WEBVTT - An Interview With Paul McCulley: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.520 --> 0:00:12.760 Welcome to the podcast. This week, my special guest is 0:00:12.880 --> 0:00:18.880 Paul McCully. Paul has been chief Economists, bond desk manager, 0:00:20.079 --> 0:00:24.120 a whole number of roles, UH, member of the investment community, 0:00:24.120 --> 0:00:28.960 and perhaps the most important confidante of Bill Gross at 0:00:29.040 --> 0:00:33.840 PIMCO for many, many years. He is now squasi retired. 0:00:33.920 --> 0:00:38.360 He's in his um mid to late fifties, and I 0:00:38.400 --> 0:00:41.000 believe he's gonna eventually find his way to some Ivy 0:00:41.080 --> 0:00:48.760 League school UM as a professor. He's he's far too experienced, knowledgeable, 0:00:48.880 --> 0:00:53.400 and and a great communicator to to just retire and 0:00:53.840 --> 0:00:56.400 let those skills waste. He'll he'll find his ways to 0:00:56.480 --> 0:01:00.280 a professorship somewhere. We have a long and and really 0:01:00.320 --> 0:01:06.480 fascinating conversation about the Federal Reserve and the financial crisis, 0:01:06.959 --> 0:01:09.800 the state of the global economy, what's going on in 0:01:09.800 --> 0:01:14.319 inflation and deflation. We really talked about everything and anything, 0:01:14.760 --> 0:01:17.800 and as you'll hear, he can wax eloquent on just 0:01:17.920 --> 0:01:22.840 about any subject intremendous depth. I can re regale you 0:01:22.920 --> 0:01:25.520 and recount some of the highlights, but I don't wanna 0:01:26.120 --> 0:01:29.639 reveal any spoilers, So rather than me doing my usual 0:01:29.720 --> 0:01:33.120 five minute babble to start the podcast, instead, I'm just 0:01:33.160 --> 0:01:37.399 gonna say, without any further ado, my conversation with Pimco's 0:01:37.600 --> 0:01:45.319 Paul McCulley. This is Masters in Business with Barry Ridholts 0:01:45.520 --> 0:01:50.640 on Bloomberg Radio. My special guest this week is Paul McCulley. 0:01:50.720 --> 0:01:54.240 He is probably best known as the chief economist and 0:01:54.360 --> 0:01:59.160 Managing director at PIMCO, where he served from two thousand 0:01:59.200 --> 0:02:02.640 and Tenna's that about right, with a little stint afterwards, UH, 0:02:02.880 --> 0:02:06.360 sort of a return visit. Uh. Got his MBA from 0:02:06.440 --> 0:02:11.680 Columbia Business School, headed pimco's short term bond desk, led 0:02:11.720 --> 0:02:15.320 the cyclical economic forums, and was a member of the 0:02:15.360 --> 0:02:20.440 Investment committee named to the Institutional All America Fixed Income 0:02:20.800 --> 0:02:24.079 Research Team. That I get that right, I really. I 0:02:24.120 --> 0:02:27.120 think of Paul as one of the most astute fed 0:02:27.160 --> 0:02:31.440 watchers there is. He's often on the shortlist as a 0:02:31.520 --> 0:02:36.440 potential f O m c role. McCully coined the term 0:02:36.520 --> 0:02:42.080 Minsky moment in response to the Russian uh financial crisis, 0:02:42.160 --> 0:02:47.640 and is rumored to have coined the phrase shadow banking system. 0:02:46.960 --> 0:02:50.520 More than a rumor that you get full credit for that. Currently, 0:02:50.520 --> 0:02:53.960 he's a member of the board of the Global Interdependent Center, 0:02:54.320 --> 0:02:57.520 better known as g i C. It's a thin tank 0:02:57.720 --> 0:03:00.880 in Philly, and pretty much what are doing these days 0:03:01.200 --> 0:03:04.280 is thinking, writing, and speaking. Is that, uh, the way 0:03:04.320 --> 0:03:06.720 you like to describe it? Yeah, it is. I'm first 0:03:07.040 --> 0:03:12.639 gamefully unemployed, meaning that I'm retired, but I'm not retired 0:03:12.720 --> 0:03:15.480 from the things that I love doing. Uh. And it 0:03:15.560 --> 0:03:19.960 really comes down to global macro and I think about it, 0:03:20.440 --> 0:03:23.680 I write about it, and I give about one lecture 0:03:23.840 --> 0:03:27.680 or speech a months. So right now that's what I'm doing. 