Neil Dutta on Economic Research

Bloomberg Radio host Barry Ritholtz speaks with Neil Dutta, partner and head of economic research at Renaissance Macro Research. Dutta analyzes global trends and cross-market investment themes. He was previously a senior economist at Bank of America Merrill Lynch and an analyst at Barron’s. He has appeared on Bloomberg TV and CNBC as well as in the Wall Street Journal, New York Times, Financial Times, Associated Press and Bloomberg News for his insights on interest rates, inflation, the manufacturing sector, employment and consumer spending.

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Episode Transcript

Speaker 1 (00:00):
M. This is Mesters in Business with very Results on
Bloombird Radio. This week on the podcast, I have an
extra special guest. Neil Dutta has been doing economic analysis
and research from a market based perspective for over twenty years.
He has a fascinating career and has been a whole

(00:23):
lot more right than wrong than most of his fellow
economists who cover the street. I found this to be
just an absolutely fascinating discussion about how to best contextualize
the world of economic data around you in a way
that's useful for you as an investor. Very often there's

(00:45):
a ton of information that comes out and by the
time it's released, it is fairly meaningless to what the
market is going to be doing a few months. Hence,
understanding nuance, understanding that the world isn't binary is the
challenge for investors, and few do it better than Neil
does in terms of putting together a global view of

(01:07):
what's happening in the economy, what's happening around the world,
what's happening with the Fed, and what's happening with the
stock market. I found this conversation to be fascinating and
I think you will also with no further ado ren
Max Neil Data. So let's start out with a little
bit about your background. You graduate cum laude from n

(01:27):
y U with a b a. In economics and policy.
What was your first job in the economics and finance space?
So I was actually thinking about being a lawyer. So
I ended up taking my l S at my senior
year at n y U, and UM I did okay,
but I didn't do well enough to go to a
school that I really wanted to go to, and so

(01:48):
UM at that point, I was kind of scrambling, and
I was like, I need to get into the financial
industry because I'm in New York. I have a passion
for finance. But it was kind of late, so a
lot of the investment banking and US have had already
lined up their gigs. So I ended up getting a
job at Merrill Lynch as a compensation analyst in human resources.
Really yes, so that was so UM I did that.

(02:11):
I started that in two thousand and five after I graduated. UM.
But one of the good things about being an HR
Barry is you kind of know where all the jobs
in the organization are. So fast forward about a year
and a job had opened up as an economic research
analyst in Someone's someone you may know David Rosenberg of course. Um,

(02:36):
so that was actually my first foray into economics, and
the rest is history. Um, you also worked as an
analystic Barrens. Tell us a little bit about that. Where
was that in your career path? Well, that was really
more of an internship than anything else. But I worked
with um Gene Epstein, the economics editor at Barns noted, uh, libertary,

(03:00):
are and enthusiast now, but yeah, I mean that was
back when I guess Alan Abelson was running was running
the Up and Down Wall Street column. Now obviously it's Randy,
but Randall fourth sythe yea who was another Gene Dolan,
right Donalin Alan Abelson was must read each week, Randy
forsythe they had a killer lineup, and Gene basically wrote

(03:20):
a weekly economics column. So that was my sort of
first foray into just analysis in terms of economic data. Right,
Like some of the tools that people would use back then,
right hey, r analytics was a big one, and so
Jeane kind of introduced me to that. So when I
was a trader back in the nineties, my Saturday's always
began with a big mug coffee and Barns. And you know,

(03:45):
back before you had everything at your fingertips, it took
a little bit of effort to find things in the
pre Google days, and sitting down with Barns was a
weekly routine, and it felt like it was the publication
that everybody on the street was pouring over every week.
Do you think it's still that way? I think the

(04:07):
world has changed radically, clearly. Twitter is the new tape.
I see things on Twitter before I see them on
the terminal, because I could be in the car on
a train or something and something will across Twitter and
I'm sure it's on Bloomberg at the exact same time
because they passed Twitter constantly. But I don't always have

(04:29):
my terminal up and open in my face, certainly not
when I'm driving. I agree. I think that the whole
finn Twitter community is probably the most useful uses Twitter
as a as a sort of social media tool. To
say nothing about how easy it is to find anything online,
not just through Twitter, but Google also is an enormous resource.

(04:52):
The nineties were what thirty years ago, right, very different world.
Three decades two a half anyway, decades have passed you're
not on Twitter. As far as I can tell, I
am on Twitter. Well, we run our company not under
your name, no, not under my name. That's I mean,
we sort of run that as a company policy. Um
but um yeah, I mean I I tweet. I try

(05:15):
to put information out there. What we try to do,
of course, is to make sure we're sending it out
a little bit later than our clients get because then,
you know, I pay for research in the first place,
if you can get it for free on Twitter. But yeah,
I mean, you know we started that account maybe. Yeah,
we've been growing it ever since and we have a

(05:35):
good yeah, we and um yeah. What we try to
do is promote our our in house ideas. So let's
talk a little bit about what you did at Merrill Lynch.
We worked with Rosie, which I'm sure you have lots
of stories from that. What was your role there? What
sort of researching and writing did you do well? So
when I started as an analyst under Rosie, Um, I
was basically a junior economist. I mean a lot of

(05:57):
I mean. One of the great things about Rosie, I mean,
you know, was just he is I think one of
the best examples of what a wall street economist should
be like we had this UM weekly piece called the
market Economist, right, And that I think is very important
because he was a markets economist. He wasn't a PhD.
And he didn't think like one either. And what I

(06:18):
think he understood and what he kind of ingrained in me,
you know, very early on, is that this is really
fundamentally if you're a sell side research economist, you are
in the client service business. And that's what Rosie was
really great at UM. I mean, he was always on
the road. I mean, gosh, I don't even remember when
I don't even remember when I saw him UM, because
he was always on the road, particularly in in in

(06:40):
oh seven and oh eight, when UM when it's you know,
I mean it was sort of with with Rosie. It
was kind of wrong wrong and then spectacularly right, right.
And so when he became spectacularly right, you know, he
was he was on the road constantly, and so one
of the things I would do for him was just
kind of feed him ideas, feed him charts that kind

(07:00):
of reinforced his his thesis that he could then go
and present the clients while he was on the road.
So a lot of it was sort of getting in
the weeds on on charts and data. But that's that's
what I would do for him. And then you know,
as I got better at that, he kind of gave
me a little bit more freedom in terms of allowing
me to write. And obviously, if you work in in
a Belgian bracket like that, you're obviously writing under the

(07:22):
lead analyst, right, So my name would go on the reports,
but they would be under his, of course. And he
gave me a little bit more freedom as time went on,
and I would end up writing his morning note, which
was the widely read you know Rosie Tidbits, remember, I
mean you know those now it's Breakfast with Dave. Back then,
it used to be called Rosie's Morning Tidbits. And I
think that was a play on because you know, Rosie

(07:42):
was Canadians Canadians and still is um and in my career,
I feel like the Canadian they produce a large number
of economists. I mean, it's it's kind of right, I
mean comedians. And I have no idea, but I think
the tid bits was a play on tim Bits, right,
Tim Horton's sort of their version of dunkin Donuts, I guess,

(08:04):
And so he gave me some freedom in writing that.
For so Rosie actually ends up going back home to Toronto,
I know, oh nine, And so now you're at Meryl
without him writing heard on you. What was it like
when you had a little more latitude to go where
you wanted? Well, um, it was actually an interesting time because, um,

(08:25):
when Rosie left, things were starting to turn around a little.
And I remember I wrote a piece basically, I think
in June two thousand and nine, basically saying that the
recession was over. And at the time it was a
controversial call. Um, but that was when we didn't even
have a head of economics because there was a bit
of a sort of murky you know, let's say six

(08:48):
to nine month period where Rosie had left and it
had been a you know, and and then Ethan Harris
had yet to come in, so we kind of had
a lot of freedom in terms of what we wanted
to do. And um, you know, so I wrote that piece.
It got a lot of attention, I think, But yeah,
I mean it was a good call and I think
it was interesting to say the least, because um, here
you had Rosie, who was a noted market bear at

