WEBVTT - Kopi Time E144 - 2025 outlook with Dr. Komal Sri-Kumar 0:00:06.030 --> 0:00:09.799 Hello, this is COI Time, a podcast series on markets 0:00:09.800 --> 0:00:13.130 and economies from DBS Group Research. I'm Teri, chief economist, 0:00:13.420 --> 0:00:17.819 welcoming you to our 144th episode. This is the year's 0:00:17.819 --> 0:00:21.299 last podcast. Now, we have a tradition. We end the 0:00:21.299 --> 0:00:24.010 year with Dr. Komal Sri Kumar, president of Shri Kumar 0:00:24.010 --> 0:00:27.500 Global Strategies, based in Santa Monica, California. He's a senior 0:00:27.500 --> 0:00:29.940 fellow at the Milken Institute and previously spent over two 0:00:29.940 --> 0:00:33.060 decades with the Trust Company of the West, known as 0:00:33.060 --> 0:00:34.339 TCW in most Circle. 0:00:34.970 --> 0:00:38.250 Working on investment strategy and asset allocation, I find it 0:00:38.250 --> 0:00:41.729 delightful to review the year with Shri and then look 0:00:41.729 --> 0:00:43.888 forward to the next year. And if you have been 0:00:43.889 --> 0:00:45.990 to this podcast in the past, you know how a 0:00:45.990 --> 0:00:49.130 student insightful his views can be. Shri, welcome back to 0:00:49.130 --> 0:00:49.880 COVID time. 0:00:50.610 --> 0:00:52.689 Thank you very much, Jor. Good to be back with 0:00:52.689 --> 0:00:53.330 you again. 0:00:53.750 --> 0:00:56.060 I'm so glad to have you back and I'm glad 0:00:56.060 --> 0:00:59.819 that we now have this tradition of ending the year together. Sri, 0:01:00.509 --> 0:01:04.059 let's get right to it. Take stock of 2024, your 0:01:04.059 --> 0:01:08.500 views on the US economy, markets, fiscal position, and the Fed. 0:01:08.540 --> 0:01:09.900 And of course you may also want to comment on 0:01:09.900 --> 0:01:10.839 the elections. 0:01:11.459 --> 0:01:15.209 Sure. Let's see. Let's start with the overall US economy. 0:01:15.220 --> 0:01:19.018 The US economy was much stronger than I had anticipated. 0:01:19.819 --> 0:01:22.509 And I, along with a whole lot of others, had 0:01:22.510 --> 0:01:25.629 thought that, uh, the sky-high interest rates that we have 0:01:25.629 --> 0:01:32.419 had since 2022 would, um, result eventually in a recession. 0:01:33.029 --> 0:01:36.779 But what I think, not just I, what the majority 0:01:36.779 --> 0:01:40.190 of the analysts failed to take into account was the 0:01:40.190 --> 0:01:43.709 fact that the amount of stimulus that was created on 0:01:43.709 --> 0:01:46.870 the monetary and fiscal side in the United States was 0:01:46.870 --> 0:01:48.150 so immense. 0:01:48.980 --> 0:01:53.680 That even high interest rates, 40 year high levels were 0:01:53.680 --> 0:01:58.750 not sufficient to bring inflation down. We are seeing retail sales, 0:01:58.800 --> 0:02:02.190 for example, continuing to remain very strong. That's a reflection 0:02:02.190 --> 0:02:07.720 of US consumers. And Tuesday morning, Washington DC time will 0:02:07.720 --> 0:02:11.110 be the retail sales number will come out, the latest one. 0:02:11.919 --> 0:02:14.770 And the expectation is that it's going to be very 0:02:14.770 --> 0:02:19.139 strong as well. So the US economy has remained very strong, 0:02:19.809 --> 0:02:23.190 but you talked about fiscal deficit more. That is where 0:02:23.190 --> 0:02:27.850 you have the fiscal deficit, which continued to rise both 0:02:27.850 --> 0:02:31.649 in dollar terms as and as a percentage of GDP. 0:02:32.610 --> 0:02:37.369 Uh, I learned when I began my career in 1978, 1979. 0:02:38.080 --> 0:02:43.369 That the so-called safe maximum ratio for the debt to 0:02:43.369 --> 0:02:45.080 GDP was 50%. 0:02:46.699 --> 0:02:51.660 The United States is running at 120%. We have France, 0:02:51.740 --> 0:02:53.859 which is running at 110%. 