WEBVTT - Morgan Stanley Braces for a Soft Landing 0:00:14.040 --> 0:00:17.400 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.520 --> 0:00:20.600 My name is Mike Reagan. I'm a senior editor at Bloomberg. 0:00:20.239 --> 0:00:23.040 And I'm all down a higher across asset reporter with Bloomberg. 0:00:23.520 --> 0:00:26.200 And this week on the show, well, what if we've 0:00:26.239 --> 0:00:29.600 all been bracing for a recession that never actually shows up. 0:00:30.320 --> 0:00:32.760 That's a question that's floating around more and more of 0:00:32.800 --> 0:00:35.680 these days as the economy just keeps hanging in there 0:00:36.200 --> 0:00:39.440 despite the rapid rise in interest rates, a few bank failures, 0:00:39.479 --> 0:00:42.000 and all the dire predictions that came along with both 0:00:42.040 --> 0:00:44.440 of those. We'll get into it with a well known 0:00:44.479 --> 0:00:48.360 economist at a major Wall Street bank. But first of all, Donna, 0:00:48.400 --> 0:00:52.120 I've got a very strange question for it. I'm shocked, shocked. Yeah, 0:00:52.159 --> 0:00:54.720 I've never asked you a strange question. Have you ever 0:00:54.840 --> 0:00:57.920 daydreamed about like being a princess or a queen? No 0:00:59.040 --> 0:01:02.520 you haven't. No, that's a healthy outlook. 0:01:02.760 --> 0:01:05.680 Yeah it's not real. And they like didn't have bathrooms. 0:01:06.160 --> 0:01:08.720 Well there are real princesses and oh that's true, like 0:01:08.800 --> 0:01:09.520 modern day. 0:01:09.400 --> 0:01:12.960 Do you think, uh, the current princesses and princes Prince 0:01:12.959 --> 0:01:14.360 Harry doesn't have a modern bathroom. 0:01:14.400 --> 0:01:18.120 He definitely does, but like, are they beloved by their people? 0:01:18.520 --> 0:01:21.360 You know, it comes with a lot of baggage. 0:01:21.440 --> 0:01:22.800 All right, well that's a healthy editor. 0:01:22.800 --> 0:01:23.479 Why are you asking? 0:01:23.760 --> 0:01:27.040 Well, it's my craziest thing this week has to do 0:01:27.360 --> 0:01:30.800 with there's actually a market for royal titles, if you 0:01:30.800 --> 0:01:31.280 believe it or not. 0:01:31.480 --> 0:01:34.680 Wow, So we'll get by one. You would, all right, 0:01:34.840 --> 0:01:35.920 I would be the highest bitro. 0:01:36.400 --> 0:01:37.399 You're going to find out how much? 0:01:40.319 --> 0:01:42.400 Okay, I don't want to keep our guests waiting because 0:01:42.760 --> 0:01:44.520 and I actually just told him this right before we 0:01:44.560 --> 0:01:47.160 started taping. I'm a huge fan of his. I've been 0:01:47.360 --> 0:01:50.480 a fan for years and I'm so excited. 0:01:50.840 --> 0:01:52.600 The posters on the walls, yeah. 0:01:52.520 --> 0:01:56.640 Kind of yeah, No, no, not to that extreme. It's 0:01:56.680 --> 0:02:00.880 Seth Carpenter. He's the global chief economist at Morgan's Stanley. Seth, 0:02:00.960 --> 0:02:03.120 thank you so much for joining us, Bill. 0:02:02.960 --> 0:02:05.280 Donna, thank you, Mike, thanks for having me. I am 0:02:05.400 --> 0:02:07.559 I'm glad that this is audio only because I would 0:02:07.560 --> 0:02:08.400 have blushed. 0:02:08.639 --> 0:02:10.280 You just I'm blushing, don't worry. 0:02:10.360 --> 0:02:14.200 He's also a former writer of The Princeton Dinky as well. 0:02:14.400 --> 0:02:17.920 I know, yes, yes, he got his PhD at Princeton 0:02:17.960 --> 0:02:18.400 with what's. 0:02:18.280 --> 0:02:20.320 A weird hobby is? I love the Princeton Dinky. I 0:02:20.320 --> 0:02:22.640 don't know why, but I find it fascinating that there's 0:02:23.280 --> 0:02:26.040 a one car train that goes what a mile back 0:02:26.040 --> 0:02:26.760 and forth every. 0:02:26.720 --> 0:02:28.360 Day and you can have your tall guy on it, 0:02:28.480 --> 0:02:32.400 or what's it called a tall guy, a tall tall boy. 0:02:33.280 --> 0:02:35.040 You couldn't even finish a tall boy at the time. 0:02:35.080 --> 0:02:41.280 It takes okay, But Seth, you have a very decorated resume, 0:02:41.360 --> 0:02:42.280 so I'm hoping you could. 