Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: Welcome to the podcast. This week, my special guest is
Speaker 1: Paul McCully. Paul has been chief Economists, bond desk manager,
Speaker 1: a whole number of roles, UH, member of the investment community,
Speaker 1: and perhaps the most important confidante of Bill Gross at
Speaker 1: PIMCO for many, many years. He is now squasi retired.
Speaker 1: He's in his um mid to late fifties, and I
Speaker 1: believe he's gonna eventually find his way to some Ivy
Speaker 1: League school UM as a professor. He's he's far too experienced, knowledgeable,
Speaker 1: and and a great communicator to to just retire and
Speaker 1: let those skills waste. He'll he'll find his ways to
Speaker 1: a professorship somewhere. We have a long and and really
Speaker 1: fascinating conversation about the Federal Reserve and the financial crisis,
Speaker 1: the state of the global economy, what's going on in
Speaker 1: inflation and deflation. We really talked about everything and anything,
Speaker 1: and as you'll hear, he can wax eloquent on just
Speaker 1: about any subject intremendous depth. I can re regale you
Speaker 1: and recount some of the highlights, but I don't wanna
Speaker 1: reveal any spoilers, So rather than me doing my usual
Speaker 1: five minute babble to start the podcast, instead, I'm just
Speaker 1: gonna say, without any further ado, my conversation with Pimco's
Speaker 1: Paul McCulley. This is Masters in Business with Barry Ridholts
Speaker 1: on Bloomberg Radio. My special guest this week is Paul McCulley.
Speaker 1: He is probably best known as the chief economist and
Speaker 1: Managing director at PIMCO, where he served from two thousand
Speaker 1: and Tenna's that about right, with a little stint afterwards, UH,
Speaker 1: sort of a return visit. Uh. Got his MBA from
Speaker 1: Columbia Business School, headed pimco's short term bond desk, led
Speaker 1: the cyclical economic forums, and was a member of the
Speaker 1: Investment committee named to the Institutional All America Fixed Income
Speaker 1: Research Team. That I get that right, I really. I
Speaker 1: think of Paul as one of the most astute fed
Speaker 1: watchers there is. He's often on the shortlist as a
Speaker 1: potential f O m c role. McCully coined the term
Speaker 1: Minsky moment in response to the Russian uh financial crisis,
Speaker 1: and is rumored to have coined the phrase shadow banking system.
Speaker 1: More than a rumor that you get full credit for that. Currently,
Speaker 1: he's a member of the board of the Global Interdependent Center,
Speaker 1: better known as g i C. It's a thin tank
Speaker 1: in Philly, and pretty much what are doing these days
Speaker 1: is thinking, writing, and speaking. Is that, uh, the way
Speaker 1: you like to describe it? Yeah, it is. I'm first
Speaker 1: gamefully unemployed, meaning that I'm retired, but I'm not retired
Speaker 1: from the things that I love doing. Uh. And it
Speaker 1: really comes down to global macro and I think about it,
Speaker 1: I write about it, and I give about one lecture
Speaker 1: or speech a months. So right now that's what I'm doing.
Speaker 1: I'm getting more closely involved in the academic arena uh
Speaker 1: and may end up in the next six months as
Speaker 1: an adjunct professor at some esteemed institution, but that's still
Speaker 1: in the works. But right now I like to uh uh,
Speaker 1: to think and write and speak. And uh. I when
Speaker 1: I speak for nonprofits and for academics, the prices zero,
Speaker 1: and occasionally I speak for a for profit and the
Speaker 1: price is a large number. So it's either zero are
Speaker 1: large number. So we could describe you as gainfully retired exactly,
Speaker 1: all right, And and you're in your fifties, you're not
Speaker 1: a really a retirement age. You're looking to do something.
Speaker 1: By the way, I forgot to say, Paul McCulley, welcome
Speaker 1: to Bloomberg. Thanks good so so nice to have you here. UM.
Speaker 1: So let's start out talking a little bit about your background.
Speaker 1: I know you're you're a Virginia boy, right, is that
Speaker 1: where you're from. I grew up in rural Virginia outside
Speaker 1: of Stanton, Virginia, which is down in the General Valley
Speaker 1: of Virginia, about three hours southwest of UH of Washington,
Speaker 1: d CE, A beautiful area. I grew up there as
Speaker 1: a Baptist minister's son and graduated from high school UH
Speaker 1: in nineteen and seventy five, went to Grennell College out
Speaker 1: in Iowa. So so from how green is your valley
Speaker 1: to Iowa to New York City, that's kind of a surprising,
Speaker 1: uh way to bounce around. Yeah, it is Grannelle. I'm
Speaker 1: on the board of trustees at Grannelle and have been
Speaker 1: so for a number of years. Is a special place
Speaker 1: in my life and heart. And that they recruited me
Speaker 1: uh in nineteen seventy five as a hit from Virginia. UH.
Speaker 1: Grannelle is a small, private liberal arts college traditional liberal
Speaker 1: arts education. Learned a lot about a lot of different
Speaker 1: things and be able to use it in a variety
Speaker 1: of applications. Learn how to think, not just be an
Speaker 1: expert in a narrow space. Can we do UH an
Speaker 1: infomercial for you for Grannell? I mean, that's that's what
Speaker 1: That's what a good liberal arts education is about. UH.
Speaker 1: And Grannell is a national college UH. And part of
Speaker 1: their endeavor in recruiting UH is that they literally buy
Speaker 1: the list from the S A T people who do
Speaker 1: of students throughout the country who do well A and
Speaker 1: B might need some financial help in order to go
Speaker 1: to Grannell. Where were they when I was in high school?
Speaker 1: So I came up on their meter on the SS
Speaker 1: A T S of a kid from rural Virginia. Put
Speaker 1: the two together, UH, and they started talking to me.
Speaker 1: And then the third factor is that I was a
Speaker 1: runner UH in UH in high school. I was six
Speaker 1: in the state of Virginia my senior year in cross country,
Speaker 1: and the cross country coach at Grannell College sitting maybe
Speaker 1: we got a hat trick here? So how do you
Speaker 1: go from Grennell to NBA at Columbia. That was just
Speaker 1: an old fashioned sort of process, and that when I
Speaker 1: was graduating UH from Grennell with a degree in economics,
Speaker 1: I wanted to go to business school and looked at
Speaker 1: the brand name business schools, and I was intrigued by
Speaker 1: by Columbia. I had never been to New York City
Speaker 1: before UH, and applied and for some reason I was accepted.
Speaker 1: And I say for some reason, and that I was
Speaker 1: twenty two and went straight from college to business, nothing
Speaker 1: in between, nothing in between. And I understand that that
Speaker 1: is just not done anymore. They want people to have
Speaker 1: a year or two of real world experience. Yeah. I
Speaker 1: think in my class at Columbia, ten of us were
Speaker 1: the kids who went straight from college. So I got
Speaker 1: out of UH of Columbia twenty four, relatively young to
Speaker 1: have an m b A. And and to the world.
Speaker 1: So a couple of questions about Columbia. A couple of
Speaker 1: weeks ago, we had Leon Cooperman of Omega Advisors, and
Speaker 1: he couldn't be more effusive in praise for his Columbia experience.
Speaker 1: He still buds with some of his classmates, one in
Speaker 1: particular Mario ga Belly also Art Sandberg, formerly of Pequad.
Speaker 1: What really stood out to you about Columbia and any
Speaker 1: people you're still tight with from back in those days.
Speaker 1: I really enjoyed my two years at Columbia because it
Speaker 1: gave me a chance to more from economics, and that's
Speaker 1: really what I was about as an undergrad UH into
Speaker 1: finance and markets. So I think my two years at
Speaker 1: Columbia really gave me the melding of economics and finance,
Speaker 1: which set me up nicely for what turned out to
Speaker 1: be the rest of my career. You're listening to Masters
Speaker 1: in Business on Bloomberg Radio. My special guest today Paul McCulley.
Speaker 1: He was chief economist at PIMCO for UH, really fascinating
Speaker 1: period of time, the dot com collapse, throughout the two thousands,
Speaker 1: the financial crisis. One of the things I'm curious about is,
Speaker 1: so you go to Columbia to get your m b A.
Speaker 1: They're really known as a deep value shop on the
Speaker 1: equity side, yet you end up running a bond desk
Speaker 1: as well as doing the global macro How did that
Speaker 1: come about? Columbia is known as a stockhouse when you
Speaker 1: think in terms of the famous graduates. Uh. I'm a
Speaker 1: macro economist who also loves finance and try to merge
Speaker 1: the two, which ultimately was the reason I became such
Speaker 1: a Minsky I, if you will, of macro and finance. Uh.
Speaker 1: And I learned all the appropriate equity models, which was
Speaker 1: a good thing while I was at Colombia. But actually
Speaker 1: I did not get a job immediately on Wall Street
Speaker 1: in nineteen eight one. Remember nineteen eight one was not
Speaker 1: a really great time for Wall Street. I was a
Speaker 1: twenty four year old kid with a deep Southern accent,
Speaker 1: and I interviewed with all the major players because I
Speaker 1: did well there and didn't get a job from Morgan
Speaker 1: Stanley or Goldman Sachs or any of the major players. Uh.
Speaker 1: So I took a job from my first two years
Speaker 1: out of Columbia UH working for Concho, a division of
Speaker 1: at that time DuPont UH. And my first two years
Speaker 1: were at a speech writer for the executives of Kanaka. Really,
Speaker 1: that's fascinating. That was the first thing I did was
Speaker 1: actually as a ghostwriter for the executives, doing ahbeds and
Speaker 1: speeches and that sort of thing. And I got my
Speaker 1: first job on Wall Street and that teen and eighty
Speaker 1: three at E. F. Hunton. Oh. Really, we've had plenty
Speaker 1: of EF hunting people passed through here. In fact, IF
Speaker 1: Hunton seems to have been a huge feeder, obviously the
Speaker 1: spin out of Lehman Brothers, but also I know a
Speaker 1: lot of people who ended up going from IF Hunton
Speaker 1: to bear Sterns and EF Hunton to a number of
Speaker 1: other shops. So how do you go from if Hunton?
Speaker 1: Ultimately you between IF Hutton and Pimco, you find your
Speaker 1: way to UBS, which I think was Warburg at the time. Yeah,
Speaker 1: it was. It's kind of I haven't thought about my
Speaker 1: CV in a long period of time. Got to updated.
Speaker 1: It's a little skimpy, A little skimpy. Actually. The story
Speaker 1: of of nineteen eighty three when I went to F Hutton,
Speaker 1: uh Eddie Ardini had been the chief of of EF Hutton.
Speaker 1: In fact, I had studied under Eddie when he was
Speaker 1: an adjunct professor at Columbia, and it turned out he
Speaker 1: had left and went to prove there's been a big
Speaker 1: sort of movement at Proof for a long time. And
Speaker 1: when he left E. F. Hutton there was an economist
Speaker 1: in corporate finance there with the PhD from Hopkins named
Speaker 1: Bob Barbera. So they put him into action as the
Speaker 1: chief economist and he was looking for a number two
Speaker 1: who understood finance because he was an energy economist. So
Speaker 1: Bob and I worked together UH for four years, great
Speaker 1: relationship between three and nine seven, and then I left
Speaker 1: for three years to go work for Columbia Savings and
Speaker 1: Loan in Beverly Hills, California for Tom Spiegel back during
Speaker 1: the milk and days. Sure. UH worked there for three years,
Speaker 1: not in junk bonds, but in running interest rate risk
Speaker 1: for the SNL and then jump bonds blew it up.
Speaker 1: And then I went to Pimco in nineteen So, so
Speaker 1: did you first trip to California? Was that the first time?
Speaker 1: First experience at West or had you been there previously?
Speaker 1: I had traveled during my E. F. Hutton days to California,
Speaker 1: But my move to California, UH, the first time was
Speaker 1: in nineteen and eighty seven. I spent three years working
Speaker 1: with Columbia in the Drexel Hub UH, and then Bill
Speaker 1: Gross gave me a job when I was unemployed in
Speaker 1: nineteen nine. So how long will you at Pimco Ford?
Speaker 1: In total? I was two years there between ninety and
Speaker 1: ninety two, UH, and then I got the job as
Speaker 1: chief economists for U b S and I did that
Speaker 1: for seven years until back to nine and Bill Gross
Speaker 1: called me up and said, you're coming home, and I
Speaker 1: came home. So, so let's talk a little bit about Bill,
Speaker 1: because I he we've had him on the show. I
Speaker 1: find him to be a fascinating guy. Um, what was
Speaker 1: it like working with somebody who is, you know, larger
Speaker 1: than life. Uh, he's supposed to be a tough character
Speaker 1: to work for. I've known Bill for twenty five years,
Speaker 1: and I've known him well for twenty five years. So
Speaker 1: it's kind of hard to give you just a snapshot
Speaker 1: of Bill because my life experience with Bill is a
Speaker 1: movie from an unemployed kid in nineteen nine, uh to
Speaker 1: literally last year when I suited up one more time
Speaker 1: at his personal request as a personal friend for four
Speaker 1: months last year. So it's a very long, uh movie
Speaker 1: with me, A wonderful movie. Uh. He is a fascinating person.
Speaker 1: Incredibly smart, uh sometimes incredibly stubborn, right I get that sense.
Speaker 1: Also a absolute huge heart, but has it exceedingly well.
Speaker 1: He told us some really interesting stories about walking around,
Speaker 1: you know, Newport Beach in the nineties and the two
Speaker 1: thousands and people asking him, Hey, Bill, what do we
Speaker 1: do with our money, and he would stop and say,
Speaker 1: look at this fun this is something that makes might
Speaker 1: make sense to you. He seems very accessible to people,
Speaker 1: very uh, very real. You also worked with him in
Speaker 1: Muhammad Alarian. What's it like having to really smart outsized
Speaker 1: personalities and you're kind of in the middle. How is
Speaker 1: that as an experience? I know both men exceedingly well,
Speaker 1: and both men are close personal friends of mine. They're
Speaker 1: exceedingly different, and I think that's why there marriage and
Speaker 1: that's what it was lasted for as long as it
Speaker 1: did very effectively, uh, by any measure that was. I
Speaker 1: know everybody focuses on the acrimonious divorce, but that was
Speaker 1: a tremendously successful period in pimco's history. It really really was.
