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An Interview With Paul McCulley: Masters in Business (Audio) · Masters in Business

0:03
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
0:08
Speaker 1: Welcome to the podcast. This week, my special guest is
0:12
Speaker 1: Paul McCully. Paul has been chief Economists, bond desk manager,
0:20
Speaker 1: a whole number of roles, UH, member of the investment community,
0:24
Speaker 1: and perhaps the most important confidante of Bill Gross at
0:29
Speaker 1: PIMCO for many, many years. He is now squasi retired.
0:33
Speaker 1: He's in his um mid to late fifties, and I
0:38
Speaker 1: believe he's gonna eventually find his way to some Ivy
0:41
Speaker 1: League school UM as a professor. He's he's far too experienced, knowledgeable,
0:48
Speaker 1: and and a great communicator to to just retire and
0:53
Speaker 1: let those skills waste. He'll he'll find his ways to
0:56
Speaker 1: a professorship somewhere. We have a long and and really
1:00
Speaker 1: fascinating conversation about the Federal Reserve and the financial crisis,
1:06
Speaker 1: the state of the global economy, what's going on in
1:09
Speaker 1: inflation and deflation. We really talked about everything and anything,
1:14
Speaker 1: and as you'll hear, he can wax eloquent on just
1:17
Speaker 1: about any subject intremendous depth. I can re regale you
1:22
Speaker 1: and recount some of the highlights, but I don't wanna
1:26
Speaker 1: reveal any spoilers, So rather than me doing my usual
1:29
Speaker 1: five minute babble to start the podcast, instead, I'm just
1:33
Speaker 1: gonna say, without any further ado, my conversation with Pimco's
1:37
Speaker 1: Paul McCulley. This is Masters in Business with Barry Ridholts
1:45
Speaker 1: on Bloomberg Radio. My special guest this week is Paul McCulley.
1:50
Speaker 1: He is probably best known as the chief economist and
1:54
Speaker 1: Managing director at PIMCO, where he served from two thousand
1:59
Speaker 1: and Tenna's that about right, with a little stint afterwards, UH,
2:02
Speaker 1: sort of a return visit. Uh. Got his MBA from
2:06
Speaker 1: Columbia Business School, headed pimco's short term bond desk, led
2:11
Speaker 1: the cyclical economic forums, and was a member of the
2:15
Speaker 1: Investment committee named to the Institutional All America Fixed Income
2:20
Speaker 1: Research Team. That I get that right, I really. I
2:24
Speaker 1: think of Paul as one of the most astute fed
2:27
Speaker 1: watchers there is. He's often on the shortlist as a
2:31
Speaker 1: potential f O m c role. McCully coined the term
2:36
Speaker 1: Minsky moment in response to the Russian uh financial crisis,
2:42
Speaker 1: and is rumored to have coined the phrase shadow banking system.
2:46
Speaker 1: More than a rumor that you get full credit for that. Currently,
2:50
Speaker 1: he's a member of the board of the Global Interdependent Center,
2:54
Speaker 1: better known as g i C. It's a thin tank
2:57
Speaker 1: in Philly, and pretty much what are doing these days
3:01
Speaker 1: is thinking, writing, and speaking. Is that, uh, the way
3:04
Speaker 1: you like to describe it? Yeah, it is. I'm first
3:07
Speaker 1: gamefully unemployed, meaning that I'm retired, but I'm not retired
3:12
Speaker 1: from the things that I love doing. Uh. And it
3:15
Speaker 1: really comes down to global macro and I think about it,
3:20
Speaker 1: I write about it, and I give about one lecture
3:23
Speaker 1: or speech a months. So right now that's what I'm doing.
3:28
Speaker 1: I'm getting more closely involved in the academic arena uh
3:32
Speaker 1: and may end up in the next six months as
3:35
Speaker 1: an adjunct professor at some esteemed institution, but that's still
3:40
Speaker 1: in the works. But right now I like to uh uh,
3:43
Speaker 1: to think and write and speak. And uh. I when
3:48
Speaker 1: I speak for nonprofits and for academics, the prices zero,
3:52
Speaker 1: and occasionally I speak for a for profit and the
3:56
Speaker 1: price is a large number. So it's either zero are
4:00
Speaker 1: large number. So we could describe you as gainfully retired exactly,
4:06
Speaker 1: all right, And and you're in your fifties, you're not
4:08
Speaker 1: a really a retirement age. You're looking to do something.
4:11
Speaker 1: By the way, I forgot to say, Paul McCulley, welcome
4:14
Speaker 1: to Bloomberg. Thanks good so so nice to have you here. UM.
4:18
Speaker 1: So let's start out talking a little bit about your background.
4:22
Speaker 1: I know you're you're a Virginia boy, right, is that
4:24
Speaker 1: where you're from. I grew up in rural Virginia outside
4:27
Speaker 1: of Stanton, Virginia, which is down in the General Valley
4:31
Speaker 1: of Virginia, about three hours southwest of UH of Washington,
4:35
Speaker 1: d CE, A beautiful area. I grew up there as
4:38
Speaker 1: a Baptist minister's son and graduated from high school UH
4:44
Speaker 1: in nineteen and seventy five, went to Grennell College out
4:49
Speaker 1: in Iowa. So so from how green is your valley
4:53
Speaker 1: to Iowa to New York City, that's kind of a surprising,
4:57
Speaker 1: uh way to bounce around. Yeah, it is Grannelle. I'm
5:01
Speaker 1: on the board of trustees at Grannelle and have been
5:04
Speaker 1: so for a number of years. Is a special place
5:06
Speaker 1: in my life and heart. And that they recruited me
5:10
Speaker 1: uh in nineteen seventy five as a hit from Virginia. UH.
5:15
Speaker 1: Grannelle is a small, private liberal arts college traditional liberal
5:20
Speaker 1: arts education. Learned a lot about a lot of different
5:23
Speaker 1: things and be able to use it in a variety
5:26
Speaker 1: of applications. Learn how to think, not just be an
5:29
Speaker 1: expert in a narrow space. Can we do UH an
5:33
Speaker 1: infomercial for you for Grannell? I mean, that's that's what
5:37
Speaker 1: That's what a good liberal arts education is about. UH.
5:40
Speaker 1: And Grannell is a national college UH. And part of
5:45
Speaker 1: their endeavor in recruiting UH is that they literally buy
5:50
Speaker 1: the list from the S A T people who do
5:54
Speaker 1: of students throughout the country who do well A and
5:58
Speaker 1: B might need some financial help in order to go
6:02
Speaker 1: to Grannell. Where were they when I was in high school?
6:05
Speaker 1: So I came up on their meter on the SS
6:08
Speaker 1: A T S of a kid from rural Virginia. Put
6:12
Speaker 1: the two together, UH, and they started talking to me.
6:15
Speaker 1: And then the third factor is that I was a
6:18
Speaker 1: runner UH in UH in high school. I was six
6:22
Speaker 1: in the state of Virginia my senior year in cross country,
6:25
Speaker 1: and the cross country coach at Grannell College sitting maybe
6:29
Speaker 1: we got a hat trick here? So how do you
6:32
Speaker 1: go from Grennell to NBA at Columbia. That was just
6:36
Speaker 1: an old fashioned sort of process, and that when I
6:39
Speaker 1: was graduating UH from Grennell with a degree in economics,
6:44
Speaker 1: I wanted to go to business school and looked at
6:47
Speaker 1: the brand name business schools, and I was intrigued by
6:51
Speaker 1: by Columbia. I had never been to New York City
6:54
Speaker 1: before UH, and applied and for some reason I was accepted.
7:01
Speaker 1: And I say for some reason, and that I was
7:03
Speaker 1: twenty two and went straight from college to business, nothing
7:06
Speaker 1: in between, nothing in between. And I understand that that
7:09
Speaker 1: is just not done anymore. They want people to have
7:12
Speaker 1: a year or two of real world experience. Yeah. I
7:15
Speaker 1: think in my class at Columbia, ten of us were
7:20
Speaker 1: the kids who went straight from college. So I got
7:22
Speaker 1: out of UH of Columbia twenty four, relatively young to
7:27
Speaker 1: have an m b A. And and to the world.
7:29
Speaker 1: So a couple of questions about Columbia. A couple of
7:31
Speaker 1: weeks ago, we had Leon Cooperman of Omega Advisors, and
7:36
Speaker 1: he couldn't be more effusive in praise for his Columbia experience.
7:40
Speaker 1: He still buds with some of his classmates, one in
7:43
Speaker 1: particular Mario ga Belly also Art Sandberg, formerly of Pequad.
7:48
Speaker 1: What really stood out to you about Columbia and any
7:51
Speaker 1: people you're still tight with from back in those days.
7:54
Speaker 1: I really enjoyed my two years at Columbia because it
7:59
Speaker 1: gave me a chance to more from economics, and that's
8:02
Speaker 1: really what I was about as an undergrad UH into
8:07
Speaker 1: finance and markets. So I think my two years at
8:12
Speaker 1: Columbia really gave me the melding of economics and finance,
8:16
Speaker 1: which set me up nicely for what turned out to
8:19
Speaker 1: be the rest of my career. You're listening to Masters
8:23
Speaker 1: in Business on Bloomberg Radio. My special guest today Paul McCulley.
8:27
Speaker 1: He was chief economist at PIMCO for UH, really fascinating
8:31
Speaker 1: period of time, the dot com collapse, throughout the two thousands,
8:35
Speaker 1: the financial crisis. One of the things I'm curious about is,
8:40
Speaker 1: so you go to Columbia to get your m b A.
8:43
Speaker 1: They're really known as a deep value shop on the
8:47
Speaker 1: equity side, yet you end up running a bond desk
8:51
Speaker 1: as well as doing the global macro How did that
8:54
Speaker 1: come about? Columbia is known as a stockhouse when you
8:59
Speaker 1: think in terms of the famous graduates. Uh. I'm a
9:03
Speaker 1: macro economist who also loves finance and try to merge
9:08
Speaker 1: the two, which ultimately was the reason I became such
9:11
Speaker 1: a Minsky I, if you will, of macro and finance. Uh.
9:16
Speaker 1: And I learned all the appropriate equity models, which was
9:20
Speaker 1: a good thing while I was at Colombia. But actually
9:24
Speaker 1: I did not get a job immediately on Wall Street
9:27
Speaker 1: in nineteen eight one. Remember nineteen eight one was not
9:30
Speaker 1: a really great time for Wall Street. I was a
9:33
Speaker 1: twenty four year old kid with a deep Southern accent,
9:36
Speaker 1: and I interviewed with all the major players because I
9:39
Speaker 1: did well there and didn't get a job from Morgan
9:43
Speaker 1: Stanley or Goldman Sachs or any of the major players. Uh.
9:47
Speaker 1: So I took a job from my first two years
9:49
Speaker 1: out of Columbia UH working for Concho, a division of
9:55
Speaker 1: at that time DuPont UH. And my first two years
9:59
Speaker 1: were at a speech writer for the executives of Kanaka. Really,
10:04
Speaker 1: that's fascinating. That was the first thing I did was
10:06
Speaker 1: actually as a ghostwriter for the executives, doing ahbeds and
10:11
Speaker 1: speeches and that sort of thing. And I got my
10:13
Speaker 1: first job on Wall Street and that teen and eighty
10:17
Speaker 1: three at E. F. Hunton. Oh. Really, we've had plenty
10:21
Speaker 1: of EF hunting people passed through here. In fact, IF
10:24
Speaker 1: Hunton seems to have been a huge feeder, obviously the
10:28
Speaker 1: spin out of Lehman Brothers, but also I know a
10:30
Speaker 1: lot of people who ended up going from IF Hunton
10:33
Speaker 1: to bear Sterns and EF Hunton to a number of
10:36
Speaker 1: other shops. So how do you go from if Hunton?
10:39
Speaker 1: Ultimately you between IF Hutton and Pimco, you find your
10:44
Speaker 1: way to UBS, which I think was Warburg at the time. Yeah,
10:48
Speaker 1: it was. It's kind of I haven't thought about my
10:50
Speaker 1: CV in a long period of time. Got to updated.
10:53
Speaker 1: It's a little skimpy, A little skimpy. Actually. The story
10:56
Speaker 1: of of nineteen eighty three when I went to F Hutton,
11:01
Speaker 1: uh Eddie Ardini had been the chief of of EF Hutton.
11:06
Speaker 1: In fact, I had studied under Eddie when he was
11:08
Speaker 1: an adjunct professor at Columbia, and it turned out he
11:11
Speaker 1: had left and went to prove there's been a big
11:15
Speaker 1: sort of movement at Proof for a long time. And
11:17
Speaker 1: when he left E. F. Hutton there was an economist
11:20
Speaker 1: in corporate finance there with the PhD from Hopkins named
11:25
Speaker 1: Bob Barbera. So they put him into action as the
11:29
Speaker 1: chief economist and he was looking for a number two
11:34
Speaker 1: who understood finance because he was an energy economist. So
11:38
Speaker 1: Bob and I worked together UH for four years, great
11:42
Speaker 1: relationship between three and nine seven, and then I left
11:47
Speaker 1: for three years to go work for Columbia Savings and
11:52
Speaker 1: Loan in Beverly Hills, California for Tom Spiegel back during
11:57
Speaker 1: the milk and days. Sure. UH worked there for three years,
12:01
Speaker 1: not in junk bonds, but in running interest rate risk
12:04
Speaker 1: for the SNL and then jump bonds blew it up.
12:07
Speaker 1: And then I went to Pimco in nineteen So, so
12:10
Speaker 1: did you first trip to California? Was that the first time?
12:14
Speaker 1: First experience at West or had you been there previously?
12:17
Speaker 1: I had traveled during my E. F. Hutton days to California,
12:20
Speaker 1: But my move to California, UH, the first time was
12:24
Speaker 1: in nineteen and eighty seven. I spent three years working
12:29
Speaker 1: with Columbia in the Drexel Hub UH, and then Bill
12:33
Speaker 1: Gross gave me a job when I was unemployed in
12:38
Speaker 1: nineteen nine. So how long will you at Pimco Ford?
12:43
Speaker 1: In total? I was two years there between ninety and
12:46
Speaker 1: ninety two, UH, and then I got the job as
12:50
Speaker 1: chief economists for U b S and I did that
12:53
Speaker 1: for seven years until back to nine and Bill Gross
12:58
Speaker 1: called me up and said, you're coming home, and I
13:01
Speaker 1: came home. So, so let's talk a little bit about Bill,
13:05
Speaker 1: because I he we've had him on the show. I
13:08
Speaker 1: find him to be a fascinating guy. Um, what was
13:12
Speaker 1: it like working with somebody who is, you know, larger
13:16
Speaker 1: than life. Uh, he's supposed to be a tough character
13:19
Speaker 1: to work for. I've known Bill for twenty five years,
13:23
Speaker 1: and I've known him well for twenty five years. So
13:26
Speaker 1: it's kind of hard to give you just a snapshot
13:29
Speaker 1: of Bill because my life experience with Bill is a
13:33
Speaker 1: movie from an unemployed kid in nineteen nine, uh to
13:38
Speaker 1: literally last year when I suited up one more time
13:43
Speaker 1: at his personal request as a personal friend for four
13:48
Speaker 1: months last year. So it's a very long, uh movie
13:52
Speaker 1: with me, A wonderful movie. Uh. He is a fascinating person.
13:58
Speaker 1: Incredibly smart, uh sometimes incredibly stubborn, right I get that sense.
14:05
Speaker 1: Also a absolute huge heart, but has it exceedingly well.
14:12
Speaker 1: He told us some really interesting stories about walking around,
14:15
Speaker 1: you know, Newport Beach in the nineties and the two
14:18
Speaker 1: thousands and people asking him, Hey, Bill, what do we
14:21
Speaker 1: do with our money, and he would stop and say,
14:23
Speaker 1: look at this fun this is something that makes might
14:26
Speaker 1: make sense to you. He seems very accessible to people,
14:29
Speaker 1: very uh, very real. You also worked with him in
14:33
Speaker 1: Muhammad Alarian. What's it like having to really smart outsized
14:37
Speaker 1: personalities and you're kind of in the middle. How is
14:41
Speaker 1: that as an experience? I know both men exceedingly well,
14:45
Speaker 1: and both men are close personal friends of mine. They're
14:50
Speaker 1: exceedingly different, and I think that's why there marriage and
14:57
Speaker 1: that's what it was lasted for as long as it
15:00
Speaker 1: did very effectively, uh, by any measure that was. I
15:06
Speaker 1: know everybody focuses on the acrimonious divorce, but that was
15:10
Speaker 1: a tremendously successful period in pimco's history. It really really was.
15:15
Speaker 1: Mohammad came back from Harvard uh, and that was right
15:19
Speaker 1: before we went into the men Sky moment. We were prepared, UH.
15:24
Speaker 1: We had our risk management and order UH. And for
15:28
Speaker 1: the following number of years. UH, it was truly Camelot.