(09:08):
the time. He never would have put his name on
that piece, right and um, and so in some respects
I was able to and I you know, I mean
we used a lot of the same framework that he
is looking at a lot of the same indicators in
terms of you know, you know, Rosie would talk a
lot about leading indicators, the the e c R I index,
and a lot of them had been turning around. So
we had basically said, look like things are getting better

(09:29):
and it's sort of reinforced, uh, you know, the upturn
in markets. So um and speaking of markets, how often
is down fift not a pretty decent entry point for equities? Oh? Sure? Well,
I mean one of my buddies, Sam Row, who you
probably know TK t uh and um. He has that

(09:49):
you guys know each other. Sam's work is great also, Yeah,
I mean I can't I I think very highly of
him also. And one of the best things that he
says is stock markets usually we go up. That is
a factual statement, not always but most of the most
of the time. And um, it's tough being on the
low probability side of the street, right, And I think

(10:11):
that sort of set a lot of the kind of
trajectory over the next several years after um I left
Merrill and when I started at rend Mac And just
if you couldn't figure out by eleven that the sky
is not always falling, you'll you'll never figure it out.
I mean, because we had so many things happened. We
had financial crisis, double depercession fears, right, there was that

(10:31):
debt default thing, and then China hard landing that was
like this perennial thing, and European sovereign debt crisis and
stocks kept going up. And so I feel like, you know,
over my career, right, I mean, I've kind of I
started working under Rosie, right, um, but I feel like
over time I've actually been pigeonholed more as like the
more market optimist economic optimists not so let me let

(10:55):
me channel my in in a rosy and pushback on
your markets always go up. Tell that to someone who
bot Japan in or but China you're down in China.
I think you're still down in Japan. It's decades later.
What do you mean markets always go up? Well, US
equity markets usually go up. That's and and we're very

(11:17):
much US focused here. UM. I don't disagree with you,
by the way, but those are the objections that sure,
I mean, well always come up there. If anything, they're
the exceptions that proved the rule. Well, Japan is an
interesting example because, um, of course, after the financial crisis,
that was a very prominent example of what the U

(11:38):
S could turn into. We're going the way of Japan. Um.
But I think in many respects, because that example existed,
that's why we in fact didn't end up that way.
We had we we sort of cleared out our banking system,
we recapitalized our banks very rapidly compared to Japan. Obviously
Bernanke is a student of what happened. Then it's as
if we learn from other people's exactly and think about,

(11:58):
I mean, what was notable about at a sort of
post financial crisis recovery was just how steady it was, um,
you know, sort of month in, month out, continued declines
in the unemployment rate. And you know, if you go
back to some of the literature around you know, the
Swedish banking crisis, sort of the Nordic banking crisis, it
was sort of you know, six seven years he cleared

(12:20):
out the excess and things start to pick up, and
that's pretty much what happened right. I mean, the household
de leveraging was basically over and the economy was gaining
a lot of momentum. So how did you end up
at Wren Mack? Uh? You were at Merrill? Tell us
how you found your way there? So um So, as

(12:41):
I mentioned, Rosie had had left to think that it
was really in March of two thousand nine is a
classic bottom exactly contrary, it was, he left at his peak,
and I think in September of that year, Bank of
American Merrill Lynch at that point hired Ethan Harris, who
I think he was. He was a Lehman Barclays UM
and so I worked with him for until And you know,

(13:05):
Lehman was a huge sort of fixed income shop and
and that's where Ethan's focus really was UM and and
obviously you know Meryl was more of an equity shop UM.
And so one of the things that Ethan um gave
me a lot of latitude to do was just kind
of service the equity salesforce at Mery Lynch because a

(13:25):
lot of his focus was really I think more on
the fixed income side, more on the fed UM. So
you know, I I had a lot of UM sort
of opportunity because it was kind of this runway that
I just had, and and and what I would do
is try my best to kind of, you know, remember
what the equity salesforce loved about Rosie and try to
apply that in my own way. So one of the

(13:46):
things that I think that Rosie did really well is
just kind of take the economics calls and make them
useful for an equity market investment. Right, So if you
think inventories are done clearing out, what does that mean? Well,
should be good for manufacturing. Now let me call I mean,
and you have all these analysts that are covering all
these companies, So why don't you go pick up the
phone and talk to them and see what they say?

(14:07):
And then for an equity salesforce, that is a great
thing because when you have your macro guy talking to
your analyst, you can you pitch that to your clients, like, Okay,
my my macro economist is telling me that inventories are
have bottomed out. And here's what I don't know, John Inch,
who was I think the industrials analyst at the time.

(14:28):
Here's what he's saying about Caterpillar and Deer and so
on and so forth. And whenever you have that, it
makes a very good morning call, and you can it
makes a very good marketing tool. So I would try
to do that a lot. And as I did more
of that, I would be asked by the salesforce on
the equity side at Meryl to kind of can you
come on the road to me? Can you come out
to California and talk to so and so? Can you

(14:49):
Texas and so forth? And so I would do a
lot of marketing for equity accounts at Meryl Um And
I was really only like a like a VP at
the time. I was a pretty junior level person, and
so that got me going, and then I got approached
by Wren Mack and now I've been doing it for
them for this last decade. It's funny you mentioned, um

(15:10):
what the institutional sales guys like. Who was institutional sales
in Marrow for a long time. He is not public,
so I can't drop his name. But my favorite thing
that he said about taking Rosie on these road trips,
they called him a wind up toy. Doesn't matter who
the institutional client is, you would give him like an

(15:31):
eight second tea. Up. Oh, this is an endowment. They
focus on this they're interested in this aspect. They turned
the key and wind him up, push him in, and
Rosie would just be a fire hose of NonStop data,
context information. Uncle, whatever you want. Yeah, you get the order,
just leave me alone. No, Yeah, I mean for me,

(15:52):
it was a great education. I think those first you know,
seven or eight years at MARYL because I had Rosie.
I was fortunate enough to work with two greats. I mean,
I think Ethan Harris is is one of the best.
I mean, he had a great call this year. I
mean in the last year. I mean he was the
first one to basically say, you know what, the Fed's
gonna go every meeting, and at the time he said
it was pretty radical. Yeah, you had a pretty good
call also the end of last year. In fact, I

(16:15):
recall I think it was on surveillance, Bloomberg surveillance. You
came on and said, oh, the Fed's gonna raise at
least four times. That was a very out of consensus call.
Is We'll talk a little bit about that a little later,
but you were very much pushing against the consensus that
it's all good. Well, so, I mean I think again, um,

(16:35):
you had one of the best things that Ethan Harris
actually ever told me was in this business, it's about picking,
like weighing probabilities and then picking your battles with the
consensus wisely. Like I'm not the kind of person that's
just going to be contrarian for the sake of being
so like that to me doesn't really make it. Listen,
the market is the crowd exactly the right most of

(16:57):
the time, and so you have to just pick your
battles wisely. And I think in that case, I mean,
four was conservative. I mean, in hindsight that was I mean,
at the time it sounded sort of radical, but in
hindsight it was it was obviously not enough. Um. But
so I think that to me, um kind of I
thinks at the sort of stage for me at ed

(17:17):
rend McK and I think it was very helpful to
sort of come up onto those two guys. Really interesting.
So we were talking earlier about your December twenty one call.
You thought the FED would raise at least four times.
Let's look at what happened. Four basis increases to fifty
point increases one basis point increase. Why was everybody so sanguine?

(17:44):
Why did we all miss the fact that the FED
was suddenly gonna you know, slam on the brakes. Well,
I think you just have to go back to the
initial reopening of the economy, right, um. And in hindsight,
we basically had a V shape recovery, a couple of
trillion dollars of fiscal stimulus. We help, we threw a

(18:04):
lot of money at the problem on top of that, right,
I mean a lot of them. I mean we turned
the lights off, we turned it back on. You had
a V had a V shape recovery plus all the stimulus,
plus you know, paycheck protection. I mean, when we had
that first employment number, that sort of knocked the lights out.
Everyone was kind of surprised because we're all kidding off
the initial claims data, right and um, and so we

(18:24):
had seen that, you know, maybe these companies were hiring
people back pretty quickly. I remember at the time the
Atlanta Fed GDP now cast with something like minus fIF GDP,
which obviously is a horrific extracoration. But that's why I
think a lot of people were surprised that at how robust.
And at the time, remember very I mean, there was

(18:46):
a legit debate going on, are we gonna have an
L shape recovery, right, are we going to have a
U shape recovery? And I think a lot of the
issues around the FED trajectory was just a function of that,
and we Bay sickly had a V shaped recovery and
that warranted a very aggressive response from the FIT, although
we'll talk a little later about how belated that response was.

