Interview With Edward Yardeni: Masters in Business (Audio)

He now runs your Denny Research and has a fairly substantial institutional client base. This was really a very wide ranging conversation about traditional economics and how we use that as a basis of analysis of equity and bond investing. He is not a typical economist in that he really got started on the bond side and then moved to equities, and I find a lot of his perspective to be

atypical and very very interesting. UH And obviously his clients agree with that because he UH advises a lot of very substantial mutual and hedge funds and they really care a lot about what his perspectives on the world economy is.

He is both simultaneously enthusiastic and constructive about the future growth in the United States, but raises a lot of concerns about things globally, including debt in China, demography in Japan, and some of the other long term issues from globalization and automation and what it might mean for employment going forward. But but he's not a permabule of Perma bear. He's he's flip back and forth over times. And I found

him to be surprisingly constructive about the U s economy. Uh. He thinks we're late in the cycle, but nowhere near over and and that was really interesting his explanation for that. So, without any further ado my conversation with Dr Edyard Denny. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest today is Dr Edyard Denny. He is founder and chief investment strategist at Yard Denny Research. He has a storied career. He has been on Wall Street

for twenty five years. Early in his career, he was chief economist at E. F. Hutton we all remember and love those commercials, as well as working at Prudential Securities and C. J. Lawrence. Uh. He began his career at the Federal Reserve in both Washington and New York, served in the US Treasure He eventually he became chief strategist at Deutsche Bank Securities. He started out with the b a uh in in economics at Cornell as well as a PhD uh in economics at Yale, where he studied

under Nobel Laureate James Toadman, Dr Eduard Denny. Welcome to Bloombar. Thank you very much, Verry. So you have a really interesting career what I call the golden era of Wall Street. What was it like back then? I think it, Uh, it was golden, I think because it sort of the tail end of the partnerships when Wall Street firms uh were responsible for their actions and people don't realize a

partnership is joint and several liability. So not only are you responsible for your own behavior, you're responsible for what everybody else the firm is doing. Let me tell you that focus people's attention on risk. But it turned into the wild we pretty quickly early in my career because a lot of the firms went public and uh we

started to see um all kinds of trading desks open up. UM. For my career, it was great because I had a tremendous demand for what I did for a living, from the commodity people, from the equity people, the bond people. As a matter of fact, although most of my career has been focused on equity strategy, the reality is the early part of my career at If Hutton was made on the bond market. Uh. I had some great calls back then, and um so I had just for me

as an economist and then as a strategist. Um the fact that Wall Street went into more and more businesses and had more and more trading desks, and things got more volatile and more dependent than information that was great for me. It's amazing how many great equity analysts began on the fixed income side. It's really very overlooked. I have a list in my head of people in Looting, A number of guests on the show who started out and fixed income, and with that background gave them a

lot of insight into why is that. I think it gives you a tremendous advantage. And I I wish I had really spent more time on the fixed incomes side, because I spend it more on kind of the macro side, not on the credit side, and with the benefit of hindsight, being a credited analyst on the bond side or having some insights there would have been very helpful in two

thousand and seven. As a matter of fact, one of my counts in San Francisco, strategists there, came to New York in two thousand and eight and called me up and said that I don't have any time to see I'm saying just fixed income strategists. And it was bridgiant because he really early on got really spooked by what he what he heard. So I think, you know, the reason that it's important to know what's going on the

credit side, and that's where the trouble often starts. Too much too much debt, sure, too much debt, too much leverage, people wait too far out over their skis on the equities eyed things can look fine, but really a lot of trouble. Absolutely. You know, I look at your the early part of your career, you very easily could have been an academic. You studied with Tobin legendary. You end up at at the FED in the research department. That's

practically an academic position. I know that's morphed over the years. I only stated at the federals Are Bank in New York for for a year. I spent a short period of time at the Federals Are Banking Washington, d See, Uh, spending some time writing my dissertation. Honestly, my role model was actually Henry Kaufman. Uh. Yeah, back when I was an undergraduate at Cornell, actually kind of cold call Kaufman and I asked him if he'd come and speak and to a group of us, and he wasn't able to

do it. But uh, I was an early admirer of his. And as a matter of fact, my wife's uncle, Charles, was at Song and Brothers um and with Kaufman as and and in some ways, I mean she there there are been legends she passes on to me is that her uncle kind of created the Kauffman's job. So uh, there's always sort of a kinship there. But I mean I didn't know anything about that at the time, but I you know, the the role of a chief economist on Wall Street appealed to me, and uh, Kauflin really

was the fellow who blazed the trail. So so you're you're at the IVY studying economics, you you find your way to the Federal Reserve. How do you make that transition to actual finance to Wall Street from academic So so what what was what? What led you there? It was easy. I was I was bored at the Fed. Uh, I was writing these memos that were just put in the file. As it turned out, they put me on a very important subject, which was a regulation queue and

the savings and loan industry. So, I mean that came in real handy for the SNL crisis in the late eighties and the early nineties. So I I thought it was prepared for all that. But you know, the transition, well, she was easy. A head Hender called me up and said, if Hutton's looking for somebody to uh be an economist on the fixed income a little fun side, And It's like, whoa, this is exactly the job I'm looking for because that was what Henry Kaufman did. Henrykauflin focused on the flow

of funds and the outlook for interest rates. And so I mean I got the job one, two three. It was great. I'm old enough to remember when the flow of funds was something that people really retracts every week. It was a big deal. And now it seems it was huge. Yeah, if you're a called Kaufman. Actually, uh,

you know, spent an enormous amount of time. I had a big staff predicting where the flow of funds was going to go, and uh, I always thought it was a little bit uh over the top, you know, I mean, can you really forecast, you know, tough forecasting a couple of members a little own hundreds of flow of funds numbers. But he went through the exercise, and I guess I worked for him until it didn't. I'm Barry rid Halts. You're listening to Masters in Business on Bloomberg Radio. My

guest today is Dr Edyard Denny. He is the founder and chief strategist at Your Denny Research, which can be found at the website well blog dot yard Denny dot com is open to the public dot blog dot your Denny dot com. Let's let's talk a little bit about economics and economists and they're discontents, my favorite, my favorite supe favorite. So let's start with just economic indicators. What are some of your favorite things to look at in helping you assess both the state of the economy and

the overall stop market. You know, if you limited me to one. I really like the crb raw Industrial Spot Price Index and stop Spot Price Index for all commodities or industrial thirteen industrial commodities. It does not include any patrol in products. It doesn't include any wood products, which is why I like it, because I think petrolium and would have their own supply and demand. The main reason

I like it is because it's work. It's been available for years, it's available daily, and it's a very sensitive indicator of the global economy. Uh, and sometimes you get a little funky with it. I've kind of for many years been calculating the boom Bus Barometer, and that's simply that commodity index divided by initial unemployment claims, So it's it's a weekly number. So you're taking the commodity index, which is a global indicator, but looking at US unemployment.

