speaker 1: Yes, and here i'm you know, I work with a
Speaker 1: lot of different We at Equy work with a lot
Speaker 1: of different users of our material and so to keep
Speaker 1: it simple, some are investment managers and some are c
Speaker 1: suite kind of business managers, and on the investment management side,
Speaker 1: even if you're an investment manager abroad, you're going to
Speaker 1: have probably.
Speaker 2: A decent sized investment in the United States.
Speaker 1: Market, and that's one of the factors that goes into
Speaker 1: the big mix. There's also all kinds of other things
Speaker 1: in the mix, but transmissions of cycles internationally was a
Speaker 1: key thing, or early on, I think one of the
Speaker 1: bigger things that's critical today that we were working on
Speaker 1: then was the relationship of really three major aspects of
Speaker 1: the economy from a cyclical perspective. Their cycles and growth,
Speaker 1: which can be in extremes when they contract, can be
Speaker 1: business cycles, recessions and expansions. There's cycles in employment which
Speaker 1: are related but distinct. They're actually identifiable in different cycles
Speaker 1: in employment. And there's a third cycle, a third aspect
Speaker 1: which is cycles in inflation. And being able to see
Speaker 1: that just to understand the lay of the land of
Speaker 1: cycles and free market oriented economies is a huge thing.
Speaker 1: Just being aware that that's the pool that we're all
Speaker 1: swimming in is really important forgetting at some of the
Speaker 1: nuances of what's going on in the economy. So those
Speaker 1: understanding those three key aspects of the economy and not
Speaker 1: forcing them, and our process doesn't force them to directly
Speaker 1: relate to one another, gives us a great deal of
Speaker 1: flexibility in understanding what's happening growth, employment, and inflation. If
Speaker 1: you have a handle on those three aspects, you really
Speaker 1: understand what's going on in the economy. I think you.
Speaker 1: I think, well, I don't know that really really at
Speaker 1: the end there's stuff I still don't know, But I
Speaker 1: think you have a pretty good handle on the nuances,
Speaker 1: like how can it be that one's going up and
Speaker 1: the others going down? You know, because you have to
Speaker 1: tell the story what's happening of what you're seeing. Understanding
Speaker 1: that these three cycles, which are related but distinct in
Speaker 1: and of itself, is a big leap forward in that understanding.
Speaker 2: It was kind of fascinating in twenty twenty two, and
Speaker 2: to a less degree twenty three watching the kind of
Speaker 2: prior generation the old school nineteen seventies economists get the growth,
Speaker 2: employment and inflation picture completely wrong. It seemed like they
Speaker 2: defaulted back to the nineteen seventy three seventy four cycle
Speaker 2: and had a hard time. We were talking earlier about
Speaker 2: the Paul Graham quote all experts or experts in the
Speaker 2: way the world used to be. But you know, when
Speaker 2: people come out, probably most famously Laurence Summers, you need
Speaker 2: to have unemployment to shoot up to ten percent to
Speaker 2: kill inflation. Turned out that wasn't the case, wasn't.
Speaker 1: Well, no, it's not the case. And again it's because
Speaker 1: these cycles, while related, are distinct. There's more inflation cycles
Speaker 1: than business cycles. For example, probably a little fewer employment
Speaker 1: cycles that inflation cycles. Those will match up a bit
Speaker 1: more to business and growth cycles. But even allowing or
Speaker 1: understanding that these things can go in different directions is critical.
Speaker 1: Twenty two, twenty three, twenty four. It's very interesting because
Speaker 1: first let's remember that there was a huge, massive inflation
Speaker 1: cycle upturn, right it's in twenty twenty.
Speaker 2: Biggest one we've seen, much bigger than the one the
Speaker 2: financial process.
Speaker 1: And one of the things just even forget about forecasting
Speaker 1: or saying what's going to happen. One of the things
Speaker 1: that's critical to understand is that inflation is cyclical. I
Speaker 1: know those are easy words for to say and talk
Speaker 1: about on this program, but fundamentally a lot of models
Speaker 1: are not built that way, a lot of policy is
Speaker 1: not driven that way. In fact, you could still see
Speaker 1: the antecedents of that today in the markets and the
Speaker 1: way people are thinking, Hey, inflation's coming down. Yeah, sure,
Speaker 1: because it went to the moon, and yeah it's coming
Speaker 1: down from the moon. Okay, so we could agree on that,
Speaker 1: But does it just keep going down? How do you know?
Speaker 1: Does it go down and stay flat at your target?
Speaker 2: Yeah?
Speaker 1: I don't know where have you seen that happen before?
Speaker 1: If you study inflation over decades and have a cyclical
Speaker 1: vantage point on it, what you'll see is that it
Speaker 1: doesn't go down to some number and hang out. It
Speaker 1: likes to cycle. It likes to go up, and it
Speaker 1: likes to go down. And the odds, therefore, in my mind,
Speaker 1: of it going down and hanging out at some prescribed
Speaker 1: number are pretty low. And so therefore we look at
Speaker 1: leading indicators of the inflation cycle. Future inflation gauge is
Speaker 1: what we call our leading indicator, and it tries to
Speaker 1: tell us is there going to be a turn? So
Speaker 1: we watch for that in a very simplified way.
Speaker 2: That's what we're doing. Cycles. Let's look at the twenty twenties,
Speaker 2: but within the context of what came before the twenty tens.
Speaker 2: The FED talked pretty continuously in the prior decade about
Speaker 2: the challenge of getting inflation up to two percent. We
Speaker 2: were in a disinflationary environment, sometimes a deflationary environment around
Speaker 2: a lot of the world. Interest rates had gone negative,
Speaker 2: and that decade seemed to be our risk is now
Speaker 2: deflation like Japan. That's what we have to be on guard.
Speaker 2: Suddenly the decade flips, the pandemic starts. The Cares Act,
Speaker 2: the first one was the biggest fiscal stimulus since World
Speaker 2: War two, ten percent of GDP, The whole regime changes,
Speaker 2: and now we're off in a completely different cycle. Or
Speaker 2: is that just making it too simple and easy.
Speaker 1: No, something has changed. I let's agree on that. Something happened.
Speaker 1: Something happened, Okay, But look, if we're going to talk
Speaker 1: about the twenty ten's, in a way, what you're dealing
Speaker 1: with is there was a bit of a freak out
Speaker 1: after the financial crisis.
Speaker 2: Right, So we talk about the previous decade for context,
Speaker 2: you got to look at.
Speaker 1: The there's a there's a history thing. Yeah, this history thing.
Speaker 1: So in April of twenty twenty, there was a G
Speaker 1: twenty meeting in London and the primary concern was depression. Right, Okay,
Speaker 1: I mean, that's what the main headline was. And so
Speaker 1: and actually we were beginning our business cycle recovery right
Speaker 1: around then. It was starting. It was going to start
Speaker 1: in the summer. But nevertheless, the powers that be were
Speaker 1: focused on depression and they had it was almost like
Speaker 1: you don't let any crisis, good crisis, go to waste
Speaker 1: that quote, right, So here we have of massive stimulus
Speaker 1: put in in all these different programs, and we go
Speaker 1: off on this spending spray.
Speaker 2: And it wasn't just us, right, it was around the world.
Speaker 1: It was around the world, and in particular in China,
Speaker 1: where I love the statistic. In three years from eleven
Speaker 1: twenty eleven to thirteen, they poured more cement in China
Speaker 1: than the United States did in the entire twentyth century, right,
Speaker 1: I recall that, which is insane.
Speaker 2: But that's the fascinating thing about the twenty tens was
Speaker 2: that while Asia and China in particular were engaging in
Speaker 2: a massive fiscal spend, there was austerity in the UK,
Speaker 2: there was week spending in Europe and the US. It
Speaker 2: was pretty much all monetary, no fiscal.
Speaker 1: All monetary, no fiscal. So you have the stalemate or
Speaker 1: whatever logjam in Washington. I agree that you have monetary
Speaker 1: the lift is being done on the monetary side of policy.
Speaker 1: But the result of this whole thing, and now I'm
Speaker 1: I'm painting in broad brushstrokes US inflation services inflation is
Speaker 1: actually positive for much of the decade. It's really goods disinflation,
Speaker 1: which is ripping stuff down to which monetary policy is saying, oh,
Speaker 1: you know, we're gonna somehow combat this with more stimulus
Speaker 1: or easiness or whatever. And it doesn't really work that way, right, right,
Speaker 1: but it inflated some things. Right.
Speaker 2: If low rates weren't the cause of inflation, well, why
Speaker 2: would you think high rates are going to impact You know,
Speaker 2: there's got to be some causality in between the solution
Speaker 2: and the outcome.
Speaker 1: And so we have this, We have this China price
Speaker 1: being set. We have the supply chains being optimized for
Speaker 1: that as opposed to robustness, which came back with a
Speaker 1: vengeance once things went off the rails with the supply
Speaker 1: chains when COVID hit. So with I mean, I'm skipping
Speaker 1: over a lot of this qy kind of stuff that
Speaker 1: we were really mired.
Speaker 2: In that quantitative easy We now have the opposite of
Speaker 2: a quantitative titan.
Speaker 1: Well, to a degree. We have a little bit of it.
Speaker 1: We'll see how far it goes. It was very fascinating.
Speaker 1: I'm sorry, I'm jumping around here. No, it was very
Speaker 1: It was very fascinating because Japan the other day the
Speaker 1: Bank of Japan.
Speaker 2: Raised rates for the first time in seventeen years.
Speaker 1: Okay, so it's a big deal, right, I mean, it
Speaker 1: was a minuscule rate rise, But and they're doing this
Speaker 1: because they have a little bit of inflation, which they
Speaker 1: haven't seen in a long time, and so they're like, oh, okay,
Speaker 1: we're going to respond to that, but they actually can't.
Speaker 1: It's a paper tiger. They can't really raise rates because
Speaker 1: the country is so indebted that they can't service any
Speaker 1: higher rate.
Speaker 2: So they've been the post of child to the argument,
Speaker 2: who cares about deficits because they've been running deficits for forever,
Speaker 2: in part because of their demographic problems, rescued in large
Speaker 2: part because they've been an exporter since the end of
Speaker 2: World War Two?
