Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have a special guest.
Speaker 1: His name is Dr Edyard Danny and I've known him
Speaker 1: for a long time. He has been putting out research
Speaker 1: for decades. I always find is data driven commentary to
Speaker 1: be very very interesting. He's he's a realist when it
Speaker 1: comes to looking at the markets, looking at the economy,
Speaker 1: and figuring out uh the relationship between the two. UH.
Speaker 1: He also has a degree of infamy on Wall Street.
Speaker 1: He's essentially the person who invented the phrase bond vigilantes
Speaker 1: and talked about the role of the bond market in
Speaker 1: keeping policymakers honest. UH. And he also includes UH movie
Speaker 1: reviews and in his weekly commentary he writes daily but
Speaker 1: we get a weekly film review, which is always charming.
Speaker 1: I find his work to be very interesting and somewhat
Speaker 1: unique amongst the economists of the world. So, with no
Speaker 1: further ado, my interview with Dr Eduardney. I'm Barry Ridhults.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: special guest today is Dr Edyard Denny. He is president
Speaker 1: and chief investment strategist at your Denny research. He has
Speaker 1: a long and storied career on Wall Street, beginning in
Speaker 1: the early days where he was chief economist at such
Speaker 1: August firms as E. F. Hutton and then later Prudential Securities.
Speaker 1: He eventually became chief investment strategist at giant German investment
Speaker 1: house Deutsche Bank. Uh. This was many years ago. He
Speaker 1: worked at the Federal Reserve in both Washington, d C.
Speaker 1: And New York City. He has a new book out,
Speaker 1: Predicting the Markets, a professional autobiography. Dr Edyard Denny. Welcome
Speaker 1: back to Bloomberg. Very thank you so much. So let's
Speaker 1: start at the early parts of your career. You worked
Speaker 1: at the FED, both both at the New York Fed
Speaker 1: and the Federal Reserve in d C. And then you
Speaker 1: transition to Wall Street. What was that changeover like? It
Speaker 1: was pretty smooth? Quite quite honestly, Um, I was at
Speaker 1: the Federals or Bank of New York for a little
Speaker 1: over a year. Uh. Part of that, I basically finished
Speaker 1: my PhD dissertation now at the Federal Reserve Board for
Speaker 1: a few months. So I don't want to give you
Speaker 1: the impression that I had a long stint down in Washington,
Speaker 1: but I spent the year at the Federals Bank in
Speaker 1: New York, and then I got a call from a
Speaker 1: headhunter UM who placed economists and banks, and I said,
Speaker 1: would you be interested in taking a job at E. F. Hutman.
Speaker 1: I jumped at it because I I did actually want
Speaker 1: to go to Wall Street. I didn't want to stay
Speaker 1: in government when I was a kid. Well, wax nostalgic
Speaker 1: here when I was a kid. I just have such
Speaker 1: a vivid recollection of the E. F. Hunting commercials and
Speaker 1: I'll put a link up to this on on the
Speaker 1: post about this. They were seminal, they were there was
Speaker 1: nothing else like. They were a premier firm. What what
Speaker 1: was it like in those days at such an Olvis
Speaker 1: farm like EF. Well, I I felt that, you know,
Speaker 1: I was set for life. I mean moving into the
Speaker 1: EF Hunton back then. Uh it was a premier firm,
Speaker 1: not just in retail but also in the institutional field.
Speaker 1: Just a very very classic firm. UH modern offices down
Speaker 1: on State Street. And Uh, I kept pinching myself. I
Speaker 1: couldn't believe that I landed at this great firm, and
Speaker 1: I just was looking forward to being there for the
Speaker 1: rest of my life. Uh. And then and then I
Speaker 1: started talking to some of my new colleagues, and I
Speaker 1: know some of the older ones had kind of a
Speaker 1: resume where they'd worked at different firms, and I couldn't
Speaker 1: understand why they jumped around so much. And uh lo
Speaker 1: and behold, my resume kind of looks the same way. Now,
Speaker 1: you know. That's how you how you get a new position,
Speaker 1: a new pay, raise, more stock options. That and sometimes
Speaker 1: these firms don't don't stay in business. Well, Hutton ended
Speaker 1: up merging with Hutton. Yeah, but that's because Hutton had
Speaker 1: some legal issues, to put put it mildly, and so
Speaker 1: they got taken over by Jarson. But I left about
Speaker 1: a year before that happened. Uh. And then I went
Speaker 1: over to Prudential Bach at the time because George Ball
Speaker 1: was the head of Hutton and he went to Prudential Bach.
Speaker 1: Very famous person on Wall Street? Is it? Is it?
Speaker 1: I'm trying to think of who would be the equivalent
Speaker 1: of George Ball today. He was He was a star,
Speaker 1: definitely was a star. Could you could we say he
Speaker 1: was the Jamie Diamond of the Year or is that
Speaker 1: going to I think that might be going a little
Speaker 1: bit too far. I mean Jamie Diamond is in a
Speaker 1: class of his own. But Ball was, you know, master
Speaker 1: the universe back then. And how did you end up
Speaker 1: working your way to Deutsche Bank, which was then was
Speaker 1: a giant bank in German und a little bit of
Speaker 1: actually Actually from Prudential, I went over to UH. C J.
Speaker 1: Lawrence at Hyman, who's you know, the all time great
Speaker 1: star in our business, particularly as an economist, decided to
Speaker 1: go off on his own and presently created I S
Speaker 1: I Group, which turned out to be a very very
Speaker 1: successful firm. But he also created a opening at UH.
Speaker 1: I have to thank Himan for creating an opportunity to
Speaker 1: c J. Lawrence and UH. For me, c J. Lawrence
Speaker 1: was an opportunity to really focus much more on working
Speaker 1: with institutional investors. I had a great experience with the
Speaker 1: Prudential and working with retail investors, but CJ. Lawrence is just,
Speaker 1: you know, it's it's nice to change careers within careers,
Speaker 1: as long as the it's not nothing too radical. And
Speaker 1: c J. Lawrence itself was a very classy firm in
Speaker 1: that area. And then from launch you ended up at
Speaker 1: Deutsche Well. C J. Lawrence was owned by Morgan Grenfeld.
Speaker 1: When I went over there and more, and Grenfeld was
Speaker 1: owned owned by Deutsche Bank, and there was all sorts
Speaker 1: of regulatory reasons why Deutsche Bank couldn't get into the
Speaker 1: investment business. But those regulations changed and eventually C. J.
Speaker 1: Lawrence's name disappeared and it just became a series of
Speaker 1: things like Deutsch Deutsche Bank Securities and and and the like.
Speaker 1: So I I I stayed in the same office, and
Speaker 1: you know, the firm's name changed around me. So you
Speaker 1: trained as an economist, how do you affect that transition
Speaker 1: to market strategist? There were investment strategy Well, you know, UH,
Speaker 1: life as UH is full of opportunities and you just
Speaker 1: have to kind of hope that they come your way
Speaker 1: or or make the opportunities come here away. What happened
Speaker 1: at Deutsche Bank Secure Aries is that the Jim Moltz,
Speaker 1: who was my mentor in many ways he was a strategist,
Speaker 1: that was the economist. I was providing economic data information
Speaker 1: to him and he translated into marketable action ideas and
Speaker 1: of course had his own ideas. But Jim moltwent over
Speaker 1: enjoyed the I s I you enjoined at Hyman and
Speaker 1: so they did replace Jim with Tom Galvin, who was
Speaker 1: the auto analyst, and he did a great job for
Speaker 1: a couple of years as a strategist, but then he
Speaker 1: decided to go off to the by side and manage money.
Speaker 1: So there was just opening and I just jumped out
Speaker 1: and I said, hey, guys, you know, I'd be more
Speaker 1: than happy to do two jobs and pay me a
Speaker 1: little bit more, and I'll do economics and strategy, and
Speaker 1: somehow or other they agreed agreed to that. So when
Speaker 1: did the movie reviews come into your research? Because you're
Speaker 1: fairly amongst many things you're you're somewhat infamous for including
Speaker 1: movie film reviews. Well, you're a commented I joke around
Speaker 1: that the reason I do movie reviews is in case
Speaker 1: this career doesn't work out. In this in case this
Speaker 1: job doesn't work out, I could always become a movie reviewer, right,
Speaker 1: But my wife and I have always enjoyed going to movies,
Speaker 1: and uh, I guess really it was in the early
Speaker 1: nineties when I moved to C. J. Lawrence. We'd have
Speaker 1: these Monday morning conferences with the salesforce relating to them
Speaker 1: what I thought, what Jim Maltz thought on the strategy side, Right,
Speaker 1: I thought on the economics side, and I just started saying, hey,
Speaker 1: by the way, I saw the following a movie on Friday,
Speaker 1: and UH, I'd say a couple of comments about it,
Speaker 1: whether I like them or not. And more often than that,
Speaker 1: I try to, especially once I started writing these things up,
Speaker 1: I try to relate it to UH to the markets.