But looking at US unemployment, I mean, let's face it, the U s economy in the past and continues to be a major driver of the global economy. So it's still working. I mean, it's conceivable that one of these days the US won't be as important as it still is, and that indicator won't be as helpful when we look at initial claims but the commodity price index has been very,

very helpful. But you know, like all indicators, you know, I got to know when to hold them went and it went to fold them run Sometimes when they don't seem to work, they're they're helpful and in forcing you to think about what's what's different this time around? And uh, you know, with a recent drop in the industrial commodity prices until earlier this year, um I concluded there wasn't that the global economy was falling into recession. Whether we're

just way too much supply of these commodities. Uh. So we've seen something similar with the Baltic Dry Index because people used to track that obsessively and then there were just a ton of new ships that came out suddenly. That's right. It didn't indicate anything other than excess. It's a great point. So you gotta know when these indicators are useful on when they're not. This here be still useful of the Baltic isn't useful because you're just way

too many ships out there. So that's uh. But but you know, I mean other than that, I mean, there's there's really nothing that I don't look at. I mean, I'll look at West Coast container traffic. I'll look at the rail you know, that's something I mean, I'm not the only one looking at this stuff. I mean, rail car loadings is something we look at closely. U. But we try try not not to ignore anything. We mentioned

the Baltic dry indecks. What sort of economic indicators do you think are a little overhyped or that perhaps investors should not put as much weight on as they actually did. Well, I think we give a tremendous amount of weight every month to the employment numbers um and they always get revised and repeatedly. And uh, not only that, but it's just you can really sink in that swamp that they hand out every every month. It's just so much data and information. We we try to cut to the chase.

Maybe it's because I'm, you know, simple minded. I need to keep keep my mind focused on and one or two variables. But we do is we calculate something called the earned income proxy. And what that is simply is you take, okay, how many people are working, how many

hours are they working, and what's their wage. It turns out that's exactly what the the Bureau of Labor Statistics does to get an initial estimate for wages and wages is what drives the consumer to a large extent, are so um number of people working, how many hours they're working, and what's their hourly wage? That gives you total total wages? And then do you know you can use the month over a month change and uh, you know, like the last month, the everybody was disappointed by the peril number

it was. It was not a big number. It was disappointing. But when you looked at hours and wages um, the earning income proxy was up like zero point seven percent. It's a big movement. I'm at a more over a month basis and it was a great harbinger of retail sales being better than expected. So let me ask you about an ongoing issue that people keep having problems with, which is measuring productivity. If you believe the data, we've seen no real productivity gains. I know you run a

relatively small office and you're incredibly productive. I run a small office and I know what we do with a dozen or so pe people, right, we couldn't have done with less than fifty people ten So, so why aren't

we seeing any gains in the productivity statistics? You know, I think it takes a long time for the government statisticians to recognize that they're missing something, and it could take ten, fifteen, twenty years, and then it could take him another five to ten years to do a special study to try to figure out what they're missing, and then they finally come up with a revised number. Um. You know, in capital spending, remember that R and D used to be expensed and now all of a sudden,

it's included a long term investment. Yeah, now it's long term investment. Um. Software. I'm not even quite sure how you measure that, but there's a measure of software. I don't know. My my company is totally virtual. Everybody works from overword and we send all of our information to the Amazon Cloud. I'm not pitching their service, but we send it to the cloud and everything is done remotely.

We used to have two servers sitting in a server farm, and the productivity of those machines had to be extremely low. We weren't using them very much. But now the Amazon Cloud, I had to believe that the servers that Amazon has, uh, those those servers are being used very intensively. But we're working twenty four by seven, So you know maybe maybe you know, we're putting out more output, but we're also working long hours because we're I mean, you're you're accessible

on weekends and nights. We use a program called Slack, so not only is it as secure communication program, but we upload files and we share things and it's just basically made everybody reachable any time. I think, I think the productivity numbers are either right or they're wrong. Either you know, uh the statisticians have it more or less right, or else they're missing a lot of output. The truth

maybe somewhere in between. But look, the reality is a lot of the jobs that have been created been created in the service sector, and we're only now starting to see technology entering the service sector. Uh. There's this robot Pepper that soft Bank is marketing and selling, and apparently MasterCard is using it in some restaurants in Japan. I mean, you know, we already have uh LaGuardia. You know, it's

the so called Third World airport. We have iPad sitting there where you can order what you're gonna what you want to restaurant that, by the way, that's in one of the renovated terminals, that's the Delta terminal. Absolutely that was renovated, and um, I just read Fox con laid off sixty people. You look, at the end of the day, why do we really care about productivity in the answer is because he determines the standard of living. I'm Barry Ridhults.

You're listening to Masters in Business on Bloomberg Radio. My guest today is Dr Edyard Denny. He is the president and chief investment strategist at Your Denny Research. A long and storied career, he was chief economist at IF Hotton, chief investment strategist at Deutsche Bank, and one of the first people to begin warning about a computer glitch that was potentially problematic. You you very famously warned about the Y two K bug years years in advance. Your background

is that of an economist. How on earth did you ever stumble into that odd little programming glitch? And before you answer for you young uns who may not remember this, it turns out that lots of computers were programmed with only two digits for the year, and I guess people forgot that eventually the century it will end. So instead of going to two thousand, after the concern was it was just going to roll over to nineteen O one or nine hundred and that would cause all manner of mayhem.

So so how did you stumble onto that issue? Yeah, I UM, I guess during my wonder years. Um, you know, I uh. I went to elementary school in Cleveland, O High Oh, and then we moved to San Jose, California, which even back then was Silicon Valley. My father worked for IBM. It was in a science club, and UH learned four trend programming, so I've always had a interest in that. And when I went to UH cornell Um, I started out in engineering and just couldn't take differential equations.

It was way too hard, and physics was way too hard. It's funny you say that. I started out applied mathematics physics at Stony Brook. By the time I hit my senior year, it's like, gee, you know, I'm up too much. So yes, I became an economist. But when I switched over to Arts and sciences, I still stayed with physics for one one last gasp and took a course in semiconductors and a course in UH material science really and and assembly programming. And I really like programming, but you know,

I never really mastered it. I just kind of enjoyed it. Uh. And actually I think I was probably the first economists on All Street with his own website. I don't know how I got away with it. My firm let me actually put Dr Edyard Denny's Economics network on it. I remember that, and I would imagine they had no idea what a website was. They had no idea what the compliance department. Certainly no, no, there's no lawyers around. And

so I had my own website. It was fantastic, UM and UM in the early nineteen the nine nineties for me. The eighties for me was when I was forecasting disinflation and I was very bullsh on bonds. The nineteen nineties, my focus, with the benefit of hindsight, turned out to be larger in technology. N I started to argue that we were in the early stages of high tech revolution. Uh.