0:02:54.770 --> 0:02:57.910 Even Germany, which used to be a great country known 0:02:57.910 --> 0:03:03.419 for its fiscal, um, uh, rectitude, now has again the 0:03:03.419 --> 0:03:07.250 situation is totally out of control. Uh, so the point 0:03:07.250 --> 0:03:12.130 here is, we have talked about that causing a problem 0:03:12.130 --> 0:03:15.398 for the United States, but the fiscal deficit is very large, 0:03:15.570 --> 0:03:20.049 dangerously high, but it has not caused a problem yet. 0:03:20.788 --> 0:03:23.729 And the reason I would say, and again, since I'm 0:03:23.729 --> 0:03:26.929 speaking to you in the heart of Asia, Timor, I 0:03:26.929 --> 0:03:29.199 would say the reason is we had thought the Chinese 0:03:29.199 --> 0:03:32.529 renminbi Yan would by now be an effective competitor. 0:03:33.399 --> 0:03:36.119 Or that the Europeans would get their act together and 0:03:36.119 --> 0:03:41.339 a common currency, the euro would be dominated. Neither has happened, 0:03:41.600 --> 0:03:44.960 and both of them are actually very weak in the 0:03:44.960 --> 0:03:48.039 in the last several months, and I don't expect that 0:03:48.039 --> 0:03:51.960 to change. So the dollar got a reprieve, the fiscal 0:03:51.960 --> 0:03:55.279 deficit could run at a high level because there was 0:03:55.279 --> 0:03:58.169 no alternative to the dollar. So in other words, 0:03:58.660 --> 0:04:02.259 You talk about teaching a class, and very many students 0:04:02.259 --> 0:04:05.699 are performing very poorly in terms of grade, but I 0:04:05.699 --> 0:04:08.330 can still turn out to be the best students because, 0:04:08.339 --> 0:04:11.330 not because I'm great, but because the others are much worse. 0:04:11.899 --> 0:04:15.639 So that's what we are going through. Now, I don't 0:04:15.639 --> 0:04:18.380 want to leave the topic of fiscal deficit yet. Go 0:04:18.380 --> 0:04:22.540 to 2025. Will this continue? I don't think it can. 0:04:23.269 --> 0:04:27.229 Because the, you're going to have enormous amount of borrowing 0:04:27.230 --> 0:04:29.738 requirement on the part of the treasury. 0:04:30.440 --> 0:04:34.469 And even though Janet Yellen will stop being the Treasury 0:04:34.470 --> 0:04:38.479 Secretary on January 20th, we have Scott Besant, a former hedge, 0:04:38.850 --> 0:04:43.729 fudge fund manager who's the designate to take over. There's 0:04:43.730 --> 0:04:47.649 nothing much that he can do immediately, other than try 0:04:47.649 --> 0:04:51.329 to infuse some confidence, but he cannot change the numbers. 0:04:52.079 --> 0:04:54.760 So it is going to be very difficult for that 0:04:54.760 --> 0:04:59.119 to happen, and my concern is if the tariffs are 0:04:59.119 --> 0:05:02.359 increased at the same time as the fiscal deficit is 0:05:02.359 --> 0:05:03.229 very large. 0:05:04.140 --> 0:05:07.660 The the tariffs are going to do two things. One, 0:05:08.230 --> 0:05:10.899 they are going to cause the prices to go up 0:05:10.899 --> 0:05:14.988 for US consumers and therefore, the US inflation rate will 0:05:14.988 --> 0:05:19.868 go higher up. I have repeatedly said that inflation is 0:05:19.869 --> 0:05:23.589 down only temporarily, it's going to pick up again and 0:05:23.589 --> 0:05:26.989 it's starting to happen. It's going to be pronounced in 0:05:26.988 --> 0:05:28.829 2025 in my mind. 0:05:29.510 --> 0:05:32.959 And if that happens, the US Treasury 10 year yield 0:05:32.959 --> 0:05:36.018 will again start to go up. I'm worried about it's 0:05:36.019 --> 0:05:38.260 hitting 5% again on the 10 year. 0:05:39.420 --> 0:05:42.779 Uh, and if that happens and the tariffs are imposed, 0:05:42.820 --> 0:05:48.219 even if it is not, uh, 60% or higher on China, 0:05:48.299 --> 0:05:52.820 for example, if it has increased significantly, and I think 0:05:52.820 --> 0:05:56.178 Trump has to do that because after threatening all the countries, 0:05:56.260 --> 0:05:59.399 he can't just walk away and say, OK, now I'm president, 0:05:59.559 --> 0:06:01.820 I'm not going to do it. That's not going to happen. 