(19:08):
They they clearly could have started tightening earlier at a
slower pace. But let's put it in and that I
want to talk about your call where you said there's
going to be at least four increases. Tell us a
little bit about your process. What are you looking at
that leads you to say, Hey, the consensus is way
too sanguine. They're missing this. The FED is really going

(19:31):
to step up here. So I think the first thing
to do in this business is you want to make
sure you have the now cast right right, forget the forecast.
Let's just figure out what's going on right now and
what's been happening. And at the time, what did we know.
Inflation was coming in a little bit firmer, a lot firm,
and unemployment was falling more rapidly than people thought. So

(19:52):
what do you expect the FIT to do at that point. Uh.
And oh, by the way, um they're behind right, So um,
aren't they always? I mean you could you can make
that argument. Um, but you know, in this case, they
were kind of very much keying off of labor market
dynamics for the reaction function, and the unemployment was falling

(20:14):
very very rapidly, and so that's what started it. And um,
that's the area you're looking at that Hey, this is
a red flag. Everybody is way too sanguine about c
P I. I think the thing that really got it
for me was what was going on in the housing market, right.
I mean, if you have this sort of pandemic event
and people go out and what's the thing that pops

(20:35):
first is residential investment and home sales. That to me
is a huge, uh you know issue, totally opposite from
the last crisis because and what do we know about housing?
It is the it's like an irreversible decision, right, I mean,
once you buy a home, you can't just go out
and be like, oh, don't want to do that again.
I mean you can't return it. So you have to

(20:56):
be very very sure about the macro environment before you
make a down payment on a home. So the fact
that people are willing to do that I think kind
of led me to believe. Okay, if housing is historically
a good leading indicator for the economy and that's what's
really surging right now, what does that mean for everything else? Um?
And obviously if you're going to buy a home, you

(21:17):
have to fill it with stuff, and we had a
huge boom in stuff, and that to me is what
is what did it? Um? So you know to me
that the v shape recovery and the good side of
the economy I think was an important development. And so
let me ask you will drill down a little bit
into the specifics. There are all these sort of binary
debates around inflation. Is it goods or is its services?

(21:40):
Is it fiscal stimulus or is it monetary um? Is
this demand driven or is this supply constraint driven? What
are the factors? How do you take those pairs of
contradictory positions and reconcile them? What do you think about
those choices? And it obviously can be a little bit
of everything. It's not just one thing. Well, this business

(22:00):
is always nuance. Nuance never gets enough attention. But that's
usually where the answer is. I mean, on inflation, Is
it supply driven? Of course it is. Is it demand driven? Yes,
it is. I mean that's both. Um, Well, if supply
could answer demand, we wouldn't have inflation exactly got to
be a little bit. It's gotta be a little bit
of both. Um. I guess in terms of where we
stand right now, Um, you know, clearly there's a lot

(22:23):
of improvement on the supply chain side. We're seeing delivery
times come down, shipping containers are back to prepension. Um.
You know, obviously we know that motor vehicle assemblies are
picking up some steam here, but demand is still very
very strong. I mean, um, if you look at something

(22:45):
like real consumer spending of goods relative to its pre
pandemic trend, I mean there's been no big sort of
collapse to trend. I mean it's sort of working itself
out through time, right. I mean that we had that
big spike and we haven't come back down from it.
We've just plateaued with a slight up until the December

(23:06):
consumer spending, it looked like the upward bias was going
on forever. Yeah, and that probably overstates things, right. I
mean we know that looking forward, auto sales will probably
be running better than thirteen and a half millions are
over the next several months. Um, we already see several months,
next several years because there's no used cars to be
had because they were so little exactly new cars. And

(23:30):
then and now on top of this, look at home
building stocks over the last on fire. Yeah, what does
that tell you? I mean a lot of these growth
pessimists that we're talking about housing is the leading indicator. Well,
where are they now? I mean, housing is starting to
revive And what do you think that means for durables?
We'll keep in mind you mentioned how things lagged post

(23:50):
financial crisis. We underbuilt single family homes for what almost
a decade, and now suddenly there's been massive household formation
pre and during the pandemic. What are we short? A
million houses? Two million houses? It's a giant not yeah. Yeah,
if you assume like a normalized vacancigrate, it's probably a
little over a million units, right. Uh. And you're also

(24:13):
in a very strong demographic patch for housing, right, I
mean people are you know, we're sort of in our
prime marriage years as a country, and so so that
that helps as well. I mean, one of the interesting
developments out of the pandemic is just we have a
little a bit of a mini baby boom going on, right,
And so what does that mean? So people are not
only gonna buy a home for that zoom room, now

(24:33):
they're buying a home for that nursery. And I think
people figure it out. I Mean, one of the things
I think people will be surprised to see is just
look at what the incremental drop in rates will do
for housing activity. Right, I mean, so people got locked
out when rates went from six to seven. Now they're
coming back down to six. But four month loads about six.
Things like mortgage demand pick up and even in the sixes, right,

(24:56):
exactly right, I mean that's double what it was a year.
And and the thing is that it never got as
low as it did in fourteen despite seven percent mortgage rates. Right,
So what does that tell you about underlying demand? So
I think to me, that's an interesting kind of development here.
And um, obviously if you have a pick up in housing,
that's going to provide um, you know, some tailwind two

(25:16):
things like householdurable goods, furniture, carpets, appliances, stuff like that.
So we're in a sort of weird zone where Jerome
pal and the FED is telling us, hey, we're not
done raising rates, and when we are done, we're keeping
them up here for a while. Markets seem to disagree
with that. How do you think about this, you know,

(25:39):
tug of war between what the markets believe about rates
and what the FED is saying about rates. Well, one
of the it's a it's a great question, um. I mean,
as you know that there's this sort of thing that
goes around Wall Street where the equity guys are the
dumb guys and the bond guys are the smart guys. Right,
I don't believe that there certainly are elements of truth

(26:00):
to that, because the bond guys tend not to blow
up the way some equity guys have. Maybe that's a
bad example, but I think that's what colors people's perspective. Well,
I mean, there was the great, the great Samuelson quote
that we all know of, right, like the stock markets,
you know, predicted nine to the last five recessions, right,
But in reality, the stock market has probably predicted four

(26:24):
of the last five FED pivots, Right. So I mean,
how bad can the stock market be? How dumb can
that money be? If that's what's driving a lot of
the Fed's reaction function at times. And if you think
the bond market is smarter than the stock market, well,
what's the inverted yield curve telling you that the Fed's
gonna end up doing well? It means that they're gonna
push the economy into recession. I mean, I guess, I guess.
The one thing I would say about the bond market

(26:45):
is that the bond market has the habit of pricing
and tightening cycles way before they actually start, right, So
there's always these sort of opportunities in the front end
of the yield curve early on in an economic cycle,
and they tend to price in the end of the
tightening cycle after for its start too soon. Once the
cycle starts, the bond market tends to price in the
end too soon. And I think this is probably another

(27:07):
one of those times, because um, I don't think the
FED is going to cut and one of the reasons
why is because there's just too much economic momentum behind,
you know, behind the U S economy. So you were
talking the other day on TV about landings, hard landing,
soft landing. If there's no landing, tell us what you

(27:27):
mean about that in terms of what are the stock
and bond markets pricing in and what are your views
on the economy for the rest of Well, I definitely
think the odds of a no landing scenario are going up.
What what is a no landing scenario but no recession? Yeah,
growth at potential, if not a little better. I mean, um,

(27:48):
I guess for me, it's you know, what's the mechanism
for the recession? Right? I mean, you're the argument now
is what China's reopening and Europe is looking a little better,
and the U s economy is going into recession. I mean,
in my experience, the causality never goes that way. It
goes from the US to the rest of the world.
Not The rest of the argument is the FED over titans.
They kill real estate, that can kill consumer spending, and
that tips us into a month. So it's like it's

