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00:00:04:02 - 00:00:08:14
- Welcome back to Storytellers
in Business podcast.
00:00:08:14 - 00:00:12:00
Today I'm with my colleague
and friend, Steve Ricchiuto,
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who is Mizuho's Managing Director
00:00:14:08 - 00:00:17:07
and Chief US Economist in New York.
00:00:17:07 - 00:00:22:01
Steve is a highly regarded,
sought-after guest
00:00:22:01 - 00:00:25:12
for global financial media, an author.
00:00:25:12 - 00:00:28:09
His most recent book,
"Deconstructing Credit Cycles"
00:00:28:09 - 00:00:32:09
was published last year,
and an incredible colleague.
00:00:32:29 - 00:00:37:03
His daily incisive commentary
and welcome sense of humor
00:00:37:03 - 00:00:40:08
certainly make for an illuminating
and insightful reading
00:00:40:08 - 00:00:42:15
in what could be an otherwise rote
00:00:42:15 - 00:00:44:18
day-to-day reporting of numbers.
00:00:44:18 - 00:00:47:00
He also makes very bold predictions
00:00:47:00 - 00:00:51:00
and is accustomed to being a
contrarian in what is a crowded
00:00:51:00 - 00:00:55:19
and opinionated space of
economists, market pundits,
00:00:55:19 - 00:00:58:05
commentators, and talking heads.
00:00:58:05 - 00:01:01:12
Steve has spent more than 35 years
00:01:01:12 - 00:01:04:21
in the financial services industry.
00:01:04:21 - 00:01:08:00
Clearly has seen a
rollercoaster of interest rates,
00:01:08:00 - 00:01:12:25
credit cycles, inflation
cycles, and what have you.
00:01:12:25 - 00:01:16:05
And prior to joining Mizuho 16 years ago,
00:01:16:05 - 00:01:19:11
Steve has held very senior
positions as a Chief Economist,
00:01:19:11 - 00:01:23:21
Head of Fixed Income Research,
Fixed Income Economist,
00:01:23:21 - 00:01:28:07
Equity Economist, Bond
Strategist, Equity Strategist,
00:01:28:07 - 00:01:29:17
and a Director of Fixed Income.
00:01:29:17 - 00:01:35:08
Wow, that's a mouthful, but
certainly gave you a great sense
00:01:35:08 - 00:01:39:07
and a very broad spectrum of, I would say,
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experiences to share with
us in conversation today.
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So, with that, first of all,
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I'd like to welcome you
Steve to our podcast.
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- Thank you, boss.
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- So, I'm excited to have you share
00:01:50:25 - 00:01:53:12
with folks some insights, given the fact
00:01:53:12 - 00:01:56:13
that you are at the
forefront of a lot of data
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and information that the Fed,
the regulators, our clients,
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are using to inform their
decision-making processes,
00:02:03:22 - 00:02:05:25
whether it be accessing capital,
00:02:05:25 - 00:02:08:11
making strategic moves and what have you.
00:02:08:11 - 00:02:10:14
But I thought maybe we'd
start the conversation
00:02:10:14 - 00:02:13:13
with a little bit about
your personal journey,
00:02:13:13 - 00:02:16:07
and kind of what has
brought you to Wall Street.
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And when thinking about this conversation
00:02:18:21 - 00:02:20:23
you made a comment to me and you said,
00:02:20:23 - 00:02:24:26
"Life has found me rather
than me finding life."
00:02:24:26 - 00:02:25:29
What did you mean by that?
00:02:25:29 - 00:02:28:18
- Well, that's exactly the truth.
00:02:28:18 - 00:02:31:06
You know, for me, the
journey here was nothing
00:02:31:06 - 00:02:34:06
I really planned ahead of time.
00:02:34:06 - 00:02:35:29
I was in undergraduate,
00:02:35:29 - 00:02:38:27
and I was getting out at the
time that we were starting
00:02:38:27 - 00:02:41:16
to go through a stagflation environment.
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And the decision was take a menial job
00:02:44:18 - 00:02:46:08
at one or two institutions,
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or go where every one of the math majors
00:02:48:24 - 00:02:51:09
in the school I was going
to, which was Bell Labs,
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and go take a job there or do
something else with my life.
