David Woo on What the Economists Got Wrong About the Stimulus

sequential basis. Inflation readings the cp I have been quite elevated lately by historical standards, and there's this whole debate about whether it's transitory or some sort of new regime and what's causing it and so forth. We'll get into all that, but at least for this one month, and at least like on a sequential basis, we definitely saw a bit of a deceleration used car prices, which had been absolutely soaring. It finally looks like that whole thing

is topped out a little bit. Yeah, And we've had such a heated debate over whether or not inflation is transitory or something more permanent. And I think the vociferous nous of that debate kind of hints at something wider and more fundamental about the economic situation right now, which is that we're in a really unusual time. The recession that we saw during COVID was basically unlike any others.

It only lasted for a couple of months. In the end um we had record stimulus, and so that kind of means that no one's really sure exactly what the recovery is going to look like, and it's hard to look at previous recoveries in order to make an analogy to today. Yeah, and inflation in particular, Like you know, we get economic data points literally every day, are virtually almost every day, but inflation is one of those that really gets people going in a way that other data

points don't people. You know, we had that recent episode with Rico MoManI A. People feel that they feel it at the grocery store. They attribute it to policies. When it's up, they attributed to policies that they don't like. They attribute it to FED, they attributed to spending and so forth. Inflation just it gets people going. It does indeed, and it's very easy for people to sort of overlay their own thoughts and feelings and biases on inflation, so

people kind of see what they want to see. Um, you know, cherry picking the data is something that goes on quite a lot. And and again, like in the current environment, there is a reason that you would strip out some unusual activity and things like used car prices. But then you get into the dangerous terror tory of are you basically stripping everything out that's actually rising um and obscuring what's happening in the market inflation ex inflation.

All right, Well, I am very excited, you know, I said, Uh, you know, inflation always gets people going. I'm very excited because we have a guest today who almost never needs any uh anything to get him going. Very one. He's long been one of my favorite people to interview. Talked to him several times on TV, but we've never had him on the podcast before. We're gonna be speaking with David wu. He was formerly the head of Global Rates, Global Effects, Global em fixed income and Economic Research at

Bank of America. He's a veteran there of ten years and recently left and now he's he's a blogger. He's like us. Uh, he's a blogger. He has uh David wu unbound where he talks about all this stuff, macro things, things going on in society, the data and so forth, and always one of my favorite people to talk to you, so sort of a perfect person to uh kick off a sort of like let's take stock of the macros suation right now. David, thank you so much for coming

on odd lots. It's my total pleasure. Thank you for inviting. Absolutely it's always a treat to talk to you. David. Let's start with that inslation print. I'm sure you have been looking at it for the last half hour, as have me and Tracy. How would you put it into context? What's your take on it? And how does it fit more broadly in where you see, uh, the overall inflation situation right now in the US. I think, you know, I think you know we have to first but put

things in perspective. I don't think anybody in the right mind thought that the sort of six percent seven percent inflation was sustainable. Everybody knew, you know, that it had to do with these one off factors like use cars, computers, you know, things that have been affected by supply chain basically breakdown. So therefore the spiking price all to be temporary. I supply chain basically came back on track. So the question really is, you know, so if it's not six

or seventh percent, what is it now? The fact is, notwithstanding you know, basically the sharp drop in basic inflation for use car prices, you know, this month, if you look at the core inflation, we're still up zero point three. I mean that is an annualized rate of close to four percent. I mean that's like higher than anything we've ever seen, you know, basically, you know, basically in the

run up to COVID and more recently. So I would say that forget about, like you know, basically, whether it is whatever, six or seven, the fact that it is even running at three percent, four percent, that's a problem because the point here is that the whole world economy is currently calibrated on the assumption that the FED phones rate is going to remain very very low for a very among time. The only way that's going to be

possible is that the inflation doesn't become a problem. You don't need inflation of five or six percent to become a problem. All you need inflation at three percent, and the FED has got a huge headache ahead of them and so with the market. So so let's not beat around the bush. I don't read I'm not I'm one of these people balding tables saying we're going to see

your double dis you the inflation any time soon. Given that the whole entire market has been gotten used to the idea that the inflation was always going to remain somewhere belottle two percent, allowing the FED to basically carry on with this very commentative stance. If inflation just goes above two percent, even just goes to three percent, the

world is gonna have a huge problem. Um. We've been talking a lot about the Fed's new framework on the show and the idea of average inflation targeting, and I'm wondering, you know, is that something that you buy into in the sense that you think the FED is actually going to be more flexible um when it comes to inflation. Is that something that could maybe buy it a bit more time and um put off a rate rise? Tracy, No, Honestly, I think the whole averaging inflation was a gimmick. And