(28:10):
the Milton Friedman like long and variable lag argument, you know,
Milton Freedom. I mean that may or may not be
all that accurate. I don't think it is that the
FED has been talking about. If you look at some
of the Federal Reserve research papers, they're saying, hey, maybe
FED activities work with a shorter leg. Then we've been
let to believe. I mean yeah, I mean back in
the eighties, I mean, research analyists would figure out what

(28:31):
the Fed did three weeks ago, right, based on what
was going on the money markets. Now it's they tell
you what they're going to do in the markets price
in instantaneously. Um. But I think the growth impulse from
financial markets is already flipping positive. So how could it?
I mean the funny thing about this long and variable
lag argument if it's an eighteen month lag, So what

(28:52):
was happening eighteen months ago? The economy was ripping and
the Fed was reiterating it's low low, lower lower for
longer approach, so that its Monterrey policy was really really easing.
So are we still dealing with the easing of eighteen
months ago? It's ridiculous. So no, I mean, even if
you go back a year, you had inflation ticking with
what was it, March cp I went through the two

(29:16):
percent target rates, So real rates for cratering, right, I mean,
so the long the lags are not long and variable,
and they're short and predictable. And you're seeing that already, right.
I mean, as an example, we we just talked about
how interest rates have been moderating. What have we also seen.
We've seen mortgage purchase applications pick up, We've seen homebuilding
stocks do better, We've seen builder sentiment pick up. It's

(29:37):
it's instantaneous. So um, and it's the same thing. I
think you can make that argument with the dollar, right,
I mean everyone's kind of up in arms about Oh
the I s N manufacturing p m I is below fifty. Yeah,
and the dollars off ten percent from where it was
in September. What do you think that does for factories?
Obviously a juice's export doesn't hurt him. Right. Uh, you're
talking last year about in about king dollar and how

(30:00):
how strong it was. How do you contextualize a moving
the like a twenty year moving the dollar like that?
What does that mean in terms of inflation and economic growth? Well? Um,
more recently, obviously, the dollar decline is I think an
unambiguous positive for US growth because it's going to juice
exports particularly have manufactured goods. Um. But a lot of

(30:24):
the rally and the dollars say from too, you know,
up until recently, I mean a lot of that was
just growth differential, right, I mean, think about why the
dollar moves the dollar moves really for I think it
could say two reasons. It's basically growth differentials and policy differential.
Wait a second, I have to interrupt you, because all
I heard during the was queue and zurp, We're going

(30:46):
to kill the dollar financial pression. The dollar is done
light a bonfire. They're no good, They're worthless. And I
recall having that thrown at me over and over again.
It couldn't possibly have been more wrong. No, I'm mean,
this is I mean, you know that doom cells on
Wall Street, there is a steady diet of this is

(31:08):
my fourth doom cycle, And yeah, I mean, but to
me it's it's actually kind of it's kind of shocking,
like how how enamored people get with these doom and
gloom sort of ideas because they don't pay at all.
I mean, like, I like, it's one of these things
where one of the things I've learned is that the
negative case always gets sounds a little bit more intellectual,

(31:29):
people give it a little bit more attention. And but
one of the things that I've learned is that in
this business, people that get one call right tend to
be wrong about most everything else. And I think this
is you know, I mean so as an example, like
like the goldbugs, and I mean it's it's the same
sort of thing, you know, And um and I think

(31:50):
that you can make that argument with the dollar. The dollar,
I mean, there's no alternative right to the to the U. S. Dollar.
It's still the reserve currency because we have the most liquid,
the deepest capital markets in the world. Right so, and
nobody trusts China, nobody trust Jipsan, Europe, where else youre
going to go? And until that changes, you can't you
can't really make that argument. And so so for me,
it's why does the dollar move. The dollar basically moves

(32:14):
because of policy and growth differentials, and so in the
reason the dollar was doing so well is because the
US economic growth was a lot better than Europe, it
was a lot better than Asia. I mean, we were
talking about our China hard landing like literally every year
following the financial following, right, so, China reflated and basically

(32:35):
every year after that it was hard landing risk in China. Um. So,
I think that's why the dollar moved. And right now
what's going on is the dollar is I think losing
steam because people are getting a little bit more optimistic
about what's going on globally. So, in other words, after
a really strong pandemic recovery here in the US, the

(32:57):
rest of the world is finally beginning to ca uch
up with us. And that's before we talk about the
end of zero COVID policy in China and them them exactly. So,
so you sound like an economic optimist looking out the
next couple of years. Well, I'm certainly an economic optimist
relative to the consensus um and I think the consensus

(33:20):
is way off sides, as I think the FED is
way off sides right now, and meaning what so they're
too cautious, So the consensus is too cautious. Do you
think the FED is in the process of overtightening here? No,
I mean I'm of the view that they probably I
think the FED will probably step back soon. I mean,
they're basically telling you that they get rates up to
something a little over five percent and stop. The question

(33:40):
from my mind is whether they're stopping too soon. Really,
I do think that I think that you can make
that argument because I just feel like financial conditions are
easing too much. They didn't really they shot their shot,
and at the same time, fiscal policy tightened last year.
Last year two and despite all that, the unemployment right
finished the year at dot dot dot three point five percent.

(34:02):
So let's talk about that. We we referenced earlier that
there was a shortage of single family homes in the
United States. Let's talk about labor. Immigration has been on
a downward trend long before Trump. My friends, who blame Trump,
it started taking down way before him. He might have
spoke a lot about it. I don't see the Biden

(34:23):
administration moving off of the Trump policies limiting legal immigration.
You have a lot of early retirements, you have a
lot of disability. We lost I don't know to fifty
thousand workers due to COVID to say nothing about the
people affected, and I've seen estimates from five million to
fifteen million people who are affected by long COVID. We

(34:45):
have a massive shortfall of workers. How are you going
to get unemployment to tick up or wages too slow
under those circumstances short of causing that hard landing we've
been talking about. Well, yeah, I mean you can have
some of that addressed through policy, right, Um, are we
as anyone addressing that? No? No, I mean no that

(35:08):
that I don't I mean, you can maybe see. I
mean I think part of the issue though, is think
about who's filling some of that vacuum, right, I mean
you you are seeing participation rates rising for those age
sixty four years old, not prime age workers, but younger people,
and a lot of them are coming in. Now, what
does that mean? You're basically you talked about retirements. You

(35:32):
have a lot of inexperienced workers coming in. What does
that mean? Those aren't the most productive people. So experienced
people are leaving, inexperienced workers are coming in. That's not
necessarily the best dynamic for for product for labor productivity, right,
I mean, it's gonna take some time for those workers
to kind of get up to snuff, right, But that
is inflationary from the fetes perspective. Remember, um, the sort

(35:52):
of equation that Powell always references is compensation growth equals
inflation plus productivity. That is sort of a identity that
they use in macro and what's wrong what's wrong with that?
It's not about what's wrong with it or not. I mean,
I'm a business economist. I don't have an opinion. For me,

(36:13):
it's what are they telling me? You know what I mean?
For whatever reason, the Fed views the labor markets as
the conduit. And if compensation growth is running right now,
let's say it's five and productivity is one one and
a half, you're basically talking about an inflation environment of
three and a half percent ish, which is not terrible

(36:36):
from their mind. And remember the one time you had
a soft landing in the US content, right, So this
is one of the things. I do think we have
an increasing odds of a soft landing right now, but
that doesn't mean the odds are increasing permanently, right um,
think about when we had a soft landing that The
example that most people will remember is the nineties. So
what happened during that time. First of all, we don't

(36:56):
have a formalized inflation target of two and number two
what was it called that green Span? Now he got
the productivity call right at the time. I mean, Janet
Yellen was telling him you gotta keep hiking, like, look
at how low the unemployment rate was getting. But what
green Span came around and said was, well, look, productivity
is taking off. We probably don't need to be hiking
as aggressively. So let's talk about that productivity number now.

