Ed Yardeni Discusses Global Investment Strategy

He's essentially the person who invented the phrase bond vigilantes and talked about the role of the bond market in keeping policymakers honest. UH. And he also includes UH movie reviews and in his weekly commentary he writes daily but we get a weekly film review, which is always charming. I find his work to be very interesting and somewhat unique amongst the economists of the world. So, with no further ado, my interview with Dr Eduardney. I'm Barry Ridhults.

You're listening to Masters in Business on Bloomberg Radio. My special guest today is Dr Edyard Denny. He is president and chief investment strategist at your Denny research. He has a long and storied career on Wall Street, beginning in the early days where he was chief economist at such August firms as E. F. Hutton and then later Prudential Securities. He eventually became chief investment strategist at giant German investment

house Deutsche Bank. Uh. This was many years ago. He worked at the Federal Reserve in both Washington, d C. And New York City. He has a new book out, Predicting the Markets, a professional autobiography. Dr Edyard Denny. Welcome back to Bloomberg. Very thank you so much. So let's start at the early parts of your career. You worked at the FED, both both at the New York Fed and the Federal Reserve in d C. And then you transition to Wall Street. What was that changeover like? It

was pretty smooth? Quite quite honestly, Um, I was at the Federals or Bank of New York for a little over a year. Uh. Part of that, I basically finished my PhD dissertation now at the Federal Reserve Board for

a few months. So I don't want to give you the impression that I had a long stint down in Washington, but I spent the year at the Federals Bank in New York, and then I got a call from a headhunter UM who placed economists and banks, and I said, would you be interested in taking a job at E. F. Hutman. I jumped at it because I I did actually want to go to Wall Street. I didn't want to stay in government when I was a kid. Well, wax nostalgic

here when I was a kid. I just have such a vivid recollection of the E. F. Hunting commercials and I'll put a link up to this on on the post about this. They were seminal, they were there was nothing else like. They were a premier firm. What what was it like in those days at such an Olvis farm like EF. Well, I I felt that, you know, I was set for life. I mean moving into the EF Hunton back then. Uh it was a premier firm, not just in retail but also in the institutional field.

Just a very very classic firm. UH modern offices down on State Street. And Uh, I kept pinching myself. I couldn't believe that I landed at this great firm, and I just was looking forward to being there for the rest of my life. Uh. And then and then I started talking to some of my new colleagues, and I know some of the older ones had kind of a resume where they'd worked at different firms, and I couldn't understand why they jumped around so much. And uh lo

and behold, my resume kind of looks the same way. Now, you know. That's how you how you get a new position, a new pay, raise, more stock options. That and sometimes these firms don't don't stay in business. Well, Hutton ended up merging with Hutton. Yeah, but that's because Hutton had some legal issues, to put put it mildly, and so they got taken over by Jarson. But I left about

a year before that happened. Uh. And then I went over to Prudential Bach at the time because George Ball was the head of Hutton and he went to Prudential Bach. Very famous person on Wall Street? Is it? Is it? I'm trying to think of who would be the equivalent of George Ball today. He was He was a star, definitely was a star. Could you could we say he was the Jamie Diamond of the Year or is that going to I think that might be going a little bit too far. I mean Jamie Diamond is in a

class of his own. But Ball was, you know, master the universe back then. And how did you end up working your way to Deutsche Bank, which was then was a giant bank in German und a little bit of actually Actually from Prudential, I went over to UH. C J. Lawrence at Hyman, who's you know, the all time great star in our business, particularly as an economist, decided to go off on his own and presently created I S I Group, which turned out to be a very very

successful firm. But he also created a opening at UH. I have to thank Himan for creating an opportunity to c J. Lawrence and UH. For me, c J. Lawrence was an opportunity to really focus much more on working with institutional investors. I had a great experience with the Prudential and working with retail investors, but CJ. Lawrence is just, you know, it's it's nice to change careers within careers, as long as the it's not nothing too radical. And c J. Lawrence itself was a very classy firm in

that area. And then from launch you ended up at Deutsche Well. C J. Lawrence was owned by Morgan Grenfeld. When I went over there and more, and Grenfeld was owned owned by Deutsche Bank, and there was all sorts of regulatory reasons why Deutsche Bank couldn't get into the investment business. But those regulations changed and eventually C. J. Lawrence's name disappeared and it just became a series of things like Deutsch Deutsche Bank Securities and and and the like.

So I I I stayed in the same office, and you know, the firm's name changed around me. So you trained as an economist, how do you affect that transition to market strategist? There were investment strategy Well, you know, UH, life as UH is full of opportunities and you just have to kind of hope that they come your way or or make the opportunities come here away. What happened at Deutsche Bank Secure Aries is that the Jim Moltz, who was my mentor in many ways he was a strategist,

that was the economist. I was providing economic data information to him and he translated into marketable action ideas and of course had his own ideas. But Jim moltwent over enjoyed the I s I you enjoined at Hyman and so they did replace Jim with Tom Galvin, who was the auto analyst, and he did a great job for a couple of years as a strategist, but then he decided to go off to the by side and manage money.

So there was just opening and I just jumped out and I said, hey, guys, you know, I'd be more than happy to do two jobs and pay me a little bit more, and I'll do economics and strategy, and somehow or other they agreed agreed to that. So when did the movie reviews come into your research? Because you're fairly amongst many things you're you're somewhat infamous for including movie film reviews. Well, you're a commented I joke around that the reason I do movie reviews is in case

this career doesn't work out. In this in case this job doesn't work out, I could always become a movie reviewer, right, But my wife and I have always enjoyed going to movies, and uh, I guess really it was in the early

nineties when I moved to C. J. Lawrence. We'd have these Monday morning conferences with the salesforce relating to them what I thought, what Jim Maltz thought on the strategy side, Right, I thought on the economics side, and I just started saying, hey, by the way, I saw the following a movie on Friday, and UH, I'd say a couple of comments about it,

whether I like them or not. And more often than that, I try to, especially once I started writing these things up, I try to relate it to UH to the markets. But two thousand and four is the first one I actually have on the website. So when they go back quite a ways, this book is filled with all sorts of quotes that I really enjoy. I'm going to start

