Interview With Martin H. Barnes: Masters in Business (Audio)

things economics. Martin Barnes is the chief economist at bc A Research, where he has been a senior editor, managing partner and essentially grand popa more or less for the past thirty years. I know Martin for a long time. He's a fishing buddy. He's somebody I've been friendly with um personally for for a while. I am not only entranced by his thick scott his brogue. I wish I could have gotten him to eurse uh. It is hilarious when you hear him dropped the occasional bomb uh in

a heavy Scottish accents. It's he wants to be taken seriously when he curses, but it's just so hilarious when you hear it. If you're a friend of here is and you managed to make him curse, We just fall off our seats laughing. He is an incredibly insightful person when it comes to the inner workings of the Federal Reserve. He has been, if not an insider, so certainly someone with the inside track as to the thought process of

various FED governors and various FED chair people. Uh. He is just one of those folks that has been around long enough and and been in the right place at the right time to have really learned a lot of things. So if you are interested in various economic thoughts, if you're interested in what drives the FED and and perhaps what the that should be doing instead of what they are doing, Martin Barnes is your guy. With no further ado, my conversation with Martin Barnes. This is Masters in Business

with Barry Ridholds on Bloomberg Radio. My special guest today is Martin Barnes. He is the chief economist at bc A Research, which he joined in eighteen of those years was as the managing editor of the well regarded Bank Credit Analyst, which is their flagship publication. Uh. Martin Barnes, Welcome to Bloomberg Thank you, Barry. Pleasure to be with you. This is your first time in this building, it is my first time. Very exciting building. So so let's jump

right into your background. You began your career as an economist for British Petroleum for BP. Is that right? What was that? That means I've been working as an economist for forty three years, which means time. I've very confused person. I was going to say, after forty three years, you should be pretty good at it. You got in the other direction, you go in the other direction, all right, So so what was the job at BP? Like, what

did you do? Well? I joined their forecasting division, which is part of their corporate planning department, trying to figure out where global economic growth was going and then forecasting energy demand and within that oil demand of course, and that was a key and put into BPS planning process.

But of course I joined in January ninety three. Oil was three dollars a barrel, had been for a long time, and of course all future projections were based on the assumption that oil would be three dollars a barrel, and by the end of three guess what happened? We had an oil embargo. When I recall oil spiked something like mind and after twelve whatever, so everything was turned upside down. So that was a wonderful learning experience, to say the least. And then a few years later in nine d seven

you came to North America. No I. Then I was with BP for five years and then I moved to a brookeradge firm in the UK of Wall Street firm. I was an economist with a UK broker firm, which actually got me back to Scotland, which was nice because their research was based in Edinburgh, so it would be like moving from London, sorry, from New York to Boston kind of thing. So how did you go from from

London to Scotland to Vancouver and here in North America? Well, so five years in London with BP, then I came across this opportunity to join this firm called Wood Mackenzie, which was a brokerage firm research based in Edinburgh though they traded in London. Was with them for ten years and was headhunted by b C A chance to gosh, come to Canada. Why the heck would I want to do that? But after thinking about it, took the move and never looked back. Really and you made that move

in was that anywhere near the eighty seven crash? Well, I accepted the job before the crash. I accepted the job job in August. The last piece of research I wrote for my previous employer with Mackenzie was called after the crash what would happen? And then I moved to Canada in November, So just one month after the crash, the seven Black Monday? Did it interfere? Did you say maybe? I had? No, No, no, not at all. They were

excited about it. Yeah. Sure and um so so let's talk a little bit about the work you've been doing for bc A research for thirty years. You spent eighteen years being the editor of the Bank Credit Analysts. Tell us about that publication. Well, b c A is a very interesting I think it's pretty unique firm. It's almost unlikely firm because it's based in Montreal, which is of course a financial backwater, but it's been a right since nine.

It's a pure research firm, doesn't manage money, doesn't trade, there's no proprietary stuff going on. All we're selling this research. So it's focused on trying to figure out where the markets are going. And it's a pretty intense place. When I joined, it was tiny. I was employee number fourteen. Were more than ten times bigger that in terms of employees. But the focus is still the same. We're still trying to still thirty years later, still trying to figure out

where the markets are going. So so who are the clients of BC, who's the typical describe what the typical client is is. We're pretty much challenged to still these days, which was not the case when I joined. When I joined, maybe a third of the clients were behind it worth. They're kind of been priced out of adopted a different

business model. So we're kind of institutional now. And it's range everything from finger snapping hedge funds hiking you make me money this afternoon to slow moving state pension funds, know and everything in between. So that sounds interesting. So and I'm very global, by the way, I should point out, although we're based in Canada for historical reasons, that's just where the company began and there's a very powerful force and we just stayed there. But you know, half of

our client base is probably outside North America. Come for the high taxes, stay for the miserable winters. That's the that's the the marketing campaign for although where you are I know live in Victoria Bridge, Columbia, but my spec is still based in Montreal and that's where my job

is based. Your climate is quite delightful. You're you have a very similar climate to Seattle and Portland's less rain, less rain and just just as opposed to Scotland where planning of rain you said you were You don't know the day you were the exact whether of the day you were born, but it's a fair case it was raining. So what's the what's the your favorite part of your job? What do you like that you what do you like

to do the most as part of BCA research? Oh gosh, I mean I look, I've been there twenty nine years and if there was anything I really didn't like, I would have left a long time ago. So I write, and that's always cool when you can come up with a new angle on something. I enjoy writing. I enjoy speaking. Standing up in front of a crowd of people giving my views is is fun. Traveling, visiting, talking with clients. I can't see this any part of it. I don't like.