15:34
Speaker 1: So the one real important question I have to ask
15:37
Speaker 1: about PIMCO. Their growth corresponded with a tremendous bond bull market,
15:44
Speaker 1: a thirty plus year bond bull market, but every other
15:47
Speaker 1: bond manager had the same wind that at their back.
15:51
Speaker 1: What did PIMCO do that allowed them to capitalize on
15:54
Speaker 1: that market so much better than just about everybody else?
15:59
Speaker 1: Thank There a lot of factors. First and foremost is
16:04
Speaker 1: the pure genius of the founders. And there were three founders,
16:09
Speaker 1: not just Gross, but Jim Muzzy and Bill Podlick. Bill
16:16
Speaker 1: Podlick was an amazing businessman, Jim Muzzy, they're all three alive.
16:21
Speaker 1: Jim Muzzy is an amazing client man and marketing man,
16:27
Speaker 1: and Bill Gross is an amazing investor. So from the
16:30
Speaker 1: beginning of the firm, they had a division of labor
16:34
Speaker 1: is you run the business, you run the clients, and
16:38
Speaker 1: I run the money. Uh. And so therefore there was
16:41
Speaker 1: a clear articulation of whose job was whose job, And
16:48
Speaker 1: the three men who ran the place from the beginning
16:51
Speaker 1: did an extraordinary job of doing their jobs and cooperating.
16:55
Speaker 1: So I think the part of it is the genius
16:58
Speaker 1: of the organizational structure, sure, and the three men who
17:02
Speaker 1: were the founders. I think that's hugely important because I
17:06
Speaker 1: look at a lot of other competitors and they've never
17:09
Speaker 1: really quite grasp that it is a three part business,
17:14
Speaker 1: and that you can be really good at one part
17:17
Speaker 1: but maybe not the other two. So I think that
17:20
Speaker 1: is a key factor, another factor, And here I simply
17:25
Speaker 1: have to take my hat off to Bill Gross. Uh.
17:28
Speaker 1: He's brilliant. Uh. He is a macro thinker. Uh. And
17:35
Speaker 1: also he is a very good marketer. So in the
17:38
Speaker 1: last minute we have, let me ask you this related question.
17:42
Speaker 1: Did it become harder and harder to keep delivering the
17:45
Speaker 1: sort of performance numbers the firm became known for as
17:49
Speaker 1: the size uh continue to grow or was that just
17:52
Speaker 1: something that had to be dealt with that everybody deals
17:55
Speaker 1: with as they grow. Bill has spoken to this, and
17:59
Speaker 1: I think you spoken the truth. By definition, it gets
18:03
Speaker 1: harder the bigger you are. You're listening to Masters in
18:07
Speaker 1: Business on Bloomberg Radio. My special guest this week is
18:11
Speaker 1: Paul McCulley. He was chief economist and part of the
18:14
Speaker 1: investment committee at PIMCO for quite a long time. Let's
18:18
Speaker 1: talk a little bit about this global economy which seems
18:21
Speaker 1: to be a little bit influx. First question, inflation, disinflation
18:27
Speaker 1: or deflation from a global perspective of the predominant tail wind?
18:32
Speaker 1: Is disinflation if not deflation. Describe the difference between the
18:37
Speaker 1: two for listeners who may not pick up the nuances
18:40
Speaker 1: between them. Disinflation is a slow down in the rate
18:46
Speaker 1: of inflation, so rices are still rising, but rising at
18:50
Speaker 1: a slower rate. Where deflation is actually a fall in prices.
18:56
Speaker 1: And we're experiencing deflation and a lot of commodity with
19:00
Speaker 1: everyone knowing about oil. That's deflation, whereas disinflation would be
19:07
Speaker 1: just a very very slow and slower rate of increase,
19:14
Speaker 1: slowing inflation as opposed to falling process. Perfect example, suppose
19:19
Speaker 1: you've got a three percent raise last year and this
19:22
Speaker 1: year you've got a one percent raise. You experience disinflation.
19:27
Speaker 1: You went from a three percent raise to a one
19:30
Speaker 1: percent raise. If your boss cut your pay by three percent,
19:34
Speaker 1: you experienced deflation, actual deflation. So you you mentioned oil,
19:38
Speaker 1: let's talk about it. Oil peaked last year at a
19:41
Speaker 1: hundred and twelve dollars. It's now running in about forty
19:44
Speaker 1: three dollars. That's a six decrease. So the two questions
19:49
Speaker 1: that everyone wants to know, what are the causes of this?
19:53
Speaker 1: I don't know if that's all that challenging of a question.
19:56
Speaker 1: With the dollar rate multi year eyes, massive supplies come
20:00
Speaker 1: online and softening of demand. The more important question is
20:04
Speaker 1: what are the implications of this failing oil price? Oil price?
20:08
Speaker 1: What does this mean to the US, What does it
20:09
Speaker 1: mean to countries like China and the global economy? And
20:13
Speaker 1: feel free to completely disagree with my causes, No, I
20:17
Speaker 1: think I agree with your causes. I would put the
20:19
Speaker 1: dollar at the low at the low end of my list.
20:23
Speaker 1: At the highest end is the fact that at a
20:26
Speaker 1: hundred dollar plus for oil and technology, you had an
20:30
Speaker 1: incredible economic incentive to increase supply, and we did, and
20:35
Speaker 1: huge we did, and huge and so and supply outstrip demand.
20:40
Speaker 1: OPEC sucked it up, Saudi Arabia sucked it up and
20:44
Speaker 1: kept the price up there. But ultimately the sheer force
20:48
Speaker 1: of increased supply meant that if Saudi Arabia continued the
20:52
Speaker 1: game and tried to defend it at a hundred, they
20:55
Speaker 1: would not be in the all production business anymore. Uh.
20:59
Speaker 1: So that was the underlying economics micro economics of that
21:04
Speaker 1: is that a hundred didn't work. Uh And I don't
21:08
Speaker 1: know if forty works, but clearly forty is more likely
21:11
Speaker 1: to work than a hundred. And now we have my
21:14
Speaker 1: ran coming online as well. How what's that going to
21:16
Speaker 1: do to it? It's certainly is relative to where we
21:21
Speaker 1: were going to increase supply. And global demand has been
21:26
Speaker 1: exceedingly weak because global economic activity. Global agree demand has
21:34
Speaker 1: been weak ever since the financial crisis for two thousand
21:38
Speaker 1: and eight UM. And I think demand for oil really
21:43
Speaker 1: is more a function of growth than it is the price. Uh.
21:48
Speaker 1: And right now, the demand side is impacted negatively by
21:53
Speaker 1: weak growth. And you've got supplies out of a flood.
21:55
Speaker 1: So you put two and two together and you get
21:57
Speaker 1: forty buck oil. There you go. And you know, when
22:00
Speaker 1: you're growing robustly, it almost doesn't matter what the price
22:04
Speaker 1: of oil is. We needed bring it in, but let's
22:06
Speaker 1: just just get it in here knowing thinks twice about it. Yeah,
22:09
Speaker 1: and walk terms uh And the short run, the demand
22:14
Speaker 1: for oil is a whole lot more income elastic than
22:17
Speaker 1: it is price elastic. So let's let's talk about So
22:19
Speaker 1: we've seen, for lack of a bit of word punk
22:22
Speaker 1: growth ever since the crisis. The US seems to be
22:27
Speaker 1: leading in the recovery, behind US as Japan. Behind Japan
22:30
Speaker 1: is Europe. What's it gonna take to see global growth returned?
22:34
Speaker 1: To forget five percent of four percent, how about three
22:37
Speaker 1: percent in the United States and three percent in Europe.
22:40
Speaker 1: I'm not looking for a return to robust global growth
22:45
Speaker 1: for a long long time, and there are several reasons
22:50
Speaker 1: for that. First and foremost is my diagnosis of the
22:54
Speaker 1: breaking growth going back to two thousand and eight and
22:59
Speaker 1: the years prior to the financial crisis. You had a
23:03
Speaker 1: financial sector boom. You had a private sector borrowing boom.
23:09
Speaker 1: We all know about it in the housing sector here,
23:12
Speaker 1: but also the Club Med countries in Europe had a
23:17
Speaker 1: massive private sector boom and borrowing, so you were driving
23:23
Speaker 1: growth with increased private leverage. Every since then, the private
23:29
Speaker 1: sector has been de levering, either outright or slowing its
23:34
Speaker 1: pace of debt accumulation. So you've had a negative from
23:38
Speaker 1: the private sector because of de levering. Now, logic, good
23:42
Speaker 1: old fashioned Keynesian logic from where I live and breede,
23:46
Speaker 1: would suggest if the private sector is in force de levering,
23:51
Speaker 1: the government sector should go the other direction in order
23:55
Speaker 1: to maintain adequate aggregate demand. You're listening to Master in
24:00
Speaker 1: Business on Bloomberg Radio. My special guest this week is
24:03
Speaker 1: Paul McCulley. He served as chief economist, head of one
24:07
Speaker 1: of the bond desks, and member of the investment committee
24:10
Speaker 1: at PIMCO for many years. Earlier, we started talking about
24:16
Speaker 1: Europe and that leads to the Federal Reserve. So let's
24:19
Speaker 1: let's hold off on Europe and Japan for that matter,
24:22
Speaker 1: and talk about the financial crisis here and the Federal
24:26
Speaker 1: reserves response. So, first question, what did the FED get right?
24:31
Speaker 1: What did they do right that a lot of people
24:34
Speaker 1: don't seem to really understand. I think the Fed has
24:37
Speaker 1: done a huge amount of things that are right every
24:42
Speaker 1: since the financial crisis. I can argue with some of
24:46
Speaker 1: the technical details of this, that or the other, but
24:50
Speaker 1: the broad thrust of monetary policy every since the financial
24:54
Speaker 1: crisis has been spot on. So zero interests policy, quantitative easing,
25:02
Speaker 1: all of the regulation they've put in the place, stress
25:05
Speaker 1: tests for the banks. You're you like all of that. Yeah,
25:09
Speaker 1: I'm a big believer that they did a mosaic of
25:14
Speaker 1: good things. And remember, the regulatory side of things is
25:17
Speaker 1: not just the Federal Reserve. You know, Frank, you have SEC,
25:22
Speaker 1: you have a whole bunch of other the f D,
25:25
Speaker 1: I see, there a whole bunch of other regulatory agency yeah, exactly.
25:28
Speaker 1: We now have an f sock. So therefore we have,
25:30
Speaker 1: you know, this collection of regulatory agencies and the FEDS
25:33
Speaker 1: part of that. But from pure monetary policy, I think
25:37
Speaker 1: they have been spectacular. And I want to speak to
25:42
Speaker 1: quantitative easing UM. And quantitative easing has two impacts. One,
25:51
Speaker 1: which is what the market tends to focus on, is
25:53
Speaker 1: the sheer supply demand effect that the balance sheet balance
25:58
Speaker 1: their buying duration out the marketplace, which was you know,
26:02
Speaker 1: the uh uh, the notion that somehow they're gonna bloom
26:06
Speaker 1: their balance sheet and we're gonna have you know, hyper inflation,
26:09
Speaker 1: those ups of the dollar, hyper inflation, five thousand dollar gold,
26:13
Speaker 1: all of that nonsense. And that's the only thing I
26:17
Speaker 1: can say politely about it. That we heard six years
26:20
Speaker 1: ago was nonsense. And those who were spouting it, oh
26:26
Speaker 1: the world and apology and they old Ben Bernankee personally,
26:30
Speaker 1: an apology. When you're in a liquidity trap, uh, you
26:35
Speaker 1: go to zero for interest rates, nothing much happens in
26:38
Speaker 1: the private sector because the private sector is delevering. So
26:43
Speaker 1: you do what's next, which is quantitative easing, which has
26:47
Speaker 1: an impact in directly pulling down UM long term interest rates.
26:52
Speaker 1: But the bigger impact or quantitative easing is a commitment
26:56
Speaker 1: device for forward guidance. Because forward guidance is a new
27:02
Speaker 1: tool that the FED has been using. Word zero and
27:05
Speaker 1: we're gonna stay at zero for an extended period of
27:08
Speaker 1: time or until we do this quote. That was literally
27:11
Speaker 1: the language that the US so because the bond market
27:14
Speaker 1: is nothing more than a forward curve on expected Fed
27:17
Speaker 1: policy plus a risk premium. So therefore forward guidance is
27:21
Speaker 1: reinforced by quantitative easing. And if there was ever any
27:26
Speaker 1: question about that, it was last year with the whole
27:30
Speaker 1: taper UH issue and the Fed said, well, we're thinking
27:34
Speaker 1: about tapering, and the market went crazy and said, the
27:36
Speaker 1: next thing that's gonna happen is the Fed is gonna
27:39
Speaker 1: hike short term interest rates UH, And the Fed had
27:42
Speaker 1: to do a great deal of communications work to say no,
27:46
Speaker 1: we're still at zero. Taper means tapering off the purchases
27:51
Speaker 1: of bonds, not tapering away from zero. Right. But but
27:55
Speaker 1: the fact that we had that experience underscores the notion
27:58
Speaker 1: that the power for me anyway of que was as
28:03
Speaker 1: a commitment device. As long as we're doing que que,
28:07
Speaker 1: there is zero discussion of getting off for zero. So
28:10
Speaker 1: the moment they said we're gonna taper, que people said,
28:13
Speaker 1: well now we need to start contemplating when they're gonna
28:16
Speaker 1: get off a zero. And the FED had the massage
28:19
Speaker 1: the market psychic on the whole thing. So I think
28:22
Speaker 1: zero is right. I think Quee was right. I think
28:26
Speaker 1: the regulatory things they did were right. Working in tandem
28:29
Speaker 1: with Treasury on TARP was right. Uh, they saved us
28:34
Speaker 1: from another great depression? Is your position? Absolutely? And I
28:37
Speaker 1: hear by the way, I hear heads exploding all over
28:41
Speaker 1: the audience listening. Um, So let me ask you two
28:44
Speaker 1: questions and see if those people can settle down that
28:47
Speaker 1: are related to this. First, we have the September meeting
28:51
Speaker 1: coming up. Should we still be at zero today? Should
28:53
Speaker 1: we have moved off of zero? Previously hard question. I
29:00
Speaker 1: don't know what the FOMC is gonna do in September.
29:05
Speaker 1: The case for getting off of zero is not because
29:09
Speaker 1: we have an incipient inflationary problem. It is simply not.
29:13
Speaker 1: I look at getting off zero as declaring victory and
29:19
Speaker 1: getting out of the liquidity trap, or put differently, a
29:24
Speaker 1: valedictory of graduating UH. With the FED being at the
29:30
Speaker 1: top of the class getting out off of zero uh uh.
29:36
Speaker 1: And actually I think the FED should get extraordinary applause
29:41
Speaker 1: for getting us out of a liquidity trap, because the
29:44
Speaker 1: textbook that I studied and you studied set in a
29:47
Speaker 1: liquidity trap when the private sector is delevering, you should
29:52
Speaker 1: use physical policy, uh to stimulate aggregate demand. That that
29:57
Speaker 1: was the argument that since Congress had abandoned their traditional role.
30:01
Speaker 1: You look at the two thousand two thousand one recession,
30:05
Speaker 1: there was a huge fiscal stimulus, huge task cutch, huge
30:08
Speaker 1: spending increases. They were a wall. The FED was pretty
30:12
Speaker 1: much the only game in town, weren't they They were
30:14
Speaker 1: the only game in town, and they didn't want to be.
30:18
Speaker 1: But if you're the only game in town and you
30:20
Speaker 1: have a congressional mandate to avoid another depression, you do
30:25
Speaker 1: what you can do. It doesn't mean that you like it.
30:29
Speaker 1: I don't think Ben Bernanke liked doing some of the
30:32
Speaker 1: things that he had to do, but effectively it was
30:34
Speaker 1: the only thing that he could do consistent with his mandate.
30:39
Speaker 1: So let's take the counter factual on that. Assume Bernanke
30:44
Speaker 1: listened to people who said the FED was going to
30:47
Speaker 1: cause hyperinflation. Collapse of the dollar and five thousand dollar gold.
30:50
Speaker 1: Assume he said they were right, and say, you know what,
30:54
Speaker 1: Taylor rule says, we should be at two and a
30:56
Speaker 1: half or three and a half percent UM fed funds
30:59
Speaker 1: rate and there's no quee. What would have happened then,
31:03
Speaker 1: Who've had a modern day depression similar to the thirties nine.
31:08
Speaker 1: I don't know if it'd be similar to the thirties.
31:10
Speaker 1: That's why I said modern day because the dominant thing
31:14
Speaker 1: back during the thirties is we didn't have deposit insurance,
31:17
Speaker 1: so we had a total collapse of the banking system.