Speaker 1: Yeah, can you just print money and run deficits of
Speaker 1: very large sizes forever? And to many of us, we
Speaker 1: would say, well, it doesn't sound like.
Speaker 2: That could work, But you're pushing it. And yet since
Speaker 2: I graduated college in the nineteen eighties, all I have
Speaker 2: heard is if with the US runs big deficits, well
Speaker 2: that'll be the demise of the dollar. Inflational run am uck,
Speaker 2: you'll crowd out private capital. No will leend money to
Speaker 2: Uncle Sam. And all the things that I have been
Speaker 2: told are the manifestation of deficits. None of them have
Speaker 2: come true. At a certain point, I think perhaps something
Speaker 2: goes wrong. But after being wrong for fifty years, it
Speaker 2: kind of makes me look at the people warning about
Speaker 2: deficits and saying, I don't know, You've had half a
Speaker 2: century to get this right, and everything you've said has
Speaker 2: been false. Why should I listen to you today? Well,
Speaker 2: this time was serious. Yeah, it's weird.
Speaker 1: It's a really interesting question. So post GFC, we ran
Speaker 1: up the debt towards ten trillion, maybe just under ten trillion,
Speaker 1: and then post COVID we're north of thirty right in
Speaker 1: the US right, so who knows? I don't know.
Speaker 2: Could we do sixty?
Speaker 1: I at this point, I don't know.
Speaker 2: The thinking is at some point eventually I remember the
Speaker 2: weight of that. You're old enough to Remever, now I'm
Speaker 2: sorry I'm.
Speaker 1: So sorry for the younger listeners. But I got to
Speaker 1: go back even further to President Clinton's Bill Clinton's first term.
Speaker 2: When do we balance the budget? Was it the first term?
Speaker 1: Towards the end it says in the second term he
Speaker 1: got into surplus. But in the first term he comes in.
Speaker 1: I think he's got he's got the whole thing, right,
Speaker 1: he's got the full hand, right, he's got a full house,
Speaker 1: he's got the Congress and Senate him. And he's in there,
Speaker 1: and they're going to go to town. They got programs,
Speaker 1: and the bond market says, no, you don't and raises
Speaker 1: raise long term rates, and they and Jim Carville very
Speaker 1: and he comes back. He says, you know, look, I
Speaker 1: would have I would have wanted to come back as
Speaker 1: the president, the pope, a four hundred hitter in baseball.
Speaker 1: But actually, now you want to be a bond the
Speaker 1: bond market. It's the most powerful thing.
Speaker 2: I want to be reincordinated as the bond Madler. It's
Speaker 2: such a great.
Speaker 1: So do the vangilantes come back. We'll see. I don't know.
Speaker 2: It's really quite a fascinating story. I'm not necessarily a
Speaker 2: member of either the fiscal hawks or the m MTS.
Speaker 2: I think both extremes in any circumstance, raised questions. But
Speaker 2: I have a hard point getting past all the forecasts
Speaker 2: about here are the terrible things that are going to
Speaker 2: happen from the eighties. Yeah, and if nothing happens in
Speaker 2: forty years, well kind of it makes me say, all right,
Speaker 2: we have to break this down to first principles and
Speaker 2: figure out why are deficits problematic? How do the negativities
Speaker 2: manifest themselves? And how can we check if we're right
Speaker 2: or wrong? What's the line in the sand that says, uh,
Speaker 2: we got this right or we got this wrong.
Speaker 1: You have a lot of different levers being pulled, with
Speaker 1: a lot of different frameworks on how the economy runs
Speaker 1: and works. Now, to our great benefit, we're in a
Speaker 1: in economies for the most part, that are dominated by
Speaker 1: free market oriented activity, which has inherent in it a
Speaker 1: very Darwinian type of regulation. This is that I'm talking about, Like,
Speaker 1: why do economies accelerate and decelerate? You know, so before
Speaker 1: we had policymakers, before you had the FED, you still
Speaker 1: had cycles. Okay, it's not like cycles are new, and
Speaker 1: it's not like cycles didn't turn up and down without
Speaker 1: policy intervention.
Speaker 2: They did.
Speaker 1: So there is a mechanism under there that is kind
Speaker 1: of optimizing or penalizing decision making. And when we look
Speaker 1: at forecasts that are made, right, what you're really doing,
Speaker 1: I think it's not so much. Hey, I think it's
Speaker 1: going to be one and it said it was I
Speaker 1: right or wrong? Right, that's I don't think. I think
Speaker 1: that's kind of a fool's game. It's managing risks. What
Speaker 1: is the risk that things are going to go the
Speaker 1: other way than what everybody's thinking. Because as a decision maker,
Speaker 1: it's easy enough to go with the crowd. You know,
Speaker 1: it probably feels less risky everybody else is doing it whatever.
Speaker 1: The interesting and tough thing is when you deviate from
Speaker 1: the crowd.
Speaker 2: Right, When you deviate from the crowd, this career risk
Speaker 2: when you're wrong with the crowd. All right, I was wrong,
Speaker 2: but so is everybody else correct?
Speaker 1: And so but now let's take this to an economy
Speaker 1: or a business, so it's policy or private business decision making.
Speaker 1: I think for an economy theory, you want this to
Speaker 1: be healthy, strong, growing, improving quality of life, which probably
Speaker 1: means not crazy inflation, but decent growth. Which is going
Speaker 1: to be related to productivity growth on some level. And
Speaker 1: so how do you achieve all of that? Well, one
Speaker 1: way to move towards that is to smooth out the
Speaker 1: cycle a bit. Okay, Booms and busts are very.
Speaker 2: Very freaky, right. They disruptive, They scare you right.
Speaker 1: On the one hand, you're like, the sky is falling,
Speaker 1: I got a baton down the hatches. That's that's very
Speaker 1: expensive and disruptive. On the other hand, when you're in
Speaker 1: a boom, you start taking pretty crazy risks, right because
Speaker 1: you say I'm going to the fear of missing out
Speaker 1: kicks in and you start to really overextend yourself.
Speaker 2: And by the way, we saw that at the end
Speaker 2: of the nineteen nineties, the eighty two to two thousand cycle.
Speaker 2: We certainly saw that in a different asset class in
Speaker 2: the two thousands with houses and mortgages. And then the
Speaker 2: question is are we seeing that today when we look
Speaker 2: around at tech and AI and things that we think
Speaker 2: are going to change the future. Have we gotten into
Speaker 2: that fomo things are out of hand?
Speaker 1: Face? I think so, because let me just tell you
Speaker 1: the story of our indicators over the last couple of years.
Speaker 1: Because that sets steady answers this question in a way.
Speaker 1: So the indicators, first off, they shoot up in twenty twenty, right,
Speaker 1: so we see the short and nasty short recession we
Speaker 1: were writing about, right, and so we get that correct,
Speaker 1: and there's a lot of hand ringing that we all
Speaker 1: felt later in twenty twenty and twenty one.
Speaker 2: I'm not denying.
Speaker 1: Any of that. The indicators don't feel any of that, right,
Speaker 1: They're just we're moving to the upside, and so they're
Speaker 1: directionally giving us this upside tilt in the way that
Speaker 1: we're looking.
Speaker 2: At risk separate from the way people experience it, which
Speaker 2: is after any sort of break or crash or even
Speaker 2: short reception, there's that PTSD that follows. In fact, we
Speaker 2: were talking earlier about the GFC in eight oh nine,
Speaker 2: I have a vivid recollection as talking to people in
Speaker 2: twenty ten, twenty twelve, as late as twenty fifteen, still
Speaker 2: talking about I'm still waiting for the other and shoot
Speaker 2: a drop.
Speaker 1: It manifested even I think, you know, maybe in order
Speaker 1: of magnitude or post COVID from what you just described.
Speaker 2: People did not believe the rally off of the March life.
Speaker 1: So two big things happen one preceded COVID. I'm just
Speaker 1: talking numbers here. It's not nothing else but legal migration
Speaker 1: kind of round to a halt during the Trump administration.
Speaker 1: That runs about a million people a year. So over
Speaker 1: the course of four years.
Speaker 2: We're not talking Mexican border. We're talking about legal immigrants
Speaker 2: with a green card and the right to work.
Speaker 1: It's about so you lose on the order of four
Speaker 1: million people out of the workforce. I mean, look, we
Speaker 1: have a big workfurse, but it's noticeable number, right, And
Speaker 1: then you have COVID, and regardless of the shutdowns in
Speaker 1: this and that a lot of people didn't come back
Speaker 1: to the workforce. You lose another serious hunks.
Speaker 2: So a million people all I'm describing.
Speaker 1: Look, I am i am very empathetic to the human
Speaker 1: cost here, but I'm just saying from an economic counting
Speaker 1: the people who are in the workforce point of view,
Speaker 1: you have a huge constriction of the labor supply. At
Speaker 1: the same time that PTSD and the impulse that we
Speaker 1: have as a country or people community is that we
Speaker 1: want to help, we want to do something. So the
Speaker 1: amount of dollar support given to the economy post COVID
Speaker 1: is just mind boggling. Okay, you know Senator Everett Dirkson
Speaker 1: used to quip about a billion here, a billion there.
Speaker 1: Now we're talking real money. We're talking trillions right here,
Speaker 1: trillions there. I think it's on the order back of
Speaker 1: the napkin. I think it's on the order of about
Speaker 1: seven trillion dollars dumped on the economy when you have
Speaker 1: a constrained labor supply by a serious amount.
Speaker 2: By the way, to put some flesh on those bones.
Speaker 2: Karres Act one was two trillion dollars, which, by the way,
Speaker 2: was under President Trump. The Kars Act two wasn't quite
Speaker 2: as large. I want to say, it was about eight
Speaker 2: hundred billion. Yes, stimmy checks. All of these things also
Speaker 2: under Trump. And the fascinating thing about those that hit
Speaker 2: the economy immediately wasn't spread out. Then President Biden comes in.
Speaker 2: Kars Act three was another trillion, then spread out over
Speaker 2: the next decade, the Infrastructure Act, the Inflation Reduction Act,
Speaker 2: Semiconductor and Chips Act, Ships and Science and then there
Speaker 2: was one other. But those were all those four things
Speaker 2: were spread out over a decade. So they're still hill winds.