with a long one, and let's have you comments on it. Economists, especially of the pessimistic persuasion, rarely pay attention to technological developments. Yet these developments regularly transformed the course of human history. Human nature may not change much over time, but technology often does, does so in ways that profoundly impact human societies, their economies, and financial markets. So first, why don't economists pay attention to technology? And and then secondly, why have

you found it to be such an attractive area? I guess a lot of them don't view it as being

part of their job setting, their job description. Um, they tend to be fairly narrowly focused on whatever it is that they choose to focus on and a graduate school, so they're either microeconomists or macro economists or monetary economists, and um, you know, I'm not too up to date on what they're teaching in grad school these days, but I don't think they're are really any courses that focus on how technology impacts economies impacts the way uh uh

economies evolve, which is kind of bizarre because when you think about one of the first economists was Mauthis, and Mauthis predicted that they be food shortages and what he didn't anticipate was technological innovation and agriculture. Um, clearly he misunderstood the rate of change and innovation. Yeah, and not then you also have to understand or try to think about how human beings respond to technological innovations. So again

going back to the Malthusian uh dire warnings. Uh So, as uh technology improved the ability of agriculture defeat everybody, you didn't really need anybody to be out in the fields anymore. You needed far fewer workers. So you saw tremendous urbanization. And guess what, when people go to cities, they have fewer kids. So all this concerns that populations will grow faster than the food supply just totally blew

up because technology cured the problem. But you know, economists, you know I I went back recently and I looked at Samuelson's classic textbook on economics, which is what most most economics students study when they first get into the field. And if you go back to you know, this first book, I think in the mid forties, and look at the latest one, which is written by Samuel Lynn and Nordhouse, you'll see that they define economics as, uh, the study

of how you allocate scarce resources optimally. And I was the radiant after and I kind of added this to my book after I've written most of it. I said, no, that's not really true. When when something is scarce, guess what entrepreneurs come in and they figure out new technologies to make things less scarce or to substitute for the scarce areas. And micro economics actually teaches that, you know, uh, there's no such concept of there's no such thing a scarcity.

Something is scarce, as the price goes up, you can still get it, you just gotta pay a higher price for it. And that encourages entrepreneurs to come in and figure out how to lower that. My favorite example is in New York City, if you want the helicab, it used to be next to impossible when you wanted it, and then uber came along and suddenly there are cars everywhere. And by the way, the value of that medallion at four millions because it's eleven cents. That's it. That scarcity

led to a technological innovation. Absolutely, it's so so that really raises the question, why are we missing technology from our economic textbooks. Why hasn't the dismal set figured this out? Well, you know, economics started out being called political economy, uh, and which included philosophy, included economics, included history. It was a broad ranging, uh, study of human nature and how it interacts with the environment, and technology was was part

of that. And somewhere along the way economics became very stratify stratisfied. I think I would I blame Keynes for a lot a lot and uh, you know, when Keens invented macro economics, that meant that anybody who didn't study macroeconomics was kind of a micro economist. And it's kind of divorced the study of economics from reality. In my opinion, it became too theoretical. And yet Keynes was a very savvy investor. He understood how economics interacted, which leads me

to another quote from the book. Investing is in a moral pursuit. It's not about right or wrong, good or evil, it's about bullish or bearish. Well, uh, I guess it was when when Obama got elected. Um, there were there were a lot of policies that were being discussed that I I thought were just much too interventionist in the economy. And uh I, um, I was sort of politically biased in my writing. And one of my accounts kicked me in the butt and said, you know, I don't pay

you to do Fox News. I don't pay you, you know, for your political views. I pay you for what you've done in the past, which is kind of seem clearly where the signal is and away from the noise and a lot of politics as noise. Absolutely, and uh it kind of like brought me to my senses and being an entrepreneurial capitalist realizing that this guy's an important account, I started to realize, you know, I mean, basically the market was telling me this is not what you really

need to be doing. What you need to be doing is focusing on is it bullish or bearish? That is it good or bad. Don't be a policy don't criticize the policy makers. Tell me what they're gonna do. By the way, that's my pet theory for why so many hedge funds have been underperforming the past decade. They thought they were sitting in think tanks when they were actually managing of people's money, and we got distracted. That's right. So I tell people I'm not a preacher. I don't

do good or bad. I don't do uh right or wrong. I'm an investment strategist. I do bullish or bearish, and sometimes you can let your political views. If you let your political views get no way, you could be bearish and miss a great bullmarket, no no doubt about it. One last quote, I'll go out on a limb and predict there will be another financial crisis in our lifetimes. However, like previous ones, it will offer great opportunity for buying stocks. So, so,

how soon is the next financial crisis coming? And at what levels should we be well? So, those are all great, great questions, and I'm not going to pretend that I have clairvoyance to tell you exactly when these things are gonna occur. But you know, over the past forty years, I've observed that recessions happen, uh, and very often they're

preceded by a financial crisis. And what's happened in the past is um credit was too easily available, and it was too cheape, and uh, people gotta get caught up. And how smart they were, I mean bull you know, bull markets make a lot of people very smart. Um borrowed a lot of money and then uh, suddenly we got an inflationary boom. The fan had to step on the brakes and uh low and behold, a lot of debtors just couldn't keep making their payments and the whole

thing came on glued. And history is full of this. I mean, it's just, uh, it's a traditional boom bust cycle. Um. So let's let's look a little closer at the boom bust cycle and the two thousands. At least before the crisis, you had easy credit and cheap money. Correct. Today we have not so easy credit and money was cheap, but it's getting a little less cheap. Where are we in that long term boom bust cycle. Well, I'm you know, I always like to think a little bit outside the box.

But but but always uh stimulated by what the data is telling me. And uh what what the data is telling me, What the experience of the past few years tells me is maybe just maybe we could have rolling recessions that kind of roll through different industries at different times. So didn't we just have a pretty severe recession and the energy and commodity space in two thousand and The answer rhetorical question, The answer is yes, it was very severe. The amazing thing is how quickly we came out of

it in two thousand and sixteen. And that's because one of the big differences between the current environment and the nineteen thirties is that in the nineteen there's no such thing as distressed asset funds that we're looking to buy things that fifty cents on the dollar. Now there are, so when things fall apart, there's money that just kind of pours in to buy these things really cheap, and that kind of keeps the system from really imploding completely.

