Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Wisenthal.
And I'm Tracy Alloway.
Tracy, we've been on the road a lot late.
I know it's been NonStop trips.
Let's see, we did Jackson Hole and then we went to California at Huntington Beach and now we're in Austin, Texas, your hometown.
Have you enjoyed Austin so far?
I love it?
Okay, I mean, I'm not gonna lie. Large parts of it. Do you remind me of Dallas? But controversial opinion, but it has its own thing, going to like amazing bars, restaurants, shops. We went Cowboy boot shopping at Alan Boots. We've had some amazing tex mex really excellent barbecue at Terry Black's. It's been good.
Yeah, we were in Jackson Hole and we did a lot of episodes in Jackson Hall, but a lot of them were sort of like these sort of like longer running like academic questions that a lot of the episodes that we did, we didn't really do too much there on Like okay, but like what's happening right now in the economy with like monetary policy, the impact of the FED rate hikes things like that, even though that's sort of on a lot of people's much.
Yeah.
Funnily enough, at a macroeconomic conference, the real economy wasn't the first topic of conversation. Although that's a little bit unfair because they did talk about supply chains and things like that.
But you're right.
We haven't done a current state of the Economy episode for a while, although we've touched on it in various ways. One of the more recent ones was when we spoke to Wayne Dahl from oak Tree about the credit market, and a big topic of conversation in there was why haven't we seen more of an impact from this historic pace of rate hikes on the real economy.
Yeah, it feels like this is still this looming question and until until we have a sort of better idea of what's going on here, I think there's like a
sense of unease. And even add Jackson Hole at Powell's speech, even with the improvement in inflation from last year, there is this still underlying sense of unease, which is partly driven by the fact that we've seen improvement, but it's like we can't quite explain why because drawing that line between the rate hikes to the improvement and h inflation is hard to draw. You would expect that, okay, if
unemployment had been rising significantly. It's like, okay, well we could tell the traditional monetary policy story Ship's curve is alive, and well, yes, we can't quite tell that story. And then maybe it has something to do with the terming out of the debt that we talked about, Wayne Dahl. And then if that's the case, well what does that mean then, like are we still going to feel the impact? So it's like there's improvement, but it's like there's sense of unease underneath.
Absolutely, But the most simple explanation for what's been going on is, yes, we had a massive terming out of debt on the corporate side and arguably on some individual as well, homeowners for instance, and that's provided a cushion, you know, between twenty twenty one, twenty twenty twenty two
and where we are now. But it can only last for so long, and you're sort of getting back to the traditional long and variable lags argument, like, yeah, maybe this is just the longest lag that we've seen in many, many years.
So we did actually have this conversation at Jackson Hole. We just didn't get it on the record.
We just oh, yeah, you're right.
We did actually talk about all this at Jacksonville. We just never recorded an episode. But the person who we spoke to in Jackson Hole in Wyoming last month happens to be based here in Austin, Texas. So we are like, in a way, we're going to like pick up the jackson Hole series with someone who happens to be here in Texas.
I like how we've gone to Austin to record an episode with someone we talked to in Wyoming.
So I'm very excited we're going to explore these topics and more for them. I'm very excited about our guests. Second time, I believe her appearance on Odd Lads, We're going to be speaking with Julia Coronado. She is the founder, CEO, and president of Macro Policy Perspectives. She is also a clinical assistant professor at the University of Texas on business and economics. So, Julia, thank you so much for joining us.
It is my absolute pleasure to be here with you.
Really simple question to actually to start.
Wait, Can I just say Julia is the first All Thoughts guest who has ever brought us breakfast tacos.
Hey, which, now, if you're listening and you want to come on odd lots, this is now the expectation.
Yeah, bring food, bring breakfast tacos.
But Julia, so great to show you actually did real quick. What do you do at Macro Policy Perspectives?
So Macro Policy Perspectives is a macro forecasting firm. So we work mostly with money managers, people that are managing portfolios, and we provide them a perspective on the US economy. We're US focused, but globally oriented and very markets oriented, so we work with money managers to help them understand this crazy world.