It was a great call. And as a matter of fact, I think back then the SMP five tech companies were about eleven percent of the market cap, and I predicted they get to seven seventeen percent. I think they got to twenty five percent of our market cap. And um, along the is that as that call worked out. UM my contry instincts came out a little bit, and uh, you know there were some of these ye two K companies that were fixing the problem, and so I I

started to look into it. I mean, basically, the forecast was working out real well, and sometimes when something's working out, don't don't mess with it. Um. But um, when I saw that Alan Greenspan was starting to be a cheerleader for the tech revolution and was saying this is gonna be a once in a century development and uh was that like circle in nine? Yeah, but by nine he was actually he gave a speech called the the uh I think it was called the Technology Lottery, something to

that effect. Basically he was saying that, uh yeah, tex tax seam overvalued. It's kind of questionable why a FED chairman should should be talking about evaluation. I think they were afraid that the bubble was going to burst, and he was. He was, and especially after the nine speech, famous irrationalist suberant speech four years early. I think he thought there was a credibility. He wanted to show that he was on top of it. But as you know, is he made it very clear that he wasn't in

the bubble bursting business. That he cleaned up the mess after it happened, and so I started to worry a little bit more about the mess, and UH it seemed to me that White u K could create a problem. UH. And so I did start to write about that issue, and UH, suddenly I started to attract all these white touquet people, not not the fringe people, but UH, investment technology chiefs were calling me up and said, you know, it's good to have somebody outside of the industry kind

of raising the flag. And as a matter of fact, it turned out that the sp F companies spent fifty billion dollars on the problem. UH, and as a result, we didn't have a problem. UH. So that that was that was a good thing. I think with the benefit of hindsight, UM, I I can to the right conclusion for for the wrong reason why du Que didn't cause a recession. Everything was was fixed. White UK led to contribute it to the technology bubble, which then burst in

two thousand. I'm Barry Ridholtz. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Dr Edyar Denny of your Denny Research, UH, formerly chief strategist at Deutsche Bank. You know before we get into the details of the global economy. I would be remiss if I didn't ask. So you've worked at US based banks like Prudential and E. F. Hutton, R. C. J. Lawrence. Alright, alright. Deutsche Bank, on the other hand, is this giant German

bank with branch offices here in the US. What is the cultural differences like between a US bank headquartered in New York and an outpost of a European bank that might have a different philosophy or world deal. Well, you know, C C J. Lawrence when I joined it in the early nineties was owned by Morgan Grenfeld, but very arms length. And then Morgan Grenfell was bought by Deutsche Bank, also very arms length, and it took a while before the regulators in the US allowed the foreign banks to have

any influence on on C. J. Lawrence. So you started at a company that was brought by Morgan Grenfell and then and eventually you came back to that later in your career. No, no, no, no, no no no. It was just the same, just the same for same different party exactly. So I mean the bottom line is I was there for basically, you know, the ninety nineties and I really didn't see much impact at all, because you know, Americans still basically ran the shop, and certainly on the

on the equity side. It was only the kind of late period there that it became a little bit more international. But I didn't really see much of it because when when we've spoken to people for MUBS or credit Swiss, maybe it's just the Swiss, but it seems that there's a somewhat although you could say the same is true with Barclays and and the British is a little bit of a different philosophical mindset. Maybe that's amongst the sea level execs and by the time it filters down to

the U S staff. I don't know that. I don't know if it's US versus foreign so much as it is big versus small. Uh. If Hutton was relatively small, Prudential Beich was relatively small, believe it or not, back then, um c J was small. But uh, you know, let's you start talking about Deutsche that's that's a big, big bank.

I think. I think big organizations there's a lot of politics and uh, they seem to change their strategy and a regular basis, right every every quarter or so, so so let's talk a little bit about the global economy and the U S economy you mentioned earlier. The U S seems to be the locomotive that's driving a lot. So how do you compare how the US is doing versus Japan, Europe and emerging markets. Well, the US is doing great in some ways. It's reminiscent of the nineteen nineties.

Remember back then there was the high tech revolution, and uh it was very US centric. If you wanted to invest in in technology, you pretty much had to be in the in the US. UM. When I was on the all Street, I recalled Dell boxes and everywhere you have to be careful not to trip over them. I remember that when I first started, uh, you know, and in the early nineties, it was a rare person who got a laptop. And then suddenly everybody's getting PCs and

laptops and everything. So, uh, you know, the the the whole the whole environment. Uh on. Technology changed pretty dramatically, but again, the US was where you wanted to be. Uh. We had an emerging market crisis in nineteen ninety seven

in Asia, the Russian Death crisis in nine. The Europeans were suffering from what they called rose clorosis, and they remember and they were trying to Yes, well, they're back to it, but they were just starting to put together the euro So the the world feels to me kind of like the second half of the ninety nineties, where the US was doing well and everybody else was kind

of fumbling along. What's different this time maybe is the user is actually more diversified, and we're doing well in technology, we're doing all in finance, we're doing well in healthcare. Just across the board, we're doing extremely well. And um, you know, I think we did respond to the two thousand and eight crisis by restructuring a lot of the excesses.

And uh, lawyers are you know, running rampant on on Wall Street, and banks have become regulated utilities, and look, we just had this energy debacle, and uh, it hasn't taken us down in the financial system, which I think has proof positive that we've learned something from from that experience. And the usual suspects came out and said, here comes two thousand and eight again, all these bad loans to the energy complex and go to bring the economy to

a halt, you know, for the hills. I was called into one of my accounts at the beginning of the year a mutual fund of New York and UH thirty people in the room usually get fifteen people in the room. And and there was a lot of concerns about those issues. You know, how could seventy drop in the price of the world not lead to a debacle? How how could we not see the Chinese value in the currency. So, I mean, look, a lot of those issues are still

out there. But this pool market has been really driven by UH central banks providing ultra easy monetary policies and corporate to finance managers, particularly in the US, buying back their shares. And so so far we really we've had a lot of panic attacks and followed by relief valllies in the stock market. But back to the global story. UM, it's hard to detect much of a pulse in UH. In the Eurozone UM in production production is actually flat for the past two years, which is it's kind of

weird because car sales have actually been pretty good. In retail sales have been actually pretty good. So's there over there over there? Now? Is that a function of low costs of credit? It must be. It must be that you know, consumers are still consuming over there, but you know they're exports clearly are stuffering because the global economy, on balances is growing at a subpar pace. Japan is uh in a coma, and China is slowing down dramatically.

China is the world's maybe biggest ever bubble of all times. Why why do you say bubble? That's interesting? Well, bubbles. You know we were talking about earlier in in our discussion about why it's so important to focus on debt UH and UH in thinking about financial markets. UM. The number there's floors me is when you look at bank loans outstanding in China UH in dollars, there were five trillion dollars in two thousand and eight, their fifteen trillion dollars.

Now they've tripled. So over this same period, we've seen our bank loans go up by about a trillion UH. They certainly haven't tripled. UH. Now, how much of that is just driven by everyone forgets China is still essentially controlled sort of communists regime dabbling in capitalism. How much of this is the central makers saying lend money to businesses or pulled back. It's probably so. I mean, I I think China is being driven by the government trying

to keep this thing from falling apart. But Japan kind of went down the same road. Remember they were the debt to GDP ratios. They also had their you know MITI remember the Industrial Policy Committee that's set down and said til Ritsu that that everything you have Mitsubishi motives and Mitsubushi banking and Mitsubishi real estate and control planning

doesn't work. It works for a while until it blows up, works till it does, and it works until So let's talk about China, and I don't want to talk about a lucky outcome or a or a worse case scenario. Come Let's let's say China continues to run into problems. How does that play out going forward? I think we we have a we have a good example of where China's going, maybe where Europe's going, and eventually, well we're going though, I I don't think we're going to go

down that same road. And that's Japan. You know, Japan was early on with the too much debt not enough. They started out with the bubble, and you know, China is going to be the Japan is gonna be the world's largest economy. I remember Rockefeller center, and oh they're coming and buying all that stuff, and they thought that they could take it back to Japan. But that was the fearback. And so when that bubble burst, what do they do? They lower their interest rates to zero. They

were early on with a quantitative easing. They were actually late on negative interest rates, but they caught up earlier this year. The demography is terrible, the fertility rates collapsed, and no immigration, no immigration, the entire society is just rapidly aging with not a lot of Now China in many ways just a bigger version of all that. The demography is terrible. The one child act now they they've gotten rid of that, but it's gonna take a while

to work. And they've been generation well, they've very interviewed couples and the couples say, well, thanks, but no thanks, it's too expensive to have a kid. Yeah, so it's not it's not obvious that that's going to turn things around. It's not gonna do anything for them anytime soon. You know. The The old concern was will China grow old before it grows rich? And uh, there's more and more evidence saying that it's chronicled faster than has grown rich. That's amazing.

