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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.

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Speaker 1: Tracy, you know what actually surprises me a little bit

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Speaker 1: about twenty twenty four, maybe twenty twenty three.

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Speaker 2: We're only we're only two weeks in, so go on, or.

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Speaker 1: Maybe it's twenty twenty three. So here's what surprised. Maybe,

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Speaker 1: and think about this, like we've had this a huge

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Speaker 1: increase in raids. We're coming to the end, you know,

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Speaker 1: the pandemic like shook up the world. But by and large,

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Speaker 1: like things have normalized in some level. I'm surprised that

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Speaker 1: things aren't more different than they are in fact. Yeah, Like,

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Speaker 1: you know, we have the Nasdaq surging. I was just

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Speaker 1: looking at It's like the Nasdaq was surging back of

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Speaker 1: the day, NASA crypto is back. Like I thought the

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Speaker 1: world was gonna change or turned upside down. And yet

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Speaker 1: like I'm kind of surprised, like we have this seemingly

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Speaker 1: different macro environment, and I'm a little surprised by how

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Speaker 1: many themes actually did not go awheyre did not change.

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Speaker 2: It's kind of crazy. So rates have basically like tripled

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Speaker 2: or at least funding costs, yeah, tripled for companies, and

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Speaker 2: yet as far as I can tell, we're sort of

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Speaker 2: heading back into twenty twenty two territory. I know the

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Speaker 2: S and P five hundred has been wobbling a bit.

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Speaker 2: We're recording this on January seventeenth, so it's been down

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Speaker 2: for the past couple days or so. But we did

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Speaker 2: have a really big rally going into the end of

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Speaker 2: twenty twenty three. A lot of the tech companies, the

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Speaker 2: usual culprits, the ones you would recognize from twenty twenty

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Speaker 2: one to twenty twenty two, were sort of leading the way.

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Speaker 2: It is strange that we are in a new regime

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Speaker 2: of higher interest rates, and yet the new regime looks

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Speaker 2: a lot like the old regime.

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Speaker 1: And then throw in some of these huge things. So

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Speaker 1: I mentioned the pandemic, which had this huge disruptive effect

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Speaker 1: on society. But then there's multiple wars happening right now.

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Speaker 1: The war in Ukraine means ongoing, the war against Gaza,

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Speaker 1: the firing against the ships in the Red Sea, et cetera.

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Speaker 1: So geopolitics is back in a big way. We just

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Speaker 1: had the Taiwanese election. We did a recent episode on

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Speaker 1: sort of thinking about some of the geopolitical risks outside

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Speaker 1: of China, Like, there's a lot going on also, speak

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Speaker 1: of China today, did you see the population numbers?

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Speaker 2: I did, pretty staggering statistics.

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Speaker 1: Yeah, so the second year in a row that the

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Speaker 1: population in China actually shrank, birth rates continue involve. There's

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Speaker 1: just a lot of stuff going on, you know, throwing

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Speaker 1: stuff like AI. You know, they're probably talking about I

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Speaker 1: think they're talking about that in Davos right now, Like

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Speaker 1: there is a lot going on.

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Speaker 2: I bet they're talking about demographics to show probably and

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Speaker 2: geopolitical risk. I guarantee you there's someone in Davos talking

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Speaker 2: about the big risk for twenty twenty four is geopolitical.

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Speaker 1: They'll probably talking about elections and elections in the US.

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Speaker 1: There is a lot going on, and it's like, yeah,

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Speaker 1: maybe like we'red in all the time, high in stocks

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Speaker 1: are close enough, but like it still feels like everything

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Speaker 1: feels very unsettled or sort of like the abilt or

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Speaker 1: easily unsettled at this point.

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Speaker 2: Well, I think the issue is there's sort of there's

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Speaker 2: an unease about the current economy, which is that we

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Speaker 2: have seen this incredibly dramatic run up in rates and

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Speaker 2: yet it feels like we haven't really seen I guess,

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Speaker 2: the full result of it or the shoe dropping just yet.

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Speaker 2: We've had three banks failed in twenty twenty three. It's

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Speaker 2: definitely not nothing. But compared to how people were talking

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Speaker 2: about ten years of ultralow interest rates after the two

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Speaker 2: thousand and eight financial crisis, this idea that central banks

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Speaker 2: were distorting markets, there were all these zombie companies, everything

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Speaker 2: was artificial because of low rates. It feels like something

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Speaker 2: more should have changed in sort of twenty twenty three.

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Speaker 1: Should we have a big picture macro conversation.

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Speaker 3: Let's do it?

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Speaker 1: All right, Well, I am really excited. We have a

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Speaker 1: perfect guest. I'm thrilled that we have him here in studio.

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Speaker 1: We're gonna be speaking with Jason Cumming. He is the

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Speaker 1: head of research and chief economist and Brevin Howard asset Management,

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Speaker 1: been there for a long time. He's also previously an

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Speaker 1: economist at the Federal Reserve Board. So really the perfect

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Speaker 1: guest to be speaking about some of these big macro issues. Jason,

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Speaker 1: thank you so much for coming on. Odd lots.

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Speaker 4: Thank you, Joe. Thanks Tracy.

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Speaker 1: All Right, I'm gonna ask an embarrassing question, but maybe

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Speaker 1: hopefully it's something that our listeners will find useful. What

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Speaker 1: is a chief economist and a head of research at

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Speaker 1: an asset manager like Brevin or specifically Brevin. What do

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Speaker 1: you do and what is your role within the company

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Speaker 1: and within the investment process?

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Speaker 4: Okay, I think it's useful. Instead of going through a

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Speaker 4: job description about what a chief economist does? Is you

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Speaker 4: frame this up both for economists and for the investment

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Speaker 4: management industry more generally, Sure, I make the distinction between

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Speaker 4: desk generals and special operators, and whether you're an economist

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Speaker 4: or operating in a hedge fund or across the asset

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Speaker 4: management industry. This taxonomy is helpful to try and think

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Speaker 4: about people who are big picture sure desk generals who

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Speaker 4: move pieces around on a map, and people are special

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Speaker 4: operators who do house to house combat every day with

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Speaker 4: the data and with markets. What we do at our

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Speaker 4: fund Brevan Howard is much more like house to house combat,

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Speaker 4: whereas other shops, certainly a Warren Buffett or the old

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Speaker 4: David Swinson model of endowment management that has more the

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Speaker 4: air of a desk general moving things around strategically very

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Speaker 4: long lived bets, and what we do at a hedge

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Speaker 4: fund is really different from that. We don't afford ourselves

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Speaker 4: the ability to just make long term bets and then

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Speaker 4: walk away because we have stewardship over capital that has

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Speaker 4: to be marked to market every day for our investors

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Speaker 4: who face very real budget constraints. We don't manage money

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Speaker 4: for the Warren Buffets of the world or the Yale

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Speaker 4: endowments of the world. We manage money for shops more

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Speaker 4: like the investment committee that I'm on. Two of them,

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Speaker 4: Brookings and Swarthmore. Swarthmore has a really impressive endowment, Tracy.

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Speaker 4: Fifty percent of the operating budget is funded by that endowment.

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Speaker 4: They can't afford to have a year where their private

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Speaker 4: equity partners come to them and say sorry, no distributions

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Speaker 4: this year, because then the kids don't have their scholarships.

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Speaker 4: They need partners more like Brevan Howard, who are doing

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Speaker 4: this houseouse combat with markets every day, trying to extract

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Speaker 4: risk premium in all different kinds of markets. So we

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Speaker 4: are neither long risk assets all the time, nor are

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Speaker 4: we sitting around just buying vall all the time, because

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Speaker 4: as you well know, people overpay for options. So if

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Speaker 4: you were long vall all the time, you would end

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Speaker 4: up going out of business sooner rather than later. So

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Speaker 4: what a chief economist does, Joe, is try and provide

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Speaker 4: the framework for thinking about investment management, whatever the environment is,

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Speaker 4: and then figuring out exactly the ways in which we're

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Speaker 4: going to go about that on a high frequency basis,

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Speaker 4: because we aren't paid for our long term views about

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Speaker 4: whether we're in the new normal or the new abnormal

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Speaker 4: for interest rates, we have to figure out when the

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Speaker 4: FED pivot is, when the next interest rate cuts are.

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Speaker 4: And so the essence of a macro hedge fund is

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Speaker 4: is not figuring out the terminal destination, but it's figuring

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Speaker 4: out how you get there, what the exact path is,

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Speaker 4: the volatility along the way, all those different elements, and

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Speaker 4: the chief economist tries to weave together all those different

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Speaker 4: all those different pieces.

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Speaker 2: Wait, can I ask an even a broader step back question?

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Speaker 2: A step back from the step back? And you sort

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Speaker 2: of touched on it just then, But what does a

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Speaker 2: macro hedge fund actually do?

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Speaker 3: Because I take the.

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Speaker 2: Point about I take the point about, you know, being

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Speaker 2: tactical and having to sort of pivot on a day

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Speaker 2: to day basis, But my impression was that macro hedge

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Speaker 2: funds were all about making the big bets on big

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Speaker 2: changes in the global economy, macroeconomic regime shifts, that sort

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Speaker 2: of thing.

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Speaker 4: So a macro hedge fund is defined by the kinds

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Speaker 4: of assets it's trades, so it trades foreign exchange, currency, credit,

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Speaker 4: and traditionally, certainly in the kind of older style Soros

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Speaker 4: big macro hedge fund bets where we broke the Bank

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Speaker 4: of England. It's certainly true that in Brevin Howard's history

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Speaker 4: we've had amazing returns through very difficult times in the economy,

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Speaker 4: for example two thousand and eight and certainly during the pandemic.

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Speaker 4: But we wouldn't be good partners with our stakeholders if

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Speaker 4: we told them we were only going to make money

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Speaker 4: if there's a pandemic. We can't count on a pandemic happening.

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Speaker 4: We can't count on breaking the Bank of England once.

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Speaker 4: So we try and make the inner girl the path

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Speaker 4: integral of what goes on, and markets make money through

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Speaker 4: all those different environments, which sometimes might mean tracy that

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Speaker 4: your long just carry. Last year it turned out that

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Speaker 4: some of our best performing parts of our fund were

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Speaker 4: long credit, and that's not something that is the essence

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Speaker 4: of the old style macro of let's pick a big

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Speaker 4: up or down. But it is true we punctuated some

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Speaker 4: of our best returns in those periods of time where

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Speaker 4: being the chief economist, we looked at what was going

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Speaker 4: on with the pandemic and people were enormously complacent. You'll

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Speaker 4: remember that period of time in February March of twenty

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Speaker 4: twenty when we went through the it's just the flu

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Speaker 4: phase of things, and we were looking out across the

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Speaker 4: investment landscape and saying, people are not tuned to the

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Speaker 4: global economy shutting down. We were probably Tracy only a

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Speaker 4: week or two ahead of people in that case, but

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Speaker 4: that was all that we needed in order to be

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Speaker 4: able to in one of our funds make one hundred

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Speaker 4: percent during that period of time.

