Masters in Business: COO of ECRI Lakshman Achuthan (Audio)

Not a lot of people in economics can say that at some point over the past few years they thought we were at risk of an imminent recession, and what ended up happening is QUEI either three or four came along and that pretty much avoided what they thought was the next recession. There was a big New York Time piece about them a few years ago, which traditionally is the kiss of death. To quote our guests from a

month ago, Paul Krugman. He who the gods wished to destroy they first put on the cover of Business Week. So perhaps a deep New York Times profile is roughly the equivalent of that. I find him to be a really interesting guy. I've known him for quite a number of years. Our offices used to be literally block away

from each other. We would go to lunch pretty regularly and chat about what was going on during the Great Financial Crisis, what we both thought should happen, why what the government was doing was either good or bad, or might help or might not help, and just a really really interesting guy, very data driven, sticks to his guns.

This is somewhat of an unusual period in time, and I think that at the reason they saw a recession coming and it didn't happen was I don't believe their model fully incorporates the impact of what Qui was actually doing. It was relatively unprecedented at the time. It's hard to build that into a model. You know, invaders come from Mars. What does that do to your your holiday spending forecast? And the answer is it throws it off a bit. That's that's their view of quantitative easing and what it

did to the model. But generally speaking, they're really insightful. They're leading Economic index is excellent. It's done a really good job about describing when the economy is actually getting better or worse. Doesn't have to be a full blown recession.

Or a full blown robust expansion. They just have a nice set of metrics, and I find him to be a really interesting guy who a lot of this subject matter can get really wonky, can get really deep, but he does a lovely job explaining in planing lish all the things that are going on in the economy, what we need to be aware of, what the relationship for you traders out there, what the relationship between the economy and the market is. It's really not what everybody thinks

it is. It's a much shorter leading indicator, and very often by the time a recession is over, the market has already moved forward and is positive. It's it's quite fascinating, uh to look at that relationship and how different it is from lots of our expectations. I really enjoy his his discussions on what's been going around globally. They have a really huge database. They provide a lot of information to corporate America, to multinational companies, and to governments around

the world. They're really a key player in econometric data. Without any further ado, here's my conversation with Lachman A. Shan. This is Masters in Business with Barry rid holts On Bloomberg Radio. I'm pleased to bring a friend of mine on the show. You probably, if you follow economic data, have heard of him and his company, or you might have seen him in somewhere in the financial circuit um. He's really a fascinating guy, into some fascinating work, and

I think you're gonna enjoy this. Welcome to the show, Laxman than of the Economic Cycle Research Institute, better known as Eckery. You got it what well? Well said? Well pronounced? I know some mouthful Listen. I've spent my whole childhood having people RILs, so I always try and get people's names more or less close. There you go, there you go. Well it's well, you know, thanks a lot for having

me on. I'm looking forward to the conversation. So I think the first place that a member of the public might have become familiar with you was this fantastic profile that the New York Times did of you, um about two years ago. Is that about right eleven something like somewhere. They couldn't have been more complimentary, they couldn't have been nicer. And some people call that the kiss of death. And

as they do that, you're marked. The famous Paul Krugman quote from Business Week is whom he whom the gods seek to destroy, they first put on the cover of Business Week. So this is a version of that um. But what the Times mentioned that was so fascinating is, unlike the traditional economists out there, the way your firm looks at the economy anticipates recessions, intictrates recovery. Not only is it a very different approach, it has a vastly

superior track record. And essentially you're study is of the business cycle, hence the name economic cycle. Yeah, so tell us a little bit about what your farm does. That's we study recessions and recoveries. Okay, so that's what I've done for all of my professional career. I started in the nineteen with ression, right, a fairly mis um. People were a little freaked out back then. Remember Japan was going to take over the world and they bought thirty

Rockefeller Center. They bought and that was it. They're gonna buy the United States and move it back to town. Yeah. Bill Clinton won the that presidential election with its the economy stupid, even though the recovery was starting, had already begun, but are was so anemic. That's where that double dip recession talk first game and all of that, and um, that's that's where I kind of broke my teeth on looking at recessions and recoveries with Jeffrey Moore up at

Columbia University. So let's talk for a moment about Jeffrey Moore, because I think most people know the name for a different Jeffrey guy who wrote the book Crossing the Chasm. This is not that. This is Jeffrey Jeffrey Simore. So I love some of the stuff about about his bio. First, he essentially is the guy who I don't know if you want to use the word discover or invented, invented

the idea of leading economic indicator right right. The Wall Street Journal called him uh the father of leading indicators. And to put it in perspective, Dr Moore UH was the protege of Wesley Mitchell and Arthur Burns, earlier business cycle researchers. Wesley Mitchell Burns eventually became Fed CHAMPI kam fed chairman under Nixon in the nixt administration. Now, um, but earlier Wesley Mitchell UH in the early part of

the last century. UH in the twenties helped to form the National euro of Economic Research, and this is where so known as the nb ER, which is the organization that currently has a committee that officially dates dates the beginning and end of recessions. But it always wasn't always a committee, wasn't. No, no is Dr Moore. He he used to say, he'd quipped that he would have lunch with himself. I've a meeting with himself over lunch and

decide the dates. And so he's literally the guy who, prior to the current incarnation of the NBR officially I said, this is a recession. It began here in an end of their correct Like, that's a lot of power. And yeah, the shaded areas on your charts, when did they start an end? Dr Moore picked him all until set them right. So it's so so Mitchell figured out what was a business cycle and that was a huge thing to figure out,

huge insight, huge insight. He started to do work UM when More was working under him on leading indicators of revivals because there were a lot of depressions and More after Um World War two took up that work again and refined it to leading indicators of revival and recession. That's your first set of leading indicators. He worked with a man named Julius Shiskin at the Commerce Department to invent the idea of the statistics for a composite index.

They put the leading indicators in the composite index together, those two ideas, and there's your original index of leading economic Indicators, which they then gave to the Commerce Department. Fascinating. We're talking with Lakshman than of Eckery about basically the history of dating recessions, both of those so from nineteen forty nine for the post war period up until it's it's Dr Moore. After that they put in he retired. He retires and he's head of the committee, the Business

Cycle Dating Committee. So how do you start working with Doc to more UH? He when he retires from the National Bureau UH where he was director, he starts forecasting and he and he creates a research firm called the Center for International Business Cycle Research, which originally was at Rutgers and it moved very quickly over to UH Columbia Business School, where Mitchell and Burns had also taught, and that's where it was housed from the early eighties through

the mid nineties. And I began working with Dr Moore. Right there, Let's let's make this really simple. Let's break this down. What exactly is a recession? No, recession is really at the heart of how a market economy works, where it alternates between up swings and down swings and growth, and some of those down swings, uh turn into recessions. You actually contract and in other words, when the economy is no longer growing, no longer flat, is actually getting

small and actually shrinking. So you might you might have the overall economy expand three percent, and then it will slow to two percent or one percent and hopefully re accelerate. And sometimes it does, sometimes it doesn't, and sometimes you know, in the in the recessions, it goes negative. Now I've heard you give a very specific I don't want to call it technical definition, but really your your textbook definition.

Describe what that is. Well, this is going back to generations Zachary's the third generation of this research, going back to Wesley Mitchell who helped to find what a recession is. It's a pronounced, pervasive and persistent decline in output, employment, income, and sales. So when you say pronounced, persistent and pervasive, pronounced means it's significant, it's noticeable, persistent. Is it last for a while. It has to last really about two

quarters at least. And pervasive is it's in most, if not all, corners of the right. It can't just be something hitting one spot of the accoun on me. It's going to spread across and kind of infect So you so cycles. You can have a vicious cycle, which is a recession. It's snowballs, you know, because if let's say production goes down, employment goes down, the income goes down, you can't buy that much. Sales go down and that kicks production down. So that's paradox of thrift. You get this.

My saving is otherwise would be your income. So if I stop spending, you got it. Suddenly we have and once everybody puts their while it's away, we get a vicious The vicious cycle. Now that can also turn virtuous and at times that you don't expect, like in two thousand and nine, uh, where it kind of runs its course to the downside fever breaks, and the fever breaks

you have some pent up demand. Uh, and you can actually see it the vicious cycle turned virtuous where an unexpected kind of sales leads to catches production is short, and then you have to gear up and higher and incomes and then you can work. You suddenly have a virtual cycle. So the business cycle in a free market.