0:06:01.859 --> 0:06:03.459 He has to impose something. 0:06:04.130 --> 0:06:08.100 And when he does that, not only is inflation going 0:06:08.100 --> 0:06:11.459 to pick up, the dollar is going to become very strong, 0:06:11.670 --> 0:06:14.029 the bond yields are going to rise, and that's going 0:06:14.029 --> 0:06:15.829 to be negative for the economy. 0:06:16.859 --> 0:06:19.738 And that in turn brings us to the Federal Reserve. 0:06:20.369 --> 0:06:22.730 Sorry to be long-winded, but you are, no, not at all, 0:06:23.920 --> 0:06:24.880 not at all to your question. 0:06:25.589 --> 0:06:30.070 Um, I think the Federal Reserve policy under Jerome Powell 0:06:30.070 --> 0:06:31.549 has been irresponsible. 0:06:32.480 --> 0:06:38.779 Uh, in 2020, we uh had the beginning of COVID in, uh, February, 0:06:38.920 --> 0:06:40.070 March of that year. 0:06:41.000 --> 0:06:45.100 And at that time, the Federal Reserve's balance sheet was 0:06:45.100 --> 0:06:49.970 about $4 trillion and it was already 5 times the 0:06:49.970 --> 0:06:52.769 level of what it was when I, when, on what 0:06:52.769 --> 0:06:56.250 I call Lehman Day, September 15, 2008. 0:06:57.089 --> 0:07:00.820 So it went from $800 billion to $4 trillion and 0:07:00.820 --> 0:07:06.238 by March of 2022, 2 years later, it was $9 trillion. 0:07:07.130 --> 0:07:11.760 That's what I call the height of irresponsibility. When you 0:07:11.760 --> 0:07:15.450 have COVID, to cure it, you need a vaccine. You 0:07:15.450 --> 0:07:18.690 cannot increase the money supply and hope that everybody will 0:07:18.690 --> 0:07:22.250 get well because the Federal Reserve's balance sheet has doubled. 0:07:23.130 --> 0:07:25.760 That's what he did at the same time, the interest 0:07:25.760 --> 0:07:30.640 rates were brought down to zero. There was $900 billion 0:07:30.640 --> 0:07:34.730 of fiscal stimulus in the final months of the Trump administration, 0:07:35.279 --> 0:07:39.769 and another $1.9 trillion in the first months of the 0:07:39.769 --> 0:07:45.399 Biden administration. So $2.8 trillion plus zero interest rates, plus doubling. 0:07:46.250 --> 0:07:47.420 Of the Fed balance sheet. 0:07:48.290 --> 0:07:52.309 So no wonder inflation hit a 40-year high, uh, because 0:07:52.309 --> 0:07:55.829 you would expect that all of that would happen. And 0:07:55.829 --> 0:07:58.410 that is what we are fighting. And when the interest 0:07:58.410 --> 0:08:01.709 rates started to come down, they said, oh, the Fed 0:08:01.709 --> 0:08:05.299 has brought the inflation rate down, but it should never 0:08:05.299 --> 0:08:06.549 have gone to that level. 0:08:07.339 --> 0:08:11.600 And now that he's easing up, he's ignoring the lessons 0:08:11.600 --> 0:08:14.239 of 1973 to 1979. 0:08:14.859 --> 0:08:20.730 When we had a very pliant Federal Reserve chairman under 0:08:20.730 --> 0:08:24.730 Arthur Burns, and who did what was required by Richard 0:08:24.730 --> 0:08:28.649 Nixon to, I, I say, I've written saying the monetary 0:08:28.649 --> 0:08:32.489 policy followed the dictates of the political cycle rather than 0:08:32.489 --> 0:08:33.690 the needs of the economy. 0:08:34.739 --> 0:08:38.518 And of course, we had sky-high inflation, and you had 0:08:38.518 --> 0:08:41.439 to have a very severe recession to bring it back. 0:08:41.768 --> 0:08:46.528 So those are my concerns for 2025. Uh, it appears 0:08:46.528 --> 0:08:50.328 as a Wednesday afternoon, uh, Washington DC time. 0:08:51.590 --> 0:08:54.190 You're going to have again another rate cut. 0:08:54.979 --> 0:08:59.030 The first rate cut, which happened in September, was expected 0:08:59.030 --> 0:09:04.020 to be 5025 basis points, turned out to be 50. 0:09:04.510 --> 0:09:05.869 Why is he doing that? 0:09:06.799 --> 0:09:10.609 I have a theory, and I feel very strongly about it. 0:09:10.940 --> 0:09:14.250 I think the Federal Reserve is very much a political entity, 0:09:14.380 --> 0:09:18.059 even though Trump, uh even though Powell keeps repeating that 0:09:18.059 --> 0:09:19.349 he's apolitical. 