WEBVTT - Kopi Time E114 - US markets with Dr. Komal Sri-Kumar 0:00:05.960 --> 0:00:09.318 Welcome to Copy Time, a podcast series on Markets and 0:00:09.329 --> 0:00:13.359 Economies from DVS Group Research. I'm Tambe, chief economist. Welcoming 0:00:13.369 --> 0:00:18.399 you to our 114th episode. Today, we will do a 0:00:18.409 --> 0:00:22.020 year end wrap up and a look ahead to 2024 0:00:22.030 --> 0:00:26.559 with our favorite market strategist. Ko Sh Kumar is president 0:00:26.569 --> 0:00:30.020 of Shrier Global Strategies based in Santa Monica California. He's 0:00:30.030 --> 0:00:32.778 also a senior fellow at the Milken Institute. 0:00:33.279 --> 0:00:36.130 Earlier, she spent 22 years with the trust company of 0:00:36.139 --> 0:00:38.869 the West that are known as TCW, where his last 0:00:38.880 --> 0:00:42.810 position was Chief Global strategist and chairman of asset allocation Committee. SHS. 0:00:42.819 --> 0:00:46.089 Views on asset allocation investment risk management are widely followed 0:00:46.098 --> 0:00:51.490 in the financial industry as well as by numerous institutional investors. Shri. 0:00:51.639 --> 0:00:53.020 A warm welcome back to C 0:00:53.060 --> 0:00:56.259 Time. Thank you very great to be back with you, Timor. 0:00:56.470 --> 0:00:58.950 It's always a pleasure to chat, talk with you about 0:00:58.959 --> 0:01:01.860 the various issues and I look forward to today's discussion. 0:01:02.240 --> 0:01:05.289 Absolutely. Shri and uh you know, year end wrap up, 0:01:05.300 --> 0:01:07.550 I really could not think of a better person to 0:01:07.559 --> 0:01:10.930 have a conversation with. So let's start by taking stock 0:01:10.940 --> 0:01:15.009 of the markets uh for the year 2023. What surprised 0:01:15.019 --> 0:01:19.379 you on the rates, FX equities and credit space? Big question. 0:01:20.379 --> 0:01:23.569 Yeah, it's a big question but also in some ways, Timor, 0:01:23.709 --> 0:01:29.680 an easy answer. I cannot say that anything with respect 0:01:29.690 --> 0:01:32.610 to rates, with respect to equities, with respect to credits. 0:01:32.620 --> 0:01:36.959 We maybe the credit spreads having remained so restrained is 0:01:36.970 --> 0:01:40.819 probably somewhat of a surprise. The biggest surprise of them 0:01:40.830 --> 0:01:44.199 all is the volatility that we have had in the markets. 0:01:44.980 --> 0:01:48.129 Uh It has made, made it very difficult to guess 0:01:48.139 --> 0:01:52.180 the path for interest rates, the path for equities. And 0:01:52.190 --> 0:01:55.599 if you made a decision on what was going to happen, 0:01:55.989 --> 0:01:59.779 you found analysts changing their views in 2 to 4 weeks, 0:01:59.790 --> 0:02:03.260 they completely had to reverse themselves. That is, I think 0:02:03.269 --> 0:02:07.080 the big surprise and to me, the big change happened 0:02:07.089 --> 0:02:11.359 even within that, within what happened on the rate front 0:02:11.839 --> 0:02:16.538 and think about October 22nd, 23rd, the 10 year treasury 0:02:16.550 --> 0:02:22.110 yield peaking at 5.02% and a couple of minutes ago, 0:02:22.119 --> 0:02:26.270 it just closed at 4.2%. So you've had an 80 0:02:26.279 --> 0:02:30.000 basis point move which has taken place in just over 0:02:30.008 --> 0:02:34.500 a month and what explains the 80 basis point move 0:02:34.589 --> 0:02:38.758 absolutely nothing animal spirits. And that is what is surprising 0:02:38.770 --> 0:02:39.299 to me 0:02:39.639 --> 0:02:42.699 that markets will go up and go down, especially on 0:02:42.710 --> 0:02:46.059 the fixed income side with very little to explain for it. 0:02:46.220 --> 0:02:48.320 But I have my own reason. For it and I'm 0:02:48.330 --> 0:02:49.520 happy to talk about it. 0:02:50.389 --> 0:02:54.109 Well, let's, let's talk about that in a second. I 0:02:54.119 --> 0:02:56.070 just want to ask you about the FX space, the 0:02:56.080 --> 0:03:00.539 dollar strength through the year and now the quasi capsulation 0:03:00.550 --> 0:03:03.649 we're seeing against the yen and also against some em currencies. 