WEBVTT - Kopi Time E143 - Markets and Policy Path Dependence with Mustafa Chowdhury 0:00:05.920 --> 0:00:09.189 Hello, this is Copy Time, a podcast series on Markets 0:00:09.199 --> 0:00:12.640 and Economies from D BS Group Research. I'm Tambe, chief economist. 0:00:12.648 --> 0:00:15.340 Welcoming you to our 143rd episode. 0:00:15.970 --> 0:00:20.000 Today we will dive into the markets lots going on there. 0:00:20.290 --> 0:00:23.879 Our return guest is Mustafa Choudhury, a seasoned global rates 0:00:23.889 --> 0:00:28.190 and Macro analyst. During a three decade career. He has 0:00:28.200 --> 0:00:32.159 held senior positions in Freddie Mac Bear Stearns Deutsche Bank 0:00:32.220 --> 0:00:35.259 where I had the pleasure of interacting with him, Bluecrest 0:00:35.270 --> 0:00:37.450 Voya and most recently Macro hive, 0:00:37.819 --> 0:00:40.540 we had him on copy time, mid last year when 0:00:40.549 --> 0:00:45.220 we discussed at length the US, fiscal and monetary policy outlook. Today, 0:00:45.229 --> 0:00:47.360 we will discuss the US, but then we will widen 0:00:47.369 --> 0:00:51.779 the discussion because Mustafa has very interesting insights on international macro, 0:00:51.790 --> 0:00:54.680 especially pockets of value in em assets, not just with 0:00:54.689 --> 0:00:58.580 short term but also medium term perspective. Mua choi. Welcome 0:00:58.590 --> 0:00:59.799 back to K Kobe Time. 0:01:02.049 --> 0:01:05.819 Thanks. It's nice to be back for the second time. 0:01:05.830 --> 0:01:08.179 Thanks for having me. A few, 0:01:08.190 --> 0:01:11.760 few, few things have happened since you and I last talked. 0:01:11.970 --> 0:01:14.949 Um but one of the things I remember from the 0:01:14.959 --> 0:01:18.679 copy time episode of summer of 2023 Mustafa is you 0:01:18.690 --> 0:01:21.720 had insisted that instead of looking at market based inflation 0:01:21.730 --> 0:01:23.870 expectation markers, which is sort of things that, you know, 0:01:23.879 --> 0:01:25.449 you and I do on a day to day basis, 0:01:25.690 --> 0:01:28.019 they're actually second best. And you asserted that we should 0:01:28.029 --> 0:01:31.309 look at survey based inflation expectation, that's a superior indicator. 0:01:31.650 --> 0:01:34.029 So now we're sitting at the end of 2024. Do 0:01:34.040 --> 0:01:35.230 you still maintain that view? 0:01:36.910 --> 0:01:39.730 Yes. Uh I I do and I think it's a 0:01:39.739 --> 0:01:46.089 fundamental long term issue for economists to address this uh 0:01:46.099 --> 0:01:50.860 me measurement problem in inflation. What really is inflation? Because 0:01:50.870 --> 0:01:51.069 in 0:01:52.230 --> 0:01:56.870 at the end, what matters is the inflation expectations and 0:01:56.879 --> 0:02:01.919 not the observed inflation itself. And we use observed inflation 0:02:01.930 --> 0:02:06.959 sort of as a proxy for uh inflation expectations. But 0:02:06.970 --> 0:02:10.918 inflation expectations could be determined by multiple other things. As 0:02:10.929 --> 0:02:14.149 we have often we cannot distinguish between the two. 0:02:14.449 --> 0:02:18.410 But this last few years in the US was a 0:02:18.419 --> 0:02:23.589 striking reminder that if uh the inflation that the consumers 0:02:23.600 --> 0:02:28.419 feel was quite different from what the data was showing 0:02:28.720 --> 0:02:32.209 and we saw uh the Michigan survey one year ahead, 0:02:32.220 --> 0:02:37.649 inflation persistent at a fairly high level. And while we 0:02:37.660 --> 0:02:39.179 saw the CP I 0:02:40.538 --> 0:02:46.360 pieces of the core P ce although stayed fairly elevated, 0:02:46.550 --> 0:02:50.080 uh uh uh uh would come down quite hard. So 0:02:50.490 --> 0:02:53.619 that sort of effect, you can tell that affecting the 0:02:53.630 --> 0:02:57.850 political outcome in the US in all of the survey results, 0:02:57.860 --> 