I'll tell you what the gimmick was. The gimmick was to baseically help them convince the market to drive interest rates. Love right, because they're gonna tell you what, even when the inflation goes about two percent, we're not going to hike rates anytime soon. Therefore, you know the market. So in some sense it was stronger for guidance than what

y'allin introduced what about five six years ago. The point here is the inflation really starts to go up from two to three percent, three to four percent, you think the Fed is going to be sitting there putting their thumbs because they're going to be very nervous about the return of inflation expectations. You know, it took just think about what Volker had to do to crush inflation expectation

early in the eighties. It had to basically bring the engineer a recession u as economy to crush inflation expectation. Inflation expectation, I mean, you know anything, you know, economists don't know that much. Honestly, the truth is economists no much less than anybody give them credit for. If there's one thing they know and they're afraid of is basically inflation expectation is like a Pandora's box. Once you open it,

it's gonna be difficul to close it. So this is why if inflation starts to edge higher, forget about the whole idea of inflation averaging, inflation target effect will go. They will have no choice but to go because they realize what will be at that stake, because if they don't go, an inflation expectation goes up, and then having to bring it down down the road, it's going to be that much more costly. This is why I think, you know, the whole inflation averaging business was nothing more

than just empty talk at the end of the day. Well, okay, so you can, as we point out, even if you strip out used cars, there's sort of this underlying inflationary pace right now, that's uh, well above that's enough above in your view, enough above two to create a problem. How come look, what's the explanation for it? So, I mean, you know, we can all look at the data, but we need a theory to explain it or to understand where it's going. Why is it? Yeah, I mean, Joe,

you asked that's the right question. That's exactly the right question, and I'm going to tell you the answer. I mean, for it was worth, you know, I write about it actually my big my own blog, which is does right. The last twenty years, I don't tell you kaynzie In School of Economics has been on the ascendency. I can tell you this wasn't always the case because twenty years ago when I got my PhD at Columbia and Economics, you know, at the time, it was the New Classical

School of economics that was invoked. And these have been the main schools of economics that have been, you know, in rivalry for much of the last fifty years. You could argue, now, what is the essential difference between the Kaynesian school versus the New Classical school New Classical School, by the way, it's that you're called Chicago, so we can think about it that way. The main difference is the kaynzie In school emphasizes negative demand shocks, whereas the

New Classical School emphasized as negative supply shock. Now, what is the negative demand shock. Neither demanding shock is like oh, the outcome bubble bursting in two thousands, okay, which unleashed this massive negative wealth effect. Negative demand shock is like oh September, you know, basically eleven, that crush confidence and

cause people to pull back their spending. Negative demand shock is like what happened in two thousand and eight following the collapse eleven Brothers, which basically caused all the banks to pull back in terms of their credit lending, which

basically forced negative demand shock. And then the Kynsians argue and right, and so when you have a negative demand shock, the right thing to do is to basically engage in proactive okay, fiscal and monetary expansion to offset the negative demand shock in whe did to bring the coming back to for you for employmentquilibrium. This is why the last twenty years, the reason why Kynzie in economics is so

well was because one after another oldie shocks. As I said, the dot com bubble bursting September eleven, two thou eight, will all negative demand shocks. Now, guess what what is COVID, you might ask. I can tell you if if COVID is anything at all, is not a negative demand shock in my view, is a negative supply shock. And by the way, just think about this, I mean, how is

it affecting supply? I don't tell you right now. For example, you look at you know, global freight prices, global freight rates for containers going through the roof right now, and so it went basically double last year and double already this year, showing no signs of moderation. You know why because right now in Asia where basically the pandemic is basically breaking out once again, and then countries are not allowing okay, these containman ships to upload their cargoes. So

are there results? Thousands of ships right now around the world are being stranded at their ports, not being able to offload their cargo's information, the sailors, the crew. Now that's a negative supply shock to the extent that COVID's actually, you know, has basically reduced ability of the economy to basically to respond to increase demand. Now, what else is basically a negative supply shock? Think about this, all these women.

We have seen a massive drop in labor participation rate of women in the United States in the last basic gating months. Why is that they're not even looking for a job, these women who just simply left the labor force. Because it's very simple because as long as COVID right now it's about, there's no vaccine for children. As a result, women are now having to stay home to look after

their young children who cannot go to school. Now, if COVID is gonna be here to stay, you know what, or that for that matter, if we don't have vaccine anytime soon for children, guess what you're gonna see a large part of labor force basically disappeared. That's a negative

supply shock. Let me tell you this. If you look at a very basic economics supply and demand shock, which all your viewers have heart about, that's why they're listening to this program, a negative demand shock is deflation, ay, But guess what a negative supply e shock is inflationary. Your supply curse moves to the left and push down

employment and push our prices. So when you are basically when the FED and the US government unleashed massive fistical stimulus to try to offset a negative supply shock, all it's gonna do is basically push up inflation. That is, by the way, and I'm telling you this, this is why the neo classical school framework thinking about recession about prices is the more relevant framework in this particular point

in time because of COVID. I would say, I'm not saying that COVID only is negative supply shock, because maybe there's a little bit of negative demand shock at least in the beginning when it first hit, when her confidence is once so forth. But I think the longerest thing drags out, is becoming more of a negative supply shock. And then yet the FED and the Biden administration continue to respond to COVID as though it were a negative demand shock, and that, in my view, is going to

be a very a very dangerous game to play. Can we dive into um the demand side a little bit more so? I remember, you know, early last year, people were talking about how this would permanently scar consumers, particularly in America. You know, this huge global crisis, people losing their jobs, having to stay inside, a really sort of unique and terrible experience for a lot of people during a global pandemic. How would you classify us consumers now?

