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Interview With Edward Yardeni: Masters in Business (Audio) · Masters in Business

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Speaker 1: Cone Resnick dot com slash Breakthrough. This is Masters in
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Speaker 1: Business with Barry Ridholts on Bloomberg Radio. This week on
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Speaker 1: the podcast, my special guest is Dr Edyar Denny. He
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Speaker 1: has a storied career on Wall Street UH prudential base SHEF.
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Speaker 1: Hutton and probably best known for his work at Deutsche Bank.
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Speaker 1: He now runs your Denny Research and has a fairly
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Speaker 1: substantial institutional client base. This was really a very wide
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Speaker 1: ranging conversation about traditional economics and how we use that
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Speaker 1: as a basis of analysis of equity and bond investing.
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Speaker 1: He is not a typical economist in that he really
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Speaker 1: got started on the bond side and then moved to equities,
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Speaker 1: and I find a lot of his perspective to be
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Speaker 1: atypical and very very interesting. UH And obviously his clients
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Speaker 1: agree with that because he UH advises a lot of
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Speaker 1: very substantial mutual and hedge funds and they really care
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Speaker 1: a lot about what his perspectives on the world economy is.
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Speaker 1: He is both simultaneously enthusiastic and constructive about the future
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Speaker 1: growth in the United States, but raises a lot of
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Speaker 1: concerns about things globally, including debt in China, demography in Japan,
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Speaker 1: and some of the other long term issues from globalization
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Speaker 1: and automation and what it might mean for employment going forward.
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Speaker 1: But but he's not a permabule of Perma bear. He's
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Speaker 1: he's flip back and forth over times. And I found
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Speaker 1: him to be surprisingly constructive about the U s economy. Uh.
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Speaker 1: He thinks we're late in the cycle, but nowhere near
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Speaker 1: over and and that was really interesting his explanation for that. So,
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Speaker 1: without any further ado my conversation with Dr Edyard Denny.
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Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
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Speaker 1: My special guest today is Dr Edyard Denny. He is
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Speaker 1: founder and chief investment strategist at Yard Denny Research. He
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Speaker 1: has a storied career. He has been on Wall Street
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Speaker 1: for twenty five years. Early in his career, he was
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Speaker 1: chief economist at E. F. Hutton we all remember and
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Speaker 1: love those commercials, as well as working at Prudential Securities
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Speaker 1: and C. J. Lawrence. Uh. He began his career at
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Speaker 1: the Federal Reserve in both Washington and New York, served
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Speaker 1: in the US Treasure He eventually he became chief strategist
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Speaker 1: at Deutsche Bank Securities. He started out with the b
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Speaker 1: a uh in in economics at Cornell as well as
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Speaker 1: a PhD uh in economics at Yale, where he studied
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Speaker 1: under Nobel Laureate James Toadman, Dr Eduard Denny. Welcome to Bloombar.
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Speaker 1: Thank you very much, Verry. So you have a really
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Speaker 1: interesting career what I call the golden era of Wall Street.
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Speaker 1: What was it like back then? I think it, Uh,
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Speaker 1: it was golden, I think because it sort of the
3:35
Speaker 1: tail end of the partnerships when Wall Street firms uh
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Speaker 1: were responsible for their actions and people don't realize a
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Speaker 1: partnership is joint and several liability. So not only are
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Speaker 1: you responsible for your own behavior, you're responsible for what
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Speaker 1: everybody else the firm is doing. Let me tell you
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Speaker 1: that focus people's attention on risk. But it turned into
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Speaker 1: the wild we pretty quickly early in my career because
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Speaker 1: a lot of the firms went public and uh we
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Speaker 1: started to see um all kinds of trading desks open up. UM.
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Speaker 1: For my career, it was great because I had a
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Speaker 1: tremendous demand for what I did for a living, from
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Speaker 1: the commodity people, from the equity people, the bond people.
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Speaker 1: As a matter of fact, although most of my career
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Speaker 1: has been focused on equity strategy, the reality is the
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Speaker 1: early part of my career at If Hutton was made
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Speaker 1: on the bond market. Uh. I had some great calls
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Speaker 1: back then, and um so I had just for me
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Speaker 1: as an economist and then as a strategist. Um the
4:40
Speaker 1: fact that Wall Street went into more and more businesses
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Speaker 1: and had more and more trading desks, and things got
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Speaker 1: more volatile and more dependent than information that was great
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Speaker 1: for me. It's amazing how many great equity analysts began
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Speaker 1: on the fixed income side. It's really very overlooked. I
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Speaker 1: have a list in my head of people in Looting,
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Speaker 1: A number of guests on the show who started out
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Speaker 1: and fixed income, and with that background gave them a
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Speaker 1: lot of insight into why is that. I think it
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Speaker 1: gives you a tremendous advantage. And I I wish I
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Speaker 1: had really spent more time on the fixed incomes side,
5:15
Speaker 1: because I spend it more on kind of the macro side,
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Speaker 1: not on the credit side, and with the benefit of hindsight,
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Speaker 1: being a credited analyst on the bond side or having
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Speaker 1: some insights there would have been very helpful in two
5:27
Speaker 1: thousand and seven. As a matter of fact, one of
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Speaker 1: my counts in San Francisco, strategists there, came to New
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Speaker 1: York in two thousand and eight and called me up
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Speaker 1: and said that I don't have any time to see
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Speaker 1: I'm saying just fixed income strategists. And it was bridgiant
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Speaker 1: because he really early on got really spooked by what
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Speaker 1: he what he heard. So I think, you know, the
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Speaker 1: reason that it's important to know what's going on the
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Speaker 1: credit side, and that's where the trouble often starts. Too
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Speaker 1: much too much debt, sure, too much debt, too much leverage,
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Speaker 1: people wait too far out over their skis on the
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Speaker 1: equities eyed things can look fine, but really a lot
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Speaker 1: of trouble. Absolutely. You know, I look at your the
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Speaker 1: early part of your career, you very easily could have
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Speaker 1: been an academic. You studied with Tobin legendary. You end
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Speaker 1: up at at the FED in the research department. That's
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Speaker 1: practically an academic position. I know that's morphed over the years.
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Speaker 1: I only stated at the federals Are Bank in New
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Speaker 1: York for for a year. I spent a short period
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Speaker 1: of time at the Federals Are Banking Washington, d See, Uh,
6:29
Speaker 1: spending some time writing my dissertation. Honestly, my role model
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Speaker 1: was actually Henry Kaufman. Uh. Yeah, back when I was
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Speaker 1: an undergraduate at Cornell, actually kind of cold call Kaufman
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Speaker 1: and I asked him if he'd come and speak and
6:44
Speaker 1: to a group of us, and he wasn't able to
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Speaker 1: do it. But uh, I was an early admirer of his.
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Speaker 1: And as a matter of fact, my wife's uncle, Charles,
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Speaker 1: was at Song and Brothers um and with Kaufman as
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Speaker 1: and and in some ways, I mean she there there
7:06
Speaker 1: are been legends she passes on to me is that
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Speaker 1: her uncle kind of created the Kauffman's job. So uh,
7:13
Speaker 1: there's always sort of a kinship there. But I mean
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Speaker 1: I didn't know anything about that at the time, but
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Speaker 1: I you know, the the role of a chief economist
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Speaker 1: on Wall Street appealed to me, and uh, Kauflin really
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Speaker 1: was the fellow who blazed the trail. So so you're
7:31
Speaker 1: you're at the IVY studying economics, you you find your
7:35
Speaker 1: way to the Federal Reserve. How do you make that
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Speaker 1: transition to actual finance to Wall Street from academic So
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Speaker 1: so what what was what? What led you there? It
7:46
Speaker 1: was easy. I was I was bored at the Fed. Uh,
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Speaker 1: I was writing these memos that were just put in
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Speaker 1: the file. As it turned out, they put me on
7:55
Speaker 1: a very important subject, which was a regulation queue and
7:57
Speaker 1: the savings and loan industry. So, I mean that came
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Speaker 1: in real handy for the SNL crisis in the late
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Speaker 1: eighties and the early nineties. So I I thought it
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Speaker 1: was prepared for all that. But you know, the transition, well,
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Speaker 1: she was easy. A head Hender called me up and said,
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Speaker 1: if Hutton's looking for somebody to uh be an economist
8:17
Speaker 1: on the fixed income a little fun side, And It's like, whoa,
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Speaker 1: this is exactly the job I'm looking for because that
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Speaker 1: was what Henry Kaufman did. Henrykauflin focused on the flow
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Speaker 1: of funds and the outlook for interest rates. And so
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Speaker 1: I mean I got the job one, two three. It
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Speaker 1: was great. I'm old enough to remember when the flow
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Speaker 1: of funds was something that people really retracts every week.
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Speaker 1: It was a big deal. And now it seems it
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Speaker 1: was huge. Yeah, if you're a called Kaufman. Actually, uh,
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Speaker 1: you know, spent an enormous amount of time. I had
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Speaker 1: a big staff predicting where the flow of funds was
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Speaker 1: going to go, and uh, I always thought it was
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Speaker 1: a little bit uh over the top, you know, I mean,
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Speaker 1: can you really forecast, you know, tough forecasting a couple
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Speaker 1: of members a little own hundreds of flow of funds numbers.
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Speaker 1: But he went through the exercise, and I guess I
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Speaker 1: worked for him until it didn't. I'm Barry rid Halts.
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Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
9:11
Speaker 1: guest today is Dr Edyard Denny. He is the founder
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Speaker 1: and chief strategist at Your Denny Research, which can be
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Speaker 1: found at the website well blog dot yard Denny dot
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Speaker 1: com is open to the public dot blog dot your
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Speaker 1: Denny dot com. Let's let's talk a little bit about
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Speaker 1: economics and economists and they're discontents, my favorite, my favorite
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Speaker 1: supe favorite. So let's start with just economic indicators. What
9:37
Speaker 1: are some of your favorite things to look at in
9:40
Speaker 1: helping you assess both the state of the economy and
9:43
Speaker 1: the overall stop market. You know, if you limited me
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Speaker 1: to one. I really like the crb raw Industrial Spot
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Speaker 1: Price Index and stop Spot Price Index for all commodities
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Speaker 1: or industrial thirteen industrial commodities. It does not include any
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Speaker 1: patrol in products. It doesn't include any wood products, which
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Speaker 1: is why I like it, because I think petrolium and
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Speaker 1: would have their own supply and demand. The main reason
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Speaker 1: I like it is because it's work. It's been available
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Speaker 1: for years, it's available daily, and it's a very sensitive
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Speaker 1: indicator of the global economy. Uh, and sometimes you get
10:14
Speaker 1: a little funky with it. I've kind of for many
10:17
Speaker 1: years been calculating the boom Bus Barometer, and that's simply
10:22
Speaker 1: that commodity index divided by initial unemployment claims, So it's
10:26
Speaker 1: it's a weekly number. So you're taking the commodity index,
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Speaker 1: which is a global indicator, but looking at US unemployment.
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Speaker 1: But looking at US unemployment, I mean, let's face it,
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Speaker 1: the U s economy in the past and continues to
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Speaker 1: be a major driver of the global economy. So it's
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Speaker 1: still working. I mean, it's conceivable that one of these
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Speaker 1: days the US won't be as important as it still is,
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Speaker 1: and that indicator won't be as helpful when we look
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Speaker 1: at initial claims but the commodity price index has been very,
10:54
Speaker 1: very helpful. But you know, like all indicators, you know,
10:57
Speaker 1: I got to know when to hold them went and
10:59
Speaker 1: it went to fold them run Sometimes when they don't
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Speaker 1: seem to work, they're they're helpful and in forcing you
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Speaker 1: to think about what's what's different this time around? And uh,
11:09
Speaker 1: you know, with a recent drop in the industrial commodity
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Speaker 1: prices until earlier this year, um I concluded there wasn't
11:16
Speaker 1: that the global economy was falling into recession. Whether we're
11:19
Speaker 1: just way too much supply of these commodities. Uh. So
11:22
Speaker 1: we've seen something similar with the Baltic Dry Index because
11:25
Speaker 1: people used to track that obsessively and then there were
11:29
Speaker 1: just a ton of new ships that came out suddenly.
