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Torsten Slok Discusses the Complexity of Global Economics · Masters in Business

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  Speaker 1: This is Masters in Business with very Ridholts on Bloomberg Radio.
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  Speaker 1: This week on the podcast, I have an extra special guest.
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  Speaker 1: His name is Torsten Slack, and he is uh the
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  Speaker 1: chief economist at Deutsche Bank Securities. But more importantly, he's
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  Speaker 1: someone I've been reading for I don't even know how
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  Speaker 1: many years, and I consistently find his research and his
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  Speaker 1: writing to be among the most interesting and useful and
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  Speaker 1: contextualizing economic data um of pretty much anyone I've seen.
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  Speaker 1: He is to me the modern incarnation of ed Hyman
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  Speaker 1: of I s I. He he sees the world from
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  Speaker 1: a very holistic perspective. He looks at the world of
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  Speaker 1: markets and the economy just from a very very broad perspective,
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  Speaker 1: and I just find um, he's one of the few
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  Speaker 1: economists that I'll look at a chart and I'll look
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  Speaker 1: at what he writes and I kind of scratched my
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  Speaker 1: head and say, that's that's fascinating. How did how did
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  Speaker 1: I not see that before? How do I not understand
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  Speaker 1: this relationship between what otherwise is thought of as a
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  Speaker 1: small little piece, a little corner of the economy, and
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  Speaker 1: it turns out to be much more complicated, much more
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  Speaker 1: sophisticated and much more interesting. I think you'll find this
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  Speaker 1: a tour to force conversation not only on the world
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  Speaker 1: of economics, but how economics intersects with markets, with stock investing,
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  Speaker 1: with bond investing, and how we should think about uh,
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  Speaker 1: what drives the economy and what drives the longer term
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  Speaker 1: cycles that affect pretty much everything. So strap yourself in
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  Speaker 1: get ready my conversation with Torsten Slock. My special guest
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  Speaker 1: today is torched In Slock. He is the chief economist
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  Speaker 1: at Deutsche Bank Securities, where he has been toiling away
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  Speaker 1: since two thousand and five. The Deutsche Bank team, led
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  Speaker 1: by Mr Slock, has been top ranked by Institutional Investor
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  Speaker 1: for both fixed income and equities for the past five
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  Speaker 1: years running. Previously, he worked at the Organization of Economic
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  Speaker 1: Cooperation and Development in Paris and and before that he
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  Speaker 1: was at UH the i m F. He is a
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  Speaker 1: member of the Economic Club of New York. Educated at
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  Speaker 1: both the University of Copenhagen and Princeton University. Torsten Slock,
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  Speaker 1: Welcome to Bloomberg. Thanks for having me Berry. So your
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  Speaker 1: background is really quite fascinating. You worked at the I
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  Speaker 1: m F, you worked at the O E c D.
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  Speaker 1: What was it like transitioning to Wall Street. Well, that's
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  Speaker 1: a very important, very good question, and it was a
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  Speaker 1: bit of a culture shock coming from the I m
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  Speaker 1: F and the O c D, where you have a
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  Speaker 1: lot of time to sit and think in close the
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  Speaker 1: door office about very complicated problems, and you need to
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  Speaker 1: write papers for committees, you need to write reports for
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  Speaker 1: managers and for board meetings, and that process of really
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  Speaker 1: having a lot of time and a lot of resources
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  Speaker 1: available to investigate something. It was a real luxury review
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  Speaker 1: today in the sense that you had in some cases
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  Speaker 1: several months to come up with an answer to why
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  Speaker 1: did you have a crisis, Why did home prices go
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  Speaker 1: down in one country? Why did the healthcare system not
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  Speaker 1: work in one country? So the short answer is that
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  Speaker 1: then at the O c D and I MF you
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  Speaker 1: really have time and energy and a lot of very
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  Speaker 1: smart colleagues that you can debate things with. And getting
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  Speaker 1: to Wall Street, of course, was quite a turnaround where
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  Speaker 1: you suddenly have clients asking twenty seven questions that you
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  Speaker 1: have to answer in a few sentences. So in that sense,
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  Speaker 1: it was it was quite a different But in my
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  Speaker 1: view and in my personal opinion. I found it incredibly
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  Speaker 1: stimulating that you had to use what you learned and
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  Speaker 1: what you were taught at these d n A I
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  Speaker 1: m F to come up with answers to incredibly difficult
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  Speaker 1: questions with a very few number of sentences, very very
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  Speaker 1: so what I'm hearing from you is a very different
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  Speaker 1: sense of urgency and a emphasis on brevity. So a
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  Speaker 1: very busy fund manager trader fill in the blank can
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  Speaker 1: digest the response quickly and then either add, subtract, or whatever,
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  Speaker 1: change the portfolio based on your take exactly. Because the
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  Speaker 1: whole problem is that the and this is really important
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  Speaker 1: when you think about how the financial service industry is organized,
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  Speaker 1: that the sales side is really offering services. And what
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  Speaker 1: I do and we do in my group, is that
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  Speaker 1: we offer the service of having a view on what
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  Speaker 1: the economy will do, what mark it will do. And
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  Speaker 1: we also have great colleagues I have in Deutsche Bank
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  Speaker 1: who offer views on rates, effects equities. And the bottom
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  Speaker 1: line of that is that there's just a lot of
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  Speaker 1: competition for air space for customers. So clients get three
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  Speaker 1: emails every day. So if you in some cases righte
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  Speaker 1: long winded explanations that say there's fifty fifty change that
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  Speaker 1: something might happen. Many customers will just not find that
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  Speaker 1: particularly helpful. So in some cases we have to shop
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  Speaker 1: in the pencil and come up with answers that are
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  Speaker 1: particularly helpful for saying, what is it exactly that you're
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  Speaker 1: asking about? And at all boys down at the end
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  Speaker 1: of the tract, here is the answer. Are we buying
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  Speaker 1: or are we selling? Which sometimes can be a frustrating process,
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  Speaker 1: but nevertheless it turns out to be very important for
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  Speaker 1: getting your message across to clients in terms of helping them.
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  Speaker 1: And I get your research in my office and I
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  Speaker 1: notice two specific things. Just about every day you put
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  Speaker 1: out a specific chart, often not just here's the SMP
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  Speaker 1: five dred, but typically it's a somewhat unusual will aspect
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  Speaker 1: of the economy that also sheds a lot of light
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  Speaker 1: on what's going on. And I'm always fascinated how you
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  Speaker 1: find these really eclectic. Oh gee, I hadn't thought about
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  Speaker 1: that sort of thing, but they're very interesting and they
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  Speaker 1: make you stop and think, hey, what is what is
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  Speaker 1: really going on at the thirty ft view level? As
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  Speaker 1: opposed to kind of getting lost in the weeds and
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  Speaker 1: getting too specific and and lacking the ability to show
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  Speaker 1: the context. But you also do the big context pieces,
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  Speaker 1: the big monthly and quarterly chart books. Tell us how
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  Speaker 1: you developed that approach. Yah. Know, that's a very important issue.
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  Speaker 1: I mean too. In my view, to be successful, you
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  Speaker 1: need to you need to get people's attention, not by
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  Speaker 1: saying I think this in pill go to some extreme level,
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  Speaker 1: either higher or low, but rather to add some value
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  Speaker 1: to the thought process. And how do you add value
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  Speaker 1: to the thought process? If I just sent you a
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  Speaker 1: chart saying, oh, the unemployment rate is going down, it's
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  Speaker 1: four point one, you would say, okay, thank you very much.
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  Speaker 1: I already know that, So why should I open this email?
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  Speaker 1: If I already know that the inflation code CPI is
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  Speaker 1: two point one and unemployment is four point one, so
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  Speaker 1: why should I care? So some of the goal, and
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  Speaker 1: I'm very pleased to hear what you're saying, some of
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  Speaker 1: the goal with what I'm doing is that it's supposed
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  Speaker 1: to be crazy. It's supposed to be a little bit
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  Speaker 1: wild and unusual, because there's a lot of things going
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  Speaker 1: on that actually are very relevant. If I only sent
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  Speaker 1: you a chance with inflation unemployment, you would say, okay,
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  Speaker 1: I already know those things, but there's so many other
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  Speaker 1: things going on that are incredibly difficult to quantify and
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  Speaker 1: incredibly difficult to assess. The nevertheless actually play a role
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  Speaker 1: for whether markets are going up or down. So yes,
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  Speaker 1: we try to have a mix of both, having things
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  Speaker 1: that are sort of punchy and informative and sort of
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  Speaker 1: factoys if you will, and tell you in a few sentences,
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  Speaker 1: this went up, and you can then say, well, why
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  Speaker 1: did this go up? And you could say this is obvious,
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  Speaker 1: I already knew that, or you could say I didn't
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  Speaker 1: know that. But that whole process of getting you stimulated
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  Speaker 1: and getting some value to how you think about your
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  Speaker 1: investment process in your firm, it turns out to be
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  Speaker 1: quite important in terms of of the goal of what
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  Speaker 1: we're doing. And you're also an economist who sort of
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  Speaker 1: ventures into the worlds of equity and fixed income. A
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  Speaker 1: lot of economists, certainly fixed income is more common, but
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  Speaker 1: a lot of economists steer a bit clear. I could
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  Speaker 1: think of three Rosenberg, Ordini, and ed Himan, But most
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  Speaker 1: of the economists whose work I see, they really want
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  Speaker 1: to talk about the economy and not necessarily the market.
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  Speaker 1: So so what led you to focus to a large
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  Speaker 1: degree on the intersection between markets and the economy. That
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  Speaker 1: was a lot driven by understanding who your customer is.
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  Speaker 1: So certainly we also have quote unquote customers from the
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  Speaker 1: FIT and D E, C B and the I, M
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  Speaker 1: F and O C D who read our research, and
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  Speaker 1: all those of course have similar mindsets to when I
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  Speaker 1: sat down in my chair in two thousand five. But
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  Speaker 1: if the customer has to translate whatever we're saying about
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  Speaker 1: the economy into something that's useful for are we buying stocks,
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  Speaker 1: are we selling stocks? Are we buying rates or selling rates?
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  Speaker 1: It is it's all a going up or down? Is
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  Speaker 1: all the prices? Is any other commodity price going up
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  Speaker 1: or down? I mean the input into that process. I
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  Speaker 1: feel that you can stop short of not giving invested advice,
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  Speaker 1: as much as that's very interesting on his own, because
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  Speaker 1: the problem is that the economy is just not only
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  Speaker 1: the driver or financial markets. There's so many other things
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  Speaker 1: going on that are relevant. And just because our PSD
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  Speaker 1: economics models as interesting as they are, just because they
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  Speaker 1: are living their own life and have some limitations to
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  Speaker 1: what they can do and what you can talk about,
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  Speaker 1: that doesn't mean that that's the way that financial markets
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  Speaker 1: are functioning. There's so many things outside those PSD and
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  Speaker 1: fit models that actually it turns out to be quite important.
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  Speaker 1: So to your good question, I think it's very important
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  Speaker 1: to come up with additional value then just talk about
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  Speaker 1: real bit the Psyger models or other complicated things. I mean,
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  Speaker 1: if I it's no problem for me to tell you
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  Speaker 1: something that's really complicated, but the whole challenge for me
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  Speaker 1: really is to tell you something that's easier to understand
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  Speaker 1: where you still will say wow. I actually find that
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  Speaker 1: useful and also find that quite interesting. I want to
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  Speaker 1: talk a little bit about the many factors that go
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  Speaker 1: into the equity markets, but I have to lead with
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  Speaker 1: something you wrote. Um, I think it was late last year,
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  Speaker 1: thirty market risks for let's let's discuss that. Yeah, so
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  Speaker 1: we try at the beginning of very year to think
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  Speaker 1: hot about it. What are the risks both to the
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  Speaker 1: economy but the risks more broadly that market participants should
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  Speaker 1: be worrying about. And we have been making a list
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  Speaker 1: for the last few years, and this year it actually
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  Speaker 1: grew to thirty because we thought that there were so
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  Speaker 1: many things going on and if we missed something out,
• 10:48
  Speaker 1: it would be a shamed But it's clear that those
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  Speaker 1: risks can be categorized into different buckets. At one risk,
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  Speaker 1: of course, which is the traditional risk, or call it
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  Speaker 1: the organic risk, is it cannot make risks which have
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  Speaker 1: to do with where are we in the business cycle?