(37:19):
Because I have my entire career been perplexed by these
very what's the old joke from UM was it? Professor
Solo and m I t uh. Productivity numbers are showing
up everywhere, but in the statistics, and as someone who's
a white collar worker who can operate remote, I feel

(37:40):
like every year my productivity is up. Now, if you're
working in a factory or if you're delivering mail or
something elsewhere, technology isn't helping you that much. You're probably
not seeing those sort of technology gains. Am I just
seeing the world through my narrow perspective? Or is a
data missing a lot of productivity games? I don't know

(38:04):
that the data is really missing that much. I mean,
productivity has been weak even in the areas where it's
very easy to measure it, like manufacturing, So that to
me is is something that's important to point out. UM.
But you know, think about capital spent? I mean, right,
so capital deepening is what what drives productivity, and that's
basically capex relative to labor hours, and that hasn't been
particularly strong either. So what's the I mean, I get

(38:26):
that there there are interesting things going on, but I
don't know that that's necessarily going to drive significant gains
and productivity. Um. And of as I mentioned, labor quality
is a lot is a lot worse now than it
had been before. So I think it's it's it's a
bit more for me, it's a little bit more challenging
to accept the idea that productivity is going to save
you from from the inflation. Um. So let's talk about

(38:47):
that inflation. You know, for at least for the median
wage owner and below, prior to the pandemic, their wage
is lagged everything. They lagged in inflation. Leg the stock
market lagged, corporate profits, it legged c suite compensation. So
it seems like suddenly the bottom half of the economic

(39:09):
strata is seeing wage increases and the FED is like, hey, hey, hey,
slow down a little bit. What's that about. I mean,
it's it's a nasty little secret. I mean well, I mean, um,
it was a giant New York Times piece a couple
of Sundays ago in the magazine section talking about who
is the FED increases falling the hardest on They view

(39:32):
the labor markets as the conduit to achieve their inflation goals.
We can debate whether that's right or wrong. I mean,
I'm not an academic economist, but that's what they're telling us.
And so if that's the case, then unemployment is one
way they're going to achieve the goal of getting inflation

(39:52):
back to two percent in a sustainable way. Seems like
a twenty twenty century central bank confronted with the twenty
century b I mean, it may well be, but I
think look, I mean, right now, the labor markets are
still very very tight, and there's still an inflationary impulse
from the labor markets. And yeah, look, I mean I

(40:15):
think that this is also, in some respects, maybe a
tell on our society. I mean, what do you think
most people would prefer, right, I mean, would you prefer
five percent unemployment and two percent inflation or three percent
unemployment and four percent inflation. It depends if you're the
guy that's unemployed or not. I mean, if I'm unemployed,
I don't really care what the hell inflation is. I

(40:35):
got no income. Yeah. Well, I mean it's one of
the reasons why I think Reagan became president and Sanders
never will, right, I mean the fact, I mean, because
I think it's it's much easier I think, to form
a political coalition around inflation then around unemployment, because it's
always Oh, it's like, oh, no, I gotta pay for that,
you know what I mean, Like, that's how right, because

(40:57):
the baseline expectation, like your social contract in America, I think,
is oh you gotta like to me, it's like, yeah,
I got a job, great, good for you. Everyone has one,
you know, whereas oh, the prices for these things are
going up like six that's weird. Right. So that's why
I think politically it's much easier for politicians to address

(41:17):
that than than unemployment prior to the I mean, right,
I mean, think about think about this, right, I mean, well,
the two thousands use a giant spike inflation, arguably caused
by the FED taking rates too low and keeping them
there too long. Um, I mean yeah, core inflation during
the two thousand was running a little bit, I mean
I think around two and a half percent, but spiked up,

(41:38):
you know in right into the crisis in oh eight,
the bottom was falling out from the economy and Pete.
I mean we were having you know, we had like
five or six months of job losses. Even as gas
prices are oil We're people talking about let's go and like, um,
you know, stop gap the banks and like even though
no they weren't right because you know, it was like, oh, well,

(42:02):
what had more public support suspending the gas tax or
bailing out the banking industry. At that time, absolutely there
was very little support for bailing out the banks, and
in fact, there was the whole Tea party came about
when you attempted to bail out the homeowners. There was
a lot of political crosscurrents during that. So I think

(42:23):
that to me is is sort of this interesting kind
of dynamic, is that it's just it's a lot easier
um politically, I think, to fight inflation. Really interesting. So
we've been talking a little bit about what the consensus
is and what the Fed's gonna do. Um, all these
rapid increases in rates we've seen. You've said you question

(42:44):
whether or not the FIT has a coherent strategy. Explain that, well,
I mean they're kind of playing catch up, right. I mean,
I think based on their behavior over the last twelve months,
it's pretty clear that they should have started sooner, although
wise they wouldn't have been so aggressive in the first
So let's put let's put some flesh on that. The
CPI goes through two in March one. By the end

(43:09):
of the year, CPI is what seven percent something like that,
And in March the Fed first starts raising rates. They're
like a year behind the curve. Well, I mean they
very much were anchored to I mean there's a recency
bias in in policy and policymaking. Um. You know, in
the same way that fiscal policy makers were criticized for

(43:31):
not doing enough during the financial crisis, you could make
the argument that fiscal policy makers overreacted during the pandemic crisis.
So what we have. We had two trillion in the
first CARES Act, we had another trillion in the second
CARES Act. Then the new administration comes in, there's another
trillion in the third CARES Act. Then there's the Inflation
Reduction Act, and there's the um Infrastructure Bill. That's a

(43:53):
lot of fiscal stimulus, isn't it. Yeah. And remember back
when um, you know, Trump ran and they the whole
t c j A. What was the big Yeah, what
was the big discussion? Then monetary offset? Remember that monetary offset,
Like the Fed needs to come in and counteract the
fiscal stimulus. Well, think about it this time. There's a
lot of fiscal stimulus that needs to be contracted, particularly

(44:14):
when people are still sitting on trillion dollars of pandemic savings.
So how much of that can be accomplished with quantitative tightening, unwinding,
quantitative easing, and how much of that has to be
purely rate driven? I think it's very driven, because I
don't I don't know that quantitative tightening has that much
of an effect on really because people were warning, oh,

(44:37):
you don't understand what a head headwind QUEI has been
a tail winds. Not only is that gone, now you
have the head wind of of QT. Just you wait,
that was the last doomsayer. I think QUEE was basically
a way for the FED to tell the the markets
that it really meant business about keeping rates low for
a long time. And you know, to me, let's say

(44:58):
the FED came out and stopped QT because they want
to maintain like an ample level of reserves. Does that
tell you anything about what interests are gonna do. No,
the Fed can raise rates whenever they want, So that
that to me is I don't think it's it's really
the same thing, um And so yeah, I don't know.
I mean, yeah, there's always these sort of there's this
like knee jerk kind of desire I think in markets

(45:19):
to like explain things that as simplistically as possible. And
so it's like, oh, like, here's this overlay chart if
the Feds QWI and the stock market, and that's why
the stock it's going up, And it's just you suggest
it's absolutely binary, that it's more nuanced, to use your
earlier phrase. I mean, to me, it's just a ridiculous
thing because if you take that to its logical conclusion,

(45:41):
the FETE has an infinite ability to expand its balance
So that means that there should the stock market should
never ever go down, if that's what you'd right, I mean,
so if you think about it logically, take it to
its end conclusion, does the Central Bank have Is there
any constraint on the Fed in terms of printing money
doing QWI? There is none, really, I means it's political,
but you know, theoretically there's none. And so if if

(46:04):
the balance sheet is all that drives the stock market,
then the stock market should never go down. You have
to think about it that way. And so to me,
you know, the stock markets driven by earnings and by
fundamentals and and sentiment and sentiment, and you know the
FED can play a role and sort of back talking
sentiment a short run. But the FED can't permanently increase

(46:25):
the level of asset values. So there's been a lot
of discussions about when PAL is going to pivot. Are
you saying we're over emphasizing that? Is the market sussing
that out early enough? How much should investors be paying
attention to each and every utterance from j Pale and

(46:45):
his bands of merry central bankers. Well, I think it's
important to follow the data. And um, Ultimately, if the
FET is saying that it's data dependent, then the data
will drive their views on policy. Um. You know, I
must admit right now, it does feel that the it
is kind of moving a little bit away from that
because it seems like they just want to get rates
just about five and regardless and wait and see, regardless