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Speaker 1: That's right. It didn't indicate anything other than excess. It's
11:35
Speaker 1: a great point. So you gotta know when these indicators
11:38
Speaker 1: are useful on when they're not. This here be still
11:40
Speaker 1: useful of the Baltic isn't useful because you're just way
11:43
Speaker 1: too many ships out there. So that's uh. But but
11:46
Speaker 1: you know, I mean other than that, I mean, there's
11:48
Speaker 1: there's really nothing that I don't look at. I mean,
11:50
Speaker 1: I'll look at West Coast container traffic. I'll look at
11:53
Speaker 1: the rail you know, that's something I mean, I'm not
11:56
Speaker 1: the only one looking at this stuff. I mean, rail
11:57
Speaker 1: car loadings is something we look at closely. U. But
12:03
Speaker 1: we try try not not to ignore anything. We mentioned
12:06
Speaker 1: the Baltic dry indecks. What sort of economic indicators do
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Speaker 1: you think are a little overhyped or that perhaps investors
12:12
Speaker 1: should not put as much weight on as they actually did. Well,
12:17
Speaker 1: I think we give a tremendous amount of weight every
12:20
Speaker 1: month to the employment numbers um and they always get
12:23
Speaker 1: revised and repeatedly. And uh, not only that, but it's
12:28
Speaker 1: just you can really sink in that swamp that they
12:30
Speaker 1: hand out every every month. It's just so much data
12:33
Speaker 1: and information. We we try to cut to the chase.
12:37
Speaker 1: Maybe it's because I'm, you know, simple minded. I need
12:39
Speaker 1: to keep keep my mind focused on and one or
12:42
Speaker 1: two variables. But we do is we calculate something called
12:45
Speaker 1: the earned income proxy. And what that is simply is
12:48
Speaker 1: you take, okay, how many people are working, how many
12:51
Speaker 1: hours are they working, and what's their wage. It turns
12:54
Speaker 1: out that's exactly what the the Bureau of Labor Statistics
12:58
Speaker 1: does to get an initial estimate for wages and wages
13:02
Speaker 1: is what drives the consumer to a large extent, are
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Speaker 1: so um number of people working, how many hours they're working,
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Speaker 1: and what's their hourly wage? That gives you total total wages?
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Speaker 1: And then do you know you can use the month
13:15
Speaker 1: over a month change and uh, you know, like the
13:17
Speaker 1: last month, the everybody was disappointed by the peril number
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Speaker 1: it was. It was not a big number. It was disappointing.
13:24
Speaker 1: But when you looked at hours and wages um, the
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Speaker 1: earning income proxy was up like zero point seven percent.
13:31
Speaker 1: It's a big movement. I'm at a more over a
13:32
Speaker 1: month basis and it was a great harbinger of retail
13:35
Speaker 1: sales being better than expected. So let me ask you
13:40
Speaker 1: about an ongoing issue that people keep having problems with,
13:44
Speaker 1: which is measuring productivity. If you believe the data, we've
13:48
Speaker 1: seen no real productivity gains. I know you run a
13:52
Speaker 1: relatively small office and you're incredibly productive. I run a
13:56
Speaker 1: small office and I know what we do with a
13:59
Speaker 1: dozen or so pe people, right, we couldn't have done
14:02
Speaker 1: with less than fifty people ten So, so why aren't
14:06
Speaker 1: we seeing any gains in the productivity statistics? You know,
14:09
Speaker 1: I think it takes a long time for the government
14:12
Speaker 1: statisticians to recognize that they're missing something, and it could
14:17
Speaker 1: take ten, fifteen, twenty years, and then it could take
14:21
Speaker 1: him another five to ten years to do a special
14:24
Speaker 1: study to try to figure out what they're missing, and
14:27
Speaker 1: then they finally come up with a revised number. Um.
14:30
Speaker 1: You know, in capital spending, remember that R and D
14:34
Speaker 1: used to be expensed and now all of a sudden,
14:35
Speaker 1: it's included a long term investment. Yeah, now it's long
14:39
Speaker 1: term investment. Um. Software. I'm not even quite sure how
14:42
Speaker 1: you measure that, but there's a measure of software. I
14:46
Speaker 1: don't know. My my company is totally virtual. Everybody works
14:48
Speaker 1: from overword and we send all of our information to
14:52
Speaker 1: the Amazon Cloud. I'm not pitching their service, but we
14:55
Speaker 1: send it to the cloud and everything is done remotely.
14:59
Speaker 1: We used to have two servers sitting in a server farm,
15:02
Speaker 1: and the productivity of those machines had to be extremely low.
15:06
Speaker 1: We weren't using them very much. But now the Amazon Cloud,
15:09
Speaker 1: I had to believe that the servers that Amazon has, uh,
15:12
Speaker 1: those those servers are being used very intensively. But we're
15:15
Speaker 1: working twenty four by seven, So you know maybe maybe
15:19
Speaker 1: you know, we're putting out more output, but we're also
15:21
Speaker 1: working long hours because we're I mean, you're you're accessible
15:25
Speaker 1: on weekends and nights. We use a program called Slack,
15:28
Speaker 1: so not only is it as secure communication program, but
15:31
Speaker 1: we upload files and we share things and it's just
15:36
Speaker 1: basically made everybody reachable any time. I think, I think
15:40
Speaker 1: the productivity numbers are either right or they're wrong. Either
15:42
Speaker 1: you know, uh the statisticians have it more or less right,
15:46
Speaker 1: or else they're missing a lot of output. The truth
15:49
Speaker 1: maybe somewhere in between. But look, the reality is a
15:52
Speaker 1: lot of the jobs that have been created been created
15:54
Speaker 1: in the service sector, and we're only now starting to
15:56
Speaker 1: see technology entering the service sector. Uh. There's this robot
16:01
Speaker 1: Pepper that soft Bank is marketing and selling, and apparently
16:05
Speaker 1: MasterCard is using it in some restaurants in Japan. I mean,
16:08
Speaker 1: you know, we already have uh LaGuardia. You know, it's
16:12
Speaker 1: the so called Third World airport. We have iPad sitting
16:17
Speaker 1: there where you can order what you're gonna what you
16:19
Speaker 1: want to restaurant that, by the way, that's in one
16:22
Speaker 1: of the renovated terminals, that's the Delta terminal. Absolutely that
16:27
Speaker 1: was renovated, and um, I just read Fox con laid
16:30
Speaker 1: off sixty people. You look, at the end of the day,
16:34
Speaker 1: why do we really care about productivity in the answer
16:36
Speaker 1: is because he determines the standard of living. I'm Barry Ridhults.
16:40
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
16:44
Speaker 1: guest today is Dr Edyard Denny. He is the president
16:48
Speaker 1: and chief investment strategist at Your Denny Research. A long
16:54
Speaker 1: and storied career, he was chief economist at IF Hotton,
16:57
Speaker 1: chief investment strategist at Deutsche Bank, and one of the
17:02
Speaker 1: first people to begin warning about a computer glitch that
17:07
Speaker 1: was potentially problematic. You you very famously warned about the
17:12
Speaker 1: Y two K bug years years in advance. Your background
17:16
Speaker 1: is that of an economist. How on earth did you
17:19
Speaker 1: ever stumble into that odd little programming glitch? And before
17:24
Speaker 1: you answer for you young uns who may not remember this,
17:28
Speaker 1: it turns out that lots of computers were programmed with
17:31
Speaker 1: only two digits for the year, and I guess people
17:35
Speaker 1: forgot that eventually the century it will end. So instead
17:39
Speaker 1: of going to two thousand, after the concern was it
17:43
Speaker 1: was just going to roll over to nineteen O one
17:45
Speaker 1: or nine hundred and that would cause all manner of mayhem.
17:49
Speaker 1: So so how did you stumble onto that issue? Yeah,
17:52
Speaker 1: I UM, I guess during my wonder years. Um, you know,
17:56
Speaker 1: I uh. I went to elementary school in Cleveland, O
17:59
Speaker 1: High Oh, and then we moved to San Jose, California,
18:03
Speaker 1: which even back then was Silicon Valley. My father worked
18:07
Speaker 1: for IBM. It was in a science club, and UH
18:11
Speaker 1: learned four trend programming, so I've always had a interest
18:15
Speaker 1: in that. And when I went to UH cornell Um,
18:18
Speaker 1: I started out in engineering and just couldn't take differential equations.
18:22
Speaker 1: It was way too hard, and physics was way too hard.
18:24
Speaker 1: It's funny you say that. I started out applied mathematics
18:27
Speaker 1: physics at Stony Brook. By the time I hit my
18:30
Speaker 1: senior year, it's like, gee, you know, I'm up too much.
18:34
Speaker 1: So yes, I became an economist. But when I switched
18:37
Speaker 1: over to Arts and sciences, I still stayed with physics
18:40
Speaker 1: for one one last gasp and took a course in
18:43
Speaker 1: semiconductors and a course in UH material science really and
18:47
Speaker 1: and assembly programming. And I really like programming, but you know,
18:51
Speaker 1: I never really mastered it. I just kind of enjoyed it. Uh.
18:55
Speaker 1: And actually I think I was probably the first economists
18:59
Speaker 1: on All Street with his own website. I don't know
19:02
Speaker 1: how I got away with it. My firm let me
19:04
Speaker 1: actually put Dr Edyard Denny's Economics network on it. I
19:08
Speaker 1: remember that, and I would imagine they had no idea
19:11
Speaker 1: what a website was. They had no idea what the
19:13
Speaker 1: compliance department. Certainly no, no, there's no lawyers around. And
19:16
Speaker 1: so I had my own website. It was fantastic, UM
19:20
Speaker 1: and UM in the early nineteen the nine nineties for me.
19:24
Speaker 1: The eighties for me was when I was forecasting disinflation
19:27
Speaker 1: and I was very bullsh on bonds. The nineteen nineties,
19:30
Speaker 1: my focus, with the benefit of hindsight, turned out to
19:33
Speaker 1: be larger in technology. N I started to argue that
19:37
Speaker 1: we were in the early stages of high tech revolution. Uh.
19:43
Speaker 1: It was a great call. And as a matter of fact,
19:45
Speaker 1: I think back then the SMP five tech companies were
19:48
Speaker 1: about eleven percent of the market cap, and I predicted
19:51
Speaker 1: they get to seven seventeen percent. I think they got
19:53
Speaker 1: to twenty five percent of our market cap. And um,
19:59
Speaker 1: along the is that as that call worked out. UM
20:03
Speaker 1: my contry instincts came out a little bit, and uh,
20:06
Speaker 1: you know there were some of these ye two K
20:08
Speaker 1: companies that were fixing the problem, and so I I
20:12
Speaker 1: started to look into it. I mean, basically, the forecast
20:14
Speaker 1: was working out real well, and sometimes when something's working out,
20:17
Speaker 1: don't don't mess with it. Um. But um, when I
20:21
Speaker 1: saw that Alan Greenspan was starting to be a cheerleader
20:24
Speaker 1: for the tech revolution and was saying this is gonna
20:26
Speaker 1: be a once in a century development and uh was
20:31
Speaker 1: that like circle in nine? Yeah, but by nine he
20:35
Speaker 1: was actually he gave a speech called the the uh
20:39
Speaker 1: I think it was called the Technology Lottery, something to
20:42
Speaker 1: that effect. Basically he was saying that, uh yeah, tex
20:46
Speaker 1: tax seam overvalued. It's kind of questionable why a FED
20:49
Speaker 1: chairman should should be talking about evaluation. I think they
20:53
Speaker 1: were afraid that the bubble was going to burst, and
20:55
Speaker 1: he was. He was, and especially after the nine speech,
21:00
Speaker 1: famous irrationalist suberant speech four years early. I think he
21:05
Speaker 1: thought there was a credibility. He wanted to show that
21:07
Speaker 1: he was on top of it. But as you know,
21:11
Speaker 1: is he made it very clear that he wasn't in
21:14
Speaker 1: the bubble bursting business. That he cleaned up the mess
21:17
Speaker 1: after it happened, and so I started to worry a
21:19
Speaker 1: little bit more about the mess, and UH it seemed
21:22
Speaker 1: to me that White u K could create a problem. UH.