I'm Barry Ridhults. You're listening to masters in Business on Bloomberg Radio. My special guest today is Martin Barnes. He is the chief economist at BC, a research affirm he's been working at for let's round it up and call it thirty years. Uh, and let's let's talk a little bit about the global economy. So where are we? If you have to pick one, is it inflation, deflation or disinflation? Well, showing that I'm a true economist, I'm going to have to give either the it depends out, sir, you know.

I mean, if you're in you know, the manufacturing sector, or you're a taxi driver, you would say it's deflation because it's tough, it's competitive, and prices in your business are falling and in some cases may have been falling for a while. Um. If you're a parent, um, you know, paying for your kids kids college education, or you've got a lot of health care expenses. You know, you you

just see the world as horrendously inflationary. And if your wife is like my wife, she'll just laugh at you any suggestion as deflation because she'll beat you up and tell you how much everything is going up in price since last time she went to the grocery store. So it's different. We're not looking an aggregate, we are not in a deflationary we don't have absolute deflation, but it feels deflationary in a lot of places, and there's a little pockets of of inflation. But it's a very different

world from the inflationary seventies. Of course. Sure, the joke I've heard is we have inflation and the things we need, and we have deflation and the things we want, which I thought was kind of it. So it was like, kind of got a cute way of putting it. Another way of thinking about it is that the things that we spend money on day to day or week to week, month to month tend to have inflation, and the things that we only buy occasion occasionally fallen price. You know,

so refrigerators, TVs. So you don't notice that, but you sure as heck notice if you're parking fees are going up. This so their small amounts of money to compared to the price of refrigerators. So let's talk a little bit about commodities. So two years ago the price of oil was over a hundred bucks, and now here we are with OPEC having a conversation and oil can barely maintain a forty hands all. What's the commodity story? Is that a dollar story or is that a supply story or

something else. One of the first lecguiliarity economics at school is, you know, it's a supply demand curve, and you know, increased supply alter to demand and price falls and vice versa. So we have comi more than anything else. You know, the respond to to price signals. Raise the price of week, water farmer is going to do. They'll grow so much week they'll be giving away in street corners after the

nick harvest. Some commodities, the cycles are a bit longer because if you have to find the stuff and dig the mines, et cetera, maybe it takes a few years. But commodities respond to prices, and you know, we had and sometimes these cycles are really long. So we had a twenty year bear market, if you like, in in commodities, from the early eighties into the early two thousands, to the point where prices got so low, you know, open a couper minor you nuts. So we starved to come

out the resource sector of resources. Who wants to be a mining engineer when you can be an investment banker who wants to open a copper mind. So when demand picked up, particularly driven by China, the supply we just wasn't there priced. So then we had this powerful bull market, ten year blue market. Guess what that's prices went. It became more attractive to find the stuff, so the supply responded as it always does, and then we ended up

with too much supply and then prices went down. The bull markets tend to be much shorter than the bear market, so we had ten ten year bull market followed by twenty year bear market. Historically has kind of been like that, and if that is still true, um prices there were only pretty early stage of a bear face. There's still quite a lot of supply out there. Oil is a little bit different, still a ton of supply fracts, still

the same. You you have a g political overlay with oil that you don't have with other products, but it's still the same story. And of course because of shale, it's changed things. We believe, I guess most people you know believe that once you get into the fifties, fifty five and above, shale becomes very competitive again and turn you can turn sheal on and off much more quickly

than deep water oil. So oil's capped. Shale puts a cap a price cap on, so you don't see oil going over sixty dollars a barrel anytime in the next couple of some short term geo political stuff. And what about natural gas, which it seems that we're just finding endlessly supplies? Yeah, what was it a few weeks ago, a couple of months ago. Wasn't they finally enormous reserves in Texas? The biggest fuel Just it just seems like it's an almost inexhaustible It's the whole shale technology hasn't

really been exploited aggressively outside the US. We're still early stages of that. So so I wouldn't be a bull of commodities. No, they're not going to fall forever, and you can have short term moves, but you know the very long term and b C. We love long term stuff. Um, you know, you do a two hundred year chart of real commodity prices and that just trends steadily down and any spikes are short lived wars supply disruption. So is

that a story of of improving technology and exploration? So your reference China earlier, I have to ask how significant is China to the demand for commodities and when they begin to cool off, how impactful is China on falling commodity prices. It's not hugely impactful for oil, but has been massively significant for medals, where some cases fifty of

global demand has come from China. Now the standard story for MINA is it has to and has begun to orientals orient itself away from manufacturing construction war towards services. This is a long, slow process, but they still half the country working on the farms, right some crazy should I mean, their growth model should be a less commodity intensive growth model going forward than it's been in the past,

but it will continue to be a big player. And you've got India, You've got a bunch of other remerging economies all want to industrialize more. So the commodity story is an m story for sure, not just China. UM and things like auto ownership, homeownership, things that are commodity intensive are still at pretty little levels. And a lot of countries like Vietnam, and then they are compared to the Western levels, and you've got to assume, you know, they want to get to where we are, So commodity

demand will go up. The issue is supply. You know, there is a big moves in supply that that causes, you know, the big moves in in commodity prices, not demand as much more steady. We had that crazy train of boom, but you know we're not going to have that again. I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio. My guest today is Martin Barnes. He is the chief economist at b c A Research, a pure research shop located up in Montreal, Canada, but

really they are a global institutional shop. Let's talk a little bit about the state of the labor market here in the United States. By the time this comes out, we will have just had yet another non farm payrolls report. Um. What do you see as the state of the labor market in North America and globally? Well, it's pretty good. In North America. Well, the US particularly, you've created, We've

created a lot of jobs. Unemployment rate is back down to what most people would have called fool employment anytime within the last ten years. Um. But if the labor market was really tight, you would have expected wages to be growing much more strongly than they have been, so that suggests that there we're not there yet in terms of a tight labor market. So I guess uncomfortably, I have to side with Janet Yellen on this one um, which is something I know you don't like to do.

