Masters in Business: Westwood Capital Dan Alpert (Audio)

commercial products. Most of the structured commercial back mortgage guaranteed papers, the cmos that you've seen were residential mortgages. Dan worked with first a group of distressed assets and then a group of commercial assets, and that was fairly early in the world of structured products. He also put out one of the very first reads that ever existed. He's an expert on everything from UH structuring credit and debt to putting out um new products getting them through the process.

Really a fascinating conversation about what's happened over the past couple of years and why this is not a temporary phenomena, why it's structural and nature. We talked about central banks around the world and what they should and shouldn't have done, as well as discuss the lack of fiscal response, which is part of the ongoing um fairly mediocre recovery that we've seen since the financial crisis ended in O nine.

I find Dan would be just a very informative and intelligent guy who can talk about a number of subjects quite articulately. And it was really a fascinating conversation. If you're listening to this part of the conversation, you're probably listening to the full podcast. And we went for a little over an hour, and before I forget, I have to start thanking some of the people who helped put

this together. Dan was very generous with his time. My engineer is Charlie Vollmer, and the head of research who really did a deep dive on this is Michael bat Nick. And without any further ado, here's my conversation with Dan Albert. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My guest this week is Dan Albert. He is the founder of Westwood Capital. He is also an expert on structured finance and distressed companies, and he is the author

of the book The Age of Oversupply. Dan, Welcome to the show. Good, Thanks so much for coming in. So you we're gonna get a little wonky today. We're gonna go in the weeds at a certain point. But let's just start with your background. Tell us a little bit about how you found your way into distressed companies and structured finance. Well, I think investment aching as a whole. I had a fairly unusual beginning. Um during the early nineteen eighties. I was in the real estate syndication business,

which was very much tax driven at the time. It was sort of taking candy from babies, really couldn't help but make money. All that change very very suddenly in n six were the U. S. Government tried to pull off the old trick of pulling the tablecloth out without disturbing the dishes, and of course the whole renovation to a lot of parts of the tax code and a lot of formerly um let's call it tax focused investment

themes suddenly went on right and uh. And that of course precipitated the S and L crisis because of the loans that those banks had made, and then ultimately created the real estate recession, which spread like wildfire around the country, starting in Texas and moving from the east coast to the West coast. Ultimately by prices felt pretty substantially, I mean it was. It was a great training ground for the period of time that came the last ten years.

So even though they had told us that real estate had never fallen in price previously, well, well, of course that was residential real estate this time around the first commercials commercial. But what what happened after that is I was very lucky enough to be able to take over the real estate investment banking franchise at Oppenheimer and Company UH, and in that capacity was able to create some new products in in the middle of what was really a

total real estate depression, not even a recession. So let's talk about some of those products. One of the innovations that you created, and I don't want to misstate or overstate this, but essentially you took a pool of distressed assets and was that the first securitized pool we did distress commercial, We did the first rated UH commercial mortgage backed securities. Before that, the only mortgage backed securities out

there were pools of residential mortgages. Nobody could quite get their head wrapped around the concept of of their being commercial mortgages that could actually be diversified enough to take a rating. UH. And what we were able to do is convince at that time my recollections, correct Standard and Poors and Fitch UH to develop a methodology for rating pools of commercial mortgages. It was a little easy because in that very first trade we were buying a large

pool of mortgages a significant discount from Xerox Credit. I remember, and at that time Zero's Credit had been told by the rating agencies they had to divest of all of their non copy or related businesses because they were investing in UH. They had loans in aviation and real estate and everything that you can imagine, and that led to UH, They're they're being forced effectively to fire sales massets which we bought, which were actually performing assets at the time UM.

And we were able to securitize those in the first pool. And then that was different UH and and and very good because we were able to deal with a pool where we had multiple borrowers, which is not terribly characteristic of commercial real estate London. So so essentially the first commercial securitized mortgage back paper. In other words, hundreds thousands of different loans in one problem. No, no, no, I mean, you don't get the advantage of having hundreds and thousands

in commercial real estate, do you. I mean, obviously during the bubble we had large, large pools, but you know, typically in this particular case, I think they were like sixty somewhat loans, but it's still a big distribution as much, there was a decent distribution to it. Uh. Subsequently, we did UH a year later, actually this was a year later, we did the first a single borrower pool where basically

all of the assets where assets of a single company. Uh. They were obviously put into bankruptcy remode structures, but at the end of the day, we were able to overcome this issue of well, if you have a single company controlling all the assets, they can just throw the keys back. And again these were done at fairly low loan to value ratios. When you look at what happened in the CMBs business during the two thousands, it is almost night and day compared to what we were doing in the

early days. So collateralized mortgage backed securities then, and then of course you you saw this demand for yield developed as rates continued to fall from the nineteen eighties. Obviously we had a spike in the beginning of my career in nineteen eighty two or we had double digit treasury rights and certainly double digit inflation, and then we saw rates gradually decline, and so by the time you got into the early nineties and ninety three you saw an

enormous clamoring for yield. People still had an inflation mentality. They still thought that inflation was coined. Oh god, it spiked interestingly and if now this, I'm really flying by the seat of my pants, because but it was at one no no, no, no, no, no, no, no, there it was. It was in the high single digits, low double digits. But I do remember ninety three, I think it was we had a spike UH and that cost

a little bit of a bobble um. But anyway, we did we did a portfolio in connection with the next iteration of this business. We did the second UH read

that came out. The first rate was a company called Kimko was done by Meryl, and we did one called Kransco about a few months later, and used structured debt as the leverage because again the debt market was very much bolloxed up still UH, and we were able to do that through the capital markets, which was very which was very creative at the time, pulling off a simultaneous issue of a CMBs offering an anequity offering. No one

has done that before, so that's really fascinating. And since that time there's been a tremendous growth of both collateralized mortgages and reads. So you were there at at very early in the process. So in the last thirty seconds we have in this segment, um what's more complex dealing with reats or dealing with far more complex to do what I did next, which is started an investment bank of your own and run it for the last twenty years. I'm barry. It helps. You're listening to Masters in Business

on Bloomberg Radio. My guest today is Dan Albert, founding partner of Westwood Capital. Building your own investment bank, which is something that we don't see happen all that much these days. Back in the eighties or so, was it late eighties, mid nineties, you built grown bank left Oppenheimer and I will say that that the only way we could have possibly done what we did. And this is where you come face to face with technology. I mean, when I started working in we had typist pools right.