We just had a recession. We're probably still in a recession in the shopping malls and the retailing industry, and we're seeing how that industry is restructuring itself. Uh um, So that may be the way things continue to unfold. So I don't want to say there will never be a recession again, but we may just have these kind of rolling recessions without the kind of the gut wrenching six eighteen month downturn that we have experienced during the past forty years that I've been in looking at things.

The economy is that bulkanized that you could getting narrow energy or commercial real estate recession and it doesn't spill over to the rest of the broad economy. Well that you know, maybe I'm showing my inherent optimism and kind of aiming in that direction. I mean, clearly, uh you know, given current events, if we have a trade war. In my book, I do write about the Great Depression, and I do believe that the Great Depression was at least

triggered by the trade wars, by the and all that. So, you know, I mean, it's certainly conceivable to have a economy wide global recession. I want to talk a little bit about com oddities and and what you describe as your favorite indicator, but I have to start with a quote of yours the best or or a quote that you write in the book, The best cure for high commodity prices is high commodity prices, obviously referring to market forces either bringing more supply on or or reducing demands.

So from that, why do you come to the conclusion that raw industrial spot price index is the best of all economic indicators. Well, commodity markets are probably the most competitive markets. They're also very efficiently organized. We have we have some pretty good institutions where these things are traded where uh they're they're self regulating to a large extent. So the exchanges have a long history of being very honest brokers between supply and suppliers and demanders of commodities.

You're in user consumers. These aren't like speculative maybe I want to own stops or not. These are people who are actually buying commodities and using them in and that's that's that's right. Um. By the way, is as a side note here that I'm not convinced that some that commodities really should be viewed as an asset class because I think that, uh, mostly the commodities do have end users that actually want to use them as opposed to

just kind of stockpile them. Commodities don't really have d and E. They don't have dividends that they don't have earnings, so they're they're a different kind of animal. But would you say the same about gold, because I know the emails from the goldbugs are about to start. Yeah, well, look, i'm I'm gold is a unique commodity. It's the only one that I know of that that has its own fan club. And they call that they called gold bugs. And I say that respectfully. I don't say that, you know, Uh,

I just don't do gold. I I need dividends, I need earnings. I have nothing against owning some golden portfolio. Most strategist will tell you, you know, sure, go ahead and on some gold. But that's I've had some good calls, a few good calls and and and gold, but you know,

nothing that stands out in any meaningful way. But to your question about the c rb ROW Industrials um, it's it's an index that's been around since the fifties and uh, first monthly, then weekly, now daily, and I found that it's very highly correlated with global economic activity and therefore also US economic activity because the US matters, UH so much, so I watch it on a on a daily basis for an indication of what the global economy is doing.

It's got thirteen raw industrials. It does not have a oil, it does not have lumber, which I think both those commodities have their own unique supplied demand characteristics. And I like the divided by initial unemployment claims, and I call that the boom bust barometer. So raw spot price index divided by initial unemployment claims. So that's that's become a weekly indicator. And what's the signal that, hey, a recession

is coming. Well, it's really a coincident indicator. But it's available weekly, so you know, I don't have to wait for some of the monthly data. UM. So, for example, the CRB raw industrials and next took a dive in the second half of two thousand fourteen and two thousand and fifteen, signaling that something was happening in the global economy. It was getting weaker UH. And then it hit a bottom in early two thousand sixteen, and UH alerted me

that global economic activity was improving. And then I started to see it in some of the indicators that we use for forecasting corporate earnings, and it all sort of kind of came together earlier this year, and we're recording this in April, you had said, I think inflation is dead. So what do you mean by that and what is it suggest to bond investors? Going, well, it's it's not a a new mantra for me. I've been basically of that opinion since UH for forty years of my uh

my career. I mean, it wasn't dead in the late seventies when I started my career, but when Vulcar adopted UH monetary policy UH procedures that led to interest rates going straight up, I concluded that he would in fact break the back of inflation. And the amazing thing, the remarkable thing was how quickly inflation came down once policy

really aimed at bringing it down. And I was I've been a disinflationist, which means it doesn't mean falling prices, means that the price inflation, the rate of inflation comes down. And I've been a disinflationist throughout my entire career. And maybe at some point I need to just you know, let go the Cliver victory art or well, you know, I hope in my next forty years, God willing or you know what, what whatever part of that, I continue

to uh be employed the way I am. And um, yeah, I think inflation what I've learned is it's not a monetary phenomenon. With all due respect to Milton Friedman, I mean, by now we should all just empirically realize, clearly, clearly, it's not a monetary phenomenon. I'm not gonna tell you it's not at all related to what the central banks

are doing. But if anybody had told us that the central banks are gonna pile on the kind of liquidity they've put into the system since two thousand and eight, we would have all said, by now, inflation should have been soaring. I didn't inflation hyper inflation. Um, I mean I didn't see what the central banks were gonna do. And I guess if you told me that, I might

have turned into a reflationist. But I think what's uh, what's continuing to work is what's worked for the past forty years is globalization, global competition, and that's obviously under some stress here with the trade tensions. UM. Technological innovation, as we discussed earlier, is a is very uh powerful and bringing prices down, and then aging demo graphics, people getting older. Older societies I think tend to be less inflation prone. Let's talk a little bit about the early

days of your career. You got to Wall Street. You mentioned we were in the middle of a very recessionary period. Uh, we had stagflation, we had high oil prices, we had an oil embargo. Stocks essentially went nowhere, and we were coming out of the worst recession since the Great Depression. What was it like to start your career in that environment. Well, with the benefit of hindsight, how is remarkably lucky? I mean,

but up is that the thing? Well? Yeah, I mean the seventies were awful, and I was in graduate school, so you know what, what what did I know? I know, I was studying theories and u uh, taking courses, and what was happening in the real world really didn't matter all that much to me, except for the fact that I had to wait in the long gasolene lines in nineteen seventy nine. So clearly we all experienced the angst of high inflation and two energy shocks in seventy three

and seventy nine. But you know, I landed on Wall Street in nineteen seventy eight. So kind of in the thick of of all the misery and all the barishness and um low and behold, I started to kind of see the light early on in my career that maybe Volker would break the back of inflation, and if he did, that could bring bond deals down. So I started to talk about what I called the hat size bond yields

when they were over ten percent. Uh and uh. Also in the early eighties turned the bullish on stocks along with my mentor back then on the strategy side was Greg Smith at first Study if Hunt, then at Prudential. So I mean forty years. During the past forty years, the stock markets basically gone from a thousand to twenty six thousand, maybe back down to five thousand. The bond deal has dropped from well over ten two around three percent now it got as lows one and a half percent.