This is in every free market. As you've seen uh formally planned economies like India or China loosen up and become more free market oriented, you're seeing those cycles present themselves, uh in a in a in a more traditional way as we've seen in the developed world, and we're certainly seeing that in China these days. That they're formally to a double digit growth rate is now five or six percent, which would be great in the United States, but their economy is what half a third of our kind, it's

really much smaller on an absolute basis. You'll have you'll have the you'll have these economies, and especially in the post World War two period Western Europe, Japan, where they get very high trend growth because they're rebuilding in all of these things, and so they'll still have cycles in growth,

but it will be around a higher trend. What we're seeing now, which is quite interesting from the cyclical bantage point for that cyclical framework, is that the developed economies, their trend growth is so low that the cycle, which is endogenous. It's part of how a free market works. Each downturn you have an easier chance to go negative. So let's that brings up a really fascinating point. What is it that actually causes a recession? And I want

to put that into a little context. I've been hearing people for the past three years four years say, hey, where at stoll speed? Like as if there's an airplane and I engine slows down a little more, you lose list and you crash. Where it's stall speed? Where risk of recession? How come some slowdowns never really turned the recession and other slowdowns there's some sort of external shocks some economies, weather and others. It's like a drum that caused them to tip over great point, and I think

it's really the reason we exist. I mean and and I want to contrast it a bit with more mainstream economics. But but first let me answer your question directly. A key finding of generations of work. I'm talking decades of work where the third generation now is that recession is not simply caused by an external shock, you know, like an oil shock or the FED did something or whatever. Sometimes those things happen and there's no, even though some

of these are really big external shocks like Katrina. Katrina could have been but recession because the recession our research shows, and this is I'm looking over a lot of time, many centuries, almost a century in some cases, and many different economies around the world, and what we find is the free market has this indog in, this cyclicality to it where it wants to accelerates and decelerates. Now that's going on. That's the nature of a free market at

its very essence. Now, shocks are always happening. If a shock occurs when there's a cycle downturn, the vulnerability is there. When when we when we have this the leading indicators of the indicators of the cycle turning down, we like to we describe it as a window of vulnerability opening. And at that time, if there's a shock, very easy for it to be recessionary more vulnerable, that more vulnerable. It's like you have your compromise immune system and if

there's a shock boom, you're in trouble. On the other hand, if you're in an upswing and you have a shock, for example, uh Pearl Harbor, we had a big upswing going on in the indicators and it's pretty massive shock. But the nine eleven of its day just even in some ways, it's bigger, right in some ways, and and and and but definitely a nine eleven of its day and and boom economy cruises right through it. And people

tend to associate recessions with the nearby shock. Nine eleven is a great example that occurred half a year after the recession was underway. The recession was a month or two away from ending. Yeah, that much closer to the end. But but everybody, you know, immediately their muscle memory brings you to nine eleven and that recession. And I constantly A'm saying to people, how can nine eleven in September have caused a recession that began the previous March? Correct?

Correct in the same thing with Lehman, that's eight months after the recession began, for example, That's right. So that's let's talk about that September two thousand and eight. And the recession was dated December two thousand and seven, two thousand seven. So by the time Lehman and then A. I. G. And everything else came along, we were already You're very vulnerable, right, You're at a place where you're that's eight nine months.

So the way so from our again, from our fairly unique perspective, right, and not a lot of people talk from a from a cycle perspective, but from that perspective, we're in this cyclical downturn already and then you have a huge financial shock and it makes a bad recession, the Great Recession. Today, I've been speaking with Lakshman, Arthur Sean and and discussing various ways of looking at business cycles and recessions, and obviously Bloomberg being a financial channel.

One of the questions that everyone wants to know, what's the relationship between the stock market and the economy and how to recessions fit into that site. Sure, well, I mean stocks are key, key, key metrics in a free market economy, right, It's all about what these equities are worth in some sense, and in these market prices. So market prices are UH an area you can go to UH to see where you are in the cycle. Sometimes are coincidence, sometimes they're leading. The stock prices are a

short leading indicator of the economy. They are part of the original indicators that more developed back in the late fifties and um, as I said, they they're they're a short leading indicator. There. Let me let me stop you there, because I've heard repeated endlessly. Oh, the stock mark gives you years warning before recession. You're implying that's not true. No, no, no, it's not. It's a short leader is maybe five six months average lead, and then hidden inside the word average

is some variability. So there may have been a case here and there where it had a long lead, but I wouldn't classify it as a long leader, something that led by three or four quarters. It's it's more likely to be one or two quarters. Uh. And uh, it might be a little bit longer lead at the peak and a little shorter lead at the trough. But on its own, it's a very imperfect indicator that it's not

a holy grail. Neither is even the leading index. Uh. But one of the things you do when you put leading indicators from different areas, different sources together into a leading index, you get some confirmation. And so Uh. The stock prices are one piece of the puzzle in a set of short leading indicators that were created half a

century ago. So are some of the other short leading indicators. Oh, you could you could look at things from the labor market, things from capital investment, things from interest rates, uh, some some sensitive commodity prices, um, some survey data which wasn't available half a century ago. So these are different types of short leading indicators. Uh. Some come from government, some come from market prices, some come from private surveys. This

is you're diversifying your risk among your indicators here. Um. But the the thing that people should know is any one of these indicators is highly fallible even together. It's not a holy grail, but it's certainly better than relying on any single input. Absolutely. I can't tell you how many times I've responded to people who are saying, because of this factor, here's what's Hey, Listen, the market's much more complex than that. The economy can't be depicted in

in a single variable. You need a multiple, a multiple variate in order to come up with any sort of not at all and so and so. Um. We've been doing a lot of work in a half a century, right. So in that time, we've i'm of a long leading indicators, leading indicators of different sectors of the economy, of employment, of inflation. And this larger array of leading indicators is

what we actually use not anyone leading UH index. And also what's happened is that, um, the l e I of course has been privatized, has been taken out of the public sector, and you know, most people are more comfortable, most economists are much more comfortable with econometric models and estimations and extrapolations, and a lot of that has actually started to appear inside the l e I numbers that you're getting, So inside some of those components are extrapolated

econometric forecast, which is really kind of antithetical to the whole idea. Less less than optimal in other words, is when you're you're trying to fit the thing and then it's it's it's no different to see what we do have a model within a model. The idea is to use the data to well inputs into your model so you get a clean output. Yeah, that's what we do is we don't use models. So a pure cyclical UH framework won't even use an econometric type model anywhere in

its presentation. You're monitoring specific, very very limited cyclical indicators. And here what's happening is, oh, this component isn't ready to let me estimate it, and that is a totally another that's a different ball game. That's what you see every day when someone doesn't estimate off of a model, and and most of those estimates are pretty uh, you know, you get what medio garbage in garbage you said it, I'm being polite. That's the g rated all right, all right,

So we have a minute left in this segment. When we come back, I want to talk a little bit about policy and politics. But one of the things that we think of when we think about the market and the economy is I have two thousand sticks out in my head. And maybe it's a bad example because of the bubble and the tech bus, but I remember earnings misses starting long before the recession began. And perhaps that's how the market picks this up long before the recession.

Is efficient. I think the market, the market left to its own devices, is a is a you know, a risk management tool. Um. But and here's just give you the statistics in in in in three three out of the last fifteen recessions, you saw, uh, the market go up even when there was a recession. It's a couple of times you've seen it disconnect. And the one that's very interesting is that roaring twenties where it disconnected completely,

but it ended badly. This week, I'm sitting with Laxman Acuthan of Eckery Economic Cycle Research, and we've been talking about the relationship between the stock market and the economy. I want to bring something up that's policy related that I recall you writing. I don't remember it was oh seven or oh eight, but you had written a piece and published it somewhere where you essentially said, hey, there's a recession coming, but there's also a last chance to

avoid this recession. And if Congress acts, you could miss this recession. It absolutely does it was. There was a brief window of opportunity in two thousand and seven, uh where uh there was literally no inventory on the shelves.