Uh So, so as a pre girl, that literally what I was thinking. But the the you know, by the time year old around, we we actually had the beginnings of email. Not quite I think I was still using an A O L dial up account, but certainly we we had a computing environment in which we did not need the kind of back office that you would have needed ten years before. And so we were able to to start a company with relatively small amount of capital.

Uh and and as a true old style investment bank, taking our roller dex and matching it against people who need money. Uh and and that that has been our business for twenty years now. Of course, we've expanded considerably since uh In we we began to branch out into Asia. We opened an office in Tokyo and in two thousand

we've now we're now covering all of Pacific Asia. And thanks to my good friends at City Bank for destroying their business, we were able to um we were able to bring on board the entire Latin American structured finance team from from City Bank, and uh they've been a great addition to our firm and and have have been

there ever since. So how do you go for from a guy who's structuring products for either come austual real estate or or reads to building a bank, who who is the there's always a mentor behind that sort of thing, who helped guide you through that process. I guess it's funny because it had nothing to do with what happened

in ninety five. But back in nineties and eighties seven, I was working for a guy in the in the real estate syndication industry before I left for Oppenheimer, and he took me aside one day and he said, Dan, you're never going to be happy until you have your own shop. Turns around, it turns out he was right, and uh, and yes, I had a great time. I had learned a ton in at Oppenheimer during the some really great years. We had terrific bankers, we had terrific people.

But by nine five I was done and had the opportunity, had a little capital, and had a couple of partners. Uh, and we're able to strike out. And quite frankly, it all comes from realizing from whence you get your business right. If you are very capital dependent, if you're a trader,

you don't have a choice. You need a large platform with capital but if you're using your creative powers in terms of being able to design solutions for people that haven't been used before, which quite frankly was what we did for the first ten years of our business, uh, and have a decent roll at X in decent context UM, then eventually you realize that you don't need the the overlay of the larger institution, so you could be a little more nimble. And it's really just a matter of

putting the right peg in the right hole. Plus, I don't know who ever taught me this, uh, this phrase, but sometime way back when somebody told me keep it small, keep it all and uh, and that became that became my guideline for guide words. But you guys aren't really all that small. Well, you know, we've we've grown, but but still we we managed to do this on a platform that is reasonably sized. We don't keep a ton

of capital in the business because we don't need it. Uh, and we we operate um as a practical matter and you know about say the world. So now let's talk a little bit about your expertise in in complex um, real estate structures and and other things. We just came out of a crisis where residential mortgages were the underlying problem and structured residential mortgages was really the bull's eye. How did that happen? And how do we avoid having

that happening? Yeah, it's interesting. So again by way of background, I'll go back into what happened recently. So suddenly I find myself an author and economist. Where I had taken my my degree and in those subjects and and stuck them in a drawer for most of my where you going to the University of Pennsylvania, and I graduated with a degree in public policy which incorporated economics and business

and a whole bunch of other stuff. Um, But when I when I saw in March of what was going on to volts in the mortgage industry that was already past the peak in both volume and price. We've already but you know, and you were, You were there at the time for sure. But there were a few of us, if you recall, who were actually writing and speaking and and formulating. Literally we all knew each other. Right, you

could count it on practically one hand. I can't. Every now and then I'll pull up one of the old criticisms, how many subprime mortgages. Do you think this there are that it's going to actually impact Well, how big is a you know, I'm alignant to him or relative to a man's body weight? Size isn't what does it. It's that leverage point of affecting everything. It turned out it was pretty sizable. Top. Well, we were talking during the break,

we were talking about structured finance. And if you put, you know, bad meat into a sausage maker, what you get out the other side is bad sausage. How much bad debt was there, how much bad paper was there that substantly got structured and structured in structure. Well, you know, so you you you saw an industry that from the beginning of the decade two thousand until its peak, had grown from about five point some odd trillion dollars and

outstanding mortgages to almost eleven in seven short years. So it was it was an outstanding balloon of of credit. Uh. And then you also saw five trillion to eleven trillion eleven and change. And if you look at total debt in the United States, it actually grew from about twenty six trillion to fifty two doubled there as well. So you know it wasn't just housing, it was it was across the board. We were in this massive debt bubble um. But what what happened is you you you had to

ask yourself the question. And in fact you were at a luncheon that I was at at the Harvard Club with with Neurie L. Rabini. I believe you were there. My recollection is that you were. Um where I first articulated this, which is, you know, at some point you have to follow the money and uh. And I had always believed obviously for the first six months, I was just stunned with what was going on, uh in the markets and what was going on. Obviously could see the

impendent collapse. Made a few bucks, making a couple of good trades, but but nothing on this on the on the score of a port Paulson or somebody like that, not not Michael Barry money, yeah exactly. But but started to write and that was really the changes that I I felt that I had something I wanted to say. Uh. This was an industry that I had been involved in creating at least one st class if not more of

and uh. And I felt that the rating agencies in particular had dropped the ball that the people on the bike side didn't know what they were buying. Uh. And the people who were putting these these packages together, we're we're committing how I fraught, So they didn't care what it was. Right. My guest today is Dan Alpert of Westwood Capital. He's the author of the Age of Oversupply. And let me pull out a quote from the book

that I really liked. You said, the greatest challenge facing the global economy is the oversupply of labor, productive capacity, and capital relative to the demand for all three. Explain that, well, this all goes back really to something that we all lived through, or most of us who aren't children, and that is that we saw the collapse of the socialist world, the emergence of these very very large countries with tons of people into bed Idea, all of Eastern Europe and

even you can count Vietnam. So so you're talking about three and a half billion people. If you put this in perspective, Uh, the developed world, the so called developed world, Japan, US, Canada, Western Europe is eight million people. So you have three and a half billion people who show up and they decide one day they want to eat our lunch and play by our rules. Uh. And of course part of that is that there will link to work very cheaply. Obviously they have far lower standards of living and far

little costs of living. So that digitaliant global labor arbitrage. It's it's a giant global labor glut. And the glut is one of these ones in a history of mankind kind of things. I mean, whoever thought you would shut down the development of the world for some of the world's people behind the iron curtain and the bamboo curtain and say, and then one day something with those curtains and they all show back up. We're we're going to come back out into the So that so that that

