David R. Kotok on Fed Studies of Pandemic Shocks (Podcast)

funny is is not ha funny, but just unusual funny. Uh. He is the nexus of a network of people, very influential folks within the world of finance, asset management, economics, public policy uh, Federal Reserve and monetary policy. Uh. He international relations and global interdependent inns. Uh. He has really created one of these careers where he is a very consequential individual, far over what you might expect just from you know, a quick read of his bio. I've been

going to his events. I don't know how I managed to wrangle an invitation all the way back in oh eight or oh nine. Maybe it was when I was writing about the financial crisis before the financial crisis that got me somehow an invite, but it really became one of my favorite things I do each year as we go up to Maine every August and and go fishing. And I have met people who have become lifelong friends

from from this event. I have engaged in in deals and transactions and media events and all manner of things that came out of this sort of miniature VOS that takes place in private on the lakes and streams and in the woods of Maine. It's it's really an amazing legacy that he's created for himself from this experience. And uh, I find him to just be one of those rare and unique individuals who just makes everybody around him that

much better. So rather than me just babbling on and on, let me just say, with no further ado, my conversation with Cumberland's David Kotok. This is Mesters in Business with Very Renaults on Bloomberg Radio. My extra special guest this week is one of my favorite people world of finance. David Kotok is co founder, chairman, and chief investment officer of Cumberland Advisers, which runs about four billion dollars in

plying assets. He is the author of numerous books, including Adventures in Muni Land, from Bull to Bear with ETFs. His most recent publications include Lessons from Fucidities and Zeka Lessons from a Pandemic. He comes to us with three degrees from the Wharton School at the University of Pennsylvania. David Kotok, Welcome back to Bloomberg, Barry. It took pleasure. Indeed, we made it this far through the pandemic, and we've made it on a number of fishing trips and experiences

for many years. And so I'm delighted to be here one and to be on the conversation, in the conversation with you, and that you were here as well. So we're going to circle back to some of the writings you've done, but let's just start out talking about what you were referencing these past two years. Market and an economy working its way through a global pandemic. As an investor, what do you make of this whole period, Well, you know, it's an interesting, um, it's an interesting way to start

the discussion. I've studied pandemics as from you, and I spoke about folks want some normalcy, they want business cycles, they want the traditional metrics. Pandemics don't work that way. They never have throughout history, and this one is no different. And therefore market agents and people who do this type of analysis and examination of this COVID pandemic who haven't studied history miss the degree of the shock of a pandemic. And so what I make of this is how few

people have really studied the history. There are some, of course who have. You and I spoke about that, but uh, not a lot. They don't read history. I guess if it doesn't fit within the Twitter limits it's too much to read, or who could possibly ask for more than characters on any subject? That seems excessive. So you and I have been chatting about this big research piece you've been working on on the history of market shocks, especially

pandemics and health crises through history. Tell us about what some of your preliminary research has found. Well, we've really divided the market, Chucksberry, into sort of three segments. So

antiquity UM, post medieval period UM. Think of that as the Black Death plague seven hundred years ago up through UM maybe the century or two centuries ago, and then the modern period and particularly the modern period during the Spanish flu misname Spanish flu but John Barry has made the name famous with his book UM in nineteen eighteen, which was really a pandemic of nineteen seventeen, eighteen ninety and twenty one, and and the Asian Flu period, which

was the end of the Eisenhower administration, that's nineteen fifty seven and fifty eight. And we looked at the Federal Reserve Bank of San Francisco's study of pandemics for seven hundred years. They derived some macro economic data. It also provided us with a little bit of bibliography. We also went looking for more um and that's how we are assembling this piece that I have to write in three sections about pandemic shocks, not the disease. We know a

lot about the disease. Part about interest rates, inflation rates, wages, economic changes, growth curves, reallocation of labor to capital. And what we've kind of find is every single pandemic shock delivers a similar sequence and this one is no different. Alright, So hold on, I have to interrupt you. So so when I think about that list that you gave us, the Black plague, the pandemic of the nineteen fifties, these are all very different environments, and I want you to

walk me through them. First, the Black Plague in the middle of the last millennia. Yeah, how do we even have any sort of data from the hundreds and sixteen hundreds? Tell us a little bit about the economic impact of the bubonic plague? Okay, So what we did is this, how do you find economic data? That was a real challenge. And you can't go to Wikipedia or uh some other source. You've got to open a book. It's an old fashioned kind of research. So I have books sitting around now

in my office. Um, they are references, historical references, and they helped me, and they helped me in this search for information. And they also helped me by saying what isn't in them? So a good example is Sydney Homer's Treatise on the History of Interest Rates, because I can look at interest rate data that he accumulated in his research and find information that corresponds with the time periods

of plagues and pandemics. At the same time, I went into Allan Meltzer's History of the Federal Reserve, which covered the period of the creation of the fad from nineteen thirteen to nineteen fifty one. It was the first of

the two volumes. Unfortunately, Allan Meltzer died and never completed the second volume, and I looked at Milton Friedman's Treatise about Monetary Policy with Anna Schwartz, two marvelous books that cover, in the case of Meltzer, the Spanish flu pandemic period and in the case of Friedman, both the Spanish flu pandemic period and the nineteen fifty seven fifty eight Asian Flu period. Neither one mentions disease, neither one mentions pandemic shock.

The minutes of the Federal Reserve, the history don't talk about it. They talk about the war loans and the interest rates and the slowdown, and they attribute to war or geopolitical risk characteristics that also exists in pandemics. And what's very interesting is that when you look at history you see pandemics and shocks, you also see wars. They go together, and that becomes a fascinating linkage. In modern time. We couldn't find the references, but we did find the data.

For example, in the fifty fifty eight Asian Flu period, interest rates and federalies are of activity. Then was a very narrowly defined operation of a central bank. And what we found was by nineteen fifty nine inflation had rolled over and was back down towards zero and interest rates were falling, and there was a shock. Sure was it attributed by the central Bank to a disease shock? No? Was the disease shock a cause? Maybe? I remember the fifty seven fifty eight Asian flu I was a teenager.