0:03:28.280 --> 0:03:32.600 I'm getting more closely involved in the academic arena uh 0:03:32.680 --> 0:03:35.800 and may end up in the next six months as 0:03:35.840 --> 0:03:40.680 an adjunct professor at some esteemed institution, but that's still 0:03:40.760 --> 0:03:43.440 in the works. But right now I like to uh uh, 0:03:43.560 --> 0:03:48.000 to think and write and speak. And uh. I when 0:03:48.040 --> 0:03:51.640 I speak for nonprofits and for academics, the prices zero, 0:03:52.680 --> 0:03:56.240 and occasionally I speak for a for profit and the 0:03:56.440 --> 0:04:00.120 price is a large number. So it's either zero are 0:04:00.240 --> 0:04:05.920 large number. So we could describe you as gainfully retired exactly, 0:04:06.000 --> 0:04:08.400 all right, And and you're in your fifties, you're not 0:04:08.880 --> 0:04:11.360 a really a retirement age. You're looking to do something. 0:04:11.560 --> 0:04:13.960 By the way, I forgot to say, Paul McCulley, welcome 0:04:14.000 --> 0:04:18.440 to Bloomberg. Thanks good so so nice to have you here. UM. 0:04:18.480 --> 0:04:21.760 So let's start out talking a little bit about your background. 0:04:22.720 --> 0:04:24.680 I know you're you're a Virginia boy, right, is that 0:04:24.720 --> 0:04:27.840 where you're from. I grew up in rural Virginia outside 0:04:27.920 --> 0:04:31.359 of Stanton, Virginia, which is down in the General Valley 0:04:31.400 --> 0:04:35.640 of Virginia, about three hours southwest of UH of Washington, 0:04:35.720 --> 0:04:38.920 d CE, A beautiful area. I grew up there as 0:04:38.960 --> 0:04:43.920 a Baptist minister's son and graduated from high school UH 0:04:44.040 --> 0:04:49.599 in nineteen and seventy five, went to Grennell College out 0:04:49.680 --> 0:04:53.279 in Iowa. So so from how green is your valley 0:04:53.279 --> 0:04:56.919 to Iowa to New York City, that's kind of a surprising, 0:04:57.120 --> 0:05:01.719 uh way to bounce around. Yeah, it is Grannelle. I'm 0:05:01.760 --> 0:05:04.280 on the board of trustees at Grannelle and have been 0:05:04.320 --> 0:05:06.640 so for a number of years. Is a special place 0:05:06.800 --> 0:05:10.200 in my life and heart. And that they recruited me 0:05:10.960 --> 0:05:15.200 uh in nineteen seventy five as a hit from Virginia. UH. 0:05:15.360 --> 0:05:20.359 Grannelle is a small, private liberal arts college traditional liberal 0:05:20.440 --> 0:05:23.600 arts education. Learned a lot about a lot of different 0:05:23.640 --> 0:05:26.160 things and be able to use it in a variety 0:05:26.200 --> 0:05:29.560 of applications. Learn how to think, not just be an 0:05:29.560 --> 0:05:33.160 expert in a narrow space. Can we do UH an 0:05:33.160 --> 0:05:37.120 infomercial for you for Grannell? I mean, that's that's what 0:05:37.400 --> 0:05:40.799 That's what a good liberal arts education is about. UH. 0:05:40.839 --> 0:05:45.360 And Grannell is a national college UH. And part of 0:05:45.400 --> 0:05:50.440 their endeavor in recruiting UH is that they literally buy 0:05:50.520 --> 0:05:53.479 the list from the S A T people who do 0:05:54.080 --> 0:05:58.279 of students throughout the country who do well A and 0:05:58.480 --> 0:06:02.480 B might need some financial help in order to go 0:06:02.600 --> 0:06:05.240 to Grannell. Where were they when I was in high school? 0:06:05.360 --> 0:06:08.040 So I came up on their meter on the SS 0:06:08.040 --> 0:06:12.080 A T S of a kid from rural Virginia. Put 0:06:12.120 --> 0:06:15.440 the two together, UH, and they started talking to me. 0:06:15.560 --> 0:06:18.000 And then the third factor is that I was a 0:06:18.080 --> 0:06:22.040 runner UH in UH in high school. I was six 0:06:22.120 --> 0:06:25.600 in the state of Virginia my senior year in cross country, 0:06:25.720 --> 0:06:29.320 and the cross country coach at Grannell College sitting maybe 0:06:29.320 --> 0:06:32.080 we got a hat trick here? So how do you 0:06:32.080 --> 0:06:36.360 go from Grennell to NBA at Columbia. That was just 0:06:36.480 --> 0:06:39.760 an old fashioned sort of process, and that when I 0:06:39.800 --> 0:06:44.240 was graduating UH from Grennell with a degree in economics, 0:06:44.240 --> 0:06:47.160 I wanted to go to business school and looked at 0:06:47.240 --> 0:06:50.920 the brand name business schools, and I was intrigued by 0:06:51.680 --> 0:06:54.479 by Columbia. I had never been to New York City 0:06:54.520 --> 0:07:00.560 before UH, and applied and for some reason I was accepted. 