Growth, Employment and Inflation Cycles With Lakshman Achuthan

Published Aug 1, 2024, 10:22 PM

Barry Ritholtz speaks to Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. Achuthan met his mentor, Geoffrey H. Moore, at Columbia University in 1990; they formed ECRI with Anirvan Banerji in 1996. He serves on the board of governors for the Levy Economics Institute of Bard College. In 2004, he co-authored Beating the Business Cycle: How to Predict and Profit From Turning Points in the Economy. 

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On this week's podcast, I sit down with Lakshman Achuthan. He is the co founder of EKRI, the Economic Cycle Research Institute. I've known Blacksman for I don't know, fifteen years, almost twenty years, and I've always found his take on the world of economics and recessions and inflation and employment just fascinating and unique and different from what everybody else does. It is very specifically data driven, based on a model that was originally co developed by Professor Jeffrey Moore, And I don't know how else to describe it other than you're looking at a data You're looking at leading indicators of different lengths as well as coincidental indicators, and you're trying to figure out when cycles turn. Hey, anybody can predict the trends, just stay with it until it ends, but catching the turns is much more challenging. They've put together a tremendous track record over the past thirty years, better than just about everybody. Nobody's perfect, but they've gotten more of the turns and more of the major cycle turns than anybody else, and that's why their research is read by not just big investment houses and companies, but sovereign banks and governments around the world. I thought this conversation was absolutely fascinating, and I think you will also with no further ado, my discussion with Lakshman at your thon Lasman. Welcome back to Bloomberg.

Well, it's wonderful to be back in congratulations on this series.

Over all these years, ten years you were in the first year's shows, which I have to be honest, are pretty unlistenable. I go back and listen to them and you could tell them just like a poppy dog caffeine and adrenaline. But thank you so much for coming back, and we'll do this the right way this time. So let's start out with a little bit of your backgrounds. I had already graduated college. In grad school, you were doing some work at Columbia with Geoffrey Moore. Tell us a little bit about the sort of research projects you were doing back in the nineteen nineties.

Right, So thank you and pleasure to be here with you, and thanks for the question. I had the good fortune or interesting timing of starting with doctor Moore right when the nineteen ninety ninety one recession was happening. So it's very interesting and what my whole life's work is around business cycles. So this was extremely interesting to see in real time rather than reading it in a history book. And what I found so interesting about his work was it was applied economics and it brought some cohesiveness to the way economies work around the world, free market oriented economies. Because I'd done some earlier traveling around Europe, I saw all these different economies and different currencies, and I wondered, how does this all fit together? And he had kind of a framework for it, the makings of one, which I found very interesting. One key thing we were doing back then was how or if cycles are transmitted internationally.

That was a big aspect of what sort of cycles business cycles? How are business cycles transmitted from country to country?

Yeah, so if Europe goes into recession, what's the impact on the US or vice versa, and or Japan or these were all the big economies then, and how do they get transmitted? What are the impacts we have? How does it? You know, what cycles are there that we all are participating in around the world, and which ones are slightly more local to specific economy, so that's a big issue.

Can we assume trade is a big impact into those as a transmission mechanism or is it more nuanced than that. It's always more nuanced.

But trade is a big one. Trade is a big one. Markets are a big one, and a lot of people take their queue from what's going on in the US. So there's an outsized impact of the US market globally, even in local economies around the world. And it's very much in the goods and trades area, where we've all taken little spots in the manufacturing floor, and so we're linked that way, and for better or worse, can impact us. And meanwhile, our domestic economies may be doing something different.

So everybody thinks of the dollar as our exorbitant privilege, but you're implying US stock markets are really a giant exorbitant privilege to the US. It is part of what drives the global economy.

Yes, and here i'm you know, I work with a lot of different We at Equy work with a lot of different users of our material and so to keep it simple, some are investment managers and some are c suite kind of business managers, and on the investment management side, even if you're an investment manager abroad, you're going to have probably.

A decent sized investment in the United States.

Market, and that's one of the factors that goes into the big mix. There's also all kinds of other things in the mix, but transmissions of cycles internationally was a key thing, or early on, I think one of the bigger things that's critical today that we were working on then was the relationship of really three major aspects of the economy from a cyclical perspective. Their cycles and growth, which can be in extremes when they contract, can be business cycles, recessions and expansions. There's cycles in employment which are related but distinct. They're actually identifiable in different cycles in employment. And there's a third cycle, a third aspect which is cycles in inflation. And being able to see that just to understand the lay of the land of cycles and free market oriented economies is a huge thing. Just being aware that that's the pool that we're all swimming in is really important forgetting at some of the nuances of what's going on in the economy. So those understanding those three key aspects of the economy and not forcing them, and our process doesn't force them to directly relate to one another, gives us a great deal of flexibility in understanding what's happening growth, employment, and inflation. If you have a handle on those three aspects, you really understand what's going on in the economy. I think you. I think, well, I don't know that really really at the end there's stuff I still don't know, But I think you have a pretty good handle on the nuances, like how can it be that one's going up and the others going down? You know, because you have to tell the story what's happening of what you're seeing. Understanding that these three cycles, which are related but distinct in and of itself, is a big leap forward in that understanding.

It was kind of fascinating in twenty twenty two, and to a less degree twenty three watching the kind of prior generation the old school nineteen seventies economists get the growth, employment and inflation picture completely wrong. It seemed like they defaulted back to the nineteen seventy three seventy four cycle and had a hard time. We were talking earlier about the Paul Graham quote all experts or experts in the way the world used to be. But you know, when people come out, probably most famously Laurence Summers, you need to have unemployment to shoot up to ten percent to kill inflation. Turned out that wasn't the case, wasn't.

Well, no, it's not the case. And again it's because these cycles, while related, are distinct. There's more inflation cycles than business cycles. For example, probably a little fewer employment cycles that inflation cycles. Those will match up a bit more to business and growth cycles. But even allowing or understanding that these things can go in different directions is critical. Twenty two, twenty three, twenty four. It's very interesting because first let's remember that there was a huge, massive inflation cycle upturn, right it's in twenty twenty.

Biggest one we've seen, much bigger than the one the financial process.

And one of the things just even forget about forecasting or saying what's going to happen. One of the things that's critical to understand is that inflation is cyclical. I know those are easy words for to say and talk about on this program, but fundamentally a lot of models are not built that way, a lot of policy is not driven that way. In fact, you could still see the antecedents of that today in the markets and the way people are thinking, Hey, inflation's coming down. Yeah, sure, because it went to the moon, and yeah it's coming down from the moon. Okay, so we could agree on that, But does it just keep going down? How do you know? Does it go down and stay flat at your target?

Yeah?

I don't know where have you seen that happen before? If you study inflation over decades and have a cyclical vantage point on it, what you'll see is that it doesn't go down to some number and hang out. It likes to cycle. It likes to go up, and it likes to go down. And the odds, therefore, in my mind, of it going down and hanging out at some prescribed number are pretty low. And so therefore we look at leading indicators of the inflation cycle. Future inflation gauge is what we call our leading indicator, and it tries to tell us is there going to be a turn? So we watch for that in a very simplified way.

That's what we're doing. Cycles. Let's look at the twenty twenties, but within the context of what came before the twenty tens. The FED talked pretty continuously in the prior decade about the challenge of getting inflation up to two percent. We were in a disinflationary environment, sometimes a deflationary environment around a lot of the world. Interest rates had gone negative, and that decade seemed to be our risk is now deflation like Japan. That's what we have to be on guard. Suddenly the decade flips, the pandemic starts. The Cares Act, the first one was the biggest fiscal stimulus since World War two, ten percent of GDP, The whole regime changes, and now we're off in a completely different cycle. Or is that just making it too simple and easy.