0:03:01.600 people still feel inflation. And so 0:03:04.100 --> 0:03:05.800 it, I know that it's very hard 0:03:06.610 --> 0:03:11.589 uh for economists to have a clear concrete, they need 0:03:11.600 --> 0:03:15.669 a uh we, as economists need a concrete measurement of 0:03:15.809 --> 0:03:19.160 uh of inflation. So we do have to go through 0:03:19.169 --> 0:03:22.770 this very public approach, but we, we have to still 0:03:22.779 --> 0:03:27.070 figure out if there's few other estimates that reflect how 0:03:27.080 --> 0:03:32.029 people feel inflation. For example, the month before the election 0:03:32.038 --> 0:03:34.380 in uh in September, when the CP I came out 0:03:34.699 --> 0:03:38.509 just the everything was the inflation numbers, the headline numbers 0:03:38.520 --> 0:03:41.139 are good co uh co CP I was good. But 0:03:41.149 --> 0:03:44.020 if you just separated out the egg price inflation, it 0:03:44.029 --> 0:03:47.490 was 20% increase in egg prices. So anyone who are 0:03:47.500 --> 0:03:52.300 walking into a grocery store sees much higher inflation than 0:03:52.610 --> 0:03:56.179 um than the data that CP I data subsequently that 0:03:56.190 --> 0:03:57.820 came up. And so 0:03:58.169 --> 0:04:03.470 that disconnect we need to address as um as uh market, 0:04:03.479 --> 0:04:07.759 market players and as well as economists. Uh I think 0:04:07.770 --> 0:04:12.160 that's happening everywhere else as well that uh the, and the, 0:04:12.169 --> 0:04:16.579 and the this may be becoming even bigger as the 0:04:16.790 --> 0:04:21.339 uh the income and wealth disparity in around the world 0:04:21.350 --> 0:04:22.230 is going up. 0:04:22.660 --> 0:04:27.010 The consumption baskets of the overall aggregate consumption basket could 0:04:27.019 --> 0:04:30.109 be quite diff the one that's used in the measurement 0:04:30.119 --> 0:04:34.079 quite to be quite different from where the different percentile 0:04:34.299 --> 0:04:38.779 uh populations consumption basket is and it's going to be 0:04:38.790 --> 0:04:42.279 more and more different. And therefore the measurement has to 0:04:42.290 --> 0:04:48.000 address that consumption basket difference by different segments of the population. 0:04:48.010 --> 0:04:51.480 So I think it's important it needs to be addressed 0:04:51.869 --> 0:04:52.459 uh 0:04:53.649 --> 0:04:58.250 to be at least making the policy, right, also the 0:04:58.260 --> 0:05:04.549 communication right to uh to the um from the government 0:05:04.559 --> 0:05:05.510 to the people. 0:05:07.459 --> 0:05:10.890 What about the difference between a 12 month measure of 0:05:10.899 --> 0:05:13.928 inflation which you know, you and I would use to 0:05:13.940 --> 0:05:17.320 price bonds, we would use it to talk about in expectation. 0:05:17.649 --> 0:05:20.390 But the average person seems to be thinking in the 0:05:20.399 --> 0:05:23.820 last four years, my egg prices are up 30 40% 0:05:23.829 --> 0:05:26.500 and that's what I care about. Not this artificial 12 0:05:26.510 --> 0:05:29.549 month cookie cutter thing that economists do. So do you 0:05:29.559 --> 0:05:31.450 think there's something going on there as well? 0:05:32.480 --> 0:05:37.019 Huge? And I am trained and Time Series economic that 0:05:37.029 --> 0:05:40.320 turned into a bond portfolio manager. But a few things 0:05:40.329 --> 0:05:44.289 that I I have learned quite well as a time 0:05:44.299 --> 0:05:47.579 to this guy is that all this back history, 12 0:05:47.589 --> 0:05:52.510 month old history really doesn't matter. It's already embedded in 0:05:52.519 --> 0:05:57.359 expectations embedded in all the other relationships. What matters is, 0:05:57.369 --> 0:06:00.390 what's the new information is the just a month of 0:06:00.399 --> 0:06:00.820 a month? 