How how did that compare to either the current um pandemic we're going through with covid or And I know this is before your time, the pandemic of n eighteen and the years before and after. Okay, so if you look if you look at the World War One period, and you look at the Spanish flu pandemic, which was a worldwide event, and you say, I'm going to really combine them because actually the war in part was part of the re in the spread we're so severe. What

happened after the shock? Was it only the recovery from a post war environment? What triggered inflation to go down to zero? In What triggered a period of no inflation even as credit was expanding in the roaring twenties? What was the change? And the change was when you have a demographic shock and you have fewer people. You get

two things. You get a rise in wages because of the remaining people get paid more, meaning literally, the death rate affects the labor pool that much fewer bodies, same demand equals higher wages exactly, and people begin to compete to pay more to get minimal or scared labor. At the same time, something else happens. Entrepreneurial folks. Governments too, reallocate capital away from labor to capital investment because they don't have a choice. They they change what they do

because they don't have the people to do them. We now have that going on in this pandemic, whether it's telemedicine or a robot that carries a patient or a pronating bed in the hospital. And we're going to soon have it with self driving trucks because we don't have people to drive the trucks. Who knows where this goes. So what do you do when you when you get capital investment instead of labor, you get productivity gains, which means you can get growth without the inflation shock. You

get the inflation shock at the front end. We've got it. We've had it every single pandemic habit. Interesting data in the European post medieval shocks. You can see some of this in historical references. You can see a government in your act to try to maintain wage controls because the price of labor was rising, and obviously the power that be was in trying to influence to suppress the ability of people to get paid more. If you look at interest rates on some loans, you can find they rolled

over and declined post shock. And if you look at prices you can see the price shocks coming from foods or from agriculture changes which are observable in the antiquity period. You can't find any history why labor with slave labor. So during during the plague in Athens, HM, it was interesting I tried to find a wage change. First of all, it's hard to find what the wages were in Athens. Secondly,

you know, I I looked everywhere. I looked in A professor ed Cohen, who studied Greek history, actually wrote a marvelism book on prostitution in Athens. Can you imagine writing such a book and you can't find the prices in Athens. You can't find changes in prices. For example, I was able to find that a mercenary who was hired to fight a war. And those days you had mercenaries and you're hired him to fight wars and they were paid one drachma a day. But when they were in battle,

they were paid too. And that was the rate at which you went to hire people to fight war for you one drama. Normally combat pay was to drop. Now what's the conversion rate from drachma to dollars? Do we do? We know what? Well, this is ancient Greece, so so so, no bls, no monthly data. We're really trying to reconstruct this from broken fragments. Uh and papyrus reads from two thousand years ago. My pyrus were reads and thucidities translated

with a good English translation. It's not so easy to do, but it's fascinating because there are references. So I've broken the references into three pieces. Antiquity, which is really a history lesson medieval period. To think of it, it's four or five years starting with the Great Plague, and the most recent period which is Spanish Flu period in Asian Flu period. And the message is always the same. Anecdotes

are different, but they all tell the same story. You get a shock, you get wages up, you get an reallocation to capital. Because you have fewer people, you have to replace the functions. You get a productivity game. Inflation is transitory. Transitory needs definition of time because it's an intertemporal relationship. But it does happen. Yeah. I find that whenever people talk about transitory, the the audience says, all right, you've got three days, and then if I don't see

my results in three days, then it's not transitory. When you use the phrase transitory. And you and I have discussed this before. I'm in the same camp as you. You're talking about um anywhere from two four, six quarters or more. Well, I would agree, and I would like to add the shock isn't even over yet. Only we got a bunch of people walking around the state saying, oh, I want it to be over. Okay, you can want it to be over. The virus doesn't care what you want.

So so let me let me follow up with one other period I have to ask you about. So the Greeks two thousand years ago, Medieval five hundred years ago, what you've described as modernity in terms of the early nineteen teens, UM and under Eisenhower in the late nineteen fifties, between Eisenhower and today though uh was Zeka and you also did a study of the impact of Zeka. Tell us what you learned from that was that consistent with these other health related pandemic shocks. What was your takeaway

the takeaway from Zeke? And you know, I wrote a nine chapter I think it was pamphlett about it, and did did some research about SEEK. In fact, it was fascinating. I actually took a trip to Cuba, which had UM, a preventive medicine only its a poor country, and I was able with gratuity or two to actually walk. You notice I'm being polite when I said a gratuity or UM. I was able to actually walk with mosquito spraying units in the morning and see how they managed this mosquito

born because it's a mosquito factor. And and what ZEKA did was have the early stage pandemic disease fear risk component, but it never evolved into a pandemic or a large spread. So you saw signs of it in South American countries and it was a mosquito vector, and you saw cases of it, but it never got big enough to be pandemic risk. The early stage had the fear component Ebola, by the way, did the same. It was so fatal. And therein lies what's an alarming lesson or trajectory that

history teaches. History says, these things mutate and mutate and mutation, and some of those mutations of them, I don't know the exact number, but a huge number have no material change, and therefore they don't get a Greek letter called delta or macron or alpha or other name. But every once in a while the mutations become extraordinarily different O macron is very transmissible, but not as dangerous in terms of

f although if you're not vaccinated, it'll get you. It's simple is that what we don't know is is a mutation in front of us which has the killer cytokine storm trigger that made the Spanish flu what it really was, and we don't know. That's the unknown. And it was the unknown with Stars and two thousand and three, it was the unknown with mirrors, it was the unknown with Zeka, it was the unknown with Ebola, and it is the

unknown with COVID. And it seems that throughout history there is a period in a pandemic where some mutation or alteration makes it very deadly that changes behaviors because a lot of people who in history said, oh it's it's it's religiously based, or God is punishing knows, or God is punishing the ones who got sick, or whatever the reasons were in history, suddenly say, wait a minute, this is really serious and can affect me. And we've reached

maybe some of that in the US. We've got all approximately a million excess deaths in the United States, but we've got a whole population that still doesn't get it. It's I don't know where this inc it. Will talk a little bit more about the anti vax or movement later. I wanna stick with the impact of these shocks on the economy and the market, because essentially we're a financial if nothing else. So you mentioned that wages go up

um inflation, am I'm interpreting this right. You're saying inflation spikes but then eventually rolls over as do rates. What what is the impact on equities? We we we get the impact on bonds there, but what is the impact in the world of equities. Well that's not easy to do because we don't have a lot of history. But we have some history. We have a century in the United States to two pandemics and now this one. And we have some references in Europe, but not very much, um.