(47:08):
of whatever happens. Let me throw some data you. It
looks like inflation peaked mid year last year. Certainly on
the good side, we talked about let's energy, lumber, shipping containers,
used cars, even rolexes are rolling over in price. So
that's or depending on what year you're looking at, that's

(47:32):
of inflation problem. What about services? We continue to see
at least owner's equivalent rent portion of cp I appear elevated.
What are we to make of that? Is the FED
looking at the data or are they looking in the
wrong place? Well, I mean Powell kind of splice the

(47:53):
inflation data into three parts, right, And you talked about
core goods inflation, which is I think what you're getting at,
which is it's it's deflating. Right. So those are your cars,
your furniture appliances, right. Um. Then you have housing rental inflation,
which has been quite strong, um, but is also likely
to decelerate quite a bit. I mean. One of the

(48:15):
reasons why inflation has historically been a lagging indicator is
because shelter, which is a big component of inflation, is
a lagging indicator of in and of itself, right, and
it tends to lag home prices um. And home prices
have been moderating, and we know that new lease growth
has also been moderating quite a bit. So I think
it's inevitable that housing rental inflation, and as it's measured

(48:37):
in the CPI data, will will come down. That's a
key phrase, as it's measured. There have been both from
places like the Cleveland FED and Zillo rents. There have
been a couple of new ways of looking at rental
inflation that make it appear the BLS model is really
on a long lag. When you look at Zillo rent

(49:00):
they appear to be plumbering. And when you look at
a paper I think it was the Cleveland Fed that
tried to look at repeat rents as opposed to the
whole world of rents. They're showing that rents not only
have stopped going up but are now rapidly. But that's
also been well known. I mean, that's been a a
I think a well known feature of the inflation statistics. Right,

(49:22):
So this idea that, oh, this is such a lagging
indicator like that, No, that's a lot of people just
saying that they want the Fed to back off, and
they're using that to justify I'm talking my book. So
that let me ask you this question, because Bernanki was
saying inflation is a lagging indicator, right, So inflation is
a lagging indication, right. So Bernanki made that point back

(49:43):
in two thousands, right around the time he said sub
prime was contained. Well it was after that, but he
was right about the inflation being a lagging indicator. Because
he was using that to justify and a more aggressive
monetary policy easing. And the Hawks wanted to go because
they were making the point that, look, inflation is still high, well,
inflation is lagging indicators, so interesting, and so it's it's
sort of the same, it's sort of the same thing

(50:04):
that's happening now kind of in reverse. And but you're
suggesting that the Fed is ignoring all of this softening
inflation data because for whatever reason, j Pal wants to
get to five and a quarter that And also I
don't think they view inflation the same way as the
markets do. Right. The markets are very very good at
kind of telling you about what's happening with goods inflation, right,

(50:26):
so we know what commodities are doing at any moment. Right.
The markets don't have a great way of telling you
how much your barber is going to charge you for
your haircut or or yeah, or you're dry cleaner. And
also it's about the overall inflation process, right, I mean,
so the stuff that you're talking about, like, let's say

(50:49):
we had this burst of household formation and that's what
drove this spectacular increase in rents during the you know,
during and immediately after the pandemic, and now it's just
becoming too onerous on people, and they've all decided, you
know what, I'm going to go find a roommate. I've
been dating somebody, I'm going to go move in with them.
What have you just done for yourself? You've reduced household formation,

(51:10):
But what have you done for yourself, assuming you haven't
lost your Now, what do you go out and do
with the money you spend it on? And what does
that due to the prices of the goods and services
upon which you spend the money depends on what you're
spending it on. Is it these things you wouldn't have
purchased anyway? Or I don't know, but that's the way
the FETs thinking about it. So you see, I mean,
compensation equals inflation plus productives. So all you're talking about

(51:33):
is relative price shifts. If wage inflation is still running
at four and a half five percent, it's going to
be difficult like that. I mean, I hate to say
it like this. It just means the disinflation that you're
going to see this year is also transitory. And that's
the thing, and that's the thing that the FAT I
think has to wrestle with is that they haven't really
to me, they haven't told us a good kind of

(51:56):
framing around this idea of in proving composition of growth. Right,
real GDP growth is probably accelerating as inflation is coming off.
What does that mean, right? I mean because ultimately, if
real growth is getting better, that means you're putting pressure
on physical capacity, physical resources. Right. Your real growth is
what drives more employment. Real growth is what drives more production.

(52:18):
You know, that means capacitization goes up, and that is
what pushes prices up. So I think that's kind of
the thing that they have to wrestle with, which is
why I say it's difficult for the markets to get
the cuts that they are currently pricing. If I'm right
about the economy, if real growth is holding up and
we're growing above potential, then even if price inflation is moderating,

(52:42):
it's still going to be difficult for the FED to
cut in that environment. So let me push back on
all that, and let me give you my narrative has
to where the consensus might be right and where the
FED is wrong. And it's two parts, and I'll make
it really short. The first part is, hey, We've been
in a deflation stionary environment for the past three decades. Globalization, technology, automation, productivity,

(53:07):
all these factors have been deflationary for a long time.
The pandemic was a unique one off, right, and heading
into the pandemic, we are sixty percent services goods. Suddenly
we invert that, where services sixty goods. When everyone's stuck
at home, they're not going to hotels and f flying,
they're not going to movies, they're building, buying, doing all

(53:30):
this stuff just in time. Supply chain can't deal with it.
Prices spike on top of a decade long shortfall of
home construction, and during the pandemic, whoever could afford to
buy a second house or a third house did without
selling a house. So all this whatever little supply there
was that gets sucked up, and once that normalizes, inflation

(53:51):
should return to normal. However, following that's part A, Part
B is the FED doubles and then some mortgage rates.
Everybody who's looking to buy a starter home or uh,
you know, a a you know, a sub one million
dollar home, A lot of those folks are now priced
out of that market and would be buyers or renters

(54:13):
and Paradoxically, rising FOMC rates means higher mortgage rates, which
pours people into the rental market, making inflation higher. The FED,
if they want to stop inflation, should stop raising rates
and allow those renters to become home buyers. Where is
that thesis wrong? Well, I think on the globalization side,

(54:34):
I mean, we probably have a little bit more of
a home bias now. I mean, if there's one bipartisan
thing that's that's come about um from Trump to Biden,
it's this this sort of um having learned the justin
I mean we had, right, I mean, we had the
flattening out of the global supply chain, and now the
global supply chain is actually narrowing. We want to make it,
you know, more resistant to global shocks, and so I

(54:55):
think that that's probably inflationary. I mean, final assembly is
probably leaking out of the lowest cost destiny and we'll
have a big inventory build. But once that's done, that's
transitory also, isn't it. Well, I mean it just again
it goes back to this idea of what's driving inflation
over the longer run, and ultimately to me, it's about

(55:16):
labor market dynamics. And you know, I mean we had
a period of disinflation. It wasn't like but I'm inflation
was sort of stable in the twenty times. I mean,
Bernanke famously said, if inflation is the benchmark, I have
the best inflation record of any chairman, because it's basically
been two percent the entire time I've been I've been.
So he actually hit it right on the head. So

(55:37):
you know, so it wasn't like inflation was getting even
slower during the financial crisis. And so now, um, by
the way, I think it's hilarious that a massive financial
crisis leading to an inability for inflation get any traction
and he wants to take credit for But but I
think about now do GDP and wages over that same decade. Yeah,

(55:58):
I mean, it wasn't until the very end of that
decade had that real way just started to look a
bit better. But again, it's one of these interesting things
very where if you look at like consumer confidence, it
was very very it got very good after like so
once you started, particularly when gasoline prices started, when we
had the windfall from the positive supply shock and energy.
But um, you know I do think that, yeah, I mean,

(56:19):
there there's more, Um, we haven't really invested much in
in mining cap x um. If you have an incremental
pickup in global demand that could sort of royal energy markets. Um,
that's a risk. That's an inflationary risk we talked about.
I mentioned productivity. Productivity hasn't been a strong You have
experienced workers that are that are now leaving the workforce.
That means that the quality of your workforce isn't It's