It was just a little bit of a weirdness in the inventory cycle, and at that moment some cash in consumers pockets would have spurred a temporary I'm not saying I would have solved anything long term, but a temporary restocking and staved off the recession that began in December of two thousand and seven. But thanks to the way that you know, DC works, the Bush Pelosi Bernankee fiscal stimulus that they did actually vote through, which was what like a hundred and fifty, right, I mean that was

those the three checks. These are checks in the mail, right, But they didn't they didn't arrive until two thousand and eight, and then towards the summer and and the summer and and the recession was already on the way. So it I think in principle, if there's these little tactical moments, you might be able to kind of throw a monkey wrench inside of that vicious cycle just for a second.

You're not going to get rid of it, but you could maybe stave it off so that you're ready for or a little bit better prepared, instead of what we had here, which was basically a debacle. And and uh, I don't you know, it's hard to you know, I guess it could have been worse, but um, the but it's interesting in half, But it is kind of interesting back in that back then an adorable number, isn't it cute? But that was back in the day when it was a really big number, and it sank like a stone.

Nobody even remembers it. And you and you see, you know, these numbers they get so large that you don't know what they mean. But they you know, it sounds like it could have plugged a hole somewhere in a budget we had. We had Jim Channis on a few weeks when we were discussing his histories, and short Salary identifies broad the first company he had identified cooking the books, and and very famously short it was Baldwin, which was

a piano manufacturer that became an insurance company. And when they went belly up, and this is the late eighties early nineties, um, it was the biggest bankruptcy in history. And it was nine billion dollars. And I'm like, oh, that's adorable dollars. That's nothing, but a hundred and fifty billion dollars in seven o eight was was still real money.

And remember, you know Washington is famous for gridlock. But here you had again Bush and and bernanke Republican who's effectively a bypart, and they all went at this fiscal thing to get it done. I think that they saw some writing on the wall. But even with that kind of consensus, it's just too slow. So the idea that I think in theory Congress might be able to say, but in practice it's almost impossible to get ahead of the cycle, especially these days where it's all so so.

What you're effectively saying much different than than what I've been reading from some of the more extreme elements of the political spectrum, is that you can engage in a form of stimulus allah John Maynard Keynes and actually have a net impact on the economy. I think, in very unique circumstances that may be able to happen. But I would actually at the same time, let me, let's let's

stop right there. So let's look at two recent policy actions that have and we're going to keep it by partisan, but there's a lot of politics behind both of this. One was the stimulus in two thousand nine, and the second was the sequester in two thousand thirteen. Each of those were big chunks of money. Theoretically, do those two things do for the economy? The stimulus you really want to know? I think so sure that. So keep in mind the stimulus really kind of a half estates hit. Well,

that's what I was gonna say. It's it's really kind of half arsked because remember it is unemployment extension, and some of it is temporary type cut, and not a lot of it was what we think of like Eisenhower in the interstate highway system was really a big, bad stimulus that worked. Wonders goes to thesis. Now, Um, okay, so you have a cycle and the cycle doesn't care about the politics that's happening. It's this endogenous cycle in a free market where we're going to have an ebb

and flow in our activity. And we had a nasty downturn. Uh And by um, the spring of two thousand and nine, the recession is still going on. Uh. In Davos in April at that not in Davos, it was twenty meeting in London. They were um talking about depression in April. Uh. But the leading indicators had all turned up sharply so that we were forecasting an end of recession by the middle of oh nine. Uh. And I'm pretty sure the

stimulus was still kind of cooking its through. Yeah. So, but so in other words, I'm saying the recession U ending. See these things end right. Session was already that stimulus is already too late to make much of an impact. These are the facts. And two hundred and twenty two years we've had forty seven recessions. The Fed's been around for maybe half of those um so um. They've been around when there have been a lot of recessions, so they haven't been able to get rid of them, or

maybe they contributed to some I don't know. You know, we could argue that took okay. So so the point is is, like, you know, this is the condition of the environment we're in that it has this cycle going up and down, and so if things get really bad. I am a very empathetic, sympathetic person. I am not saying everybody should just be like in bubble. You know, I'm not going there. And I understand I understand everybody

from both sides of the policy spectrum. They're trying to figure out how to make things better and they have suggestions. But the but the idea that you can go so far as to get rid of the business cycle is one that has been promoted many times and it's failed many time and time again. Irving Fisher And so we're speaking with Lakshman Than of the Economic Cycle Research Institute

about recessions and the impact of policies. So people have been calling, at least they used to before the collapse, the Greenspan era as the great moderation we seem to have less recessions, less frequently, they were shallower. How do you look at that and how what does that mean going forward? I think it's very interesting. This is at the core of something that's been concerning us since two

thousand and eight. And uh we we call it the yo Yo years were we've entered our Yoyo years, which is a period of weaker growth and more frequent recessions. In the Greenspan years are related to that in a way, they masked it. Trend growth in the United States, no matter how you slice it has been getting weaker and weaker since the mid seventies. The pace of each recovery

since the seventies has been getting weaker and weaker. It's stairs stepping down now in the in the nineties, which was which had relatively low trend growth compared to earlier decades. As long as it's an extended, a long business cycle, you don't matter. You don't mind that much. And and and here the volatility of the cycle comes in. So we have a relatively moderate cycle, not big swings, gentle swings,

but our altitude is low, so it feels okay. And in fact, that was a very impressive on many statistical accounts expansion. The problem is if the volatility returns and you're altitude level at that little level, you're in big trouble. And so let's take a look at Europe or the UK after the Great Recession. Uh, they all recovered for a little bit, and then they went back into recession, and then they recovered again, and now they're all actually

turning down a little bit. So they're seeing more frequent recessions in Europe right now. Already it's not even a forecast anymore that this. Look at Japan in in in twenty one years, well, in twenty one years, they've had six recessions, They've had albonomics. They've almost shot everything they can shoot at at the economy. The structural stuff is a little their their version of QUI is what three times six times hours. I think they're inversion, you know,

it's issue number ten now or something like that. And this was a really big one, the one that they did recently. And they're already slowing there in their third decade of of weak growth. And Japan famously has been fighting deflation. Europe is very clearly having some price problems just in relation, and actually the US is too. I

think that we're not that exceptional. I think in this regard, I know, dare I say, hey, I'm I'm a true American here, but I'm but but I'm saying that that on this cyclical count of slow trend growth we are we need to face up to what's going on. Larry Summers at the end of last year went out and talked about secular stagnation and nobody wanted to hear it. I still want to hear you still don't know. It's not I don't want to hear anything from him. But

this isn't But this isn't fun to hear. PIMCO has been talking about the new normal. These are all different angles on this issue. Now. Is this a function of where a more mature economy and therefore we're going to have slower growth. Is it a function of the aging of the baby boomers, globalization sending some jobs overseas? What is it that credit issues, big, deleveraging big? Well, I think the deleveraging actually is it's a contributing factor, but

I don't think it's causing it. So what I'm saying is, when de leveraging is over, this problem doesn't go away. I want to talk now in this segment where we don't have any time limitations and we could just open up our top button chill out a little bit. So I you and I know each other for a long time, we go to lunch on a regular basis. I'm very familiar with your work. I want to talk a little bit about your track record, which for the most part

has been excellent. But you've been getting some grief lately about the call in that Hey, the US has at an increasing risk of a recession, so there's a lot of different things I want to come back to and discuss. You know, anyone in the public eye gets grief from a variety of people. How do you deal with that sort of stuff? First? And then let's talk a little bit about the actual call and what you guys said

and where you're going from from there. And again we mentioned during the broadcast section section that the New York Times gave you this phenomenal profile that talked about essentially said you had a perfect forecasting, right, which is right, that's the kiss of death. They never piss off the trade and Gods my head trade or always used to say anytime you were on a roll. It's like man, you are living dangerous, like just shut up and stay

below the radar. So it's almost as if a profile like that guarantees the next call is going to mean revert. But talk a little bit about how do you deal with just the people. You know, it's so easy for people to dismiss somebody out of hand. It would be really it would be really tough. I mean this, It takes a certain type of person to do this. First off. I mean I and I guess I have some of

those abilities. And I don't think skin small brain. Is that what you're saying, you know, to a degree, I probably, But but I think what it is is having a framework. And I mean Jeffrey Moore, my mentor, Dr Jeffrey H. Moore was um an interesting guy, uh for the same reason. I don't purport to be as bright as he was. But he was able uh in academia, which can be a pretty rough environment. You know, you can get stabbed

in the back there often. And and he went against the grain in terms of forecasting, and he did not uh go into the model building econometrics, and he instead stayed with the monitoring of cyclical indicators and developing that type of research which was not in fashion in academia. And that framework that we have there is what I'm taking advantage of today at Equery, with all of our research group. I mean, just to be clear, there's a lot of people behind me. This is not all my work.