But the impact is that when you reallocate from labor to capital, that means you go to entrepreneurial businesses. Entrepreneurial businesses get productivity gains. That's how the growth takes place in the new demographically adjusted population and it becomes more profitable. And we see that in the US equity response so far, and we I believe once we get posts pandemic shock in other places in the world, we'll see it there as well. So are the US has had a leadership role.

Look at how well we did in trying to roll out vaccines and by the way, we're now lagging, no longer leading. That's a shame, um, But that's the case. Our companies are leading. Our population isn't. So equities do well owning survivors the winners. There are winners and losers in every shock, and the winners really do well. H quite fascinating. Let's talk a little bit about Cumberland, because you guys were a little bit of ahead ahead of

the carve. The company is founded in seventy three, so you're just about g almost almost fifty years old, but about a decade ago you relocated Cumberland from the Tri state area to Florida. Tell us a little bit about what the motivation of that relocation was. It turned out that you were on the leading edge of a lot of financial firms looking to relocate to places where the

cost structure is cheaper and the taxes are lower. Well, we we were looking at the move in late two thousand six, seven and eight, and the financial crisis was unfolding at the time. What we found is my colleagues and I were on airplanes to Florida all the time, so that became a trigger. I at that point it was my company, and now I have seventeen shareholders and

the majority of them are employees. But I was the driver in two thousand and eight two thousand nine, and um I was the caregiver for my mother who died in two thousand and eight, So it was a restraining a situation for me. Before I moved, the move commenced seriously to Florida in two thousand and nine, we had examined it for a number of years and we started to transition the entire company and we still have a

little office in New Jersey. We still have a person um and sometimes two people in the New Jersey office, but everything is in Florida. Took us four years to move people. It was literally during the financial crisis and aftermaths. It was very difficult. Um. And there's a long story as to how we got to Sarasota instead of the East coast, and that's another story. But the bottom line is we're now here. We're about forty six people, UM, and we do most of the activities in Florida. The

motivation was not just taxes. Everybody says, oh, yeah, you went there to cut your taxes, Well, that was part of it. And certainly in New Jersey after John Corzine high taxes, he encouraged us to leave. I jokingly say, John Corzine bought my condo for me. That's what I was laughing about, because I remember that exact line coming from you, you know, eight years ago. Well, we moved into a very nice place that Corsne paid for, meaning what you're not paying in state taxes basically covers your

the cost of your very nice housing on on the intercoastal. Yeah. Well here's the here's the thing, though, we had our accounts at the time, and I said, look at the company and give me the picture if this were in Florida, and so, well, that's easy. We just change the income tax. And Business to Act said, no, no, no, no, no, take all these people. Have them live in the same value house, have them insure their cars in Florida. Give

me a full picture. The full picture was really compelling because the cost structure totally besides just the direct taxes was was an enormous amount. So I said, so if I move people and I can give them real incentives, and those incentives give them an opportunity to really examine a full picture. And that's what we created. And we had a very strong incentive package of moving expenses. We reimbursed bonuses if you make the move. If you choose not to make the move, you stay at your desk

in New Jersey. Um and all but two eventually made the move, and we had to deal with a whole lot of issues. People to sell houses and buy houses, and then the deal with families, and I had. The biggest crisis I had was somebody's daughter had a date for the prom and couldn't come them. And by the way, she broke up and went to the problem with somebody else. But I mean, we went through it all, but we got everybody here. So so that was way before the pandemic.

The question I'm leading you towards is, so now with the pandemic the past two years, you and I have talked about hiring people having never met them in person and having never had them step into your office, but having them work remote raises the question, how has the pandemic and the work from home era changed the entire calculus of where a firm like yours can can elect to locate itself. Well, it's massive. You've written about it in describing your own experiences work from home. I have to.

Work from home can be in Idaho or in Florida. It has it can be for many people where you want it to be, and what you and I would add, it's made us much more productive, our capacity to do things and accomplish units of work if you will, it's so much improved depending on what you do. So, um, work from home. Why Florida, if it's so attractive, is not growing as fast as Idaho? Why is this change taking place? So you have to ask yourself, are people

rethinking location and lifestyle. And I think that you look at place of the Guidaho, Montana, you look at sections of the country, and you say, something's going on here because they want to get out of the center of the big city. You and I have friends who have moved out of center city in downtown New York. Worry and are they going to come back? I mean, we we have. This is all part of what I call pandemic shock disruption. So let's let's go into let's delve

into that a little more deeply. And I want to talk about wages and I want to talk about real estate. The first question is if and let's not count the dozen partners and or people whose names are on the door at a firm like yours or mine. Um, we're talking about you know, either new hires or or administrative staff. If you can locate them anywhere in the country. Do you pay the same wages in Idaho that you do

in San Francisco or New York? Or is it a cost savings having a person remote in an area where the cost of living is so much lower. Well, that's your that's that's a good question. But is it just savings or can you obtain and higher, better skill set, and more productivity, Yes, and more productivity, and so paying more really obtains you a better bargain, and both of

those things are happening, and that this whole notion. There was a book I have a book in my library from nineteen thirty five or that area is by a German economist by the name of Lersh unknown mostly and he wrote about the economics of location, and did it in those days in the form of concentric circles to a center point and distance. The concept in that book not the location itself, because in those days yet to think about a horse or a chart, or maybe a railroad.