Speaker 1: They're actually still hitting now. I mean when we look
Speaker 1: at one of the Now I'm going to get in
Speaker 1: the weeds for two seconds. One of the cycles, because
Speaker 1: we look at many cycles on growth. So one of
Speaker 1: the cycles we look at which we can see and
Speaker 1: track is non residential construction in the United States, and
Speaker 1: so that's cycling down. The leading indicators are collapsing. The
Speaker 1: actual coincident indicator is turning down, and it just does.
Speaker 1: The coincident index, which is the target, just does a
Speaker 1: hockey stick in August twenty two, because I understand that
Speaker 1: these fiscal infrastructure accidents and Chips acts are going to
Speaker 1: come out over time, but private sector also jumps on that. Right,
Speaker 1: They're like, we're going to get in on this, and
Speaker 1: we want we want to we want to have access
Speaker 1: to this, so we'll put in some you put in
Speaker 1: some All of that starts back in the fall of
Speaker 1: twenty two. You see a cyclical impulse, which is to
Speaker 1: the downside. I mean, look, leading indicators of the economy
Speaker 1: turned down hard and twenty two into twenty three, they
Speaker 1: were completely consistent with an outright recession.
Speaker 2: You had, Oh yet rates go up five hundred and
Speaker 2: twenty five.
Speaker 1: Base even before the rate hike though, oh really, before
Speaker 1: the rate hike.
Speaker 2: Yes, so from it again, and let's call it March
Speaker 2: twenty twenty two, something like that.
Speaker 1: So before that you're seeing the indicators already, Wan, but
Speaker 1: you had.
Speaker 2: A lot of jaw boning. There were expectations that rates
Speaker 2: wouldn't go up. Yeah, people, some people believed that. Some
Speaker 2: people didn't. The market clearly anticipated it. They were a
Speaker 2: little late on the rates up. The market was late
Speaker 2: on the rates up compared to the leading indicators of inflation.
Speaker 2: They were, they were leading indicators of inflation, went up
Speaker 2: end of summer into the.
Speaker 1: Fall, and the markets started in twenty one. Yeah, and
Speaker 1: markets started to move later and towards the end of
Speaker 1: twenty one.
Speaker 2: That's right, that's right. And then twenty two bad year
Speaker 2: for both stocks and bonds.
Speaker 1: That's putting it mildly. That has a nasty year for bonds,
Speaker 1: But okay.
Speaker 2: Unusual by the way that you had stocks and bonds
Speaker 2: both down double digits. I don't think we say that
Speaker 2: for forty years. Eighty one eighty two was the last
Speaker 2: time we saw that.
Speaker 1: Yeah, that's not that's not your typical thing. It's hard
Speaker 1: to run a system with that as a likelihood. And
Speaker 1: I think that's why a lot of people got tagged
Speaker 1: then understandably, But the point is, when you have that
Speaker 1: much foam on the runway, that's a lot of phone.
Speaker 1: Because we didn't even talk about the Central Bank earlier
Speaker 1: on for the you know, before they started to tighten,
Speaker 1: they were very very comminative. So when you have that
Speaker 1: much foam on the runway, it was very different than
Speaker 1: what we saw in other economies.
Speaker 2: Around the world.
Speaker 1: And so you you saw GDP actually contract for a
Speaker 1: couple of quarters and twenty two, but jobs did not
Speaker 1: go negative. In order to have a recession, you need
Speaker 1: to see output and employment going negative along with sales
Speaker 1: and income, and so those conditions did not present themselves.
Speaker 1: There's been a tug of war, I think, going on
Speaker 1: for much of twenty three between cyclical impulses to the
Speaker 1: downsign and foam on the runway pushing to the upside.
Speaker 2: Saying, combine with what you were hinting at earlier, which
Speaker 2: is a labor force that's arguably four to six million bodies.
Speaker 1: Short, bodies short, and so you would have employers literally
Speaker 1: if you could walk and talk, you got hired. And
Speaker 1: now I think people are a bit more picky.
Speaker 2: Although you still hear some companies talk about labor warehousing. Yeah,
Speaker 2: because if they have growth, right, labor hoarding and labor warehousing.
Speaker 2: If you're expecting growth, you don't know if you're gonna
Speaker 2: be able to have the bodies to execute it. You
Speaker 2: hire sooner rather than later.
Speaker 1: And hiring and firing is very disruptive for a business.
Speaker 1: So if they could, if they could see over the
Speaker 1: valley and hang on to people, they try to do that.
Speaker 1: So you see when you look inside of the different
Speaker 1: levers that employers can pull, work week temphires, part time
Speaker 1: versus full time, all these different things that employers can do,
Speaker 1: a lot of them are marginally you know, they're moving down.
Speaker 1: They have been moving down, but they've fallen short about
Speaker 1: right firing because, as you say, if things firm, I
Speaker 1: don't want to be scrambling to find someone to work.
Speaker 1: And there was a little bit of a line here.
Speaker 1: The big businesses were able to hire people. There was
Speaker 1: a smaller businesses that had a really, really tough time
Speaker 1: and they have PTSD today where they're very reticent to
Speaker 1: let people go. Again, you've got slower jobs growth, but
Speaker 1: positive jobs growth. So in the tug of war between
Speaker 1: the cyclical impulse down and the foam on the runway.
Speaker 1: We're staying out of recession so far. Now. Meanwhile, we
Speaker 1: talked about the different cycles. Meanwhile, the inflation cycle downturn
Speaker 1: which has been going on and is projected to continue
Speaker 1: and get towards two percent and hang out there. That's
Speaker 1: not cooperating, right, That has stalled out our future. Inflation.
Speaker 1: Gage are leading indicator of inflation has come down and
Speaker 1: it's gone sideways for almost a year, stops going down.
Speaker 1: So very consistent with this headline kind of statement of
Speaker 1: sticky inflation without getting in the weeds of what's what
Speaker 1: in there. Overall inflation is not reducing the way it's
Speaker 1: supposed to do, and that could be a problem. I
Speaker 1: think that's going to be a problem this year.
Speaker 2: So let me challenge or push back on that a
Speaker 2: little bit. In the twenty tens, we couldn't get inflation
Speaker 2: up to two thousand. We had a very punk post
Speaker 2: crisis recovery, which, by the way, is not a typical
Speaker 2: following of financial crisis. You tend to have a weakish recovery.
Speaker 2: Combine that with mostly monetary hardly any fiscal stimulus following
Speaker 2: the financial crisis, so that's the original framework that we
Speaker 2: came into this with. And then Roger Ferguson, the former
Speaker 2: Vice Chairman of the Federal Reserve, had this delightful column
Speaker 2: he wrote, maybe it was foreign affairs. I don't remember
Speaker 2: where I saw it. The two percent target is hilariously
Speaker 2: made up, and it traces its roots to a live
Speaker 2: television show that it was either Australia or New Zealand's
Speaker 2: you had a banker at that right and kind of
Speaker 2: just spitballed it. And that was in the nineteen eighties.
Speaker 2: And why we still stuck with two percent as a target,
Speaker 2: especially when we're in an era of big fiscal stimulus. Well,
Speaker 2: it's well it is kookie.
Speaker 1: Look I want to step back for a second, because
Speaker 1: this is the product of a model driven mindset. Yes
Speaker 1: that if you add this to that and tweak this,
Speaker 1: that we get some number at the end. And a
Speaker 1: lot of forecasting and model driven and the way people
Speaker 1: think about the world is based on econometric modeling right now.
Speaker 1: Econometric modeling is a very useful tool of It can
Speaker 1: help frame like what are we looking at outside our window?
Speaker 1: But one of its particular weaknesses, probably the biggest, weakness
Speaker 1: is it can't handle a turning point. Right, Okay, Now,
Speaker 1: if you live in an environment that has upswings and
Speaker 1: down swings and your framework can't handle turning points, you
Speaker 1: shouldn't be surprised that this thing goes awry every once
Speaker 1: in a while. And so right now, right so, all
Speaker 1: I do is turning points. All Eckri does is turning points.
Speaker 1: So my mentor, Jeffrey Moore was the father of leading indicators.
Speaker 1: His mentor Wesley Mitchell identified what a business cycle was
Speaker 1: over a century ago. And so we don't think in
Speaker 1: model terms. We're thinking in directional change terms. And today
Speaker 1: if the model is saying we should go to two
Speaker 1: percent and hang out there, and the leading indicators of
Speaker 1: inflation are saying, yeah, it's not going down a lot,
Speaker 1: and that risk of an upturn is growing every day,
Speaker 1: the cyclical upturn. I'm not making a big pronouncement about
Speaker 1: the amount of debt out there, or is China exporting
Speaker 1: disinflation again or anything. I'm just saying that cyclically, these
Speaker 1: forward looking drivers of inflation collectively stopped falling a year
Speaker 1: ago and are starting to edge up. What gives me
Speaker 1: some anxiety, that doesn't give me anxiety. What gives me
Speaker 1: anxiety is that we look at this around the world,
Speaker 1: not just the US. So when we look around the
Speaker 1: world at inflation cycles in Europe and Asia, emerging markets,
Speaker 1: major emerging markets, we see that in this century they've
Speaker 1: been largely synchronized and lo and behold all the leading
Speaker 1: indicators of inflation. The future inflation gauges abroad are moving
Speaker 1: up sharply, so that we have an international inflation cycle
Speaker 1: upturn taking shape. What are the odds that the US
Speaker 1: is going to set this out? I'm not so sure
Speaker 1: about that, So I'm watching the future inflation gage very
Speaker 1: very closely.
Speaker 2: So I really liked the framework of let's look at
Speaker 2: three distinct but interrelated cycles growth, employment, and inflation. I
Speaker 2: also have a very vivid recollection of our first interview.
Speaker 2: You said something that just stayed with me with a
Speaker 2: for a long time, which is, recessions just don't happen
Speaker 2: when the economy is robust and sturdy. The economy can
Speaker 2: a robust economy can take a hit and kind of
Speaker 2: catch its footing and keep going. But if you have
Speaker 2: an economy that's weak, that has some structural problems, and
Speaker 2: there is an economic shock, those are the sort of
Speaker 2: setups that create recessions, am I.