Speaker 1: Mohammad came back from Harvard uh, and that was right
Speaker 1: before we went into the men Sky moment. We were prepared, UH.
Speaker 1: We had our risk management and order UH. And for
Speaker 1: the following number of years. UH, it was truly Camelot.
Speaker 1: So the one real important question I have to ask
Speaker 1: about PIMCO. Their growth corresponded with a tremendous bond bull market,
Speaker 1: a thirty plus year bond bull market, but every other
Speaker 1: bond manager had the same wind that at their back.
Speaker 1: What did PIMCO do that allowed them to capitalize on
Speaker 1: that market so much better than just about everybody else?
Speaker 1: Thank There a lot of factors. First and foremost is
Speaker 1: the pure genius of the founders. And there were three founders,
Speaker 1: not just Gross, but Jim Muzzy and Bill Podlick. Bill
Speaker 1: Podlick was an amazing businessman, Jim Muzzy, they're all three alive.
Speaker 1: Jim Muzzy is an amazing client man and marketing man,
Speaker 1: and Bill Gross is an amazing investor. So from the
Speaker 1: beginning of the firm, they had a division of labor
Speaker 1: is you run the business, you run the clients, and
Speaker 1: I run the money. Uh. And so therefore there was
Speaker 1: a clear articulation of whose job was whose job, And
Speaker 1: the three men who ran the place from the beginning
Speaker 1: did an extraordinary job of doing their jobs and cooperating.
Speaker 1: So I think the part of it is the genius
Speaker 1: of the organizational structure, sure, and the three men who
Speaker 1: were the founders. I think that's hugely important because I
Speaker 1: look at a lot of other competitors and they've never
Speaker 1: really quite grasp that it is a three part business,
Speaker 1: and that you can be really good at one part
Speaker 1: but maybe not the other two. So I think that
Speaker 1: is a key factor, another factor, And here I simply
Speaker 1: have to take my hat off to Bill Gross. Uh.
Speaker 1: He's brilliant. Uh. He is a macro thinker. Uh. And
Speaker 1: also he is a very good marketer. So in the
Speaker 1: last minute we have, let me ask you this related question.
Speaker 1: Did it become harder and harder to keep delivering the
Speaker 1: sort of performance numbers the firm became known for as
Speaker 1: the size uh continue to grow or was that just
Speaker 1: something that had to be dealt with that everybody deals
Speaker 1: with as they grow. Bill has spoken to this, and
Speaker 1: I think you spoken the truth. By definition, it gets
Speaker 1: harder the bigger you are. You're listening to Masters in
Speaker 1: Business on Bloomberg Radio. My special guest this week is
Speaker 1: Paul McCulley. He was chief economist and part of the
Speaker 1: investment committee at PIMCO for quite a long time. Let's
Speaker 1: talk a little bit about this global economy which seems
Speaker 1: to be a little bit influx. First question, inflation, disinflation
Speaker 1: or deflation from a global perspective of the predominant tail wind?
Speaker 1: Is disinflation if not deflation. Describe the difference between the
Speaker 1: two for listeners who may not pick up the nuances
Speaker 1: between them. Disinflation is a slow down in the rate
Speaker 1: of inflation, so rices are still rising, but rising at
Speaker 1: a slower rate. Where deflation is actually a fall in prices.
Speaker 1: And we're experiencing deflation and a lot of commodity with
Speaker 1: everyone knowing about oil. That's deflation, whereas disinflation would be
Speaker 1: just a very very slow and slower rate of increase,
Speaker 1: slowing inflation as opposed to falling process. Perfect example, suppose
Speaker 1: you've got a three percent raise last year and this
Speaker 1: year you've got a one percent raise. You experience disinflation.
Speaker 1: You went from a three percent raise to a one
Speaker 1: percent raise. If your boss cut your pay by three percent,
Speaker 1: you experienced deflation, actual deflation. So you you mentioned oil,
Speaker 1: let's talk about it. Oil peaked last year at a
Speaker 1: hundred and twelve dollars. It's now running in about forty
Speaker 1: three dollars. That's a six decrease. So the two questions
Speaker 1: that everyone wants to know, what are the causes of this?
Speaker 1: I don't know if that's all that challenging of a question.
Speaker 1: With the dollar rate multi year eyes, massive supplies come
Speaker 1: online and softening of demand. The more important question is
Speaker 1: what are the implications of this failing oil price? Oil price?
Speaker 1: What does this mean to the US, What does it
Speaker 1: mean to countries like China and the global economy? And
Speaker 1: feel free to completely disagree with my causes, No, I
Speaker 1: think I agree with your causes. I would put the
Speaker 1: dollar at the low at the low end of my list.
Speaker 1: At the highest end is the fact that at a
Speaker 1: hundred dollar plus for oil and technology, you had an
Speaker 1: incredible economic incentive to increase supply, and we did, and
Speaker 1: huge we did, and huge and so and supply outstrip demand.
Speaker 1: OPEC sucked it up, Saudi Arabia sucked it up and
Speaker 1: kept the price up there. But ultimately the sheer force
Speaker 1: of increased supply meant that if Saudi Arabia continued the
Speaker 1: game and tried to defend it at a hundred, they
Speaker 1: would not be in the all production business anymore. Uh.
Speaker 1: So that was the underlying economics micro economics of that
Speaker 1: is that a hundred didn't work. Uh And I don't
Speaker 1: know if forty works, but clearly forty is more likely
Speaker 1: to work than a hundred. And now we have my
Speaker 1: ran coming online as well. How what's that going to
Speaker 1: do to it? It's certainly is relative to where we
Speaker 1: were going to increase supply. And global demand has been
Speaker 1: exceedingly weak because global economic activity. Global agree demand has
Speaker 1: been weak ever since the financial crisis for two thousand
Speaker 1: and eight UM. And I think demand for oil really
Speaker 1: is more a function of growth than it is the price. Uh.
Speaker 1: And right now, the demand side is impacted negatively by
Speaker 1: weak growth. And you've got supplies out of a flood.
Speaker 1: So you put two and two together and you get
Speaker 1: forty buck oil. There you go. And you know, when
Speaker 1: you're growing robustly, it almost doesn't matter what the price
Speaker 1: of oil is. We needed bring it in, but let's
Speaker 1: just just get it in here knowing thinks twice about it. Yeah,
Speaker 1: and walk terms uh And the short run, the demand
Speaker 1: for oil is a whole lot more income elastic than
Speaker 1: it is price elastic. So let's let's talk about So
Speaker 1: we've seen, for lack of a bit of word punk
Speaker 1: growth ever since the crisis. The US seems to be
Speaker 1: leading in the recovery, behind US as Japan. Behind Japan
Speaker 1: is Europe. What's it gonna take to see global growth returned?
Speaker 1: To forget five percent of four percent, how about three
Speaker 1: percent in the United States and three percent in Europe.
Speaker 1: I'm not looking for a return to robust global growth
Speaker 1: for a long long time, and there are several reasons
Speaker 1: for that. First and foremost is my diagnosis of the
Speaker 1: breaking growth going back to two thousand and eight and
Speaker 1: the years prior to the financial crisis. You had a
Speaker 1: financial sector boom. You had a private sector borrowing boom.
Speaker 1: We all know about it in the housing sector here,
Speaker 1: but also the Club Med countries in Europe had a
Speaker 1: massive private sector boom and borrowing, so you were driving
Speaker 1: growth with increased private leverage. Every since then, the private
Speaker 1: sector has been de levering, either outright or slowing its
Speaker 1: pace of debt accumulation. So you've had a negative from
Speaker 1: the private sector because of de levering. Now, logic, good
Speaker 1: old fashioned Keynesian logic from where I live and breede,
Speaker 1: would suggest if the private sector is in force de levering,
Speaker 1: the government sector should go the other direction in order
Speaker 1: to maintain adequate aggregate demand. You're listening to Master in
Speaker 1: Business on Bloomberg Radio. My special guest this week is
Speaker 1: Paul McCulley. He served as chief economist, head of one
Speaker 1: of the bond desks, and member of the investment committee
Speaker 1: at PIMCO for many years. Earlier, we started talking about
Speaker 1: Europe and that leads to the Federal Reserve. So let's
Speaker 1: let's hold off on Europe and Japan for that matter,
Speaker 1: and talk about the financial crisis here and the Federal
Speaker 1: reserves response. So, first question, what did the FED get right?
Speaker 1: What did they do right that a lot of people
Speaker 1: don't seem to really understand. I think the Fed has
Speaker 1: done a huge amount of things that are right every
Speaker 1: since the financial crisis. I can argue with some of
Speaker 1: the technical details of this, that or the other, but
Speaker 1: the broad thrust of monetary policy every since the financial
Speaker 1: crisis has been spot on. So zero interests policy, quantitative easing,
Speaker 1: all of the regulation they've put in the place, stress
Speaker 1: tests for the banks. You're you like all of that. Yeah,
Speaker 1: I'm a big believer that they did a mosaic of
Speaker 1: good things. And remember, the regulatory side of things is
Speaker 1: not just the Federal Reserve. You know, Frank, you have SEC,
Speaker 1: you have a whole bunch of other the f D,
Speaker 1: I see, there a whole bunch of other regulatory agency yeah, exactly.
Speaker 1: We now have an f sock. So therefore we have,
Speaker 1: you know, this collection of regulatory agencies and the FEDS
Speaker 1: part of that. But from pure monetary policy, I think
Speaker 1: they have been spectacular. And I want to speak to
Speaker 1: quantitative easing UM. And quantitative easing has two impacts. One,
Speaker 1: which is what the market tends to focus on, is
Speaker 1: the sheer supply demand effect that the balance sheet balance
Speaker 1: their buying duration out the marketplace, which was you know,
Speaker 1: the uh uh, the notion that somehow they're gonna bloom
Speaker 1: their balance sheet and we're gonna have you know, hyper inflation,
Speaker 1: those ups of the dollar, hyper inflation, five thousand dollar gold,
Speaker 1: all of that nonsense. And that's the only thing I
Speaker 1: can say politely about it. That we heard six years
Speaker 1: ago was nonsense. And those who were spouting it, oh
Speaker 1: the world and apology and they old Ben Bernankee personally,
Speaker 1: an apology. When you're in a liquidity trap, uh, you
Speaker 1: go to zero for interest rates, nothing much happens in
Speaker 1: the private sector because the private sector is delevering. So
Speaker 1: you do what's next, which is quantitative easing, which has
Speaker 1: an impact in directly pulling down UM long term interest rates.
Speaker 1: But the bigger impact or quantitative easing is a commitment
Speaker 1: device for forward guidance. Because forward guidance is a new
Speaker 1: tool that the FED has been using. Word zero and
Speaker 1: we're gonna stay at zero for an extended period of
Speaker 1: time or until we do this quote. That was literally
Speaker 1: the language that the US so because the bond market
Speaker 1: is nothing more than a forward curve on expected Fed
Speaker 1: policy plus a risk premium. So therefore forward guidance is
Speaker 1: reinforced by quantitative easing. And if there was ever any
Speaker 1: question about that, it was last year with the whole
Speaker 1: taper UH issue and the Fed said, well, we're thinking
Speaker 1: about tapering, and the market went crazy and said, the
Speaker 1: next thing that's gonna happen is the Fed is gonna
Speaker 1: hike short term interest rates UH, And the Fed had
Speaker 1: to do a great deal of communications work to say no,
Speaker 1: we're still at zero. Taper means tapering off the purchases
Speaker 1: of bonds, not tapering away from zero. Right. But but
Speaker 1: the fact that we had that experience underscores the notion
Speaker 1: that the power for me anyway of que was as
Speaker 1: a commitment device. As long as we're doing que que,
Speaker 1: there is zero discussion of getting off for zero. So
Speaker 1: the moment they said we're gonna taper, que people said,
Speaker 1: well now we need to start contemplating when they're gonna
Speaker 1: get off a zero. And the FED had the massage
Speaker 1: the market psychic on the whole thing. So I think
Speaker 1: zero is right. I think Quee was right. I think
Speaker 1: the regulatory things they did were right. Working in tandem
Speaker 1: with Treasury on TARP was right. Uh, they saved us
Speaker 1: from another great depression? Is your position? Absolutely? And I
Speaker 1: hear by the way, I hear heads exploding all over
Speaker 1: the audience listening. Um, So let me ask you two
Speaker 1: questions and see if those people can settle down that
Speaker 1: are related to this. First, we have the September meeting
Speaker 1: coming up. Should we still be at zero today? Should
Speaker 1: we have moved off of zero? Previously hard question. I
Speaker 1: don't know what the FOMC is gonna do in September.
Speaker 1: The case for getting off of zero is not because
Speaker 1: we have an incipient inflationary problem. It is simply not.
Speaker 1: I look at getting off zero as declaring victory and
Speaker 1: getting out of the liquidity trap, or put differently, a
Speaker 1: valedictory of graduating UH. With the FED being at the
Speaker 1: top of the class getting out off of zero uh uh.
Speaker 1: And actually I think the FED should get extraordinary applause
Speaker 1: for getting us out of a liquidity trap, because the
Speaker 1: textbook that I studied and you studied set in a
Speaker 1: liquidity trap when the private sector is delevering, you should
Speaker 1: use physical policy, uh to stimulate aggregate demand. That that
Speaker 1: was the argument that since Congress had abandoned their traditional role.
Speaker 1: You look at the two thousand two thousand one recession,
Speaker 1: there was a huge fiscal stimulus, huge task cutch, huge
Speaker 1: spending increases. They were a wall. The FED was pretty
Speaker 1: much the only game in town, weren't they They were
Speaker 1: the only game in town, and they didn't want to be.
Speaker 1: But if you're the only game in town and you
Speaker 1: have a congressional mandate to avoid another depression, you do
Speaker 1: what you can do. It doesn't mean that you like it.