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Speaker 2: I remember that time in early twenty twenty, and it

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Speaker 2: was amazing, like how slim the edge was, but also

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Speaker 2: kind of how obvious because I remember in January February

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Speaker 2: twenty twenty, I mean, China shut down like a huge

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Speaker 2: portion of its economy and stocks were still rising in

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Speaker 2: the US and everyone was talking about the Trump impeachment,

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Speaker 2: and it was kind of stunning to me that we'd

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Speaker 2: been worried about a trade war with China for so

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Speaker 2: many years, and then China shuts down most of its

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Speaker 2: economy and everyone was like.

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Speaker 3: It doesn't matter, it's fun.

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Speaker 1: Can I ask a questions? So obviously making good decisions,

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Speaker 1: hopefully pivoting at the right moment, being ahead of others

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Speaker 1: in terms of is there a describable, persistent source of

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Speaker 1: alpha that you could say across the cycle? Something like

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Speaker 1: you know, and I think like some hedge funds, like

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Speaker 1: maybe like they're expertise, is like all their different portfolio

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Speaker 1: managers and the risk management practices that they apply to

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Speaker 1: sort of allocating capital internally, and maybe their ability to

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Speaker 1: do that is a source of alpha. Or maybe some

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Speaker 1: of them are really good at like applying the cutting

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Speaker 1: edge of technology or AI, et cetera, and that is

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Speaker 1: their edge, et cetera. Is there like a describable edge

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Speaker 1: that Brevin aims to exploit across the cycle.

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Speaker 4: So I've thought about how to answer this question a lot.

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Speaker 4: Because everyone is hard working and everyone is smart in market,

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Speaker 4: So there's no real alpha from working an extra hour

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Speaker 4: per week and having an extra IQ point, because that's

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Speaker 4: an arms race where everyone is up to the frontier.

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Speaker 4: I think about it in three different ways, going from

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Speaker 4: narrowly out. So first is muscle memory. I've seen as

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Speaker 4: chief economists all kinds of different things. So I was

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Speaker 4: just reminded, you know, we were talking about the pandemic

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Speaker 4: just a moment ago. You need to have seen a

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Speaker 4: lot and be able to pull together my academic training,

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Speaker 4: my policy training, or markets training to be able to

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Speaker 4: make a view. So in that period right around February,

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Speaker 4: when I saw that when the people who were put

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Speaker 4: away in Travis Air Force Base actually started community spread

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Speaker 4: at Vacaville Community Hospital a mile away, I knew that

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Speaker 4: there was going to be spread everywhere. When I saw

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Speaker 4: that the La Unified School District was shutting down, I

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Speaker 4: knew that the whole economy was shutting down. That kind

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Speaker 4: of muscle memory, knowing what happens when those developments are

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Speaker 4: going to hit markets is a key source of alpha.

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Speaker 4: Going back to earlier periods, you were just talking in

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Speaker 4: the intro about how things seem fine. Now you flip

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Speaker 4: the calendar and it doesn't really seem like anything really changes.

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Speaker 4: I'll tell you another period of time where you flip

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Speaker 4: the calendar and something really changed. GDP growth at the

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Speaker 4: end of two thousand and seven, just a few days

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Speaker 4: before the business cycle peak in December of two thousand

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Speaker 4: printed four percent on a quarterly annualized rate, which was

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Speaker 4: the fastest run rate of growth going in to the

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Speaker 4: business cycle peak a few days later than you had

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Speaker 4: seen in four years. A few weeks after that, the

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Speaker 4: unemployment rate went up three tenths. The FED did an

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Speaker 4: emergency seventy five basis point cut, followed just a few

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Speaker 4: days later by regularly scheduled meetings fifty basis point cut.

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Speaker 4: Things can change very quickly, and one of the persistent

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Speaker 4: source of alpha that we have is that experience of

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Speaker 4: the individuals we have in the firm, MEAs chief economists

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Speaker 4: and other The two others I would just mention quickly

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Speaker 4: are I think it's underappreciated how important trust is in organizations.

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Speaker 4: And that may seem like something that's a very soft

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Speaker 4: consideration when it comes to something right.

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Speaker 1: It sounds like a car, but it's not.

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Speaker 4: Which is, you can get sources of information anywhere. But

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Speaker 4: if you trust me, Tracy, when I come to you

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Speaker 4: and say listen, the US economy is going to shut down,

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Speaker 4: that may be the difference between you putting on a

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Speaker 4: trade that's one unit or ten units. And then finally

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Speaker 4: the last one is there's intangible capital that is developed

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Speaker 4: over a period of time. In a firm we've been

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Speaker 4: around for more than twenty years, we have intangible capital

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Speaker 4: in the way we structure trades, the AI, the individuals,

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Speaker 4: and that is something that we have as a permanent

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Speaker 4: a source of strategic ballast for us.

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Speaker 2: Joe asked you about alpha. How much of global macro

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Speaker 2: alpha is systematizable? Because again, I think about the landscape

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Speaker 2: of hedge funds. I think about the hedge funds that

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Speaker 2: have been popular in recent years. It's sort of all

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Speaker 2: you know, like relative value alg driven type momentum hedge funds.

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Speaker 2: And you're here, you're talking about like very specific things

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Speaker 2: that have happened in the global economy. Like you know,

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Speaker 2: I was watching the spread of the pandemic and I

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Speaker 2: saw this one base in what was happening there. How

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Speaker 2: systematizable is that kind of insight?

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Speaker 4: I think almost none of it. I think that you

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Speaker 4: have to there's no designer indicator. People will look at

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Speaker 4: financial conditions indexes, or they'll look at regularities that they've

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Speaker 4: seen in the past and hopefully be able to you know,

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Speaker 4: extract some risk creamium out of the markets. But I

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Speaker 4: harken back to a podcast you just did the other

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Speaker 4: day with Harley Bassman, who's developed some you know, pretty

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Speaker 4: sophisticated financials, but in the hands of people who aren't

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Speaker 4: sophisticated investors, their weapons of mass destruction. If you just

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Speaker 4: kept your p fix throughout the cycle, it's an excellent

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Speaker 4: financial instrument. But what if you missed the day of

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Speaker 4: the FED pivot? What if you missed the day that

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Speaker 4: there's you know, essentially a failed auction, because this is

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Speaker 4: the day that people decide that the US's credits is

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Speaker 4: really in question. Those are the kinds of things that

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Speaker 4: I think require real feel for the analysis, plus mapping

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Speaker 4: into the markets. It's very difficult to systemae systematize. You

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Speaker 4: might take a step back and look at markets and say, listen,

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Speaker 4: most of the returns in stocks and bonds have been

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Speaker 4: around FED days, But which FED days pick them? Was

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Speaker 4: it just because you were able to know that J.

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Speaker 4: Powell was going to do a trillion dollars of que

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Speaker 4: in response to the pandemic, it was important to pick

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Speaker 4: that week.

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Speaker 1: Let's talk about this moment interesting times. Obviously, debates about

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Speaker 1: whether the FED is gonna cut in March. We recently

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Speaker 1: had the Waller speech. Waller was one of the hawks

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Speaker 1: leading the way, and though he didn't say we're going

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Speaker 1: to go right away, he clearly indicated that on some

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Speaker 1: level he is ready for the rate cut cycle to happen.

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Speaker 1: Inflation trajectory generally seems fine, labor market seems solid, lots

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Speaker 1: of optimism about the soft landing. January seventeenth, here we are,

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Speaker 1: how do you see just sort of the short term

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Speaker 1: macro picture of the medium term.

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Speaker 4: Let's weave that into the very recent Waller speech and

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Speaker 4: especially his Q and A. The FED is pulled a

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Speaker 4: little bit of a fast one. They told you that

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Speaker 4: they are data dependent and you just needed to look

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Speaker 4: at the data. So let's over the last six months

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Speaker 4: look at what's happened with the data. The June sep

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Speaker 4: is an important milestone. At that meeting, the median forecast

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Speaker 4: for that nineteen member committee was three point nine percent

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Speaker 4: for corp PC inflation. We project at the end of

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Speaker 4: this month, and we, like many others, put a lot

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Speaker 4: of effort into this kind of high frequency data analysis.

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Speaker 4: We project at the end of the month, the release

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Speaker 4: for core PC inflation will be two point nine percent.

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Speaker 4: They've missed by one hundred basis points in six months.

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Speaker 4: In the era of the SEPs, going back to twenty fourteen,

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Speaker 4: they've never missed in that direction by that magnitude. In

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Speaker 4: twenty nineteen, when they missed by a mere thirty basis points,

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Speaker 4: it was enough to get a seventy five basis point

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Speaker 4: mid cycle adjustment, as they called it, in an economy

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Speaker 4: that was performing otherwise pretty well. It faced some shocks

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Speaker 4: with obviously the Trump trade war and so on, but

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Speaker 4: just a thirty basis point miss got them to cut

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Speaker 4: three times starting in the summer and into the fall.

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Speaker 4: They missed by one hundred basis points. Just on what

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Speaker 4: we know, and furthermore, in terms of thinking about where

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Speaker 4: we're going farther down the line, Monetary policy now is

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Speaker 4: as tight as it's ever been on the precipice of

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Speaker 4: recessions if you take the FED seriously. They think that

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Speaker 4: long term neutral is two and a half percent, so

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Speaker 4: rates are broadly three hundred basis points above neutral. Whenever

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Speaker 4: that's been true, you've had a recession, with one small

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Speaker 4: exception in nineteen eighty four. But if it's the case

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Speaker 4: that monetary policy is tight, what is the natural equilorating

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Speaker 4: force of the economy to bring it into equilibrium and

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Speaker 4: just keep it there. Well, it's not monetary policy, because

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Speaker 4: that's putting continual downward pressure on the economy. So we

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Speaker 4: fully expect the economy to continue to slow. And the

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Speaker 4: interesting thing about Waller's take on thing is he had

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Speaker 4: obviously taken on board what's happened with inflation and what

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Speaker 4: he projects to happen inflation. He's discounting the prospects of

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Speaker 4: a deterioration in the labor market, which we do foresee.

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Speaker 4: But he slipped in something very important Joe, especially in

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Speaker 4: the Q and A, which is he went from data

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Speaker 4: dependence to his own personal preference dependence, which is he said,

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Speaker 4: the biggest mistake we could make is starting and then

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Speaker 4: stopping or having to reverse, and in fact he used

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Speaker 4: the word worst mistake. And so he talked three times

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Speaker 4: in the official speech about how he had more confidence

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Speaker 4: in various parts to the outlook coming together which would

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Speaker 4: lead to rate cuts. But then in the Q and

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Speaker 4: A he was unwittingly revealing of his own personal preferences,

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Speaker 4: which is said, the worst thing we could do is

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Speaker 4: stop and start, and furthermore that he had to be

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Speaker 4: thoroughly convinced that inflation had been slaid. So we think

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Speaker 4: that the Fed is well on its way to rate cuts.