But the concept of location was discussed in valuing distance. Work from home in the modern environment eliminates the distance, but it identifies the values which were just articulated a century ago in that book, and there at work today. You use them. I use them, a lot of us who can use them. And so what we now have is this divide, another disruption between those of us who can gain these advantages and do so and those who are unable to. And they are the ones who have

a problem, and they suffer. And so we get this divided community in which we live and we find our neighbor cannot take advantage of the positives but has to confront in daily life the risks and the negatives. That's a political discussion in the United States as well as a societal risk that comes out of pandemics. Bury every

pandemic shot also had disruption in government. Really interesting. But before we we moved to politics, I want to stick with real estate because what you were just discussing the concentric circles around urban areas. I literally had this conversation over the weekend with Jonathan Miller, who's the famed real estate appraiser and data wong at Miller Samuel and we were talking about rings around cities and my frame of

references in New York City. But it's true in Chicago, although it's a partial ring because it's up against the Great Lake or or San Francisco or l A or really any city you want to think about. You have this ring immediately around the city. The bedroom communities that are less than a thirty minute commute, those are some of the most expensive real estate today. And then the next ring thirty to forty five minutes a little less expensive,

but still you know, not cheap. Pretty pretty expensive, and as you get out past sixty minutes no longer real estate prices start to drop appreciably. What is that dynamic that Lurcher observed and that Jonathan and I observed. As the pandemic wears on and as people find the ability to locate themselves anywhere, I can imagine that inner ring is going to be the partners and the people who were at the top of the income scale and they

want a fast, easy commute into the city. For the two or three days they're probably going into the city to work, or maybe every day if they're on a trading desk or at a hedge, Fondora, private equity or VC type of shop. But what about the next rings, the forty five minutes away, the ninety minutes away. Are those areas going to be at a disadvantage to places

like Idaho and Wyoming. Well, we don't know, but history history says that what we had up until January, February or March of has changed, and the change is structural, not temporary, and it will unfold over the next few years. And history would say those who longed to go back to what was before the pandemic are going to be disappointed because it isn't going to be there. The world

has changed. Every pandemic in history introduced change, and the change, which was geographical when transportation was on a horse or cart, is now electronic. For whatever portion of economic activity takes place in the virtual space. And that's a lot. And it's also more and more, not just finance. We think of it in finance because we're in the finance area. But if I get some spot and I need a dermatologist, what do I do today? I take a picture of it.

I sent it to the dermatologist. He looks at it, He text or emails or calls me on the phone, and we talked about it. I don't have to go to this office. I can be a thousand miles away. So this is a massive disruption of what we had, huge introduction of productivity gain in every single sphere, every single thing we think about, and we've only begun to

see it. And I keep saying, you know, I had a conversation with John Farah last month in an interview on surveillance, and he said, what's your takeaway from this? And I said, the takeaway is it is a huge shock. It's not busines as usual and we end it's still going on. It's not over yet. So monstrous. So so I want to get to politics, but before I do, I have to stick with the technology question that you're

dancing around a little bit. The pushback to the shock thesis is not so much that this changes everything and we're gonna start with a clean sheet of paper. But we actually had all these trends in place pre pandemic, and this accelerated them and brought them all forward by a decade. So think about what we're doing currently. Zoom calls or Google hand calls. We've been doing that in

my office for a decade now. Everybody is very comfortable with its screen shares, FaceTime on your iPhone, delivery of food, delivery of supermarket's just everything grab vitating so rapidly towards online and Amazon. What do you take of the claim that, hey, none of this is new, you've just moved us to instead of in terms of where we are technology wise dealing with the pandemic, Uh, I would I would say that history would show that every pandemic accelerated procedures and

directions and trajectories which were under way. That's what a shock would do. It also had another impact. If the trajectory was in the direction of something that was going to fail, it accelerated the failure. Both happened, so it speeds things up in addition to introducing a new dis option simultaneity of both speed and form of disruption. So what you've described I totally agree with. But you were in a place and in a business. I'm in a place in a business where we were in a very

adaptive phase. The rest of the world didn't have to adapt. The shock forced them to. That was the accelerator. Yeah, we're fortunate that when we launched back in we were built for virtual from day one, so this transition was really very easy for us, and and I very much empathize with people. My neighbor is an orthopedic surgeon. He says, I, you know, we're not at the point where I could

log into my computer and manipulate a robot remotely. I have to go to the hospital to do surgeries, and there was a period in where any elective surgery was canceled, So you know, he was setting bones and and fixing other things. But that's you know, a third of his practice. He said, for about six months he was afraid he was gonna have to lay off all his people. I'm I'm very empathetic for people, especially frontline workers, who were putting their own health and safety at risk dealing dealing

with the public. Which brings us to the politics of this. What do you make of of some of the pushback. I know we're all exhausted and tired of the pandemic, but this started from day one. What do you make of the pushback to government interventions, mandates, masks, vaccine requirements. How do you how do you interpret this stuff? Well, history of pandemics would suggest that finger pointing, political um distraction,

governance was of victim in every pandemic. Behaviors are being repeated now in various ways, and part of the pandemic history is the pandemic. The disease doesn't have a political party, and it eventually gets those who are more likely not to be wary of it, or whose behaviors expose them more. That's what disease does, and this is no different. It's a political it's just opportunistic. Look in Milan in sixteen thirty two, I don't remember exactly, Um the governor UM

heard about. This is during the plagues that went through the Italians states in the seventeenth century, and the governor of Milan heard about what was going on. He sent to emissaries. He said, you guys, go over to Sienna. In those days, you had to ride there in a horse and look around, see what you see, and come back and tell me. So they do, if you can bring the disease back with you. Yeah, well they come back and they say, Governor, people are dying and lying

in the streets. They can't pick up the bodies fast enough. He says, we cannot tell the people. Listen, now we have documentation, because at this point we have some written documentations. What does he do? He says, Number one, get the governing council, let's report. Number two, let's not tell the people. We don't want to scare them. Number three, we have a new princess. We'll have a celebration, in a joyful celebration.