Speaker 1: But two thousand and four is the first one I
Speaker 1: actually have on the website. So when they go back
Speaker 1: quite a ways, this book is filled with all sorts
Speaker 1: of quotes that I really enjoy. I'm going to start
Speaker 1: with a long one, and let's have you comments on it. Economists,
Speaker 1: especially of the pessimistic persuasion, rarely pay attention to technological developments.
Speaker 1: Yet these developments regularly transformed the course of human history.
Speaker 1: Human nature may not change much over time, but technology
Speaker 1: often does, does so in ways that profoundly impact human societies,
Speaker 1: their economies, and financial markets. So first, why don't economists
Speaker 1: pay attention to technology? And and then secondly, why have
Speaker 1: you found it to be such an attractive area? I
Speaker 1: guess a lot of them don't view it as being
Speaker 1: part of their job setting, their job description. Um, they
Speaker 1: tend to be fairly narrowly focused on whatever it is
Speaker 1: that they choose to focus on and a graduate school,
Speaker 1: so they're either microeconomists or macro economists or monetary economists,
Speaker 1: and um, you know, I'm not too up to date
Speaker 1: on what they're teaching in grad school these days, but
Speaker 1: I don't think they're are really any courses that focus
Speaker 1: on how technology impacts economies impacts the way uh uh
Speaker 1: economies evolve, which is kind of bizarre because when you
Speaker 1: think about one of the first economists was Mauthis, and
Speaker 1: Mauthis predicted that they be food shortages and what he
Speaker 1: didn't anticipate was technological innovation and agriculture. Um, clearly he
Speaker 1: misunderstood the rate of change and innovation. Yeah, and not
Speaker 1: then you also have to understand or try to think
Speaker 1: about how human beings respond to technological innovations. So again
Speaker 1: going back to the Malthusian uh dire warnings. Uh So,
Speaker 1: as uh technology improved the ability of agriculture defeat everybody,
Speaker 1: you didn't really need anybody to be out in the
Speaker 1: fields anymore. You needed far fewer workers. So you saw
Speaker 1: tremendous urbanization. And guess what, when people go to cities,
Speaker 1: they have fewer kids. So all this concerns that populations
Speaker 1: will grow faster than the food supply just totally blew
Speaker 1: up because technology cured the problem. But you know, economists,
Speaker 1: you know I I went back recently and I looked
Speaker 1: at Samuelson's classic textbook on economics, which is what most
Speaker 1: most economics students study when they first get into the field.
Speaker 1: And if you go back to you know, this first book,
Speaker 1: I think in the mid forties, and look at the
Speaker 1: latest one, which is written by Samuel Lynn and Nordhouse,
Speaker 1: you'll see that they define economics as, uh, the study
Speaker 1: of how you allocate scarce resources optimally. And I was
Speaker 1: the radiant after and I kind of added this to
Speaker 1: my book after I've written most of it. I said, no,
Speaker 1: that's not really true. When when something is scarce, guess
Speaker 1: what entrepreneurs come in and they figure out new technologies
Speaker 1: to make things less scarce or to substitute for the
Speaker 1: scarce areas. And micro economics actually teaches that, you know, uh,
Speaker 1: there's no such concept of there's no such thing a scarcity.
Speaker 1: Something is scarce, as the price goes up, you can
Speaker 1: still get it, you just gotta pay a higher price
Speaker 1: for it. And that encourages entrepreneurs to come in and
Speaker 1: figure out how to lower that. My favorite example is
Speaker 1: in New York City, if you want the helicab, it
Speaker 1: used to be next to impossible when you wanted it,
Speaker 1: and then uber came along and suddenly there are cars everywhere.
Speaker 1: And by the way, the value of that medallion at
Speaker 1: four millions because it's eleven cents. That's it. That scarcity
Speaker 1: led to a technological innovation. Absolutely, it's so so that
Speaker 1: really raises the question, why are we missing technology from
Speaker 1: our economic textbooks. Why hasn't the dismal set figured this out? Well,
Speaker 1: you know, economics started out being called political economy, uh,
Speaker 1: and which included philosophy, included economics, included history. It was
Speaker 1: a broad ranging, uh, study of human nature and how
Speaker 1: it interacts with the environment, and technology was was part
Speaker 1: of that. And somewhere along the way economics became very
Speaker 1: stratify stratisfied. I think I would I blame Keynes for
Speaker 1: a lot a lot and uh, you know, when Keens
Speaker 1: invented macro economics, that meant that anybody who didn't study
Speaker 1: macroeconomics was kind of a micro economist. And it's kind
Speaker 1: of divorced the study of economics from reality. In my opinion,
Speaker 1: it became too theoretical. And yet Keynes was a very
Speaker 1: savvy investor. He understood how economics interacted, which leads me
Speaker 1: to another quote from the book. Investing is in a
Speaker 1: moral pursuit. It's not about right or wrong, good or evil,
Speaker 1: it's about bullish or bearish. Well, uh, I guess it
Speaker 1: was when when Obama got elected. Um, there were there
Speaker 1: were a lot of policies that were being discussed that
Speaker 1: I I thought were just much too interventionist in the economy.
Speaker 1: And uh I, um, I was sort of politically biased
Speaker 1: in my writing. And one of my accounts kicked me
Speaker 1: in the butt and said, you know, I don't pay
Speaker 1: you to do Fox News. I don't pay you, you know,
Speaker 1: for your political views. I pay you for what you've
Speaker 1: done in the past, which is kind of seem clearly
Speaker 1: where the signal is and away from the noise and
Speaker 1: a lot of politics as noise. Absolutely, and uh it
Speaker 1: kind of like brought me to my senses and being
Speaker 1: an entrepreneurial capitalist realizing that this guy's an important account,
Speaker 1: I started to realize, you know, I mean, basically the
Speaker 1: market was telling me this is not what you really
Speaker 1: need to be doing. What you need to be doing
Speaker 1: is focusing on is it bullish or bearish? That is
Speaker 1: it good or bad. Don't be a policy don't criticize
Speaker 1: the policy makers. Tell me what they're gonna do. By
Speaker 1: the way, that's my pet theory for why so many
Speaker 1: hedge funds have been underperforming the past decade. They thought
Speaker 1: they were sitting in think tanks when they were actually
Speaker 1: managing of people's money, and we got distracted. That's right.
Speaker 1: So I tell people I'm not a preacher. I don't
Speaker 1: do good or bad. I don't do uh right or wrong.
Speaker 1: I'm an investment strategist. I do bullish or bearish, and
Speaker 1: sometimes you can let your political views. If you let
Speaker 1: your political views get no way, you could be bearish
Speaker 1: and miss a great bullmarket, no no doubt about it.
Speaker 1: One last quote, I'll go out on a limb and
Speaker 1: predict there will be another financial crisis in our lifetimes. However,
Speaker 1: like previous ones, it will offer great opportunity for buying stocks. So, so,
Speaker 1: how soon is the next financial crisis coming? And at
Speaker 1: what levels should we be well? So, those are all great,
Speaker 1: great questions, and I'm not going to pretend that I
Speaker 1: have clairvoyance to tell you exactly when these things are
Speaker 1: gonna occur. But you know, over the past forty years,
Speaker 1: I've observed that recessions happen, uh, and very often they're
Speaker 1: preceded by a financial crisis. And what's happened in the
Speaker 1: past is um credit was too easily available, and it
Speaker 1: was too cheape, and uh, people gotta get caught up.
Speaker 1: And how smart they were, I mean bull you know,
Speaker 1: bull markets make a lot of people very smart. Um
Speaker 1: borrowed a lot of money and then uh, suddenly we
Speaker 1: got an inflationary boom. The fan had to step on
Speaker 1: the brakes and uh low and behold, a lot of
Speaker 1: debtors just couldn't keep making their payments and the whole
Speaker 1: thing came on glued. And history is full of this.
Speaker 1: I mean, it's just, uh, it's a traditional boom bust cycle. Um.
Speaker 1: So let's let's look a little closer at the boom
Speaker 1: bust cycle and the two thousands. At least before the crisis,
Speaker 1: you had easy credit and cheap money. Correct. Today we
Speaker 1: have not so easy credit and money was cheap, but
Speaker 1: it's getting a little less cheap. Where are we in
Speaker 1: that long term boom bust cycle. Well, I'm you know,
Speaker 1: I always like to think a little bit outside the box.
Speaker 1: But but but always uh stimulated by what the data
Speaker 1: is telling me. And uh what what the data is
Speaker 1: telling me, What the experience of the past few years
Speaker 1: tells me is maybe just maybe we could have rolling
Speaker 1: recessions that kind of roll through different industries at different times.
Speaker 1: So didn't we just have a pretty severe recession and
Speaker 1: the energy and commodity space in two thousand and The
Speaker 1: answer rhetorical question, The answer is yes, it was very severe.