No, something has changed. I let's agree on that. Something happened. Something happened, Okay, But look, if we're going to talk about the twenty ten's, in a way, what you're dealing with is there was a bit of a freak out after the financial crisis.

Right, So we talk about the previous decade for context, you got to look at.

The there's a there's a history thing. Yeah, this history thing. So in April of twenty twenty, there was a G twenty meeting in London and the primary concern was depression. Right, Okay, I mean, that's what the main headline was. And so and actually we were beginning our business cycle recovery right around then. It was starting. It was going to start in the summer. But nevertheless, the powers that be were focused on depression and they had it was almost like you don't let any crisis, good crisis, go to waste that quote, right, So here we have of massive stimulus put in in all these different programs, and we go off on this spending spray.

And it wasn't just us, right, it was around the world.

It was around the world, and in particular in China, where I love the statistic. In three years from eleven twenty eleven to thirteen, they poured more cement in China than the United States did in the entire twentyth century, right, I recall that, which is insane.

But that's the fascinating thing about the twenty tens was that while Asia and China in particular were engaging in a massive fiscal spend, there was austerity in the UK, there was week spending in Europe and the US. It was pretty much all monetary, no fiscal.

All monetary, no fiscal. So you have the stalemate or whatever logjam in Washington. I agree that you have monetary the lift is being done on the monetary side of policy. But the result of this whole thing, and now I'm I'm painting in broad brushstrokes US inflation services inflation is actually positive for much of the decade. It's really goods disinflation, which is ripping stuff down to which monetary policy is saying, oh, you know, we're gonna somehow combat this with more stimulus or easiness or whatever. And it doesn't really work that way, right, right, but it inflated some things. Right.

If low rates weren't the cause of inflation, well, why would you think high rates are going to impact You know, there's got to be some causality in between the solution and the outcome.

And so we have this, We have this China price being set. We have the supply chains being optimized for that as opposed to robustness, which came back with a vengeance once things went off the rails with the supply chains when COVID hit. So with I mean, I'm skipping over a lot of this qy kind of stuff that we were really mired.

In that quantitative easy We now have the opposite of a quantitative titan.

Well, to a degree. We have a little bit of it. We'll see how far it goes. It was very fascinating. I'm sorry, I'm jumping around here. No, it was very It was very fascinating because Japan the other day the Bank of Japan.

Raised rates for the first time in seventeen years.

Okay, so it's a big deal, right, I mean, it was a minuscule rate rise, But and they're doing this because they have a little bit of inflation, which they haven't seen in a long time, and so they're like, oh, okay, we're going to respond to that, but they actually can't. It's a paper tiger. They can't really raise rates because the country is so indebted that they can't service any higher rate.

So they've been the post of child to the argument, who cares about deficits because they've been running deficits for forever, in part because of their demographic problems, rescued in large part because they've been an exporter since the end of World War Two?

Yeah, can you just print money and run deficits of very large sizes forever? And to many of us, we would say, well, it doesn't sound like.

That could work, But you're pushing it. And yet since I graduated college in the nineteen eighties, all I have heard is if with the US runs big deficits, well that'll be the demise of the dollar. Inflational run am uck, you'll crowd out private capital. No will leend money to Uncle Sam. And all the things that I have been told are the manifestation of deficits. None of them have come true. At a certain point, I think perhaps something goes wrong. But after being wrong for fifty years, it kind of makes me look at the people warning about deficits and saying, I don't know, You've had half a century to get this right, and everything you've said has been false. Why should I listen to you today? Well, this time was serious. Yeah, it's weird.

It's a really interesting question. So post GFC, we ran up the debt towards ten trillion, maybe just under ten trillion, and then post COVID we're north of thirty right in the US right, so who knows? I don't know.

Could we do sixty?

I at this point, I don't know.

The thinking is at some point eventually I remember the weight of that. You're old enough to Remever, now I'm sorry I'm.

So sorry for the younger listeners. But I got to go back even further to President Clinton's Bill Clinton's first term.

When do we balance the budget? Was it the first term?

Towards the end it says in the second term he got into surplus. But in the first term he comes in. I think he's got he's got the whole thing, right, he's got the full hand, right, he's got a full house, he's got the Congress and Senate him. And he's in there, and they're going to go to town. They got programs, and the bond market says, no, you don't and raises raise long term rates, and they and Jim Carville very and he comes back. He says, you know, look, I would have I would have wanted to come back as the president, the pope, a four hundred hitter in baseball. But actually, now you want to be a bond the bond market. It's the most powerful thing.

I want to be reincordinated as the bond Madler. It's such a great.

So do the vangilantes come back. We'll see. I don't know.

It's really quite a fascinating story. I'm not necessarily a member of either the fiscal hawks or the m MTS. I think both extremes in any circumstance, raised questions. But I have a hard point getting past all the forecasts about here are the terrible things that are going to happen from the eighties. Yeah, and if nothing happens in forty years, well kind of it makes me say, all right, we have to break this down to first principles and figure out why are deficits problematic? How do the negativities manifest themselves? And how can we check if we're right or wrong? What's the line in the sand that says, uh, we got this right or we got this wrong.

You have a lot of different levers being pulled, with a lot of different frameworks on how the economy runs and works. Now, to our great benefit, we're in a in economies for the most part, that are dominated by free market oriented activity, which has inherent in it a very Darwinian type of regulation. This is that I'm talking about, Like, why do economies accelerate and decelerate? You know, so before we had policymakers, before you had the FED, you still had cycles. Okay, it's not like cycles are new, and it's not like cycles didn't turn up and down without policy intervention.

They did.

So there is a mechanism under there that is kind of optimizing or penalizing decision making. And when we look at forecasts that are made, right, what you're really doing, I think it's not so much. Hey, I think it's going to be one and it said it was I right or wrong? Right, that's I don't think. I think that's kind of a fool's game. It's managing risks. What is the risk that things are going to go the other way than what everybody's thinking. Because as a decision maker, it's easy enough to go with the crowd. You know, it probably feels less risky everybody else is doing it whatever. The interesting and tough thing is when you deviate from the crowd.

Right, When you deviate from the crowd, this career risk when you're wrong with the crowd. All right, I was wrong, but so is everybody else correct?

And so but now let's take this to an economy or a business, so it's policy or private business decision making. I think for an economy theory, you want this to be healthy, strong, growing, improving quality of life, which probably means not crazy inflation, but decent growth. Which is going to be related to productivity growth on some level. And so how do you achieve all of that? Well, one way to move towards that is to smooth out the cycle a bit. Okay, Booms and busts are very.

Very freaky, right. They disruptive, They scare you right.

On the one hand, you're like, the sky is falling, I got a baton down the hatches. That's that's very expensive and disruptive. On the other hand, when you're in a boom, you start taking pretty crazy risks, right because you say I'm going to the fear of missing out kicks in and you start to really overextend yourself.

And by the way, we saw that at the end of the nineteen nineties, the eighty two to two thousand cycle. We certainly saw that in a different asset class in the two thousands with houses and mortgages. And then the question is are we seeing that today when we look around at tech and AI and things that we think are going to change the future. Have we gotten into that fomo things are out of hand?