(56:40):
going to take time to get that back up. So
I think there are interesting arguments on both sides of
this debate, but you know, for the short run, I
think it's really just about the labor markets. And the
FED keeps saying that they think things are out of balance,
and so that means that they're going to have to
bring it back into balance. So the consensus is either
no recession or a mild recession, and the FED stops

(57:04):
raising and by the end of the year their cutting rates.
You're saying, you think the consensus should listen to what
Jerome pal is telling them, because you think he's going
to do exactly what he says he's going to do. Yeah,
I mean the consensus right now is recession. That is
the consensus. If you look at the soft landing or

(57:25):
hard landing. It's not even about soft landing. It's a recession.
I mean, the consensus is overwhelmingly in a way I've
never I mean, I think if you surveyed, it's like
six recession of the if not more. Usually, when the
consensus is that overwhelming for the recession, you're already in one, right,
and we're not. So I recall deep into two thousand

(57:47):
and eight, there was still an argument as to whether
or not when we were in recession, when it started
six eight months earlier, and right in the middle of that,
people were still arguing, well, well, I remember one analyst
famously thinking that the FED was going to be hike
in the back half of two thousand and eight. Um. Right,
key feature, key distinction though of that period was that

(58:07):
we were seeing job loss month in and month out
over this first time. We're not seeing that now, and
I think that is an important sort of you know,
and you can talk about, oh, employment is coincident, or
it's lagging, or at the end of the day, initial
claims are low. That's a leading indicator. And um but
to me, again, it's not about the data as it's

(58:28):
coming and tell me why it keeps going right, that's
what's right. I mean, so, can we get a recession
with employment markets this strong, this tight? You can? But
I don't think the feed is going to give you
that right away. I mean, it's going to take a
little bit more time to play out. But more importantly,
it's about the mechanism, like how do you get the recession?

(58:50):
Like what is the mechan like, for example, is there
a massive financial shock that gets companies? So the thing
that I've been explorer is that one of one of
the ways you get recession, in my view, is through
an element of surprise. Right, So companies sort of think
things are gonna be okay and then something falls out
of bed, and that means that they have to cut
their hiring plans, adjust their capex budgets, clear out their inventories.

(59:11):
But what if we've been doing that for the last
six to nine months already, and now there's a risk
with inflation falling. Gas prices have come down. No one's
talking about that anymore. Natural gas prices are down, which
means you're gonna see lower utility bills. Food prices are
coming down, which means you'll see lower grocery bills. What
does that mean? That is a tale and for real
disposable income, So that should buoy demand. Now, if companies

(59:36):
are all on this side of the fence and they
think household demand is going to slow down and then
the opposite happens, what does that mean? That creates a
risk where you have this situation where the companies are
having to catch up to the end consumer. You can
have an inflation echo and a restarted real growth will
pick up as a result. And I think that's the
risk that I'm more likely to highlight now, and I

(59:58):
think that's something the consensus not really positioned for. And
I think that that's becoming the more increasingly the more
likely outcome, because we've been talking about a recession for
the last three quarters and it just hasn't happened. So
the question is is the bad news in stock prices
already or is the good news already in stock prices?

(01:00:20):
How do you contextualize that? I think the bad news
is in the price It is already in there. Well,
I mean Google earnings recession. Everyone's talking about, Oh that's
the next thing. Oh it's you know this, This move
in stocks is all about rates and the next you
to drop his earnings recession. How do you get an
earnings recession if nominal growth is running at five? Has

(01:00:41):
anyone mentioned about the dollar, like the dollars off ten percent?
Doesn't that have a mechanical effect on corporate earnings for
the multinationals at trade on the SMP five? And I
guess the other thing is in a weird way, like
interest rates coming down and people betting on the Fed
to kind of back off juice is the housing market.
Because you see home buildings stocks at a fifty two

(01:01:01):
week kid Now some recession like call me when rates
are going down and building stocks are going down, because
that would be a big problem, right, But that's not
what's happening today. You know how many how many? I
mean you've been around long after know like this sort
of cottage industry of nonsense on the street about oh,
the i s M is below fifty, the Fed's got
to come in and do something. How's that been working

(01:01:22):
out for the industrial stocks? Call industrials have been outperforming.
Caterpillar is another stock that's doing really well. So I
don't see it. I mean again, I think, I mean
the earnings recession call is is purely driven by like
you know, look the I ms below fifty. I draw
you over your chart of earnings, and it looks like
it lines up. So that's the earnings recession. But if

(01:01:44):
you peel back the onion a little bit and you
think about where's growth coming in, where is inflation, you're
still talking about a five percent ish nominal growth environment.
That is not consistent with earnings recession. In my view,
Let's talk a little bit about what's going on with earnings.
We have people like Elon Musk and Jamie Diamond screaming

(01:02:04):
we're gonna have a recession for what six months? Now?
Are you seeing a recession anywhere in any of the
corporate earnings data? You mentioned home builders, you mentioned manufacturers.
Where is this recession showing up? The recession is showing
up in the f R B US model, and that's
pretty much it. So I have a friend who says
to me, we're not going to get a contemporaneous recession.

(01:02:28):
It's going to be a rolling series of sector by
sector recessions. Oh, energy did well, now energy is depressed,
and then this sector is doing well. Manufacturer was depressed
last year and now it's doing well. Can you get
a rolling sector by sector recession or is that just
then that wouldn't be a recession. Okay, so what do
we see for earnings then? Well, I'm not a stock

(01:02:52):
market strategist, but what I will tell you is that
when you think of corporate profits, right, I mean, it's
largely based on an identity, right, I mean it's it's
basically revenue, right, less unit labor and unit non labor costs.
And so when you think about it through that lens,
I think revenues will reign steady because nominal growth is

(01:03:14):
holding up UM, So even though inflation is moderating, you'll
see real economic growth pickup. I think unit labor costs
will moderate somewhat UM as a labor markets kind of normalized.
I mean, we won't see as many people quitting and
that should take some of the pressure off. And we
see unit non labor costs coming down because supply chains

(01:03:36):
are using, commodity prices are easing, and so that should
be a reasonably healthy backdrop for corporate profits. The question
is is what is it you know for the markets?
Is if the FED is not cutting, that means that
rates will be higher, and all aso equal, higher rates
are not good for stocks. So when we talk about

(01:03:57):
margins last year, they hit all time high. Companies seem
to have no difficulty passing along input cost increases to
consumers and and some companies managed to pass along phantom
increases and managed to to see their margins widen. Um,
what are we thinking about overall margins in the face

(01:04:18):
of five and a quarter fed rates. Well, you'd expect
margins to come down somewhat. I mean, obviously they're very,
very high, um. But that also means that companies are
are probably more likely to spend some money, right, So
that's um that that's sort of the way and companies
spending money that also helps corporate earnings, right, So it's
about why the margins are coming down. A margin decline

(01:04:40):
that's driven by companies spending more on capex employment is
very different than a margin decline that's driven by UM
for productivity weakness, right, because in the in the former case,
there's an opportunity for companies to offset some of the
hit to their bottom line with a stronger top line. So, Um,
that's sort of the way I'm thinking about. So you

(01:05:01):
mentioned earlier sentiment. Generally, consumer sentiment has been not just bad,
but like below financial crisis bad. It doesn't make a
whole lot of sense to me. I'm curious as to
your thoughts given everything else you've said that's been so constructed.
It goes back to a discussion we're having earlier about
what you know, what's easier to form a political coalition
around employment or you've never seen this much of a

(01:05:24):
gap between attitudes about the jobs market and overall consumer
sentiment ever. Right, If you look at the Conference Board data,
which is you know, widely followed consumer sentiment number, um,
it's very weak. But if you look at the labor differential,
which is basically consumer attitudes about jobs, it's rarely been
this high. It's basically where it was right before the

(01:05:46):
pandemic in the nine late nineties, when the labor markets
are very very strong. So I think that speaks to
this inflation dynamic. Um, But what do we know about inflation, Barry?
At least in the things that people buy frequently, there's improvement.
I mean, gas prices finished last year lower than where
they started that, which is an amazing Statuste. You think

(01:06:09):
we aren't hearing enough, um, And then we know that
natural gas prices have come down somewhat. That will with
a lag bleed into household utility bills UM, and then
grocery bills will probably come down because agricultural commodities have
come in somewhat. So UM, all of that should provide
some tail into UM to consumer sentiment. And you know, look,

(01:06:30):
the stock markets are up about what three or four
percent so far this year. UM, that should help as well.
So you know, to me, if you think about what
drives consumer sentiment, its wealth, employment, inflation, and UM. All
three of those suggest consumer sentiment should be pretty strong.