Because of anything, it seems like they've emerged on the other side of this much more prepared to spend. It looks like exactly because the the honest true is crazy. The the I mean, the one thing I wouldn't have forecasted. I mean, you know, like you have like a Martian who just landed on kind of earth looking at what's

happened last year? I guarantee you nobody, no genius, Okay, nobody all price the comments could have predicted what which is that somehow, after the biggest basically crisis they hit the world in a hundred years, that somehow US household balance sheet has improved and their cash flow is improved. I don't want to tell you US household net worth as a shop disposted income is not all time high because we've seen a massive rallying the stock market unbelievably,

we've seen a massive appreciation in home prices. So as a result, Americans who owned stocks and houses are far richer today than they worked a year ago. Ironically, at the same time, COVID has driven down interest rate as a result, debt payment as a sharp disppost, income for American is basically at all time look at the same time. Meanwhile, if you don't have any money, guess what you know what for one thing, the banks are begging you to borrow.

If you look at answer the Senior Loan office and Sturday, the willingness of your field let your money. Credit card for people who have no money is at all time high right now. On top of that, you know what, if you really do have any money, you know what Biden has promised to basically make sure you do not miss the party right now. You know, I don't have to tell you. The big news the last two weeks was the fact that, you know what, Biden has decided

to suspend the moratorium. You basically extend the moratoriament on eviction again. If you cannot pay rent, no problem, you can stay on and go on a vacation. Meanwhile, okay, and worry about paying rent down the road, because we're gonna make sure you don't get evicted. Meanwhile, last week, of course, they also came under pressure from the liberal weight of the Democratic Party. Now you cannot pay your student loans. They've also extended the student loans moratorium until

basically October. So and then now they're talking about maybe possibly extending the the enhanced benefits federal basically unemployment trans benefit to make sure I mean, think about this, I mean, the the amount of benefits that people were getting, including the enhanced benefit. Most of the people who lost your jobs were actually getting more money from the benefits than what they were earning before. So you're telling me which

American has actually been lost out. Sure, some people have lost your family, that kind of thing is all very sad. But economically, yeah, basically because of policy which I think we're gonna have to pay for dearly down the road, has made sure that everybody is better at all. So against this factor of yeah, I'm not surprised Americans are basically are about to basically spend some serious money. What

do you what do you mean? So people say that a lot we're gonna have to pay for these policies down the road, And that's always you know, I've heard that all my life, long before COVID or any of these. You know, I heard it about TARP, and I heard it about all this. What is it means specifically to you? Because although it's true that there has been this massive, by historical standards physical expansion, some of it is coming

to an end. We've seen a reduction in the unemployment insurance expansion most likely, I think most people do not expect that to be continued. I guess there is some debate. We still do have a significant employment whole, although that does seem, you know, by some estimates, are still eight million jobs short of where we would be had it not been for the crisis. So what do you actually see as the what is paying for it? Look like, let's look at the numbers here, so I mean, forget

about anything else. This's look at two thousand and twenty, right two, the global clarmy contracted by three point six percent. Okay, the economy was growing about six percent before that. So the foregone output last year was about ten percent of global GDP, which comes to about nine trail million dollars. Right, that was how much global GDP foregone basically loss if

you like. On top of that, based on the land if number, fifteen trillion dollars of fiscal spending has now been taken out by governments around the world to finance whatever they're firefighting. So fifteen billion, fifteen trillion plus nine trillion, four trillion dollars not just for two thousand twenty. You said, well, what's what's twenty four trillion dollars? These days we talked about trillions as though there were nothing. Let's put that

in perspective. Okay, let's put that in perspective. I don't know people realize this, but you know what, if you look at the combined wealth of the two thousand seven hundred and fifty five billion years in the world. So if you take all the billionaires in the world, you add up all their money, it's only thirteen trillion dollars. By the way, okay, so even if we were to confiscate all the money from all the richest billionaires in the world, time enough to basically even fill the whole. Now,

another way to look at this. You said, well, what can you buy with twenty four trillion dollars? You might that way. Now think about this. You know you could argue today the most you know, the ultimate symbol of wealthy days is to buy sports teams and luxury real estate. But you know you could buy the fifty most valuable teams in the world. I'm talking about like from the l A Lakers to I don't know United, you know,

basically a Manchester United. You can buy the fifty most valuable teams in the world for just one and seventy billion dollars compared with the twenty four trillion dollars just told you. Is the something that you know that costs the world? Basically from COVID just in two thousand twenty, do you know you can buy all of Manhattan's land for one point seven trillion dollars. Again, COVID causes twenty four trillion dollars. Do you know what you know what

it is? I figured it out, you know, you know, you know what twenty trillion dollars really mean. With twenty four trillion dollars, we can basically feed the seven hundred million people in the world who suffer from chronic nourishment. We can prove mind clean water and basic sanitation for everyone in the world. We can provide education for all the children in the world who are not able to

attend school. On top of that, we can protect all the endangerous species from extinction, okay, which only cost is about some seventy six billion dollars a year. In other words, just the cost of last year is basically forgotten GDP, and the fiscal costs is enough to make the world a much better place. In other words, the way I think about this is, okay, is that now we as though that before the crisis, there was nobody went hungry at night, nobody went without clean water, all the children

went to school, animals live in total peace. And now guess what after COVID just one year, seven million people are going hungry every night based more than a billion people don't have these safe water basically about five and people are not going to school when they should. And then guess what animals are dying left and right. That is the cost just in two thousand twenty. Not to mention beyond. Now I can tell you something else. You might say, well, when are we gonna pay this price?