0:02:42.320 --> 0:02:43.000 We can just start out. 0:02:43.040 --> 0:02:45.200 You can tell us about your background and then how 0:02:45.240 --> 0:02:46.520 you ended up at Morgan Stantley. 0:02:47.040 --> 0:02:49.000 How did I get to where I am? You started 0:02:49.040 --> 0:02:52.000 off noting that I have a PhD in economics, and 0:02:52.040 --> 0:02:55.480 I'm happy to say that my primary advisor was Ben Bernanke, 0:02:55.680 --> 0:02:57.760 who when I was at Princeton did not have a 0:02:57.760 --> 0:03:00.840 Nobel Prize and now he does, so I had something 0:03:00.880 --> 0:03:05.120 to do with that, I would say. So. No, that 0:03:05.240 --> 0:03:08.760 was actually a fantastic opportunity, and I actually thought I 0:03:08.760 --> 0:03:11.560 was going to be an academic. My research was on 0:03:11.639 --> 0:03:14.440 monetary policy, but I went to teach for a couple 0:03:14.480 --> 0:03:16.080 of years at the College of William and Mary, and 0:03:16.120 --> 0:03:19.040 then the FED called and said, are you interested in 0:03:19.240 --> 0:03:22.359 coming up to give a to do an interview? And 0:03:22.480 --> 0:03:25.280 the answer was yes, and they offered me a job 0:03:25.600 --> 0:03:28.520 and I took it. And shocking news for anybody who's 0:03:28.520 --> 0:03:31.000 in their late twenties, Washington, d C. Is a bit 0:03:31.040 --> 0:03:34.600 more interesting to live in than Williamsburg, Virginia. So I 0:03:34.680 --> 0:03:37.360 ended up staying in Washington, DC, and I was at 0:03:37.360 --> 0:03:39.760 the FED for fifteen years. By the time I left, 0:03:39.800 --> 0:03:42.800 I was the Deputy Director of the Division of Monetary Affairs. 0:03:43.560 --> 0:03:47.920 Got to work through the financial crisis, which was a 0:03:48.000 --> 0:03:50.560 terrible point in economic history, but now that it's in 0:03:50.560 --> 0:03:53.520 the rearview mirror, it sort of was fascinating part of 0:03:53.560 --> 0:03:55.840 my career to be at the FED in the trenches, 0:03:56.360 --> 0:03:58.840 trying to work on both strategy for policy and then 0:03:58.880 --> 0:04:02.120 the nitty gritty like all of the different lending programs 0:04:02.120 --> 0:04:05.120 the FED did, and thinking about the FED balance sheet. 0:04:05.200 --> 0:04:07.880 I was for a while the Fed's person in charge 0:04:07.920 --> 0:04:10.600 of the Fed's balance sheet, if you will, So it 0:04:10.680 --> 0:04:13.440 was fascinating. But at some point I needed a break. 0:04:13.600 --> 0:04:17.440 I went to the Treasury Department, ostensibly for just a 0:04:17.440 --> 0:04:20.200 one year visit, but while I was there, I had 0:04:20.200 --> 0:04:23.640 the very good fortune of having President Obama nominate me 0:04:23.720 --> 0:04:27.479 to be Assistant Secretary for Financial Markets. So I resigned 0:04:27.480 --> 0:04:30.279 from the FED and got to work at the Treasure Department, 0:04:30.279 --> 0:04:32.200 and I have to say that was a fantastic job. 0:04:32.720 --> 0:04:34.520 But I did that until twenty sixteen, and then I 0:04:34.520 --> 0:04:38.000 went to the private sector to financial markets, worked for 0:04:38.040 --> 0:04:40.480 a year at a hedge fund, worked for four years 0:04:40.480 --> 0:04:42.400 at a different bank, and now I'm happy to say 0:04:42.400 --> 0:04:45.760 I am the global chief economist here at Morgan Stanley, 0:04:45.880 --> 0:04:47.000 and I couldn't be happier. 0:04:47.080 --> 0:04:48.760 I guess you did have to buy a new wardrobe 0:04:48.760 --> 0:04:50.680 when you moved to Washington, though, Seth, you couldn't walk 0:04:50.680 --> 0:04:52.920 around in those colonial uniforms anymore. 0:04:55.000 --> 0:04:56.440 Ten striped suit with a tri corner. 0:04:56.560 --> 0:05:00.640 Had to get back to what I was saying in 0:05:00.680 --> 0:05:04.160 the introduction. You know, my impression is that you were 0:05:04.240 --> 0:05:07.320 sort of leading into the soft landing camp these days, 0:05:07.680 --> 0:05:11.320 thinking that perhaps fingers crossed, knock on wood and all, 0:05:11.320 --> 0:05:14.520 that we actually might be able to avoid a recession. 