Face? I think so, because let me just tell you the story of our indicators over the last couple of years. Because that sets steady answers this question in a way. So the indicators, first off, they shoot up in twenty twenty, right, so we see the short and nasty short recession we were writing about, right, and so we get that correct, and there's a lot of hand ringing that we all felt later in twenty twenty and twenty one.

I'm not denying.

Any of that. The indicators don't feel any of that, right, They're just we're moving to the upside, and so they're directionally giving us this upside tilt in the way that we're looking.

At risk separate from the way people experience it, which is after any sort of break or crash or even short reception, there's that PTSD that follows. In fact, we were talking earlier about the GFC in eight oh nine, I have a vivid recollection as talking to people in twenty ten, twenty twelve, as late as twenty fifteen, still talking about I'm still waiting for the other and shoot a drop.

It manifested even I think, you know, maybe in order of magnitude or post COVID from what you just described.

People did not believe the rally off of the March life.

So two big things happen one preceded COVID. I'm just talking numbers here. It's not nothing else but legal migration kind of round to a halt during the Trump administration. That runs about a million people a year. So over the course of four years.

We're not talking Mexican border. We're talking about legal immigrants with a green card and the right to work.

It's about so you lose on the order of four million people out of the workforce. I mean, look, we have a big workfurse, but it's noticeable number, right, And then you have COVID, and regardless of the shutdowns in this and that a lot of people didn't come back to the workforce. You lose another serious hunks.

So a million people all I'm describing.

Look, I am i am very empathetic to the human cost here, but I'm just saying from an economic counting the people who are in the workforce point of view, you have a huge constriction of the labor supply. At the same time that PTSD and the impulse that we have as a country or people community is that we want to help, we want to do something. So the amount of dollar support given to the economy post COVID is just mind boggling. Okay, you know Senator Everett Dirkson used to quip about a billion here, a billion there. Now we're talking real money. We're talking trillions right here, trillions there. I think it's on the order back of the napkin. I think it's on the order of about seven trillion dollars dumped on the economy when you have a constrained labor supply by a serious amount.

By the way, to put some flesh on those bones. Karres Act one was two trillion dollars, which, by the way, was under President Trump. The Kars Act two wasn't quite as large. I want to say, it was about eight hundred billion. Yes, stimmy checks. All of these things also under Trump. And the fascinating thing about those that hit the economy immediately wasn't spread out. Then President Biden comes in. Kars Act three was another trillion, then spread out over the next decade, the Infrastructure Act, the Inflation Reduction Act, Semiconductor and Chips Act, Ships and Science and then there was one other. But those were all those four things were spread out over a decade. So they're still hill winds.

They're actually still hitting now. I mean when we look at one of the Now I'm going to get in the weeds for two seconds. One of the cycles, because we look at many cycles on growth. So one of the cycles we look at which we can see and track is non residential construction in the United States, and so that's cycling down. The leading indicators are collapsing. The actual coincident indicator is turning down, and it just does. The coincident index, which is the target, just does a hockey stick in August twenty two, because I understand that these fiscal infrastructure accidents and Chips acts are going to come out over time, but private sector also jumps on that. Right, They're like, we're going to get in on this, and we want we want to we want to have access to this, so we'll put in some you put in some All of that starts back in the fall of twenty two. You see a cyclical impulse, which is to the downside. I mean, look, leading indicators of the economy turned down hard and twenty two into twenty three, they were completely consistent with an outright recession.

You had, Oh yet rates go up five hundred and twenty five.

Base even before the rate hike though, oh really, before the rate hike.

Yes, so from it again, and let's call it March twenty twenty two, something like that.

So before that you're seeing the indicators already, Wan, but you had.

A lot of jaw boning. There were expectations that rates wouldn't go up. Yeah, people, some people believed that. Some people didn't. The market clearly anticipated it. They were a little late on the rates up. The market was late on the rates up compared to the leading indicators of inflation. They were, they were leading indicators of inflation, went up end of summer into the.

Fall, and the markets started in twenty one. Yeah, and markets started to move later and towards the end of twenty one.

That's right, that's right. And then twenty two bad year for both stocks and bonds.

That's putting it mildly. That has a nasty year for bonds, But okay.

Unusual by the way that you had stocks and bonds both down double digits. I don't think we say that for forty years. Eighty one eighty two was the last time we saw that.

Yeah, that's not that's not your typical thing. It's hard to run a system with that as a likelihood. And I think that's why a lot of people got tagged then understandably, But the point is, when you have that much foam on the runway, that's a lot of phone. Because we didn't even talk about the Central Bank earlier on for the you know, before they started to tighten, they were very very comminative. So when you have that much foam on the runway, it was very different than what we saw in other economies.

Around the world.

And so you you saw GDP actually contract for a couple of quarters and twenty two, but jobs did not go negative. In order to have a recession, you need to see output and employment going negative along with sales and income, and so those conditions did not present themselves. There's been a tug of war, I think, going on for much of twenty three between cyclical impulses to the downsign and foam on the runway pushing to the upside.

Saying, combine with what you were hinting at earlier, which is a labor force that's arguably four to six million bodies.

Short, bodies short, and so you would have employers literally if you could walk and talk, you got hired. And now I think people are a bit more picky.

Although you still hear some companies talk about labor warehousing. Yeah, because if they have growth, right, labor hoarding and labor warehousing. If you're expecting growth, you don't know if you're gonna be able to have the bodies to execute it. You hire sooner rather than later.

And hiring and firing is very disruptive for a business. So if they could, if they could see over the valley and hang on to people, they try to do that. So you see when you look inside of the different levers that employers can pull, work week temphires, part time versus full time, all these different things that employers can do, a lot of them are marginally you know, they're moving down. They have been moving down, but they've fallen short about right firing because, as you say, if things firm, I don't want to be scrambling to find someone to work. And there was a little bit of a line here. The big businesses were able to hire people. There was a smaller businesses that had a really, really tough time and they have PTSD today where they're very reticent to let people go. Again, you've got slower jobs growth, but positive jobs growth. So in the tug of war between the cyclical impulse down and the foam on the runway. We're staying out of recession so far. Now. Meanwhile, we talked about the different cycles. Meanwhile, the inflation cycle downturn which has been going on and is projected to continue and get towards two percent and hang out there. That's not cooperating, right, That has stalled out our future. Inflation. Gage are leading indicator of inflation has come down and it's gone sideways for almost a year, stops going down. So very consistent with this headline kind of statement of sticky inflation without getting in the weeds of what's what in there. Overall inflation is not reducing the way it's supposed to do, and that could be a problem. I think that's going to be a problem this year.

So let me challenge or push back on that a little bit. In the twenty tens, we couldn't get inflation up to two thousand. We had a very punk post crisis recovery, which, by the way, is not a typical following of financial crisis. You tend to have a weakish recovery. Combine that with mostly monetary hardly any fiscal stimulus following the financial crisis, so that's the original framework that we came into this with. And then Roger Ferguson, the former Vice Chairman of the Federal Reserve, had this delightful column he wrote, maybe it was foreign affairs. I don't remember where I saw it. The two percent target is hilariously made up, and it traces its roots to a live television show that it was either Australia or New Zealand's you had a banker at that right and kind of just spitballed it. And that was in the nineteen eighties. And why we still stuck with two percent as a target, especially when we're in an era of big fiscal stimulus. Well, it's well it is kookie.