0:06:01.440 --> 0:06:03.399 And if you really want to take a little bit 0:06:03.410 --> 0:06:06.459 of the noise out, maybe uh the number that I 0:06:06.470 --> 0:06:10.500 look at is the annually three month, last three months average. 0:06:10.709 --> 0:06:13.179 I almost never look at the year over year. Only 0:06:13.190 --> 0:06:15.419 reason I look at the year over year is because 0:06:15.428 --> 0:06:18.609 I want to know what Feds putting as an input 0:06:18.809 --> 0:06:24.760 because it's too stale the previous nine months. And so 0:06:24.769 --> 0:06:30.500 that needs to be also uh uh somehow addressed 0:06:30.760 --> 0:06:35.149 because uh year over year is a basically a state 0:06:35.160 --> 0:06:37.779 piece of information in, in my opinion. But it seems 0:06:37.790 --> 0:06:41.839 like because Fed puts that as an input to their 0:06:41.850 --> 0:06:42.540 models 0:06:43.350 --> 0:06:47.369 market then has to be aware of that and discuss that. 0:06:47.380 --> 0:06:50.959 And I, I find myself at a loss. Why do 0:06:50.970 --> 0:06:53.970 I need to know how far inflation has moved since 0:06:53.980 --> 0:06:57.399 the middle of last year or whatever, November last year, 0:06:57.410 --> 0:06:59.190 I need to know what happened in the last two 0:06:59.200 --> 0:07:02.640 or three months. And so yes, that is um that 0:07:02.649 --> 0:07:09.089 is from a pure information content point of view. Uh 0:07:09.470 --> 0:07:13.200 that needs to be also something uh revised and looked 0:07:13.209 --> 0:07:16.369 at more recent data. But there are most you can 0:07:16.380 --> 0:07:21.399 look at you can reduce noise without having to bring 0:07:21.410 --> 0:07:25.500 in so much stale data. If, if the objective is 0:07:25.510 --> 0:07:29.410 to reduce noise in the inflation and all data, you know, 0:07:29.420 --> 0:07:31.850 it just looks like a lot of noise, a lot 0:07:31.859 --> 0:07:34.010 of stale data in the process. 0:07:34.799 --> 0:07:36.470 So yes, I'm totally on that 0:07:36.720 --> 0:07:36.769 account. 0:07:37.059 --> 0:07:40.290 So, so Musa I have a slightly different take on 0:07:40.299 --> 0:07:42.399 this issue and hear me out for a second. So 0:07:42.410 --> 0:07:43.829 I think the three month over three months is a 0:07:43.839 --> 0:07:48.160 very good gauge of inflation momentum. And when we were 0:07:48.170 --> 0:07:50.670 sort of talking about the near term inflation outlook. The 0:07:50.679 --> 0:07:54.140 momentum is, I think a far better useful source of 0:07:54.149 --> 0:07:56.859 information than the stale data. I'm fully with you on that. 0:07:57.160 --> 0:07:59.380 But I think what I was alluding to kind of 0:07:59.390 --> 0:08:01.619 hit me during my trip to the US the week 0:08:01.630 --> 0:08:04.500 before the US elections that when I talked to taxi 0:08:04.510 --> 0:08:09.450 drivers or grocery store clerks, they were talking about ultra 0:08:09.459 --> 0:08:12.250 long memory. They were saying that my grocery bill is 0:08:12.260 --> 0:08:15.299 up 40 percent over the last four years. You and 0:08:15.309 --> 0:08:17.450 I would say, you know, they have gotten wage increases 0:08:17.459 --> 0:08:20.380 since then. So they're really suffering from some degree of 0:08:20.390 --> 0:08:24.059 illusion or they're getting a systemic error in their way 0:08:24.070 --> 0:08:25.989 of looking at the world. But it seems to me 0:08:26.000 --> 0:08:27.040 that long memory 0:08:27.429 --> 0:08:30.929 in this election played a role because the Feds or 0:08:30.940 --> 0:08:34.520 the treasuries or the Biden administration's communication to the public was, 0:08:34.580 --> 0:08:38.150 inflation was high in 2022 and it's come been coming 0:08:38.159 --> 0:08:41.900 down steadily uh to your point that some items have 0:08:41.909 --> 0:08:44.799 been volatile and they've gone up a lot. But generally speaking, 0:08:44.809 --> 0:08:46.829 you know, the goods inflation problem we had in 22 0:08:46.840 --> 0:08:50.580 and it's gone. Commodity prices are well under control, but 0:08:50.590 --> 0:08:53.729 people didn't seem to believe that narrative at all because 0:08:53.739 --> 0:08:57.090 they kept on demonstrating like a super long memory 0:08:57.369 --> 0:09:00.059 that prices are up a lot since 2020. Do you 0:09:00.070 --> 0:09:01.710 have any sympathy with that perspective? 