0:05:15.000 --> 0:05:16.919 Walk us through how you're thinking about that. You know 0:05:16.960 --> 0:05:20.000 what's changed to make you a little bit less worried 0:05:20.000 --> 0:05:20.760 about recession? 0:05:21.040 --> 0:05:23.760 Absolutely, we've we've actually been in the soft landing camp 0:05:23.839 --> 0:05:26.400 for a while, there were definitely times when everyone in 0:05:26.480 --> 0:05:29.880 markets was throwing rocks and sticks at us and saying 0:05:29.920 --> 0:05:32.320 that we're crazy, because it was clear we'd get a recession. 0:05:32.360 --> 0:05:35.040 And then the data for Januine and February came in 0:05:35.080 --> 0:05:36.800 that looked a lot better, and people were telling us 0:05:36.839 --> 0:05:38.520 that we were crazy, that we were still calling for 0:05:38.560 --> 0:05:41.279 a big slowdown. And now the world has shifted again. 0:05:41.880 --> 0:05:44.400 What is our thinking. The first thing is that seems 0:05:44.480 --> 0:05:46.640 hard to avoid the fact that the US economy is 0:05:46.680 --> 0:05:49.000 going to slow down. And part of the reason why 0:05:49.000 --> 0:05:51.839 that's hard to avoid is because that is absolutely, categorically 0:05:51.920 --> 0:05:54.400 the feds objective. Right The reason they will keep hiking 0:05:54.440 --> 0:05:56.880 industrates at least a bit more is because they want 0:05:56.960 --> 0:05:59.240 the economy to slow down a lot in order to 0:05:59.240 --> 0:06:02.320 have inflationary pressures of bait. So the slowdown part should 0:06:02.360 --> 0:06:04.520 be pretty easy to get on board with. So what 0:06:04.640 --> 0:06:07.919 about the missing the recession part? Well, partly because the 0:06:07.960 --> 0:06:11.200 slowdown is the Fed's choice, at least, having a chance 0:06:11.240 --> 0:06:13.600 to avoid a recession should also be the fed's choice, 0:06:13.600 --> 0:06:16.279 And we think they're looking carefully at the data and 0:06:16.360 --> 0:06:19.080 asking do we have enough evidence that things are slowing 0:06:19.120 --> 0:06:22.359 down a lot? But not yet crashing, because that's what 0:06:22.360 --> 0:06:24.480 they're looking for in order to stop the hiking cycle. 0:06:24.520 --> 0:06:26.960 So we think the last hike is in May, when 0:06:27.000 --> 0:06:29.719 there'll be more evidence of more of a slowdown, but 0:06:29.960 --> 0:06:32.560 not yet evidence that things have actually fallen off of 0:06:32.560 --> 0:06:35.480 a cliff. And then I think the last part of 0:06:35.480 --> 0:06:38.839 our thesis is usually what takes in the US to 0:06:38.880 --> 0:06:41.800 get a recession is some shock or something that causes 0:06:41.800 --> 0:06:44.240 the slowdown. So we've got that, but you also need 0:06:44.240 --> 0:06:48.560 an amplification mechanism. So the economy slows down and businesses 0:06:48.680 --> 0:06:51.320 lay off millions of workers and their lack of income 0:06:51.400 --> 0:06:54.080 causes a slump and stending, or you get a big 0:06:54.120 --> 0:06:58.680 credit crunch and everything seizes up. Both of those are 0:06:58.680 --> 0:07:03.559 clearly possible, but we don't think they are imminent. For 0:07:03.839 --> 0:07:06.400 the labor side of things, the job market still seems 0:07:06.400 --> 0:07:09.560 pretty healthy, the unemployment rates very low, and if you 0:07:09.960 --> 0:07:12.320 kind of look at how much employment do we have 0:07:13.000 --> 0:07:16.280 relative to the level of GDP, you'd come away with 0:07:16.400 --> 0:07:19.760 the conclusion that, boy, businesses are still a little shorthanded. 