So I count myself just you know, I just kind of lucked out be have forty years of my prime focus during bull markets, great bull markets and bonds and stocks. You're credited with creating the term bond vigilantes. Why did you come up with that and what did you mean by Yeah? I'll probably be on my tombstone. You know that anytime the bond yield goes up anywhere on the planet Earth, I get a call from somebody in the

media saying, you know, the bond vigiliantes back. So when Greek bond deals were going up, I actually got some calls from Greece asking me if the bond vigilantes had decided to take a vacation and UH in Greece and cause some trouble over there. But in three UM bond deals were starting to go up. There's a fear that inflation was going to come back, and I guess i uh. I was trying to defend my disinflation scenario, said, don't

worry about it. If inflation comes back, if if the Fed doesn't deal with it, then the markets will deal it with The bond market will will deal with it. I recently sort of segued that into the dal vigilantes within the context of the trade tiff that's going on. So let's let's move into equity. Since you brought it up, a lot of people are saying US equities are expensive, especially relative to emerging markets. Where are we in the

broader market cycle, and do you think stocks are expensive here. Well, again, looking over the past forty years, I've come to the conclusion that what causes bear markets is obvious. It's uh, it's recessions. Um. We had one bear market that was

not caused by recession. But with the benefit of hindsight, I think it's almost like a flash crash, which I'm sure it's at all occurred sort of in one day, turned out to be a great buying opportunity, but certainly there were some pretty nasty recessions in the past forty years. Benefit of hindsight, if you had the stomach for it and stayed with it, you'd be still very well off.

The problem we all have, of course, is you know, when I was just starting out, I didn't have a lot of money, and I couldn't possibly anticipate the kind of bull markets we had. But to get to to the present, UM, stocks are not cheap. They're not cheap in the United States. UH. About A lot of that is um because the so called fang stocks are very expensive. Take those out, and UH stocks are sort of fairly valued. UH.

Factor in that inflation is low and interest rates are low. UH. Then I think you can also argue that stocks are not grossly overvalued. H Warren Buffett has got the famous Buffet ratio looking at market cap of the SMP five to g d P, and it's back to the highs of two thousand, right before the market took a took a dive. But Buffets pointing out that he's not paying that much attention to the ratio because inflation and interest

rates are so low. You know. I guess the answer about where we are in the cycle is when will the next recession occur? If we continue to have these rolling recessions, and maybe we will continue to have a very elongated, very maybe the longest expansion ever, and I think people will therefore would be willing to continue to pay relatively high multiples as long as earnings are growing. And we just got this huge booster two earnings from

the from the from the tax cuts. So I don't know exactly when the next barre market is going to occur. I don't think we're gonna have a recession in two thousand and eighteen, this year or next year is possible that that's that's a fair that's a fair, but but but everything is you know, I mean, you gotta keep your wits about you. I mean this, this trade issue is UH is a significant one, but I I'm I'm on the side that believes that this too shall pass.

So you're looking at these as pronouncements that get walked back and cooler heads prevail, or a trade war is in that right now, I view had more as war war of words, yes, than than tweets. You have tweets, that's right, that's rather than an outright trade war. And the fact that the United States is now finding that both Japan and the European Union is joining in UH basically attacking China for unfair practices, particularly with regards to technology.

I think is a is a positive development technology. I think there's something tip of the idea that trade isn't just about trade. There's a national security issues of course. UM we've already seen a number of Chinese takeovers of US corporations, UM prevented because of security concerns. Well, that's become you know, because of because technology does have such an impact on national security. Trade is no longer are just about you know, trading corn for silk or something

like that. There's there there are issues that do bring in some political considerations. So one of the things I find fascinating about you. A lot of people who came of age as investors during the nineties seventies, they seem to be scarred by it. They have PTSD, they're terrified of inflation, they're terrified of recessions. You seem to have emerged from that era with nary a scratch on you. What do you attribute that too, and and why do you think you're outlooked differ so much from your peers

of that that same era. Well, it's possible that you know, I I am very dated dependent. You know, the feed always says they're very data dependent. I'm very empirical, and and that's sort of the way I look at things. I think a lot of a lot of people are seem to be what it to the theories UH, and then try to stress the data to fit that. So I think, you know, in the nineteen seventies, UH, a lot of people got conditioned to the I d that inflation is a problem that was created by central bankers

and would continue to be created by central bankers. There's a lot of fears that deficits UH would lead to to ruin and um, look, I'm a conservative fellow I don't like deficits. I don't like central banks. I call them central monetary planners running amuck. But again, I'm not a preacher. You know, I'm not saying you know right or wrong. I'm saying what what what are we actually saying? And what I guess what I sensed is that there's

more to to our economy than just policymakers. There's a lot of entrepreneurs, a lot of businesses, a lot of workers. And uh, one of my kind of pitches when I visit a council get worried about policies, said, look, well we've done despite Washington, right, And that's that's That's kind of helped me focus on the importance of understanding that the people get up in the morning and they go to work, and they want to work. They want to

make money, they want to create something. And uh, you know I see that, especially now that I'm an entrepreneurial capitalist myself. I have my own firm, and um, every day, I want to stay in business and I want to grow my business. And and that's completely independent of what policymakers do. I mean, if they get my way, I'll do the best I can to to run my business with the policies that that I have to deal with.