Look I want to step back for a second, because this is the product of a model driven mindset. Yes that if you add this to that and tweak this, that we get some number at the end. And a lot of forecasting and model driven and the way people think about the world is based on econometric modeling right now. Econometric modeling is a very useful tool of It can help frame like what are we looking at outside our window? But one of its particular weaknesses, probably the biggest, weakness is it can't handle a turning point. Right, Okay, Now, if you live in an environment that has upswings and down swings and your framework can't handle turning points, you shouldn't be surprised that this thing goes awry every once in a while. And so right now, right so, all I do is turning points. All Eckri does is turning points. So my mentor, Jeffrey Moore was the father of leading indicators. His mentor Wesley Mitchell identified what a business cycle was over a century ago. And so we don't think in model terms. We're thinking in directional change terms. And today if the model is saying we should go to two percent and hang out there, and the leading indicators of inflation are saying, yeah, it's not going down a lot, and that risk of an upturn is growing every day, the cyclical upturn. I'm not making a big pronouncement about the amount of debt out there, or is China exporting disinflation again or anything. I'm just saying that cyclically, these forward looking drivers of inflation collectively stopped falling a year ago and are starting to edge up. What gives me some anxiety, that doesn't give me anxiety. What gives me anxiety is that we look at this around the world, not just the US. So when we look around the world at inflation cycles in Europe and Asia, emerging markets, major emerging markets, we see that in this century they've been largely synchronized and lo and behold all the leading indicators of inflation. The future inflation gauges abroad are moving up sharply, so that we have an international inflation cycle upturn taking shape. What are the odds that the US is going to set this out? I'm not so sure about that, So I'm watching the future inflation gage very very closely.

So I really liked the framework of let's look at three distinct but interrelated cycles growth, employment, and inflation. I also have a very vivid recollection of our first interview. You said something that just stayed with me with a for a long time, which is, recessions just don't happen when the economy is robust and sturdy. The economy can a robust economy can take a hit and kind of catch its footing and keep going. But if you have an economy that's weak, that has some structural problems, and there is an economic shock, those are the sort of setups that create recessions, am I.

We talked about the window of vulnerability is what we talked about. And so again the basic structure of how we look at the economy is it's a free market oriented economy. This is a condition we see in market oriented economies and they have an upswing and a down swing. And we see this in the United States, and we see this around the world wherever free markets present themselves and sessions occur during the downswing, during the slow down, when the economy is slowing down. And now I'm talking about a growth rate cycle slow down, so you're decelerating.

Let's say you're expanding but at a slower.

Yeah, you go from three to two to one percent growth something like that. So you're going to growth rate cycle slow down. Now, if a shock hits you when you're in a slowdown and the forward looking drivers of the economy haven't turned up yet, now that's the recipe for recession. That's how you're vulnerable. You're vulnerable. So we can have an example of that. Would have been my first recession in real time with doctor Moore was in nineteen ninety and the leading indicators had turned down most of the Wall Street and the professional forecasting class thought that we had dodged economic risk at this point. But the forward looking leading indicators were turning down. The economy started to slow a little bit, and then Saddam Hussein invaded Kuwait and you had okay spike and oil prices. So that's the shock, and that contribute together in the FED was a little tight, and so that was the those combination of events boom, we get a recession. We could see other moments where pretty big things happened, but you didn't have a recession. In two thousand and five, I guess it was Katrina shut down, about shut down, about a quarter of the country. No recession. It was a big hurricane. You had nineteen eighty seven crash, took out a quarter of the market, of the equity market. You didn't have a You didn't have a recession. World War two, the attack on Pearl Harbor, pretty big shock, didn't cause a recession. Huh okay. So there are these moments where what you would think would or could be recessionary shocks are not recessionary because of which way you're trending in the business cycle or in the economic cycle, and then others that seem like, eh, okay, that's negative, but it wasn't really that big. But it turns out to be timed right at that moment of weakness. That's how you get recessions.

So lest we were talking about last decade, you had a couple of periods throughout the twenty tens, most recently twenty nineteen. Heading into twenty twenty, a number of people were starting to warn about, hey, we're decelerating, we could see a recession. I want to say mid mid decade, twenty fifteen, twenty sixteen, same sort of thing, a little bit to slow down, and then twenty eleven there was a pretty robust consensus that we're going back into recession. So when I look at that that decade, and yet we went the entire decade without a recession, what is it that allows those instances to avoid becoming what you taught me persistent, pervasive, announce and pronounced.

Are declines in the indicator the three p's.

It's not just a little dip, it's not just a sector. It's big and broad and less.

So there's a lot of evidence. So what I would say is in twenty eleven twelve, we had a pronounced, pervasive and persistent decline in the forward looking leading indicators. Okay, and you had weakness in the coincident indicators. You had a six month period with the weakest GDP outside of recession in the past half a century. That happened, right, and that happens in twenty eleven into twenty twelve.

Now, in retrospect, why wasn't that a recession?

Right? There wasn't a shock. We didn't have a shock there. And one of the things that stood out when we did the post mortem of that period was that it was the most stable period of oil prices ever since oil prices were fixed in the seventies. Okay, there was a moment of price fixing under Nix. Okay, So since then we'd never seen the stability in oil prices as we saw during that little window when we had vulnerability. And I think, I mean, I'm not looking, I'm not an oil supply expert, but fracking was coming on. And so when you would have like the Arab spring or Egypt was shut down or something was shut down, and you'd have the supply shock boom, you had fracking comes step right in and be like we're here we've got the supply and your prices were just rock steady. So that's twenty eleven, twelve, in the mid two thousand's, twenty tens, twenty ten, So sorry, the fourteen fifteen sixteen we absolutely nailed that because we weren't calling for a US recession then. But what we did see, and I alluded to this in the earlier segment, was about the global industrial town turnt which impacted the US, and.

How much of that was China, how much of that was Europe and or elsewhere?

It was everybody in that one, it was everybody. It was China, Europe, and the United States, other emerging markets all felt this global industrial growth down swing so much so that the US had a manufacturing sector downturn that was pretty sharp. And anybody in that business would have called it a recession for them, right, they would have. That's how they would have felt. Now, the overall economy never went into recession. We didn't call on there.

Fourth quarter of twenty eighteen market down twenty percent, and then twenty nineteen following that sort of a recovery, but people were still a.

Little stay on twenty eighteen for a second because everybody was so young then right, we were pre COVID, including Jerome Powell. Okay, And so he goes out and talks to I think it was Judy Woodruff or something and starts talking about our star and how it's we're far away from our star and he's hiking and all this stuff, and meanwhile, the future inflation gage has turned straight down. Huh, it is already turned down, right, So inflation not a problem. But this is what's keeping him up at night enough so that he freaks out the equity market and you get a nasty December that sets you up for the Powell pivot in January, where he's just like, oh, yeah, screw this, I'm going to go the other way and says I'm going to go on a listening tour and try to figure out what went wrong.

And he you know, I'm not going to say more about that. So let me stop you there, because you're pointing to a couple of really fascinating things I want to talk about, and I'm taking notes. I'm writing energy, I'm writing FOMC, I'm runing houses. Let's start with energy. Yeah, So today we simultaneously have these two conflicting challenges. On the one hand a launch of Iranian missiles at Israel. Israel ninety nine percent of them were knocked out. Oil prices ticked up, but they didn't go crazy. At the same time, I just was looking at a chart. Was it Torsten Slock? I'm trying to remember who sent it? The US is now the world's largest producer of oil, more than Russia, more than Saudi Arabia, more than any other country in the world. So when we look at the challenges to energy as a shock, how do you contextualize geopolitical turmoil? By the way, I didn't even get to Russia invading Ukraine. How do you balance all of these SoCs cards.

