Constance Hunter Discusses International Finance

fund manager. Eventually UH did some work managing alternative investments before she ended up as chief economist at KPMG. This is a really interesting conversation I expect you will find in intriguing with no further ado, my conversation with Constance Hunter.

My guest today is Constance Hunter. She has been chief economist at KPMG since previously, she was the Deputy Chief Investment Officer for fixed income at ACTA Investment Managers, where she joined after fifteen years on the by side, investing globally in fixed income equities and foreign exchange. She is a member of the New York Association of Business Economics and one hundred Women in Finance. She also participates in the National Committee for US China Relations, working on track

to economic dialogues. She earned her master's degree in International Affairs at Columbia. Constance Hunter, Welcome to Bloomberg. Berry is so good to be here. So Constance, let's talk a little bit about your background. How did you find your way into finance? So a couple of ways. First, my father, uh worked for an investment bank in Philadelphia, and so there was investing going on in my family. That's where you grew up. I grew up in Philadelphia. And and

then how did you manage to make your way to Manhattan? Well, I went to ny U. But the other influence that got me into finance my very good friend father, Dan Bongovanni, was an avid reader, and so he was reading a book called The Coming Economic War with Japan, and I was, I know, this was the early eighties. I was in high school. And let me just let me just set the scene a little bit. The Japanese are dominating exports, They're buying Rockefell Or Center. They're gonna take over America,

take over America a little bit like China today. But we'll get back to that Uh. So, I remember he's reading this book the Coming Economic War with Japan, and the whole concept of an economic war seemed fascinating to me. And I was fourteen or fifteen, and so he ended up telling me about the book and I borrowed it. I read it. I don't you know how much of it went over my head, but it I was hooked. I was hooked that I not only on finance, but

on international finance. You end up at n y U. Was there a business or international relations in the undergraduate? So I did um Liberal Arts, So I have a b a. In economics. Uh, And I felt that was important. I wanted to have that broad philosophical grounding that a good liberal arts degree gives you, um in being able to think and baby being able to understand, uh, sort of history of Western thought, reading all of the great books. That's I think a good grounding for someone who's going

to spend their career thinking and so. Um. So that was my My undergraduate degree was in economics. And then you go to Columbia for a master's in International Relationship Master so it's a school of International and Public Affairs.

So my degree is a Master of International affairs, but I focused on economics and international economics, and so I had professors like jug desbug Waddy and Armenio Fraga, who was a adjunct professor when he was at Soros and then later went on to become the head of the Central Bank of Brazil, for example. So world famous UM faculty. Yes, just to say the very least. So you you come out with this international relations graduate degree, how does that

translate to a career on Wall Street? So interestingly enough, I was interviewing at Chase Manhattan Bank, so pre Chemical Bank merger. I mean, so you're talking n early late ninety three, early Ninet'm interviewing at Chase, and they were recruiting for the private bank, and I wasn't terribly interested in that. UM. I was also interviewing at a bankers Trust if anybody go back in time and remember bankers Trust for auto analyst position, so very heavily on economics.

International affairs is important. There's obviously trade component to that. So I'm they're interviewing at the private bank, and I see this research piece and it's a daily foreign exchange update on what happened overnight and what's going on with the currencies, and like it was one sentence, maybe two sentences about every single economy and a font that I couldn't read today to save my life. And and I saw this, and I thought, this is what I want

to do. I want to do this, And so I networked my way to the to the Foreign Exchange Department and the person who was responsible for this, and it turns out they were hiring and and so that person's name is chriss Igo, who was also I worked with him at ACCA later in my career, and um, he had interviewed PhD economists who would say, well, there's a perfect information and there's no foreign exchange markets, or you know that you can't make any extra money, why forecast them?

It's all the information is already in the price. And here I was coming in looking at the economics and the politics and and how they all interplayed with one another packed the foreign exchange market. So it was really the perfect first job out of graduate school for me. And it's funny that two of us are both sitting here holding reading glasses in our hands, and you're talking about funds. Let me mix this up a little bit

with you. McKenzie just came out with a study that said by the year almost a million jobs will have been replaced by and with technology. What does that tell you about what's going on in the labor market these days? Okay, so let's put this in a big context. The US labor market is how many people, hundred and fifty million people and fifty exactly, So this is percentagewise, a small percentage of total jobs. It sounds big, right, it's a

little Austin powers. One million jobs are going to disappear, right, But but the reality is, first of all, let's so contextualize it in terms of the whole labor market. There's two other things that need to be highlighted when thinking about this issue, and we're actually working on some search on this, which I can tell you about in more detail. But the first thing is they don't talk about what new jobs are going to be created, and that's a

really important thing to think about. They also don't talk about the areas where labor shortages and pending labor shortages intersect with the technology. So let me give you one example. As the trucking industry and long haul trucking, it's widely anticipated we're going to have self driving trucks. And while they aren't necessarily we're not necessarily going to have the robotics to do the loading of the truck, the unloading of the truck, the bringing of the goods into the

home or the store. Eventually, who knows. We're making progress in robotics, but just the driving part is certainly something the and the long haul driving part is something that could be automated. Young people don't want to do this job. It's a very old industry and and you know, you can't be on your little dopamine giving device all day when that is your job when you're driving a truck.