So we've talked a bit about technology and the Malthusians. Um, what do you think of the fear that we see among some economists that technology and robotics is going to take away everybody's jobs and we'll soon all of us will be unemployed and it'll just in the Amazon. In the book, I I addressed that issue kind of under

subbetting of Bray of a a New World. And uh, another section is called ice Spartacus, the uh the idea that, uh, you know, androids are going to be doing all all the dirty work for us, and one of them will rise up I Spartacus, and you know, everybody will the the androids will revolt and uh launch of revolution against the humans. Japan is a good example. Japan's kind of sort of a leading indicator for the rest of us.

They're geriatric and aging society. Their unemployment is extremely low, They've got what appears to be actually a shortage of workers, and yet probably they're were the most robotized automated economies in the world. The demography on a global basis, we're just you know, we're we're sort of on the road to self extinction. Fertility rates have collapsed around the world, with the only exception being India and Africa, and those

two may changes. Urbanization continues. We were ahead of Europe for a long time here in the United States, and we've sort of fallen into that. Yeah, you know, fraction of percentage fertility rate in the US exactly so. And and the labor force growth because of the aging of the baby boomers. We really are seeing around the world with a few exceptions, that working age populations are really declining, and so we actually need robotics and automation to do

things that we don't have people to do. What about skilled immigration? Do we want to pull the best and brightest from around the world or how immigration historically has always been a source of economic growth. As a matter of fact, I would attribute some of the surprising growth in Europe over the past couple of years to the to the Median people that uh migrated from Africa in the Middle East to Europe. I mean a lot of us looked at us, Oh, this is gonna be terrible.

I mean, the mix of cultures is going to be horrendous. And by the way, it hasn't been pretty I mean the crime rates have gone up, but still you know, Germany's economy is absolutely booming, and I would say that it's just another example that sometimes uh, I mean, historically migration has been a source of growth. Can you stick around? I have a charm more questions for you. We have been speaking with Dr Eduard Any of your Danny research UH and author of the new book Predicting the Markets,

a professional autobiography. If you enjoy this conversation, be sure and stick around for the podcast extras. Will you keep the tape rolling and continue to discuss all things markets. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. You can follow me on Twitter at Ridhults. Check out my daily column on Bloomberg View dot com. I'm Barry Riholts. You're listening to Masters in Business on Bloomberg Radio. Welcome to

the podcast. Thank you Ed for doing this. Been looking forward to to going over UM the book and some other stuff. I've been getting your research for a long time and I always find it um quite fascinating. But I have to start with a question about the book. So you crank out a lot of material every day, I could tell you read a lot, you write a lot.

What was your process like for writing the book, and how challenging was it on top of everything else you do well in some ways, I've been writing the book for forty years, right, because it's you know, and and in the book I point out I I really didn't have to do much research because that's what I've been doing for the past forty years. But still getting three words out one word. I'd tell you that I didn't know I had it in me. I mean when I put it all together, I couldn't believe how much I

had written. It's you know, the book is six d pages long, and uh so, I guess forty years years, you know, I had things to say and I wanted to write them down. So it's it's kind of like and play the piano. But I guess it's kind of like sitting the piano and saying and being a composer and say, I don't know what I'm possibly going to compose and suddenly just comes to you. But once I once I organized the book under once I organized the structure of the book, and it's all every chapter is

about predicting, you know. I started with predicting the past kind of reviewing, uh, a quick overview of things, then predicting bonds and stocks. Once I did that, it uh, it was a pretty fast effort. So a lot of it was written actually from the summer of two thousand and six to the summer of two thousand and seven, and obviously at nights and on the weekends um uh.

And sometimes when I had some gaping holes and what I needed to put it in the book, I'd uh put it in my my daily write it up there and think about it, research it and then throw it into the book. Quite quite interesting. And how long did it take you to write this other than the forty years to absolutely well, I I the bulk of the book was written from two thousands suwhere in two thousand sixteen to the summer of two thousand seventeen. So let's

talk a little bit about index funds. You know, they had been invented around the time your career started, but they really haven't captured the popular imagination like they have since the financial crisis. What do you think about the role of index funds in in an investor's portfolio and to what would you attribute this sudden recognition that hey, this is cheap, easy and efficient. Well, I think it's uh, you know, the the media made it clear that this

is an alternative way. I think also a lot of stockbrokers started to promote the idea that, you know, the individual investor could could buy indexes. And by the way, a lot of institutional accounts, when they want to be uh long technology will maybe just buy an index uh that monitors technology or has technology stocks. So I think it just kind of fed on itself. And uh, here we are with an et F I just about anything

that you can trade on the planet Earth. And you've been doing this long enough where you've gotten a number of things very right. Uh. What are the things that you've gotten wrong that stand out in your mind? And what lessons did you take from those? Well, I think in our last conversation you asked me about why two K and uh you know two thousand uh in nine I uh uh started to focus on on why two K is a potential problem. And this is a good example of I uh you shouldn't mess around with subjects

that you don't fully understand. And uh you know, I'm I like technology, I use it a lot, but I uh I used to I used to uh, I studied assembler programming, but I'm not a codeer, so um, but we could we could make the defense for you that Hey, you helped draw attention to a potential problem, and a lot of time and resources were thrown at that problem,

which made it considerably smaller. Well, I was at the time very publicly monitoring what corporations were saying in their uh SEC filings about how much they were spending, and it really added up to about fifty billion dollars. So you know, I obviously was concerned about a problem that corporations were concerned about. But the fact of the matter is they dealt with it and nothing happened. And so when nothing happened, I was a little bit embarrassed because

I thought it could lead to a recession. Benefit of hindsight I should have I think I had the right issue, but declared victory. I was. I was right for the wrong reason. Benefits benefit of hindsight would really happened is corporations went on a technology spending boom and used white two ks and excuse us to get all the brand

used hardware and software. And then when the millennium recurrent, all that spending just dried up, and the whole thing just kind of imploded with It's pretty easy, with the benefit of the hindsight to look at those March two thousand UM earnings mrs and conference calls as oh, all that spending in was pulled forward. Maybe you pulled five years with the spending forward, and that's what led to a dearth and and suddenly even reasonably priced stocks became

very pricey. On the test side, didn't didn't take a lot to watch those profits disappear. UM. There was one other question I wanted to ask ask you about the bond vigilante term. Where where did the idea that there were certain players in the bond market that would either punish the FED or at least use their portfolios as a way to draw it tension to the threat of inflation.