So in our forward looking data, so I'm not talking about what's actually happening, but what are the risks of a turn in the drivers of the economy. We're looking at hard data from the government. We're looking at market data, so just what do we price something of barrel oil at, for example, or something interest rates? And then soft data survey data, and these are our sources of ingredients. In a way or consider to give us a hint about what are the key drivers of activity. We're separate cycles like inflation doing We're looking at it very much from the demand side of things. Okay, so if there's a supply constraint or all of a sudden the supply gets flush, then the demand is interacting with the supply to give us kind of where we are in the world. So one of the things that we've been talking about since last year is that this year we're going to see a global industrial upturn, a bona fide cyclical global industrial.

Upturn, just straight up demand for more manufactured.

Goods around the world. And this is not country specific, it's not specific to somebody's policy or anything. It's the way the global industrial cycle works. That's cycling, that's bottoming and cycling up. And so you've seen this begin to manifest in some very short leading indicators, very short leading indicators of global industrial activity, which would be industrial commodity price inflation in PMIS, and in some of the export data that you'll see out of different countries, and those are all starting to gear. Because the movement in the forward data has been pronounced pervasive and persistent, this ought to keep going for a couple of quarters.

So in other words, when you look out at at least the manufacturing sector, you're not seeing a global recession in that space. No, No, which makes it harder for that to be a global recession.

I imagine it certainly is the backdrop on which we're all operating. Let's say, in the US specific tug of war that's been going on around window of vulnerability to shunks. The window's been kind of pushed down because of all that foam on the runway. And now with a global industrial upturn happening, it gives some relief to our manufacturing sector.

Which will get to be able to gear a little bit.

More, and that gives a bid on energy prices, notwithstanding what happens to supply. You know, supply is other people are experts on supply. I mean, we've been doing fracking for a long time. It's it's it's brought us to become the world's biggest producer of oil. I don't know how long we can do that. You know, maybe that peaks out. I'm not sure, but it's not weeks, it's but it's not weeks, it's year, right exactly.

So then the second related question is, you know you mentioned the palpivot in twenty nineteen. I am getting the sense from reading and listening to the chairman that they're aware of the problem child in inflation is housing. They've locked a bunch of people in who have mortgages five percent, four percent, three percent. They can't put those houses up for sale coast, They're new financing is going to be too pricey. Add to that the fact that following the financial crisis, the United States wildly underbuilt single family homes for a decade. And you have a recipe for sustain rental prices, sustain home prices and limited supply, how would you imagine the economy is going to respond to what limited choices Pal has in front of him.

Look, job owning is half of the game here, and so the whole time there's been this job owning about like, Okay, you know, they missed the boat on the inflation upturn, so they had to make up for that. A stitch in time saves nine. They had to make nine stitches, right, So they put in the nine stitches. And then now they're caught up and they're like, okay, now we'll go the other way. We're going to do that, and the market gets out over at skis right the way he talked in December, I think they got six rate hikes priced it right.

Wait, so let's just look at this calendar. Yeah, so cares Act in twenty twenty and then the Act two and three and twenty and twenty one. Inflation spikes, passes the two percent upside target March twenty twenty one. By March twenty twenty two, it's seven eight percent, and the Fed starts hiking. Ironically, by June twenty twenty two, inflation peaks at nine percent starts coming down in part to increases, in part to draw boning. By June twenty twenty three, the Fed has done five hundred and twenty five basis points and hikes and kinda says we're pretty good for a while. That's nine months, almost a year ago. Whatever the long and variable lag of inflation is is probably that rate increases have probably been felt in the economy. Now it seems that he's not gonna do six cuts, but two or three certainly felt like they were all.

That take, so that he went from six to two or three, and then now we're taking the under on that right on that rate, I think that's where it's it seems to be headed, which is again consistent with the future inflation gauge not falling anymore, right, And when it's been going sideways, anybody who's borrowing money is feeling the pressure of the higher rates. Right. So you're you're especially Uncle Sam, Uncle Sam. You've got delinquencies rising from lower rates. You've got bankruptcy, she got all those kind of things happening. Problematic Again, Yeah, the levels are pretty low, but the direction, the direction is clear, right, they're moving to the upside. One of the bigger issues out there is probably all that commercial real estate stuff that's financing, and where are those walls of financing out there, and when do they have to refinance them? And so the hope is very much that rates come down before those loans come home to roost. The problem is the inflation cycle may be firming if, for example, commodity and price inflation has a bid from the demand side. Forget, I don't I'm not talking about the supply side, the supply if supply gets constrained even more so so far, I don't think we've had that disinflation from China that we enjoyed in the previous decade. Maybe that'll come back, maybe it won't. There's there's some talks of tariffs for example, and then things like that. Right, so this is a very fluid thing in terms of global trade. That all those all those supply chains which used to be just in time, they've been hardened to become just in case. And that's expensive just.

In time to just in case.

That's a big makes a lot of sense. So that's and that there's a cost when you start to do that. There's a cost all of a sudden. Now there's a cost for holding inventories. Right, last decade you could it was zero financing.

Now this decade you got to finance, You got to put in a warehouse, you have to have shippers standing by.

All that costs money. And then the PTSD on the difficulty of hiring people doesn't have employers firing people. So wages which let's say Atlanta Fed has a wage tracker, it was a had a north of a six handle a year ago. Now it's down, but it's down to like just above five percent increase in wages. Now that's a real number. Like that's that's not zero, right, that's a real number. And this will start to squeeze on margins. And we touched very quickly on AI and the hope around AI, and we're as hopeful as anyone else that it's going to boost overall productivity, but it could cost.

Right, Like every time there's a new technology comes along, the ludites come out and they say, this is the end of the workforce. And for the most part, it's been pretty easy to dismiss that sort of fatalism. It almost feels as if AI is the first time where you have to be, hey, let's not be quite so dismissive this time. You could see how and we all kind of laugh at Siri is terrible, and even Alexa is awful, but you could see that, hey, it's not going to be a century before this is usable. It's going to be months and years, not decades.

Right, But will it happen fast enough to offset the inflation cycle upturn that's looking like it's showing up in twenty twenty four. Probably not idea, My guess is probably not there, although I think we can. We can probably adapt reasonably fast. You know, after COVID, the remote work kind of stuck, right, you people adapted to that pretty quickly.

It's funny because you know, everybody blames COVID. All this technology has existed for a decade before my office was doing remote work remote offices in the twenty tens, what change was Society suddenly recognized, Wait, why are we going to a building nine to five Monday to Friday to sit there and do stuff I can do in my pajamas at home. I don't understand. It's a social there's a social component to it that we do is mentoring this collaborative work. There are a lot of reasons, but it's not nine to five, five days a week. And what you mentioned with commercial real estate kind of fascinating that that is a slow motion train wreck because these are ten and twenty year leases. They come up a little bit every year, so it gives the Fed and the regulator's time to manage that, which comes back to hey, I understand why Jerome Pwell is concerned about reducing rates. If low rates didn't cause inflation, again, are high rates reducing inflation? I would argue, not only your high rates keeping rental prices up and limiting supply in real estate, but now you have to deal with commercial real estate and the federal deficit. Like there is a good case for him to take rates from five and a quarter to four and a half and say, let's see what happens if we leave them here?