creates this massive instability. It created, in my argument, the bubble itself because we saw something we've never seen in the history of mankind, which is something economists call reverse capital flows, where we see money coming from poor countries to rich countries, when the Chinese buy our bonds, when other countries buy our bonds, um and and we've never seen that in the history of the world before either

um And. So what that creates is as an environment where you have enormous amount of capital trying to find their way into into sovereign debt of developed countries. Interest rates of course then decline because you have an overabundance of demand for for bonds. UM, you have an excess supply of labor relative to total demand because as you know, the Chinese and the Indians, while they're producing, they're not consuming what they should be at least what they should

be in order to create equilibrium UM and UH. And then you have the the issue of of uh, way too much stuff being made. And we can see that now as we saw infrastructure and other investment being made in China and other countries has now outstripped rational demand for the product that they make. I mean, look at the steel industry for example. Are you talking like those cities, well, domestically yes, But I think what's even more important is

looking at at at the production of manufactured products. And steel is probably the best example. You saw an environment in which people were building steel panets willy nilly and anticipation of not only the a structure demand in China, but also large demand growth globally. And of course that demand growth was haha, driven by a massive amount of debt that was being creative when you created, when you took when you took away the debt, you took away

all that demand. Let's talk about over supply in the United States. One of my favorite examples is the total square footage of shopping malls, which is massive. And you go into just about any reasonable sized town in or city in America and there are two malls. There's the new good mall, and then there's the old dilapidated mall, which is half empty, self correcting by the fact that those old malls are now shutting down and becoming ghost properties.

UM that that that type of of of over abundance. You have to again go back to the beginning of which is how was it fueled? Right? How did you get those extra malls? And the answer is there was a There was a huge amount of capital that was chasing yield, and as yield drops, real estate becomes, at least on surface, an attractive investment because you can leverage

it with cheaper and cheaper money. UH. And of course that's an entire fallacy and and one of the problems with the period through which we're living right now, not just in UH the US, but globally is the zero interest rate environment that all large central banks are pursuing uh in in the developed countries, is creating a price dislocation. We really don't know what the value of anything is

on a on a going forward basis. I can't tell you that the house that you bought last week for half a million dollars is really worth half a million because you bought it with money that was so cheap relative to what normal would be. And of course we really don't know what normal is going to be a guest, So shouldn't the market eventually correct that? Because I've been hearing similar arguments from a lot of people for a while. We have market prices, except the market prices are distorted

by the Fed. Now we have the Fed end in queue, or at least in theory, ending que They ended quee, whether or not they can reverse zero interest rate policy. Right, so we're twenty five basis points. There are some people who think that by the time the year is over will be closer to one percent FED funds rate, which is still historically extraordinarily low. Is that theoretically possible? Can the Fed? A lot of people claim the Feds boxed

in what's your perspective on the Fed? The Fed is boxing itself, and I don't believe they'll be able to raise rates other than a token basis point rise just to say, look, we've got control over the tiller. But as a practical matter, the wave of price softness that's not just here in the United States but elsewhere h is really telling the story for them. Well, my guest today is Dan Albert. He is the founder and managing partner of Westwood Capital. He is also the author of

the Age of Oversupply. And we've been talking about UH three and a half billion new on on entrance into the labor pool, which is part of the reason why we haven't seen any increase in wages. So let's talk a little bit about what's going on around the world. We have three central banks, the US Federal Reserve, the European Central Bank, and the Bank of Japan, and they all seem to be So don't leave the Bank of

England at it. This will be insulted, is the Bank of How big a player these days is the Bank of England relative to the Trilateral But what's fascinating to me about those three banks is they all seem to be in a different phase. The US done with QUI

and talking about raising rates. The Bank of Japan in the middle of their qui and relative to the size of their economy actually bigger than the U s que And now the European actually announcing I think we're gonna have to do something because this austerity thing has been working. So how do we find ourselves in this situation with bankers all lot of phase with each other? Well, I

don't see it really is being out of days. Uh, They're they're all basically pursuing the same policy, whether you go from zero interest rate policy to actual quantitative easing. It's it's just two versions of the same same soup. The the the upshot though, is that what's been going on since the Great Recession is we have been literally seeing the hot potato of inadequate demand being passed back and forth among regions. And it's very interesting how that happens.

It happens due to uh, policy, it happens due to labor markets. Uh, it happens due to fiscal issues and government fiscal issues. Um. But nevertheless, you know, we were looking at a period only a few years ago where Europe was, you know, before the European crisis. They were sitting there saying Oh, we're fine, We're great, right uh.

And it was the US that was that was in trouble. Uh. And suddenly we find ourselves with the correcting of the realities or reaching of the realities of what was really going on with Europe, which was this mass of or cancelous policy out of Germany. Um and and and we saw the problem are up there that was very similar in nature, just fractioned into eighteen different countries, with all each with their own little story, but still pretty much

the same overall one monetary policy. Yeah crazy, yeah, but but the uh so we saw them uh suffer and and then of course as they began to suffer, Japanese tried Albonomics and albynamics gave them a little booze for a period of time, ultimately failed. Um and so failed did they introduced that big sales tax. Sales tax was stupid,

but arrescued whatever growth they had going. But but but as a practical matter, uh, you know, the effectiveness of Albanomics was basically tanking the currency, right, and they did that more or less by jaw boning it's expectations based tanking of the currency. Yes, they did quei and they did all the things that would engender that. But as practical matter, well, their their interest rates were low already

right up until yesterday. We're recording this on a Wednesday, up until yesterday, lowest rates in the world until Germany managed to bypass them. Right. So so you you you know, you had Japan sitting there with for the most part, a surplus for most of the period of time, current account and trade surplus. Uh, simply because they were in a period of almost continuous deflation, right, mild deflation, not

not not severe deflation. Um. And you know what they experienced and what was what was really putting them on the ropes is they saw their currency appreciate through the roof. You had the end go you know, below eighty and and that was which is this is a couple of years ago, a couple of years ago, and that was stiming their their exports, and uh, suddenly their trade deficit

was was vanished, a trade surplus was vanishing. Uh. And uh it really has nothing due to anything more than the fact that, Uh, what you have to ask yourself, why did the currency of a country that was the most heavily indebted country in the world and had it was experiencing deflation, no nominal growth, right, why was its

currency appreciating? And quite frankly, the only answer is, and you know, I put it in simplistic terms, that a grain of rice just costs less en in in in end terms, right if the if the end, If you're if you're having consistent year over year deflation and the price of the goods that are manufactured or produced in Japan drop in end terms, well then they're worth more by definition in dollar terms, all currencies are relative, right, All currencies a relative, so so they so so the

currency appreciated, which you wouldn't sort of put in the same but when you look at it from the perspective of the grain of rice, but the energy expanded to produce this grain of rice is more or less the same or from year to year, so it's closting less. It means the measuring stick actually has to be getting a little bit exactly. So, so we saw this happen, which is also something that economists would not have expected.