That obviously you know is immediately tied to the whole inflation story. The reason why yelling, and this is why I have no respect for people like yelling. She keeps talking about why if interest rates are zero, then there's no cast, let's just take on more debt if the interest rates zero, But she's assuming that inflation is never

gonna go back up. I just told you. If COVID turns out to be a negative supplying shock, then everything they're doing right now is going to be pushing up inflation and pushing up the inflation unless they want inflation to go out of control, which I don't think they do. The fact web no choice, but the race interest rate. When they starts to rates an interest rate, that's when that's the day we start paying for basically the cost,

and it's gonna be a big cost. I want to ask a slightly different question based on that yell in comment. But you know you were at BAMIL for a very long time. I think about ten years, and your new blog is called David Woo Unbound. Is the suggestion that I don't know that you were sort of bound um in terms of what you could say when you were

at Bank of America Maryland, Tracy. You know, let me tell you something, you know, you know, you know what really basically sort of like the day of reckoning for me at Bank a marking, you know, by the way you know I mean, I I don't want to say I have only good things to say about Bank America. I was there for ten years. I did great, The bank treated me great. I couldn't be any happier that. That's the honest truth. So my leading Bank America has nothing to do with how the bank treated me or

anything like that. I've always thought that they paid me much more than actually I was worth. But nevertheless, you know what, I'm not going to complain now. I'll tell you what really got to me. It's a sort of sequence of events, one of which was what been in January Febrary, this year now, I don't have to remind you, right, you know, the one point whatever six trillion dollar fiscal stimulus package that got through very quickly in January, as

soon as the new administration was warning. Now that one point six trillion, I can tell you any reasonable economists will tell you it was not just excessive, it was probably unnecessary. Now, it's very interesting to me how many economists came out speaking up against it. Obviously not a single one on All Street, but literally, you know, the people who spoke up against it are like Olivia Blanchard, who's the former chief economist at the I m F,

who's not retired, who doesn't guart anymore. I mean, he has no he doesn't have to pay the political price for saying things that may not be politically correct. I can hear you. Who other person can John Cochrane, who used to be at Berkeley, who's now whoever institute, who has been banished already to the North Pole, if you like,

who basically wrote about it. In other words, to me, what we're shocking in January and February was that we just decided to write this massive check that was completely unnecessary, and yet not a single academic economists, okay, really spoke up with the exception of a few honest and courageous people, they didn't mind to be canceled because either they were already in the retirement what they were already basically in

North Pole, they've already been canceled. So from that point of view, this is what we was a wake up call for me because then I realized that the whole canceled culture has gone much too far. I can tell you so many of my professor friends, you know, classmates at Columbia who are now basically teaching a major university IVY league, who tell me they do not there to speak up today because they might lose their job, they might lose your tenure, they might have students basically complaining

about them. That is the climate today in America, and it is starting, and it was getting onto Wall Street. And I said, you know what, I gotta do something about this because I benefited from Wall Street. I mean I've I've spent twenty years on Wall Street. One thing I learned what anything else on Wall Street is the Wall Street is about the celebration of differences. Just think about this. Every day people are going on your show you know, debating about A and B is inclusion going up,

inclustion going down. You know what Wall Street is about the celebration differences. If somebody today is buying Tesla stock is because somebody else is selling it. So I wanted basically, I decided to set out my own in order to basically bring this very important lesson from Wall Street that I become. It's been a very big part of my success to basically the general public. That's what I want to do on this question of like who gets to

criticize I mean the stimulus. I mean also Larry Summers was a critic of some of the size of the spending, and of course he continues to have a significant media platform. Jason Furman, former official within the Obama administration, critic, also listened to I mean, I think that there really are economists who, to use your term, they're not banished to

the North Pole, who have been criticized. But I want to, uh, can we just basically answer that question if you read for me, Larry Summers has no credibility whatsoever when it comes to this, because he has been If you I don't tell you, I don't do remind you Joe. You remember this is for the last ten years he's been advocating mass epistical stimulus. Remember he was the one was

talking about stagnation does in theory. Why doesn't that give him more credibility as someone who No, I don't think so, because I would say that they were following his blueprint. In fact, if you actually read his Washington Post article, it was pussy footing around. It was like it was nothing. It was not like, you know, he really came out forcefully. He felt that he had to basically say something. That's

that's the feeling I got, certainly. I you know, again, go back to read the article and see if you actually Larry summer is it's not someone who puss the foot around. He basically make sure that you hear him when he speaks. And in the way he wrote that article,