I have a huge it's a full floor. You have a couple of dozen people, are you yeah, and they are focused, Like you know, we're all really impressed with this cyclical framework of monitoring the indicators and the we actually don't even consider ourselves forecasters. We we we consider ourselves monitors. Were monitoring very limited and with an eye

and uh, we're we're watching these indicators. And so when I say to you, here's what they're saying, um, it may even go against my gut instinct, but I have a lot of respect for the framework. And that is why sometimes I think I can stand in a room where everybody disagrees and say, well, here's what I think. Here's what the framework is. It's not about it's not about what some guy whispered to me in a corner somewhere,

you know, who supposedly knows something. It's rather it's what the framework of objective indicators are saying are they moving in a pronounced, pervasive, in persistent way one way or the other, And then it's my job to kind of figure out the story around that, trying to explain it. So let's put this into a little context. Here we are in which just came off a quarter that either

was really weak or actually contractually contracted slightly. Although now we're in the second quarter, the data looks much better. I think a lot of the weather related issues in Q one just deferred certain purchases, deferred certain activities to Q two. So as bad as Q one looks, Q two looks that much better. But how do we look

at the past couple of years? How would you describe? Sure? Sure? Sure? Well, um, I think in twenty you know, when we look backwards, Uh, time will tell if we were technically correct on our recession call. Yeah, it looks like there was a Uh, the epicenter of the weakness of the downturn will be in the fourth quarter of and in the first quarter of where you have annualized GDP growth for that half

a year at a fraction of barely positive. And if you look underneath and see why what was the growth, it was a freak outsized contribution of agriculture, which never contributes to GDP. It surrounding aera typically, and it made up the bulk of that growth. So the rest of the economy was not in action during that time, right, So essentially flat for two quoters or not? There no negative? See, I mean it was the agriculture that made it just

skate a little bit of it. And now would that be considered No, I mean the revisions are still coming. These revisions are not over. So, but let's use the three piece. So it was persistent? Does two quarters two quarters is persistent? Yeah, you could have. You could have a short recession and then throughout the entire economy except for agriculture apparently, so it was nearly Well, agriculture is not I mean non farm is where we focus. I mean the farm industry is not a big component typically

of this economy. So and then what I pronounced, was it a deep No, it would have been mild. It was not. That was not that was not a deep. That was not a deep if so, at most it was possibly a short mild recession. Correct. That absolutely breakes perfect sense to me. But you've gone on television. I've seen you on bloom. But I've seen you in CNBC. You've gotten back and forth with Joe Karnan about and

I thought you did an admirable job. I think keep blaming what you're trying to explain in a thirty seconds sound bite. But how do you deal with that sort of nonsense when people are just I think one of the things is binary. People are buying recession, yes or no. Well, I think people equate recession with the end of the world, and I just always a losing it. I don't, you know, I don't. I think a recession, as bad as it can be for for for people who are near the

collateral damage, they can be very cathartic. I mean, there's reasons for recessions, you know, there's It does squeeze out your excesses and sets you and it will properly set you up for growth in the current environment. One could argue that all of this recession denial, or all of the policies designed to kind of like dot by hook or by crook to pull some demand from next quarter into this quarter, actually is keeping trying to subvert that process,

which is actually a very healthy process for a market economy. Um. You know, people point to the UK and say, oh, look it's growing well, austerity works well or whatever. They have some argument right, Actually they had to recessions which really squeeze a lot of stuff out and set them up for some growth. Now, I'm sorry to say that that'll that'll fade a little bit at some point. But still these recessions do set you up for more sustained growth.

And when you have a policy which is just so limited to pulling next quarter into this quarter, low inch or traits some some tax break if you keep pulling demand from the from next quarter into this quarter, from the future into now what's left of the future. That that's reminds me of a country song, how can I miss you if you won't go away? So how could you get How did you ever find that pent up demand? How could you squeeze out those excesses if you never

let the cycle one its natural course? That's and that's and so the I I get, I get the arguments, and I think that there are reasonable arguments for extraordinary uh intervention uh at the depths of the Great recession. I get it. But that was a long time ago,

wasn't that Number one? Yes, it was, and number Two, I think we all know the bottom line was that we have these banks festied with bad mortgages, and so if we had another bad recession, we would have wasted all bailout dollars when the banks would have collapsed again. Another I don't know if that's still the case. No, No, I mean another way of looking at it is, um you know, the FED takes rates to zero or close to them effectively, and then what are they supposed to

do next? So that while they're pushing on a stream, but they don't want to admit that, so that they say, so, now we're gonna do the wealth effect. We're gonna make the house price go up, We're gonna make the stock price go up, and then you're gonna go out and spend right and the wealth of and you see that's broken. That that that hasn't happened. So let's talk about that, because that's a pet peeve of mine for two reasons.

The first reason is, I think, and I've written about this extensively, I think the wealth effect is something that the FED gets completely wrong. And I have to go out to Jackson Hole one summer and would agree, we would agree with you from the evidence but when you look in so let's talk about a cycle for a second. When we look in a strong economic cycle. You mentioned the areas that you have in recovery. You have income gains, you have employment gains, you have manufacturing gains. What was

the fourth one, income, manufacturing, retails als gales. So you had all these things that are going positively. Ellen, what a surprise. Lots of people are working, they're getting wage gains, they're going out and spending that money on houses, cars, and other consumer goods, both durable and non durable. Manufacturing and exports are working well. And oh, by the way, the stock market is doing really well on those circumstances. Hey, it looks like it looks like when the stock market

goes up, everybody's really happy. But actually that's getting the causation backwards. The positive fundamental underlying factors that are rising or lifting all boats. That's the tail that's wagging the door of the stock market. Isn't what's making all these good things happen. All these good things are making the

stock market, and that's where the FED gets it backwards. Well, typically it does work that way, and that's why in twelve out of the last fifteen downturns, you've seen the stock market react, and three of them they did the Roaring twenties. Didn't Now remember the Roaring twenties. I mean I don't. I wasn't born, but they say it sounds pretty uh you know they were people were pretty excited, right,

and so they had they had a recession. They had those crazy dance, they had the crazy dance, they had all kinds of not no booze, what I mean, you can imagine, uh, you know, if there was no disrespect to Jim Kramer here, but if there was a Jim Kramer there, he would have been saying bye bye bye, right that at that moment. And and so here we have a recession. It's a it's a full blown pronounce pervasive position whatever in all the indicators from twenty seven.

Stock market goes up. Wow, that's amazing. Okay, recession ends now the fundamentals are back, uh in in play, and you got another two years of market games not too shaty. And then it all ends badly because well, given those numbers, no surprise. Well, and it was built. There was some there was some, there was some New York active other things. There was different kinds of consumer financing was coming in all kinds of average. Okay, so that's we're not that.

But what it what that shows you is that what's going on now has happened before. Okay, this it's it's not like everything's broken and it doesn't make any sense this this can happen, But it does suggest that, um, that feeling that you have that it might not end well, um,

you know there's some precedent for that. Uh. And I can't say, uh that tomorrow is going to be bad or whatever, but you know, ultimately, if we don't have uh stronger economic growth on a sustained basis, that disconnect between some of the expectations and the fundamentals may have to get reconciled. So that brings us back to your previous comment that you end up with you end up with a situation where you have more frequent recessions even

though they're more shallow. And so is that what we know, they're not necessarily more they don't have to be more shallow. So in UH remember Japan, UH seventeen years ago on April one, raised it's UH tax, and this past April one, they raised their tax against sales tax and um, it didn't work out well because at the time either well currently it doesn't seem to be working out too well. And last time didn't they just print like a five point nine percent GDP or something crazy like in anticipation

of the tax. So if you're so everybody's front running, the new Q two is going to be a jerk back the other way. So when does the tax take effect? April one? So all just now? Oh so so Q one was before the tax? Correct, So you bought your bicycle or your air conditioner before and then you didn't have to pay five percent more in tax? Is that what it is? It's five percent doubled that they doubled it practically right, So when trying to stimulate spending, why