Um and uh, and that created a huge amount of pain because you saw the trade surplus evaporate and then um, you already had no upward pressure on wages. In fact, wages had deflated along with with goods and services. The the way they tried to reverse that was to try to talk down the end and they did successfully. You

talk it down quite a bit. Uh. And so what what you then had is an environment in which you would think that you could create inflation, right because they still have to import oil, it would cost more, blah blah blah. But here's the magic to all of this. And this applies in the United States, it applies in Europe, applies throughout the world. In the age of oversupply. Unless you can move wages, you cannot create inflation. We're experiencing

this right now in the United States. Europe has been experiencing it for years, Japan has been experiencing it for decades, and we're now seeing if you start looking at what's going on in China, some very worrisome signs. I mean, their last inflation print. This is a country that's growing, depending on who you believe, five to seven percent a year. And we saw we saw an inflation print there of one point four percent year over year last month or

maybe one point five of my memories. So essentially their wages aren't growing. The well prices certainly aren't growing. Wages have continued to grow, but at some point people are going to shrug their shoulders and say, why do I need to pay anymore for labor? Because their costs are not the costs being incurred by the families are not rising. So you said something before. I want to come back around too, because I find it really fascinating you had

said they're the natural demand just didn't exist. And we've been talking about monetary policy, which is playing interest rates and it's a supply side concept. Monetary policy. What you're doing. Uh, you know, montery policy has in this in this context, has several stages, right. Uh. One is you try to make sure that you create solvency and liquidity in the banking systems so their banks don't shut down. So they did that right by lowering rates and by by pursuing QUWI.

Then you try to make it very, very attractive to borrow. But in order to want to borrow, you need a need for new capacity and need for new production and equipment what have you. If that doesn't work, you go to your third step, which is you make risk free assets, bonds and what have you so ridiculously unattractive to people because the interest rates are so low that you force people into risk assets. That's the monetary side, that's supply

side monitorism. And then if that doesn't work, you count on the wealth effect, which which to create increased asset prices and and make a few people with money actually able to There's there's a lot of math behind the wealth effect that basically suggests that it's more correlation than causation. When when you look at when you look at all these things going up, people weren't spending because they felt wealthier people were earning more money and therefore spending more.

And therefore, I think a lot of of the FED research on this gets it exact back exactly backwards. But let's go back to the demand side of the equation. So we have a huge amount of FED driven monetary policy during the central banks, not right, all central banks during the crisis, after the crisis, but in the United States and to some degree Europe, actually a greater degree Europe,

the fiscal response is non existent. Oh it's not just Europe in the United States, it's Europe, the UK, United States, Japan's across the board. But China seems to be spending money, you know, left and right, speed els and cities, and they're sitting on a three point seven trillion dollar foreign currency reserve. Why not know they're They're bigger problem is they they've now exceeded the demand for the facilities that

they're building. Um, so you're you're now building for the future, so to speak, and there's a limit to how much you can do with that. So you're old enough, you're more or less my age that you could recall in Soviet Russia, they would have a factory where they get raw materials come in one end and what would roll out the other end, or jeeps and tanks, and then they would take those to another factory where they would take it apart and send the components back to the

first factory. Is China at a point where they're not not quite because they're they're consumer economy. While it's not adequately consuming relative to production, their consumer economy is growing. Uh. And I don't see that as being a problem because obviously China is dumping off it's very high quality products, and the quality of their products in terms of where they are and the value added chain is going up every year, so they're dumping those products abroad. Uh. And

that's what's causing the problem. Right, So that's part of the oversupplies, part of the chief Chinese labor making high quality. But getting back to the fiscal issue, right, you have you have uh, these the countries all pursuing monetary policy was there, as I say, is a supply side remedy, and not pursuing demand side remedies, which would be fiscal spending. In fact, they've cut if you're in Europe, cut dramatically back, and in the US with our sequester, cut dramatically back.

During the period immediately prior to ABBE in Japan, the Japanese abandoned heavy fiscal spending because they started to worry about the same thing, they're debt to GDP ratio, so they stopped spending right And in the UK you saw a conservative fiscal policy as well. This policy of austerity, whether it's within a region or globally, is a huge problem in the age of oversupply. What you're effectively doing is you're trying to solve a demand side problem with

supply side remedies. And it's like throwing fire on throwing gas on a fire. It's it's ridiculous. So are you saying that after all this time, John Mayner and Keynes turned out to be right, and we're ignoring lessons that we're learned almost a century ago. I don't know how anyone could conclude otherwise. Thank you Dan for spending so much time with us. Today, I've been speaking with Dan Albert of Westward Capital UH. Dan is the author of

the Age of Oversupply. What's your Twitter handle? Dan at Daniel Albert at Daniel Albert. If you enjoy these conversations, you can listen to Dan and I continue chatting about everything from the Fed, two Keynes to austerity. UH. That's available on Bloomberg dot com as well as on iTunes, where all of our prior conversations have been archived. You can follow my daily column on Bloomberg View dot com and at Ridults dot com, which is the Big Picture,

or follow me on Twitter at Ridhults. I'm Barry Rihults. You're listening to Masters in Business on Bloomberg Radio. Welcome back to the show. This is the podcast portion of the show, which is a little more loose and freewheeling and m Dan and I have taken our ties off and basically loosened it loosened it up. Um let's continue where we left off. We stopped on the broadcast portion about something that I think is really fascinating and it never ceases to amaze me that people argue about this.