31:21
Speaker 1: But it would have been a modern day depression that
31:25
Speaker 1: would have been self feeding and would have had elements
31:29
Speaker 1: of what's been going on UH in the last five
31:33
Speaker 1: or seven years. And Southern Europe so are unemployment rate
31:38
Speaker 1: peaked at around ten percent or underemployment rate peaked at
31:42
Speaker 1: around the Great Depression unemployment? What would have happened this
31:48
Speaker 1: time around UM had there been no Zerpa, no quee.
31:52
Speaker 1: And again, those of you whose heads are about to explode,
31:55
Speaker 1: I apologize again. The counter fact is really difficult. Unemployment
32:03
Speaker 1: would have been dramatically higher. No problem with that whole notion,
32:10
Speaker 1: because when we were at the depths of our recession,
32:16
Speaker 1: we were not self correcting, we were self feeding. It
32:20
Speaker 1: took meaning it's a vicious cycle down exactly. And remember
32:25
Speaker 1: the FED went to zero uh and started que four months,
32:32
Speaker 1: five months before the stock market finally found a bottom
32:38
Speaker 1: uh in March of nine. Uh. So I mean, normally,
32:42
Speaker 1: do you think in terms of Wall Street responds quitting
32:45
Speaker 1: pretty quickly to you know, warm and fuzzies from the
32:47
Speaker 1: Central Bank. But if it takes that long for Wall
32:51
Speaker 1: Street to recognize they've been given a gift, uh, it
32:55
Speaker 1: tells you something is seriously wrong with the underlying economy.
32:59
Speaker 1: So it's that plus the panic that was there really
33:02
Speaker 1: fed upon Yeah, it was. It was you know, it
33:06
Speaker 1: was truly a nefarious downward spare that the private sector
33:13
Speaker 1: simply did not have the ability to deal with itself.
33:18
Speaker 1: The thing that stood out to me at that time
33:21
Speaker 1: is when you have the CEOs of companies like General
33:25
Speaker 1: Electric and Walmart and Ford calling the White House saying
33:29
Speaker 1: we're not going to make payroll because our credit sources
33:32
Speaker 1: have disappeared. You got to do something that is a
33:35
Speaker 1: pretty serious situation. Yeah, it's it's it had elements if
33:39
Speaker 1: you will, of what happened during the Great Depression UH
33:43
Speaker 1: in the money market sector, because remember one of the
33:46
Speaker 1: programs that UH the Federal Reserve did was the commercial
33:51
Speaker 1: paper Funding Facility. The commercial paper market, which is where
33:55
Speaker 1: big companies and small companies in a great deal of
33:58
Speaker 1: the shadow banking system as well, was funding itself literally
34:02
Speaker 1: shut down UH and GE is one of the biggest
34:07
Speaker 1: issuers of commercial paper at that juncture and existence. So
34:12
Speaker 1: when you shut down the commercial paper market, you're talking
34:15
Speaker 1: about shutting down access to working capital, which is payroll,
34:21
Speaker 1: which is very similar to what happened back in the
34:24
Speaker 1: nineteen and thirties. So rather than having a run on
34:27
Speaker 1: the conventional banking system, we had a run on the
34:30
Speaker 1: shadow banking system, and the FED had to stop it
34:33
Speaker 1: or else they would have continued to self feed us
34:35
Speaker 1: into a depression. So if you want to hear our
34:38
Speaker 1: conversation continue, be sure and check out our podcast extras
34:42
Speaker 1: on Bloomberg dot com, SoundCloud and Apple iTunes. Check out
34:46
Speaker 1: my daily column on Bloomberg View dot com and follow
34:50
Speaker 1: me on Twitter at Rid Halts. I'm Barry Ridhults. You're
34:54
Speaker 1: listening to Masters in Business on Bloomberg Radio. Welcome to
34:58
Speaker 1: our podcast extras. I'm very Holton my guest today. I
35:01
Speaker 1: say this every week, but it's really true. My special
35:04
Speaker 1: guest this week is Paul McCulley. Paul and I um
35:09
Speaker 1: first met actually up in Maine on a fishing trip.
35:14
Speaker 1: I want to say a decade ago. Is that right?
35:16
Speaker 1: Sounds right? I don't know if you recall that particular meeting,
35:21
Speaker 1: but we were not feeling a whole lot of pain,
35:23
Speaker 1: you especially, and um, let's see if I can refresh
35:27
Speaker 1: your recollection with this. You had mentioned you only went
35:31
Speaker 1: to a couple of conferences each year, that one in
35:34
Speaker 1: Jackson Hole, and you gave me a reason why, which
35:37
Speaker 1: had something to do with a trillion dollars worth of bonds.
35:41
Speaker 1: And my answer to you was, yeah, but it's fixed income.
35:44
Speaker 1: That stuff runs itself, and you exploded at me. I
35:49
Speaker 1: can't remember what my wives acre response was, but I'm
35:52
Speaker 1: sure I had one. It's Scott Scott Frew at Rockingham Capital.
35:56
Speaker 1: Can can probably fill in the blanks, but I've I've
35:59
Speaker 1: known you ever since then. It's always, uh, it's always educational,
36:03
Speaker 1: it's always fun, um speaking with you. I always learned
36:06
Speaker 1: something new before the break and in the last I
36:09
Speaker 1: shouldn't say before the break. In the last section on radio,
36:12
Speaker 1: we were talking about the FED and what the FED
36:15
Speaker 1: got right and what the FED got wrong. And there
36:19
Speaker 1: are a lot of people who really are infuriated at
36:24
Speaker 1: what the FED has done. And they're promising, promising us
36:28
Speaker 1: for now, for five or six years, but it's coming.
36:32
Speaker 1: Just because it hasn't happened yet doesn't mean it's not
36:34
Speaker 1: gonna happen. They're promising us a giant disaster. Why are
36:38
Speaker 1: they wrong? Lots of economic reasons that they're wrong. Uh,
36:45
Speaker 1: notably that monetary expansion as well as zero interest rates
36:51
Speaker 1: are not going to have a huge stimultive effect on
36:54
Speaker 1: the economy and liquidity trap. So I can give you all.
36:57
Speaker 1: And that's the same reason why there's no hyper inflation.
37:00
Speaker 1: Wages are flat to fall in commodity prices are falling.
37:03
Speaker 1: The time to think about inflation was when the dot
37:06
Speaker 1: from oh one to oh eight. I have a chart
37:09
Speaker 1: up on the website I've I've posted this like every
37:12
Speaker 1: other year for ten years. From oh one to oh eight,
37:15
Speaker 1: the US dollar fell for coincidentally, apparently oil went from
37:22
Speaker 1: one fifty, food went through the roof milk meat. Everything
37:25
Speaker 1: went crazy in a collapsing dollar environment. Now the dollar
37:30
Speaker 1: is the cleanest shirt in the hamper. I think that
37:34
Speaker 1: was Bill's uh phrase. So, how are you going to
37:37
Speaker 1: have hyper inflation in that environment? You simply are not
37:41
Speaker 1: forget hyperinflation. How you gonna have the FEDS struggling to
37:45
Speaker 1: get up to its two percent target? So as a
37:48
Speaker 1: as an economist, I've always been fuddled, quite frankly at
37:54
Speaker 1: those at the uh extreme and I call them the extreme.
37:59
Speaker 1: Uh I guess it's probably grounded in monitorism. You print money,
38:04
Speaker 1: there's going to be inflation without understanding the context in
38:07
Speaker 1: which you are printing money. Uh So, it's really befuddled
38:12
Speaker 1: me as an economist that other side of the of
38:15
Speaker 1: the divide. As a money manager, it was delightful because
38:20
Speaker 1: you just knew the guy was categorically wrong. Created a
38:22
Speaker 1: lot of opportunities. Absolutely so your personal portfolio, not old
38:27
Speaker 1: gold and silver miners that we're telling me you want
38:30
Speaker 1: a lot of physical goal, don't you? You have bars
38:32
Speaker 1: stacked away, not not any no, no programs, no, no,
38:39
Speaker 1: not a uh so uh so, actually just see I
38:44
Speaker 1: could feel the hate mail coming and we're not even live,
38:48
Speaker 1: so I so economically, I've never been able to understand
38:52
Speaker 1: that camp. But thinking in terms of human nature, some
38:57
Speaker 1: may call it, you know, behavioral economics. UM I do
39:02
Speaker 1: have a thesis, let's hear it, which is that people
39:05
Speaker 1: looked at the huge expansion in the Federal reserves balance sheet.
39:13
Speaker 1: We also those charts with a giant hockey stick, they
39:16
Speaker 1: went from a trillion to four trillion dollars. That they
39:19
Speaker 1: look at that chart as the moral equivalent of a
39:23
Speaker 1: fat man in speedos. It's just wrong. It's just wrong.
39:28
Speaker 1: I can't tell you why it's wrong, but it's just wrong.
39:33
Speaker 1: The fat man in speedos. I resemble that remark, although
39:37
Speaker 1: although I'm quite sure you would be shot by your
39:41
Speaker 1: family if you ever showed up in speedos, and I
39:43
Speaker 1: would too. By the way, if when you go to
39:45
Speaker 1: beaches in the Mediterranean in Europe, like at least in
39:49
Speaker 1: the United States, people where the surfer shorts over there,
39:53
Speaker 1: it's speedos and those guys apparently, UH have a FED
39:58
Speaker 1: balance sheet of her own to worry about. So so
40:00
Speaker 1: let's get back to what these guys are are getting wrong.
40:04
Speaker 1: So it's not economically defendable. We haven't seen it in
40:09
Speaker 1: the real world. Are we is that theory? Is that thesis?
40:14
Speaker 1: And I'm asking you an impossible question. Is that thesis
40:17
Speaker 1: gonna just eventually fade away? Or are these guys consistently
40:22
Speaker 1: you know, the gold pops up every twenty years as
40:25
Speaker 1: an investment and then goes away for a while. But
40:28
Speaker 1: if you catch it right, it's a fantastic trade. Actually,
40:33
Speaker 1: I think they will be perpetually wrong in their forecast
40:37
Speaker 1: of nefarious consequences. But I do think there's something that's
40:41
Speaker 1: important and this public discussion, if you will, which is
40:47
Speaker 1: the role of monetary policy in the mosaic of government
40:54
Speaker 1: and the role of monetary policy relative to fiscal policy
41:00
Speaker 1: see in microeconomic uh fine tuning. So so I think
41:05
Speaker 1: I think there's a lot of substance there. Uh. In fact,
41:09
Speaker 1: two of the very long ad plus page scholarly papers
41:14
Speaker 1: I wrote during my retirement years while I was at
41:18
Speaker 1: the g i C. We're on particularly this issue of
41:21
Speaker 1: the monetary physical policy mixing a liquidity trap. So I
41:25
Speaker 1: think I do understand, uh, a sense of resentment, if
41:31
Speaker 1: you will, that this institution that is ostensibly a political
41:39
Speaker 1: was the only game in town, uh and therefore had
41:44
Speaker 1: to play the role it did. Now I actually think
41:48
Speaker 1: that if I did a wonderful job of playing the
41:52
Speaker 1: role that was foisted up on them. Uh so those
41:56
Speaker 1: who were forecasting the opposite, we were wrong. But I
41:59
Speaker 1: hate the issue of where does monetary policy fit in
42:04
Speaker 1: the mosaic of overall government policy? Says, a legitimate source
42:10
Speaker 1: of discussion. So so let's let's talk about Lord Kens
42:19
Speaker 1: and his findings and why so many people don't seem
42:23
Speaker 1: to have learned the lessons he taught. And I look
42:27
Speaker 1: at it as a willful misunderstanding of Kings. I speak
42:32
Speaker 1: to a lot. I have a lot of conservative friends
42:33
Speaker 1: who insist the budget deficit is caused by KINSI and economics.
42:40
Speaker 1: And my answer is, well, yeah, if you only listen
42:42
Speaker 1: to the first half of it. The second half of
42:45
Speaker 1: it says, hey, in an expansion, the government should step
42:48
Speaker 1: out of the way and let the private sector take
42:50
Speaker 1: That's when you raise taxes, lower spending, balance the budget,
42:54
Speaker 1: and get out of the way. The politicians, though, don't
42:56
Speaker 1: want to do that. No, no they don't. But I've
43:01
Speaker 1: spent a lot of time, uh trying to figure out
43:06
Speaker 1: why Keynes is still a four letter word in a
43:10
Speaker 1: lot of circles, UH, when Keynesian policies have been precisely
43:16
Speaker 1: what ultimately have been employed to get us out of
43:20
Speaker 1: the liquidity trapping or shell being employed. And I have
43:25
Speaker 1: a thesis on this verry is that I think a
43:28
Speaker 1: lot of people, unfortunately, a lot of people in our
43:31
Speaker 1: business don't understand the difference between micro economics and macro economics.
43:40
Speaker 1: I think a lot of people in our business look
43:42
Speaker 1: at macro economics as simply the summing up of microeconomics.
43:50
Speaker 1: Micro economics being you know, old fashioned supply demand transaction
43:55
Speaker 1: on a transaction by transaction basis, the commodity pits you
43:58
Speaker 1: know in Chicago, the ultimate you know, micro economics. They
44:02
Speaker 1: haven't been replaced by algos yet, are they still? Actually
44:06
Speaker 1: I think they were done. Maybe they are. I haven't
44:08
Speaker 1: actually been on the pit in a long long time.
44:10
Speaker 1: But I think a lot of people think in terms
44:12
Speaker 1: of macro is simply the summing up of of micro.
44:18
Speaker 1: A whole lot more than that. And macro is not
44:21
Speaker 1: the summing up of micro. It is an entirely different,
44:26
Speaker 1: UH discipline, And macro is defined by the paradox of aggregation.
44:34
Speaker 1: And I'm getting wonky here, but this is hugely important.
44:37
Speaker 1: So listen. We have a wonky audience. If they're with
44:41
Speaker 1: us this latent to the podcast, they'll appreciate it. So
44:44
Speaker 1: explain what people don't understand about macro and explain what
44:49
Speaker 1: Keen's got right, and white people should listen to him. Okay,
44:53
Speaker 1: you have forty five minutes begin Actually I have a
44:57
Speaker 1: three R lecture on this one. But um, the key
45:03
Speaker 1: difference between micro and macro is what is rational for
45:08
Speaker 1: the individual. If all individuals do so at the same time,
45:14
Speaker 1: is irrational for the community, such as the paradox of thrift.
45:19
Speaker 1: The paradox of thrift is the textbook one that you
45:22
Speaker 1: would explain. It's that, Um, that is quite okay for
45:27
Speaker 1: you to rationally say I need to spend less and
45:30
Speaker 1: save more in balance my budget, etcetera, etcetera, etcetera. In fact,
45:34
Speaker 1: most of us have preached this to our children at
45:37
Speaker 1: some juncture. You know the you know the virtues of thrift.
45:40
Speaker 1: You know God and all this sort of thing. The
45:43
Speaker 1: virtues of thrift. However, it is a fact that one
45:47
Speaker 1: man spending as another man's income. So therefore, if we
45:51
Speaker 1: all decide to spend less and save more at the
45:55
Speaker 1: same time, we collectively kill our elective income, which is
46:01
Speaker 1: the fountain from which savings flow. Another example, that's perfectly rational.
46:06
Speaker 1: Who could disagree with that? But people don't want to
46:10
Speaker 1: go to that logical conclusion because then you were saying, well,
46:14
Speaker 1: are you saying that thrift is a bad thing? Economic thrift,
46:21
Speaker 1: not virtuous thrift, not and not biblical thrift. We're talking
46:24
Speaker 1: about exactly, and and quite frequently religion and economics get
46:30
Speaker 1: uh melded. Quite quite frequently. Economics is a religion, and
46:33
Speaker 1: it becomes a problem, absolutely absolutely, which brings us to
46:38
Speaker 1: the naked hatred of Kine's How did that come about?
46:43
Speaker 1: I don't understand it. He seems to make sense. So wait,
46:46
Speaker 1: when the economy slows down enough and aggregate demand is weak,
46:50
Speaker 1: the government replaces private sector spending. And when the opposite happens,
46:54
Speaker 1: the government steps out of the way and allows private
46:56
Speaker 1: sector spending to do what if it wants that his
47:00
Speaker 1: reas shown us, that's a pretty reasonable model to operate under.
47:05
Speaker 1: The more the older I get, the more I accept
47:09
Speaker 1: the proposition that self evident truths are frequently not self
47:15
Speaker 1: evident to the masses. Well, write a book, but that's
47:18
Speaker 1: that's that's absolutely true. Write a book and you're like, Okay,
47:21
Speaker 1: this is now resolved, And the biggest frustration of writing
47:24
Speaker 1: a book is now that I've settled this question, discovering
47:29
Speaker 1: that you really haven't settled that question. I've only written
47:33
Speaker 1: one book in my lifetime, and I don't think I
47:35
Speaker 1: will write another one. That was actually around the time
47:38
Speaker 1: I met you in two thousand and six, which was
47:41
Speaker 1: when I had an incredible day job, so it was
47:43
Speaker 1: quite a task to try to produce a book at
47:45
Speaker 1: that juncture. So I don't anticipate writing another one. Now
47:48
Speaker 1: you have all the spare time in the world, you
47:49
Speaker 1: should be cranking at a book a year. Our friend
47:52
Speaker 1: John Wolden writes a book a month. You should keep
47:54
Speaker 1: up with John. I have no desire to do that whatsoever.