0:03:03.660 --> 0:03:04.769 I mean, what do you make of that? 0:03:05.669 --> 0:03:09.339 I think it all comes to what the expectation is 0:03:09.350 --> 0:03:13.029 for the fed and the dollar weakness that has taken 0:03:13.038 --> 0:03:16.089 place recently, as you said, with respect to the yen, 0:03:16.100 --> 0:03:20.259 with respect to some Asian currencies is not matched by 0:03:20.270 --> 0:03:26.638 the dollar Euro relationship. The dollar has actually appreciated from 0:03:26.649 --> 0:03:29.690 about let's say dollar 10 to the euro a few 0:03:29.699 --> 0:03:33.089 weeks ago to dollar and seven cents to the euro. Now, 0:03:33.750 --> 0:03:35.039 what is the difference? 0:03:35.660 --> 0:03:39.759 The difference is between the Euro and the US dollar? 0:03:39.770 --> 0:03:43.679 The expectation is that the Euro European Central Bank is 0:03:43.690 --> 0:03:48.539 probably going to do something very urgently with respect to 0:03:48.550 --> 0:03:51.899 cutting interest rates perhaps much faster than the fed. 0:03:52.720 --> 0:03:55.580 And that's, and as far as the relationship with the 0:03:55.589 --> 0:03:57.250 Asian currencies is concerned, 0:03:57.869 --> 0:04:00.520 there are two things I think at work. One from 0:04:00.529 --> 0:04:04.550 the US side, the expectation that the fed may indeed 0:04:04.559 --> 0:04:09.559 cut rates very quickly. Despite Jerome Powell's protestations that he's 0:04:09.570 --> 0:04:13.369 not going to do so. And the second one is 0:04:13.380 --> 0:04:17.489 again that Mr Ueda at the Bank of Japan may 0:04:17.500 --> 0:04:22.250 be getting ready to get rid of the 1% peak 0:04:22.260 --> 0:04:25.589 that they that they informally fall over the 10 year 0:04:25.600 --> 0:04:26.779 J GB yield. 0:04:27.209 --> 0:04:30.829 And if that's the case and it's allowed to go up, clearly, 0:04:30.839 --> 0:04:34.010 it marks a further appreciation of the yen with respect 0:04:34.019 --> 0:04:34.589 to the dollar. 0:04:36.428 --> 0:04:39.880 So we uh every week have a tactical trades, uh 0:04:39.890 --> 0:04:42.899 monitor that we do with our strategies, make them, make 0:04:42.910 --> 0:04:46.380 the calls. The EU R US D call is the 0:04:46.390 --> 0:04:48.000 one that we really have gotten it wrong in the 0:04:48.010 --> 0:04:50.339 last couple of months. But again, to your point, these 0:04:50.350 --> 0:04:52.820 things change in a very short duration. 0:04:53.079 --> 0:04:55.059 The view on the market in the euro was very 0:04:55.070 --> 0:04:58.459 different two months ago. And it's, it's evolved around the 0:04:58.470 --> 0:05:00.880 European outlook and to your point about the E CBS 0:05:00.890 --> 0:05:04.170 policy direction, which I mean, I have a feeling might 0:05:04.178 --> 0:05:07.010 again change in the early part of 2024 if data 0:05:07.250 --> 0:05:10.368 flows were to change. All right, going back to rates, 0:05:10.690 --> 0:05:12.609 I am interested in a couple of things. So one 0:05:12.619 --> 0:05:14.820 is the whole us fiscal picture and it 0:05:14.910 --> 0:05:19.058 impact on rates. Second is the whole supply demand of bonds. 0:05:19.309 --> 0:05:22.488 I mean, in 2024 or 2023 to your point, this 0:05:22.500 --> 0:05:25.079 entire rally of the last couple of months or even 0:05:25.089 --> 0:05:27.649 less than that has happened still against the back of 0:05:27.660 --> 0:05:31.290 a really poor fiscal outlook. So how do we reconcile 0:05:31.299 --> 0:05:34.649 the market structure by that interest as well as the 0:05:34.660 --> 0:05:36.609 rather alarming supply side of the bonds? 