And so if we had a self driving truck, that could really help an industry that has had to continue to raise wages to get people to even consider working in that field. It's not something people want to do anymore. And that we're talking about right there. It's a it's a profession that has two and a half million people. So there's there's a match that that's happening in some cases where the disappearing of these jobs is a good thing. The second thing that they don't talk about, um is

the number of new jobs that could appear. So someone's got a design and build all those robotics. Well, and interestingly enough, right now there are more people being employed in in artificial intelligence and um robotics than than people that are being than jobs that are being destroyed. Now, I'm not saying that's going to go on forever, but if we look back historically too, when we had guilt, when artisans produced things where it took one guy a month to produce let's say an ax, right, and he

produced all parts of that acts. Then we moved away from artisans and we had factories and you had one producing the handle and one guy producing the top part of the metal part of the acts. And then you had then you had multiple people working in this factory and you could produce. You could have fifteen people producing a hundred axes in a month. Right. That's a representative example.

Those aren't the exact numbers, but the point being that you create actually created more jobs because the thing that you're producing became less expensive. But you created new types of jobs. So the idea of a clerical worker that didn't exist, right, You that that role of clerical worker. People to do the accounting, people to do hr management, people to do building management, all that kind of stuff evolved after we had corporate structure, which we couldn't have

until we had specialized jobs. So my suspicion is that we will have new jobs that evolve as a result of the technology that we're building. Now, let's jump right into where we are in the modern economy. On the perspective of a big accounting and consulting firm, they split the two pieces into different groups. Is that right? So we have some regulatory requirements that create Chinese walls, and we there are a long list of advisory services that

we cannot offer to our audit clients. Um. But this is a great business model because it diversifies our business. We have audit and tax um, and then we have our entire advisory business, which is very diverse. So we do things like data and analytics, we do things. We have an entire business called people and change, which when you think about what is happening in the labor force and the way technology is impacting firms and how they're

managing for that, how they're retraining their workers. Um, that's a that's a huge practice for us. For example, so you of course risk compliance, all that other stuff that traditionally expect someone like KPMG to do so. You originally were on the buy side, You were in an investor in fixed income and alternative investments. How has that colored how you see, uh, the world of economics, whether it's for an audit slash consulting firm or anyone else. What

does coming from the buy side due to your economic perspective? Well, for me, I think it's critical to my edge and and that is that I've spent most of my career using economics to make investment decisions and put money on the line. So that sort of classic UH saying I'd love to find a one handed economist. Right on the other hand, um and and certainly that that discipline I think is very important. And I think the other thing that it really um and that's sort of a chicken

and egg thing. I noticed this about myself when I was at Chase. I noticed that I had an ability to do pattern recognition and see when there might be opportunities in the market as a result of either shifting market data or shifting economic data and matching those two together and doing analysis on them. So because I had this ability to see inflection points, it pushed me from the cell side at chase into the by side, and while I was at on the Bye side, that's really

where I had my edge. And coming back into doing applied economics or business economics, I think when I go speak with either the leaders of our firm, our clients, when I write research, it's all oriented towards what is the inflection point we need to be paying attention to and how do you make money off of this inflection point. So let's address that precise topic. Where are we in the economic cycle today and where do you see the

next inflection point coming, both in terms of sectors or chronology. Yeah, so we're in the happy part of the cycle, We're in the we're in the end of the cycle probably, Although with that said, I firmly believe UH expansions don't die of old age, right, they need to bump into something. And so we have had consecutive months and this consecutive is really important, consecutive months of jobs growth. If you look back over previous recoveries, that is a streak that

is seventy longer than the previous record. So even though people aren't necessarily happy about the jobs mix that we have in the economy right now, that is still an unprecedented statistic, and it is allowed consumers to really feel very confident. We see that in the consumer confidence data. The consumer has been the backbone of the recovery. We haven't had as much investment, for example, as in previous recoveries, and so it's it's helping us sort of continue that

consumption boom. But it's well founded. Household balance sheets are fairly healthy, right, we haven't um In fact, because of the crisis, we actually had a bit of a line in in debt for households, mostly in the in the housing sector. But it's allowed us to have sort of a balanced recovery for the most part. And so in terms of inflection points, at some point, I know people

have been watching and waiting for this. I expect we're going to see some wage increases and we're seeing significant shortages in a very important sector and that is the construction sector. So the Associated General Contractors does a survey and there are a number of categories where over seventy of their respondents say they cannot find qualified workers and

that they have to go ahead and raise wages. How much of that is related to the fact that during the financial crisis and during the housing collapse, a huge number of immigrants who were actually contractors, builders, electricians, plumbers, etcetera. All went home, went back to Mexico or wherever because the jobs weren't here. And so you created this void. The economy created this void in that segment of the

labor force. So we lost about a million and a half construction jobs, and some of them were filled by immigrants, some of them were filled by native born individuals, and a lot of people started to do new things. They had to pivot to new careers, and they haven't been

drawn back into the construction sector. Um. Another thing that we had during the housing boom is we had people forego higher education and just leave high school and go start doing construction because it was a career where you could make a fair amount of money towards the end of the boom. And and so those people, a lot of them went back to university after the crisis and then retooled themselves. If we get frothy enough again, if the if the price of labor goes up enough, you

will draw people into that sector. The issue, of course, is that they won't have the skills, right, So some of these some of these jobs are our medium skilled jobs that you need to learn how to do a specialty where whether we're talking about electricians, plumbers, um carpenters, so you you can't just walk into that job. Now that we're ten years past the financial crisis, are things beginning to normalize in the world of economics, Yes, in

a way, there's still a big mystery. So even though I expect some of the labor shortage data that we're seeing, whether it's National Federation of Independent Business or this associated General Contractors, some of this labor shortage I expect to eventually translate into wage increases. But I'll tell you, the FETE has been waiting for this for a long time. We have all been waiting for this for a long time, and there is some slack in the labor market still

that that is um confusing. And I'll tell you why. Most people that have been out of the labor force for a period of time, they're not setting wages right, they're not the most desirable people to hire. They've had

skills atrophy. They come back in generally if they come back in at a lower rage, and it's not We've had a pickup in the participation rate, but not to the point where you would really expect this portion of the labor force to be influencing wages, and so it is perplexing to me, it is perplexing to the Fed. Um Janet Yellen has called the lack of inflation and mystery.