So he convenes it and he hosts a super spreader, and three months later he's got dead people all over his town. That was thirty Barry. Yeah, well, you would hope we have learned over the ensuing five years how to behave in a panza. Although arguably many of us have not well the nature of the human being. Well, let me ask you this question. And as someone who's vaxed and boosted, and as soon as they give me the green light cross um boost, I'm fiser up till

now I will happily go get the maderna. As number four, I'm not worried about you know, I'm trying to avoid getting catching it, but I'm not worried about a terrible outcome of of hospitalization, ventilator and death. However, this long COVID is quite a scary proposition. What do you think about this? And and how has this to bring it back from the human element to the economy, how has this impacted uh, the labor force and and the overall

impact of of you know how we're dealing with the pandemic. Well, I believe long COVID is really a monster issue in front of us. A little disclosure, I sponsored am sponsoring for the Global Interdependent Center a webinar series on long COVID and the health issues. Um, I'm part of a group which is a long COVID initiative. And here's what we know. In the UK. We've now identified over a million by their definition long COVID patients, they have a

population of sixty seven million. If we use that reference for the United States, we're due for five or six million cases. The numbers grow every single reporting period. In the United States. We now have about a hundred and fifty long COVID clinics in America. We had zero a year ago. We have about fifty pediatric long COVID clinics. We had zero a year ago. What are we finding. People think of COVID as a respiratory disease, that's how you get it, But there's more and more evidence that

it's a blood disease. Gets into you, then you get micro cloths, and it gets to all your organs. So long COVID, I think, is a big issue. That estimates for the United States are somewhere between ten and twenty million cases before this is over, and again back to the political question. The vaccines tend so far to reduce enormously the risk of long COVID. If you get sick, the unvaccinated are going to be the victims. If they didn't die, they are the most likely to get long

COVID symptoms. It's a terrible circumstance, but long COVID is here. It's big, and it's going to be bigger and bigger. Think of it as people who are temporarily, partially or permanently disabled. That's a cohort of million ms, and many of them are labor force age. So let me ask you about that exact question, because following the financial crisis in O eight oh nine, I think people were somewhat surprised at the big surge, the big uptick in disability

applications that took place. A shocking large slice of the labor force moved to disability. Are you suggesting we're gonna see the same sort of thing post COVID. Yes, I think we're gonna see it. I think it's going to be bigger than people think. I think there's going to be all the fights with the insurance company and who's going to pay and what are the definitions? Right now, the World Health Organization, the UK and the U s h h S have three different They're similar, but they're

not identical. And we have to remember this is a worldwide disease, which means disabled here is also disabled in all the countries of the world. Wow, amazing, there seems to be a ton of focus on the Federal Reserve and inflation and rising interest rates. But before we dive deep into the FED, let's start with its chairman. What do you make of J. Pale? What sort of job has he been doing, uh navigating over the past six years. Well, my opinion is that J. Pal has been a terrific

Central Bank chairman in the midst of this pandemic. Number One, he's a student of history. Number two, he knows the degrees through and he has a lens which is deeper than just monetary economics. So he sees it in the in the full sense of financial markets, look at all the different programs that were implemented along the way. And he also sees it in terms of community impact and people impact on three d and thirty five million Americans.

And so I applaud Pal and those who criticize him after the fact that it's easy to quarterback a game on a Monday, if I could use the cliche, miss what it's like to have to make real time decisions in the midst of such a shock. Pal has done that, and he's done it really well. Under the circumstances. There's an entire committee in the FED which is reaching to community elements that are outside the banking system, philanthropy, community activities,

support systems, and it's advising the FED on impacts. It's not well known. The minutes are published, people don't know about it. What has pal done? He said, the Federal reserves position must be much broader than this. The narrowly defined banking system financial stability. Those are important, that's our bread and butter business. But if we don't get to the full impact in the country, we're missing this shock and its effects. And that's something that Pale has done

very quietly, no fanfare. I've had occasion to speak to people who are on that committee, and some of the programs from the Federal Reserve, which narrowed to very small balances to be able to give financial support and system too smaller businesses, conduit structures came out of that sensitivity. Let me pick up on that. Because the consistent criticism we've heard about the FED and and we have at some of the events we go to. You know the

exact people. I won't mention it by name, but you know the people who bring up Look at how giants the Federal Reserve balance sheet has become, Look at the rate of change over the past ten twenty thirty years. This is unprecedented and then's badly. How do you respond to the folks who say the accumulation of assets on the Federal Reserve balance sheet is problematic and will result

in subsequent crises. Well, I would answer two ways with two elements, because in our dialogue, in the business that we're both in, we get those kinds of conversations all the time. And I say to somebody, show me number one, a study which is curated that determines the optimal size of the Fed's balance sheet, produced to study to criticize its size. Produce the study to say this is how large it should be, and this is why now we do know. There's some elements in the Fed's balance sheet.

For example, currency in circulation, it's a liability. The treasury balances, it's a liability necessary bank reserves. It's a liability. To do that, you need assets. On the other side, you have to support the international balances, so that's global Central rank repot redeposits at the FED. So that's a liability. So you can add up some elements and say, gee, I can get to four or five or six trillion immediately,

and I haven't gone beyond it. Now the question becomes how much cushion should you have and how big should it be? And ben Bonanke himself said, if you wait long enough, the balance sheet will abs orb any size over time as long as you have nominal growth. He's right. So this favor pointing about the size of the bid FEDS balance sheet and hand ringing about it, to me, is a great way to introduce hyperbole without curated facts.

Why if it's so bad and so inflationary and so destructive, is the Japanese central bank balance sheet larger than the GDP of the country and there's no inflation? And to be fair, to be fair about the US Central Bank and the current bout of inflation, Hey, it's been twelve years with very very low inflation. To blame the post pandemic period on the FED balance sheet to blame that inflation really seems to be an unfair accusation. I completely agree.