So I want to get to wages. But before we get two wages, I have to ask a related question. So this The traditional measure of unemployment is you three word at four point nine. The broader measure is you six, which is around ten per and that's the measure of underemployment, which which leads to this question how much underemployment meaning either people working part time who want to work full time or people taking low paying jobs when they're really

more qualified for a higher paying job. UB how underemployed are we here in America? Your question that you know gives the answer in a sense that broader unemployment rate is still very high. Ten unemployment rate implies that there's a lot of underemployment, you know, so you have a lot of people who would like to be working full time,

who would like better paying jobs. So there is still slack in the labor market, and underemployment is one component of slack and I think you have a of a large number of people who have been forced to take jobs that are below their skill well blow blow with what they would like. So you referenced a lack of wage pressure UM. That seems to be a little bit of a mixed picture. We had the Census Bureau report not too long ago that showed so or a five

point three percent increase in wages. Even with that record setting one year increase, we're still below wages and the median income media family incomes. That's not wages, that's that takes out. So how do you reconcile those two the increase in wages and the median family income UM, we're still being so far below where we were fifteen. It's fifteen years and we're still not back to where we were right. So again that's consistent with the slowest recovery

on record. And although we have created a lot of jobs and brought the unemployment ratedown, a lot of these jobs presumably are lower wage jobs, or people shifting from high wage jobs do lower wage jobs full time to part time, and that's kept family incomes depressed, not even not and a more typically economic cycle. If you had looked at what the unemployment rate had done, what overall employment, and you would have fought median family incomes would have

done much better than they had. As you pointed out, we're still below levels of ten years ago. So yeah, they picked up last year. Great, that's one year. That's one year. So let's let's let me ask the question differently. So Ryan Hart and rogue Off in this time is different, don't you use the financial folly make a distinction between the usual um economic cycle and financial recessions. A credit

crisis gets a very different type of recovery. You agree with their perspective, Yes, absolutely this, but it's actually been worse than that. So this isn't just so. Rougoff was the chief economis that the IMF for a while and he did that. They did that research while still at the IMF, so they actually published stuff on financial recessions are different. Recoveries are weak. They knew that at the IMF long before the right right right, So the I m F cut bought into the idea that recoveries are

after for actual recessions. One of the charts I love to show. I use it every time I give a speech to as it clients, and it's a total damnation of my profession, if you like. And I don't have a copy with it with me to show you, but it's incredible. You look at what the I m F was forecasting for global growth in September twenty eleven. They do their big forecasting grounds twice a year, but the big one is in the fall to coincide with the

IMF beatings. So September twenty eleven global growth was they were saying it's around four percent at the moment, and it's going to get steadily better. So by now it was going to be five. They were forecasting close to five percent for so it's basically a line going up. And look at their latest projections and we'll get some new ones in a couple of weeks, and basically it's a line that goes straight down. There now saying three percent for this year, and it looks like the jaws

of death, you know what I mean. And it's not just a one year forecast there, They've got every year raw so you can plot all the intervening forecast and it's just got every year was provided down, down down, So it's the most egregious forecasting era I could ever imagine because it persisted for five years, and you can blame lots of one off things, euro crisis, earthquakes in Japan, laborship,

the government shutdown to the US, etcetera, um. But this has been an absolutely awful, awful global recovery and I think you can explain it. So and this is the I m f knowing that recoveries were week after for the actual recession, but they still got it horribly wrong. And nobody in September twenty living by the way, was saying time, if oh, you guys are too optimistic, you'll know it's never going to be that good. That was

a box standard consensus view. So what's the problem. We underestimated the dead weight of debt, We underestimated just the legacy of that bad financial downturn, um, we underestimated how cautious businesses would be about capital spending. And I guess we had a lot of fiscal austerity plus the whole series of shocks like the euro crisis. So the bottom line is they really did a terrible job. Despite having rogue Off warning them, hey, this is going to be

a really soft recovery. The whole profession did I wouldn't focus just you see the FED, the U E c D, and most private sector economists. I'm Barry rid Halts. You're listening to Masters in Business on Bloomberg Radio. My guest today is Martin Barnes. He is the chief economist at b c A Research. They are the publishers of the Bank Credit Analyst, highly regarded and well respected research shop. Let's start talking about the Federal Reserve. You have been

visiting the FED for quite a long time. I think I first started visiting FED people in LinkedIn seventy nine. I was still living in in the UK at the time, but part of my job was to follow the US, of course, so I just started coming over to the US and visiting the FED. And I was fortunate enough, strangely to get to go to Jackson Hole eighteen times. I think it's not too many people managed that. And I used to go and visit governors. I got fairly

close to people like Dong Koan, etcetera. And I pretty early on talking to the FED. Visiting the FED, I I learned something that was made me feel good and bad at the same time. You know we have this the FED, is this aura of of you know omnipotence around them. You know that got all these smart people, they know what's going on. Um, yeah, well they used to have that image anyway, So that you go to the FED and there's so much more knowledgeable and smarter

than you. Well, I learned pretty early on that actually that is not the case. They may have a lot inside information and micro stuff, but when it comes to the really big questions, you know, whence housing going to peak or why our businesses, they have no more idea than you or I. And that's kind of cool because it means that your view is just as good as their view, and they're actually quite interested to know what

you think. So I thought that was good. It kind of levels the playing field so I could I could have conversations with the FED and my views were just as good as their's. But then I thought, oh my god, this is not good because I don't know what's going on. I need them to know. And the fact that they don't know any more than me, but yeah, they're controlling monetary policy was really scary. And I think we have learned that their forecasting record has not been great. It's

been terrible. But then again, what economists forecasting, but we need short of that, we need our monetary policy makers to do better than us. We're we're not raising a lowering interest rates. They are, So I would like them to know more than me. So more important than their forecasting, what how curate is their assessment of what's happening right now?