So speaking of crazy world, and we'll get to all the dead stuff. Tercy and I the other night were we actually spoke to a group of students here at the Business school at Macombs and weird chatting about various
things and what of the students said something interesting. They're like, oh, you know, they're talking about CMBs and they're like, oh, you know, it's hard to know what's in some of the they're very smart case they said, hard to know what are in some of these assets that people are buying, and what if you're buying stuff that's like Austin, downtown Austin real estate and there's huge vacancies. Isn't that true?
It seems like this town is booming, is actually underneath the facade here in Austin like some problems brewing.
It depends. There's a debate. The commercial real estate crowd is inherently optimistic glass half hole type of people. I think you have to be to take that kind of risk. And they've been printing money for a decade, right Austin has been booming. All of the developments exceed expectations and so it's been a great run. But yes, there is an overhang. So you see the cranes all around you,
but a lot of these buildings are empty. So we have very high vacancy rates, very high rates of sub leasing, which is another indication that you know, Google or Meta builds a building, but then they don't need it and so they sublease a lot of the space. And depending on how you look at it, that the estimates of the pipeline under construction as a percent of the existing inventory is by far the highest in the nation and
at record highs by many measures. So we've got a lot of supply both in offices and in multifamily that are coming to market in the next twelve to eighteen months and rates are high, vacancies are high. Probably the assumptions that went into these projects at the beginning are not going to materialize. So the question is does that mean just reduced profits or does that mean outright defaults, delinquencies and some distress.
Right, this was going to be my next question, which is how does distress in commercial real estate actually feed through into the wider economy because you see different types of arguments. You know, you see a more optimistic scenario, which is, well, yes there are pockets of stress, but not everything is dire at the moment. Yes, downtown offices are probably the most affected, but you know, maybe a multi use building in the suburbs with doctors' offices and
little shops like probably not as huge a deal. And then the dire scenario that you see every once in a while is that we are going to get a bunch of defaults eventually and that will impact the banks presumably and they're going to have to cut back on lending. So how are you viewing like the actual impact of cre distress.
That is extraordinarily difficult to get a clear idea of or put good parameters around because CRE is inherently idiosyncratic. Every project is different. The financing of each of these projects come in layers and are you know, sourced differently, so it's really hard to get kind of a macro
framing of how much potential distress. You know, I would categorize the banking channel is one that could go nonlinear in the sense that you know, it could we could see more bank failures, or it could be just a macroeconomic channel of a headwind. Right right now, the unemployment rate in Texas is underperforming. It's risen more than the national average. That's unusual for Texas. Some of that is the tech layoffs, which are part of what's behind some
of the vacancies. So as these projects roll off, you're going to see less jobs. You know, people in the real estate industry and the construction industry are seeing layoffs here. Maybe not everywhere, but certainly here. So you'll just see some regular old garden variety economic headwinds. Even if it's not, you know, some sort of crisis, it's it's yet to be felt. And therein are the legs and monetary policy.
So I want to get into obviously this whole legs debate. But before we do, you know, you mentioned the developers of various sorts in Austin have been printing money, and you mentioned all the cranes. We don't really see many cranes in New York because I guess it's a city you forgot how to build for various reasons.
Well.
Also, even if they're there, they're up pretty high high.
Right because the one thing they do build out those like super tall buildings for.
The tall skinny cigarette skin.
Yeah, but Austin is not alone. I mean, like this is is this a broader sun Belt story? And can you talk about like how much of these developments have a sort of speci Okay, we're like we're building this for Google or we're building this for whatever versus we're building this and it's the sun Belt and someone is eventually going to rent, rent it, but we'll build it without even knowing how.
Yeah, there is a lot more build it and they will come activity in the sun Belt that doesn't exist in New York. In New York, before you build a Hudson Yards, you've got several anchor tenants lined up. That is not the case here you can actually a lot of these developments. You know, the Google and the Meta buildings are an exception, but there are a lot of developments around town that are built on spec And is it broader than Austin. Yes, there's a number of cities.
Austin is by far got the biggest overhang, but Dallas has a pretty big overhang. Denver, Boise. There are a number of the sun Belt boom towns, the COVID boom towns in the West where you can build where it's relatively more straightforward to get from concept to groundbreaking. And I would say it is a sun Belt slash COVID boomtown phenomenon, mostly in the West and the South and the southeast.
