Latest / Bloomberg Intelligence / Joel Stern Says Fed Raising Rates Will Cause a Recession(Audio)

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Joel Stern Says Fed Raising Rates Will Cause a Recession(Audio) · Bloomberg Intelligence

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  Speaker 1: This is a Bloomberg Business Flash from Bloomberg World Headquarters.
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  Speaker 1: I'm Charlie Pallet. Equities end of the day, a little changed.
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  Speaker 1: I'm Charlie Pallett, and that's a Bloomberg Business Flash. You're
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  Speaker 1: listening to Taking Style with Kathleen and Pim Fox Bloomberg Radio.
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  Speaker 1: What will the Federal Reserve do? What will the US
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  Speaker 1: economy do? What should it be doing? What you should
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  Speaker 1: be doing with your money. All these questions and more
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  Speaker 1: I'm gonna put to my next guest, Joel Stern. He
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  Speaker 1: is the chairman the chief executive of Stern Value Management,
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  Speaker 1: and just as a note, I believe that we can
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  Speaker 1: describe him as a pioneer in a shareholder value and
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  Speaker 1: linking financial economics with corporate performance and corporate valuation. Joel Stern,
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  Speaker 1: thank you very much for coming. It's always a pleasure.
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  Speaker 1: So I started by, I mean, everyone wants to know
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  Speaker 1: if they if they knew, you know, wouldn't really be
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  Speaker 1: much fun, right, I mean if everybody had the same opinion.
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  Speaker 1: But tell me what your thoughts are about the U
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  Speaker 1: s economy. And I know you travel a great deal,
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  Speaker 1: so you have some perspective the US economy and the
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  Speaker 1: federal reserves place in it. Okay, the United States economy
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  Speaker 1: has been growing out about half of what its potential is.
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  Speaker 1: It should be growing at close to four percent a
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  Speaker 1: year now. When we had the recession back in seven
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  Speaker 1: and eight and ending and nine, the drop was so substantial,
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  Speaker 1: so negative. We have to revert back to macroeconomic theory.
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  Speaker 1: What does it tell us? It says the faster you fall,
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  Speaker 1: the faster you come. Out, but that didn't happen this time,
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  Speaker 1: and people were puzzled. The late Gary Becker, who was
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  Speaker 1: a very close friend and a Nobel Prize winner at
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  Speaker 1: the University of Chicago, he said that the major reason
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  Speaker 1: why the growth rate was so small was because of
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  Speaker 1: the reregulation of the US economy. In other words, let
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  Speaker 1: me use my my terminology for it. The determining factor
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  Speaker 1: is what is the return on total capital going to be.
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  Speaker 1: You invest in a new project, you need to be
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  Speaker 1: sure in your mind or reasonably sure that the rate
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  Speaker 1: of return earned on capital employed will be greater than
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  Speaker 1: the required rate of return based on the risk of
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  Speaker 1: the investment. That's the whole key to this thing. Now,
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  Speaker 1: if the risks go up because government comes along and says, oh,
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  Speaker 1: we're gonna aggregate or revoke your property rights, essentially, that's
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  Speaker 1: what's happening. That increases the risk of making a decision.
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  Speaker 1: And what if that crowds out good worthwhile investments that
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  Speaker 1: are job creators and that strengthen the dollar and do
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  Speaker 1: all kinds of good things for the U. S economy.
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  Speaker 1: When that happens, then the growth rate falls to about
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  Speaker 1: where it has been. And what's amazing is that whenever
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  Speaker 1: the President or other members of ex happening to talk
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  Speaker 1: about the economy, they always look for the snippet that's
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  Speaker 1: doing very well, but they don't tell us about all
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  Speaker 1: of the people who have dropped out of the workforce
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  Speaker 1: because they are discouraged. They've been unable to find the
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  Speaker 1: work they want. Also, some people who accounted as working
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  Speaker 1: are working at jobs they don't really like and they
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  Speaker 1: don't want to have, and they would want to take
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  Speaker 1: the jobs that were would be the strong growth jobs,
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  Speaker 1: and they're just not available to them. So that's one thing.