0:05:37.339 --> 0:05:40.640 Great questions and very timely let me start out in 0:05:40.649 --> 0:05:45.619 this way. I share your concern about the fiscal mismanagement 0:05:45.630 --> 0:05:48.709 that has gone on in the United States. It began 0:05:48.720 --> 0:05:52.230 with the Trump administration. It has accelerated in the, in 0:05:52.238 --> 0:05:57.799 the Biden administration. It's a bipartisan effort to ruin the 0:05:57.809 --> 0:06:01.600 fiscal situation so nobody can especially take credit for that. 0:06:01.609 --> 0:06:03.200 They are all responsible for it. 0:06:03.890 --> 0:06:08.738 However, as you said, the, the auctions treasury auctions are 0:06:08.750 --> 0:06:12.149 going well, the auctions are all the bonds are being 0:06:12.160 --> 0:06:17.070 placed and without any difficulty so far. And that's what 0:06:17.079 --> 0:06:21.609 brought the 10 year yield down to 420 this Tuesday 0:06:21.619 --> 0:06:26.010 afternoon in the United States that this is, I would 0:06:26.019 --> 0:06:29.149 give an analogy to explain what is happening. You're looking 0:06:29.160 --> 0:06:30.029 to buy a home 0:06:30.980 --> 0:06:34.178 and there is only one home available in that neighborhood. 0:06:34.190 --> 0:06:35.359 It's not in great shape, 0:06:36.089 --> 0:06:39.269 it's actually deteriorating, but you want a home 0:06:40.059 --> 0:06:42.339 and that is a good place to put your money 0:06:42.350 --> 0:06:45.479 and to try to improve it in the future or 0:06:45.769 --> 0:06:48.190 you can go without a home, what are you going 0:06:48.200 --> 0:06:49.070 to do about it? 0:06:49.799 --> 0:06:52.269 So if you are a global investor, 0:06:53.109 --> 0:06:56.808 if you do not like the US Treasury's policies and 0:06:56.820 --> 0:06:57.368 I don't, 0:06:58.089 --> 0:07:00.290 but where are you going to go? Are you going 0:07:00.299 --> 0:07:02.659 to go into Chinese Renminbi? You're not going to go 0:07:02.670 --> 0:07:06.869 into the Euros and the German market is too small 0:07:06.880 --> 0:07:11.029 to take it. There is no other alternative. Five years ago, 0:07:11.040 --> 0:07:14.279 the thought was China would be a competitor to the 0:07:14.290 --> 0:07:17.829 United States in terms of where the US dollar is going. 0:07:18.140 --> 0:07:21.820 And the Chinese Renminbi Yuan would surpass the US Dollar 0:07:21.829 --> 0:07:23.029 in terms of supremacy. 0:07:23.619 --> 0:07:26.019 It just hasn't happened and I don't think it is 0:07:26.029 --> 0:07:28.000 going to happen in the foreseeable future. 0:07:28.730 --> 0:07:32.309 So from if you were Janet Yellen and you were 0:07:32.320 --> 0:07:34.950 looking at the situation, you don't have much to worry 0:07:34.959 --> 0:07:35.429 about 0:07:36.130 --> 0:07:38.989 the global demand is going to exist. And that's the 0:07:39.000 --> 0:07:44.309 reason why the US fiscal mismanagement, the big important topic 0:07:44.320 --> 0:07:47.829 though it is it is essentially in the background. It's 0:07:47.839 --> 0:07:50.339 not very relevant to explain bond yields. 0:07:51.339 --> 0:07:53.920 It is rather remarkable treat. I mean, I have been 0:07:53.929 --> 0:07:57.790 looking at ownership data by investor T and of course, 0:07:57.799 --> 0:08:00.390 you know, fed, we know to the QT its holding 0:08:00.399 --> 0:08:01.959 of us situations have come down. 0:08:02.200 --> 0:08:04.109 Uh when we look at Asia, which used to be 0:08:04.119 --> 0:08:07.079 a very large buyer of us treasuries, that's not quite 0:08:07.089 --> 0:08:10.179 there anymore. Uh Middle Eastern Central banks do buy a bit, 0:08:10.190 --> 0:08:14.059 but they're clearly not offsetting all the lackluster demand in 0:08:14.070 --> 0:08:18.600 most parts of Asia. So the uh the gap if 0:08:18.609 --> 0:08:20.640 you will is being picked up by the private sector, 0:08:20.649 --> 0:08:24.179 both us private sector and non us private sector have 