Where where did that come from? It's kind of unexpected. Well, you know, I I back then I was writing UM a weekly now right a daily, and uh you know, I always find that, Uh, I feel a responsibility. If I want to sit down and write something, I want people to read it. Uh So I try to read it, write it in a way that makes it interesting, and uh you know, I'm constantly coining. You know, I coined that hat sized body of Ie D and the bondage Lineyes, was just something I put into I think it was

July piece. They just kind of got a life of its own, suddenly kind of caught on. I was I was looking for a film derivation that it came from some posse going after yeah, yeah, no, no, no, such no such luck in that particular case. But you know, and then in the early nineties, the Clinton administration basically paid homage to the bondage Gilantes. Uh, when Clinton's advisers told them, you know, you can't do that because the

bond folks won't let you get away with it. Robert Reuben, Right, car Carville, I think what was the famous quote something that you know from Reborn? I want to be reborn as a you know, uh, it is a bond vigilanty, but you know, a bond got or whatever. And so you've been on both sides of the research aisle as both an economist and a strategist. How do those roles differ and how does that affect the sort of work you do each day? Well? They really, uh, there really

should be one and the same. It's kind of goes back to our conversation earlier about how academics and professionals, uh, the nature of things is, we we tend to become very uh uh segmented and very kind of confined to

viewing what we do, uh, very narrowly. Uh. Fortunately for me, I was able to uh segue from economics into investment strategy and and and and make them sort of the same the same subject really because people, some people say that predicting the economy and protecting the stock market are

too totally different. Well, I just wrote a book that it says the opposite that you know, you you want to understand the economy, and you want to understand the financial markets, and you want to appreciate how the to interact markets can affect policy. Uh, policies can affect effect markets. Um. Economic events cause people to change the way they they view markets. So I think they're very much one and

the same. So in other words, you're not going to get your economic forecast wrong, but your market forecast right. If if you're getting one right, you should get the other right, and shot one wrong, you're probably gonna have problems in the other you should, But I mean it's I mean, it's conceivable that you could get an economic scenario right overall, um, and you have still miss the markets. But I think, uh, it's for starters. It's always get

good to get the economy right. Uh. And if you can do that, and I found historically getting inflation right, it's been paramount paramount, So so everything comes down to the right inflation forecast. Inflation gets you the economy right. It also gets you the FED right, and then it gets you the markets from markets evaluation right. Uh, I mean right now, if I'm gonna be just dead wrong in place, you would make an amazing comeback and suddenly

all these deficits that we're looking at become a real concern. Worse, much worse. Uh well, interest rates will be a lot higher and uh, deficits will be so it will be a completely different scenario. But hey, look, if I have to change my views, I'll do that. I mean again, I'm I'm not stuck to theory. I'm not stuck to uh right or wrong. I'm I just do bullush or bearish. Huh. That's quite fascinating. Um. There was one of the questions I wanted to ask you about the market cycle, and

you you almost addressed it before. What I want to bring it back to this. So here we are. The market made its lows in March O nine, it made new highs and uh, the economy continues to expand. However, we're starting to see the average job creation slide a little bit. You go back five years and we were doing two fifty a month, and then tune a quarter into twenty. Now we're on on track to doing UM

something like one sixty five a month. And we're recording this after a disappointing hundred and ten thousand UM scenario. Is the economy cooling off? What does this mean for inflation? What does this mean for stock markets? Well, and in the past, when the unemployment rate was this slow, we would have a boom. I mean, companies would scramble to higher workers, to be paying much higher wages, they'd be expanding their capacity, and inflation would take off. The FED

with tight than you have a recession. Uh, the old days, the old days. Right now, we've got a very tight labor market, but we're not seeing wage inflation take off. I think that seems to be the key to a lot of future issues. Look, both both policy and I'm I'm I'm sixty eight. I just wrote a book about the past forty years, and I hope to write another book about the next forty years or twenty years or whatever. I'm granted, but I haven't had a pay increase in

about ten, maybe twenty years. There's a lot of baby boomers that made a lot of money in their careers from you know, I'm making a lot more money out that I was making when I was first starting the business. But the reality is, I think there's a lot of baby boomers just aren't retiring and they're not getting paid increases because they're getting paid enough, and in some cases, uh their pay is going down because but they still

want to work. Uh So, how much of this is just a hangover from the Great Financial Crisis and a loss of people feel like, Hey, I lost a good couple of years before and after that, I can't retire. I have to keep working. I think that's well, I think we're well past that. I think people that are working now. I think a lot of baby boomers that are still working really do want to work. Um So, this isn't I have to work because I need to. This is Hey, I like working and it gives me

not a purpose. I think some people are living longer and uh, you know, some people can retire and play golf and tennis and uh go travel around the world. I personally can't do that. I mean, I need to be working, I need to be thinking, keep keep keep my mind going. I love this business because I don't know if any business that kind of keeps you so focused on current events and thinking about how the world actually works. So so let's let's stay with the issue

of wages. You said your wages. Have your personal wages flat for a decade. I'm not complaining, but but lots of people's wages have been flat for several decades. Well, what does this mean? They're real wages? Yeah, there there's a there's a section in the book where I focus on predicting the consumers and predicting demography, in which I I think I may I convinced myself that the notion that real incomes have been stagnant, uh for the past fifteen years. It just doesn't jibe with with with with

the data. Uh. Now, when you say the data, I want to really get into this little bit. I don't have any doubt that the quality of life for people has gone up significantly even as their wages have remained well. That's the flat earth concept is based entirely on a series that's produced annually by the Census Bureau on money income,

where they ask people about their money income. They don't ask them about uh, non money sources of income, so entitling programs social securities in there but not medicare not medicaid UM. There's just a huge discrepancy between personal income, which is available monthly. But the problem is where when you look at median, the census data is a median. I can't give you a median and personal income. I can give you an a mean, I can give you an average, but I can't give you that you know