0:09:20.049 --> 0:09:24.280 And the reason why he keeps repeating it is because 0:09:24.280 --> 0:09:27.440 he just, that it's not true. So he has to 0:09:27.440 --> 0:09:31.119 keep repeating it because he probably doesn't believe it himself. 0:09:31.969 --> 0:09:36.218 So, 50 basis points without any reason, another 25, and 0:09:36.219 --> 0:09:38.409 he's going to do 25 more. 0:09:39.400 --> 0:09:42.799 And then there is a talk of passing in January. 0:09:43.929 --> 0:09:46.460 Is it because Trump is going to come into office 0:09:46.460 --> 0:09:48.169 and he doesn't want to oblige him? 0:09:49.059 --> 0:09:51.940 We're not clear what it's all about and why he's 0:09:51.940 --> 0:09:53.099 doing what he's doing. 0:09:54.909 --> 0:09:59.140 So let's talk about that intersection of Fed policy and politics, 0:09:59.190 --> 0:10:02.330 because if it was Jerome Powell's, you know, 0:10:02.929 --> 0:10:06.880 Explicit or implicit desire to help the political cycle, it 0:10:06.880 --> 0:10:11.109 didn't work, Sri. The point that you made that when 0:10:11.280 --> 0:10:13.750 policy should have been tighter, it was not as tight, 0:10:14.119 --> 0:10:17.829 basically caused the cost of living prices that afflicts Americans today. 0:10:18.190 --> 0:10:20.869 Actually, a week before the US elections, I traveled through 0:10:20.869 --> 0:10:24.510 San Francisco, DC, New York. I asked about 50 people 0:10:24.510 --> 0:10:26.989 who's going to win, and I was not exactly in 0:10:26.989 --> 0:10:29.789 the red state heartland, you know, these are liberal towns, 0:10:29.830 --> 0:10:33.059 and 46 out of 50 said Trump would win, and 0:10:33.409 --> 0:10:35.069 which was itself, you know, it was kind of shocking 0:10:35.070 --> 0:10:37.150 to me because looking at the polls, it seemed like 0:10:37.150 --> 0:10:40.109 a 50/50 outcome, but 46 out of 50 people that 0:10:40.109 --> 0:10:42.358 I asked said Trump would win and by and large 0:10:42.359 --> 0:10:44.669 they said it's because of cost of living. 0:10:45.210 --> 0:10:49.479 So, by having an accommodating policy, by trying to stretch 0:10:49.479 --> 0:10:53.439 out the cycle, if the Fed's desire was to keep 0:10:53.440 --> 0:10:55.270 the Democrats in power, that didn't work out. 0:10:56.219 --> 0:10:59.609 It did not, it did not help. Uh, that may 0:10:59.609 --> 0:11:02.919 well have been the reason why he did it, but, uh, 0:11:02.929 --> 0:11:05.849 now we are going into the political sphere, uh, which 0:11:05.849 --> 0:11:08.729 I'm not an expert to talk about, but there were 0:11:08.729 --> 0:11:15.520 various other areas such as talking about, uh, discrimination, equality, 0:11:15.609 --> 0:11:18.959 and whether it was coming from the Democrats or the Republicans. 0:11:19.369 --> 0:11:22.609 But what I think the elections missed is that the 0:11:22.609 --> 0:11:26.010 cost of living, as you said, very correctly so, uh, Tor. 0:11:26.539 --> 0:11:30.500 That turned out to be the single overwhelming topic. Even 0:11:30.500 --> 0:11:34.750 on the economic side, the Biden campaign and then the 0:11:34.750 --> 0:11:39.450 Kamala Harris campaign subsequently said, look, we have actually done 0:11:39.450 --> 0:11:41.579 a lot in terms of economic growth. 0:11:42.530 --> 0:11:45.989 But that did not match the fact that the inflation 0:11:45.989 --> 0:11:49.630 had also gone up substantially. That was the dominating issue 0:11:49.919 --> 0:11:52.598 in the voters' minds rather than what was happening in 0:11:52.599 --> 0:11:56.719 terms of uh economic growth. And the reason is the following. 