would you want to put a further dragon. I will not I will not try to explain the policies of these countries. I'm not I'm not a free market absolutist, but it's pretty clear. If you want more of something, tax it less. If you want less of something, tax it more. Well, And I would say from a cycle point of view where I can add something that that when the cycle is decelerating, you probably don't want to

push it down further. You know, if I if I had to raise taxes at some point, I do it when the cycle was going up, not when I was going down as they did in seven. Now people think Japan has had deflation forever. Actually no, it didn't start till after this policy mistake where they raised taxes going into a downturn, and that recession that they had, uh was one of the nastiest, most severe recessions they've had, and it brought to that economy real persistent deflation. Now

in Europe you're fighting disinflation. In the US, you're fighting disinflation. We're not a deflation. But although we have been seeing signs of an uptick in inflation, you've seen in in in in the stuff that normal people care about, which is food and energy. You know, you know, the cost of your iPad might go down a little bit, but the food and the energy part, uh, that is non discretionary. Uh,

that part's going up. So the money that's left for discretionary spending, which is very cyclical, is smaller, and so the cyclical piece of your economy. Right when you look at the rebound, the so called rebound and retail sales that we had in the last print. You'll you'll notice that it's what people need. It's not what they want, but they're buying. And I think that kind of discribed stuff that describes what's going on. I mean, uh, and and when we talk about who who who can benefit

from looking at cyclical risk. If you're on the business side, uh, if you're uh a discretionary type of business, your product is somewhat discretionary, very cyclical. You have to be very sensitive to the cycle. If you sell toilet paper, you know, even in a downturn, you're gonna sell toilet paper. So this raises an interesting question, not so much about toilet paper, but about who are the folks that use your research.

Who are your you don't have to name names, but who are the sort of people who are your clients. It's really those who want to manage cyclical risks. So in broad strokes, you'll have that that that includes governments, industry, investors, all three so so so in in in in for investors. Uh, it's it's uh largely around an asset allocation decision because it's not a day trader stuff. Right, there's the day traders couldn't couldn't really care about our stuff. But but

but are there any day traders left? I think I think that they're you know, stegasaurus and day traders are kind of there. You go about the same number of roaming the Yeah, I know. But if you want to look at what what region of the world, what country, stocks and bonds, real estate, commodities, those kinds of asset uh shifts and fourth, that's stuff that cycle indicators can tell you about the risk of things going one way

or another. And when you look at businesses, the cyclical businesses where there's there's a discretionary spending component, those are the businesses that are really interested in managing cycle risk. Manufacturing is very interested in that, they're very cyclical. Uh so those kind of companies. And what about governments, do you guys actually date recessions for twenty one countries sounds

like a strange Well, yeah, when does it become serious? So, well, twenty one countries, you're the arbiter of one recession being right. So for policymakers, I mean, I think, uh, certainly, um at the central bank level, there's a lot of interest. I think for longer term policymakers, like how do we get out of this mess. Uh, there's interest, but it's more on a theoretical level, because if we are in this low growth, more frequent recession, it does all kinds

of things to your budget policy. Uh, you know, because you're going to have high on the you know, long term un employment's gonna be high, disability payments are gonna be high, all these other transfers are gonna be high. So your budget issues are are there, and there's no clear policy that is going to jerk your trend growth right up. Uh and so, and this isn't something that's simply about the US. We're seeing it in Europe, We're seeing it in Japan. This is a global phenomenon. This

is a global phenomenon of more developed economies. And it may have demographics, it may have globalization. It's certainly I think productivity growth is an issue which has been pretty weak. Now. Is it weak because it's gained so much over the past thirty years, or is it just weak because companies aren't investing in capex and other such things that improve productivity the way they did ten years ago. Well, Um, probably a little bit of both. Probably a little bit

of both. I mean, that's an interesting I was talking earlier this morning about the policies, you know, low interest rates or or a tax break on cap X. And it's interesting because you're essentially paying businesses to the extent they will invest to invest in something that will get rid of a job. You know, that's a lot of

what they're that they've been doing. And when you look at businesses I you may have seen Larry Fink from black Rock wrote a letter to his peers, uh two months ago, and he said, please please please spot Star spendence your money, you know, and sitting on reckon amounts of cash but breaks them out and um. But the businesses are not that interested in doing it because the

demand is, you know, lackluster. It's kind of black. One of the things we noticed really early to mid two thousands people call it business intelligence or other types of software. There's a a few dozen publicly traded companies, everything from

salesforce to business objects as tons of them. And when you speak to the people who are fairly senior in those companies, they'll basically say, our whole presentation is to walk into any company and say this software is going to cost you twelve million dollars and the CEO CFO wants to kick him out of the room, and he says, before you throw me out, it's gonna save you thirty seven million dollars in the first two years alone, and if it doesn't, I'll refund the twelve million. Go on,

I'm listening. Here's what it does, Here's how it makes you more efficient, here's how much staff you could lay off. Blah blah blah. So look, I know my office what we do with less than ten people. Ten forget twenty years ago. Ten years ago would have taken forty people. You know, there was a Dilbert comic of a year or two ago where the caption says that the job market is uh uh changing quicker than people can evolve.

And that's kind of what we're in and it's displaced a lot of people who will not be able to work. And it's not even just in the U s. It's happening in Europe. It's happening to Triman. And you see, older people are having to work longer, and younger people are having a tougher time starting off in a good spot, and that impacts their entire career path for their life.

So they begin Yeah, the the era if you graduate college in the midst of recession, your lifetime earnings are significantly lower than someone who graduates in the midst of a boom. Luck of the draw just absolutely has nothing to do with the skill set. So we also noticed with creating a lot of tech jobs, with creating a lot of energy jobs, but we're also creating a lot of low wage jobs. So it's restaurant workers, it's employees.

The energy jobs are high paying, mining and energy and these and dirt there, and and they don't play how many people. I mean, yeah, if you can get them, they're they're they're interesting and high paying. To North Dakota where the unemployment rate is zero. But there's but there's not and it's not going to move the dial on the big numbers. And what you see is average hourly earnings.

It's going up, ticking up slowly. Uh, And that sounds pretty good, right, But it's it's heavily weighted with it's a fat head long tail. But it's actually not even true if I mean, it's true that it's going up, but it's going up for a statistically poor reason. The reason that's going up is because the pace at which your hours are being reduced, and is go is they're being reduced faster than your wage is being reduced. So people are working less but getting paid more per hour. Yeah,

you know, they're both going down. You're getting you're working less hours and you're getting paid less, but the hours are falling faster than your pay. So your average hourly earnings go up, but NETT income going down. Yeah, and that's really the only thing that matters. And you're saving. People are diving into their savings and it's down at

a low, low level. And when you go to credit, the kind of credit you can at is um You can get stuff that's collateralized like a car loan, uh and you might even have to stretch it out over seven years. You can get a mortgage, but they'd rather sell a house to somebody who's paying cash. And a lot of people do pay cash. Just by the way. There's just something And I've been back and forth with Johnathan Miller about this today. Something came out today. I

sent it to him. Coasted struck me as wrong. Of the homes purchased in Manhattan ap purchased with cash. Seems like that number just seems way high. It might be condos but still it's a huge point. I mean, whether whether the numbers wrong. That's the general thrust of that is cashes can the cash can go out and buy, but but most people don't. You know, most people have

to They can't afford to buy a house outright. And and so it's either speculative business or just wealthy people who are doing it are wealthy global people who are doing it. The Chinese are trying to get the money out of China because they said, we're going to slow this thing down, so you get your money out. And it's either London, New York, kirk California, Vancouver. You there.