So we have normalized in some ways, but in this aspect of prices and whether um and and specifically related to wages we have we don't seem to have normalized. Although maybe we're all just misunderstanding the slack that's out there, or perhaps want a tipping point of higher wages, which I think in certain sectors is an absolute given. You've had a number of pretty high profile jobs in the world of finance. Does this tell us anything about women in finance? We know women have been let me man

explain to you women in finance. We have very interested in what you have to say. Well, we know that women have not been promoted. There aren't as many women on the board level, at the sea level, uh, managing assets, etcetera. It's it's uh disproportionately a boys club, although there are signs that that's starting to change. Tell us a little bit about your career path and what it was like being a woman in a world where these were, for

a long time traditionally male jobs. Well, I would say that I'm still in a very male dominated industry in general. Now at KPMG, we have a goal of having of our partners be women. And we're at twenty five now, so compared to Wall Street, that is definitely a better environment. And our CEO is a woman. We oh, Lynn Duddy is a woman. She's fabulous. She happens to be a woman. She's fabulous CEO and um. And so we've made a

concerted effort. And the reason that's important, and the reason I think that it's taken so long in places like Wall Street that are male dominated, is that there's an natural in group bias, right, so we tend to hire people who look like us and who who act like us and I share the same interests and and so it's it's understandable, and it pervades everything. It pervades the recruiting practices. It also pervades what when you look at young women and they look out, well, what do I

want to be when I grew up? Now, I was lucky I had My father was in finance, so he never had a bias that I shouldn't be in finance. In fact, he probably had a bias that I should be in finance, right, So so that I think gave me um an edge and uh and a unique perspective and approach that I never thought it was d that I would be in finance or that I would be

very successful in finance. Michelle Myers, who's one of the senior economists at Merrill Lynch, specifically said at in the current environment, there are now women who are role models, whether it's real Seabird or Lizzie and Sanders at Schwab or there's a whole run of different absolutely women you can name, but go back at generation there really weren't a whole lot of role models for women who wanted

to go to Wall Street. Well, let's focus on this because this issue of role models is really important and it's one of the things that's going to propel more women, and it's one of the reasons where you need a certain critical mass because if you were just the token woman, you don't get really from a firm perspective, you don't get necessarily all of the diversifying effects and all of the beneficial effects of having a more diverse perspective in

your workplace. But once you hit a critical mass, let's say it's you start to have a very different um type of conversation around certain things. Your marketing appeals to a broader segment of the purchasing population. Uh, you just um, you tend to have less fraud. They are all sorts of definite advantages to having a greater mix of men and women in an organization. So since you've joined the world of finance, what improvements have been made towards achieving

a better balance of males to females um in the workplace. So, certainly in the field of business economics now is different in academic economics. I was very fortunate to join the National Association for Business Economics as a young economist, and NAVE as it's called for short, has always had women leaders within the organization. So we had women presidents of NAVE, people like Maureen Haver who founded Haver Analytics, Diane Swank

when she was the chief economist at Mazzaro. Uh, Ellen Hughes Cromwick who used to be the chief economy missed it Ford. Uh you know I could, I could list more right, and so that I saw these women who were chief economists as role models and that, and I saw women attending our meetings. Um, now when I have I have a young woman on my team who you who I brought into I said, you have to start at name. Young, You're going to learn so much it

will be great. And to me, coming from Wall Street, I thought, well, Name is great because we probably have in the membership about women and in leadership probably about women. So people on the board of Name, people who are presidents of Name. And she's like, no, it's so she sees all men, whereas I see, Oh, my gosh, that's so much improvement because my frame of reference. So this makes me excited for a couple of reasons. One, I got to see progress too. It's obviously not yet and

the next generation is going to make that happen. The fact that it's women, they look at its oh, this isn't remotely what it Maybe it's thirty five, but still compared with twenty years ago, it's miles ahead. And the fact that it's looked at as oh, they're not getting this done is pretty that's pretty amazing. So we now have men who are feminists and and mainstream men people like Justin Trudeau, who's the Prime Minister of Canada. Right, and now I've heard I've heard more and more men

say I'm a feminist. And and the thing is is that it takes both men and women to make this happen. It takes us working together. This isn't just a woman's cause. And it's not even just a men of men who are fathers of daughters cause. Right. It benefits everybody. And so the more men that can get out there and say, yeah, I'm also a feminist, it benefits them. It benefits them financially, it benefits them socially, and we're starting to see that

more and more. Let me ask you a question that will give the compliance people at KPMG a heart attack, since you you brought up Trudeau in Canada. I am absolutely fascinated by the concept that Canada will become the first G seven country that's going to completely legalize marijuana. I'm fascinating. I don't smoke weed. I mean it's not