0:11:57.450 --> 0:12:02.218 The economic growth and the unemployment rate being low benefits 0:12:02.219 --> 0:12:04.820 a whole lot of different people, but on the other hand, 0:12:04.979 --> 0:12:09.979 inflation is pernicious, and it affected people in the low 0:12:09.979 --> 0:12:14.260 and middle income groups. The higher income groups couldn't care 0:12:14.260 --> 0:12:17.820 less in high inflation, but I'm invested in the stock 0:12:17.820 --> 0:12:21.989 market and stocks went up even more. So I'm doing fine, 0:12:22.119 --> 0:12:22.700 thank you. 0:12:23.510 --> 0:12:26.489 But the lower income groups do not have it, and 0:12:26.489 --> 0:12:29.209 that is where I think the, uh, they made a 0:12:29.210 --> 0:12:32.489 serious mistake in terms of the judgment that they made 0:12:32.489 --> 0:12:32.890 on it. 0:12:34.020 --> 0:12:37.369 She also for me, one big takeaway has been when 0:12:37.369 --> 0:12:39.940 you and I talk about the rate of inflation, we're 0:12:39.940 --> 0:12:42.780 talking about a 12 month change in prices, but the 0:12:42.780 --> 0:12:45.059 people that I spoke with in the context of cost 0:12:45.059 --> 0:12:47.539 of living seem to be thinking about the cumulative inflation 0:12:47.539 --> 0:12:51.219 over the last 4 years, that they feel the prices 0:12:51.219 --> 0:12:53.978 are up 40%. They don't quite understand when I say, well, 0:12:54.020 --> 0:12:56.700 inflation is down a lot, they say, no, prices are 0:12:56.700 --> 0:12:58.289 up 40% in the last 4 years. 0:12:58.750 --> 0:12:58.989 Right. 0:12:59.469 --> 0:13:02.130 That that to me, it makes a lot of sense. 0:13:02.530 --> 0:13:05.728 And you and I are not low income earners. We 0:13:05.729 --> 0:13:09.650 are relatively well off. But even when I go to 0:13:09.650 --> 0:13:13.419 the grocery store, and then I say, buy just a 0:13:13.419 --> 0:13:16.799 gallon of milk and bring it home, or a dozen 0:13:16.799 --> 0:13:20.450 eggs and bring it home, and you see that suddenly 0:13:20.450 --> 0:13:24.159 the gallon of milk here is, we are talking about 0:13:24.489 --> 0:13:27.848 6 $7 US dollars for half a gallon. 0:13:28.150 --> 0:13:32.130 And you gasp, saying, boy, this is not the way 0:13:32.130 --> 0:13:36.929 it used to be until about 2018, 2019. So it 0:13:36.929 --> 0:13:41.080 is clear that people do compare the price level today 0:13:41.080 --> 0:13:45.039 with the price level five years ago. And the reason is, 0:13:45.330 --> 0:13:49.289 for most people, that income levels have not increased by 0:13:49.289 --> 0:13:53.289 the same percentage. And that's why, uh, that, that, that 0:13:53.289 --> 0:13:54.969 is a very important comparison. 0:13:56.489 --> 0:13:59.890 3, you touched upon the fiscal issue and I want 0:13:59.890 --> 0:14:01.409 to go back to that. I want to connect the 0:14:01.409 --> 0:14:06.049 fiscal issue with banks to some extent. The US has 0:14:06.049 --> 0:14:10.729 massive issuance needs going forward, and when they issue long 0:14:10.729 --> 0:14:13.750 duration bonds, banks are a big holder of that bond, 0:14:13.929 --> 0:14:16.369 those bonds, and we saw last year in the regional 0:14:16.369 --> 0:14:18.809 banking crisis episode that when you hold a lot of 0:14:18.809 --> 0:14:22.500 long duration assets in an inflationary tight monetary policy environment, 0:14:22.809 --> 0:14:24.260 the system can trip up a lot. 0:14:24.859 --> 0:14:29.099 Now we had that crisis in early 2023. Silicon Valley 0:14:29.099 --> 0:14:31.419 Bank and a few other banks. We saw the Fed 0:14:31.419 --> 0:14:34.659 come up with very robust response by creating more lending 0:14:34.659 --> 0:14:39.000 windows and treating those bonds and par value and averted 0:14:39.000 --> 0:14:40.859 that crisis to some extent other than a couple of 0:14:40.859 --> 0:14:43.940 banks going under and being forced to merge. Now when 0:14:43.940 --> 0:14:46.130 I look at the data stream, what I find strange 0:14:46.130 --> 0:14:47.419 is that since then, 0:14:48.489 --> 0:14:52.159 The US financial sector hasn't necessarily gone short duration. It 0:14:52.159 --> 0:14:54.520 still remains long duration, and we have all these large 0:14:54.520 --> 0:14:58.960 banks which are still saddled with a lot of large 0:14:58.960 --> 0:15:03.200 duration debt. So why haven't we seen the duration risk 0:15:03.200 --> 0:15:04.640 come down, because I would have thought that would have 0:15:04.640 --> 0:15:08.840 been the key response to the crisis. And going back 0:15:08.840 --> 0:15:12.000 to the fiscal issue, if indeed people should be worried 0:15:12.000 --> 0:15:15.090 about long duration exposure, then how will the US fund itself? 