the family in the middle. But when you look at the average, it's it's up like in real terms over the per household UM. And by the way, I believe household is the best measure for measuring standard of living. My kids have a great standard of living. I wish I lived as well as they did. Uh, But the data for average real incomes is up. Like whether use personal income, If use average hourly earnings, UH, you're you're up about as much. So I think there's for some reason,

there's been this focus on this one data series. And Trump mentioned it when when he was running for president, that people's earnings have stagnated. The data just doesn't show that consumption is at an all time record high, no doubt about that, and son the stores closed consumption continues to rise. Yeah, yeah, So how much of that is healthcare spending and how much of that is um goods

and services that aren't related. It's really all of the above, you know, I mean, standards are living have gone up across the board. So if there was one area that that you had one magic wish to fix in the economy and public policy and what have you, what would that be? Because I know you think about these things

long and hard. Well, um, you know, I I'd like to believe the supply siders that you cut taxes and you're gonna get a lot more work and a lot more income and it will kind of pay for itself. I sent some skepticism on your part in the way you framed that. Well, it's it's it's faith based economics, you know, and it hasn't. It always unleashes some animal spirits,

but it rarely pays. It never seems to pay for. Well, that's because uh, you know, maybe the policy the politicians used that as an excuse is like, well, we can go ahead and increase entilement programs and uh not means test them and not worry about all these pensions. Uh you know, I mean school teachers are basically strike in some states because they're not getting paid enough, uh, where

they literally have had no raises for tanks. And then we have to we have a situation in Flint, Michigan, where the water supply has been polluted and a lot of that is because we we have this amazing concept that you're entitled to retire. Uh and if you're a municipal worker, allowed to retire at a very early age,

and those bills are extremely expensive. It's one thing for cops who take their life into their hands every time they go to work, and the same with firemen, but when you have clerical workers with these very generous pension funds, although well, it's it's it's it's generally yeah, exactly, I

mean it's uh. I agree that an individual basis, people who have risk risky professions, but you know, a lot of a lot of municipal workers when they retire early, get another job, and they get another pension, and maybe we should consider that come back when you're sixty five, and then we'll pay you the pension at that point. I don't want to get a lot of people mad at me here. But it's too late, I guess across the line. But that is that is not a radical

philosophy that you're saying. And also, lots of these pension funds they're wildly undefunded and it's questionable, that's right. I mean, while a lot of uh, principal workers who retired years ago, I've done extremely well. I think I think we're getting to the point where the pension funds just the money is just not there, and people have been made promises that can't be delivered. Right, Charlie Elise has been running

about this for a while. I know I only have you for a finite amount of time, So let me get to some of my favorite questions. Um tell us the most important thing that people don't know about you? Well, um, there are a lot of things that are too personal to to share, obviously, so I've only uh, that's why I wrote a professional autobiographer. You know. It's it is very professional. Uh and uh, I don't uh, I don't say anything bad about anybody. I don't have any grudges

that that I settled in the book. I know grudges, No, not, No, I've six hundred pages, not a single not a single thing. Um. I would say what they don't mean not. What they don't know about me is I'm working on my second book already already they already. God, it took me like five years before I can even think, well, this this is the this book. I is the book that I I had to write just because I you know, I've learned so much over forty years. Just not to do

it was it would be a shame. The book I'm working on now is the one I want to write. It's more philosophical, It's more more about what I've learned philosophically about about things. And it's called the the Theft of Nations, a trademark that before someone grabs it well with book titles, there's already that already there anybody who us there already is a book of that. But it's uh, basically the capitalist ideal and its corruption. Capitalism makes so

much sense, entrepreneurial capitalism. I'm an entrepreneurial capitalist. It makes so much sense that it benefits consumers, and consumers are the only class that we really should care about. So why does it constantly get corrupted? Why why can't we stick with it? And so that's what they don't know about because I'm writing another book. That's that's interesting. Tell us about some of your early mentors you're already mentioned, uh,

Mr Smith? Who else were? Well? Again? Greg Smith and Jim Maltz were my mentors on the investment strategy side. But my role model I never worked with him was Henry Kaufman Henry Coffin. It was the chief economy that Solomon Brothers highly regarded in the seventies, helped to save New York City, Right, Yeah, I think I believe so. Um. But when I was a graduate student, UM, I was impressed by how he had taken economics and you use that for a very successful career on Wall Street, And

that's very much appealed to me. Uh And in a lot of the ways he looked at things using a flow of funds approach is kind of the way I started. UM. But I developed my own tools that worked better for me than the ones who worked for him. Who who else influenced your approach to economics and investment. Well, I I think that's it. I mean it's not really Uh it's one and the same. It's kind of one and the same. Tell Us about some of your favorite books

be the fiction nonfiction market related? Yeah? You know? Uh I yes, Uh I like history a lot of quite a bit. Uh And because uh I am so involved and fascinated by but what I do for a living, my my day job, I read a lot of stuff that's that's relevant to to that. So I really like reading biographies, autobiography. So I really enjoyed um Ben Bernanke's uh book The Courage to Act. Um. You know, there's been books written by and about Alan Greenspan. Um, so

those have been some of my relatively recent reads. And Turbulence was that spans age age of turbulence. Uh. I also um like uh watching watching movies. But I I've started to really get into some of these uh docu dramas. And there's uh there's one about the men who uh kind of overcame the American Frontier. It's about frontiersman. It's fascinating how a few individuals really sort of opened up

the American continent. They unfortunately, uh, displaced a lot of native tribes here and uh there was a lot of wars that we're just in. Massacres were awful but fascinating. Uh to watch some of the docu dramas. What excites you about the markets right now? Well, I would say that the drama is always exciting. I mean it was getting kind of dull there in two thousand and seventeen.

It was a day with volatility and yeah, and and um I was you know, I mean for me it was it was fortunate because I could focus on my book without having to suddenly scramble to learn about something that was occurring. And now all of a sudden, I'm scrambling to kind of you would have I know about trade and uh those kind of issues. So the I mean Trump right now is a fascinating character. I mean I love him or hate him again, I don't do.