Right? Is that wishful thinking on my I think I think that you know, that's a that sounds plausible. It sounds like everybody has pain but can kind of manage it, which is probably the course that seems reasonable.

And it's still at a level if there's a recession, they could they have some room.

So this, this, all, this all seems reasonable, except that there's a cycle. Right, the cycle has it's like, doesn't care about that plan. Right, it's doing what it does. And the inflation cycle doesn't go down to a number and hang out until you're ready. Okay, it it does what it does. And and so right now, internationally, look we have a global industrial upturn.

So that's got a bit on your industrial.

Materials prices, sensitive industrial materials prices, energy metals and these things. Then you have recessions have kind of run their course. There's been in Europe you've had a few recessions. China you've had a few recessions. Uh So these recessions have been happening Taiwan, New Zealand, Russia, Japan flirted with recessions, Sweden and Austria, Germany, UK and Germany. They well, so technically I don't know if they went in because of the employment. The employment didn't contract there. They got the negative GDPs, but they didn't get the negative employment quite the same.

So then let me ask you an employment question here. If the US is pick a number, If we were four million immigrants short, we lost a million to two million people to COVID. So whatever the number is, there's a few million people missing from our labor pool. Is that true? In Europe and in the Far East.

To a degree they didn't have the same issues, but to a degree it's tighter. I mean, clearly Japan has look demographically, there's a whole nother structural demographic discussion we can have where there's a hunk of people who got old, all right, and then there's not as much younger people happen.

Pan has its own specific demographic challenge. Then when we look at China, the one child policy is coming home to roost. They have an enormous shortfall generationally speaking, huge.

Not easy to solve, and it's where robots and AI and these kind of things have to pick up the slack. And probably the only significant place in the world that has a lot of people being born. I guess India to a degree, and then Africa. These are the regions of the world where the populations are growing.

South America also, but not as much.

Not quite as much. Right, So growth, which we all want is really broken down to population growth. When I say growth in the I'm talking about growth in.

The economic growth.

Economic growth is populate your workforce growth plus your productivity growth. Productivity growth, by the way, is really bad. It's really, really really bad and has been and it's kind of deteriorating for decades, and.

Which is just so stunning to me and I imagine you also because the work that we do, technology has been nothing but a boon, allowing us to accomplish more with less. But that's I've figured out, or if I had beaten into me over the years. Yeah, you're doing certain type of work that benefits from this, but not everybody gets the benefit of faster internet and quicker computers.

Information technology jobs have benefited quite a bit, and the productivity is shot up, But our economy is not simply that, right, It's much bigger, and there's a lot of hands on stuff that happens in our economy and we all experience it when we go about our day, and that overall workforce productivity growth has basically been suffering. Now what happened is around COVID and in the aftermath of COVID, you had a gargantuan plunge.

In productivity growth.

So it's it's stared stepping down over decades and it just absolutely plunges.

Really then it rebounds because I recalled the initial part of when we were in lockdown and work from home. There were all these reports that were surprisingly and again.

Because because the hours work went down and output stayed up.

Productivity and that was people who were who had the ability to work from home. But if you were not working from home, if you were not able to just log into your office from your computer, I have to imagine that productivity.

Yeah, so some stuff like if you were if you were doing hands on work, you just had to stop working, right people were furloughed, and so that that output just collapsed. Now as we open up, we've seen a big spike and you get like positive two or three percent productivity growth. And it happens around the same time that we see all of the story worries around generative AI. So in our simple human brains were like, oh, generative AI gave us this productivity thing, which is not true. Right. What really happened is you had a snapback in productivity growth from horrible numbers which were not real numbers. They were around the whole recession in COVID debacle. Now is that kind of productivity growth sustainable? It's the only way out of this inflation conundrum that the FED is stuck with.

So currently you're saying productivity growth is the only way out.

At the moment, right, I mean, how are you going to pay someone five percent more but not have high inflation? For example? Right, you need productivity growth.

Well, you got to go back a stead. You need more employees, you need more houses, you need more semiconductors to put into cars. A lot of the inflation that we've seen over and above the giant fish stimulus has just been these shortages that kind of we're lurking and we really didn't pay attention to them.

Again, you're back to just in time versus just in case. And so now if a trade route gets pinched, if a bridge goes down, if somebody threatens a factory somewhere, or a factory gets messed up, boom, the ripples up the supply chain. So there's probably a new structural floor on inflation. By the way, it's probably.

Not as much as its earlier.

That structural floor is probably a little bit higher because of the more robustness that we're gonna want in our.

Are you talking three three and a half four?

I don't know.

It's just higher, but it.

Ain't one and a half two percents. No, it ain't one and a half two percent. The other thing though, You know, history doesn't repeat, but it rhymes, right. The seventies inflation stuff is interesting, not that anything that's happening now is what happened then. But early on in that inflationary era, people weren't that pissed it inflame. They were more excited about the growth. It was that each time inflation cycled down, it didn't get down as far as it did before, so that you had higher lows in the inflation cycle. And at the end of this decade or so, where inflation went from below three percent to above thirteen percent.

It was cycling.

The average was seven. It was really.

High in nineteen seventies.

For the seventies, for that decade roughly right, But.

It's such a different decade compared completely different.

But I'm saying psychologically interacting as consumers with prices when the lows, when inflation turns down, but it doesn't get low enough, it stops at a higher rate. That starts to get pretty annoying, and.

People start talking about it as a structural component.

They start talking about it. Look, Burns was the FED chairman in the early part of the seventies and Volker was the FED chairman in the end and towards into the eighties. And Burns gets a bad rap because he was at the beginning of this inflation era. But understand that the environment was not at all open to him controlling inflation. It was very much like what are you doing? Don't raise rates? Are you crazy? And then it's only towards the end of the era when Volker kind of had some cover to be as aggressive as he was in fighting inflation, and he was very aggressive. Huh.

Quite interesting. So let's talk a little bit about predicting business cycles, and I want to talk about your leading and your coincidental indicators. Let's start with the l eis what goes into that and how useful are they in letting you know when, hey, a turn is coming?

Right? So the leading economic indicators are very useful in managing risk because they're telling you what is the risk that whatever's going on now is going to change direction and go the other way? Right? So you can have your general plan. Hey, I've got my plan for business this year and you're running it. But if these indicators turn up noticeably or turned down noticeably, then you ought to start making contingency plans, being ready and thinking about what would I do if things accelerated or what would I do if things decelerated? Am I ready for that play? Am I ready to run that plays? As an investor or a business manager. That's the purpose of the leading indicators. Now, inside of those, while ultimately they're proprietary, inside of them are data from the government. There's hard data, so they're counting things. That's what we mean by hard data. There's soft data, which is when someone does a survey, Hey, how are you doing? What do you feel like you're doing? Are you going to buy a refrigerator? Right? They ask you these questions and hopefully you can see through some of the biases in there. And then there's the actual price, Like you know, how much does a bar of gold go for? How much does the thing of oil go for? How much does the lumber go for? How much does the house go for? These are all just prices at their stocks. What are the stock prices? Spreads in different things. So these are all different measures that reveal how the drivers of the business cycle are acting in concert.

So what's different from the leis to the coincidental indicator.