Speaker 1: The amazing thing is how quickly we came out of
Speaker 1: it in two thousand and sixteen. And that's because one
Speaker 1: of the big differences between the current environment and the
Speaker 1: nineteen thirties is that in the nineteen there's no such
Speaker 1: thing as distressed asset funds that we're looking to buy
Speaker 1: things that fifty cents on the dollar. Now there are,
Speaker 1: so when things fall apart, there's money that just kind
Speaker 1: of pours in to buy these things really cheap, and
Speaker 1: that kind of keeps the system from really imploding completely.
Speaker 1: We just had a recession. We're probably still in a
Speaker 1: recession in the shopping malls and the retailing industry, and
Speaker 1: we're seeing how that industry is restructuring itself. Uh um,
Speaker 1: So that may be the way things continue to unfold.
Speaker 1: So I don't want to say there will never be
Speaker 1: a recession again, but we may just have these kind
Speaker 1: of rolling recessions without the kind of the gut wrenching
Speaker 1: six eighteen month downturn that we have experienced during the
Speaker 1: past forty years that I've been in looking at things.
Speaker 1: The economy is that bulkanized that you could getting narrow
Speaker 1: energy or commercial real estate recession and it doesn't spill
Speaker 1: over to the rest of the broad economy. Well that
Speaker 1: you know, maybe I'm showing my inherent optimism and kind
Speaker 1: of aiming in that direction. I mean, clearly, uh you know,
Speaker 1: given current events, if we have a trade war. In
Speaker 1: my book, I do write about the Great Depression, and
Speaker 1: I do believe that the Great Depression was at least
Speaker 1: triggered by the trade wars, by the and all that. So,
Speaker 1: you know, I mean, it's certainly conceivable to have a
Speaker 1: economy wide global recession. I want to talk a little
Speaker 1: bit about com oddities and and what you describe as
Speaker 1: your favorite indicator, but I have to start with a
Speaker 1: quote of yours the best or or a quote that
Speaker 1: you write in the book, The best cure for high
Speaker 1: commodity prices is high commodity prices, obviously referring to market
Speaker 1: forces either bringing more supply on or or reducing demands.
Speaker 1: So from that, why do you come to the conclusion
Speaker 1: that raw industrial spot price index is the best of
Speaker 1: all economic indicators. Well, commodity markets are probably the most
Speaker 1: competitive markets. They're also very efficiently organized. We have we
Speaker 1: have some pretty good institutions where these things are traded
Speaker 1: where uh they're they're self regulating to a large extent.
Speaker 1: So the exchanges have a long history of being very
Speaker 1: honest brokers between supply and suppliers and demanders of commodities.
Speaker 1: You're in user consumers. These aren't like speculative maybe I
Speaker 1: want to own stops or not. These are people who
Speaker 1: are actually buying commodities and using them in and that's
Speaker 1: that's that's right. Um. By the way, is as a
Speaker 1: side note here that I'm not convinced that some that
Speaker 1: commodities really should be viewed as an asset class because
Speaker 1: I think that, uh, mostly the commodities do have end
Speaker 1: users that actually want to use them as opposed to
Speaker 1: just kind of stockpile them. Commodities don't really have d
Speaker 1: and E. They don't have dividends that they don't have earnings,
Speaker 1: so they're they're a different kind of animal. But would
Speaker 1: you say the same about gold, because I know the
Speaker 1: emails from the goldbugs are about to start. Yeah, well, look,
Speaker 1: i'm I'm gold is a unique commodity. It's the only
Speaker 1: one that I know of that that has its own
Speaker 1: fan club. And they call that they called gold bugs.
Speaker 1: And I say that respectfully. I don't say that, you know, Uh,
Speaker 1: I just don't do gold. I I need dividends, I
Speaker 1: need earnings. I have nothing against owning some golden portfolio.
Speaker 1: Most strategist will tell you, you know, sure, go ahead
Speaker 1: and on some gold. But that's I've had some good calls,
Speaker 1: a few good calls and and and gold, but you know,
Speaker 1: nothing that stands out in any meaningful way. But to
Speaker 1: your question about the c rb ROW Industrials um, it's
Speaker 1: it's an index that's been around since the fifties and uh,
Speaker 1: first monthly, then weekly, now daily, and I found that
Speaker 1: it's very highly correlated with global economic activity and therefore
Speaker 1: also US economic activity because the US matters, UH so much,
Speaker 1: so I watch it on a on a daily basis
Speaker 1: for an indication of what the global economy is doing.
Speaker 1: It's got thirteen raw industrials. It does not have a oil,
Speaker 1: it does not have lumber, which I think both those
Speaker 1: commodities have their own unique supplied demand characteristics. And I
Speaker 1: like the divided by initial unemployment claims, and I call
Speaker 1: that the boom bust barometer. So raw spot price index
Speaker 1: divided by initial unemployment claims. So that's that's become a
Speaker 1: weekly indicator. And what's the signal that, hey, a recession
Speaker 1: is coming. Well, it's really a coincident indicator. But it's
Speaker 1: available weekly, so you know, I don't have to wait
Speaker 1: for some of the monthly data. UM. So, for example,
Speaker 1: the CRB raw industrials and next took a dive in
Speaker 1: the second half of two thousand fourteen and two thousand
Speaker 1: and fifteen, signaling that something was happening in the global economy.
Speaker 1: It was getting weaker UH. And then it hit a
Speaker 1: bottom in early two thousand sixteen, and UH alerted me
Speaker 1: that global economic activity was improving. And then I started
Speaker 1: to see it in some of the indicators that we
Speaker 1: use for forecasting corporate earnings, and it all sort of
Speaker 1: kind of came together earlier this year, and we're recording
Speaker 1: this in April, you had said, I think inflation is dead.
Speaker 1: So what do you mean by that and what is
Speaker 1: it suggest to bond investors? Going, well, it's it's not
Speaker 1: a a new mantra for me. I've been basically of
Speaker 1: that opinion since UH for forty years of my uh
Speaker 1: my career. I mean, it wasn't dead in the late
Speaker 1: seventies when I started my career, but when Vulcar adopted
Speaker 1: UH monetary policy UH procedures that led to interest rates
Speaker 1: going straight up, I concluded that he would in fact
Speaker 1: break the back of inflation. And the amazing thing, the
Speaker 1: remarkable thing was how quickly inflation came down once policy
Speaker 1: really aimed at bringing it down. And I was I've
Speaker 1: been a disinflationist, which means it doesn't mean falling prices,
Speaker 1: means that the price inflation, the rate of inflation comes down.
Speaker 1: And I've been a disinflationist throughout my entire career. And
Speaker 1: maybe at some point I need to just you know,
Speaker 1: let go the Cliver victory art or well, you know,
Speaker 1: I hope in my next forty years, God willing or
Speaker 1: you know what, what whatever part of that, I continue
Speaker 1: to uh be employed the way I am. And um, yeah,
Speaker 1: I think inflation what I've learned is it's not a
Speaker 1: monetary phenomenon. With all due respect to Milton Friedman, I mean,
Speaker 1: by now we should all just empirically realize, clearly, clearly,
Speaker 1: it's not a monetary phenomenon. I'm not gonna tell you
Speaker 1: it's not at all related to what the central banks
Speaker 1: are doing. But if anybody had told us that the
Speaker 1: central banks are gonna pile on the kind of liquidity
Speaker 1: they've put into the system since two thousand and eight,
Speaker 1: we would have all said, by now, inflation should have
Speaker 1: been soaring. I didn't inflation hyper inflation. Um, I mean
Speaker 1: I didn't see what the central banks were gonna do.
Speaker 1: And I guess if you told me that, I might
Speaker 1: have turned into a reflationist. But I think what's uh,
Speaker 1: what's continuing to work is what's worked for the past
Speaker 1: forty years is globalization, global competition, and that's obviously under
Speaker 1: some stress here with the trade tensions. UM. Technological innovation,
Speaker 1: as we discussed earlier, is a is very uh powerful
Speaker 1: and bringing prices down, and then aging demo graphics, people
Speaker 1: getting older. Older societies I think tend to be less
Speaker 1: inflation prone. Let's talk a little bit about the early
Speaker 1: days of your career. You got to Wall Street. You
Speaker 1: mentioned we were in the middle of a very recessionary period. Uh,
Speaker 1: we had stagflation, we had high oil prices, we had
Speaker 1: an oil embargo. Stocks essentially went nowhere, and we were
Speaker 1: coming out of the worst recession since the Great Depression.