0:07:01.000 --> 0:07:03.000 And I say for some reason, and that I was 0:07:03.000 --> 0:07:06.800 twenty two and went straight from college to business, nothing 0:07:06.800 --> 0:07:09.440 in between, nothing in between. And I understand that that 0:07:09.560 --> 0:07:12.720 is just not done anymore. They want people to have 0:07:12.760 --> 0:07:15.120 a year or two of real world experience. Yeah. I 0:07:15.120 --> 0:07:20.160 think in my class at Columbia, ten of us were 0:07:20.280 --> 0:07:22.560 the kids who went straight from college. So I got 0:07:22.600 --> 0:07:27.000 out of UH of Columbia twenty four, relatively young to 0:07:27.040 --> 0:07:28.760 have an m b A. And and to the world. 0:07:29.120 --> 0:07:31.880 So a couple of questions about Columbia. A couple of 0:07:31.920 --> 0:07:35.880 weeks ago, we had Leon Cooperman of Omega Advisors, and 0:07:36.000 --> 0:07:40.280 he couldn't be more effusive in praise for his Columbia experience. 0:07:40.600 --> 0:07:43.480 He still buds with some of his classmates, one in 0:07:43.520 --> 0:07:48.040 particular Mario ga Belly also Art Sandberg, formerly of Pequad. 0:07:48.640 --> 0:07:51.360 What really stood out to you about Columbia and any 0:07:51.400 --> 0:07:53.960 people you're still tight with from back in those days. 0:07:54.920 --> 0:07:59.120 I really enjoyed my two years at Columbia because it 0:07:59.200 --> 0:08:02.880 gave me a chance to more from economics, and that's 0:08:02.920 --> 0:08:06.920 really what I was about as an undergrad UH into 0:08:07.240 --> 0:08:11.600 finance and markets. So I think my two years at 0:08:12.480 --> 0:08:16.560 Columbia really gave me the melding of economics and finance, 0:08:16.600 --> 0:08:19.320 which set me up nicely for what turned out to 0:08:19.360 --> 0:08:23.040 be the rest of my career. You're listening to Masters 0:08:23.040 --> 0:08:26.720 in Business on Bloomberg Radio. My special guest today Paul McCulley. 0:08:27.080 --> 0:08:31.680 He was chief economist at PIMCO for UH, really fascinating 0:08:31.720 --> 0:08:35.480 period of time, the dot com collapse, throughout the two thousands, 0:08:35.520 --> 0:08:39.960 the financial crisis. One of the things I'm curious about is, 0:08:40.559 --> 0:08:43.000 so you go to Columbia to get your m b A. 0:08:43.120 --> 0:08:47.480 They're really known as a deep value shop on the 0:08:47.520 --> 0:08:51.480 equity side, yet you end up running a bond desk 0:08:51.520 --> 0:08:54.640 as well as doing the global macro How did that 0:08:54.679 --> 0:08:59.360 come about? Columbia is known as a stockhouse when you 0:08:59.360 --> 0:09:02.960 think in terms of the famous graduates. Uh. I'm a 0:09:03.040 --> 0:09:08.679 macro economist who also loves finance and try to merge 0:09:08.720 --> 0:09:11.679 the two, which ultimately was the reason I became such 0:09:11.720 --> 0:09:16.640 a Minsky I, if you will, of macro and finance. Uh. 0:09:16.679 --> 0:09:20.640 And I learned all the appropriate equity models, which was 0:09:20.679 --> 0:09:23.960 a good thing while I was at Colombia. But actually 0:09:24.040 --> 0:09:27.160 I did not get a job immediately on Wall Street 0:09:27.600 --> 0:09:30.080 in nineteen eight one. Remember nineteen eight one was not 0:09:30.240 --> 0:09:33.240 a really great time for Wall Street. I was a 0:09:33.280 --> 0:09:36.400 twenty four year old kid with a deep Southern accent, 0:09:36.520 --> 0:09:39.120 and I interviewed with all the major players because I 0:09:39.160 --> 0:09:43.600 did well there and didn't get a job from Morgan 0:09:43.720 --> 0:09:47.560 Stanley or Goldman Sachs or any of the major players. Uh. 0:09:47.600 --> 0:09:49.760 So I took a job from my first two years 0:09:49.920 --> 0:09:55.240 out of Columbia UH working for Concho, a division of 0:09:55.360 --> 0:09:59.440 at that time DuPont UH. And my first two years 