47:58
Speaker 1: And I think in terms of of I think the
48:03
Speaker 1: single best evangelist for right thinking in macro huh is
48:10
Speaker 1: Paul Krugman. And Paul does an absolutely fantastic job of
48:15
Speaker 1: trying to explain the difference between micro and macro, trying
48:20
Speaker 1: to explain the I S l M model, and Paul
48:23
Speaker 1: is incredibly articulate and prolific, and he pulls his hair
48:30
Speaker 1: out trying to convert the un convertible. See we've had
48:35
Speaker 1: Paul as a guest. I don't think he pulls his
48:37
Speaker 1: hair out. I think he understands this. By the way,
48:40
Speaker 1: send your hate mail to Paul McCulley at pimco dot com.
48:44
Speaker 1: That's Paul McCulley at pimco dot com. Actually it will
48:47
Speaker 1: be rejected. Oh no, it's Paul dot McCulley at pimco
48:54
Speaker 1: dot com. So, um, look, I mean, if Paul Krugman
48:58
Speaker 1: can't make handway in explaining the obvious, that I have
49:04
Speaker 1: to bow to the impossibility of doing it. Because there's
49:07
Speaker 1: nobody better at the pen than Paul. So so you know,
49:12
Speaker 1: we were at an event once and we were talking.
49:16
Speaker 1: I do the weekly column. I do to two personal
49:19
Speaker 1: finance columns a month for the Washington Post. He does
49:22
Speaker 1: two columns a week for the New York Times. And
49:25
Speaker 1: I asked him how much time do you put in
49:28
Speaker 1: each column, thinking he's gonna say an hour or two,
49:30
Speaker 1: so because I eight to twelve hours, and I fell
49:33
Speaker 1: off my chair and I'm like, I got a lot
49:35
Speaker 1: of work to do. So he when the reason he
49:39
Speaker 1: his columns are as tight and well written and he
49:43
Speaker 1: really pounds away on less than a thousand words, and
49:48
Speaker 1: he's spending twelve hours on him. It's it's amazing to me.
49:51
Speaker 1: It is much more difficult to write. I apologize for
49:56
Speaker 1: the length of the letter. I didn't have time. Yeah,
49:59
Speaker 1: it's it's absolutely case. So since we're in in the
50:02
Speaker 1: wonky phase of the show, what's the difference between Kinsianism
50:07
Speaker 1: and neo Kinsianism For people who may not understand the
50:11
Speaker 1: nuances there, including me, neo kinesian Ism, it's simply Kin's
50:22
Speaker 1: updated for new information, new techniques of analysis. There's not
50:28
Speaker 1: a whole lot of difference. I'm sure that you could
50:31
Speaker 1: have an academic to debate. You know, Smith is the
50:34
Speaker 1: guy to fine tune this, to define tune the whole
50:38
Speaker 1: third thing is, you know what constitutes a fat man
50:41
Speaker 1: and speed us. I mean, I'm sure you could have
50:43
Speaker 1: people debate the whole issue. But you know, I kind
50:46
Speaker 1: of know when when I see one that that that
50:49
Speaker 1: is the same definition that we had of of pornography.
50:53
Speaker 1: So um, so we let's bring this back to the
50:57
Speaker 1: to the fed um or or even more interestingly, let's
51:01
Speaker 1: let's talk about the financial crisis. Why what should have
51:06
Speaker 1: been the response from Congress, and the counter argument to
51:10
Speaker 1: saying we we didn't have a Keensian response. You had
51:14
Speaker 1: an eight hundred billion dollar TARP, you had all sorts
51:18
Speaker 1: of bailouts for different entities, You had the f D
51:21
Speaker 1: I C and the FED working over time. Can can
51:25
Speaker 1: you make the argument that we had a traditional Keensian response,
51:30
Speaker 1: you had elements of a Kensian response. Actually in the
51:35
Speaker 1: phiscal stimulus package. TARP was not part of the piscal stimulus,
51:38
Speaker 1: so it's tart plus and and Krugman has argued that
51:42
Speaker 1: the stimulus was too low by an order of magnitude,
51:46
Speaker 1: and I certainly agree with him on that. I mean,
51:49
Speaker 1: Larry Summers used to you know, talking temporary, uh timely
51:53
Speaker 1: and targeted the three t s uh and and this
51:58
Speaker 1: was none of that. It may have been timely, but
52:01
Speaker 1: unfortunately it was temporary. I'm not sure it was particularly
52:04
Speaker 1: well targeted. Uh So it's better than nothing, just barely,
52:11
Speaker 1: but but just barely. And then in two thousand and
52:14
Speaker 1: ten we went the other direction when the Tea Party
52:18
Speaker 1: hijacked the country. So, yeah, the sequester we had, which
52:22
Speaker 1: was you know, absurdity square, But isn't that what's going on?
52:25
Speaker 1: Today in in Europe. Aren't adity squared? That's all I
52:30
Speaker 1: can say. Man, so absolutely no since whatsoever? And that
52:36
Speaker 1: you know, it's recommending a starvation dot for an anorexic.
52:40
Speaker 1: But it makes no sense. It's working out for Greece,
52:42
Speaker 1: isn't it is? Aren't they doing fantastic? I mean, Greece
52:45
Speaker 1: is doing well right that they're on their third bail out.
52:49
Speaker 1: They only have unemployment. It's not the worst thing in
52:52
Speaker 1: the world. And um, their GDP has been what down
52:56
Speaker 1: their GDP? This is fascinating to me. The g d
53:00
Speaker 1: HE of Greece is now worse than the GDP of
53:02
Speaker 1: the United States in the twenties and thirties, in the
53:05
Speaker 1: in the Great Depression, post crash Great Depression. Someone said
53:08
Speaker 1: that I haven't verified it, but I don't doubt it
53:11
Speaker 1: for a second. We don't need any more data to
53:15
Speaker 1: support the thesis that austerity and all liquidity trapp is stupid. Uh,
53:22
Speaker 1: you're letting facts get in the way of a narrative.
53:25
Speaker 1: And and those people don't really care. Um, I mean,
53:28
Speaker 1: you know, maybe you know, we just have to go
53:30
Speaker 1: back to you know, Forrest Scump. You know, stupid is
53:33
Speaker 1: a stupid dues. So if you could get the e
53:38
Speaker 1: c B, if you were speaking to the e c B,
53:40
Speaker 1: what would you say to them? Actually, I had no
53:43
Speaker 1: particular problem with the ECB doing what they're doing right now. Uh.
53:48
Speaker 1: The e c B is what about Angela Merkel? Then?
53:51
Speaker 1: Is she the one you need to chastise because people
53:54
Speaker 1: thought Bush was giving a massage, but I think he
53:56
Speaker 1: was trying to strangle her. Got no comment on that.
54:01
Speaker 1: What I will say is that the German perspective that
54:06
Speaker 1: everybody should be just like in Germany is a paradox
54:12
Speaker 1: of aggregation, because if everybody was just like in Germany,
54:17
Speaker 1: then we would start to have to trade with Mars
54:20
Speaker 1: because Germany runs chronically a surplus on trade everybody else
54:28
Speaker 1: and double entry bookkeeping requires. If one person runs a surplus,
54:32
Speaker 1: somebody else has got to run. It's a zero sum games,
54:35
Speaker 1: a zero sound games. So if Germany says everyone should
54:38
Speaker 1: be like us, I want to know where the other
54:42
Speaker 1: side of the trade is. Uh. Germany actually absorbs global
54:48
Speaker 1: aggregate demand as opposed to contributing to it. The theory
54:53
Speaker 1: that's been out there for a while is that the
54:55
Speaker 1: Eurozone and the euro have essentially worked to the ben
55:00
Speaker 1: benefit of Germany. Um, someone called it Berlin's revenge, and um,
55:07
Speaker 1: you know, as much as their heart on Greece, this
55:09
Speaker 1: has really been something that was constructed by and for
55:14
Speaker 1: the Germans more than anything else. I think the better
55:18
Speaker 1: part of valor would for me, would be not to
55:21
Speaker 1: comment on that. What I will say is that the
55:28
Speaker 1: Euro is a lot weaker then would be the case
55:33
Speaker 1: if the club Med countries were not in the Euro,
55:38
Speaker 1: which euro is weaker. So, in other words, if we
55:41
Speaker 1: lose Italy, Greece, excuse me, that the Euro would be
55:45
Speaker 1: a lot stronger than it is right now. And so
55:48
Speaker 1: Germany benefits from the fact that its currency is drugged
55:53
Speaker 1: down by its neighbors. So the exporting machine called Germany
56:00
Speaker 1: benefits in some respects because there are other people in
56:04
Speaker 1: the house, uh, that are making their currency weaker than
56:08
Speaker 1: would otherwise be the case. You know, and I think
56:10
Speaker 1: we've all played, you know, the counterfactual game in our brain.
56:15
Speaker 1: Suppose you had, you know, the weaker countries of the
56:19
Speaker 1: Euro exit and that's not a forecast. I don't think
56:21
Speaker 1: they're gonna happen period, not even Greece. No, that would
56:25
Speaker 1: not be my base case scenario. But uh, if they
56:29
Speaker 1: were to exit and effectually the euro became the mark,
56:33
Speaker 1: how much stronger would it be in The answer is much,
56:37
Speaker 1: a lot much, and that would not be great for
56:39
Speaker 1: Germany's export business exactly, although you know that's the only
56:43
Speaker 1: thing I would say is I think they are the
56:45
Speaker 1: beneficiaries of a weaker currency than would be the case
56:51
Speaker 1: in the absence of the problems down south. So so,
56:56
Speaker 1: how does let's stay in Europe? So how does the
56:59
Speaker 1: European problems play out? What does grease ever a cover?
57:04
Speaker 1: Is there ever gonna be The real question is is
57:06
Speaker 1: there ever gonna be a haircut for the lenders to
57:09
Speaker 1: these insolvent nations that will or a default that allows
57:13
Speaker 1: them to move You know, Argentina, South America, Mexico. You
57:18
Speaker 1: look at all the defaults we've seen over the decades.
57:22
Speaker 1: It's the first step to healing yourselves. All Right, we
57:25
Speaker 1: get rid of these debts. Now we're gonna have to
57:27
Speaker 1: pay more to borrow, but at least we're out from
57:29
Speaker 1: under that. Let's reboot, let's start over. Is that a
57:32
Speaker 1: possibility in Greece or are they just saddled with more
57:36
Speaker 1: debt than then? I wish I could come up with
57:38
Speaker 1: a good scenario for Greece, I really do. Um, greg'sit
57:44
Speaker 1: and the dragma, that's that's my scenario. Yeah, and I
57:47
Speaker 1: think we've all you know, run that through our brains
57:49
Speaker 1: and say, you know it's it's it's held between you know,
57:52
Speaker 1: for the next two years to get there, because you
57:54
Speaker 1: would actually take two years to re establish a currency
57:58
Speaker 1: in a banking system and all that sort of stuff
58:00
Speaker 1: will be a two year period of hell. But on
58:02
Speaker 1: the other side there may be a story of redemption.
58:05
Speaker 1: But I don't think that no, no, no one makes
58:08
Speaker 1: it pain. And I don't think there would be quote
58:11
Speaker 1: unquote a an official type of default because that would
58:17
Speaker 1: be too much embarrassment for too many people. Um So
58:21
Speaker 1: I think it's uh more of a round about type
58:26
Speaker 1: of default. And any example, suppose when you graduated from
58:29
Speaker 1: college you had a buddy who owed you two hundred bucks. Uh,
58:34
Speaker 1: you could declare an event of default and say, hey, pal,
58:37
Speaker 1: you owe me two hundred bucks. Were graduating, we're out
58:39
Speaker 1: of here, give me my two hundred bucks. And if
58:41
Speaker 1: you're not, I'm gonna take your car. You know, that
58:44
Speaker 1: would be declaring an event of default. I can say Harry,
58:48
Speaker 1: you know, when you got the two hundred bucks, you know,
58:50
Speaker 1: give it back to me. You know, at your thirty
58:52
Speaker 1: year reunion, Harry gives you the two hundred bucks. Now,
58:56
Speaker 1: was there a default there, Well, technically yes, but was
59:00
Speaker 1: eventually repaid it. It was worth the tenth of what
59:04
Speaker 1: it started. Yeah, exactly. So therefore Harry kept his car.
59:08
Speaker 1: There was no embarrassment, you know, and you you know,
59:11
Speaker 1: had a loan, you know, for thirty years for turner back.
59:14
Speaker 1: The lenders had. The lenders absorbed the loss just over time,
59:19
Speaker 1: just over Yeah. But but but they save face by
59:24
Speaker 1: doing it this way. Economically, we always conclude, well, let's
59:30
Speaker 1: just you know, quit the pretense game and get here.
59:32
Speaker 1: But in the political world, pretense there's a currency. Uh.
59:38
Speaker 1: Interests is a currency. So so pretense has to be managed, exploited,
59:46
Speaker 1: uh and practiced. Uh. And you see it there. We
59:51
Speaker 1: actually see it a little bit south of here, down
59:53
Speaker 1: in uh Washington, d C. I mean, when you see
59:56
Speaker 1: a corgnressman stand up and say about some buddy on
1:00:00
Speaker 1: the other side of the out my good friend, what
1:00:05
Speaker 1: do you think, Barry? I don't think they're really friends.
1:00:07
Speaker 1: That's that's my take. Um, you know, the old joke
1:00:12
Speaker 1: is a conservative is a liberal who got mugged. A
1:00:15
Speaker 1: cynic is an optimist who's been around for a while.
1:00:18
Speaker 1: So the same thing. So let's shift a little bit.
1:00:21
Speaker 1: Let's talk about Japan. Uh, the United States have wrapped
1:00:25
Speaker 1: up our que program. It's now more or less running off,
1:00:29
Speaker 1: which is a question I keep getting from people. For you,
1:00:31
Speaker 1: I'm gonna say, come back to that. What so Japan
1:00:36
Speaker 1: after gee, it seems like decades it has been began
1:00:41
Speaker 1: a quee program and their economy started to tick up,
1:00:45
Speaker 1: their infrash inflation rate in a tiny manner, ticked up.
1:00:49
Speaker 1: Their stock market has moved substantially higher. What is going
1:00:53
Speaker 1: on with Japan and qwee? And and what do we
1:00:56
Speaker 1: think the end game is gonna look like for Japan
1:00:59
Speaker 1: over the next few years? Is I think the end
1:01:02
Speaker 1: game now is no end just kwei forever could very
1:01:06
Speaker 1: well be and I think that would be appropriate for Japan. Um.
1:01:12
Speaker 1: The irony of history here is it was only less
1:01:16
Speaker 1: than two decades ago that the Bank of Japan got
1:01:20
Speaker 1: its political independence, And conceptually, you want a independent central
1:01:25
Speaker 1: bank to cut off the fat tale of inflation Japan
1:01:29
Speaker 1: has been living in the fat tale of deflation for
1:01:32
Speaker 1: all of our adult lifetime, assuming our adult lifetime has started,
1:01:35
Speaker 1: of course. And uh, well let's just say, yeah, the
1:01:40
Speaker 1: last twenty five years, uh, and the Bank of Japan
1:01:46
Speaker 1: for a long period of time until the current administration
1:01:50
Speaker 1: set not our problem, not our problem. Uh. And now
1:01:53
Speaker 1: you actually have a forceful Knesian type of approach whatever
1:02:00
Speaker 1: it takes, with monetary policy being subservient to physical policy. There.
1:02:06
Speaker 1: So I think they're doing the right things. Um, but
1:02:11
Speaker 1: I'm not sure you're gonna have you know, any sort
1:02:13
Speaker 1: of you know, bell ringing positive results. Besides the equity
1:02:16
Speaker 1: market that was that was one of the free trades
1:02:18
Speaker 1: of the century when they did that on the equity market.
1:02:21
Speaker 1: We should never confuse equity markets with the main street. Uh,
1:02:24
Speaker 1: two completely different things. What speaking of which, what about
1:02:27
Speaker 1: that consumption text they put into effect which really seemed
1:02:31
Speaker 1: to derail But then but but then the next one
1:02:34
Speaker 1: they said, you know, we're not going to do the
1:02:36
Speaker 1: next one. Uh. And so actually I think Japan has
1:02:41
Speaker 1: a challenge unlike the United States, Europe has a little
1:02:46
Speaker 1: bit of it, which is a demographic challenge. They're getting
1:02:50
Speaker 1: old very very fast and has a monster challenge. And
1:02:56
Speaker 1: the other thing is they don't have immigration at all
1:03:00
Speaker 1: zero Like there are very very few non Japanese in Japan.