What about the US consumer, long the driver of much of the global economy. Can the US consumer keep consuming? And what about the ongoing de leveraging We've been well, God bless American God bless the American consumer. I mean, one one thing that American consumers are very good at is consuming. Uh and uh, they really haven't let us

down over over the years. And I think there's some concerns, you know that the baby boomers who were yuppies and now they're getting older, are aren't doing the kind of spending they used to. And maybe maybe the millennials aren't going to pick a pick up the ball um or the baton as as well. But the thing this shows that consumers consume their incomes and uh, you know, employment

has been growing, wages have been growing. Again, there's this uh myth out there that Americans, uh, wages have stagnated for the past twenty years. That's based on one statistic that's collected by the Census Bureau UH to measure poverty. And it's measured before taxes, it's measured before entitlements. UH. So it's uh, it's it's not a good measure of the purchasing power. The consumers actually have um so. People who want to find more of your writings, they go

to blob dot your Denny dot com. We've been speaking with Dr edyar Denny of your Denny Research. If you enjoy this conversation, be sure and come back and check out our podcast, True is where we keep the tape rolling and continue chatting about all things economic. Feel free to check out my daily column on Bloomberg dot com. Follow me on Twitter at rit Halts. I'm Barry Hults. You've been listening to Masters in Business on Bloomberg Radio. Are you looking to take your business to the next level?

The accounting, tax and advisory professionals from Cone Resnick can guide you. Cone Resnick delivers industry expertise and forward thinking perspective that can help turn business possibilities into business opportunities. Look ahead, gain insight, imagine more. Is your business ready to break through? Learn more at cone Resnick dot com Slash Breakthrough, Cone Resnick Accounting Tax Advisory. Welcome to the podcast portion of our show. I don't know why I

do this every time, I just feel feel obligated. Uh ed, Thank you so much for doing this. People have me about you, and I said, I know you for quite some time. We actually live in adjacent towns and have gone out to dinner with our respective spouses. UM, I have a ton of questions for you. But before I forget you, just reference the millennials versus the Boomers in the last segment. So let's talk a little bit about

the difference between the two of them. The Boomers clearly passed their peaks spending the years other than medicinal marijuana. I couldn't guess what the average boomers spending money on. UM and the millennials seem to be a very different

consumer cohort, at least so far. Maybe they'll follow in their parents footsteps, but it seems they're less inclined to buy a car between between rideshare and Uber and everything that right, they're living more in the cities, except when they're living at home with their parents, and usually there's an extra car lying around there. How DI from an economic perspective, our millennials versus the Boomers, well, the you know, the the boomers got married earlier in their lives than

the millennials. Uh, the average age of marriage for both men and women has extended. Maybe that has something to do with social networking. You're gonna have plenty of dates whereas uh Si left. Yeah, I mean when when I was going to college, you know a lot of people

married their high school and college sweethearts. Uh. And then the next thing you did is maybe you moved to the city, and then six months later you got pregnant, moved to the moved to the bourbs, and then got a couple of cars and then upgraded to a bigger house. And so it was. It was a different lifestyle than

the millennials are used to. And you know, at some point they may you know, tire of you know, dating different people uh on a regular basis, and find their h that their true soul mate and settled down and decide time to have keys. But you know, the later you wait to get married, odds are you're gonna have fewer kids. And so I think the demography is I've always believed that demography is very, very important. Everybody thinks it takes too long to have an impact. I don't

think that's the case at all. I think it explains a lot. The time is going to go by, whether you're looking at the demography or not. So why not at least be aware or of it. And the United States has a relatively high birth rate compared with other industrialized nations. How big of an advantage is that it's a huge advantage of fertility rates have collapsed around the world. Europe is flat, Japan is negative. It's nobody's got I

don't think there's one explanation. I think, uh, uh, you know, when women have become economically freer in a lot of these countries, and I don't want to have as many kids, But the same is true in the US. How do you explain that? Or is the US that diverse culturally that New York is not, Chicago is not. I think I think it's diverse culturally, and uh, there's there, there's

still uh. I mean, religion has a lot to do with with with people who are religious tant to have more kids, and so I think and getting married earlier and stay married, or at least that was the old theory. I don't know if the data. It used to be that you'd have to have a lot of kids to take care of you and your old age and the farm. Well, now the government takes is expected to take care of you. So what's the point of having kids. So I think

that's had an impact. And but um, for one reason or another, there are lots of reasons why fertility rates have stayed Uh at we really had replacement, We're not really you know, slightly above, lightly above maybe when when most most of Europe is either slightly under or or significantly under. And then you look in Asia, and at least in Japan and China. I can't speak about Korea or Vietnam or India appears to be above replaced. But but the big developed powers like Japan and China, they're

running a negative of fertility rate as well. Yeah, and Russia. Russia has got a terrible fertility Oh really, I haven't thought about that. So so what does this mean to the future of these countries economies? Well, I think one of the great challenges looking ahead. Um. I kind of learned my lesson from White que not to get to get too millennial about these things. But you know, a

longer term, I mean, demography is destiny. I mean, you know, you know who's born, you know what the fertility rates are, you know how much longer people are living. How do we take care of all these old people? Um? Is that is Japan is kind of there. I say that half jokingly. On my summer reading list, I have the book Rise of the robot and Japan remains a massive export power. If are they capable and they're fairly automated in a lot of their factories, how far can this

robotics revolution go? Can they replace the low birth rate in places like Japan and China at least for manufacturing. It's still kind of raises the question who's gonna pay for all that? I mean, if you got you know, people getting older and older not able to work. They need robots, but you know they need to eat, they need medication, they need transportation. Well, Switzerland, you gotta guarantee thirty tho dollar year salary coming up. Well again, these

things all work until they don't work. I mean, you know, uh, I mean right now, central banks printing money is working until it doesn't work. So um, I you know, I don't think anybody is really trying to figure out how we manage in the future. It's not good for our kids. Um, but maybe they're too young to u But there are less and less of them, so it doesn't matter. I guess it doesn't matter as much. You mentioned central banks quee and zero interest rate policy. I would be remiss

if I did not bring that up to discuss. So what is the impact of what the FED has done in terms of low rates and quantitative easing? Did they help solve the financial crisis by adding all this liquidly? And then what does it mean long term? And what what's the end game? How do they get out of this? Well, they solved the crisis that I think in some ways

they were complicit in create. In creating. Listen, Greenspan took rates after nine eleven down to it was below two percent for a couple of years, and it was actually under one percent for a year, which was you know, you go back to the fifties and early sixties. You could see rates dip below one percent for a moment and then it's gone, not like here's twelve months of one percent or less. And Berninkia was giving a speech on the Great Moderation and saying that central banks have

conquered the business cycle. A capitalistic system has its ups and downs. I mean, people have to deal with failure if they've speculated too much, and if the central bank says, don't worry about it, we'll give you the green span at the Bernankey, put the yell and put you know, it creates too much speculation, too much access, and too much debt. As I mentioned before, there's nobody that's doing that on a bigger scale right now than than the Chinese.