Do they have a good read on the here and now? Look, nobody knows what a year looks like out in the future, but well, their views on what's going on right now should be as good as anybody else's, should be better because they know, you know, these regional presidents talk to their local business contacts, etcetera, etcetera. Um. The problem is that the models that they have relied on have led them astray. And that goes back to what I said about the I m F forecasts. That's just a model.

You know, the world the past is not is not as good a guid to the future as it used to be in models are all based on the past. So they've been led astray by the models. I think they wrongly bought into this forward guidance commitment strategy. I think that's been a mistake. I think that is in that transparency and communication. Look I remember the day, maybe you do, when the FED never even used to tell

you and it changed policy. Right, you would find out rates and because the market, the whole industry economist analyzing the weekly money supply numbers to what the FED was doing. So that was to a paque, I mean, no sense. But they have gone way too far in the other direction. I don't think they should be publishing these dots. The dad plots are a waste of time. I think they're just wrong to do that. I think they talked too much. They in their effort to create transparency and guide markets,

have just created confusion. So you think a little mystery would actually help the markets. I would like to think that they should be able to say, look, you know, this is what we want to do. We're trying to get inflation at two your decent economy, we will we will keep policy at the appropriate level for as long as necessary, and then just shut up. Really so, so let me so when you set these we won't raise rachel till the unemployment rate hit six and a half percent. Now,

how dumb was that? And now it's four point nine percent? Exactly, why do you constrain yourself with these commitments? So much uncertainty in the world. So let me ask you a question. You've used the phrase financial repression in some of your writings. Yes, for for some of the listeners who may not be familiar with that brands of criticism, what is financial repression? I've used it in a context of of, oh, of

how do we deal with high levels of debt? You know, b c A. Over the years, debt has been a big part of what we write about. We we I think we were the ones that created the debt supercycle term. You know. I joined in eighty seven, we'd already been using it for probably ten years at least before that, and the debt supercycle was just a story about ever rising levels of debt, etcetera, etcetera. I think that is over now, but I still get asked, probably more than

any other question. When I was at client, it's how what's the endgame here of all this debt? Well, it's private debt, government debt. How do we ever get rid of it? And it is interesting that debt two GDP ratios have continued to rise pretty much everywhere, even though people are trying to de leverage. You cannot easily deleverage when growth is weak. Um, So what's the end game? Is it default? Is it inflation? Can you grow out of it? Um? I think it's gonna be hard to

grow out of it. Nobody wants to default, unless your Greece. Perhaps, um, maybe inflation is the end game, but mm hmm, nobody really wants to truly inflate it away. So if you if you can't get rid of your debt, you just make it easy to live with. And how do you make it easy to live with your very low interest rates? And you can you can sustain extraordinary higher levels of debt for a very long time if your debt, if

your interest rates as close to zero. So financial pressure is really about keeping the costs of your debt down, and perhaps through regulatory pressure is forcing people to buy your debt as well. In terms of sovereign debt, so you can do that by forcing painted funds or banks to buy government debt higher capital ratios, So for ntural pressure is artificially keeping down interest rates. We're speaking with

Martin Barnes of BCA Research. You mentioned GDP to debt ratio. Nobody, at least no, no solvent government has a higher debt to GDP ratio than Japan now over two, and yet people are lending to them at negative interest rates. They have no problem borrowing what seems like an infinite amount of cash. How do you reconcile those two, Well, you're not lending to them, and I'm not lending to well,

somebody is. So the pad fractual system is effectively closed in a way in the sense that it doesn't rely on foreigners because I'm not sure any foreigners would buy it UM, So it's just in its internally financed. What the Bank of Japan has actually been buying all the net issuance. They've got a very aggressive qui program that they're buying. But prior to that, UM, you know, their Postal Savings Bank was buying pretty much huge numbers of bonds,

and they're real bond yields. Of course, they've had mild deflation, so they're real bond yields were higher than their nominal yields, So bonds actually weren't as unattractive as their low nominal yields would have suggested. UM and the stock market crash in Japan, I mean the nick I peeked at close to forty you know, so here we are many years

later that so the the retailer vistas of Japan. I've been out of the stock market for a very long time, so they're probably happier owning bonds than than these risky things called equities, even they know they've had no trouble financing their deficits so at all. So let's stay in that same part of the world. We look at China, where a lot of people are suggesting is the next

dead bomb to blow up? How bad is the situation in terms of China's being so heavily leveraged and carrying some much What people are worried about in the case of China is the very rapid increase in their corporate debt re show. The b I S have warned about it, the I M F of worried about it. It's not that the level of debt even as is that how I mean, there's other countries. Overall debt in China is still notice hig as it is another country. It's just

going up so fast so quickly. So the question there is um how much of it is kind of within the quasi public sector because you were a lot of state owned enterprises, A lot of it is local authorities UM, related to local authorities, activities in the real estate sector. It could all be socialized. Very Chinese government has the capacity to socialize at all. I mean they can absorb the just treated it as all as one big giant public sector, and their overall public sector debt is actually

quite low in China. So so let me let me bring this back to the FED UM, and let me let me ask you a counter factual. What would the US economy, what would the global economy look like if there wasn't the FEDS program of quantitative using and there wasn't zero interest rate policy, what would the world look like today? Well, most people would pat them on the back, and I would to for for their actions during the downturn. You know, if they if if credit intermediation that is

totally frozen, you know, the globe just shuts down. And it did. You know. You also the stories about the ships backed up at the Singapore Harbor that could be unloaded because there was no trade, credit, etcetera, etcetera. So they had to do whatever was necessary to free to free up the credit system. UM, and they did that. So que one absolutely, que two maybe a little less, a little less, but you know, the economy was kind of still looking a bit dodgy, and yeah, that was