Speaker 1: I don't think Ben Bernanke liked doing some of the
Speaker 1: things that he had to do, but effectively it was
Speaker 1: the only thing that he could do consistent with his mandate.
Speaker 1: So let's take the counter factual on that. Assume Bernanke
Speaker 1: listened to people who said the FED was going to
Speaker 1: cause hyperinflation. Collapse of the dollar and five thousand dollar gold.
Speaker 1: Assume he said they were right, and say, you know what,
Speaker 1: Taylor rule says, we should be at two and a
Speaker 1: half or three and a half percent UM fed funds
Speaker 1: rate and there's no quee. What would have happened then,
Speaker 1: Who've had a modern day depression similar to the thirties nine.
Speaker 1: I don't know if it'd be similar to the thirties.
Speaker 1: That's why I said modern day because the dominant thing
Speaker 1: back during the thirties is we didn't have deposit insurance,
Speaker 1: so we had a total collapse of the banking system.
Speaker 1: But it would have been a modern day depression that
Speaker 1: would have been self feeding and would have had elements
Speaker 1: of what's been going on UH in the last five
Speaker 1: or seven years. And Southern Europe so are unemployment rate
Speaker 1: peaked at around ten percent or underemployment rate peaked at
Speaker 1: around the Great Depression unemployment? What would have happened this
Speaker 1: time around UM had there been no Zerpa, no quee.
Speaker 1: And again, those of you whose heads are about to explode,
Speaker 1: I apologize again. The counter fact is really difficult. Unemployment
Speaker 1: would have been dramatically higher. No problem with that whole notion,
Speaker 1: because when we were at the depths of our recession,
Speaker 1: we were not self correcting, we were self feeding. It
Speaker 1: took meaning it's a vicious cycle down exactly. And remember
Speaker 1: the FED went to zero uh and started que four months,
Speaker 1: five months before the stock market finally found a bottom
Speaker 1: uh in March of nine. Uh. So I mean, normally,
Speaker 1: do you think in terms of Wall Street responds quitting
Speaker 1: pretty quickly to you know, warm and fuzzies from the
Speaker 1: Central Bank. But if it takes that long for Wall
Speaker 1: Street to recognize they've been given a gift, uh, it
Speaker 1: tells you something is seriously wrong with the underlying economy.
Speaker 1: So it's that plus the panic that was there really
Speaker 1: fed upon Yeah, it was. It was you know, it
Speaker 1: was truly a nefarious downward spare that the private sector
Speaker 1: simply did not have the ability to deal with itself.
Speaker 1: The thing that stood out to me at that time
Speaker 1: is when you have the CEOs of companies like General
Speaker 1: Electric and Walmart and Ford calling the White House saying
Speaker 1: we're not going to make payroll because our credit sources
Speaker 1: have disappeared. You got to do something that is a
Speaker 1: pretty serious situation. Yeah, it's it's it had elements if
Speaker 1: you will, of what happened during the Great Depression UH
Speaker 1: in the money market sector, because remember one of the
Speaker 1: programs that UH the Federal Reserve did was the commercial
Speaker 1: paper Funding Facility. The commercial paper market, which is where
Speaker 1: big companies and small companies in a great deal of
Speaker 1: the shadow banking system as well, was funding itself literally
Speaker 1: shut down UH and GE is one of the biggest
Speaker 1: issuers of commercial paper at that juncture and existence. So
Speaker 1: when you shut down the commercial paper market, you're talking
Speaker 1: about shutting down access to working capital, which is payroll,
Speaker 1: which is very similar to what happened back in the
Speaker 1: nineteen and thirties. So rather than having a run on
Speaker 1: the conventional banking system, we had a run on the
Speaker 1: shadow banking system, and the FED had to stop it
Speaker 1: or else they would have continued to self feed us
Speaker 1: into a depression. So if you want to hear our
Speaker 1: conversation continue, be sure and check out our podcast extras
Speaker 1: on Bloomberg dot com, SoundCloud and Apple iTunes. Check out
Speaker 1: my daily column on Bloomberg View dot com and follow
Speaker 1: me on Twitter at Rid Halts. I'm Barry Ridhults. You're
Speaker 1: listening to Masters in Business on Bloomberg Radio. Welcome to
Speaker 1: our podcast extras. I'm very Holton my guest today. I
Speaker 1: say this every week, but it's really true. My special
Speaker 1: guest this week is Paul McCulley. Paul and I um
Speaker 1: first met actually up in Maine on a fishing trip.
Speaker 1: I want to say a decade ago. Is that right?
Speaker 1: Sounds right? I don't know if you recall that particular meeting,
Speaker 1: but we were not feeling a whole lot of pain,
Speaker 1: you especially, and um, let's see if I can refresh
Speaker 1: your recollection with this. You had mentioned you only went
Speaker 1: to a couple of conferences each year, that one in
Speaker 1: Jackson Hole, and you gave me a reason why, which
Speaker 1: had something to do with a trillion dollars worth of bonds.
Speaker 1: And my answer to you was, yeah, but it's fixed income.
Speaker 1: That stuff runs itself, and you exploded at me. I
Speaker 1: can't remember what my wives acre response was, but I'm
Speaker 1: sure I had one. It's Scott Scott Frew at Rockingham Capital.
Speaker 1: Can can probably fill in the blanks, but I've I've
Speaker 1: known you ever since then. It's always, uh, it's always educational,
Speaker 1: it's always fun, um speaking with you. I always learned
Speaker 1: something new before the break and in the last I
Speaker 1: shouldn't say before the break. In the last section on radio,
Speaker 1: we were talking about the FED and what the FED
Speaker 1: got right and what the FED got wrong. And there
Speaker 1: are a lot of people who really are infuriated at
Speaker 1: what the FED has done. And they're promising, promising us
Speaker 1: for now, for five or six years, but it's coming.
Speaker 1: Just because it hasn't happened yet doesn't mean it's not
Speaker 1: gonna happen. They're promising us a giant disaster. Why are
Speaker 1: they wrong? Lots of economic reasons that they're wrong. Uh,
Speaker 1: notably that monetary expansion as well as zero interest rates
Speaker 1: are not going to have a huge stimultive effect on
Speaker 1: the economy and liquidity trap. So I can give you all.
Speaker 1: And that's the same reason why there's no hyper inflation.
Speaker 1: Wages are flat to fall in commodity prices are falling.
Speaker 1: The time to think about inflation was when the dot
Speaker 1: from oh one to oh eight. I have a chart
Speaker 1: up on the website I've I've posted this like every
Speaker 1: other year for ten years. From oh one to oh eight,
Speaker 1: the US dollar fell for coincidentally, apparently oil went from
Speaker 1: one fifty, food went through the roof milk meat. Everything
Speaker 1: went crazy in a collapsing dollar environment. Now the dollar
Speaker 1: is the cleanest shirt in the hamper. I think that
Speaker 1: was Bill's uh phrase. So, how are you going to
Speaker 1: have hyper inflation in that environment? You simply are not
Speaker 1: forget hyperinflation. How you gonna have the FEDS struggling to
Speaker 1: get up to its two percent target? So as a
Speaker 1: as an economist, I've always been fuddled, quite frankly at
Speaker 1: those at the uh extreme and I call them the extreme.
Speaker 1: Uh I guess it's probably grounded in monitorism. You print money,
Speaker 1: there's going to be inflation without understanding the context in
Speaker 1: which you are printing money. Uh So, it's really befuddled
Speaker 1: me as an economist that other side of the of
Speaker 1: the divide. As a money manager, it was delightful because
Speaker 1: you just knew the guy was categorically wrong. Created a
Speaker 1: lot of opportunities. Absolutely so your personal portfolio, not old
Speaker 1: gold and silver miners that we're telling me you want
Speaker 1: a lot of physical goal, don't you? You have bars
Speaker 1: stacked away, not not any no, no programs, no, no,
Speaker 1: not a uh so uh so, actually just see I
Speaker 1: could feel the hate mail coming and we're not even live,
Speaker 1: so I so economically, I've never been able to understand
Speaker 1: that camp. But thinking in terms of human nature, some
Speaker 1: may call it, you know, behavioral economics. UM I do
Speaker 1: have a thesis, let's hear it, which is that people
Speaker 1: looked at the huge expansion in the Federal reserves balance sheet.
Speaker 1: We also those charts with a giant hockey stick, they
Speaker 1: went from a trillion to four trillion dollars. That they
Speaker 1: look at that chart as the moral equivalent of a
Speaker 1: fat man in speedos. It's just wrong. It's just wrong.
Speaker 1: I can't tell you why it's wrong, but it's just wrong.
Speaker 1: The fat man in speedos. I resemble that remark, although
Speaker 1: although I'm quite sure you would be shot by your
Speaker 1: family if you ever showed up in speedos, and I
Speaker 1: would too. By the way, if when you go to
Speaker 1: beaches in the Mediterranean in Europe, like at least in
Speaker 1: the United States, people where the surfer shorts over there,
Speaker 1: it's speedos and those guys apparently, UH have a FED
Speaker 1: balance sheet of her own to worry about. So so
Speaker 1: let's get back to what these guys are are getting wrong.
Speaker 1: So it's not economically defendable. We haven't seen it in
Speaker 1: the real world. Are we is that theory? Is that thesis?
Speaker 1: And I'm asking you an impossible question. Is that thesis
Speaker 1: gonna just eventually fade away? Or are these guys consistently
Speaker 1: you know, the gold pops up every twenty years as
Speaker 1: an investment and then goes away for a while. But
Speaker 1: if you catch it right, it's a fantastic trade. Actually,
Speaker 1: I think they will be perpetually wrong in their forecast
Speaker 1: of nefarious consequences. But I do think there's something that's
Speaker 1: important and this public discussion, if you will, which is
Speaker 1: the role of monetary policy in the mosaic of government
Speaker 1: and the role of monetary policy relative to fiscal policy
Speaker 1: see in microeconomic uh fine tuning. So so I think
Speaker 1: I think there's a lot of substance there. Uh. In fact,
Speaker 1: two of the very long ad plus page scholarly papers
Speaker 1: I wrote during my retirement years while I was at
Speaker 1: the g i C. We're on particularly this issue of
Speaker 1: the monetary physical policy mixing a liquidity trap. So I
Speaker 1: think I do understand, uh, a sense of resentment, if
Speaker 1: you will, that this institution that is ostensibly a political
Speaker 1: was the only game in town, uh and therefore had
Speaker 1: to play the role it did. Now I actually think
Speaker 1: that if I did a wonderful job of playing the
Speaker 1: role that was foisted up on them. Uh so those
Speaker 1: who were forecasting the opposite, we were wrong. But I
Speaker 1: hate the issue of where does monetary policy fit in
Speaker 1: the mosaic of overall government policy? Says, a legitimate source
Speaker 1: of discussion. So so let's let's talk about Lord Kens
Speaker 1: and his findings and why so many people don't seem
Speaker 1: to have learned the lessons he taught. And I look
Speaker 1: at it as a willful misunderstanding of Kings. I speak
Speaker 1: to a lot. I have a lot of conservative friends
Speaker 1: who insist the budget deficit is caused by KINSI and economics.
Speaker 1: And my answer is, well, yeah, if you only listen
Speaker 1: to the first half of it. The second half of
Speaker 1: it says, hey, in an expansion, the government should step
Speaker 1: out of the way and let the private sector take
Speaker 1: That's when you raise taxes, lower spending, balance the budget,
Speaker 1: and get out of the way. The politicians, though, don't
Speaker 1: want to do that. No, no they don't. But I've
Speaker 1: spent a lot of time, uh trying to figure out
Speaker 1: why Keynes is still a four letter word in a
Speaker 1: lot of circles, UH, when Keynesian policies have been precisely
Speaker 1: what ultimately have been employed to get us out of
Speaker 1: the liquidity trapping or shell being employed. And I have
Speaker 1: a thesis on this verry is that I think a
Speaker 1: lot of people, unfortunately, a lot of people in our
Speaker 1: business don't understand the difference between micro economics and macro economics.
Speaker 1: I think a lot of people in our business look
Speaker 1: at macro economics as simply the summing up of microeconomics.
Speaker 1: Micro economics being you know, old fashioned supply demand transaction
Speaker 1: on a transaction by transaction basis, the commodity pits you
Speaker 1: know in Chicago, the ultimate you know, micro economics. They
Speaker 1: haven't been replaced by algos yet, are they still? Actually
Speaker 1: I think they were done. Maybe they are. I haven't
Speaker 1: actually been on the pit in a long long time.
Speaker 1: But I think a lot of people think in terms
Speaker 1: of macro is simply the summing up of of micro.
Speaker 1: A whole lot more than that. And macro is not
Speaker 1: the summing up of micro. It is an entirely different,
Speaker 1: UH discipline, And macro is defined by the paradox of aggregation.
Speaker 1: And I'm getting wonky here, but this is hugely important.
Speaker 1: So listen. We have a wonky audience. If they're with
Speaker 1: us this latent to the podcast, they'll appreciate it. So
Speaker 1: explain what people don't understand about macro and explain what
Speaker 1: Keen's got right, and white people should listen to him. Okay,
Speaker 1: you have forty five minutes begin Actually I have a
Speaker 1: three R lecture on this one. But um, the key
Speaker 1: difference between micro and macro is what is rational for
Speaker 1: the individual. If all individuals do so at the same time,
Speaker 1: is irrational for the community, such as the paradox of thrift.
Speaker 1: The paradox of thrift is the textbook one that you
Speaker 1: would explain. It's that, Um, that is quite okay for
Speaker 1: you to rationally say I need to spend less and
Speaker 1: save more in balance my budget, etcetera, etcetera, etcetera. In fact,
Speaker 1: most of us have preached this to our children at
Speaker 1: some juncture. You know the you know the virtues of thrift.
Speaker 1: You know God and all this sort of thing. The
Speaker 1: virtues of thrift. However, it is a fact that one
Speaker 1: man spending as another man's income. So therefore, if we
Speaker 1: all decide to spend less and save more at the
Speaker 1: same time, we collectively kill our elective income, which is
Speaker 1: the fountain from which savings flow. Another example, that's perfectly rational.