Speaker 1: We talked about the window of vulnerability is what we
Speaker 1: talked about. And so again the basic structure of how
Speaker 1: we look at the economy is it's a free market
Speaker 1: oriented economy. This is a condition we see in market
Speaker 1: oriented economies and they have an upswing and a down swing.
Speaker 1: And we see this in the United States, and we
Speaker 1: see this around the world wherever free markets present themselves
Speaker 1: and sessions occur during the downswing, during the slow down,
Speaker 1: when the economy is slowing down. And now I'm talking
Speaker 1: about a growth rate cycle slow down, so you're decelerating.
Speaker 2: Let's say you're expanding but at a slower.
Speaker 1: Yeah, you go from three to two to one percent
Speaker 1: growth something like that. So you're going to growth rate
Speaker 1: cycle slow down. Now, if a shock hits you when
Speaker 1: you're in a slowdown and the forward looking drivers of
Speaker 1: the economy haven't turned up yet, now that's the recipe
Speaker 1: for recession. That's how you're vulnerable. You're vulnerable. So we
Speaker 1: can have an example of that. Would have been my
Speaker 1: first recession in real time with doctor Moore was in
Speaker 1: nineteen ninety and the leading indicators had turned down most
Speaker 1: of the Wall Street and the professional forecasting class thought
Speaker 1: that we had dodged economic risk at this point. But
Speaker 1: the forward looking leading indicators were turning down. The economy
Speaker 1: started to slow a little bit, and then Saddam Hussein
Speaker 1: invaded Kuwait and you had okay spike and oil prices.
Speaker 1: So that's the shock, and that contribute together in the
Speaker 1: FED was a little tight, and so that was the
Speaker 1: those combination of events boom, we get a recession. We
Speaker 1: could see other moments where pretty big things happened, but
Speaker 1: you didn't have a recession. In two thousand and five,
Speaker 1: I guess it was Katrina shut down, about shut down,
Speaker 1: about a quarter of the country. No recession. It was
Speaker 1: a big hurricane. You had nineteen eighty seven crash, took
Speaker 1: out a quarter of the market, of the equity market.
Speaker 1: You didn't have a You didn't have a recession. World
Speaker 1: War two, the attack on Pearl Harbor, pretty big shock,
Speaker 1: didn't cause a recession. Huh okay. So there are these
Speaker 1: moments where what you would think would or could be
Speaker 1: recessionary shocks are not recessionary because of which way you're
Speaker 1: trending in the business cycle or in the economic cycle,
Speaker 1: and then others that seem like, eh, okay, that's negative,
Speaker 1: but it wasn't really that big. But it turns out
Speaker 1: to be timed right at that moment of weakness. That's
Speaker 1: how you get recessions.
Speaker 2: So lest we were talking about last decade, you had
Speaker 2: a couple of periods throughout the twenty tens, most recently
Speaker 2: twenty nineteen. Heading into twenty twenty, a number of people
Speaker 2: were starting to warn about, hey, we're decelerating, we could
Speaker 2: see a recession. I want to say mid mid decade,
Speaker 2: twenty fifteen, twenty sixteen, same sort of thing, a little
Speaker 2: bit to slow down, and then twenty eleven there was
Speaker 2: a pretty robust consensus that we're going back into recession.
Speaker 2: So when I look at that that decade, and yet
Speaker 2: we went the entire decade without a recession, what is
Speaker 2: it that allows those instances to avoid becoming what you
Speaker 2: taught me persistent, pervasive, announce and pronounced.
Speaker 1: Are declines in the indicator the three p's.
Speaker 2: It's not just a little dip, it's not just a sector.
Speaker 2: It's big and broad and less.
Speaker 1: So there's a lot of evidence. So what I would
Speaker 1: say is in twenty eleven twelve, we had a pronounced,
Speaker 1: pervasive and persistent decline in the forward looking leading indicators. Okay,
Speaker 1: and you had weakness in the coincident indicators. You had
Speaker 1: a six month period with the weakest GDP outside of
Speaker 1: recession in the past half a century. That happened, right,
Speaker 1: and that happens in twenty eleven into twenty twelve.
Speaker 2: Now, in retrospect, why wasn't that a recession?
Speaker 1: Right? There wasn't a shock. We didn't have a shock there.
Speaker 1: And one of the things that stood out when we
Speaker 1: did the post mortem of that period was that it
Speaker 1: was the most stable period of oil prices ever since
Speaker 1: oil prices were fixed in the seventies. Okay, there was
Speaker 1: a moment of price fixing under Nix. Okay, So since
Speaker 1: then we'd never seen the stability in oil prices as
Speaker 1: we saw during that little window when we had vulnerability.
Speaker 1: And I think, I mean, I'm not looking, I'm not
Speaker 1: an oil supply expert, but fracking was coming on. And
Speaker 1: so when you would have like the Arab spring or
Speaker 1: Egypt was shut down or something was shut down, and
Speaker 1: you'd have the supply shock boom, you had fracking comes
Speaker 1: step right in and be like we're here we've got
Speaker 1: the supply and your prices were just rock steady. So
Speaker 1: that's twenty eleven, twelve, in the mid two thousand's, twenty tens,
Speaker 1: twenty ten, So sorry, the fourteen fifteen sixteen we absolutely
Speaker 1: nailed that because we weren't calling for a US recession then.
Speaker 1: But what we did see, and I alluded to this
Speaker 1: in the earlier segment, was about the global industrial town
Speaker 1: turnt which impacted the US, and.
Speaker 2: How much of that was China, how much of that
Speaker 2: was Europe and or elsewhere?
Speaker 1: It was everybody in that one, it was everybody. It
Speaker 1: was China, Europe, and the United States, other emerging markets
Speaker 1: all felt this global industrial growth down swing so much
Speaker 1: so that the US had a manufacturing sector downturn that
Speaker 1: was pretty sharp. And anybody in that business would have
Speaker 1: called it a recession for them, right, they would have.
Speaker 1: That's how they would have felt. Now, the overall economy
Speaker 1: never went into recession. We didn't call on there.
Speaker 2: Fourth quarter of twenty eighteen market down twenty percent, and
Speaker 2: then twenty nineteen following that sort of a recovery, but
Speaker 2: people were still a.
Speaker 1: Little stay on twenty eighteen for a second because everybody
Speaker 1: was so young then right, we were pre COVID, including
Speaker 1: Jerome Powell. Okay, And so he goes out and talks
Speaker 1: to I think it was Judy Woodruff or something and
Speaker 1: starts talking about our star and how it's we're far
Speaker 1: away from our star and he's hiking and all this stuff,
Speaker 1: and meanwhile, the future inflation gage has turned straight down. Huh,
Speaker 1: it is already turned down, right, So inflation not a problem.
Speaker 1: But this is what's keeping him up at night enough
Speaker 1: so that he freaks out the equity market and you
Speaker 1: get a nasty December that sets you up for the
Speaker 1: Powell pivot in January, where he's just like, oh, yeah,
Speaker 1: screw this, I'm going to go the other way and
Speaker 1: says I'm going to go on a listening tour and
Speaker 1: try to figure out what went wrong.
Speaker 2: And he you know, I'm not going to say more
Speaker 2: about that. So let me stop you there, because you're
Speaker 2: pointing to a couple of really fascinating things I want
Speaker 2: to talk about, and I'm taking notes. I'm writing energy,
Speaker 2: I'm writing FOMC, I'm runing houses. Let's start with energy. Yeah,
Speaker 2: So today we simultaneously have these two conflicting challenges. On
Speaker 2: the one hand a launch of Iranian missiles at Israel.
Speaker 2: Israel ninety nine percent of them were knocked out. Oil
Speaker 2: prices ticked up, but they didn't go crazy. At the
Speaker 2: same time, I just was looking at a chart. Was
Speaker 2: it Torsten Slock? I'm trying to remember who sent it?
Speaker 2: The US is now the world's largest producer of oil,
Speaker 2: more than Russia, more than Saudi Arabia, more than any
Speaker 2: other country in the world. So when we look at
Speaker 2: the challenges to energy as a shock, how do you
Speaker 2: contextualize geopolitical turmoil? By the way, I didn't even get
Speaker 2: to Russia invading Ukraine. How do you balance all of
Speaker 2: these SoCs cards.
Speaker 1: So in our forward looking data, so I'm not talking
Speaker 1: about what's actually happening, but what are the risks of
Speaker 1: a turn in the drivers of the economy. We're looking
Speaker 1: at hard data from the government. We're looking at market data,
Speaker 1: so just what do we price something of barrel oil at,
Speaker 1: for example, or something interest rates? And then soft data
Speaker 1: survey data, and these are our sources of ingredients. In
Speaker 1: a way or consider to give us a hint about
Speaker 1: what are the key drivers of activity. We're separate cycles
Speaker 1: like inflation doing We're looking at it very much from
Speaker 1: the demand side of things. Okay, so if there's a
Speaker 1: supply constraint or all of a sudden the supply gets flush,
Speaker 1: then the demand is interacting with the supply to give
Speaker 1: us kind of where we are in the world. So
Speaker 1: one of the things that we've been talking about since
Speaker 1: last year is that this year we're going to see
Speaker 1: a global industrial upturn, a bona fide cyclical global industrial.
Speaker 2: Upturn, just straight up demand for more manufactured.
Speaker 1: Goods around the world. And this is not country specific,
Speaker 1: it's not specific to somebody's policy or anything. It's the
Speaker 1: way the global industrial cycle works. That's cycling, that's bottoming
Speaker 1: and cycling up. And so you've seen this begin to
Speaker 1: manifest in some very short leading indicators, very short leading
Speaker 1: indicators of global industrial activity, which would be industrial commodity
Speaker 1: price inflation in PMIS, and in some of the export
Speaker 1: data that you'll see out of different countries, and those
Speaker 1: are all starting to gear. Because the movement in the
Speaker 1: forward data has been pronounced pervasive and persistent, this ought
Speaker 1: to keep going for a couple of quarters.
Speaker 2: So in other words, when you look out at at
Speaker 2: least the manufacturing sector, you're not seeing a global recession
Speaker 2: in that space. No, No, which makes it harder for
Speaker 2: that to be a global recession.
