Hello, and welcome to another episode of the Odd Lots Podcast.

Hello, and welcome to another episode of the Odd Lots Podcast.

I'm Joe Wisenthal and I'm Tracy Alloway.

I'm Joe Wisenthal and I'm Tracy Alloway.

Tracy, you know what actually surprises me a little bit about twenty twenty four, maybe twenty twenty three.

Tracy, you know what actually surprises me a little bit about twenty twenty four, maybe twenty twenty three.

We're only we're only two weeks in, so go on, or.

We're only we're only two weeks in, so go on, or.

Maybe it's twenty twenty three. So here's what surprised. Maybe, and think about this, like we've had this a huge increase in raids. We're coming to the end, you know, the pandemic like shook up the world. But by and large, like things have normalized in some level. I'm surprised that things aren't more different than they are in fact. Yeah, Like, you know, we have the Nasdaq surging. I was just looking at It's like the Nasdaq was surging back of the day, NASA crypto is back. Like I thought the world was gonna change or turned upside down. And yet like I'm kind of surprised, like we have this seemingly different macro environment, and I'm a little surprised by how many themes actually did not go awheyre did not change.

Maybe it's twenty twenty three. So here's what surprised. Maybe, and think about this, like we've had this a huge increase in raids. We're coming to the end, you know, the pandemic like shook up the world. But by and large, like things have normalized in some level. I'm surprised that things aren't more different than they are in fact. Yeah, Like, you know, we have the Nasdaq surging. I was just looking at It's like the Nasdaq was surging back of the day, NASA crypto is back. Like I thought the world was gonna change or turned upside down. And yet like I'm kind of surprised, like we have this seemingly different macro environment, and I'm a little surprised by how many themes actually did not go awheyre did not change.

It's kind of crazy. So rates have basically like tripled or at least funding costs, yeah, tripled for companies, and yet as far as I can tell, we're sort of heading back into twenty twenty two territory. I know the S and P five hundred has been wobbling a bit. We're recording this on January seventeenth, so it's been down for the past couple days or so. But we did have a really big rally going into the end of twenty twenty three. A lot of the tech companies, the usual culprits, the ones you would recognize from twenty twenty one to twenty twenty two, were sort of leading the way. It is strange that we are in a new regime of higher interest rates, and yet the new regime looks a lot like the old regime.

It's kind of crazy. So rates have basically like tripled or at least funding costs, yeah, tripled for companies, and yet as far as I can tell, we're sort of heading back into twenty twenty two territory. I know the S and P five hundred has been wobbling a bit. We're recording this on January seventeenth, so it's been down for the past couple days or so. But we did have a really big rally going into the end of twenty twenty three. A lot of the tech companies, the usual culprits, the ones you would recognize from twenty twenty one to twenty twenty two, were sort of leading the way. It is strange that we are in a new regime of higher interest rates, and yet the new regime looks a lot like the old regime.

And then throw in some of these huge things. So I mentioned the pandemic, which had this huge disruptive effect on society. But then there's multiple wars happening right now. The war in Ukraine means ongoing, the war against Gaza, the firing against the ships in the Red Sea, et cetera. So geopolitics is back in a big way. We just had the Taiwanese election. We did a recent episode on sort of thinking about some of the geopolitical risks outside of China, Like, there's a lot going on also, speak of China today, did you see the population numbers?

And then throw in some of these huge things. So I mentioned the pandemic, which had this huge disruptive effect on society. But then there's multiple wars happening right now. The war in Ukraine means ongoing, the war against Gaza, the firing against the ships in the Red Sea, et cetera. So geopolitics is back in a big way. We just had the Taiwanese election. We did a recent episode on sort of thinking about some of the geopolitical risks outside of China, Like, there's a lot going on also, speak of China today, did you see the population numbers?

I did, pretty staggering statistics.

I did, pretty staggering statistics.

Yeah, so the second year in a row that the population in China actually shrank, birth rates continue involve. There's just a lot of stuff going on, you know, throwing stuff like AI. You know, they're probably talking about I think they're talking about that in Davos right now, Like there is a lot going on.

Yeah, so the second year in a row that the population in China actually shrank, birth rates continue involve. There's just a lot of stuff going on, you know, throwing stuff like AI. You know, they're probably talking about I think they're talking about that in Davos right now, Like there is a lot going on.

I bet they're talking about demographics to show probably and geopolitical risk. I guarantee you there's someone in Davos talking about the big risk for twenty twenty four is geopolitical.

I bet they're talking about demographics to show probably and geopolitical risk. I guarantee you there's someone in Davos talking about the big risk for twenty twenty four is geopolitical.

They'll probably talking about elections and elections in the US. There is a lot going on, and it's like, yeah, maybe like we'red in all the time, high in stocks are close enough, but like it still feels like everything feels very unsettled or sort of like the abilt or easily unsettled at this point.

They'll probably talking about elections and elections in the US. There is a lot going on, and it's like, yeah, maybe like we'red in all the time, high in stocks are close enough, but like it still feels like everything feels very unsettled or sort of like the abilt or easily unsettled at this point.

Well, I think the issue is there's sort of there's an unease about the current economy, which is that we have seen this incredibly dramatic run up in rates and yet it feels like we haven't really seen I guess, the full result of it or the shoe dropping just yet. We've had three banks failed in twenty twenty three. It's definitely not nothing. But compared to how people were talking about ten years of ultralow interest rates after the two thousand and eight financial crisis, this idea that central banks were distorting markets, there were all these zombie companies, everything was artificial because of low rates. It feels like something more should have changed in sort of twenty twenty three.

Well, I think the issue is there's sort of there's an unease about the current economy, which is that we have seen this incredibly dramatic run up in rates and yet it feels like we haven't really seen I guess, the full result of it or the shoe dropping just yet. We've had three banks failed in twenty twenty three. It's definitely not nothing. But compared to how people were talking about ten years of ultralow interest rates after the two thousand and eight financial crisis, this idea that central banks were distorting markets, there were all these zombie companies, everything was artificial because of low rates. It feels like something more should have changed in sort of twenty twenty three.

Should we have a big picture macro conversation.

Should we have a big picture macro conversation.

Let's do it?

Let's do it?

All right, Well, I am really excited. We have a perfect guest. I'm thrilled that we have him here in studio. We're gonna be speaking with Jason Cumming. He is the head of research and chief economist and Brevin Howard asset Management, been there for a long time. He's also previously an economist at the Federal Reserve Board. So really the perfect guest to be speaking about some of these big macro issues. Jason, thank you so much for coming on. Odd lots.

All right, Well, I am really excited. We have a perfect guest. I'm thrilled that we have him here in studio. We're gonna be speaking with Jason Cumming. He is the head of research and chief economist and Brevin Howard asset Management, been there for a long time. He's also previously an economist at the Federal Reserve Board. So really the perfect guest to be speaking about some of these big macro issues. Jason, thank you so much for coming on. Odd lots.

Thank you, Joe. Thanks Tracy.

Thank you, Joe. Thanks Tracy.

All Right, I'm gonna ask an embarrassing question, but maybe hopefully it's something that our listeners will find useful. What is a chief economist and a head of research at an asset manager like Brevin or specifically Brevin. What do you do and what is your role within the company and within the investment process?

All Right, I'm gonna ask an embarrassing question, but maybe hopefully it's something that our listeners will find useful. What is a chief economist and a head of research at an asset manager like Brevin or specifically Brevin. What do you do and what is your role within the company and within the investment process?