I'm you know, not a college kid anymore. But I'm fascinated from an economic perspective what that's going to do to a country in terms of taxing, it taking money away from the black market and saving countless amounts of money that's currently spent incarcerating people for you know, simple marijuana expenses. What is the potential economic impact of of something like that? There? And then the harder question is,

and what does that due to the United States? So Canada produces actually a lot of marijuana over one of theirs, one of their bigger crops. I did not know that, and uh, and so it'll be it'll be very interesting. Now there is a lot of data which suggests that if you smoke or I guess now you can eat marijuana and under the age of certainly, it really is very very bad for you, sod for brain development, brain for a different precisely. So unless they can manage that

part of it, which I think will be challenging. They do a pretty good job with that with alcohol and with cigarettes, certainly with twenty one. You know, you're not keeping weed away from kids today regardless. So and they have to be smarter about labeling gummy bears so it doesn't look like candy and that sort of stuff. I mean, see, when we look at Colorado and Seattle and California, they've all done a pretty mediocre job. It's kind of Hey,

it's a case of first impression. They eventually figured out if you make the stuff look like candy and leaving around, guess what kids are gonna eat it? But you know,

they've kind of a learned that lesson. Assuming Canada addresses that part of it and handles it well, um, then it's it's like you said that the benefit is twofold, right, And I don't know the size of the market in Canada or their incarceration rate for this sort of thing, but you get rid of the cost of incarcerating, so then we have more people in your labor force, right, So that's always a good thing when we have these population declines. And then you also have the economic benefit

of this industry. And if we based it on the rest of the sin industry, right, it's pretty large. Let's talk a little bit about the state of the economy today, and there are so many different things we could go over. I have to start with the issue of the Federal reserve tightening normalizing first, what should we call what the Federal Reserve is doing? Well, they're definitely raising rates, so they're tightening. Okay, they're selling assets off of their balance sheet.

Are they selling them or they letting them just roll off when there My understanding is they're doing both. That is, in effect a tightening. Now there's a debate about this, right, is it the stock of the Fed's balance sheets that is the size of the balance sheet or is it the flow that is the change? And generally speaking, the Fed thinks it's the stock. Wall Street thinks it's the flow.

The Fed might end up being right, or I think the Fed is being proven correct because we look at ten yere yields and they're much lower than they were, for example, but that's due to a confluence. Are you surprised that Wall Street looks at the flow as opposed to the balance sheet. That's how the street gets paid, so of course that's what matters to them. There is

a little classic confirmation bias. So what about the idea of the Fed isn't so much tightening as we're still at very accommodative rates and they're just getting off their emergency footing. This is really normalization. So I went back and looked at real tenure yields. Right over the last four decades, average is about two. Absolutly, there's wide variations, but the average is about two. Real real adjusted for inflation.

Right ten year yields we are now almost zero, so still very kind, We are very it's by that metric we are still pretty accommodated emergency funding. There'n't really no other way to describe that. By the way, I find myself having to always define real because some people anytime I mentioned real, I always want the audience to hear

after inflation, after inflation adjusted. Let's talk about the yield curve. Historically, an inverted yield curve was a sign of an impending and recession, not immediately, but a year or two later. And a lot of people are all up in arms over the flattening yield curve as the FED is tightening. What what do you think about what's taking place in that part of the curve. So a few things. One is, we may very well be a year and a half away from the next recession. Uh that is, that is

very possible. But you also have to look at what's going on globally in terms of central bank balance sheets. So if we look globally right now, we have fourteen trillion dollars of central bank balance sheets. Now the feed is about four and a half um four point three I think to be exact and trillion. And so we have the Bank of Japan and the e c B, both with significant balance sheets. So just to put this in context, the FEEDS balance sheet is of the U

S economy. The ECB balance sheet is thirty eight percent of the of the European economy, the EU economy or I'm sorry that the Monetary Union, right, And Japan's by balance sheet is ninety one per cent of GDP at the Bank of Japan's balance sheet. So these are very very significant amounts of capital, and they're influencing bond markets all over the world, but especially the tenure yield. So

let's let's talk about that. You have the United States, which really seemed to get hit by the financial crisis first and then it spread globally um, and you also have the United States is the first to really aggressively respond to the financial crisis, and then Japan and then Europe. Is how unusual is it to have the three major economic centers um of the world plus China all sort of out of phase with each other in terms of economic,

fiscal and especially monetary policy. Well, yes, it's both the monetary and the fiscal I think that's really important because Europe did fiscal tightening after the Great Recession Sterity right into the teeth of of collapse turns out not an especially great UH policy. Well, that and then the ECB raised rates prematurely, if you recall, and and that coincided with the Greek crisis and sort of spilled over into

widening bonnields in Italy and Spain, Portugal, Ireland. UH. Now, a lot of these economies have come out the other side right or they're they're on the upswing. So really, since Draggy did his whatever it takes speech, and since they really started growing the balance sheet, you've seen consecutive months of jobs growth, You've seen consumption, you've seen bank lending expand. I mean to get to negative rates to do it, but you still saw the bank lending expand.