0:09:59.600 --> 0:10:04.440 were at a speech writer for the executives of Kanaka. Really, 0:10:04.559 --> 0:10:06.760 that's fascinating. That was the first thing I did was 0:10:06.840 --> 0:10:10.880 actually as a ghostwriter for the executives, doing ahbeds and 0:10:11.280 --> 0:10:13.560 speeches and that sort of thing. And I got my 0:10:13.640 --> 0:10:17.400 first job on Wall Street and that teen and eighty 0:10:17.400 --> 0:10:21.160 three at E. F. Hunton. Oh. Really, we've had plenty 0:10:21.200 --> 0:10:23.960 of EF hunting people passed through here. In fact, IF 0:10:24.040 --> 0:10:28.160 Hunton seems to have been a huge feeder, obviously the 0:10:28.200 --> 0:10:30.760 spin out of Lehman Brothers, but also I know a 0:10:30.760 --> 0:10:33.199 lot of people who ended up going from IF Hunton 0:10:33.679 --> 0:10:36.400 to bear Sterns and EF Hunton to a number of 0:10:36.400 --> 0:10:39.520 other shops. So how do you go from if Hunton? 0:10:39.600 --> 0:10:44.320 Ultimately you between IF Hutton and Pimco, you find your 0:10:44.320 --> 0:10:48.160 way to UBS, which I think was Warburg at the time. Yeah, 0:10:48.160 --> 0:10:50.640 it was. It's kind of I haven't thought about my 0:10:50.760 --> 0:10:53.120 CV in a long period of time. Got to updated. 0:10:53.120 --> 0:10:56.320 It's a little skimpy, A little skimpy. Actually. The story 0:10:56.480 --> 0:11:00.560 of of nineteen eighty three when I went to F Hutton, 0:11:01.160 --> 0:11:06.520 uh Eddie Ardini had been the chief of of EF Hutton. 0:11:06.520 --> 0:11:08.280 In fact, I had studied under Eddie when he was 0:11:08.360 --> 0:11:11.520 an adjunct professor at Columbia, and it turned out he 0:11:11.679 --> 0:11:15.280 had left and went to prove there's been a big 0:11:15.320 --> 0:11:17.880 sort of movement at Proof for a long time. And 0:11:17.920 --> 0:11:20.559 when he left E. F. Hutton there was an economist 0:11:20.600 --> 0:11:25.400 in corporate finance there with the PhD from Hopkins named 0:11:25.440 --> 0:11:29.880 Bob Barbera. So they put him into action as the 0:11:29.960 --> 0:11:33.760 chief economist and he was looking for a number two 0:11:34.760 --> 0:11:38.679 who understood finance because he was an energy economist. So 0:11:38.760 --> 0:11:42.280 Bob and I worked together UH for four years, great 0:11:42.320 --> 0:11:47.320 relationship between three and nine seven, and then I left 0:11:47.360 --> 0:11:52.199 for three years to go work for Columbia Savings and 0:11:52.320 --> 0:11:57.360 Loan in Beverly Hills, California for Tom Spiegel back during 0:11:57.400 --> 0:12:01.280 the milk and days. Sure. UH worked there for three years, 0:12:01.280 --> 0:12:04.080 not in junk bonds, but in running interest rate risk 0:12:04.840 --> 0:12:07.559 for the SNL and then jump bonds blew it up. 0:12:07.800 --> 0:12:10.240 And then I went to Pimco in nineteen So, so 0:12:10.360 --> 0:12:14.240 did you first trip to California? Was that the first time? 0:12:14.360 --> 0:12:17.160 First experience at West or had you been there previously? 0:12:17.360 --> 0:12:20.719 I had traveled during my E. F. Hutton days to California, 0:12:20.800 --> 0:12:24.719 But my move to California, UH, the first time was 0:12:24.760 --> 0:12:29.400 in nineteen and eighty seven. I spent three years working 0:12:29.400 --> 0:12:33.560 with Columbia in the Drexel Hub UH, and then Bill 0:12:33.600 --> 0:12:38.120 Gross gave me a job when I was unemployed in 0:12:38.360 --> 0:12:42.840 nineteen nine. So how long will you at Pimco Ford? 0:12:43.000 --> 0:12:46.520 In total? I was two years there between ninety and 0:12:46.600 --> 0:12:50.000 ninety two, UH, and then I got the job as 0:12:50.080 --> 0:12:52.920 chief economists for U b S and I did that 0:12:53.200 --> 0:12:58.680 for seven years until back to nine and Bill Gross 0:12:58.760 --> 0:13:01.800 called me up and said, you're coming home, and I 0:13:01.840 --> 0:13:05.600 came home. So, so let's talk a little bit about Bill, 0:13:05.600 --> 0:13:08.520 because I he we've had him on the show. I 0:13:08.559 --> 0:13:12.360 find him to be a fascinating guy. Um, what