Okay, so the coincident indicators don't try to anticipate anything. They're just like, what's going on outside your window? So how much output? How much stuff are we making, either physical stuff or services or houses and things? How many people are working? What is the aggregate sales? Like, what's the value of everything that we're selling? And another related point is what's the income? What are we gaining? It's the other side of the sales right in a way. So those four indicators are the coincident. They tell you exactly how things are outside your window. The fact that there's a cycle means that collectively those four indicators rise together and fall together at the turning points. And when they do that, they tend to keep doing it for at least a couple of quarters.

Some persistency. Persistency. It's pervasive.

You can't hide, it's persistent, you can't wish it away. It's going to keep happening, and it's pronounced. It's going to be big enough that it leaves a mark either to the upside of the down.

So coincidental will go up and down in real time. They're not giving you a heads up. How much of a lead do you get from the l eis versus.

Oh and by the way, coincidental, Just to be annoying here, it's actually slightly lagging, which would.

Make which would make sense when we get government data about employment. It's telling you about last month or GDP last quarter, So of course there's always going to be a little bit of a lag. We have some stuff that's a little quicker.

And roughly speaking, the US will come out with the data a little faster than some of the other countries. But yeah, that's the coincident data.

Now, the lead time is this is probably one.

Of the bigger advancements since where most people think leading indicator technology lives is that the lead times are different. We have what I would call kind of a standard leading indicator might lead by a quarter or two.

That's a long lead.

Three six months, pretty good, pretty decently. That's kroin of a standard one. A short leader might lead by a quarter to two or three months, and a long leader can push it to three or four quarters. From a process point of view, we would look to the long leader for the first heads up that a turn might be taking place, and it leads by three or four quarters. So this gives us a prior view to watch the leading indicators. And then if we see the leading indicators following what the long leaders did, then we're looking for it in the short leading indicators, and then finally, sequentially in the coincident data. I have to say, the headlines and the market tone and the market narrative lives very much between the coincident and very short leading indicators.

Right, they change it on a dime. I love. Just the past twelve months have been markets are going up because the Fed's going to cut, markets are going up because inflation is coming down. Okay, maybe the FED isn't going to cut, but it's a magnificent seven, all right. Maybe it's not the magnificent seven, maybe it's AI and the story, right, it's always an after the fact explanation. That looks silly and hart.

So what's very interesting? Right? So I've been doing this now again, I'm sorry, I'm in my late fifties. I feel old, but but I'm like, wait a minute, I've been doing this since nineteen ninety.

Real time, we prefer the term experienced and wizened.

Wizzened. Yeah, yeah, definitely wizen. The pattern I see, right is that sequential stuff with our leading indicators long leader only coincidence. So I'm tracking that. That's my world. I won't live in that. Uh. And there's one hundred indexes I'm watching for the US and around the world in growth, the different sectors of growth, inflation, and employment. What I'll see though, is that our indicators will turn and to the extent they diverge from the consensus narrative. And that's a funny thing, the consensus narrative, right, because we all have our own consensus or whatever. But I you know, market prices kind of give us some beat on that, and you can get some algamation of what all the smart people are saying, and you get some sense of what the narrative is or what the FED saying or whatever. And when the cyclical story from these objective leading indicators, which they don't care about the narrative. When they diverge from the narrative and a gap opens up, that's interesting. That's where the really interesting stuff lives. Because if there is a cyclical turn and these indicators are I don't know anything better to get these cyclical turns, the risk of a cyclical turn to watch it. If these cyclical indicators are correct, and that divergence has to be resolved, it has to be resolved in some way or another by the narrative moving toward the indicators. And so it's I don't know exactly how the narrative's going to catch up. Maybe it's gonna say housing did it. Maybe it's gonna say.

You know, but at least did it. It doesn't matter. By hook or by crook.

By the end of twenty twenty four, you're gonna see ooh there's some demand for commodities. Who saw that coming and global industrial or manufacturing emergence, whatever the story is. And then oh, inflation didn't go down as far as we thought. All these banks around the world are banking on cutting ECB. Everybody risk of people are talkingalking about cutting.

So let's talk about those four long, leading, short, and coincidental. We're recording this. It's the second quarter of twenty twenty four. Yeah, markets had a pretty robust rally to start the year, giving up some some of those gains. As the narrative, First it was vibe session. Then it's six cuts. Now it's three cuts, maybe two cuts, maybe one cut, maybe none. What are you seeing across long, leading, short, and coincidental indicators today.

For the cycle on growth? I'd say, by and large, if I squint, they're firming, meaning doing okay, they're doing better. This tug of war that has been going on between earlier cyclical impulse to the downside and all that stimulus that went out the flood of and continues to go the foam on the runway, we may be seeing the window of vulnerability starting to edge shut.

You sound much less recessionary. Correct, Then I recall hearing from you correct a couple of quarters ago.

Correct?

You were, You were hearing correctly. And yet the same time, I'm not hearing a whole lot of optimism that we're going to see inflation full much below where it is.

I see, so the immaculate disinflation was the pipe dream, Right, that's the one where it just doesn't seem to work that way. Look, I've been trying all my life to have my cake and eat it too. It doesn't work that way. It doesn't exactly work that way.

So that's what flip side of the strong economy is careful inflationary impulse, Careful what you wish. By the way, I've had people say to me, imagine how great things would be if oil was thirty dollars, and my answer is always no, you'd be in a depression if oil was thirty dollars. Careful what you want, it's it's how you get there.

So I mean oversimplifying. You could pick a recession and sqush inflation that way eventually.

And send unemployment up to five six and do all of that you can. Nobody wants that.

Nobody wants that. So we're trying to thread the needle. Right, there's I think it's an open question on threading the needle by spending over seven trillion dollars, that's an apology question that the people can debate. You know, you know, reasonable people get to be.

So let's stick with threading the needle. Or as most people describe it a soft landing. Yeah, what is this soft landing? And what was it?

Okay, So here if people can imagine those coincident data, you put them together into an index. It has a growth rate if output, employment, income, in sales. It's cycled down very hard into twenty two into twenty three. I've seen the picture. It's a sharp decline and then it kind of levels out at around two percent. It gets pretty weak back in twenty two when GDP goes negative for a couple of quarters, but employment keeps it from going negative, and so we've been bouncing along. Now. I think that that can start to firm a little bit. If it does that, it starts to move to the upside. You have a soft landing. You had a cyclical downturn in growth without a contraction, without it going negative in overall growth. And again I'm talking GDP, employment, income, and sales collectively. There's no one statistic like GDP which is going to define recession, and that would be a soft landing. Okay, But everything I'm talking about is in cyclical terms. I'm looking out a few quarters. I have not said there can't be a recession over a year from now, right, there could be. And one of the things that I'm watching for that's not in the play that everybody is waiting to see, is inflation possibly turning up before it's supposed to.

Let me ask you the question that sums all of this up. You get a phone call from the White House, Lashman, we have some questions for you about the next six months before the election. What's going to happen between now and November with unemployment, with inflation in the economy, and what should we do about it? How do you answer the White House who's throwing that curveball at you?

Well, let me take the first part. What's going to happen the indicators. I could just tell you what they're telling right.

Growth is going to firm, and I think it's going.

To be industrial based. It will be the first thing that you see we are going to see. I think employment kind of hang in there.

You're still under four percent unemployment.

Because it's cos active because of growth affirming and the PTSD. Every all the employers have in trying to hire people, they're very reticent to fire. You might see shorter work weeks. You're going to see weakness and temp hiring.

Enough tick in part time.

You see the uptick in part time you'll see all those levers being pulled. But I don't think you see the firing.

Which is part of recession.