I thought there were too many ifs. Just going back to this question, you say, Okay, they are all these critics of the stimulus who had secret felt like they couldn't say anything and because of yeah, whatever in your in your in your characterization, cancel culture that big said, Okay,

let's look at what's actually happened. Well, it is true that we have had some elevated inflation prints and there's probably reason to think, you know that even if there's a cool down, UM, we are going to get the UH, they may remain as such for a while. We also see an extremely robust labor market recovery nearly two million jobs in the last two months. We did see a

massive hit two incomes. And I know that we've focused a lot, say on this show, UM about a lot of the supply chain disruptions, and we've talked a lot

about containing ers as well as you have. But on the other hand, small business incomes, service sector incomes absolutely decimated for several months, and we don't really have the counter factual of what it would have looked like without the p PP program and the expanded UI, but huge swaths of the economy their incomes, at least for the for several months after the virus hit would have basically gone to zero, and that would have crushed their spending,

and that would have crushed rents. And you know, you talked about some of the UH the eviction moratorium. On the other hand, there are millions of landlords who probably wouldn't have been able to collect any rent had it not been for the UI and some of these programs. So why is it not reasonable to say, I mean that there were really truly shocks to both the demand and supply and whiles, and that the supply side is absolutely not sorted out, that the demand side has more

or less remained uh smooth, thanks to the ongoing fiscal expansion. Right, you asked a very good question. And again I don't want to sound overly political, I would argue I, in my humble opinion, I think Secretary niche was probably the best Secretary of US charging we've had very very long time. Okay. One of the reasons, I mean that he did a lot of great things. He just someone who was just obviously a bit of an introverse so he didn't know how to basically, you know, do his own pr now.

And because his association with you know, with Trump, you know, people didn't want to give him any credit for anything he did. But he was the one who came up with p PP. If you think about p p P, Okay, p p P was basically a supply side response by the last administration, right, because the whole idea was, well, these business is gonna go bankrupt, you know, and there's a cost two companies going bankrupt because like you know, it's easy for companies to go bankrupt, but it would

be difficult for these companies to come back. Okay. Therefore, the whole p VP okay, the payroll BA sickally a program was to help small business survive the shock and the Minchill also understood that you know what, there will be some money that was going to be stolen in that process, right because as we know, like a lot of companies basically faked there whatever you know, payrolls and

basically got the money that they shouldn't have. It doesn't meanly matter, but that was a good example of a supply response to help basically mitigate the real, basically the long term cost of the crisis by preventing a large number of businesses from simply going bankrupt. That was the right policy. But what happened earlier this year when Biden and with he basically endorsement of Gallon sentate check to everybody again four thousand, two hundred dollars. That is not

the supply side policy. Especially at the time already US household savings was like eight percent, nine percent, ten percent. You know, if people had that kind of we're sitting. If you look at average saving rings never been higher, so a ma kins were sending on so many savings. If they were not spending, it was not because they didn't have the money, presumably because you know what, there was no place to spend it, because you know what,

they wanted to go out the restaurant. The restaurants were closed. Maybe they bought all the computers they have. And you can see what's happening right now, by the way, this last month, you know, you saw the nonvomparent number last week. This is the fourth month in a row the hospitality and leisure created more jobs than all the other private sectors combined, my friend, because Americans are rushing out to basically eat out, to basically hit the road on vacations,

on and so forth. So from not pointing view again, but what I'm saying is this, I'm not saying that any fiscal response is wrong. I have no doubt that last year the aggressive fiscal response was correct. It was calibrated, and I love the PPP program because that made a lot of sense to me. And on top of that, there was also more assuasion placed on the banks not to foreclose. Okay on basically businesses warfa, I'm outter mortgages. These was the point side response that was basically pushed

by the last administration. This administration came in. The first thing you want to do is spend more, to give people who didn't need the money to spend more. That's what I've a problem with. I'd like to widen out the conversation a little bit more because we've been focusing a lot on the US, But you know, I'm over here in Asia and one thing that's been happening here is we've seen a resurgence in COVID cases. UM the delta variant is spreading in Malaysia, Indonesia, Vietnam, places like that.

We have some cases in China again, and I'm watching the p M I s and they seem to be rolling over For are some very important economies in terms of the global supply chain, but also potentially demand. And even China is getting close to UM that fifty mark that is the difference between expansion and contraction. So how much does China and broader Asia matter when it comes to the global recovery And how much does I guess the variations in the economic recovery um complicate the global picture.