0:08:24.190 --> 0:08:28.100 bid very, very enthusiastically for us treasuries through the course 0:08:28.109 --> 0:08:28.820 of this year. 0:08:29.070 --> 0:08:32.289 Um So it goes back to your point that you 0:08:32.299 --> 0:08:34.890 don't really like the Chinese home and the European home, 0:08:35.030 --> 0:08:36.859 you may not like the US home that much, but 0:08:36.869 --> 0:08:38.770 it's still AAA. So you used to buy the US home. 0:08:39.989 --> 0:08:44.328 Exactly. That is what you're doing. And unless something changes 0:08:44.338 --> 0:08:47.809 to the contrary and what could that change be? You 0:08:47.818 --> 0:08:52.028 need to get a rapidly developed European capital market that's 0:08:52.039 --> 0:08:54.448 not going to happen within the next 2 to 3 years. 0:08:54.968 --> 0:08:58.809 And the Chinese completely take the change, their policies, attract 0:08:58.818 --> 0:09:03.387 foreign direct investments become much more capitalistic than they have 0:09:03.398 --> 0:09:07.848 and put down communism and push up the importance of 0:09:07.859 --> 0:09:09.489 markets that's not going to happen. 0:09:09.989 --> 0:09:12.030 So when all of that is the case, it's a 0:09:12.039 --> 0:09:14.640 very easy bet that us dollar is where you're going 0:09:14.650 --> 0:09:17.900 to be. There's one competition though, look at the price 0:09:17.909 --> 0:09:20.449 of gold and I have to speak to a client 0:09:20.460 --> 0:09:24.039 early next week. And I'm pointing out that first for 0:09:24.049 --> 0:09:26.400 the first time in quite a while gold is getting 0:09:26.409 --> 0:09:30.210 a life. And the reason that is the case is 0:09:30.219 --> 0:09:32.760 because you're going to have a situation when rates are 0:09:32.770 --> 0:09:33.689 going to come down 0:09:34.559 --> 0:09:38.080 in the United States, we'll reserve to later as to 0:09:38.090 --> 0:09:39.598 why rates may come down. 0:09:40.419 --> 0:09:43.789 But when rates are going to come down, holding us dollars, 0:09:43.799 --> 0:09:46.150 whether in the form of treasuries or in the form 0:09:46.159 --> 0:09:50.840 of other assets becomes less attractive and the opportunity cost 0:09:50.849 --> 0:09:52.760 of holding gold goes down, 0:09:53.520 --> 0:09:55.349 which is I think what is going to happen? I 0:09:55.359 --> 0:09:57.979 think the gold price is going to go up, but 0:09:57.989 --> 0:10:00.789 it's not as if you can use gold as a 0:10:00.799 --> 0:10:04.500 currency to physically move from one to the other. So 0:10:04.510 --> 0:10:07.260 as long as that's not the case, it's very little 0:10:07.270 --> 0:10:11.659 competition still for the, for the dollar supremacy in global markets. 0:10:12.419 --> 0:10:15.880 Well, we've also seen a pretty spectacular reversion of value 0:10:15.890 --> 0:10:19.119 in Bitcoin, but we'll keep that aside free. Um One 0:10:19.130 --> 0:10:20.770 final question on that, as I said, I want to 0:10:20.780 --> 0:10:23.059 go to the US economy after that and we will 0:10:23.070 --> 0:10:24.700 talk about credit leaders. I just want to talk a 0:10:24.710 --> 0:10:27.539 little bit about equities with you. Uh It's been a, 0:10:27.549 --> 0:10:31.909 you know, remarkable year for equities in 2023. Initially, 0:10:31.994 --> 0:10:36.075 poor outlook than the A I tail wind drove the 0:10:36.085 --> 0:10:40.064 magnificent seven stocks up substantially. And now we're ending 2023 0:10:40.075 --> 0:10:43.145 actually in a rather high. Despite the fact that S 0:10:43.155 --> 0:10:47.775 and P 500 pe is extremely high. The yield gap 0:10:47.784 --> 0:10:50.085 vis A vis the US Treasury is still substantial and 0:10:50.094 --> 0:10:51.484 still people buy a lot of stocks, 0:10:52.390 --> 0:10:55.669 right? Uh People buy a lot of stocks because I 0:10:55.679 --> 0:10:58.869 think there are 22 reasons I would attribute to it 0:10:59.400 --> 0:11:02.539 from a macro point of view. And first of all, 0:11:02.549 --> 0:11:03.809 you have a situation 0:11:04.500 --> 0:11:10.289 uh where despite the higher rates, the fed is also 0:11:10.299 --> 0:11:13.718 at the being going very easy with respect to policy. 