It's just an enormous amount of debt relative to what eventually their economy can carry. So would we have This is a pet peeve of mine, and I try not to bring up too many of them, But would we have been better off in the two thousand and eight o nine crisis letting more banks, if not do a full Lehman face splat on the pavement, but do a full bankruptcy reorg and maybe Uncle Sam is the dead or in possession financer clean up these banks, rip the band aid off. I have to think the equity market

would not have bottomed at six six six. Maybe we would have seen something much worse, But would we have been healthier in the long run? Well, I think I don't disagree with the notion that QUE one and help

to end the crisis. I don't know that QUE three and four, all those other quis, I think they just I think the central banks have become just kind of like drug dealers, to to the economy and and and to the wants to go through withdrawal nobody wants and uh, you know, um again capitalism, this guy, it's winners and losers.

I like to show Shark Tank on TV and now they're doing some segments showing what it's like after people get supported, and uh, winning is a lot of people lose after they win because they don't know how to manage their inventories and they fail, and some of them,

you know, dust off and start all over again. But we we just don't have that kind of you know, central banks have kind of softened this up, and I'm not quite sure how we get out of this miss So right now, all the chatter has been on Juno July's interest rate increase in in two thousand and sixteen. For a while, look like every time the Fed looked like they were serious about an increase, the equity markets

would throw a hissy fit. Here we are at coming to the end of the second quarter of sixteen, and it looks like markets are starting to accept that, hey, maybe the Fed is serious, and maybe the last rate increase was December. Maybe we're gonna see one or two rate increases this year. Is that putting us on the path to some form of normalization? I hope? So, I mean, you know, the word normalization is a very healthy word. I mean, we all want normal although one percent FED

funds rate isn't what I would consider normal. No, it's not. But there are some structural forces out there that had nothing to do with the FED, like Agian demographics I think is slowing the global economy down. Technology is fundamentally disruptive global competition otherwise known as globalization. So there are the there are forces at work here that, uh really have structurally changed the outlook for inflation and for growth, and so maybe interest rates are going to stay historically love.

So let's talk a little bit about you mentioned slowing growth due in part to demography. What do you think of the secular stagnation argument? Do you buy into that? Is? How responsible is demography? And or is this something that we eventually will innovate a way out. I buy into secular stagnation is a description of what we're going through. Um And since I buy into it, I'm buying into the words secular in other words, could could last a while.

I don't buy into the Larry Summer's idea that we need more government policy to to get us out of this mess. Um, you know, I mean the next thing that government may very well do is helicopter money. Uh. It doesn't really mean that they're gonna rent helicopters and drop money. It means more infrastructial infrastructure spending. The rest fiscal directly financed by by the by by the federal government. The problem is we we we proved earlier on a

few years ago that we're not shovel ready. There's too many regulations and it's not clear that you know, even if we did something like that, it would really show showing in our infrastructure. It would be nice if that was the case. Uh. You live not too far from Chicken Valley Road, which has finally, after years of falling apart, repaved and so the it took a major hurricane to just a couple of horrible winner So my my again. Another pet peev on infrastructure is our local airports are

fairly terrible. They arrange for mediocre to terrible. Although to be fair, the renovated terminals in JFK are pretty nice and I think it's terminal for at Laguardi of the newest delta terminal, the one that has all the iPads to order food. That's a pretty all things considered. The rest of the airport is it dumping And that's such a short runway, it's no fun coming in anytime. It's wendy. But that said, the US really could stand for a

massive infrastructure upgrade. You travel right here in Europe. You're an Asia preregularly. I'm astonished. The last time I was in Brussels in Italy, they were apologizing for their conditions of their roads, And I'm like, who do I have to pay off to get roads like this? And they think the roads are bad? No, I I can't. I don't know why we're such a miserable situation other than government regulation. And uh, I mean we we do spend money, but it just doesn't seem to show up in uh,

in the infrastructure. We we haven't really, So here's I'm not in favor of cranking up taxes. And I know all the candidates for president have their own tax schemes, but dear lord, the gasoline tax has been frozen since nineteen three and and I just tanked up the other day. It was twenty six dollars. It's the cheapest high test

I've ever seen fill up a tank. I'm happy to see that go up to twenty or thirty tents if the money goes to bridges and row you know, I mean, we we did have and during this administration, in the beginning administration, they are are the American Recovery and something has billion dollars and but what's supposed to be infrastructure, but it really wasn't. So about a third of it was temporary tax scots. If you're gonna make a tax cut, economic theory says it needs to be permanent to really

have an impact, and temporary extension of unemployment. So that was like a two hundred billion dollars of which we've seen some improvements. But you know this is with the benefit of hindsight, we could have spent two to four trillion dollars over a decade and really just just barely just really barely started doing at The good news is both candidates seem to be in favor of infrastructure SPA. Let's see if they come up with an intelligent way

um um to fund that. But all this fiscal conversation is really a way to get to a back doorway to get to a different question, which is have we reached the end of what monetary policy can do? I think we have, UM, and I think financial markets UM, I've kind of signaled that, UM. You know, we haven't seen the markets go down because you never know when a central bank we'll try another shock and awe, but we just don't get shocked and add the way we

used to no response. You've you still see it in Japan. So the way I look at it, the US is done, Japan is sort of halfway through, and and Europe is just getting started. The problem is, UM, it's based on demand side management, right. If you can demand side manager and explain what you mean by that, I means you know, these easy money and you're gonna stimulate demand. Uh, you know,

very very kenzy. I think the problem is that we're overloaded with debt, right, So I think that's where the central bankers are are just aren't in tune with reality. They've been doing this for so long that they're just way too much debt relative to income and so easy money. Empirically,

we can see it's just not being very very stimulative anymore. UM. So here's here's a friend's argument, who is on the bond side, on the credit side, says, the Fed has kind of painted themselves into a corner because there's so

much debt. If they actually were to take rates up to three and a half four percent, now, think of what you're doing with all this massive amount of debt you've just put out there, And what is that going to mean for the economy if everybody is buried under their debt services And in some ways we were lucky that some structural secular forces have kept inflation down. Imagine if all this liquidity really did bring back CPI inflation, then the central banks for credibility what have to raise

interest rates, which would be disastrous. And so that's a that's another fascinating question. Why has inflation been so low for so long? And remember you go back to I want to say two thousand and ten, there was a very famous letter published in the Wall Street Journal from a number of really smart bond guys, equity guys, fund managers warning that hey, all this QUEUEI and and zurup is going to cause hyper inflation, and instead we saw

disinflation and the risk of deflation. I think one of the big factors has been globalization and uh I impacked on the labor market especially. I I have a chart that I show of the cp I going back to eighteen hundred. It's a monthly chart, and obviously it's changed over the years. It used to be carosen and grain, now a whole bunch of other things include services, much

more now than it did back then. And uh what that chart shows when you look at the level of the CPO, I just it just screams at you, and that is um, inflation tends to be associated with wars, and deflation tends to occur during peace times and after a long enough peacetime, you sort of have price stability. UM send me that short I'll post it when we I think what that confirms for me is that micro economics has become more relevant or is more relevant than

macro economics and things about the households. Economics is going to be more significant than what I want. What I mean is macro economists are looking at too big, at the big picture. The micro economists looking at market structure, and uh so they're saying, Okay, are the markets competitive or they're monopolized? In war times, it's very little competition, and you tend and then you can't trade with your enemies.