The difference between Asia and the rest of the world is very simple. Asia was fighting a different matter in the rest of the world. During the entire COVID pandemic. You know, an Asia was successful, you know, in terms of their strategy coping with COVID by simply, you know, pursuing an elimination strategy. Right, don't to tell you great examples Taiwan, right and now Australia. I mean, they would just they basically shut down the whole countries so that

it was impossible for anybody to even get in. I should know this. My parents live in Taiwan. I can tell you it's impossible. So as a result, Asia became too complacent. They were able to contain basically keep them basically COVID at bay by keeping it outside basically their countries. They didn't aggressively trying to get vaccines, and that's of course the big story. Right. So and then what it's

really I've always said, China got super lucky. I don't know if China, if you know, if if the virus was bio biolologically engineered or now I don't really care. What I think is China got really insanely lucky last year because we all knew the virus okay, once they got out of China on its way to Europe became literally a percent more contagious. By the time they started to spread in Europe, it had already mutated. It was

a much more infectious. Basically, virus did anything that Chinese had to deal with in last January and Febrary in China. And ironically, you know the mutation that has been happening now, you know, from basically in Europe, and then you know, but you know, the alpha, the beta, the gamma in South Africa, Brazil. Now the delta is now finally reaching Asia, and all of a sudden, you know, the Asian basic

elimination strategy doesn't work, and rightly so doesn't work. I never thought was gonna work, because now you've got, you know, basically the delta, which is fifty more basic contagious than the altpha. The alpha was basically add percent more contagious in the Chinese. This is what's really going on. But I'm not terribly worried about this, and I'll tell you why I'm not terribly worried about this. If you look at the experience of alpha, gamma, beta, and the delta.

They all follow a very similar pattern. And you have to look at the country's of origin for each of these basically variants, okay, and basically in the UK, South Africa, and Brazil. Following the outbreak of alpha, beta and gamma. In India, which is the home of origin of delta, the number of new cases collapsed. And it's pretty fascinating because even India, well you've got something like twenty vaccination Okay, so that's pretty impressive. The numbers have completely collapsed in India.

Let's look at the UK. UK is another good example. UK, you know, because of the close ties with India, was the first western country to get hit by delta. And the number of cases basically when flying and guess what, it's been coming down a lot more than seventy is now stabilizing, Okay. This is also the reason why I think the US story is gonna follow very safe similar pattern, which is that I think probably the next few weeks we all to see basically delta cases also starting to peak.

In Asia. I think the reason why the economy has been hit is because once again, these economies are still trying to deal with basically Delta using yesterday's medicine, which is by trying to shut down the economy, trying to

basically limited That is not a winning strategy. The only strateogy that works now is to basically And this is why I think the UK approach it's going to be really really important because I don't tell you UK saw massive increase in cases and they decided to basically reopen economy, relax all restrictions because they decided, you know what, let's elimination strategy doesn't work. Let's just basically pursue a strategy

of coexistence. Okay, if you get everybody vaccinated, you know what, maybe we don't have to close if not many people are dying. And in fact, if you look at the mortality rate in the UK, it's about point two percent, which is about double that of a flu okay for vaccinated people. I think that's what it is. So I think it's basically ASIA strategy worked in the beginning, it stop working once Delta became much more con pages, and yet Asia continues to try to basically control it as

though we were fighting the original virus. I think, just like everybody else, there's gonna be a learning curve. I think even Asia is gonna get there, and when they get there, we're gonna we're gonna decide that maybe we can live with this. Now, of course, I want to say this one big of course, which is I have no idea what's gonna happen later later this year, I mean during winter, because I don't tell you Alpha, gamma, Delta and basically a gamma all developed during late fall

and early winter and early spring. The fact that Delta became more infectious now that you could basically in a defined basically vaccination, I can tell you I'm in Israel right now, and then you know the you know, the immunity rate is now less than among people who receive two shots. Okay, So from that point of who knows what's going to be the next mutation is not going to basically, you know, basically become not only more contagious

but also more virulent. That is a different story. But right now, given if we're just talking about delta right now, I wouldn't want to be basically overly concerned about this. Is this being enough to derail the global recovery? Well, what let's go back to what does this mean then for the supply side, and your view is that by and large, the disrupt the disruption COVID is a supply

side story. And and look, you know, I think if any listener to odd lots would to some extent degree because we do a lot of episodes on supply side disruption, shipping containers, all of that. So to some extent there is a large agreement. If you know, we have these sort of ongoing waves. We don't know for the mutations we you as you say, these sort of like completely stamp it out strategy is a failure against a mutation is violent as uh that spreads as easily as delta.

What is the prospect for supply side normalization? Like when do we see container rates normalized or what would it take for container rates to normalize? Things like at I think I think it's gonna depends on different sectors, right, you know, obviously, like for example, we all know that you know, the supply crunch in semit conductors, Right, that was one of the reason why like computer prices went

through the room. But computer prices starting to come back down a bit, Right, That's one of the reasons why like use car prices went through the rout because there were new no new cars because like certain chips that were not available, so that certain new models were not available. And then actually what happened this week this month is the reason why use car prices started to basically moderate prices is because new models are being wrote out. That's why,

like new car price has been going up. But I do think so these these these are temporary shocks. By the way, these are temporary supply shows. I'm not too worried about them. I'm much more concerned about potential permanent supply shock, negative supply shock. What are those. Let's think

about this number one. As I said before, you know, you know, if COVID is gonna be here to stay, Okay, if it becomes the new normal, you know what, I do think many of women are going to end up staying home simply because I do think that starts to for younger children. This is going to be a major issue. Okay. And then especially not certainly not before the vaccine becomes widely available, which may not be the case for many years,