Speaker 1: What was it like to start your career in that environment. Well,
Speaker 1: with the benefit of hindsight, how is remarkably lucky? I mean,
Speaker 1: but up is that the thing? Well? Yeah, I mean
Speaker 1: the seventies were awful, and I was in graduate school,
Speaker 1: so you know what, what what did I know? I know,
Speaker 1: I was studying theories and u uh, taking courses, and
Speaker 1: what was happening in the real world really didn't matter
Speaker 1: all that much to me, except for the fact that
Speaker 1: I had to wait in the long gasolene lines in
Speaker 1: nineteen seventy nine. So clearly we all experienced the angst
Speaker 1: of high inflation and two energy shocks in seventy three
Speaker 1: and seventy nine. But you know, I landed on Wall
Speaker 1: Street in nineteen seventy eight. So kind of in the
Speaker 1: thick of of all the misery and all the barishness
Speaker 1: and um low and behold, I started to kind of
Speaker 1: see the light early on in my career that maybe
Speaker 1: Volker would break the back of inflation, and if he did,
Speaker 1: that could bring bond deals down. So I started to
Speaker 1: talk about what I called the hat size bond yields
Speaker 1: when they were over ten percent. Uh and uh. Also
Speaker 1: in the early eighties turned the bullish on stocks along
Speaker 1: with my mentor back then on the strategy side was
Speaker 1: Greg Smith at first Study if Hunt, then at Prudential.
Speaker 1: So I mean forty years. During the past forty years,
Speaker 1: the stock markets basically gone from a thousand to twenty
Speaker 1: six thousand, maybe back down to five thousand. The bond
Speaker 1: deal has dropped from well over ten two around three
Speaker 1: percent now it got as lows one and a half percent.
Speaker 1: So I count myself just you know, I just kind
Speaker 1: of lucked out be have forty years of my prime
Speaker 1: focus during bull markets, great bull markets and bonds and stocks.
Speaker 1: You're credited with creating the term bond vigilantes. Why did
Speaker 1: you come up with that and what did you mean
Speaker 1: by Yeah? I'll probably be on my tombstone. You know
Speaker 1: that anytime the bond yield goes up anywhere on the
Speaker 1: planet Earth, I get a call from somebody in the
Speaker 1: media saying, you know, the bond vigiliantes back. So when
Speaker 1: Greek bond deals were going up, I actually got some
Speaker 1: calls from Greece asking me if the bond vigilantes had
Speaker 1: decided to take a vacation and UH in Greece and
Speaker 1: cause some trouble over there. But in three UM bond
Speaker 1: deals were starting to go up. There's a fear that
Speaker 1: inflation was going to come back, and I guess i uh.
Speaker 1: I was trying to defend my disinflation scenario, said, don't
Speaker 1: worry about it. If inflation comes back, if if the
Speaker 1: Fed doesn't deal with it, then the markets will deal
Speaker 1: it with The bond market will will deal with it.
Speaker 1: I recently sort of segued that into the dal vigilantes
Speaker 1: within the context of the trade tiff that's going on.
Speaker 1: So let's let's move into equity. Since you brought it up,
Speaker 1: a lot of people are saying US equities are expensive,
Speaker 1: especially relative to emerging markets. Where are we in the
Speaker 1: broader market cycle, and do you think stocks are expensive here. Well, again,
Speaker 1: looking over the past forty years, I've come to the
Speaker 1: conclusion that what causes bear markets is obvious. It's uh,
Speaker 1: it's recessions. Um. We had one bear market that was
Speaker 1: not caused by recession. But with the benefit of hindsight,
Speaker 1: I think it's almost like a flash crash, which I'm
Speaker 1: sure it's at all occurred sort of in one day,
Speaker 1: turned out to be a great buying opportunity, but certainly
Speaker 1: there were some pretty nasty recessions in the past forty years.
Speaker 1: Benefit of hindsight, if you had the stomach for it
Speaker 1: and stayed with it, you'd be still very well off.
Speaker 1: The problem we all have, of course, is you know,
Speaker 1: when I was just starting out, I didn't have a
Speaker 1: lot of money, and I couldn't possibly anticipate the kind
Speaker 1: of bull markets we had. But to get to to
Speaker 1: the present, UM, stocks are not cheap. They're not cheap
Speaker 1: in the United States. UH. About A lot of that
Speaker 1: is um because the so called fang stocks are very expensive.
Speaker 1: Take those out, and UH stocks are sort of fairly valued. UH.
Speaker 1: Factor in that inflation is low and interest rates are low. UH.
Speaker 1: Then I think you can also argue that stocks are
Speaker 1: not grossly overvalued. H Warren Buffett has got the famous
Speaker 1: Buffet ratio looking at market cap of the SMP five
Speaker 1: to g d P, and it's back to the highs
Speaker 1: of two thousand, right before the market took a took
Speaker 1: a dive. But Buffets pointing out that he's not paying
Speaker 1: that much attention to the ratio because inflation and interest
Speaker 1: rates are so low. You know. I guess the answer
Speaker 1: about where we are in the cycle is when will
Speaker 1: the next recession occur? If we continue to have these
Speaker 1: rolling recessions, and maybe we will continue to have a
Speaker 1: very elongated, very maybe the longest expansion ever, and I
Speaker 1: think people will therefore would be willing to continue to
Speaker 1: pay relatively high multiples as long as earnings are growing.
Speaker 1: And we just got this huge booster two earnings from
Speaker 1: the from the from the tax cuts. So I don't
Speaker 1: know exactly when the next barre market is going to occur.
Speaker 1: I don't think we're gonna have a recession in two
Speaker 1: thousand and eighteen, this year or next year is possible
Speaker 1: that that's that's a fair that's a fair, but but
Speaker 1: but everything is you know, I mean, you gotta keep
Speaker 1: your wits about you. I mean this, this trade issue
Speaker 1: is UH is a significant one, but I I'm I'm
Speaker 1: on the side that believes that this too shall pass.
Speaker 1: So you're looking at these as pronouncements that get walked
Speaker 1: back and cooler heads prevail, or a trade war is
Speaker 1: in that right now, I view had more as war
Speaker 1: war of words, yes, than than tweets. You have tweets,
Speaker 1: that's right, that's rather than an outright trade war. And
Speaker 1: the fact that the United States is now finding that
Speaker 1: both Japan and the European Union is joining in UH
Speaker 1: basically attacking China for unfair practices, particularly with regards to technology.
Speaker 1: I think is a is a positive development technology. I
Speaker 1: think there's something tip of the idea that trade isn't
Speaker 1: just about trade. There's a national security issues of course.
Speaker 1: UM we've already seen a number of Chinese takeovers of
Speaker 1: US corporations, UM prevented because of security concerns. Well, that's
Speaker 1: become you know, because of because technology does have such
Speaker 1: an impact on national security. Trade is no longer are
Speaker 1: just about you know, trading corn for silk or something
Speaker 1: like that. There's there there are issues that do bring
Speaker 1: in some political considerations. So one of the things I
Speaker 1: find fascinating about you. A lot of people who came
Speaker 1: of age as investors during the nineties seventies, they seem
Speaker 1: to be scarred by it. They have PTSD, they're terrified
Speaker 1: of inflation, they're terrified of recessions. You seem to have
Speaker 1: emerged from that era with nary a scratch on you.
Speaker 1: What do you attribute that too, and and why do
Speaker 1: you think you're outlooked differ so much from your peers
Speaker 1: of that that same era. Well, it's possible that you know,
Speaker 1: I I am very dated dependent. You know, the feed
Speaker 1: always says they're very data dependent. I'm very empirical, and
Speaker 1: and that's sort of the way I look at things.
Speaker 1: I think a lot of a lot of people are
Speaker 1: seem to be what it to the theories UH, and
Speaker 1: then try to stress the data to fit that. So
Speaker 1: I think, you know, in the nineteen seventies, UH, a
Speaker 1: lot of people got conditioned to the I d that
Speaker 1: inflation is a problem that was created by central bankers
Speaker 1: and would continue to be created by central bankers. There's
Speaker 1: a lot of fears that deficits UH would lead to
Speaker 1: to ruin and um, look, I'm a conservative fellow I
Speaker 1: don't like deficits. I don't like central banks. I call
Speaker 1: them central monetary planners running amuck. But again, I'm not
Speaker 1: a preacher. You know, I'm not saying you know right
Speaker 1: or wrong. I'm saying what what what are we actually saying?
Speaker 1: And what I guess what I sensed is that there's
Speaker 1: more to to our economy than just policymakers. There's a
Speaker 1: lot of entrepreneurs, a lot of businesses, a lot of workers.
Speaker 1: And uh, one of my kind of pitches when I
Speaker 1: visit a council get worried about policies, said, look, well
Speaker 1: we've done despite Washington, right, And that's that's That's kind
Speaker 1: of helped me focus on the importance of understanding that
Speaker 1: the people get up in the morning and they go
Speaker 1: to work, and they want to work. They want to
Speaker 1: make money, they want to create something. And uh, you
Speaker 1: know I see that, especially now that I'm an entrepreneurial
Speaker 1: capitalist myself. I have my own firm, and um, every day,
Speaker 1: I want to stay in business and I want to
Speaker 1: grow my business. And and that's completely independent of what
Speaker 1: policymakers do. I mean, if they get my way, I'll
Speaker 1: do the best I can to to run my business
Speaker 1: with the policies that that I have to deal with.