Speaker 1: I imagine it certainly is the backdrop on which we're all operating.
Speaker 1: Let's say, in the US specific tug of war that's
Speaker 1: been going on around window of vulnerability to shunks. The
Speaker 1: window's been kind of pushed down because of all that
Speaker 1: foam on the runway. And now with a global industrial
Speaker 1: upturn happening, it gives some relief to our manufacturing sector.
Speaker 2: Which will get to be able to gear a little bit.
Speaker 1: More, and that gives a bid on energy prices, notwithstanding
Speaker 1: what happens to supply. You know, supply is other people
Speaker 1: are experts on supply. I mean, we've been doing fracking
Speaker 1: for a long time. It's it's it's brought us to
Speaker 1: become the world's biggest producer of oil. I don't know
Speaker 1: how long we can do that. You know, maybe that
Speaker 1: peaks out. I'm not sure, but it's not weeks, it's
Speaker 1: but it's not weeks, it's year, right exactly.
Speaker 2: So then the second related question is, you know you
Speaker 2: mentioned the palpivot in twenty nineteen. I am getting the
Speaker 2: sense from reading and listening to the chairman that they're
Speaker 2: aware of the problem child in inflation is housing. They've
Speaker 2: locked a bunch of people in who have mortgages five percent,
Speaker 2: four percent, three percent. They can't put those houses up
Speaker 2: for sale coast, They're new financing is going to be
Speaker 2: too pricey. Add to that the fact that following the
Speaker 2: financial crisis, the United States wildly underbuilt single family homes
Speaker 2: for a decade. And you have a recipe for sustain
Speaker 2: rental prices, sustain home prices and limited supply, how would
Speaker 2: you imagine the economy is going to respond to what
Speaker 2: limited choices Pal has in front of him.
Speaker 1: Look, job owning is half of the game here, and
Speaker 1: so the whole time there's been this job owning about like, Okay,
Speaker 1: you know, they missed the boat on the inflation upturn,
Speaker 1: so they had to make up for that. A stitch
Speaker 1: in time saves nine. They had to make nine stitches, right,
Speaker 1: So they put in the nine stitches. And then now
Speaker 1: they're caught up and they're like, okay, now we'll go
Speaker 1: the other way. We're going to do that, and the
Speaker 1: market gets out over at skis right the way he
Speaker 1: talked in December, I think they got six rate hikes
Speaker 1: priced it right.
Speaker 2: Wait, so let's just look at this calendar. Yeah, so
Speaker 2: cares Act in twenty twenty and then the Act two
Speaker 2: and three and twenty and twenty one. Inflation spikes, passes
Speaker 2: the two percent upside target March twenty twenty one. By
Speaker 2: March twenty twenty two, it's seven eight percent, and the
Speaker 2: Fed starts hiking. Ironically, by June twenty twenty two, inflation
Speaker 2: peaks at nine percent starts coming down in part to increases,
Speaker 2: in part to draw boning. By June twenty twenty three,
Speaker 2: the Fed has done five hundred and twenty five basis
Speaker 2: points and hikes and kinda says we're pretty good for
Speaker 2: a while. That's nine months, almost a year ago. Whatever
Speaker 2: the long and variable lag of inflation is is probably
Speaker 2: that rate increases have probably been felt in the economy.
Speaker 2: Now it seems that he's not gonna do six cuts,
Speaker 2: but two or three certainly felt like they were all.
Speaker 1: That take, so that he went from six to two
Speaker 1: or three, and then now we're taking the under on
Speaker 1: that right on that rate, I think that's where it's
Speaker 1: it seems to be headed, which is again consistent with
Speaker 1: the future inflation gauge not falling anymore, right, And when
Speaker 1: it's been going sideways, anybody who's borrowing money is feeling
Speaker 1: the pressure of the higher rates. Right. So you're you're
Speaker 1: especially Uncle Sam, Uncle Sam. You've got delinquencies rising from
Speaker 1: lower rates. You've got bankruptcy, she got all those kind
Speaker 1: of things happening. Problematic Again, Yeah, the levels are pretty low,
Speaker 1: but the direction, the direction is clear, right, they're moving
Speaker 1: to the upside. One of the bigger issues out there
Speaker 1: is probably all that commercial real estate stuff that's financing,
Speaker 1: and where are those walls of financing out there, and
Speaker 1: when do they have to refinance them? And so the
Speaker 1: hope is very much that rates come down before those
Speaker 1: loans come home to roost. The problem is the inflation
Speaker 1: cycle may be firming if, for example, commodity and price
Speaker 1: inflation has a bid from the demand side. Forget, I
Speaker 1: don't I'm not talking about the supply side, the supply
Speaker 1: if supply gets constrained even more so so far, I
Speaker 1: don't think we've had that disinflation from China that we
Speaker 1: enjoyed in the previous decade. Maybe that'll come back, maybe
Speaker 1: it won't. There's there's some talks of tariffs for example,
Speaker 1: and then things like that. Right, so this is a
Speaker 1: very fluid thing in terms of global trade. That all
Speaker 1: those all those supply chains which used to be just
Speaker 1: in time, they've been hardened to become just in case.
Speaker 1: And that's expensive just.
Speaker 2: In time to just in case.
Speaker 1: That's a big makes a lot of sense. So that's
Speaker 1: and that there's a cost when you start to do that.
Speaker 1: There's a cost all of a sudden. Now there's a
Speaker 1: cost for holding inventories. Right, last decade you could it
Speaker 1: was zero financing.
Speaker 2: Now this decade you got to finance, You got to
Speaker 2: put in a warehouse, you have to have shippers standing by.
Speaker 1: All that costs money. And then the PTSD on the
Speaker 1: difficulty of hiring people doesn't have employers firing people. So
Speaker 1: wages which let's say Atlanta Fed has a wage tracker,
Speaker 1: it was a had a north of a six handle
Speaker 1: a year ago. Now it's down, but it's down to
Speaker 1: like just above five percent increase in wages. Now that's
Speaker 1: a real number. Like that's that's not zero, right, that's
Speaker 1: a real number. And this will start to squeeze on margins.
Speaker 1: And we touched very quickly on AI and the hope
Speaker 1: around AI, and we're as hopeful as anyone else that
Speaker 1: it's going to boost overall productivity, but it could cost.
Speaker 2: Right, Like every time there's a new technology comes along,
Speaker 2: the ludites come out and they say, this is the
Speaker 2: end of the workforce. And for the most part, it's
Speaker 2: been pretty easy to dismiss that sort of fatalism. It
Speaker 2: almost feels as if AI is the first time where
Speaker 2: you have to be, hey, let's not be quite so
Speaker 2: dismissive this time. You could see how and we all
Speaker 2: kind of laugh at Siri is terrible, and even Alexa
Speaker 2: is awful, but you could see that, hey, it's not
Speaker 2: going to be a century before this is usable. It's
Speaker 2: going to be months and years, not decades.
Speaker 1: Right, But will it happen fast enough to offset the
Speaker 1: inflation cycle upturn that's looking like it's showing up in
Speaker 1: twenty twenty four. Probably not idea, My guess is probably
Speaker 1: not there, although I think we can. We can probably
Speaker 1: adapt reasonably fast. You know, after COVID, the remote work
Speaker 1: kind of stuck, right, you people adapted to that pretty quickly.
Speaker 2: It's funny because you know, everybody blames COVID. All this
Speaker 2: technology has existed for a decade before my office was
Speaker 2: doing remote work remote offices in the twenty tens, what
Speaker 2: change was Society suddenly recognized, Wait, why are we going
Speaker 2: to a building nine to five Monday to Friday to
Speaker 2: sit there and do stuff I can do in my
Speaker 2: pajamas at home. I don't understand. It's a social there's
Speaker 2: a social component to it that we do is mentoring
Speaker 2: this collaborative work. There are a lot of reasons, but
Speaker 2: it's not nine to five, five days a week. And
Speaker 2: what you mentioned with commercial real estate kind of fascinating
Speaker 2: that that is a slow motion train wreck because these
Speaker 2: are ten and twenty year leases. They come up a
Speaker 2: little bit every year, so it gives the Fed and
Speaker 2: the regulator's time to manage that, which comes back to hey,
Speaker 2: I understand why Jerome Pwell is concerned about reducing rates.
Speaker 2: If low rates didn't cause inflation, again, are high rates
Speaker 2: reducing inflation? I would argue, not only your high rates
Speaker 2: keeping rental prices up and limiting supply in real estate,
Speaker 2: but now you have to deal with commercial real estate
Speaker 2: and the federal deficit. Like there is a good case
Speaker 2: for him to take rates from five and a quarter
Speaker 2: to four and a half and say, let's see what
Speaker 2: happens if we leave them here?
Speaker 1: Right? Is that wishful thinking on my I think I
Speaker 1: think that you know, that's a that sounds plausible. It
Speaker 1: sounds like everybody has pain but can kind of manage it,
Speaker 1: which is probably the course that seems reasonable.
Speaker 2: And it's still at a level if there's a recession,
Speaker 2: they could they have some room.
Speaker 1: So this, this, all, this all seems reasonable, except that
Speaker 1: there's a cycle. Right, the cycle has it's like, doesn't
Speaker 1: care about that plan. Right, it's doing what it does.
Speaker 1: And the inflation cycle doesn't go down to a number
Speaker 1: and hang out until you're ready. Okay, it it does
Speaker 1: what it does. And and so right now, internationally, look
Speaker 1: we have a global industrial upturn.
Speaker 2: So that's got a bit on your industrial.
Speaker 1: Materials prices, sensitive industrial materials prices, energy metals and these things.
Speaker 1: Then you have recessions have kind of run their course.
Speaker 1: There's been in Europe you've had a few recessions. China
Speaker 1: you've had a few recessions. Uh So these recessions have
Speaker 1: been happening Taiwan, New Zealand, Russia, Japan flirted with recessions,
Speaker 1: Sweden and Austria, Germany, UK and Germany. They well, so
Speaker 1: technically I don't know if they went in because of
Speaker 1: the employment. The employment didn't contract there. They got the
Speaker 1: negative GDPs, but they didn't get the negative employment quite
Speaker 1: the same.