21:26
Speaker 1: And so I did start to write about that issue,
21:31
Speaker 1: and UH, suddenly I started to attract all these white
21:35
Speaker 1: touquet people, not not the fringe people, but UH, investment
21:40
Speaker 1: technology chiefs were calling me up and said, you know,
21:43
Speaker 1: it's good to have somebody outside of the industry kind
21:46
Speaker 1: of raising the flag. And as a matter of fact,
21:48
Speaker 1: it turned out that the sp F companies spent fifty
21:51
Speaker 1: billion dollars on the problem. UH, and as a result,
21:55
Speaker 1: we didn't have a problem. UH. So that that was
21:58
Speaker 1: that was a good thing. I think with the benefit
22:00
Speaker 1: of hindsight, UM, I I can to the right conclusion
22:05
Speaker 1: for for the wrong reason why du Que didn't cause
22:07
Speaker 1: a recession. Everything was was fixed. White UK led to
22:10
Speaker 1: contribute it to the technology bubble, which then burst in
22:15
Speaker 1: two thousand. I'm Barry Ridholtz. You're listening to Masters in
22:19
Speaker 1: Business on Bloomberg Radio. My special guest today is Dr
22:23
Speaker 1: Edyar Denny of your Denny Research, UH, formerly chief strategist
22:29
Speaker 1: at Deutsche Bank. You know before we get into the
22:32
Speaker 1: details of the global economy. I would be remiss if
22:35
Speaker 1: I didn't ask. So you've worked at US based banks
22:38
Speaker 1: like Prudential and E. F. Hutton, R. C. J. Lawrence. Alright, alright.
22:42
Speaker 1: Deutsche Bank, on the other hand, is this giant German
22:45
Speaker 1: bank with branch offices here in the US. What is
22:49
Speaker 1: the cultural differences like between a US bank headquartered in
22:54
Speaker 1: New York and an outpost of a European bank that
22:59
Speaker 1: might have a different philosophy or world deal. Well, you know,
23:02
Speaker 1: C C J. Lawrence when I joined it in the
23:04
Speaker 1: early nineties was owned by Morgan Grenfeld, but very arms length.
23:09
Speaker 1: And then Morgan Grenfell was bought by Deutsche Bank, also
23:12
Speaker 1: very arms length, and it took a while before the
23:14
Speaker 1: regulators in the US allowed the foreign banks to have
23:18
Speaker 1: any influence on on C. J. Lawrence. So you started
23:22
Speaker 1: at a company that was brought by Morgan Grenfell and
23:25
Speaker 1: then and eventually you came back to that later in
23:28
Speaker 1: your career. No, no, no, no, no no no. It
23:30
Speaker 1: was just the same, just the same for same different
23:34
Speaker 1: party exactly. So I mean the bottom line is I
23:37
Speaker 1: was there for basically, you know, the ninety nineties and
23:41
Speaker 1: I really didn't see much impact at all, because you know,
23:45
Speaker 1: Americans still basically ran the shop, and certainly on the
23:49
Speaker 1: on the equity side. It was only the kind of
23:51
Speaker 1: late period there that it became a little bit more international.
23:56
Speaker 1: But I didn't really see much of it because when
23:58
Speaker 1: when we've spoken to people for MUBS or credit Swiss,
24:02
Speaker 1: maybe it's just the Swiss, but it seems that there's
24:05
Speaker 1: a somewhat although you could say the same is true
24:07
Speaker 1: with Barclays and and the British is a little bit
24:10
Speaker 1: of a different philosophical mindset. Maybe that's amongst the sea
24:16
Speaker 1: level execs and by the time it filters down to
24:19
Speaker 1: the U S staff. I don't know that. I don't
24:22
Speaker 1: know if it's US versus foreign so much as it
24:25
Speaker 1: is big versus small. Uh. If Hutton was relatively small,
24:29
Speaker 1: Prudential Beich was relatively small, believe it or not, back then,
24:33
Speaker 1: um c J was small. But uh, you know, let's
24:36
Speaker 1: you start talking about Deutsche that's that's a big, big bank.
24:39
Speaker 1: I think. I think big organizations there's a lot of
24:42
Speaker 1: politics and uh, they seem to change their strategy and
24:45
Speaker 1: a regular basis, right every every quarter or so, so
24:48
Speaker 1: so let's talk a little bit about the global economy
24:51
Speaker 1: and the U S economy you mentioned earlier. The U
24:54
Speaker 1: S seems to be the locomotive that's driving a lot.
24:58
Speaker 1: So how do you compare how the US is doing
25:00
Speaker 1: versus Japan, Europe and emerging markets. Well, the US is
25:05
Speaker 1: doing great in some ways. It's reminiscent of the nineteen nineties.
25:10
Speaker 1: Remember back then there was the high tech revolution, and
25:13
Speaker 1: uh it was very US centric. If you wanted to
25:15
Speaker 1: invest in in technology, you pretty much had to be
25:19
Speaker 1: in the in the US. UM. When I was on
25:22
Speaker 1: the all Street, I recalled Dell boxes and everywhere you
25:26
Speaker 1: have to be careful not to trip over them. I
25:28
Speaker 1: remember that when I first started, uh, you know, and
25:31
Speaker 1: in the early nineties, it was a rare person who
25:34
Speaker 1: got a laptop. And then suddenly everybody's getting PCs and
25:37
Speaker 1: laptops and everything. So, uh, you know, the the the
25:42
Speaker 1: whole the whole environment. Uh on. Technology changed pretty dramatically,
25:47
Speaker 1: but again, the US was where you wanted to be. Uh.
25:50
Speaker 1: We had an emerging market crisis in nineteen ninety seven
25:53
Speaker 1: in Asia, the Russian Death crisis in nine. The Europeans
25:58
Speaker 1: were suffering from what they called rose clorosis, and they
26:01
Speaker 1: remember and they were trying to Yes, well, they're back
26:05
Speaker 1: to it, but they were just starting to put together
26:07
Speaker 1: the euro So the the world feels to me kind
26:10
Speaker 1: of like the second half of the ninety nineties, where
26:13
Speaker 1: the US was doing well and everybody else was kind
26:15
Speaker 1: of fumbling along. What's different this time maybe is the
26:19
Speaker 1: user is actually more diversified, and we're doing well in technology,
26:22
Speaker 1: we're doing all in finance, we're doing well in healthcare.
26:24
Speaker 1: Just across the board, we're doing extremely well. And um,
26:28
Speaker 1: you know, I think we did respond to the two
26:29
Speaker 1: thousand and eight crisis by restructuring a lot of the excesses.
26:34
Speaker 1: And uh, lawyers are you know, running rampant on on
26:37
Speaker 1: Wall Street, and banks have become regulated utilities, and look,
26:41
Speaker 1: we just had this energy debacle, and uh, it hasn't
26:44
Speaker 1: taken us down in the financial system, which I think
26:47
Speaker 1: has proof positive that we've learned something from from that experience.
26:50
Speaker 1: And the usual suspects came out and said, here comes
26:53
Speaker 1: two thousand and eight again, all these bad loans to
26:56
Speaker 1: the energy complex and go to bring the economy to
26:58
Speaker 1: a halt, you know, for the hills. I was called
27:03
Speaker 1: into one of my accounts at the beginning of the
27:05
Speaker 1: year a mutual fund of New York and UH thirty
27:08
Speaker 1: people in the room usually get fifteen people in the room.
27:10
Speaker 1: And and there was a lot of concerns about those issues.
27:13
Speaker 1: You know, how could seventy drop in the price of
27:16
Speaker 1: the world not lead to a debacle? How how could
27:19
Speaker 1: we not see the Chinese value in the currency. So,
27:22
Speaker 1: I mean, look, a lot of those issues are still
27:23
Speaker 1: out there. But this pool market has been really driven
27:28
Speaker 1: by UH central banks providing ultra easy monetary policies and
27:32
Speaker 1: corporate to finance managers, particularly in the US, buying back
27:36
Speaker 1: their shares. And so so far we really we've had
27:39
Speaker 1: a lot of panic attacks and followed by relief valllies
27:41
Speaker 1: in the stock market. But back to the global story. UM,
27:45
Speaker 1: it's hard to detect much of a pulse in UH.
27:49
Speaker 1: In the Eurozone UM in production production is actually flat
27:53
Speaker 1: for the past two years, which is it's kind of
27:56
Speaker 1: weird because car sales have actually been pretty good. In
27:59
Speaker 1: retail sales have been actually pretty good. So's there over
28:03
Speaker 1: there over there? Now? Is that a function of low
28:06
Speaker 1: costs of credit? It must be. It must be that
28:08
Speaker 1: you know, consumers are still consuming over there, but you
28:11
Speaker 1: know they're exports clearly are stuffering because the global economy,
28:15
Speaker 1: on balances is growing at a subpar pace. Japan is
28:19
Speaker 1: uh in a coma, and China is slowing down dramatically.
28:23
Speaker 1: China is the world's maybe biggest ever bubble of all times.
28:28
Speaker 1: Why why do you say bubble? That's interesting? Well, bubbles.
28:31
Speaker 1: You know we were talking about earlier in in our
28:34
Speaker 1: discussion about why it's so important to focus on debt
28:37
Speaker 1: UH and UH in thinking about financial markets. UM. The
28:42
Speaker 1: number there's floors me is when you look at bank
28:46
Speaker 1: loans outstanding in China UH in dollars, there were five
28:50
Speaker 1: trillion dollars in two thousand and eight, their fifteen trillion dollars.
28:54
Speaker 1: Now they've tripled. So over this same period, we've seen
28:58
Speaker 1: our bank loans go up by about a trillion UH.
29:01
Speaker 1: They certainly haven't tripled. UH. Now, how much of that
29:04
Speaker 1: is just driven by everyone forgets China is still essentially
29:08
Speaker 1: controlled sort of communists regime dabbling in capitalism. How much
29:14
Speaker 1: of this is the central makers saying lend money to
29:18
Speaker 1: businesses or pulled back. It's probably so. I mean, I
29:21
Speaker 1: I think China is being driven by the government trying
29:26
Speaker 1: to keep this thing from falling apart. But Japan kind
29:29
Speaker 1: of went down the same road. Remember they were the
29:32
Speaker 1: debt to GDP ratios. They also had their you know
29:37
Speaker 1: MITI remember the Industrial Policy Committee that's set down and
29:41
Speaker 1: said til Ritsu that that everything you have Mitsubishi motives
29:44
Speaker 1: and Mitsubushi banking and Mitsubishi real estate and control planning
29:49
Speaker 1: doesn't work. It works for a while until it blows up,
29:52
Speaker 1: works till it does, and it works until So let's
29:55
Speaker 1: talk about China, and I don't want to talk about
29:57
Speaker 1: a lucky outcome or a or a worse case scenario.
30:00
Speaker 1: Come Let's let's say China continues to run into problems.
30:05
Speaker 1: How does that play out going forward? I think we
30:09
Speaker 1: we have a we have a good example of where
30:13
Speaker 1: China's going, maybe where Europe's going, and eventually, well we're
30:17
Speaker 1: going though, I I don't think we're going to go
30:19
Speaker 1: down that same road. And that's Japan. You know, Japan
30:22
Speaker 1: was early on with the too much debt not enough.
30:26
Speaker 1: They started out with the bubble, and you know, China
30:28
Speaker 1: is going to be the Japan is gonna be the
30:29
Speaker 1: world's largest economy. I remember Rockefeller center, and oh they're
30:33
Speaker 1: coming and buying all that stuff, and they thought that
30:36
Speaker 1: they could take it back to Japan. But that was
30:38
Speaker 1: the fearback. And so when that bubble burst, what do
30:41
Speaker 1: they do? They lower their interest rates to zero. They
30:43
Speaker 1: were early on with a quantitative easing. They were actually
30:47
Speaker 1: late on negative interest rates, but they caught up earlier
30:49
Speaker 1: this year. The demography is terrible, the fertility rates collapsed,
30:53
Speaker 1: and no immigration, no immigration, the entire society is just
30:57
Speaker 1: rapidly aging with not a lot of Now China in
31:00
Speaker 1: many ways just a bigger version of all that. The
31:02
Speaker 1: demography is terrible. The one child act now they they've
31:06
Speaker 1: gotten rid of that, but it's gonna take a while
31:08
Speaker 1: to work. And they've been generation well, they've very interviewed
31:11
Speaker 1: couples and the couples say, well, thanks, but no thanks,
31:13
Speaker 1: it's too expensive to have a kid. Yeah, so it's
31:17
Speaker 1: not it's not obvious that that's going to turn things around.
31:19
Speaker 1: It's not gonna do anything for them anytime soon. You know.
31:22
Speaker 1: The The old concern was will China grow old before
31:24
Speaker 1: it grows rich? And uh, there's more and more evidence
31:27
Speaker 1: saying that it's chronicled faster than has grown rich. That's amazing.
31:31
Speaker 1: What about the US consumer, long the driver of much
31:35
Speaker 1: of the global economy. Can the US consumer keep consuming?