It's hard to trade with your friends, so you tend to have a lot of inflation, a lot of the labor forces in the trenches, peace breaks out. That's globalization. This is not the first round of globalization we've ever had. We had after this, the War of eighteen twelve, after the Civil War, after World War One, and it's just what happens is you now can trade with people around

the world and there's more competition. Is really what happens, you know, you mentioned trading with people around the world. Last week we had professor Stephen Pinker of Harvard who two books ago wrote The Better The Better Nature of Our Angels wha looking at why globally despite the headlines, the amount of crime, the amount of violence, the amount

of wars or at record lows. So so when you're trading with China and Russia and Japan and Germany, and where go around the world, Korea, wherever Vietnam, President Obama was just in Vietnam, you're much less likely to launch a bombing attack on the place where you're getting your supply chain to make your your your goods. So is is possibly a long piece that we're entering. That means that globalization is going to be ongoing. Deflation or at

least disinflation is not likely to go away. And and we have really a very different economy than we had last century. You never want to jinx it. Uh, you know, I'm sure, like if I had that right before World War One, I'm sure somebody permanently high plateau remember globalization, and you know, everything like just hunky dory. I mean, we're dealing here with humans here, and but but these are big secular I think another way to put it is there's just so much money now that's at risk

with globalization. People are making a lot of money with free trade um. And there's a lot of complaints about the income inequality, but the world on a on average has become more equal. I mean, we've we've lost some income here, but other countries of emotional markets have and and the population and the most empowerished. That's why it's a more peaceful world. People have more of a steak in maintaining peaceful relationships and and and and engaging in commerce.

Professor Pinker had said something that I thought was really fascinating, which was we see a surprising little impact on crime and war from affluence, except when people have zero hope, nothing to live for. The all the most impoverished nations that were in lots and lots of civil wars last century, many of them have worked their way out of that state, and the wars tend to go away. They tend to be more economically productive. And trade is a big cause,

and it makes all the sense in the world. I mean, when people have aspirations and the thing they can do better, they're gonna do better. Uh. If you cut them off from those and they have nothing to lose, then they behave like that. So crime war, civil war old. That's so you men should income inequality? Um, what are your views on what that means? Here in the United States, at least in the developed world. There have been lots

and lots of complaints. Be it picketty, be it I could give Robert Frank There's a whole run of folks who have looked at numbers and said, yes, the distribution of wealth has changed, but it hasn't changed so much as the middle class versus the upper class. It's changed most dramatically in the upper class versus the upper upper upper the point oh one of of earners. What does that mean and what should we do about it? If anything? Well, I think this process of globalization, free trade uh has

created more income equality on a global basis. But you know, and by the way the data supports you on that, then there are far less people living completely in poverty than there were fifty years. The problem, though, is if you were making a lot of money as an auto worker or some manufacturing and suddenly the job is not even there, obviously, you're gonna feel dispossessed. You're gonna feel like, you know something, something's been taken away from you. So

I think we have to acknowledge that. I mean, we can't just like pretend that's that's not the case. Um. But I don't think politically we want to get carried away with this notion that Americans are are not doing well. Um. I think we we need to really focus on the fact that this country on average is doing well. But you know, and acknowledge it. Part of that average, of course, is the rich are getting richer. Um. But look, um, you know it's it clearly gets into the whole politics

of taxation and whether we're taxing enough. Um. I happen to believe that, uh, jobs and wages are created by profitable companies for sure. So I'm all for uh, what I call entrepreneurial capitalism. I'm against chrony capitalism, and I think I think a lot of the excess is that the income inequality people are looking at rightly, so are

in the chrony capitalism arena. But capitalism has blamed for it, and I think it's uh, it's it's when chrony capital star and cahoots with politicians that we get our income inequality. I mean, one of the highest standards of living in America today's in Washington, d C. I wonder why that might be the case if you look at it's so let me back up a sec. When you look at who's doing well and who's not doing well in the US, you can control for a number of things. If you

can control for degree of education, that's very insightful. If you can control for what sector of the economy you're working in. That pro had some information, But it's surprising at how many winners and losers there are geographically Minnesota

doing fantastic, Seattle, Portland, San Francisco, Boston, New York. But what really is the standout more than any period I can remember over the past half century, Washington, d C. And all the surrounding environments, house to fire, absolutely blown up. Politics is a good business. It I don't think it always was as lucrative of businesses now I don't know if that's the lobbying side, and some of the Supreme

Court cases that changed and gamed and gamed. It seems like the past since two thousand, the past twenty fifteen or so years, it's really exploded, so so that that's interesting. So in terms of what we should be looking at income inequality, I get the sense that you would like to see the US corporate tax code revamped, changed, simplified, And I think I think the entire tax code that it needs to be simplified for for the good of

all of us. I mean, clearly it benefits tax lawyers. Um. But if we clean up the corporate tax code, he said, talking his own book. UM, I got the sense you think that it would be more hiring and more employment

if if that was if there were less impediments. So anything, anything in my mind that increases profit legitimately, uh, and in a competitive entrepreneurial system is going to create more jobs, and it's going to create more wages because there'll be more demand for labor and and wages will go up. So yeah, I think it also gets into the issue of the double taxation of dividends um and how how we value stocks. I mean, we just raise taxes on dividends a few years, so that's now what are we

a twenty three something? Yeah? I mean I'd like to see the stock market go back to dividend discount evaluations where we all we really care about is there's the company been paying it dipen in and are they increasing it? Everything else is accounting fluff. So so what do we at about two point eight percent or so on the I'm doing this for memory on the SMPI dividend yields. It's actually answer about that alright, plus or mind us

a little bit. What happens to that number if and when the FED things rates up to one and a half two percent, Because right now the argument is, hey, you get a two point nine percent dived and yield or two point seven percent dive in yield, and you get all the upside of of the best of corporate America when you could buy a safe three treasury yield. What does that mean for sp I? I think, you know, one of the things that I've learned over the years is I wish I had a lot more money when

I was younger. Just put it all in dividend yielding stocks. Well, with the benefit of hindsight, for sure. I mean, there's nothing like putting your money in a company that's increasing its dividend over the years. Um, you know, if you sleep all at night, you you just kind of stick with it. And so I would say for younger folks that's not a bad thing to do. And um, you know, eliminating the double taxation of dividends would be nice thing.

So in a tax defered account. Um, I'm under the impression that going back to I want to say, nineteen six and again I'm I'm doing this from memory, almost half of the Dow returns have been reinvested dividends, that right, if not more so, And you would think, what's two and a half three percent? But over time that that really compounds. All right, let me see what there was one or two other questions I wanted to get through

before I start going to my standard questions. Although we've really covered a lot of these um one less since you since you covered both economics and the markets, there's one question that always comes up that and you're the perfect person to ask this. So it seems very often like the markets are out of sync with the economy. You know, how do you reconcile that which drives which

or is it mutual? I think it's mutual. The the stock market can't get too out of out of sync with with the economy, unless, of course, we're in a speculative bubble situation, and which case it can come back to bite us, which is what we've seen a few times here over over the years where what they're talking about the market being the stock market or the housing market. When ascid values get way out of sync with reality because of speculative excesses, that can come back and create

a financial crisis and a recession. So um again. I most economists, macroeconomists tend to focus on the business cycle. I prefer to focus on the profit cycle. I think it's the profit cycle that drives the business cycle. The business cycle is basically sort of again a demand side construct. It's, uh, how do we stay mulate demand so that business does better?