(01:06:51):
But it really is below what you would expect given
the states. Well, I mean, well, it's because people are
kidding off the level of prices in some respects, not
the rate of change. So I would say that the
rate of change in consuming consumer confidence should be getting
better over the next several months. Let's jump to my
favorite questions that I asked all of our guests, starting
with the question that I really should retire my pandemic question.

(01:07:14):
Tell us what you've been streaming on Netflix or Amazon
or what have you? So my wife and I always
we try to watch the same shows. UM, so we've
been watching The Crown so good, such a good show. Um,
I think there's one more season coming still. Yeah, I
mean the last season was great, so we we we

(01:07:34):
Um Handmaids Tell is another one that we watch. Um,
she got me into this show called from Scratch. From scratch, Yeah,
it's what Zoe Saldanna sounds like. It's a tear jerker.
I mean, but it's. But you know, it took me
a little bit to get into it. But I did
get into it, more for her than for myself. But
you know, it was it was, it was well worth it.

(01:07:56):
I we need to start White Lotus. We haven't done
that yet. I watched the season. I haven't gotten enthusiastic
about the second season yet, which a lot of people
really liked. Um. Have you seen any of the Kaleidoscope?
It's kind of interesting. I haven't. What's it about? Um?
So the twist is you can watch it in any
order you like, except for the last episode. It's a

(01:08:18):
Highst sort of film, and you don't know who is
the mole, who's cheating on who, And it's told in
a very asynchronous way, where two weeks before the Highst,
six years before the heist, week after the hist It's
like each episode just plops you down in this random

(01:08:39):
time zone as opposed to telling the story chronologically, so
it kind of unfolds in a really and it's a
fabulous cast. It's really great. Uh, I got look into it. Yeah.
It dropped on Netflix a while ago and a number
of people recommended it. It's fun. There's a couple of
moments where you're like, don't do that, like you ever watching,

(01:08:59):
Like don't go in the house. It's like that, and
you're like, please don't make that mistake. And then certain
things like that. There's a funny little thing that happens
with a watch where like why would you make that
mistake that? Um, later on it's like, oh, maybe not
such a mistake. Maybe just just like all sorts of
really interesting things. It's it's not The Crown, which was

(01:09:21):
just spectacular, but it's interesting. And as I'm moving away
from Lockdown, I find myself I don't need episodes of anything.
It's it's limited to I think eight episodes done, which
is sort of like, um, the Queen's Gambit. It's like,
all right, I could get in and get out of
this and not be Uh. That's another one that we saw. Yeah,

(01:09:42):
that was a lot of fun tell us a little
bit about your mentors. You mentioned Rosenberg and Ethan. Who
else have been your mentors? Um, I mean those are
the two big ones, and I think those are two
great ones to have. Drew Madis would be another one. Um,
he's I think the head of investment strategy at meant
Life if I'm mistaken, and um, you know he and
I worked together at Morrow for a period of time,

(01:10:03):
So he would be someone else that I would, uh
that I would lead on quite a bit for you know,
just advice and not only economics, but just life. Him
he's got three kids, just like I do, so it's
uh there, No, he doesn't, and his kids are a
lot older than mine. But but so he's someone that
I would consider a mentor, not only from my career,

(01:10:24):
but for life as well. Tell us about some of
your favorite books and what are you reading right now?
So I have a confession, I don't really read books. Um.
I do read a lot of articles on Bloomberg and
opinion columns and Wall Street research, but I'm not a

(01:10:47):
big book Lee Cooperman says the same thing. He's like,
I read all day long. I can't remember the last
time I picked up a buck Um, I'm not. I'm
not a big book person. Definitely a challenge. Our final
two questions, what sort of advice would give to a
recent college grad who is interested in a career in
either economics finance research. What would you advise them? So

(01:11:10):
my advice would be just get your foot in the door,
because that's what I did, right. I mean, when I
was in college, I had no idea that there were
jobs like this. Oh, there are jobs that where you
just talk about macro and the economy all day long
and people pay you for that. I mean, it's it's great.
You would never think about it, And I think, Um,
if if I'm giving someone advice, I would say, started

(01:11:33):
a large institution, because I get that I'm at a
smaller one now. But when you're at a large one,
there's they have so many different departments and so many
different asset classes and so many different types of constituents
that they serve, right, and you can kind of see
every nook and cranny of what goes on in the
financial market space and financial services space. Um, and then

(01:11:54):
you can find your passion and UM. So I would say,
get your foot in in the door of one of
these big firms. And our final question, what do you
know about the world of macro and economic research and
marketing economics today that you wish you knew twenty plus
years or so ago when you were first getting started. Well,
I wish I had known back then that you know,

(01:12:16):
a lot of these indicators that people put their um
faith in are just really bogus. I mean I didn't,
I mean I can't. I had someone at me today
on Twitter about that's not what M three suggests. I'm like,
I thought we stopped reports. I mean, there's you know,
I you know, there used to be a time when
I thought someone overlaying a chart of manufacturing production in

(01:12:38):
the I s M was like, Wow, you really found
something really interesting there. Now I realized it's nonsense, you know,
And so what else are nonsensible indicators? Um? Well, I
think to me, the the I s M is the
one that I harp on the most because there's a
cottage industry of people that just drive their entire asset
allocation process off of it. Really shocking and there's nothing,

(01:13:03):
there's nothing those three purchasing managers that are surveyed by
I s M no about the world that you don't, right,
and so, um, I think that that's an indicator I
don't like, Um, I think you know, look what. To me,
in this business, it's about taking a holistic approach to data, right.
It's not about finding the one indicator, right, I mean, Oh,

(01:13:26):
look at this weekly leading index, it leads everything else. Well, no,
it's just an amalgam of like all these like financial
market variables. So why do I need that, you know?
I mean so, um, if it was that simple, there
wouldn't be you know, there is. I mean, you don't
have to believe like an efficient market theory to know
that if it was just one thing, there wouldn't be
all these people analyzing the same thing, right. So um,

(01:13:48):
it's it's just to me, it's about taking a holistic
approach to data, looking at all the indicators and also
remembering that what ultimately leads data is your narrative. You know,
people don't realize that, but if your narrative is right,
the leading indicators will lag your narrative. Do you see
what I mean? And I think that's to me, in
other words, contextualize the story so you know where it's

(01:14:11):
going to go exactly. To me, it's about the process, right,
I mean Why should I s M being below fifty now?
I mean I should be negative about things three months
from now. If all these other things I see happening,
like China reopening Europe or whatever. You can apply that
throughout all the different kinds of cycle. It's not the
data itself is not what's important. It's about getting your

(01:14:34):
thought process and your outlook correct, and then if you're
right about that, then the data will follow suit. Really fascinating.
Thank you, Neil for being so generous with your time.
We have been speaking with Renaissance Macro Research is Neil Datta,
who runs all of the economic research at the shop.
If you enjoy this conversation, we'll be sure and check

(01:14:55):
out any of our previous five hundred or so such
discussions that we you've had over the past eight years
nine years. You can find those on iTunes, Spotify, YouTube,
wherever you feed your podcast fix. Check out my daily
reads at Ridaltz dot com. Follow me on Twitter at
rit Halts. Follow all of the Bloomberg podcasts on Twitter

(01:15:17):
at podcasts. I would be remiss if I did not
thank the crack team that helps put these conversations together
each week. Justin Milner is my audio engineer. Attica val
Bron is my project manager. Sean Russo is my head
of research. Paris Wold is my producer. I'm Barry Ritholtz.
You've been listening to Masters in Business on Bloomberg Radio.