31:39
Speaker 1: And what about the ongoing de leveraging We've been well,
31:42
Speaker 1: God bless American God bless the American consumer. I mean,
31:45
Speaker 1: one one thing that American consumers are very good at
31:49
Speaker 1: is consuming. Uh and uh, they really haven't let us
31:53
Speaker 1: down over over the years. And I think there's some concerns,
31:57
Speaker 1: you know that the baby boomers who were yuppies and
32:00
Speaker 1: now they're getting older, are aren't doing the kind of
32:03
Speaker 1: spending they used to. And maybe maybe the millennials aren't
32:06
Speaker 1: going to pick a pick up the ball um or
32:09
Speaker 1: the baton as as well. But the thing this shows
32:12
Speaker 1: that consumers consume their incomes and uh, you know, employment
32:17
Speaker 1: has been growing, wages have been growing. Again, there's this
32:21
Speaker 1: uh myth out there that Americans, uh, wages have stagnated
32:26
Speaker 1: for the past twenty years. That's based on one statistic
32:29
Speaker 1: that's collected by the Census Bureau UH to measure poverty.
32:33
Speaker 1: And it's measured before taxes, it's measured before entitlements. UH.
32:38
Speaker 1: So it's uh, it's it's not a good measure of
32:40
Speaker 1: the purchasing power. The consumers actually have um so. People
32:44
Speaker 1: who want to find more of your writings, they go
32:47
Speaker 1: to blob dot your Denny dot com. We've been speaking
32:51
Speaker 1: with Dr edyar Denny of your Denny Research. If you
32:55
Speaker 1: enjoy this conversation, be sure and come back and check
32:58
Speaker 1: out our podcast, True is where we keep the tape
33:01
Speaker 1: rolling and continue chatting about all things economic. Feel free
33:06
Speaker 1: to check out my daily column on Bloomberg dot com.
33:10
Speaker 1: Follow me on Twitter at rit Halts. I'm Barry Hults.
33:15
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.
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33:44
Speaker 1: Slash Breakthrough, Cone Resnick Accounting Tax Advisory. Welcome to the
33:50
Speaker 1: podcast portion of our show. I don't know why I
33:53
Speaker 1: do this every time, I just feel feel obligated. Uh ed,
33:56
Speaker 1: Thank you so much for doing this. People have me
34:00
Speaker 1: about you, and I said, I know you for quite
34:03
Speaker 1: some time. We actually live in adjacent towns and have
34:06
Speaker 1: gone out to dinner with our respective spouses. UM, I
34:11
Speaker 1: have a ton of questions for you. But before I
34:13
Speaker 1: forget you, just reference the millennials versus the Boomers in
34:18
Speaker 1: the last segment. So let's talk a little bit about
34:21
Speaker 1: the difference between the two of them. The Boomers clearly
34:25
Speaker 1: passed their peaks spending the years other than medicinal marijuana.
34:30
Speaker 1: I couldn't guess what the average boomers spending money on.
34:34
Speaker 1: UM and the millennials seem to be a very different
34:38
Speaker 1: consumer cohort, at least so far. Maybe they'll follow in
34:43
Speaker 1: their parents footsteps, but it seems they're less inclined to
34:46
Speaker 1: buy a car between between rideshare and Uber and everything
34:51
Speaker 1: that right, they're living more in the cities, except when
34:55
Speaker 1: they're living at home with their parents, and usually there's
34:57
Speaker 1: an extra car lying around there. How DI from an
35:00
Speaker 1: economic perspective, our millennials versus the Boomers, well, the you know,
35:07
Speaker 1: the the boomers got married earlier in their lives than
35:12
Speaker 1: the millennials. Uh, the average age of marriage for both
35:15
Speaker 1: men and women has extended. Maybe that has something to
35:18
Speaker 1: do with social networking. You're gonna have plenty of dates
35:21
Speaker 1: whereas uh Si left. Yeah, I mean when when I
35:25
Speaker 1: was going to college, you know a lot of people
35:28
Speaker 1: married their high school and college sweethearts. Uh. And then
35:31
Speaker 1: the next thing you did is maybe you moved to
35:33
Speaker 1: the city, and then six months later you got pregnant,
35:36
Speaker 1: moved to the moved to the bourbs, and then got
35:38
Speaker 1: a couple of cars and then upgraded to a bigger house.
35:41
Speaker 1: And so it was. It was a different lifestyle than
35:44
Speaker 1: the millennials are used to. And you know, at some
35:47
Speaker 1: point they may you know, tire of you know, dating
35:51
Speaker 1: different people uh on a regular basis, and find their
35:55
Speaker 1: h that their true soul mate and settled down and
35:58
Speaker 1: decide time to have keys. But you know, the later
36:02
Speaker 1: you wait to get married, odds are you're gonna have
36:04
Speaker 1: fewer kids. And so I think the demography is I've
36:08
Speaker 1: always believed that demography is very, very important. Everybody thinks
36:11
Speaker 1: it takes too long to have an impact. I don't
36:13
Speaker 1: think that's the case at all. I think it explains
36:16
Speaker 1: a lot. The time is going to go by, whether
36:18
Speaker 1: you're looking at the demography or not. So why not
36:21
Speaker 1: at least be aware or of it. And the United
36:24
Speaker 1: States has a relatively high birth rate compared with other
36:28
Speaker 1: industrialized nations. How big of an advantage is that it's
36:31
Speaker 1: a huge advantage of fertility rates have collapsed around the world.
36:35
Speaker 1: Europe is flat, Japan is negative. It's nobody's got I
36:39
Speaker 1: don't think there's one explanation. I think, uh, uh, you know,
36:43
Speaker 1: when women have become economically freer in a lot of
36:46
Speaker 1: these countries, and I don't want to have as many kids,
36:49
Speaker 1: But the same is true in the US. How do
36:51
Speaker 1: you explain that? Or is the US that diverse culturally
36:54
Speaker 1: that New York is not, Chicago is not. I think
36:58
Speaker 1: I think it's diverse culturally, and uh, there's there, there's
37:03
Speaker 1: still uh. I mean, religion has a lot to do
37:06
Speaker 1: with with with people who are religious tant to have
37:09
Speaker 1: more kids, and so I think and getting married earlier
37:12
Speaker 1: and stay married, or at least that was the old theory.
37:15
Speaker 1: I don't know if the data. It used to be
37:17
Speaker 1: that you'd have to have a lot of kids to
37:19
Speaker 1: take care of you and your old age and the farm. Well,
37:23
Speaker 1: now the government takes is expected to take care of you.
37:26
Speaker 1: So what's the point of having kids. So I think
37:28
Speaker 1: that's had an impact. And but um, for one reason
37:31
Speaker 1: or another, there are lots of reasons why fertility rates
37:34
Speaker 1: have stayed Uh at we really had replacement, We're not
37:37
Speaker 1: really you know, slightly above, lightly above maybe when when
37:41
Speaker 1: most most of Europe is either slightly under or or
37:44
Speaker 1: significantly under. And then you look in Asia, and at
37:47
Speaker 1: least in Japan and China. I can't speak about Korea
37:50
Speaker 1: or Vietnam or India appears to be above replaced. But
37:56
Speaker 1: but the big developed powers like Japan and China, they're
38:00
Speaker 1: running a negative of fertility rate as well. Yeah, and Russia.
38:03
Speaker 1: Russia has got a terrible fertility Oh really, I haven't
38:05
Speaker 1: thought about that. So so what does this mean to
38:08
Speaker 1: the future of these countries economies? Well, I think one
38:12
Speaker 1: of the great challenges looking ahead. Um. I kind of
38:15
Speaker 1: learned my lesson from White que not to get to
38:18
Speaker 1: get too millennial about these things. But you know, a
38:23
Speaker 1: longer term, I mean, demography is destiny. I mean, you know,
38:26
Speaker 1: you know who's born, you know what the fertility rates are,
38:28
Speaker 1: you know how much longer people are living. How do
38:30
Speaker 1: we take care of all these old people? Um? Is
38:33
Speaker 1: that is Japan is kind of there. I say that
38:37
Speaker 1: half jokingly. On my summer reading list, I have the
38:40
Speaker 1: book Rise of the robot and Japan remains a massive
38:45
Speaker 1: export power. If are they capable and they're fairly automated
38:51
Speaker 1: in a lot of their factories, how far can this
38:55
Speaker 1: robotics revolution go? Can they replace the low birth rate
39:01
Speaker 1: in places like Japan and China at least for manufacturing.
39:06
Speaker 1: It's still kind of raises the question who's gonna pay
39:08
Speaker 1: for all that? I mean, if you got you know,
39:10
Speaker 1: people getting older and older not able to work. They
39:13
Speaker 1: need robots, but you know they need to eat, they
39:15
Speaker 1: need medication, they need transportation. Well, Switzerland, you gotta guarantee
39:19
Speaker 1: thirty tho dollar year salary coming up. Well again, these
39:22
Speaker 1: things all work until they don't work. I mean, you know, uh,
39:26
Speaker 1: I mean right now, central banks printing money is working
39:29
Speaker 1: until it doesn't work. So um, I you know, I
39:33
Speaker 1: don't think anybody is really trying to figure out how
39:37
Speaker 1: we manage in the future. It's not good for our kids. Um,
39:41
Speaker 1: but maybe they're too young to u But there are
39:44
Speaker 1: less and less of them, so it doesn't matter. I
39:46
Speaker 1: guess it doesn't matter as much. You mentioned central banks
39:49
Speaker 1: quee and zero interest rate policy. I would be remiss
39:53
Speaker 1: if I did not bring that up to discuss. So
39:56
Speaker 1: what is the impact of what the FED has done
40:00
Speaker 1: in terms of low rates and quantitative easing? Did they
40:05
Speaker 1: help solve the financial crisis by adding all this liquidly?
40:11
Speaker 1: And then what does it mean long term? And what
40:13
Speaker 1: what's the end game? How do they get out of this? Well,
40:15
Speaker 1: they solved the crisis that I think in some ways
40:19
Speaker 1: they were complicit in create. In creating. Listen, Greenspan took
40:22
Speaker 1: rates after nine eleven down to it was below two
40:27
Speaker 1: percent for a couple of years, and it was actually
40:29
Speaker 1: under one percent for a year, which was you know,
40:32
Speaker 1: you go back to the fifties and early sixties. You
40:34
Speaker 1: could see rates dip below one percent for a moment
40:37
Speaker 1: and then it's gone, not like here's twelve months of
40:40
Speaker 1: one percent or less. And Berninkia was giving a speech
40:43
Speaker 1: on the Great Moderation and saying that central banks have
40:47
Speaker 1: conquered the business cycle. A capitalistic system has its ups
40:51
Speaker 1: and downs. I mean, people have to deal with failure
40:54
Speaker 1: if they've speculated too much, and if the central bank says,
40:58
Speaker 1: don't worry about it, we'll give you the green span
41:00
Speaker 1: at the Bernankey, put the yell and put you know,
41:02
Speaker 1: it creates too much speculation, too much access, and too
41:04
Speaker 1: much debt. As I mentioned before, there's nobody that's doing
41:07
Speaker 1: that on a bigger scale right now than than the Chinese.
41:09
Speaker 1: It's just an enormous amount of debt relative to what
41:13
Speaker 1: eventually their economy can carry. So would we have This
41:17
Speaker 1: is a pet peeve of mine, and I try not
41:19
Speaker 1: to bring up too many of them, But would we
41:21
Speaker 1: have been better off in the two thousand and eight
41:25
Speaker 1: o nine crisis letting more banks, if not do a
41:29
Speaker 1: full Lehman face splat on the pavement, but do a
41:34
Speaker 1: full bankruptcy reorg and maybe Uncle Sam is the dead
41:38
Speaker 1: or in possession financer clean up these banks, rip the
41:42
Speaker 1: band aid off. I have to think the equity market
41:46
Speaker 1: would not have bottomed at six six six. Maybe we
41:48
Speaker 1: would have seen something much worse, But would we have
41:51
Speaker 1: been healthier in the long run? Well, I think I
41:55
Speaker 1: don't disagree with the notion that QUE one and help
42:00
Speaker 1: to end the crisis. I don't know that QUE three
42:02
Speaker 1: and four, all those other quis, I think they just
42:06
Speaker 1: I think the central banks have become just kind of
42:08
Speaker 1: like drug dealers, to to the economy and and and
42:12
Speaker 1: to the wants to go through withdrawal nobody wants and uh,
42:16
Speaker 1: you know, um again capitalism, this guy, it's winners and losers.