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Speaker 4: Figuring out the exact timing is going to depend upon

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Speaker 4: one piece of data or another. How does the next

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Speaker 4: employment report play out? But I think you can have

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Speaker 4: more conviction about the ultimate destination than about the exact timing.

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Speaker 4: I just remind you the last two normal rate cutting

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Speaker 4: cycles started out with a bang, with a fifty basis

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Speaker 4: point cut. One of them was intermeeting, followed up by

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Speaker 4: in that same month in January two thousand and one,

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Speaker 4: another cut. And remember the two thousand and one recession

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Speaker 4: we called a recession. It you never even ultimately strung

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Speaker 4: together two quarters of negative GDP, and the Fed was

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Speaker 4: cutting by one hundred basis points because they kind of

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Speaker 4: waited around. And then Greenspan did his thing. He said,

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Speaker 4: I looked at initial claims and second week auto sales

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Speaker 4: in December of two thousand and the economy's changed. He

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Speaker 4: said to his colleagues, the last move is always a mistake.

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Speaker 4: We need to take it back and take it back quickly.

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Speaker 4: So the March versus mad debate, I think, in some

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Speaker 4: ways obscure is what's really going on, because that's a

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Speaker 4: guess about a policy maker's utility function and how risk

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Speaker 4: averse they're going to be with regard to this really

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Speaker 4: severe aversion to policy reversals, and that's tough to judge.

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Speaker 2: So I take the point about timing, and in some

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Speaker 2: respects it's academic whether it's March or like a few

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Speaker 2: months later. But you mentioned something earlier that was really

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Speaker 2: interesting to me, which was that I think you said

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Speaker 2: you went long credit in twenty twenty three, and that

385
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Speaker 2: was kind of a bold and unusual call, because again,

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Speaker 2: going into twenty twenty three, towards the end of twenty

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Speaker 2: twenty two, everyone the consensus was that we were going

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Speaker 2: to have a recession and that corporate defaults were going

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Speaker 2: to spike. And we have seen a pickup in defaults.

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Speaker 2: This is true, but certainly not to the extent that

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Speaker 2: a lot of people were thinking.

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Speaker 3: We have seen.

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Speaker 2: Spreads come in since towards the end of twenty twenty three.

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Speaker 2: What went into making that specific call, I go back to.

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Speaker 4: Two thousand and six, as a good template. So two

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Speaker 4: thousand and six saw the end of the rate hiking cycle.

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Speaker 4: Then in June of two thousand and six, there was

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Speaker 4: widespread worries about the economy, and there were more manifest

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Speaker 4: than they are now because housing was obviously slowing down

400
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Speaker 4: and looking very dodgy in certain parts of the country.

401
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Speaker 4: At that point, it appeared to be an environment that

402
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Speaker 4: it would just be crazy to be long some of

403
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Speaker 4: these risk assets, especially ones that were tied to housing,

404
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Speaker 4: in the event fed stop raising rates in the middle

405
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Speaker 4: of the earth like they did in twenty twenty three.

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Speaker 4: There were lots of worries even dating back into two

407
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Speaker 4: thousand and five, in that prior episode and in this

408
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Speaker 4: one as well, but it was fine to be long

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Speaker 4: credit because you hadn't seen the deterioration in the economy.

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Speaker 4: So ultimately, in two thousand and six and in twenty

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Speaker 4: twenty three, stocks were up by double digits. Credit did fine,

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Speaker 4: and those indicators. Despite the market's interest in trying to

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Speaker 4: find designer indicators to tell you what's going to happen

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Speaker 4: somewhere down the road, financial conditions indexes predict nothing reliably.

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Speaker 4: They have false negatives, they have false positives, sometimes credit

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Speaker 4: is predicted a downturn or a financial market ruction. Sometimes

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Speaker 4: it hasn't. Again, going back to that period of time,

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Speaker 4: like in two thousand and seven, real GDP growth was

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Speaker 4: four percent going into a recession. I remember one of

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Speaker 4: the times that I was the most bearish in Brevan

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Speaker 4: Howard history was just after bear Stearns was bailed out.

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Speaker 4: We thought the economy was absolutely falling apart. And in

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Speaker 4: the event, if you look back at private payrolls at

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Speaker 4: that point, you were losing two hundred and fifty thousand

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Speaker 4: jobs per month. In April and May. After bear Stearns failed,

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Speaker 4: stocks went right up. Credit did fine, And it was

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Speaker 4: only until later on in the year, and even in

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Speaker 4: the week that Lehman failed stocks went up. It's oftentimes

429
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Speaker 4: going to be the case that financial instruments and financial

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Speaker 4: markets do fine until they don't.

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Speaker 1: I want to get into some big pictures, but just

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Speaker 1: before we do, on this sort of current moment, so

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Speaker 1: we talked about the Waller speech. We talked about how

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Speaker 1: the you know, historically speaking, the FED is you know,

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Speaker 1: the recent overestimation I guess of the inflation trajectory is

436
00:22:10,119 --> 00:22:13,080
Speaker 1: quite large. They've expected inflation to be much hotter at

437
00:22:13,160 --> 00:22:16,760
Speaker 1: least I'm measured by CORPCE than it has been. So

438
00:22:16,800 --> 00:22:19,360
Speaker 1: what's your sort of view, specifically in terms of rate

439
00:22:19,400 --> 00:22:21,680
Speaker 1: cuts in the prospect of recession in twenty twenty four.

440
00:22:22,320 --> 00:22:25,159
Speaker 4: So we are a recession shop because of the reason

441
00:22:25,240 --> 00:22:28,800
Speaker 4: I mentioned earlier, Joe, which is that whenever monetary policy

442
00:22:28,800 --> 00:22:31,560
Speaker 4: has been tight, you've been falling into recession again with

443
00:22:31,600 --> 00:22:35,520
Speaker 4: that exception of nineteen eighty four. And I take the

444
00:22:35,560 --> 00:22:38,840
Speaker 4: point that Waller was implicitly trying to make in a speech,

445
00:22:38,880 --> 00:22:42,160
Speaker 4: which is that everything that has happened in the past

446
00:22:42,200 --> 00:22:44,119
Speaker 4: has happened for the first time once. So maybe this

447
00:22:44,200 --> 00:22:46,800
Speaker 4: is a business cycle where everything comes out with the

448
00:22:46,800 --> 00:22:49,440
Speaker 4: perfect soft landing. But let me frame it this way.

449
00:22:49,880 --> 00:22:53,760
Speaker 4: Even if they have the Sully Sullenberger soft landing of

450
00:22:53,760 --> 00:22:59,600
Speaker 4: all anniversary of the US are eighteen forty two of

451
00:23:00,200 --> 00:23:03,040
Speaker 4: soft landings, it's still the case that monetary policy is

452
00:23:03,200 --> 00:23:06,520
Speaker 4: miles off in terms of its terminal destination because they

453
00:23:06,560 --> 00:23:09,080
Speaker 4: should be it around neutral if you're getting a soft landing,

454
00:23:09,440 --> 00:23:13,080
Speaker 4: and right now you're arguably on their own market.

455
00:23:13,000 --> 00:23:15,800
Speaker 1: Pricing, and how many cuts this year right now.

456
00:23:15,600 --> 00:23:20,480
Speaker 4: As of today, less than six cuts, And you think

457
00:23:20,520 --> 00:23:23,680
Speaker 4: it'll be more. Listen, let me go back to twenty

458
00:23:23,840 --> 00:23:28,440
Speaker 4: twenty one. In twenty twenty two, intellectual consistency that got

459
00:23:28,480 --> 00:23:31,720
Speaker 4: you to the rate hikes seen during that cycle, with

460
00:23:31,800 --> 00:23:35,240
Speaker 4: inflation going up and demanding that you do what turned

461
00:23:35,240 --> 00:23:37,439
Speaker 4: out to be four seventy five basis point hikes in

462
00:23:37,440 --> 00:23:41,119
Speaker 4: a row. Intellectual consistency demands that if you thought that

463
00:23:41,119 --> 00:23:44,639
Speaker 4: that was appropriate, it's similarly appropriate to be doing cuts,

464
00:23:44,720 --> 00:23:47,800
Speaker 4: not of the same magnitude in total, going back down

465
00:23:47,840 --> 00:23:50,320
Speaker 4: to zero, but certainly back down to neutral. And the

466
00:23:50,359 --> 00:23:53,280
Speaker 4: reason for that is because you have policy set to

467
00:23:53,320 --> 00:23:56,320
Speaker 4: a very high inflation environment. Now that's no longer no

468
00:23:56,400 --> 00:23:58,560
Speaker 4: longer out there whaller're said in a speech, the six

469
00:23:58,600 --> 00:24:01,320
Speaker 4: month change will be around two. I'm not going to

470
00:24:01,400 --> 00:24:03,439
Speaker 4: argue with the policy maker what around two is, but

471
00:24:03,440 --> 00:24:05,600
Speaker 4: it'll be one point eight percent. On a three month

472
00:24:05,640 --> 00:24:07,720
Speaker 4: annualized basis, it'll be one point four percent.

473
00:24:08,200 --> 00:24:09,960
Speaker 2: This is exactly what I wanted to ask you, because

474
00:24:09,960 --> 00:24:11,880
Speaker 2: it feels to me like rates at the moment are

475
00:24:11,920 --> 00:24:14,760
Speaker 2: sort of the solution to and the cause of all

476
00:24:14,800 --> 00:24:17,560
Speaker 2: the markets problems. Right, so we might get a recession

477
00:24:17,560 --> 00:24:20,359
Speaker 2: because interest rates have gone up so much and the

478
00:24:20,400 --> 00:24:24,200
Speaker 2: cost of financing is high. But if that starts to happen,

479
00:24:24,400 --> 00:24:27,239
Speaker 2: I mean, the FED can start to cut and they

480
00:24:27,280 --> 00:24:30,840
Speaker 2: can do insurance cuts even before they see a sort

481
00:24:30,880 --> 00:24:33,879
Speaker 2: of durable impact from the higher rates. How much of

482
00:24:33,880 --> 00:24:36,159
Speaker 2: a problem is this if the issue is kind of

483
00:24:36,200 --> 00:24:38,760
Speaker 2: caused by higher rates but can also be solved by

484
00:24:38,800 --> 00:24:41,320
Speaker 2: lower rates. Is the limiting factor here? Is the constraint

485
00:24:41,359 --> 00:24:42,760
Speaker 2: really what happens with inflation?

486
00:24:43,520 --> 00:24:45,320
Speaker 4: I think we need to bring in the other part

487
00:24:45,320 --> 00:24:47,119
Speaker 4: of the dual mandate here, which is that you're playing

488
00:24:47,119 --> 00:24:49,040
Speaker 4: with fire. So a very careful look at the labor

489
00:24:49,080 --> 00:24:52,320
Speaker 4: market now will suggest that hiring has just ground to

490
00:24:52,320 --> 00:24:56,200
Speaker 4: a halt. So if it weren't for participation falling back

491
00:24:56,240 --> 00:24:59,000
Speaker 4: by a huge amount three tenths in the last report

492
00:24:59,000 --> 00:25:00,840
Speaker 4: at the unemployment rate would have gone up by three

493
00:25:00,840 --> 00:25:03,639
Speaker 4: tens to four percent. Would have totally change the macro conversation.