Speaker 1: So we've talked a bit about technology and the Malthusians. Um,
Speaker 1: what do you think of the fear that we see
Speaker 1: among some economists that technology and robotics is going to
Speaker 1: take away everybody's jobs and we'll soon all of us
Speaker 1: will be unemployed and it'll just in the Amazon. In
Speaker 1: the book, I I addressed that issue kind of under
Speaker 1: subbetting of Bray of a a New World. And uh, another
Speaker 1: section is called ice Spartacus, the uh the idea that, uh,
Speaker 1: you know, androids are going to be doing all all
Speaker 1: the dirty work for us, and one of them will
Speaker 1: rise up I Spartacus, and you know, everybody will the
Speaker 1: the androids will revolt and uh launch of revolution against
Speaker 1: the humans. Japan is a good example. Japan's kind of
Speaker 1: sort of a leading indicator for the rest of us.
Speaker 1: They're geriatric and aging society. Their unemployment is extremely low,
Speaker 1: They've got what appears to be actually a shortage of workers,
Speaker 1: and yet probably they're were the most robotized automated economies
Speaker 1: in the world. The demography on a global basis, we're
Speaker 1: just you know, we're we're sort of on the road
Speaker 1: to self extinction. Fertility rates have collapsed around the world,
Speaker 1: with the only exception being India and Africa, and those
Speaker 1: two may changes. Urbanization continues. We were ahead of Europe
Speaker 1: for a long time here in the United States, and
Speaker 1: we've sort of fallen into that. Yeah, you know, fraction
Speaker 1: of percentage fertility rate in the US exactly so. And
Speaker 1: and the labor force growth because of the aging of
Speaker 1: the baby boomers. We really are seeing around the world
Speaker 1: with a few exceptions, that working age populations are really declining,
Speaker 1: and so we actually need robotics and automation to do
Speaker 1: things that we don't have people to do. What about
Speaker 1: skilled immigration? Do we want to pull the best and
Speaker 1: brightest from around the world or how immigration historically has
Speaker 1: always been a source of economic growth. As a matter
Speaker 1: of fact, I would attribute some of the surprising growth
Speaker 1: in Europe over the past couple of years to the
Speaker 1: to the Median people that uh migrated from Africa in
Speaker 1: the Middle East to Europe. I mean a lot of
Speaker 1: us looked at us, Oh, this is gonna be terrible.
Speaker 1: I mean, the mix of cultures is going to be horrendous.
Speaker 1: And by the way, it hasn't been pretty I mean
Speaker 1: the crime rates have gone up, but still you know,
Speaker 1: Germany's economy is absolutely booming, and I would say that
Speaker 1: it's just another example that sometimes uh, I mean, historically
Speaker 1: migration has been a source of growth. Can you stick around?
Speaker 1: I have a charm more questions for you. We have
Speaker 1: been speaking with Dr Eduard Any of your Danny research
Speaker 1: UH and author of the new book Predicting the Markets,
Speaker 1: a professional autobiography. If you enjoy this conversation, be sure
Speaker 1: and stick around for the podcast extras. Will you keep
Speaker 1: the tape rolling and continue to discuss all things markets.
Speaker 1: We love your comments, feedback and suggestions right to us
Speaker 1: at m IB podcast at Bloomberg dot net. You can
Speaker 1: follow me on Twitter at Ridhults. Check out my daily
Speaker 1: column on Bloomberg View dot com. I'm Barry Riholts. You're
Speaker 1: listening to Masters in Business on Bloomberg Radio. Welcome to
Speaker 1: the podcast. Thank you Ed for doing this. Been looking
Speaker 1: forward to to going over UM the book and some
Speaker 1: other stuff. I've been getting your research for a long
Speaker 1: time and I always find it um quite fascinating. But
Speaker 1: I have to start with a question about the book.
Speaker 1: So you crank out a lot of material every day,
Speaker 1: I could tell you read a lot, you write a lot.
Speaker 1: What was your process like for writing the book, and
Speaker 1: how challenging was it on top of everything else you
Speaker 1: do well in some ways, I've been writing the book
Speaker 1: for forty years, right, because it's you know, and and
Speaker 1: in the book I point out I I really didn't
Speaker 1: have to do much research because that's what I've been
Speaker 1: doing for the past forty years. But still getting three
Speaker 1: words out one word. I'd tell you that I didn't
Speaker 1: know I had it in me. I mean when I
Speaker 1: put it all together, I couldn't believe how much I
Speaker 1: had written. It's you know, the book is six d
Speaker 1: pages long, and uh so, I guess forty years years,
Speaker 1: you know, I had things to say and I wanted
Speaker 1: to write them down. So it's it's kind of like
Speaker 1: and play the piano. But I guess it's kind of
Speaker 1: like sitting the piano and saying and being a composer
Speaker 1: and say, I don't know what I'm possibly going to
Speaker 1: compose and suddenly just comes to you. But once I
Speaker 1: once I organized the book under once I organized the
Speaker 1: structure of the book, and it's all every chapter is
Speaker 1: about predicting, you know. I started with predicting the past
Speaker 1: kind of reviewing, uh, a quick overview of things, then
Speaker 1: predicting bonds and stocks. Once I did that, it uh,
Speaker 1: it was a pretty fast effort. So a lot of
Speaker 1: it was written actually from the summer of two thousand
Speaker 1: and six to the summer of two thousand and seven,
Speaker 1: and obviously at nights and on the weekends um uh.
Speaker 1: And sometimes when I had some gaping holes and what
Speaker 1: I needed to put it in the book, I'd uh
Speaker 1: put it in my my daily write it up there
Speaker 1: and think about it, research it and then throw it
Speaker 1: into the book. Quite quite interesting. And how long did
Speaker 1: it take you to write this other than the forty
Speaker 1: years to absolutely well, I I the bulk of the
Speaker 1: book was written from two thousands suwhere in two thousand
Speaker 1: sixteen to the summer of two thousand seventeen. So let's
Speaker 1: talk a little bit about index funds. You know, they
Speaker 1: had been invented around the time your career started, but
Speaker 1: they really haven't captured the popular imagination like they have
Speaker 1: since the financial crisis. What do you think about the
Speaker 1: role of index funds in in an investor's portfolio and
Speaker 1: to what would you attribute this sudden recognition that hey,
Speaker 1: this is cheap, easy and efficient. Well, I think it's uh,
Speaker 1: you know, the the media made it clear that this
Speaker 1: is an alternative way. I think also a lot of
Speaker 1: stockbrokers started to promote the idea that, you know, the
Speaker 1: individual investor could could buy indexes. And by the way,
Speaker 1: a lot of institutional accounts, when they want to be
Speaker 1: uh long technology will maybe just buy an index uh
Speaker 1: that monitors technology or has technology stocks. So I think
Speaker 1: it just kind of fed on itself. And uh, here
Speaker 1: we are with an et F I just about anything
Speaker 1: that you can trade on the planet Earth. And you've
Speaker 1: been doing this long enough where you've gotten a number
Speaker 1: of things very right. Uh. What are the things that
Speaker 1: you've gotten wrong that stand out in your mind? And
Speaker 1: what lessons did you take from those? Well, I think
Speaker 1: in our last conversation you asked me about why two
Speaker 1: K and uh you know two thousand uh in nine
Speaker 1: I uh uh started to focus on on why two
Speaker 1: K is a potential problem. And this is a good
Speaker 1: example of I uh you shouldn't mess around with subjects
Speaker 1: that you don't fully understand. And uh you know, I'm
Speaker 1: I like technology, I use it a lot, but I
Speaker 1: uh I used to I used to uh, I studied
Speaker 1: assembler programming, but I'm not a codeer, so um, but
Speaker 1: we could we could make the defense for you that Hey,
Speaker 1: you helped draw attention to a potential problem, and a
Speaker 1: lot of time and resources were thrown at that problem,
Speaker 1: which made it considerably smaller. Well, I was at the
Speaker 1: time very publicly monitoring what corporations were saying in their
Speaker 1: uh SEC filings about how much they were spending, and
Speaker 1: it really added up to about fifty billion dollars. So
Speaker 1: you know, I obviously was concerned about a problem that
Speaker 1: corporations were concerned about. But the fact of the matter
Speaker 1: is they dealt with it and nothing happened. And so
Speaker 1: when nothing happened, I was a little bit embarrassed because
Speaker 1: I thought it could lead to a recession. Benefit of
Speaker 1: hindsight I should have I think I had the right issue,
Speaker 1: but declared victory. I was. I was right for the
Speaker 1: wrong reason. Benefits benefit of hindsight would really happened is
Speaker 1: corporations went on a technology spending boom and used white
Speaker 1: two ks and excuse us to get all the brand
Speaker 1: used hardware and software. And then when the millennium recurrent,
Speaker 1: all that spending just dried up, and the whole thing
Speaker 1: just kind of imploded with It's pretty easy, with the
Speaker 1: benefit of the hindsight to look at those March two
Speaker 1: thousand UM earnings mrs and conference calls as oh, all
Speaker 1: that spending in was pulled forward. Maybe you pulled five
Speaker 1: years with the spending forward, and that's what led to
Speaker 1: a dearth and and suddenly even reasonably priced stocks became
Speaker 1: very pricey. On the test side, didn't didn't take a
Speaker 1: lot to watch those profits disappear. UM. There was one
Speaker 1: other question I wanted to ask ask you about the
Speaker 1: bond vigilante term. Where where did the idea that there
Speaker 1: were certain players in the bond market that would either
Speaker 1: punish the FED or at least use their portfolios as
Speaker 1: a way to draw it tension to the threat of inflation.