Speaker 1: Who could disagree with that? But people don't want to
Speaker 1: go to that logical conclusion because then you were saying, well,
Speaker 1: are you saying that thrift is a bad thing? Economic thrift,
Speaker 1: not virtuous thrift, not and not biblical thrift. We're talking
Speaker 1: about exactly, and and quite frequently religion and economics get
Speaker 1: uh melded. Quite quite frequently. Economics is a religion, and
Speaker 1: it becomes a problem, absolutely absolutely, which brings us to
Speaker 1: the naked hatred of Kine's How did that come about?
Speaker 1: I don't understand it. He seems to make sense. So wait,
Speaker 1: when the economy slows down enough and aggregate demand is weak,
Speaker 1: the government replaces private sector spending. And when the opposite happens,
Speaker 1: the government steps out of the way and allows private
Speaker 1: sector spending to do what if it wants that his
Speaker 1: reas shown us, that's a pretty reasonable model to operate under.
Speaker 1: The more the older I get, the more I accept
Speaker 1: the proposition that self evident truths are frequently not self
Speaker 1: evident to the masses. Well, write a book, but that's
Speaker 1: that's that's absolutely true. Write a book and you're like, Okay,
Speaker 1: this is now resolved, And the biggest frustration of writing
Speaker 1: a book is now that I've settled this question, discovering
Speaker 1: that you really haven't settled that question. I've only written
Speaker 1: one book in my lifetime, and I don't think I
Speaker 1: will write another one. That was actually around the time
Speaker 1: I met you in two thousand and six, which was
Speaker 1: when I had an incredible day job, so it was
Speaker 1: quite a task to try to produce a book at
Speaker 1: that juncture. So I don't anticipate writing another one. Now
Speaker 1: you have all the spare time in the world, you
Speaker 1: should be cranking at a book a year. Our friend
Speaker 1: John Wolden writes a book a month. You should keep
Speaker 1: up with John. I have no desire to do that whatsoever.
Speaker 1: And I think in terms of of I think the
Speaker 1: single best evangelist for right thinking in macro huh is
Speaker 1: Paul Krugman. And Paul does an absolutely fantastic job of
Speaker 1: trying to explain the difference between micro and macro, trying
Speaker 1: to explain the I S l M model, and Paul
Speaker 1: is incredibly articulate and prolific, and he pulls his hair
Speaker 1: out trying to convert the un convertible. See we've had
Speaker 1: Paul as a guest. I don't think he pulls his
Speaker 1: hair out. I think he understands this. By the way,
Speaker 1: send your hate mail to Paul McCulley at pimco dot com.
Speaker 1: That's Paul McCulley at pimco dot com. Actually it will
Speaker 1: be rejected. Oh no, it's Paul dot McCulley at pimco
Speaker 1: dot com. So, um, look, I mean, if Paul Krugman
Speaker 1: can't make handway in explaining the obvious, that I have
Speaker 1: to bow to the impossibility of doing it. Because there's
Speaker 1: nobody better at the pen than Paul. So so you know,
Speaker 1: we were at an event once and we were talking.
Speaker 1: I do the weekly column. I do to two personal
Speaker 1: finance columns a month for the Washington Post. He does
Speaker 1: two columns a week for the New York Times. And
Speaker 1: I asked him how much time do you put in
Speaker 1: each column, thinking he's gonna say an hour or two,
Speaker 1: so because I eight to twelve hours, and I fell
Speaker 1: off my chair and I'm like, I got a lot
Speaker 1: of work to do. So he when the reason he
Speaker 1: his columns are as tight and well written and he
Speaker 1: really pounds away on less than a thousand words, and
Speaker 1: he's spending twelve hours on him. It's it's amazing to me.
Speaker 1: It is much more difficult to write. I apologize for
Speaker 1: the length of the letter. I didn't have time. Yeah,
Speaker 1: it's it's absolutely case. So since we're in in the
Speaker 1: wonky phase of the show, what's the difference between Kinsianism
Speaker 1: and neo Kinsianism For people who may not understand the
Speaker 1: nuances there, including me, neo kinesian Ism, it's simply Kin's
Speaker 1: updated for new information, new techniques of analysis. There's not
Speaker 1: a whole lot of difference. I'm sure that you could
Speaker 1: have an academic to debate. You know, Smith is the
Speaker 1: guy to fine tune this, to define tune the whole
Speaker 1: third thing is, you know what constitutes a fat man
Speaker 1: and speed us. I mean, I'm sure you could have
Speaker 1: people debate the whole issue. But you know, I kind
Speaker 1: of know when when I see one that that that
Speaker 1: is the same definition that we had of of pornography.
Speaker 1: So um, so we let's bring this back to the
Speaker 1: to the fed um or or even more interestingly, let's
Speaker 1: let's talk about the financial crisis. Why what should have
Speaker 1: been the response from Congress, and the counter argument to
Speaker 1: saying we we didn't have a Keensian response. You had
Speaker 1: an eight hundred billion dollar TARP, you had all sorts
Speaker 1: of bailouts for different entities, You had the f D
Speaker 1: I C and the FED working over time. Can can
Speaker 1: you make the argument that we had a traditional Keensian response,
Speaker 1: you had elements of a Kensian response. Actually in the
Speaker 1: phiscal stimulus package. TARP was not part of the piscal stimulus,
Speaker 1: so it's tart plus and and Krugman has argued that
Speaker 1: the stimulus was too low by an order of magnitude,
Speaker 1: and I certainly agree with him on that. I mean,
Speaker 1: Larry Summers used to you know, talking temporary, uh timely
Speaker 1: and targeted the three t s uh and and this
Speaker 1: was none of that. It may have been timely, but
Speaker 1: unfortunately it was temporary. I'm not sure it was particularly
Speaker 1: well targeted. Uh So it's better than nothing, just barely,
Speaker 1: but but just barely. And then in two thousand and
Speaker 1: ten we went the other direction when the Tea Party
Speaker 1: hijacked the country. So, yeah, the sequester we had, which
Speaker 1: was you know, absurdity square, But isn't that what's going on?
Speaker 1: Today in in Europe. Aren't adity squared? That's all I
Speaker 1: can say. Man, so absolutely no since whatsoever? And that
Speaker 1: you know, it's recommending a starvation dot for an anorexic.
Speaker 1: But it makes no sense. It's working out for Greece,
Speaker 1: isn't it is? Aren't they doing fantastic? I mean, Greece
Speaker 1: is doing well right that they're on their third bail out.
Speaker 1: They only have unemployment. It's not the worst thing in
Speaker 1: the world. And um, their GDP has been what down
Speaker 1: their GDP? This is fascinating to me. The g d
Speaker 1: HE of Greece is now worse than the GDP of
Speaker 1: the United States in the twenties and thirties, in the
Speaker 1: in the Great Depression, post crash Great Depression. Someone said
Speaker 1: that I haven't verified it, but I don't doubt it
Speaker 1: for a second. We don't need any more data to
Speaker 1: support the thesis that austerity and all liquidity trapp is stupid. Uh,
Speaker 1: you're letting facts get in the way of a narrative.
Speaker 1: And and those people don't really care. Um, I mean,
Speaker 1: you know, maybe you know, we just have to go
Speaker 1: back to you know, Forrest Scump. You know, stupid is
Speaker 1: a stupid dues. So if you could get the e
Speaker 1: c B, if you were speaking to the e c B,
Speaker 1: what would you say to them? Actually, I had no
Speaker 1: particular problem with the ECB doing what they're doing right now. Uh.
Speaker 1: The e c B is what about Angela Merkel? Then?
Speaker 1: Is she the one you need to chastise because people
Speaker 1: thought Bush was giving a massage, but I think he
Speaker 1: was trying to strangle her. Got no comment on that.
Speaker 1: What I will say is that the German perspective that
Speaker 1: everybody should be just like in Germany is a paradox
Speaker 1: of aggregation, because if everybody was just like in Germany,
Speaker 1: then we would start to have to trade with Mars
Speaker 1: because Germany runs chronically a surplus on trade everybody else
Speaker 1: and double entry bookkeeping requires. If one person runs a surplus,
Speaker 1: somebody else has got to run. It's a zero sum games,
Speaker 1: a zero sound games. So if Germany says everyone should
Speaker 1: be like us, I want to know where the other
Speaker 1: side of the trade is. Uh. Germany actually absorbs global
Speaker 1: aggregate demand as opposed to contributing to it. The theory
Speaker 1: that's been out there for a while is that the
Speaker 1: Eurozone and the euro have essentially worked to the ben
Speaker 1: benefit of Germany. Um, someone called it Berlin's revenge, and um,
Speaker 1: you know, as much as their heart on Greece, this
Speaker 1: has really been something that was constructed by and for
Speaker 1: the Germans more than anything else. I think the better
Speaker 1: part of valor would for me, would be not to
Speaker 1: comment on that. What I will say is that the
Speaker 1: Euro is a lot weaker then would be the case
Speaker 1: if the club Med countries were not in the Euro,
Speaker 1: which euro is weaker. So, in other words, if we
Speaker 1: lose Italy, Greece, excuse me, that the Euro would be
Speaker 1: a lot stronger than it is right now. And so
Speaker 1: Germany benefits from the fact that its currency is drugged
Speaker 1: down by its neighbors. So the exporting machine called Germany
Speaker 1: benefits in some respects because there are other people in
Speaker 1: the house, uh, that are making their currency weaker than
Speaker 1: would otherwise be the case. You know, and I think
Speaker 1: we've all played, you know, the counterfactual game in our brain.
Speaker 1: Suppose you had, you know, the weaker countries of the
Speaker 1: Euro exit and that's not a forecast. I don't think
Speaker 1: they're gonna happen period, not even Greece. No, that would
Speaker 1: not be my base case scenario. But uh, if they
Speaker 1: were to exit and effectually the euro became the mark,
Speaker 1: how much stronger would it be in The answer is much,
Speaker 1: a lot much, and that would not be great for
Speaker 1: Germany's export business exactly, although you know that's the only
Speaker 1: thing I would say is I think they are the
Speaker 1: beneficiaries of a weaker currency than would be the case
Speaker 1: in the absence of the problems down south. So so,
Speaker 1: how does let's stay in Europe? So how does the
Speaker 1: European problems play out? What does grease ever a cover?
Speaker 1: Is there ever gonna be The real question is is
Speaker 1: there ever gonna be a haircut for the lenders to
Speaker 1: these insolvent nations that will or a default that allows
Speaker 1: them to move You know, Argentina, South America, Mexico. You
Speaker 1: look at all the defaults we've seen over the decades.
Speaker 1: It's the first step to healing yourselves. All Right, we
Speaker 1: get rid of these debts. Now we're gonna have to
Speaker 1: pay more to borrow, but at least we're out from
Speaker 1: under that. Let's reboot, let's start over. Is that a
Speaker 1: possibility in Greece or are they just saddled with more
Speaker 1: debt than then? I wish I could come up with
Speaker 1: a good scenario for Greece, I really do. Um, greg'sit
Speaker 1: and the dragma, that's that's my scenario. Yeah, and I
Speaker 1: think we've all you know, run that through our brains
Speaker 1: and say, you know it's it's it's held between you know,
Speaker 1: for the next two years to get there, because you
Speaker 1: would actually take two years to re establish a currency
Speaker 1: in a banking system and all that sort of stuff
Speaker 1: will be a two year period of hell. But on
Speaker 1: the other side there may be a story of redemption.
Speaker 1: But I don't think that no, no, no one makes
Speaker 1: it pain. And I don't think there would be quote
Speaker 1: unquote a an official type of default because that would
Speaker 1: be too much embarrassment for too many people. Um So
Speaker 1: I think it's uh more of a round about type
Speaker 1: of default. And any example, suppose when you graduated from
Speaker 1: college you had a buddy who owed you two hundred bucks. Uh,
Speaker 1: you could declare an event of default and say, hey, pal,
Speaker 1: you owe me two hundred bucks. Were graduating, we're out
Speaker 1: of here, give me my two hundred bucks. And if
Speaker 1: you're not, I'm gonna take your car. You know, that
Speaker 1: would be declaring an event of default. I can say Harry,
Speaker 1: you know, when you got the two hundred bucks, you know,
Speaker 1: give it back to me. You know, at your thirty
Speaker 1: year reunion, Harry gives you the two hundred bucks. Now,
Speaker 1: was there a default there, Well, technically yes, but was
Speaker 1: eventually repaid it. It was worth the tenth of what
Speaker 1: it started. Yeah, exactly. So therefore Harry kept his car.
Speaker 1: There was no embarrassment, you know, and you you know,
Speaker 1: had a loan, you know, for thirty years for turner back.
Speaker 1: The lenders had. The lenders absorbed the loss just over time,
Speaker 1: just over Yeah. But but but they save face by
Speaker 1: doing it this way. Economically, we always conclude, well, let's
Speaker 1: just you know, quit the pretense game and get here.
Speaker 1: But in the political world, pretense there's a currency. Uh.
Speaker 1: Interests is a currency. So so pretense has to be managed, exploited,
Speaker 1: uh and practiced. Uh. And you see it there. We
Speaker 1: actually see it a little bit south of here, down
Speaker 1: in uh Washington, d C. I mean, when you see
Speaker 1: a corgnressman stand up and say about some buddy on
Speaker 1: the other side of the out my good friend, what
Speaker 1: do you think, Barry? I don't think they're really friends.
Speaker 1: That's that's my take. Um, you know, the old joke
Speaker 1: is a conservative is a liberal who got mugged. A
Speaker 1: cynic is an optimist who's been around for a while.
Speaker 1: So the same thing. So let's shift a little bit.
Speaker 1: Let's talk about Japan. Uh, the United States have wrapped
Speaker 1: up our que program. It's now more or less running off,
Speaker 1: which is a question I keep getting from people. For you,
Speaker 1: I'm gonna say, come back to that. What so Japan
Speaker 1: after gee, it seems like decades it has been began
Speaker 1: a quee program and their economy started to tick up,
Speaker 1: their infrash inflation rate in a tiny manner, ticked up.