by the way, who knows. Okay, I can tell you that from experience, because my both of my basically had daughters in Israel, have very young children, my grand my grandsons, you know, they have not been going to kindergarten for for a long time. As a result, my both of my basically daughters having to quit their job or certainly kept back on their work in order to basically look

after the children. That's one major issue. I think another major issue is that COVID, if it's going to be here to stay, is also changing the skills that are required by employers. Okay, you can see very clearly in the data, you know, unemployment rate for basically people with college education has pretty much gone back to it's almost not exactly, but very close to getting back to what

we wore before the crisis. Wise, people with only a high school degree, that is much less the case, which tells you that there's no doubt that it makes a big difference whether you can work from home. Well, you cannot work from home if you can now, if COVID is transforming the economy in terms of the skill requirement, a very big part of our labor force may simply become unemployable. That's a negative basically supply shock, other supply shocks.

Think about this, I think you know, there's no doubt my mind. You know, one of the things that you know, Joe, like I really care a lot about is the US trying to trade wark Okay, there is no doubt. Nobody wants to say this, but I ain't. In the U S China relationship has gotten ten times worse under Biden than under Trump, by the way, and there is no doubt.

I mean, this is why it's actually interesting, Like you were thinking, the US county is on fire, the Chinese basically is actually struggling the export now in the past, including doing two thousand and ten, the two thousand and ten two thousand fifting recovery. It's like, well, US was growing and then they were sucking all these cheap imports from China, therefore kepting basically prices very low. Now there's

not longly the case, Okay. So basically what worries me much more is basically this kind of thing is a permanent supply shock that basically shifts the labor supply curve basically in and then because of the disruption in global trade, a lot of which has become so politicized that I don't see we're gonna be able to overcome them anytime soon. That is also going to reduce the aggregate supply okay

for the global economy. So from that point of view, a lot of the advantages that were previously associated with globalization and so on and so forth, it's just not going to help us that much to storm around on the inflation front. So I have a dumb question on this point. But it's something that, um, I've been thinking about because Joe and I have been talking so much

about the supply issues. So there's this idea of the bullwhip effect and that you know, UM, a shortage in supplies means that company is going to overorder in the next round, and then that leads to sort of over capacity and things like that. But I'm wondering, is the response to supply issues can that be good for the

wider economy. For instance, if people decide that China is too risky UM for whatever reason, whether it's COVID or something like the trade war, and they start building UM manufacturing capacity closer to home, like in the US, that would seem to potentially be a good thing. You're right, I mean, depends for who. But just just just let's be very specific. Right, Let's just say right now, you know, the US determined to basically shut down the entire semiconductor

basically production. Okay, trying right, I mean the US decided that we don't want to China to be in this business all because it's going it threatens the US hegemony too much, right, I mean, it's not even at this point, it's not even about whether they steal from us, they don't steal from us, or they spite from us. Is now it's like, well, we don't want them to basically threaten our competitive basically our technology gradual morning in the

space different. We don't want them to be in that space period, which means basically, you know what, you have to basically build these points somewhere else, right, which means some companies that will have to pour a lot of money into that, which means, can you imagine in the extreme case where everything that we're currently buying from China we now have to basically build production capacity somewhere else to build the same thing. You don't think that's going

to be very expensive? I mean sure, I mean you know what, you know, you've gotta basically think about that from that point of view, which is relative to where we are. Because again this comes back to the whole

inflation story. Okay. The only reason why the stock market is trading where is trading right now, the only reason why house price has gone up so much when I hes talking about today, yesterday, what we're talking about the last twenty years, we've seen that massive, okay, rally in the stock market, in basically home prices, in wealth in general, and that's all because of disinflation as a result of globalization that allows center banks around the world to really

cut interest rates to unbelievably low level. And by cutting interest rate the very low level, you are reducing the discount rate. Okay, That prices all risk the ass because by reducing the future discounted cash flows due to that, that's why you've seen this massive as surprise appreciation. Okay. So now you're telling me, who cares about that? Who cares about the disinflation. Let's embrace a little bit of inflation.

Then what happens to a surprises you tell me? Okay, So from that point of view, you know, the debt, the wealth basic explosion of the last twenty years was all thanks to you know, globalization, which is about the integration of the Chinese economy and the global economy that kept global prices low, that allow interest race to globe, They allow the kind of you know, you could argue with the globalist the elite basically benefits with that because

they're the ones who's sitting on They almost of the wealth that benefits on the price appreciation of these assets. But nevertheless, we gotta be very very careful to think of That's why Trump, even though he started to trade over China, he had a very defined objective. He wanted China to play fair. He wanted China to respect US intellectual property and right. He wanted you know, all these

concessions Chinese. And from that point of view, that's why I always saw that the first agreement, the Face one Agreement, was a very significant agreement. Yeah, I was probably the only person on Wall Street to have read the entire hundred page document. To me, is still a spectacular agreement. I think it should go down to history as one

of the most important milestones. Unfortunately, Trump lost the election and that agreement is not worth nothing, Okay, But the point here is that that had a very defined objective which could potential should you still put the US in