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  Speaker 1: The second thing I should tell you is that because
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  Speaker 1: of the baggage, the excess baggage I carry as having
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  Speaker 1: been a student at the University of Chicago in economics
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  Speaker 1: and finance, I am a compulsive free market here. In
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  Speaker 1: other words, I say to myself, what would things look
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  Speaker 1: like if we simply had a wide open and free economy. Incidentally,
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  Speaker 1: I'm even I even disagreed with Gary Gary Becker when
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  Speaker 1: I said to him one day I'm against anti trust laws.
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  Speaker 1: He said, why wouldn't that create monopolies? Not if we
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  Speaker 1: have very open borders. Let's have no tarists, no import quotas,
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  Speaker 1: no exports up todays. Be like whom not be like Mike.
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  Speaker 1: Let's be like Singapore, Let's be like Hong Kong. Let's
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  Speaker 1: be like places that are growing like crazy. And by
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  Speaker 1: the way, for those people who believe in a larger
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  Speaker 1: role for government, what they should do is examine how
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  Speaker 1: well India has been doing, especially since Mr Modi became
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  Speaker 1: the Prime minister. It's not that he's been freeing the economy.
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  Speaker 1: He has simply been saying to himself, I'm not going
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  Speaker 1: to let regulations stand in the way. The monopolies and
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  Speaker 1: governments still exists. Unfortunately, they should be either privatized or
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  Speaker 1: they should do what we did for the US Postal
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  Speaker 1: Service in the nineties and put them on our e V,
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  Speaker 1: a bonus system which will create tremendous innovation uh and
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  Speaker 1: and and on cost cutting. I want to bring this
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  Speaker 1: back though, to the June fourteen and fifteen meeting at
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  Speaker 1: the Federal Reserve and the current level of interest rates.
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  Speaker 1: What what did the economy tell you that the Federal
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  Speaker 1: Reserve should do or not do? The reason why interest
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  Speaker 1: rates are low and the reason there's no way to
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  Speaker 1: escape this. In fact, the reason why interest rates are
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  Speaker 1: low is because the economy is doing so poorly. Interest
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  Speaker 1: rates would rise if real returns were rising at a
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  Speaker 1: rapid rate, because what higher real interest rates do is
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  Speaker 1: they signal the world that high rates of return on
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  Speaker 1: capitol are being earned. In the United States, the fact
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  Speaker 1: that we have low interest rates is a very sad tale.
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  Speaker 1: By the way, you might say, oh, well, businesses benefit
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  Speaker 1: because they pay low borrowing costs, But think about all
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  Speaker 1: of the millions and millions of savers who are earning
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  Speaker 1: next to nothing. Can I tell you a pretty quick story.
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  Speaker 1: I was having my taxes done recently and I had
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  Speaker 1: forgotten about my checking account at Citi Bank, and they said,
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  Speaker 1: you forgot to give us the tax material. I said, no, no,
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  Speaker 1: it won't make any difference. My total interest income for
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  Speaker 1: last year was thirty seven dollars and forty two cents.
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  Speaker 1: They will not care if we didn't report that, even
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  Speaker 1: though they have it from the bank and we all left.
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  Speaker 1: Isn't it sad? Hey? Not long ago I used to
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  Speaker 1: have a very big numbers interest income. Not anymore. So.
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  Speaker 1: The question is what should retired people do who cannot
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  Speaker 1: earn a decent return on their savings. And it might
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  Speaker 1: encourage them to make a mistake and put their money
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  Speaker 1: into the share market. So what do you have a solution?
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  Speaker 1: What do you think can you do it in ten seconds?
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  Speaker 1: With the fellow reserves simply got to get out of
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  Speaker 1: the way. They have to let infest rates be whatever
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  Speaker 1: they would be. But you see right now they can't
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  Speaker 1: afford to raise infest rates because it would caused the
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  Speaker 1: economy to go right into recession. Thank you very much,
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  Speaker 1: Joel Stern, Chairman, chief executive Stern Value Management, sharing his
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  Speaker 1: thoughts about the economy and what needs to happen to
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  Speaker 1: make it grow. You've been listening to taking Stock. I'm
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  Speaker 1: pim Fox, My co host Katheen Hayes is on holiday,
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