was 0:13:12.400 --> 0:13:16.040 it like working with somebody who is, you know, larger 0:13:16.080 --> 0:13:18.920 than life. Uh, he's supposed to be a tough character 0:13:19.040 --> 0:13:23.320 to work for. I've known Bill for twenty five years, 0:13:23.600 --> 0:13:26.000 and I've known him well for twenty five years. So 0:13:26.040 --> 0:13:29.360 it's kind of hard to give you just a snapshot 0:13:29.400 --> 0:13:33.840 of Bill because my life experience with Bill is a 0:13:33.880 --> 0:13:38.280 movie from an unemployed kid in nineteen nine, uh to 0:13:38.840 --> 0:13:42.280 literally last year when I suited up one more time 0:13:43.000 --> 0:13:47.960 at his personal request as a personal friend for four 0:13:48.040 --> 0:13:52.040 months last year. So it's a very long, uh movie 0:13:52.080 --> 0:13:57.640 with me, A wonderful movie. Uh. He is a fascinating person. 0:13:58.200 --> 0:14:05.280 Incredibly smart, uh sometimes incredibly stubborn, right I get that sense. 0:14:05.360 --> 0:14:11.400 Also a absolute huge heart, but has it exceedingly well. 0:14:12.040 --> 0:14:15.360 He told us some really interesting stories about walking around, 0:14:15.960 --> 0:14:18.840 you know, Newport Beach in the nineties and the two 0:14:18.840 --> 0:14:21.280 thousands and people asking him, Hey, Bill, what do we 0:14:21.320 --> 0:14:23.440 do with our money, and he would stop and say, 0:14:23.880 --> 0:14:26.400 look at this fun this is something that makes might 0:14:26.440 --> 0:14:29.680 make sense to you. He seems very accessible to people, 0:14:29.880 --> 0:14:33.240 very uh, very real. You also worked with him in 0:14:33.320 --> 0:14:37.840 Muhammad Alarian. What's it like having to really smart outsized 0:14:37.880 --> 0:14:41.120 personalities and you're kind of in the middle. How is 0:14:41.160 --> 0:14:45.720 that as an experience? I know both men exceedingly well, 0:14:45.840 --> 0:14:50.160 and both men are close personal friends of mine. They're 0:14:50.280 --> 0:14:57.040 exceedingly different, and I think that's why there marriage and 0:14:57.120 --> 0:15:00.880 that's what it was lasted for as long as it 0:15:00.960 --> 0:15:06.680 did very effectively, uh, by any measure that was. I 0:15:06.760 --> 0:15:10.360 know everybody focuses on the acrimonious divorce, but that was 0:15:10.400 --> 0:15:15.480 a tremendously successful period in pimco's history. It really really was. 0:15:15.680 --> 0:15:19.440 Mohammad came back from Harvard uh, and that was right 0:15:19.480 --> 0:15:23.960 before we went into the men Sky moment. We were prepared, UH. 0:15:24.200 --> 0:15:28.280 We had our risk management and order UH. And for 0:15:28.360 --> 0:15:33.680 the following number of years. UH, it was truly Camelot. 0:15:34.040 --> 0:15:37.880 So the one real important question I have to ask 0:15:37.920 --> 0:15:44.800 about PIMCO. Their growth corresponded with a tremendous bond bull market, 0:15:44.800 --> 0:15:47.800 a thirty plus year bond bull market, but every other 0:15:47.880 --> 0:15:50.720 bond manager had the same wind that at their back. 0:15:51.320 --> 0:15:54.280 What did PIMCO do that allowed them to capitalize on 0:15:54.320 --> 0:15:57.600 that market so much better than just about everybody else? 0:15:59.160 --> 0:16:04.200 Thank There a lot of factors. First and foremost is 0:16:04.360 --> 0:16:09.359 the pure genius of the founders. And there were three founders, 0:16:09.520 --> 0:16:15.920 not just Gross, but Jim Muzzy and Bill Podlick. Bill 0:16:16.000 --> 0:16:21.520 Podlick was an amazing businessman, Jim Muzzy, they're all three alive. 0:16:21.600 --> 0:16:26.440 Jim Muzzy is an amazing client man and marketing man, 0:16:27.040 --> 0:16:30.240 and Bill Gross is an amazing investor. So from the 0:16:30.280 --> 0:16:33.600 beginning of the firm, they had a division of labor 0:16:34.280 --> 0:16:38.120 is you run the business, you run the clients, and 0:16:38.160 --> 0:16:41.760 I run the money. Uh. And so therefore there was 0:16:41.800 --> 0:16:47.960 a clear articulation of whose job was whose job, And 0:16:48.000 --> 0:16:50.960 the three men who ran the place from the beginning 0:16:51.640 --> 0:16:55.840 did an extraordinary job of doing their jobs and cooperating. 