Okay, I think it's useful. Instead of going through a job description about what a chief economist does? Is you frame this up both for economists and for the investment management industry more generally, Sure, I make the distinction between desk generals and special operators, and whether you're an economist or operating in a hedge fund or across the asset management industry. This taxonomy is helpful to try and think about people who are big picture sure desk generals who move pieces around on a map, and people are special operators who do house to house combat every day with the data and with markets. What we do at our fund Brevan Howard is much more like house to house combat, whereas other shops, certainly a Warren Buffett or the old David Swinson model of endowment management that has more the air of a desk general moving things around strategically very long lived bets, and what we do at a hedge fund is really different from that. We don't afford ourselves the ability to just make long term bets and then walk away because we have stewardship over capital that has to be marked to market every day for our investors who face very real budget constraints. We don't manage money for the Warren Buffets of the world or the Yale endowments of the world. We manage money for shops more like the investment committee that I'm on. Two of them, Brookings and Swarthmore. Swarthmore has a really impressive endowment, Tracy. Fifty percent of the operating budget is funded by that endowment. They can't afford to have a year where their private equity partners come to them and say sorry, no distributions this year, because then the kids don't have their scholarships. They need partners more like Brevan Howard, who are doing this houseouse combat with markets every day, trying to extract risk premium in all different kinds of markets. So we are neither long risk assets all the time, nor are we sitting around just buying vall all the time, because as you well know, people overpay for options. So if you were long vall all the time, you would end up going out of business sooner rather than later. So what a chief economist does, Joe, is try and provide the framework for thinking about investment management, whatever the environment is, and then figuring out exactly the ways in which we're going to go about that on a high frequency basis, because we aren't paid for our long term views about whether we're in the new normal or the new abnormal for interest rates, we have to figure out when the FED pivot is, when the next interest rate cuts are. And so the essence of a macro hedge fund is is not figuring out the terminal destination, but it's figuring out how you get there, what the exact path is, the volatility along the way, all those different elements, and the chief economist tries to weave together all those different all those different pieces.

Okay, I think it's useful. Instead of going through a job description about what a chief economist does? Is you frame this up both for economists and for the investment management industry more generally, Sure, I make the distinction between desk generals and special operators, and whether you're an economist or operating in a hedge fund or across the asset management industry. This taxonomy is helpful to try and think about people who are big picture sure desk generals who move pieces around on a map, and people are special operators who do house to house combat every day with the data and with markets. What we do at our fund Brevan Howard is much more like house to house combat, whereas other shops, certainly a Warren Buffett or the old David Swinson model of endowment management that has more the air of a desk general moving things around strategically very long lived bets, and what we do at a hedge fund is really different from that. We don't afford ourselves the ability to just make long term bets and then walk away because we have stewardship over capital that has to be marked to market every day for our investors who face very real budget constraints. We don't manage money for the Warren Buffets of the world or the Yale endowments of the world. We manage money for shops more like the investment committee that I'm on. Two of them, Brookings and Swarthmore. Swarthmore has a really impressive endowment, Tracy. Fifty percent of the operating budget is funded by that endowment. They can't afford to have a year where their private equity partners come to them and say sorry, no distributions this year, because then the kids don't have their scholarships. They need partners more like Brevan Howard, who are doing this houseouse combat with markets every day, trying to extract risk premium in all different kinds of markets. So we are neither long risk assets all the time, nor are we sitting around just buying vall all the time, because as you well know, people overpay for options. So if you were long vall all the time, you would end up going out of business sooner rather than later. So what a chief economist does, Joe, is try and provide the framework for thinking about investment management, whatever the environment is, and then figuring out exactly the ways in which we're going to go about that on a high frequency basis, because we aren't paid for our long term views about whether we're in the new normal or the new abnormal for interest rates, we have to figure out when the FED pivot is, when the next interest rate cuts are. And so the essence of a macro hedge fund is is not figuring out the terminal destination, but it's figuring out how you get there, what the exact path is, the volatility along the way, all those different elements, and the chief economist tries to weave together all those different all those different pieces.

Wait, can I ask an even a broader step back question? A step back from the step back? And you sort of touched on it just then, But what does a macro hedge fund actually do?

Wait, can I ask an even a broader step back question? A step back from the step back? And you sort of touched on it just then, But what does a macro hedge fund actually do?

Because I take the.

Because I take the.

Point about I take the point about, you know, being tactical and having to sort of pivot on a day to day basis, But my impression was that macro hedge funds were all about making the big bets on big changes in the global economy, macroeconomic regime shifts, that sort of thing.

Point about I take the point about, you know, being tactical and having to sort of pivot on a day to day basis, But my impression was that macro hedge funds were all about making the big bets on big changes in the global economy, macroeconomic regime shifts, that sort of thing.

So a macro hedge fund is defined by the kinds of assets it's trades, so it trades foreign exchange, currency, credit, and traditionally, certainly in the kind of older style Soros big macro hedge fund bets where we broke the Bank of England. It's certainly true that in Brevin Howard's history we've had amazing returns through very difficult times in the economy, for example two thousand and eight and certainly during the pandemic. But we wouldn't be good partners with our stakeholders if we told them we were only going to make money if there's a pandemic. We can't count on a pandemic happening. We can't count on breaking the Bank of England once. So we try and make the inner girl the path integral of what goes on, and markets make money through all those different environments, which sometimes might mean tracy that your long just carry. Last year it turned out that some of our best performing parts of our fund were long credit, and that's not something that is the essence of the old style macro of let's pick a big up or down. But it is true we punctuated some of our best returns in those periods of time where being the chief economist, we looked at what was going on with the pandemic and people were enormously complacent. You'll remember that period of time in February March of twenty twenty when we went through the it's just the flu phase of things, and we were looking out across the investment landscape and saying, people are not tuned to the global economy shutting down. We were probably Tracy only a week or two ahead of people in that case, but that was all that we needed in order to be able to in one of our funds make one hundred percent during that period of time.

So a macro hedge fund is defined by the kinds of assets it's trades, so it trades foreign exchange, currency, credit, and traditionally, certainly in the kind of older style Soros big macro hedge fund bets where we broke the Bank of England. It's certainly true that in Brevin Howard's history we've had amazing returns through very difficult times in the economy, for example two thousand and eight and certainly during the pandemic. But we wouldn't be good partners with our stakeholders if we told them we were only going to make money if there's a pandemic. We can't count on a pandemic happening. We can't count on breaking the Bank of England once. So we try and make the inner girl the path integral of what goes on, and markets make money through all those different environments, which sometimes might mean tracy that your long just carry. Last year it turned out that some of our best performing parts of our fund were long credit, and that's not something that is the essence of the old style macro of let's pick a big up or down. But it is true we punctuated some of our best returns in those periods of time where being the chief economist, we looked at what was going on with the pandemic and people were enormously complacent. You'll remember that period of time in February March of twenty twenty when we went through the it's just the flu phase of things, and we were looking out across the investment landscape and saying, people are not tuned to the global economy shutting down. We were probably Tracy only a week or two ahead of people in that case, but that was all that we needed in order to be able to in one of our funds make one hundred percent during that period of time.

I remember that time in early twenty twenty, and it was amazing, like how slim the edge was, but also kind of how obvious because I remember in January February twenty twenty, I mean, China shut down like a huge portion of its economy and stocks were still rising in the US and everyone was talking about the Trump impeachment, and it was kind of stunning to me that we'd been worried about a trade war with China for so many years, and then China shuts down most of its economy and everyone was like.

I remember that time in early twenty twenty, and it was amazing, like how slim the edge was, but also kind of how obvious because I remember in January February twenty twenty, I mean, China shut down like a huge portion of its economy and stocks were still rising in the US and everyone was talking about the Trump impeachment, and it was kind of stunning to me that we'd been worried about a trade war with China for so many years, and then China shuts down most of its economy and everyone was like.

It doesn't matter, it's fun.

It doesn't matter, it's fun.