These they call them see through towers. Not like in the nineteen eighties where it was a pejorative term in Dallas when the energy boom busted and they had all these buildings that were unrented. They have these hot, gorgeous luxury high rise apartment buildings fully sold out, almost no one living there, a vertical ghost. It's an asset and if they have to it's a lifeboat. If they have to get out, they have a place to live for

a student loan, government government guaranteed student loan. And you've seen the growth there has been pretty helpless. Right, So, but when you go to just regular consumer credit or other kinds of loans, or you know, if you've got if you go through the motions, I think someone putting down, they gotta put down for a house, and it's it's not terribly easy to get the mortgage. You gotta go through a lot of stuff together. Plus you have the return of p m I, you have the return of

mortgage insurance. I'm hearing some people, and again I know enough people in the real estate industry that this is anecdotal, but interesting, um, and we we know the plural of anecdote isn't data. However, when you hear someone say they're putting down and therefore they don't have to put any sort of mortgage insurance, and then by the time they're done with closing costs and this and that, you know, you're kind of on the border of getting a proof

for this. We want you to have mortgage insurance anyway, if you want us to underwrite the mortgage. So now, in Canada, which had a huge housing boom but didn't have a bus like we did, mortgage insurance is fairly mandatory and unless you put it used to be down. I think they lowered that to down. So and pretty much they have a highly regulated There are no exotic

negative amorization interests, only mortgages. It's pretty straightforward. So, yeah, there's credit in the United States, but it's not certainly not loose credit. It's not easy to get a mortgage. And unless you have a high income and a good credit, raining and plenty of room you're not over extending yourself, You're gonna have a tough time getting a mortgage in the United States. And and so what's and so, so what's interesting, that's the kind of the lay of the land.

And and what's interesting is that at the end of last year, we have the second half of last year, we have some growth in the second there is some lift happening to the economy, and we're looking for it to be pronounced, pervasive and persistent, and we want to put an end of that. Well, so we get pronounced and we get pervasive, we didn't get persistent. And the leading indicators forward looking indicators at the end of last year had all turned down before the weather got bad.

The leading indicators of construction had turned down well before the weather got back. The leading indicators of home price inflation turned down even before the taper tantrum when Bernardi opened his mouth. So that was last June, the last spring. Yeah, it's a year ago. And so what what this is saying is that when we go back to what is

a cycle, why is there one? It's it's part of the free market, that there were these indulge inous, cick local forces that had been rolling over before Bernanki opens his mouth, before the bad weather, and then uh, we get something like Q one. Now I'm not saying Q one GDP as weak as it was was um unrelated to weather. I think weather had a lot to do with it, obviously, and so we will get some bounce back from that. But but that I suspect is noise.

I think the trend inside of that remains down. And when we look at the forward indicators, there's no imminent lift that's supposed that that's there. And so you look at um the thinking on the economy and there seems to be confusion. You know, there's there's there's still a relatively kind of optimistic we're gonna get escape philosophies on and so forth. But there are sarious signals like bond yields, for example, that are saying, you know, there's something happening.

Maybe it's geopolitical stuff, maybe it's something else. We don't know exactly, but it doesn't fit this picture of everything's green light, no doubt about that. You mentioned Bernanke, who's no longer with the FED. What sort of relationship does eck Rey have with the Federal Reserve? Um, you know, nothing, uh that I can like officially speak of or anything

like that. I what I can talk about is that, uh, earlier there was a there was a close personal relationship between my mentor, Jeffrey Moore and uh Sherman Greenspan uh And um, you know, Bernankey was probably aware of all of that. And I do know that, you know, the central banks are aware of our stuff, and in particular the future inflation gauge, right because they'd love to see some inflation right there looking they would love to see

some inflation and anywhere Europe too. In Europe and these and these future inflation gauges for the Eurozone and for the US UM have been down, you know, week for an extended period of time. Recently, at the end of last year, the future inflation gates started to pick up a little bit, but it seems to have stalled out,

which is kind of a concern. Do you ever look at things like the billion price project, that product billion price project at m I T where they're tracking all these online prices instead of relying on the BLS output or sure, sure and that's a that's a that's a very interesting way to get at where prices are now. Uh And we think that's very interesting. It's a coincident indicator. Uh not that doesn't really tell you anything about the future. So,

but that's still a nice alternate data set. We look at the BLS data, we look p P I, c p I g GDP to flatter all of these items we're looking at, uh, all heavily modeled, with all sorts of all heavily model But what happens is over time they're going to get the cyclical direction right right, and just to ignore the markings on the vertical access and look at the line. Yeah, I don't, I don't, Yeah, I don't say that any one of these numbers is correct, you know, I I but but is this just came up,

just came up this morning the Boskin Commission. A friend had tweeted on the his handle on Twitter as a Relevant Investor that his wife was complaining that lamb chops are now too expensive, and I said, hey, the Boston Commission said you could substitute chicken wings for that, and it's the same. There's no food inflation just because you've been priced out of one food and are substituting a

cheaper food. You know, they're trying to take a any way to not show higher inflation back in the seventies and eighties, and today it's the opposite. Today they want to show something. I was talking with somebody who's writing an article in there, and they're basically, what are you going to believe the a stick or your lying eyes? I mean, you know if you're we all know we all are. But you also have to put that into perspective.

We fill our cars with gasoline, and there are ten ft tall prices on each corner showing the sign of that. But you know I spend fifty dollars a week on gasoline. Is not by go back thirty years, fuel was nine percent of the family budget. Today even at at a hundred dollars a barrel, it's two and a half percent. So even though we see that we don't realize that could look in Europe it's twelve dollars a gallon, so that's a whole different story. But I think people's perspective

on what they're spending money on. You don't really see what college costs, what healthcare costs until you write that check for how much. And that's gone up in a huge way, much bigger impact than what you buy every day, and has a disproportioned impact to you see, and and it goes back to needs and wants and and I think what may be happening is that you're right, the the energy components say at the gas tank is a smaller fraction of your family budget than it used to be.

But what's happening is that you don't have a lot of money left over for discretionary spending at the end of the day. And that is making you either go into your savings or take out credit. And taking our credit, I mean the plan here is to get you to borrow morning more money, right, which as we see, so this is where you see where the policy um of I think denying what is happening is dangerous. Uh, we're not going back to three train growth anytime soon or never,

just uh not next decade. Yeah, it looks like five ten years. It's not happening, right, And so if that is indeed true, and I think I can argue pretty strongly that it is, then shouldn't our policies consider that possibility? And we don't want to think about it. Here's a policies and I'm not listening, not now. The policy instead is, oh, you know, don't worry, don't freak out, to be happy,

interest rates will stay low. And if you shut off and consume, and if you default, it was your fault, you know, And he said, it's a it's a kind of a weird set up here. Well, it is true, if you default, it's your fault, but you're the one to buying this in the first place when the policy

is to borrow. Uh And um, I don't know how the whole student loan thing will get reconciled, but at some point that I'll have to the Elizabeth Warren proposal to say, hey, people, who are you know, we've bailed out banks, you have this trillions and student loans, why not reset that to the what we're currently lending. You'll you'll it'll be tremendously stimulative because suddenly all these students will be able to afford to move out of their

parents base, or they'll buy another Apple product. Um they're buying that apple product anyway. The question is can we get them out of their parents based and the format how household formation get married? Have two point three kids by a half, buy a car, and that's how we'll

get you know. The weird thing about the millennials, the group that I think are defined as being born between nine eight and two thousand, strictly in numbers, not necessarily in proportions, but in numbers, they're a bigger group than the baby Boomers were. Like, this is potentially a demographic cohort that can drive now the problems and their risk averse.

They're underemployed, they're unemployed or unemployed. They're forming households at a much lower rate than the previous generation because their peer group is in the same situation. There's something kind of like I think, you know, in an earlier generation, if you lived at home, it's like what are you doing? You get right out right, and because your peers were, Now if your peers are at home, I can stay at home too. Right, there's a different slightly different in

it's far less socially framed upon. Right, that's it's not stigmatized like it would have been with the generation. I'm not gonna get I'm not going to get the quote exactly right, but I'm gonna be able to paraphrase this. I want to go to the other end of the spectrum to retirees and uh. During Yellen's confirmation and may I think it was a Senate confirmation here, yes, and there was there was a senator from a retiree state,

like an Arizona state, something like that. And so it's either McCain or whoever was McCain someone I don't yeah, as probably junior center. And so he says, you know, miss Yellen, UM, my constituents have done everything that they were supposed to do. They worked, they saved for their retirement. Uh, they worked out their budget, they set everything up, and your policies are crushing them because of the zero interest rates.