Speaker 2: So then let me ask you an employment question here.
Speaker 2: If the US is pick a number, If we were
Speaker 2: four million immigrants short, we lost a million to two
Speaker 2: million people to COVID. So whatever the number is, there's
Speaker 2: a few million people missing from our labor pool. Is
Speaker 2: that true? In Europe and in the Far East.
Speaker 1: To a degree they didn't have the same issues, but
Speaker 1: to a degree it's tighter. I mean, clearly Japan has
Speaker 1: look demographically, there's a whole nother structural demographic discussion we
Speaker 1: can have where there's a hunk of people who got old,
Speaker 1: all right, and then there's not as much younger people happen.
Speaker 2: Pan has its own specific demographic challenge. Then when we
Speaker 2: look at China, the one child policy is coming home
Speaker 2: to roost. They have an enormous shortfall generationally speaking, huge.
Speaker 1: Not easy to solve, and it's where robots and AI
Speaker 1: and these kind of things have to pick up the slack.
Speaker 1: And probably the only significant place in the world that
Speaker 1: has a lot of people being born. I guess India
Speaker 1: to a degree, and then Africa. These are the regions
Speaker 1: of the world where the populations are growing.
Speaker 2: South America also, but not as much.
Speaker 1: Not quite as much. Right, So growth, which we all
Speaker 1: want is really broken down to population growth. When I
Speaker 1: say growth in the I'm talking about growth in.
Speaker 2: The economic growth.
Speaker 1: Economic growth is populate your workforce growth plus your productivity growth.
Speaker 1: Productivity growth, by the way, is really bad. It's really,
Speaker 1: really really bad and has been and it's kind of
Speaker 1: deteriorating for decades, and.
Speaker 2: Which is just so stunning to me and I imagine
Speaker 2: you also because the work that we do, technology has
Speaker 2: been nothing but a boon, allowing us to accomplish more
Speaker 2: with less. But that's I've figured out, or if I
Speaker 2: had beaten into me over the years. Yeah, you're doing
Speaker 2: certain type of work that benefits from this, but not
Speaker 2: everybody gets the benefit of faster internet and quicker computers.
Speaker 1: Information technology jobs have benefited quite a bit, and the
Speaker 1: productivity is shot up, But our economy is not simply that, right,
Speaker 1: It's much bigger, and there's a lot of hands on
Speaker 1: stuff that happens in our economy and we all experience
Speaker 1: it when we go about our day, and that overall
Speaker 1: workforce productivity growth has basically been suffering. Now what happened
Speaker 1: is around COVID and in the aftermath of COVID, you
Speaker 1: had a gargantuan plunge.
Speaker 2: In productivity growth.
Speaker 1: So it's it's stared stepping down over decades and it
Speaker 1: just absolutely plunges.
Speaker 2: Really then it rebounds because I recalled the initial part
Speaker 2: of when we were in lockdown and work from home.
Speaker 2: There were all these reports that were surprisingly and again.
Speaker 1: Because because the hours work went down and output stayed up.
Speaker 2: Productivity and that was people who were who had the
Speaker 2: ability to work from home. But if you were not
Speaker 2: working from home, if you were not able to just
Speaker 2: log into your office from your computer, I have to
Speaker 2: imagine that productivity.
Speaker 1: Yeah, so some stuff like if you were if you
Speaker 1: were doing hands on work, you just had to stop working,
Speaker 1: right people were furloughed, and so that that output just collapsed.
Speaker 1: Now as we open up, we've seen a big spike
Speaker 1: and you get like positive two or three percent productivity growth.
Speaker 1: And it happens around the same time that we see
Speaker 1: all of the story worries around generative AI. So in
Speaker 1: our simple human brains were like, oh, generative AI gave
Speaker 1: us this productivity thing, which is not true. Right. What
Speaker 1: really happened is you had a snapback in productivity growth
Speaker 1: from horrible numbers which were not real numbers. They were
Speaker 1: around the whole recession in COVID debacle. Now is that
Speaker 1: kind of productivity growth sustainable? It's the only way out
Speaker 1: of this inflation conundrum that the FED is stuck with.
Speaker 2: So currently you're saying productivity growth is the only way out.
Speaker 1: At the moment, right, I mean, how are you going
Speaker 1: to pay someone five percent more but not have high inflation?
Speaker 1: For example? Right, you need productivity growth.
Speaker 2: Well, you got to go back a stead. You need
Speaker 2: more employees, you need more houses, you need more semiconductors
Speaker 2: to put into cars. A lot of the inflation that
Speaker 2: we've seen over and above the giant fish stimulus has
Speaker 2: just been these shortages that kind of we're lurking and
Speaker 2: we really didn't pay attention to them.
Speaker 1: Again, you're back to just in time versus just in case.
Speaker 1: And so now if a trade route gets pinched, if
Speaker 1: a bridge goes down, if somebody threatens a factory somewhere,
Speaker 1: or a factory gets messed up, boom, the ripples up
Speaker 1: the supply chain. So there's probably a new structural floor
Speaker 1: on inflation. By the way, it's probably.
Speaker 2: Not as much as its earlier.
Speaker 1: That structural floor is probably a little bit higher because
Speaker 1: of the more robustness that we're gonna want in our.
Speaker 2: Are you talking three three and a half four?
Speaker 1: I don't know.
Speaker 2: It's just higher, but it.
Speaker 1: Ain't one and a half two percents. No, it ain't
Speaker 1: one and a half two percent. The other thing though,
Speaker 1: You know, history doesn't repeat, but it rhymes, right. The
Speaker 1: seventies inflation stuff is interesting, not that anything that's happening
Speaker 1: now is what happened then. But early on in that
Speaker 1: inflationary era, people weren't that pissed it inflame. They were
Speaker 1: more excited about the growth. It was that each time
Speaker 1: inflation cycled down, it didn't get down as far as
Speaker 1: it did before, so that you had higher lows in
Speaker 1: the inflation cycle. And at the end of this decade
Speaker 1: or so, where inflation went from below three percent to
Speaker 1: above thirteen percent.
Speaker 2: It was cycling.
Speaker 1: The average was seven. It was really.
Speaker 2: High in nineteen seventies.
Speaker 1: For the seventies, for that decade roughly right, But.
Speaker 2: It's such a different decade compared completely different.
Speaker 1: But I'm saying psychologically interacting as consumers with prices when
Speaker 1: the lows, when inflation turns down, but it doesn't get
Speaker 1: low enough, it stops at a higher rate. That starts
Speaker 1: to get pretty annoying, and.
Speaker 2: People start talking about it as a structural component.
Speaker 1: They start talking about it. Look, Burns was the FED
Speaker 1: chairman in the early part of the seventies and Volker
Speaker 1: was the FED chairman in the end and towards into
Speaker 1: the eighties. And Burns gets a bad rap because he
Speaker 1: was at the beginning of this inflation era. But understand
Speaker 1: that the environment was not at all open to him
Speaker 1: controlling inflation. It was very much like what are you doing?
Speaker 1: Don't raise rates? Are you crazy? And then it's only
Speaker 1: towards the end of the era when Volker kind of
Speaker 1: had some cover to be as aggressive as he was
Speaker 1: in fighting inflation, and he was very aggressive. Huh.
Speaker 2: Quite interesting. So let's talk a little bit about predicting
Speaker 2: business cycles, and I want to talk about your leading
Speaker 2: and your coincidental indicators. Let's start with the l eis
Speaker 2: what goes into that and how useful are they in
Speaker 2: letting you know when, hey, a turn is coming?
Speaker 1: Right? So the leading economic indicators are very useful in
Speaker 1: managing risk because they're telling you what is the risk
Speaker 1: that whatever's going on now is going to change direction
Speaker 1: and go the other way? Right? So you can have
Speaker 1: your general plan. Hey, I've got my plan for business
Speaker 1: this year and you're running it. But if these indicators
Speaker 1: turn up noticeably or turned down noticeably, then you ought
Speaker 1: to start making contingency plans, being ready and thinking about
Speaker 1: what would I do if things accelerated or what would
Speaker 1: I do if things decelerated? Am I ready for that play?
Speaker 1: Am I ready to run that plays? As an investor
Speaker 1: or a business manager. That's the purpose of the leading indicators. Now,
Speaker 1: inside of those, while ultimately they're proprietary, inside of them
Speaker 1: are data from the government. There's hard data, so they're
Speaker 1: counting things. That's what we mean by hard data. There's
Speaker 1: soft data, which is when someone does a survey, Hey,
Speaker 1: how are you doing? What do you feel like you're doing?
Speaker 1: Are you going to buy a refrigerator? Right? They ask
Speaker 1: you these questions and hopefully you can see through some
Speaker 1: of the biases in there. And then there's the actual price,
Speaker 1: Like you know, how much does a bar of gold
Speaker 1: go for? How much does the thing of oil go for?
Speaker 1: How much does the lumber go for? How much does
Speaker 1: the house go for? These are all just prices at
Speaker 1: their stocks. What are the stock prices? Spreads in different things.
Speaker 1: So these are all different measures that reveal how the
Speaker 1: drivers of the business cycle are acting in concert.
Speaker 2: So what's different from the leis to the coincidental indicator.
Speaker 1: Okay, so the coincident indicators don't try to anticipate anything.
Speaker 1: They're just like, what's going on outside your window? So
Speaker 1: how much output? How much stuff are we making, either
Speaker 1: physical stuff or services or houses and things? How many
Speaker 1: people are working? What is the aggregate sales? Like, what's
Speaker 1: the value of everything that we're selling? And another related
Speaker 1: point is what's the income? What are we gaining? It's
Speaker 1: the other side of the sales right in a way.
Speaker 1: So those four indicators are the coincident. They tell you
Speaker 1: exactly how things are outside your window. The fact that
Speaker 1: there's a cycle means that collectively those four indicators rise
Speaker 1: together and fall together at the turning points. And when
Speaker 1: they do that, they tend to keep doing it for
Speaker 1: at least a couple of quarters.
Speaker 2: Some persistency. Persistency. It's pervasive.
Speaker 1: You can't hide, it's persistent, you can't wish it away.
Speaker 1: It's going to keep happening, and it's pronounced. It's going
Speaker 1: to be big enough that it leaves a mark either
Speaker 1: to the upside of the down.