0:07:20.200 --> 0:07:22.440 But what that means is the economy can slow down 0:07:22.840 --> 0:07:25.240 and businesses don't have to do the same wave of 0:07:25.360 --> 0:07:27.880 firing that they've had to do in previous slowdown, So 0:07:27.880 --> 0:07:31.119 that makes us feel a little bit better. And even 0:07:31.120 --> 0:07:35.800 though there's clearly tighter funding conditions for banks and banks 0:07:35.800 --> 0:07:40.239 are pulling back on their lending, especially given what's happened 0:07:40.240 --> 0:07:44.120 in the wake of all of the banking turmoil, we 0:07:44.240 --> 0:07:46.600 kind of remember that things were already slowing down. Loan 0:07:46.720 --> 0:07:50.320 growth was already slowing before we got these new sensational 0:07:50.600 --> 0:07:54.720 headlines about the banking sector turmoil. And because we were 0:07:54.760 --> 0:07:57.480 sure the economy was going to be slowing down anyway, 0:07:57.840 --> 0:07:59.960 the demand for that borrowing is going to be following. 0:08:00.040 --> 0:08:02.680 And so we don't think any pullback by banks and 0:08:02.720 --> 0:08:04.760 their willingness to lend is going to be the thing 0:08:04.760 --> 0:08:08.720 that tips us over to recession. So not a super 0:08:08.800 --> 0:08:11.480 rosy outlook. We are looking for growth that's below a 0:08:11.560 --> 0:08:14.160 half a percent in real terms, so very very close 0:08:14.200 --> 0:08:17.800 to zero. But importantly, we are not looking for a 0:08:17.800 --> 0:08:20.360 full blown recession where we have several months in a 0:08:20.440 --> 0:08:21.320 row of contraction. 0:08:21.960 --> 0:08:25.000 Okay, so Seth, you mentioned tighter funding conditions, and I'm 0:08:25.040 --> 0:08:28.000 wondering where else you are looking to see signs of 0:08:28.040 --> 0:08:30.680 that now that we've obviously we've had the bank turmoil. 0:08:31.040 --> 0:08:34.439 Been a month since that happened. I know, I was 0:08:34.480 --> 0:08:36.320 reading some notes from some of the big banks, and 0:08:36.440 --> 0:08:39.280 a couple of them actually mentioned Fastenal some of the 0:08:39.320 --> 0:08:41.520 warnings from that company, and that company being such a 0:08:41.559 --> 0:08:43.600 bell weather. So where else are you looking maybe for 0:08:43.760 --> 0:08:46.280 signs of tighter funding conditions. 0:08:46.880 --> 0:08:49.280 So we're trying to look as broadly and as deeply 0:08:49.320 --> 0:08:52.720 as we possibly can. You can look at things like 0:08:52.880 --> 0:08:56.200 delinquency rates and deterioration of credit quality on credit cards 0:08:56.400 --> 0:08:59.160 and that kind of lending to customers. But I you know, 0:08:59.240 --> 0:09:01.640 close to home for big chunk of my career, the 0:09:01.640 --> 0:09:05.040 Federal Reserve has their Senior Loan Officer Opinion Survey. They 0:09:05.080 --> 0:09:07.839 have a survey in terms of business lending, and there 0:09:07.920 --> 0:09:11.720 they ask lots of banks, what's going on with your lending? 0:09:11.760 --> 0:09:14.960 And I think that's another really key, uh source of 0:09:15.000 --> 0:09:17.800 information about willingness to lend by creditors. 0:09:18.040 --> 0:09:22.000 Yes, I wonder everybody was kind of bracing for, if 0:09:22.000 --> 0:09:25.760 not a credit crunch, definitely some kind of credit slowdown. 0:09:25.960 --> 0:09:29.800 After Silicon Valley Bank and Signature Bank failed. Was the 0:09:30.520 --> 0:09:34.080 emergency term lending facility that was introduced, and the you know, 0:09:34.160 --> 0:09:37.800 the discount window at the FED opened wide. Was that 0:09:38.000 --> 0:09:42.760 enough to basically prevent that type of contagion from that 0:09:42.760 --> 0:09:46.280 that type of nervousness among banks to rein in lending, 0:09:46.720 --> 0:09:48.480 do you think, or is it something else? 0:09:48.679 --> 0:09:50.760 So that's a great question, and it's really hard to 0:09:50.800 --> 0:09:53.360 know what the counter factual would have been. But then 0:09:53.360 --> 0:09:55.920 when you start to look into the details, there wasn't, 0:09:55.960 --> 0:09:58.040 at least in the first week, that much that went 0:09:58.040 --> 0:10:01.680 through that nude term lending facilit about twelve billion dollars 0:10:01.760 --> 0:10:05.640 or so. A huge amount went to the FDIC's bridge banks. 