0:15:15.309 --> 0:15:17.210 Should it, would it only issue at the short end? 0:15:18.340 --> 0:15:21.419 Uh, here, let's first, you have 2 or 3 issues 0:15:21.419 --> 0:15:24.580 embedded in your question, so let me start out with 0:15:24.580 --> 0:15:26.179 the banking crisis first. 0:15:27.010 --> 0:15:31.049 Uh, they did again a study of it, um, under 0:15:31.049 --> 0:15:34.609 the vice chairman for regulation, he actually went through it 0:15:34.609 --> 0:15:37.489 and came up with the conclusion that the banks made 0:15:37.489 --> 0:15:38.729 a serious error. 0:15:39.590 --> 0:15:43.390 But my conclusion is very different. If I were, if 0:15:43.390 --> 0:15:46.650 I had been the chairman and CEO of Silicon Valley Bank, 0:15:47.539 --> 0:15:50.409 And I heard day in and day out the chairman 0:15:50.409 --> 0:15:53.929 of my Federal Reserve telling me that inflation is transitory. 0:15:55.219 --> 0:15:59.940 And I, and, and 2021, you're talking about 10-year treasury 0:15:59.940 --> 0:16:03.489 is going just about 2% or lower than 2%. 0:16:04.450 --> 0:16:07.330 As the CEO of Silicon Valley Bank, I should go 0:16:07.330 --> 0:16:07.919 and buy it. 0:16:09.070 --> 0:16:11.830 Because I believe my Fed chairman, and if he says 0:16:11.830 --> 0:16:14.500 that the 10 year yield is going to go down 0:16:14.500 --> 0:16:17.710 to 1% because inflation is transitory. 0:16:18.869 --> 0:16:23.190 And I buy during a period of transitory high inflation. 0:16:23.960 --> 0:16:26.570 And I'm going to get a huge capital gain when 0:16:26.570 --> 0:16:28.809 inflation and bond yields go down. 0:16:29.659 --> 0:16:33.369 Except that the Federal Reserve Chairman was wrong, inflation was 0:16:33.369 --> 0:16:36.409 not transitory, and the 10 year yield went as high 0:16:36.409 --> 0:16:42.530 as 5%. So they ran into huge losses. Now, what 0:16:42.530 --> 0:16:44.849 happened in response to that? 0:16:45.820 --> 0:16:49.590 The regulators essentially stepped in, as you pointed out, and 0:16:49.590 --> 0:16:53.340 prevented that from becoming an overall crisis for the economy. 0:16:53.989 --> 0:16:58.059 They stopped quantitative tightening that had been taking place. 0:16:58.859 --> 0:17:03.140 And took the balance sheet of the Federal Reserve overnight, 0:17:03.469 --> 0:17:06.410 took it back to where it was about six months earlier, 0:17:06.510 --> 0:17:11.189 till about September or October of 2022, uh, and they 0:17:11.189 --> 0:17:13.300 did that in March of 2023. 0:17:14.329 --> 0:17:18.640 So you lost some uh important and valuable time. What 0:17:18.640 --> 0:17:23.130 was the other thing that happened? People who had unlimited 0:17:23.130 --> 0:17:27.800 amount of deposits in the failing banks were made good 0:17:28.170 --> 0:17:32.979 by the federal government, by the taxpayer. Why? They should 0:17:32.979 --> 0:17:36.599 have borne the loss of anything over the insured amount 0:17:36.599 --> 0:17:41.209 of $250,000 US dollars. They did not because the Fed 0:17:41.209 --> 0:17:42.989 didn't want an overall crisis. 0:17:43.430 --> 0:17:47.719 But this is how they quote unquote solve the problem. 0:17:48.000 --> 0:17:50.119 You throw money at the whole issue. 