0:09:02.760 --> 0:09:04.580 Yes. And there is this whole 0:09:05.450 --> 0:09:08.848 war between level versus change and it's not, it's an 0:09:08.859 --> 0:09:14.978 a perpetual uh perpetual question in time series Econometrics, not 0:09:14.989 --> 0:09:20.549 just in uh not just in the inflation measurement. Uh 0:09:20.900 --> 0:09:26.270 the level L level we tend to use change or 0:09:26.280 --> 0:09:31.630 percentage change as new information, whether it's a year over 0:09:31.640 --> 0:09:34.630 year or month, over month or three months is 0:09:35.520 --> 0:09:36.450 how much 0:09:37.359 --> 0:09:40.329 new information that you want to have. But 0:09:42.000 --> 0:09:46.640 one of the observations and it was striking uh after 0:09:46.650 --> 0:09:53.539 the GGFC is that level matters as well. Level matters. 0:09:53.750 --> 0:09:58.119 If you have marginal changes, month, over month, year, over year, 0:09:58.130 --> 0:10:03.390 which economists tends to think of, then change is enough 0:10:03.400 --> 0:10:05.939 or percentage change is enough. But if you have a 0:10:05.950 --> 0:10:07.820 large shift 0:10:08.880 --> 0:10:15.340 or like a banking crisis or a COVID um pandemic, 0:10:15.349 --> 0:10:18.700 then you have large shift we had during the pandemic, 0:10:18.710 --> 0:10:20.090 we had large shifts in 0:10:21.270 --> 0:10:26.080 uh participation rate, for example of um actually massive shifts 0:10:26.090 --> 0:10:29.939 in the uh labor force participation rate in the United States. 0:10:30.130 --> 0:10:33.569 So when you have large shifts like that, then level 0:10:33.580 --> 0:10:38.968 starts to matter more and uh you can't just have changes. 0:10:39.450 --> 0:10:43.159 And so you the the models, there are some 0:10:44.039 --> 0:10:49.488 approaches to that uh uh the whole concept. Uh I 0:10:49.500 --> 0:10:52.640 won't go into technicalities of this. The whole concept of 0:10:52.650 --> 0:10:55.488 co integration, et cetera has been developed to incorporate both 0:10:55.500 --> 0:11:01.030 levels and changes into um into this. But there are 0:11:01.039 --> 0:11:06.459 times after big shifts after GFC level started to matter 0:11:06.469 --> 0:11:10.830 a lot and and then start to, then it start 0:11:10.840 --> 0:11:12.598 to matter less eventually. 0:11:12.950 --> 0:11:16.130 Uh Now after the COVID, we have big shifts in 0:11:16.140 --> 0:11:19.729 certain numbers now level will matter for a while, like 0:11:19.739 --> 0:11:20.409 brand 0:11:21.179 --> 0:11:24.319 rents kind of starting to flatten out. But when I 0:11:24.330 --> 0:11:27.329 think of rent, I think of the it's 30 to 35% 0:11:27.340 --> 0:11:30.830 higher than pre COVID level. And so that's the only 0:11:30.840 --> 0:11:34.820 thing that matters to me. So after five years, then 0:11:34.830 --> 0:11:37.510 the month to month changes or three month to month 0:11:37.520 --> 0:11:42.489 change will be matter, will matter. So as policymakers, as 0:11:42.500 --> 0:11:46.770 well as investors, we need to take that into account 0:11:46.780 --> 0:11:48.000 after large shifts, 0:11:48.530 --> 0:11:53.590 take level into account. Now, fed had prior to COVID 0:11:53.619 --> 0:11:56.799 had a project to figure out what the whether they 0:11:56.809 --> 0:12:00.679 should do, do, do price level targeting or, or whether 0:12:00.690 --> 0:12:04.599 they should interest uh target interstate targeting. And in