0:10:05.960 --> 0:10:08.839 There's also a fair amount based on First republic z 0:10:08.840 --> 0:10:12.839 owned public disclosures that went directly there. And so, you know, 0:10:12.920 --> 0:10:16.680 my initial reading, perhaps through some slightly rose colored glasses, 0:10:16.800 --> 0:10:20.560 was that the situation based on that borrowing was more 0:10:20.679 --> 0:10:24.960 idiosyncratic than systemic. Now, there were still a lot of 0:10:25.000 --> 0:10:27.760 borrowing from many banks, and the amounts going through that 0:10:27.880 --> 0:10:30.920 term facility has actually edged up a bit over time, 0:10:31.000 --> 0:10:34.559 it has not fallen, So we don't want to be complacent, 0:10:34.920 --> 0:10:38.960 but my initial read was that it was more idiosyncratic 0:10:39.000 --> 0:10:41.920 than systemic, and so as a result, yeah, I suspect 0:10:41.960 --> 0:10:44.960 that the lending was there took care of some of 0:10:44.960 --> 0:10:48.360 the institutions that critically needed. Others, as we know, or 0:10:49.000 --> 0:10:52.640 have been resolved or being resolved, and so you know, 0:10:52.760 --> 0:10:55.760 my take really though, is that we had a largely 0:10:55.800 --> 0:10:59.160 idiosyncratic problem against the backdrop of the whole system have 0:10:59.280 --> 0:11:01.280 been facing a high funding costs. But that was very 0:11:01.360 --> 0:11:03.720 much the intent of the Fed by raising the Federal 0:11:03.760 --> 0:11:06.360 Funds rate five hundred basis points. I do think there 0:11:06.400 --> 0:11:08.480 was mostly an adies and credit situation going on. 0:11:14.960 --> 0:11:17.439 You know, the other issue that's coming up with banks 0:11:17.480 --> 0:11:20.040 a lot these days, seth And admittedly I'm kind of 0:11:20.040 --> 0:11:21.520 talking my book here a little bit. I've got a 0:11:21.520 --> 0:11:25.080 story in our BusinessWeek magazine about this this week. But 0:11:25.679 --> 0:11:28.680 it's basically the notion of deposit beta. When the Fed 0:11:28.720 --> 0:11:32.120 Funds rate goes up to five percent, how quickly do 0:11:32.240 --> 0:11:36.480 banks jack up their rates that they pay on savings deposits, 0:11:36.800 --> 0:11:40.400 demand deposits, especially in reflection to how much the Fed 0:11:40.440 --> 0:11:43.480 Fund's rate has gone up, Because it's a really fascinating, 0:11:43.600 --> 0:11:47.760 I think, almost a historical whiplash that we've seen. You 0:11:47.800 --> 0:11:53.040 saw bank deposits just swell tremendously during the pandemic, something 0:11:53.080 --> 0:11:56.640 like twenty percent in twenty twenty, I believe it was, 0:11:56.679 --> 0:11:59.560 and then another ten percent in twenty twenty one. Now 0:11:59.520 --> 0:12:03.000 there's start to shrink, albeit you know, not by a ton. 0:12:03.080 --> 0:12:04.560 I think it was like a percent and a half 0:12:04.640 --> 0:12:07.880 last year, but you know, on an aggregate basis, bank 0:12:07.920 --> 0:12:12.200 deposits are shrinking. There's more competition possibly for deposits. A 0:12:12.200 --> 0:12:15.080 lot of banks are now paying above four percent on 0:12:15.160 --> 0:12:19.200 their savings rates their deposit rates. To me, that that 0:12:19.240 --> 0:12:22.200 creates a lot of questions I think about the financial system, 0:12:22.400 --> 0:12:24.400 you know, And warning here I'm about to give you 0:12:24.400 --> 0:12:27.720 about a ten part question, so stand by. But you know, 0:12:28.240 --> 0:12:32.080 a does that sort of deposit competition, that worriiness about 0:12:32.160 --> 0:12:36.400 stickiness of deposits have any effect on the supply of 0:12:36.440 --> 0:12:40.680 credit you think? And secondly, does it have any macro 0:12:41.320 --> 0:12:44.480 follow up for the markets themselves? You know, I'm thinking, 0:12:44.480 --> 0:12:46.320 if I'm getting if I can get four to four 0:12:46.320 --> 0:12:50.160 and a half percent on my savings account at a bank, 0:12:50.920 --> 0:12:52.720 am I going to be less willing to take risk 0:12:52.800 --> 0:12:54.839 in the stock market? That sort of thing? So I'm 0:12:54.880 --> 0:12:57.600 curious how you see that whole situation playing out, both 0:12:57.600 --> 0:13:01.480 from the credit side and any other potential macro impact 0:13:01.520 --> 0:13:01.960 it might. 