Speaker 2: So coincidental will go up and down in real time.
Speaker 2: They're not giving you a heads up. How much of
Speaker 2: a lead do you get from the l eis versus.
Speaker 1: Oh and by the way, coincidental, Just to be annoying here,
Speaker 1: it's actually slightly lagging, which would.
Speaker 2: Make which would make sense when we get government data
Speaker 2: about employment. It's telling you about last month or GDP
Speaker 2: last quarter, So of course there's always going to be
Speaker 2: a little bit of a lag. We have some stuff
Speaker 2: that's a little quicker.
Speaker 1: And roughly speaking, the US will come out with the
Speaker 1: data a little faster than some of the other countries.
Speaker 1: But yeah, that's the coincident data.
Speaker 2: Now, the lead time is this is probably one.
Speaker 1: Of the bigger advancements since where most people think leading
Speaker 1: indicator technology lives is that the lead times are different.
Speaker 1: We have what I would call kind of a standard
Speaker 1: leading indicator might lead by a quarter or two.
Speaker 2: That's a long lead.
Speaker 1: Three six months, pretty good, pretty decently. That's kroin of
Speaker 1: a standard one. A short leader might lead by a
Speaker 1: quarter to two or three months, and a long leader
Speaker 1: can push it to three or four quarters. From a
Speaker 1: process point of view, we would look to the long
Speaker 1: leader for the first heads up that a turn might
Speaker 1: be taking place, and it leads by three or four quarters.
Speaker 1: So this gives us a prior view to watch the
Speaker 1: leading indicators. And then if we see the leading indicators
Speaker 1: following what the long leaders did, then we're looking for
Speaker 1: it in the short leading indicators, and then finally, sequentially
Speaker 1: in the coincident data. I have to say, the headlines
Speaker 1: and the market tone and the market narrative lives very
Speaker 1: much between the coincident and very short leading indicators.
Speaker 2: Right, they change it on a dime. I love. Just
Speaker 2: the past twelve months have been markets are going up
Speaker 2: because the Fed's going to cut, markets are going up
Speaker 2: because inflation is coming down. Okay, maybe the FED isn't
Speaker 2: going to cut, but it's a magnificent seven, all right.
Speaker 2: Maybe it's not the magnificent seven, maybe it's AI and
Speaker 2: the story, right, it's always an after the fact explanation.
Speaker 2: That looks silly and hart.
Speaker 1: So what's very interesting? Right? So I've been doing this
Speaker 1: now again, I'm sorry, I'm in my late fifties. I
Speaker 1: feel old, but but I'm like, wait a minute, I've
Speaker 1: been doing this since nineteen ninety.
Speaker 2: Real time, we prefer the term experienced and wizened.
Speaker 1: Wizzened. Yeah, yeah, definitely wizen. The pattern I see, right
Speaker 1: is that sequential stuff with our leading indicators long leader
Speaker 1: only coincidence. So I'm tracking that. That's my world. I
Speaker 1: won't live in that. Uh. And there's one hundred indexes
Speaker 1: I'm watching for the US and around the world in growth,
Speaker 1: the different sectors of growth, inflation, and employment. What I'll
Speaker 1: see though, is that our indicators will turn and to
Speaker 1: the extent they diverge from the consensus narrative. And that's
Speaker 1: a funny thing, the consensus narrative, right, because we all
Speaker 1: have our own consensus or whatever. But I you know,
Speaker 1: market prices kind of give us some beat on that,
Speaker 1: and you can get some algamation of what all the
Speaker 1: smart people are saying, and you get some sense of
Speaker 1: what the narrative is or what the FED saying or whatever.
Speaker 1: And when the cyclical story from these objective leading indicators,
Speaker 1: which they don't care about the narrative. When they diverge
Speaker 1: from the narrative and a gap opens up, that's interesting.
Speaker 1: That's where the really interesting stuff lives. Because if there
Speaker 1: is a cyclical turn and these indicators are I don't
Speaker 1: know anything better to get these cyclical turns, the risk
Speaker 1: of a cyclical turn to watch it. If these cyclical
Speaker 1: indicators are correct, and that divergence has to be resolved,
Speaker 1: it has to be resolved in some way or another
Speaker 1: by the narrative moving toward the indicators. And so it's
Speaker 1: I don't know exactly how the narrative's going to catch up.
Speaker 1: Maybe it's gonna say housing did it. Maybe it's gonna say.
Speaker 2: You know, but at least did it. It doesn't matter.
Speaker 2: By hook or by crook.
Speaker 1: By the end of twenty twenty four, you're gonna see
Speaker 1: ooh there's some demand for commodities. Who saw that coming
Speaker 1: and global industrial or manufacturing emergence, whatever the story is.
Speaker 1: And then oh, inflation didn't go down as far as
Speaker 1: we thought. All these banks around the world are banking
Speaker 1: on cutting ECB. Everybody risk of people are talkingalking about cutting.
Speaker 2: So let's talk about those four long, leading, short, and coincidental.
Speaker 2: We're recording this. It's the second quarter of twenty twenty four. Yeah,
Speaker 2: markets had a pretty robust rally to start the year,
Speaker 2: giving up some some of those gains. As the narrative,
Speaker 2: First it was vibe session. Then it's six cuts. Now
Speaker 2: it's three cuts, maybe two cuts, maybe one cut, maybe none.
Speaker 2: What are you seeing across long, leading, short, and coincidental
Speaker 2: indicators today.
Speaker 1: For the cycle on growth? I'd say, by and large,
Speaker 1: if I squint, they're firming, meaning doing okay, they're doing better.
Speaker 1: This tug of war that has been going on between
Speaker 1: earlier cyclical impulse to the downside and all that stimulus
Speaker 1: that went out the flood of and continues to go
Speaker 1: the foam on the runway, we may be seeing the
Speaker 1: window of vulnerability starting to edge shut.
Speaker 2: You sound much less recessionary. Correct, Then I recall hearing
Speaker 2: from you correct a couple of quarters ago.
Speaker 1: Correct?
Speaker 2: You were, You were hearing correctly. And yet the same time,
Speaker 2: I'm not hearing a whole lot of optimism that we're
Speaker 2: going to see inflation full much below where it is.
Speaker 1: I see, so the immaculate disinflation was the pipe dream, Right,
Speaker 1: that's the one where it just doesn't seem to work
Speaker 1: that way. Look, I've been trying all my life to
Speaker 1: have my cake and eat it too. It doesn't work
Speaker 1: that way. It doesn't exactly work that way.
Speaker 2: So that's what flip side of the strong economy is
Speaker 2: careful inflationary impulse, Careful what you wish. By the way,
Speaker 2: I've had people say to me, imagine how great things
Speaker 2: would be if oil was thirty dollars, and my answer
Speaker 2: is always no, you'd be in a depression if oil
Speaker 2: was thirty dollars. Careful what you want, it's it's how
Speaker 2: you get there.
Speaker 1: So I mean oversimplifying. You could pick a recession and
Speaker 1: sqush inflation that way eventually.
Speaker 2: And send unemployment up to five six and do all
Speaker 2: of that you can. Nobody wants that.
Speaker 1: Nobody wants that. So we're trying to thread the needle. Right,
Speaker 1: there's I think it's an open question on threading the
Speaker 1: needle by spending over seven trillion dollars, that's an apology
Speaker 1: question that the people can debate. You know, you know,
Speaker 1: reasonable people get to be.
Speaker 2: So let's stick with threading the needle. Or as most
Speaker 2: people describe it a soft landing. Yeah, what is this
Speaker 2: soft landing? And what was it?
Speaker 1: Okay, So here if people can imagine those coincident data,
Speaker 1: you put them together into an index. It has a
Speaker 1: growth rate if output, employment, income, in sales. It's cycled
Speaker 1: down very hard into twenty two into twenty three. I've
Speaker 1: seen the picture. It's a sharp decline and then it
Speaker 1: kind of levels out at around two percent. It gets
Speaker 1: pretty weak back in twenty two when GDP goes negative
Speaker 1: for a couple of quarters, but employment keeps it from
Speaker 1: going negative, and so we've been bouncing along. Now. I
Speaker 1: think that that can start to firm a little bit.
Speaker 1: If it does that, it starts to move to the upside.
Speaker 1: You have a soft landing. You had a cyclical downturn
Speaker 1: in growth without a contraction, without it going negative in
Speaker 1: overall growth. And again I'm talking GDP, employment, income, and
Speaker 1: sales collectively. There's no one statistic like GDP which is
Speaker 1: going to define recession, and that would be a soft landing. Okay,
Speaker 1: But everything I'm talking about is in cyclical terms. I'm
Speaker 1: looking out a few quarters. I have not said there
Speaker 1: can't be a recession over a year from now, right,
Speaker 1: there could be. And one of the things that I'm
Speaker 1: watching for that's not in the play that everybody is
Speaker 1: waiting to see, is inflation possibly turning up before it's
Speaker 1: supposed to.
Speaker 2: Let me ask you the question that sums all of
Speaker 2: this up. You get a phone call from the White House, Lashman,
Speaker 2: we have some questions for you about the next six
Speaker 2: months before the election. What's going to happen between now
Speaker 2: and November with unemployment, with inflation in the economy, and
Speaker 2: what should we do about it? How do you answer
Speaker 2: the White House who's throwing that curveball at you?
Speaker 1: Well, let me take the first part. What's going to
Speaker 1: happen the indicators. I could just tell you what they're
Speaker 1: telling right.
Speaker 2: Growth is going to firm, and I think it's going.
Speaker 1: To be industrial based. It will be the first thing
Speaker 1: that you see we are going to see. I think
Speaker 1: employment kind of hang in there.
Speaker 2: You're still under four percent unemployment.
Speaker 1: Because it's cos active because of growth affirming and the PTSD.
Speaker 1: Every all the employers have in trying to hire people,
Speaker 1: they're very reticent to fire. You might see shorter work weeks.
Speaker 1: You're going to see weakness and temp hiring.
Speaker 2: Enough tick in part time.
Speaker 1: You see the uptick in part time you'll see all
Speaker 1: those levers being pulled. But I don't think you see
Speaker 1: the firing.