But the problem that we've been suffering for for all this time is a lack of organic demand. We had a huge credit bubble. You know, when you have a regular bubble, what you're left with afterwards is cheap infrastructure.

So think back to the nineties old the dark fiber that was laid at Media Fiber and global crossing it so they all go belly up, and because you can buy that stuff for pennies on the dollar, you end up with YouTube and Facebook and Google Maps and Uber and all these bandwidth intensive applications that you couldn't have done in the nineties because they just weren't the pipes for it. And if even if you had the pipes, that were really expensive, following the end of a credit bubble,

you're left with nothing but debt that crimps demand. People are de leveraging even if they want to spend, they can't get credit. Isn't it obvious that we need some sort of temporary boost to demands and we're just not seeing it from the congressional side, from the fiscal side. Yeah, I think your your point is well taken. We have a classic Irving Fisher style debt deflation, right and where

everybody's trying to pay down debt. People have seen their assets fall below the value of the debt that they've taken on. You have to remember that even today, with the price recovery that we've seen in the US housing market, we still have ten million homes that are not you know that are they're either underwater or just slightly above water. Uh, and those people are still stuck in those homes. Those

homes can't trade. It's part of the reason, by the way, that home prices actually accelerated as fast as they did simply because a lot of homes can't trade. Jonathan Miller talks about the perversion of all these homes with either no equity or low equity or negative equity, and that perversely causes home prizes to rise. Very strange because you've artificially prempt the supply potential sellable homes. Um But but that's a you know, that's a unique function of the

US residential real estate markets. Something you don't see elsewhere because the structure isn't the same. But um, when you look at what's going on in on the demand side, you have to conclude that we've done pretty much everything possible to avoid addressing that problem. Because if you think it's just a debt deflation and what we've been through is a severe downturn on a cyclical basis, and I think a large portion of both pundits and UH Chicago

style economists believe this. They really believe that what we've incurred is a is a severe downtick in the business cycle. Of course, in order to believe that, you have to believe there is such a thing this is a cycle. I'm not so sure of that. Um. But but regardless, what we have other folks out there who start to understand that this is actually a much broader secular problem.

It's not just a secular problem within the borders of the United States or any other global It's a global secular problem, in my opinion, caused by the oversupply of labor, productive capacity, and capital. Right, So, how much of this is a function of demographics? You have you have an aging population in Japan with with no immigration or practically no immigration and a very low birth rate. You look

throughout most of Europe, really low birth rates. United States is one of the best developed country birth rates and even birth rate we're not we're now falling the you know where we actually fell below replacement, which is a little bit disconcerting when you look at where that replacement was coming from. Was coming from a very small group of recent immigrants, mostly mostly Hispanic uh and they have now sort of become higher income and more developed than

hence they're having for your children. But the that's the nature of the demographic trends is right, and you don't get a lot. You don't get a lot of immigration when you have no job. So it creates another problem. There was a brief period and I want to say, oh eight oh nine where the border problem disappeared because nobody was coming to right. We had we actually had reverse for for I think fifteen months, we had reverse migration to Mexico, which is our biggest source of immigration.

So you have a big problem in that in that context, but when you point at the demographic argument, excuse me, it's very tempting because you have this incredible obvious correlation, right, You see that the developed world, that even China is getting a older and it's very tempting to say that

that's the cause of all the problems. You go one iteration away, you go one iteration away, and what you what you find is that look at, for example, US labor force participation, there has been some obvious demographic decline that's been going on since well before the Great Recession. Yeah, well, I mean it really was the early two thousands when you look at the stats. But but yeah, it was that.

It was that period of time and you saw the labor force participation rates start to decline slightly, but it fell off a cliff after the Great Recession. This is not the same factor. The This slope and that slope I'm using my hands are not the same slope. There's been something else going of a far broader secular phenomenon. Add to that the fact that when you talk about aging populations and don't talk in the same sentence or

at least the following sentence about technology. Technology, of course, has always been regarded as a sort of enemy of labor, at least in terms of its initial introduction, right, and then eventually we have people freed to do other things. Sometimes more creative things in our society has become better, etcetera, etcetera.

But I don't know anyone that can look at the demographic phenomenon that are going on in developed countries and ignore the fact that we just don't need as many people to do the same jobs that we did before. We have a technology issue we and and believe me, that's not being that is more than that's more than offsetting the decline in working population, right, and so that creates oversupply of labor in and of itself. We have a global phenomena that has always been the case. I mean,

there's nothing new about technology. We have a debt deflation right where you have an inadequacy of demand because people are paying off that, and then you have this global oversupply of labor that has basically made it very un a track active for people to employ individuals in developed countries. Let me, I mentioned this, It comes up every few weeks.

So we were running a small office that we launched a less than eighteen months ago, and everything we do has a very heavy software technology component, whether it's the financial planning side, whether it's the software to rebalance you know years ago, if you want to rebalance a multi factor portfolio. You had five guys and and Green Eye Eye advisors working a week to figure out, right, here's what we need to do in order to capture some tax losses. And you know we'll harvest. Now you push

a button, it's done. And so what we end up doing with seven people, whether it's producing content or managing portfolios or just communicating with clients and staying on top of stuff ten years ago would have taken fifteen people to do, and twenty five years ago would have taken forty people to do. And it's amazing that. You know, every time we think about adding a body, the first question is, well, isn't there a software I can get from grand to do this instead of paying someone eight

dollars a year. It's astonished. Just look at the clerical head count. You're talking about the stando pool that the girls in type everybody does their own typing today, and and and telecommunications is not something you need staff for. I mean, you look at the decline in support staff necessary to run even a large institution, and it's it's it's astronomical. It's it's there's no doubt about it. And

then on top of everything else. There are all these companies that have become niche specialists where they use their software. So you used to have a bookkeeper, on accountant, on staff. We use a company to handle an outside company. They charge us like a hundred dollars a person a month to basically you all of the payroll, the tax, the state compliance, the UH disability. There's a whole run of things that you run a business that you used to

have a staff to do that's gone. Bringing this all back into the macro context, right, So now you have these three phenomenon. You have the continued UH development of technology. You have UH the the debt deflation, and then you have this oversupply of labor globally. And these things are secular. The the not going away anytime. There's no there's no

there's no business cycle for technology. As you have plateaus, but technology continues to progress, right, That's been going on for thousands of years and it's only accelerated, right, um with with the the debt deflation is classically secular. Right, It's not a you can say it's cyclical because we had a bubble, right, But until we're able to remove that impediment, it's a secular impediment, and it's a decade or longer. It's not we have to actually get to that.