And I'm thinking more from a supply side standpoint, you know, how do we have companies generate more profits so that they'll want to expand capital and hire people, and then those people go and spend money. Um, So they're clearly there's it's it's not one. It's not one direction that works both ways. So let's talk a little bit about profits. We we've had corporate profits at or near record highs for the past six years. We've seen profits come down

when oil prices plummeted. That was almost or maybe a little over ten percent of the smp UM and their profits basically just collapsed. Where are we in the profits cycling and what's the most important thing to watch for as that moves forward? Well, and I an historical cyclical basis, were relating to the expansion phase. I mean, when we had the recovery, which is V shaped and that was based simply two then uh, we recovered back to the previous high and have been moved on to two new

eyes at at a slower pace. So that's sort of the the expansion. What really hasn't happened yet is margins haven't compressed. Usually profit margins compressed at this point in the cycle because companies get to slap happy. Business is great, they hire too many people, they spent too much because the two thousand night. They're being very careful not to do at this time. So the margins haven't regressed to

the mean as they say. They stayed at a record high and that may very well continue to be the case. So profits are going to be driven by the growth of revenues, and revenues will be driven by global economic activity, which looks pretty punk. It looks so you know, maybe looking at three growth globally and maybe two to three percent inflation. Six not terrible, but that's probably what profits are gonna grow, and it's probably what the market's gonna do.

Isn't that more or less the average? We've seen six percent profits, even though the analysts of forecasting for forever analysts tend to be too optimistic and have to lower their numbers. Um. But yeah, I think that's true. I mean, we're kind of an average. So so what should investor be looking at for signs that either profit compression is coming along or that the cycle is you know, at the end of its row. Um. The problem with the profit margins data as it's available only quarterly, with a lag.

We we look at some data that's actually available weekly, but it's based on analyst consensus expectations. UM. I think at the end of the day, it's still gonna be a perception of what do you think the economy is doing?

If the economy just continues to chug along like this, muddle along, and that's what the global economies is doing, maybe kind of lagging behind, but still growing, I think you can pretty much count on earnings growth matching revenues growth in the stock market giving you kind of mid single digit returns. Hey, that's not if that's if that's

what we're looking at. That's not the worst sort of environment at all, considering we're still you know, six seven years and if you don't dividend paying stocks will continue to pay you the the dividends, and uh yeah, this is just not an environment to do anything, really trick to your jazzy. So six plus two and a half eight and a half nine percent is not the worst sort of not the worst sort of thing. All right,

So let's get to some of my favorite questions. We talked a bit about your background and what you did before you were on the street. Let's talk about your early mentors. You mentioned Henry Kaufman. Who else was an early mentor to you? Well, again, Henry Kaufman was a mentor from AFAR. I mean I sort of aspired that I liked what he the job he had, and you know,

kind of followed his career path in some ways. Uh. Greg Smith was an investment strategist that I worked with very closely at UH at EF Hutton and Prudential all that I moved over to C. G. Lawrence and Jim Maltz was the investment strategy fail. So you know, some of these guys are sort of uh legends within within the business of investment strategy. So I learned a lot from them and kind of segued into being investment strategist.

Economists aren't really taught academically too. To help people be good investors, you have to learn that on the streets. So I think I had some good mentors along those lines. So so what that that raises a good question? What investors do you think you've learned from over the years. In terms of famous or colleague you worked with? Um? Well, um, again, not all these people are household media stars, but the

warm buffet aside. Yeah, I mean Warren Buffett and and I haven't crossed paths, but you know, I've I've had regular conversations almost weekly with all a boy name of Hank Herman, who uh runs what L Reid uh and uh you know, we we've I've learned a lot from him early on and when I was doing particularly well in the bond markets forecast. Um. Van Hoysington's uh very well well regarded names. I think it's especially unemployment data. And I think in some ways he really is the

bond king. Uh. You know, I mean Bill Gross gets that label. Uh and a couple of other people have been labeled bond kings, but uh, Van Hoysington's has been bullish on bond since the early eighties and good timing and manager portfolio with very very good returns. And he's the one that I kind of got the phrase hat sized bond yields back when Bonnier. Uh. I walked into also and I said, you know, Van, I think bond yields could go to seven percent. I said, yeah, you know,

his Texas drawl had sized bond yields. So I picked up on that and I worked really well for me in the eighties. So I have to thank him for helping uh my career in the early part of of that period. So let's talk about some books. What are some of your favorite be a nonfiction market related fiction. I like history a lot um and um, I like uh biographies. Uh um. I've been particularly fond of reading uh biographies of the founding fathers uh and sort of

what they're they're philosophical. Ben sure, I'm a big fan of Madison. Uh so Yeah, who wrote the most recent Madison bio? I I mean I got three or four books on the shelves and uh, I'm not good to remember any authors, but um then UM, I like reading uh the so called you know Robert Barons. Uh. Some of them weren't really Robert Barons. So so that's like Carnegie. Ye who else is in that less well child? You certainly Rockefeller, you know, I think his uh you know

he uh. He was sort of attacked for putting a lot of people out of out of business, but a lot of more small little businesses that weren't doing very efficiently, and his number one interest was to lower the price of carosene so it would be more affordable to a lot more people. So he probably did more to increase standards of living that many other people uh in in

in uh in industry. So I like, I like reading the controversies about you know, people who kind of believe that these people were Robert Barns, and then what was the real story. Some of them were absolutely Robert Barrens. They were chrony capitalists, but some of them were really committed to, you know, providing a better product and service to to the consumer. Give me, give me one more

book to put down for a trilogy here. Well, look, um, you know what, at the risk of you know, sounding trite, I mean I uh, I mean Adam Smith the Wealth of Nations and combined with the theory of moral sentiments is certainly uh the Bible for me. I don't think anyone is going to call Adam Smith trite, at least now, and at least, you know, pretending that you know, it's important. I mean it is. I mean, I'm not pretending. I learned a lot from that book. So, but but you know,

as I did from Milton Friedman's Monetary History. Um, but I have to say I didn't really learn much from the General Theory by John Maynard Keynes. I mean, I studied in a keensie and discipline, but it never kind of made sense to me, quite honestly. So you're you're

more of a freedman night than a keensie. I'm more um Madisonian, you know, constitutional economist, I think, you know, and environment where entrepreneurial capitalists, not chronic capitalists are, are set free and don't get in each other's way by hiring lobbyists. Um, I like, I like people who you know, wake up in the morning trying to figure out how

to make it a better world for consumers. So so let me ask you this question, what should we do about this bullmarkt and lobbyists, about the never ending parade through the holes of Congress, of of special interests and people who don't care about Madison, who don't care about Adam Smith. But basically, you're paid to be mercenaries on behalf of the system has become horribly corrupt. So how do you fix that? It's it's so corrupt that I don't really know how you fix it. Do you do?