probably okay. Q Que three not so much. I think that was probably not necessary. Um twists you have twist after that. Yeah, they've been in central backs generally, and I wouldn't just pick out the FED obviously, the ECB saying just getting increasingly desperate to to try and get economic growth higher and doing more and more desperate things. It's unfortunate. And I'm one of those who would agree that monetary policy has been asked to do more than

it should have been asked to do. And it's meaning that there should have been some fiscal policy at a certain point taking over from Congress should have stepped in and said, okay, we got it from here, Federal Reserve, you've done your share. I mean, that's a sort of hair shirt part of me that would argue. I think that, Look, we had thirty years, three decades of rapid credit growth, and I'm talking to the private secty years, which in a sense stole growth from the future, and this is

payback time. Um, so we've got this slow recovery, but it is any kind of recovery. We're kind of growing at trend and to try and force force it higher by creating, you know, distortions and asset markets. Trying to restart a credit cycle when debt levels already still too high might not be the right thing to do, and maybe we should just accept Look, we're in a slow recovery. That doesn't mean that government shouldn't do anything and just set back. We've got issues of an equality and as

parts of the economy they're depressed. There's a lot we could do in the US and overseas to make policy about growth friendly without relying on monetary policy. Taxes, tax reform obviously, I think regulations have become a big burden on a lot of small businesses. So we could do things to try and get a better economic outcome without just continuing to rely so much of monit policy to finracial markets and economists generally are way too obsessed with

monet to policy. If there's anything that drives me nuts these days, among many things do, but it's just this obsession with with when the federal raise rates and if the nuance of every utterance that comes out of these policymakers mouse, it doesn't matter that much. We've been speaking with Martin Barnes. He's the chief economist at b c

A Research. If you enjoy this conversation, be sure and stick around for our podcast extras, where we keep the tape rolling and continue chatting about all things regarding the economy. Be sure and check out my daily column on Bloomberg View dot com. You can follow me on Twitter at rid Halts. I'm Barry Rid Halts. You've been listening to Masters in Business on Bloomberg Radio, brought to you by

Bank of America. Merrill Lynch committed to bringing higher finance to lower carbon named the most innovative investment bank for climate change and sustainability by the Banker. That's the power of Global Connections. Bank of America North America Member f D I C. Welcome to the podcast extra. I'm I'm actually here with somebody who I think I know you

for a decade. Right. You've been going to Camp Coo Talk up in Maine since I've been going since oh six, you have to have been going be seven or something, So, I mean that's where I first met you. I think it was the first year you and I want first years were there where we're there together, that's always a ton of a ton of fun um before we get into our standard questions. I have a handful of um things. I have to uh, I have to get that that I missed. Um on QUEI. So you said QUEWI one

and maybe QUI two was successful. Beyond that it was it's been diminishing returns from monetary stimulus generally. I think we're at the point here, yeah, where whatever problems are out there facing the global economy or the U S economy, I don't believe it's anything to do with the level of interest rate. So when do you see those rates returning to normal? And what would you describe normal? Well, um, yeah, gosh, we used to think in the old days that five

four five was normal for the funds rate. How about the ten years? Maybe it's two to three. Well, the all rule of thumb was ten year plus inflation just the normal nominal growth of the nominal GDP growth was kind of a ballpark. And if trained growth was two and a half and two to half percent fla there for four to four and a half fish would would be the right level for bone eels. Um, Well, growth is lower now, maybe we might still get the two

percent flation eventually. Um, But it's probably you know, three and a half to four or even or even three. Yeah, And so let me put you on the spot, because you're in the forecasting business. So what's the date when when the FED funds rate hits three nine? How far out do you see that happening? Well, let me ask you different this way. Are we gonna see an increase before the years over we're having this? This is late September. Is it going to be uh? I mean I think

they should. Percially, I don't think it matters a whole lot of twenty five basis point halfe is neither here nor there. The economy doesn't really need it. I think they should do it just just to get it over with so well. I mean, unfortunately, if if they do, we'll still have the will they won't really just appreciate they've got to um break this perception of their slaves to the market. Yes, and of the market's not discounting it. We can't do it, and they've got to get over that.

That traces back to green Span, and I think it's a huge mistake the FED mad and they've enough dissension within the FED I think just in terms of keeping some of the discontents happy to do it that way as well. I think they're a little bit out of control U in terms, Janet has lost control of the the group. Just because there were three descents. That's that. That looks like healthy generally, just about talking goes on

and different opinions. This would never happen with Vulker, well now he pa, and it wouldn't even have happened with Ben BERNANKI actually, and what about green Span? What it happened with green Span? Remember green Span? I mean there was a big difference between Greenspan's first half first half of his term. In the second half there was a reasonable number of descents. So the first half, second half

of them, you did not dare contradict the maestro. They became very anti democratic, and I think Burnanky changed that for the better. But Burnanky wasn't as democratic as many people think. I mean, I was chatting, we just had our conference here and we had a former Fed governor there and he was Burnanky ruled the Fed with a much stronger film than is the popular perception. That's very interesting.