0:17:50.780 --> 0:17:54.329 And therefore, the problem goes away only that it will 0:17:54.329 --> 0:17:56.930 come back again next time because you haven't learned any 0:17:56.930 --> 0:17:58.170 lesson from it. 0:17:59.089 --> 0:18:03.969 Lehman Brothers, 2008, we threw money into it. Ben Bernanke 0:18:03.969 --> 0:18:08.089 started quantitative easing, which he said was a temporary measure. 0:18:08.939 --> 0:18:11.650 You believe it's temporary when it was, it goes from 0:18:11.650 --> 0:18:16.208 800 billion to several trillion under his watch, that's supposed 0:18:16.209 --> 0:18:18.520 to be temporary. We are never going to go back 0:18:18.520 --> 0:18:22.410 to that level. So that is what is happening with 0:18:22.410 --> 0:18:26.060 respect to the banking side. I'm very concerned for 2025. 0:18:26.829 --> 0:18:29.709 And the reason I'm concerned is you have a new issue, 0:18:29.839 --> 0:18:34.948 the commercial real estate issue, for where the major lenders 0:18:34.949 --> 0:18:39.458 are small and medium-sized banks are the big uh percentage 0:18:39.459 --> 0:18:43.079 of their portfolios go to commercial real estate. 0:18:44.209 --> 0:18:48.250 So, and there again, people still haven't gone back to offices. 0:18:48.300 --> 0:18:52.530 The demand for office space has gone down substantially, and 0:18:52.530 --> 0:18:55.599 that is going to be a problem for banks' portfolios. Now, 0:18:56.089 --> 0:18:59.500 what you had another, I said you had several questions embedded. 0:18:59.569 --> 0:19:02.209 I'm going to go to another one. Why did they 0:19:02.209 --> 0:19:04.839 not reduce the duration? And the reason is, 0:19:05.760 --> 0:19:09.750 We, I, I'm a failing bank. I was, and then 0:19:09.750 --> 0:19:13.790 what I do gradually is that instead of keeping those 0:19:13.790 --> 0:19:18.589 assets where I bought bonds at treasury, say, treasury bonds 0:19:18.589 --> 0:19:21.989 at low interest rate, I'm going to move them into 0:19:21.989 --> 0:19:26.349 a long-term investment portfolio away from a trading portfolio. 0:19:27.069 --> 0:19:29.369 And if I do that, I don't have to recognize 0:19:29.369 --> 0:19:30.219 the loss. 0:19:31.810 --> 0:19:34.239 In my mind, the loss is a, is a loss. 0:19:34.390 --> 0:19:37.849 Accounting doesn't, I don't care about accounting. You're holding an 0:19:37.849 --> 0:19:41.209 asset which has gone down in value, you better recognize it. 0:19:42.500 --> 0:19:45.520 Now, that's not what happened. They moved it in, so 0:19:45.520 --> 0:19:48.389 you have a lot of the assets which are sitting 0:19:48.390 --> 0:19:51.359 in long-term issues and they have a loss which they 0:19:51.359 --> 0:19:52.439 don't have to declare. 0:19:53.339 --> 0:19:58.069 And therefore, the incentive for the banks to reduce the 0:19:58.069 --> 0:20:03.550 duration simply goes away. So the regulations are such that 0:20:03.550 --> 0:20:06.939 they encourage the banks to take undue amount of risk 0:20:07.550 --> 0:20:10.020 and not to cut it down. That is what has happened. 0:20:10.270 --> 0:20:12.670 Now come over to the fiscal side. You said that 0:20:12.670 --> 0:20:17.319 was the last part of your question. The fiscal side again, is, 0:20:17.430 --> 0:20:19.339 as I said, is irresponsible? 0:20:20.500 --> 0:20:23.829 If they had followed the rules and they tried to 0:20:23.829 --> 0:20:26.670 issue the same amount of bonds, so in other words, 0:20:26.709 --> 0:20:29.540 if a 10-year bond is maturing, if you issue another 0:20:29.540 --> 0:20:33.109 10-year bond, and you're paying a much higher interest rate 0:20:33.109 --> 0:20:36.109 to borrow for 10 years or 30 years, you will 0:20:36.109 --> 0:20:39.540 learn a lesson, and therefore, you will be cutting back 0:20:39.540 --> 0:20:40.750 on your fiscal deficit. 0:20:41.849 --> 0:20:46.040 On the other hand, uh, the Treasury and Janet Yellen, 0:20:46.489 --> 0:20:50.689 what they did was to finance it in short-dated issues. 