Not so far from the truth. And she responds, and it was an amazing moment of I'm going to say cognitive dissonants where she says, well, you know, my policies or our I think Chairman Bernanke's policies that she was going saying she was going to continue, Um, you know, they shouldn't look at it that way. They should look at it, uh that these policies are giving them an economy that they can go, that they can go and

find a job in so assuming they can. But it's I thought it was kind of funny that you're telling a retiree to go find a job and that's the plan. So here's that weird. Here's the more articulate way she should have said that, Hey, listen, we're confronted. Let me let me put it this way. Imagine if someone pushes a button and everybody who testifies in Congress has to tell the truth, just hypothet So it's like that Jim

Carrey movie that's which is, which is utterly hilarious. But imagine if you could push the truth button and Yellen says, I'm completely empathetic to the people in your state. However, you have to understand, this economy is hanging on by its fingernails. You have a Congress that refuses to do what we normally do after recession, which is stimulated. In fact, if this economy would have if this Congress would have

did what the Congress in No. One oh two did, then we'd have a two and a half percent g d P and a five unemployment rate. Instead, government, state, local, and federal are a drag on the economy because they're laying off huge numbers of policemen, firemen, teachers, etcetera. So that's the first truth I have to share with you, And the second truth I have to share with you is we're the only game in town. And if we stop quee, at least this is what I believe, she believes.

If we stop que, you idiots keep telling me that que doesn't work and the policies of failure. Hey, if I stop this, we're back in a recession. Home prices plummet, rates normalize, Banks that have their books laden with bed mortgages start not only going, but we end up back in a great recession again. Well, you guys are not gonna be able to fix this. You don't know that it would be a I would. I would. I'm just telling you the truth. She would say, Hey, do you

want us to let Bank America City, Meryl Goldman? You want us to let those guys go back again? Because you guys spend a trillion dollars and it's a false set up to even think that we can avoid recessions. I think that's part of bad framing here. And if we want to go down the road of like different scenarios, what might have happened? I I sometimes wonder, um, what if the Great Recession was greater? So my you know, look I'm talking my book now you know my view was, Hey,

the right thing to do is down the street. We have that nice building with the vertical columns. It's called the bankruptcy Court. And I don't care if you Goldman Saxon Leman with Mancamara City Group what we ended up doing for GM prepackaged bankruptcy where the government is providing the dead rim possess shan finance, the dip finance, that's the that's tearing off the band aid. Maybe the Dow wouldn't have found a bottom at six and change. Maybe the six six six bottom in the SMP would have

been five five five or four for four. Picture if that sets you up for better, but then you're much healthier. My favorite example is you take the bank American Merrill Lynch Countrywide Company, which is one company you basically say to to Countrywide, you'r to that whole group. Your your bankrupt. So we're gonna spin out Merrill Lynch as a free standing debt free investment bank. We're gonna spin out Countrywide as a free standing debt free no bad mortgages zombies. Right,

We're gonna take Bank of America. We're gonna take all of your shareholders and wipe them out. We're gonna take your bond holders and give them a giant haircut, so the bonds are worth fifteen cents on the dollar. We're gonna take all the what people are calling toxic assets, but really it's toxic prices. These assets at tens on the dollar have upside. We're gonna spin that out and sell it to the public. Then we take Bank America and we spin them out as a free standing, clean bank.

And if we do that, bank after bank after bank, it's a lot of turmoil, it's a lot of fear, but it's over. At the end of two thousand and nine, you have a healthy economy with a healthy banking system and the possibility of normal, not fed manipulated growth. But politically that was especially when you again, I'm gonna I'm gonna when you have a surgical screw up, you don't send the guys in to fix it who were operating

on the patient. So taking taking Larry Summers and taking Tim Geithner, who were two of many key players who helped create the crisis, putting these guys back in charge, there's not going to be an emission of, hey, we really screwed up. With greater recessions, a great recession, among other things, may have resulted in a more wholesale change in Washington, Chad. You see, because it takes a lot like people explore, explain that. Because I'm on the same

page as you are. I mean, look at the you know, you know, because then you're going to say, I I don't want you to try to fix it. I want someone new. Right, That's right. Not only do I not want you to fix it, you and your party, you, the Republicans, you, the Democrats, you're both out. We're gonna try something new. And by the way, this idea of finance being economy, let once these guys go belly up, that reverts back to its historical me. It was wildly outsized.

We had financialized our economy. The process of definancializing the economy was interrupted by the bailoff, you know, and and you know, again taking that really big picture over a couple of centuries, forty seven recessions in twenty and twenty two years. Some of them were bad, uh, some of them were mild, but we've survived them. Which what is this notion, This is what I would really push back against this, What is this notion that we can do all kinds of crazy things in in in, in in,

in the name of avoiding recession. That is a silly That is a really silly thing for policymakers to actually do, because the price you're paying relates to significant components of the future, and we're feeling it that now, I think petically reduced growth. People feel that and look at you can look around at other major developed economies and you look at Europe and they're they're sick in many ways, and you look at Japan and they're sick in many ways.

And do we really want to do the same thing? I mean, can we consider something else? Well, this is what happens when you have a finance sector that's very fragile and you have a banking sector. So the good news is and you could tell me if this isn't any of the data. Five years later, we have an economy that, uh, in theory, a lot of the bad housing has been bought by private equity because they've been

able to borrow money for practically free. So you have thirty five billion dollars and PE funds that are have become the new home flippers right there buying renting them. And then in a way a period of time, you have banks that have been slowly shedding all these mortgages and all these foreclosures and bank old real estate. But you have this, but we don't really know what the data is because they don't have to disclose it. You know that this is true, and yeah, you know, interest

rates are very important component of the free market. And when when you interfear and and and put your on the skin manage control. Look, isn't that even the opposite of what a free market is? By the way, that that was that was always the great paradox about Alan Greenspan, the ultimate randy and free marketer, who refused to take his hand off the wheel. Here you go, so so here, you know, you might argue, under certain emergency moments you have to do things. But at what point is the

emergency over? And when do we get to see what it feels like without the pain medicine and what where we really are because that ten years after the Christ, that is an important thing to understand. What does it feel like to stand on your leg? You're not gonna know that until that's my my I don't do forecast. The one prediction i'mill in a way make is you're probably not going to see that one of two things happen. Either ten years elapse or someone named Paul as their

last name becomes elected president. So if Ron Paul ran In Pole becomes president, and I'm by the way, I'm I'm right, I'm wishy washing on both of them, although I find Ron Pole to be a fascinating dude. But but when you get someone who's going to step in and say, hey, I'm a libertarian and I don't believe the government should be interfering in the free market. Therefore I'm going to have the FED stand down, and if we go into a recession, it'll be cleansing, it'll be Catharctic,

and the economy we will, we we will. It's not even if the idea that you're not going to go into recession is just far. It will happen. And I would feel much better if I was on the policy and responsible for policy, or just even as an American, if we had an interest rate to cut when we went into when we went into being able to cut rates rates high enough that you could on a tactical basis reduce an interest rate from the central bank because the fiscal side can move that quickly. Now I know,

it's like the emergency. In case of emergency, break glass glass is broken there. So I look, we're not Japan. Japan is so different than us, where we we have a lot of things going for us that they don't.

But when you look at them and they're into their third lost decade, I don't even think people understand that they are generations their twenties, five, four or five years into this thing, right, So, um, here they are, and uh, they own a ton of their treasury market, of their treasury their own the j the Japanese treasury market is the second largest treasuring market and the Bank of Japan owns most of it. Uh, lending money to themselves. Yeah,

at least they know what it is looking for. This is and that's even kind of a weird concept if you think too hard about it. My my, again, my anti FED friends would say, isn't that what the Federal Reserve is doing? They all start they are and I you know, if you start to think too much about it, it it gets bothersome. But but let's think too much about it just yet. And and just one one. It was a couple of weeks ago there was no private bid for a j GB for a day and a half.