Right now. On inflation, I think you have to really think about it firming and not going down. And so that's the fly in the ointment. And you know, an inflation cycle upturn is an inflation cycle upturn. It's not that you can necessarily do anything about it.

It is what it is. It's gonna happen. You can pound your chest about it if it works out, and try and change the subject.

If it doesn't, I think you get in front of it and you try to frame it right. So the whole thing is about the jaw boning and the narrative. And if you were the opposition, you're gonna harp on that every single day. And if you're an incumbent, you're gonna say, yeah, but look at all this other stuff that's going well, where the economy's growing.

Huh, really really interesting? All right, I only have you for another ten minutes, so let's jump to our favorite questions that we ask all of our guests, starting with, Hey, what are you streaming? What are you watching or listening? These days on Netflix or podcasts or whatever.

This is all entertainment for the most part.

That's fine.

Owl House, really, do you know Owl House? No, I don't think you would. I'm joking, Barry. It's it's this is a show. It's a fantasy show for the kids. About it.

I know, I've seen the It's.

A lot of fun. It's a great it's really well written and nice storytelling in a group of a group of kids.

You're older, now, you know.

No, I got a nine and I have nine and twelve and sixteen, and I try to keep them young. Okay, it's best I can. They're going to get older no matter.

What I get about about six year old.

And so ol House and troll Hunter, those are nice kids shows. I was impressed with how Apple handled Foundation in the Foundation.

Of the books, and I watched the first season. I haven't gotten into the second season yet.

They did a reasonable job. I mean, look, there's no way you can tell the story that kind of story. It's like Dune. Also, it's very hard to tell the story or three body problem that you were talking about.

Which which, by the way, they did a really good job in the first season.

Because they're so expansive these stories, how do you put it to film? I enjoyed that. The one that disturbs me.

But for some reason I watch it from time to time.

Is Black Mirror, Yeah, which is every once in a while when I'm like, can I take something shocking, I'll watch that and then I don't watch it for a moment because it's very disturbing. But but I've been liking all of those. I mean, there's so much good stuff, and some of the.

There's too much good stuff. My wife and I have been saying, all right, let's wrap up. We're finishing up Curb and it's like, after we're done with this, I want to cut out TV a few days.

Without without getting political. Something that I rewatched it with my sixteen year old was Gandhi really yeah, and it held up really really well. The movie it's it's it's three hours something long, but it's so interesting to see how you know, to remember the history, and then to see how the politics get in and things.

There's been a few shows like The Bodyguard and The Diplomat that are to say nothing of the Crown, that are of an era and they're just so informative and fascinating especially I don't really think of myself as an anglophile, but the Crown was just one of those things where you fall into a whole nother world. And Gandhi, I would imagine, is the same.

Ghandhi is amazing and you're seeing it from the other side of the table, right, So it's fascinating and I enjoyed watching that. But I mean, there's so much stuff to watch.

Sure, let's talk about your mentors who helped shape your career.

I don't want to leave anyone out.

There are so many people. Well, obviously doctor Moore is huge, who really.

Was the pinnacle of my mentors, I would say others some teachers. Shout out to my teachers. I met with Sam Lockwood, who taught me fourth and fifth grade last summer, and that was really nice to see him, and he was just he loved letting me be curious. And then as I got into college and into cycles, I had a professor at Roxton College in the UK, doctor Baldwin, who taught me a lot about politics and the civil service, the power of the civil service, which I know which I now have come to appreciate, or the deep the deep states, the deep state, But I don't think it was so nefarious, but yes it was.

It was definitely that they're powerful.

Uh, Doctor Loreene Harris who introduced me to doctor Moore, to Jeffrey Moore, and then also my father in law who came from a different angle, more from a financial investing angle, but very interested in economics and psychology, always.

In the markets, which was which was very important. Let's look about books. What are some of your favorite and what are you reading right now?

I'm a sci fi buff, right, Okay, So I like the Culture Series.

It took Ian M.

Banks.

Okay, and uh, it's it's a two.

Thousand in the future. It's very philosophical, but it's excellent. It's like space opera stuff. It's if you like Dune and those kind of cools, you'll love Ian Banks and the and the Culture Series. And I'm reading The Player of Games. It's a fun one.

The Player of Games.

Player of Games?

Yeah, who wrote that?

Ians Banks? Yeah, it's a series of things on a more practical sense in terms of thinking. There's an old favorite that I go back to, which is called Deep Work by cal Newport.

I recall that book. Yeah, very very good.

I'm showing my age, but Outlive by Peter Atia on longevity.

Yeah, on longevity.

Looking, I'm looking for the name of a book as we speak, and then for fun my wife does. She's a graphic novelist, Tracy White, and so I dig through her library and find things. And there's one that I love, which is it's very dated, but it kind of does well today. It's called trans Metropolitan by Warren Ellis. It's a graphic novel and it's about a journalist, Spider Jerusalem, and he's this funny, funny character who's trying to speak truth to power and all that. But a great graphic novel. I'm reading this with my son. He's twelve.

Be Useful by Arnold Schwarzenegger. Oh really looks kind of interesting.

That's pretty interesting, and it's, you know, whatever, whatever you think about individuals, the message that he's got in that book is a positive one.

There is a book I'm looking for the title of that is a series of related but disconnected short stories and the name of the book is Intergalactic Refrigerator repair Man Seldom Carry Cash. And let me recommend that that's been my almost sounds like Doug. It's got a touch of that it's not quite as absurd, but it's got just a flavor of mixed in with harder science. I look it up an element of of that goofballness. Our final two questions, and by the way, that's a really good list of books you have. Our final two questions, What sort of advice would you give to a recent college grad interested in studying either market cycles or investing, or any sort of economic research.

This goes for any kind of pursuit, let alone economic or financial research. Be sure that you truly enjoy the work. That'll make it easy easier to be successful, because you're going to have to persist. Right, none of this is easy. You're going to have to persist. It doesn't just fall in your lap. And so if you enjoy it, you can keep doing it. That's my main advice.

And our final question. What do you know about the world of cycles, economy, investing research today you wish you knew back in the early nineteen nineties when you were first getting started.

Well, I think the overarching concept is you don't know what you don't know, and that's the thing that can hurt you. Probably the thing that has surprised me the most is the sheer size and extent of deficit spending. When you take a look at what happened in the twenty tens post GFC, and then you take a look at what's happened post COVID. We're not in Kansas anymore. We're somewhere new. It's different for the US in many ways because we are the world's superpower and we are the biggest market. So it's not the same as if Japan did it or someone else did it. So I don't want to underestimate the ability for US to do deficit spending.

Really quite fascinating. Thank you Lachman for being so generous with your time. We have been speaking with Lashman. You than co founder of the Economic Cycle Research Institute and author of Beating the Business Cycle. If you enjoy this conversation, check out any of the previous five hundred discussions we've had over the past nine and a half years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcast. Check out my new podcast at the Money, short ten minute conversations with experts about issues that affect your money, earning it, spending it, and most importantly, investing it. At the Money, wherever you find your favorite podcasts and in the Master's and business feed I would be remiss if I did not thank the Crack team that helps put these conversations together each week. Juantares is my audio engineer. Attikavalbrun is my project manager. Anna Luke is my producer. Sean Russo is my researcher. I'm Barry results you've been listening to Masters in Business on Bloomberg Radio

Masters in Business

Bloomberg Radio host Barry Ritholtz has in-depth discussions with the people and ideas that shape ma 
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