I think it's taking advantage of a shock to throw a political barb. Well, central banks are always fair game because they cannot defend themselves in political environment, so they're an easy target for a politician or critic. It's a hold different story when you have to sit in the room in real time and make a decision and you don't have a full plate of facts because you're in a moving environment. So I'm a defender of PAL. I think the fit has done as good a job as

you could ever expect under these extraordinary circumstances. So so what do you make of the current move where we're actually recording this early January Poal is as literally testifying to Congress as as we speak, so you don't get to hear what he is currently saying. What do you make of the current move towards the taper and the idea that quantitative easements and purchase is of bonds have run their course. We we won't even get to zero

interest rate policy just yet. What do you think of quie in the idea of the taper, Well, to taper from some level to some lower level and then eventually to zero is something that eventually had to happen, and the forces that require the Fed to do that, which are both political and economic in the face of evidence of this shorter term You're quite right, inflation shock require them to do that. My biggest fear is the Federal

try to do two things at once. It will try to reset an interest rate to a higher level than zero. I never like zero because it's such a distortion. I don't mind if it was a quarter of a point or a half a point floor, but zero destroy did things and we were in a long time. To do that and also alter the composition in size of the balance sheet at the same time is to try to

do two very difficult things simultaneously. It's hard enough for the central Bank to do one of them, and so my view is they should tackle one before they tackle the other. And if I were sitting in that room, I would tackle the interest rate first. I'd take a hike in March or April or may get the rate

above zero. Clear markets, clear, repo, clear sofa, get an operating system above zero, so anybody who's got any cash anywhere in the world can put it to work and get more than a single basis point at some place. And now you have a market clearing mechanism, and then when you get interest rate trip, then you can tackle the size of the balance sheet. I'm afraid, though the pressure is such, they're going to do both at once, and to me, that's a recipe for trouble. Huh, that's

really uh, that's really interesting. So what does this mean for your business? You're essentially known humbling is known as a bond shop. At one point, mini bonds were super attractive on an after tax basis as a source of yield versus treasuries or even high grade corporates. Given everything that's taken place for us with the financial crisis and then subsequently with the pandemic, how should bond investors be

operating in this environment? Well, I don't know what others should do, but I can say what we do do. We've been running a Barbel. Barbell means you got a slug of a portfolio, depending on the type of portfolio, in the shortened earlier shorter duration maturities, and you get very low yield there, and then you have a piece in the longer maturities, which is how you get some yield by blending them. Our duration in the morning meeting

yesterday was approximately four. That is relatively short. So we've been rolling duration around four, waiting for the opportunity for markets to deliver a higher yield. Now today you can, as we're speaking, you can look at the market and say, well, I could get about three percent in a high grade

tax free bond, depending on what state and jurisdiction. But my guess is as rates rise, and it looks like they're going to, we may get close to three and a half or four in a municipal yield out of four. This becomes very attractive rate, really interesting. So we're recording this early in January. The tenure yield has just tipped up about one eight percent or so. Do you think the bond markets are seeing inflation as a structural element of the economy looking forward or did they see this

as transitory? UM. Bond markets are adjusting upward of view, away from much lower inflation expectations to something higher. UM. The shock inflation measures we see at six and seven are inconsistent with the yields and the bond market of one point eight or two or two and a half or even three. So what the bond market is saying is we're going to have an adjustment. It's not going to be anywhere near this high single digit perpetual rate

of inflation. Is the temporary shock now where it comes out two, two and a half, three maybe, but not a lot more. That's what the bottom market is saying, and history would say, if we have a transition and we get beyond the shock, that's the more likely outcome. Really really interesting. So if we think this shock eventually passes,

what's the best definition of transitory? Are you implying it's twelve to twenty four months before we're back to a more normal footing, albeit at higher federal funds rate and higher yield on the tenure? I think so it's an opinion. We'll find out in a couple of years. But my worry is central banks, in their hurry to renormalize policy, make the transitory rollover worse. Huh. They are under pressures to do so everywhere in the world, and so my

worry is they go too far, too fast. So you want a more gradual shift towards away from the emergency footing and towards a more normal footing from central banks around the world. Which raises an interesting question, what do you think about what's been going on from a macro perspective in China well as well as the rest of the non Chinese emerging market world. Well, China is a story. We have an emerging dictatorship, we have a model, the

Malsa tongue model modernized. And we see behaviors in China, in the second largest economy in the world, and they are alarming. Um where this leads I don't know. My hope is that behaviors don't get to war, which I don't think anybody wants. It doesn't serve a purpose. But the relationship between the United States and China is permanently changed, permanently meaning for at least a generation, and it's evolving. In the United States, politics drive a hard China line

both parties. In China, politics drive more isolationism, a different internal structure, no dissent permitted, a suppression of whatever forces of descent or outspokenness or existing, and the forced initiatives of Beijing on a population at one point four billion people. And that's underway. So that's what That's the world that we live in and are probably going to live in

for the rest of our lives. And what about doing are only you and I are only thirty nine years old, like Jack Benny, so we you know we have UM, what about the rest of the emerging markets outside of China? How do you look at those parts of the world when China has become so such an outsized contributor to global GDP. What's your perspective there, Well, I think there are some places that are are a real interest. So I think Vietnam is a frontier market um that has

entrepreneurial characteristics independent of China. Uh South Korea is an example of developed market. There are plenty of places that are not China. In Taiwan, of course, emerges as a mature market, although it's out geopolitical risk with the China so close. But what we see is many places which have the ability to modernize, highly productive, contribute to world economic activity and do so with with modern skills, and

they will supplant China. They will go to places for capital investment, and China is less and less a safe place. I've been to China several times. I wouldn't travel to China now, not because of COVID, because I would feel at risk being there. Others say the same thing. You and I have a lot of colleagues who have business relationships and analytical relationships with China, and they are afraid they physically wouldn't go now. Oh yeah, we and you

know we speak to when we're together in Maine. We we meet and talk up these things is as you're you're an old timer, you're a tenured professor of it. I am, I am, but I'm kind of surprised that people would you mean, fear physically for their safety as an American in China, Yes, I would. I wouldn't go from the public or from the government. Well, I would be afraid of the government. And I'm not sure how welcome I would be now as an American from the public.