0:16:55.840 --> 0:16:58.440 So I think the part of it is the genius 0:16:58.480 --> 0:17:02.640 of the organizational structure, sure, and the three men who 0:17:02.720 --> 0:17:06.919 were the founders. I think that's hugely important because I 0:17:06.960 --> 0:17:09.680 look at a lot of other competitors and they've never 0:17:09.800 --> 0:17:13.960 really quite grasp that it is a three part business, 0:17:14.440 --> 0:17:17.040 and that you can be really good at one part 0:17:17.480 --> 0:17:20.520 but maybe not the other two. So I think that 0:17:20.760 --> 0:17:25.560 is a key factor, another factor, And here I simply 0:17:25.600 --> 0:17:28.600 have to take my hat off to Bill Gross. Uh. 0:17:28.600 --> 0:17:34.919 He's brilliant. Uh. He is a macro thinker. Uh. And 0:17:35.000 --> 0:17:38.280 also he is a very good marketer. So in the 0:17:38.359 --> 0:17:42.080 last minute we have, let me ask you this related question. 0:17:42.160 --> 0:17:45.359 Did it become harder and harder to keep delivering the 0:17:45.400 --> 0:17:49.280 sort of performance numbers the firm became known for as 0:17:49.320 --> 0:17:52.359 the size uh continue to grow or was that just 0:17:52.480 --> 0:17:55.720 something that had to be dealt with that everybody deals 0:17:55.760 --> 0:17:59.600 with as they grow. Bill has spoken to this, and 0:17:59.640 --> 0:18:03.600 I think you spoken the truth. By definition, it gets 0:18:03.840 --> 0:18:07.879 harder the bigger you are. You're listening to Masters in 0:18:07.960 --> 0:18:11.159 Business on Bloomberg Radio. My special guest this week is 0:18:11.160 --> 0:18:14.679 Paul McCulley. He was chief economist and part of the 0:18:14.720 --> 0:18:18.960 investment committee at PIMCO for quite a long time. Let's 0:18:18.960 --> 0:18:21.560 talk a little bit about this global economy which seems 0:18:21.600 --> 0:18:26.639 to be a little bit influx. First question, inflation, disinflation 0:18:27.320 --> 0:18:31.879 or deflation from a global perspective of the predominant tail wind? 0:18:32.040 --> 0:18:37.520 Is disinflation if not deflation. Describe the difference between the 0:18:37.560 --> 0:18:40.639 two for listeners who may not pick up the nuances 0:18:40.680 --> 0:18:45.760 between them. Disinflation is a slow down in the rate 0:18:46.400 --> 0:18:50.160 of inflation, so rices are still rising, but rising at 0:18:50.200 --> 0:18:56.480 a slower rate. Where deflation is actually a fall in prices. 0:18:56.480 --> 0:19:00.280 And we're experiencing deflation and a lot of commodity with 0:19:00.320 --> 0:19:06.680 everyone knowing about oil. That's deflation, whereas disinflation would be 0:19:07.119 --> 0:19:14.320 just a very very slow and slower rate of increase, 0:19:14.480 --> 0:19:19.240 slowing inflation as opposed to falling process. Perfect example, suppose 0:19:19.280 --> 0:19:22.600 you've got a three percent raise last year and this 0:19:22.680 --> 0:19:27.439 year you've got a one percent raise. You experience disinflation. 0:19:27.520 --> 0:19:30.520 You went from a three percent raise to a one 0:19:30.560 --> 0:19:34.000 percent raise. If your boss cut your pay by three percent, 0:19:34.440 --> 0:19:38.440 you experienced deflation, actual deflation. So you you mentioned oil, 0:19:38.520 --> 0:19:41.520 let's talk about it. Oil peaked last year at a 0:19:41.600 --> 0:19:44.280 hundred and twelve dollars. It's now running in about forty 0:19:44.320 --> 0:19:49.560 three dollars. That's a six decrease. So the two questions 0:19:49.640 --> 0:19:52.360 that everyone wants to know, what are the causes of this? 0:19:53.119 --> 0:19:56.439 I don't know if that's all that challenging of a question. 0:19:56.520 --> 0:19:59.920 With the dollar rate multi year eyes, massive supplies come 0:20:00.080 --> 0:20:03.879 online and softening of demand. The more important question is 0:20:04.280 --> 0:20:07.720 what are the implications of this failing oil price? Oil price? 