And that's helped give the European economies legs. But like you said, they're not synchronized with and the fiscal and the fiscal austerity has waned right there, so they've they've moved through that. So I would say there maybe two or three years behind us in terms of the business coal um if you look at Japan, how but in terms of the monetary cycle, how far are they behind the US that is sort of coming off, I would say I would say about two years behind, maybe eighteen

eighteen months to two years. Well, Japan is its own special case, and it's its own special case because it's demographics are so much worse. Right, so they they're working age population began to decline in which was right about the time their debt bubble burst. What was the peak in the of the nine I think it was nine, and so it took a little while for the debt bubble to fully burst. And then they of course have longevity, so people living in retirement for longer. So that's a

drag fiscally, uh, and it's also disinflationary or deflationary. That damn healthy lifestyle and low red meat diet that's right, is causing that that issue and almost zero immigration where very immigration, fairly uniform society and culture. But even with that said, is the year the European the Europe's working age population started to decline, and our working age population is merely growing at a slower rate. So we're growing

at zero point three percent a year. And it's problem yes, absolutely, but it's problematic but it's definitely better than if it was outright declining like you have in Japan. So that in Japan is now declining at a rate of zero point three percent per year, and that puts Japan in a very very special case. And something that and and and their debt to GDP ratio is a hud. Nobody else is even close. Nobody else is even close. But

I'll tell you something that they're doing. So if you look at the debt held by the public versus the debt held by the central bank, because they have been purchasing so much of the debt, the debt held by the public has gone down to of debt to GDP. Yes, And and I'm glad we introduced the concept of real versus nominal before because if you look at their nominal growth rate, it is about two basis points above their ten uere yield, and that is allowing them to obtain

greater and greater fiscal health. So they're using this negative rate policy and this extreme balance sheet example again balance

sheet expansion again to their GDP. Right, they're using this to uh refinance their government debt effectively at a much lower rate well negative rates negative So imagine your corporation and you're overindebted and you can't default, but over time you can refinance your debt with negative rates, meaning you get paid for your debt basically, which is which is shocking.

You know, you hinted at something I want to expand on because it's so fascinating when when we talk about the declining labor for US, we really have to discuss the falling um fertility rates and the falling um I forgot the replacement percentage what it's called, just the declining birth rates effectively in Japan, in Europe, and up until recently, the United States was marginally positive. I think we just slipped negative also in terms of our birth replacement rate

replacement rate of new birth versus deaths. The US population is becoming fairly stable, and it's outright shrinking in Europe and Japan. What does this mean for the economy ten years since? Yeah, so it's very challenging. And let's not forget China's working age populations started to decline this year right now, how much of that has to do with the one child at the child right so, they haven't been at replacement rate for decades now. And even though

that rule has been overturned. People are not rushing to have more than one child. It's not it's not like the minute that was overturned. In the next year you saw a whole bunch of two and three child families. Right now. That may change, and they may may need to do things and create incentives for that, but that it's it's not going to change overnight. Um and so. And then we have South Korea. They're working age population started to decline. So this is a phenomenon in a

lot of a lot of different places. So it's starting to impact emerging markets more in Asia, more in Asia x X India than in Latin America or Africa. Because I've thought of this as a developed world issue, not an emerging markets issue. Are you saying that this is even spilling fast forward fifteen years and it's going to be Look at Mexico. Their birth rates are declining. It's

one of the reasons we have. There are two reasons we have fewer Mexican immigrants into the U. S M. Why the flow is actually been the other direction first of the wall, and then what's the what's the other reason. So as their birth rates have declined, they've needed more labor in their own economy. Right, So there's just a few were people that come here are going up their and their wages have been going up a little bit more so. So not the wall, and we actually have flow.

The flow has actually gone the other direction for several years. But that's an aside since the financial crisis, since the and which which loops back into when we were talking about housing earlier. Right. So anyway, we are digressing massively here. So let me get us back on track. Something about the yield curve. I think we started with, yes, and and so this these disinflationary or deflationary pressures are also

distorting the shape of the yeld curve. So you have you have a completely new demographic phenomenon that aside from a brief period uh during the Great Depression when we had a declining working age population for a little blip of time about seven years UM, we have never had before and we've never and and while we have that, we did not have the longevity that we're having now. Right.

So the combination of these two things disinflationary um disinflationary meaning you're not seeing inflation go up and the rate of inflation is going down correct, not not outright deflationary, just five four two inflation or one and a half percent these days, right, correct? So what does that tell us that the future economy looks like? If if you if you had a draw a conclusion from the disinflation in the system, is that informing us of anything? So a few things to say about that. One is that

I'm going to introduce the concept of potential GDP. So in its simplest form, potential GDP is the sum of the growth rate of the working age population plus the growth rate of productivity. And historically, if we look back fifty years, we had average working age population growth of one point six percent, average productivity growth of one point eight. Quickly, that gets us to a three point six percent potential GDP.

We now have a working age population growth rate of zero point three and until recently, productivity during the recovery was averaging zero point eight, so that's a one point one potential GDP. Now productivity is picked up to one point five, so that gets us up to about a one point eight percent potential GDP, which is the growth rate that you can grow without inducing inflation in the economy.

It's that mythical beast equilibrium. Let me ask you a question about productivity, because this is an ongoing UM question that I keep wrestling with, and every time I have an economist in front of me, I feel obligated to ask the question. In the real world, we are all experiencing a massive amount of personal productivity gains software the ability to walk around with with a powerful computer in my pocket. That's ten x what the what the astronauts

took to the moon. UM is in a amazing productivity enhancer. And I'm not being on Facebook, so I don't get the productivity killing aspect of it, although I guess Twitter substitutes for that. But in the office, what we're capable of doing in terms of communicating with clients and doing screen shares to say, show them different charts and documents and this and that, it feels like we're doing so much more with a handful of people versus a hundred

people that was required a few years ago. It makes me ask the question, do we have a productivity problem or do we have a problem in measuring productivity? It depends on the industry. So in finance, you're in an industry whereas there's been huge measured productivity gains, all right, So what you're saying makes sense. It's what's shown in the data, and it is true for other financial services firms.