When I was in China, it was a very welcoming experience. When I was in China with a group of economists, when we traveled around, it was a welcoming experience. Hong Kong a welcoming experience. Beijing a welcoming experience today not the same. To go there. They describe it and they say it's different. You go and and the way you're treated, greeted and viewed is different. Things have changed last things in China you have changed because the people are afraid

of their government and understandable reasons. So for me, I think, you know, I watch a lot of our colleagues and a lot of investment firms, and they're placing money at risk in China, and they're developing things in China, and Okay, that's their decision. My view is China is a growing risk for capital investment, entrepreneurial investment UM and physically dangerous for some people. So you're preaching to the choir about

capital risk. I asked the question a year ago. Is China becoming uninvestable when you see what they did to Ali Baba and the rest of the tech space, And some people try to draw a parallel to what Donald Trump did. Trump was mostly noise and tweets about companies. This is actually government action in China UM affecting how companies operate and behave not just noise but rules. So so I understand where you're coming from saying you would

be reluctant to put capital at risk there. UM. But you brought something else up that I'm I'm eager to talk about. You mentioned fishing and what we've done in Maine. So let's talk a little bit about what's become known as Camp COO talk, where you gather four or five dozen economists, fund managers, commentators, analysts, etcetera, for what what some people have described as a more productive miniature version of of Davos tell us a little bit about camp

Ko talk. Well, it's interesting now you're you've been irregular there for a lot of years. So going back to I think oh eight was my first year. So you're a tenured professor, ampoke. You think about you think about the history. We're twenty years since um the towers in

the attack in New York. And it was the year after the World Trade Center event that ratcheted up the discussion and the number of people who would say, all right, I'll come with you will go out in the woods and we'll spend a weekend and I don't care about fishing. I remember Harvey Rosenbloom from the Dallas Fed the first time he held a fishing rod in his hand, and I said, Harvey, you're not supposed to hit the fish over the head. You actually have to use a hook

and line. And Harvey's head was head of research at the Dallas Fed. Not an inconsequential economist. Well, he was director of research at the Dallas Fed for a long time. Said a lot of federal open market committees of the Fed and everything else. But he came, and before that he never would have never would have come. What me go out the main fishing? What are you talking about.

So it's changed. We've created an environment I think, where there are periods of conversation under Chatham House rule where people are comfortable and they can speak privately, and they can talk about their views of the world, and they can exchange views and take a takeaway. Um, those conversations are rare anymore, so so let's let's the place that we can hold them. So so let's stay with that. Because I was discussing Maine with another friend of ours.

We're gonna be name dropping everywhere. David Noddig, who who his takeaway was being outside with people in nature, engaging in holistic thinking, being able to have these important, meaningful discussions in private, not in the public square. He says, that's a completely different experience than than something like Vos or anywhere else where everything is televised and it's just completely a public spectacle. Was that the intention from the beginning or it did? Did it just an evolve into

this wonderful outdoor experience? Well, evolution I think is the right word. You know, Dave told me he's already in communication with you to figure out how to ride together or something like that. So did that last year? Also? Yeah? So I mean we we've we've created something, it's evolved over time, we've changed lodges, and we've modified the program. Some people say, gee, why do you have thirty minutes of a panel before dinner? And why not do it in the afternoon. People don't want to do it in

the afternoon. The fact is, if you do thirty minutes before dinner, Barry, you've been a moderator, you've been a seeker, a part of those sessions. We talk about a topic for thirty minutes in a structured environment. Thirty minutes enough, and then the dinner conversation, more sent all kinds of things for the next two hours. That's right. And the secret is you close the bar during the panel discussion so you have everybody's attention, and as soon as it's over,

the bar reopens and and the conversation really starts. And we do it before dinner. Remember, they're hungry, they've been out in the woods all day, so you get them wet, then you close the bar. Then you keep them hungry for thirty minutes and everybody and you as you know you were, you were you ran a panel and you said and the rules were seven minutes. I remember you standing in the front of the dining hall and said seven minutes, I'm going to shut you down. Go to

the next one. You were, that's what you have. People through rolls at me. They wanted to keep going. It was it's very unruly group to enforce discipline, especially by the time you roll around to the second or third night and the second or third glass of wine. Uh. It's amazing how people you think of as button down, stiff economists turned out to be uh, a little more free flowing when when the time is right, no question

for sure. So so I when I think of you, when I describe David Ko talk, there's a lot of different ways I think of you. But I think the legacy of camp Ko Talk has probably had the greatest impact on the greatest number of people, even those people three and four and five steps removed from the event, to the point where where people have asked me, Hey, what do I have to do to get on the camp COO talk list? And my enter is always, you're sucking up to the wrong guy. You gotta go suck

up to David, not me. It's called camp Ko Talk, not camp Rid Halts. He's the guy that's off too. Well, thank you very much. There are a lot of folks who raise that question. Interesting mix of folks because we was trying to mix it up and where you know, also involved with the Global Interdependence Center now and that helps with what we try to organize and do the programming for it. It's interesting if I can just say,

the name camp cook Talk was not coined by me. Um. Steve Leashman was up there and he was interviewing me on the deck. I don't know if I can do Amazy's gimbals thing here, but whatever. No, absolutely Leastman was not only was he there for CNBC UM and CBC and Bloomberg have both been up there with cameras, but he's a pretty well known dead head and a singer musician,

and he would bring a guitar and entertain people. Yes, and if he comes back this year and I've invited him and he can bring it again, I would tell you he's also an excellent fly fisherman. We've fish together. But when Liceman was interviewing me on the deck and they broke to a commercial break, it was Becky Quipp who coined the name camp co Talk. That's where the name came from. I didn't create the name. When I first heard the name, I heard the Shadow Federal Reserve

Committee was how it initially was approached to me. And I had enough people asked me about it that eventually I wrote this long, two thousand word missive for Business Week about it that I still get emails about. You know, it was a couple of years ago. Ready. That name came from John Hilton Rath when he was writing a column. He was up there and he wrote a column in the Journal, and he called it the Shadow Kansas City Fit.