494
00:25:04,119 --> 00:25:08,840
Speaker 4: Underneath that headline statistic, the gross flows within the household

495
00:25:08,880 --> 00:25:11,480
Speaker 4: survey are telling you that folks who are not in

496
00:25:11,480 --> 00:25:14,760
Speaker 4: the labor work force moving into hiring fell by almost

497
00:25:14,800 --> 00:25:18,080
Speaker 4: a record amount. So we're seeing the underlying details of

498
00:25:18,119 --> 00:25:19,919
Speaker 4: a labor market which is slowing down. You're kind of

499
00:25:19,920 --> 00:25:23,720
Speaker 4: living in this twilight between recession and non recession. The

500
00:25:23,760 --> 00:25:26,840
Speaker 4: FED is essentially running I know this from your compexity conversation.

501
00:25:26,920 --> 00:25:29,639
Speaker 4: You'll love this, Tracy. The FED is running essentially a

502
00:25:29,680 --> 00:25:33,480
Speaker 4: short Gamma position with regard to any weak data, any piece.

503
00:25:33,280 --> 00:25:35,240
Speaker 2: Of feel like there's a bell we should ring when

504
00:25:35,280 --> 00:25:36,080
Speaker 2: someone says.

505
00:25:35,840 --> 00:25:39,840
Speaker 4: Gamma, any week data that comes out that's material, not

506
00:25:40,000 --> 00:25:43,480
Speaker 4: like the Empire Survey, which is a few manufacturers in Buffalo,

507
00:25:43,760 --> 00:25:47,320
Speaker 4: a really material piece of weak data, and the FED

508
00:25:47,400 --> 00:25:49,720
Speaker 4: will stop and look around like they have in the past,

509
00:25:49,720 --> 00:25:53,040
Speaker 4: whether it was at January two thousand and one or

510
00:25:53,119 --> 00:25:55,840
Speaker 4: in January of two thousand and eight, and say, listen,

511
00:25:55,920 --> 00:25:58,480
Speaker 4: we calibrated policy to a different environment that no longer

512
00:25:58,520 --> 00:26:01,639
Speaker 4: apparently prevails. The thing I'm trying to provide you with

513
00:26:01,760 --> 00:26:05,000
Speaker 4: is it's not just an antiseptic, technocratic reading of the

514
00:26:05,080 --> 00:26:07,720
Speaker 4: data that's necessary here. You have to play the man

515
00:26:07,800 --> 00:26:10,640
Speaker 4: and the ball, the man or the woman, but man

516
00:26:10,640 --> 00:26:13,440
Speaker 4: in this case in j Powell gets to decide when

517
00:26:13,640 --> 00:26:16,360
Speaker 4: he starts cutting rates, and that's going to depend upon

518
00:26:16,400 --> 00:26:19,159
Speaker 4: his own kind of personal welfare function of what he

519
00:26:19,240 --> 00:26:21,639
Speaker 4: thinks is important and if he's really averse to a

520
00:26:21,640 --> 00:26:23,680
Speaker 4: policy reversal, and he wants to be that much more

521
00:26:23,720 --> 00:26:26,000
Speaker 4: sure and makes it more likely that they have to

522
00:26:26,040 --> 00:26:26,840
Speaker 4: do more later on.

523
00:26:27,359 --> 00:26:29,840
Speaker 2: This was sort of Basman's point as well, about like,

524
00:26:30,280 --> 00:26:33,760
Speaker 2: if you think about what's driving policy makers, it's probably

525
00:26:33,840 --> 00:26:35,440
Speaker 2: reputation and legacy.

526
00:26:36,320 --> 00:26:38,399
Speaker 4: It's a dual mandate as well. I mean, they're genuine

527
00:26:38,480 --> 00:26:41,640
Speaker 4: There's no greater public servant than j. Powell, who has

528
00:26:41,760 --> 00:26:45,640
Speaker 4: spent his entire life around Washington trying to do good

529
00:26:45,680 --> 00:26:48,080
Speaker 4: for public policy. I think he genuinely wants to do good.

530
00:26:48,200 --> 00:26:50,440
Speaker 2: Oh you were at the FED, of course, how much

531
00:26:50,440 --> 00:26:53,160
Speaker 2: does that experience feed into your thinking now?

532
00:26:54,080 --> 00:26:56,879
Speaker 4: It's formative, It's incredibly important. So I started out my

533
00:26:57,440 --> 00:27:00,800
Speaker 4: career as a PC economist and then a per and

534
00:27:00,880 --> 00:27:03,760
Speaker 4: I felt like I learned in the Green Span era

535
00:27:04,200 --> 00:27:06,479
Speaker 4: all about how to analyze the data and all about

536
00:27:06,520 --> 00:27:09,959
Speaker 4: the sausage making of how policymaking really gets done. And

537
00:27:10,000 --> 00:27:14,000
Speaker 4: so having that appreciation for how these decisions really get made.

538
00:27:14,000 --> 00:27:16,880
Speaker 4: It's not about you know, the data release here or there.

539
00:27:17,119 --> 00:27:20,880
Speaker 4: It's coalition building. It's how they're interpreting things, it's forward

540
00:27:20,920 --> 00:27:24,080
Speaker 4: guidance and so forth. That experience I think is invaluable.

541
00:27:24,119 --> 00:27:27,679
Speaker 4: Having seen how the sausages actually made really helps you

542
00:27:28,119 --> 00:27:29,240
Speaker 4: be able to sample it.

543
00:27:29,440 --> 00:27:31,399
Speaker 1: I want to talk about some big picture topics, but

544
00:27:31,520 --> 00:27:34,919
Speaker 1: real quickly before that, as you point out, you know

545
00:27:35,400 --> 00:27:37,800
Speaker 1: and the most recent non firm payils are work, there

546
00:27:37,800 --> 00:27:39,560
Speaker 1: could have been a different narrative than the one that

547
00:27:39,680 --> 00:27:41,760
Speaker 1: was because while the headline was good, we did see

548
00:27:41,800 --> 00:27:44,879
Speaker 1: that weakening and labor force participation, we did see that

549
00:27:45,040 --> 00:27:48,720
Speaker 1: increase in U six prime age employment to population did weaken.

550
00:27:49,119 --> 00:27:53,200
Speaker 1: But whatever the unemployment rate did hold steady, when does

551
00:27:53,240 --> 00:27:55,199
Speaker 1: it change and sort of people wake up to as

552
00:27:55,240 --> 00:27:58,000
Speaker 1: you point out, that hiring is really slowed down.

553
00:27:58,240 --> 00:28:00,640
Speaker 4: So Joe, listen, what's going to happ and is the

554
00:28:00,840 --> 00:28:03,600
Speaker 4: recession should it unfold the way we think it unfolds,

555
00:28:03,800 --> 00:28:06,760
Speaker 4: will feel like a slow down, even if we're right.

556
00:28:06,800 --> 00:28:09,440
Speaker 4: So suppose we're absolutely confident that there's going to be

557
00:28:09,480 --> 00:28:11,040
Speaker 4: a recession, at the start, it's going to feel just

558
00:28:11,080 --> 00:28:13,720
Speaker 4: like a slowdown. And the reason for that go back

559
00:28:13,760 --> 00:28:16,240
Speaker 4: to the stat I quoted you earlier on there were

560
00:28:16,280 --> 00:28:19,760
Speaker 4: five hundred thousand jobs lost in the two months following

561
00:28:19,800 --> 00:28:21,879
Speaker 4: the Bear Stearns failure. At the time, we didn't know

562
00:28:21,920 --> 00:28:25,119
Speaker 4: that the first print was someone minus sixteen k or

563
00:28:25,160 --> 00:28:28,600
Speaker 4: minus twenty four k. That month when Ben Bernanke cut

564
00:28:28,640 --> 00:28:30,760
Speaker 4: by an emergency seventy five and then followed it up

565
00:28:30,760 --> 00:28:34,159
Speaker 4: with another fifty basis point cut, the unemployment rate went

566
00:28:34,200 --> 00:28:37,040
Speaker 4: up three tenths, which may not seem like a big deal.

567
00:28:37,119 --> 00:28:40,000
Speaker 4: Private payrolls were still going along pretty well. The first

568
00:28:40,080 --> 00:28:43,720
Speaker 4: draft of history is not the ultimate draft that is written,

569
00:28:43,760 --> 00:28:45,840
Speaker 4: and it's a matter of kind of art and science

570
00:28:45,840 --> 00:28:48,480
Speaker 4: could taste to figure out what you should be focusing on.

571
00:28:48,520 --> 00:28:50,960
Speaker 4: And there's no designer statistic that you can always use.

572
00:28:51,400 --> 00:28:53,520
Speaker 4: Apropos The point about there's no way to design some

573
00:28:53,680 --> 00:28:55,880
Speaker 4: CTA that harvest is all the risk premium in the

574
00:28:55,920 --> 00:28:59,000
Speaker 4: FED because these things change over time. For example, right now,

575
00:28:59,000 --> 00:29:01,000
Speaker 4: I think it's very important to pay attention to this

576
00:29:01,520 --> 00:29:04,280
Speaker 4: gross flow is finding that across the board hiring is stopped,

577
00:29:04,280 --> 00:29:07,360
Speaker 4: whether it's in the jolts, whether it's in the cps

578
00:29:07,480 --> 00:29:09,320
Speaker 4: or what have you. That's a key thing to be

579
00:29:09,360 --> 00:29:11,720
Speaker 4: looking at because businesses tying it to inflation, which we

580
00:29:11,760 --> 00:29:15,480
Speaker 4: haven't talked a ton about. Businesses probably realize they're not

581
00:29:15,520 --> 00:29:19,480
Speaker 4: going to get margin increases by raising prices anymore, so

582
00:29:19,520 --> 00:29:21,640
Speaker 4: how are they going to protect or raise their margins.

583
00:29:21,640 --> 00:29:24,400
Speaker 4: In twenty twenty four, the good old fashioned way is

584
00:29:24,440 --> 00:29:27,400
Speaker 4: firing people, and I think we're on the potential edge

585
00:29:27,440 --> 00:29:30,120
Speaker 4: of that should it be the case the monetary policy remained.

586
00:29:45,920 --> 00:29:49,000
Speaker 2: This sort of reminds me of the argument about war, right,

587
00:29:49,040 --> 00:29:52,080
Speaker 2: which is like, it's not like suddenly war happens, or

588
00:29:52,160 --> 00:29:56,480
Speaker 2: at least not usually, with some notable exceptions in recent history.