This is something that is puzzling everybody because we can't change the birth rate, so we're only going to get saved by increasing productivity. Although some Nordic countries are actually running p s a s to encourage people to go on vacation in the South of France and leave their birth control at home. I mean they're literally television commercials

for that. I don't see that happening here. That said, but that's still a long term prospect, right, You're still it's twenty one years until you see benefit from that, maybe twenty six given the current education rates. So it's not an immediate solution, right. We need to do something in the intervening years. And the only savior then is productivity.

Because so many people are focusing on this. One of the things that the o e c D did was they did a study on the diffusion of technology throughout firms. So it may be Barry that you guys are really advanced and early adopters of technology, no doubt about that. So so, but the diffusion is important. So they looked at the productivity at the firm level, so not at the economy wide level, at the firm level of the frontier firm, so that the top five percent versus everybody else.

And if you look at these graphs, it's really alarming. The gap is really really wide, and it's wider in services than it is in manufacturing. Yes, and and and the question is will we get to a point where this gap closes, like what is the cause of this

lack of diffusion? And and is there a tipping point where we can start to see wider diffusion, meaning that a handful of firms are especially productive and the rest of the economic force um or firms and businesses are lagging in products are really not reaping the rewards of the technological advances we've had over the last fifteen years. There is a have and have not way of structuring. We're looking at just about every aspect of our economy. It is so bifurcated, and that duality exists in so

many places. It's fascinating. I had never heard of the this diffusion between productivity, but I guess it makes some sense because you would think the early adapters of technology and other productivity hanswers would see not only a gain, but a giant differential against their competitors who aren't adopting

the newest technology. We're actually studying this at KPMG, so we're taking the O A C D work and we're expanding it and and building a knowledge database of a multitude of different firms across different countries, across different sectors and um hopefully we'll have some research out on that in the next six to nine months. We have been speaking with Constance Hunter. She is the chief economist at KPMG.

If you enjoy this conversation, be sure and check out our podcast extras, where we keep the tape rolling and continue to discuss all things economic. You can find that at iTunes, overcast, SoundCloud, Bloomberg, or wherever final podcasts are sold. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Be sure and check out my daily column. It's on Bloomberg View dot com. You could follow me on Twitter at rid Halts.

I'm Barry rid Halts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast, Constance. Thank you so much for doing this. I have been looking forward to this for a while. I give economists a lot of grief for for both making terrible predictions or or predictions that turn out not to be accurate, and for the most part, missing the financial crisis, which we talked about earlier. You're not big into making a lot of predictions.

I don't really. I see you more as analyzing the situation than doing the usual Wall Street forecast. So I have to ask why our economists so bad at making forecasts and and how did they miss the financial crisis? Well, and you probably also know that I didn't miss the financial crisis, so I was short a lot of things, uh that went down, which is always fun, which was it's it's actually nerve wracking to be honest with you, and people give you so much grief for it. Totally.

I remember when I first started shorting ubs and oh, they have this activist investor in there. You don't know what you're doing. It's gonna go up, bah blah blah blah. And you know you're constantly second guessing yourself, more so on a short than along right, because the nature of things is to go up for the most part. Over the long term, and everybody that works at a company, their entire goal is to make everything go up there

there there. They make new plan every year, they're they're incentivizing their employees, they're cutting costs, like every single company is focus done that as well, and so that is the nature of things. So it's very nerve racking to be short. But nevertheless, that and the theoretical infinite losses kind of hangs over your head a little bit that in the theoretical infinite losses or the actual infinite losses that can occur, people of you know, what's that? What's

that famous Keynes expression? The market can remain irrational a lot longer than you can remain solvent. So so in answering your question, I think it is because of several things. First, models, I've been working on shocking my model to give it a recession because I think that we're going to see some labor shortages, that those labor shortages are going to cause wage increases, that those wage increases are going to push up inflation, that that increase in inflation, increase in

prices will reduce demand. That reduction in demand will help spur us into the next recession. Plus as wages go up, as there are shortages, we're going to get to a point I would imagine where you can't find someone at any price, and so you want to expand your business, but you just can't at any price. Well, there's some professions where we just for example, let's all this technology, you can't find data scientists at any place. There's a

handful of them, there's an handful of programmers there. They're really top notch. And so everybody is competing in this space for the same talent. And it's a very new set of skills. So isn't that just temporary? Aren't we going to see more people come in from Indian China and more graduate degrees and people moving into the space just because it's so lucrative. Sure, but that doesn't mean that we're going to see shortages of that labor over

the next couple of years. Right. It takes time for those people to get trained and for people to move into a professional Yeah, six years, a decade something like that. So the first thing is that what I had to do to shock this model because it just kind of bump it ump, goes along on trend and and it would never forecast a recession unless you made it forecast recession, right, So you have to look for tipping points. So there were there were three things that allowed me to call

the financial crisis. And I didn't call it as big as it ended up being, right because that was just large. But I've done this my whole career, the same with Russia crisis, right. So so the thing that allowed me to call the financial crisis was I was looking at mortgage equity withdrawal and g Well, not only was it giant, but if you look historically, it used to be a random walk around a hundred and fifty billion a quarter, and we go up, we'd go down. Basically a random walk.

You couldn't there's no way to predict it. It It was a modest number that practically in the US fifteen trillion dollar economy is a rounding era. But also its pattern was was some some quarters were up, somewhere down. It was a random walk. It wasn't like it was a hundred and fifty billion every quarter got withdrawn. It was

up and down. Wasn't on trend the way it became right, So we started withdrawing more and withdrawing more and withdrawing more to the point where we had withdrawn three and a half trillion dollars and you could just see that this there's no way it could keep going. There's just no It made no sense. It made absolutely no sense.