Speaker 1: Where where did that come from? It's kind of unexpected. Well,
Speaker 1: you know, I I back then I was writing UM
Speaker 1: a weekly now right a daily, and uh you know,
Speaker 1: I always find that, Uh, I feel a responsibility. If
Speaker 1: I want to sit down and write something, I want
Speaker 1: people to read it. Uh So I try to read it,
Speaker 1: write it in a way that makes it interesting, and
Speaker 1: uh you know, I'm constantly coining. You know, I coined
Speaker 1: that hat sized body of Ie D and the bondage Lineyes,
Speaker 1: was just something I put into I think it was
Speaker 1: July piece. They just kind of got a life of
Speaker 1: its own, suddenly kind of caught on. I was I
Speaker 1: was looking for a film derivation that it came from
Speaker 1: some posse going after yeah, yeah, no, no, no, such
Speaker 1: no such luck in that particular case. But you know,
Speaker 1: and then in the early nineties, the Clinton administration basically
Speaker 1: paid homage to the bondage Gilantes. Uh, when Clinton's advisers
Speaker 1: told them, you know, you can't do that because the
Speaker 1: bond folks won't let you get away with it. Robert Reuben, Right,
Speaker 1: car Carville, I think what was the famous quote something
Speaker 1: that you know from Reborn? I want to be reborn
Speaker 1: as a you know, uh, it is a bond vigilanty,
Speaker 1: but you know, a bond got or whatever. And so
Speaker 1: you've been on both sides of the research aisle as
Speaker 1: both an economist and a strategist. How do those roles
Speaker 1: differ and how does that affect the sort of work
Speaker 1: you do each day? Well? They really, uh, there really
Speaker 1: should be one and the same. It's kind of goes
Speaker 1: back to our conversation earlier about how academics and professionals, uh,
Speaker 1: the nature of things is, we we tend to become
Speaker 1: very uh uh segmented and very kind of confined to
Speaker 1: viewing what we do, uh, very narrowly. Uh. Fortunately for me,
Speaker 1: I was able to uh segue from economics into investment
Speaker 1: strategy and and and and make them sort of the
Speaker 1: same the same subject really because people, some people say
Speaker 1: that predicting the economy and protecting the stock market are
Speaker 1: too totally different. Well, I just wrote a book that
Speaker 1: it says the opposite that you know, you you want
Speaker 1: to understand the economy, and you want to understand the
Speaker 1: financial markets, and you want to appreciate how the to
Speaker 1: interact markets can affect policy. Uh, policies can affect effect markets. Um.
Speaker 1: Economic events cause people to change the way they they
Speaker 1: view markets. So I think they're very much one and
Speaker 1: the same. So in other words, you're not going to
Speaker 1: get your economic forecast wrong, but your market forecast right.
Speaker 1: If if you're getting one right, you should get the
Speaker 1: other right, and shot one wrong, you're probably gonna have
Speaker 1: problems in the other you should, But I mean it's
Speaker 1: I mean, it's conceivable that you could get an economic
Speaker 1: scenario right overall, um, and you have still miss the markets.
Speaker 1: But I think, uh, it's for starters. It's always get
Speaker 1: good to get the economy right. Uh. And if you
Speaker 1: can do that, and I found historically getting inflation right,
Speaker 1: it's been paramount paramount, So so everything comes down to
Speaker 1: the right inflation forecast. Inflation gets you the economy right.
Speaker 1: It also gets you the FED right, and then it
Speaker 1: gets you the markets from markets evaluation right. Uh, I
Speaker 1: mean right now, if I'm gonna be just dead wrong
Speaker 1: in place, you would make an amazing comeback and suddenly
Speaker 1: all these deficits that we're looking at become a real concern. Worse,
Speaker 1: much worse. Uh well, interest rates will be a lot
Speaker 1: higher and uh, deficits will be so it will be
Speaker 1: a completely different scenario. But hey, look, if I have
Speaker 1: to change my views, I'll do that. I mean again,
Speaker 1: I'm I'm not stuck to theory. I'm not stuck to
Speaker 1: uh right or wrong. I'm I just do bullush or bearish. Huh.
Speaker 1: That's quite fascinating. Um. There was one of the questions
Speaker 1: I wanted to ask you about the market cycle, and
Speaker 1: you you almost addressed it before. What I want to
Speaker 1: bring it back to this. So here we are. The
Speaker 1: market made its lows in March O nine, it made
Speaker 1: new highs and uh, the economy continues to expand. However,
Speaker 1: we're starting to see the average job creation slide a
Speaker 1: little bit. You go back five years and we were
Speaker 1: doing two fifty a month, and then tune a quarter
Speaker 1: into twenty. Now we're on on track to doing UM
Speaker 1: something like one sixty five a month. And we're recording
Speaker 1: this after a disappointing hundred and ten thousand UM scenario.
Speaker 1: Is the economy cooling off? What does this mean for inflation?
Speaker 1: What does this mean for stock markets? Well, and in
Speaker 1: the past, when the unemployment rate was this slow, we
Speaker 1: would have a boom. I mean, companies would scramble to
Speaker 1: higher workers, to be paying much higher wages, they'd be
Speaker 1: expanding their capacity, and inflation would take off. The FED
Speaker 1: with tight than you have a recession. Uh, the old days,
Speaker 1: the old days. Right now, we've got a very tight
Speaker 1: labor market, but we're not seeing wage inflation take off.
Speaker 1: I think that seems to be the key to a
Speaker 1: lot of future issues. Look, both both policy and I'm
Speaker 1: I'm I'm sixty eight. I just wrote a book about
Speaker 1: the past forty years, and I hope to write another
Speaker 1: book about the next forty years or twenty years or whatever.
Speaker 1: I'm granted, but I haven't had a pay increase in
Speaker 1: about ten, maybe twenty years. There's a lot of baby
Speaker 1: boomers that made a lot of money in their careers
Speaker 1: from you know, I'm making a lot more money out
Speaker 1: that I was making when I was first starting the business.
Speaker 1: But the reality is, I think there's a lot of
Speaker 1: baby boomers just aren't retiring and they're not getting paid
Speaker 1: increases because they're getting paid enough, and in some cases,
Speaker 1: uh their pay is going down because but they still
Speaker 1: want to work. Uh So, how much of this is
Speaker 1: just a hangover from the Great Financial Crisis and a
Speaker 1: loss of people feel like, Hey, I lost a good
Speaker 1: couple of years before and after that, I can't retire.
Speaker 1: I have to keep working. I think that's well, I
Speaker 1: think we're well past that. I think people that are
Speaker 1: working now. I think a lot of baby boomers that
Speaker 1: are still working really do want to work. Um So,
Speaker 1: this isn't I have to work because I need to.
Speaker 1: This is Hey, I like working and it gives me
Speaker 1: not a purpose. I think some people are living longer
Speaker 1: and uh, you know, some people can retire and play
Speaker 1: golf and tennis and uh go travel around the world.
Speaker 1: I personally can't do that. I mean, I need to
Speaker 1: be working, I need to be thinking, keep keep keep
Speaker 1: my mind going. I love this business because I don't
Speaker 1: know if any business that kind of keeps you so
Speaker 1: focused on current events and thinking about how the world
Speaker 1: actually works. So so let's let's stay with the issue
Speaker 1: of wages. You said your wages. Have your personal wages
Speaker 1: flat for a decade. I'm not complaining, but but lots
Speaker 1: of people's wages have been flat for several decades. Well,
Speaker 1: what does this mean? They're real wages? Yeah, there there's
Speaker 1: a there's a section in the book where I focus
Speaker 1: on predicting the consumers and predicting demography, in which I
Speaker 1: I think I may I convinced myself that the notion
Speaker 1: that real incomes have been stagnant, uh for the past
Speaker 1: fifteen years. It just doesn't jibe with with with with
Speaker 1: the data. Uh. Now, when you say the data, I
Speaker 1: want to really get into this little bit. I don't
Speaker 1: have any doubt that the quality of life for people
Speaker 1: has gone up significantly even as their wages have remained well.
Speaker 1: That's the flat earth concept is based entirely on a
Speaker 1: series that's produced annually by the Census Bureau on money income,
Speaker 1: where they ask people about their money income. They don't
Speaker 1: ask them about uh, non money sources of income, so
Speaker 1: entitling programs social securities in there but not medicare not
Speaker 1: medicaid UM. There's just a huge discrepancy between personal income,
Speaker 1: which is available monthly. But the problem is where when
Speaker 1: you look at median, the census data is a median.