589
00:29:56,520 --> 00:29:59,560
Speaker 2: But like people who live through World War One or

590
00:29:59,600 --> 00:30:02,160
Speaker 2: World War it sort of sneaks up on you in

591
00:30:02,200 --> 00:30:04,000
Speaker 2: many ways, and it's only when you look back that

592
00:30:04,040 --> 00:30:07,000
Speaker 2: you think, like, aha, here are the signs. But okay,

593
00:30:07,000 --> 00:30:11,800
Speaker 2: that was my very clumsy seg into the major changes,

594
00:30:12,000 --> 00:30:16,200
Speaker 2: the big geopolitical risks, the economic regime changes. What are

595
00:30:16,200 --> 00:30:16,800
Speaker 2: you looking at?

596
00:30:17,360 --> 00:30:19,480
Speaker 4: I think it's important, notwithstanding the fact that I said

597
00:30:19,480 --> 00:30:22,800
Speaker 4: that extracting risk premium on a daily, monthly basis what

598
00:30:22,920 --> 00:30:26,280
Speaker 4: have you. It doesn't pay to be a desk general

599
00:30:26,360 --> 00:30:29,120
Speaker 4: moving pieces around a giant map. I think it is

600
00:30:29,160 --> 00:30:31,800
Speaker 4: important to have a general framework for how you're thinking

601
00:30:31,800 --> 00:30:34,640
Speaker 4: about markets. And I think we've gone through a paradigm

602
00:30:34,680 --> 00:30:37,040
Speaker 4: shift that's maybe a little bit hard to appreciate, just

603
00:30:37,120 --> 00:30:40,240
Speaker 4: because so much has happened with the high frequency macro

604
00:30:40,360 --> 00:30:43,320
Speaker 4: with inflation and since the pandemic. But we see three

605
00:30:43,480 --> 00:30:48,720
Speaker 4: major forces that have changed. First, we were in an

606
00:30:48,760 --> 00:30:52,040
Speaker 4: era of the new normal and the global savings glut

607
00:30:52,080 --> 00:30:55,400
Speaker 4: and Ricardo cabe Ero's deficit of safe assets. You know what,

608
00:30:55,440 --> 00:30:58,840
Speaker 4: there's no deficit of now safe assets. There are a

609
00:30:58,880 --> 00:31:02,720
Speaker 4: lot of safe assets printed by the US government every month.

610
00:31:03,240 --> 00:31:06,800
Speaker 4: And that new normal for interest rates a secular stagnation

611
00:31:07,200 --> 00:31:09,880
Speaker 4: that Larry Summers gave a name to something that we

612
00:31:09,960 --> 00:31:12,800
Speaker 4: all kind of felt but weren't really sure how to describe.

613
00:31:12,800 --> 00:31:16,360
Speaker 4: In twenty fourteen, we're now out of that era. In

614
00:31:16,400 --> 00:31:19,440
Speaker 4: our view. We're in a higher interest rate, higher volatility

615
00:31:19,560 --> 00:31:23,120
Speaker 4: environment that makes it so that policy makers no longer

616
00:31:23,160 --> 00:31:26,800
Speaker 4: have the free launch that they had POSTGFC and through

617
00:31:26,840 --> 00:31:31,520
Speaker 4: the pandemic, there is a real budget constraint on sovereign debt,

618
00:31:31,680 --> 00:31:33,440
Speaker 4: especially in the United States and some of the other

619
00:31:33,480 --> 00:31:37,240
Speaker 4: developed market economies. And I think you're past the era

620
00:31:37,280 --> 00:31:39,720
Speaker 4: of the FED put because we saw a period of

621
00:31:39,760 --> 00:31:41,960
Speaker 4: time where j. Powell could say, listen, we know how

622
00:31:42,040 --> 00:31:44,960
Speaker 4: to deal with inflation. Don't worry about all the QII

623
00:31:45,000 --> 00:31:47,880
Speaker 4: we did, and that turned out not to be true.

624
00:31:47,880 --> 00:31:49,360
Speaker 4: It turned out to be a problem that made the

625
00:31:49,400 --> 00:31:51,560
Speaker 4: American people more upset than they'd ever been in the

626
00:31:51,640 --> 00:31:55,080
Speaker 4: post war period. So, whether it's fiscal policy or whether

627
00:31:55,120 --> 00:31:57,720
Speaker 4: it's monetary policy, I think we're in a new era

628
00:31:57,800 --> 00:31:59,680
Speaker 4: that makes it so that there's no longer a kind

629
00:31:59,720 --> 00:32:03,320
Speaker 4: of non economic protector of markets. That's a huge change

630
00:32:03,360 --> 00:32:05,280
Speaker 4: from what we all got used to. Used to be

631
00:32:05,320 --> 00:32:06,880
Speaker 4: able to go out as an investor and just kind

632
00:32:06,880 --> 00:32:09,880
Speaker 4: of buy everything. Any strategy was allowed to flourish because

633
00:32:09,960 --> 00:32:12,840
Speaker 4: ultimately you knew that there was a non economic actor

634
00:32:12,840 --> 00:32:15,480
Speaker 4: out there fiscal or monetary policy to bail you out.

635
00:32:15,480 --> 00:32:18,360
Speaker 4: And it's at least much more circumscribed now. I think

636
00:32:18,360 --> 00:32:20,800
Speaker 4: the second one is China. We've all lived in an era,

637
00:32:21,280 --> 00:32:24,200
Speaker 4: certainly in this century where China has been an incredible

638
00:32:24,240 --> 00:32:27,080
Speaker 4: source of dynamism for the global economy, and they've taken

639
00:32:28,080 --> 00:32:30,560
Speaker 4: all of the proceeds of that and recycled it into

640
00:32:30,600 --> 00:32:35,240
Speaker 4: financial markets another non economic buyer of treasuries. And now

641
00:32:35,280 --> 00:32:38,600
Speaker 4: Shishinping is quite clearly I mean he's doing some marketing

642
00:32:38,600 --> 00:32:42,400
Speaker 4: at Davos with some of his external officials, but he

643
00:32:42,560 --> 00:32:45,200
Speaker 4: just gave a speech at home talking about economic nationalism.

644
00:32:45,720 --> 00:32:50,680
Speaker 4: Their goal is to have state directed capitalism, common prosperity,

645
00:32:50,720 --> 00:32:52,560
Speaker 4: which is getting rid of some of the tensions that

646
00:32:52,600 --> 00:32:55,120
Speaker 4: were created in a society that had very robust growth,

647
00:32:55,160 --> 00:32:57,560
Speaker 4: generating more billionaires than anywhere else in the world, and

648
00:32:57,600 --> 00:33:00,720
Speaker 4: the national defense. This is not something that we've seen,

649
00:33:00,800 --> 00:33:04,040
Speaker 4: not something that we're used to, and has direct effects

650
00:33:04,080 --> 00:33:08,320
Speaker 4: on investors because this is deglobalization right there. And I

651
00:33:08,320 --> 00:33:11,120
Speaker 4: think it's right that you have people like Brad Sster

652
00:33:11,320 --> 00:33:14,480
Speaker 4: going out and saying, listen, nothing's really changed now, But

653
00:33:14,560 --> 00:33:16,640
Speaker 4: I think it's a snapshot apropos of what you're saying.

654
00:33:16,680 --> 00:33:19,640
Speaker 4: You never really realize when you're slouching into something. Every

655
00:33:19,680 --> 00:33:23,120
Speaker 4: marginal decision that's being made is one consistent with deglobalization

656
00:33:23,280 --> 00:33:25,800
Speaker 4: and is going to have I think, you know, epic

657
00:33:25,800 --> 00:33:29,080
Speaker 4: impact on markets. And finally, you joked one of the

658
00:33:29,080 --> 00:33:31,320
Speaker 4: podcasts earlier this year, you just need to sound smart

659
00:33:31,360 --> 00:33:35,440
Speaker 4: by stroking your chin and quoting geopolitical risks. But I'm

660
00:33:35,480 --> 00:33:38,520
Speaker 4: going to quote geopolitical risks. I think we're at the

661
00:33:38,720 --> 00:33:42,160
Speaker 4: end of the end of history era. US won the

662
00:33:42,160 --> 00:33:46,360
Speaker 4: Cold War, liberal democracy was triumphant. Liberal democracy had a

663
00:33:46,400 --> 00:33:49,280
Speaker 4: test during the Global War on Terror. But I don't

664
00:33:49,280 --> 00:33:51,840
Speaker 4: remember anyone really wanted to sign up with Osama bin

665
00:33:51,920 --> 00:33:53,800
Speaker 4: Land to go live in a cave. It was the

666
00:33:53,840 --> 00:33:56,200
Speaker 4: case that we were able to win the global war

667
00:33:56,240 --> 00:33:59,520
Speaker 4: on terror. Liberal democracy was triumphant, but now it's not.

668
00:33:59,760 --> 00:34:03,000
Speaker 4: It face is a genuine challenge with what's going on

669
00:34:03,040 --> 00:34:04,600
Speaker 4: in these wars. And you might think the wars are

670
00:34:04,640 --> 00:34:08,120
Speaker 4: just individual points, but they add up to something that wears.

671
00:34:08,120 --> 00:34:10,120
Speaker 4: The whole is much greater in the sum of its parts.

672
00:34:10,360 --> 00:34:16,040
Speaker 4: The unbounded relationship between Shishiping and Putin is important. The

673
00:34:16,080 --> 00:34:18,440
Speaker 4: Biden administration may not have learned this so well, but

674
00:34:18,520 --> 00:34:21,800
Speaker 4: certainly the bb administration has learned that deterrence doesn't work.

675
00:34:22,360 --> 00:34:25,520
Speaker 4: Our efforts to deter our adversaries, and certainly Israel's efforts

676
00:34:25,520 --> 00:34:27,719
Speaker 4: to deter Hamas if we found out it doesn't work.

677
00:34:28,000 --> 00:34:31,440
Speaker 4: And so now we face a genuine dialectic fight of

678
00:34:31,520 --> 00:34:33,960
Speaker 4: liberal democracy against the forces the challenge it And you

679
00:34:34,040 --> 00:34:36,359
Speaker 4: might think, well, you could say that at any time.

680
00:34:36,400 --> 00:34:39,040
Speaker 4: This sounds like a political science podcast, but it has

681
00:34:39,120 --> 00:34:43,799
Speaker 4: direct impact on financial markets because there's one empirical regularity

682
00:34:43,800 --> 00:34:47,440
Speaker 4: about wars. They cause inflation because they're expensive to finance.

683
00:34:48,160 --> 00:34:51,439
Speaker 2: Joe, I feel like our international relations degrees become more

684
00:34:51,640 --> 00:34:53,440
Speaker 2: useless by the day. You would think it would be

685
00:34:53,480 --> 00:34:56,799
Speaker 2: the opposite, with all this geopolitical risk, But I remember, like, well,

686
00:34:56,920 --> 00:34:58,680
Speaker 2: I think you would have done it around the same time.

687
00:34:59,000 --> 00:35:02,680
Speaker 2: It was all like neoliberal end of globalization. It was

688
00:35:02,719 --> 00:35:06,440
Speaker 2: all Fukuyama and people like that. And yeah, it doesn't

689
00:35:06,440 --> 00:35:07,799
Speaker 2: seem to have happened, doesn't well.