fact, Williams, 0:12:04.880 --> 0:12:08.099 uh when he was at the San Francisco Fed, he 0:12:08.109 --> 0:12:10.969 had a paper on that very detailed paper on that. 0:12:11.320 --> 0:12:11.750 Uh 0:12:12.299 --> 0:12:16.479 and there was some, some uh movement in that direction 0:12:16.489 --> 0:12:20.679 towards this alternative uh targeting, but that would also be 0:12:20.690 --> 0:12:23.799 wrong because not all the time that price level matters 0:12:24.299 --> 0:12:28.760 and and sometimes price level matters, sometimes the rate uh 0:12:28.809 --> 0:12:31.409 the rate of change matters. The important thing for the 0:12:31.419 --> 0:12:36.440 policymakers and investors is to know and know when to 0:12:36.450 --> 0:12:39.630 shift from one to the other. This and I'm going 0:12:39.640 --> 0:12:41.228 back to technical term again, 0:12:41.539 --> 0:12:44.739 this term, this whole concept of integrated process and co 0:12:44.820 --> 0:12:50.179 integration actually addresses some of this problem of incorporating level 0:12:50.190 --> 0:12:53.760 and change in the same model. And maybe that's where 0:12:53.770 --> 0:12:56.440 that's the direction it should go to catch a ball. 0:12:57.090 --> 0:13:00.340 Right? I I fully sort of, you know, that that 0:13:00.349 --> 0:13:03.890 point resonates with me heavily. I I remember the years 0:13:03.900 --> 0:13:07.700 when inflation target was undershot and you could argue that 0:13:07.710 --> 0:13:10.909 the price level, the gap between a 2% inflation R 0:13:10.919 --> 0:13:13.859 and the actual price level was widening. And then the 0:13:13.869 --> 0:13:16.140 argument I remember Ken Roo talking about it. So then 0:13:16.309 --> 0:13:18.449 if you have a transitory shock and you have higher 0:13:18.460 --> 0:13:22.579 than 2% inflation, you should not intervene because the price 0:13:22.590 --> 0:13:24.968 level is beginning to catch up, not necessarily go over 0:13:24.979 --> 0:13:25.820 the 2% line. 0:13:26.070 --> 0:13:29.419 I think that sort of consideration played into the transitory 0:13:29.429 --> 0:13:35.059 camp to not the most useful and helpful outcome. Because 0:13:35.070 --> 0:13:36.239 if you was, you know, if I look at on 0:13:36.250 --> 0:13:39.069 a 10 year I undershot now I should overshoot lo 0:13:39.109 --> 0:13:41.140 a little bit. And I think that that was a 0:13:41.150 --> 0:13:43.010 big problem in 2021 2022. 0:13:44.760 --> 0:13:49.890 That absolutely was uh the uh the I remember going 0:13:49.900 --> 0:13:54.260 to seminars in 2018, 19. Um 0:13:55.700 --> 0:13:59.619 uh that there was this, people started to believe that 0:13:59.669 --> 0:14:04.799 the level uh level matters. And so that's caused them 0:14:04.809 --> 0:14:09.840 to be too slow when the inflation spiked up in 2001. 0:14:09.849 --> 0:14:13.840 Because they were thinking on average, they're still kind of 0:14:13.849 --> 0:14:17.409 two hun 2% or haven't gone too far. About 2%. So, 0:14:17.419 --> 0:14:21.570 waited and waited and waited, work didn't work out very well, uh, 0:14:21.580 --> 0:14:24.799 at that time. And, uh, 0:14:26.359 --> 0:14:26.969 is that 0:14:28.239 --> 0:14:32.299 similarly? I think that I just to, uh, connect what's, 0:14:32.309 --> 0:14:35.570 what's going on now, same thing with the fed now, 0:14:35.580 --> 0:14:39.500 in the other direction, um, with rates, um, 0:14:40.369 --> 0:14:44.580 in the, in the whole, um, high easing cycle. So, 0:14:44.590 --> 0:14:47.869 the hiking is kind of over, there's too slow to hike. 0:14:48.369 --> 0:14:55.840 And that made us take big, take a long time 0:14:55.849 --> 0:14:58.960 to get the um inflation back, 0:14:59.859 --> 0:15:05.030 not even to 2% even. Right now, we're still running 3% 0:15:06.030 --> 0:15:10.830 in core inflation, whether it's in the core P CS annually, 0:15:11.750 --> 0:15:16.270 