Can we get Jackson Holish for a moment, But you know, going back to the way monetary policy is supposed to work. When you hike interest rates, you are supposed to be deterring some speculative frothy activity. So in a sense, how expected is this development for policy makers? I mean, you were in Wyoming, you were talking to loads of people. When you talk to them about what's going on in the Sunbelt, construction maybe slowing in places like Austin, what do they say and what do they think?
That's a great framing. There's a range of views obviously, and yes, this is an intended channel to the extent that people took risks that turn out not to be you know, viable, or have a lower rate of return than they anticipate. That's just, you know, that's life in the big city, right. It's just part of taking risk is you realize sometimes some losses as well as some gains.
So this is an intended channel of policy. The debate is more around have we seen all that we've seen and therefore we need to do more to slow the economy? Or are a lot of the effects of this still do they still lie ahead of us? And I think
that's where there's a range of views. I really respect and like to hear the views of Chris Waller, Governor Waller, but he tends to be of the view that, you know, the lags are shorter because of forward guidance, because the FED is very transparent, that markets react almost instantaneously well before they actually raise rates, and therefore it's all priced in. I think if we think about a credit channel, and it's something we didn't really have last time, right, the
credit channel was crisis. We didn't have this elongated kind of tighter credit. How does it feed through into the economy. And because of the refunding that you touched on with
your other episode, the lags are probably longer. And this is something that if you talk to European central bankers, they think of the legs as being longer because of fixed rate financing and more of that, and that it's going to take some time for financing to roll over and to feel the effects and employment and activity, and so you have to know that what you've done already is going to keep being a restraining force going forward.
So I'm more in the lags are longer camp because of this than the lags are all behind us Camp, Joe.
This kind of reminds me of some of the discussion around inflation, just the idea that it's been decades since anyone has really had to deal with higher inflation and we're not sure how.
To deal with it.
This idea that like, well, maybe it's been decades since we've had a sharp change in monetary policy propagated out into the economy, and we don't really get how it works. And the last example was so extreme in two thousand and eight.
I love the way you put that, which is that we think of two thousand and eight as a credit crisis. Yes, but the actual mechanism by which the economy slowed down was not per se the contraction of credit. But oh my god, the world is falling apart, and everyone just slams the breakout once. They slam the breakout hiring, they slam the break on new development, etc. Which is not really what people have in mind, this idea that we're
just going to pull back on credit and slow things down. Right, this is the key dynamic we want to talk about. But you know, the realized disinflation that we've seen so far. So at one point, I think we're looking around nine percent. Maybe we're closer like three something percent now, But as I said in the intro, no one really knows why exactly, and unemployment didn't rise like the way many economists would expect.
What's your story basically for the last twelve months of fairly nice disinflation.
So we are big believers in sector analysis micro to macro. Right, so what's going on looks sector bi sector, what's going on in the dynamics of you know, how concentrated is a sector, how are the profits panning out, how is
consumer price sensitivity in that sector? And then building you know, running the top down macro models, but also building that outlook from the bottom up and the bottom up is you know, on the one hand, it led us to be falsely in the transitory camp early, but then we pivoted because the reason it failed was we had more supply chain frictions, We had more waves of COVID, we had Malaysian chip factory shutdowns, we had all kinds.
Of Russia, Ukraine, Russia, Ukraine.
These frictions and challenges sand in the gears that kept inflation. Meanwhile, also like very strong demand support, very in price and sensitive demand. When we look out at the dynamics so far, me of it. Yes, when you look at cars, for example, which has been such a key part of the inflation and now it's been a key part of the disinflation, it's both a macro story higher rates, lower demand for cars, more price sensitive demand for cars, but also improving supply chains,
improving inventories, available chips. So it's both, you know, a supply and a policy story tangled up together, hard to disentangle, but you know, it's definitely a key part of the disinflation. And if you don't think in those terms, if you're just thinking, okay, economic growth equals inflation, which is kind of what Powell did at the press conference, then you're going to be untrusting. You're going to be skeptical, part of which is perfectly healthy, but also maybe too skeptical.