0:11:13.729 --> 0:11:18.960 Despite 5.5% of interest rate increases, I still do not 0:11:18.969 --> 0:11:22.039 think the situation is as tight as it should be. 0:11:22.929 --> 0:11:26.080 You talked for instance, about the balance sheet being reduced 0:11:26.090 --> 0:11:27.559 by quantitative tightening. 0:11:28.739 --> 0:11:32.159 But I point out in a recent write up that 0:11:32.169 --> 0:11:36.159 between March of 2020 March of 2021 0:11:37.140 --> 0:11:37.869 one year, 0:11:38.729 --> 0:11:40.210 the balance sheet of the fed 0:11:41.169 --> 0:11:43.750 increased by 77% 0:11:45.020 --> 0:11:49.960 to about $7.6 trillion in March of 2021. 0:11:50.820 --> 0:11:55.580 And right now, it is standing at $7.7 trillion. If 0:11:55.590 --> 0:11:59.228 you compare today with March of 2021 there has been 0:11:59.239 --> 0:12:00.520 no quantitative tightening. 0:12:01.130 --> 0:12:04.390 It's all a matter of your perspective. It's a matter 0:12:04.400 --> 0:12:06.710 of where we are standing when you're viewing it. 0:12:07.479 --> 0:12:11.598 The other point is that the interest rates were reduced 0:12:11.609 --> 0:12:15.239 to zero and maintained when the economy was recovering and 0:12:15.250 --> 0:12:17.500 that was highly irresponsible 0:12:18.460 --> 0:12:22.579 and you cannot make up for eating an unlimited amount 0:12:22.590 --> 0:12:26.109 of food and drinking a lot by saying that you're 0:12:26.119 --> 0:12:28.640 going to go hungry and you're going to stop eating 0:12:28.650 --> 0:12:31.679 for the next week. It doesn't, you do not get 0:12:31.690 --> 0:12:33.799 back to good health as a result of what you 0:12:33.809 --> 0:12:37.919 did before. So that's close to what the Fed is doing. 0:12:37.979 --> 0:12:41.130 They made a huge mistake. They've never admitted it. By 0:12:41.140 --> 0:12:45.590 the way, Jerome Powell called the increase in the inflation 0:12:45.599 --> 0:12:48.280 rate as quote unexpected. 0:12:49.260 --> 0:12:51.679 It has nothing to do with monetary policy. It has 0:12:51.690 --> 0:12:54.760 nothing to do with zero interest rates or increase in 0:12:54.770 --> 0:12:58.159 the balance sheet. So I think there is so one 0:12:58.169 --> 0:13:00.960 reason why the equities have continued to do well 0:13:01.690 --> 0:13:04.098 is because there is a lot of liquidity. Thanks to 0:13:04.109 --> 0:13:08.989 the Federal Reserve. Second, you refer to the fiscal deficit. 0:13:09.750 --> 0:13:12.829 You are, it is not your time to pay the piper. 0:13:12.840 --> 0:13:15.729 You do not have to pay any penalty for the 0:13:15.739 --> 0:13:19.510 fiscal deficit, but you can enjoy the benefit of the 0:13:19.520 --> 0:13:23.689 deficit and that stimulus is also helping the equity market. 0:13:23.700 --> 0:13:26.450 So that is the second reason why I think it's 0:13:26.460 --> 0:13:29.349 persisting When does it come to an end? 0:13:30.340 --> 0:13:34.799 And that's where I differ from the consensus. The consensus 0:13:34.809 --> 0:13:35.439 believes 0:13:36.159 --> 0:13:39.059 that there will be some form of a recession, maybe 0:13:39.070 --> 0:13:42.559 a mild recession, a soft landing, but that still requires 0:13:42.849 --> 0:13:45.729 the fed to cut interest rates because inflation will come 0:13:45.739 --> 0:13:50.580 down to very low levels. I disagree. Janet Yellen said 0:13:50.590 --> 0:13:54.710 earlier today that she believes that she disagrees that the 0:13:54.719 --> 0:13:58.059 last one mile of inflation fight is the toughest 0:13:58.729 --> 0:14:02.270 it is. I have followed markets for 50 years and 0:14:02.280 --> 0:14:06.238 every time starting from the Richard Nixon author Burns Years, 0:14:06.659 --> 0:14:09.460 they have been very difficult once you bring it down 0:14:09.469 --> 0:14:13.119 to very low levels, it unless you show determination to 0:14:13.130 --> 0:14:13.819 keep it there. 0:14:14.450 --> 0:14:18.010 So that is again a reason why there is a 0:14:18.020 --> 0:14:22.510 concern in the market about equities, something may break in 0:14:22.520 --> 0:14:25.570 the system, you may have a credit even which will 0:14:25.580 --> 0:14:28.510 bring the equities down. And then of course, you have 0:14:28.520 --> 0:14:32.770 a period of equities and the pressure and before they 0:14:32.780 --> 0:14:37.929 pick up again, so think about December 2008 to early 0:14:37.940 --> 0:14:39.750 March of 2009, 0:14:40.599 --> 0:14:45.440 December 2008. We were still suffering from the aftermath of 0:14:45.450 --> 0:14:49.539 Lehman Brothers. The Federal Reserve had cut interest rates to zero. 0:14:49.890 --> 0:14:54.940 They talked about quantitative easing in a, they basically increased 0:14:54.950 --> 0:14:58.940 it in a massive manner after September of 2008. But 0:14:58.950 --> 0:15:02.119 it took until March 9th of 2009 for the S 0:15:02.130 --> 0:15:04.099 and P 500 to reach its bottom. 0:15:04.849 --> 0:15:07.750 So you may have a situation like that where equities 0:15:07.760 --> 0:15:09.890 go down, but that's going to be the time you 0:15:09.900 --> 0:15:13.450 go and when this blood on the street you buy again. 0:15:13.479 --> 0:15:17.950 So my outlook for equities is from the current level 0:15:17.960 --> 0:15:20.859 go down perhaps in the next six months. 0:15:21.900 --> 0:15:25.679 It then languishes for 3 to 4 months at that stage. 0:15:26.359 --> 0:15:30.809 Then the fed once again introduces quantitative easing brings down 0:15:30.820 --> 0:15:33.679 the uh brings down the interest rate. It doesn't matter 0:15:33.690 --> 0:15:37.159 what the inflation rate is. As for the, for the 0:15:37.169 --> 0:15:41.700 central bank, inflation is a consideration only when there is 0:15:41.710 --> 0:15:42.739 no crisis. 0:15:43.640 --> 0:15:46.460 When there is a crisis, you set aside your inflation 0:15:46.469 --> 0:15:47.849 concerns and just inflate. 0:15:48.489 --> 0:15:50.599 And that's I think what's going to happen that will 0:15:50.609 --> 0:15:54.140 help equities and that is also going to be very 0:15:54.150 --> 0:15:56.750 beneficial overall to risk assets. 0:15:57.609 --> 0:16:00.070 Well, it will be consistent with the reaction function of 0:16:00.080 --> 0:16:02.590 the fed that you have been writing about for many years. 0:16:02.630 --> 0:16:04.520 Uh Shri and in the last two podcasts that you 0:16:04.530 --> 0:16:07.659 and I have done over the last 34 years. Uh You, 0:16:07.669 --> 0:16:11.979 you've gotten that perspective, you know, absolutely spot on that, 0:16:11.989 --> 0:16:17.039 you know, market considerations, Trump inflation consideration whenever the markets are, 0:16:17.049 --> 0:16:17.869 you know, convulsing. 0:16:18.190 --> 0:16:21.130 Um If we, it's been a remarkable year for the 0:16:21.140 --> 0:16:24.169 US economy at the beginning of this year, consensus forecast 0:16:24.179 --> 0:16:27.099 was growth was going to slow substantially. It didn't at all. 0:16:27.109 --> 0:16:29.520 I think US will probably end up with 2.5% growth 0:16:29.530 --> 0:16:34.090 for 2023. So higher than 2022. Uh and it will 0:16:34.099 --> 0:16:38.030 take that momentum to some extent into 24. So before 0:16:38.039 --> 0:16:41.469 we talk about 24 just the performance of the first 0:16:41.479 --> 0:16:44.010 three quarters including the spectacular third quarter that we saw. 0:16:44.900 --> 0:16:49.640 Yeah, uh two or three points to answer to that. 0:16:49.650 --> 0:16:52.200 First of all, once again, it is the extent of 0:16:52.210 --> 0:16:55.799 stimulus that existed. And for instance, toward the end of 0:16:55.809 --> 0:17:00.409 2022 it was estimated that there was somewhere in the 0:17:00.419 --> 0:17:07.000 range of 1.7 trillion worth of excess surplus in the 0:17:07.010 --> 0:17:09.729 hands of consumers. And it is showing up in terms 0:17:09.739 --> 0:17:12.149 of retail sales levels. It is showing up 0:17:12.579 --> 0:17:16.099 in terms of for a while the low participation rate 0:17:16.349 --> 0:17:18.180 that existed in the labor market. 0:17:18.920 --> 0:17:22.939 So that is one reason why, why I think uh 0:17:22.949 --> 0:17:26.619 you have the the vibrant US economy. 0:17:27.458 --> 0:17:31.348 The second you mentioned is clearly the A I the revolution, 0:17:31.359 --> 0:17:33.828 there is a productivity growth and that is showing up 0:17:33.838 --> 0:17:38.298 in recent productivity numbers. Uh being healthy productivity again, is 0:17:38.308 --> 0:17:41.529 a very volatile concept. You have it going up for 0:17:41.538 --> 0:17:43.957 quite a few quarters and then it does you cannot 0:17:43.968 --> 0:17:47.258 sustain it. So that's the second reason why I think 0:17:47.269 --> 0:17:51.457 it is sustained. Uh But the question is when you 0:17:51.468 --> 0:17:54.958 look at the overall us economy market and when you look, 0:17:54.968 --> 0:17:57.359 by the way, when you compare it with what happened 0:17:57.760 --> 0:18:00.819 to the what the treasury market is telling you 0:18:01.530 --> 0:18:04.709 the eel curve, the 2 to 10 eel curve inverted 0:18:04.930 --> 0:18:09.909 in early July of 2022. So that's about 17 months 0:18:09.920 --> 0:18:10.310 ago 0:18:11.089 --> 0:18:15.550 and invariably every time it has resulted in a recession. 0:18:16.349 --> 0:18:20.250 And now you see that in terms of slower labor 0:18:20.260 --> 0:18:24.329 market growth, wages are coming down to some extent, 0:18:25.109 --> 0:18:28.188 the jolts report as we call it, the job openings 0:18:28.199 --> 0:18:31.469 are not as strong as they used to be. The 0:18:31.479 --> 0:18:35.800 quit rate has gone down from earlier levels. So all 0:18:35.810 --> 0:18:39.179 of those are suggesting that it is slowly starting to 0:18:39.189 --> 0:18:42.599 take shape. So the answer to your issue, which is 0:18:42.609 --> 0:18:47.400 I think very relevant is you have not banished recession, 0:18:47.819 --> 0:18:51.369 you have not gone into a state of Nirvana where 0:18:51.380 --> 0:18:54.170 you have perennial rapid economic growth. 0:18:54.599 --> 0:18:58.030 What you have is a situation where rapid growth was 0:18:58.040 --> 0:19:02.510 promoted by technological changes as well as by the stimulus, 0:19:02.939 --> 0:19:06.170 but eventually it is going to revert and you're going 0:19:06.180 --> 0:19:09.550 to reach a situation where the recession is going to come. 0:19:09.560 --> 0:19:12.188 It is delayed but not denied, denied, 0:19:13.359 --> 0:19:16.560 delayed but not delighted. Uh One thing that did not get, 0:19:16.569 --> 0:19:19.819 uh denied earlier this year was the regional banks. So 0:19:19.829 --> 0:19:22.280 we had quite a few in your home state of California, 0:19:22.290 --> 0:19:27.900 in particular, uh, regional bank failures. We saw a pretty strong, uh, uh, 0:19:27.910 --> 0:19:30.869 you know, sort of intervention by the Fed and nothing 0:19:30.880 --> 0:19:34.689 has happened since then. Uh But I, I worry that, 0:19:34.699 --> 0:19:36.979 you know, there is, you know, duration mismatch all over 0:19:36.989 --> 0:19:40.379 the economy. Uh, and the way interest rates went up 0:19:40.390 --> 0:19:41.420 and then came down, 0:19:42.209 --> 0:19:45.420 there's bound to be some financial accidents. So what's your sense? 0:19:45.430 --> 0:19:47.458 I mean, are there risks lurking here and there? 