And then if you look at the demographics, that made no sense either, because you could see that the working age population started to decline in two thousand, so you could see it's shifting demographic demand if you were looking

for it, right. But you have to be open and searching for the things that are going to be inflection points, and then you have to have the conviction to shock your model, in other words, come up with some set of exogenius or or maybe normal economic shifts that tip an economy into a recession or or or into a big growth period as well. Um So, so I think you have to be willing to look for those things and and and understand inflection points. But that is not

the way most people study economics necessarily. And I'm fortunate that I have this pattern recognition skill combined with a lifetime of investing that has honed that skill. So the other question I didn't get to that I have to ask you about we really haven't touched upon China And let's talk a little bit about China for a moment. What do you see going on in China? Is it a growth area? Is it a risk? Does China become the biggest economy by far? Just extrapolating trends out for forever.

What is the role of China in the modern economy? So China is a big economy. It's the same size as the US. Obviously, their population is much larger, so their per capita GDP is smaller. So they're big, but they're not rich, right, They're not first world economy. Obviously the coast are rich. You've multiple because it's so large, you have many different China's. But if we just think about that for a second, their sheer size um makes

them an amazing market. And if we think about it in the context of what's happening with artificial intelligence and data and analytics, you have huge amounts of data there um, which is an interesting, uh situation given our modern focus on platform companies and and um the network effect. Right, So you have that sort of on steroids in China, and it's interesting to watch. However, like any economy, imbalances developed and China is still a command economy. It is not.

Let's not mistake it for a market economy. It has some features of a market economy, but it has many more features of a command economy. They're essentially planned communist regime that seems to dabble in capitalism precisely. Okay, So I just had to touch upon that because I know it's it's such a fascinating area. So I think China is gonna see some bumps in the road that are going to surprise people over the next two to three years. Do those bumps in the road have the potential to

tip any major economies into a recession? Yeah, I think they might. And and so if you look back right, we were at three percent almost on the tenure if you use the p m I index, uh, seventy nine percent of the world was growing. And if you look

at what happened in China, China's demand shifted downward. And so what I look at I look at a hole host and we saw that across commodities especially well especially and so if you look at China's imports and you use the O E C D data, and this is important because they get the real the real number, not the nominal number. Because obviously for commodities there's a huge fluctuation in nominal price changes. And they compile the data using all of China's trading partners, so they don't rely

on the Chinese data collection. And this is important because we all know that there are some question marks around China's data collection. They make Bernie made off look like he was actually using real numbers. That that's what you can't say, but I can set you. I cannot say that. So in any case, um, what we saw was a big year, your year over year decline in imports and this impacted all of the commodity producers Australia, Russia, South Africa, Brazil, you name it. And we felt only six of the

pm I reporting countries experiencing growth. So let's in the last and so we had a massive impact, I guess. So when to answer your question, it could have a very significant impact on global liquidity and global demand. All right, So now in our remaining minutes, let's jump to our favorite questions. Tell us about the most important thing people

don't know about your background. So this is a tough question to answer to, Mary, I know, I like, I mean, one question is you know genos or Pats, I can ask you that, but give us okay, So that could be and with not without okay. So that's if you know about Philadelphia, about your people email what that was she talking? You can google there's an NPR story about this,

with or without, and Pats got it. So I think people don't know because it's been some time has passed that I used to invest in the former Soviet Union. I have traveled all over the former Soviet Union. I've been a mile underground in the nickel mine. Really, yeah, you know, I look at the Soviet Union as an organized crime family with a standing army attached? Is that is that an exaggeration? Or well, back when I was there, it was in the hopeful days of glassnost Prestoika, right, um,

Yeltson was was president. He was he was trying to reform. Now was there some corruption, Yes, there were? They're oligarchs most definitely. Are you surprised that the way Russia has changed to Underputin? Not really? You know when he first came, so, yelts In hand picked him, which is interesting, that's yeah. And and and Putin came into power and let Yelson live and just as well, you know, pre Gorbachev, this was not the way of Soviet power transition or Russian

power transition. So he was a drunk old man at that point though, wasn't It was pretty harmless, um, but you could tell that it was a very different approach, a very very different approach. And remember they had they were just coming off the default and devaluation, right oil was it about twenty barrel, So we had to do something to get the economy going and to do things and and coming off of that crisis, and what happened in his first decade in power really improved people's lives.

So the loyalty that he has among Russians who remember that time period is very very high. Some people have said that he is actually the wealthiest man in the world than he's worth three. I have heard that from a lot of reliable sources. Really, so it's not number two. That's fascinating. Early mentors. Tell us about some of your early mentors. So I think my earliest mentor was probably my father, who uh had me calculate saber metrics and baseball. Yeah,

learned That's how I learned statistics. And he he would he would This is back when people would read the Wall Street Journal and look at all the stock metrics on the back of the back pages of the journal. So he taught me what a pe was and dividends pre money ball, pre money ball. This is the seventies, so you were literally doing this with baseball stats or with baseball stats, with baseball stats, NI six Philadelphia Phillies World Series, rally fingers. That's right that I'm old enough

to remember. That's that is impressive. You're gonna have more googling and more more questions that mustash. Who could forget that? Must um? And then I had really amazing professors like Columbia. So we had a class that was taught by two gentlemen who were at George Soros running money for George at the time. And so it was Armenio Fraga and

Robert Johnston. Robert Johnson is now with i NET Institute for New Economic Thinking, and Armenia Fraga went on to be the head of Brazil's Central Bank and then has started a fund called Cavilla. I think, um it's been around for for a decade or more. So these were two people who really it was a little confirmation bias on my part, but they really solidified this idea that you need to read widely on a lot of different subjects. You need to be a student of history, you need

to be a student of people. You need to understand as many different financial crises as you possibly can. So this was right after the UH Nordic banking crisis, right, so we were delving into what was the cause of that Nordic banking crisis? Um, so it was it was those were two really just um big, big thinkers who had a very strong influence on the way I practice economics and the way I invest. So I've interviewed almost

a hundred seventy people here. I can't tell you how often the issue of being well rounded, being well read comes up over and over and over again from people.