I mean, where you realize that while people point to debt to GDP figures or debt to all sorts of even debt to income UM because and certainly debt service UH costs have have decreased enormously but nominally from the point of the bubble to today, total debt outstanding UH in households in the United States has fallen by four percent,

not a whole lot. Yeah, and and so so you're you're you're not talking about this enormous retrenchment where suddenly you've written off half the debt or something like that. And of course you see the same problem in Europe. The problem in Europe is different from country to country. Spain has massive household debt, Greece has massive government. That

doesn't really matter how they took the money. Ultimately, they took the money, generally to pay to their own people, whether it was lending it to them or paying them wages for jobs that they shouldn't have paid for. But it doesn't really matter how they took the money. They ultimately took the money from mostly other European lenders who received that money received that money by through the enormous

influx of demand for their government bonds. So let me bring this back to an earlier conversation we had about some criticism, and you've been a pretty vocal critic about the Federal Reserve and all the central I'm not a critic of the Federal Reserve. In fact, thank God for the Federal Depression. So what did the so I was gonna turn this on you? What did the Fed do? Right? Well,

they stepped in early and hard. And what Bernanke did obviously as a student of the depression, as he came in and he he realized the emergent nature of the situation, and he he did what was prescribed by the years of study and research that he's done, which is to flood the markets with enormous amounts of liquidity uh and

and bail out institutions. But of course, when you really go back and understand the role of a central bank, you have to reflect back onto its lender of last resort function, which is really why central banks were created to begin with, the whole notion of stopping bank runs. So banks have a bank to borrow from Uh. And it wasn't that supposed to be at um punitive rates to institutions of of good credit market actually market rates markets of good right, badge, My is a going to

be terrible, But that's not really what we did. We lent money at very low rates to companies that were essentially bankrupt and against assets that were questionable value. So uh, if anything, it did not follow Badget's prescription. Uh. And we ended up with with the situation with with the situation in which we created enormous you talk about moral hazard for the shop owners or whatever I mean, moral hazard that we created for banking institutions will be with

us now for for decades generations. Uh and and and we may, in order to reverse that, have to let a huge bank fail at some point. And letting Lehman go down, by that wasn't sufficient. Well, that wasn't the warning Colude, or should have been. It was ironically counterproductive. So by letting Lehman go down, which of course they felt they had to do, that created such an enormous financial crisis that their conclusion was, what, we can't lose

anyone else. What they did instead of uh, nationalizing, which is what you know when I was I was actually sitting a few feet from this very room in which we're talking on Charlie Rose back in twenty nine and uh and you know, those were the days in which everybody, half the people out there were talking about nationalizing them. I thought that's the way to go, and and and one of the benefits of nationalization. There are many many detriments, and I'm glad to a certain extent we didn't do

some of that. But the notion of allowing managements to continue on in management after they've blown it so badly is really the worst of moral hazards that can create. So the benefit of nationalization, I can't believe it's and was talking about it in abstract theoretical terms, is that you wipe out the shareholders who had made ill advised

investments and deserved to be wiped out. The government provides dead or in possession financing the them in Warren Buffett are the only people who could afford to an even who was questionable if Warren could have bailed out everybody or provided piece once called Warren Buffett walks into a bar, and it was about Warren Buffett not having any money in his wallet. So he decided he'd write an IOU on a napkin, right, And I was trying to explain the notion of of of currency and who wouldn't take

that currency? Anybody would take Warren Buffett's napkin. And first of all, you would never even cash in. You want that napkin, you put that outside, assuming it's not for seven figures, right, that's exactly right. So so you you wipe about the shareholders. You give the bond holders, who then become the main creditors of the institution a haircut, but you really hit the nail on the head. You

also clear out that top level of management. They're all fired, and then the next level of people below them hopefully learn Oh, by the way, if you drive the bank into insolvency, you're gonna get fired. You don't get your bonus, your stock is worthless. But you also don't retain the bondholders as bondholders. You make them owners. They become equity owners. There's a classic and in fact, what's going on right now in Europe. You can look at what vera Focus

is doing in Greece. He's trying to pull off a classic dead equity swap, right, he's got all this dead outstanding that he can't pay, and he's basically running around Europe right now telling the finance ministers of Europe, look, here's what we'll do if we come out of this and our GDP rises will give you a piece of it, but we're not gonna owe you this money anymore. Well, why doesn't he even take us a further step and say, you know what, we're out, We're done, we're defaulting, We're

out of the euro, We're on the Drachma. And if the drachma plummet's great, we'll sell a lot of yogurt and have a lot of touris force only that they can. They have yogurt and olive oil, but they don't have a lot of hard exports. And one of the problems with exiting for them, I mean, if if it were Spain or Italy, you're talking about easy Italy, it'll be easy, but Greeten be easy, but it be easier easier for the for the exiting country. The problem in h in Greece,

as you have a country that doesn't make matter very much. Now, in theory, if they exited and they had a redenominated currency and paid their taxes. Yeah, they would, They would attract investment because people would want to use their labor pool, which would be very cheap to use um and and hopefully that would work itself out, but it's still be massively painful and within Greece itself, public opinion is not

supportive of that. So it's very hard to get a consensus for for gregsit as they call it, the gregs. So so back to the earlier conversation, Lord Keynes wrote about this and it was pretty forceful and pretty persuasive and pretty clear um. But there is a subset of people who are just knee jerk opponents of any philosophical

spending by the government. Their philosophical opponents of hey, there's a massive decrease in demand on a temporary basis, let's have the government step in and we'll refurbish the roads, and we'll shore up our defenses in our electrical grid and our ports in and our chemical plants is planting.