Speaker 1: Their stock market has moved substantially higher. What is going
Speaker 1: on with Japan and qwee? And and what do we
Speaker 1: think the end game is gonna look like for Japan
Speaker 1: over the next few years? Is I think the end
Speaker 1: game now is no end just kwei forever could very
Speaker 1: well be and I think that would be appropriate for Japan. Um.
Speaker 1: The irony of history here is it was only less
Speaker 1: than two decades ago that the Bank of Japan got
Speaker 1: its political independence, And conceptually, you want a independent central
Speaker 1: bank to cut off the fat tale of inflation Japan
Speaker 1: has been living in the fat tale of deflation for
Speaker 1: all of our adult lifetime, assuming our adult lifetime has started,
Speaker 1: of course. And uh, well let's just say, yeah, the
Speaker 1: last twenty five years, uh, and the Bank of Japan
Speaker 1: for a long period of time until the current administration
Speaker 1: set not our problem, not our problem. Uh. And now
Speaker 1: you actually have a forceful Knesian type of approach whatever
Speaker 1: it takes, with monetary policy being subservient to physical policy. There.
Speaker 1: So I think they're doing the right things. Um, but
Speaker 1: I'm not sure you're gonna have you know, any sort
Speaker 1: of you know, bell ringing positive results. Besides the equity
Speaker 1: market that was that was one of the free trades
Speaker 1: of the century when they did that on the equity market.
Speaker 1: We should never confuse equity markets with the main street. Uh,
Speaker 1: two completely different things. What speaking of which, what about
Speaker 1: that consumption text they put into effect which really seemed
Speaker 1: to derail But then but but then the next one
Speaker 1: they said, you know, we're not going to do the
Speaker 1: next one. Uh. And so actually I think Japan has
Speaker 1: a challenge unlike the United States, Europe has a little
Speaker 1: bit of it, which is a demographic challenge. They're getting
Speaker 1: old very very fast and has a monster challenge. And
Speaker 1: the other thing is they don't have immigration at all
Speaker 1: zero Like there are very very few non Japanese in Japan.
Speaker 1: So actually, I can, you know, put in the best
Speaker 1: macro Kansian policies possible, but if you've got a shrinking population,
Speaker 1: it's very difficult and your pass some element of that.
Speaker 1: Whereas United States doesn't have a shrinking rate of the
Speaker 1: industrial we have a good birth rate. And also we
Speaker 1: have an open UH perspective about immigration imrants and UH
Speaker 1: is it a million legal immigrants a year or something
Speaker 1: like that, And actually, you know, on I'm not forecasting
Speaker 1: it UM as a nearby outcome, but actually I think
Speaker 1: and lightens immigration reform in the United States, where we
Speaker 1: have robust immigration not just on the historical model of family,
Speaker 1: but on the concept of skill set, is UH could
Speaker 1: actually increase the potential growth rate of our economy. One
Speaker 1: of the biggest post non eleven mistakes that was made,
Speaker 1: and there were many, was the shutting down of the
Speaker 1: HB one viasas for really qualified UM technology grad student
Speaker 1: in people don't realize half of the C suite population
Speaker 1: in Silicon Valley are far and born and we attract
Speaker 1: we at least we used to the best and brightest
Speaker 1: of these folks to come here for for the opportunities,
Speaker 1: and it's been an enormous economic boom, enormous positive for
Speaker 1: the United States. I mean, one of the ironies is
Speaker 1: that one of the the U S products that is
Speaker 1: universally sold around the world that is wonderful is our
Speaker 1: educational system you call it, you know, higher education, being
Speaker 1: one of our most profound exports. Even though we actually
Speaker 1: do it here, we're selling the product to the foreign customer.
Speaker 1: The foreign customer comes here exceedingly well, and then we
Speaker 1: won't let him stay and keep a job here. It
Speaker 1: makes absolutely no sense. So this is a political issue.
Speaker 1: It's a political issue, and I do understand the political issue,
Speaker 1: which is that our immigration policy has been based historically
Speaker 1: on family connections. You can bring family members over based
Speaker 1: on economics. We are a nation of immigrants. Uh. We
Speaker 1: can all trace our you know, origins back you know,
Speaker 1: to this country or the other. You know. My dad
Speaker 1: was scotch Irish, my mom was German. Uh, So there's
Speaker 1: the that historical issue that uh, you earned the right
Speaker 1: by birth to be in the United States. Uh. And
Speaker 1: I think enlightened immigration reform is to is to preserve
Speaker 1: that legacy, which is a treasure for us, but also
Speaker 1: recognizing that we can have immigration policy that includes UH
Speaker 1: having skilled people bring economic value to our country as well.
Speaker 1: So it's not to me it's not one or the other.
Speaker 1: It should be both. But anytime we talk about reform
Speaker 1: of immigration, it seems like the political system is, well,
Speaker 1: this is if we do this, then we have to
Speaker 1: stop doing that. I think a blend of the two
Speaker 1: could be a very positive, uh sort of thing for
Speaker 1: the country, and probably for the first time this month,
Speaker 1: this week, this year. I may even sound like a Republican.
Speaker 1: God forgive me. So why haven't we been able to
Speaker 1: get this done? Why can't we get a rational? I mean,
Speaker 1: we all know what the answer is, but why can't
Speaker 1: we get a rational? This is something that both sides
Speaker 1: of the aisle they have an interest in. B. There's
Speaker 1: a huge overlap. I won't I won't say they agree on,
Speaker 1: but that ven diagram has a lot of common area.
Speaker 1: We'll put Ben diagram. I don't know. I wish I
Speaker 1: knew the answer to that question, because you'd like to
Speaker 1: believe even though democracy is supposed to be in efficient
Speaker 1: so I don't complain too much about any efficiency in Washington,
Speaker 1: because that's how it was designed to be and efficient.
Speaker 1: But sometimes there's things that are so singularly obvious that
Speaker 1: should be done UH, that you would think they would
Speaker 1: get done. And actually after nine eleven there was one,
Speaker 1: which is outsourcing UH airport protection to private companies. We said, no,
Speaker 1: why we should actually have to government function? You know
Speaker 1: what I spoke to. We had Less Gelb as a
Speaker 1: guest recently, and um, one of the things he said
Speaker 1: that was really fascinating. So he here's a guy, incredibly
Speaker 1: storied background, UM working for Senator Jacob Javitt's a traditional
Speaker 1: liberal Northeast Republican center. Right, Well, the Javits Javits is
Speaker 1: no longer with us. That that that's completely gone, you know.
Speaker 1: But what he said was there were enough people who
Speaker 1: in the Senate that regardless of politics that he didn't
Speaker 1: say ven diagram, but that same ven diagram where you
Speaker 1: and I may degree about issue, disagree about issues one
Speaker 1: to three, four, five, but gee, we totally agree about
Speaker 1: six through ten. So let's hold one through five aside
Speaker 1: and get six through ten done and then we can
Speaker 1: see what we can figure out with one through five.
Speaker 1: According to him, that's gone away. And that's why this
Speaker 1: Congress has become such a do nothing congress, and it's
Speaker 1: why brings it back to the FED. They became the
Speaker 1: only game in town. Nothing was done that's normally done.
Speaker 1: I'm not saying anything radical or new needed to be done.
Speaker 1: All of the traditional post crisis fiscal things that you
Speaker 1: expect that happened as recently as two thousand just did
Speaker 1: not have been this time around. Yeah, it's um as
Speaker 1: a citizen, which I am first and foremost these days
Speaker 1: as a retired man, I I'm discouraged about the fact
Speaker 1: that Venn diagram as you speak of, she's just not
Speaker 1: really working in obvious sort of places. I don't think
Speaker 1: Congress could agree on velveta on white bread as a
Speaker 1: lunch sandwich anymore. I mean, worse it works at a
Speaker 1: debate about that, it's uh. The question is is it
Speaker 1: a self correcting mechanism? Is it gonna get so extreme?
Speaker 1: Is it gonna get so bad that the throm the
Speaker 1: throw the bums out response is gonna give us a
Speaker 1: fresh start? I don't know people who don't think it is.
Speaker 1: Some people think that it has to get worse before
Speaker 1: it gets better. Yeah, And actually that's one where I
Speaker 1: really don't have an informed opinion. The older I get,
Speaker 1: the more I recognize there are some areas I just
Speaker 1: won't ever be able to understand. Sausages make Washington. Uh,
Speaker 1: some things I was just never understand. It is what
Speaker 1: it is. So, speaking of being a retired man, you
Speaker 1: give a speech a month, that's retired. You're not publishing.
Speaker 1: I know that you like to bowl, What what else
Speaker 1: are you doing? I travel a fair amount. Yeah, with
Speaker 1: with with g I C. There seems to be events
Speaker 1: constantly all around the world. And and I traveled with
Speaker 1: the g I C occasionally, But in our speech a
Speaker 1: month actually involves a trip a month usually. Uh. And
Speaker 1: now that I'm retired, it's not just to go in
Speaker 1: uh and uh, give the speech and go back to
Speaker 1: the airport for instantly. You know. Was it? Last fall?
Speaker 1: I had a speech down in Argentina and spent five
Speaker 1: days in Argentina. That's fun, that's fun. Uh. Actually, I
Speaker 1: have not been back to China since I've retired. During
Speaker 1: my active career, I went to China on business twenty
Speaker 1: six times really starting in nineteen ninete. So you've seen
Speaker 1: insane changes, and I've seen insane changes since nineteen But
Speaker 1: what I haven't seen, actually is the wall? Really? Twenty
Speaker 1: six trips never so you need it, You need a
Speaker 1: tourist trip to change. Yeah. I heard I was shooting
Speaker 1: The Breeze with Bill Gross about it and I said, Bill,
Speaker 1: I've been to China twenty six times and yet to
Speaker 1: see the wall. And he looked at me like, how
Speaker 1: is that possible? How is that possible? And then I said, Bill,
Speaker 1: I was working for your company. Oh, now I get it,
Speaker 1: you know, in and out. So actually, the next time
Speaker 1: I get a invitation to a group that I want
Speaker 1: to speak to in China, I'm want to see that wall.
Speaker 1: So you'll you'll build in an extra week of some
Speaker 1: tourist activities. Speaking of Bill Gross, so we talked a
Speaker 1: little bit about him professionally. But you guys are really budds.
Speaker 1: You hang out. Yeah, yeah, we do, particularly over the
Speaker 1: last Um you're eighteen months uh time at my home.
Speaker 1: You're in Newport Beach, Calibania, which, by the way, for
Speaker 1: those of you who haven't been there, I'll put your
Speaker 1: dress up on the website so people can stop by.
Speaker 1: But I found Newport Beach to be one of the
Speaker 1: I gave a speech at the Newport Beach Public Library
Speaker 1: PIMCO series. I found Newport Beach to be one of
Speaker 1: the most beautiful places I've ever been to in my life.
Speaker 1: It's spect you know what it is. It's the Hampton's
Speaker 1: meets Fire Island. It's these big, gorgeous houses, but instead
Speaker 1: of being on two acre estates with giant hedges, it's
Speaker 1: like Fire Island there shoulder or shoulder right on the water.
Speaker 1: And what is the beach right on the other side
Speaker 1: of the body of water that's there. The there's a
Speaker 1: public park over there, something with a b bar. Balboa
Speaker 1: Island which is also lovely. Yeah. In fact, my home
Speaker 1: is actually on Leado Island, which is off of Balboa
Speaker 1: or off of actually the Newport Harbor has uh seven islands. Uh.
Speaker 1: Balboa is a beak one that's also a tourist place
Speaker 1: with lots of commercials. Uh. Leedo is strictly residential. There's
Speaker 1: not nothing commercial on Leedo. And then there's Harbor Island.
Speaker 1: There's seven islands. Can you drive to that or doesn't
Speaker 1: take a there's a bridge so you can drive. There's
Speaker 1: one bridge to get onto. Uh, actually both islands. Um,
Speaker 1: there is a ferry to Balboa Island that it took
Speaker 1: three minutes. There's not a ferry to Leado. Bill actually
Speaker 1: lives doesn't live in Newport Beach. He lives in Laguna Beach,
Speaker 1: which is you know, it's actually the other direction, and
Speaker 1: in a beautiful home overlooking uh the ocean. Uh. And
Speaker 1: he and actually bowled together in neither place. We bowl
Speaker 1: together and Fountain Valley, which has the best bowling alley
Speaker 1: in the in the area. So you're telling me people
Speaker 1: walk into a bowling league and there's Bill Gross and
Speaker 1: Paul McCulley bowling, it wouldn't be a leg. But if
Speaker 1: you come by out on a Tuesday afternoon at three o'clock,
Speaker 1: you can very well run into me and Bill bowling. Yeah. Um,
Speaker 1: are you a good buller? I'm a pretty good bowler. Uh.
Speaker 1: It's one of my things I like to do. I
Speaker 1: like to fish, I like to bowl, I like to
Speaker 1: ride my bike, and I bowled a lot more in
Speaker 1: recent years. I'm probably about a one NINETI average something like.
Speaker 1: Is he a good bowler? Bill is a very good athlete. Really,
Speaker 1: he's not bowling, has never been his particular sport. But
Speaker 1: when he started bowling with me, uh, he got progressively better.
Speaker 1: And and I wouldn't venture what he uh would roll
Speaker 1: on an average because we don't roll enough that he
Speaker 1: would because I go to or three times a week. Yeah,
Speaker 1: and not in Bill and I go occasionally. Uh. But
Speaker 1: he's a very very good athlete. Uh. And actually uh,
Speaker 1: this goes back about five months ago. We actually went
Speaker 1: once with his wife too. We had a great time,
Speaker 1: uh when Sue went with his bowling, but once Bill
Speaker 1: just shot good an athlete, he is made the six
Speaker 1: seven ten split. I've been bowling for thirty years and
Speaker 1: I've only made it three or four times. And he
Speaker 1: as a rare bowler. I don't think he bowled, you
Speaker 1: know much. And you know, since you know his kids
Speaker 1: were a little made the six seven ten splits. So
Speaker 1: you know, if you ever see him, just say, what
Speaker 1: did it feel like to make the six seven ten split.