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  Speaker 1: Is the higher risk of overheating? Is the higher risk
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  Speaker 1: of a recession. What sects us of the economy are
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  Speaker 1: out of balance? Is consumption out of balances, topics out
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  Speaker 1: of balance, our financial markets out of balances, the banking
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  Speaker 1: sector is in the case that you have the housing
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  Speaker 1: market out of balance, So that many of the risks
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  Speaker 1: we had on our list, we're really focusing first and
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  Speaker 1: of all on sort of the traditional old school macroeconomic
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  Speaker 1: risks in terms of where are we in the cycle?
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  Speaker 1: What's next over thecoming quarters? Is it overheating? Is it recession?
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  Speaker 1: And the short answer to that first bucket was that
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  Speaker 1: we were still today a lot more about overheating and
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  Speaker 1: inflation than we were about recession. So those risks, of
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  Speaker 1: course are still slowly playing out. The second part of
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  Speaker 1: the list, well, let me let me stop you right
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  Speaker 1: there before we get to the second part. So this
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  Speaker 1: is now five months, four months later we see the
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  Speaker 1: fattest saying um rates are going to continue to tick up,
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  Speaker 1: that we have a variety of indicate aations that if
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  Speaker 1: we're not at full employment, were certainly very very close
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  Speaker 1: with unemployment, you know, four percent, we may even see
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  Speaker 1: a three handle sometime coming soon exactly. And yet inflation,
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  Speaker 1: while there are signs of inflation and slignes of signs
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  Speaker 1: of some wage pressure, it's slight and we haven't seen
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  Speaker 1: inflation tick up like you might imagine would happen in
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  Speaker 1: a full employment on the verge of overheating economy. How
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  Speaker 1: do you explain that? And what does that do to
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  Speaker 1: the risk for of an overheating economy? Absolutely, this has
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  Speaker 1: been one of the big mysteries of this expansion that
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  Speaker 1: we have still not quite seen the inflationary upward pressure
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  Speaker 1: that we've been waiting for for so long. So the
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  Speaker 1: fit has been crying wolf, inflation is about to go up,
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  Speaker 1: Rates about to go up in the market pricing and
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  Speaker 1: fit fund futures, and mostly for that matter, what the
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  Speaker 1: street expectations have been to long. Rates have also been
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  Speaker 1: crying both and say rates are going rates are going up,
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  Speaker 1: But race didn't go up for the last four or
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  Speaker 1: five years as expected, So you could certainly ask the question,
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  Speaker 1: why should we expect that to be now? Why are
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  Speaker 1: we still saying that this is a risk. What makes
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  Speaker 1: today different from a few years ago The following things. Maybe,
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  Speaker 1: First of all, today the issue is that the unemployee
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  Speaker 1: is now so low ready tour it was a few
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  Speaker 1: years ago, So that's suggesting that we have an economy
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  Speaker 1: that's close to overheating. Relative to the Congressional Budget Office,
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  Speaker 1: we are at close to full capacity by some metrics,
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  Speaker 1: were actually a little bit above full capacity. So that's
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  Speaker 1: number one reason what's different today relative to a few
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  Speaker 1: years ago. The second reason why also we see upward
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  Speaker 1: pressure on inflation is that the dollar is actually going
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  Speaker 1: down now. I remember, when the dollar goes down, you'll
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  Speaker 1: see inflation goes up. So that's also a second reason. Certainly,
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  Speaker 1: absolutely that's also adding to what's happening with the upward
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  Speaker 1: pressure on inflation. The third reason why we still think
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  Speaker 1: that we will have inflation in two thousand eighteen and
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  Speaker 1: coming potentially already in the next few months, is that
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  Speaker 1: we just did an enormous physical expansion, and the physical
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  Speaker 1: expansion was also not something that we did a few
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  Speaker 1: years ago. That's your also be putting some upwear pressure.
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  Speaker 1: And the fourth and final argument now why now is
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  Speaker 1: different and why we think the wolf will finally come,
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  Speaker 1: is that we do believe that all the discussion about
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  Speaker 1: trade war on tariffs will also be having some more
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  Speaker 1: modest upwear pressure on prices. So if I add these
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  Speaker 1: things together, off, we had full capacity, the dollars going down,
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  Speaker 1: we did a physical expansion. The trade war on tariffs
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  Speaker 1: talk is also lifting prices modestly. We do think that
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  Speaker 1: by the end of this year, inflation and here we're
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  Speaker 1: talking about core PC will be well above the FITS
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  Speaker 1: two percent target. Because the FIT has a two percent
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  Speaker 1: target and we've been below for the last five years.
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  Speaker 1: So many people your medium rates say will be below
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  Speaker 1: the target for so long. Why should we over shoot
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  Speaker 1: where the risks are now that we could be getting
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  Speaker 1: very close to that. The inflation data we just got
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  Speaker 1: from core CPI, which is a different inflation indicator, was
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  Speaker 1: two point one. But the bottom line is that the
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  Speaker 1: trend is not your friend when you look at what's
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  Speaker 1: happening on inflation. So we do get worried about the
• 14:53
  Speaker 1: FED actually raising rates as many times as they're saying,
• 14:55
  Speaker 1: and potentially also resulting in the steepening of the yield
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  Speaker 1: curve later this year, which which would quiet down all
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  Speaker 1: the people who were saying the flattening is causing recession.
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  Speaker 1: But let's hold that and come back to it. I
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  Speaker 1: want to push back on inflation, not because I necessarily
• 15:09
  Speaker 1: agree with this, but here's the here's the counter argument.
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  Speaker 1: I want to hear your response. So three pieces. A.
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  Speaker 1: We have full employment, but compare the current full employment
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  Speaker 1: to twenty years ago and a lot of people who
• 15:22
  Speaker 1: lost good, high paying or middle class jobs have been
• 15:27
  Speaker 1: replaced with mediocre, low paying jobs in the hospitality industry,
• 15:34
  Speaker 1: food and beverage service, the low end of healthcare. So
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  Speaker 1: while we have full employment, the wage picture has skewed
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  Speaker 1: dramatically across most of the middle class. That's that's bullet
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  Speaker 1: point one. And then two and three is you still
• 15:48
  Speaker 1: have technology driving the price down of everything. You have
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  Speaker 1: automation making things faster, cheaper, better, um. And lastly, even
• 15:57
  Speaker 1: with the trade war, globalization can contain used to drive
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  Speaker 1: prices down and drive labor costs down. As we have
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  Speaker 1: a global labor arbitrage, how do you respond? And by
• 16:08
  Speaker 1: lets just off the top of my head. I'm sure
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  Speaker 1: a real economist unlike myself who's a um follow economist, UH,
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  Speaker 1: could give you even more. But how how credible is
• 16:20
  Speaker 1: the counter arguments to inflation? Well, the first observation is
• 16:24
  Speaker 1: that the FED is saying that they want to high
• 16:25
  Speaker 1: rate three times this year and four times next year.
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  Speaker 1: You've gotta think really hard about what is their thought process.
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  Speaker 1: Why are they saying that race needs took up so much?
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  Speaker 1: If they were worried that all these forces from globalization
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  Speaker 1: or Amazon other things could be holding inflation down more permanently,
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  Speaker 1: then they wouldn't have this firm view among these incredibly
• 16:43
  Speaker 1: smart people on there from see that rates need to
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  Speaker 1: go up so much over the next few years. I
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  Speaker 1: think one thing that's really important to keep in mind
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  Speaker 1: to your very good points is to remember what the
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  Speaker 1: CPI is CPI inflation. The weight in the CPI two
• 16:56
  Speaker 1: goods is about a third, and the weight in the
• 16:59
  Speaker 1: CPI to services is about two thirds. So what's really
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  Speaker 1: critical about that It is that it's true that China
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  Speaker 1: is holding US inflation down, is true that Amazon is
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  Speaker 1: holding US inflation down very modestly. But it's also true
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  Speaker 1: that Mexico and other countries are having competitive pressure holding
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  Speaker 1: inflation down in the US, but goods only make up
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  Speaker 1: a third. In other words, tradeable goods only make up
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  Speaker 1: a third of the index, whereas non tradeable stuff in
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  Speaker 1: the index, meaning services, makes up two thirds. And what
• 17:23
  Speaker 1: is services that is, first of all housing and housing
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  Speaker 1: is not under downward competitive pressure globally. Housing makes up
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  Speaker 1: of the CPI overall cost CPI, so that means that
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  Speaker 1: it actually is a very important part of our consumption.
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  Speaker 1: Healthcare makes up about the CPI, so that's also not
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  Speaker 1: something Healthcare costs also at the moment of now going up,
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  Speaker 1: so also it's not under globalization pressures or Amazon pressures
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  Speaker 1: as such. And finally, education costs also make up a
• 17:48
  Speaker 1: significant share of CPI. So they complain that you often
• 17:51
  Speaker 1: hear among heads funds and others that well, prices will
• 17:55
  Speaker 1: never go up except on healthcare, education and on housing.
• 17:59
  Speaker 1: Well wait a minute, but those components make up two
• 18:01
  Speaker 1: thirds of the CPI. So I think the reason why
• 18:03
  Speaker 1: if you look at the actually inflation rates for services
• 18:05
  Speaker 1: have been around two and a half three percent now
• 18:07
  Speaker 1: almost for the last decade, where as inflation for goods
• 18:11
  Speaker 1: has indeed been negative. So a very important part of
• 18:13
  Speaker 1: the arguments you you just listed on, a very critical
• 18:16
  Speaker 1: part of the discussion with customers about whether we'll ever
• 18:19
  Speaker 1: see inflation is that the weight to goods only being
• 18:22
  Speaker 1: a third. Think about how much of your money you
• 18:23
  Speaker 1: actually spent going to strip modes and going to Amazon
• 18:27
  Speaker 1: and going elsewhere and shopping. The share you spend on
• 18:30
  Speaker 1: goods is actually resively small compared to how much you
• 18:32
  Speaker 1: spend on your mortgage or your rent, how much you
• 18:34
  Speaker 1: spend on healthcare, so we'll you spend on education. So
• 18:36
  Speaker 1: what I'm hearing from you is deflation in the things
• 18:39
  Speaker 1: we want and inflation in the things we need. That's
• 18:41
  Speaker 1: a good way to put it. Let's jump into the
• 18:44
  Speaker 1: rest of your thirty market risks for we talked about
• 18:48
  Speaker 1: the economic risks before. What are some of the non
• 18:52
  Speaker 1: economic risks that you're considering um for for this year
• 18:57
  Speaker 1: to the market. Well, they basically fall in very big bucket,
• 19:01
  Speaker 1: which is called political risk or deal political risks. This
• 19:05
  Speaker 1: includes everything that we're talking about in markets and have
• 19:08
  Speaker 1: been talking about for a while, from what is happening
• 19:12
  Speaker 1: in US politics, what's happening in European politics, more recently
• 19:16
  Speaker 1: we also discussed quite intensively what's happening in Japanese politics.
• 19:19
  Speaker 1: We have also been debating for quite some time what's happening,
• 19:21
  Speaker 1: of course with North Korea. More recently we started debating
• 19:24
  Speaker 1: again the serious situation. All those risks are incredibly difficult
• 19:29
  Speaker 1: to quantify, but nevertheless turned out to be pretty important
• 19:32
  Speaker 1: for how markets are moving. So the the problem is
• 19:34
  Speaker 1: that nobody really has a great toolbox for political risks.