He's not boring. He's not boring, right, I canantee you that. Yeah, I mean sometimes I just you know, he really should have just stop tweeting. He should have like gone gone and take a vacation after the tax cut and just kind of winged it until the mid term elections. But he just can't. He can't stop, he can't compulsive, There's no doubt about it. I'm shocked that he finally came out and said something about Stormy Daniels because he had been radio silent on that for while the whole thing

was unfolding. You know, he is something had to come out eventually. Well again, I think, you know, we live in interesting times. We always do. And you know saying a president that you know, one month can give you extraordinary bullish policies of cutting taxes and and one a month or two later start to talk about protectionism, and suddenly that's extremely bearish, it's wild, it's it makes for

very interesting times. Let me push back on that a touch because I have I have friends who are investors on both sides of the aisle, and collectively they seem shocked, shocked to discover gambling going on. He's been talking, he campaigned like who is what did they think? Well, he's just kidding. What's unusual about him is he's going through a checklist. And you know, I mean if you go and read his speech on his campaign speech on trade, it's all he's just going through this. This is it

he's he's doing it. That's why I'm always surprised when people say, well, the market wasn't prepared for this. Really, did you not see eighties six speeches where this exact thing was laid out. Well, you know, we we kind of got who kind of got slow and lazy in two thousands seventeen. I mean, I guess that he came after healthcare and that fell apart, so everybody figured that that was much harder though, when everybody taking a taking

an entitlement away is very challenged. But the result was everybody figured that his agenda was dead, that he couldn't get anything through, and all of a sudden, we're all we're mostly on vacation, and December twenty two we pass this amazing tax tax legislation. And by the way it's ultimate impact, it's kind of confusing. It may already actually be depressing New York and California and other other places

where high tax states, high high abductible states are. We probably find that whatever stimulus it provides to some people are offset by the tax increases to others. I just read that California, if it was a country, has now become the sixth largest economy in the world doesn't seem

to be really having that bed of an effect. Although we really haven't seen the tax rep everything we're doing now for April fifteen, we won't really feel the tax hit until I don't, yeah, until I personally don't know what my texts are going to be in two thousand and eighteen, other than they're gonna be higher because you're in New York resident you actually live. Yeah, we're next to you, we're one town apart. Um. Let's talk about what you do for fun? What what do you do

to relax? What do you do when you're out of the office too? Just sort of kicked back. My wife and I like to go see a movie every Friday night, so I'm not sure what she's gonna she She usually is the one who picks them so and I review them. What what has been the tell us the last three movies you saw? Well, the one that sticks side is actually the one that I won an Academy Award for something I'm not I don't recall what it was, but

it wasn't for this Pictures called get Out. You know it's it's it's a comedy, it's sort of am it's it's it's a strange movie. It's a movie about a fellow who goes uh visits his girl girlfriend and uh his girlfriend's parents, and there's just something totally odd about the whole situation and everything suggests that he should just get the hell out of there as quickly as possible, and he just doesn't get the message. And I kind of try to relate that to the market is like,

you know, sometimes just look around you. Uh. But in terms of what I really enjoy I like to play tennis quite a bit. But really yeah. But but but the problem is when I play with my wife, she's very competitive and I'm not, so she's always beating me. But I don't really get upset about that. But I think she's mad that I don't try to be more competitive. But I just do it for the exercise. It's a great sport. I've come to it late in life, and

you know, it's fun. It's it's fun. It's um. When I started playing the next quarter over there are these four guys they have to be a hundred years old and there they play every week and they're great. That's the crazy thing is you don't have to run around like other sports you basically just have to be aware of where like playing basketball or well, I got my wife killed my basketball career in my late thirties. I rolled my ankle, came home and I was like, yeah,

you're done. And that tends out to be pretty pretty accurate. Um, have you seen Ready Player one? That the book was wonderful, It just came out. I'm looking forward to to seeing that with my Mark tonight. I don't know how Spielberg is gonna take this. The whole film is essentially in it. The whole book is essentially exists in in a alternative world, cyberspace world, and there's an ongoing internal dialogue for the main character. It'll be interesting to see how he how

he did that. What sort of advice would you give to a millennial or recent college graduate who said, hey, Dr Ed I'm thinking about going into market strategy or economics. Oh god, I mean you just set me up for for a commercially or read my book. I mean that's you know, throughout my career, I've had people ask me, you know what, what, what is there one book that they should read or that they should have their interns

read really understand the markets? And uh, I think I had to write the book partly that to say, well, read my book that that's your answer. That's my answer is it's all in its crass commercialism, that it is what it is. It's all in there, and and tell us something you know about the world of markets investing in economics today that you wish you knew forty years

ago when you were first starting. Well, I think this idea of just stay laser focused on bullet that you know that that well we really have to do in our business is just is it is focused on other events. Uh, policies our bullish or bearish, and that's just not at the macro level. That's you know, you can be looking at at companies as well, and you can be critical of management and the stock goes up anyways, and you have to really try to figure out what is it

that the markets focus that's important to the market. Uh so don't it's it's I just I learned the wisdom of old adages like don't fight the market, let the trend be your friend. The best cure for high commodity prices is high commodity prices. You know, that's why they're old adages, because guys like me uh after a while, appreciate just how how much you wisdom. There's there. Well, this has been fascinating. Thank you so much, Ed, I

appreciate your time. We have been speaking with Dr rd any of your any research an author of the new book Predicting the Market's a professional autobiography. If you enjoy this conversation, be sure and look up an Inch or down an Inch on Apple iTunes, overcast, SoundCloud, wherever you find your favorite podcasts, and you could see any of the other two hundred or so such conversations we've had. We love your comments, feedback and suggestions right to us

at m IB podcast at Bloomberg dot net. You can check out my daily column on Bloomberg dot com. Follow me on Twitter at rid Halts. I would be remiss if I did not think our crack staff who helps to put together this conversation each week. Michael Batnick is my head of research. Taylor Riggs is our producer slash booker. Medina Partwana is our audio engineer slash producer. I'm Barry Ridhults. You've been listening to Masters in Business on Bloomberg Radio. Take the tent int