1:03:04
Speaker 1: So actually, I can, you know, put in the best
1:03:08
Speaker 1: macro Kansian policies possible, but if you've got a shrinking population,
1:03:13
Speaker 1: it's very difficult and your pass some element of that.
1:03:17
Speaker 1: Whereas United States doesn't have a shrinking rate of the
1:03:22
Speaker 1: industrial we have a good birth rate. And also we
1:03:25
Speaker 1: have an open UH perspective about immigration imrants and UH
1:03:33
Speaker 1: is it a million legal immigrants a year or something
1:03:35
Speaker 1: like that, And actually, you know, on I'm not forecasting
1:03:39
Speaker 1: it UM as a nearby outcome, but actually I think
1:03:44
Speaker 1: and lightens immigration reform in the United States, where we
1:03:51
Speaker 1: have robust immigration not just on the historical model of family,
1:03:57
Speaker 1: but on the concept of skill set, is UH could
1:04:01
Speaker 1: actually increase the potential growth rate of our economy. One
1:04:05
Speaker 1: of the biggest post non eleven mistakes that was made,
1:04:08
Speaker 1: and there were many, was the shutting down of the
1:04:12
Speaker 1: HB one viasas for really qualified UM technology grad student
1:04:17
Speaker 1: in people don't realize half of the C suite population
1:04:22
Speaker 1: in Silicon Valley are far and born and we attract
1:04:27
Speaker 1: we at least we used to the best and brightest
1:04:29
Speaker 1: of these folks to come here for for the opportunities,
1:04:33
Speaker 1: and it's been an enormous economic boom, enormous positive for
1:04:36
Speaker 1: the United States. I mean, one of the ironies is
1:04:39
Speaker 1: that one of the the U S products that is
1:04:44
Speaker 1: universally sold around the world that is wonderful is our
1:04:49
Speaker 1: educational system you call it, you know, higher education, being
1:04:54
Speaker 1: one of our most profound exports. Even though we actually
1:04:57
Speaker 1: do it here, we're selling the product to the foreign customer.
1:05:01
Speaker 1: The foreign customer comes here exceedingly well, and then we
1:05:05
Speaker 1: won't let him stay and keep a job here. It
1:05:08
Speaker 1: makes absolutely no sense. So this is a political issue.
1:05:12
Speaker 1: It's a political issue, and I do understand the political issue,
1:05:16
Speaker 1: which is that our immigration policy has been based historically
1:05:21
Speaker 1: on family connections. You can bring family members over based
1:05:27
Speaker 1: on economics. We are a nation of immigrants. Uh. We
1:05:32
Speaker 1: can all trace our you know, origins back you know,
1:05:35
Speaker 1: to this country or the other. You know. My dad
1:05:37
Speaker 1: was scotch Irish, my mom was German. Uh, So there's
1:05:41
Speaker 1: the that historical issue that uh, you earned the right
1:05:45
Speaker 1: by birth to be in the United States. Uh. And
1:05:50
Speaker 1: I think enlightened immigration reform is to is to preserve
1:05:55
Speaker 1: that legacy, which is a treasure for us, but also
1:06:00
Speaker 1: recognizing that we can have immigration policy that includes UH
1:06:07
Speaker 1: having skilled people bring economic value to our country as well.
1:06:12
Speaker 1: So it's not to me it's not one or the other.
1:06:15
Speaker 1: It should be both. But anytime we talk about reform
1:06:20
Speaker 1: of immigration, it seems like the political system is, well,
1:06:25
Speaker 1: this is if we do this, then we have to
1:06:27
Speaker 1: stop doing that. I think a blend of the two
1:06:30
Speaker 1: could be a very positive, uh sort of thing for
1:06:33
Speaker 1: the country, and probably for the first time this month,
1:06:36
Speaker 1: this week, this year. I may even sound like a Republican.
1:06:39
Speaker 1: God forgive me. So why haven't we been able to
1:06:42
Speaker 1: get this done? Why can't we get a rational? I mean,
1:06:46
Speaker 1: we all know what the answer is, but why can't
1:06:48
Speaker 1: we get a rational? This is something that both sides
1:06:51
Speaker 1: of the aisle they have an interest in. B. There's
1:06:55
Speaker 1: a huge overlap. I won't I won't say they agree on,
1:06:58
Speaker 1: but that ven diagram has a lot of common area.
1:07:01
Speaker 1: We'll put Ben diagram. I don't know. I wish I
1:07:05
Speaker 1: knew the answer to that question, because you'd like to
1:07:09
Speaker 1: believe even though democracy is supposed to be in efficient
1:07:13
Speaker 1: so I don't complain too much about any efficiency in Washington,
1:07:17
Speaker 1: because that's how it was designed to be and efficient.
1:07:20
Speaker 1: But sometimes there's things that are so singularly obvious that
1:07:24
Speaker 1: should be done UH, that you would think they would
1:07:29
Speaker 1: get done. And actually after nine eleven there was one,
1:07:32
Speaker 1: which is outsourcing UH airport protection to private companies. We said, no,
1:07:38
Speaker 1: why we should actually have to government function? You know
1:07:41
Speaker 1: what I spoke to. We had Less Gelb as a
1:07:44
Speaker 1: guest recently, and um, one of the things he said
1:07:47
Speaker 1: that was really fascinating. So he here's a guy, incredibly
1:07:52
Speaker 1: storied background, UM working for Senator Jacob Javitt's a traditional
1:07:59
Speaker 1: liberal Northeast Republican center. Right, Well, the Javits Javits is
1:08:05
Speaker 1: no longer with us. That that that's completely gone, you know.
1:08:09
Speaker 1: But what he said was there were enough people who
1:08:12
Speaker 1: in the Senate that regardless of politics that he didn't
1:08:17
Speaker 1: say ven diagram, but that same ven diagram where you
1:08:22
Speaker 1: and I may degree about issue, disagree about issues one
1:08:24
Speaker 1: to three, four, five, but gee, we totally agree about
1:08:28
Speaker 1: six through ten. So let's hold one through five aside
1:08:30
Speaker 1: and get six through ten done and then we can
1:08:33
Speaker 1: see what we can figure out with one through five.
1:08:35
Speaker 1: According to him, that's gone away. And that's why this
1:08:37
Speaker 1: Congress has become such a do nothing congress, and it's
1:08:42
Speaker 1: why brings it back to the FED. They became the
1:08:45
Speaker 1: only game in town. Nothing was done that's normally done.
1:08:48
Speaker 1: I'm not saying anything radical or new needed to be done.
1:08:52
Speaker 1: All of the traditional post crisis fiscal things that you
1:08:56
Speaker 1: expect that happened as recently as two thousand just did
1:08:59
Speaker 1: not have been this time around. Yeah, it's um as
1:09:02
Speaker 1: a citizen, which I am first and foremost these days
1:09:05
Speaker 1: as a retired man, I I'm discouraged about the fact
1:09:11
Speaker 1: that Venn diagram as you speak of, she's just not
1:09:14
Speaker 1: really working in obvious sort of places. I don't think
1:09:18
Speaker 1: Congress could agree on velveta on white bread as a
1:09:22
Speaker 1: lunch sandwich anymore. I mean, worse it works at a
1:09:25
Speaker 1: debate about that, it's uh. The question is is it
1:09:29
Speaker 1: a self correcting mechanism? Is it gonna get so extreme?
1:09:33
Speaker 1: Is it gonna get so bad that the throm the
1:09:36
Speaker 1: throw the bums out response is gonna give us a
1:09:40
Speaker 1: fresh start? I don't know people who don't think it is.
1:09:43
Speaker 1: Some people think that it has to get worse before
1:09:45
Speaker 1: it gets better. Yeah, And actually that's one where I
1:09:49
Speaker 1: really don't have an informed opinion. The older I get,
1:09:53
Speaker 1: the more I recognize there are some areas I just
1:09:56
Speaker 1: won't ever be able to understand. Sausages make Washington. Uh,
1:10:02
Speaker 1: some things I was just never understand. It is what
1:10:05
Speaker 1: it is. So, speaking of being a retired man, you
1:10:09
Speaker 1: give a speech a month, that's retired. You're not publishing.
1:10:15
Speaker 1: I know that you like to bowl, What what else
1:10:19
Speaker 1: are you doing? I travel a fair amount. Yeah, with
1:10:23
Speaker 1: with with g I C. There seems to be events
1:10:26
Speaker 1: constantly all around the world. And and I traveled with
1:10:29
Speaker 1: the g I C occasionally, But in our speech a
1:10:32
Speaker 1: month actually involves a trip a month usually. Uh. And
1:10:36
Speaker 1: now that I'm retired, it's not just to go in
1:10:39
Speaker 1: uh and uh, give the speech and go back to
1:10:42
Speaker 1: the airport for instantly. You know. Was it? Last fall?
1:10:45
Speaker 1: I had a speech down in Argentina and spent five
1:10:48
Speaker 1: days in Argentina. That's fun, that's fun. Uh. Actually, I
1:10:53
Speaker 1: have not been back to China since I've retired. During
1:10:56
Speaker 1: my active career, I went to China on business twenty
1:11:02
Speaker 1: six times really starting in nineteen ninete. So you've seen
1:11:06
Speaker 1: insane changes, and I've seen insane changes since nineteen But
1:11:11
Speaker 1: what I haven't seen, actually is the wall? Really? Twenty
1:11:16
Speaker 1: six trips never so you need it, You need a
1:11:19
Speaker 1: tourist trip to change. Yeah. I heard I was shooting
1:11:21
Speaker 1: The Breeze with Bill Gross about it and I said, Bill,
1:11:24
Speaker 1: I've been to China twenty six times and yet to
1:11:27
Speaker 1: see the wall. And he looked at me like, how
1:11:30
Speaker 1: is that possible? How is that possible? And then I said, Bill,
1:11:33
Speaker 1: I was working for your company. Oh, now I get it,
1:11:36
Speaker 1: you know, in and out. So actually, the next time
1:11:39
Speaker 1: I get a invitation to a group that I want
1:11:43
Speaker 1: to speak to in China, I'm want to see that wall.
1:11:45
Speaker 1: So you'll you'll build in an extra week of some
1:11:48
Speaker 1: tourist activities. Speaking of Bill Gross, so we talked a
1:11:52
Speaker 1: little bit about him professionally. But you guys are really budds.
1:11:55
Speaker 1: You hang out. Yeah, yeah, we do, particularly over the
1:11:59
Speaker 1: last Um you're eighteen months uh time at my home.
1:12:06
Speaker 1: You're in Newport Beach, Calibania, which, by the way, for
1:12:09
Speaker 1: those of you who haven't been there, I'll put your
1:12:12
Speaker 1: dress up on the website so people can stop by.
1:12:14
Speaker 1: But I found Newport Beach to be one of the
1:12:17
Speaker 1: I gave a speech at the Newport Beach Public Library
1:12:23
Speaker 1: PIMCO series. I found Newport Beach to be one of
1:12:27
Speaker 1: the most beautiful places I've ever been to in my life.
1:12:31
Speaker 1: It's spect you know what it is. It's the Hampton's
1:12:33
Speaker 1: meets Fire Island. It's these big, gorgeous houses, but instead
1:12:38
Speaker 1: of being on two acre estates with giant hedges, it's
1:12:41
Speaker 1: like Fire Island there shoulder or shoulder right on the water.
1:12:44
Speaker 1: And what is the beach right on the other side
1:12:46
Speaker 1: of the body of water that's there. The there's a
1:12:49
Speaker 1: public park over there, something with a b bar. Balboa
1:12:55
Speaker 1: Island which is also lovely. Yeah. In fact, my home
1:12:59
Speaker 1: is actually on Leado Island, which is off of Balboa
1:13:02
Speaker 1: or off of actually the Newport Harbor has uh seven islands. Uh.
1:13:08
Speaker 1: Balboa is a beak one that's also a tourist place
1:13:12
Speaker 1: with lots of commercials. Uh. Leedo is strictly residential. There's
1:13:16
Speaker 1: not nothing commercial on Leedo. And then there's Harbor Island.
1:13:19
Speaker 1: There's seven islands. Can you drive to that or doesn't
1:13:21
Speaker 1: take a there's a bridge so you can drive. There's
1:13:25
Speaker 1: one bridge to get onto. Uh, actually both islands. Um,
1:13:29
Speaker 1: there is a ferry to Balboa Island that it took
1:13:33
Speaker 1: three minutes. There's not a ferry to Leado. Bill actually
1:13:37
Speaker 1: lives doesn't live in Newport Beach. He lives in Laguna Beach,
1:13:42
Speaker 1: which is you know, it's actually the other direction, and
1:13:46
Speaker 1: in a beautiful home overlooking uh the ocean. Uh. And
1:13:51
Speaker 1: he and actually bowled together in neither place. We bowl
1:13:54
Speaker 1: together and Fountain Valley, which has the best bowling alley
1:13:58
Speaker 1: in the in the area. So you're telling me people
1:14:01
Speaker 1: walk into a bowling league and there's Bill Gross and
1:14:03
Speaker 1: Paul McCulley bowling, it wouldn't be a leg. But if
1:14:07
Speaker 1: you come by out on a Tuesday afternoon at three o'clock,
1:14:11
Speaker 1: you can very well run into me and Bill bowling. Yeah. Um,
1:14:15
Speaker 1: are you a good buller? I'm a pretty good bowler. Uh.
1:14:19
Speaker 1: It's one of my things I like to do. I
1:14:22
Speaker 1: like to fish, I like to bowl, I like to
1:14:25
Speaker 1: ride my bike, and I bowled a lot more in
1:14:28
Speaker 1: recent years. I'm probably about a one NINETI average something like.
1:14:32
Speaker 1: Is he a good bowler? Bill is a very good athlete. Really,
1:14:37
Speaker 1: he's not bowling, has never been his particular sport. But
1:14:42
Speaker 1: when he started bowling with me, uh, he got progressively better.
1:14:46
Speaker 1: And and I wouldn't venture what he uh would roll
1:14:50
Speaker 1: on an average because we don't roll enough that he
1:14:52
Speaker 1: would because I go to or three times a week. Yeah,
1:14:56
Speaker 1: and not in Bill and I go occasionally. Uh. But
1:15:00
Speaker 1: he's a very very good athlete. Uh. And actually uh,
1:15:04
Speaker 1: this goes back about five months ago. We actually went
1:15:08
Speaker 1: once with his wife too. We had a great time,
1:15:10
Speaker 1: uh when Sue went with his bowling, but once Bill
1:15:16
Speaker 1: just shot good an athlete, he is made the six
1:15:19
Speaker 1: seven ten split. I've been bowling for thirty years and
1:15:23
Speaker 1: I've only made it three or four times. And he
1:15:26
Speaker 1: as a rare bowler. I don't think he bowled, you
1:15:29
Speaker 1: know much. And you know, since you know his kids
1:15:31
Speaker 1: were a little made the six seven ten splits. So
1:15:36
Speaker 1: you know, if you ever see him, just say, what
1:15:38
Speaker 1: did it feel like to make the six seven ten split.
1:15:40
Speaker 1: It's a nice feeling. Let me tell you, I'm still
1:15:43
Speaker 1: holding one sort of thing. I'm still I'm still it's
1:15:46
Speaker 1: it's kind of like a holding one. I'm still wrapping
1:15:48
Speaker 1: my head around the the two of you bowling. That
1:15:52
Speaker 1: that's that's a hard that's a hard um image to
1:15:56
Speaker 1: to get on him. So that's a picture that would
1:15:58
Speaker 1: make Bloomberg if someone to it, absolutely would make Bloomberg.
1:16:02
Speaker 1: There's no doubt in my mind. It is a just Um,
1:16:09
Speaker 1: I'm I'm struck somewhat uh speechless. So so clearly your
1:16:15
Speaker 1: relationship goes way back. Would you consider to consider Bill
1:16:18
Speaker 1: Gross a mentor of yours? Yeah? I would, uh tell
1:16:25
Speaker 1: us about the early days when you said he's a
1:16:27
Speaker 1: guy who hired an unemployed kid? What what was that
1:16:31
Speaker 1: experience like? What was it like starting a job with
1:16:34
Speaker 1: a guy. Even then he was fairly storied. People were
1:16:38
Speaker 1: starting to know who he was. This is nineteen ninety. Um,
1:16:43
Speaker 1: I think he engenders beer. Mm hmm. Supposed to be
1:16:51
Speaker 1: a tough guy if you're just a kid out of school,
1:16:54
Speaker 1: supposed to be a tough guy to work for. He
1:16:56
Speaker 1: is a tough guy to work for. He has uh
1:16:59
Speaker 1: low tolerance for beating around the bush. What doesn't suffer fools? Gladly,
1:17:05
Speaker 1: that's another way of putting it. If he asked you
1:17:06
Speaker 1: a question, he wants one of two things, A detailed, complete,
1:17:11
Speaker 1: accurate answer or I don't know, sir, I'll be back
1:17:15
Speaker 1: to you tomorrow morning. If you can't give him one
1:17:18
Speaker 1: of those two answers but are somewhere in between, you
1:17:21
Speaker 1: have a problem. There's no problem saying Bill, I don't know.