42:22
Speaker 1: I like to show Shark Tank on TV and now
42:24
Speaker 1: they're doing some segments showing what it's like after people
42:28
Speaker 1: get supported, and uh, winning is a lot of people
42:33
Speaker 1: lose after they win because they don't know how to
42:34
Speaker 1: manage their inventories and they fail, and some of them,
42:37
Speaker 1: you know, dust off and start all over again. But
42:40
Speaker 1: we we just don't have that kind of you know,
42:43
Speaker 1: central banks have kind of softened this up, and I'm
42:46
Speaker 1: not quite sure how we get out of this miss
42:49
Speaker 1: So right now, all the chatter has been on Juno
42:54
Speaker 1: July's interest rate increase in in two thousand and sixteen.
42:59
Speaker 1: For a while, look like every time the Fed looked
43:02
Speaker 1: like they were serious about an increase, the equity markets
43:05
Speaker 1: would throw a hissy fit. Here we are at coming
43:09
Speaker 1: to the end of the second quarter of sixteen, and
43:13
Speaker 1: it looks like markets are starting to accept that, hey,
43:16
Speaker 1: maybe the Fed is serious, and maybe the last rate
43:19
Speaker 1: increase was December. Maybe we're gonna see one or two
43:23
Speaker 1: rate increases this year. Is that putting us on the
43:27
Speaker 1: path to some form of normalization? I hope? So, I mean,
43:30
Speaker 1: you know, the word normalization is a very healthy word.
43:35
Speaker 1: I mean, we all want normal although one percent FED
43:38
Speaker 1: funds rate isn't what I would consider normal. No, it's not.
43:42
Speaker 1: But there are some structural forces out there that had
43:45
Speaker 1: nothing to do with the FED, like Agian demographics I
43:48
Speaker 1: think is slowing the global economy down. Technology is fundamentally
43:53
Speaker 1: disruptive global competition otherwise known as globalization. So there are
43:58
Speaker 1: the there are forces at work here that, uh really
44:01
Speaker 1: have structurally changed the outlook for inflation and for growth,
44:05
Speaker 1: and so maybe interest rates are going to stay historically love.
44:08
Speaker 1: So let's talk a little bit about you mentioned slowing
44:11
Speaker 1: growth due in part to demography. What do you think
44:15
Speaker 1: of the secular stagnation argument? Do you buy into that? Is?
44:20
Speaker 1: How responsible is demography? And or is this something that
44:23
Speaker 1: we eventually will innovate a way out. I buy into
44:27
Speaker 1: secular stagnation is a description of what we're going through.
44:31
Speaker 1: Um And since I buy into it, I'm buying into
44:34
Speaker 1: the words secular in other words, could could last a while.
44:37
Speaker 1: I don't buy into the Larry Summer's idea that we
44:41
Speaker 1: need more government policy to to get us out of
44:45
Speaker 1: this mess. Um, you know, I mean the next thing
44:48
Speaker 1: that government may very well do is helicopter money. Uh.
44:52
Speaker 1: It doesn't really mean that they're gonna rent helicopters and
44:54
Speaker 1: drop money. It means more infrastructial infrastructure spending. The rest
44:59
Speaker 1: fiscal directly financed by by the by by the federal government.
45:04
Speaker 1: The problem is we we we proved earlier on a
45:06
Speaker 1: few years ago that we're not shovel ready. There's too
45:09
Speaker 1: many regulations and it's not clear that you know, even
45:12
Speaker 1: if we did something like that, it would really show
45:15
Speaker 1: showing in our infrastructure. It would be nice if that
45:18
Speaker 1: was the case. Uh. You live not too far from
45:22
Speaker 1: Chicken Valley Road, which has finally, after years of falling apart,
45:27
Speaker 1: repaved and so the it took a major hurricane to
45:33
Speaker 1: just a couple of horrible winner So my my again.
45:38
Speaker 1: Another pet peev on infrastructure is our local airports are
45:42
Speaker 1: fairly terrible. They arrange for mediocre to terrible. Although to
45:47
Speaker 1: be fair, the renovated terminals in JFK are pretty nice
45:53
Speaker 1: and I think it's terminal for at Laguardi of the
45:56
Speaker 1: newest delta terminal, the one that has all the iPads
45:59
Speaker 1: to order food. That's a pretty all things considered. The
46:03
Speaker 1: rest of the airport is it dumping And that's such
46:05
Speaker 1: a short runway, it's no fun coming in anytime. It's wendy.
46:09
Speaker 1: But that said, the US really could stand for a
46:13
Speaker 1: massive infrastructure upgrade. You travel right here in Europe. You're
46:17
Speaker 1: an Asia preregularly. I'm astonished. The last time I was
46:20
Speaker 1: in Brussels in Italy, they were apologizing for their conditions
46:26
Speaker 1: of their roads, And I'm like, who do I have
46:28
Speaker 1: to pay off to get roads like this? And they
46:30
Speaker 1: think the roads are bad? No, I I can't. I
46:34
Speaker 1: don't know why we're such a miserable situation other than
46:38
Speaker 1: government regulation. And uh, I mean we we do spend money,
46:44
Speaker 1: but it just doesn't seem to show up in uh,
46:46
Speaker 1: in the infrastructure. We we haven't really, So here's I'm
46:49
Speaker 1: not in favor of cranking up taxes. And I know
46:52
Speaker 1: all the candidates for president have their own tax schemes,
46:56
Speaker 1: but dear lord, the gasoline tax has been frozen since
46:59
Speaker 1: nineteen three and and I just tanked up the other day.
47:03
Speaker 1: It was twenty six dollars. It's the cheapest high test
47:06
Speaker 1: I've ever seen fill up a tank. I'm happy to
47:11
Speaker 1: see that go up to twenty or thirty tents if
47:14
Speaker 1: the money goes to bridges and row you know, I mean,
47:17
Speaker 1: we we did have and during this administration, in the
47:20
Speaker 1: beginning administration, they are are the American Recovery and something
47:25
Speaker 1: has billion dollars and but what's supposed to be infrastructure,
47:30
Speaker 1: but it really wasn't. So about a third of it
47:32
Speaker 1: was temporary tax scots. If you're gonna make a tax cut,
47:35
Speaker 1: economic theory says it needs to be permanent to really
47:38
Speaker 1: have an impact, and temporary extension of unemployment. So that
47:42
Speaker 1: was like a two hundred billion dollars of which we've
47:45
Speaker 1: seen some improvements. But you know this is with the
47:49
Speaker 1: benefit of hindsight, we could have spent two to four
47:52
Speaker 1: trillion dollars over a decade and really just just barely
47:58
Speaker 1: just really barely started doing at The good news is
48:01
Speaker 1: both candidates seem to be in favor of infrastructure SPA.
48:05
Speaker 1: Let's see if they come up with an intelligent way
48:08
Speaker 1: um um to fund that. But all this fiscal conversation
48:12
Speaker 1: is really a way to get to a back doorway
48:14
Speaker 1: to get to a different question, which is have we
48:17
Speaker 1: reached the end of what monetary policy can do? I
48:22
Speaker 1: think we have, UM, and I think financial markets UM,
48:26
Speaker 1: I've kind of signaled that, UM. You know, we haven't
48:31
Speaker 1: seen the markets go down because you never know when
48:34
Speaker 1: a central bank we'll try another shock and awe, but
48:36
Speaker 1: we just don't get shocked and add the way we
48:39
Speaker 1: used to no response. You've you still see it in Japan.
48:42
Speaker 1: So the way I look at it, the US is done,
48:44
Speaker 1: Japan is sort of halfway through, and and Europe is
48:48
Speaker 1: just getting started. The problem is, UM, it's based on
48:53
Speaker 1: demand side management, right. If you can demand side manager
48:56
Speaker 1: and explain what you mean by that, I means you know,
48:58
Speaker 1: these easy money and you're gonna stimulate demand. Uh, you know,
49:01
Speaker 1: very very kenzy. I think the problem is that we're
49:05
Speaker 1: overloaded with debt, right, So I think that's where the
49:08
Speaker 1: central bankers are are just aren't in tune with reality.
49:12
Speaker 1: They've been doing this for so long that they're just
49:14
Speaker 1: way too much debt relative to income and so easy money. Empirically,
49:18
Speaker 1: we can see it's just not being very very stimulative anymore. UM.
49:22
Speaker 1: So here's here's a friend's argument, who is on the
49:26
Speaker 1: bond side, on the credit side, says, the Fed has
49:30
Speaker 1: kind of painted themselves into a corner because there's so
49:33
Speaker 1: much debt. If they actually were to take rates up
49:36
Speaker 1: to three and a half four percent, now, think of
49:38
Speaker 1: what you're doing with all this massive amount of debt
49:40
Speaker 1: you've just put out there, And what is that going
49:43
Speaker 1: to mean for the economy if everybody is buried under
49:45
Speaker 1: their debt services And in some ways we were lucky
49:48
Speaker 1: that some structural secular forces have kept inflation down. Imagine
49:53
Speaker 1: if all this liquidity really did bring back CPI inflation,
49:58
Speaker 1: then the central banks for credibility what have to raise
50:00
Speaker 1: interest rates, which would be disastrous. And so that's a
50:05
Speaker 1: that's another fascinating question. Why has inflation been so low
50:10
Speaker 1: for so long? And remember you go back to I
50:12
Speaker 1: want to say two thousand and ten, there was a
50:15
Speaker 1: very famous letter published in the Wall Street Journal from
50:18
Speaker 1: a number of really smart bond guys, equity guys, fund
50:23
Speaker 1: managers warning that hey, all this QUEUEI and and zurup
50:27
Speaker 1: is going to cause hyper inflation, and instead we saw
50:30
Speaker 1: disinflation and the risk of deflation. I think one of
50:34
Speaker 1: the big factors has been globalization and uh I impacked
50:39
Speaker 1: on the labor market especially. I I have a chart
50:43
Speaker 1: that I show of the cp I going back to
50:45
Speaker 1: eighteen hundred. It's a monthly chart, and obviously it's changed
50:49
Speaker 1: over the years. It used to be carosen and grain,
50:51
Speaker 1: now a whole bunch of other things include services, much
50:54
Speaker 1: more now than it did back then. And uh what
50:57
Speaker 1: that chart shows when you look at the level of
50:59
Speaker 1: the CPO, I just it just screams at you, and
51:02
Speaker 1: that is um, inflation tends to be associated with wars,
51:06
Speaker 1: and deflation tends to occur during peace times and after
51:10
Speaker 1: a long enough peacetime, you sort of have price stability.
51:15
Speaker 1: UM send me that short I'll post it when we
51:19
Speaker 1: I think what that confirms for me is that micro
51:23
Speaker 1: economics has become more relevant or is more relevant than
51:26
Speaker 1: macro economics and things about the households. Economics is going
51:29
Speaker 1: to be more significant than what I want. What I
51:33
Speaker 1: mean is macro economists are looking at too big, at
51:36
Speaker 1: the big picture. The micro economists looking at market structure,
51:40
Speaker 1: and uh so they're saying, Okay, are the markets competitive
51:43
Speaker 1: or they're monopolized? In war times, it's very little competition,
51:48
Speaker 1: and you tend and then you can't trade with your enemies.
51:50
Speaker 1: It's hard to trade with your friends, so you tend
51:52
Speaker 1: to have a lot of inflation, a lot of the
51:54
Speaker 1: labor forces in the trenches, peace breaks out. That's globalization.
51:57
Speaker 1: This is not the first round of globalization we've ever had.
52:00
Speaker 1: We had after this, the War of eighteen twelve, after
52:02
Speaker 1: the Civil War, after World War One, and it's just
52:08
Speaker 1: what happens is you now can trade with people around
52:11
Speaker 1: the world and there's more competition. Is really what happens,
52:15
Speaker 1: you know, you mentioned trading with people around the world.