They're extreme. They have very pessimistic inflation assumptions for the remainder of the year in their forecast. They you know, definitely seem to be leaning on we maybe need to do more, and we see a lot of good things happening in inflation dynamics. One of the things we look at, for example, is the diffusion how many prices are increasing
versus decreasing. That tells you if you look at the seventies, that was one hundred percent, every single price was going up every single month, quarter year, All wages were going up. That's not what's happening now. Some prices are falling, airfares go up and down depending on consumer demand. Capacity There
has totally normalized auto sales similarly up and down. So I think we're seeing a much more dynamic healthy pricing dynamic, which gives us more optimism that these lower this lower regime can have some staying power and you don't need
to hammer the economy. I mean, we had several cycles over the last thirty years where we had growth and no inflation, but because because of the PTSD from the pandemic, there's this equating of growth with inflation almost amongst and what's what was surprising about the meeting, the September FOMC meeting to me was how unanimous it seems to be. Everybody's forecasts kind of showed a higher funds rate, and everybody raised their twenty twenty four inflation forecast, or a
lot of people did. There isn't a lot of sectoral inflationists on the FOMC, and I think that gives them a very rigid view of how things are playing out.
This was going to be exactly my next question. Actually, you mentioned Powell's speech, which was very macro and sort of traditional FOMC speech ish, but Christine Legard of the UCB gave basically the opposite speech, talking about like we are in this weird period where it feels like the real economy of supply chain can straints U fiscal is more in control than monetary policy, and it poses new
challenges to economists. How well equipped do you think economists are to start looking at, you know, individual industries or looking at specific sectors as you just pointed out, versus the sort of macroeconomic theory that many of them have been trained on.
There's a lot of good economists, ourselves included, I would say, that are doing this kind of work. So Alan Dettmeister at UBS, Gonda Armana at Employee America, Oh, Mayr Sharif, Mike Knskall at Rose.
I love that most of these are thoughts.
Yeah, we've we should have definitely should yeah, yeah, the who's who have? But there's and you know, we we engage in this conversation, in this debate, you know, in social media, and there's lots of great exchanges and analysis. The sellers inflation, your your point about the ECB is a great one. Seller's inflation. Let's set aside the loaded term greedflation, but the idea of profits.
We have purposely avoided saying greedflation. We tried to coin the term excuse flation, which did some people have been using it. But yeah, I think sellers sellers inflation and.
Yeah, let inflation. And if you look at say Lagarde's press conference, she breaks down what's been happening in inflation in terms of what's driven by the labor market and what's driven by profits, Like as a matter of accounting, you know, there's plenty of ECB officials that are sort of well versed in Yes, there's the labor market, and then there's the product side, there's the profit side, the industry side. It has to do with concentration and common shocks,
et cetera. So it's not like it's a radical theory. It's not like there's no workout there. It's just like there's nobody on the FMC that embraces this, you know, very you know, overtly.
Uh.
And so again, I just think there's a common framework at the FETE that is, you know, it's an important framework. It's a useful framework, but it's not the only framework, and you need to have I would say it's better to have as many possible perspectives and points of view to understand these dynamics. You know, inflation went up more than even the macro models suggested, and at a timing
that does not align with the macro models. So when you have an error on your model as a forecaster, you look forward and think, hmm, that error might reverse at some point, I might get downside surprises standard forecasting. I'm not saying anything radical now. Of course, it's not the Central Bank's job to err on the side of optimism when they're above their target. But you know, you can talk. I don't understand, like Powell had several opportunities
at the press conference. There was three or four questions.
Actually.
Craig Torres of Bloomberg asked an excellent question about the nuances of higher rates and supply side lead inflation in real estate, and Powell just won't go there. He just doesn't want to go to the supply side and talk about those. I mean he did, to be fair, he did say we understood that fading pandemic frictions are part of the story. But again, I think they just are very shell shocked by what they've been through in the last couple of years and are still airing on the pessimistic side.
You know, one other thing in that regards speech, specifically that you mentioned this idea of like the price and sensitive demand and the big source of that is the investment that's happening in like green transition and energy infrastructure, and that's going to have it regardless of we could have a recession. Yeah, you could have a boom. But we know governments are going to spend a lot on this and they're going to subsidize a lot and of course we talk about that all the time on odd lots,
and yeah, this is an interesting dynamic. There's a lot of spending that's going to happen regardless of where we are in the cycle. I want to get deeper in to the lags debate because I have this like sort of like weird sympathy for the priced in. Everything's always everything's always priced in.
Yeah, that's what we saw after the FMC means right, a pced in.