0:13:01.840 --> 0:13:06.280 Have absolutely so fascinating topic one that is absolutely critical. 0:13:06.640 --> 0:13:08.440 So let me take a step back and think about 0:13:08.480 --> 0:13:12.280 it in an historical sense. Every time we have an 0:13:12.320 --> 0:13:14.800 interest rate cycle, business cycle, and then the Fed's moving 0:13:15.080 --> 0:13:17.520 short term rates up and down, you see an interesting 0:13:17.559 --> 0:13:20.640 and fairly familiar pattern when when the FED cuts rates 0:13:20.640 --> 0:13:23.559 and market rates fall, deposit rates fall along with them, 0:13:23.880 --> 0:13:25.800 and then the Fed starts to raise interest rates and 0:13:25.800 --> 0:13:29.240 deposit rates kind of lag, and then over time that 0:13:29.280 --> 0:13:33.040 deposit beta, as you noted, starts to starts to pick 0:13:33.160 --> 0:13:37.400 up a big plug. To my colleague Betsy Graysek, who 0:13:37.480 --> 0:13:41.480 runs equity research at Morgan Stanley for financial institutions, she's 0:13:41.520 --> 0:13:44.320 been saying since the beginning of this hiking cycle that 0:13:44.360 --> 0:13:47.440 the deposit beta increased this time would be more dramatic 0:13:47.480 --> 0:13:49.840 than it has been in past cycles, and that's been 0:13:49.880 --> 0:13:52.640 born out. As you've said, I think there are a 0:13:52.640 --> 0:13:54.600 few things that are that are a little bit different 0:13:54.679 --> 0:13:59.160 this time than previous cycles, at least recent cycles. One 0:13:59.240 --> 0:14:02.200 is the speed with which the FED increased interest rates. 0:14:02.240 --> 0:14:04.600 We had four to seventy five basis point rate increases 0:14:04.640 --> 0:14:08.680 this time compared to the previous couple of hiking cycles. 0:14:08.679 --> 0:14:11.719 That's a really big departure in terms of speed, and 0:14:12.280 --> 0:14:16.120 banks are are having to follow up on it. Historically, though, 0:14:16.240 --> 0:14:18.080 what do you see. You see the growth rate of 0:14:18.200 --> 0:14:21.760 deposits fall, or even an outright decline in deposits, because 0:14:21.920 --> 0:14:25.120 as market rates start to go up and people can 0:14:25.160 --> 0:14:28.520 invest in treasury bills, deposits start to look a little 0:14:28.520 --> 0:14:33.080 bit less attractive, and you see that same pattern. So qualitatively, 0:14:33.120 --> 0:14:36.280 we're seeing the same thing. Quantitatively, the speed of the 0:14:36.320 --> 0:14:39.240 increase was much bigger. Key difference here is that the 0:14:39.240 --> 0:14:42.280 FED has this reverse repo facility where they take in 0:14:42.440 --> 0:14:46.720 cash from investors and primarily money marketing mutual funds, and 0:14:47.080 --> 0:14:50.200 they're using that tool to help keep all market interest 0:14:50.320 --> 0:14:55.080 rates higher. That tool existed in the last hiking cycle, 0:14:55.120 --> 0:14:57.040 but that was a much more gradual hiking cycle. It 0:14:57.080 --> 0:15:00.320 did not exist in any other previous hiking cycle. And 0:15:00.360 --> 0:15:03.000 so what you can see are investors who might have 0:15:03.120 --> 0:15:05.880 otherwise had their cash and deposited banks can now have 0:15:06.200 --> 0:15:08.640 their cash shifted over to a money market mutual fund. 0:15:09.040 --> 0:15:12.080 That money market mutual fund can put that cash at 0:15:12.120 --> 0:15:17.040 the FED, and it's facilitating that very historical pattern of 0:15:17.520 --> 0:15:20.320 higher interest rates leading to slower deposit growth or even 0:15:20.400 --> 0:15:23.640 negative deposit growth. It's helping that process move along, but 0:15:23.680 --> 0:15:27.320 it's doing it even more effectively than historically, and again 0:15:27.440 --> 0:15:30.440 against the backdrop of a much faster hiking cycle. So 0:15:30.480 --> 0:15:32.960 the first part of the question is absolutely, yes, this 0:15:33.560 --> 0:15:37.600 shift in deposit matters. It's part of a normal hiking cycle. 