A lot of people are unaware that member green Spin started in eight summer of eighty seven, and I think was either ninety or nine one. In between meetings on his own, he raised he lowered interest rates. That was something the FED chair was allowed to do, and the f O m C slapped his wrist and removed that authority. Uh. That was very early in his career. As you said in the latter half, he was the maestro and no one challenge was on such a high pedestal, which was

unjustified by the way. I completely agree, highly highly overrated. So let me ask you a related question. Who do you think was the most effective FED chair and who do you think is the is the person who really understood the job the best? Well you have to see Vulcari, I don't, but I want you to. I agree with he did the hard work. He did the hard work. We're gonna crank up rates, cause a recession, break the

back of inflation, and begin a thirty year bondman. I just spent an hour into having this kind of chat with him actually at our conference which we had earlier this week. And I mean, he is a product of his time, and any inflation at all to him is still anathema. Absolutely, and also to the idea that the center back should raise their inflation targets from two now to three or four. He thinks it's just crazy. Negative interest rates don't make any sense to him, So for him,

inflation is still evil. Um. I don't have quite as a stronger view as he does, but he he was the guy that said in motion a sea change in in the global economic environment for the better. So so let's let's follow up on that. We we've seen both in the United States and especially in the UK and

parts of Europe, the austerity movement movement. I think it precisely the wrong time where where there's a need, when private sector demand is soft, as as Lord Kin's had has taught us, the government should step in and replace that demands, and when it's strong, the government should step out of the way. Do you agree with that? Do you think the Austerians had it all wrong? And have they been a drag on the economic recovery in some places?

But don't forget we had massive stimulus during the downturn nine so the austerity in the sense was just pulling back from that dream levels of stimulus that we had in terms of the Eurozone. Yeah, absolutely, it was bad. Yes, I mean, knew made a bad situation worse. You know, when countries are already on their knees, you know, just trying to to to force a sterity on them just takes a bad situation, have they Has anybody in Europe learned? So?

I think? So, I mean the Europe. Yeah, the Europe has now loosened the constraints on fiscal policy to some degree. So I think we've turned the corner on that. I mean, we're not radio anywhere really to launch massive fiscal stimulus, but we're past the austerity for sure. Alright, So now let's jump into my favorite podcast questions that I asked all my guests, and I have people prep for so, so tell us about some of your early mentors, who

who guided your career along. Well this might be a slightly strange way to answer, but in a sense, my mentors were more events than people. And by that I mean, you know, I had a lot of Look, I've been do this for over forty years, so I've been through a lot of regime shifts in various areas where even the people that might have been my mentors experienced people were struggling along with everybody else what this all meant.

So it was new for everybody. So you know, we talked earlier about how I joined BP in nineteen seventy three. So going through that first oil crisis when everything had to be shifted was there was nobody the technic to mentor me through that because they hadn't been through themselves either. That was a received shift. Living through the inflation of the UK in the seventies UM where the unions were running them up. We had the so called Winter of Discotheque.

There was strikes constantly. Even the labor government that was empowered had lost control. That was a lesson in the evils of steak your excessive socialism, if you like. And then living through the Vulcar Thatcher years where we saw a complete reversal. That's very interesting. You call it bringing inflation back down again. You call it the Vulcar Thatcher years. Everybody usually calls those the Reagan Thatcher years. You're giving more credit to Vulcan than I guess I. I don't

disagree with you. I just think it's interesting. I never hear people describe it that way. Who else was Look, I've been lucky over the years, and it's partly because b c A is a very well respected firm for a very long time, to have met many, many smart people. You know the Henry cow legends, if you like the Henry Kaufman's Biggs is. I've met all these people who've had them speaking our conferences. I've learned from them. I guess if I had to pick one person, I mean,

obviously I've learned from lots of people. Tony Beck, who was the principle of b c A, he's a guy that hired me almost thirty years ago. What did I learn from him? Well, BCS focus has always been, you know, helping our clients. There's a big difference working for a firm that's selling research to working from a broker which

just turns out bits of paper. So you have to add value when people are paying hard cash for what you're you're doing, and you have to pass the soapwat because a lot of economists just write stuff just for the sake of talking about the economy, as if the economy is the end point? Who cares what the economy

is doing if there's no market significance to it. So I very much learned to try and always have some market implications of everything we wrote about, not necessarily short term could be very long term, but bring it make it relevant and I that's very much a lesson I learned a b. C. A. So what son't you? So you give an economic analysis and if the client says, so, what test and if there there isn't a good answer, then that's a bad analysis. Yeah that's not that's not

not maybe great analysis, it's just not value added. Yeah what do I do with this? How doesn't help me make my investment decisions? So that that was a good lesson that from B. C. A. So let's talk about investors. When investors do you admire and have influenced the way you think? Um? Okay, look I'm very conservative. Um maybe it's big Scottish whatever, um so I I'm not a

momentum high flying following fads. Get a guy, So I'm watch more attracted to the the old style Peter Lynch kind of view of investing, you know, investing for the long term. While you um, so people with that perspective, you know, I guess you would put warm Buffett in that category much more than the short term. Very clever traders. John Paulson making a killing in the mortgage back wonderful. I'd love to be able to do that. But it's

not gonna happen. But what happened. So let's let's shift gears a little bit and talk about your favorite books, whether it's investing, were lated or not, fiction or not fiction? What books, um do you enjoy? What books would you recommend? I was brought up with in a household where books were everywhere, so I've always enjoyed reading um trash as

as well as inter quality stuff. So give us an example. Well, forget the trash, but I mean, you think my favorite book from going back to the most serious investment stuff that I think anybody going into our business should should read. It was written quite a while ago now as Charles gound Berger's Manias, Panics and Crashes. Sure, it's a wonderful read and just describing, you know, how these market overshoots and crashes occurred. It wonderful anecdotes, It's easy to read.