1:17:28
Speaker 1: I will have a memo on your desk tomorrow morning
1:17:30
Speaker 1: with a complete answer. You better have the memo onning
1:17:32
Speaker 1: is ask tomorrow morning with a complete answer. That's a
1:17:35
Speaker 1: fine answer. If you have the answer in detail when
1:17:39
Speaker 1: he asked you, that's a great thing. What's not a
1:17:41
Speaker 1: good thing is to try to bluff him with bull stuff.
1:17:46
Speaker 1: And I don't I take him as a guy who's
1:17:48
Speaker 1: a pretty good poker player, you probably don't want to
1:17:51
Speaker 1: bluff him. You don't want to bluff him. Uh. And
1:17:57
Speaker 1: also he has um. This is an interesting aspect of
1:18:01
Speaker 1: Bill that very few people know. I mean, he's known
1:18:04
Speaker 1: as you know, a tough boss, and he is tough
1:18:08
Speaker 1: I think fair but also a very tough boss and
1:18:11
Speaker 1: you know, a very close but he still you know,
1:18:14
Speaker 1: you know, in in the latter years of my career,
1:18:16
Speaker 1: would go off on me sometimes and I could go
1:18:19
Speaker 1: off back at him. That's a big difference because we've
1:18:21
Speaker 1: reached that stage of of friendship. Um. But he's still
1:18:26
Speaker 1: to this day, believes that all of his success is
1:18:29
Speaker 1: the function of the client, and he's absolutely marvelous with clients.
1:18:34
Speaker 1: He's not gruff. And actually he is amazingly receptive to
1:18:39
Speaker 1: the fact that I'm rich because I'm delivering what the
1:18:43
Speaker 1: client wants. And if I don't know what the client wants,
1:18:46
Speaker 1: I shut up and I listened. Uh. So, actually, Build
1:18:49
Speaker 1: is an amazingly good listener to clients uh and is
1:18:53
Speaker 1: very good with clients. UH. And Uh He's different with
1:18:58
Speaker 1: employees who uh are trying to blow smoke up his
1:19:01
Speaker 1: back side, but with clients he's amazingly good. Um. Who
1:19:05
Speaker 1: else would you count as as mentors? Uh? Obviously I
1:19:13
Speaker 1: never knew either John Maynard Keynes or Hyman Minsky, but
1:19:17
Speaker 1: they had a profound impact on me intellectually. Uh. Bill Miller,
1:19:25
Speaker 1: of like Mason fame U, is a close personal friend
1:19:30
Speaker 1: and mentored me. Uh. And being able to fluently move
1:19:38
Speaker 1: back and forth between valuation in the bond market and
1:19:42
Speaker 1: valuation in the equity market. So I learned a great
1:19:47
Speaker 1: deal from Bill Miller. I don't you ever had Bill
1:19:49
Speaker 1: on one of your guests short, you know what make
1:19:53
Speaker 1: the introduction. I would love to to have a conversation
1:19:56
Speaker 1: with him. He's a fascinating, fascinating guy. People. Don't you
1:20:00
Speaker 1: know who else I know who is tight with him
1:20:02
Speaker 1: is Michael Mosa mom Mobisan of Colombia and now um
1:20:07
Speaker 1: formerly of Credit Swiss, and or is he now Credit Swiss,
1:20:10
Speaker 1: formerly of like Mason, But he's someone else who worked
1:20:13
Speaker 1: with Miller. Everything I've read about the guy. First of all,
1:20:16
Speaker 1: the streak is unpressed fifteen consecutive. He is a beating
1:20:20
Speaker 1: the SMB. Some people are going to insist it's just random,
1:20:25
Speaker 1: but I don't know that that's just there are too
1:20:28
Speaker 1: many fund managers for it to be one guy for
1:20:31
Speaker 1: fifteen years. That that's really amazing. I he obviously was
1:20:35
Speaker 1: on the wrong side of the Minsky moment um, but
1:20:40
Speaker 1: now is living a story of redemption and doing exceedingly
1:20:44
Speaker 1: well the fund. At least there's the you know, the
1:20:47
Speaker 1: two thousd the the crisis year has hurt. His long
1:20:51
Speaker 1: term total track record is batting average, but the past
1:20:55
Speaker 1: five years has been pretty darn good for him. A. Yeah,
1:21:00
Speaker 1: they have. And the word mentor is a very special
1:21:04
Speaker 1: word for me that I would not, you know, want
1:21:07
Speaker 1: to burden A lot of people with are saying you've
1:21:10
Speaker 1: been There's been a lot of people who have been
1:21:13
Speaker 1: influential uh in my thought process that I know personally. Uh.
1:21:18
Speaker 1: And so I'm not suggesting that that that they're you know,
1:21:22
Speaker 1: not others as well. I have benefited enormously over a
1:21:27
Speaker 1: long period of time, uh from um, from from Paul
1:21:32
Speaker 1: Krugman's work and Kens Krugman, Minsky, Bill Miller, Bill Gross
1:21:39
Speaker 1: That that's a murders row right there. That's that's that's
1:21:41
Speaker 1: a pretty good group of people. Let's let's talk about
1:21:44
Speaker 1: Minsky a little bit, because I don't think people really know,
1:21:47
Speaker 1: especially late people don't know who Himan Minsky was. He
1:21:51
Speaker 1: unfortunately passed away before his work started to be really
1:21:56
Speaker 1: recognized as as seminal as it is. And I'm gonna
1:22:00
Speaker 1: coming up in a quick sentence, which is stability begets instability.
1:22:06
Speaker 1: Let's describe that discussed that because you've written more about
1:22:09
Speaker 1: Minsky and you've probably done more to bring Minsky to
1:22:14
Speaker 1: the mainstream of economics than just about anybody else out there.
1:22:18
Speaker 1: Thank you. I really appreciate that Minsky built upon what
1:22:22
Speaker 1: Kines did. Uh. In fact, I can find most of
1:22:28
Speaker 1: what Minsky wrote about in chapter twelve of the general theory.
1:22:34
Speaker 1: That's one of my fund sort of things to ask people.
1:22:36
Speaker 1: What is your favorite chapter of the general theory? Uh?
1:22:40
Speaker 1: Mine is obviously chapter twelve. We're effectively founded behavioral economics
1:22:45
Speaker 1: and Minsky uh financial instability apothesis is very straightforward, which is,
1:22:53
Speaker 1: as you put it, stability breeds instability because it changes behavior,
1:22:58
Speaker 1: changes people's risk efforts, risk appetite. UH. So I would
1:23:02
Speaker 1: say he's one of the founders of behavioral economics. Uh.
1:23:07
Speaker 1: In contrast to the Chicago school that every decision or
1:23:10
Speaker 1: every transaction you make is based upon a full calculus
1:23:14
Speaker 1: of rationality. UM, I don't know anybody of that nature.
1:23:20
Speaker 1: That your decisions are a function or path dependent or
1:23:24
Speaker 1: a function of what has happened previously, and that human
1:23:28
Speaker 1: beings tend to put an extraordinary amount of focus on
1:23:34
Speaker 1: bad things having happened. So therefore, if nothing bad has
1:23:38
Speaker 1: happened for a while, life has been stable, nothing bad
1:23:42
Speaker 1: is happening, then they ramp up their risk. But interestingly,
1:23:47
Speaker 1: when they're ramping up their risk, that means they're barring
1:23:50
Speaker 1: more money and driving up asset prices, so that everyone says, well,
1:23:54
Speaker 1: that was really smart. More leverage is good, so therefore
1:23:59
Speaker 1: you know lad rents and repeat. Uh So, essentially a
1:24:03
Speaker 1: Minsky journey is essentially lather, rinse, and repeat until something
1:24:10
Speaker 1: goes wrong. And when something goes wrong, it goes disaster
1:24:15
Speaker 1: ly wrong. And Minsky had a nice phrase for it
1:24:18
Speaker 1: is when essentially the guy who has become the most
1:24:22
Speaker 1: risk seeking has to sell book to make book. Now
1:24:27
Speaker 1: describe that. In other words, a person is highly leveraged
1:24:31
Speaker 1: and assets that are suddenly no longer going up and
1:24:35
Speaker 1: generates either a margin call or some other factors that
1:24:38
Speaker 1: leads to there were a buyer, now they're a leverage buyer,
1:24:43
Speaker 1: and now they're a de leveraging seller. Yeah, and I
1:24:46
Speaker 1: guess around what we were talking about fire sales. But
1:24:48
Speaker 1: it's always love that Minsky phrase. You have to sell
1:24:52
Speaker 1: book to make book, satisfy your margins. In order to
1:24:57
Speaker 1: stay solvent, you have to start liquidating positions. And then
1:25:00
Speaker 1: you get into the paradox of aggregation of everybody is
1:25:03
Speaker 1: selling book to make book. Where's the bid? Where the bid? So?
1:25:09
Speaker 1: So that's it's funny because I love how different people
1:25:13
Speaker 1: I speak to. It's the six blind men describe the
1:25:15
Speaker 1: elephant where you end up with a very very different
1:25:21
Speaker 1: perspective of some aspect of Wall Street. But you're really
1:25:25
Speaker 1: saying the same thing, So you know, Rob are not right.
1:25:29
Speaker 1: So Rob Rob was one of our earliest guests, and
1:25:31
Speaker 1: one of the things he describes when when you're looking
1:25:35
Speaker 1: at a market, if you're actually if you're actually in
1:25:41
Speaker 1: a traditional market cap based index, what happens, courtesy of
1:25:48
Speaker 1: Minsky towards the end of that bull cycle is everybody
1:25:52
Speaker 1: is piling in and they're piling into fewer and fewer names,
1:25:56
Speaker 1: and so what happens in the end of that cycle
1:25:59
Speaker 1: is you have this use huge spasm up and then
1:26:02
Speaker 1: this giant collapsed down, and because you're in cap weighted equities,
1:26:07
Speaker 1: you end up having a much worse down draft than
1:26:11
Speaker 1: you would have if that index was created not cap cap.
1:26:16
Speaker 1: It's a genius and I used the word on purpose
1:26:19
Speaker 1: genius of what Rob has done with his fundamental indexes. Oh,
1:26:23
Speaker 1: I forget you guys. So for those of you who
1:26:27
Speaker 1: haven't listened to the r No Interview, strongly recommend go
1:26:31
Speaker 1: to iTunes. Pull it down. It's really fascinating. But not
1:26:34
Speaker 1: only does his models run a hundred plus or maybe
1:26:38
Speaker 1: it's closer to two plus billion dollars now based on
1:26:42
Speaker 1: his models, but he also was running almost a hundred
1:26:45
Speaker 1: billion dollars of pimco um assets. I don't know what
1:26:49
Speaker 1: what what that number is now. Maybe it was eighty
1:26:51
Speaker 1: million if I remember correctly using his math and Pimco's
1:26:55
Speaker 1: assetmag Actually, he's expanded his relationship with pim since I
1:27:01
Speaker 1: retired the second time, So I actually don't exactly the
1:27:04
Speaker 1: nature of it. It's he does a lot of asset
1:27:07
Speaker 1: allocation as well as his fundamental indexes. Very very smart
1:27:12
Speaker 1: man and actually one of I've known Rob for a
1:27:15
Speaker 1: long long time. Uh we go back to you know,
1:27:20
Speaker 1: I know, twenty years or something of that nature. You know,
1:27:23
Speaker 1: just his fellow wants and even when he and I
1:27:26
Speaker 1: vehemently disagree on something, we enjoy having a discussion because
1:27:31
Speaker 1: we learn from each other and that's the fun part
1:27:33
Speaker 1: of this business. I describe him as a rational conservative.
1:27:38
Speaker 1: That's a very very good way of putting it, because
1:27:42
Speaker 1: he's data driven. You may disagree with him about something,
1:27:46
Speaker 1: but you're never gonna say, ah, this guy's a wing nut.
1:27:49
Speaker 1: He's just making stuff up. When I disagree with Rob
1:27:52
Speaker 1: about something, it forces me to go back and say,
1:27:55
Speaker 1: let me think about this, because if he's saying this,
1:27:58
Speaker 1: there's gonna be some data underneath, and there's going to
1:28:00
Speaker 1: be an analysis, and then you have to find either
1:28:03
Speaker 1: where he's off a little bit in his trajectory and
1:28:07
Speaker 1: that's what sent him down the wrong road, or where
1:28:09
Speaker 1: your belief system has a flaw in it. And not
1:28:12
Speaker 1: a lot of people can do that in a way
1:28:15
Speaker 1: that is, oh, you know, there's got to be something
1:28:18
Speaker 1: to that. In fact, the longer we are in this
1:28:21
Speaker 1: business probably also reflected age as well. Speak for yourself,
1:28:26
Speaker 1: I'm not age seven all day long. Um. The more
1:28:33
Speaker 1: from the standpoint of debate and discussions is it's all
1:28:39
Speaker 1: about wanting to gather with people who help you think.
1:28:46
Speaker 1: It's not a matter whether or not they're right or wrong,
1:28:49
Speaker 1: but who challenge your intellectual horsepower. We see that with
1:28:54
Speaker 1: the guys we hang out with Fishing, you know, over
1:28:57
Speaker 1: the years and we have vehement agreements. But part of
1:29:02
Speaker 1: having a disagreement is it forces you to think, did
1:29:05
Speaker 1: I miss something. I'll tell you something. I'll tell you
1:29:08
Speaker 1: two guys. Well, there's a whole run of guys up
1:29:12
Speaker 1: at Camp Kotalk. I mean, I'm friends with Rosie for years,
1:29:16
Speaker 1: and he and I are often on the opposite sides
1:29:18
Speaker 1: of stuff, but he forces me like it's he makes
1:29:22
Speaker 1: my arguments better because he forces me to go back
1:29:25
Speaker 1: and come up with specific responses what about this? What
1:29:28
Speaker 1: about that? And he's also a walking inside. You could say,
1:29:32
Speaker 1: what was the non farm payrolls in October, you know,
1:29:35
Speaker 1: two thousand and three and he'll answer so so that
1:29:38
Speaker 1: becomes a real challenge to debate him because he can
1:29:41
Speaker 1: pull stuff like like nobody uh. Stut Taylor of Advance
1:29:46
Speaker 1: is another one who I've never enjoyed disagreeing with someone
1:29:50
Speaker 1: more than Stu because we're often on the opposite sides
1:29:54
Speaker 1: of stuff, and he'll lay out an argument and it's
1:29:58
Speaker 1: not just you know, the global warming guys are crazy
1:30:02
Speaker 1: and there everything they said the assumption is built in
1:30:05
Speaker 1: are all factually wrong, and it's just you can you know.
1:30:09
Speaker 1: I love the famous quote never try and teach a
1:30:11
Speaker 1: pick to sing it waste your time and a noise
1:30:13
Speaker 1: to pick. Hold that aside when when I disagree with
1:30:17
Speaker 1: stew Taylor or Dave Rosenberg or Doug cass is another one.
1:30:22
Speaker 1: Doug and I are almost always on the opposite sides
1:30:25
Speaker 1: of the equity trade. But he makes me go back
1:30:29
Speaker 1: and defend the position because now sometimes we're just looking
1:30:34
Speaker 1: at different timelines, but other times he's making an argument. Hey,
1:30:38
Speaker 1: here's where the sentiment is. You're you're bullish, embarish, look
1:30:41
Speaker 1: at this, look at that, and you have to really
1:30:43
Speaker 1: go back and very carefully take those arguments apart. It's
1:30:48
Speaker 1: fascinating and there's no doubt my mind, rob are not absolutely.
1:30:53
Speaker 1: I've begotten to known over the years a little bit
1:30:57
Speaker 1: Cliff Fastness, who is another like raw, brilliant guy, brilliant mathematician,
1:31:03
Speaker 1: but also can speak English in a coherent fashion, which
1:31:06
Speaker 1: is relatively again the ven diagram of those two, that's
1:31:09
Speaker 1: a smaller overlap. He's another guy that I disagree with him.
1:31:14
Speaker 1: But if Aston says something that I disagree with, man,
1:31:17
Speaker 1: I have to go back and say, um gee, what
1:31:20
Speaker 1: am I doing here that he disagrees with? What assumptions
1:31:24
Speaker 1: do I have? Where is the model wrong? Where is
1:31:26
Speaker 1: the conclusion not supported by the data? Because he doesn't
1:31:31
Speaker 1: just on a whim say something. There is always a
1:31:34
Speaker 1: massive amount of research and data underlying what what he does.