Speaker 1: I can't give you a median and personal income. I
Speaker 1: can give you an a mean, I can give you
Speaker 1: an average, but I can't give you that you know
Speaker 1: the family in the middle. But when you look at
Speaker 1: the average, it's it's up like in real terms over
Speaker 1: the per household UM. And by the way, I believe
Speaker 1: household is the best measure for measuring standard of living.
Speaker 1: My kids have a great standard of living. I wish
Speaker 1: I lived as well as they did. Uh, But the
Speaker 1: data for average real incomes is up. Like whether use
Speaker 1: personal income, If use average hourly earnings, UH, you're you're
Speaker 1: up about as much. So I think there's for some reason,
Speaker 1: there's been this focus on this one data series. And
Speaker 1: Trump mentioned it when when he was running for president,
Speaker 1: that people's earnings have stagnated. The data just doesn't show
Speaker 1: that consumption is at an all time record high, no
Speaker 1: doubt about that, and son the stores closed consumption continues
Speaker 1: to rise. Yeah, yeah, So how much of that is
Speaker 1: healthcare spending and how much of that is um goods
Speaker 1: and services that aren't related. It's really all of the above,
Speaker 1: you know, I mean, standards are living have gone up
Speaker 1: across the board. So if there was one area that
Speaker 1: that you had one magic wish to fix in the
Speaker 1: economy and public policy and what have you, what would
Speaker 1: that be? Because I know you think about these things
Speaker 1: long and hard. Well, um, you know, I I'd like
Speaker 1: to believe the supply siders that you cut taxes and
Speaker 1: you're gonna get a lot more work and a lot
Speaker 1: more income and it will kind of pay for itself.
Speaker 1: I sent some skepticism on your part in the way
Speaker 1: you framed that. Well, it's it's it's faith based economics,
Speaker 1: you know, and it hasn't. It always unleashes some animal spirits,
Speaker 1: but it rarely pays. It never seems to pay for. Well,
Speaker 1: that's because uh, you know, maybe the policy the politicians
Speaker 1: used that as an excuse is like, well, we can
Speaker 1: go ahead and increase entilement programs and uh not means
Speaker 1: test them and not worry about all these pensions. Uh
Speaker 1: you know, I mean school teachers are basically strike in
Speaker 1: some states because they're not getting paid enough, uh, where
Speaker 1: they literally have had no raises for tanks. And then
Speaker 1: we have to we have a situation in Flint, Michigan,
Speaker 1: where the water supply has been polluted and a lot
Speaker 1: of that is because we we have this amazing concept
Speaker 1: that you're entitled to retire. Uh and if you're a
Speaker 1: municipal worker, allowed to retire at a very early age,
Speaker 1: and those bills are extremely expensive. It's one thing for
Speaker 1: cops who take their life into their hands every time
Speaker 1: they go to work, and the same with firemen, but
Speaker 1: when you have clerical workers with these very generous pension funds,
Speaker 1: although well, it's it's it's it's generally yeah, exactly, I
Speaker 1: mean it's uh. I agree that an individual basis, people
Speaker 1: who have risk risky professions, but you know, a lot
Speaker 1: of a lot of municipal workers when they retire early,
Speaker 1: get another job, and they get another pension, and maybe
Speaker 1: we should consider that come back when you're sixty five,
Speaker 1: and then we'll pay you the pension at that point.
Speaker 1: I don't want to get a lot of people mad
Speaker 1: at me here. But it's too late, I guess across
Speaker 1: the line. But that is that is not a radical
Speaker 1: philosophy that you're saying. And also, lots of these pension
Speaker 1: funds they're wildly undefunded and it's questionable, that's right. I mean,
Speaker 1: while a lot of uh, principal workers who retired years ago,
Speaker 1: I've done extremely well. I think I think we're getting
Speaker 1: to the point where the pension funds just the money
Speaker 1: is just not there, and people have been made promises
Speaker 1: that can't be delivered. Right, Charlie Elise has been running
Speaker 1: about this for a while. I know I only have
Speaker 1: you for a finite amount of time, So let me
Speaker 1: get to some of my favorite questions. Um tell us
Speaker 1: the most important thing that people don't know about you? Well, um,
Speaker 1: there are a lot of things that are too personal
Speaker 1: to to share, obviously, so I've only uh, that's why
Speaker 1: I wrote a professional autobiographer. You know. It's it is
Speaker 1: very professional. Uh and uh, I don't uh, I don't
Speaker 1: say anything bad about anybody. I don't have any grudges
Speaker 1: that that I settled in the book. I know grudges, No, not, No,
Speaker 1: I've six hundred pages, not a single not a single thing. Um.
Speaker 1: I would say what they don't mean not. What they
Speaker 1: don't know about me is I'm working on my second
Speaker 1: book already already they already. God, it took me like
Speaker 1: five years before I can even think, well, this this
Speaker 1: is the this book. I is the book that I
Speaker 1: I had to write just because I you know, I've
Speaker 1: learned so much over forty years. Just not to do
Speaker 1: it was it would be a shame. The book I'm
Speaker 1: working on now is the one I want to write.
Speaker 1: It's more philosophical, It's more more about what I've learned
Speaker 1: philosophically about about things. And it's called the the Theft
Speaker 1: of Nations, a trademark that before someone grabs it well
Speaker 1: with book titles, there's already that already there anybody who
Speaker 1: us there already is a book of that. But it's uh,
Speaker 1: basically the capitalist ideal and its corruption. Capitalism makes so
Speaker 1: much sense, entrepreneurial capitalism. I'm an entrepreneurial capitalist. It makes
Speaker 1: so much sense that it benefits consumers, and consumers are
Speaker 1: the only class that we really should care about. So
Speaker 1: why does it constantly get corrupted? Why why can't we
Speaker 1: stick with it? And so that's what they don't know
Speaker 1: about because I'm writing another book. That's that's interesting. Tell
Speaker 1: us about some of your early mentors you're already mentioned, uh,
Speaker 1: Mr Smith? Who else were? Well? Again? Greg Smith and
Speaker 1: Jim Maltz were my mentors on the investment strategy side.
Speaker 1: But my role model I never worked with him was
Speaker 1: Henry Kaufman Henry Coffin. It was the chief economy that
Speaker 1: Solomon Brothers highly regarded in the seventies, helped to save
Speaker 1: New York City, Right, Yeah, I think I believe so. Um.
Speaker 1: But when I was a graduate student, UM, I was
Speaker 1: impressed by how he had taken economics and you use
Speaker 1: that for a very successful career on Wall Street, And
Speaker 1: that's very much appealed to me. Uh And in a
Speaker 1: lot of the ways he looked at things using a
Speaker 1: flow of funds approach is kind of the way I started. UM.
Speaker 1: But I developed my own tools that worked better for
Speaker 1: me than the ones who worked for him. Who who
Speaker 1: else influenced your approach to economics and investment. Well, I
Speaker 1: I think that's it. I mean it's not really Uh
Speaker 1: it's one and the same. It's kind of one and
Speaker 1: the same. Tell Us about some of your favorite books
Speaker 1: be the fiction nonfiction market related? Yeah? You know? Uh
Speaker 1: I yes, Uh I like history a lot of quite
Speaker 1: a bit. Uh And because uh I am so involved
Speaker 1: and fascinated by but what I do for a living,
Speaker 1: my my day job, I read a lot of stuff
Speaker 1: that's that's relevant to to that. So I really like
Speaker 1: reading biographies, autobiography. So I really enjoyed um Ben Bernanke's
Speaker 1: uh book The Courage to Act. Um. You know, there's
Speaker 1: been books written by and about Alan Greenspan. Um, so
Speaker 1: those have been some of my relatively recent reads. And
Speaker 1: Turbulence was that spans age age of turbulence. Uh. I
Speaker 1: also um like uh watching watching movies. But I I've
Speaker 1: started to really get into some of these uh docu dramas.
Speaker 1: And there's uh there's one about the men who uh
Speaker 1: kind of overcame the American Frontier. It's about frontiersman. It's
Speaker 1: fascinating how a few individuals really sort of opened up
Speaker 1: the American continent. They unfortunately, uh, displaced a lot of
Speaker 1: native tribes here and uh there was a lot of
Speaker 1: wars that we're just in. Massacres were awful but fascinating.
Speaker 1: Uh to watch some of the docu dramas. What excites
Speaker 1: you about the markets right now? Well, I would say
Speaker 1: that the drama is always exciting. I mean it was
Speaker 1: getting kind of dull there in two thousand and seventeen.
Speaker 1: It was a day with volatility and yeah, and and
Speaker 1: um I was you know, I mean for me it
Speaker 1: was it was fortunate because I could focus on my
Speaker 1: book without having to suddenly scramble to learn about something
Speaker 1: that was occurring. And now all of a sudden, I'm
Speaker 1: scrambling to kind of you would have I know about
Speaker 1: trade and uh those kind of issues. So the I
Speaker 1: mean Trump right now is a fascinating character. I mean
Speaker 1: I love him or hate him again, I don't do.