Day one, So and so like okay, that's the Waller view as you characterize it, Like why isn't it all price it? What is the case for? Like why like all right, even if we know that raid hikes are coming, they telegraph it. We're in an age of very aggressively clear forward guidance. The dots didn't used to exist. That's
a modern innovation in central banking. So like, let's talk theoretically, and then like, let's get more concrete, like what is the case for why it wouldn't all just be priced in and why people don't adjust their behavior the moment the central banks give their indication of where rates are going.
Yeah. The way I think about it is I break it into two channels. There's the capital markets channel, and then there's the credit channel. Okay, and the capital markets channel exactly as you describe. The FED telegraphs its intentions, it's perspective on the balance of risks, and capital markets
price it in. But there's the credit channel side where you've got this you know, fixed rate financing for a couple of years, and you've got time, and there's legitimate uncertainty about where we're going to be in a year, in two years, and if you are you know, again, commercial real estate is a perfect example because they are you know, glass half full kind of people. And there's been a real conversation and you know, I talk to
a lot of people in the real estate industry. There's a real sense that you know, if we hold on long enough, rates are going to go back down. Uh, And so I'm not going to mark my losses. I'm not going to scale back my project. I'm going to maybe slow walk that project and not be in a hurry because I think and if I come to market in a year or two years and I need to
roll over my financing, I'll get better terms then. And that's not irrational, but it does mean that you know if they're wrong, which you know, the market has moved. One of the things that's happened since the last FMC meeting in July is that markets did move to higher for longer pricing. Real rates are up fifty basis points, and so we have yet to feel the effect of
that last leg of increase in real rates. It just happened, and that was a change in psychology in the market, the market realizing, hmm, maybe higher for longer is where we're going, in which case we need to reprice things in which case, And then you look at the impact of that. We've seen mortgage applications roll over. We've seen car analysts lower their forecasts for the remainder of the year because there's less pent up demand at these interest rates.
So all these leading indicators are saying, yeah, there's going to be an effect from that last leg up in interest rates, and and the Fed raised it's twenty twenty four forecast, not lowered it. So the conviction they have on extrapolating the recent good performance into twenty twenty four was surprising to me.
It's not lost on me. When you think about commercial real estate developers. It just the sort of like sheer belief that it'll be find yes that the two most famous developers, and I think I may have stolen this observation from someone, the two most famous commercial real estate developers that everyone knows are Donald Trump and Adam Newman, which sort of gives you a sense of maybe like the sort of mindset of a lot of the people dealing.
Those are the poster children for commercial real estate optimistes.
The sheer case, the sheer belief in winning.
I realized we've been talking a lot about corporates. Can we talk maybe a little bit more about household talent sheets because this is the other area of uncertainty, and there is a lot of debate at the moment over how healthy the consumer actually is. And you see these charts of outstanding credit card debt, you know, going up to records, and people panicking that people are going to struggle to pay some of this back as interest rates
go higher. But on the other hand, there's plenty of discourse that says individual balance sheets are basically in the best shape they've been in a very long time. So how are you viewing that particular debate.
Yeah, yeah, So, first of all, the credit card debt at record highs. You never look at nominal debt. You always scale it by income. The flow of funds for Q two just came out. Debt to income is right back down. So if you look at including credit card debt as a percent of income came down. So I don't look at households as and see a picture of oh, they're binging on debt or they're leaning on debt because they can't finance their spending with income. I do think
household balance sheets are in fantastic shape. We came into this tightening cycle in the best shape ever, both in terms of net worth but also in terms of delinquencies on all categories of consumer loans. It was the first recession where we actually lowered delinquencies through the recession, through all of that fiscal support. People used it to pay their auto loans, they used it to pay their credit cards, So we didn't have the delinquencies we typically have with
job losses. That was part of the idea, and so I think there's a bit of a haves and have nots in the consumer world. If you look at delinquencies, they're coming up off the lows across categories. Auto delinquencies, credit card delinquencies, mortgage delinquencies are still very low. But so you've got you know, lower income consumers who have been hit by the rental inflation versus homeowners who got to refinance to record low morgage rates.
I feel like this is really the lynchpin.