three months average annually is running at 3.3 right now 0:15:16.280 --> 0:15:19.039 in the most recent data. So we still have way 0:15:19.049 --> 0:15:21.119 about f uh 0:15:22.020 --> 0:15:27.890 uh feds desired level for that. So it's been how 0:15:27.900 --> 0:15:31.530 long it's two years and eight months that uh since 0:15:31.539 --> 0:15:34.200 we first started hiking and we haven't still got an 0:15:34.210 --> 0:15:40.700 inflation anywhere close to the desired level. Uh And so 0:15:40.710 --> 0:15:42.599 there is this, uh 0:15:45.309 --> 0:15:49.210 I think that this uh the, the, the clearly there 0:15:49.219 --> 0:15:52.619 was an error in beginning of the hiking. 0:15:53.289 --> 0:15:57.270 And now once you make an error, then there is 0:15:57.280 --> 0:16:01.099 more errors in the other direction in the beginning of 0:16:01.109 --> 0:16:01.669 the easing. 0:16:03.039 --> 0:16:03.650 And, 0:16:05.570 --> 0:16:07.710 and that's, yeah, go ahead. 0:16:08.530 --> 0:16:11.309 Now just saying that slow to hike, but then very 0:16:11.320 --> 0:16:14.109 quick to cut. And now looking back in September and 0:16:14.119 --> 0:16:16.830 October measures, I mean, the market is saying you guys 0:16:16.840 --> 0:16:17.630 probably overdid it 0:16:19.010 --> 0:16:25.169 is. Uh, absolutely, absolutely. And, um, so there, there are 0:16:25.179 --> 0:16:27.309 a lot of, uh, so there's a one is the 0:16:27.320 --> 0:16:31.750 level versus change confusion in the policy making world. 0:16:32.159 --> 0:16:35.700 Uh I think market is a little better in getting 0:16:35.710 --> 0:16:38.979 this than the FED does. And I don't understand why 0:16:39.299 --> 0:16:43.150 the FED also has some problem in understanding few things 0:16:43.159 --> 0:16:46.700 that has happened in the last 13 years in the 0:16:46.710 --> 0:16:51.580 US uh US economy and the bond market. And uh 0:16:51.590 --> 0:16:53.530 and that's the result of 0:16:54.929 --> 0:16:58.669 extremely long period of zero interest rate 0:16:59.309 --> 0:17:07.910 from 2008, late 2008 to 2015. And it a little 0:17:07.920 --> 0:17:10.369 bit of higher interest rate than zero again. 0:17:11.250 --> 0:17:16.930 And that the the that zero interest period for a 0:17:16.939 --> 0:17:18.229 long time 0:17:19.439 --> 0:17:23.688 cause some structural changes in the system. So you cannot 0:17:23.699 --> 0:17:28.589 dial down, dial up rate and then dial downgrade. Clearly, 0:17:28.599 --> 0:17:31.389 dialing up didn't work very well. In terms of bringing 0:17:31.400 --> 0:17:37.060 inflation down back to desired level, dialing down is also 0:17:37.229 --> 0:17:39.420 going to not work because it's 0:17:40.130 --> 0:17:42.640 change the structure of the economy. I'll tell you a 0:17:42.650 --> 0:17:48.010 few examples on the structure of the economy. Uh obvious 0:17:48.020 --> 0:17:50.790 one that manufacture, if you look at the manufacturing data 0:17:50.800 --> 0:17:54.349 US looks quite slow, slowing. If you look at ISM 0:17:54.359 --> 0:17:55.179 manufacturing 0:17:55.699 --> 0:18:00.250 for below 50 if you look services, it looks like perfect, 0:18:00.260 --> 0:18:03.050 there is nothing going on. There's no sign of recession 0:18:03.579 --> 0:18:08.630 statistically robust for month after month. So there's clearly the 0:18:08.640 --> 0:18:14.479 two sectors have clear dichotomy between the two subparts of 0:18:14.489 --> 0:18:19.760 the economy and manufacturing is a significantly smaller part than services. 