0:20:08.000 --> 0:20:09.560 What does this mean to the US, What does it 0:20:09.600 --> 0:20:13.119 mean to countries like China and the global economy? And 0:20:13.160 --> 0:20:17.439 feel free to completely disagree with my causes, No, I 0:20:17.480 --> 0:20:19.840 think I agree with your causes. I would put the 0:20:19.880 --> 0:20:23.080 dollar at the low at the low end of my list. 0:20:23.520 --> 0:20:26.720 At the highest end is the fact that at a 0:20:26.800 --> 0:20:30.880 hundred dollar plus for oil and technology, you had an 0:20:30.920 --> 0:20:35.480 incredible economic incentive to increase supply, and we did, and 0:20:35.680 --> 0:20:40.040 huge we did, and huge and so and supply outstrip demand. 0:20:40.480 --> 0:20:44.080 OPEC sucked it up, Saudi Arabia sucked it up and 0:20:44.160 --> 0:20:48.600 kept the price up there. But ultimately the sheer force 0:20:48.680 --> 0:20:52.480 of increased supply meant that if Saudi Arabia continued the 0:20:52.520 --> 0:20:55.680 game and tried to defend it at a hundred, they 0:20:55.680 --> 0:20:59.119 would not be in the all production business anymore. Uh. 0:20:59.240 --> 0:21:04.360 So that was the underlying economics micro economics of that 0:21:04.520 --> 0:21:08.399 is that a hundred didn't work. Uh And I don't 0:21:08.400 --> 0:21:11.520 know if forty works, but clearly forty is more likely 0:21:11.560 --> 0:21:14.200 to work than a hundred. And now we have my 0:21:14.400 --> 0:21:16.680 ran coming online as well. How what's that going to 0:21:16.760 --> 0:21:21.120 do to it? It's certainly is relative to where we 0:21:21.119 --> 0:21:26.680 were going to increase supply. And global demand has been 0:21:26.840 --> 0:21:34.560 exceedingly weak because global economic activity. Global agree demand has 0:21:34.600 --> 0:21:38.760 been weak ever since the financial crisis for two thousand 0:21:38.800 --> 0:21:43.440 and eight UM. And I think demand for oil really 0:21:43.520 --> 0:21:48.240 is more a function of growth than it is the price. Uh. 0:21:48.280 --> 0:21:53.280 And right now, the demand side is impacted negatively by 0:21:53.440 --> 0:21:55.919 weak growth. And you've got supplies out of a flood. 0:21:55.960 --> 0:21:57.920 So you put two and two together and you get 0:21:57.960 --> 0:22:00.560 forty buck oil. There you go. And you know, when 0:22:00.600 --> 0:22:04.520 you're growing robustly, it almost doesn't matter what the price 0:22:04.520 --> 0:22:06.840 of oil is. We needed bring it in, but let's 0:22:06.880 --> 0:22:09.440 just just get it in here knowing thinks twice about it. Yeah, 0:22:09.760 --> 0:22:14.040 and walk terms uh And the short run, the demand 0:22:14.040 --> 0:22:17.120 for oil is a whole lot more income elastic than 0:22:17.160 --> 0:22:19.600 it is price elastic. So let's let's talk about So 0:22:19.680 --> 0:22:22.800 we've seen, for lack of a bit of word punk 0:22:22.960 --> 0:22:26.879 growth ever since the crisis. The US seems to be 0:22:27.040 --> 0:22:30.679 leading in the recovery, behind US as Japan. Behind Japan 0:22:30.800 --> 0:22:34.360 is Europe. What's it gonna take to see global growth returned? 0:22:34.400 --> 0:22:37.720 To forget five percent of four percent, how about three 0:22:37.760 --> 0:22:40.359 percent in the United States and three percent in Europe. 0:22:40.640 --> 0:22:45.040 I'm not looking for a return to robust global growth 0:22:45.280 --> 0:22:50.040 for a long long time, and there are several reasons 0:22:50.119 --> 0:22:54.480 for that. First and foremost is my diagnosis of the 0:22:54.640 --> 0:22:59.480 breaking growth going back to two thousand and eight and 0:22:59.560 --> 0:23:03.280 the years prior to the financial crisis. You had a 0:23:03.320 --> 0:23:09.080 financial sector boom. You had a private sector borrowing boom. 0:23:09.160 --> 0:23:12.320 We all know about it in the housing sector here, 0:23:12.720 --> 0:23:17.720 but also the Club Med countries in Europe had a 0:23:17.760 --> 0:23:23.159 massive private sector boom and borrowing, so you were driving 0:23:23.240 --> 0:23:29.240 growth with increased private leverage. Every since then, the