That's unbelievable. That's a problem. Well like point six, Now, what if they get what if they get what they wish for an interest rates go up, they'll be able to sell more debt, but they're ongoing debt is going to be more. So this is one of the reasons why I think you really do need to believe the FED in the US that they want to get out of this game, and that they're serious about getting out of it, and that the plan is that the economy needs to reach escape velocity soon. And I'm afraid on

that last part escape pelocity isn't happening. So so let's put you in charge of policy for a moment. Let's have a hypothetical play. You're in charge of policy. What do you do all policy? You're you're philosopher king, what do you do? Yeah? You know, I would, I would, I would be less scared of a recession. Uh. And uh so that's bullet point number one. Recessions are going to happen. To learn to expect it, deal with it, and don't be freaked out by it. Don't be freaked

out by it, don't. Uh, the world we all always turns, So we all always turns. I mean, there there are lots of policy challenges that we have, but the main one is that our trend growth uh is so low. Do we do anything about that? Or is it just a fact of life that we have to Except you you have to think about productivity. What what can we do to improve productives? I'm open for suggestions on that. But but but here you're probably talking about it destroyed

Facebook and productivity goes up. You're probably talking about different ideas around uh, infrastructure and education and things of this nature. But and I'm not an expert on either of those, but those are areas where those are productivity enhancing type. Um the policy east that you want to be thinking about. And give me an example of a productivity enhancing policy. Well,

let's just say that some of the infrastructure worked better. Listen, you're talking, you're preaching to the every day when you go into the office, someone's like, oh my gosh, I was stuck for We're here in New York City and you know, I was stuck in the subway for twenty minutes because X Y Z happens. See, I only take the seven. There is the best of But a couple of years ago, I was in Troy complete. That's that's

an infrastructure example. They completely renovated this line and the trains come like anyone who runs for seven is an idiot because they seem to come every two and a half minutes. And I'm not a productivity enhancing you genormous. You can rely on it. It's there. You you see the trainer. You know I'm walking down the stairs. The doors are open. I don't run to the doors closed.

They there's a term called pre walking. You walk to the spot on the platform that's gonna let you off at where you want to be in and your exit stoff profess and they're different for every stop. So people don't all bunch up. It's not this. There's some really fascinating people outright, civic engineering. There's a lot of fascinating things. So the pre walking is, so I've this happened this morning.

I walked down the stairs and as I'm walking down the stairs to the seven, as the subway doors start to close, people are running and I'm just think to myself, Idget's, you know, just morons. And by the time I walk halfway down the platform to where I know when I get into is gonna let me out by the stairs, we're gonna get out in Grand Central, the other train is already pulling into the platform. They come like three there, three during rush hour three minutes. It's it might as

well be a giant conveyor belt. That's a that's a a good example. Um, but these things, you know, I don't think there's any one silver bullet here. Uh. And and only the other component is if you have this this theoretical preemptive fed policy where if they're ahead of the cycle, not behind it, uh, then they could act countercyclically. When there's a run up in the cycle, they could tamp it down, and there's a downturn, they can cut off the bottom a little bit, smooth out and smooth

the volatility a little bit towards all. Oh, the Great moderation, right. Um, Now, the problem with the Great Moderation is that, uh, if you look at it closely, Um, the best explanation is we were lucky. It's not it's not that the FED did anything particularly helpful. And and when you look at FED policy over time, you find that they're very reactive. Including the most recent cycle, they were late to the game, uh and totally and then they've been they've been trying

to make up for it in size. And that's actually pro cyclical because if you're hind the highs are higher behind the curve. If you think about an engineering kind of thing, and these the way it feeds back, it actually makes the cycle bigger. And they're behind it in a big way. Remember subprime was contained you see. So this also bugs me a little bit because you know at some point, uh, that volatility comes back, and that when you're at low altitude, uh, makes makes for a

bumpy ride. And uh, we don't even have interest rates anywhere where you can lower them. So this is why I have some anxiety. So if we were an aircraft and Q one comes along, we're essentially scraping our belly along the top of the wheat fields. If we're lucky, maybe even you know. And and when we look at the statistics on the United States and on Europe and on an on Japan in particular, uh, the patterns are

basically the same. Uh. You know we I know that people year look across the pond at Connell, Europe and we say, yeah, you guys got problems, Yeah you have some inflation issues. But actually we're a mirror image of that. Uh. And both of us are actually kind of following a track that Japan uh is They're in front of us on it. And so I don't think we can really reasonably claim that we're different here. So back to the

original question, what would benevolent dictator Lachman do? Well, one thing, the first thing you said was be a little more anticipatory and not as reactive. Well, the second thing I'm hearing is, if you're gonna spend spend on productivity enhancing things like infrastructure, roads, bridges, cell systems, internet, go down the whole the whole run, what is that? What else is left for us to do to get back on track?

I would, and I expect an op ed from you on this one of these days, how to fix the US economy free easy steps. I think I think my it's are best spent on gonna make risk, But but are you going to actually make me? I will write this how to fix the Economy and threesy steps. So the first thing, uh, except that recessions are inviable, right, you can't. Second thing is be a little more anticipatory, not quite as reactive well, which they've been trying to

do in theory. They can't. They just can't do it. I'm not gonna hold They're not gonna hold my breath on that, because because basically they're all economists, right, they all got these models, and models at their very root do not forecast recessions because they extrapolate things. So what they're saying is, oh, look at grew a couple of percent last quarter, is gonna go a couple of percent next quarter. Although fair to the economists, they have forecasts

twelve of the past two recessions. So there you go. I have to give them that. So so the second so we have the enhanced productivity through infrastructure to not this void recessions at all costs but accepted as a natural part of the cycle. Right. This is really on the fiscal side. It's less of the central bank issue, right, which is why the truth telling Janet Yellen said, hey man, this is up to you guys. You guys have left this on. This is the big this is the big

switcheroo that happened. Okay, you have the great recession and then you have the central bank come in and say, oh, it's not structural. There's no, no, nothing to see here. It's not structural. It's all cyclical. We'll take care of it. And five years later they're like, you know, maybe maybe it is structural, and actually it is. It probably very likely is structural, in which case it's not a central bank issue in the first place. It's really a policy issue.

And this is where the discussion should be in Washington about what's going on with trend growth because, by the way, look at Europe in Japan and this is the world we live in and what are we going to do about So another another column I haven't written is but is in the back of my head, and we've talked about it before, is on that exact point. And if I want the most controversial headline I could get, by

the way, people don't realize this. When you submit a column to Bloomberg of the Washington Post in New York Times, you give them a proposed headline, but an editor actually writes that you don't get to so every now and then I'm like, hey, that's a really good headline, And then there are other times were like, no, that's not at all what I mean, and you're gonna close trouble with that. But um so having a good editor is

really really important. But what the headline that just pruss my cranium was how the Federal Reserve supports the Tea Party, And essentially the Federal Reserve could have said, as you suggested, Hey, recessions are inevitable. This is a fiscal not a monetary issue. This is not a this is a structural issue that we are not involved. So I'm not gonna We're not gonna do anything because it's non cyclical and it's up to you. And if you guys don't do anything, stuff

is gonna get really bad. But the self correcting mechanism is you idiots get thrown out of office and someone else will come in and fix it. So so in a really again, these are the unintended consequences. Earlier, I said the FED bailout prevented the ongoing definancialization of the economy. Now I'm saying the FED bailout the FED monetary policy instead of fiscal policy is keeping people elected who under North. Look when things get bad, President, senators, congressmen, governors, they

all get thrown out, all right. Next is what this is where I was going with Maybe the Great Recession wasn't great enough. That's why I wanted to bring you back to and then and then Barry also in so it's in March and April of two thousand and nine that we're forecasting our recovery. Now, if you were asking me, do we need emergency Central bank intervention towards the end of O nine or into I don't think I could

have argued for it. Oh okay, but what do you know later weight fine, but but but but but but but when you're on the other side, when you've gone through and you're the why why we still already? So that would have been a moment to back off. If we had to, we could have come back. You always reserve the right to come back, But at that moment

you've got the cycle going. The other way. But here, if you're reactive, you're not forward looking, which is what the system is, then you don't see that and you miss the opportunity. And I think that's a really great not to end on. So locksman, this has been really fascinating. I'm gonna start calling you a lot, and um what will end up doing. The broadcast part will go up on I don't know the queue yet when it's released, but I'll send you some infos. So here's what I'm

gonna do. Here's what I'm gonna start doing when each of these go to broadcasts. So I'm gonna put up a page about this. By the way, I didn't get to mention you wrote a book eating Beating the business side, the business cycle, So I'll put up a link to that on Amazon. I'll put up so we'll have that

explains the framework that we use. I'll link back to Eckery you guys, and and full disclosure, you've published in my blog the Big Picture every time, and then you'll do a longer form article and we'll we'll post it there. But you put out on your side are a couple of regular charts that get up there. Absolutely there's the

weekly leading index there, the future inflation gauges there. The business cycle dates are all there for one economies around the world, so including all the bricks, and that's all at business cycle dot com. Thanks so much for coming, Thank you, Barry, thanks for having me. You're listening to Masters in Business with Berry rid Holts on Bloomberg Radio.