690
00:35:07,880 --> 00:35:10,239
Speaker 1: To be honest, I don't remember anything in college. And

691
00:35:10,239 --> 00:35:12,040
Speaker 1: it was not because I was like partying like crazy.

692
00:35:12,080 --> 00:35:16,120
Speaker 1: I just it's been a long time. There's a lot there.

693
00:35:16,520 --> 00:35:18,680
Speaker 1: Let's talk a little bit more China for a second.

694
00:35:18,719 --> 00:35:22,040
Speaker 1: In fact, just today this morning, we got some new

695
00:35:22,120 --> 00:35:25,960
Speaker 1: data out of China. Not great. Population continuing to shrink.

696
00:35:26,239 --> 00:35:29,279
Speaker 1: There's this question about like, when are they going to

697
00:35:29,360 --> 00:35:32,279
Speaker 1: stimulate the economy, When is that big spending coming up?

698
00:35:32,400 --> 00:35:35,200
Speaker 1: When are they going to have something more resembling a

699
00:35:35,200 --> 00:35:38,640
Speaker 1: welfare state, common bread sets or theme that allows the

700
00:35:38,760 --> 00:35:41,920
Speaker 1: Chinese consumer to add more buying power. What is going

701
00:35:41,960 --> 00:35:44,600
Speaker 1: on in China even sitting this maybe some of these

702
00:35:44,600 --> 00:35:49,439
Speaker 1: sort of national security or national defense ambitions, et cetera.

703
00:35:49,800 --> 00:35:52,239
Speaker 1: What is you know, when you say economic nationalism, what

704
00:35:52,360 --> 00:35:56,160
Speaker 1: is Hijinping trying to do? Right? Now in your view

705
00:35:56,200 --> 00:35:57,200
Speaker 1: to the Chinese economy.

706
00:35:57,440 --> 00:36:00,000
Speaker 4: So investors, whether it's in the West or with regards

707
00:36:00,160 --> 00:36:04,279
Speaker 4: to China, are continually hoping for the FED put the

708
00:36:04,400 --> 00:36:06,360
Speaker 4: China put around the corner, and I think it just

709
00:36:06,400 --> 00:36:09,440
Speaker 4: misunderstands what's going on with China, and I describe clearly

710
00:36:09,440 --> 00:36:12,719
Speaker 4: as making an effort to develop the economy through state

711
00:36:12,800 --> 00:36:18,040
Speaker 4: run enterprises. Common prosperity is their version of income redistribution

712
00:36:18,160 --> 00:36:21,600
Speaker 4: and directing things to national defense clearly as its own goals.

713
00:36:22,120 --> 00:36:23,840
Speaker 4: I think one of the things you learned from history,

714
00:36:23,920 --> 00:36:27,040
Speaker 4: so shifting from the ir degree to the history degree,

715
00:36:27,120 --> 00:36:30,880
Speaker 4: is these leaders, as communist leaders, whether it's Stalin or

716
00:36:30,880 --> 00:36:34,440
Speaker 4: Shishin Ping or Mao, they believe behind closed doors what

717
00:36:34,520 --> 00:36:37,160
Speaker 4: they say to you in public, whether you're looking at

718
00:36:37,160 --> 00:36:40,680
Speaker 4: Stephen Cottinggan's work about Stalin or Frank Decotter's work about Mao.

719
00:36:41,320 --> 00:36:44,000
Speaker 4: Whenever they've gone to the archives, they've found out what

720
00:36:44,040 --> 00:36:45,719
Speaker 4: they sing in the poll Up Bureau that they never

721
00:36:45,719 --> 00:36:47,719
Speaker 4: thought would be released was exactly what they were saying

722
00:36:47,760 --> 00:36:52,279
Speaker 4: in public. And Shijingping is telling you what he believes in.

723
00:36:52,840 --> 00:36:56,680
Speaker 4: And therefore a lot of the templates that people use

724
00:36:57,000 --> 00:36:59,200
Speaker 4: in order to try and understand China. Now, I think

725
00:36:59,200 --> 00:37:01,480
Speaker 4: are you know, they have some resonance, but I think

726
00:37:01,480 --> 00:37:03,680
Speaker 4: they're just missing the major point, which is you'll have

727
00:37:03,719 --> 00:37:07,040
Speaker 4: some people say, oh, it's a balance sheet recession, or

728
00:37:07,239 --> 00:37:09,600
Speaker 4: China's on the edge of its Lehman moment, because Chinese

729
00:37:09,680 --> 00:37:13,239
Speaker 4: real estate genuinely is the world's largest asset class. Those things,

730
00:37:13,239 --> 00:37:15,560
Speaker 4: in some sense are both true. But I don't think

731
00:37:15,560 --> 00:37:18,200
Speaker 4: he helps you understand what's going on in China. I

732
00:37:18,320 --> 00:37:20,799
Speaker 4: go back to and bear with me, because this may

733
00:37:20,800 --> 00:37:25,799
Speaker 4: seem at first like a goofy comparison. Shishingping's notion of

734
00:37:25,840 --> 00:37:29,440
Speaker 4: common prosperity reminded me I forget when the penny dropped

735
00:37:29,880 --> 00:37:35,840
Speaker 4: of FDR's efforts in the immediate aftermath of his effort

736
00:37:35,920 --> 00:37:39,120
Speaker 4: to stimulate the economy out of the Great Depression. What

737
00:37:39,239 --> 00:37:41,560
Speaker 4: happened in the Great Depression in the United States is

738
00:37:41,560 --> 00:37:44,799
Speaker 4: that we expanded state control of the economy. Fiscal and

739
00:37:44,880 --> 00:37:48,719
Speaker 4: monetary policy were pretty inert, and you demonized any private success.

740
00:37:49,239 --> 00:37:53,160
Speaker 4: I asked this was a good example of using chat GPT.

741
00:37:53,320 --> 00:37:58,160
Speaker 4: I asked chat GPT to compare FDR's second inaugural address

742
00:37:58,239 --> 00:38:03,000
Speaker 4: in nineteen thirty seven with Shishingping's key speeches about common prosperity.

743
00:38:03,360 --> 00:38:05,320
Speaker 4: This was everything you need to know about chat GPT,

744
00:38:05,440 --> 00:38:10,319
Speaker 4: because first it begged me not to do it. It said,

745
00:38:10,360 --> 00:38:12,840
Speaker 4: you shouldn't be doing this, You absolutely should not compare

746
00:38:13,000 --> 00:38:17,080
Speaker 4: FDR and shishing Ping. So it spit that out like

747
00:38:17,120 --> 00:38:19,520
Speaker 4: a ferbal. But then when I forced it to answer,

748
00:38:20,080 --> 00:38:22,719
Speaker 4: if you go and compare a common prosperity speech to

749
00:38:22,800 --> 00:38:25,799
Speaker 4: that second inaugural, they have the same elements. And let

750
00:38:25,800 --> 00:38:28,200
Speaker 4: me tie this into answering your question Joe about why

751
00:38:28,239 --> 00:38:31,680
Speaker 4: this is helpful for understanding Chinese macro now. The essence

752
00:38:31,920 --> 00:38:36,239
Speaker 4: of the NRA and the Great Depression, the Wagner Act,

753
00:38:36,560 --> 00:38:39,840
Speaker 4: it was all to suppress competition. There was a perception

754
00:38:39,960 --> 00:38:42,839
Speaker 4: the competition was a bad thing. And what that did

755
00:38:43,000 --> 00:38:46,400
Speaker 4: was it set wages above the market clearing level. And

756
00:38:46,480 --> 00:38:48,880
Speaker 4: what is the result when you have wages set above

757
00:38:48,880 --> 00:38:52,239
Speaker 4: the market clearing level? Unemployment? Why do you have unemployment

758
00:38:52,280 --> 00:38:52,680
Speaker 4: in China?

759
00:38:52,680 --> 00:38:52,839
Speaker 3: Now?

760
00:38:52,880 --> 00:38:54,920
Speaker 4: Is it because it's not a particularly dynamic economy. It's

761
00:38:54,920 --> 00:39:00,000
Speaker 4: still an amazingly productive and growth oriented set of businesses.

762
00:39:00,640 --> 00:39:05,480
Speaker 4: It's experiencing unemployment because the overall price level of that

763
00:39:05,520 --> 00:39:09,160
Speaker 4: economy is inappropriate and then in response, you end up

764
00:39:09,200 --> 00:39:11,239
Speaker 4: with status leaders doing the same thing that FDR did,

765
00:39:11,239 --> 00:39:13,080
Speaker 4: which is you might have noticed some of the news

766
00:39:13,080 --> 00:39:16,279
Speaker 4: stories about Shi Shinping sending people down into the provinces.

767
00:39:16,400 --> 00:39:18,239
Speaker 4: It's the same thing we did in the new deal

768
00:39:18,280 --> 00:39:21,520
Speaker 4: with the CCC, the WPA. I even got a chuckle

769
00:39:21,520 --> 00:39:23,040
Speaker 4: in December when they said they were going to do

770
00:39:23,040 --> 00:39:25,920
Speaker 4: fiscal stimulus by flood abatement, which reminded me of the TVA.

771
00:39:26,080 --> 00:39:30,040
Speaker 4: So for me, I go back to the government meddling

772
00:39:30,040 --> 00:39:32,600
Speaker 4: in the economy like we did in the Great Depression,

773
00:39:32,960 --> 00:39:35,799
Speaker 4: as being a useful template for what's going on in China.

774
00:39:35,800 --> 00:39:40,120
Speaker 4: The unemployment rate never went below fourteen percent after nineteen

775
00:39:40,200 --> 00:39:42,200
Speaker 4: thirty three until we had World War Two. So let's

776
00:39:42,200 --> 00:39:43,920
Speaker 4: hope World War two is in his solution to his

777
00:39:43,960 --> 00:39:44,880
Speaker 4: unemployment problem.

778
00:39:45,320 --> 00:39:49,120
Speaker 2: You know, the mistake you made asking chat GPT when

779
00:39:49,160 --> 00:39:52,120
Speaker 2: you should have asked You know, there's like a study

780
00:39:52,200 --> 00:39:53,320
Speaker 2: Shei shin Ping.

781
00:39:53,480 --> 00:39:55,520
Speaker 1: GPT version yeah, the Chinese.

782
00:39:55,760 --> 00:39:59,959
Speaker 2: Yeah, there's like a nationalistic version of Chat GPT in China.

783
00:40:00,239 --> 00:40:03,840
Speaker 2: And it's funny because I played around with it. You

784
00:40:03,880 --> 00:40:07,120
Speaker 2: actually you can't ask any questions in English. It refuses

785
00:40:07,600 --> 00:40:11,240
Speaker 2: to engage in English, because it will tell you Chinese

786
00:40:11,280 --> 00:40:14,040
Speaker 2: is a beautiful language and you should be interacting with

787
00:40:14,080 --> 00:40:16,080
Speaker 2: it in Chinese. So you need to ask that same

788
00:40:16,160 --> 00:40:18,920
Speaker 2: question to the shehin Ping thought.