Speaker 2: Which is part of recession.
Speaker 1: Right now. On inflation, I think you have to really
Speaker 1: think about it firming and not going down. And so
Speaker 1: that's the fly in the ointment. And you know, an
Speaker 1: inflation cycle upturn is an inflation cycle upturn. It's not
Speaker 1: that you can necessarily do anything about it.
Speaker 2: It is what it is. It's gonna happen. You can
Speaker 2: pound your chest about it if it works out, and
Speaker 2: try and change the subject.
Speaker 1: If it doesn't, I think you get in front of
Speaker 1: it and you try to frame it right. So the
Speaker 1: whole thing is about the jaw boning and the narrative.
Speaker 1: And if you were the opposition, you're gonna harp on
Speaker 1: that every single day. And if you're an incumbent, you're
Speaker 1: gonna say, yeah, but look at all this other stuff
Speaker 1: that's going well, where the economy's growing.
Speaker 2: Huh, really really interesting? All right, I only have you
Speaker 2: for another ten minutes, so let's jump to our favorite
Speaker 2: questions that we ask all of our guests, starting with, Hey,
Speaker 2: what are you streaming? What are you watching or listening?
Speaker 2: These days on Netflix or podcasts or whatever.
Speaker 1: This is all entertainment for the most part.
Speaker 2: That's fine.
Speaker 1: Owl House, really, do you know Owl House? No, I
Speaker 1: don't think you would. I'm joking, Barry. It's it's this
Speaker 1: is a show. It's a fantasy show for the kids.
Speaker 1: About it.
Speaker 2: I know, I've seen the It's.
Speaker 1: A lot of fun. It's a great it's really well
Speaker 1: written and nice storytelling in a group of a group
Speaker 1: of kids.
Speaker 2: You're older, now, you know.
Speaker 1: No, I got a nine and I have nine and
Speaker 1: twelve and sixteen, and I try to keep them young. Okay,
Speaker 1: it's best I can. They're going to get older no matter.
Speaker 2: What I get about about six year old.
Speaker 1: And so ol House and troll Hunter, those are nice
Speaker 1: kids shows. I was impressed with how Apple handled Foundation
Speaker 1: in the Foundation.
Speaker 2: Of the books, and I watched the first season. I
Speaker 2: haven't gotten into the second season yet.
Speaker 1: They did a reasonable job. I mean, look, there's no
Speaker 1: way you can tell the story that kind of story.
Speaker 1: It's like Dune. Also, it's very hard to tell the
Speaker 1: story or three body problem that you were talking about.
Speaker 2: Which which, by the way, they did a really good
Speaker 2: job in the first season.
Speaker 1: Because they're so expansive these stories, how do you put
Speaker 1: it to film? I enjoyed that. The one that disturbs me.
Speaker 2: But for some reason I watch it from time to time.
Speaker 1: Is Black Mirror, Yeah, which is every once in a
Speaker 1: while when I'm like, can I take something shocking, I'll
Speaker 1: watch that and then I don't watch it for a
Speaker 1: moment because it's very disturbing. But but I've been liking
Speaker 1: all of those. I mean, there's so much good stuff,
Speaker 1: and some of the.
Speaker 2: There's too much good stuff. My wife and I have
Speaker 2: been saying, all right, let's wrap up. We're finishing up
Speaker 2: Curb and it's like, after we're done with this, I
Speaker 2: want to cut out TV a few days.
Speaker 1: Without without getting political. Something that I rewatched it with
Speaker 1: my sixteen year old was Gandhi really yeah, and it
Speaker 1: held up really really well. The movie it's it's it's
Speaker 1: three hours something long, but it's so interesting to see
Speaker 1: how you know, to remember the history, and then to
Speaker 1: see how the politics get in and things.
Speaker 2: There's been a few shows like The Bodyguard and The
Speaker 2: Diplomat that are to say nothing of the Crown, that
Speaker 2: are of an era and they're just so informative and
Speaker 2: fascinating especially I don't really think of myself as an anglophile,
Speaker 2: but the Crown was just one of those things where
Speaker 2: you fall into a whole nother world. And Gandhi, I
Speaker 2: would imagine, is the same.
Speaker 1: Ghandhi is amazing and you're seeing it from the other
Speaker 1: side of the table, right, So it's fascinating and I
Speaker 1: enjoyed watching that. But I mean, there's so much stuff
Speaker 1: to watch.
Speaker 2: Sure, let's talk about your mentors who helped shape your career.
Speaker 1: I don't want to leave anyone out.
Speaker 2: There are so many people. Well, obviously doctor Moore is huge,
Speaker 2: who really.
Speaker 1: Was the pinnacle of my mentors, I would say others
Speaker 1: some teachers. Shout out to my teachers. I met with
Speaker 1: Sam Lockwood, who taught me fourth and fifth grade last summer,
Speaker 1: and that was really nice to see him, and he
Speaker 1: was just he loved letting me be curious. And then
Speaker 1: as I got into college and into cycles, I had
Speaker 1: a professor at Roxton College in the UK, doctor Baldwin,
Speaker 1: who taught me a lot about politics and the civil service,
Speaker 1: the power of the civil service, which I know which
Speaker 1: I now have come to appreciate, or the deep the
Speaker 1: deep states, the deep state, But I don't think it
Speaker 1: was so nefarious, but yes it was.
Speaker 2: It was definitely that they're powerful.
Speaker 1: Uh, Doctor Loreene Harris who introduced me to doctor Moore,
Speaker 1: to Jeffrey Moore, and then also my father in law
Speaker 1: who came from a different angle, more from a financial
Speaker 1: investing angle, but very interested in economics and psychology, always.
Speaker 2: In the markets, which was which was very important. Let's
Speaker 2: look about books. What are some of your favorite and
Speaker 2: what are you reading right now?
Speaker 1: I'm a sci fi buff, right, Okay, So I like
Speaker 1: the Culture Series.
Speaker 2: It took Ian M.
Speaker 1: Banks.
Speaker 2: Okay, and uh, it's it's a two.
Speaker 1: Thousand in the future. It's very philosophical, but it's excellent.
Speaker 1: It's like space opera stuff. It's if you like Dune
Speaker 1: and those kind of cools, you'll love Ian Banks and
Speaker 1: the and the Culture Series. And I'm reading The Player
Speaker 1: of Games. It's a fun one.
Speaker 2: The Player of Games.
Speaker 1: Player of Games?
Speaker 2: Yeah, who wrote that?
Speaker 1: Ians Banks? Yeah, it's a series of things on a
Speaker 1: more practical sense in terms of thinking. There's an old
Speaker 1: favorite that I go back to, which is called Deep
Speaker 1: Work by cal Newport.
Speaker 2: I recall that book. Yeah, very very good.
Speaker 1: I'm showing my age, but Outlive by Peter Atia on longevity.
Speaker 2: Yeah, on longevity.
Speaker 1: Looking, I'm looking for the name of a book as
Speaker 1: we speak, and then for fun my wife does. She's
Speaker 1: a graphic novelist, Tracy White, and so I dig through
Speaker 1: her library and find things. And there's one that I love,
Speaker 1: which is it's very dated, but it kind of does
Speaker 1: well today. It's called trans Metropolitan by Warren Ellis. It's
Speaker 1: a graphic novel and it's about a journalist, Spider Jerusalem,
Speaker 1: and he's this funny, funny character who's trying to speak
Speaker 1: truth to power and all that. But a great graphic novel.
Speaker 1: I'm reading this with my son. He's twelve.
Speaker 2: Be Useful by Arnold Schwarzenegger. Oh really looks kind of interesting.
Speaker 1: That's pretty interesting, and it's, you know, whatever, whatever you
Speaker 1: think about individuals, the message that he's got in that
Speaker 1: book is a positive one.
Speaker 2: There is a book I'm looking for the title of
Speaker 2: that is a series of related but disconnected short stories
Speaker 2: and the name of the book is Intergalactic Refrigerator repair
Speaker 2: Man Seldom Carry Cash. And let me recommend that that's
Speaker 2: been my almost sounds like Doug. It's got a touch
Speaker 2: of that it's not quite as absurd, but it's got
Speaker 2: just a flavor of mixed in with harder science. I
Speaker 2: look it up an element of of that goofballness. Our
Speaker 2: final two questions, and by the way, that's a really
Speaker 2: good list of books you have. Our final two questions,
Speaker 2: What sort of advice would you give to a recent
Speaker 2: college grad interested in studying either market cycles or investing,
Speaker 2: or any sort of economic research.
Speaker 1: This goes for any kind of pursuit, let alone economic
Speaker 1: or financial research. Be sure that you truly enjoy the work.
Speaker 1: That'll make it easy easier to be successful, because you're
Speaker 1: going to have to persist. Right, none of this is easy.
Speaker 1: You're going to have to persist. It doesn't just fall
Speaker 1: in your lap. And so if you enjoy it, you
Speaker 1: can keep doing it. That's my main advice.
Speaker 2: And our final question. What do you know about the
Speaker 2: world of cycles, economy, investing research today you wish you
Speaker 2: knew back in the early nineteen nineties when you were
Speaker 2: first getting started.
Speaker 1: Well, I think the overarching concept is you don't know
Speaker 1: what you don't know, and that's the thing that can
Speaker 1: hurt you. Probably the thing that has surprised me the
Speaker 1: most is the sheer size and extent of deficit spending.
Speaker 1: When you take a look at what happened in the
Speaker 1: twenty tens post GFC, and then you take a look
Speaker 1: at what's happened post COVID. We're not in Kansas anymore.
Speaker 1: We're somewhere new. It's different for the US in many
Speaker 1: ways because we are the world's superpower and we are
Speaker 1: the biggest market. So it's not the same as if
Speaker 1: Japan did it or someone else did it. So I
Speaker 1: don't want to underestimate the ability for US to do
Speaker 1: deficit spending.
Speaker 2: Really quite fascinating. Thank you Lachman for being so generous
Speaker 2: with your time. We have been speaking with Lashman. You
Speaker 2: than co founder of the Economic Cycle Research Institute and
Speaker 2: author of Beating the Business Cycle. If you enjoy this conversation,
Speaker 2: check out any of the previous five hundred discussions we've
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