There's not of almost free money right now. If based on what's going on in the Bloomberg terminal right now, and since I don't have it up in front of me, my guess is that the ten year Treasury bill, probably treasury bond probably cost closed it around. And uh, the that those rates, you can pretty much go out and build whatever you want and actually be in the money on the trade. And here's why. If I have a bridge, I know I'm going to have to rebuild twenty years

from now. I know that either by obsolescence or by increased volume that it needs to carry, or for whatever reason, I know I wouldn't need to rebuild it or expand it. And I take that work and I present value it to today. And I do that work today, creating massive amounts of economic stimulus. And it costs me one to borrow one five As of the time we're recording, the market rallied at the end even cheaper it was. It's even cheaper. So it cost me, you know that that

kind of an interest rate. It's a little higher for twenty years, but still very very low. Uh and uh and you have, uh that kind of borrowing costs in order to present value the work, you know you're gonna

have to spend the money anyway. So you do it today, you create massive influx of both primary benefits in terms of paying workers wages, secondary benefits in terms of paying to procure uh, steal and what have you that you need, creates other jobs and then of course terch arey benefits because all those people spend all that money or a lot of it, and you create a platform for goods and services to move some upward pressure on wages, and you cure the problem. Now this is really a critical

issue here. We have an addition to all of the other problems that we have. We have an enormous amount of polarization of wealth and income. So we have people who are sitting on enormous amounts of money, who are putting that money in treasuries I mean anywhere that they're not going to lose it, and sometimes in cash uh. And those people have no desire to reinvest because there's no demand for private sector goods that's not being satisfied

by a cheaper source outside the country. UH. And so you ask yourself, well, here we have the ability to round trip some of this money. After all, they're buying bonds. The Chinese are buying our bonds. Everybody else is buying our bonds, which is why interest rates are at the level that they're at. And all we're missing is the connecting piece which is what's known by which was economists

called the collective agent. Right, if I'm depending on Barry Ridholts to make an investment decision, I pretty much know what Barry Ridholts is going to invest in right now, and I certainly know your point of view. Uh, And I know that you're not going to step in and build a giant plant that doesn't need to be built because you have cheaper sources of labor elsewhere. You're not stupid,

and and so you're going to sit on your money. Uh. It is only US as a country, as a nation collectively that can decide to do otherwise, not by taking your money. You can keep your money, but we're very happy to take your not taking your use your money where it's being parked in those treasury bills and put it to productive use. And by the way, all of the people that buy our bonds outside of the United States who depend on us demand to sell their goods

and some of their services. Those people would kiss us on the you know what in Macy's window. If we actually use that kind of money for for for infrastructure building, created additional jobs in the United States, which would ultimately create additional demand for for their building for their goods and services. So in other words, it becomes a giant economic stimulus that a cruise to the benefit of everybody, and I get to ride on roads that don't destroy

the suspension system of my car. Well that that is actually very interesting, uh thing you mentioned because the the that's the fourth benefit of infrastructure constructing actually create greater

efficiency in the economy. Not only greater efficiency, but at one point in time, now I'm gonna wax a little philosophical, at one point in time we actually had an infrastructure that wasn't embarrassing when when you have clients or or colleagues flying from London and passed through JFK and say I got off the jet and I was a little confused. I thought I was in Zimbabwe. And the answer is no, no, you are con fuse. Zimbabwe has a nice new airport. So that sort of stuff is is to me is

just where is the I understand the philosophical debate. I understand the drowned the beast drowned, the baby in the in the bathtub argument. Even though I don't agree with government the baby being government. I don't agree with that argument, but I understand it But what I don't understand is where is your pride of ownership? This is your country. You drive around you look, you and I both criss crossed the country. I was just in Seattle. I got a trip coming up to San Francisco. I'm gonna be

in Miami. I'm gonna be in you probably. But here's here's it's astonishing if you, if you really think it through. What is driving that argument. Let's driving that argument in the simplistic sense is that those people who are making it believe that they will one day have to pay that money back. And what I'm saying is that they're never going to be in a situation where they're gonna let the bridge fall into the river. How do we

know that's the case. How long did it? Literally the Capital Dome was collapsing, and the Congress for five years refused to authorize One thing I know about it. One thing I know about infrastructure is that if it starts costing businesses too much money to ship their goods and don't get workers because the bridges are out the answers, bloody hell, they're going to get the consensus. So we're

gonna do it late and expensive instead of early and cheap. Yeah, I mean, and and in an environment in which the cost of of of recycling money. And I think that's the way you have to look at it. This the sovereign debt rate is at the level it is because we are not recycling money. We've actually created a blockage in where money is supposed to flow. We've created this, this this black hole of of sovereign debt where people are parking their money. That is not too different than

holding bundles of cash. If you look at the cash in your wallet, you'll see it says federal reserve note. But it's a special magical kind of federal reserve note. It doesn't pay intest zero interest, so it's a zero interest pot. Well, if you're issuing a short term debt at twenty two basis points, it's not much different than cash.

And you mentioned the longer twenty year thirty year we're at, So if the ten year was that, so the thirty year, according to my Bloomberg app is a two spot three four. That's insane. That's that's about as close to free money over long periods of time you're gonna get. And again, you pay you you you look at it as a at some point, as a cash substitute, you might as

well take the interest. It ain't much, but you might as well take it knowing that the guy on the other end of that bond owns a printing press and is always going to be able to repay you. The idea of the inflationistas out there saying, but you're gonna

lose purchasing power. Era of we have the most incredible environment in the world where we have all these people running around shouting about the potent ential for inflation because we flooded the world with cash, and and in fact inflation is dropping like a stone and the dollar is appreciating. So it's very, very hard for me to understand where the big disconnect is. And quite frankly, I do think

it does rest in one place. It does it. It is a It is a thirty year argument that we've been having, actually more like going close to forty between people who really don't like government and people who really believe in something called the efficient market hypothesis. And these people, during the nineteen eighties, the Reagan years, took control of government and changed people actually did things that I would

argue in the least uh and certainly. I have friends who believe this as well, who were in the Reaguan administration, and the first Reagulan administration, cutting the tax on income above a thousand dollars a year from seventy to fifty was probably the right. That's a huge behavioral change in response to that giant tax. Right, so so so and that, but from right, they didn't cut it down to where we are today, and and and the second thing they did is that they did deregulate some of the guild