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And I decided, well, I
really like academia,
00:02:56:29 - 00:02:59:14
so let me go off to graduate school.
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Economics turned out to
be my course, my path,
00:03:03:04 - 00:03:05:16
simply because my thesis advisor
00:03:05:16 - 00:03:07:19
from my undergraduate mathematics degree
00:03:07:19 - 00:03:10:05
told me I couldn't think in
more than seven dimensions.
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And that he wouldn't give me
a letter of recommendation
00:03:12:25 - 00:03:15:05
as a theoretical mathematician.
00:03:15:05 - 00:03:17:19
So, that then led me to
find something else to do,
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and economics had the
beginnings of math in it.
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So, it had equations, it had curves,
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so I decided to go with economics.
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- And how has that
background in mathematics
00:03:29:00 - 00:03:33:00
and I guess then a credit research analyst
00:03:33:00 - 00:03:35:13
have helped shape what has been more
00:03:35:13 - 00:03:38:20
of a differentiated
approach that you have taken
00:03:38:20 - 00:03:41:12
to forming views around the macro?
00:03:41:12 - 00:03:44:06
- Yeah, you know, that's a
really interesting question,
00:03:44:06 - 00:03:46:19
and it really gets back to
the first time I was asked
00:03:46:19 - 00:03:49:22
to be the Director of
Fixed Income Research.
00:03:49:22 - 00:03:52:10
I was given the opportunity to build
00:03:52:10 - 00:03:54:06
the Fixed Income Research Department.
00:03:54:06 - 00:03:55:21
And coming from a mathematical
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quantitative-oriented background,
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even in the economics community,
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where we were at the leading
edge of using econometrics
00:04:02:17 - 00:04:05:04
and statistical analysis to try to project
00:04:05:04 - 00:04:07:22
macroeconomic data on a monthly basis,
00:04:07:22 - 00:04:09:26
daily and a weekly basis in the markets.
00:04:11:05 - 00:04:12:21
I had to sit there and say,
"Well, what am I going to do
00:04:12:21 - 00:04:14:21
with hiring all these credit analysts?"
00:04:14:21 - 00:04:17:16
And the Head of Fixed
Income Sales said to me,
00:04:17:16 - 00:04:19:26
"Well, go interview them
before you figure you can
00:04:19:26 - 00:04:22:29
just solve all the problems
in the world with a model.
00:04:22:29 - 00:04:24:21
Go interview them and see what you learn."
00:04:24:21 - 00:04:26:18
And I did, I interviewed
a whole bunch of them.
00:04:26:18 - 00:04:31:00
We eventually hired about 30
credit analysts at the time.
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And I realized what they were
doing wasn't rocket science,
00:04:33:27 - 00:04:37:22
but there was an ability to
adapt what they were doing
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in terms of their
company-specific analysis
00:04:41:08 - 00:04:43:14
to macroeconomics.
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And that was really a
real clear dividing point
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between being your traditional economist
00:04:50:19 - 00:04:53:12
and being sort of the
economist that I morphed into,
00:04:53:12 - 00:04:56:03
and that's how I got
into doing bond strategy.
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And that also then led me
00:04:57:16 - 00:05:00:18
to how I got into doing equity strategy
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because it was really
out of that opportunity
00:05:03:00 - 00:05:04:26
to having to build credit analysts
00:05:04:26 - 00:05:08:13
and realizing that the way
credit analysts study companies
00:05:08:13 - 00:05:11:01
could be applied to
studying the US economy.
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- So, we'll talk a little bit about that.
00:05:12:21 - 00:05:15:06
So, you've had this 35-year history
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of tracking the economy
through its cycles,
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and this experience clearly gives you
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invaluable insights and perspectives.
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So, looking back over the years,
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there have been a few
significant economic events,
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but maybe focus a little
bit around the recent
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regional banking crisis and
maybe your perspective on that
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and what people got wrong,
particularly just given
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that initial fear of
perhaps a systemic failure.
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- Yeah, I think the whole point
of the credit risk analysis
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is to understand that there
are cyclical components
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to credit and there are
secular components to credit.
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To put it differently, credit is a symptom
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of an aging expansion,
credit deterioration,
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or it can lead you to a
reversal in economic outcomes,
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i.e. you can have a
systemic credit crunch.