1:31:39
Speaker 1: But you know, that's what makes the market different people
1:31:42
Speaker 1: see things from different perspectives. And the guys we really
1:31:46
Speaker 1: respect are the ones who make you defend yourself and
1:31:50
Speaker 1: make you make better arguments to agree with you wholeheartedly.
1:31:55
Speaker 1: Of it as intellectual fellowship. Absolute. I like the word fellowship. Uh.
1:32:02
Speaker 1: And that you're not having a fight, You're not having
1:32:05
Speaker 1: an argument, You're having an intellectual fellowship. You know it's uh.
1:32:10
Speaker 1: And that you know you can be fishing, you could
1:32:13
Speaker 1: be bowling, whatever the case may be, or you know,
1:32:15
Speaker 1: I'll find meal uh. And that you enjoy each other's company.
1:32:19
Speaker 1: It's not about the process of you know, tip for tat,
1:32:23
Speaker 1: I got this one right, you've got that and wrong.
1:32:25
Speaker 1: It's just do we enjoy each other's fellows? Do you
1:32:28
Speaker 1: appreciate the qualities of their minds? And that? And that's
1:32:31
Speaker 1: a really UM interesting thing. Let's let's go over some
1:32:35
Speaker 1: of my favorite UM questions before we uh lose what's
1:32:39
Speaker 1: left of our our listeners. Although I get emails all
1:32:42
Speaker 1: the time that people say, you know, I drive back
1:32:45
Speaker 1: and forth to Boston, I listened to the podcast in
1:32:47
Speaker 1: each direction, or I spend an hour each day on
1:32:49
Speaker 1: the on the treadmill, and you've made my UM life easier.
1:32:53
Speaker 1: But these are some of the questions UM that I
1:32:56
Speaker 1: ask every guest, and some of them you've asked answered.
1:32:59
Speaker 1: You've answered, what you did before you with PIMCO. Who
1:33:03
Speaker 1: your early mentors were. I think we know what philosophers
1:33:07
Speaker 1: and economists affected your approach to UM economics. What investors
1:33:13
Speaker 1: you mentioned Bill Miller's what investors affected your investing philosophy?
1:33:21
Speaker 1: And I guess we can include Knes in that because
1:33:23
Speaker 1: he was running money, wasn't Yeah, he was running college.
1:33:26
Speaker 1: I think he was running money for their endowment. Yeah,
1:33:29
Speaker 1: I UM in that category, it wouldn't be a large
1:33:37
Speaker 1: group of people. And and Bill Gross would be so
1:33:41
Speaker 1: much in a leg He's the Sun, and there's a
1:33:44
Speaker 1: bunch of other planets. There's a bunch of other planets. Uh,
1:33:48
Speaker 1: And you could do us and Bill Gross and and
1:33:52
Speaker 1: Bill's general philosophy. And I'm sure he's you know, he's
1:33:57
Speaker 1: been public about it. I'm not talking out of school. What's, however,
1:34:01
Speaker 1: is it's a bit like you know, gambling, and I
1:34:06
Speaker 1: simply want to win more than I lose. I don't
1:34:11
Speaker 1: have the objective of winning all the time, and I
1:34:15
Speaker 1: want to calculate the odds in real time. Uh. And
1:34:21
Speaker 1: also I want to avoid gambler's run. Never that a
1:34:27
Speaker 1: mistake take you out of the game. Longevity matters, and
1:34:33
Speaker 1: that philosophy um is a humbling philosophy because you can
1:34:38
Speaker 1: say this one, I know I got this one, but
1:34:41
Speaker 1: never make a mistake that can take you about the game.
1:34:45
Speaker 1: And Bill Gross was the guy who fundamentally drove that
1:34:48
Speaker 1: into my head just in sizing of bets, of sizing
1:34:53
Speaker 1: in a portfolio. Uh. And no tears that if you
1:34:58
Speaker 1: should have made it bigger. No, you shouldn't have made
1:35:01
Speaker 1: it bigger because that because if you were wrong, it
1:35:03
Speaker 1: had taken you out. He discussed that extensively when he
1:35:06
Speaker 1: was here. It was quite quite fascinating. And you wouldn't
1:35:09
Speaker 1: think a guy running fixed income would be really that.
1:35:14
Speaker 1: You know, if you're running managed futures, those guys blow
1:35:16
Speaker 1: up pretty regularly. You read Education of a Speculator, uh n,
1:35:21
Speaker 1: ninder Hoffer is blown up, you know a number of times.
1:35:25
Speaker 1: It's really surprising coming from the fixed income side. Well,
1:35:29
Speaker 1: a key issue on the fixed income side is that
1:35:33
Speaker 1: you're playing for a small alpha versus the benchmark. You
1:35:39
Speaker 1: can't get ten baggers in fixed income very right. So Actually,
1:35:44
Speaker 1: it's not like you're gonna be taken out of the
1:35:46
Speaker 1: game because you lost all of your clients money. It's
1:35:50
Speaker 1: if your alpha shrinks, then in your next competition to
1:35:55
Speaker 1: get a client, you're not going to be as successful.
1:36:00
Speaker 1: And also there's a very pragmatic matter is defending your
1:36:03
Speaker 1: fees as a function of the alpha. And so therefore,
1:36:09
Speaker 1: in fixed income, your alpha is your potential alpha is
1:36:12
Speaker 1: not huge to begin with, UH, and so therefore there's
1:36:16
Speaker 1: a lot of risks to both the growth of your
1:36:18
Speaker 1: business and your profit margins UH if you actually don't
1:36:23
Speaker 1: size your bets right. So the philosophy of gameras of
1:36:28
Speaker 1: gammeras run holes even though the stakes are different, because
1:36:32
Speaker 1: the stakes UH are idiosyncratic to that business, makes a
1:36:37
Speaker 1: lot of sense. Um. You mentioned the general theory. What
1:36:42
Speaker 1: other books do you find to be UM influential. What
1:36:47
Speaker 1: are the key books that you you've that have affected
1:36:50
Speaker 1: you when you've read them. Peter Bernstein Against the Gods
1:36:56
Speaker 1: would be right at the very top of my must
1:37:02
Speaker 1: read list when young graduates are asking. And Peter was
1:37:06
Speaker 1: a dear personal friend of mine. We lost him a
1:37:09
Speaker 1: few years ago, UH and amazing sweet harbor Man and
1:37:14
Speaker 1: brilliant uh so and essentially his he had the best.
1:37:20
Speaker 1: He's a wonderful writer. He also uh that book is
1:37:24
Speaker 1: consistently on the everybody yeah top, so I would put
1:37:29
Speaker 1: that that book uh in there along with Ken's general
1:37:34
Speaker 1: theory of theory, and obviously you know Minsky's work, which
1:37:39
Speaker 1: Minsky book, uh, Stabilizing the Unstable Economy. That's what I'm
1:37:45
Speaker 1: gonna end up doing for those of you listening to this,
1:37:47
Speaker 1: I'll put this up in the on the on the
1:37:50
Speaker 1: blog post. Then I'll have the list of all the
1:37:52
Speaker 1: books you mentioned. So we have Keynes, we have Minsky,
1:37:55
Speaker 1: we have Berns Bernstein, and I'll give you a fourth.
1:38:00
Speaker 1: And it's a very recent addition to my list. It's
1:38:05
Speaker 1: literally in the last six nine months. And it's not
1:38:11
Speaker 1: about economics per se. It's former Congressman Barney Frank's autobiography. Really,
1:38:20
Speaker 1: it is an amazing treatise on understanding Washington, d c.
1:38:28
Speaker 1: Over the last thirty years of the wise and the
1:38:34
Speaker 1: wherefores of outcomes that have always left us scratching our head.
1:38:41
Speaker 1: If you haven't read Barney's book, you gotta get it. Uh.
1:38:46
Speaker 1: Life in Politics from Great Society, The Same Sex Marriage no,
1:38:50
Speaker 1: can this just came out in March of this year
1:38:53
Speaker 1: that that's really quite amazing. So that's a movie and
1:38:57
Speaker 1: you're you're saying that it's not so much out the
1:39:00
Speaker 1: political battles, it's about the process in DC and how
1:39:03
Speaker 1: it's changed. Yeah, I mean, I mean, you and I
1:39:05
Speaker 1: could write a book about you know, Wall Street for
1:39:07
Speaker 1: the last thirty years, because we lived it were You're
1:39:10
Speaker 1: a little younger than I am, but you know, not
1:39:12
Speaker 1: a whole lot. But you know, I work for a living.
1:39:16
Speaker 1: That's the difference. You're gain fully retire what what what
1:39:19
Speaker 1: do you like? You're four years older than me. That's
1:39:22
Speaker 1: you are, So you're five years old in them. So
1:39:25
Speaker 1: that is a new gym that I would recommend to
1:39:29
Speaker 1: anybody who wants to to consider themselves informed in what
1:39:34
Speaker 1: makes Washington work? Wow that or not? As the case
1:39:37
Speaker 1: or so? Now, So the Frank book discusses what's changed
1:39:42
Speaker 1: in d C over the thirty years. Let let me
1:39:45
Speaker 1: ask you the book that you're not going to write,
1:39:48
Speaker 1: how has Wall Street and finance and the practice of
1:39:52
Speaker 1: investing money changed over that same time period. Ah. It
1:39:58
Speaker 1: really the profound shame since I came to Wall Street profound.
1:40:03
Speaker 1: I guess that the one that's most significant when because
1:40:09
Speaker 1: I've thought a lot about this when I first got
1:40:12
Speaker 1: in the business and again I came to Wall Street
1:40:14
Speaker 1: in eight three. Um, being on the cell side of
1:40:21
Speaker 1: the street was the cats me out. Really that's a
1:40:24
Speaker 1: that's a huge change. And the by side were you know,
1:40:28
Speaker 1: the great on washed you know. And for people who
1:40:31
Speaker 1: may not understand the difference between the terms, if you're
1:40:35
Speaker 1: on the sale side, you're a broken dealer, you're a
1:40:37
Speaker 1: commissioned person. The bye side are hedge funds, mutual funds,
1:40:41
Speaker 1: asset managers who are buying assets for clients who they're
1:40:47
Speaker 1: charged with running their money, versus let's say, brokers who
1:40:50
Speaker 1: are selling client assets either two institutions or individuals. It's
1:40:55
Speaker 1: a subtle but important distinction. Yeah, you know, and I
1:40:59
Speaker 1: think back to you know, the mid eighties. You know,
1:41:02
Speaker 1: your your average sell side bond salesman what make maybe
1:41:08
Speaker 1: three hundred thousand dollars a year, whereas the guy that
1:41:12
Speaker 1: he was selling the bonds to will be making ninety
1:41:15
Speaker 1: five thousand dollars a year. And that's completely shifted since
1:41:18
Speaker 1: so so essentially it was the the guy who was
1:41:22
Speaker 1: selling the bonds was making the big bucks. The guy
1:41:25
Speaker 1: who was buying the bonds was considered to be a
1:41:28
Speaker 1: necessary nuisance. That's pretty funny. So so the guy buying
1:41:32
Speaker 1: the bonds is Bill Gross, the guys selling the bonds
1:41:35
Speaker 1: is whoever covered him at Goldman Morrigan, Meryl whoever, and
1:41:39
Speaker 1: the salespeople were making more than the portfolio man. Whereas
1:41:42
Speaker 1: now actually hedge funds were you know, thirty years ago.
1:41:46
Speaker 1: And a hand for the joke is the hundred hedge
1:41:51
Speaker 1: funds that existed thirty years ago are still around. They're
1:41:53
Speaker 1: just the ones creating alfit today. Not a bad joke,
1:41:57
Speaker 1: It has an element of truth to it. Uh. But
1:42:00
Speaker 1: now it's the guy on the by side who had
1:42:03
Speaker 1: this chance to shoot the moon financially, and the guy
1:42:07
Speaker 1: on the cell side has been replaced by one of
1:42:08
Speaker 1: those machines over there. Because remember this, Uh back thirty
1:42:13
Speaker 1: years ago, you actually had the you know, the direct lines,
1:42:18
Speaker 1: and you didn't have electronic trading, you didn't have price discovery. Uh.
1:42:24
Speaker 1: It was you know, Harry, I want to buy you know,
1:42:26
Speaker 1: five million of you know, the A T. T s
1:42:29
Speaker 1: were there trading other ninty eight ninety eight and a
1:42:31
Speaker 1: half alright, Phil, get them done. Whereas now you know,
1:42:36
Speaker 1: thanks to the terminals, you don't need to talk to
1:42:38
Speaker 1: Harry about where the A T. T s are trading.
1:42:41
Speaker 1: I know, and I can hit a button and Harry
1:42:43
Speaker 1: doesn't make dollars a year anymore, not in business anymore.
1:42:48
Speaker 1: The guys that are still in business, the commissions have
1:42:50
Speaker 1: come down from the fifteen cents a share now it's
1:42:53
Speaker 1: a penny or two, and half of them have have disappeared.
1:42:56
Speaker 1: That that business has has completely changed. And so so. Actually,
1:43:01
Speaker 1: back when we were young, that would be the question
1:43:03
Speaker 1: of where's the customer's yacht? Yep them anymore? That's the
1:43:10
Speaker 1: famous book that was written in the I want to
1:43:12
Speaker 1: say thirties or or forties. I'm trying to remember. And
1:43:15
Speaker 1: I could see the guy's name right in front of me.
1:43:19
Speaker 1: So over my career, the customers got in the yacht
1:43:23
Speaker 1: and the broker hails a cab and and that's a
1:43:28
Speaker 1: huge I know that's good or bad. That's just an
1:43:30
Speaker 1: observation that that's a huge change, you know, the old
1:43:32
Speaker 1: the old. The other old joke was Wall Street is
1:43:35
Speaker 1: the only place where you know, millionaires talk to people.
1:43:39
Speaker 1: People who take rolls Royce's to work, talk to people
1:43:43
Speaker 1: take subways to work, and that's a French sweat. I
1:43:47
Speaker 1: could not access that name that by the way, that
1:43:50
Speaker 1: is literally I've been on Wall Street for a hundred years.
1:43:53
Speaker 1: That is literally the next book in my que to read.
1:43:56
Speaker 1: I have never read that book, and people just in
1:44:00
Speaker 1: it's hilarious. In the life, I have not read anything.
1:44:02
Speaker 1: It's supposed to be wonderful and it it's on your list. Well,
1:44:07
Speaker 1: I've read the same point of you know what, kids,
1:44:10
Speaker 1: I've got to read and many so so you know,
1:44:14
Speaker 1: Minsky was a big contributor to that book. By the way,
1:44:16
Speaker 1: I have a very close friends imus. Oh, I didn't
1:44:19
Speaker 1: know that. That's fascinating. And Minsky wrote a huge biography
1:44:24
Speaker 1: of Kane's. Yes he did. Is that Is that something
1:44:26
Speaker 1: that's on your list or is it a little too wonky?
1:44:28
Speaker 1: It is just read General Employment Theory. You have to
1:44:32
Speaker 1: be an affectionado. Okay, you can get really deep into
1:44:36
Speaker 1: the weeds. There's if you like really deep in the weeds. Uh,
1:44:43
Speaker 1: that's fine, but I wouldn't recommend men that too. Stabilizing
1:44:47
Speaker 1: and Unstable Economy is would be the one book on Minsky.
1:44:52
Speaker 1: There was an interesting book I read some time ago. Um,
1:44:57
Speaker 1: is it Keen's Way to Wealth. It's something like that.
1:45:00
Speaker 1: It's about Keens the investor, not Keens the economist. And
1:45:03
Speaker 1: it turned out he's really, for his day, an extremely successful,
1:45:09
Speaker 1: buffet like investor who just completely turned around. I think
1:45:13
Speaker 1: it's King's College. Yeah he did, Yeah he did, and
1:45:16
Speaker 1: he um gets back to chapter twelve of his famous book.
1:45:20
Speaker 1: He was a behavioral economist. He understood that markets are
1:45:24
Speaker 1: not always rational, and the beauty contest is a perfect
1:45:30
Speaker 1: is a perfect one? Uh? And uh he had the
1:45:35
Speaker 1: ability and he actually lost some money sometimes being a
1:45:38
Speaker 1: little bit early or wrong. Uh, well that's as traders know,
1:45:43
Speaker 1: early is gonna be wrong. Essentially saying, you know, when
1:45:48
Speaker 1: bad news is fully discounted, and I hear about it
1:45:52
Speaker 1: from the guy who shines my shoe at the bus station,
1:45:56
Speaker 1: probably it's time to go the other direction makes sense.