789
00:40:18,880 --> 00:40:22,759
Speaker 1: That would be that would be a fun experiment talk

790
00:40:22,800 --> 00:40:25,720
Speaker 1: to us about the end of the end of history

791
00:40:25,760 --> 00:40:28,960
Speaker 1: a little bit more incidentally, and it was not planned

792
00:40:29,000 --> 00:40:32,920
Speaker 1: at all. I'm like halfway through the Fukuyama book right now.

793
00:40:32,960 --> 00:40:35,640
Speaker 1: I started reading it about two weeks ago. Setting aside

794
00:40:35,640 --> 00:40:38,960
Speaker 1: whether it's right or wrong, it's a very interesting book.

795
00:40:39,000 --> 00:40:40,799
Speaker 1: But what do you sort of talk about what that

796
00:40:40,960 --> 00:40:43,120
Speaker 1: means the end of history to you, and what it

797
00:40:43,160 --> 00:40:45,959
Speaker 1: means for that thesis or that idea to be coming

798
00:40:46,000 --> 00:40:46,440
Speaker 1: to an end.

799
00:40:46,960 --> 00:40:49,680
Speaker 4: So I think this cohort of policymakers and the mainstream,

800
00:40:49,719 --> 00:40:54,480
Speaker 4: certainly of US policymakers, believes that the Postcold War architecture

801
00:40:54,520 --> 00:40:57,919
Speaker 4: either doesn't really demand the US to do that much

802
00:40:58,080 --> 00:41:02,680
Speaker 4: or deterrence is enough. But it's evident that deterrence didn't

803
00:41:02,680 --> 00:41:08,560
Speaker 4: work for Putin invading Ukraine, it's evident that deterrence didn't

804
00:41:08,560 --> 00:41:11,080
Speaker 4: work for Hamas. And then perhaps what's going on with

805
00:41:11,160 --> 00:41:17,839
Speaker 4: Hesbelah against Israel. Big question mark whether deterrence is enough

806
00:41:18,080 --> 00:41:21,839
Speaker 4: for maintaining the status quo with Taiwan. These are all

807
00:41:22,000 --> 00:41:24,239
Speaker 4: questions that you have to ask yourself. The end of

808
00:41:24,280 --> 00:41:26,360
Speaker 4: the end of history for me, means do we have

809
00:41:26,400 --> 00:41:29,480
Speaker 4: to have a completely different security architecture In the immediate

810
00:41:29,520 --> 00:41:33,160
Speaker 4: aftermath of the In the Cold War period, the post

811
00:41:33,200 --> 00:41:36,439
Speaker 4: World War Two period, we had NSC sixty eight, which

812
00:41:36,440 --> 00:41:38,239
Speaker 4: said we need to develop the H bomb, we need

813
00:41:38,239 --> 00:41:39,720
Speaker 4: to be able to fight two and a half wars,

814
00:41:40,160 --> 00:41:42,799
Speaker 4: and we ended up not doing deterrence. We ended up

815
00:41:42,840 --> 00:41:47,879
Speaker 4: fighting multiple wars in order to enforce the liberal democratic order.

816
00:41:48,239 --> 00:41:50,480
Speaker 4: I worry that we're moving back into an era where

817
00:41:50,600 --> 00:41:52,640
Speaker 4: the end of the end of history means that we

818
00:41:52,680 --> 00:41:56,720
Speaker 4: can't just, as my friend Neil Ferguson says, talk softly

819
00:41:56,760 --> 00:41:59,760
Speaker 4: and carry a big stick, that we'll have to actually

820
00:42:00,280 --> 00:42:01,360
Speaker 4: the who's the stick?

821
00:42:01,760 --> 00:42:04,000
Speaker 1: But you know, you made the point when you're sort

822
00:42:04,040 --> 00:42:07,440
Speaker 1: of giving the big picture, like after nine to eleven,

823
00:42:08,080 --> 00:42:10,600
Speaker 1: that there was a major military effort and there was

824
00:42:10,640 --> 00:42:12,960
Speaker 1: war in Afghanistan, there was a warre in Rock, but

825
00:42:13,080 --> 00:42:17,480
Speaker 1: there was not some big sudden impulse. It felt like

826
00:42:17,520 --> 00:42:20,160
Speaker 1: to sort of like take the side of al Qaeda

827
00:42:20,239 --> 00:42:24,080
Speaker 1: regardless of the war itself, and you know, obviously Fukiyama

828
00:42:24,160 --> 00:42:26,960
Speaker 1: is telling you know, sort of liberal democracy is like

829
00:42:27,360 --> 00:42:30,480
Speaker 1: the logical endpoint for society. That's the ultimate sort of

830
00:42:30,680 --> 00:42:34,200
Speaker 1: the expression of society with the least internal contradictions. And

831
00:42:34,239 --> 00:42:37,319
Speaker 1: so you're saying now is like, actually there is there

832
00:42:37,360 --> 00:42:40,279
Speaker 1: is competition, there are people, and there are countries, et cetera.

833
00:42:40,320 --> 00:42:41,919
Speaker 1: I think maybe there is a different way.

834
00:42:43,040 --> 00:42:46,359
Speaker 4: Listen surveys of the global South, and if you don't

835
00:42:46,440 --> 00:42:48,839
Speaker 4: trust the surveys, just look at what the leadership does,

836
00:42:48,880 --> 00:42:52,440
Speaker 4: whether it's whether it's Brazil or India. They're not taking sides.

837
00:42:52,840 --> 00:42:57,960
Speaker 4: They're seeing the dialectic between liberal democracy and illiberal tendencies,

838
00:42:58,440 --> 00:43:02,440
Speaker 4: and they are not so sure about signing up with

839
00:43:02,480 --> 00:43:05,800
Speaker 4: the post Cold War liberal order just by revealed preference.

840
00:43:05,840 --> 00:43:08,520
Speaker 4: So you're seeing this play out in real time in

841
00:43:08,520 --> 00:43:11,919
Speaker 4: a very important way, even with allies who we've hugged

842
00:43:11,960 --> 00:43:15,120
Speaker 4: closer in certain spheres like India. So I think this

843
00:43:15,160 --> 00:43:17,359
Speaker 4: is a real you're seeing the manifestation of it right

844
00:43:17,400 --> 00:43:19,080
Speaker 4: in front of your right, in front of our eyes.

845
00:43:19,480 --> 00:43:23,560
Speaker 2: How do you express these ideas in actual trades? So

846
00:43:23,719 --> 00:43:27,160
Speaker 2: all these big picture thoughts, end of secular stagnation, a

847
00:43:27,200 --> 00:43:31,560
Speaker 2: major change in China's economic and potentially political trajectory, the

848
00:43:31,719 --> 00:43:34,600
Speaker 2: end of the end of history. How do these actually

849
00:43:34,600 --> 00:43:36,279
Speaker 2: translate into positioning?

850
00:43:36,560 --> 00:43:38,360
Speaker 4: So let me give you a Let me give you

851
00:43:38,360 --> 00:43:40,439
Speaker 4: a case study, because you might think these are all

852
00:43:40,880 --> 00:43:43,840
Speaker 4: pretty airy fairy ideas, difficult to figure out exactly how

853
00:43:43,880 --> 00:43:45,600
Speaker 4: to put on a trade, because ultimately you got to

854
00:43:45,600 --> 00:43:47,560
Speaker 4: go to your Bloomberg and pick out a ticker whether

855
00:43:47,600 --> 00:43:49,920
Speaker 4: you want to be long or short. Let's take the

856
00:43:50,040 --> 00:43:53,239
Speaker 4: term premium move last year, So the term premium in

857
00:43:53,320 --> 00:43:56,640
Speaker 4: the US treasury market, which is the extra compensation that

858
00:43:56,719 --> 00:44:00,239
Speaker 4: you get for owning an asset with longer duration, by

859
00:44:00,239 --> 00:44:03,839
Speaker 4: about one hundred basis points from July to October. Did

860
00:44:03,880 --> 00:44:07,480
Speaker 4: that just rise exogenously? No, that was really importantly influenced

861
00:44:07,480 --> 00:44:09,360
Speaker 4: by some of the forces that I'm talking about. You

862
00:44:09,400 --> 00:44:12,200
Speaker 4: don't have the same economic non economic actors going out

863
00:44:12,239 --> 00:44:15,520
Speaker 4: and buying treasuries hand over fists. We're experiencing QT and

864
00:44:15,560 --> 00:44:18,919
Speaker 4: the Chinese being more reluctant to buy treasuries. We also

865
00:44:19,000 --> 00:44:22,560
Speaker 4: saw that banks, for regulatory reasons and maybe reasons related

866
00:44:22,560 --> 00:44:25,680
Speaker 4: to the cycle, we're buying fewer treasuries. So that was

867
00:44:25,680 --> 00:44:29,160
Speaker 4: a very real manifestation losing these non economic actors buying

868
00:44:29,160 --> 00:44:31,840
Speaker 4: treasuries as a buffer to that big increase in the

869
00:44:31,920 --> 00:44:34,920
Speaker 4: term premium. Similarly, if you buy into our argument that

870
00:44:35,040 --> 00:44:36,600
Speaker 4: we're at the end of the new normal or the

871
00:44:36,640 --> 00:44:39,360
Speaker 4: global savings glot, there now is a surf feet of

872
00:44:39,640 --> 00:44:42,120
Speaker 4: safe assets, not a dearth of them. You should expect

873
00:44:42,160 --> 00:44:44,239
Speaker 4: the term premium to go up over time, and you

874
00:44:44,280 --> 00:44:46,560
Speaker 4: can construct very specific trades for that, what sort of

875
00:44:46,640 --> 00:44:49,799
Speaker 4: short duration outright, a curve steepener because you want to

876
00:44:49,800 --> 00:44:51,719
Speaker 4: pair it with a bet that the Fed is cutting rate.

877
00:44:51,840 --> 00:44:54,839
Speaker 4: So these have very tangible implications for us. And then

878
00:44:55,440 --> 00:44:57,720
Speaker 4: kind of the art of it and also the science

879
00:44:57,719 --> 00:45:00,000
Speaker 4: of figuring out the timing will depend upon the data

880
00:45:00,000 --> 00:45:03,160
Speaker 4: and what the policymakers are doing. But having this broad framing,

881
00:45:04,000 --> 00:45:06,480
Speaker 4: you can see how it can translate into something that

882
00:45:06,640 --> 00:45:09,960
Speaker 4: is a very real opportunity seen last year.

883
00:45:10,719 --> 00:45:13,640
Speaker 1: Jason Cummins, thank you so much for coming on odd Locks.

884
00:45:13,680 --> 00:45:14,759
Speaker 1: Fascinating the conversation.

885
00:45:15,160 --> 00:45:15,680
Speaker 4: Thank you both.

886
00:45:28,760 --> 00:45:32,400
Speaker 1: Tracy. Can I just say real quickly, all guests should

887
00:45:32,400 --> 00:45:35,759
Speaker 1: come prepared to cite as many past episodes as Jason did.