• 19:38
  Speaker 1: We have a great toolbox, we have a great light
• 19:40
  Speaker 1: post to give us a lot of light under the
• 19:42
  Speaker 1: economics problems. Therefore, we spend enormous amounts of time trying
• 19:45
  Speaker 1: to look at the individual economic indicators. But the end
• 19:48
  Speaker 1: of the day is certainly something very unquantifiable comes in
• 19:51
  Speaker 1: political risk from just left field, and we just didn't
• 19:54
  Speaker 1: expect it, and suddenly we need to have a view
• 19:56
  Speaker 1: on is this good news? Is a bad news? How
• 19:58
  Speaker 1: big is this story? Is it a big story? Is
• 20:00
  Speaker 1: it is most story? What can I quantify? Just like
• 20:02
  Speaker 1: more recently we've got the trade wall. Stuff has coming
• 20:05
  Speaker 1: to the radar screen. Is that a big deal? Is
• 20:07
  Speaker 1: that not a big deal? We have discusses with equity
• 20:09
  Speaker 1: investors who think that's a big deal. Rates investors think
• 20:12
  Speaker 1: this is not a big deal because the macro implications
• 20:13
  Speaker 1: are ready to be limited. So the whole non economic
• 20:17
  Speaker 1: list of risks that we have is just has the
• 20:21
  Speaker 1: distinguished features that we just don't really have a good
• 20:24
  Speaker 1: understanding and good way of really assessing this, which actually,
• 20:27
  Speaker 1: in some cases makes it very exciting to discuss. So
• 20:30
  Speaker 1: I completely agree with you, it's fascinating to discuss. But
• 20:34
  Speaker 1: I always find myself pushing back on the here the
• 20:38
  Speaker 1: political risk from the market, and I want to throw
• 20:39
  Speaker 1: a couple of ideas that you uh and get your
• 20:42
  Speaker 1: your thoughts on it. So two thousand and seventeen was
• 20:47
  Speaker 1: by most measures, the most politically violent year, certainly in
• 20:51
  Speaker 1: recent memory, certainly in my memory. Um, I don't I
• 20:55
  Speaker 1: didn't live through the thirties, I didn't live through War two,
• 20:57
  Speaker 1: so I can't tell you what the politics were like that.
• 21:00
  Speaker 1: Buteen was just a relent It was like the campaign
• 21:04
  Speaker 1: never ended and it just got louder and more volatile.
• 21:08
  Speaker 1: And yet at the same time, the market volatility was
• 21:14
  Speaker 1: the lowest we've seen in like thirty years. It was
• 21:16
  Speaker 1: just a slow, modest grind up every day and at
• 21:21
  Speaker 1: the end of the year, the SMP had gained um
• 21:24
  Speaker 1: all in including dividends. That's a huge, huge contradiction to
• 21:30
  Speaker 1: how we should contextualize politics and and markets. So so
• 21:35
  Speaker 1: if you could explain that, yeah, absolutely, I mean you're
• 21:39
  Speaker 1: right to say that there were many predictions ahead of
• 21:42
  Speaker 1: many elections, including the US election, that things would have
• 21:45
  Speaker 1: gone completely different than what actually happened. It just tells
• 21:48
  Speaker 1: you how difficult it is in some cases to get
• 21:51
  Speaker 1: some good quantification and assessment of what's actually going to happen.
• 21:54
  Speaker 1: I think what's very important to keep in mind that
• 21:56
  Speaker 1: from the economics broad a textbook, there are the politicians
• 21:59
  Speaker 1: who really are accountable for what generally speaking can be
• 22:02
  Speaker 1: called fiscal policy and structural policy. And then there is
• 22:05
  Speaker 1: the central bank, in this case the FIT, which is
• 22:08
  Speaker 1: basically only responsible for basically one thing, name the interest
• 22:11
  Speaker 1: rates and monetary policy, but really keeping interest rates at
• 22:13
  Speaker 1: a level that they think is relevant for where the
• 22:15
  Speaker 1: economy is. And what I think is the very important
• 22:17
  Speaker 1: backdrop also to what happened in two Husands seventeen is
• 22:20
  Speaker 1: that monetary policy has for many many years been very
• 22:23
  Speaker 1: very easy. So in some sense, what's driving markets. It
• 22:26
  Speaker 1: might not be fiscal policy or structural policy or just
• 22:29
  Speaker 1: what politicians are doing. It could be that the dominating
• 22:32
  Speaker 1: force for many, many years has actually been the FIT
• 22:34
  Speaker 1: and the ECB and the b o J, and maybe
• 22:36
  Speaker 1: that was the reason why stock market did so well
• 22:39
  Speaker 1: for so long since two thousand nine, essentially, equities have
• 22:42
  Speaker 1: done incredibly well simply because the amount of support that
• 22:45
  Speaker 1: has been coming not only from the FIT, also from
• 22:47
  Speaker 1: the easy B b o j s and b even
• 22:49
  Speaker 1: PBOC in China, we have seen significant money printing that
• 22:53
  Speaker 1: needed to find at home outside of fixed income in
• 22:56
  Speaker 1: many cases, and outside of fixed income basically in most
• 22:59
  Speaker 1: cases me equities and equities probably also benefited. And this
• 23:03
  Speaker 1: was the intention from the significant amount of money printing.
• 23:06
  Speaker 1: So maybe even when the FED was tightening and quantitative
• 23:10
  Speaker 1: easing was ending and their balance sheet was I don't
• 23:13
  Speaker 1: want to say it was getting, it was shrinking, but
• 23:15
  Speaker 1: it was certainly not expanding the way it had But
• 23:17
  Speaker 1: the Global Central Bank, that's true, You're right to say
• 23:20
  Speaker 1: that they FIT, it absolutely was pulling in liquidity. But
• 23:23
  Speaker 1: if you look at the Global Central Bank Balanty d
• 23:25
  Speaker 1: CP was still popularly speaking, printing money. The b o
• 23:27
  Speaker 1: J was still printing money. Also what happened again, and
• 23:30
  Speaker 1: China was also supporting the economy. So let me ask
• 23:33
  Speaker 1: you on that point. I apologize for interrupting, but this
• 23:36
  Speaker 1: cycle globally seemed to be very much with the major
• 23:41
  Speaker 1: economic centers very much out of step, out of sync
• 23:44
  Speaker 1: with each other. Normally it's a global everybody cuts rates together,
• 23:48
  Speaker 1: everybody races. But it seemed like the US did what
• 23:51
  Speaker 1: they did, and then Japan did albonomics, and Europe eventually
• 23:54
  Speaker 1: said hey, these guys seem to be onto something and
• 23:57
  Speaker 1: they started how unusual is that and what does this
• 24:00
  Speaker 1: mean for the economy and the markets going forward? Well,
• 24:04
  Speaker 1: what's really unusual about this cyclically, exactly to the way
• 24:06
  Speaker 1: you just outlined it and sequenced it, is that remember
• 24:10
  Speaker 1: that the central banks are now buying assets. Specifically, of course,
• 24:13
  Speaker 1: the US BE and the BOG still buying assets, and
• 24:15
  Speaker 1: they fit that this. For many years, they're buying basically
• 24:18
  Speaker 1: government bonds. I used to work at the I m
• 24:20
  Speaker 1: F where we would fly to two countries and say,
• 24:22
  Speaker 1: don't buy your own government bonds. That's crazy. Your money
• 24:25
  Speaker 1: science in your own debt, and the market will not
• 24:27
  Speaker 1: think that you're credible if you do it as a
• 24:28
  Speaker 1: central bank. And now the FATE has been buying their
• 24:31
  Speaker 1: own going bonds, the e CP has been buying their
• 24:32
  Speaker 1: own government bonds, the bug has been buying their own
• 24:34
  Speaker 1: conming bands. And now we all sit here and say,
• 24:36
  Speaker 1: oh yeah, now it's fine. They can get away with it.
• 24:38
  Speaker 1: So the issue is that it really is true that
• 24:41
  Speaker 1: markets are distorted by the very significant amount of asset
• 24:45
  Speaker 1: purchases or que that has been carried out by the
• 24:48
  Speaker 1: three major central banks. And therefore the exit, which is
• 24:51
  Speaker 1: what we're beginning slowly to go through with the FIT
• 24:53
  Speaker 1: raising rates next year, the eusy B will race rates
• 24:56
  Speaker 1: and eventually the BUJ will also raise rates. The exit
• 24:58
  Speaker 1: will be associated some unwinding of those distortions. So a
• 25:02
  Speaker 1: lot of my client discussions exactly about what you just
• 25:04
  Speaker 1: said named what kind of distortions were created, and that's
• 25:08
  Speaker 1: sequencing that we saw. What would the endgame be as
• 25:11
  Speaker 1: we get back to quote unquote a more normal situation,
• 25:14
  Speaker 1: and is it possible to get back to a more
• 25:15
  Speaker 1: normal situation where assetprises are not heavily distorted by central
• 25:19
  Speaker 1: bank as it purchases are QUI So you mentioned ECB
• 25:23
  Speaker 1: in the FED over in Japan, their central bank are
• 25:27
  Speaker 1: actually buying equities. We don't. We don't see that in
• 25:30
  Speaker 1: the US, and I don't believe we see a lot
• 25:32
  Speaker 1: of it in Europe. Absolutely. What is the Central Bank
• 25:36
  Speaker 1: of Japan doing and what is the impact on on
• 25:40
  Speaker 1: Japanese markets? Is albinomics working or is it just one
• 25:44
  Speaker 1: joint distortion and we can't tell. Yeah. So abonomics has
• 25:47
  Speaker 1: three arrows named monetary postsy, fiscal posts, and then structural posties,
• 25:51
  Speaker 1: which is an attempt to say, let's make the economy
• 25:53
  Speaker 1: more competitive, Let's make it easier to fire in Japan,
• 25:56
  Speaker 1: miss let's make it easier to hire, let's get more
• 25:59
  Speaker 1: women into the labor force, Let's try to get the
• 26:01
  Speaker 1: economy more flexible and dynamic. And the answer is that
• 26:04
  Speaker 1: on the fiscal side, the dead level is just enormous
• 26:07
  Speaker 1: monstery policy has now tried many different things and that
• 26:09
  Speaker 1: hasn't really created a significant amount of success stories. Unfortunately,
• 26:13
  Speaker 1: despite that, we're now almost twenty years and plus and counting,
• 26:17
  Speaker 1: and that's like to g DP something like that. This
• 26:22
  Speaker 1: is the dead to GDP level exactly, which makes them
• 26:24
  Speaker 1: very vulnerable to high interest rates. So the answer today
• 26:28
  Speaker 1: to your question is that it just hasn't really worked
• 26:31
  Speaker 1: quite yet, and of course it opens up a lot
• 26:33
  Speaker 1: of questions. Is the US also going down the road
• 26:35
  Speaker 1: of being Japan eventually? We don't think so at all,
• 26:38
  Speaker 1: because the problem in Japan is that the economy is
• 26:41
  Speaker 1: just not dynamic enough, and they are just some very
• 26:44
  Speaker 1: ingrained reasons why it's been very difficult to create inflation. Whereas,
• 26:48
  Speaker 1: as we spoke about earlier, we're already seeing some signs
• 26:51
  Speaker 1: of inflation in the US in the CPI and pc
• 26:53
  Speaker 1: it's only very small upward moves. But as I mentioned,
• 26:57
  Speaker 1: the list of reasons why we think that now is
• 26:59
  Speaker 1: a bit different. Also, the labor market is more dynamic
• 27:01
  Speaker 1: in the U S which is why the employment cost
• 27:03
  Speaker 1: in diction trading higher. We've seen media weekly learnings trending higher.
• 27:06
  Speaker 1: We've seen even UNI labor costs they've also started moving
• 27:09
  Speaker 1: up a bit. So I get it that average are
• 27:11
  Speaker 1: learnings hasn't really moved up as much, at least more recently.