0:15:37.600 --> 0:15:39.960 But it's just happening much more quickly and perhaps much 0:15:39.960 --> 0:15:42.920 more effectively than it has historically. What does it mean 0:15:42.960 --> 0:15:46.720 for other asset prices? I mean again, usually when people 0:15:46.720 --> 0:15:50.200 talk about portfolio construction, sort of think about what can 0:15:50.240 --> 0:15:52.440 you get on a risk free asset, and then any 0:15:52.520 --> 0:15:56.800 other risky asset has to outperform and expand and expected value. 0:15:57.040 --> 0:16:00.360 And yeah, deposits are paying more this time around. Money 0:16:00.440 --> 0:16:03.520 funds are paying more than before. Tea bills are doing 0:16:03.560 --> 0:16:07.080 more than paying more than before. My colleagues and interest 0:16:07.160 --> 0:16:09.840 rates strategy here at Morgan Stanley had put out a 0:16:09.880 --> 0:16:13.080 piece as their outlook for twenty twenty three that was 0:16:13.120 --> 0:16:16.360 called the Year of Yield. Cash once again is an 0:16:16.360 --> 0:16:18.920 actual asset class. It's not just sort of where you 0:16:18.960 --> 0:16:20.800 have your wealth because you can't make up your mind yet. 0:16:20.800 --> 0:16:23.920 It's a legitimate asset class because t bills are paying 0:16:24.000 --> 0:16:26.880 five percent. So yeah, the second part of your question, 0:16:27.560 --> 0:16:30.280 I'll also answer yes too. I think this is absolutely 0:16:30.320 --> 0:16:33.200 an important development. It matters at a macro level, it 0:16:33.280 --> 0:16:37.200 matters at a financial market level, but it is ultimately 0:16:37.240 --> 0:16:38.520 at the end of the day and just part of 0:16:38.560 --> 0:16:42.200 how monetary policy works. But boy, the details are a 0:16:42.240 --> 0:16:43.040 little bit different this. 0:16:43.040 --> 0:16:44.440 Time around, Seth. 0:16:44.440 --> 0:16:48.640 I'm also wondering if maybe there's a disinflationary aspect to this, 0:16:48.840 --> 0:16:50.840 in that if I'm somebody who puts a bunch of 0:16:50.840 --> 0:16:53.840 money in a money market fund, I'd be less inclined 0:16:53.880 --> 0:16:56.920 to actually go and then spend it. I wouldn't have 0:16:57.000 --> 0:16:58.720 it at the ready if I wanted to buy a 0:16:58.720 --> 0:16:59.920 brand new TV, for instance. 0:17:00.760 --> 0:17:03.160 I mean, I think that is possible. I think there's 0:17:03.200 --> 0:17:07.439 definitely the possibility that easier savings means less spending, and 0:17:07.520 --> 0:17:09.959 that makes a lot of sense. There's not always a 0:17:10.040 --> 0:17:12.600 lot of evidence in the empirical research, and it all 0:17:12.640 --> 0:17:16.840 comes down to sort of how do households way spending 0:17:16.920 --> 0:17:20.119 versus savings. But one thing that it clearly does is 0:17:20.119 --> 0:17:23.200 for anybody who is going to be borrowing in order 0:17:23.280 --> 0:17:26.640 to spend, the cost of funding is just going up. 0:17:26.680 --> 0:17:29.119 So We see this clearly in banks. Their cost of 0:17:29.119 --> 0:17:31.359 funding is going up, making it harder for them to 0:17:31.440 --> 0:17:34.159 lend households that might want to borrow in order to 0:17:34.359 --> 0:17:36.680 buy a new car. Their cost of borrowing is going 0:17:36.760 --> 0:17:39.760 up because anyone who's borrowing at this point is going up. 0:17:40.119 --> 0:17:44.080 That for me is the traditionally stronger channel for monetary policy, 0:17:44.440 --> 0:17:46.800 but it could work through the savings mechanism the way 0:17:46.800 --> 0:17:47.560 you said it as well. 0:17:48.160 --> 0:17:50.800 You know, Seth, you had mentioned those flashbacks to your 0:17:50.880 --> 0:17:55.000 days in Washington when the debt sailing first sort of 