0:18:20.010 --> 0:18:22.968 But we still our brain, we're programmed to look at 0:18:22.979 --> 0:18:27.389 manufacturing and think that this is going to um this 0:18:27.400 --> 0:18:30.060 is it, the economy is slowing down but it is not. 0:18:30.880 --> 0:18:35.119 So that one more simple problem that 0:18:35.849 --> 0:18:38.790 I think Fed understands that it's not clear how do 0:18:38.800 --> 0:18:41.959 you look at the aggregate uh because you wouldn't cut 0:18:41.969 --> 0:18:43.750 if you just looked at the services sector of the 0:18:43.760 --> 0:18:45.829 US economy. But the most 0:18:46.640 --> 0:18:51.380 difficult part is this bunch of path to dependencies that 0:18:51.390 --> 0:18:54.420 has been created. It's not the level of the interest 0:18:54.430 --> 0:18:59.290 rates or it's the path that the interest rate has taken. 0:18:59.300 --> 0:18:59.979 And we 0:19:01.949 --> 0:19:06.699 people, the people in the bond world that also spend 0:19:06.709 --> 0:19:10.050 a lot of time on options market and options market 0:19:10.060 --> 0:19:14.500 understand how important part is important. The, the part and 0:19:14.510 --> 0:19:18.550 the part of zero for this loan that may create 0:19:18.660 --> 0:19:24.050 some major structural changes in the economy. First. Um The, 0:19:24.060 --> 0:19:27.520 the the rates that people pay the mortgage rates. 0:19:28.989 --> 0:19:29.819 There are 0:19:30.619 --> 0:19:33.229 people, most homeowners are paying 0:19:34.739 --> 0:19:41.879 like 3 to 3.5% maximum 4% mortgage rate in the US. 0:19:42.550 --> 0:19:45.739 So all these rate hikes by zero from 0 to 0:19:45.750 --> 0:19:49.729 45 and a quarter did not have any effect of 0:19:49.739 --> 0:19:53.050 majority of the more, uh, homeowners in the United States, 0:19:53.530 --> 0:19:57.810 only people that were affected were the newcomers, the, the 0:19:57.819 --> 0:20:01.750 new home buyers. And so their mortgage rate is a 0:20:01.760 --> 0:20:06.209 little high. So that, that part, I think Fed doesn't 0:20:06.219 --> 0:20:07.719 know how to incorporate that. 0:20:08.339 --> 0:20:12.709 The biggest credit market is untouched by rate hikes. 0:20:14.189 --> 0:20:16.409 So it doesn't slow down anything. 0:20:17.390 --> 0:20:22.810 And second, um, and there are some generational issue that the, 0:20:22.819 --> 0:20:26.150 all the young people are paying higher mortgage rate than 0:20:26.160 --> 0:20:29.239 a little older ones. So there is a th those 0:20:29.250 --> 0:20:32.170 are social issues that eventually will have to be addressed, 0:20:32.920 --> 0:20:36.688 but then corporations as well, corporations turned out to longer 0:20:36.699 --> 0:20:41.119 maturity funding. So they are not affected much. They didn't 0:20:41.130 --> 0:20:45.180 get affected by the rate hikes as well. Um So 0:20:45.189 --> 0:20:45.938 the biggest 0:20:47.520 --> 0:20:52.689 credit component of credit in the United States fairly untouched 0:20:52.770 --> 0:20:58.159 by this whole rate hiking cycle. Uh The uh then 0:20:58.170 --> 0:21:01.270 there is another interesting couple of more interesting things happened 0:21:01.280 --> 0:21:06.219 with this zero rate policy. One is that the mostly 0:21:06.229 --> 0:21:09.619 from QE that we supplied all these reserves to the 0:21:09.630 --> 0:21:10.260 banks 0:21:11.689 --> 0:21:15.479 and the banks took those reserves and when we look 0:21:15.489 --> 0:21:18.909 at econ 10 macro economics 101, you increase reserves and 0:21:18.920 --> 0:21:22.140 the bank's balance sheet goes up and you decrease reserves. 0:21:22.150 --> 0:21:23.550 Balance sheet should shrink. 0:21:24.750 --> 0:21:25.969 In reality, it doesn't 0:21:26.680 --> 0:21:30.609 because banks as they take the reserve, they deploy it 0:21:30.619 --> 0:21:33.189 in their risk assets on the balance sheet and they 0:21:33.199 --> 0:21:36.599 bought treasuries, mortgages, whatever it is and they got the 0:21:36.609 --> 0:21:40.849 deposits higher. So when you start to do QK, 0:21:41.900 --> 0:21:44.930 it can't reduce its balance sheet to reflect the QT 0:21:44.939 --> 0:21:50.199 as the reserves are going away. And so Feds just 0:21:50.209 --> 0:21:53.829 cannot continue