• 27:14
  Speaker 1: But and then as they we do think that we
• 27:16
  Speaker 1: will get more wage pressure, we will get therefore get
• 27:18
  Speaker 1: a different situation in the US with higher rates, which
• 27:21
  Speaker 1: is why the FIT is hiking. And also a different
• 27:24
  Speaker 1: level of interest rates compared to what Japan has been with.
• 27:27
  Speaker 1: When you discussed the structural issues in Japan, are you
• 27:30
  Speaker 1: referring to the kuritsure, You're referring to their post office
• 27:34
  Speaker 1: essentially being their retirement accounts. What how How is Japan
• 27:39
  Speaker 1: so different than the US? We know it's very different,
• 27:42
  Speaker 1: So but what do you mean structure? What One extremely
• 27:44
  Speaker 1: important difference is demographics, that the Japanese population is aging,
• 27:49
  Speaker 1: and therefore you actually have a shrinking labor force, whereas
• 27:53
  Speaker 1: in the US we actually still have a growing labor force.
• 27:55
  Speaker 1: It may grow a little bit less quickly than it
• 27:58
  Speaker 1: did earlier, but we still have a significant of immigration,
• 28:00
  Speaker 1: we still population growth in the US. So one very
• 28:03
  Speaker 1: important structural, very in very simple terms structural difference is
• 28:06
  Speaker 1: that the amount of taxpayers in Japan is falling, whereas
• 28:10
  Speaker 1: in the US the amount of taxpayers is still growing
• 28:12
  Speaker 1: because we're adding in the labor force, more people that
• 28:14
  Speaker 1: pay taxes that can help for the aging population, help
• 28:17
  Speaker 1: for paying for retirement payments and transfers to older generations
• 28:22
  Speaker 1: and Medica and Medicaid, whereas you don't really have that
• 28:24
  Speaker 1: in Japan, which is really weighing both on the government
• 28:26
  Speaker 1: finances but also weighing on the economy more broadly. You know,
• 28:30
  Speaker 1: I want to talk a little bit about your career
• 28:32
  Speaker 1: because your path is somewhat um I don't want to
• 28:35
  Speaker 1: say unusual, because lots of people go from government institutions
• 28:40
  Speaker 1: and banks to Wall Street, but yours meandered through Europe,
• 28:44
  Speaker 1: through Paris to New York. Tell us right out of
• 28:48
  Speaker 1: graduate school that was Princeton, correct, Yeah, so I did
• 28:51
  Speaker 1: get my ps D from Copenhagen, but this spending in
• 28:53
  Speaker 1: Princeton where I got the americanized and opened up my
• 28:58
  Speaker 1: eyes for what this wonderful tree can do. So where
• 29:02
  Speaker 1: tell us about the career path. Did you go from
• 29:05
  Speaker 1: Copenhagen to the O E C D. Yeah, though, so,
• 29:07
  Speaker 1: first I did my PSD in Copenhagen, and as part
• 29:11
  Speaker 1: of the program in most European countries they ask you
• 29:14
  Speaker 1: to go to a U S university. Let's just say
• 29:17
  Speaker 1: the way it is that the quality of the PSD
• 29:19
  Speaker 1: programs in several European countries, if not most, is nowhere
• 29:23
  Speaker 1: near what you can get in the US. So that's
• 29:25
  Speaker 1: why they encourage people to say go and take a
• 29:27
  Speaker 1: year somewhere and the government said we'll pay the tuition,
• 29:30
  Speaker 1: will pay your room and board. Why don't you go this?
• 29:33
  Speaker 1: And I'm sorry, I'm sorry. Your tuition and room and
• 29:37
  Speaker 1: board was paid at graduate level, absolutely was paid by
• 29:41
  Speaker 1: Education is free and actually all Nordic countries. But what
• 29:46
  Speaker 1: else is free? County healthcare is also free? Its help
• 29:48
  Speaker 1: us off course are higher, but how much higher? So
• 29:52
  Speaker 1: average tax rates are roughly around the it's not that
• 29:57
  Speaker 1: it's about ten percent points high. Then here you do
• 30:01
  Speaker 1: get free healthcare, free education, which I was so lucky
• 30:04
  Speaker 1: to benefit from, which brought me Therefore in my one
• 30:07
  Speaker 1: year to New Jersey to Princeton, where I got to
• 30:10
  Speaker 1: work with the various professors. I worked with Michael Potle
• 30:13
  Speaker 1: who was visiting at the time. Barry I agree, was
• 30:15
  Speaker 1: actually also being there. I was a resources system for them,
• 30:18
  Speaker 1: and they basically said you should go and try and
• 30:21
  Speaker 1: get an internship at the I m F. And I said, okay,
• 30:24
  Speaker 1: that could be fun. And I did an internship at
• 30:26
  Speaker 1: the I m F the following summer, and I figure
• 30:28
  Speaker 1: out quicker than internships in this country is about figuring
• 30:31
  Speaker 1: out if you want to do that job more permanently,
• 30:33
  Speaker 1: if they want to keep you and I'm al so
• 30:34
  Speaker 1: lucky that they offered me a job. So I started
• 30:37
  Speaker 1: in the Economy's program with the PSP program at the
• 30:40
  Speaker 1: at the I m F. And by the way, if
• 30:42
  Speaker 1: memory serves, Princeton's Economics department was a powerhouse well at
• 30:47
  Speaker 1: the time of the department. And yeah, and you also
• 30:52
  Speaker 1: had Ken Rokoff was also there at the time, and
• 30:55
  Speaker 1: I didn't interact with them all the time, but I
• 30:58
  Speaker 1: mean they were there, and as you know, professors want
• 31:01
  Speaker 1: to talk to PSD students, which I was so incredibly
• 31:04
  Speaker 1: lucky that they also wanted to talk to me. So yeah,
• 31:06
  Speaker 1: that's true. It was a really interesting ground for just
• 31:10
  Speaker 1: getting again at academic overview of what's going on in
• 31:14
  Speaker 1: different areas and specializing in the in the areas that
• 31:17
  Speaker 1: I wrote about. So the I m F two O
• 31:20
  Speaker 1: E C D was at the next step. Yeah, I
• 31:23
  Speaker 1: did spend a year at the Bank of America here
• 31:25
  Speaker 1: in New York. But after that then I did go
• 31:28
  Speaker 1: to the ODE in Paris, and then there was Dan Paris.
• 31:31
  Speaker 1: Some of my former managers from the I m F
• 31:34
  Speaker 1: had moved to Deeutgia Bank, and specifically David fog Atlanta,
• 31:38
  Speaker 1: who I still have the pleasure of working with today,
• 31:40
  Speaker 1: and my great colleague being each other asked if I
• 31:43
  Speaker 1: wanted to come to work for Tougia Bank in New York,
• 31:45
  Speaker 1: and in two thousand and five I said yes to that,
• 31:47
  Speaker 1: And I've been sitting in that chair for the last
• 31:50
  Speaker 1: twelve thirteen years and counting and enjoying every moment of it.
• 31:53
  Speaker 1: So that's pretty fascinating. So you're now on Wall Street
• 31:56
  Speaker 1: for a dozen years. How different is it today than
• 32:02
  Speaker 1: it was when you joined right in the middle of
• 32:05
  Speaker 1: the credit and housing boom. Well, I think one very
• 32:08
  Speaker 1: important difference is that then in two thousand five and
• 32:12
  Speaker 1: two thousand six, obviously there was much fewer worries about
• 32:18
  Speaker 1: all the things that actually turned out to be really important.
• 32:22
  Speaker 1: We have gotten much more humble, first of all in
• 32:25
  Speaker 1: terms of our forecasting ability, but also in terms of
• 32:29
  Speaker 1: what is it actually that we need to look at,
• 32:31
  Speaker 1: which also gets back to why do I have my
• 32:34
  Speaker 1: little business model today of just sending a child in
• 32:36
  Speaker 1: a few sentences. Well, some of the idea is that
• 32:38
  Speaker 1: I cannot just only look at a certain small set
• 32:41
  Speaker 1: of indicators, because if I do that, I risk that
• 32:43
  Speaker 1: I'm missing something that actually could turn out to be
• 32:46
  Speaker 1: extremely important. So the straw that breaks the cameras back
• 32:51
  Speaker 1: here is not only necessarily inflation unemployment, but could be
• 32:54
  Speaker 1: something coming out of the blue that I had just
• 32:55
  Speaker 1: not appreciate it enough. So inflation risks can come from
• 32:58
  Speaker 1: different sources, but most important, recession risks can now come
• 33:01
  Speaker 1: from a whole range of difference. So also so I
• 33:04
  Speaker 1: would say that over the last at least decade, very
• 33:08
  Speaker 1: important change in the way and that the economics profession
• 33:11
  Speaker 1: on the street is working is that you've got to
• 33:13
  Speaker 1: open your eyes more too, risks that out there and
• 33:16
  Speaker 1: asking constantly are these risks important? How are these risks
• 33:19
  Speaker 1: playing out? Is this something I should be spending more
• 33:21
  Speaker 1: time on. So so let's delve in that into that
• 33:23
  Speaker 1: a little bit. What do you think I'm gonna ask
• 33:26
  Speaker 1: this question in a little bit of a skewed way.
• 33:29
  Speaker 1: What do you think are potential risks that much of
• 33:34
  Speaker 1: either the investor class or the economist class might be overlooking. Well,
• 33:40
  Speaker 1: I think that the sort of the number one organic
• 33:42
  Speaker 1: risk that we spoke about earlier is that there's some
• 33:44
  Speaker 1: upside risk to inflation. You can then say we economics
• 33:48
  Speaker 1: profession and also the fet have been crying both all
• 33:50
  Speaker 1: these years and inflation, why should it come now? So
• 33:52
  Speaker 1: maybe there's some uncertainty about that risk, but that too
• 33:54
  Speaker 1: also other risks that I think are very important. First
• 33:57
  Speaker 1: of all, the fiscal expansion requires lot of net issuance
• 34:00
  Speaker 1: of treasuries. And if you expand the amount of safe
• 34:04
  Speaker 1: assets in the world, if you expand the amount of
• 34:07
  Speaker 1: treasuries that are outstanding, you are basically beginning to compete
• 34:12
  Speaker 1: with the risk free asset with more risky assets. This
• 34:16
  Speaker 1: is exactly what we're seeing in some sense with the
• 34:18
  Speaker 1: T bill issuance that's competing with light BOLB, that's competing
• 34:21
  Speaker 1: with commercial paper, probably even competing with I G. That
• 34:24
  Speaker 1: if you suddenly offer to investors a lot more risk
• 34:27
  Speaker 1: free assets, meaning assets that have basically no risk associated
• 34:30
  Speaker 1: with them, in this case US treasuries, then investors will
• 34:33
  Speaker 1: of course, I would rather have a risk free asset
• 34:35
  Speaker 1: rather than have a risky acid with a credit risk
• 34:38
  Speaker 1: that has the worst credit rating. So the more that
• 34:40
  Speaker 1: the amount of risk free assets is expanded, the higher
• 34:43
  Speaker 1: ist the risk that investors will start to pick risk
• 34:45
  Speaker 1: free as is right to risky as. It may sound
• 34:47
  Speaker 1: very abstract, but what It means, in very practical terms,
• 34:50
  Speaker 1: is that if the U. S. Government needs to essentially
• 34:52
  Speaker 1: double the issuance of treasuries over the next eighteen months,
• 34:56
  Speaker 1: which is what is in the pipeline from two seventeen
• 34:58
  Speaker 1: two nineteen, the risks associated with that for risky acids
• 35:02
  Speaker 1: meaning i g. High yield loans, clos even mortgages. The
• 35:06
  Speaker 1: risk for those fixed income ass' is begin to increase
• 35:09
  Speaker 1: simply because there will be a crowding out of other
• 35:12
  Speaker 1: spread product fixed in commem asces readily to what's happening
• 35:15
  Speaker 1: in treasuries. There has been a line of thought that's
• 35:19
  Speaker 1: existed for a while that suggests there's been a shortage
• 35:23
  Speaker 1: of high quality sovereign debt over the past ten or
• 35:27
  Speaker 1: twenty years. Isn't this new set of issuance kind of
• 35:31
  Speaker 1: getting back to a more normal supply, And that seems
• 35:34
  Speaker 1: to be a theme normalizing rates, normalizing inflation, and normalizing
• 35:39
  Speaker 1: sovereign treasury supply. Absolutely, But think about it. Let's say
• 35:44
  Speaker 1: that the you and I were a pension fund or
• 35:46
  Speaker 1: an insurance company, and we have been begging for high
• 35:50
  Speaker 1: interest rates for many many years. Now, high interest rates
• 35:53
  Speaker 1: suddenly begin to appear because tenure. Treasury rates have moved
• 35:56
  Speaker 1: up modestly the consensus. If you look at your Bloomberg screen,
• 35:59
  Speaker 1: you'll see consensus expected to move through three later this year.