0:17:55.080 --> 0:17:57.720 reared its ugly head and became an issue. I think 0:17:57.760 --> 0:18:00.680 as we you know, I guess we're in the extraordinary 0:18:00.720 --> 0:18:03.960 measures phase of the debt ceiling right now, and as 0:18:03.960 --> 0:18:06.640 we get closer and closer to sort of the drop 0:18:06.720 --> 0:18:10.639 dead date, you know, there's this assumption that it's brinkmanship, 0:18:11.000 --> 0:18:13.359 that some sort of deal will be cut at the 0:18:13.400 --> 0:18:17.000 eleventh hour. But I got to say, you know, politics 0:18:17.040 --> 0:18:20.040 is way more bare knuckles than I think it's ever 0:18:20.080 --> 0:18:22.879 been in my life, and I wonder if that is 0:18:23.720 --> 0:18:25.480 the wrong way to think about it this time. You 0:18:25.520 --> 0:18:29.240 think there is a bigger risk this time of some 0:18:29.640 --> 0:18:34.720 actual default and some serious you know, financial risks to 0:18:34.760 --> 0:18:36.040 the whole system because of that. 0:18:36.200 --> 0:18:40.600 This time, absolutely, I do think that the risks are 0:18:40.680 --> 0:18:42.280 bigger this time, and I think there are a few 0:18:42.280 --> 0:18:45.440 things that figure into that calculus. At the end of 0:18:45.440 --> 0:18:49.880 the day, this is a standoff game theoretic setting between 0:18:50.359 --> 0:18:53.760 two sides and a negotiation, and that's for me, part 0:18:53.760 --> 0:18:55.520 of how I think about it as an economist. But 0:18:55.640 --> 0:18:59.320 the things that are different now relative to say, twenty 0:18:59.359 --> 0:19:02.840 eleven and twenty thirteen, and let's not forget both of 0:19:02.880 --> 0:19:07.080 those episodes came basically down to the wire and we're 0:19:07.119 --> 0:19:10.040 a little bit for me at least nerve wracking. But 0:19:10.160 --> 0:19:13.640 now you've got different leadership in the House of Representatives 0:19:13.720 --> 0:19:16.560 where there were, you know, lots of rounds of voting 0:19:16.560 --> 0:19:19.159 to come up with the speakership, and I think that 0:19:19.200 --> 0:19:22.159 probably changes a little bit how the calculation goes on 0:19:22.160 --> 0:19:25.919 that side. I think the other point that's very different 0:19:26.000 --> 0:19:29.800 now relative to twenty eleven or twenty thirteen is that 0:19:30.520 --> 0:19:34.080 in the public domain on the fed's public website are 0:19:34.119 --> 0:19:37.680 the transcripts of two different conference calls, one in twenty 0:19:37.720 --> 0:19:41.600 thirteen one in twenty eleven, where the FMC discussed what 0:19:41.680 --> 0:19:43.800 would happen if we got to the point where the 0:19:43.840 --> 0:19:46.440 treasury ran out of cash. And if you read that, 0:19:47.160 --> 0:19:50.440 you might conclude, I think wrongly from my personal perspective, 0:19:50.440 --> 0:19:52.119 but it would be easy to conclude that the Fed's 0:19:52.119 --> 0:19:55.639 got a plan and there's a way to finesse not 0:19:55.760 --> 0:20:01.040 defaulting on treasury securities while avoiding paying on other government obligations. 0:20:01.800 --> 0:20:05.800 I'm not sure creating that potentially false sense of comfort 0:20:06.200 --> 0:20:08.720 is a good thing to get a quick and easy 0:20:08.760 --> 0:20:10.960 resolution to these sorts of things. So I do think 0:20:11.200 --> 0:20:14.440 the water has got more muddy because of the political circumstances, 0:20:14.520 --> 0:20:18.359 because of the extra information in the public domain, And 0:20:19.480 --> 0:20:21.879 you know, I worry. Maybe it's just because I'm always 0:20:21.880 --> 0:20:25.199 a congenital worrier, but we really do. In my opinion, 0:20:25.160 --> 0:20:29.000 you need to see, hopefully a timely resolution one way 0:20:29.080 --> 0:20:29.440 or the other. 0:20:44.680 --> 0:20:44.880 Zeth. 0:20:44.920 --> 0:20:47.160 I also want to take us abroad because you're bullish 0:20:47.200 --> 0:20:50.760 on China growth, and I'm wondering, first of all, what 0:20:50.800 --> 0:20:55.120