Speaker 1: It's a nice feeling. Let me tell you, I'm still
Speaker 1: holding one sort of thing. I'm still I'm still it's
Speaker 1: it's kind of like a holding one. I'm still wrapping
Speaker 1: my head around the the two of you bowling. That
Speaker 1: that's that's a hard that's a hard um image to
Speaker 1: to get on him. So that's a picture that would
Speaker 1: make Bloomberg if someone to it, absolutely would make Bloomberg.
Speaker 1: There's no doubt in my mind. It is a just Um,
Speaker 1: I'm I'm struck somewhat uh speechless. So so clearly your
Speaker 1: relationship goes way back. Would you consider to consider Bill
Speaker 1: Gross a mentor of yours? Yeah? I would, uh tell
Speaker 1: us about the early days when you said he's a
Speaker 1: guy who hired an unemployed kid? What what was that
Speaker 1: experience like? What was it like starting a job with
Speaker 1: a guy. Even then he was fairly storied. People were
Speaker 1: starting to know who he was. This is nineteen ninety. Um,
Speaker 1: I think he engenders beer. Mm hmm. Supposed to be
Speaker 1: a tough guy if you're just a kid out of school,
Speaker 1: supposed to be a tough guy to work for. He
Speaker 1: is a tough guy to work for. He has uh
Speaker 1: low tolerance for beating around the bush. What doesn't suffer fools? Gladly,
Speaker 1: that's another way of putting it. If he asked you
Speaker 1: a question, he wants one of two things, A detailed, complete,
Speaker 1: accurate answer or I don't know, sir, I'll be back
Speaker 1: to you tomorrow morning. If you can't give him one
Speaker 1: of those two answers but are somewhere in between, you
Speaker 1: have a problem. There's no problem saying Bill, I don't know.
Speaker 1: I will have a memo on your desk tomorrow morning
Speaker 1: with a complete answer. You better have the memo onning
Speaker 1: is ask tomorrow morning with a complete answer. That's a
Speaker 1: fine answer. If you have the answer in detail when
Speaker 1: he asked you, that's a great thing. What's not a
Speaker 1: good thing is to try to bluff him with bull stuff.
Speaker 1: And I don't I take him as a guy who's
Speaker 1: a pretty good poker player, you probably don't want to
Speaker 1: bluff him. You don't want to bluff him. Uh. And
Speaker 1: also he has um. This is an interesting aspect of
Speaker 1: Bill that very few people know. I mean, he's known
Speaker 1: as you know, a tough boss, and he is tough
Speaker 1: I think fair but also a very tough boss and
Speaker 1: you know, a very close but he still you know,
Speaker 1: you know, in in the latter years of my career,
Speaker 1: would go off on me sometimes and I could go
Speaker 1: off back at him. That's a big difference because we've
Speaker 1: reached that stage of of friendship. Um. But he's still
Speaker 1: to this day, believes that all of his success is
Speaker 1: the function of the client, and he's absolutely marvelous with clients.
Speaker 1: He's not gruff. And actually he is amazingly receptive to
Speaker 1: the fact that I'm rich because I'm delivering what the
Speaker 1: client wants. And if I don't know what the client wants,
Speaker 1: I shut up and I listened. Uh. So, actually, Build
Speaker 1: is an amazingly good listener to clients uh and is
Speaker 1: very good with clients. UH. And Uh He's different with
Speaker 1: employees who uh are trying to blow smoke up his
Speaker 1: back side, but with clients he's amazingly good. Um. Who
Speaker 1: else would you count as as mentors? Uh? Obviously I
Speaker 1: never knew either John Maynard Keynes or Hyman Minsky, but
Speaker 1: they had a profound impact on me intellectually. Uh. Bill Miller,
Speaker 1: of like Mason fame U, is a close personal friend
Speaker 1: and mentored me. Uh. And being able to fluently move
Speaker 1: back and forth between valuation in the bond market and
Speaker 1: valuation in the equity market. So I learned a great
Speaker 1: deal from Bill Miller. I don't you ever had Bill
Speaker 1: on one of your guests short, you know what make
Speaker 1: the introduction. I would love to to have a conversation
Speaker 1: with him. He's a fascinating, fascinating guy. People. Don't you
Speaker 1: know who else I know who is tight with him
Speaker 1: is Michael Mosa mom Mobisan of Colombia and now um
Speaker 1: formerly of Credit Swiss, and or is he now Credit Swiss,
Speaker 1: formerly of like Mason, But he's someone else who worked
Speaker 1: with Miller. Everything I've read about the guy. First of all,
Speaker 1: the streak is unpressed fifteen consecutive. He is a beating
Speaker 1: the SMB. Some people are going to insist it's just random,
Speaker 1: but I don't know that that's just there are too
Speaker 1: many fund managers for it to be one guy for
Speaker 1: fifteen years. That that's really amazing. I he obviously was
Speaker 1: on the wrong side of the Minsky moment um, but
Speaker 1: now is living a story of redemption and doing exceedingly
Speaker 1: well the fund. At least there's the you know, the
Speaker 1: two thousd the the crisis year has hurt. His long
Speaker 1: term total track record is batting average, but the past
Speaker 1: five years has been pretty darn good for him. A. Yeah,
Speaker 1: they have. And the word mentor is a very special
Speaker 1: word for me that I would not, you know, want
Speaker 1: to burden A lot of people with are saying you've
Speaker 1: been There's been a lot of people who have been
Speaker 1: influential uh in my thought process that I know personally. Uh.
Speaker 1: And so I'm not suggesting that that that they're you know,
Speaker 1: not others as well. I have benefited enormously over a
Speaker 1: long period of time, uh from um, from from Paul
Speaker 1: Krugman's work and Kens Krugman, Minsky, Bill Miller, Bill Gross
Speaker 1: That that's a murders row right there. That's that's that's
Speaker 1: a pretty good group of people. Let's let's talk about
Speaker 1: Minsky a little bit, because I don't think people really know,
Speaker 1: especially late people don't know who Himan Minsky was. He
Speaker 1: unfortunately passed away before his work started to be really
Speaker 1: recognized as as seminal as it is. And I'm gonna
Speaker 1: coming up in a quick sentence, which is stability begets instability.
Speaker 1: Let's describe that discussed that because you've written more about
Speaker 1: Minsky and you've probably done more to bring Minsky to
Speaker 1: the mainstream of economics than just about anybody else out there.
Speaker 1: Thank you. I really appreciate that Minsky built upon what
Speaker 1: Kines did. Uh. In fact, I can find most of
Speaker 1: what Minsky wrote about in chapter twelve of the general theory.
Speaker 1: That's one of my fund sort of things to ask people.
Speaker 1: What is your favorite chapter of the general theory? Uh?
Speaker 1: Mine is obviously chapter twelve. We're effectively founded behavioral economics
Speaker 1: and Minsky uh financial instability apothesis is very straightforward, which is,
Speaker 1: as you put it, stability breeds instability because it changes behavior,
Speaker 1: changes people's risk efforts, risk appetite. UH. So I would
Speaker 1: say he's one of the founders of behavioral economics. Uh.
Speaker 1: In contrast to the Chicago school that every decision or
Speaker 1: every transaction you make is based upon a full calculus
Speaker 1: of rationality. UM, I don't know anybody of that nature.
Speaker 1: That your decisions are a function or path dependent or
Speaker 1: a function of what has happened previously, and that human
Speaker 1: beings tend to put an extraordinary amount of focus on
Speaker 1: bad things having happened. So therefore, if nothing bad has
Speaker 1: happened for a while, life has been stable, nothing bad
Speaker 1: is happening, then they ramp up their risk. But interestingly,
Speaker 1: when they're ramping up their risk, that means they're barring
Speaker 1: more money and driving up asset prices, so that everyone says, well,
Speaker 1: that was really smart. More leverage is good, so therefore
Speaker 1: you know lad rents and repeat. Uh So, essentially a
Speaker 1: Minsky journey is essentially lather, rinse, and repeat until something
Speaker 1: goes wrong. And when something goes wrong, it goes disaster
Speaker 1: ly wrong. And Minsky had a nice phrase for it
Speaker 1: is when essentially the guy who has become the most
Speaker 1: risk seeking has to sell book to make book. Now
Speaker 1: describe that. In other words, a person is highly leveraged
Speaker 1: and assets that are suddenly no longer going up and
Speaker 1: generates either a margin call or some other factors that
Speaker 1: leads to there were a buyer, now they're a leverage buyer,
Speaker 1: and now they're a de leveraging seller. Yeah, and I
Speaker 1: guess around what we were talking about fire sales. But
Speaker 1: it's always love that Minsky phrase. You have to sell
Speaker 1: book to make book, satisfy your margins. In order to
Speaker 1: stay solvent, you have to start liquidating positions. And then
Speaker 1: you get into the paradox of aggregation of everybody is
Speaker 1: selling book to make book. Where's the bid? Where the bid? So?
Speaker 1: So that's it's funny because I love how different people
Speaker 1: I speak to. It's the six blind men describe the
Speaker 1: elephant where you end up with a very very different
Speaker 1: perspective of some aspect of Wall Street. But you're really
Speaker 1: saying the same thing, So you know, Rob are not right.
Speaker 1: So Rob Rob was one of our earliest guests, and
Speaker 1: one of the things he describes when when you're looking
Speaker 1: at a market, if you're actually if you're actually in
Speaker 1: a traditional market cap based index, what happens, courtesy of
Speaker 1: Minsky towards the end of that bull cycle is everybody
Speaker 1: is piling in and they're piling into fewer and fewer names,
Speaker 1: and so what happens in the end of that cycle
Speaker 1: is you have this use huge spasm up and then
Speaker 1: this giant collapsed down, and because you're in cap weighted equities,
Speaker 1: you end up having a much worse down draft than
Speaker 1: you would have if that index was created not cap cap.
Speaker 1: It's a genius and I used the word on purpose
Speaker 1: genius of what Rob has done with his fundamental indexes. Oh,
Speaker 1: I forget you guys. So for those of you who
Speaker 1: haven't listened to the r No Interview, strongly recommend go
Speaker 1: to iTunes. Pull it down. It's really fascinating. But not
Speaker 1: only does his models run a hundred plus or maybe
Speaker 1: it's closer to two plus billion dollars now based on
Speaker 1: his models, but he also was running almost a hundred
Speaker 1: billion dollars of pimco um assets. I don't know what
Speaker 1: what what that number is now. Maybe it was eighty
Speaker 1: million if I remember correctly using his math and Pimco's
Speaker 1: assetmag Actually, he's expanded his relationship with pim since I
Speaker 1: retired the second time, So I actually don't exactly the
Speaker 1: nature of it. It's he does a lot of asset
Speaker 1: allocation as well as his fundamental indexes. Very very smart
Speaker 1: man and actually one of I've known Rob for a
Speaker 1: long long time. Uh we go back to you know,
Speaker 1: I know, twenty years or something of that nature. You know,
Speaker 1: just his fellow wants and even when he and I
Speaker 1: vehemently disagree on something, we enjoy having a discussion because
Speaker 1: we learn from each other and that's the fun part
Speaker 1: of this business. I describe him as a rational conservative.
Speaker 1: That's a very very good way of putting it, because
Speaker 1: he's data driven. You may disagree with him about something,
Speaker 1: but you're never gonna say, ah, this guy's a wing nut.
Speaker 1: He's just making stuff up. When I disagree with Rob
Speaker 1: about something, it forces me to go back and say,
Speaker 1: let me think about this, because if he's saying this,
Speaker 1: there's gonna be some data underneath, and there's going to
Speaker 1: be an analysis, and then you have to find either
Speaker 1: where he's off a little bit in his trajectory and
Speaker 1: that's what sent him down the wrong road, or where
Speaker 1: your belief system has a flaw in it. And not
Speaker 1: a lot of people can do that in a way
Speaker 1: that is, oh, you know, there's got to be something
Speaker 1: to that. In fact, the longer we are in this
Speaker 1: business probably also reflected age as well. Speak for yourself,
Speaker 1: I'm not age seven all day long. Um. The more
Speaker 1: from the standpoint of debate and discussions is it's all
Speaker 1: about wanting to gather with people who help you think.
Speaker 1: It's not a matter whether or not they're right or wrong,
Speaker 1: but who challenge your intellectual horsepower. We see that with
Speaker 1: the guys we hang out with Fishing, you know, over
Speaker 1: the years and we have vehement agreements. But part of
Speaker 1: having a disagreement is it forces you to think, did
Speaker 1: I miss something. I'll tell you something. I'll tell you
Speaker 1: two guys. Well, there's a whole run of guys up
Speaker 1: at Camp Kotalk. I mean, I'm friends with Rosie for years,
Speaker 1: and he and I are often on the opposite sides
Speaker 1: of stuff, but he forces me like it's he makes
Speaker 1: my arguments better because he forces me to go back
Speaker 1: and come up with specific responses what about this? What
Speaker 1: about that? And he's also a walking inside. You could say,
Speaker 1: what was the non farm payrolls in October, you know,
Speaker 1: two thousand and three and he'll answer so so that
Speaker 1: becomes a real challenge to debate him because he can
Speaker 1: pull stuff like like nobody uh. Stut Taylor of Advance
Speaker 1: is another one who I've never enjoyed disagreeing with someone
Speaker 1: more than Stu because we're often on the opposite sides
Speaker 1: of stuff, and he'll lay out an argument and it's
Speaker 1: not just you know, the global warming guys are crazy
Speaker 1: and there everything they said the assumption is built in
Speaker 1: are all factually wrong, and it's just you can you know.
Speaker 1: I love the famous quote never try and teach a
Speaker 1: pick to sing it waste your time and a noise
Speaker 1: to pick. Hold that aside when when I disagree with
Speaker 1: stew Taylor or Dave Rosenberg or Doug cass is another one.