• 36:02
  Speaker 1: All this suggests that if the risk free assets suddenly
• 36:05
  Speaker 1: gives a high return, then the question becomes, well, how
• 36:07
  Speaker 1: does that crowd out the willingness to invest in investment
• 36:10
  Speaker 1: grade credit and other risk here assets. And therefore the
• 36:13
  Speaker 1: risk is in my view that yes, it's true that
• 36:15
  Speaker 1: we need to see some normalization. But in two thousands seven,
• 36:19
  Speaker 1: in round numbers, total US government dead was around nine trillion,
• 36:23
  Speaker 1: and we are going towards that the total amount of
• 36:25
  Speaker 1: government dead outstanding will be twenty one trillion, Meaning we
• 36:28
  Speaker 1: have expanded dramatically over the last decade the amount of
• 36:32
  Speaker 1: treasury is outstanding, and that's beginning again to compete. And
• 36:34
  Speaker 1: this is where you really will test the market. This
• 36:37
  Speaker 1: is really I m F Page one. Is there enough
• 36:39
  Speaker 1: demand for U? S treasuries? Will we get into some
• 36:44
  Speaker 1: so of course this is a bit extreme, but we'll
• 36:45
  Speaker 1: get into some situation like Venezuela or Zimbabwe or other
• 36:49
  Speaker 1: emerging markets where you certainly have problems financing your government finances. Obviously,
• 36:54
  Speaker 1: the US will nowhere near any of the problems that
• 36:56
  Speaker 1: many emerging markets have. But you really are beginning to
• 36:59
  Speaker 1: ask em s questions to the US, namean, what happens
• 37:01
  Speaker 1: to countries that expand the fiscal situation as much as
• 37:05
  Speaker 1: the US has been doing. What happens with the credit rating,
• 37:07
  Speaker 1: what happens to the exchange rate with the dollar go
• 37:09
  Speaker 1: down mall, what happens to interest rates, and what happens
• 37:12
  Speaker 1: for that matter, politically when you have a situation where
• 37:14
  Speaker 1: you're something needs to have such an incredible increase in
• 37:18
  Speaker 1: financing needs, and if you have a recession, of course
• 37:20
  Speaker 1: the financing needs will go up because then we also
• 37:22
  Speaker 1: need to pay more on unemployment. But if it's etcetera.
• 37:24
  Speaker 1: So so the short answer to your question is that
• 37:27
  Speaker 1: it's true that you want to see some normalization in
• 37:30
  Speaker 1: treasury issues and for that matter, and treasury yields, But
• 37:33
  Speaker 1: that normalization is now coming at the same time while
• 37:36
  Speaker 1: we're doing a big expansion, which I think is at
• 37:38
  Speaker 1: a very significant risk to financial markets over the coming quarters.
• 37:41
  Speaker 1: So earlier you referenced um possibility of a trade war.
• 37:45
  Speaker 1: Let's let's discuss these tariffs and and that issue. Lots
• 37:50
  Speaker 1: of folks have looked at these new tariffs on steel
• 37:52
  Speaker 1: and aluminum, and uh, the arguments back and forth with China,
• 37:57
  Speaker 1: almost as if it's a big surprise. But come on,
• 38:00
  Speaker 1: let's be honest. Then, Candidate Trump campaigned on protectionism. His
• 38:06
  Speaker 1: whole slogan, make America First, every whistle stop was We're
• 38:11
  Speaker 1: gonna erect tariffs, and we're gonna get rid of NAFTA,
• 38:13
  Speaker 1: and we're gonna throw out all of these trade agreements. Um,
• 38:18
  Speaker 1: can we really say we're surprised and we know this
• 38:21
  Speaker 1: process takes like a year to implement. Can we really
• 38:25
  Speaker 1: say the markets are surprised by a president who campaigned
• 38:30
  Speaker 1: on this, talked about it consistently, still talks about it constantly,
• 38:34
  Speaker 1: actually did what he said he was gonna do. I
• 38:36
  Speaker 1: completely agree with what you're saying. It's not a surprise
• 38:39
  Speaker 1: in the sense that globalization has been benefiting tremendously people
• 38:43
  Speaker 1: in China and Mexico and emerging markets because they benefited
• 38:47
  Speaker 1: tremendously from a more open use economy and a more global,
• 38:50
  Speaker 1: open trading system. You also saw tremendous benefits to consumers
• 38:54
  Speaker 1: and US living in the US who buy goods and
• 38:56
  Speaker 1: people in Europe who buy goods, and you saw cheaper
• 38:59
  Speaker 1: goods that what you who had ever seen before on
• 39:01
  Speaker 1: so many different fronts basically anywhere in anything that you
• 39:04
  Speaker 1: bought in the good spectrum. But what we also need
• 39:07
  Speaker 1: to recognize, and this, of course, what's very important part
• 39:09
  Speaker 1: of this, is that there were certainly some people in
• 39:11
  Speaker 1: West Virginia and in Pennsylvania and Ohio who basically lost
• 39:15
  Speaker 1: out because they didn't produce these goods anymore, they didn't
• 39:18
  Speaker 1: produce steal anymore. And this is what this political process
• 39:22
  Speaker 1: is now telling us and what we're going through. How
• 39:26
  Speaker 1: do you put up on the scale the benefits that
• 39:29
  Speaker 1: you might have had from cheaper goods and someone in
• 39:31
  Speaker 1: China who got a job because they had to produce
• 39:33
  Speaker 1: goods for us buying stuff redditive to the unfortunate situation
• 39:38
  Speaker 1: that many people in the US and in Europe lost
• 39:41
  Speaker 1: their jobs because of open trade and because of globalization.
• 39:46
  Speaker 1: So it's in some sense not a surprise that we've
• 39:51
  Speaker 1: gotten to where we are, and that's of course the
• 39:54
  Speaker 1: main problem that the politicians are struggling with. How do
• 39:57
  Speaker 1: we compensate those who lost out in the shame of
• 40:00
  Speaker 1: globalization in Europe and in the US and how do
• 40:02
  Speaker 1: we make sure that they don't fall through now that
• 40:04
  Speaker 1: we have gotten to a point where it looks like
• 40:07
  Speaker 1: it's point of no return. But politicians are doing everything
• 40:10
  Speaker 1: they can, not only the US but also in Europe
• 40:12
  Speaker 1: to try to find some solutions to making sure that
• 40:16
  Speaker 1: those who lost out in the global trading system that
• 40:19
  Speaker 1: was so open and benefiting so much in cheaper goods,
• 40:21
  Speaker 1: that that that was hurting them so much. I recently
• 40:24
  Speaker 1: had a conversation with someone who started their career in
• 40:27
  Speaker 1: the nineteen seventies, and I had to ask them, how
• 40:30
  Speaker 1: did that period scar them? In terms of uh inflation
• 40:35
  Speaker 1: and you know, low returns in the stock market and
• 40:39
  Speaker 1: spiking interest rates. So you started your career at least
• 40:43
  Speaker 1: on Wall Street, right in the midst of what would
• 40:47
  Speaker 1: later turn out to be a credit bubble and a
• 40:49
  Speaker 1: housing collapse. How has that colored your view of the
• 40:53
  Speaker 1: world or or has it not? Yeah, I would say
• 40:56
  Speaker 1: that going through now, having spent most of my time
• 40:59
  Speaker 1: on the street um in a period of crisis or
• 41:04
  Speaker 1: basically a period of trying to figure out what was
• 41:06
  Speaker 1: wrong with the economics textbook, what was wrong with the
• 41:08
  Speaker 1: financial system, what was wrong with the way that we
• 41:11
  Speaker 1: analyze things and why didn't why couldn't we predict this better? Um,
• 41:16
  Speaker 1: we did in Deutche Bank have a number of warning
• 41:19
  Speaker 1: pieces out ahead of the crisis, but the reality is
• 41:22
  Speaker 1: that there was really nobody anywhere who predicted this crisis
• 41:26
  Speaker 1: would be coming in, particularly not the force and the
• 41:28
  Speaker 1: magnitude of what actually happened. So a lot of the
• 41:31
  Speaker 1: way that we think about things, and a lot of
• 41:34
  Speaker 1: their agenda for how we think about things and how
• 41:37
  Speaker 1: we try to help clients think about what's going on
• 41:40
  Speaker 1: is very much colored by the fact that they there
• 41:44
  Speaker 1: cannot be as stone unturned. We have to make sure
• 41:48
  Speaker 1: that we lift every area, that we cover every base,
• 41:52
  Speaker 1: so we are actually absolutely sure that there's nothing in
• 41:55
  Speaker 1: terms of risks that we are missing out over the
• 41:58
  Speaker 1: waall that has also created, i mean, let's just say,
• 42:00
  Speaker 1: the way it is in markets, a much more stressed situation.
• 42:03
  Speaker 1: Also on the bye side, because people are now seeing
• 42:05
  Speaker 1: crisis everywhere constantly, someone is saying, oh my god, there's
• 42:09
  Speaker 1: something happening over here, and we've got to make sure
• 42:12
  Speaker 1: that this is not turning everything down and creating an
• 42:15
  Speaker 1: next recession. The older, the old expression is every general
• 42:18
  Speaker 1: fights the last war. And that's so true. And I
• 42:20
  Speaker 1: don't know how many times over the last ten years,
• 42:23
  Speaker 1: essentially the two thousand nine when we left the recession,
• 42:25
  Speaker 1: I have not received emails from clients saying, oh, the
• 42:27
  Speaker 1: next recess is just around the corner, And it wasn't
• 42:30
  Speaker 1: And now we're sitting here, well maybe you shouldn't. And
• 42:32
  Speaker 1: this is a really important invest in implications of in
• 42:34
  Speaker 1: my view of how you should think about things today,
• 42:36
  Speaker 1: is that the risks of overheating today are much higher
• 42:39
  Speaker 1: than the risk of recession, most importantly because of the
• 42:41
  Speaker 1: significant tail when from the fiscal expansion. So yes, we're
• 42:44
  Speaker 1: still watching, and to your question, we're still watching a
• 42:47
  Speaker 1: lot of different risks and I think we need as
• 42:49
  Speaker 1: investors to constantly monitor everything that's going on. But that's
• 42:52
  Speaker 1: just also created that much more confusing environment where we
• 42:56
  Speaker 1: just in some cases just don't have whatsoever any toolbox
• 42:59
  Speaker 1: for understanding that type of risk. We have been speaking
• 43:02
  Speaker 1: with Torsten Slack. He is the chief international economist for
• 43:05
  Speaker 1: Deutsche Bank Securities. If you enjoy this conversation, be sure
• 43:09
  Speaker 1: and check out the podcast extras, where we keep the
• 43:12
  Speaker 1: tape rolling and continue discussing all things economic wonkery. You
• 43:17
  Speaker 1: can find those wherever finer podcasts are sold iTunes, Bloomberg
• 43:22
  Speaker 1: dot com or overcast. We love your comments, feedback and
• 43:26
  Speaker 1: suggestions right to us at m IB podcast at Bloomberg
• 43:30
  Speaker 1: dot net. Be sure and check out my daily column
• 43:34
  Speaker 1: on Bloomberg dot com. You can follow me on Twitter
• 43:37
  Speaker 1: at rit Halts. I'm Barry Hults. You're listening to Masters
• 43:41
  Speaker 1: in Business on Bloomberg Radio. Welcome to the podcast, Torsten.