Can I ask a questions? So obviously making good decisions, hopefully pivoting at the right moment, being ahead of others in terms of is there a describable, persistent source of alpha that you could say across the cycle? Something like you know, and I think like some hedge funds, like maybe like they're expertise, is like all their different portfolio managers and the risk management practices that they apply to sort of allocating capital internally, and maybe their ability to do that is a source of alpha. Or maybe some of them are really good at like applying the cutting edge of technology or AI, et cetera, and that is their edge, et cetera. Is there like a describable edge that Brevin aims to exploit across the cycle.

Can I ask a questions? So obviously making good decisions, hopefully pivoting at the right moment, being ahead of others in terms of is there a describable, persistent source of alpha that you could say across the cycle? Something like you know, and I think like some hedge funds, like maybe like they're expertise, is like all their different portfolio managers and the risk management practices that they apply to sort of allocating capital internally, and maybe their ability to do that is a source of alpha. Or maybe some of them are really good at like applying the cutting edge of technology or AI, et cetera, and that is their edge, et cetera. Is there like a describable edge that Brevin aims to exploit across the cycle.

So I've thought about how to answer this question a lot. Because everyone is hard working and everyone is smart in market, So there's no real alpha from working an extra hour per week and having an extra IQ point, because that's an arms race where everyone is up to the frontier. I think about it in three different ways, going from narrowly out. So first is muscle memory. I've seen as chief economists all kinds of different things. So I was just reminded, you know, we were talking about the pandemic just a moment ago. You need to have seen a lot and be able to pull together my academic training, my policy training, or markets training to be able to make a view. So in that period right around February, when I saw that when the people who were put away in Travis Air Force Base actually started community spread at Vacaville Community Hospital a mile away, I knew that there was going to be spread everywhere. When I saw that the La Unified School District was shutting down, I knew that the whole economy was shutting down. That kind of muscle memory, knowing what happens when those developments are going to hit markets is a key source of alpha. Going back to earlier periods, you were just talking in the intro about how things seem fine. Now you flip the calendar and it doesn't really seem like anything really changes. I'll tell you another period of time where you flip the calendar and something really changed. GDP growth at the end of two thousand and seven, just a few days before the business cycle peak in December of two thousand printed four percent on a quarterly annualized rate, which was the fastest run rate of growth going in to the business cycle peak a few days later than you had seen in four years. A few weeks after that, the unemployment rate went up three tenths. The FED did an emergency seventy five basis point cut, followed just a few days later by regularly scheduled meetings fifty basis point cut. Things can change very quickly, and one of the persistent source of alpha that we have is that experience of the individuals we have in the firm, MEAs chief economists and other The two others I would just mention quickly are I think it's underappreciated how important trust is in organizations. And that may seem like something that's a very soft consideration when it comes to something right.

So I've thought about how to answer this question a lot. Because everyone is hard working and everyone is smart in market, So there's no real alpha from working an extra hour per week and having an extra IQ point, because that's an arms race where everyone is up to the frontier. I think about it in three different ways, going from narrowly out. So first is muscle memory. I've seen as chief economists all kinds of different things. So I was just reminded, you know, we were talking about the pandemic just a moment ago. You need to have seen a lot and be able to pull together my academic training, my policy training, or markets training to be able to make a view. So in that period right around February, when I saw that when the people who were put away in Travis Air Force Base actually started community spread at Vacaville Community Hospital a mile away, I knew that there was going to be spread everywhere. When I saw that the La Unified School District was shutting down, I knew that the whole economy was shutting down. That kind of muscle memory, knowing what happens when those developments are going to hit markets is a key source of alpha. Going back to earlier periods, you were just talking in the intro about how things seem fine. Now you flip the calendar and it doesn't really seem like anything really changes. I'll tell you another period of time where you flip the calendar and something really changed. GDP growth at the end of two thousand and seven, just a few days before the business cycle peak in December of two thousand printed four percent on a quarterly annualized rate, which was the fastest run rate of growth going in to the business cycle peak a few days later than you had seen in four years. A few weeks after that, the unemployment rate went up three tenths. The FED did an emergency seventy five basis point cut, followed just a few days later by regularly scheduled meetings fifty basis point cut. Things can change very quickly, and one of the persistent source of alpha that we have is that experience of the individuals we have in the firm, MEAs chief economists and other The two others I would just mention quickly are I think it's underappreciated how important trust is in organizations. And that may seem like something that's a very soft consideration when it comes to something right.

It sounds like a car, but it's not.

It sounds like a car, but it's not.

Which is, you can get sources of information anywhere. But if you trust me, Tracy, when I come to you and say listen, the US economy is going to shut down, that may be the difference between you putting on a trade that's one unit or ten units. And then finally the last one is there's intangible capital that is developed over a period of time. In a firm we've been around for more than twenty years, we have intangible capital in the way we structure trades, the AI, the individuals, and that is something that we have as a permanent a source of strategic ballast for us.

Which is, you can get sources of information anywhere. But if you trust me, Tracy, when I come to you and say listen, the US economy is going to shut down, that may be the difference between you putting on a trade that's one unit or ten units. And then finally the last one is there's intangible capital that is developed over a period of time. In a firm we've been around for more than twenty years, we have intangible capital in the way we structure trades, the AI, the individuals, and that is something that we have as a permanent a source of strategic ballast for us.

Joe asked you about alpha. How much of global macro alpha is systematizable? Because again, I think about the landscape of hedge funds. I think about the hedge funds that have been popular in recent years. It's sort of all you know, like relative value alg driven type momentum hedge funds. And you're here, you're talking about like very specific things that have happened in the global economy. Like you know, I was watching the spread of the pandemic and I saw this one base in what was happening there. How systematizable is that kind of insight?

Joe asked you about alpha. How much of global macro alpha is systematizable? Because again, I think about the landscape of hedge funds. I think about the hedge funds that have been popular in recent years. It's sort of all you know, like relative value alg driven type momentum hedge funds. And you're here, you're talking about like very specific things that have happened in the global economy. Like you know, I was watching the spread of the pandemic and I saw this one base in what was happening there. How systematizable is that kind of insight?

I think almost none of it. I think that you have to there's no designer indicator. People will look at financial conditions indexes, or they'll look at regularities that they've seen in the past and hopefully be able to you know, extract some risk creamium out of the markets. But I harken back to a podcast you just did the other day with Harley Bassman, who's developed some you know, pretty sophisticated financials, but in the hands of people who aren't sophisticated investors, their weapons of mass destruction. If you just kept your p fix throughout the cycle, it's an excellent financial instrument. But what if you missed the day of the FED pivot? What if you missed the day that there's you know, essentially a failed auction, because this is the day that people decide that the US's credits is really in question. Those are the kinds of things that I think require real feel for the analysis, plus mapping into the markets. It's very difficult to systemae systematize. You might take a step back and look at markets and say, listen, most of the returns in stocks and bonds have been around FED days, But which FED days pick them? Was it just because you were able to know that J. Powell was going to do a trillion dollars of que in response to the pandemic, it was important to pick that week.

I think almost none of it. I think that you have to there's no designer indicator. People will look at financial conditions indexes, or they'll look at regularities that they've seen in the past and hopefully be able to you know, extract some risk creamium out of the markets. But I harken back to a podcast you just did the other day with Harley Bassman, who's developed some you know, pretty sophisticated financials, but in the hands of people who aren't sophisticated investors, their weapons of mass destruction. If you just kept your p fix throughout the cycle, it's an excellent financial instrument. But what if you missed the day of the FED pivot? What if you missed the day that there's you know, essentially a failed auction, because this is the day that people decide that the US's credits is really in question. Those are the kinds of things that I think require real feel for the analysis, plus mapping into the markets. It's very difficult to systemae systematize. You might take a step back and look at markets and say, listen, most of the returns in stocks and bonds have been around FED days, But which FED days pick them? Was it just because you were able to know that J. Powell was going to do a trillion dollars of que in response to the pandemic, it was important to pick that week.

Let's talk about this moment interesting times. Obviously, debates about whether the FED is gonna cut in March. We recently had the Waller speech. Waller was one of the hawks leading the way, and though he didn't say we're going to go right away, he clearly indicated that on some level he is ready for the rate cut cycle to happen. Inflation trajectory generally seems fine, labor market seems solid, lots of optimism about the soft landing. January seventeenth, here we are, how do you see just sort of the short term macro picture of the medium term.

Let's talk about this moment interesting times. Obviously, debates about whether the FED is gonna cut in March. We recently had the Waller speech. Waller was one of the hawks leading the way, and though he didn't say we're going to go right away, he clearly indicated that on some level he is ready for the rate cut cycle to happen. Inflation trajectory generally seems fine, labor market seems solid, lots of optimism about the soft landing. January seventeenth, here we are, how do you see just sort of the short term macro picture of the medium term.

Let's weave that into the very recent Waller speech and especially his Q and A. The FED is pulled a little bit of a fast one. They told you that they are data dependent and you just needed to look at the data. So let's over the last six months look at what's happened with the data. The June sep is an important milestone. At that meeting, the median forecast for that nineteen member committee was three point nine percent for corp PC inflation. We project at the end of this month, and we, like many others, put a lot of effort into this kind of high frequency data analysis. We project at the end of the month, the release for core PC inflation will be two point nine percent. They've missed by one hundred basis points in six months. In the era of the SEPs, going back to twenty fourteen, they've never missed in that direction by that magnitude. In twenty nineteen, when they missed by a mere thirty basis points, it was enough to get a seventy five basis point mid cycle adjustment, as they called it, in an economy that was performing otherwise pretty well. It faced some shocks with obviously the Trump trade war and so on, but just a thirty basis point miss got them to cut three times starting in the summer and into the fall. They missed by one hundred basis points. Just on what we know, and furthermore, in terms of thinking about where we're going farther down the line, Monetary policy now is as tight as it's ever been on the precipice of recessions if you take the FED seriously. They think that long term neutral is two and a half percent, so rates are broadly three hundred basis points above neutral. Whenever that's been true, you've had a recession, with one small exception in nineteen eighty four. But if it's the case that monetary policy is tight, what is the natural equilorating force of the economy to bring it into equilibrium and just keep it there. Well, it's not monetary policy, because that's putting continual downward pressure on the economy. So we fully expect the economy to continue to slow. And the interesting thing about Waller's take on thing is he had obviously taken on board what's happened with inflation and what he projects to happen inflation. He's discounting the prospects of a deterioration in the labor market, which we do foresee. But he slipped in something very important Joe, especially in the Q and A, which is he went from data dependence to his own personal preference dependence, which is he said, the biggest mistake we could make is starting and then stopping or having to reverse, and in fact he used the word worst mistake. And so he talked three times in the official speech about how he had more confidence in various parts to the outlook coming together which would lead to rate cuts. But then in the Q and A he was unwittingly revealing of his own personal preferences, which is said, the worst thing we could do is stop and start, and furthermore that he had to be thoroughly convinced that inflation had been slaid. So we think that the Fed is well on its way to rate cuts. Figuring out the exact timing is going to depend upon one piece of data or another. How does the next employment report play out? But I think you can have more conviction about the ultimate destination than about the exact timing. I just remind you the last two normal rate cutting cycles started out with a bang, with a fifty basis point cut. One of them was intermeeting, followed up by in that same month in January two thousand and one, another cut. And remember the two thousand and one recession we called a recession. It you never even ultimately strung together two quarters of negative GDP, and the Fed was cutting by one hundred basis points because they kind of waited around. And then Greenspan did his thing. He said, I looked at initial claims and second week auto sales in December of two thousand and the economy's changed. He said to his colleagues, the last move is always a mistake. We need to take it back and take it back quickly. So the March versus mad debate, I think, in some ways obscure is what's really going on, because that's a guess about a policy maker's utility function and how risk averse they're going to be with regard to this really severe aversion to policy reversals, and that's tough to judge.

Let's weave that into the very recent Waller speech and especially his Q and A. The FED is pulled a little bit of a fast one. They told you that they are data dependent and you just needed to look at the data. So let's over the last six months look at what's happened with the data. The June sep is an important milestone. At that meeting, the median forecast for that nineteen member committee was three point nine percent for corp PC inflation. We project at the end of this month, and we, like many others, put a lot of effort into this kind of high frequency data analysis. We project at the end of the month, the release for core PC inflation will be two point nine percent. They've missed by one hundred basis points in six months. In the era of the SEPs, going back to twenty fourteen, they've never missed in that direction by that magnitude. In twenty nineteen, when they missed by a mere thirty basis points, it was enough to get a seventy five basis point mid cycle adjustment, as they called it, in an economy that was performing otherwise pretty well. It faced some shocks with obviously the Trump trade war and so on, but just a thirty basis point miss got them to cut three times starting in the summer and into the fall. They missed by one hundred basis points. Just on what we know, and furthermore, in terms of thinking about where we're going farther down the line, Monetary policy now is as tight as it's ever been on the precipice of recessions if you take the FED seriously. They think that long term neutral is two and a half percent, so rates are broadly three hundred basis points above neutral. Whenever that's been true, you've had a recession, with one small exception in nineteen eighty four. But if it's the case that monetary policy is tight, what is the natural equilorating force of the economy to bring it into equilibrium and just keep it there. Well, it's not monetary policy, because that's putting continual downward pressure on the economy. So we fully expect the economy to continue to slow. And the interesting thing about Waller's take on thing is he had obviously taken on board what's happened with inflation and what he projects to happen inflation. He's discounting the prospects of a deterioration in the labor market, which we do foresee. But he slipped in something very important Joe, especially in the Q and A, which is he went from data dependence to his own personal preference dependence, which is he said, the biggest mistake we could make is starting and then stopping or having to reverse, and in fact he used the word worst mistake. And so he talked three times in the official speech about how he had more confidence in various parts to the outlook coming together which would lead to rate cuts. But then in the Q and A he was unwittingly revealing of his own personal preferences, which is said, the worst thing we could do is stop and start, and furthermore that he had to be thoroughly convinced that inflation had been slaid. So we think that the Fed is well on its way to rate cuts. Figuring out the exact timing is going to depend upon one piece of data or another. How does the next employment report play out? But I think you can have more conviction about the ultimate destination than about the exact timing. I just remind you the last two normal rate cutting cycles started out with a bang, with a fifty basis point cut. One of them was intermeeting, followed up by in that same month in January two thousand and one, another cut. And remember the two thousand and one recession we called a recession. It you never even ultimately strung together two quarters of negative GDP, and the Fed was cutting by one hundred basis points because they kind of waited around. And then Greenspan did his thing. He said, I looked at initial claims and second week auto sales in December of two thousand and the economy's changed. He said to his colleagues, the last move is always a mistake. We need to take it back and take it back quickly. So the March versus mad debate, I think, in some ways obscure is what's really going on, because that's a guess about a policy maker's utility function and how risk averse they're going to be with regard to this really severe aversion to policy reversals, and that's tough to judge.

So I take the point about timing, and in some respects it's academic whether it's March or like a few months later. But you mentioned something earlier that was really interesting to me, which was that I think you said you went long credit in twenty twenty three, and that was kind of a bold and unusual call, because again, going into twenty twenty three, towards the end of twenty twenty two, everyone the consensus was that we were going to have a recession and that corporate defaults were going to spike. And we have seen a pickup in defaults. This is true, but certainly not to the extent that a lot of people were thinking.

So I take the point about timing, and in some respects it's academic whether it's March or like a few months later. But you mentioned something earlier that was really interesting to me, which was that I think you said you went long credit in twenty twenty three, and that was kind of a bold and unusual call, because again, going into twenty twenty three, towards the end of twenty twenty two, everyone the consensus was that we were going to have a recession and that corporate defaults were going to spike. And we have seen a pickup in defaults. This is true, but certainly not to the extent that a lot of people were thinking.

We have seen.

We have seen.

Spreads come in since towards the end of twenty twenty three. What went into making that specific call, I go back to.

Spreads come in since towards the end of twenty twenty three. What went into making that specific call, I go back to.

Two thousand and six, as a good template. So two thousand and six saw the end of the rate hiking cycle. Then in June of two thousand and six, there was widespread worries about the economy, and there were more manifest than they are now because housing was obviously slowing down and looking very dodgy in certain parts of the country. At that point, it appeared to be an environment that it would just be crazy to be long some of these risk assets, especially ones that were tied to housing, in the event fed stop raising rates in the middle of the earth like they did in twenty twenty three. There were lots of worries even dating back into two thousand and five, in that prior episode and in this one as well, but it was fine to be long credit because you hadn't seen the deterioration in the economy. So ultimately, in two thousand and six and in twenty twenty three, stocks were up by double digits. Credit did fine, and those indicators. Despite the market's interest in trying to find designer indicators to tell you what's going to happen somewhere down the road, financial conditions indexes predict nothing reliably. They have false negatives, they have false positives, sometimes credit is predicted a downturn or a financial market ruction. Sometimes it hasn't. Again, going back to that period of time, like in two thousand and seven, real GDP growth was four percent going into a recession. I remember one of the times that I was the most bearish in Brevan Howard history was just after bear Stearns was bailed out. We thought the economy was absolutely falling apart. And in the event, if you look back at private payrolls at that point, you were losing two hundred and fifty thousand jobs per month. In April and May. After bear Stearns failed, stocks went right up. Credit did fine, And it was only until later on in the year, and even in the week that Lehman failed stocks went up. It's oftentimes going to be the case that financial instruments and financial markets do fine until they don't.

Two thousand and six, as a good template. So two thousand and six saw the end of the rate hiking cycle. Then in June of two thousand and six, there was widespread worries about the economy, and there were more manifest than they are now because housing was obviously slowing down and looking very dodgy in certain parts of the country. At that point, it appeared to be an environment that it would just be crazy to be long some of these risk assets, especially ones that were tied to housing, in the event fed stop raising rates in the middle of the earth like they did in twenty twenty three. There were lots of worries even dating back into two thousand and five, in that prior episode and in this one as well, but it was fine to be long credit because you hadn't seen the deterioration in the economy. So ultimately, in two thousand and six and in twenty twenty three, stocks were up by double digits. Credit did fine, and those indicators. Despite the market's interest in trying to find designer indicators to tell you what's going to happen somewhere down the road, financial conditions indexes predict nothing reliably. They have false negatives, they have false positives, sometimes credit is predicted a downturn or a financial market ruction. Sometimes it hasn't. Again, going back to that period of time, like in two thousand and seven, real GDP growth was four percent going into a recession. I remember one of the times that I was the most bearish in Brevan Howard history was just after bear Stearns was bailed out. We thought the economy was absolutely falling apart. And in the event, if you look back at private payrolls at that point, you were losing two hundred and fifty thousand jobs per month. In April and May. After bear Stearns failed, stocks went right up. Credit did fine, And it was only until later on in the year, and even in the week that Lehman failed stocks went up. It's oftentimes going to be the case that financial instruments and financial markets do fine until they don't.

I want to get into some big pictures, but just before we do, on this sort of current moment, so we talked about the Waller speech. We talked about how the you know, historically speaking, the FED is you know, the recent overestimation I guess of the inflation trajectory is quite large. They've expected inflation to be much hotter at least I'm measured by CORPCE than it has been. So what's your sort of view, specifically in terms of rate cuts in the prospect of recession in twenty twenty four.

I want to get into some big pictures, but just before we do, on this sort of current moment, so we talked about the Waller speech. We talked about how the you know, historically speaking, the FED is you know, the recent overestimation I guess of the inflation trajectory is quite large. They've expected inflation to be much hotter at least I'm measured by CORPCE than it has been. So what's your sort of view, specifically in terms of rate cuts in the prospect of recession in twenty twenty four.

So we are a recession shop because of the reason I mentioned earlier, Joe, which is that whenever monetary policy has been tight, you've been falling into recession again with that exception of nineteen eighty four. And I take the point that Waller was implicitly trying to make in a speech, which is that everything that has happened in the past has happened for the first time once. So maybe this is a business cycle where everything comes out with the perfect soft landing. But let me frame it this way. Even if they have the Sully Sullenberger soft landing of all anniversary of the US are eighteen forty two of soft landings, it's still the case that monetary policy is miles off in terms of its terminal destination because they should be it around neutral if you're getting a soft landing, and right now you're arguably on their own market.

So we are a recession shop because of the reason I mentioned earlier, Joe, which is that whenever monetary policy has been tight, you've been falling into recession again with that exception of nineteen eighty four. And I take the point that Waller was implicitly trying to make in a speech, which is that everything that has happened in the past has happened for the first time once. So maybe this is a business cycle where everything comes out with the perfect soft landing. But let me frame it this way. Even if they have the Sully Sullenberger soft landing of all anniversary of the US are eighteen forty two of soft landings, it's still the case that monetary policy is miles off in terms of its terminal destination because they should be it around neutral if you're getting a soft landing, and right now you're arguably on their own market.

Pricing, and how many cuts this year right now.

Pricing, and how many cuts this year right now.

As of today, less than six cuts, And you think it'll be more. Listen, let me go back to twenty twenty one. In twenty twenty two, intellectual consistency that got you to the rate hikes seen during that cycle, with inflation going up and demanding that you do what turned out to be four seventy five basis point hikes in a row. Intellectual consistency demands that if you thought that that was appropriate, it's similarly appropriate to be doing cuts, not of the same magnitude in total, going back down to zero, but certainly back down to neutral. And the reason for that is because you have policy set to a very high inflation environment. Now that's no longer no longer out there whaller're said in a speech, the six month change will be around two. I'm not going to argue with the policy maker what around two is, but it'll be one point eight percent. On a three month annualized basis, it'll be one point four percent.

As of today, less than six cuts, And you think it'll be more. Listen, let me go back to twenty twenty one. In twenty twenty two, intellectual consistency that got you to the rate hikes seen during that cycle, with inflation going up and demanding that you do what turned out to be four seventy five basis point hikes in a row. Intellectual consistency demands that if you thought that that was appropriate, it's similarly appropriate to be doing cuts, not of the same magnitude in total, going back down to zero, but certainly back down to neutral. And the reason for that is because you have policy set to a very high inflation environment. Now that's no longer no longer out there whaller're said in a speech, the six month change will be around two. I'm not going to argue with the policy maker what around two is, but it'll be one point eight percent. On a three month annualized basis, it'll be one point four percent.

This is exactly what I wanted to ask you, because it feels to me like rates at the moment are sort of the solution to and the cause of all the markets problems. Right, so we might get a recession because interest rates have gone up so much and the cost of financing is high. But if that starts to happen, I mean, the FED can start to cut and they can do insurance cuts even before they see a sort of durable impact from the higher rates. How much of a problem is this if the issue is kind of caused by higher rates but can also be solved by lower rates. Is the limiting factor here? Is the constraint really what happens with inflation?

This is exactly what I wanted to ask you, because it feels to me like rates at the moment are sort of the solution to and the cause of all the markets problems. Right, so we might get a recession because interest rates have gone up so much and the cost of financing is high. But if that starts to happen, I mean, the FED can start to cut and they can do insurance cuts even before they see a sort of durable impact from the higher rates. How much of a problem is this if the issue is kind of caused by higher rates but can also be solved by lower rates. Is the limiting factor here? Is the constraint really what happens with inflation?

I think we need to bring in the other part of the dual mandate here, which is that you're playing with fire. So a very careful look at the labor market now will suggest that hiring has just ground to a halt. So if it weren't for participation falling back by a huge amount three tenths in the last report at the unemployment rate would have gone up by three tens to four percent. Would have totally change the macro conversation. Underneath that headline statistic, the gross flows within the household survey are telling you that folks who are not in the labor work force moving into hiring fell by almost a record amount. So we're seeing the underlying details of a labor market which is slowing down. You're kind of living in this twilight between recession and non recession. The FED is essentially running I know this from your compexity conversation. You'll love this, Tracy. The FED is running essentially a short Gamma position with regard to any weak data, any piece.

I think we need to bring in the other part of the dual mandate here, which is that you're playing with fire. So a very careful look at the labor market now will suggest that hiring has just ground to a halt. So if it weren't for participation falling back by a huge amount three tenths in the last report at the unemployment rate would have gone up by three tens to four percent. Would have totally change the macro conversation. Underneath that headline statistic, the gross flows within the household survey are telling you that folks who are not in the labor work force moving into hiring fell by almost a record amount. So we're seeing the underlying details of a labor market which is slowing down. You're kind of living in this twilight between recession and non recession. The FED is essentially running I know this from your compexity conversation. You'll love this, Tracy. The FED is running essentially a short Gamma position with regard to any weak data, any piece.

Of feel like there's a bell we should ring when someone says.

Of feel like there's a bell we should ring when someone says.

Gamma, any week data that comes out that's material, not like the Empire Survey, which is a few manufacturers in Buffalo, a really material piece of weak data, and the FED will stop and look around like they have in the past, whether it was at January two thousand and one or in January of two thousand and eight, and say, listen, we calibrated policy to a different environment that no longer apparently prevails. The thing I'm trying to provide you with is it's not just an antiseptic, technocratic reading of the data that's necessary here. You have to play the man and the ball, the man or the woman, but man in this case in j Powell gets to decide when he starts cutting rates, and that's going to depend upon his own kind of personal welfare function of what he thinks is important and if he's really averse to a policy reversal, and he wants to be that much more sure and makes it more likely that they have to do more later on.

Gamma, any week data that comes out that's material, not like the Empire Survey, which is a few manufacturers in Buffalo, a really material piece of weak data, and the FED will stop and look around like they have in the past, whether it was at January two thousand and one or in January of two thousand and eight, and say, listen, we calibrated policy to a different environment that no longer apparently prevails. The thing I'm trying to provide you with is it's not just an antiseptic, technocratic reading of the data that's necessary here. You have to play the man and the ball, the man or the woman, but man in this case in j Powell gets to decide when he starts cutting rates, and that's going to depend upon his own kind of personal welfare function of what he thinks is important and if he's really averse to a policy reversal, and he wants to be that much more sure and makes it more likely that they have to do more later on.

This was sort of Basman's point as well, about like, if you think about what's driving policy makers, it's probably reputation and legacy.

This was sort of Basman's point as well, about like, if you think about what's driving policy makers, it's probably reputation and legacy.

It's a dual mandate as well. I mean, they're genuine There's no greater public servant than j. Powell, who has spent his entire life around Washington trying to do good for public policy. I think he genuinely wants to do good.

It's a dual mandate as well. I mean, they're genuine There's no greater public servant than j. Powell, who has spent his entire life around Washington trying to do good for public policy. I think he genuinely wants to do good.

Oh you were at the FED, of course, how much does that experience feed into your thinking now?

Oh you were at the FED, of course, how much does that experience feed into your thinking now?

It's formative, It's incredibly important. So I started out my career as a PC economist and then a per and I felt like I learned in the Green Span era all about how to analyze the data and all about the sausage making of how policymaking really gets done. And so having that appreciation for how these decisions really get made. It's not about you know, the data release here or there. It's coalition building. It's how they're interpreting things, it's forward guidance and so forth. That experience I think is invaluable. Having seen how the sausages actually made really helps you be able to sample it.

It's formative, It's incredibly important. So I started out my career as a PC economist and then a per and I felt like I learned in the Green Span era all about how to analyze the data and all about the sausage making of how policymaking really gets done. And so having that appreciation for how these decisions really get made. It's not about you know, the data release here or there. It's coalition building. It's how they're interpreting things, it's forward guidance and so forth. That experience I think is invaluable. Having seen how the sausages actually made really helps you be able to sample it.

I want to talk about some big picture topics, but real quickly before that, as you point out, you know and the most recent non firm payils are work, there could have been a different narrative than the one that was because while the headline was good, we did see that weakening and labor force participation, we did see that increase in U six prime age employment to population did weaken. But whatever the unemployment rate did hold steady, when does it change and sort of people wake up to as you point out, that hiring is really slowed down.

I want to talk about some big picture topics, but real quickly before that, as you point out, you know and the most recent non firm payils are work, there could have been a different narrative than the one that was because while the headline was good, we did see that weakening and labor force participation, we did see that increase in U six prime age employment to population did weaken. But whatever the unemployment rate did hold steady, when does it change and sort of people wake up to as you point out, that hiring is really slowed down.

So Joe, listen, what's going to happ and is the recession should it unfold the way we think it unfolds, will feel like a slow down, even if we're right. So suppose we're absolutely confident that there's going to be a recession, at the start, it's going to feel just like a slowdown. And the reason for that go back to the stat I quoted you earlier on there were five hundred thousand jobs lost in the two months following the Bear Stearns failure. At the time, we didn't know that the first print was someone minus sixteen k or minus twenty four k. That month when Ben Bernanke cut by an emergency seventy five and then followed it up with another fifty basis point cut, the unemployment rate went up three tenths, which may not seem like a big deal. Private payrolls were still going along pretty well. The first draft of history is not the ultimate draft that is written, and it's a matter of kind of art and science could taste to figure out what you should be focusing on. And there's no designer statistic that you can always use. Apropos The point about there's no way to design some CTA that harvest is all the risk premium in the FED because these things change over time. For example, right now, I think it's very important to pay attention to this gross flow is finding that across the board hiring is stopped, whether it's in the jolts, whether it's in the cps or what have you. That's a key thing to be looking at because businesses tying it to inflation, which we haven't talked a ton about. Businesses probably realize they're not going to get margin increases by raising prices anymore, so how are they going to protect or raise their margins. In twenty twenty four, the good old fashioned way is firing people, and I think we're on the potential edge of that should it be the case the monetary policy remained.

So Joe, listen, what's going to happ and is the recession should it unfold the way we think it unfolds, will feel like a slow down, even if we're right. So suppose we're absolutely confident that there's going to be a recession, at the start, it's going to feel just like a slowdown. And the reason for that go back to the stat I quoted you earlier on there were five hundred thousand jobs lost in the two months following the Bear Stearns failure. At the time, we didn't know that the first print was someone minus sixteen k or minus twenty four k. That month when Ben Bernanke cut by an emergency seventy five and then followed it up with another fifty basis point cut, the unemployment rate went up three tenths, which may not seem like a big deal. Private payrolls were still going along pretty well. The first draft of history is not the ultimate draft that is written, and it's a matter of kind of art and science could taste to figure out what you should be focusing on. And there's no designer statistic that you can always use. Apropos The point about there's no way to design some CTA that harvest is all the risk premium in the FED because these things change over time. For example, right now, I think it's very important to pay attention to this gross flow is finding that across the board hiring is stopped, whether it's in the jolts, whether it's in the cps or what have you. That's a key thing to be looking at because businesses tying it to inflation, which we haven't talked a ton about. Businesses probably realize they're not going to get margin increases by raising prices anymore, so how are they going to protect or raise their margins. In twenty twenty four, the good old fashioned way is firing people, and I think we're on the potential edge of that should it be the case the monetary policy remained.

This sort of reminds me of the argument about war, right, which is like, it's not like suddenly war happens, or at least not usually, with some notable exceptions in recent history. But like people who live through World War One or World War it sort of sneaks up on you in many ways, and it's only when you look back that you think, like, aha, here are the signs. But okay, that was my very clumsy seg into the major changes, the big geopolitical risks, the economic regime changes. What are you looking at?

This sort of reminds me of the argument about war, right, which is like, it's not like suddenly war happens, or at least not usually, with some notable exceptions in recent history. But like people who live through World War One or World War it sort of sneaks up on you in many ways, and it's only when you look back that you think, like, aha, here are the signs. But okay, that was my very clumsy seg into the major changes, the big geopolitical risks, the economic regime changes. What are you looking at?

I think it's important, notwithstanding the fact that I said that extracting risk premium on a daily, monthly basis what have you. It doesn't pay to be a desk general moving pieces around a giant map. I think it is important to have a general framework for how you're thinking about markets. And I think we've gone through a paradigm shift that's maybe a little bit hard to appreciate, just because so much has happened with the high frequency macro with inflation and since the pandemic. But we see three major forces that have changed. First, we were in an era of the new normal and the global savings glut and Ricardo cabe Ero's deficit of safe assets. You know what, there's no deficit of now safe assets. There are a lot of safe assets printed by the US government every month. And that new normal for interest rates a secular stagnation that Larry Summers gave a name to something that we all kind of felt but weren't really sure how to describe. In twenty fourteen, we're now out of that era. In our view. We're in a higher interest rate, higher volatility environment that makes it so that policy makers no longer have the free launch that they had POSTGFC and through the pandemic, there is a real budget constraint on sovereign debt, especially in the United States and some of the other developed market economies. And I think you're past the era of the FED put because we saw a period of time where j. Powell could say, listen, we know how to deal with inflation. Don't worry about all the QII we did, and that turned out not to be true. It turned out to be a problem that made the American people more upset than they'd ever been in the post war period. So, whether it's fiscal policy or whether it's monetary policy, I think we're in a new era that makes it so that there's no longer a kind of non economic protector of markets. That's a huge change from what we all got used to. Used to be able to go out as an investor and just kind of buy everything. Any strategy was allowed to flourish because ultimately you knew that there was a non economic actor out there fiscal or monetary policy to bail you out. And it's at least much more circumscribed now. I think the second one is China. We've all lived in an era, certainly in this century where China has been an incredible source of dynamism for the global economy, and they've taken all of the proceeds of that and recycled it into financial markets another non economic buyer of treasuries. And now Shishinping is quite clearly I mean he's doing some marketing at Davos with some of his external officials, but he just gave a speech at home talking about economic nationalism. Their goal is to have state directed capitalism, common prosperity, which is getting rid of some of the tensions that were created in a society that had very robust growth, generating more billionaires than anywhere else in the world, and the national defense. This is not something that we've seen, not something that we're used to, and has direct effects on investors because this is deglobalization right there. And I think it's right that you have people like Brad Sster going out and saying, listen, nothing's really changed now, But I think it's a snapshot apropos of what you're saying. You never really realize when you're slouching into something. Every marginal decision that's being made is one consistent with deglobalization and is going to have I think, you know, epic impact on markets. And finally, you joked one of the podcasts earlier this year, you just need to sound smart by stroking your chin and quoting geopolitical risks. But I'm going to quote geopolitical risks. I think we're at the end of the end of history era. US won the Cold War, liberal democracy was triumphant. Liberal democracy had a test during the Global War on Terror. But I don't remember anyone really wanted to sign up with Osama bin Land to go live in a cave. It was the case that we were able to win the global war on terror. Liberal democracy was triumphant, but now it's not. It face is a genuine challenge with what's going on in these wars. And you might think the wars are just individual points, but they add up to something that wears. The whole is much greater in the sum of its parts. The unbounded relationship between Shishiping and Putin is important. The Biden administration may not have learned this so well, but certainly the bb administration has learned that deterrence doesn't work. Our efforts to deter our adversaries, and certainly Israel's efforts to deter Hamas if we found out it doesn't work. And so now we face a genuine dialectic fight of liberal democracy against the forces the challenge it And you might think, well, you could say that at any time. This sounds like a political science podcast, but it has direct impact on financial markets because there's one empirical regularity about wars. They cause inflation because they're expensive to finance.

I think it's important, notwithstanding the fact that I said that extracting risk premium on a daily, monthly basis what have you. It doesn't pay to be a desk general moving pieces around a giant map. I think it is important to have a general framework for how you're thinking about markets. And I think we've gone through a paradigm shift that's maybe a little bit hard to appreciate, just because so much has happened with the high frequency macro with inflation and since the pandemic. But we see three major forces that have changed. First, we were in an era of the new normal and the global savings glut and Ricardo cabe Ero's deficit of safe assets. You know what, there's no deficit of now safe assets. There are a lot of safe assets printed by the US government every month. And that new normal for interest rates a secular stagnation that Larry Summers gave a name to something that we all kind of felt but weren't really sure how to describe. In twenty fourteen, we're now out of that era. In our view. We're in a higher interest rate, higher volatility environment that makes it so that policy makers no longer have the free launch that they had POSTGFC and through the pandemic, there is a real budget constraint on sovereign debt, especially in the United States and some of the other developed market economies. And I think you're past the era of the FED put because we saw a period of time where j. Powell could say, listen, we know how to deal with inflation. Don't worry about all the QII we did, and that turned out not to be true. It turned out to be a problem that made the American people more upset than they'd ever been in the post war period. So, whether it's fiscal policy or whether it's monetary policy, I think we're in a new era that makes it so that there's no longer a kind of non economic protector of markets. That's a huge change from what we all got used to. Used to be able to go out as an investor and just kind of buy everything. Any strategy was allowed to flourish because ultimately you knew that there was a non economic actor out there fiscal or monetary policy to bail you out. And it's at least much more circumscribed now. I think the second one is China. We've all lived in an era, certainly in this century where China has been an incredible source of dynamism for the global economy, and they've taken all of the proceeds of that and recycled it into financial markets another non economic buyer of treasuries. And now Shishinping is quite clearly I mean he's doing some marketing at Davos with some of his external officials, but he just gave a speech at home talking about economic nationalism. Their goal is to have state directed capitalism, common prosperity, which is getting rid of some of the tensions that were created in a society that had very robust growth, generating more billionaires than anywhere else in the world, and the national defense. This is not something that we've seen, not something that we're used to, and has direct effects on investors because this is deglobalization right there. And I think it's right that you have people like Brad Sster going out and saying, listen, nothing's really changed now, But I think it's a snapshot apropos of what you're saying. You never really realize when you're slouching into something. Every marginal decision that's being made is one consistent with deglobalization and is going to have I think, you know, epic impact on markets. And finally, you joked one of the podcasts earlier this year, you just need to sound smart by stroking your chin and quoting geopolitical risks. But I'm going to quote geopolitical risks. I think we're at the end of the end of history era. US won the Cold War, liberal democracy was triumphant. Liberal democracy had a test during the Global War on Terror. But I don't remember anyone really wanted to sign up with Osama bin Land to go live in a cave. It was the case that we were able to win the global war on terror. Liberal democracy was triumphant, but now it's not. It face is a genuine challenge with what's going on in these wars. And you might think the wars are just individual points, but they add up to something that wears. The whole is much greater in the sum of its parts. The unbounded relationship between Shishiping and Putin is important. The Biden administration may not have learned this so well, but certainly the bb administration has learned that deterrence doesn't work. Our efforts to deter our adversaries, and certainly Israel's efforts to deter Hamas if we found out it doesn't work. And so now we face a genuine dialectic fight of liberal democracy against the forces the challenge it And you might think, well, you could say that at any time. This sounds like a political science podcast, but it has direct impact on financial markets because there's one empirical regularity about wars. They cause inflation because they're expensive to finance.

Joe, I feel like our international relations degrees become more useless by the day. You would think it would be the opposite, with all this geopolitical risk, But I remember, like, well, I think you would have done it around the same time. It was all like neoliberal end of globalization. It was all Fukuyama and people like that. And yeah, it doesn't seem to have happened, doesn't well.

Joe, I feel like our international relations degrees become more useless by the day. You would think it would be the opposite, with all this geopolitical risk, But I remember, like, well, I think you would have done it around the same time. It was all like neoliberal end of globalization. It was all Fukuyama and people like that. And yeah, it doesn't seem to have happened, doesn't well.

To be honest, I don't remember anything in college. And it was not because I was like partying like crazy. I just it's been a long time. There's a lot there. Let's talk a little bit more China for a second. In fact, just today this morning, we got some new data out of China. Not great. Population continuing to shrink. There's this question about like, when are they going to stimulate the economy, When is that big spending coming up? When are they going to have something more resembling a welfare state, common bread sets or theme that allows the Chinese consumer to add more buying power. What is going on in China even sitting this maybe some of these sort of national security or national defense ambitions, et cetera. What is you know, when you say economic nationalism, what is Hijinping trying to do? Right? Now in your view to the Chinese economy.

To be honest, I don't remember anything in college. And it was not because I was like partying like crazy. I just it's been a long time. There's a lot there. Let's talk a little bit more China for a second. In fact, just today this morning, we got some new data out of China. Not great. Population continuing to shrink. There's this question about like, when are they going to stimulate the economy, When is that big spending coming up? When are they going to have something more resembling a welfare state, common bread sets or theme that allows the Chinese consumer to add more buying power. What is going on in China even sitting this maybe some of these sort of national security or national defense ambitions, et cetera. What is you know, when you say economic nationalism, what is Hijinping trying to do? Right? Now in your view to the Chinese economy.

So investors, whether it's in the West or with regards to China, are continually hoping for the FED put the China put around the corner, and I think it just misunderstands what's going on with China, and I describe clearly as making an effort to develop the economy through state run enterprises. Common prosperity is their version of income redistribution and directing things to national defense clearly as its own goals. I think one of the things you learned from history, so shifting from the ir degree to the history degree, is these leaders, as communist leaders, whether it's Stalin or Shishin Ping or Mao, they believe behind closed doors what they say to you in public, whether you're looking at Stephen Cottinggan's work about Stalin or Frank Decotter's work about Mao. Whenever they've gone to the archives, they've found out what they sing in the poll Up Bureau that they never thought would be released was exactly what they were saying in public. And Shijingping is telling you what he believes in. And therefore a lot of the templates that people use in order to try and understand China. Now, I think are you know, they have some resonance, but I think they're just missing the major point, which is you'll have some people say, oh, it's a balance sheet recession, or China's on the edge of its Lehman moment, because Chinese real estate genuinely is the world's largest asset class. Those things, in some sense are both true. But I don't think he helps you understand what's going on in China. I go back to and bear with me, because this may seem at first like a goofy comparison. Shishingping's notion of common prosperity reminded me I forget when the penny dropped of FDR's efforts in the immediate aftermath of his effort to stimulate the economy out of the Great Depression. What happened in the Great Depression in the United States is that we expanded state control of the economy. Fiscal and monetary policy were pretty inert, and you demonized any private success. I asked this was a good example of using chat GPT. I asked chat GPT to compare FDR's second inaugural address in nineteen thirty seven with Shishingping's key speeches about common prosperity. This was everything you need to know about chat GPT, because first it begged me not to do it. It said, you shouldn't be doing this, You absolutely should not compare FDR and shishing Ping. So it spit that out like a ferbal. But then when I forced it to answer, if you go and compare a common prosperity speech to that second inaugural, they have the same elements. And let me tie this into answering your question Joe about why this is helpful for understanding Chinese macro now. The essence of the NRA and the Great Depression, the Wagner Act, it was all to suppress competition. There was a perception the competition was a bad thing. And what that did was it set wages above the market clearing level. And what is the result when you have wages set above the market clearing level? Unemployment? Why do you have unemployment in China?

So investors, whether it's in the West or with regards to China, are continually hoping for the FED put the China put around the corner, and I think it just misunderstands what's going on with China, and I describe clearly as making an effort to develop the economy through state run enterprises. Common prosperity is their version of income redistribution and directing things to national defense clearly as its own goals. I think one of the things you learned from history, so shifting from the ir degree to the history degree, is these leaders, as communist leaders, whether it's Stalin or Shishin Ping or Mao, they believe behind closed doors what they say to you in public, whether you're looking at Stephen Cottinggan's work about Stalin or Frank Decotter's work about Mao. Whenever they've gone to the archives, they've found out what they sing in the poll Up Bureau that they never thought would be released was exactly what they were saying in public. And Shijingping is telling you what he believes in. And therefore a lot of the templates that people use in order to try and understand China. Now, I think are you know, they have some resonance, but I think they're just missing the major point, which is you'll have some people say, oh, it's a balance sheet recession, or China's on the edge of its Lehman moment, because Chinese real estate genuinely is the world's largest asset class. Those things, in some sense are both true. But I don't think he helps you understand what's going on in China. I go back to and bear with me, because this may seem at first like a goofy comparison. Shishingping's notion of common prosperity reminded me I forget when the penny dropped of FDR's efforts in the immediate aftermath of his effort to stimulate the economy out of the Great Depression. What happened in the Great Depression in the United States is that we expanded state control of the economy. Fiscal and monetary policy were pretty inert, and you demonized any private success. I asked this was a good example of using chat GPT. I asked chat GPT to compare FDR's second inaugural address in nineteen thirty seven with Shishingping's key speeches about common prosperity. This was everything you need to know about chat GPT, because first it begged me not to do it. It said, you shouldn't be doing this, You absolutely should not compare FDR and shishing Ping. So it spit that out like a ferbal. But then when I forced it to answer, if you go and compare a common prosperity speech to that second inaugural, they have the same elements. And let me tie this into answering your question Joe about why this is helpful for understanding Chinese macro now. The essence of the NRA and the Great Depression, the Wagner Act, it was all to suppress competition. There was a perception the competition was a bad thing. And what that did was it set wages above the market clearing level. And what is the result when you have wages set above the market clearing level? Unemployment? Why do you have unemployment in China?

Now?

Now?

Is it because it's not a particularly dynamic economy. It's still an amazingly productive and growth oriented set of businesses. It's experiencing unemployment because the overall price level of that economy is inappropriate and then in response, you end up with status leaders doing the same thing that FDR did, which is you might have noticed some of the news stories about Shi Shinping sending people down into the provinces. It's the same thing we did in the new deal with the CCC, the WPA. I even got a chuckle in December when they said they were going to do fiscal stimulus by flood abatement, which reminded me of the TVA. So for me, I go back to the government meddling in the economy like we did in the Great Depression, as being a useful template for what's going on in China. The unemployment rate never went below fourteen percent after nineteen thirty three until we had World War Two. So let's hope World War two is in his solution to his unemployment problem.