1:46:00
Speaker 1: Our last two or last three favorite questions. So, given
1:46:04
Speaker 1: these major changes that we've seen over the past three decades,
1:46:08
Speaker 1: what are the next couple of changes that we're going
1:46:10
Speaker 1: to see? Uh? Coming up first and foremost, I think
1:46:18
Speaker 1: is producaries. You know, whether it's endowments or to find
1:46:24
Speaker 1: benefit pension schemes or colleges? Do we want to call
1:46:28
Speaker 1: them define benefit schemes? Is that the rights they call them,
1:46:32
Speaker 1: you know, to find benefit plans? Yeah? Maybe, I just
1:46:35
Speaker 1: you know, PIMCO, we had to. I was around the
1:46:37
Speaker 1: British too often. Schemes. That's a British phrase, right, it
1:46:42
Speaker 1: doesn't have the same kind of right. It's a strange
1:46:45
Speaker 1: standard word there here it means something the farious. Yeah,
1:46:48
Speaker 1: ye as absolutely um and it's likely. Remember one of
1:46:54
Speaker 1: the British phrase that struck me is frequently when something
1:46:57
Speaker 1: is good around, they would say brilliant, right. I mean
1:47:01
Speaker 1: here in America we've reserved brilliant for you know, special
1:47:03
Speaker 1: sort of things. Right now, brilliant is oh that's good.
1:47:06
Speaker 1: How was your I'll bring it right now. I've never
1:47:08
Speaker 1: described an ice t is brilliant. Oh you haven't had
1:47:10
Speaker 1: my ice t. It's fantastic. It's it's brilliant, it's brilliant.
1:47:17
Speaker 1: So so what I think is having expectations, uh, bringing
1:47:22
Speaker 1: down expectations to what logically can they be expected over
1:47:28
Speaker 1: the next ten to twenty years on returns more modest numbers,
1:47:32
Speaker 1: more modest returns, Yeah, more modest returns. Uh. And the
1:47:37
Speaker 1: difficulty of doing that is the rear view mirror effect.
1:47:41
Speaker 1: And the last five or seven years have been absolutely
1:47:44
Speaker 1: glorious investment spectacular. And by the way, the people who
1:47:48
Speaker 1: are you mentioned earlier who are on the wrong side
1:47:51
Speaker 1: of that, this is once in the lifetime, maybe twice
1:47:54
Speaker 1: in a lifetime sort of market run. And if you
1:47:57
Speaker 1: missed it, well, don't worry, it'll be another one coming
1:47:59
Speaker 1: to round in forty years or so. That this was
1:48:03
Speaker 1: all about having to use monetary policy alone to get
1:48:08
Speaker 1: out of a litquidter D trap, which means that there's
1:48:11
Speaker 1: a revaluation of all long D long duration assets, with
1:48:16
Speaker 1: equities being the longest. Uh. And so it has been
1:48:19
Speaker 1: an absolute marvelous time to be in the markets because
1:48:25
Speaker 1: you've been revaluing assets. Now you simply have lofty asset prices.
1:48:30
Speaker 1: We've been revalued. What does that mean going forward? It
1:48:32
Speaker 1: means theoretically, and I know Rob or Not is also
1:48:36
Speaker 1: in this camp, theoretically lower returns over the next as
1:48:39
Speaker 1: is Cliff Fastness. All the quants basically are in the
1:48:43
Speaker 1: camp of Hey, the odds are that you're gonna see
1:48:46
Speaker 1: lower than average returns. You've just had higher than average returns,
1:48:50
Speaker 1: at least over the past six years. I mean, I mean,
1:48:52
Speaker 1: suppose you buy a stock that has one dollars worth
1:48:55
Speaker 1: of earnings at ten times, so you pay ten bucks
1:48:58
Speaker 1: for the stock. That's a good that's a good event
1:49:00
Speaker 1: has been problems. It's actually not a bad investor. I
1:49:02
Speaker 1: supposed five years later it's still making one dollar, but
1:49:05
Speaker 1: now it's but but the markets decided it's worth a
1:49:09
Speaker 1: thirty multiple. Still just making one Dollar's gone from ten
1:49:14
Speaker 1: dollars to thirty dollars. Are you a genius should do
1:49:18
Speaker 1: by more thirty? The if you're a momentum investor, you're
1:49:22
Speaker 1: all over, and if you're a value guy, you're probably
1:49:25
Speaker 1: a seller, not a buyer at that point exactly. And
1:49:27
Speaker 1: but it's really hard to say, I bought it at
1:49:30
Speaker 1: ten and now it's at thirty, so therefore it double wow.
1:49:35
Speaker 1: I made a potload of money over the last five years.
1:49:37
Speaker 1: I can't possibly sell this stock, and it's gonna go
1:49:41
Speaker 1: to sixty and there's gonna go to ninety. Human nature
1:49:44
Speaker 1: is to extrapolate that simple. Leon Kooperman tells the story
1:49:48
Speaker 1: that so another value guy from Colombia that and put
1:49:52
Speaker 1: up tremendous, tremendous numbers. They have a target. When they
1:49:56
Speaker 1: hit their targets, they sell. Some of his clients come
1:49:59
Speaker 1: to him and say, listen, Lee, we have a need
1:50:02
Speaker 1: for a tax sensitive portfolio. So he structures same basic
1:50:07
Speaker 1: underlying thing, only when it hits his target, he doesn't sell.
1:50:11
Speaker 1: He lets it run because they're not looking for It's
1:50:13
Speaker 1: got to be a certain length. He said. The returns
1:50:17
Speaker 1: on the tax sensitive portfolio are actually better then the
1:50:23
Speaker 1: returns on the tax insensitive portfolios because it forces you
1:50:28
Speaker 1: to hold things far beyond where left your own devices
1:50:31
Speaker 1: you might and his numbers are just ridiculous. So I
1:50:35
Speaker 1: know I can't keep you forever. Let me get to
1:50:37
Speaker 1: my favorite last two questions. Um. The first, so someone's
1:50:42
Speaker 1: graduating college or a millennial or whatever we want to
1:50:45
Speaker 1: call this generation. What advice does Paul McCully give to
1:50:49
Speaker 1: those kids coming out of school right now if they're
1:50:52
Speaker 1: thinking about a career in finance. Let's take a long
1:50:57
Speaker 1: walk around the block and see if you can think
1:50:59
Speaker 1: of another industry. Really, Um, I remember I have my
1:51:05
Speaker 1: son is twenty six years old and not going into
1:51:09
Speaker 1: the family business. No, he's not going into finance. He
1:51:12
Speaker 1: uh is in the technology business. He's a gamer and
1:51:18
Speaker 1: a programmer. Uh. And you think this technology stuff is
1:51:22
Speaker 1: going to catch on. What I do know, UH, is
1:51:29
Speaker 1: there's a lot of America that hasn't gotten, hasn't exploited
1:51:35
Speaker 1: the technology that we have where and in the area
1:51:40
Speaker 1: that my son's in, which I think is really a
1:51:42
Speaker 1: growth industry, is just taking what technology we have now
1:51:49
Speaker 1: and applying it to core businesses, whether it's education, the
1:51:55
Speaker 1: medical care system, the d MB, all sorts of areas,
1:52:00
Speaker 1: information management. Now sitting here in Bloomberg's building, obviously you
1:52:05
Speaker 1: have the best of it all on technology. So this
1:52:09
Speaker 1: floor that you're standing on, I don't know if if
1:52:11
Speaker 1: you ever see them take the floor apart. There's nothing
1:52:14
Speaker 1: but fiber optic cables as thick as your leg running
1:52:18
Speaker 1: through here. The building was built pre wired for nothing
1:52:23
Speaker 1: but information technology. But this is the exception. Most industries
1:52:28
Speaker 1: are not this tech forward looking, and I think, I mean,
1:52:31
Speaker 1: I think that is a huge growth industry. The medical
1:52:35
Speaker 1: profession is an area that's it's it's nice, it is
1:52:40
Speaker 1: right for it, government itself, transportation, lots of areas. So
1:52:45
Speaker 1: I think the application of technology in a general h
1:52:50
Speaker 1: economic sense is where their growth is. But actually know
1:52:53
Speaker 1: that you know the really you know wise, you know
1:52:56
Speaker 1: guys who can figure out, you know, what to make
1:52:58
Speaker 1: my my uh my smartphone do uh though I reach
1:53:02
Speaker 1: it reaches its limitations. I think that's a function of
1:53:06
Speaker 1: us being old guys. Yea. The younger kids don't, don't
1:53:10
Speaker 1: They don't get saturated the way. And I kind of
1:53:13
Speaker 1: have a foot in each camp. Um tech oriented enough
1:53:17
Speaker 1: to really like all my toys and my phones, but
1:53:22
Speaker 1: I sort of see myself the people older than me
1:53:25
Speaker 1: are utterly saturated sooner, and the people younger than me
1:53:28
Speaker 1: are wholly immersed in it with no end in sight.
1:53:31
Speaker 1: It's fascinating to watch that. So you wouldn't send people
1:53:35
Speaker 1: into finance all that that quickly? Yeah, And if you
1:53:39
Speaker 1: know a kid wanted to go into finance, where I
1:53:43
Speaker 1: would say is over the next thirty years, Asia in
1:53:49
Speaker 1: particular China. But I think the emerging markets at large,
1:53:54
Speaker 1: if they're going to shift to more domestic demand, are
1:53:59
Speaker 1: gonna have to to construct a household sector finance, uh
1:54:07
Speaker 1: sector that is meaningful and uh so that would be
1:54:11
Speaker 1: the area you think in terms of here in America,
1:54:14
Speaker 1: So be prepared to travel, be prepared to and also
1:54:17
Speaker 1: think in terms of bringing credit effectively to the growing
1:54:22
Speaker 1: middle class of the emerging market. She think in terms
1:54:26
Speaker 1: of market, it's a huge market and and it's got
1:54:30
Speaker 1: to happen over the next thirty years. It's it's underserved
1:54:34
Speaker 1: in partmer costs of barriers to entry. But that is
1:54:37
Speaker 1: a frontier for a kid a thirty year a career.
1:54:41
Speaker 1: Uh is to be the king of consumer finance. Go
1:54:46
Speaker 1: to Brazil, to an emerging emerging market where, of course
1:54:49
Speaker 1: you mean thinking now here in America. You know, if
1:54:51
Speaker 1: somebody gets out of college, he's probably already got a
1:54:54
Speaker 1: college loan, he gets a loan or at least on
1:54:56
Speaker 1: a car. You know, he borrows money from his dad
1:54:58
Speaker 1: for a down payment on a house. Else So we
1:55:00
Speaker 1: think in terms of of essentially borrowing forward income as
1:55:06
Speaker 1: a young person and paying it back as you get
1:55:09
Speaker 1: older and your income goes up. Yes, that's a concept
1:55:12
Speaker 1: that will get roots and the emerging markets over the
1:55:16
Speaker 1: next two to three decades. And there's a lot of
1:55:19
Speaker 1: money being to be made in that space. So Argentina, Chili, Vietnam,
1:55:25
Speaker 1: where would you send a kid today? You know, first
1:55:28
Speaker 1: of you depend upon which language facility for language. So
1:55:31
Speaker 1: actually the advice let's go back four years you're in college,
1:55:35
Speaker 1: learn to speak Portuguese, Spanish, man's are in exactly else exactly? Uh,
1:55:41
Speaker 1: Latin is really cool, but I don't know very many
1:55:43
Speaker 1: people who transact in Latin these right. You can become
1:55:45
Speaker 1: a monk, you can go to the original stuff and
1:55:48
Speaker 1: they brew fantastic beer. So but I don't know that
1:55:51
Speaker 1: if that's really counts as a career in finance. Okay,
1:55:54
Speaker 1: last question, all right, and this is my favorite. What
1:55:58
Speaker 1: do you know about investing today that you wish you
1:56:01
Speaker 1: knew when you began all those years ago? I love
1:56:07
Speaker 1: the thoughtful, pregnant pause too, your most precious asset. It's
1:56:17
Speaker 1: time I knew you were going to go there. Elucidate,
1:56:20
Speaker 1: expand on that to the con I can make more
1:56:28
Speaker 1: money if I need to make more money. I can't
1:56:31
Speaker 1: make more time. You can. You can. You can chant
1:56:34
Speaker 1: trade time for money, but you can't change trade money
1:56:38
Speaker 1: for time. Is the James Taylor layer, exactly. And that's
1:56:43
Speaker 1: what I deeply appreciate now. And I you know, I'm not,
1:56:49
Speaker 1: you know, beating myself up on it, but I looking back,
1:56:54
Speaker 1: I wish I'd had a deeper appreciation for that at
1:56:58
Speaker 1: a younger age. Is there any rational reason that a
1:57:02
Speaker 1: man has been to Beijing twenty six times and not
1:57:05
Speaker 1: seeing the wall. I have a friend whose company. I
1:57:10
Speaker 1: have a friend whose company in the mid nineties was
1:57:12
Speaker 1: bought by Yahoo worked out really well for him, and
1:57:17
Speaker 1: a conversation like this. He said something similarly. I go,
1:57:22
Speaker 1: do you travel all over the country, all of the
1:57:24
Speaker 1: world for ya who? That must be so much fun.
1:57:27
Speaker 1: You must see so many places? And his answer was, yeah,
1:57:30
Speaker 1: I could tell you what every major airport, every every
1:57:33
Speaker 1: major hotel, every major conference facility is like. But I
1:57:37
Speaker 1: have no idea what those countries are like. So when
1:57:39
Speaker 1: you're traveling for business, you don't get to sight. So
1:57:42
Speaker 1: you know, we had, um, we had somebody in here.
1:57:48
Speaker 1: Oh my god, I'm drawing a blank. Uh. Byron Ween.
1:57:51
Speaker 1: We had Byron who's still in his eighties and still
1:57:54
Speaker 1: travels constantly for work, which is he's at at um
1:58:00
Speaker 1: black Rock, still constantly traveling for work, but he takes
1:58:04
Speaker 1: his wife along. He builds a week into the trip,
1:58:07
Speaker 1: so he goes to China and then he cites these
1:58:10
Speaker 1: for a week. He goes to the Philippinans and then
1:58:13
Speaker 1: he cites he was describing having more fun now working
1:58:18
Speaker 1: because he sees the world. Then you know, then he
1:58:21
Speaker 1: did you know the decades of Morgan Stanley. It was
1:58:24
Speaker 1: the same situation. You may be in China twenty six
1:58:26
Speaker 1: times but never having seen the wall. Yeah, yeah, I
1:58:29
Speaker 1: guess you know, to use a you know, a cliche
1:58:32
Speaker 1: about the whole thing. Um, when you're a young person
1:58:37
Speaker 1: and immortal, you're immortal at those ages. Yeah. Actually you
1:58:40
Speaker 1: don't think in terms of, you know, the fact that
1:58:42
Speaker 1: you may get old, because you know that's the way
1:58:44
Speaker 1: off from the future. Finite lifespan. Is that theoretical, it's
1:58:47
Speaker 1: not really is the the concept of work life balance
1:58:51
Speaker 1: is but a concept which actually financially works out well
1:58:57
Speaker 1: for you because all you do is work right, But
1:59:01
Speaker 1: with tim uh and maturity uh, you recognize that time
1:59:06
Speaker 1: is your most valuable asset and that I've never seen
1:59:11
Speaker 1: a tombstone that d I wish I had put more
1:59:15
Speaker 1: hours in at the office. Speaking of time, thank you
1:59:19
Speaker 1: Paul McCulley for being so generous with your time. This
1:59:22
Speaker 1: has been absolutely fascinating. We've been speaking with Paul McCulley.
1:59:27
Speaker 1: He is the former chief economist at Pimco and has
1:59:31
Speaker 1: a long and storied history on Wall Street. If you
1:59:36
Speaker 1: enjoyed this conversation, and I sure no I did, look
1:59:40
Speaker 1: up an inch or down an inch on the Apple
1:59:42
Speaker 1: iTunes and you'll see our other almost five dozen uh
1:59:47
Speaker 1: previous Masters in Business series. I want to thank the
1:59:52
Speaker 1: people who helped put this interview together. My head of
1:59:55
Speaker 1: research is Michael Batnick. My producer, for lack of a
2:00:00
Speaker 1: better word, is the head engineer uh at here at
2:00:03
Speaker 1: Bloomberg is Charlie Vollmer. And my recording engineer is Matt
2:00:09
Speaker 1: Matt Ryan. I know his name is Matt. I can't
2:00:11
Speaker 1: remember last names. There's a lot of work that goes
2:00:14
Speaker 1: into putting these together, and I'm always grateful for all
2:00:17
Speaker 1: the assistance that that takes to make this happy. UH.
2:00:21
Speaker 1: Be sure and go to Apple iTunes if you enjoy this,
2:00:24
Speaker 1: and review the various Masters in Business series we've done,
2:00:29
Speaker 1: and catch us next week. I'm Barry Ridhults. You've been
2:00:33
Speaker 1: listening to Masters in Business on Bloomberg Radio.