Uh and if you read what Charlie Munger and Warren Buffett and Howard Marks has said this, and Cliff Astnes has said this, and Bill McNab a vanguard, its time and time and time again people say, if you were not well rounded, well read, if you're just focused in a tiny niche within finance, you won't be able to do that job well because you need to be outside of that specialty in order to develop skills and that specialty, which lead me to everybody's favorite question, tell us about

some of your favorite books and what you're reading now. Okay, So I am actually rereading a book that was my mother's book called The Worldly Philosophers, which is yes, it's a great book about all of the sort of foremost economists that are the basis of economic theory. Right. So Adam Smith keenes Um, I think that he has a chapter on Veblen. Uh. Yeah, yeah, it's a it's a great it's a great book. And then uh, I love reading biographies, and I love reading autobiographies of the few

great ones around. Oh, there are many great ones. So one of one of my favorite biographies that I read a long time ago was called West with the Night by Beryl West. West with the Night. It's by Beryl Markham and she was a female pilot in East Africa in the thirties and she made money taking people on hunting trips. Yeah, it's a great it's a great book.

And um. One of the things that she talked about in the book was how the elephants would know that the planes were coming and then it meant that they were going to be shot and they would literally take. She talks about how the the largest female elephant would often hide with her head in a tree, so you couldn't see if it was a male or female. You couldn't see the tusks, while the hole rest of the herd, including the bull, would go off away from where the

plane was. And then when they were far enough away, the female elephant would bring her head out, and they would be circling above, kind of waiting and waiting, and it turns out it was the female and not the bull. And then they would they want the bull with the tust,

and now they had lost the herd. And so this this intelligence that these animals possessed, and just the way she tells the story, and and so I just think again, to go back to your point of being well rounded and the different ways that people think creatively in the different life experiences and things you can learn, it's just endless. Any other modern any modern biographies you're looking at or read. I have a giant stack of things I'm dying my reading list I can I purchase at a much greater

rate than I could possibly ever read. I call that the bought to read ratio. I actually one one. I actually went back and made a list of everything I purchased in the previous year and then how much I read. And you end up with like a three to one ratio. For every three books you bought this year, you've probably read one. Well, I'm definitely a ten to one. So I'm definitely because every year, so twice a year I do here's my favorite books for the winter. Here in

my summer books and in the fall. I said, you know what, let me just go to my bookshelf and pick ten books that I want read that I haven't read that are sitting there and it's embarrassing. It's like, how have I not read this? So I have It's a first all problem, though, Barry, it's a good first of all problem. It's a very good first I have a so I'll give you. I'm going to a reference. So I have, I have Grant, I have Springsteen, and I have Galileo on my bookshelf. Oh, I want to

read Springsteen's biography. Let me get to my last two questions, my favorite two questions that I have to ask you because you and I keep digressing. Um, So a millennial comes to you when they say they want they're thinking of a career in finance or a recent college graduate. What sort of advice would you give them? Okay, so you need to have rapacious curiosity, rapacious curiosity, and you need to indulge your curiosity. You need to read, you need to learn, You need to really enjoy finding out

about the world. It helps if you are doing something you are infinitely curious about. Right. If you're not is about it, you're not going to be engaged. You're not gonna love it. And and you can't only do what you love. Every job has has parts that are that are annoying or tedious, so you need to do those two. You need to do what I call play the scales. Right, so it doesn't matter to play the scale, to learn the basics and practice the basics over and over and

over again. So UM, I still go and make my own graphs sometimes well not by hand, no, in havior analytics. But I still go in and and immerse myself in the data, do my own uh EViews calculations, just because it keeps your you keep your your fingers in the dirt, so to speak. Um, And then I would say, get in before the boss and leave after the boss, all right,

And the last question that our favorite question. What is it that you know about economics and investing today that you wish you knew twenty years ago when you started? Everything is the knowing, just the amount of knowledge you have, and how that becomes cumulative. It's it's so valuable, and and knowing the history, just having it your fingertips, having experienced, you know, having experienced crisis. So what I experienced the Russia crisis and as we were approaching the dot com crisis,

and that was raising reins. I said, you know what, I think I've seen this movie before. I think I know how this is probably going to end right. And so every every experience becomes cumulative and it helps you if you let it. We have been speaking with Constance Hunter. She is the chief economist at KPMG. If you enjoy this conversation, look up an Inch or Down an Inch on Apple iTunes and you could see any of the other hundred and seventy five such podcasts we have recorded previously.

We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I would be remiss if I did not thank my crack staff that helps to put this together. Taylor Riggs is our booker, Medina Parwana is our recording producer. Michael Batnick is our head of research, and Attica Valbron is our business director. I'm Barry Ritolts. You've been listening to Masters in Business on Bloomberg Radio.