Yeah, there's a real bifurcation, and and who's feeling the effects of the higher rates. Most people that have to buy, you know, or the higher used car prices are going to be more moderate income consumers, so I think, and that's the other thing that we've been seeing too, is the labor market is still like level wise, very healthy, but the slowing in job growth is quite pronounced. And so you know, we've been in the soft landing camp
all along. We never have been forecasting a recession. I actually see the recession nods as just as high, or even maybe a little bit higher, because the labor market looks like it's closer to it's not just going great guns. The sectors that are hiring have narrowed, the pace of hiring has slowed. Wage growth is slowing, so the nominal income growth being generated by the labor market has slowed
quite a bit. Delinquencies, so again it looks more like a cyclical shift, but it's only amongst a certain segment of consumers.
Well, so this gets to the question. So the Fed, we don't know if they're done raising rates, but what they are doing, or what they are indicating, is they're telling the market that cuts are not forthcoming, correct, and that is a defect of tightening, or it is a form of us maybe second derivative tightening or something. And so if you look at their twenty twenty four dots, they're coming up and basically telling the market if you think they are cuts, they're probably not. And so let's
set this. You say, the recession odgs are ticking up a little bit because that nominal income the way labor market is slowing. It's not seeing mass layoffs or anything like that now, but there's some slowing. Wage growth is probably slowing a little bit. The inflation dynamics you think are improving meaningfully in a way that can be sustained. The FED doesn't appreciate perhaps that they can be sustained.
The dots are coming up, so talk to us about that risk that the FED is still sort of pessimistic about inflation dynamics. It's sort of engaged in a modest tightening still by raising those outdots, and in a backdrop of a time when the recession risk is ticking.
Up, it still is a very healthy economy. I mean, the fact that the corporate side of the world has gotten more optimistic is probably helps labor market resiliency in terms of preventing further layoffs. But I think you know, if you're extrapolating off of the Q three GDP tracking, then you're probably going to see some disappointments down the road.
Right the growth has ebbed and flowed. You know what I see is if I look at the consumer consumer spending sort of dropped to trend early last year, and then the quarterly numbers bounce up and down just depending on where that spending falls and kind of ebbs and flows. So you know, whatever Q three is tracking, that's not the run rate. Right now, we're in for some slower patches of data, and that could be more worrisome and sort of. But there's two things that keep us in
the resiliency camp. One is we do believe that inflation is coming down more sustainably. That is a tailwind for consumers that gives them more purchasing power. The energy shock is a complicating story to that. That could that's gonna hurt purchasing power in the next few months. But the Fed also has AMMO. If things get really rocky, they can cut rates, and we are in a world where there's a credit channel, so you might get a response
in housing. Look at housing housing world right over. Rates went down because of the recession call expectations early in the year. Then they've come back up and you've seen housing demand EBB and flow with that. So there is a lever at their disposal which is effective that they can go to. Of course, the bar is much higher
when you're coming at the inflation target from above. They're very skeptical, but you know, if we could hit a soft patch and then they could respond and that could keep us back on track.
This might be an unfair question to ask an economist, but you are also a clinical Associate Professor of Finance. I believe, yeah, so maybe you can answer this. But one of the puzzling things in markets recently has been
the very low spreads or risk premiums on corporate bonds. Right, even as you see all the concern about everything we've been talking about in this discussion, one way I can think of justifying it is that maybe markets still think, you know, if rates continue to go up, eventually something might break and then the FED comes in and cuts, and so the interest rate problem kind of goes away
again for a lot of companies. Is that a reasonable explanation or how would you explain persistently low spreads in the credit market.
You know, that's a great question. I think you're. One of your prior guests talked about how a lot of the weak hands got squeezed out during the trade wars. Yes, this is true, and I thought that was a very interesting point because a lot of the sort of riskiest businesses were in the energy sector, and a lot of those already felt their recession before the recession, and so
we have sort of a higher credit quality landscape. The other area of pronounced weakness is in the tech sector, and they're just not that debt exposed, right, their valuation exposed. Their valuations are much more volatile. That's where all the speculation goes when people are optimistic or pessimistic, but it doesn't necessarily translate into credit spreads. So it is perplexing that it's still so solid in terms of a global
capital flows perspective. One question I've been asking sort of more globally oriented people is we know that less money is going into China, where does that money go?
That's a good point.
Yeah, is it possible that developed markets are experiencing a little bit more of a tailwind from money that has to be reallocated to the US or other countries? And I think the answer is possibly yes. You know, you think about what does it mean this sort of structural shift in China. One of the things we think, well, China has been the source of the excess savings glut.