China into win win position because of each other. I can tell you for the last all throughout two thousand and eight nineteen, when I was going to China in big corporate offices and government office, people will come up to me whispering my ears and no, David Trump is a great man. These are Chinese people telling Trumps because they're saying that, you know what, reforms had been stalling in China for the last ten years under shooting pain and thanks to China, thanks to Trump, the pressure is

on China to once again accelerate reform. And that's what Trump did. And this is what people don't realize. Indian China agreed to the Phase one agreement because ultimately the reformers got back into the driversy because of pressure from Trump. And I thought that this was going to lead to a basically a happy ending for both sides because the name of the day, you know what, that's when we that's what we all want me, Tracy, you'll send me in Asian. But now with Biden, it's like, wow, gloves

are off. So from not when we're now moving from an economic conflict that was ultimately well defined under the administration, that that we were getting close to basically resolving to now ideological contests which can never be resolved at this point. And that is if you're telling me, if that's you want to basically start building all these expensive plans you outside China and hire people that got Yeah, you're can

increase some jobs, but you're gonna create a lot of implation. Well, David, like I said at the beginning, it's always interesting speaking to you, always provocative and really really appreciate your insight. Thanks for coming out an outlot. No, not at all, I mean thanks for putting up with me. And you know, I love coming on the Bloomberg because I know that you guys are willingly to contemplate. You know, there are other alternative views out there than the main streams, and

it's great. Thank you, thank you so much, thank you so much. As you know, obviously, uh where to start. David has um pretty some you know, out of consensus as you you asked a good question, did he feel bound previously a sort of out of consensus perspectives on a lot of stuff, but you know, on a lot of things, like I think his his views are worth taking, are worth taking seriously, at least at least several of the points are like you know, this is this is

worth thinking about in debating. I like David wu unbound. Um. You know, he was always sort of outspoken um while he was a Bank of America Mary Lynch and um. He seems to have taken that to a new level just then. But so, for instance, his points about China kind of decoupling from the global economy, I would totally agree that that is an underappreciated um risk or thing

that is actually happening now in the global market. And it reminds me a lot of in early two thousand twenty when the COVID outbreak first happened and China basically shut down its entire economy, and the US, or at least the US markets just ignored it completely and it was like, well, we spent the past two or four years worrying about the trade war with China, and you know,

that was all anyone could talk about. And now China has basically closed off and US markets are doing absolutely nothing, um, not responding to it at all. And eventually they did in March, of course, But like I kind of feel a similarity with the current situation. It's not going to be like as sharp as it was in March but I do think at some point people are going to wake up to this dynamic. Yeah, no, I I agree, And I think your assessment that it has not been

fully appreciated. I think I saw a tweet from you and last night or this morning about some of this rolling over in the p M. I s that like, just like the sort of like the absolute effect of the slowdown and then the ongoing supply chain disruption is that that's going to cause. And you know, we joke about this, it's not really a joke, but our very first episodes we're talking about um COVID as a as

it supplies shock story. Like the first one we did with Dan Wong back in early March or maybe February probably February twenty was like, well, what's it gonna mean for Apple and so forth? And it's interesting the degree to which we just like, oh, it's gonna normalize, and you know, container prices are gonna crest and so forth, and this idea that well maybe there is like this sort of like deeper thing going on that's not about

the crest. And David's point about how the approaches that Asian countries took to completely stamp out the virus in the beginning may not be is effective with the UH

the more transmittable delta variant. Extremely interesting. Yeah. The other thing I found interesting was his contrasting of you know, a demand side shock or recession versus the supply side, and the idea that a lot of the thing that policymakers are doing right now end up boosting demand and not really solving the supply issues, and so that accelerates inflation.

That seems like a reasonable risk to me. Yeah, I mean, look, I think that I guess the question is, all right, we you know, people in all different camps, you know, the supply side camp, the more demand focused Kansian camp, we all like sort of like point to the same things, right, It's like, okay, there's the semiconductors and the containers and

so forth. The question, I guess is the degree to which, I guess we didn't really get into it, but it's the degree to which the demand side policies have exacerbated the problem. So it's like, Okay, everyone can accept the theory supply side shocks and we can see it in the data in which categories, but like, you know, alright, used cars, was that really because of like stimulus or expanded you Y or the chip shortage, etcetera. So there's still a question of like waiting of the different factors.

And look, millions of people did lose their jobs. That is a fact. Yeah, yeah, that is very very true. Um well, I'm sure this isn't going to be the last time we talked about this topic. And of course, as you noted in the intro, inflation does tend to get people going, especially David Wou. Should we leave it there? Let's leave it there. Okay, this has been another episode of the Off Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe

Why Isn't All? You can follow me on Twitter at the Stalwart. Follow our guest David Wu on Twitter. He's at David Wu Unbound, although it doesn't look like he's ever tweeted, but maybe he'll start. Follow our producer Laura Carlson, She's at Laura M. Carlson. Followed the Bloomberg head of podcast Francesca Levi at Francesca Today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening to