This is Master's in Business with Barry Ridholts on Bloomberg Radio. This week on the podcast, I have an extra special guest. His name is Nathan Sheets, and he comes to us by way of Pigum Fixed Income, a giant institutional shop. Their fixed income department alone seven hundred and forty three billion dollars in fixed income assets UM. Nathan has a unique background. He served in the Treasury Department. He was with the Federal Reserve for um eighteen or so years. He worked at City and then Prudential, and now he's been at Pigum for a while. He is uniquely situated to comment about, and analyze and discuss monetary policy, state of the economy, how best to analyze employment inflation, what it means for interest rates, what that means for fixed income investments. Uh. It really is a fascinating conversation filled with wonky goodness. So if you are at all remotely interested in any of those things, and you know I'm interested in all of those things, you will find this to be an utterly fascinating discussion. So, with no further ado, my conversation with Pijum Fixed Incomes Nathan Sheets. This is Master's in Business with Barry Ridholts on Bloomberg Radio. My special guest this week is Nathan Sheets. He is the chief economist and head of Global macro economic Research at PIJUM Fixed Income, which manages seven hundred and forty three billion dollars in assets. Previously, he was the Under Secretary of the Treasury for International Affairs UH. Prior to that, he worked at US Treasury Department, as well as the Federal Reserve, where he served as director of the Division International Finance. Previously he was at City Group. Did I get that right or room? How far off? Was? I think you nailed it all right? Nathan Sheets, Welcome to Bloomberg. Pleasure to be here. Thank you. So you have a fascinating background. You were now you're currently at PEJAM Fixed Income. Previously you were prudential at City Group, the U. S Treasury and the Federal Reserve. Was was this the plan? Was this the career path you had mapped out for yourself. I think it would have been impossible to foresee how things would evolve, But coming out of grad school, I did want a career in practical economics. I wanted to take the theory that I had learned and applied in a way that it might actually make a difference in in the lives of people. And hence all this public service at the Treasury Department and the Federal Reserves I envisioned. I envisioned public service. My first job was was at the Federal Reserve. But uh, I'm also you know, I think a practically minded guy, at least as practically as you can be and still be an economist, and I was interested in applying these kinds of principles in a in a private sector context as well. So I couldn't have predicted the path or how things would evolve. I've been very fortunate in the opportunities that I've had, but uh, I did very much want to do qualitatively these kinds of things. So so you come out of your PhD program, you say, I'm not going to go into academia, but the next best best thing is the Federal Reserve, who typically hires PhDs as researchers. What what was your first job at the Fed? Like the Federal Reserve, for me, especially in those first years, was a vigorous post doc. It allowed me to take, uh the theory and as I said, apply it in practical ways to real world issues. So my first assignment was to follow Rush UH and some of the other transitioning economies Poland, Hungary and so forth. I in the in the mid ninety nineties when they were transitioning from a centrally planned system into market based economies, and it was it was very exciting to see the interplay between politics and policy and economics and sociology through through that period. So Russia continues to struggle with corruption on its path to capitalism. Some of the outer block form of Soviet countries are doing much better. What's that transition like and are they still heading in the right direction. What we're finding is that the countries that had some tradition of capitalism are doing quite well. Most of those. Most of those are the Central Europeans. The Czech Republic is doing very well, Slovakia is is doing well. UH. Kind of the next wrong. You've got countries like like Gary and Romania, maybe not quite as well as as the Czech Republic and in the Slovak Republic, but they're they're proceeding. Uh. Russia, as you say, UH continues to struggle, and frankly, I think history will have a judgment as to whether we had opportunities there to help the Russians more effectively than we actually did. And then many of the UH former Soviet republics continue to struggle. They have very low levels of per capity income, and UH have a significant distance yet to go before they're really part of the global economy. Since your early days at the FED, the global monetary system has really evolved, some of it, certainly in response to the Great Financial Crisis. Where do you see the future of monetary policy UM from from your perspective at Pigium today. During the twenty five years when I've been a professional economist, the global economic and monetary system has absorbed two very large shocks or changes. I'd say the first one has been the ongoing integration of China. From a structural standpoint. Uh, the addition of one in a quarter billion Chinese into the global economy has been UH significant, and we're still dealing with the implications of that. Deflationary or inflationary or at times both. I think so far more deflationary or disinflationary that uh, most of those folks had lower wages than Western workers, and I think that's put downward pressure on wages throughout the world over the last twenty or twenty five years. And the second issue. You mentioned that second major issue is the global financial crisis, so China. The big actual issue, the global financial crisis, is the big cyclical issue. But the bottom line, and as it pertains to the international monetary system in particular, is that notwithstanding these two big shocks, the role of the dollar and the centrality of US markets has remained largely intact. The dollars still by far the world's leading reserve currency, the US financial markets are essentially unrivaled in the world. That that in many ways the world is more multipolar, but not so much in finance. Let's talk a little bit about your role at the Federal Reserve. How did you start, what did that evolve into, and how closely did you end up working with the board and its chairman so UH. I was at the Fed for eighteen years. UH. During the entirety of the time, I was in the Division of International Finance. UH. During the first fourteen of those years, I held a variety of roles. I mentioned Russia, and I was falling emerging markets in Japan and so forth. During the last four which started in two thousand and seven, I was the director of the International Finance Division as the global financial crisis emerged, and had the opportunity and the responsibility to work closely with Ben Bernanke and the Board and and and others and trying to respond to that that terrible set of economic conditions. So there's been a lot of revisionist Dick history. If you remember um early on in the in the financial crisis, the FED is going to be the ruin of all of us. They're gonna cause hyper inflation, They're going to destroy the dollar. They should just stand down. What sort of great do you give the Federal Reserve for the job they did both before, during, and after the financial crisis? So I'm probably a little biased. Uh, I would give the FED, I don't know, a B for a pre crisis. And I think the criticism there is not about monetary policy, which I think was about right. But the FED didn't do what it could have done in the regulatory space and allowed imbalances in the financial system. Relic and his work for sure, exactly exactly, and the FED was not unique, the FED was not alone. But I don't see I can give the Fed more than a B. Now during the heat of the crisis. UH, A vigorous response was absolutely necessary. As we were sitting in the Fed's building and those terrible facts were emerging. UH. It reminded me a bit of the Jack Nicholson line, you can't handle the truth. The truth was terrible, and UH Bernankee and guide here and then UH pulse and at the Treasury. They just worked through this and they had a set of a set of responses. I would give the FED an A for that period. Lehman obviously failed and no one saw the consequences of that. I think they were going to let somebody fail at some point. That's why I don't give them an UH an A plus. And then, frankly, since the financial crisis, I think the FED again has done a pretty good job keeping keeping inflation expectations well anchored and supporting UH growth in the US economy. When you look around the world, you know, we can't say things are growing gangbusters in the United States, but we're doing better than Europe and Japan and UH and many others. So let me push back a little bit. I don't think we're all that far apart, and in fact, I think revisionist history helps the fed's decision with Lehman Brothers because subsequently learned that Lehman Brothers had a negative net worth of minus a hundred and fifty billion dollars. Nobody could have taken Lehman Brothers on ps. Dick Folds turned down Warren Buffett when they needed some capital six months before they collapsed. At what point I just picture these meetings at the FED where someone says, this idiot said no to Buffett, how can we possibly bail him out? It's but here's where I disagree with you. So in the period leading up to the crisis, we're we're totally in sync about people like Ed Graham should have been listened to. He understood the regulatory lapses that were being taken advantage of by the private sector. But dear Lord, we had federal reserve rates um under two percent for three years and at one percent for a year. That really kicked off a giant inflationary spiral. I think Greenspan was far too accommodative post nine eleven. He was emotionally shaken up and did not normalize rates fast enough. I have heard people make the same complaints post crisis. The FED has not normalized rates fast enough. In each case, it both instances led to um income inequality and political instability. How far off is that criticism? So? UH, when I think about what a different path of policy rates might have looked like, I suppose you compare it to a benchmark like the Tailor rule. The FED was a little bit softer than the Tailor rule. But in my mind, the misses are a couple of rate hikes and a little bit in timing. It doesn't seem like, even if we think there should have been a more vigorous UH monetary policy response, that the difference between what they did and what one might envision was large enough to explain the imbalances UH and problems that erupted in the economy. My feeling really is that the mistakes were on the regulatory side, on the government side, in board rooms, amongst managers, amongst traders. I mean, there's a lot of blame to go around for the global faviss but I just don't think that the misses for monetary policy we're big enough to get really on the scoreboard relative those other mistakes. So let's let's play a counter factual game. Some people wanted the FED to do nothing during the crisis. Hey, it's Congress's responsibility. What would the world have looked like if the FED said we'd like to create uh um either QWI years up, but really it's up to the Senate in the House, we're gonna do nothing and follow their lead. What would the world have looked like then? So as it was, we saw the unemployment rate rise to ten percent. I honestly believe that if the Fed had done nothing and had just waited for Congress, we could have seen the unemployment rate twice that hot. That would have been more like what happened during the Great Depression. And h I think that if the FETE had been hands off, if they had said, that's not our responsibility, that uh, we could have had Great Depression two point oh right. And as it was, as it said, it was unimaginably terrible, but it could have been even worse. Um, I don't I don't disagree with that at all. Um. Lots of folks got the implications of KWIE wrong. Very famously. A number of people had a letter in the Wolf Street Journal to Ben Bernecki that said, I want to say this was, Hey, your quantitative easing is again, We're gonna see hyper inflation. We're going to see the collapse of the dollar. You're destroying the economy. And in fact none of the sort happened. Why did people get quantitative easing so long? Was it the fundamental understanding of economics? Was it bias or or we just haven't lived through anything like that? What excuses can these folks legitimately offered for being so wrong? So as the FED pursued quantitative easing, they were really pushing out the frontier of monetary policy and Fed, the markets and the rest of the world didn't know the full implications of what they were doing, and I think that's what kicked off some of these concerns and anxieties that you described. But I think that UH, Ben Bernanke and Jenny Yellen have been very effective at having their economic dashboard, and I would say at the center of that dashboard has been inflation expectations, where if they have one objective, it's to make sure that inflation expectations stay well anchored around two percent. And these various policies that the FED pursued, quantitative easing and the like, have pushed up UH inflation expectation sans some to keep them well anchored, but there hasn't been any overshooting. Let's talk a little bit about your current role. It seems like your backgrounds UH in international finance at the Treasury and everything you've done at the Federal Reserve pretty perfect preparation for being a head of research at a at a big fixed income shop. I feel like I learned global macro at the Fed and the Treasury during my time at City. I learned how to talk to investors about markets, and I'm able to draw on that background on a daily basis in my work at at PGAM Fixed Income. The new dimension is being closer to the portfolio allocation process and closer to the portfolio managers and getting a better sense of the real considerations that go into that decision of should we buy or sell a given asset. So your clients are essentially all big institutions, UM, how often do you get to interact with UH investors from these other institutions and and what are they concerned about today? So UH, the interaction with with our clients is frequent, UH and intensive. I travel extensively across the United States and also globally. We have lots of clients in Europe, Japan, Asia, and elsewhere. In terms of issues, I would say the short term issue that clients are the most interested in is how much steam does this expansion have left? Are we looking at a recession around the corner. It's been running for a while, We've been hearing warnings about that for two or three years. Exactly is this late cycle or not? The longer term issue that they're the most focused on is debt and demographics. What what does this kind of ad verse cocktail mean for our long term performance? So so let's talk about the first one about the length of the cycle. I have long since complained that most economists are using the wrong data set. It's not recessions, it's post credit crisis recoveries that they should be looking at, and they seem to be very different than the ordinary balance sheet recession. Explained that if you would yes, so uh a decade or so ago, uh Ken Rogoff and Carmen Reinhardt did some very interesting work where they looked at decades and decades of recessions and compared those that are driven by banking crises to those recessions that arise for other reasons. And what they found was that the recoveries from those banking crises were systematically slower, and that the slower pace of growth persisted for up to a decade. And when you look at the US experien ariants, it seems to be match Reinhardt and rogue Off almost almost almost precisely. It really is is quite extraordinary. Now, the one thing I would say that's on the other side of the ledger is that this has been slower as they predicted, but this has also been a uh an extraordinarily persistent expansion, where by July it will be the longest expansion in in US history. So it's been slower but also longer lived. So some people have given Reinhardt and rogue Off a little pushbacked um, this time is different. Eight Centuries of Financial Folly was the book they wrote post crisis. But what a lot of folks do not recall is that in December two thousand and seven they put out a white paper that looked at five crises. I want to say it was US, Mexico, Sweden, Japan one other that escapes my my recollection. So before or like literally as the market peaked, they put out a paper that said says, here's how financial crises are different and why the recoveries are different, also very prescient. Very few people really paid a lot of attention to that, but they were dead on, weren't they. They really were, you know, I'd say five years ago there was a debate as to what was going on, why was growth slower? And I think all the other explanations have kind of melted away and we just have to accept the fact this was deep. It hit our financial sector. There are significant headwinds to to to bank credit and lending, and probably also scars in terms of of of demand for credit in the corporate sector, which is translated not only into somewhat tighter credit conditions than would have prevailed, but also Uh, corporates have been hesitant to invest, and all of that has been a slower, slower recovery. You mentioned the longer term concerns of your institutional clients are the nation of debt and demographics. I'm assuming they mean sovereign debt or is it also corporate debt? How do those two play together? I would say, Uh, primarily it's sovereign debt, with an asterisk that the private debt in China is very high. Is it really private debt? Isn't it kinda sort of like what we did with Fannie and Freddie. Isn't there the full faith and credit of the Chinese government behind that private debt? Or am I overstating that in the first instance, it's it's private debt. But your point, you know, doesn't the Chinese government implicitly guarantee uh most of the debt in China? Is absolutely right, and so maybe you just think about that as a different form of of of of public debt um. But then the question is, as these debt levels rise, and as we know in the future, there are gonna be a fewer workers and uh fewer taxpayers, And how do these things interact with the each other. What are those tax rates uh in twenty or thirty years gonna look like uh in order to in order to make payment to even service this debt I? And will those tax rates have adverse implications for incentives to work? Alternatively, will will an older society be less prone to to to want to take risks and engage an entrepreneurship than a younger one, And if so, then that might mean you have a slur productivity growth. There are a number of concerns where these issues of dabt and Demographics Interact. I'm Barry rit Helts. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Nathan Sheets. He is the chief economist and head of Global macroeconomic research at Pigeon Fixed Income, which manages seven hundred and forty three billion dollars in fixed income assets. Let's talk a little bit about the economic cycle and where we are. It's big in a decade since the Great Financial Crisis, we're still a sub three percent economy, maybe even a sub two percent economy now that the highs of the tax cuts seem to have faded. What's our growth outlook over the next couple of years and and why have we been so muddled over the past few years. So my baseline would be the growth this year is a little bit over two percent, and the growth next year as fiscal stimulus rolls off, will be a little bit under two percent. But two percent is kind of trend and that's not terrible. Mature economy compared again to many of our international competitive that looks that looks pretty good. Now underneath it, there's a really a rather deep and important question, and that is that it feels like in the economic data suggest the productivity growth has slowed significantly over the last say, enter twenty years. And and the question is, on the one hand, we see these data pointing to UH slower productivity. On the other hand, it feels like the world we're living in is a wash. And new technologies miniaturization and and machine learning and artificial intelligence and genomics and on and on and on, And the big question is when and if, but when do all of those those UH developments find their way into the national income accounts and into productivity girls. So so here's my pushback on this. And and people have told me that, well, you're in a sector that is very dependent on technology, so you're seeing productivity. But we were once a heavy manufacturing economy. We're now a service economy, which means every person in that value chain is using technology, is using computers and mobile one everything else. How much of that lack of so therefore there's a ton of productivity growth, at least I see it. So how much of that lack of productivity gains is really a measurement issue, not a lack of productivity issue. So this is something that I've explored. I've rebalanced the U S sectors and said, suppose that we had less services and more manufacturing more like what we had ten or twenty years ago, what would productivity look like? And it would still be down. So it doesn't seem like it's the services rebalancing that's driving it, but that that that could certainly certainly be part of it. I think another point that's important is there is some evidence that's what's happened so far is that the leading firms in various industries have adopted a lot of these new technologies. But these new technologies have not yet diffused them themselves deeply into various sectors, largely reflecting the investment as remain kind of lackluster. That a lot of this new technology, how are you going to get it as a firm? You're gonna get it by investing in firms have been hesitant to to put their resources on the table. Let's talk a little bit about full employment and what it should look like. We've been hovering around four percent for a while. Shouldn't we be seeing greater wage gains or is international competition tamping that down? If you had told me where the unemployment rate was, I would have guessed that wage growth would be more rapid. So I think this is uh, this is a puzzle. It's such surprise when I look at the economy. Why do I think is going on? Yep? I think technology is probably holding down wage growth. Certainly globalization is holding down wage growth. I think another key element, as I've mentioned, is that inflation X bytations are well anchored. And so if you really think that inflation is only going to be two percent and your boss offers you one and a half percent raise, you know, is it worth it to get to get agitated? And then that interacts with another key factor in the US labor market is we have very little collective bargaining. I was going to ask you about that. The unions are a fraction of what they were before. What does that do to the bargaining power of of individual employees, even highly sought after STEM employees. Yeah, so it means if you want to raise, you've got to go slam your fist down on your boss's desk and say, boss, I want to raise. And that's an uncomfortable conversation that if inflation was taking off, I think people would probably feel more comfortable having it. Now. I'd say the good news for American workers is we are seeing some acceleration way each gains are now over three which is less than I would have expected, but it's a little bit higher. And more importantly, we're also starting to see increased churn in the labor market, so people are leaving jobs and there are lots of jobs posted. And the way you get a raise in the US is to get an outside offer, and then you go to your boss and say, boss, they want more money, and the guy across the street is giving me a ten percent race. Quite interesting. So here we are, we're running bigger deficits than we ever had at this point, which is a bigger driver for the economy. Is it the fiscal policy or is it monetary policy? So I'll still give the nod to monetary policy as as being more important, but fiscal is increasingly giving it a run for its money, so to speak. Uh. In the short term, we've seen the power of fiscal policy in providing stimulus and and and supporting growth. In the long run, we have these very difficult issues of debt and deficits and how to manage those and what the implied tax rates are going to be. So uh, fiscal policy is becoming increasingly important. It really strikes me as we think of these two pillars of macro policy, how different they are in the way they're formulated. Do you have technocrats doing monetary policy and you have a very messy political process with with with fiscal You're being too kind, So, um, let's talk about what's been in the news a ton lately. Monetary theory has been making the rounds that essentially says, you know, you can run deficits, it's not the worst thing in the world. Look at Japan. Their demographics are terrible, They're running giant deficits relative to GDP, and their economy is moving along just fine. How do you respond to those claims? So my feeling is that modern monetary theory is dangerous. But also, and this is why it's particularly dangerous, is there is a grain of truth in it. We don't know what the limits are as to how much death the United States as a reserve currency can have. As you say, Japan has very high levels of public dat relative to GDP or over two of GDP. Uh And is there a good economic case that some economists have recently made when rates are very low to borrow and and do infrastructure there might have very high rates of return. So all of those things are true. But at the same time, to say there's really no constraints on fiscal policy, I consider it just not prudent. It's driving too close to the edge of the cliff. We don't know exactly where that edge is, but I sure don't want to find out. See what what you're supposed to do is lie and say these tax cuts will pay for themselves elves and then run giant deficits and by the time people figure it out, you've already retired to the bomb is in, You're you're out of office. That that, I think is the key, the key secret there um. But there is some truth to the fact that whether you're looking at monetary theory from the left or the right, and the same with fiscal theory, neither party, neither ideological wing UM has a monopoly on not running deficits. They both seem to run deficits. Although I have to give the Clinton administration a little credit for UM actually running a surplus one year, but the Obama administration and the Bush administration, they and now the Trump administration, they've all been running deficits. And I think the I think the point here is the right hates taxes, the left love spending and guess what both of those mean somewhat higher deficits. Where do we get fiscal restraint? We get fiscal restraint from the center, and uh, the political center, especially at present, is very hollowed out. So so let's talk a little bit about the center in terms of the nexus between the markets and the economy. Because the old joke is um economists have predicted nine of the previous four recessions. But in reality, when the economy begins to slow and when profits begin to get curtailed, you know, the market just happens to pick it up a little faster than the economic data because it's reported so much sooner. What what's that relationship between economics and and equity prices? So there's all sorts of theory about how uh equity prices are current expected value of future profits and uh, you know, all of those things are important. What we're expecting for for profitability, what we're expecting for rates, what we're expecting for growth. But the mapping is a very very noisy one. I'd love to be able to say, uh, if you give me the economy, I know the markets, but i'd also need to know a sentiment uh, and a lot of sociological and psychological elements. UH. So I would say macro is part of the story, but the best market commentators, the best strategists, deeply understand something in addition to the macro theory. So you you touched on sentiment. There you teed up my next question perfectly. How does sentiment vary over the course of a market cycle? How important are things like small business sentiment, consumer sentiment? Which does that drive the economy or does the economy drive sentiment? I think that the answer is both. That as sentiment uh deteriorates, that drags down the economy, But then as the economy gets worse, sentiment will respond to that. So it's very much a symbiotic self reinforcing uh kind of relationship. But UH, you know, if you press me, what's the first mover? I think sentiment typically moves before the economic data. We have been speaking with Nathan Sheets. He is the chief economist at PJIM Fixed Income. If you enjoy this conversation, we'll be sure to come back for the podcast extras, where we keep the tape rolling and continue discussing all Things Macro. You can find that wherever finer podcasts are sold Apple, iTunes, Stitcher, Overcast, Bloomberg dot com. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Check out my daily column on Bloomberg dot com slash Opinion. Follow me on Twitter at rit Halts. I'm Barry Hults. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast, Nathan. Thank you so much for doing this. I'm really enjoying this conversation. You are right in the wonky sweet spot of of some of my favorite peas. I want to circle back to the financial crisis and some of the issues related to that. But you were discussing um wages not going up as fast as anyone would have suspected relative to full employment, and I have a theory I want to run by you. Employees have seen substantial wage gains, but they're not seeing it in dollars. They're seeing it in giant increases in healthcare costs going up eight nine percent a year. If you're paying for healthcare as an employer, and what it is five or ten percent, maybe even more for some employees of the healthcare is one of the biggest inflationary inputs. We see how much of that is dollars that otherwise might have gone to salary increases. I think the answer to that is is substantial amount could have gone into salary increases, and as you say, for many employees, healthcare is a very substantial part UH of their overall compensation. Now we do have broader measures of compensation that would include healthcare and other benefits, and they also have been going up somewhat more slowly than we would have expected. So very much true that it's an enormous cost, an enormous source of of of overhead for US firms that makes it less attractive to hire in the United States, But that alone doesn't explain this UH puzzle as to why wage growth hasn't time. I'm looking at that from a competitive standpoint of US manufacturers versus Germany, US manufacturers versus Japan. Given we what are They're like three or four hundred Democratic people in the presidential race already, and almost all of them are talking about some variation of universal healthcare. I would think the corporate sector would jump all over this and say, please take this off our backs. Why is it our responsibility? And I don't necessarily agree with this, but how has corporate America evolved to be responsible for healthcare and not the government? It seems so bizarre. It's uh, it's an interesting historical feature the way our labor market is evolved, as you said, in many other major economies in Europe and in Canada and elsewhere. Uh, it's dealt with very differently. I And it is a it is a drag on on wages and a responsibility that the corporate sector bears. And I think you're right. For someone to come and say, don't worry about that would be very welcome. Now, the flip side of that is it means the burden of paying for it gets gets transferred, and so the German corporates uh don't have to deal with it. But the overall level of taxation in Germany is much higher, so the government is larger relative to GDP nolunch. That's right, there's a piper to be paid someplace. Makes a lot of sense. One would wonder, um if salary were higher and corporate earnings were higher, but the tax burden would be higher as well. Exactly could could be kind of intriguing. So so let's bring it back to the pre financial crisis era. And I didn't want to push back too much during the broadcast portion, but I have to push back on And some of this is clearly with the benefit of hindsight. But I could go back and look at what I was writing in a one oh two oh three, and I could see, Gee, these rates seem to be really low. Green Span seems to be wildly overreacting to both the mild, to both the mild post dot com recession. All things considered, it wasn't that bad. And towards the end of that recession, September eleventh happened, and there that also seemed to engender a pretty substantial overreaction. In terms of monetary policy, I look at everything that was priced in either credit or dollars as just spiraling up. Gold went from four hundred to over a thousand. Home prices doubled in some parts of the country. Um, all the commodities spiraled up. The dollar actually did UM really take a pretty healthy whack it. It suffered. So you and I completely agree that the FED missed their opportunity in terms of acting as a regulator for the banking industry, but how much of that big spiral can trace its way back to rates under green Span? So I think that say that dot Com recession compared to what we had at the time of the Great Recession later in that decade, that dot Com recession did seem pretty mild. But when we were living through it, I don't think any of us would have described it that way, especially with NASDAC falling from and the FED did respond to that, and when one broke out. I remember being inside the building. People were very concerned about what that might mean for sentiment, which we've talked about and the economy exactly people inside the FED, so there were reactions to that, and then I think Greenspan was also worried about trying to make sure that inflation expectations stayed anchored and didn't start to fall. But your comments evoke another kind of criticism of the feeds policies through that period, and that is how aggress should monetary policy be in responding to perceived imbalances in financial markets? And uh, the Greenspan FED was loath to do that, and at the time, the argument was, we don't know where the tops are. We don't know what's the bubble? And instead of trying to kill things preemptively, it's better to clean them up after the fact. We learned that central banks do need to think hard about financial stability and whether asset markets are overvalued. And I think that many central banks now have an implicit mandate. It's not part of their explicit responsibilities, but an implicit mandate to ensure financial stability. And they spent a lot of resources doing that now. So it's not just full employment and keeping inflation contained. It's oh, and now you guys are responsible for the markets. So I always pushed back to the green Spans of fans on we are loath to intervene in the markets because of all people, green Span probably intervened in the markets more than any FED chair and memory. So forget that the eighty seven crash happened right after he began. It's like every new FED chief gets a baptism of fire, and he did what he always has does, is he cut rates. But I recall very specifically when doing some research for Bailout Nation, it was either in ninety or ninety one. I'm not positive. Early nineties. In between meetings green Span without the Board of governors lowered rates on his own in response to something going on in the markets, and the Board was so offended that they clipped his wings and prevented that from happening. They passed a rule that said the Fed chief can only raise the low rates with the approval of the Board. So I've heard that argument that, well, green Span was loath to do it except when he did it, and he did it quite frequently. Am I wildly off Am I just a green Span basher? Or is that a fair criticism? Well? I think that there were some instances like seven and after one where the Federal Reserve saw risks to market functioning and the capacity of markets to operate, and in response to that, the FED did respond very very vigorously. Now that said, uh, you know, the FED was aware of what was happening in financial markets. And I think that what I should say precisely is that the FED under green Span was was hesitant to try to say, a given markets in a bubble, let's go and prick that bubble. That's really the core of the green Span doctrine. We don't know a bubble. We're not sure, we could be surprised. We don't have good tools to do it. Let's do it on the other side. And I do think that's been roundly, roundly rejected at this point by central banks. Quite quite fascinating. The other issue that has come up about the Federal Reserve. By the way, I think that last issue about um rates being too low, too long. Here's my hindsight bias. What I'm about to say, and I will admit this is hindsin bias. At the time I flagged those ultra low rates as inflationary. With the benefit of hindsight, I wish the Fed would have said, either Post nine eleven or some other one off emergency, Hey, this is an emergency. We are for six months gonna take rates down. I think that cut rates fifty basis points. We're gonna implement a fifty basis point rate cut and in six months half of it will go away, and and in nine months the other half of it will go away. So that there would have prevented that while we're afraid, there were no expectations of of a r raise, and it's going to be problematic if it would have be built into this is an emergency action, but it will automatically unwind. I think they would have been better off again pure hindsight bias, and and I think that that is a very creative form of forward guidance which the FAD has experimented, particularly under Brankie, experimented with a lot of different forms of forward guidance. Uh. Typically it's been more of the form will keep rates where they are and not pre committing to future rate hikes. But it wouldn't surprise me at some point in the future to see some central bank around the world implement a policy that had the kind of forward guidance you just described. Look, we're responding to what we believe is an extraordinary circumstance. We expect that it's going to go away, and as our expectations are confirmed, then we very well maybe hiking rates look for emerging market central bank good stuff in the future. So you bring up Bernanke and what he did during his tenures, Chairman, I'm not in this camp, but some people have criticized him as too transparent. Back in the early days, you never knew what the Fed did. You would see the reaction in the bond market. Oh, bonds are tacking up. The Fed might have raised rates. They did have a meaning This week has the Federal Reserve become too transparent. This is this is a very important question, and it's it's corollary is doesn't FED talk too much? And a concrete question is, uh, you know, through every f long C cycle, we hear a variety of voices from Federal Reserve policymakers. All the Reserve Bank presents are talking various members of the board and so forth. And does that give markets more information? Does that allow investors to make better decisions and better understand what the Federal Reserve going to do? And if you press me, I guess I'd say, on balance, yes, that transparency and and perspectives are helpful. But it's also important that the FED not talked so much that it's saying things it's not really sure about. What people want to hear from the FED is what is its reaction function? Meaning as various economic events evolved, how is it going to respond? What does it expect about the future? And I think this is one of the risks with having press conferences after every meeting, that there may be times when j Pal is going to have to say something just because the question is asked, not because it's part of his preferred proactive communication strategy h quite quite interesting. The the whole idea of we're data driven and we're gonna wait and see what the economic data looks like. Is that a fair approach or is that still too squishing an ambiguous. So I think that that is a very fair approach. I think more or less that's what central banks have been saying for for generations. The the problem with it is markets urn for something more concrete, and if the FAD says, you know, we'll just see where the data take us, then the next question is, well, where do you think the data are going to take us? And uh so markets, markets are gonna want more. But ultimately the FAD does have to be data dependent that even if they say, you know, we're going to be flat, if ultimately the economy surprises on the upside, they're gonna have to hike, and if the economy surprises on the downside, they're gonna have to cut. And for them not to act in the future because of something they said in the past, would I think not be not not be good policy. So so let's talk about out the post crisis era. I was surprised at at lower for longer. I was surprised that at the length of time that we seem to have been on emergency footing, how fast should the FED return to a more normalized rate regime. Are we there yet? Are we halfway there yet? Um? Some people have said they're behind the curve. The President is saying they're choking off economic expansion. Where where are we? Two and a half percent, by by any measure, that's still fairly accommodative, isn't it. So? I think the Fed has has handled the rate hikes quite skillfully. This has been perhaps the slowest tightening cycle in the history of central banking. We've moved. We've moved a quarter percentage point every quarter, so a one percentage point a year. Back in the days of Greenspan, they were going twenty five basis points every meeting, and they thought they had go. We're going as slow as they could. That's still twice as fast. So the Fed has gone has gone very gradually, and they're now at a place where you know, they think neutral is two and a half three something like that, where they're on the lip of of of a neutral policy, and that gives them the lauxery of being able to watch and wait and see how some of these various risks unfold, does China do better? Does Europe pick up? What happens with the trade war and so forth. So if we look at inflation today also about two two and a half percent, is that the there are a million economic inputs, but is that you know, the two d dakapo is that the one that really matters? And if inflation stays around two, the FED doesn't feel any urgency to move off of these low rates. I think, uh, in this circumstance with rates policy rates around two and a half percent, that they probably are going to need to see inflation at or probably a little bit above two percent before they seriously start thinking about more rate hikes. The flip side is, I think the other variable that they're going to continue to watch closely is the unemployment rate. And I think that as long as the labor market looks looks tight and the unemployment rate is falling, they're not going to think that they need to they need to cut rates either. I think would require an increase, a marked increase in the unemployment rate before the fad would throw it into reverse. Now we've seen some modest increases the unemployment rate, but for the good reason meaning people who had left the labor force, we're coming back into it. And suddenly there's more people in that pool. And it looks it's not that are losing their jobs, is that more people are looking for their jobs. Obviously the FED understands that nuance. Are we going to continue to pull or let me rephrase that, what's it going to take to continue pulling more and more of these discouraged workers back into the labor pool. The increase in labor force participation that we've seen of late is an extremely constructive development. There's been more slack on the edges of the labor market than I would have expected, and then most economists would have expected. And I think what it's going to take to for this process to continue is for the US economy to continue to grow at a solid pace and for us to see some further upside pressure on wages as we see that additional uh, those additional wage gains, that's gonna be very attractive to workers on the sidelines and getting them back in the labor force. And once these folks are back in the labor force, they're developing skills and abilities, they're gonna help drive the economy through the years I had, so, so let me wax wonky a little bit. You brought up the tailor rule earlier. Has the tailor rule lost its power? Is it? Is it expired? And explain it before before we go too far into the weeds. So the tailor rule basically says that in setting monetary policy, the Federal Reserve should look at the unemployment rate relative to some UH equilibrium or some trend rate of unemployment, and it should also look at the inflation rate relative to its two percent target UH. And if if if inflation is low and unemployment is high, then the tailor rule would suggest you should have a very easy monetary policy. And I do think it's fair to say that UH many central banks around the world how sued policies in recent years that are much softer than what the tailor rule would suggest. But even so, I think if you talk to those central bankers that say, yeah, we're not really following the Taylor rule right now, but we like having it as a point of departure, it really gets into this powerful question of how far should you push theory? And it's it's good as a theoretical construct, but then from there we realize that there are a number of headwinds and other challenges our economy space that explain why we should be off it. But it's a good benchmark. Still, every cycle is different. If you try and apply the same rules to different cycles, you may not be happy with the results. And that's the problem in economics is in in thinking about our recommendations. We are driven by what the data say, but the data only cover the past, which then makes trying to figure out what the next one is gonna look like really hard, it says Yogi Berras said, Forecasting is really hard, especially when it's about the future. That summarizes my life is an economist per perfect way to sum it up. So I know only have you for a finite amount of time, and I want to get to my favorite questions that I asked um every guest. Let's let's start with the first one. Tell us the most important thing that people don't know about your background. So I would say, uh, it's that I just kind of uh wandered my way into economics and uh international economics. When I was in college, I couldn't decide whether I was gonna be a lawyer or go into business or being economists. They took all the exams, all the interest exams, and finally decided, well, I'll do economics. And then in grad school, Uh, I didn't know what I wanted to do, kind of looked around and international economics was an area where the faculty at m I T was great, but there weren't very many students my year. So I went there because I said, oh, I'll have less competition getting a job, and uh, everything everything worked out well. I was very, very fortunate to fall into international which I really have enjoyed and and M I t. S economics department is just a murderers row of rock stars. When you were there, who were some of the the names that that you got to work with, either as mentors or just professors. The three key folks that I interacted with were Stan Fisher, Rudy dorn Bush, who passed away some years ago but was really big and thinking about how do we apply economics in the real world? And Olivier Blanchard, who is extremely brilliant and fertile mind. And every time I talked to him, I learned something new. Any other mentors you want to mention who helped guide either your academic or professional career? Well? When I arrived at the Federal Reserve. I'd say two folks they had a big impact on me. One was a Federal Reserve governor who your listeners have probably heard of named Larry Meyer, who Larry was was interested in taking a very empirical view and using that to analyze where the global economy was headed. And another chap was my boss. His name was Ted Truman, and Ted was intense and focused on how do we get the right answer and best serve policymakers. So I'd say those two individuals had a big impact on my early career. So you're now working at PGIM Fixed Income, which is a giant fond shop. What investors influenced your way of looking at the world of interest rates and UH inflation and everything else that goes into investment. I would say that the investors that are having the most impact on my perspectives are frankly the ones that I'm working with now and UH. A number of these folks are what I would describe them as is very balanced in their worldviews. They're getting all the information they can and they're responding to it in a way it said, okay, we'll move a little here. Relative values a little more attractive. We're gonna move there. They're never off balanced, They're responding to what the world's uh throwing at them and uh and seeking the best returns, always always in comparing one asset to the other. So let's look about books. What are some of your favorite books, fiction, non fiction, economics related or not. What do you like to read? Well, I am a heavy reader of biographies. I really enjoy uh learning what others have gone through in their lives and there in their in their career paths and the like. I'd say along those lines, my favorite writer is is probably Ron Turno written some absolutely brilliant economic biographies, uh, and I think it's very very best was his biography on Alexander Hamilton's, which, as you read it, it really is quite extraordinary that challenges that Hamilton's was facing and helping Washington and others set up the Republic, and how we face in various ways, very similar challenges. And I think the Churnell just brings all of that to life and makes it very rich in fertile in helping us think, well, how how would how would Hamilton's respond to a global financial crisis? How would Hamilton's responded to a European deck crisis, plus running the whole thing in hip hop lyrics. That was really that that that was the extra moe but but true story. That's where Lynn Manuel Miranda discovered Hamilton's was Charnou's book. It's an astonishing that book has astonishing legs. Um give us some other books that you enjoy, So I would say, uh, just continuing, I've read uh wonderful biographies of Woodrow Wilson. Uh are progressive and are and notably a progressive who was arguing for free trade because it would bring down prices for the masses. It's really extraordinary the way the free trade debate has evolved over the last hundred years or devolved as the case maybe. UH read continuing in that kind of time and history. Love to read about Teddy Roosevelt, brilliant, brilliant individual, but in addition really focused on getting things done. Who wrote the Roosevelt bio? Because there are a ton of them? Which one did you like? You nailed me? I don't remember, so emailed to me and I'll add it to the info on this because there there are the problem with a lot of these bios is that there are so many of them. Yes, a friend recommended a Genghis Khan bio. This book is great, so I ordered on Amazon and I say to him, this was a great book, thanks for recommending it. And he looks at the book he goes, no, no, that's the wrong one. I'm like, dude, a thousand pages of Genghis Khan. I'm good. I don't need to read the second one. Have you gotten around to reading mcculla's Right Brothers book? No, I thought about it though I read it on vacations. It was just fascinating, like, you