It's not a huge home he said to reading. That's one of my favorites. Another kind of freely obscure book that nobody paid any attention to when it first came out. It kind of got popular a few years ago when Quee started was buy an obscure Scottish guy called Adam Fergus. He wrote this book called When Money Dies, and it was about German hyper inflation. Yes, I again, not particularly well written actually, but wonderful anecdotes. Um, I actually have

them on my bookshelf and I've never read it. It's it's got great anecdotes. Yeah, as it's not. He wasn't a gifted writer, but it's it's not a big book. But in terms of understanding the destructiveness of inflation, um, yeah, that's good. I think in terms of what we've been we went through the crash. There's so many books about the crash, and of course somebody called Barrier It Holds wrote one about bailouts Bailout Nation. Yes I've heard of that,

but yeah, you've heard of that one. But I liked David Wessel's book and Fed We Trust in terms of again it's a very easy read. It kind of takes you into what it must have been like at the FED during that period, with a sleepless night and the panic and every day you go into the office and something some other ghastly thing has happened. So that's I find that's a good way of capturing what it must have been like to be in affair at that time. A very recent one that I read is Mervin King,

the most recent governor of the Bank of England. It's called End of Alchemy. The only in it's a little bit self serving. Um. I think it's a good, good book. But I wish he had kind of said those things publicly when he was Governor of the Bank England. Why is he seeing them now? I mean it's kind of written as if he had always known this stuff. And if he did always know this stuff, he didn't certainly act on a part of it. It's supposed to be a good breed too. It's good. It's good little ms

of non I guess you know. In the UK they have this wonderful thing called desert Desert Island discs. If you have to go to the island, so you could say that a Desert Island book for me. I suppose it would be Catched twenty two Joseph Heller. That's some catch. That catch just a good way of capturing the insanity of life. Sometimes you just can't win in life, the insanity of war, of military organizations, of large institutions. The

only way to get out is you're insane. But if you see you're insane as a way of getting out, then you're obviously not insane for figuring that one out. So you're screwed. Part I'm not supposed to say that. Well, now we're in the podcast, so we could get a little O. The FCC limits what we can say on the broadcast portion. But since used that word, very bad. Um, actually that was mild. We've had people O. My reading

tastes are very clctic much. A slightly bizarre trilogy is called the Gorman Gas Trilogy by Mervin Peak Gorman Gas. I've never even heard. It's a kind of slightly fantasy. I was gonna say it's sound sci fi. It's not sci fi, but it's fantasy that the less. It's a sort of medievally kind of. I think that the descriptive writing is hard to beat. I mean, you're almost feel as if you're there. But he describes scenes and environments

and character her is. It's the most brilliant descriptive really, and it's kind of a it's a gripping thing to read as well, very obscure. Um, that's probably enough books. All right, I'm gonna ask you a question. I don't get to ask many guests, what are your favorite Netflix shows that you've been watching? Just finished watching the second season. And Arcles, which is you know, Pablosco Bar, which I thought everybody seems to love. That is very well done.

There's violence in there, but I don't think it's protuitous, because that's what happened, you know, like that. There's some great BBC or British um detectively kind of ones. Is one called Happy Valley, which is superb excellent series. Uh, Swedish Danish co production called The Bridge. There's three seasons of it. Bridge. It's called The Bridge. Is that they might have done a US remake of it. I don't know. I would watch the original. It's subtitles, but the characters

are so fantastic. There's a principal woman characters that she's amazing and it's a great gripping story to very watchable. The Bridge is that Netflix or Amazon Prime. Netflix. There's three seasons of that. Give me give me one more, um god, one more Silk. There's another British one about Lawyer. Uh. You know it's funny you mentioned um Happy Valley. When I moved out of the city to Suburbia. I don't know. Fifteen years ago, I was aghasted that the local cable

company did not carry BBC America. So and I was a big fan of Doctor Who when I was a big fan. So everybody knows about top gear today, but fifteen years ago, other than a few Anglophiles, most Americans didn't know what top gear was. So I started hunting for how the heck can I get top gear? And it turned out that Dish Satellite Networks offord top gear. So as long once I moved out of Manhattan, I've

had satellite TV. And now I think you get BBC America just about everywhere, but for a long time it wasn't available of American Well, I see Star Trekkers on it, but but there's a ton of science fiction and there's a ton of really interesting stuff on it. And half of the United States television is influenced by There was a show that was so funny called Coupling. I don't know if you recall that. It was like it was Friends, but funnier and so hilarious. By the way, I mean,

the Netflix in Canada is different. We don't get the same content, much less content, So I assume that the series I mentioned are available in the US. Obviously Narcos is. But so so let's let's turn back to your career for the last few questions. What what is the most significant change you see in economics since you joined the information overload data overload? Look, when I started, so when I was in BP DE sivties and even when I was in with Mackenzie in the eighties, I had to

follow the U S economy. Um there was no Internet, of course, the data we had to do, the forecasts and analys we had to wait for stuff to come into mail. Really called the Survey of Current Businesses by the Department of Commerce with all the GDP data in it, which is forms the basis of any understanding of the economy that came out in the mail with an enormous lag, enormous lag, you know, in terms of the monthly inflation data,

employment data. Didn't really focus too much on that. You might get some headlines from the from the newspapers, but there's no way of getting all the detail of that. UM. So now now we're just BESIEG. You can get any data you want from anywhere in the world instantly, in more detail than you can get time to analyze. And I would ask you this, has our understanding of how the economy works improved or are the quality of our forecast any better despite having all this data, And I

would say unequivocally absolutely not. And I spoke earlier about this egregious policy era over the last few years. So we're having all this data and that's all this information. In some industries, big data allows you helps you do things better. It's not obvious in the world of forecasting that we have done a better job despite because we've become so short term. People will spend more time parsing the employment data than thinking about what are the really

important big issues here. So we've become way too short term, way too focused on micro analyzing data, and not enough focused on catching the big, secular structural shifts of what's going on. And I think that applies to policy makers, applies to economists, and it's too bad. And I'm not confident that that's ever going to change now because we've created this big data world and that's that's what it is.

I don't doubt that you might be right. I'm hoping that that comprehension is simply coming with big lag, so that will eventually adapt to the era of big data with some understanding. But it's it's great. I love data as I set up a junkie data and in some industries, you know the retail industry, if you've got a minute by minute information on what's selling and what's not great.