0:19:48.660 --> 0:19:51.478 I am looking for an accident as you call it 0:19:51.489 --> 0:19:56.160 or more generally a credit event in euphemistic terms to 0:19:56.400 --> 0:19:59.469 take place sometime within the next six months. 0:20:00.420 --> 0:20:03.239 And I can give you a few candidates, 0:20:03.890 --> 0:20:07.770 more banks are affected by what happened similar to March, 0:20:07.780 --> 0:20:10.969 except that this time they are somewhat bigger, not just 0:20:10.979 --> 0:20:13.150 small banks but medium sized banks. 0:20:14.060 --> 0:20:18.290 Why does that happen recently? An estimate by a study 0:20:18.300 --> 0:20:24.079 by the Federal Reserve Bank of Kansas suggested that $550 0:20:24.089 --> 0:20:27.699 billion worth of assets of us banks are under water 0:20:28.430 --> 0:20:32.479 and that is the equivalent of 30% of regulatory capital. 0:20:33.670 --> 0:20:38.159 Now that is for the entire banking system. But clearly 0:20:38.170 --> 0:20:40.329 there are some banks which are in much better shape 0:20:40.339 --> 0:20:43.919 than that or they have other assets to offset the 0:20:43.930 --> 0:20:48.079 losses they have taken in buying long dated treasuries or 0:20:48.089 --> 0:20:51.839 long dated mortgage backed securities and see the yields go 0:20:51.849 --> 0:20:52.770 up after that. 0:20:53.689 --> 0:20:57.589 But then if you say that there are some smaller 0:20:57.599 --> 0:21:02.510 banks which are accounting for $550 billion or most of it, 0:21:02.839 --> 0:21:06.369 you're talking about them using up much more than 30% 0:21:06.380 --> 0:21:09.709 of the regulatory capital. That is a national average. 0:21:11.079 --> 0:21:14.420 That is one sign of trouble that I can see. 0:21:14.959 --> 0:21:18.619 Second one is the fact that you have the commercial 0:21:18.630 --> 0:21:22.239 real estate problem, which is essentially like a tsunami. I 0:21:22.250 --> 0:21:26.510 mean tsunami doesn't happen one instant. It gathers force for 0:21:26.520 --> 0:21:28.530 a while. And then by the time you see it, 0:21:28.540 --> 0:21:29.660 it is too powerful 0:21:30.630 --> 0:21:35.169 as of now hand where there are buildings in New 0:21:35.180 --> 0:21:39.569 York and San Francisco, which are changing hands at much, 0:21:39.579 --> 0:21:43.649 much lower prices than they did in 2019. Sometimes at 0:21:43.959 --> 0:21:48.359 60 to 70% discount from the price that was paid 0:21:48.500 --> 0:21:49.569 four years ago. 0:21:50.589 --> 0:21:55.359 And that's one. And secondly, the interest rate high interest 0:21:55.369 --> 0:21:58.050 rates mean that very many of the landlords are now 0:21:58.060 --> 0:22:00.930 able to go to the banks and say I'm not 0:22:00.939 --> 0:22:03.300 going to pay you the higher interest rate you want 0:22:03.310 --> 0:22:03.889 us to pay. 0:22:04.869 --> 0:22:08.369 You have two options. You can either reduce the interest 0:22:08.380 --> 0:22:09.089 rate for us 0:22:09.849 --> 0:22:12.750 and I can pay you a lower interest rate or 0:22:12.760 --> 0:22:13.329 second 0:22:14.109 --> 0:22:17.400 here are the keys keys to the property, you can 0:22:17.410 --> 0:22:21.489 take it. Goodbye. I'm leaving. In either case, the banks 0:22:21.500 --> 0:22:25.319 are clearly at a disadvantage. This has not come out 0:22:25.329 --> 0:22:28.119 in full and has not been discussed in public 0:22:28.920 --> 0:22:32.069 when you look at the banking regulators, when they go 0:22:32.079 --> 0:22:37.500 before Congress or when Janet Yellen repeatedly says the banking 0:22:37.510 --> 0:22:40.829 system in the United States is very sound. That word 0:22:40.839 --> 0:22:42.060 is hers, not mine. 0:22:42.709 --> 0:22:45.829 And she has repeated it quite a few times. My 0:22:45.839 --> 0:22:49.819 responses show me how it is sound but there is 0:22:49.829 --> 0:22:53.760