That's hilarious. Well, I know I only have you for a limited amount of time, and I want to get to my favorite questions. As much as I would love to wax nostalgic about all things camp Cot talk, I do have to share one for any story, and I'm not going to mention names. But we're playing poker one night, me and a buddy who's a hedge fund manager. On his right is uh, an equity manager at a you know, bold face name brand shop. On on my left is a bond manager at also a name face you know,

a bold faced name brand shop. And they both get up to go get more drinks, and they each ask us, Hey, would would you like another class? I'm sure I bring each of us say yes. And I turned to my hedge fund buddy, and I say, I just want to point out that my waiter manages a trillion dollars. Your waiter only manages five billion dollars. And that's like a typical camp co talk type of a story. And and I have we all have endless, endless versions of that.

With that said, let's jump to some of our favorite questions we ask all of our guests darting with. Given the pandemic and the lockdown, tell us what you're streaming these days? What's entertaining you on either Netflix or Amazon Prime. Okay, so you gave me warning about the five questions. I had time to think about them, and I know we're up against the clock with only a few minutes. So I thought about that and I said, okay, I'll pick

one and that Don't Look Up. And I believe the Meryl Street movie Don't Look Up, which is a parody on the politics of the country in so many ways, is a wonderful, wonderful modern parody. I enjoyed it, thought about it. I particularly liked some of the characters who depicted those which we're part of our political scene. So I would say, don't look up makes the movie lift. Huh, really really good. Let's talk about mentors. What who were some of your mentors who helped to shape your career? Well?

I thought about two an economist, probably not widely known, Hungarian economist, Gabriel Carrakesh, that many many years ago, and he was a mentor for me in many ways, and with him I actually joined in publishing the first editorial piece in a publication that was nineteen seven three, maybe something like that. Gabriel Rakish and I had a great political mentorship from Governor Tom Kane. I was able to be part of his administration and work with him and get to know them, and he affirms for me to

this day. I spoke with them just a few weeks ago, um that there is a hope for this great experiment called democracy in the United States. It's a glass half full. It's under a lot of stress these days. But Caine is a person who doesn't give up, and and he he was able to teach me something. He said, when people get the right information these days, that's a tough one, and they get the facts presented so they're clear the electorate makes valid decisions. Sometimes it's tough to get to him,

but he has confidence in the American system. That's something that has stayed with me. Tom Kane was a great mentor. Is was it really interesting? He's x and he's still going. So let's talk books. You mentioned you're surrounded by books. I'm gonna ask you this in two parts. What are some of your all time favorite books and what are you reading currently? Well, I read The Peloponnesian War again with slucidity, so I had to dig into that all time favorite books. I've got a lot, but reading now

two books. One you know the author written on Water. It's his third book, Randy Spencer, and he's a fishing guide up in Grand Lake Street, Maine. He's written several books and he's got one it's got a bunch of stories about the region. And the other book I'm reading now and I think you would know the author is Vito Racanelli. Sure it was at Barns for two decades. First novel. It's a murder mystery, the Man in Milan. So good for Vito. He's ventured away from financial writing.

And Randy has a good third book, which is what's name of the third one? Written on water? Written on water? That that makes a lot of sense. Uh. What sort of advice would you give to a recent college graduate who was interested in a career in either investment management or finance? Um one that Winston Churchill gave two students when asked about this similar question, and he said, study history, study history, study history, and when you're done, study more history.

And I think that sound advice. It's a guide we learned from history. I'm saddened that the fact that our our education system doesn't teach enough history. Huh. And our final question that we ask all of our guests, tell us what you know about the world of investing today you wish you knew fifty years or so ago when you were first starting out. Well, there there's a statistical basis Bayesian theory. And Bayesian theory was something we were taught in abstract. It's applicable. We use it in our

conotative work in our shop. We use it a lot. Uh. I didn't give it in the earlier times the respect that Tom Bays deserves. And I think if there's one single thing two articulate in a mathematical sense, that requires you to be adaptive. It's Bayesian theory applied in finance and economics and probably a whole bunch of other things too. So let me let me drill down into this a little bit, because when I think of Bay's theorem, I

I we typically think of the traditional Bell curve. Are you focusing more on that right tail and black swan events or are you focusing more on the traditional fat part of of the most likely outcomes? Well, I would start with the Bell curve, which was a Gaussian depiction data points name for Gus who created it, And the notion we have is the shape of that curve and tails. But as a practical matter, no curve looks like a bill.

It's scattered plot. And so what I think base suggests in modern times is the data points in those scatter plots are moving, and you have to examine those shifts and the rates of change in them. So whether it's right tailor left hail, or how flat the curve is, if you try to depict it, the fact is it's not constant. It's vibrating. If you will, it has it has features which are adjusting constantly to new metrics and new events. So it's a living thing, not a static thing.

And what base math does and when you incorporated in the math is attempt to measure or estimate the rates of those changes. Huh. Quite fascinating, David, Thank you so much for being so generous with your time. We have been speaking with David Kotak, chairman and chief investment officer at Cumberland Investors. If you enjoy this conversation, well, be sure and check out any of the previous four hundred or so such interviews we've done over the past eight years.

You can find that at Spotify, iTunes, Bloomberg dot com, wherever you get your favorite podcasts. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. You can sign up for my daily reading list each morning at Dhalts dot com. Follow me on Twitter at rid Halts. I would be remiss if I did not thank the correct team that helps put these conversations together each week. Mohammed Ramaui is my audio engineer. Paris Wold is my producer. Michael Batnick is

my head of research. Attica val Broun is our project manager. I'm Barry Hults. You've been listening to Master's business on Bloomberg Radio