But in the research side, just like a deluge of numbers, you spend all your time pouring over all these numbers instead of just pushing them to the side and sitting back and actually just thinking about things a bit more. I'm with you on that. You know my thoughts on

non farm payroll. I think it's wildly overrated. And every month we have the spasm and then a month later than numbers are just it's just that we have access to whatever this data times all over the world, so if it's there, you gotta look at it and spend all your time just looking at data and not enough time thinking about stuff. Let me let me change up gears a little bit on you. This is a question

that that comes from a couple of readers. Have you know I asked the same eight or nine questions to all my guests, and then a couple of readers have come up with some suggestions and these are Uh, this question I thought was interesting enough that I've worked it into our regular questions. And so what do you do to relax? What do you do when you're not in the office looking at a numbers. I like being outdoors, which is great given that I live on the Pacific Northwest,

so I try not to fall off. I did fall off two years ago and broke my hip, but I remember that's another story. I mean to hiking and biking. Um taking up bridge again, which I would play pretty badly, but I'm getting slowly better. Don't know if you could play with Bill Gates and warm but league. And I've started playing this game which you don't I think no about, called pickle ball, but some of your listeners will know what this is. It's actually one of the fastest growing

games in North America. And it's played with it like a cross between table tennis and real tennis. And it's played indoors, outdoors with a bat and a bat not a rattle. Yeah, a bat or paddle if you like. Um, So we have that a whiffle kind of a whiffle ball, and it's basically getting the ball over the net and win the points. But it's it's less a head, it's not as fast moving as tedor so it's for aging people like me. It's easier on your body, but it's

still demanding. It's fun. Pickleball, pickleball. All right, we'll have to check it out. We'll have to take a look at that traveling. I've got four grandkids. Now that's you know, so you take your mind off the market. Where where are your grandkids? What parts of the world? A married son in Toronto with two and a married daughter in Edinburgh, Scotland with with two. You are you back and forth to Scotland frequently? Yeah? She only relocated there from Switzerland

at the beginning of this year. So I will be going back, yes, absolutely. And you you went to school not in Nninburgh, glass in Glasgow, so that's where I'm from originally was born in Glasgow. Yeah, So how often you get back to Scotland? Well, I will be going back at least twice a year, I would thinks there. So my last two questions and and these are my

two favorites. I've saved for best for last. So if a millennial or recent college graduate came to you and said I'm interested in a career in economics, What sort of advice would you give them? Well, the profession has changed. Um, you know a lot of corporations have done away with the economics departments, and but you know that's still a good job, and go for it. But UM, be curious, don't be so short term, you know, don't get spent all your time poring over the employment data. Try and

figure out what the big friends are. Be disciplined, read a lot, don't get locked, don't get locked into a view. Don't think you've got it figured out, because you haven't. I've been doing this for over forty years and I certainly haven't got it figured out. That that sounds like some pretty stupid advice. And our last question, what is it that you know about out economics and investing today that you wish you knew forty years ago when you

were beginning. Oh gosh, well in terms of investing. Um, a simple one, I guess, And I know it's out there anyway. But keep your winners and get rid of your losers. And I remember we had a one of our conferences in and we had at least two speakers talking about tech h and they blew me away. They were just all the exciting things going on in tech and cell phones, and I thought, wow, this is really

really cool stuff. I completely bought into it. I went out as soon as the conference was over and I bought Nokia, Microsoft and a O L. So you're almost back to break, even a Microsoft smart move. You're almost back to break. It was really smart. You went up in nine, you know, after I bought them, and more in ninety six and ninety seven they kept going up.

And I can't remember when. In ninety seven in the first half, I thought, wow, they're going up a lot and made a bit of money here, so I sold them. I sold them before the real big game. I mean they went parabolic. Now I probably would never have been smart enough to get out at the top, but I just because I had made a a bit I sold. You should have held him another. I should have held them for longer. So keep your winners. I mean speak

obviously sensitive to sides that things are changing. You can put technical stop losses and things and and you I have been in the past guilty of getting attached to losers. Oh well, maybe they'll come back. I've already lost so much as honestly, which is stupid again, not being disciplined. Nobody wants to admit that they're wrong, so they hold on to them. So I've been guilty of that classic problem,

not being disciplined enough. And what about why I give most of my body to outside money management for him to look after because they do a better job than me. So what about on the economic side? What have you learned on the economic side that you wish you knew when you began? M hmm, that's a harder one to answer. Um, will wait, well, just again, uh would you say after that to your early question? Not to get locked into

a view. Um, you know, forecasting is kind of all about looking to the past for guidance of you know, you're looking for sip piers or that look vaguely similar. This is what happened, then you assume, well, maybe that's what happened next time. And models are all based on past relationships. But we've been through such incredible structural shifts over the years that the past isn't a very good guide to the future, and that's why the models have

all broken down. So be more sensitive to the fact that we're rapidly changing world and relying too much on what worked in the past is a mistake. I think that's a great answer, Martin. Thank you so much for being so generous with your time. I hope this wasn't all we have been speaking with Martin Barnes. He is the chief economist at bc A Research. He is also

an amateur fisherman and a professional eel skinner. If you enjoy these conversations, be sure and look up an Inch or down an Inch on Apple iTunes and you can see any of the other hundred and seven or so podcasts we've done. I would be remiss if I did not mention a few things. We love your comments, feedbacks, suggestions, etcetera. Be sure to write to us at m IB podcast at Bloomberg dot net. I have to thank my booker Taylor Riggs, my producer Charlie Volmer, my engineer Reggie and

my head of research Michael batt Nick. I'm Barry Ridolts. You've been listening to Masters in Business on Bloomberg Radio, brought to you by Bank of America. Merrill Lynch committed to bringing higher finance to lower carbon named the most innovative investment bank for climate change and Sustainability by the banker. That's the power of global connections. Bank of America North America member f D I C