Speaker 1: Doug and I are almost always on the opposite sides
Speaker 1: of the equity trade. But he makes me go back
Speaker 1: and defend the position because now sometimes we're just looking
Speaker 1: at different timelines, but other times he's making an argument. Hey,
Speaker 1: here's where the sentiment is. You're you're bullish, embarish, look
Speaker 1: at this, look at that, and you have to really
Speaker 1: go back and very carefully take those arguments apart. It's
Speaker 1: fascinating and there's no doubt my mind, rob are not absolutely.
Speaker 1: I've begotten to known over the years a little bit
Speaker 1: Cliff Fastness, who is another like raw, brilliant guy, brilliant mathematician,
Speaker 1: but also can speak English in a coherent fashion, which
Speaker 1: is relatively again the ven diagram of those two, that's
Speaker 1: a smaller overlap. He's another guy that I disagree with him.
Speaker 1: But if Aston says something that I disagree with, man,
Speaker 1: I have to go back and say, um gee, what
Speaker 1: am I doing here that he disagrees with? What assumptions
Speaker 1: do I have? Where is the model wrong? Where is
Speaker 1: the conclusion not supported by the data? Because he doesn't
Speaker 1: just on a whim say something. There is always a
Speaker 1: massive amount of research and data underlying what what he does.
Speaker 1: But you know, that's what makes the market different people
Speaker 1: see things from different perspectives. And the guys we really
Speaker 1: respect are the ones who make you defend yourself and
Speaker 1: make you make better arguments to agree with you wholeheartedly.
Speaker 1: Of it as intellectual fellowship. Absolute. I like the word fellowship. Uh.
Speaker 1: And that you're not having a fight, You're not having
Speaker 1: an argument, You're having an intellectual fellowship. You know it's uh.
Speaker 1: And that you know you can be fishing, you could
Speaker 1: be bowling, whatever the case may be, or you know,
Speaker 1: I'll find meal uh. And that you enjoy each other's company.
Speaker 1: It's not about the process of you know, tip for tat,
Speaker 1: I got this one right, you've got that and wrong.
Speaker 1: It's just do we enjoy each other's fellows? Do you
Speaker 1: appreciate the qualities of their minds? And that? And that's
Speaker 1: a really UM interesting thing. Let's let's go over some
Speaker 1: of my favorite UM questions before we uh lose what's
Speaker 1: left of our our listeners. Although I get emails all
Speaker 1: the time that people say, you know, I drive back
Speaker 1: and forth to Boston, I listened to the podcast in
Speaker 1: each direction, or I spend an hour each day on
Speaker 1: the on the treadmill, and you've made my UM life easier.
Speaker 1: But these are some of the questions UM that I
Speaker 1: ask every guest, and some of them you've asked answered.
Speaker 1: You've answered, what you did before you with PIMCO. Who
Speaker 1: your early mentors were. I think we know what philosophers
Speaker 1: and economists affected your approach to UM economics. What investors
Speaker 1: you mentioned Bill Miller's what investors affected your investing philosophy?
Speaker 1: And I guess we can include Knes in that because
Speaker 1: he was running money, wasn't Yeah, he was running college.
Speaker 1: I think he was running money for their endowment. Yeah,
Speaker 1: I UM in that category, it wouldn't be a large
Speaker 1: group of people. And and Bill Gross would be so
Speaker 1: much in a leg He's the Sun, and there's a
Speaker 1: bunch of other planets. There's a bunch of other planets. Uh,
Speaker 1: And you could do us and Bill Gross and and
Speaker 1: Bill's general philosophy. And I'm sure he's you know, he's
Speaker 1: been public about it. I'm not talking out of school. What's, however,
Speaker 1: is it's a bit like you know, gambling, and I
Speaker 1: simply want to win more than I lose. I don't
Speaker 1: have the objective of winning all the time, and I
Speaker 1: want to calculate the odds in real time. Uh. And
Speaker 1: also I want to avoid gambler's run. Never that a
Speaker 1: mistake take you out of the game. Longevity matters, and
Speaker 1: that philosophy um is a humbling philosophy because you can
Speaker 1: say this one, I know I got this one, but
Speaker 1: never make a mistake that can take you about the game.
Speaker 1: And Bill Gross was the guy who fundamentally drove that
Speaker 1: into my head just in sizing of bets, of sizing
Speaker 1: in a portfolio. Uh. And no tears that if you
Speaker 1: should have made it bigger. No, you shouldn't have made
Speaker 1: it bigger because that because if you were wrong, it
Speaker 1: had taken you out. He discussed that extensively when he
Speaker 1: was here. It was quite quite fascinating. And you wouldn't
Speaker 1: think a guy running fixed income would be really that.
Speaker 1: You know, if you're running managed futures, those guys blow
Speaker 1: up pretty regularly. You read Education of a Speculator, uh n,
Speaker 1: ninder Hoffer is blown up, you know a number of times.
Speaker 1: It's really surprising coming from the fixed income side. Well,
Speaker 1: a key issue on the fixed income side is that
Speaker 1: you're playing for a small alpha versus the benchmark. You
Speaker 1: can't get ten baggers in fixed income very right. So Actually,
Speaker 1: it's not like you're gonna be taken out of the
Speaker 1: game because you lost all of your clients money. It's
Speaker 1: if your alpha shrinks, then in your next competition to
Speaker 1: get a client, you're not going to be as successful.
Speaker 1: And also there's a very pragmatic matter is defending your
Speaker 1: fees as a function of the alpha. And so therefore,
Speaker 1: in fixed income, your alpha is your potential alpha is
Speaker 1: not huge to begin with, UH, and so therefore there's
Speaker 1: a lot of risks to both the growth of your
Speaker 1: business and your profit margins UH if you actually don't
Speaker 1: size your bets right. So the philosophy of gameras of
Speaker 1: gammeras run holes even though the stakes are different, because
Speaker 1: the stakes UH are idiosyncratic to that business, makes a
Speaker 1: lot of sense. Um. You mentioned the general theory. What
Speaker 1: other books do you find to be UM influential. What
Speaker 1: are the key books that you you've that have affected
Speaker 1: you when you've read them. Peter Bernstein Against the Gods
Speaker 1: would be right at the very top of my must
Speaker 1: read list when young graduates are asking. And Peter was
Speaker 1: a dear personal friend of mine. We lost him a
Speaker 1: few years ago, UH and amazing sweet harbor Man and
Speaker 1: brilliant uh so and essentially his he had the best.
Speaker 1: He's a wonderful writer. He also uh that book is
Speaker 1: consistently on the everybody yeah top, so I would put
Speaker 1: that that book uh in there along with Ken's general
Speaker 1: theory of theory, and obviously you know Minsky's work, which
Speaker 1: Minsky book, uh, Stabilizing the Unstable Economy. That's what I'm
Speaker 1: gonna end up doing for those of you listening to this,
Speaker 1: I'll put this up in the on the on the
Speaker 1: blog post. Then I'll have the list of all the
Speaker 1: books you mentioned. So we have Keynes, we have Minsky,
Speaker 1: we have Berns Bernstein, and I'll give you a fourth.
Speaker 1: And it's a very recent addition to my list. It's
Speaker 1: literally in the last six nine months. And it's not
Speaker 1: about economics per se. It's former Congressman Barney Frank's autobiography. Really,
Speaker 1: it is an amazing treatise on understanding Washington, d c.
Speaker 1: Over the last thirty years of the wise and the
Speaker 1: wherefores of outcomes that have always left us scratching our head.
Speaker 1: If you haven't read Barney's book, you gotta get it. Uh.
Speaker 1: Life in Politics from Great Society, The Same Sex Marriage no,
Speaker 1: can this just came out in March of this year
Speaker 1: that that's really quite amazing. So that's a movie and
Speaker 1: you're you're saying that it's not so much out the
Speaker 1: political battles, it's about the process in DC and how
Speaker 1: it's changed. Yeah, I mean, I mean, you and I
Speaker 1: could write a book about you know, Wall Street for
Speaker 1: the last thirty years, because we lived it were You're
Speaker 1: a little younger than I am, but you know, not
Speaker 1: a whole lot. But you know, I work for a living.
Speaker 1: That's the difference. You're gain fully retire what what what
Speaker 1: do you like? You're four years older than me. That's
Speaker 1: you are, So you're five years old in them. So
Speaker 1: that is a new gym that I would recommend to
Speaker 1: anybody who wants to to consider themselves informed in what
Speaker 1: makes Washington work? Wow that or not? As the case
Speaker 1: or so? Now, So the Frank book discusses what's changed
Speaker 1: in d C over the thirty years. Let let me
Speaker 1: ask you the book that you're not going to write,
Speaker 1: how has Wall Street and finance and the practice of
Speaker 1: investing money changed over that same time period. Ah. It
Speaker 1: really the profound shame since I came to Wall Street profound.
Speaker 1: I guess that the one that's most significant when because
Speaker 1: I've thought a lot about this when I first got
Speaker 1: in the business and again I came to Wall Street
Speaker 1: in eight three. Um, being on the cell side of
Speaker 1: the street was the cats me out. Really that's a
Speaker 1: that's a huge change. And the by side were you know,
Speaker 1: the great on washed you know. And for people who
Speaker 1: may not understand the difference between the terms, if you're
Speaker 1: on the sale side, you're a broken dealer, you're a
Speaker 1: commissioned person. The bye side are hedge funds, mutual funds,
Speaker 1: asset managers who are buying assets for clients who they're
Speaker 1: charged with running their money, versus let's say, brokers who
Speaker 1: are selling client assets either two institutions or individuals. It's
Speaker 1: a subtle but important distinction. Yeah, you know, and I
Speaker 1: think back to you know, the mid eighties. You know,
Speaker 1: your your average sell side bond salesman what make maybe
Speaker 1: three hundred thousand dollars a year, whereas the guy that
Speaker 1: he was selling the bonds to will be making ninety
Speaker 1: five thousand dollars a year. And that's completely shifted since
Speaker 1: so so essentially it was the the guy who was
Speaker 1: selling the bonds was making the big bucks. The guy
Speaker 1: who was buying the bonds was considered to be a
Speaker 1: necessary nuisance. That's pretty funny. So so the guy buying
Speaker 1: the bonds is Bill Gross, the guys selling the bonds
Speaker 1: is whoever covered him at Goldman Morrigan, Meryl whoever, and
Speaker 1: the salespeople were making more than the portfolio man. Whereas
Speaker 1: now actually hedge funds were you know, thirty years ago.
Speaker 1: And a hand for the joke is the hundred hedge
Speaker 1: funds that existed thirty years ago are still around. They're
Speaker 1: just the ones creating alfit today. Not a bad joke,
Speaker 1: It has an element of truth to it. Uh. But
Speaker 1: now it's the guy on the by side who had
Speaker 1: this chance to shoot the moon financially, and the guy
Speaker 1: on the cell side has been replaced by one of
Speaker 1: those machines over there. Because remember this, Uh back thirty
Speaker 1: years ago, you actually had the you know, the direct lines,
Speaker 1: and you didn't have electronic trading, you didn't have price discovery. Uh.
Speaker 1: It was you know, Harry, I want to buy you know,
Speaker 1: five million of you know, the A T. T s
Speaker 1: were there trading other ninty eight ninety eight and a
Speaker 1: half alright, Phil, get them done. Whereas now you know,
Speaker 1: thanks to the terminals, you don't need to talk to
Speaker 1: Harry about where the A T. T s are trading.
Speaker 1: I know, and I can hit a button and Harry
Speaker 1: doesn't make dollars a year anymore, not in business anymore.
Speaker 1: The guys that are still in business, the commissions have
Speaker 1: come down from the fifteen cents a share now it's
Speaker 1: a penny or two, and half of them have have disappeared.
Speaker 1: That that business has has completely changed. And so so. Actually,
Speaker 1: back when we were young, that would be the question
Speaker 1: of where's the customer's yacht? Yep them anymore? That's the
Speaker 1: famous book that was written in the I want to
Speaker 1: say thirties or or forties. I'm trying to remember. And
Speaker 1: I could see the guy's name right in front of me.
Speaker 1: So over my career, the customers got in the yacht
Speaker 1: and the broker hails a cab and and that's a
Speaker 1: huge I know that's good or bad. That's just an
Speaker 1: observation that that's a huge change, you know, the old
Speaker 1: the old. The other old joke was Wall Street is
Speaker 1: the only place where you know, millionaires talk to people.
Speaker 1: People who take rolls Royce's to work, talk to people
Speaker 1: take subways to work, and that's a French sweat. I
Speaker 1: could not access that name that by the way, that
Speaker 1: is literally I've been on Wall Street for a hundred years.
Speaker 1: That is literally the next book in my que to read.
Speaker 1: I have never read that book, and people just in
Speaker 1: it's hilarious. In the life, I have not read anything.
Speaker 1: It's supposed to be wonderful and it it's on your list. Well,
Speaker 1: I've read the same point of you know what, kids,
Speaker 1: I've got to read and many so so you know,
Speaker 1: Minsky was a big contributor to that book. By the way,
Speaker 1: I have a very close friends imus. Oh, I didn't
Speaker 1: know that. That's fascinating. And Minsky wrote a huge biography
Speaker 1: of Kane's. Yes he did. Is that Is that something
Speaker 1: that's on your list or is it a little too wonky?
Speaker 1: It is just read General Employment Theory. You have to
Speaker 1: be an affectionado. Okay, you can get really deep into
Speaker 1: the weeds. There's if you like really deep in the weeds. Uh,
Speaker 1: that's fine, but I wouldn't recommend men that too. Stabilizing
Speaker 1: and Unstable Economy is would be the one book on Minsky.
Speaker 1: There was an interesting book I read some time ago. Um,
Speaker 1: is it Keen's Way to Wealth. It's something like that.
Speaker 1: It's about Keens the investor, not Keens the economist. And
Speaker 1: it turned out he's really, for his day, an extremely successful,
Speaker 1: buffet like investor who just completely turned around. I think
Speaker 1: it's King's College. Yeah he did, Yeah he did, and
Speaker 1: he um gets back to chapter twelve of his famous book.