• 43:58
  Speaker 1: Thank you so much for doing this. I've been I've
• 43:59
  Speaker 1: been look and forward to having this conversation. I've mentioned
• 44:03
  Speaker 1: I'm a fan of your research. I have to figure
• 44:05
  Speaker 1: out a way with the new miffed rules, I'm only
• 44:07
  Speaker 1: getting some of it now. I have to figure out
• 44:09
  Speaker 1: a way to get back on the full Um, the
• 44:14
  Speaker 1: full plan. We'll talk about that afterwards. I have so
• 44:18
  Speaker 1: many questions, but I only have so much time. UM,
• 44:22
  Speaker 1: so let me let me choose the ones that I
• 44:24
  Speaker 1: think are really worthwhile. UM, tell us about your favorite
• 44:30
  Speaker 1: economic indicator. What do you think is most important? And
• 44:35
  Speaker 1: then I'll ask you what's most underrated? And what's what
• 44:37
  Speaker 1: what's most overrated? So I think the I M has
• 44:41
  Speaker 1: historically proven to be the highest correlation with GDP, so
• 44:46
  Speaker 1: I would say that from despite that is only every month,
• 44:49
  Speaker 1: it's a long time to go and wait for another
• 44:51
  Speaker 1: economic indicator. That's the definity at the top of the list,
• 44:54
  Speaker 1: of course, non fine payrolls and how many jobs were
• 44:56
  Speaker 1: creating and what the on plan right is doing is
• 44:59
  Speaker 1: a close I can in terms of the employment report
• 45:02
  Speaker 1: just has a wealth of information about what's going on
• 45:04
  Speaker 1: in the economy and what sextors are doing better, what
• 45:07
  Speaker 1: sextus are doing worse. So not the headline numbers, but
• 45:09
  Speaker 1: what's beneath the head I think there's more value. So
• 45:12
  Speaker 1: the headline has some value, but I think it has
• 45:13
  Speaker 1: more value underneath in terms of informing you about where
• 45:16
  Speaker 1: is the US economy going. And a third and finally indicator,
• 45:20
  Speaker 1: of course is the thing that we worry most about
• 45:22
  Speaker 1: at the moment, amy various indicators of inflation, specifically co PC,
• 45:25
  Speaker 1: which is the first preferred mention of inflation, because that
• 45:28
  Speaker 1: tells you are the indicators we spoke about first name
• 45:32
  Speaker 1: I S M unemployment, are they overheating? Do we need
• 45:35
  Speaker 1: more stimulus? Where are we in the business cycle? And
• 45:38
  Speaker 1: informing you about where you are in the cycle turns
• 45:40
  Speaker 1: out to be quite important. So from a pure macro perspective,
• 45:43
  Speaker 1: those we three areas and the three indicators that we
• 45:45
  Speaker 1: look most at. What do you think is an indicator
• 45:48
  Speaker 1: that people rely on too much and is probably overrated? Well,
• 45:51
  Speaker 1: I think that they. I mean there's a number of
• 45:54
  Speaker 1: things that people pay a lot of attention to. I
• 45:56
  Speaker 1: mean one area at least, the general is speaking where
• 46:03
  Speaker 1: people pay maybe too much attention, as jobless claims. Some
• 46:07
  Speaker 1: indicators like jobless claims are really derived of how many
• 46:11
  Speaker 1: people show up, which is what jobless claims measures. A
• 46:13
  Speaker 1: new jobless claims is how many people show up at
• 46:15
  Speaker 1: the unemployment office this week and ask for claims for
• 46:19
  Speaker 1: the first time. As that is that affected by weather,
• 46:22
  Speaker 1: is that affected by holidays? Many things drives to that.
• 46:24
  Speaker 1: But I mean the general trend and that is generally helpful.
• 46:27
  Speaker 1: But I still think that it does get a good
• 46:32
  Speaker 1: deal of attention, mainly because it's high frequency. But I
• 46:34
  Speaker 1: still think that it doesn't have anywhere near the amount
• 46:37
  Speaker 1: of wealth of information that you get in the employment report.
• 46:40
  Speaker 1: So I'm willing to wait for another month to see
• 46:42
  Speaker 1: where the economy is. Maybe it's just my long term
• 46:44
  Speaker 1: patience as an economy is relative to someone who is
• 46:47
  Speaker 1: managing money. So so let's talk about equities a little bit. Um.
• 46:51
  Speaker 1: You mentioned, uh, you look in the world as a
• 46:56
  Speaker 1: continuous cycle. Where are we in the mark cycle? Yeah,
• 47:01
  Speaker 1: so it's clear that first of all, the business cycle
• 47:04
  Speaker 1: is indeed getting old. The problem with that argument is
• 47:08
  Speaker 1: that the business side doesn't run on the clock. It's
• 47:11
  Speaker 1: not the case that after six years or ten years,
• 47:14
  Speaker 1: then the business side starts to die out. For the
• 47:16
  Speaker 1: business i ecle to slow down, you need some imbalanced
• 47:19
  Speaker 1: to roll over, and the normal three imbalances that starts
• 47:23
  Speaker 1: recessions and starts the business sidus will slow down and
• 47:25
  Speaker 1: therefore starts to have a big impact on equities. Is
• 47:27
  Speaker 1: either because we have too much consumption or because we
• 47:30
  Speaker 1: have too much capics meaning imbalances the consumption, imbalances in
• 47:34
  Speaker 1: capics or imbalances in financial markets. And if you look
• 47:37
  Speaker 1: at consumption at the moment, we don't really have much imbalance.
• 47:40
  Speaker 1: In the contrary, we really don't understand why consumption is
• 47:43
  Speaker 1: still on the more weak side. Likewise, with topics and
• 47:46
  Speaker 1: business fixed investment meaning private investment for companies, we don't
• 47:48
  Speaker 1: really have imbalances there either. And finally, for financial markets,
• 47:52
  Speaker 1: the big question, which essentially what you're asking about, is
• 47:55
  Speaker 1: do we have imbalances and equities to have imbalances in
• 47:58
  Speaker 1: rates to having busances in credit, or do we have
• 48:00
  Speaker 1: imbalances in effects. Generally speaking, I think the answer to
• 48:03
  Speaker 1: that is no, and I think that the fact that
• 48:05
  Speaker 1: we've got a huge fiscal tale with more recently suggest
• 48:08
  Speaker 1: that we should see solid GDP growth for the rest
• 48:10
  Speaker 1: of this year. We should see solid consumption growth for
• 48:12
  Speaker 1: the rest of this year. We should see solid capex
• 48:15
  Speaker 1: growth because capics also got incentivized by the designer of
• 48:18
  Speaker 1: the fiscal package to also grow continuously. So the answer
• 48:22
  Speaker 1: to your question is that we still think equities will
• 48:24
  Speaker 1: do well. We still think rates will slowly go higher,
• 48:27
  Speaker 1: the FED will gradually high rates. We think because of
• 48:30
  Speaker 1: all these problems we spoke about earlier with trade, because
• 48:33
  Speaker 1: of some of the issues generally on the reads, the
• 48:36
  Speaker 1: value of of assets in the U S. And we
• 48:38
  Speaker 1: do think the dollar will go down, but the generally speaking,
• 48:42
  Speaker 1: equities should continue to do well. The Peero show got
• 48:45
  Speaker 1: some adjustment more recently do the downside, so there's definitely
• 48:48
  Speaker 1: still more room for equities to rise from here, mainly
• 48:50
  Speaker 1: because the economy is not about to answer research and
• 48:53
  Speaker 1: if anything, the risks are that they can the economy
• 48:56
  Speaker 1: is about to overheat. So I heard trade wars are
• 48:59
  Speaker 1: a good thing and they're easy to win. I don't
• 49:01
  Speaker 1: recall where I read that, but I read that somewhere recently.
• 49:04
  Speaker 1: How how true is that? And what does the trade
• 49:06
  Speaker 1: war with China or a possible trade war with China,
• 49:10
  Speaker 1: what what might that mean? The risk from a market
• 49:13
  Speaker 1: perspective is really interesting because a trade war is putting
• 49:17
  Speaker 1: on essentially higher prices on either things that you import
• 49:21
  Speaker 1: or higher prices on things that you export if the
• 49:24
  Speaker 1: in this case, the Chinese retaliate. But think about what
• 49:26
  Speaker 1: that means. That means first of all, that if prices
• 49:29
  Speaker 1: of things that you import start to go up, and
• 49:31
  Speaker 1: if you don't know where they're going, then what does
• 49:33
  Speaker 1: the whole question become for corporates is well, what does
• 49:38
  Speaker 1: the playing feel look like in the future, What are
• 49:40
  Speaker 1: the prices of my inputs? What are the prices of
• 49:42
  Speaker 1: the products I'm selling? What kind of inputs can I buy?
• 49:45
  Speaker 1: And kind of substitute for things that might have gone
• 49:47
  Speaker 1: up because of terrorists? Coming in, So the uncertainty associated
• 49:52
  Speaker 1: with we don't know which kinds of terrorists are coming next,
• 49:56
  Speaker 1: and even if we do know the list of terrorists
• 49:58
  Speaker 1: that already are coming, we don't know what they italiation
• 50:00
  Speaker 1: will be. And all that is probably for companies, meaning
• 50:04
  Speaker 1: that they're holding back with a little bit with hiring,
• 50:06
  Speaker 1: holding back a little bit with investment as a result
• 50:09
  Speaker 1: of uncertainty. What does the playing feel look like for
• 50:11
  Speaker 1: me as I plan ahead as a corporate? So the
• 50:14
  Speaker 1: downside to trade wars really is that equities and particularly
• 50:18
  Speaker 1: equity names when it comes to airplanes, cars, soybeans, you
• 50:22
  Speaker 1: suddenly have very specific names in equities that benefit and
• 50:26
  Speaker 1: some who doesn't benefit. So from an equity perspective, it
• 50:29
  Speaker 1: makes sense that equities go down when trade wars come in.
• 50:33
  Speaker 1: But what's also important about that is that remember that
• 50:36
  Speaker 1: the size of terrorist is about fifty and total imports
• 50:40
  Speaker 1: in the US is about two point two trillion, So
• 50:42
  Speaker 1: the total magnitude of terrorists actually ratively small from macro perspective,
• 50:46
  Speaker 1: So that's probably why rates haven't moved. That's probably also
• 50:48
  Speaker 1: why and some says the dollar hasn't moved as much
• 50:51
  Speaker 1: simply because rates really don't move much because it's only
• 50:55
  Speaker 1: the macro economic conditions that would have to change for
• 50:57
  Speaker 1: race to move. So it makes sense in my view
• 51:00
  Speaker 1: in summary, that equities are not liking trade walls, whereas
• 51:04
  Speaker 1: you're not really seeing much movement on the rates front.
• 51:06
  Speaker 1: Meeting interest rates really haven't moved much because the macro
• 51:08
  Speaker 1: impact of terrifs is probably going to be racively small.
• 51:11
  Speaker 1: And you mentioned earlier that PE ratios are coming down,
• 51:15
  Speaker 1: which makes me ask, we're at pretty much record high
• 51:19
  Speaker 1: corporate profits. Is that sustainable? Why are profits so high?