QT. So that's why they slowed down QT 0:21:53.839 --> 0:21:57.489 now and eventually they'll have to stop QT fairly soon. 0:21:58.050 --> 0:22:03.719 So that's another thing that the bank assets, bank balance sheets, 0:22:04.390 --> 0:22:07.310 all of that had a ratchet effect that the hike 0:22:07.319 --> 0:22:10.109 didn't affect it that much. In fact, if you look 0:22:10.119 --> 0:22:12.959 at the net interest margins of the banking system, it 0:22:12.969 --> 0:22:16.949 is now higher than the beginning of the hiking cycle. So, 0:22:16.959 --> 0:22:20.250 and the stock prices are the actually bank index. 0:22:21.109 --> 0:22:23.680 If you look at the KBW, the bank index uh 0:22:23.689 --> 0:22:27.829 that doubled since the beginning of the fed hiking cycle. 0:22:27.849 --> 0:22:31.979 So you got another ratchet effect and the third one 0:22:32.000 --> 0:22:41.400 is homeowners balance sheets are like historic uh historic best situation. 0:22:41.410 --> 0:22:43.199 They the last time 0:22:43.650 --> 0:22:47.150 if you like the debt, uh the debt to uh 0:22:47.160 --> 0:22:50.739 the mortgage debt to the ho uh the value of homes, 0:22:50.750 --> 0:22:56.170 real estate ratio, it's now as low as it was 0:22:56.180 --> 0:22:59.188 at this low before 1960. 0:23:00.949 --> 0:23:05.189 So American households, most of them that put own homes 0:23:05.349 --> 0:23:10.010 are like untouchable by monetary policy, feels very rich. 0:23:10.810 --> 0:23:14.770 The and then their cash flows are still affected by 0:23:14.780 --> 0:23:20.589 mortgage rates. Same with the corporations huge wealth effect. That's 0:23:20.599 --> 0:23:23.859 why no matter you raise interest rate by five and 0:23:23.869 --> 0:23:29.708 a quarter percent, you the demand remains fairly robust service sector, 0:23:29.719 --> 0:23:34.069 working out quite well, employment in solid shape. 0:23:34.900 --> 0:23:40.280 So I think that change was not uh fully understood 0:23:40.339 --> 0:23:44.069 this part dependency. And I had myself personally had conversations 0:23:44.079 --> 0:23:48.109 with FED economists that actually made these kinds of analysis 0:23:48.530 --> 0:23:52.989 most of them because traditional economics doesn't cover this part 0:23:53.000 --> 0:23:55.389 dependency part, traditional macroeconomics 0:23:55.444 --> 0:23:58.964 doesn't cover it's more of a finance option pricing kind 0:23:58.974 --> 0:24:01.724 of story. I think R Ra Rajan has a good 0:24:01.734 --> 0:24:05.625 paper on this recently on the bank part of the 0:24:05.635 --> 0:24:09.645 aspect of the park dependency and then few and we 0:24:09.655 --> 0:24:12.545 I'm starting to see few fed working papers on the 0:24:12.555 --> 0:24:14.504 mortgage lock in effect as well. 0:24:15.709 --> 0:24:18.250 But this is kind of late already. Decision window is 0:24:18.260 --> 0:24:18.810 behind 0:24:19.869 --> 0:24:22.708 the banks have this uh at the peak they have 0:24:22.719 --> 0:24:28.139 minus 800 billion losses on their book when the, the, 0:24:28.150 --> 0:24:32.209 when the uh the Silicon Valley Bank was uh going down. 0:24:32.949 --> 0:24:38.020 And uh so you would expect after all these guarantees 0:24:38.030 --> 0:24:41.170 and everything that the banks would unwind some of that 0:24:41.300 --> 0:24:44.810 book of business and reduce that. 0:24:45.219 --> 0:24:47.239 But if you look at the bank balance sheet today, 0:24:47.369 --> 0:24:51.339 banks have done miniscule amount of reduction of the securities 0:24:51.349 --> 0:24:54.239 book on the balance sheet. And the reason that the 0:24:54.270 --> 0:24:57.510 a miniscule amount of unwind of the balance sheet is 0:24:57.520 --> 0:25:03.310 because the Federal Reserve has this multiple guarantee programs. And 0:25:03.319 --> 0:25:06.439 the big one was the uh the, the bank funding, 0:25:06.619 --> 0:25:11.439