Maybe that you know, takes away the subsidy to you know, treasury yields to some extent, but it might mean more asset allocation from global investors into the US and other asset classes. So I'm not an expert on that, but I'm I'm you know, that's something I'm trying to learn more about and think more about.
Yeah, that's interesting, going.
Back to that Reguard speech and the price and sensitive demand. I mean, the other thing that's going on now is we're like the era of big fiscal and it's like the opposite of the twenty tens, where the twenty tens A got that's pretty in retrospect of stimulus right off the bat in like two thousand and nine. Then it died pretty quickly after the Republicans won the House of twenty ten that sort of took further fiscal expansion off
the table. We're in an area where people are talking about structural deficits for a long time to come, for various reasons, including the Inflation Reduction Act, which is I suspect a lot of like high multipliers spending because it's construction and factories and all this stuff that goes into a lot of pocketbooks of sort of construction workers, et cetera. How are you thinking about like the persistent macro impact of the era of high deficits.
Yeah, yeah, so I'm really glad we got here because that's another area where I think the narrative is is is skewed. So the narrative tends to be we just equate deficits with inflation, and there's a lot of you know, the fiscal shaming coming back out. But if you look at what we're spending money on, you know, during the pandemic, yes, it was all just giving money to consumers to spend.
This is all giving money to builders to build. And Texas is We've had this conversation, I believe Joe and Jackson Hall, which was, if you look at what's happening in Texas, we are in the middle of a renewables boom, and that is arguably disinflationary because we've had the hottest summer on record. And let me tell you, anybody that lives has lived in Texas for the last two summers knows that we are in an existential change and we're going to need more capacity and we, thank goodness, have
that capacity. So I was like, somewhere in July, I'm like, why are we not like experiencing a crisis like we did, you know, during the winter of twenty twenty one. And I looked at some of the data from URKOT and the generation capacity, and well, we've just been growing, you know, handover in terms of wind solar. All the new capacity is in the renewables, thank goodness, and let's do the counterfactory. I kind of tried to ask this question at Jackson.
I'm not sure it came through. When we think about fiscal we need to think about why we're doing it right. Why are we doing it? It's not just random, Oh, let's just spend a lot of money and let's just run big deficits. Why are we doing it well? First, we did it because we were in a global pandemic
and we successfully achieved a much stronger recovery. Secondly, now we're doing it, and Christine Legard explicitly talked about this in her speech, You're going to have to expect the government to play a bigger role when we're in an energy transition because nobody else can engineer that. The private sector won't do it by itself, So the government steps in and provides these incentives and it's working. I mean, it's a story that's hopeful to me that we are
getting the capacity we need. It's in renewables. And what would have happened if you look back to twenty twenty one, the grid failure in Texas was another friction that brought chip supply shortage made it worse. Right, we had chip factories here that were affected. What would have happened if we would have didn't have this capacity this summer? You know, what would have gone down? What kind of capacity, what kind of production would have gone down? We have we
have surge pricing in Texas. Prices for sure would have gone up more than they did because of the presence of renewables. So you know, arguably that's been disinflationary already for Texas consumers. And I think we need to think more expansively about what are we doing, What are we getting for this money. It's not all just you know, going straight into demand, it's going into capacity.
Well, this was also Biden's argument in the very early innings of the IRA, His whole you know, spiel for it was that, well, we have these supply constraints, and we have these choke points in the economy, and so we spent now to solve those, and ultimately that becomes a disinflationary impulse and the solution to our inflationary problems.
I want to ask just one last question, going back to the long and variable lags idea, what are you watching out for for signs of interest rates really beginning to bite in potentially problematic or systemic ways. I know we talked about commercial real estate, but like, what are specific things people should be looking out for.
It's kind of hard to pinpoint. I mean, the SVB example is a perfect example of you know, you just don't always see it coming. That's still a possible shock. If you look at the FDIC's latest quarterly report, those securities and loan losses are just as big, yeah, if not bigger, because just went up, so their portfolios are
even further underwater. So it's there's still it's a tough road for particularly mid size and smaller banks that are making money on bread and butter economic financing, not you know, the capital markets businesses that the big banks have to offset. So I think still watching the credit channel and the
credit flows. Credit flows have slowed and are tighter the time the financing terms are tighter, and so you know, I think that that can affect the economy, not necessarily in a crisis like way, but definitely slow continue to slow things down. Big picture, we've had a generational interest rate shock after you know, years at the zero lower bound, where is all the leverage in our economy to zero rates.