00:06:11:17 - 00:06:13:06
And understanding the difference
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between the two of those is critical.
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And the regional bank
environment was one where I think
00:06:19:27 - 00:06:22:03
it was clearly evident upfront
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that what we were looking
at was idiosyncratic risk
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and more of a problem in a
few companies, individual,
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a few banking institutions,
than it was as a systemic basis.
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Because if you were studying the credit
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of the underlying balance
sheets for the household sector,
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the non-financial corporate
sector, or the banking industry,
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you walked away and said
well, the balance sheet
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of these banks, the assets
they have on their books
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are their loans, effectively.
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And these loans are being
given to high-credit borrowers,
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so we don't really have
to worry about the credit
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of their loan book.
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So, what happened with these
institutions was basically
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they mistreated their liquidity portfolio.
00:07:05:13 - 00:07:09:26
And no credit crunch
has ever been generated
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by a bank mismanaging
its liquidity portfolio.
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Because as the system works,
00:07:15:23 - 00:07:18:18
regulators and internal
regulators are often
00:07:18:18 - 00:07:22:02
very much on top of bank
liquidity portfolios
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to make sure they're there
for what they need to be.
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And in this particular instance,
00:07:26:22 - 00:07:30:10
clearly in a few institutions
that was overlooked,
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and therefore it was going to
be an idiosyncratic risk
00:07:33:09 - 00:07:34:22
rather than systemic risk.
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- And you're talking about the mismatch
00:07:36:03 - 00:07:39:03
between long and short
term on your balance sheet,
00:07:39:03 - 00:07:41:10
and maybe that stands in stark contrast
00:07:41:10 - 00:07:43:21
to the global financial crisis.
00:07:43:21 - 00:07:46:06
And maybe talk a little bit about that.
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- Yeah, the global financial crisis
00:07:48:09 - 00:07:50:22
was a very, very
different beast altogether
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because it was clear there was
00:07:52:18 - 00:07:55:01
balance sheet risk accumulating,
00:07:55:01 - 00:07:57:12
and it was clear it was
accumulating in the household space.
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And all the argument that was being given
00:07:59:29 - 00:08:03:05
for the virtuous cycle of housing prices
00:08:03:05 - 00:08:05:26
continuing to go up,
driving homeowners' wealth,
00:08:05:26 - 00:08:09:02
that then allowed them to borrow
even more and more money,
00:08:09:02 - 00:08:12:10
all of that didn't sit well,
especially in an environment
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where we were creating
no documentation loans.
00:08:14:25 - 00:08:18:08
We were giving people 120% loans to value
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based on the idea that home
prices continue to go up,
00:08:21:08 - 00:08:23:07
or they're going to put all
the money into expanding
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the value of the home in
renovations and all this
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would work out well.
- I just re-watched
00:08:28:03 - 00:08:30:03
"The Big Short" on a flight back
- Yeah.
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from the West Coast, so yes.
00:08:31:17 - 00:08:34:07
- And again, it's interesting
because many people saw it
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and lost their money
before the individuals
00:08:36:26 - 00:08:39:05
that made their money
because it was so obvious
00:08:39:05 - 00:08:41:03
that there was a fundamental flaw.
00:08:41:03 - 00:08:44:26
We were borrowing a lot of
money short, lending it long,
00:08:44:26 - 00:08:47:11
and we eventually had a rising
interest rate environment,
00:08:47:11 - 00:08:51:13
which turned the mathematics
of that short position
00:08:51:13 - 00:08:55:04
upside down and triggered
a flight of capital.
00:08:55:04 - 00:08:57:22
And as capital leaves
capital gets destroyed
00:08:57:22 - 00:08:59:10
in financial institutions,
00:08:59:10 - 00:09:01:28
and as capital is destroyed
in financial institutions
00:09:01:28 - 00:09:04:19
that's how you get a
systemic credit crunch.
00:09:04:19 - 00:09:06:17
- Going back to the regional banking,
00:09:06:17 - 00:09:09:24
you've definitely taken,
that was one of the various
00:09:09:24 - 00:09:13:08
contrarian stances that
you have taken through,
00:09:13:08 - 00:09:14:27
in my tenure here at Mizuho.