• 51:24
  Speaker 1: How much of it should be credited to really low
• 51:27
  Speaker 1: borrowing costs. What do you see the future of corporate
• 51:31
  Speaker 1: profits are looking like over the next couple of quarters. Yeah,
• 51:35
  Speaker 1: Companies have become extremely efficient in so many ways since
• 51:38
  Speaker 1: the financial crisis, and we have seen significant amounts of
• 51:41
  Speaker 1: cost cutting, which has been a very important part of
• 51:43
  Speaker 1: why they have becomes so efficient, so across sectors in
• 51:46
  Speaker 1: the s increased efficiency in the form of cost cutting
• 51:51
  Speaker 1: basically making things more lean and mean and generally more competitive,
• 51:55
  Speaker 1: both domestically Newest but also globally have certainly benefited corporate
• 51:59
  Speaker 1: America tremendously. So a very important first angwer to your
• 52:01
  Speaker 1: question is that costs have come down and companies have
• 52:04
  Speaker 1: become more efficient. So looking ahead, of course now with
• 52:07
  Speaker 1: the tail wind of the Trump text cut that we
• 52:09
  Speaker 1: got in December for corporates, that's gonna boost earnings even
• 52:13
  Speaker 1: more so if we from the In fact, we just
• 52:17
  Speaker 1: saw that in in a lot of the early earnings
• 52:20
  Speaker 1: that have been released over the past few weeks makes
• 52:22
  Speaker 1: complete sense. Big surprise like I wasn't expecting a upside
• 52:26
  Speaker 1: surprise for Bank of America, or there's a hand the
• 52:30
  Speaker 1: financial seems to be doing well. A number of other
• 52:32
  Speaker 1: companies seem to um be doing much better than expected,
• 52:36
  Speaker 1: and a lot of that goes to the the new
• 52:39
  Speaker 1: lower corporate rate. Absolutely very because we just lowered the
• 52:42
  Speaker 1: corporate race to from thirty five at a high level
• 52:48
  Speaker 1: that we just had been struggling with for many years.
• 52:51
  Speaker 1: So in that sense, we've gotten into a situation where
• 52:53
  Speaker 1: corporates are both benefiting from being incredibly efficient and lean
• 52:57
  Speaker 1: and now also getting a huge tail wind from higher
• 53:00
  Speaker 1: profits and on top of that, of course repatriation and
• 53:02
  Speaker 1: incentivizing them to invest. So the key conclusion is earning
• 53:06
  Speaker 1: his growth to continue to be strong at least for
• 53:08
  Speaker 1: the rest of this year. Wow, that that's quite a statement.
• 53:10
  Speaker 1: All right, let me jump to my favorite questions. Uh,
• 53:14
  Speaker 1: these are what we ask all of our guests and
• 53:18
  Speaker 1: it creates a sort of interesting frame of reference when
• 53:21
  Speaker 1: we look across a variety of different people. So what's
• 53:25
  Speaker 1: the most important thing that most people don't know about you? Um? Well,
• 53:32
  Speaker 1: one very important secret to what I do is that
• 53:34
  Speaker 1: we have a team in India that actually produces all
• 53:37
  Speaker 1: the charts and all the work that I do. Business perspective,
• 53:42
  Speaker 1: this has been extremely efficient and extremely helpful. When I
• 53:45
  Speaker 1: go to bed every evening, I think about what should
• 53:48
  Speaker 1: the chat be, what should I write about tomorrow? I
• 53:50
  Speaker 1: send an email to the team in India, and when
• 53:52
  Speaker 1: I wake up and look at my phone and I
• 53:54
  Speaker 1: see the chat right there. In most cases it looks perfect.
• 53:56
  Speaker 1: In some cases I need to work a little bit more.
• 53:58
  Speaker 1: But when I get to the office is really right there,
• 54:01
  Speaker 1: ready to send out. And that's, at least from a
• 54:03
  Speaker 1: business perspective, something that has been incredibly helpful and very efficient.
• 54:08
  Speaker 1: That they work in a different time zone. Are these
• 54:10
  Speaker 1: are these things done? Are these economists, data analysts or
• 54:13
  Speaker 1: chart people or everything? Five people on our team and
• 54:16
  Speaker 1: they have master's degree in economics. We even have people
• 54:18
  Speaker 1: that have PSD in economics from the Daily School of Economics,
• 54:21
  Speaker 1: and they are incredibly helpful. So if they're listening here,
• 54:24
  Speaker 1: thank you very much. Guys. It's hugely appreciated what you
• 54:26
  Speaker 1: do every day. That that's what I did not know
• 54:29
  Speaker 1: that about you, and that's quite fascinating. Um, tell us
• 54:32
  Speaker 1: about your mentors who helped shape your career. So, I
• 54:38
  Speaker 1: mean your adviser, if on on the PSD thesis would
• 54:42
  Speaker 1: always be someone who is very important in my case
• 54:44
  Speaker 1: professor and Copenhagen called Nils Tigison. But when I came
• 54:47
  Speaker 1: to Princeton, of course I got hugely inspired by Ken Rogoff.
• 54:51
  Speaker 1: Also I didn't communicate much with Ben Bananke, but a
• 54:55
  Speaker 1: number of the prince and professors where just the way
• 54:58
  Speaker 1: that they spoke about things and the way that they
• 55:00
  Speaker 1: discuss things that most importantly very generally speaking. And now
• 55:04
  Speaker 1: I may offend someone in Europe, but in Europe a
• 55:06
  Speaker 1: lot of the PSD economics programs are fairly theoretical and
• 55:10
  Speaker 1: conceptual and live their own life in models that are
• 55:12
  Speaker 1: somewhat disconnected from the data, whereas in USPSD programs. The
• 55:17
  Speaker 1: effort is constantly to try to make it relevant. In
• 55:20
  Speaker 1: many cases you don't succeed, but at least you try
• 55:22
  Speaker 1: constantly to plug it into what is exactly the problem
• 55:25
  Speaker 1: that you see on your Bloomberg screen, on your Bloomberg website,
• 55:28
  Speaker 1: and how can I try to understand these things better.
• 55:30
  Speaker 1: So those people, including people also at the i m
• 55:34
  Speaker 1: F Mike Mussa and a guy called Fleming Lassen who
• 55:37
  Speaker 1: have been also very helpful, and of course at the
• 55:39
  Speaker 1: Deutsche Pink Pink each other and day before Atlanta, have
• 55:42
  Speaker 1: really been very informative for me in terms of how
• 55:46
  Speaker 1: do you succeed and how do you adjust whatever you're
• 55:49
  Speaker 1: doing to be more successful and refine your own skills
• 55:52
  Speaker 1: and constantly learn and get better and better at what
• 55:54
  Speaker 1: you do. What about investors who influence influenced your thought
• 55:58
  Speaker 1: processes about the markets? So the issue is that in
• 56:02
  Speaker 1: my job I have about four client meetings every year,
• 56:06
  Speaker 1: so I sit down and discuss the outlook and also
• 56:08
  Speaker 1: on conference calls with people every day constantly, both in
• 56:11
  Speaker 1: the US, Europe, Asia, Latin America, so I meet a
• 56:14
  Speaker 1: lot of very very smart people also people that are
• 56:16
  Speaker 1: not known at all. Some people want to fly under
• 56:19
  Speaker 1: the radar screen. So that's a number because they don't
• 56:22
  Speaker 1: They don't have any ambition in terms of getting even
• 56:26
  Speaker 1: on the front pit of any Wall Street journal of
• 56:28
  Speaker 1: that matter, on as a top story in Bloomberg. They
• 56:31
  Speaker 1: basically want to be very good at what they do
• 56:33
  Speaker 1: and they want to discuss these things that are going on.
• 56:35
  Speaker 1: But that's a number of people who shall remain unnamed
• 56:40
  Speaker 1: in the investment community who are extremely skilled, including at
• 56:43
  Speaker 1: a number of hedge funds, and of course most importantly
• 56:46
  Speaker 1: here in Manhattan and in London, who are really really
• 56:49
  Speaker 1: good at what they do, but just just have very
• 56:51
  Speaker 1: little ambition in terms of becoming public names. Totally understandable.
• 56:56
  Speaker 1: Let's talk about books. What are your favorite books, be
• 56:58
  Speaker 1: they finance non finance, fiction non fiction. What are you
• 57:02
  Speaker 1: reading now and what have you really enjoyed reading in
• 57:04
  Speaker 1: the past. Well, one book that humped me a lot
• 57:06
  Speaker 1: was Super Forecasting by Tetlow, who basically told you that
• 57:10
  Speaker 1: you gotta update your prize and update your forecast constantly,
• 57:14
  Speaker 1: which is also again in a a humbling experience, because that
• 57:17
  Speaker 1: is basically telling you that you've gotta revise constantly as
• 57:20
  Speaker 1: new information comes in what your forecast is. Sometimes it's
• 57:24
  Speaker 1: tempting for seal side analysts to just have a forecast
• 57:27
  Speaker 1: and stick with that for a long long time. But
• 57:30
  Speaker 1: as investors and again helping customers, think about what will
• 57:34
  Speaker 1: equities do well. I can't just walk around and say, oh,
• 57:36
  Speaker 1: equities will go up, and then play golf for twelve
• 57:38
  Speaker 1: months and come back and see if they went up
• 57:40
  Speaker 1: or down. I gotta have constant evaluation, constant thinking every day,
• 57:45
  Speaker 1: what is the reasons why I'm right? What are the
• 57:47
  Speaker 1: reasons that have come in today why I'm wrong? So
• 57:50
  Speaker 1: books around forecasting and books around what's happening on, how
• 57:54
  Speaker 1: do you refine your forecasting skills? It turns out to
• 57:57
  Speaker 1: be very very important. At least that's been very important
• 57:59
  Speaker 1: spy for me. Any of the books, anything else you
• 58:02
  Speaker 1: want to mention. Unfortunately I don't have as much time
• 58:05
  Speaker 1: to read the fiction as I really wanted to. But
• 58:09
  Speaker 1: I would say that that's the main thing that I've
• 58:11
  Speaker 1: been and and of course I spent a lot of
• 58:12
  Speaker 1: time reading newspapers and again Bloomberg stories and everything that's
• 58:16
  Speaker 1: going on, but it's not as much as I I
• 58:19
  Speaker 1: wish I used to read the Kicker Guard, which as
• 58:21
  Speaker 1: you know, is a very important Danius philosopher. But sure
• 58:24
  Speaker 1: I haven't done that then now for a little while.
• 58:26
  Speaker 1: But sometimes it is important to think really hard about
• 58:28
  Speaker 1: what is it that we do, you and I in
• 58:30
  Speaker 1: our finance industry, and think about what is it exactly
• 58:33
  Speaker 1: the psychology behind what we're doing, because it is really
• 58:35
  Speaker 1: not rocket science. It really is just stories that come around.
• 58:38
  Speaker 1: And as those stories come around, the question becomes how
• 58:41
  Speaker 1: important is this story? Why is this story getting so
• 58:43
  Speaker 1: much weight? And the stories come and go. Sometimes it
• 58:46
  Speaker 1: is important to lean back and think about what is
• 58:48
  Speaker 1: the story? And it's almost sounds like fiction, But what
• 58:50
  Speaker 1: is the story that we're telling each other at the moment.
• 58:52
  Speaker 1: What are the questions that we're asking each other and
• 58:54
  Speaker 1: those other things that get the most attention. That's that's fascinating.
• 58:58
  Speaker 1: One of the things that I'm was impressed with in
• 59:02
  Speaker 1: the Tetlock book is questioning what your assumptions are and
• 59:08
  Speaker 1: questioning what you already know that might apply to figuring
• 59:11
  Speaker 1: out um some sort of forecast. As you know, and
• 59:14
  Speaker 1: some of your former guests have also said that the
• 59:17
  Speaker 1: most significant skill you can have as a market participant
• 59:21
  Speaker 1: is that you gotta be willing to change your mind. Absolutely,
• 59:25
  Speaker 1: and if you just stick to a view this is
• 59:27
  Speaker 1: so tempting, both as a sales side analyst and also
• 59:30
  Speaker 1: on the buy side. Stick to you that something is
• 59:31
  Speaker 1: going up, It's gotta go up, it's gotta go up.