0:20:51.589 --> 0:20:55.050 And we have a lot of short-dated these treasury issues 0:20:55.050 --> 0:20:59.329 coming due in 2025. And she says that there's nothing 0:20:59.329 --> 0:21:02.280 wrong in it. I was not manipulating the interest rate, 0:21:02.329 --> 0:21:05.010 and this is what we were doing in terms of 0:21:05.010 --> 0:21:08.079 reducing the amount of risk that we have to run. 0:21:08.729 --> 0:21:11.530 That again is a time bomb. It is just waiting. 0:21:12.579 --> 0:21:15.329 It's the same thing. I used to be critical of 0:21:15.329 --> 0:21:20.290 Turkey when they could not find a long-term capital flows 0:21:20.290 --> 0:21:24.020 or foreign direct investments coming in, they would borrow short 0:21:24.020 --> 0:21:28.250 term and 6 month, 9 month paper, and when there 0:21:28.250 --> 0:21:32.369 was a crisis, they would turn tail, go away, and 0:21:32.369 --> 0:21:36.020 cause a new devaluation of the Turkish lira. That is 0:21:36.020 --> 0:21:38.609 again the risk that we run on the US side. 0:21:40.670 --> 0:21:44.550 Um, so let's go a little further on that issue, 0:21:44.560 --> 0:21:46.400 since we are talking about the risk on the balance 0:21:46.400 --> 0:21:49.680 sheet of financial sector and the CRE issue you just 0:21:49.680 --> 0:21:50.468 brought up as well. 0:21:51.189 --> 0:21:55.719 So you're talking about a scenario in which the tenure 0:21:55.719 --> 0:22:01.109 heads above 5%. Given the existing facilities that the Fed has, 0:22:01.189 --> 0:22:03.280 as well as that little trick you talked about that 0:22:03.280 --> 0:22:05.310 if you keep it, take it away from your trading book, 0:22:05.520 --> 0:22:07.930 you don't have to mark the market. Isn't the system 0:22:07.930 --> 0:22:10.760 capable of handling tenure at 5%? 0:22:11.849 --> 0:22:16.489 Are you saying is, is the system capable of handling? Yeah, yeah, 0:22:16.689 --> 0:22:20.770 the system is capable of handling it, but the political 0:22:20.770 --> 0:22:26.169 consequences are what are not acceptable. Namely, if you have 0:22:26.170 --> 0:22:30.890 that go to 5%, the mortgage rate, which finally they 0:22:30.890 --> 0:22:33.729 are struggling to bring it down and people being able 0:22:33.729 --> 0:22:34.889 to buy houses. 0:22:35.479 --> 0:22:38.910 Because it's politically important for the administration to say more 0:22:38.910 --> 0:22:42.310 people are able to buy the home for the first time. 0:22:42.959 --> 0:22:46.479 They are now not able to. The housing affordability has 0:22:46.479 --> 0:22:51.189 gone down substantially. And if the mortgage rate once again 0:22:51.599 --> 0:22:57.438 goes to, say, 7.5%, because the 10-year yield goes to 5%, uh, 0:22:57.479 --> 0:22:59.399 you have a political issue on your hand. 0:23:00.859 --> 0:23:04.579 So related to that, Shri, there's a lot of talk 0:23:04.579 --> 0:23:08.250 about how since the global financial crisis, US households and 0:23:08.250 --> 0:23:12.030 corporates have been leveraged. Today, income growth is strong on 0:23:12.030 --> 0:23:15.250 the household side and earnings are strong on the corporate side, 0:23:15.500 --> 0:23:18.979 and therefore, debt service ratios are manageable even though interest 0:23:18.979 --> 0:23:22.300 rates are high. So what's your assessment of the balance 0:23:22.300 --> 0:23:24.459 sheet of US households and corporates? 0:23:25.640 --> 0:23:30.000 The balance sheet, um, the New York Fed recently had 0:23:30.000 --> 0:23:34.339 a study showing that they are not very concerned about 0:23:34.339 --> 0:23:38.640 the overall balance sheet, um, of the US households. 0:23:39.459 --> 0:23:43.069 And that is correct in the sense that if you 0:23:43.069 --> 0:23:46.989 look at the totality of US residents. 0:23:48.420 --> 0:23:53.140 They've all benefited from the run-up in equity prices, the 0:23:53.140 --> 0:23:56.929 run-up in house prices. When you put them both together, 0:23:57.180 --> 0:24:01.140 your debt did not increase as much and therefore, your 0:24:01.140 --> 0:24:04.849