52:18
Speaker 1: Last week we had professor Stephen Pinker of Harvard who
52:22
Speaker 1: two books ago wrote The Better The Better Nature of
52:26
Speaker 1: Our Angels wha looking at why globally despite the headlines,
52:32
Speaker 1: the amount of crime, the amount of violence, the amount
52:35
Speaker 1: of wars or at record lows. So so when you're
52:38
Speaker 1: trading with China and Russia and Japan and Germany, and
52:44
Speaker 1: where go around the world, Korea, wherever Vietnam, President Obama
52:48
Speaker 1: was just in Vietnam, you're much less likely to launch
52:52
Speaker 1: a bombing attack on the place where you're getting your
52:56
Speaker 1: supply chain to make your your your goods. So is
53:00
Speaker 1: is possibly a long piece that we're entering. That means
53:03
Speaker 1: that globalization is going to be ongoing. Deflation or at
53:08
Speaker 1: least disinflation is not likely to go away. And and
53:12
Speaker 1: we have really a very different economy than we had
53:16
Speaker 1: last century. You never want to jinx it. Uh, you know,
53:20
Speaker 1: I'm sure, like if I had that right before World
53:23
Speaker 1: War One, I'm sure somebody permanently high plateau remember globalization,
53:29
Speaker 1: and you know, everything like just hunky dory. I mean,
53:31
Speaker 1: we're dealing here with humans here, and but but these
53:33
Speaker 1: are big secular I think another way to put it
53:37
Speaker 1: is there's just so much money now that's at risk
53:41
Speaker 1: with globalization. People are making a lot of money with
53:44
Speaker 1: free trade um. And there's a lot of complaints about
53:49
Speaker 1: the income inequality, but the world on a on average
53:52
Speaker 1: has become more equal. I mean, we've we've lost some
53:54
Speaker 1: income here, but other countries of emotional markets have and
53:58
Speaker 1: and the population and the most empowerished. That's why it's
54:02
Speaker 1: a more peaceful world. People have more of a steak
54:06
Speaker 1: in maintaining peaceful relationships and and and and engaging in commerce.
54:12
Speaker 1: Professor Pinker had said something that I thought was really fascinating,
54:16
Speaker 1: which was we see a surprising little impact on crime
54:22
Speaker 1: and war from affluence, except when people have zero hope,
54:28
Speaker 1: nothing to live for. The all the most impoverished nations
54:32
Speaker 1: that were in lots and lots of civil wars last century,
54:37
Speaker 1: many of them have worked their way out of that state,
54:40
Speaker 1: and the wars tend to go away. They tend to
54:43
Speaker 1: be more economically productive. And trade is a big cause,
54:46
Speaker 1: and it makes all the sense in the world. I mean,
54:48
Speaker 1: when people have aspirations and the thing they can do better,
54:52
Speaker 1: they're gonna do better. Uh. If you cut them off
54:55
Speaker 1: from those and they have nothing to lose, then they
54:59
Speaker 1: behave like that. So crime war, civil war old. That's
55:04
Speaker 1: so you men should income inequality? Um, what are your
55:08
Speaker 1: views on what that means? Here in the United States,
55:12
Speaker 1: at least in the developed world. There have been lots
55:15
Speaker 1: and lots of complaints. Be it picketty, be it I
55:19
Speaker 1: could give Robert Frank There's a whole run of folks
55:21
Speaker 1: who have looked at numbers and said, yes, the distribution
55:26
Speaker 1: of wealth has changed, but it hasn't changed so much
55:29
Speaker 1: as the middle class versus the upper class. It's changed
55:33
Speaker 1: most dramatically in the upper class versus the upper upper
55:38
Speaker 1: upper the point oh one of of earners. What does
55:42
Speaker 1: that mean and what should we do about it? If anything? Well,
55:48
Speaker 1: I think this process of globalization, free trade uh has
55:53
Speaker 1: created more income equality on a global basis. But you know,
55:58
Speaker 1: and by the way the data supports you on that,
56:00
Speaker 1: then there are far less people living completely in poverty
56:03
Speaker 1: than there were fifty years. The problem, though, is if
56:07
Speaker 1: you were making a lot of money as an auto
56:09
Speaker 1: worker or some manufacturing and suddenly the job is not
56:13
Speaker 1: even there, obviously, you're gonna feel dispossessed. You're gonna feel like,
56:17
Speaker 1: you know something, something's been taken away from you. So
56:19
Speaker 1: I think we have to acknowledge that. I mean, we
56:21
Speaker 1: can't just like pretend that's that's not the case. Um.
56:26
Speaker 1: But I don't think politically we want to get carried
56:29
Speaker 1: away with this notion that Americans are are not doing well. Um.
56:36
Speaker 1: I think we we need to really focus on the
56:39
Speaker 1: fact that this country on average is doing well. But
56:43
Speaker 1: you know, and acknowledge it. Part of that average, of course,
56:46
Speaker 1: is the rich are getting richer. Um. But look, um,
56:50
Speaker 1: you know it's it clearly gets into the whole politics
56:53
Speaker 1: of taxation and whether we're taxing enough. Um. I happen
56:58
Speaker 1: to believe that, uh, jobs and wages are created by
57:03
Speaker 1: profitable companies for sure. So I'm all for uh, what
57:09
Speaker 1: I call entrepreneurial capitalism. I'm against chrony capitalism, and I
57:14
Speaker 1: think I think a lot of the excess is that
57:17
Speaker 1: the income inequality people are looking at rightly, so are
57:21
Speaker 1: in the chrony capitalism arena. But capitalism has blamed for it,
57:27
Speaker 1: and I think it's uh, it's it's when chrony capital
57:29
Speaker 1: star and cahoots with politicians that we get our income inequality.
57:34
Speaker 1: I mean, one of the highest standards of living in
57:36
Speaker 1: America today's in Washington, d C. I wonder why that
57:39
Speaker 1: might be the case if you look at it's so
57:43
Speaker 1: let me back up a sec. When you look at
57:45
Speaker 1: who's doing well and who's not doing well in the US,
57:48
Speaker 1: you can control for a number of things. If you
57:50
Speaker 1: can control for degree of education, that's very insightful. If
57:55
Speaker 1: you can control for what sector of the economy you're
57:58
Speaker 1: working in. That pro had some information, But it's surprising
58:02
Speaker 1: at how many winners and losers there are geographically Minnesota
58:08
Speaker 1: doing fantastic, Seattle, Portland, San Francisco, Boston, New York. But
58:13
Speaker 1: what really is the standout more than any period I
58:17
Speaker 1: can remember over the past half century, Washington, d C.
58:20
Speaker 1: And all the surrounding environments, house to fire, absolutely blown up.
58:25
Speaker 1: Politics is a good business. It I don't think it
58:28
Speaker 1: always was as lucrative of businesses now I don't know
58:31
Speaker 1: if that's the lobbying side, and some of the Supreme
58:33
Speaker 1: Court cases that changed and gamed and gamed. It seems
58:38
Speaker 1: like the past since two thousand, the past twenty fifteen
58:42
Speaker 1: or so years, it's really exploded, so so that that's interesting.
58:47
Speaker 1: So in terms of what we should be looking at
58:51
Speaker 1: income inequality, I get the sense that you would like
58:55
Speaker 1: to see the US corporate tax code revamped, changed, simplified,
59:00
Speaker 1: And I think I think the entire tax code that
59:03
Speaker 1: it needs to be simplified for for the good of
59:05
Speaker 1: all of us. I mean, clearly it benefits tax lawyers. Um.
59:10
Speaker 1: But if we clean up the corporate tax code, he said,
59:13
Speaker 1: talking his own book. UM, I got the sense you
59:17
Speaker 1: think that it would be more hiring and more employment
59:20
Speaker 1: if if that was if there were less impediments. So anything,
59:23
Speaker 1: anything in my mind that increases profit legitimately, uh, and
59:28
Speaker 1: in a competitive entrepreneurial system is going to create more jobs,
59:31
Speaker 1: and it's going to create more wages because there'll be
59:33
Speaker 1: more demand for labor and and wages will go up.
59:36
Speaker 1: So yeah, I think it also gets into the issue
59:39
Speaker 1: of the double taxation of dividends um and how how
59:42
Speaker 1: we value stocks. I mean, we just raise taxes on
59:45
Speaker 1: dividends a few years, so that's now what are we
59:49
Speaker 1: a twenty three something? Yeah? I mean I'd like to
59:51
Speaker 1: see the stock market go back to dividend discount evaluations
59:56
Speaker 1: where we all we really care about is there's the
59:59
Speaker 1: company been paying it dipen in and are they increasing it?
1:00:01
Speaker 1: Everything else is accounting fluff. So so what do we
1:00:04
Speaker 1: at about two point eight percent or so on the
1:00:07
Speaker 1: I'm doing this for memory on the SMPI dividend yields.
1:00:10
Speaker 1: It's actually answer about that alright, plus or mind us
1:00:13
Speaker 1: a little bit. What happens to that number if and
1:00:16
Speaker 1: when the FED things rates up to one and a
1:00:19
Speaker 1: half two percent, Because right now the argument is, hey,
1:00:22
Speaker 1: you get a two point nine percent dived and yield
1:00:24
Speaker 1: or two point seven percent dive in yield, and you
1:00:26
Speaker 1: get all the upside of of the best of corporate
1:00:29
Speaker 1: America when you could buy a safe three treasury yield.
1:00:34
Speaker 1: What does that mean for sp I? I think, you know,
1:00:38
Speaker 1: one of the things that I've learned over the years
1:00:42
Speaker 1: is I wish I had a lot more money when
1:00:43
Speaker 1: I was younger. Just put it all in dividend yielding stocks. Well,
1:00:47
Speaker 1: with the benefit of hindsight, for sure. I mean, there's
1:00:50
Speaker 1: nothing like putting your money in a company that's increasing
1:00:54
Speaker 1: its dividend over the years. Um, you know, if you
1:00:58
Speaker 1: sleep all at night, you you just kind of stick
1:01:01
Speaker 1: with it. And so I would say for younger folks
1:01:04
Speaker 1: that's not a bad thing to do. And um, you know,
1:01:07
Speaker 1: eliminating the double taxation of dividends would be nice thing.
1:01:10
Speaker 1: So in a tax defered account. Um, I'm under the
1:01:13
Speaker 1: impression that going back to I want to say, nineteen
1:01:17
Speaker 1: six and again I'm I'm doing this from memory, almost
1:01:20
Speaker 1: half of the Dow returns have been reinvested dividends, that right,
1:01:27
Speaker 1: if not more so, And you would think, what's two
1:01:30
Speaker 1: and a half three percent? But over time that that
1:01:32
Speaker 1: really compounds. All right, let me see what there was
1:01:35
Speaker 1: one or two other questions I wanted to get through
1:01:39
Speaker 1: before I start going to my standard questions. Although we've
1:01:43
Speaker 1: really covered a lot of these um one less since
1:01:49
Speaker 1: you since you covered both economics and the markets, there's
1:01:52
Speaker 1: one question that always comes up that and you're the
1:01:55
Speaker 1: perfect person to ask this. So it seems very often
1:01:59
Speaker 1: like the markets are out of sync with the economy.
1:02:03
Speaker 1: You know, how do you reconcile that which drives which
1:02:06
Speaker 1: or is it mutual? I think it's mutual. The the
1:02:12
Speaker 1: stock market can't get too out of out of sync
1:02:15
Speaker 1: with with the economy, unless, of course, we're in a
1:02:18
Speaker 1: speculative bubble situation, and which case it can come back
1:02:21
Speaker 1: to bite us, which is what we've seen a few
1:02:24
Speaker 1: times here over over the years where what they're talking
1:02:27
Speaker 1: about the market being the stock market or the housing market.
1:02:30
Speaker 1: When ascid values get way out of sync with reality
1:02:34
Speaker 1: because of speculative excesses, that can come back and create
1:02:38
Speaker 1: a financial crisis and a recession. So um again. I
1:02:45
Speaker 1: most economists, macroeconomists tend to focus on the business cycle.
1:02:49
Speaker 1: I prefer to focus on the profit cycle. I think
1:02:51
Speaker 1: it's the profit cycle that drives the business cycle. The
1:02:54
Speaker 1: business cycle is basically sort of again a demand side construct. It's, uh,
1:02:59
Speaker 1: how do we stay mulate demand so that business does better?
1:03:03
Speaker 1: And I'm thinking more from a supply side standpoint, you know,
1:03:06
Speaker 1: how do we have companies generate more profits so that
1:03:09
Speaker 1: they'll want to expand capital and hire people, and then
1:03:12
Speaker 1: those people go and spend money. Um, So they're clearly
1:03:16
Speaker 1: there's it's it's not one. It's not one direction that
1:03:19
Speaker 1: works both ways. So let's talk a little bit about profits.