• 59:34
  Speaker 1: If it's not happening, you've gotta back down and say
• 59:36
  Speaker 1: this is not happening. I gotta revise and I gotta
• 59:38
  Speaker 1: change my mind why this is not going on? So
• 59:41
  Speaker 1: what excites you right now? What are you looking at
• 59:43
  Speaker 1: in the world and saying this is just amazing, Well,
• 59:47
  Speaker 1: one of the other than inflation, which we've spoken about
• 59:49
  Speaker 1: now at great length. And I do still think that
• 59:52
  Speaker 1: this very broad concept of what is it that we
• 59:55
  Speaker 1: just have been through? If you really take a cup
• 59:58
  Speaker 1: of coffee and sit in your chair, as you all
• 1:00:00
  Speaker 1: ways say, and think hard about what is it that
• 1:00:02
  Speaker 1: we've been through in terms of what central banks have
• 1:00:03
  Speaker 1: been doing? What is the endgame to this? And I
• 1:00:06
  Speaker 1: know it sounds very fluffy and like hot air arm
• 1:00:09
  Speaker 1: wavy stuff to say, what do you mean by endgame?
• 1:00:11
  Speaker 1: But how do we get out of easy money? How
• 1:00:14
  Speaker 1: can they fit race interest rates? What are the implication
• 1:00:17
  Speaker 1: of these distortions that were made by negative insust rates
• 1:00:19
  Speaker 1: in the your area, which should never have happened, that
• 1:00:22
  Speaker 1: created an enormous amount of distortions. How can we reverse this?
• 1:00:25
  Speaker 1: And can we just snapping around and say, okay, you
• 1:00:28
  Speaker 1: know what, we'll just go to positive industrates and we'll
• 1:00:30
  Speaker 1: just stop doing quee or will there be more profound implications?
• 1:00:33
  Speaker 1: So I spent a lot of time at a very
• 1:00:36
  Speaker 1: thirty feet level thinking about what what are the implications
• 1:00:39
  Speaker 1: in terms of the exit? And how should I think
• 1:00:41
  Speaker 1: about acid classes? What was docs do? What race do?
• 1:00:43
  Speaker 1: What will effects do as we get closer to the exit,
• 1:00:45
  Speaker 1: when the easy p will be raising race next year
• 1:00:47
  Speaker 1: and the BOG ultimately also will be raising rates. What
• 1:00:49
  Speaker 1: would the new economy, meaning what would the economy and
• 1:00:52
  Speaker 1: the global financial market picture look like on the other
• 1:00:54
  Speaker 1: side of that exit. That is a really difficult question
• 1:00:57
  Speaker 1: and quite fascinating. Tell us about a time time you
• 1:01:00
  Speaker 1: failed and what you learned from the experience. So this
• 1:01:05
  Speaker 1: is really tough. But I mean anyone of course, who
• 1:01:10
  Speaker 1: not only in the financial service industry, but anyone who
• 1:01:15
  Speaker 1: works hard and works in what you and I do
• 1:01:17
  Speaker 1: very well. Of course, at some point realize, well, there's
• 1:01:19
  Speaker 1: only twenty four hours a day. So you come to
• 1:01:22
  Speaker 1: the conclusion, am I spending too much work on the
• 1:01:25
  Speaker 1: right things? Should I be working as much as I do?
• 1:01:27
  Speaker 1: Should I be working harder? So everything that has to
• 1:01:30
  Speaker 1: do and what I have done in my career with
• 1:01:34
  Speaker 1: the right work life balance. And I have been through
• 1:01:39
  Speaker 1: a number of different jobs who have seen a number
• 1:01:43
  Speaker 1: of different things. At the O c D and the
• 1:01:45
  Speaker 1: I m F, things were relatively slow paced and you
• 1:01:48
  Speaker 1: had a lot of time to think about things. So
• 1:01:49
  Speaker 1: there's a different set of problems in terms of how
• 1:01:53
  Speaker 1: you spend your time and what you do. For the
• 1:01:56
  Speaker 1: last two or thirteen years in the job I have today,
• 1:02:00
  Speaker 1: it's tempting to say this guy is the limit. I
• 1:02:02
  Speaker 1: can travel around the world and do something twenty five
• 1:02:04
  Speaker 1: hours a day, But I would say the failure would
• 1:02:08
  Speaker 1: be and what I also have done myself is that
• 1:02:11
  Speaker 1: if you spend too much time on your job and
• 1:02:15
  Speaker 1: too little time on other things, which can be and
• 1:02:18
  Speaker 1: I'm not the only talking about family and and spouse
• 1:02:21
  Speaker 1: and children likewise, but also on friends and sports and
• 1:02:25
  Speaker 1: doing things that are fun. It's very important and one
• 1:02:28
  Speaker 1: very important lesson that has taken me some time to learn.
• 1:02:31
  Speaker 1: Is that you've gotta have a balanced life. It's not
• 1:02:33
  Speaker 1: only a balanced diet, but also a balanced life in
• 1:02:36
  Speaker 1: terms of what do I think is fun? Because I
• 1:02:38
  Speaker 1: love talking about inflation, on employment and markets. But I
• 1:02:41
  Speaker 1: can't do that like you and we have these conversations often,
• 1:02:44
  Speaker 1: you and I, but we can't do that like all
• 1:02:46
  Speaker 1: day long. You've got to do other things and sometimes
• 1:02:49
  Speaker 1: you also gotta go and I play soccer once a
• 1:02:52
  Speaker 1: week on Brooklyn Bridge Pre five. That was my next question.
• 1:02:55
  Speaker 1: So what do you do for fun? I tried to
• 1:02:57
  Speaker 1: have fun with some good friends and go and do
• 1:03:00
  Speaker 1: something else just freshen your mind. You're playing full contact
• 1:03:04
  Speaker 1: soccer once a week. Yeah, so it is. We're completely hopeless,
• 1:03:08
  Speaker 1: but it is fun and where we played to win,
• 1:03:10
  Speaker 1: I should say that, But but it is to get
• 1:03:13
  Speaker 1: some exercise, to hang out with some good friends and
• 1:03:15
  Speaker 1: get to do something else that I think is a
• 1:03:17
  Speaker 1: lot of fun other than just otherwise. I mean, I'm
• 1:03:21
  Speaker 1: not kidding. I get emails seven I wake up in
• 1:03:23
  Speaker 1: the morning. I respond to emails from people in Asia
• 1:03:25
  Speaker 1: and Europe. We want to discuss things. Sometimes I just
• 1:03:27
  Speaker 1: respond with a sentence or two. But that constant flow.
• 1:03:30
  Speaker 1: You could look at your phone literally seven and that's
• 1:03:33
  Speaker 1: just no end to to how many people want to
• 1:03:36
  Speaker 1: talk about whether inflation is going up, whether the fit
• 1:03:38
  Speaker 1: were high rates, or whether the dollar is going down.
• 1:03:40
  Speaker 1: So for a recent college grad or a millennial came
• 1:03:43
  Speaker 1: up to you and said, I'm thinking about pursuing a
• 1:03:46
  Speaker 1: career in economics, what sort of advice might you give them?
• 1:03:49
  Speaker 1: I would say, which would be general career advice, not
• 1:03:53
  Speaker 1: only for economics. You've gotta get good at something that
• 1:03:57
  Speaker 1: you are just really good at. Once you're really good,
• 1:04:00
  Speaker 1: like you at investing, once you're really good at whatever,
• 1:04:03
  Speaker 1: if it's playing saga, Once you're really good at a
• 1:04:06
  Speaker 1: certain type of economics, then you just got to figure
• 1:04:08
  Speaker 1: out how can I translate this skill into something that
• 1:04:12
  Speaker 1: I both find its interesting but also someone else might
• 1:04:14
  Speaker 1: find valuable. I could sit in my chair and close
• 1:04:17
  Speaker 1: my door and say, oh, I'm so smart, you can
• 1:04:20
  Speaker 1: ask me any question. But if I didn't get out
• 1:04:22
  Speaker 1: on the dance floor myself and try to reach out
• 1:04:25
  Speaker 1: to people and talk about things and discustings and have
• 1:04:29
  Speaker 1: an approach of saying, let me be open minded to
• 1:04:31
  Speaker 1: what it is that I'm good at and how I
• 1:04:33
  Speaker 1: can maneuver at in a changing world, then I wouldn't
• 1:04:38
  Speaker 1: be doing well. So the answer to your question is,
• 1:04:41
  Speaker 1: as as again difficult as it is to respond directly
• 1:04:44
  Speaker 1: to that kind of discussion, is still find out what
• 1:04:48
  Speaker 1: you're really good at and do that really, really well,
• 1:04:51
  Speaker 1: and then find out who can use the skill. How
• 1:04:53
  Speaker 1: can I get this skill translated into something that I
• 1:04:55
  Speaker 1: think it's fun for the rest of my life, and
• 1:04:57
  Speaker 1: also that others might be willing to even pay me
• 1:05:00
  Speaker 1: a salary form? And then lastly, what is it that
• 1:05:02
  Speaker 1: you know about the world of markets, economics, investing today
• 1:05:08
  Speaker 1: that you wish you knew twenty plus years or so
• 1:05:11
  Speaker 1: ago when you first started your career. I think that
• 1:05:14
  Speaker 1: they on the financial crisis, I wish I had understood
• 1:05:19
  Speaker 1: better in two thousand eight and nine the significant importance
• 1:05:24
  Speaker 1: of what the central banks were doing. In other words,
• 1:05:27
  Speaker 1: asset prizes for the last since two thousand nine, for
• 1:05:30
  Speaker 1: the last nine years in particular, including also equities, but
• 1:05:33
  Speaker 1: rates in particular have been driven very, very importantly by
• 1:05:37
  Speaker 1: central bank action, which is why this issue of the
• 1:05:39
  Speaker 1: exit becomes so important. So I wish that I had
• 1:05:43
  Speaker 1: spent less time, if you will, on my old school
• 1:05:46
  Speaker 1: economic sex books and has spent more time reading literally
• 1:05:49
  Speaker 1: Rokov's books. This time is different because this time is
• 1:05:52
  Speaker 1: not different. This was exactly the same thing. What's difference
• 1:05:55
  Speaker 1: was that the sheer size of easing, the sheer size
• 1:05:58
  Speaker 1: of money printing that central banks were winning to throw
• 1:06:00
  Speaker 1: at the system just happened to be absolutely, by far
• 1:06:03
  Speaker 1: the most important driver of stock prices, interest rates, and
• 1:06:07
  Speaker 1: exchange rates for a very very long period. And that's
• 1:06:09
  Speaker 1: what we're exiting now. And that's why that issue of
• 1:06:13
  Speaker 1: the power of what central banks did, it turned out
• 1:06:15
  Speaker 1: to be a much more significant drive off markets, and
• 1:06:18
  Speaker 1: I wish I had appreciated that earlier. Quite quite fascinating.
• 1:06:22
  Speaker 1: We have been speaking with Torsten Slock. He is the
• 1:06:25
  Speaker 1: chief international economist at Deutsche Bank Securities. If you enjoy
• 1:06:30
  Speaker 1: this conversation, be sure to look up an inch or
• 1:06:33
  Speaker 1: down an inch on Apple iTunes or overcast Bloomberg dot
• 1:06:37
  Speaker 1: com and you could see any of the other two
• 1:06:39
  Speaker 1: hundred or so such interviews that we've conducted over the
• 1:06:43
  Speaker 1: past four years. We love your comments, feedback and suggestions
• 1:06:49
  Speaker 1: right to us at m IB podcast at Bloomberg dot net.
• 1:06:54
  Speaker 1: I would be remiss if I did not thank the
• 1:06:56
  Speaker 1: Crack staff who helps to put together this podcast each week.
• 1:07:00
  Speaker 1: Michael bat Nick is my head of research. Taylor Riggs
• 1:07:04
  Speaker 1: is my booker, producer Medina Parwana is our producer engineer.
• 1:07:10
  Speaker 1: I'm Barry Ritults. You've been listening to Masters in Business
• 1:07:14
  Speaker 1: on Bloomberg Radio.