888
00:45:36,000 --> 00:45:39,240
Speaker 1: Really that's how you know. So I really appreciate that.

889
00:45:39,040 --> 00:45:41,080
Speaker 2: He's done his prep, that's for sure.

890
00:45:41,200 --> 00:45:44,520
Speaker 1: But I did find that a sobering conversation. Yeah, at

891
00:45:44,520 --> 00:45:45,360
Speaker 1: a very minimum.

892
00:45:45,440 --> 00:45:48,080
Speaker 2: Yes, it reminded me a little bit about the conversation

893
00:45:48,239 --> 00:45:50,640
Speaker 2: we had with Anna Wong towards the end of last

894
00:45:50,719 --> 00:45:54,600
Speaker 2: year about why a recession didn't materialize in twenty twenty three,

895
00:45:54,680 --> 00:45:58,439
Speaker 2: but per her argument it could in twenty twenty four.

896
00:45:58,719 --> 00:46:01,359
Speaker 1: There's a lot there, I mean to start, I do

897
00:46:01,440 --> 00:46:03,640
Speaker 1: think his points about the labor market need to be

898
00:46:03,640 --> 00:46:06,440
Speaker 1: taken seriously. Yeah, and this idea that yes, like unemployment,

899
00:46:06,680 --> 00:46:09,720
Speaker 1: we have not triggered a some rule. Headline on employment

900
00:46:09,800 --> 00:46:13,200
Speaker 1: has remained depressed. But there were those red flags unambiguously

901
00:46:13,360 --> 00:46:15,680
Speaker 1: in that last report. We did talk We have talked

902
00:46:15,680 --> 00:46:19,040
Speaker 1: about them. We even even brought them up with Lalel Brainerd.

903
00:46:19,280 --> 00:46:22,759
Speaker 1: There are some signs of a weakening labor market and

904
00:46:23,160 --> 00:46:25,239
Speaker 1: it can go from weak to bad, or it could

905
00:46:25,280 --> 00:46:28,279
Speaker 1: go from tight to moderately tight to loose fast. And

906
00:46:28,320 --> 00:46:29,799
Speaker 1: I think that is something to pay attention to.

907
00:46:30,120 --> 00:46:33,360
Speaker 2: Yeah, I keep thinking back to Oh again, this was

908
00:46:33,400 --> 00:46:35,520
Speaker 2: a point that Anna brought up, but the two thousand

909
00:46:35,520 --> 00:46:38,399
Speaker 2: and one recession, and Jason brought it up as well.

910
00:46:38,440 --> 00:46:41,360
Speaker 2: But the idea of how quickly things kind of shifted

911
00:46:41,480 --> 00:46:44,279
Speaker 2: in there, and to some extent, people didn't really realize

912
00:46:44,360 --> 00:46:47,560
Speaker 2: it was happening until much later because you didn't see

913
00:46:48,080 --> 00:46:50,040
Speaker 2: you know, it took a while for the unemployment to

914
00:46:50,520 --> 00:46:53,239
Speaker 2: kind of start to spike. But the other thing that

915
00:46:53,280 --> 00:46:57,280
Speaker 2: I was thinking about, like, it seems to Jason's point,

916
00:46:57,480 --> 00:47:00,560
Speaker 2: it seems like the wild card here is sort of

917
00:47:00,600 --> 00:47:06,880
Speaker 2: what happens to corporate profit margins and what dial companies

918
00:47:06,960 --> 00:47:10,319
Speaker 2: have to start turning in order to maintain those, you know,

919
00:47:10,440 --> 00:47:13,919
Speaker 2: is it pricing power? Can they still eke out more

920
00:47:14,000 --> 00:47:17,800
Speaker 2: revenue from the consumer, or do they have to resort

921
00:47:17,840 --> 00:47:19,000
Speaker 2: to cost cutting measures?

922
00:47:19,080 --> 00:47:22,280
Speaker 1: Well, I thought that was really interesting, his point about

923
00:47:22,680 --> 00:47:26,160
Speaker 1: you can have periods in which the trajectory of economic

924
00:47:26,239 --> 00:47:29,520
Speaker 1: activity and financial conditions go in different directions. So, as

925
00:47:29,520 --> 00:47:31,600
Speaker 1: he pointed out, in the immediate wake I guess of

926
00:47:31,680 --> 00:47:36,520
Speaker 1: bear Stearns, we did see that rally in financial assets,

927
00:47:36,640 --> 00:47:40,080
Speaker 1: even as already the economy is really starting to shed

928
00:47:40,120 --> 00:47:43,800
Speaker 1: private sector jobs at least to a meaningful degree.

929
00:47:44,040 --> 00:47:44,239
Speaker 3: Now.

930
00:47:44,360 --> 00:47:48,120
Speaker 1: Granted, like again, the headline labor market indicators look fine,

931
00:47:48,200 --> 00:47:50,759
Speaker 1: but there have been those reports of layoffs lately, and

932
00:47:50,760 --> 00:47:52,759
Speaker 1: people are starting to wonder what that means, and so

933
00:47:52,840 --> 00:47:55,640
Speaker 1: maybe it's just about margin padding, et cetera. But there

934
00:47:55,719 --> 00:47:58,759
Speaker 1: isn't enough to watch even if like markets seem fine

935
00:47:58,840 --> 00:47:59,759
Speaker 1: or seguine about it.

936
00:48:00,200 --> 00:48:03,480
Speaker 2: Yeah, to some extent, it feels like markets or investors

937
00:48:03,719 --> 00:48:07,239
Speaker 2: kind of sometimes it takes a while to internalize the

938
00:48:07,360 --> 00:48:10,279
Speaker 2: shifts that are happening. But that said, I think there's

939
00:48:10,280 --> 00:48:14,240
Speaker 2: also there's a human tendency to call like big regime

940
00:48:14,440 --> 00:48:17,520
Speaker 2: changes constantly. And we kind of saw it, going back

941
00:48:17,560 --> 00:48:19,600
Speaker 2: to the intro of this conversation, we saw it in

942
00:48:19,640 --> 00:48:22,520
Speaker 2: twenty twenty three. You know, lots of people were arguing, Oh,

943
00:48:22,600 --> 00:48:24,160
Speaker 2: things are going to be different this year, We're going

944
00:48:24,200 --> 00:48:27,640
Speaker 2: to have a recession that didn't materialize. That doesn't necessarily

945
00:48:27,680 --> 00:48:31,080
Speaker 2: mean that it can't this year. And again to Jason's point,

946
00:48:31,160 --> 00:48:34,880
Speaker 2: like the trick here is sort of determining how long

947
00:48:35,040 --> 00:48:36,879
Speaker 2: and variable those flags actually are.

948
00:48:37,719 --> 00:48:40,879
Speaker 1: I really liked also his description of like what them

949
00:48:41,080 --> 00:48:44,080
Speaker 1: what he does or yes, And it was interesting to

950
00:48:44,120 --> 00:48:46,839
Speaker 1: hear that. And this is something that does not come

951
00:48:46,880 --> 00:48:50,080
Speaker 1: up very much, which is the connection between the big

952
00:48:50,120 --> 00:48:52,839
Speaker 1: picture ideas that he you know, is three big ends,

953
00:48:52,880 --> 00:48:55,239
Speaker 1: the end of the new normal or the end of

954
00:48:55,360 --> 00:48:59,680
Speaker 1: secular stagnation, the end of China's growth at any cost

955
00:48:59,800 --> 00:49:02,560
Speaker 1: fail is in favor of this sort of more domestic

956
00:49:02,600 --> 00:49:05,880
Speaker 1: focused in nationalism, and the end of the end of history,

957
00:49:05,920 --> 00:49:08,560
Speaker 1: the sort of geopolitical call. But it was interesting to

958
00:49:08,600 --> 00:49:12,759
Speaker 1: hear those three big ideas within the framework of a

959
00:49:12,800 --> 00:49:15,879
Speaker 1: company that needs to make short term trades to make money.

960
00:49:15,960 --> 00:49:18,520
Speaker 1: And how do you sort of connect the long term

961
00:49:18,520 --> 00:49:21,719
Speaker 1: macro with the short term macro. I really enjoyed hearing

962
00:49:21,800 --> 00:49:22,440
Speaker 1: him talk about that.

963
00:49:22,760 --> 00:49:25,200
Speaker 2: Yeah, absolutely, I kind of I always thought of macro

964
00:49:25,280 --> 00:49:29,440
Speaker 2: hedge funds as like making these big bets on regime shifts.

965
00:49:29,440 --> 00:49:32,800
Speaker 2: But his point about like, well, there is that aspect

966
00:49:32,840 --> 00:49:34,239
Speaker 2: of it, but also a lot of it is more

967
00:49:34,280 --> 00:49:38,919
Speaker 2: tactical than strategic long term investments also makes sense because

968
00:49:38,920 --> 00:49:41,239
Speaker 2: of course, where does the hedge in hedge fund come from?

969
00:49:41,400 --> 00:49:43,719
Speaker 2: You have to, you know, be long and sure and

970
00:49:43,760 --> 00:49:47,200
Speaker 2: you're trying to preserve capital, So that makes some sense.

971
00:49:47,719 --> 00:49:48,839
Speaker 2: Shall we leave it there for now?

972
00:49:48,960 --> 00:49:49,759
Speaker 1: Let's leave it there.

973
00:49:50,000 --> 00:49:52,800
Speaker 2: This has been another episode of the All Thoughts podcast.

974
00:49:52,880 --> 00:49:56,080
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.

975
00:49:55,760 --> 00:49:58,000
Speaker 1: And I'm Jeo Wisenthal. You can follow me at The

976
00:49:58,040 --> 00:50:02,560
Speaker 1: Stalwart follow our producers Carman Rodriguez at Carmen Arman, Dashel

977
00:50:02,560 --> 00:50:06,160
Speaker 1: Bennett at Dashbot and Kelbrooks at Kelbrooks. And thank you

978
00:50:06,200 --> 00:50:09,360
Speaker 1: to our producer Moses Ondem. For more Oddlots content, go

979
00:50:09,400 --> 00:50:13,080
Speaker 1: to Bloomberg dot com slash odd Lots. We have transcripts,

980
00:50:13,120 --> 00:50:15,879
Speaker 1: a blog, and a weekly newsletter, and you can chat

981
00:50:15,920 --> 00:50:19,400
Speaker 1: about all these topics with your fellow odd Lots listeners

982
00:50:19,480 --> 00:50:23,200
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983
00:50:23,280 --> 00:50:25,400
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984
00:50:25,480 --> 00:50:28,520
Speaker 2: And if you enjoy odd Lots, if you like it

985
00:50:28,600 --> 00:50:31,799
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986
00:50:31,800 --> 00:50:34,440
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987
00:50:34,440 --> 00:50:38,719
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988
00:50:38,760 --> 00:50:42,520
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989
00:50:42,600 --> 00:50:44,640
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990
00:50:44,880 --> 00:51:07,120
Speaker 3: Thanks for listening, bend

991
00:51:10,840 --> 00:51:13,680
Speaker 1: In