1:03:22
Speaker 1: We we've had corporate profits at or near record highs
1:03:26
Speaker 1: for the past six years. We've seen profits come down
1:03:31
Speaker 1: when oil prices plummeted. That was almost or maybe a
1:03:35
Speaker 1: little over ten percent of the smp UM and their
1:03:39
Speaker 1: profits basically just collapsed. Where are we in the profits
1:03:43
Speaker 1: cycling and what's the most important thing to watch for
1:03:47
Speaker 1: as that moves forward? Well, and I an historical cyclical basis,
1:03:54
Speaker 1: were relating to the expansion phase. I mean, when we
1:03:56
Speaker 1: had the recovery, which is V shaped and that was
1:03:59
Speaker 1: based simply two then uh, we recovered back to the
1:04:05
Speaker 1: previous high and have been moved on to two new
1:04:08
Speaker 1: eyes at at a slower pace. So that's sort of
1:04:11
Speaker 1: the the expansion. What really hasn't happened yet is margins
1:04:15
Speaker 1: haven't compressed. Usually profit margins compressed at this point in
1:04:18
Speaker 1: the cycle because companies get to slap happy. Business is great,
1:04:21
Speaker 1: they hire too many people, they spent too much because
1:04:24
Speaker 1: the two thousand night. They're being very careful not to
1:04:27
Speaker 1: do at this time. So the margins haven't regressed to
1:04:31
Speaker 1: the mean as they say. They stayed at a record
1:04:34
Speaker 1: high and that may very well continue to be the case.
1:04:37
Speaker 1: So profits are going to be driven by the growth
1:04:40
Speaker 1: of revenues, and revenues will be driven by global economic activity,
1:04:44
Speaker 1: which looks pretty punk. It looks so you know, maybe
1:04:47
Speaker 1: looking at three growth globally and maybe two to three
1:04:52
Speaker 1: percent inflation. Six not terrible, but that's probably what profits
1:04:56
Speaker 1: are gonna grow, and it's probably what the market's gonna do.
1:04:58
Speaker 1: Isn't that more or less the average? We've seen six
1:05:01
Speaker 1: percent profits, even though the analysts of forecasting for forever
1:05:05
Speaker 1: analysts tend to be too optimistic and have to lower
1:05:08
Speaker 1: their numbers. Um. But yeah, I think that's true. I mean,
1:05:11
Speaker 1: we're kind of an average. So so what should investor
1:05:15
Speaker 1: be looking at for signs that either profit compression is
1:05:18
Speaker 1: coming along or that the cycle is you know, at
1:05:22
Speaker 1: the end of its row. Um. The problem with the
1:05:27
Speaker 1: profit margins data as it's available only quarterly, with a lag.
1:05:32
Speaker 1: We we look at some data that's actually available weekly,
1:05:35
Speaker 1: but it's based on analyst consensus expectations. UM. I think
1:05:41
Speaker 1: at the end of the day, it's still gonna be
1:05:43
Speaker 1: a perception of what do you think the economy is doing?
1:05:45
Speaker 1: If the economy just continues to chug along like this,
1:05:49
Speaker 1: muddle along, and that's what the global economies is doing,
1:05:52
Speaker 1: maybe kind of lagging behind, but still growing, I think
1:05:55
Speaker 1: you can pretty much count on earnings growth matching revenues
1:05:59
Speaker 1: growth in the stock market giving you kind of mid
1:06:02
Speaker 1: single digit returns. Hey, that's not if that's if that's
1:06:05
Speaker 1: what we're looking at. That's not the worst sort of
1:06:08
Speaker 1: environment at all, considering we're still you know, six seven
1:06:12
Speaker 1: years and if you don't dividend paying stocks will continue
1:06:14
Speaker 1: to pay you the the dividends, and uh yeah, this
1:06:17
Speaker 1: is just not an environment to do anything, really trick
1:06:20
Speaker 1: to your jazzy. So six plus two and a half
1:06:23
Speaker 1: eight and a half nine percent is not the worst
1:06:25
Speaker 1: sort of not the worst sort of thing. All right,
1:06:27
Speaker 1: So let's get to some of my favorite questions. We
1:06:30
Speaker 1: talked a bit about your background and what you did
1:06:33
Speaker 1: before you were on the street. Let's talk about your
1:06:36
Speaker 1: early mentors. You mentioned Henry Kaufman. Who else was an
1:06:39
Speaker 1: early mentor to you? Well, again, Henry Kaufman was a
1:06:42
Speaker 1: mentor from AFAR. I mean I sort of aspired that
1:06:45
Speaker 1: I liked what he the job he had, and you know,
1:06:48
Speaker 1: kind of followed his career path in some ways. Uh.
1:06:51
Speaker 1: Greg Smith was an investment strategist that I worked with
1:06:55
Speaker 1: very closely at UH at EF Hutton and Prudential all
1:07:00
Speaker 1: that I moved over to C. G. Lawrence and Jim
1:07:03
Speaker 1: Maltz was the investment strategy fail. So you know, some
1:07:07
Speaker 1: of these guys are sort of uh legends within within
1:07:12
Speaker 1: the business of investment strategy. So I learned a lot
1:07:15
Speaker 1: from them and kind of segued into being investment strategist.
1:07:18
Speaker 1: Economists aren't really taught academically too. To help people be
1:07:25
Speaker 1: good investors, you have to learn that on the streets.
1:07:28
Speaker 1: So I think I had some good mentors along those lines.
1:07:32
Speaker 1: So so what that that raises a good question? What
1:07:35
Speaker 1: investors do you think you've learned from over the years.
1:07:38
Speaker 1: In terms of famous or colleague you worked with? Um? Well, um, again,
1:07:45
Speaker 1: not all these people are household media stars, but the
1:07:50
Speaker 1: warm buffet aside. Yeah, I mean Warren Buffett and and
1:07:54
Speaker 1: I haven't crossed paths, but you know, I've I've had
1:07:57
Speaker 1: regular conversations almost weekly with all a boy name of
1:08:00
Speaker 1: Hank Herman, who uh runs what L Reid uh and
1:08:06
Speaker 1: uh you know, we we've I've learned a lot from
1:08:09
Speaker 1: him early on and when I was doing particularly well
1:08:12
Speaker 1: in the bond markets forecast. Um. Van Hoysington's uh very
1:08:19
Speaker 1: well well regarded names. I think it's especially unemployment data.
1:08:22
Speaker 1: And I think in some ways he really is the
1:08:25
Speaker 1: bond king. Uh. You know, I mean Bill Gross gets
1:08:28
Speaker 1: that label. Uh and a couple of other people have
1:08:30
Speaker 1: been labeled bond kings, but uh, Van Hoysington's has been
1:08:35
Speaker 1: bullish on bond since the early eighties and good timing
1:08:40
Speaker 1: and manager portfolio with very very good returns. And he's
1:08:44
Speaker 1: the one that I kind of got the phrase hat
1:08:48
Speaker 1: sized bond yields back when Bonnier. Uh. I walked into
1:08:53
Speaker 1: also and I said, you know, Van, I think bond
1:08:55
Speaker 1: yields could go to seven percent. I said, yeah, you know,
1:08:58
Speaker 1: his Texas drawl had sized bond yields. So I picked
1:09:03
Speaker 1: up on that and I worked really well for me
1:09:05
Speaker 1: in the eighties. So I have to thank him for
1:09:08
Speaker 1: helping uh my career in the early part of of
1:09:11
Speaker 1: that period. So let's talk about some books. What are
1:09:13
Speaker 1: some of your favorite be a nonfiction market related fiction.
1:09:17
Speaker 1: I like history a lot um and um, I like
1:09:22
Speaker 1: uh biographies. Uh um. I've been particularly fond of reading
1:09:28
Speaker 1: uh biographies of the founding fathers uh and sort of
1:09:32
Speaker 1: what they're they're philosophical. Ben sure, I'm a big fan
1:09:35
Speaker 1: of Madison. Uh so Yeah, who wrote the most recent
1:09:39
Speaker 1: Madison bio? I I mean I got three or four
1:09:42
Speaker 1: books on the shelves and uh, I'm not good to
1:09:45
Speaker 1: remember any authors, but um then UM, I like reading
1:09:50
Speaker 1: uh the so called you know Robert Barons. Uh. Some
1:09:53
Speaker 1: of them weren't really Robert Barons. So so that's like Carnegie.
1:09:58
Speaker 1: Ye who else is in that less well child? You
1:10:02
Speaker 1: certainly Rockefeller, you know, I think his uh you know
1:10:06
Speaker 1: he uh. He was sort of attacked for putting a
1:10:13
Speaker 1: lot of people out of out of business, but a
1:10:15
Speaker 1: lot of more small little businesses that weren't doing very efficiently,
1:10:18
Speaker 1: and his number one interest was to lower the price
1:10:22
Speaker 1: of carosene so it would be more affordable to a
1:10:24
Speaker 1: lot more people. So he probably did more to increase
1:10:26
Speaker 1: standards of living that many other people uh in in
1:10:29
Speaker 1: in uh in industry. So I like, I like reading
1:10:33
Speaker 1: the controversies about you know, people who kind of believe
1:10:37
Speaker 1: that these people were Robert Barns, and then what was
1:10:40
Speaker 1: the real story. Some of them were absolutely Robert Barrens.
1:10:42
Speaker 1: They were chrony capitalists, but some of them were really
1:10:45
Speaker 1: committed to, you know, providing a better product and service
1:10:48
Speaker 1: to to the consumer. Give me, give me one more
1:10:51
Speaker 1: book to put down for a trilogy here. Well, look, um,
1:10:56
Speaker 1: you know what, at the risk of you know, sounding trite,
1:11:01
Speaker 1: I mean I uh, I mean Adam Smith the Wealth
1:11:05
Speaker 1: of Nations and combined with the theory of moral sentiments
1:11:09
Speaker 1: is certainly uh the Bible for me. I don't think
1:11:13
Speaker 1: anyone is going to call Adam Smith trite, at least now,
1:11:16
Speaker 1: and at least, you know, pretending that you know, it's important.
1:11:22
Speaker 1: I mean it is. I mean, I'm not pretending. I
1:11:26
Speaker 1: learned a lot from that book. So, but but you know,
1:11:29
Speaker 1: as I did from Milton Friedman's Monetary History. Um, but
1:11:35
Speaker 1: I have to say I didn't really learn much from
1:11:38
Speaker 1: the General Theory by John Maynard Keynes. I mean, I
1:11:41
Speaker 1: studied in a keensie and discipline, but it never kind
1:11:44
Speaker 1: of made sense to me, quite honestly. So you're you're
1:11:47
Speaker 1: more of a freedman night than a keensie. I'm more
1:11:50
Speaker 1: um Madisonian, you know, constitutional economist, I think, you know,
1:11:59
Speaker 1: and environment where entrepreneurial capitalists, not chronic capitalists are, are
1:12:05
Speaker 1: set free and don't get in each other's way by
1:12:08
Speaker 1: hiring lobbyists. Um, I like, I like people who you know,
1:12:13
Speaker 1: wake up in the morning trying to figure out how
1:12:15
Speaker 1: to make it a better world for consumers. So so
1:12:17
Speaker 1: let me ask you this question, what should we do
1:12:20
Speaker 1: about this bullmarkt and lobbyists, about the never ending parade
1:12:26
Speaker 1: through the holes of Congress, of of special interests and
1:12:30
Speaker 1: people who don't care about Madison, who don't care about
1:12:36
Speaker 1: Adam Smith. But basically, you're paid to be mercenaries on
1:12:39
Speaker 1: behalf of the system has become horribly corrupt. So how
1:12:44
Speaker 1: do you fix that? It's it's so corrupt that I
1:12:47
Speaker 1: don't really know how you fix it. Do you do?
1:12:51
Speaker 1: You overturn some of the legislation or some of the
1:12:54
Speaker 1: Supreme Court decisions. Start out with one term, you know,
1:12:58
Speaker 1: I mean the fact that you know I guess there's
1:13:00
Speaker 1: a congressman that just came up with an anonymous book
1:13:03
Speaker 1: about what it's really like to be a congressman. And
1:13:05
Speaker 1: there's apparently nothing new and there other than telling us
1:13:09
Speaker 1: what we know. And it takes you spend all your
1:13:11
Speaker 1: time raising money and then you're beholden to the people
1:13:14
Speaker 1: you you raise money with. I mean, it's unfortunately, is
1:13:17
Speaker 1: kind of the human condition people. This is where I
1:13:20
Speaker 1: actually agree with disagree with Adam Smith. Adam Smith said
1:13:23
Speaker 1: the capitalism is based on selfishness is actually based on insecurity.