You overturn some of the legislation or some of the Supreme Court decisions. Start out with one term, you know, I mean the fact that you know I guess there's a congressman that just came up with an anonymous book about what it's really like to be a congressman. And there's apparently nothing new and there other than telling us what we know. And it takes you spend all your time raising money and then you're beholden to the people you you raise money with. I mean, it's unfortunately, is

kind of the human condition people. This is where I actually agree with disagree with Adam Smith. Adam Smith said the capitalism is based on selfishness is actually based on insecurity. It's insecure people that are that are trying to now make their customers come back by providing them with something really good. Unfortunately, there's other insecure people that just higher lobbyists or you know, rest control of the political system

and and and corrupt it. So I I'm you know, it's it's it's great to see that America still means has maintained a lot about entrepreneurial spirit and that entrepreneurs can still do well. But there's an enormous amount of corruption at the tical level. And as we were discussing, that's evident in the standard of living in Washington. D c Um look we we had Roynald Reagan and we had Margaret Thatcher, and look where we are today. I mean, we aren't any better off. UM. I don't really know

how you fix the system politically. I mean you really need uh prosecutors who go after um bad people who are out to uh corrupt the system. UM. But that's only if there's a law against what they're doing. If what they're doing is legal, how do you start? What laws do we have to change? And we don't have time to solve the problem of corrupt lobbyists. But at a certain point someone has to look at this and

say the system has become completely off the rail. I think a lot about this problem, but I haven't come up with a solution. And and it's it's it's you know, my day job is not to be a preacher. I don't do uh, you know, good or bad. I don't do good or evil. I do bullish or bearish. And what what I'm when I'm amazed by is how well our economy and our financial markets have done, despite despite

the corruption, despite the politicians. It's quite amazing. UM. So let's shift gears and talk a little bit about UH, the financial services industry speaking of lobbying, what what are some of the major changes that you think are significant

since you you joined the industry. Well, Um, on the perspective of my, uh, my business, I have several hundred institutional accounts and UH I talked to them on a regular basis, and more and more of them are upset about et f s, especially the mutual fund industry, so

upset and it's kind of cutting into their business. Um and uh and then every now and then you've got some of these uh wild days of the markets up a lot or down a lot, where you kind of wonder whether it's a combination of the algorithms and the high frequency traders and t fs that are all making this uh more volatile market which then turns the the

retail investor off completely. In other words, we may be losing retail investors not just two mutual funds, but also to to E t F SO to passive index more than anything. Yeah, I think there's a concern about that for sure. I mean that's a big change. It's a big change. I mean it's not just a concern. I mean you can see it in the mutual fund numbers. Money is coming out of there. It has been going into E t F, so you could also see it

in the trading volumes. The trading volumes are down significantly, so that that's an interesting and major shift in the past. What what are the major changes that we should be watching for coming up in the future. Well, again, maybe a little knowledge is a dangerous thing, and so I have a little knowledge about technology. I'm always interested in technology and how it's impacting our economy and disrupting things. I think a lot of economists really don't pay enough

attention to technology and they get really pessimistic. And suddenly some technology comes along the way, like fracking that loads the price of oil and game changers, a game game changer, and uh, you know, it's impossible to forecast that, but it doesn't mean you can't follow it when it's starting

to make the headlines. And I'm intrigued by this blockchain technology, which is a software algorithm behind bitcoin, and um people figured out that, Uh, you know, whether you're for against bitcoin, the software technology itself, it was really quite intriguing and it very secure, very very fast transaction identification. And the fact that companies like Goldman and JP Morgan are spending billions on it suggests that literally billions. Do you think

there's billions in investments? I mean they've been articles spending that not talking about hundreds of you know, one to three billion, a lot of money, a lot of on one technology. Uh. They really see a potential here for it to uh dramatically lower their back office costs, which that has implications for employment in an area that used to be an important source of jobs. But it could have an impact on counterfeiting, it could. I mean, you know, I've I've become a kind of a little bit cranky

complainer about central banks and their impact on us. I mean, wouldn't it be interesting if we had a economic system that didn't have a central bank, where somehow the money was created digitally through uh this kind of blockchain technology.

I mean, the FED was set up initially just to help with the seasonal issues of corn production and the all two regular panics that seem to have stricken right every every few years, and now the question as well, it's actually contributed to those panics by trying to moderate the business cycle. UM. So I'm just kind of intrigued

by where fintech is. It's called UH is leading, It's not just blockchain, but it's certainly an important part of it and probably is going to continue for the foreseeable future. So so now we're down to my last two favorite questions. UM, just in time. Uh, let's say a recent college grad or a millennial came to you and and said, Dr Ed, I'm thinking about a career in finance. What sort of advice would you give them? I would say that, please learn how to write, Please read a lot um, you know,

just the two hours reading and writing. I don't really need arithmetic. I don't really need it. I think there's too much arithmetic, especially in economics. Uh yeah, there's too much quantity of analysis and that that today just don't have enough math skills and it just yes, okay, but I'm talking. You asked me about finance, and uh, you know, I mean finance has become become almost too much quantitative

and too much algorithm. And I don't know that just other than designing an algorithm that than kind of does its own thing, I don't know how you make a career out of that. Um, but I know that you're not going to find too much competition, uh, in any in any business, in any industry. UM. If you're a really good writer with with with with a fairly broad

sweep of knowledge. They're just not that many people that are, you know, renaissance men and women who are interested in a lot of different subjects and can write intelligently about it. So I would say, learn how to write, please, because I you know, I keep trying to expand my operation and uh, it's finding people who can write is very, very difficult. Huh, that's quite fascinating. Um, And I can't say I disagree with you, although I'm I'm aware of

a number of people who are outstanding writers. But maybe that proves your point. If if you're if you count in your head half a dozen or so people whose writing skills you really admire, I guess it means it's not that many people. I mean it's really communicating, you know, I mean the ability to have conversations, intelligent conversations with all kinds of different people in a business setting. And uh and otherwise, and I think we're kind of losing that.

Maybe it's you know, the tweets, the social networking. We're just characters, makes it hard to really develop an idea, that's right. So final question, and and my favorite one, of all, what is it that you know about economics and investing that you wish you knew twenty five years ago? Well, I think we teach done it. I wish I had more money, uh twenty years ago, thirty years ago, and I wish you'd put it all in dividend yielding stocks and you know, not not fooled around with all the

you know, hot tips. Uh. I would say that over the years, I've learned that hot tips are you know, sure way to lose money. So definitely stay away from that that stuff. I'd say, over the years, I've learned that uh, you know what tax of uh shelters and other means that investments that are focused just on lowering taxes uh tend not to work out either. You know, if you lower your profits, you lower your taxes. Yeah, that's right. Well, uh, ed, thank you so much for

doing this. I I appreciate how generous UH you've been with your time. If you've enjoyed this conversation, be sure and look up and inch or down an inch on Apple iTunes and you can see the other ninety five or so such questions. UH, such conversations we've had with various people over the past two years. I would be remiss if I did not thank Taylor Riggs, my booker, for helping to put together these conversations. Uh. Mike Batnick is head of research who helps us do the deep

dive into finding interesting things to talk about. And Charlie Valmer, who is down in d C doing some lobbying of his own, which is why he's not in the control booth where he belongs. Uh. You've been listening to Masters in Business on Bloomberg Radio look Ahead, Imagine more, gain insight for your industry with forward thinking advice from the professionals at Cone Resnick. Is your business ready to break through? Find out more at Cone resnick dot com slash Breakthrough