Speaker 1: He's not boring. He's not boring, right, I canantee you that. Yeah,
Speaker 1: I mean sometimes I just you know, he really should
Speaker 1: have just stop tweeting. He should have like gone gone
Speaker 1: and take a vacation after the tax cut and just
Speaker 1: kind of winged it until the mid term elections. But
Speaker 1: he just can't. He can't stop, he can't compulsive, There's
Speaker 1: no doubt about it. I'm shocked that he finally came
Speaker 1: out and said something about Stormy Daniels because he had
Speaker 1: been radio silent on that for while the whole thing
Speaker 1: was unfolding. You know, he is something had to come
Speaker 1: out eventually. Well again, I think, you know, we live
Speaker 1: in interesting times. We always do. And you know saying
Speaker 1: a president that you know, one month can give you
Speaker 1: extraordinary bullish policies of cutting taxes and and one a
Speaker 1: month or two later start to talk about protectionism, and
Speaker 1: suddenly that's extremely bearish, it's wild, it's it makes for
Speaker 1: very interesting times. Let me push back on that a
Speaker 1: touch because I have I have friends who are investors
Speaker 1: on both sides of the aisle, and collectively they seem shocked,
Speaker 1: shocked to discover gambling going on. He's been talking, he
Speaker 1: campaigned like who is what did they think? Well, he's
Speaker 1: just kidding. What's unusual about him is he's going through
Speaker 1: a checklist. And you know, I mean if you go
Speaker 1: and read his speech on his campaign speech on trade,
Speaker 1: it's all he's just going through this. This is it
Speaker 1: he's he's doing it. That's why I'm always surprised when
Speaker 1: people say, well, the market wasn't prepared for this. Really,
Speaker 1: did you not see eighties six speeches where this exact
Speaker 1: thing was laid out. Well, you know, we we kind
Speaker 1: of got who kind of got slow and lazy in
Speaker 1: two thousands seventeen. I mean, I guess that he came
Speaker 1: after healthcare and that fell apart, so everybody figured that
Speaker 1: that was much harder though, when everybody taking a taking
Speaker 1: an entitlement away is very challenged. But the result was
Speaker 1: everybody figured that his agenda was dead, that he couldn't
Speaker 1: get anything through, and all of a sudden, we're all
Speaker 1: we're mostly on vacation, and December twenty two we pass
Speaker 1: this amazing tax tax legislation. And by the way it's
Speaker 1: ultimate impact, it's kind of confusing. It may already actually
Speaker 1: be depressing New York and California and other other places
Speaker 1: where high tax states, high high abductible states are. We
Speaker 1: probably find that whatever stimulus it provides to some people
Speaker 1: are offset by the tax increases to others. I just
Speaker 1: read that California, if it was a country, has now
Speaker 1: become the sixth largest economy in the world doesn't seem
Speaker 1: to be really having that bed of an effect. Although
Speaker 1: we really haven't seen the tax rep everything we're doing
Speaker 1: now for April fifteen, we won't really feel the tax
Speaker 1: hit until I don't, yeah, until I personally don't know
Speaker 1: what my texts are going to be in two thousand
Speaker 1: and eighteen, other than they're gonna be higher because you're
Speaker 1: in New York resident you actually live. Yeah, we're next
Speaker 1: to you, we're one town apart. Um. Let's talk about
Speaker 1: what you do for fun? What what do you do
Speaker 1: to relax? What do you do when you're out of
Speaker 1: the office too? Just sort of kicked back. My wife
Speaker 1: and I like to go see a movie every Friday night,
Speaker 1: so I'm not sure what she's gonna she She usually
Speaker 1: is the one who picks them so and I review them.
Speaker 1: What what has been the tell us the last three
Speaker 1: movies you saw? Well, the one that sticks side is
Speaker 1: actually the one that I won an Academy Award for
Speaker 1: something I'm not I don't recall what it was, but
Speaker 1: it wasn't for this Pictures called get Out. You know
Speaker 1: it's it's it's a comedy, it's sort of am it's
Speaker 1: it's it's a strange movie. It's a movie about a
Speaker 1: fellow who goes uh visits his girl girlfriend and uh
Speaker 1: his girlfriend's parents, and there's just something totally odd about
Speaker 1: the whole situation and everything suggests that he should just
Speaker 1: get the hell out of there as quickly as possible,
Speaker 1: and he just doesn't get the message. And I kind
Speaker 1: of try to relate that to the market is like,
Speaker 1: you know, sometimes just look around you. Uh. But in
Speaker 1: terms of what I really enjoy I like to play
Speaker 1: tennis quite a bit. But really yeah. But but but
Speaker 1: the problem is when I play with my wife, she's
Speaker 1: very competitive and I'm not, so she's always beating me.
Speaker 1: But I don't really get upset about that. But I
Speaker 1: think she's mad that I don't try to be more competitive.
Speaker 1: But I just do it for the exercise. It's a
Speaker 1: great sport. I've come to it late in life, and
Speaker 1: you know, it's fun. It's it's fun. It's um. When
Speaker 1: I started playing the next quarter over there are these
Speaker 1: four guys they have to be a hundred years old
Speaker 1: and there they play every week and they're great. That's
Speaker 1: the crazy thing is you don't have to run around
Speaker 1: like other sports you basically just have to be aware
Speaker 1: of where like playing basketball or well, I got my
Speaker 1: wife killed my basketball career in my late thirties. I
Speaker 1: rolled my ankle, came home and I was like, yeah,
Speaker 1: you're done. And that tends out to be pretty pretty accurate. Um,
Speaker 1: have you seen Ready Player one? That the book was wonderful,
Speaker 1: It just came out. I'm looking forward to to seeing
Speaker 1: that with my Mark tonight. I don't know how Spielberg
Speaker 1: is gonna take this. The whole film is essentially in it.
Speaker 1: The whole book is essentially exists in in a alternative world,
Speaker 1: cyberspace world, and there's an ongoing internal dialogue for the
Speaker 1: main character. It'll be interesting to see how he how
Speaker 1: he did that. What sort of advice would you give
Speaker 1: to a millennial or recent college graduate who said, hey,
Speaker 1: Dr Ed I'm thinking about going into market strategy or economics.
Speaker 1: Oh god, I mean you just set me up for
Speaker 1: for a commercially or read my book. I mean that's
Speaker 1: you know, throughout my career, I've had people ask me,
Speaker 1: you know what, what, what is there one book that
Speaker 1: they should read or that they should have their interns
Speaker 1: read really understand the markets? And uh, I think I
Speaker 1: had to write the book partly that to say, well,
Speaker 1: read my book that that's your answer. That's my answer
Speaker 1: is it's all in its crass commercialism, that it is
Speaker 1: what it is. It's all in there, and and tell
Speaker 1: us something you know about the world of markets investing
Speaker 1: in economics today that you wish you knew forty years
Speaker 1: ago when you were first starting. Well, I think this
Speaker 1: idea of just stay laser focused on bullet that you
Speaker 1: know that that well we really have to do in
Speaker 1: our business is just is it is focused on other events. Uh,
Speaker 1: policies our bullish or bearish, and that's just not at
Speaker 1: the macro level. That's you know, you can be looking
Speaker 1: at at companies as well, and you can be critical
Speaker 1: of management and the stock goes up anyways, and you
Speaker 1: have to really try to figure out what is it
Speaker 1: that the markets focus that's important to the market. Uh
Speaker 1: so don't it's it's I just I learned the wisdom
Speaker 1: of old adages like don't fight the market, let the
Speaker 1: trend be your friend. The best cure for high commodity
Speaker 1: prices is high commodity prices. You know, that's why they're
Speaker 1: old adages, because guys like me uh after a while,
Speaker 1: appreciate just how how much you wisdom. There's there. Well,
Speaker 1: this has been fascinating. Thank you so much, Ed, I
Speaker 1: appreciate your time. We have been speaking with Dr rd
Speaker 1: any of your any research an author of the new
Speaker 1: book Predicting the Market's a professional autobiography. If you enjoy
Speaker 1: this conversation, be sure and look up an Inch or
Speaker 1: down an Inch on Apple iTunes, overcast, SoundCloud, wherever you
Speaker 1: find your favorite podcasts, and you could see any of
Speaker 1: the other two hundred or so such conversations we've had.
Speaker 1: We love your comments, feedback and suggestions right to us
Speaker 1: at m IB podcast at Bloomberg dot net. You can
Speaker 1: check out my daily column on Bloomberg dot com. Follow
Speaker 1: me on Twitter at rid Halts. I would be remiss
Speaker 1: if I did not think our crack staff who helps
Speaker 1: to put together this conversation each week. Michael Batnick is
Speaker 1: my head of research. Taylor Riggs is our producer slash booker.
Speaker 1: Medina Partwana is our audio engineer slash producer. I'm Barry Ridhults.
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.
Speaker 1: Take the tent int