industries like financial services. What they did in the first term Reagan was was was reasonable. What came after was was was absurd. One of the things, you know, Bruce Bartlett is a great guy to listen to. Love his stuff. He's got a new book coming out. His new book, by the way, he has the working title this is right up your enemy. It's called what the Right Gets Wrong. Yeah. Well, and again it's very with the reason. And this is

what I'm coming back to. The reason the right gets it wrong is because of the underlying product that they were able to sell to the electorate. And it has nothing to do really with economic growth other than the fact that they have this theory, right this this curve right that they say is going to produce greater growth at at at lower tax rates. But it's lower tax rates themselves that they're able to sell. And they became

very good at selling this product. And in fact, I didn't need to understand anything about economics in order to stand in front of the American people, or in the UK, or in Canada or anywhere and tell people we're going to cut your taxes, which is popular. Who votes against we're going to cut your tap? No, No, I'd rather have you increased my taxes. At least a smart person will remain neutral. But everybody likes that message, and it's

an easy way to get elected. And so you have this red state blue state division really fundamentally over that issue. It is the actual way in which small government theory or Jeffersonian jackson Ian theory metastasizes into this complete shutdown of the political system in the United The immediate question, the immediate response to anybody who says we're gonna cut your taxes, the answer has to be okay, So now I appreciate your offering up an unfunded tax cut, because

taxes pay for spending. How are you going to pay for that. What spending are you gonna cut to offset that? And by the way, this isn't a left right argument. You could say the same argument to people who want to increase spending, which is, if you're gonna increase spending, what taxes are you gonna raise to pay for it? And so anytime someone says in Kansas and Governor Brownbeck is now the have become the poster child for this.

All right, you slashed business taxes and you cut personal taxes, and now the theory says they're supposed to be an uptick in revenue. But it's years of this and by the way, he got reelected book called What's the Matter with Kansas? Right? Well that was long before he got into office. But here we are. And so the question is, if you're slash taxes, Hey, listen, I'm in a top tax bracket. I'm very happy to pay less taxes. But I want to know what I'm giving up if I'm

paying less taxes. I could tell you right now. I know I've given up infrastructure. I know that the gas. This is my pet peeve is the guess tax is locked at levels it's been since we've had big inflation over the ensuing fifteen twenty years before the deflationary period, and all these things built in the fifties and sixties and seventies are crumbling. I was just in in Belgium. They're apologizing about all the roadwork, their roads before their repair,

our head and shoulders above hours, and everybody forgets. In the fifties and sixties, after the Eisenhower administration, the United States infrastructure was the envy of the world. And now we've fallen to the bottom of the developed world. And I don't it's astonishing to me that this is even a debate. You want to drive on a highway, you gotta pay for it. And if that means adjusting the gas tax from I think it's nineteen cents now to

the cost of living to inflation. Even though there's low inflation, you still have to have some increase in spending to maintain these roads. I mean. The the the irony, of course, is that you again talking about the blockage aspect that I was saying before. Uh you you have this huge amount of what i'll call stranded capital that is sitting there not being employed for productive use. Uh So, not only is this not just a question of of tax

versus spend. It's also a question of why shouldn't we be in a situation where we are deficit spending, borrowing money that costs almost nothing to do things we know we need to do. Eventually, you're gonna have to do it, yeah, buying ourselves. You build a bridge, you get a hundred years out of it, right, we have bridged fifty years anyway,

a long time. Uh So. So we have bridges all over this country that are so old they're falling apart, require enormous amount of maintenance each year, which is an which is also cost borne by government. Um. And by replacing them, we can get all of these great benefits and unblocked this capital that's being stranded uh in in sovereign obligations. It's it's it's actually kind of collective lunacy. It is, so I would love to keep you here for hours. Let me hit you on one last subject

related to the blockage, which is velocity of money. It's something that we don't hear about that often. But if we want to get a little wonky and get into the weeds, why have we seen money just not circulating well? And I don't mean cash, I mean actual what we used to call M two and M three. Why is the money supply just kind of sitting on the Fed's balance sheet and not coursing through um our our economy. Well,

the simple answer is there's no demand for money. There's no demand for money because there's no demand for new infrastructure. There's no demand for new infrastructure's no no way of creating it. There's no demand for new plants, there's no demand for new equipment. If they're going to be built, they're likely to be built outside the United States where labor is cheaper. Um. So the demand for capital side

is really the sort of bigger answer. But then you look at what's gone on in the field of economics. You know, when Milton Friedman blessed his heart was creating monetary theory, or at least expounding upon monetary theory. In his heyday, all of his equations held the velocity of money constant, and uh and and and what we've proven in this great recession and thereafter is that the velocity

of money is anything but constant. Again, it's the view of an economics of shortage versus in economics of oversupply. You have a condition going back as long as we can remember in modern economic thought, that's probably about a hundred years even before getting back to the people who

are sitting there with with agricultural economies. Um, but you you look at sort of the post industrial revolution of view of econ of economics, it was always governed by something that quite frankly was inherited from the agricultural view, which is that most of economics is about shortage. There's always a shortage of supply relative to demand. That's a

grarian in its nature. And it's a grarian its nature, right, So you you you then then sort of ramp forward into this completely different environment, which, by the way, I would argue, probably would not have have happened. And he is in fact, in the broad scheme of things temporary. Um, if you didn't have this massive uh situational change in by by having all of these post socialist economies suddenly emerged, I mean you, I like to that's what really opened

the floodgates. Suddenly you had the Berlin Wall and the Chinaman incident. You had massive industrial policy in China, you had UH democracy flowing in and and markets flowing into Eastern Europe, and and this was this was a situation that we really cannot repair other than by looking to mechanisms that are not oriented towards this underlying premise of their always being shortage. We live in the age of oversupply.

So I'm gonna leave it at that note. For for the anti Keys and Keynsians and the tax coders, if they want to send you hate mail, what's the best way to get ahold of you? Either on Twitter or eldert at Daniel Albert And of course you can always go to my blog on econom Monitor. Uh and uh, please pulled two cents Dan Albert's two cents at econom monitor dot com. Uh and uh, you know the the I'm a fellow with the Century Foundation, so I could be found there as well. So you're you're easy to

track down to to send angry letters to. So I've been speaking to Dan Albert of Westward Capital, author of the Age of Oversupply. Thanks so much for joining us. I'm Barry Riholts. You've been listening to Masters in Business on Bloomberg Radio. H