Speaker 1: He was a behavioral economist. He understood that markets are
Speaker 1: not always rational, and the beauty contest is a perfect
Speaker 1: is a perfect one? Uh? And uh he had the
Speaker 1: ability and he actually lost some money sometimes being a
Speaker 1: little bit early or wrong. Uh, well that's as traders know,
Speaker 1: early is gonna be wrong. Essentially saying, you know, when
Speaker 1: bad news is fully discounted, and I hear about it
Speaker 1: from the guy who shines my shoe at the bus station,
Speaker 1: probably it's time to go the other direction makes sense.
Speaker 1: Our last two or last three favorite questions. So, given
Speaker 1: these major changes that we've seen over the past three decades,
Speaker 1: what are the next couple of changes that we're going
Speaker 1: to see? Uh? Coming up first and foremost, I think
Speaker 1: is producaries. You know, whether it's endowments or to find
Speaker 1: benefit pension schemes or colleges? Do we want to call
Speaker 1: them define benefit schemes? Is that the rights they call them,
Speaker 1: you know, to find benefit plans? Yeah? Maybe, I just
Speaker 1: you know, PIMCO, we had to. I was around the
Speaker 1: British too often. Schemes. That's a British phrase, right, it
Speaker 1: doesn't have the same kind of right. It's a strange
Speaker 1: standard word there here it means something the farious. Yeah,
Speaker 1: ye as absolutely um and it's likely. Remember one of
Speaker 1: the British phrase that struck me is frequently when something
Speaker 1: is good around, they would say brilliant, right. I mean
Speaker 1: here in America we've reserved brilliant for you know, special
Speaker 1: sort of things. Right now, brilliant is oh that's good.
Speaker 1: How was your I'll bring it right now. I've never
Speaker 1: described an ice t is brilliant. Oh you haven't had
Speaker 1: my ice t. It's fantastic. It's it's brilliant, it's brilliant.
Speaker 1: So so what I think is having expectations, uh, bringing
Speaker 1: down expectations to what logically can they be expected over
Speaker 1: the next ten to twenty years on returns more modest numbers,
Speaker 1: more modest returns, Yeah, more modest returns. Uh. And the
Speaker 1: difficulty of doing that is the rear view mirror effect.
Speaker 1: And the last five or seven years have been absolutely
Speaker 1: glorious investment spectacular. And by the way, the people who
Speaker 1: are you mentioned earlier who are on the wrong side
Speaker 1: of that, this is once in the lifetime, maybe twice
Speaker 1: in a lifetime sort of market run. And if you
Speaker 1: missed it, well, don't worry, it'll be another one coming
Speaker 1: to round in forty years or so. That this was
Speaker 1: all about having to use monetary policy alone to get
Speaker 1: out of a litquidter D trap, which means that there's
Speaker 1: a revaluation of all long D long duration assets, with
Speaker 1: equities being the longest. Uh. And so it has been
Speaker 1: an absolute marvelous time to be in the markets because
Speaker 1: you've been revaluing assets. Now you simply have lofty asset prices.
Speaker 1: We've been revalued. What does that mean going forward? It
Speaker 1: means theoretically, and I know Rob or Not is also
Speaker 1: in this camp, theoretically lower returns over the next as
Speaker 1: is Cliff Fastness. All the quants basically are in the
Speaker 1: camp of Hey, the odds are that you're gonna see
Speaker 1: lower than average returns. You've just had higher than average returns,
Speaker 1: at least over the past six years. I mean, I mean,
Speaker 1: suppose you buy a stock that has one dollars worth
Speaker 1: of earnings at ten times, so you pay ten bucks
Speaker 1: for the stock. That's a good that's a good event
Speaker 1: has been problems. It's actually not a bad investor. I
Speaker 1: supposed five years later it's still making one dollar, but
Speaker 1: now it's but but the markets decided it's worth a
Speaker 1: thirty multiple. Still just making one Dollar's gone from ten
Speaker 1: dollars to thirty dollars. Are you a genius should do
Speaker 1: by more thirty? The if you're a momentum investor, you're
Speaker 1: all over, and if you're a value guy, you're probably
Speaker 1: a seller, not a buyer at that point exactly. And
Speaker 1: but it's really hard to say, I bought it at
Speaker 1: ten and now it's at thirty, so therefore it double wow.
Speaker 1: I made a potload of money over the last five years.
Speaker 1: I can't possibly sell this stock, and it's gonna go
Speaker 1: to sixty and there's gonna go to ninety. Human nature
Speaker 1: is to extrapolate that simple. Leon Kooperman tells the story
Speaker 1: that so another value guy from Colombia that and put
Speaker 1: up tremendous, tremendous numbers. They have a target. When they
Speaker 1: hit their targets, they sell. Some of his clients come
Speaker 1: to him and say, listen, Lee, we have a need
Speaker 1: for a tax sensitive portfolio. So he structures same basic
Speaker 1: underlying thing, only when it hits his target, he doesn't sell.
Speaker 1: He lets it run because they're not looking for It's
Speaker 1: got to be a certain length. He said. The returns
Speaker 1: on the tax sensitive portfolio are actually better then the
Speaker 1: returns on the tax insensitive portfolios because it forces you
Speaker 1: to hold things far beyond where left your own devices
Speaker 1: you might and his numbers are just ridiculous. So I
Speaker 1: know I can't keep you forever. Let me get to
Speaker 1: my favorite last two questions. Um. The first, so someone's
Speaker 1: graduating college or a millennial or whatever we want to
Speaker 1: call this generation. What advice does Paul McCully give to
Speaker 1: those kids coming out of school right now if they're
Speaker 1: thinking about a career in finance. Let's take a long
Speaker 1: walk around the block and see if you can think
Speaker 1: of another industry. Really, Um, I remember I have my
Speaker 1: son is twenty six years old and not going into
Speaker 1: the family business. No, he's not going into finance. He
Speaker 1: uh is in the technology business. He's a gamer and
Speaker 1: a programmer. Uh. And you think this technology stuff is
Speaker 1: going to catch on. What I do know, UH, is
Speaker 1: there's a lot of America that hasn't gotten, hasn't exploited
Speaker 1: the technology that we have where and in the area
Speaker 1: that my son's in, which I think is really a
Speaker 1: growth industry, is just taking what technology we have now
Speaker 1: and applying it to core businesses, whether it's education, the
Speaker 1: medical care system, the d MB, all sorts of areas,
Speaker 1: information management. Now sitting here in Bloomberg's building, obviously you
Speaker 1: have the best of it all on technology. So this
Speaker 1: floor that you're standing on, I don't know if if
Speaker 1: you ever see them take the floor apart. There's nothing
Speaker 1: but fiber optic cables as thick as your leg running
Speaker 1: through here. The building was built pre wired for nothing
Speaker 1: but information technology. But this is the exception. Most industries
Speaker 1: are not this tech forward looking, and I think, I mean,
Speaker 1: I think that is a huge growth industry. The medical
Speaker 1: profession is an area that's it's it's nice, it is
Speaker 1: right for it, government itself, transportation, lots of areas. So
Speaker 1: I think the application of technology in a general h
Speaker 1: economic sense is where their growth is. But actually know
Speaker 1: that you know the really you know wise, you know
Speaker 1: guys who can figure out, you know, what to make
Speaker 1: my my uh my smartphone do uh though I reach
Speaker 1: it reaches its limitations. I think that's a function of
Speaker 1: us being old guys. Yea. The younger kids don't, don't
Speaker 1: They don't get saturated the way. And I kind of
Speaker 1: have a foot in each camp. Um tech oriented enough
Speaker 1: to really like all my toys and my phones, but
Speaker 1: I sort of see myself the people older than me
Speaker 1: are utterly saturated sooner, and the people younger than me
Speaker 1: are wholly immersed in it with no end in sight.
Speaker 1: It's fascinating to watch that. So you wouldn't send people
Speaker 1: into finance all that that quickly? Yeah, And if you
Speaker 1: know a kid wanted to go into finance, where I
Speaker 1: would say is over the next thirty years, Asia in
Speaker 1: particular China. But I think the emerging markets at large,
Speaker 1: if they're going to shift to more domestic demand, are
Speaker 1: gonna have to to construct a household sector finance, uh
Speaker 1: sector that is meaningful and uh so that would be
Speaker 1: the area you think in terms of here in America,
Speaker 1: So be prepared to travel, be prepared to and also
Speaker 1: think in terms of bringing credit effectively to the growing
Speaker 1: middle class of the emerging market. She think in terms
Speaker 1: of market, it's a huge market and and it's got
Speaker 1: to happen over the next thirty years. It's it's underserved
Speaker 1: in partmer costs of barriers to entry. But that is
Speaker 1: a frontier for a kid a thirty year a career.
Speaker 1: Uh is to be the king of consumer finance. Go
Speaker 1: to Brazil, to an emerging emerging market where, of course
Speaker 1: you mean thinking now here in America. You know, if
Speaker 1: somebody gets out of college, he's probably already got a
Speaker 1: college loan, he gets a loan or at least on
Speaker 1: a car. You know, he borrows money from his dad
Speaker 1: for a down payment on a house. Else So we
Speaker 1: think in terms of of essentially borrowing forward income as
Speaker 1: a young person and paying it back as you get
Speaker 1: older and your income goes up. Yes, that's a concept
Speaker 1: that will get roots and the emerging markets over the
Speaker 1: next two to three decades. And there's a lot of
Speaker 1: money being to be made in that space. So Argentina, Chili, Vietnam,
Speaker 1: where would you send a kid today? You know, first
Speaker 1: of you depend upon which language facility for language. So
Speaker 1: actually the advice let's go back four years you're in college,
Speaker 1: learn to speak Portuguese, Spanish, man's are in exactly else exactly? Uh,
Speaker 1: Latin is really cool, but I don't know very many
Speaker 1: people who transact in Latin these right. You can become
Speaker 1: a monk, you can go to the original stuff and
Speaker 1: they brew fantastic beer. So but I don't know that
Speaker 1: if that's really counts as a career in finance. Okay,
Speaker 1: last question, all right, and this is my favorite. What
Speaker 1: do you know about investing today that you wish you
Speaker 1: knew when you began all those years ago? I love
Speaker 1: the thoughtful, pregnant pause too, your most precious asset. It's
Speaker 1: time I knew you were going to go there. Elucidate,
Speaker 1: expand on that to the con I can make more
Speaker 1: money if I need to make more money. I can't
Speaker 1: make more time. You can. You can. You can chant
Speaker 1: trade time for money, but you can't change trade money
Speaker 1: for time. Is the James Taylor layer, exactly. And that's
Speaker 1: what I deeply appreciate now. And I you know, I'm not,
Speaker 1: you know, beating myself up on it, but I looking back,
Speaker 1: I wish I'd had a deeper appreciation for that at
Speaker 1: a younger age. Is there any rational reason that a
Speaker 1: man has been to Beijing twenty six times and not
Speaker 1: seeing the wall. I have a friend whose company. I
Speaker 1: have a friend whose company in the mid nineties was
Speaker 1: bought by Yahoo worked out really well for him, and
Speaker 1: a conversation like this. He said something similarly. I go,
Speaker 1: do you travel all over the country, all of the
Speaker 1: world for ya who? That must be so much fun.
Speaker 1: You must see so many places? And his answer was, yeah,
Speaker 1: I could tell you what every major airport, every every
Speaker 1: major hotel, every major conference facility is like. But I
Speaker 1: have no idea what those countries are like. So when
Speaker 1: you're traveling for business, you don't get to sight. So
Speaker 1: you know, we had, um, we had somebody in here.
Speaker 1: Oh my god, I'm drawing a blank. Uh. Byron Ween.
Speaker 1: We had Byron who's still in his eighties and still
Speaker 1: travels constantly for work, which is he's at at um
Speaker 1: black Rock, still constantly traveling for work, but he takes
Speaker 1: his wife along. He builds a week into the trip,
Speaker 1: so he goes to China and then he cites these
Speaker 1: for a week. He goes to the Philippinans and then
Speaker 1: he cites he was describing having more fun now working
Speaker 1: because he sees the world. Then you know, then he
Speaker 1: did you know the decades of Morgan Stanley. It was
Speaker 1: the same situation. You may be in China twenty six
Speaker 1: times but never having seen the wall. Yeah, yeah, I
Speaker 1: guess you know, to use a you know, a cliche
Speaker 1: about the whole thing. Um, when you're a young person
Speaker 1: and immortal, you're immortal at those ages. Yeah. Actually you
Speaker 1: don't think in terms of, you know, the fact that
Speaker 1: you may get old, because you know that's the way
Speaker 1: off from the future. Finite lifespan. Is that theoretical, it's
Speaker 1: not really is the the concept of work life balance
Speaker 1: is but a concept which actually financially works out well
Speaker 1: for you because all you do is work right, But
Speaker 1: with tim uh and maturity uh, you recognize that time
Speaker 1: is your most valuable asset and that I've never seen
Speaker 1: a tombstone that d I wish I had put more
Speaker 1: hours in at the office. Speaking of time, thank you
Speaker 1: Paul McCulley for being so generous with your time. This
Speaker 1: has been absolutely fascinating. We've been speaking with Paul McCulley.
Speaker 1: He is the former chief economist at Pimco and has
Speaker 1: a long and storied history on Wall Street. If you
Speaker 1: enjoyed this conversation, and I sure no I did, look
Speaker 1: up an inch or down an inch on the Apple
Speaker 1: iTunes and you'll see our other almost five dozen uh
Speaker 1: previous Masters in Business series. I want to thank the
Speaker 1: people who helped put this interview together. My head of
Speaker 1: research is Michael Batnick. My producer, for lack of a
Speaker 1: better word, is the head engineer uh at here at
Speaker 1: Bloomberg is Charlie Vollmer. And my recording engineer is Matt
Speaker 1: Matt Ryan. I know his name is Matt. I can't
Speaker 1: remember last names. There's a lot of work that goes
Speaker 1: into putting these together, and I'm always grateful for all
Speaker 1: the assistance that that takes to make this happy. UH.
Speaker 1: Be sure and go to Apple iTunes if you enjoy this,
Speaker 1: and review the various Masters in Business series we've done,
Speaker 1: and catch us next week. I'm Barry Ridhults. You've been
Speaker 1: listening to Masters in Business on Bloomberg Radio.