1:13:28
Speaker 1: It's insecure people that are that are trying to now
1:13:32
Speaker 1: make their customers come back by providing them with something
1:13:34
Speaker 1: really good. Unfortunately, there's other insecure people that just higher
1:13:39
Speaker 1: lobbyists or you know, rest control of the political system
1:13:43
Speaker 1: and and and corrupt it. So I I'm you know,
1:13:47
Speaker 1: it's it's it's great to see that America still means
1:13:50
Speaker 1: has maintained a lot about entrepreneurial spirit and that entrepreneurs
1:13:55
Speaker 1: can still do well. But there's an enormous amount of
1:13:59
Speaker 1: corruption at the tical level. And as we were discussing,
1:14:02
Speaker 1: that's evident in the standard of living in Washington. D
1:14:04
Speaker 1: c Um look we we had Roynald Reagan and we
1:14:08
Speaker 1: had Margaret Thatcher, and look where we are today. I mean,
1:14:12
Speaker 1: we aren't any better off. UM. I don't really know
1:14:16
Speaker 1: how you fix the system politically. I mean you really
1:14:19
Speaker 1: need uh prosecutors who go after um bad people who
1:14:25
Speaker 1: are out to uh corrupt the system. UM. But that's
1:14:28
Speaker 1: only if there's a law against what they're doing. If
1:14:30
Speaker 1: what they're doing is legal, how do you start? What
1:14:34
Speaker 1: laws do we have to change? And we don't have
1:14:36
Speaker 1: time to solve the problem of corrupt lobbyists. But at
1:14:40
Speaker 1: a certain point someone has to look at this and
1:14:42
Speaker 1: say the system has become completely off the rail. I
1:14:47
Speaker 1: think a lot about this problem, but I haven't come
1:14:51
Speaker 1: up with a solution. And and it's it's it's you know,
1:14:54
Speaker 1: my day job is not to be a preacher. I
1:14:56
Speaker 1: don't do uh, you know, good or bad. I don't
1:14:58
Speaker 1: do good or evil. I do bullish or bearish. And
1:15:02
Speaker 1: what what I'm when I'm amazed by is how well
1:15:05
Speaker 1: our economy and our financial markets have done, despite despite
1:15:10
Speaker 1: the corruption, despite the politicians. It's quite amazing. UM. So
1:15:14
Speaker 1: let's shift gears and talk a little bit about UH,
1:15:17
Speaker 1: the financial services industry speaking of lobbying, what what are
1:15:22
Speaker 1: some of the major changes that you think are significant
1:15:26
Speaker 1: since you you joined the industry. Well, Um, on the
1:15:32
Speaker 1: perspective of my, uh, my business, I have several hundred
1:15:38
Speaker 1: institutional accounts and UH I talked to them on a
1:15:42
Speaker 1: regular basis, and more and more of them are upset
1:15:47
Speaker 1: about et f s, especially the mutual fund industry, so
1:15:51
Speaker 1: upset and it's kind of cutting into their business. Um
1:15:56
Speaker 1: and uh and then every now and then you've got
1:16:00
Speaker 1: some of these uh wild days of the markets up
1:16:04
Speaker 1: a lot or down a lot, where you kind of
1:16:05
Speaker 1: wonder whether it's a combination of the algorithms and the
1:16:09
Speaker 1: high frequency traders and t fs that are all making
1:16:12
Speaker 1: this uh more volatile market which then turns the the
1:16:17
Speaker 1: retail investor off completely. In other words, we may be
1:16:20
Speaker 1: losing retail investors not just two mutual funds, but also
1:16:25
Speaker 1: to to E t F SO to passive index more
1:16:28
Speaker 1: than anything. Yeah, I think there's a concern about that
1:16:30
Speaker 1: for sure. I mean that's a big change. It's a
1:16:33
Speaker 1: big change. I mean it's not just a concern. I
1:16:34
Speaker 1: mean you can see it in the mutual fund numbers.
1:16:37
Speaker 1: Money is coming out of there. It has been going
1:16:41
Speaker 1: into E t F, so you could also see it
1:16:43
Speaker 1: in the trading volumes. The trading volumes are down significantly,
1:16:47
Speaker 1: so that that's an interesting and major shift in the past.
1:16:51
Speaker 1: What what are the major changes that we should be
1:16:54
Speaker 1: watching for coming up in the future. Well, again, maybe
1:16:59
Speaker 1: a little knowledge is a dangerous thing, and so I
1:17:01
Speaker 1: have a little knowledge about technology. I'm always interested in
1:17:04
Speaker 1: technology and how it's impacting our economy and disrupting things.
1:17:08
Speaker 1: I think a lot of economists really don't pay enough
1:17:10
Speaker 1: attention to technology and they get really pessimistic. And suddenly
1:17:13
Speaker 1: some technology comes along the way, like fracking that loads
1:17:17
Speaker 1: the price of oil and game changers, a game game changer,
1:17:20
Speaker 1: and uh, you know, it's impossible to forecast that, but
1:17:24
Speaker 1: it doesn't mean you can't follow it when it's starting
1:17:27
Speaker 1: to make the headlines. And I'm intrigued by this blockchain technology,
1:17:31
Speaker 1: which is a software algorithm behind bitcoin, and um people
1:17:36
Speaker 1: figured out that, Uh, you know, whether you're for against bitcoin,
1:17:39
Speaker 1: the software technology itself, it was really quite intriguing and
1:17:43
Speaker 1: it very secure, very very fast transaction identification. And the
1:17:47
Speaker 1: fact that companies like Goldman and JP Morgan are spending
1:17:52
Speaker 1: billions on it suggests that literally billions. Do you think
1:17:55
Speaker 1: there's billions in investments? I mean they've been articles spending
1:17:58
Speaker 1: that not talking about hundreds of you know, one to
1:18:01
Speaker 1: three billion, a lot of money, a lot of on
1:18:04
Speaker 1: one technology. Uh. They really see a potential here for
1:18:08
Speaker 1: it to uh dramatically lower their back office costs, which
1:18:11
Speaker 1: that has implications for employment in an area that used
1:18:14
Speaker 1: to be an important source of jobs. But it could
1:18:19
Speaker 1: have an impact on counterfeiting, it could. I mean, you know,
1:18:24
Speaker 1: I've I've become a kind of a little bit cranky
1:18:30
Speaker 1: complainer about central banks and their impact on us. I mean,
1:18:34
Speaker 1: wouldn't it be interesting if we had a economic system
1:18:37
Speaker 1: that didn't have a central bank, where somehow the money
1:18:40
Speaker 1: was created digitally through uh this kind of blockchain technology.
1:18:45
Speaker 1: I mean, the FED was set up initially just to
1:18:48
Speaker 1: help with the seasonal issues of corn production and the
1:18:54
Speaker 1: all two regular panics that seem to have stricken right
1:18:58
Speaker 1: every every few years, and now the question as well,
1:19:00
Speaker 1: it's actually contributed to those panics by trying to moderate
1:19:04
Speaker 1: the business cycle. UM. So I'm just kind of intrigued
1:19:08
Speaker 1: by where fintech is. It's called UH is leading, It's
1:19:11
Speaker 1: not just blockchain, but it's certainly an important part of
1:19:15
Speaker 1: it and probably is going to continue for the foreseeable future.
1:19:21
Speaker 1: So so now we're down to my last two favorite questions. UM,
1:19:26
Speaker 1: just in time. Uh, let's say a recent college grad
1:19:31
Speaker 1: or a millennial came to you and and said, Dr Ed,
1:19:34
Speaker 1: I'm thinking about a career in finance. What sort of
1:19:37
Speaker 1: advice would you give them? I would say that, please
1:19:42
Speaker 1: learn how to write, Please read a lot um, you know,
1:19:49
Speaker 1: just the two hours reading and writing. I don't really
1:19:52
Speaker 1: need arithmetic. I don't really need it. I think there's
1:19:55
Speaker 1: too much arithmetic, especially in economics. Uh yeah, there's too
1:19:59
Speaker 1: much quantity of analysis and that that today just don't
1:20:07
Speaker 1: have enough math skills and it just yes, okay, but
1:20:12
Speaker 1: I'm talking. You asked me about finance, and uh, you know,
1:20:16
Speaker 1: I mean finance has become become almost too much quantitative
1:20:19
Speaker 1: and too much algorithm. And I don't know that just
1:20:22
Speaker 1: other than designing an algorithm that than kind of does
1:20:25
Speaker 1: its own thing, I don't know how you make a
1:20:27
Speaker 1: career out of that. Um, but I know that you're
1:20:31
Speaker 1: not going to find too much competition, uh, in any
1:20:34
Speaker 1: in any business, in any industry. UM. If you're a
1:20:38
Speaker 1: really good writer with with with with a fairly broad
1:20:42
Speaker 1: sweep of knowledge. They're just not that many people that are,
1:20:45
Speaker 1: you know, renaissance men and women who are interested in
1:20:48
Speaker 1: a lot of different subjects and can write intelligently about it.
1:20:52
Speaker 1: So I would say, learn how to write, please, because
1:20:54
Speaker 1: I you know, I keep trying to expand my operation
1:20:59
Speaker 1: and uh, it's finding people who can write is very,
1:21:03
Speaker 1: very difficult. Huh, that's quite fascinating. Um, And I can't
1:21:07
Speaker 1: say I disagree with you, although I'm I'm aware of
1:21:11
Speaker 1: a number of people who are outstanding writers. But maybe
1:21:14
Speaker 1: that proves your point. If if you're if you count
1:21:17
Speaker 1: in your head half a dozen or so people whose
1:21:19
Speaker 1: writing skills you really admire, I guess it means it's
1:21:23
Speaker 1: not that many people. I mean it's really communicating, you know,
1:21:26
Speaker 1: I mean the ability to have conversations, intelligent conversations with
1:21:33
Speaker 1: all kinds of different people in a business setting. And
1:21:36
Speaker 1: uh and otherwise, and I think we're kind of losing that.
1:21:40
Speaker 1: Maybe it's you know, the tweets, the social networking. We're
1:21:44
Speaker 1: just characters, makes it hard to really develop an idea,
1:21:48
Speaker 1: that's right. So final question, and and my favorite one,
1:21:51
Speaker 1: of all, what is it that you know about economics
1:21:55
Speaker 1: and investing that you wish you knew twenty five years ago? Well,
1:21:59
Speaker 1: I think we teach done it. I wish I had
1:22:01
Speaker 1: more money, uh twenty years ago, thirty years ago, and
1:22:05
Speaker 1: I wish you'd put it all in dividend yielding stocks
1:22:07
Speaker 1: and you know, not not fooled around with all the
1:22:11
Speaker 1: you know, hot tips. Uh. I would say that over
1:22:16
Speaker 1: the years, I've learned that hot tips are you know,
1:22:19
Speaker 1: sure way to lose money. So definitely stay away from
1:22:23
Speaker 1: that that stuff. I'd say, over the years, I've learned
1:22:26
Speaker 1: that uh, you know what tax of uh shelters and
1:22:31
Speaker 1: other means that investments that are focused just on lowering
1:22:35
Speaker 1: taxes uh tend not to work out either. You know,
1:22:39
Speaker 1: if you lower your profits, you lower your taxes. Yeah,
1:22:42
Speaker 1: that's right. Well, uh, ed, thank you so much for
1:22:45
Speaker 1: doing this. I I appreciate how generous UH you've been
1:22:49
Speaker 1: with your time. If you've enjoyed this conversation, be sure
1:22:53
Speaker 1: and look up and inch or down an inch on
1:22:54
Speaker 1: Apple iTunes and you can see the other ninety five
1:22:58
Speaker 1: or so such questions. UH, such conversations we've had with
1:23:03
Speaker 1: various people over the past two years. I would be
1:23:07
Speaker 1: remiss if I did not thank Taylor Riggs, my booker,
1:23:11
Speaker 1: for helping to put together these conversations. Uh. Mike Batnick
1:23:17
Speaker 1: is head of research who helps us do the deep
1:23:20
Speaker 1: dive into finding interesting things to talk about. And Charlie Valmer,
1:23:24
Speaker 1: who is down in d C doing some lobbying of
1:23:27
Speaker 1: his own, which is why he's not in the control
1:23:29
Speaker 1: booth where he belongs. Uh. You've been listening to Masters
1:23:33
Speaker 1: in Business on Bloomberg Radio look Ahead, Imagine more, gain
1:23:44
Speaker 1: insight for your industry with forward thinking advice from the
1:23:47
Speaker 1: professionals at Cone Resnick. Is your business ready to break through?
1:23:52
Speaker 1: Find out more at Cone resnick dot com slash Breakthrough