Tech has been a surprising area of sensitivity to monetary policy. Right, they're not indebted, but their valuations sure are sensitive to QE versus QT versus you know, fed hawkish fed dubvish. It could be that there's a wave of you know,
there's been some really if lately. Maybe we get further correction there because it turns out that that was when you when you don't have just good old plane safe yields, you start speculating more on things like software and uh, crypto and crypto is another one that can keep going. There's some some leverage in that system that could spill over to the broader financing system. So there's a number of areas that we could see Titan in ways that
aren't just a gradual linear march. It sort of happens all of a sudden when people just can't roll over their funding anymore.
Julia Coronado macro policy perspectives. I'm so glad we had this conversation. We were able to make it happen after we didn't get the chance of it.
Now we can have.
Yeah, thank you so much for my pleasure. To thank you for the talker. That was such a good conversation. So much in there. I just want to say, before I forget, not all tech speculation is like some of it amounts to something. And I know this because I took my first self driving car drive home last night, So some tech investment actually becomes real. It is so amazing.
This is the problem.
You've gone to Austin, you've written around in self driving cars, and then you went to like the fund manager who is the ultimate like espouser of the efficient market hypothesis theory, and now you're just feeling really good about everything. You're like, it's all priced in. Tech is great, the future is bright. Let's eat more tacos.
Yeah.
You know what I really liked though, that I thought was extremely helpful is Julia's demarcation of the credit channel
versus the assets yes, or the capital markets channel. And that was so helpful for me in terms of thinking about like, yeah, like stocks due price in you know, the dots for twenty twenty four come up and then stocks go down or whatever it is, and then this idea that credit is just never going to work automatically like that, And there's lengths of credit, and there's different opinions,
and people can hold out and restructure, et cetera. And so the idea that credit market will respond automatically in the same way like asset valuations will, it's like a really helpful way to sort of, at least in my mind, resolve some of these tensions.
Absolutely, So two things stood out to me.
One was the point that fiscal stimulus doesn't our fiscal spending doesn't always have to be inflationary. And I know this was actually a big talking point. Again I pointed out at the beginning of the IRA this was the selling point from Biden, but I think it's it kind of got lost in the ether with all the discussion and drama around the debt ceiling and things like that.
But we have seen some glimmers of that. You know, there were.
Fiscal attempts to solve the backlogs at the port for instance, which seemed to have helped a little bit. And then the other thing that stood out to me was the contrast between the two thousand and eight monetary policy changes versus now. Yeah, and I think this is really key and maybe like one of the reasons why policy makers are struggling at this.
Moment in time.
We have not had a huge dramatic shift in monetary policy, you know, for a long time, but not in the shape that we have it currently, where it's a series of hikes. In two thousand and eight, as Julia pointed out, it was it was crisis.
That was a really good point. Like the idea of like, well, what is a credit channel constraint is like something that we haven't really experienced as well, and we're seeing glimmers of it. We saw it actually play out in housing at the end of twenty twenty two. Maybe again now with mortgage rates roughly seven and a half percent. I think the home builders have come down. Home builder optimism has declined, so we're like seeing that dynamic again. Also,
you know parentheses here. It is sort of an underappreciated point. As Julia pointed out, monetary policy can now work in the other direction. When we were at ZERP, there was not really much that the Fed could do to stimulate, right. I mean, they could like do borcui, but I think always the efficacy of that is always sort of debatable.
They can cut rates now, which is a really interesting dynamic and probably get some juice out of those raid cuts in the way that we haven't experienced in a long time.
Absolutely, shall we leave it there?
Let's leave it there.
This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy.
Alloway and I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our guest Julia Coronado, She's at jc Underscore Econ. Follow our producers Carmen Rodriguez at Carmen Arman and dash El Bennett at dashbot Big thanks to Moses Ondam for his help. Follow all of the Bloomberg podcasts under the handle at podcasts, and for more Oddlods content, go to Bloomberg dot com slash oudlots, where we post
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