have no idea, or let me rephrase that, I had no idea who they were and how they became effectively the inventors of flight. It was if you like biography, especially you know early twentieth century, it's fascinating. They Hawk last sung. Yeah, it's really interesting. So they were They weren't from Kitty Hawk. Wrville had from right, that's right. And they had tagged somebody in the National Weather Service to say, where are their steady winds of ten to fifteen miles an hour, preferably not too rocky, And they gave him a couple of things and and Kitty Hook checked out as so, now you could get to Kitty Hook really easily. Back then it was an ordeal. It was a train and then a boat and then a giant trek to get there. If you like bio biographies, you're gonna love this book. That's my record. I can give you other books to now give you one more. Okay, let me let me give you another one. I think one of the most readable and interesting books that I've been exposed to is Outliers by Malcolm glad Sure, and that that book has a very interesting argument in it which resonates with me now because my son is going through the college admission process and he shows where the Nobel Prizes and chemistry got their undergrad degrees, and they are all solid in institutions, but they all didn't go to M I T or Princeton. It is all over the map. I'm glad. Will then makes the argument that that had they all gone to M I T, then most of them would not be Nobel laureates in chemistry. That there would have been someone else or someone's else in their uh in their intradoctory and early training that would have been better chemistry, and it would have discouraged them in their career in their trajectory of ultimately great creativity. So that you know where you go to school, uh matters, But what really matters is how much your work once you're there makes perfect sense to me. Um, So let's talk a little bit about a time you failed and what you learned from the experience. So, uh, this is my time at the U. S Treasury. I was part of the team on the administration that was managing US policy regarding China's proposed Asian Infrastructure and Investment Bank, the aii B. We had concerns about this institution, that it would not pursue good standards in its lending, and consistent with that, we expressed our concerns and lack of enthusiasm. Uh. Two countries across the world, but as you know, the Brits the UK joined the ai i B, and soon thereafter dozens of other countries joined. What do I learn from from this? I think I learned two things. One important policy implication is China's rise is gonna happen. There really is not a lot that we can do about it. We can slow it down, or we can support them and have it accelerated, but they're gonna rise. And I think the big question is once they've risen, are they going to look at at us as being their friend or their foe. Secondly, and this may be more in a personal basis, but I learned from that experience. When you have a message, it's got to be simple. And we had a we had a very sophisticated position that I think had a lot of analytoltical rigor associated with it, but I needed a thousand words to explain it to nuances. For most most positions when you go through life, you need to be able to put them on a bumper sticker. Really, if it if it's if it's more complicated than that, people's eyes start to glaze over. Even how to boil it down, Even in complex diplomatic trade negotiations, you still have to dumb it down to a bumper sticks I think you gotta. I think you've got to get it on a bumper sticker. So this administration has, you know, and I think they probably they have answered the question what are we trying to achieve? We're trying to break down barriers in China and make it fairer for US firms UH to to operate there. So if you could go back in time, and rejigger your message back when you were at Treasury. What would that look like if it was reduced to a bumper stick. Well, I think we would have had to do uh further uh further argumentation inside the administration and say are we for it or we against it? Because we were we were closer to being against it. It was perceived as being fully against what we really weren't. But we have to decide are we for it against it? And I think probably a clean position would have been look, for a number of reasons, we're not going to join, mainly political reasons. We're not going to join. We have these concerns, but you make your own decision. That would have been a cleaner position. Quite interesting. So what do you do for fun? What do you do to stay mentally or physically active when you're outside of the office. So for fun, I have four kids that keep me keep me fully engaged and energized. I'm also very active in my church congregation and uh. In terms of staying physically fit, about a year ago, I came to the conclusion that I needed to do more in that department. And since I've spent a lot of time on the treadmill, which actually have come to enjoy and found to be a place where I can reflect and and unwind. Quite interesting. So if a millennial or um a recent college grad came to you and said they were interested in a career in um economics or finance, what sort of advice would you give them? My my number one, UH piece of advice is find something that you are passionate about. When I talked to to graduates and people early in their careers, sometimes I feel like they're trying to turn themselves into the perfect candidate, the candidate that everyone will want to hire. That's not what I want to see. I want them to come in and tell me this is what I really care about. And uh, if they really care about it, if they're passionate about it them, they are going to be successful in these In these these these careers, particularly in finance and and policy, there are gonna be a lot of weekends, They're gonna be a lot of late nins. And if you don't fundamentally love what you're doing, it's going to drive you to distraction. You're not gonna be as a factor. Find why you love and what you care about. And our final question, what is it that you know today about macroeconomics, monetary policy, fixed income investing that you wish you knew thirty years or so ago when you were first getting started. So I think that the biggest thing I've learned is as one goes through these cycles. And this is true as an investor, uh, it's true as a policymaker. You have to have faith your instincts. You know, at the end of the day, all the analytics are great, bring them to bear, but I think ultimately, at the end of the day we have to we have to trust our guts and trust our instincts. Quite quite intriguing. We have been speaking with Nathan Sheets. He is the chief economist at PEJAM Fixed Income. If you enjoyed this conversation, we'll look up an inch or down an inch on Apple iTunes and you could see any of the other two hundred and thirty nine such prior conversations that we've had. Um you can find that Apple iTunes, Overcast, Stitcher, Bloomberg dot com, wherever your finer podcasts are located. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Please go to Apple iTunes and give us a delightful five star review. I would be remiss if I did not thank the Cracks staff that helps put this conversation together each week. Taylor is our booker, Attica val Brun is our project manager. Michael Batnick is our head of research. I'm Barry Ritolts. You've been listening to Masters in Business on Bloomberg Radio.