private 0:23:29.280 --> 0:23:34.080 sector has been de levering, either outright or slowing its 0:23:34.160 --> 0:23:38.040 pace of debt accumulation. So you've had a negative from 0:23:38.080 --> 0:23:42.800 the private sector because of de levering. Now, logic, good 0:23:42.840 --> 0:23:46.760 old fashioned Keynesian logic from where I live and breede, 0:23:46.760 --> 0:23:51.040 would suggest if the private sector is in force de levering, 0:23:51.680 --> 0:23:55.320 the government sector should go the other direction in order 0:23:55.359 --> 0:24:00.199 to maintain adequate aggregate demand. You're listening to Master in 0:24:00.240 --> 0:24:03.399 Business on Bloomberg Radio. My special guest this week is 0:24:03.440 --> 0:24:07.520 Paul McCulley. He served as chief economist, head of one 0:24:07.520 --> 0:24:10.760 of the bond desks, and member of the investment committee 0:24:10.800 --> 0:24:16.160 at PIMCO for many years. Earlier, we started talking about 0:24:16.200 --> 0:24:19.720 Europe and that leads to the Federal Reserve. So let's 0:24:19.800 --> 0:24:22.280 let's hold off on Europe and Japan for that matter, 0:24:22.640 --> 0:24:26.640 and talk about the financial crisis here and the Federal 0:24:26.760 --> 0:24:30.920 reserves response. So, first question, what did the FED get right? 0:24:31.040 --> 0:24:33.960 What did they do right that a lot of people 0:24:34.000 --> 0:24:36.960 don't seem to really understand. I think the Fed has 0:24:37.000 --> 0:24:42.520 done a huge amount of things that are right every 0:24:42.520 --> 0:24:46.720 since the financial crisis. I can argue with some of 0:24:46.760 --> 0:24:49.879 the technical details of this, that or the other, but 0:24:50.040 --> 0:24:54.360 the broad thrust of monetary policy every since the financial 0:24:54.560 --> 0:25:01.919 crisis has been spot on. So zero interests policy, quantitative easing, 0:25:02.640 --> 0:25:05.439 all of the regulation they've put in the place, stress 0:25:05.480 --> 0:25:08.960 tests for the banks. You're you like all of that. Yeah, 0:25:09.000 --> 0:25:13.879 I'm a big believer that they did a mosaic of 0:25:14.200 --> 0:25:17.280 good things. And remember, the regulatory side of things is 0:25:17.320 --> 0:25:22.280 not just the Federal Reserve. You know, Frank, you have SEC, 0:25:22.640 --> 0:25:24.920 you have a whole bunch of other the f D, 0:25:25.000 --> 0:25:28.040 I see, there a whole bunch of other regulatory agency yeah, exactly. 0:25:28.080 --> 0:25:29.919 We now have an f sock. So therefore we have, 0:25:30.080 --> 0:25:33.800 you know, this collection of regulatory agencies and the FEDS 0:25:33.920 --> 0:25:37.800 part of that. But from pure monetary policy, I think 0:25:37.840 --> 0:25:42.159 they have been spectacular. And I want to speak to 0:25:42.560 --> 0:25:50.960 quantitative easing UM. And quantitative easing has two impacts. One, 0:25:51.200 --> 0:25:53.679 which is what the market tends to focus on, is 0:25:53.720 --> 0:25:57.520 the sheer supply demand effect that the balance sheet balance 0:25:58.480 --> 0:26:02.320 their buying duration out the marketplace, which was you know, 0:26:02.400 --> 0:26:06.119 the uh uh, the notion that somehow they're gonna bloom 0:26:06.160 --> 0:26:09.040 their balance sheet and we're gonna have you know, hyper inflation, 0:26:09.480 --> 0:26:13.040 those ups of the dollar, hyper inflation, five thousand dollar gold, 0:26:13.560 --> 0:26:17.840 all of that nonsense. And that's the only thing I 0:26:17.880 --> 0:26:20.800 can say politely about it. That we heard six years 0:26:20.800 --> 0:26:26.360 ago was nonsense. And those who were spouting it, oh 0:26:26.480 --> 0:26:30.280 the world and apology and they old Ben Bernankee personally, 0:26:30.359 --> 0:26:35.080 an apology. When you're in a liquidity trap, uh, you 0:26:35.200 --> 0:26:38.639 go to zero for interest rates, nothing much happens in 0:26:38.680 --> 0:26:43.199 the private sector because the private sector is delevering. So 0:26:43.359 --> 0:26:47.600 you do what's next, which is quantitative easing, which has 0:26:47.640 --> 0:26:52.560