00:09:14:27 - 00:09:18:10
So, maybe a question for
you is when you do make
00:09:18:10 - 00:09:23:01
these predictions and
have these convictions
00:09:23:01 - 00:09:26:15
oftentimes they're not
in line with the market
00:09:26:15 - 00:09:30:09
and with your competitors or
colleagues across the Street,
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and clients, our clients, are listening
00:09:34:01 - 00:09:35:04
to all of those opinions.
00:09:35:04 - 00:09:37:05
And when you're the one
standing out, talk to me,
00:09:37:05 - 00:09:40:15
how do you kind of stand
true to your opinion
00:09:40:15 - 00:09:44:09
in a sea of potentially
views to the contrary?
00:09:44:09 - 00:09:46:29
- I think it's a combination
of several things.
00:09:46:29 - 00:09:48:04
One is age.
00:09:48:04 - 00:09:49:17
I've been doing this a long time,
00:09:49:17 - 00:09:52:19
as we kind of indicated at
the start of this thing.
00:09:52:19 - 00:09:54:21
And so, therefore I
have a lot of experience
00:09:54:21 - 00:09:57:24
that a lot of other people
that are doing this don't have.
00:09:57:24 - 00:09:59:03
And the question comes up often
00:09:59:03 - 00:09:59:28
as to why am I still doing it?
00:09:59:28 - 00:10:02:28
And the answer is I really
love what I do for a living,
00:10:02:28 - 00:10:05:02
and I really do like where I work.
00:10:05:02 - 00:10:07:18
And the fun thing is management here
00:10:07:18 - 00:10:10:16
is willing to tolerate my
out-of-consensus views.
00:10:10:16 - 00:10:12:08
Where I think in a lot
of these institutions,
00:10:12:08 - 00:10:14:21
and having worked at
other shops historically,
00:10:14:21 - 00:10:18:13
there's a lot of pressure on a
young economist in particular
00:10:18:13 - 00:10:21:27
to kind of fold to the consensus view.
00:10:21:27 - 00:10:23:26
When you're on a trading
floor and you're dealing
00:10:23:26 - 00:10:26:04
with traders who have
really strong opinions
00:10:26:04 - 00:10:29:24
and they're very vocal, it's
hard to argue with a series
00:10:29:24 - 00:10:33:18
of traders all on your trading
floor pushing back on you.
00:10:33:18 - 00:10:36:00
I have the ability of I've
been here a long time,
00:10:36:00 - 00:10:38:19
I know most of the traders,
we have a good respect,
00:10:38:19 - 00:10:41:25
a good rapport, and
management kinda lets me
00:10:41:25 - 00:10:43:07
do what I want to do.
00:10:43:07 - 00:10:44:29
But at the end of the day it comes down to
00:10:44:29 - 00:10:47:07
how much do you believe in your model?
00:10:47:07 - 00:10:50:12
And this credit approach
has been something
00:10:50:12 - 00:10:54:19
that has been growing for many, many years
00:10:54:19 - 00:10:56:19
in terms of the way in which I do it
00:10:56:19 - 00:10:58:12
and the evolution of it.
00:10:58:12 - 00:11:01:26
And it has proven to be very, very useful,
00:11:01:26 - 00:11:04:28
and it's something most people don't do.
00:11:04:28 - 00:11:06:17
And most people don't have time to do it.
00:11:06:17 - 00:11:08:18
Because to be honest with you,
00:11:08:18 - 00:11:11:15
studying credit at a macro
level to a certain extent
00:11:11:15 - 00:11:13:09
is a little like watching paint dry.
00:11:14:09 - 00:11:16:14
You've gotta be watching it and seeing
00:11:16:14 - 00:11:18:16
if there's any streaks
that are developing.
00:11:18:16 - 00:11:19:15
But by the same token,
00:11:19:15 - 00:11:21:19
you're not going to get
instantaneous reward for it.
00:11:21:19 - 00:11:26:19
So, you have to be fully
vested in it all the time
00:11:26:19 - 00:11:29:09
so that when a problem
does happen you can assess
00:11:29:09 - 00:11:32:13
whether or not the shock
that's happening in the system
00:11:32:13 - 00:11:34:11
is going to matter or not.
00:11:34:11 - 00:11:37:04
Because as we go through economic
history what you discover
00:11:37:04 - 00:11:40:20
is the economy's always
being hit by shocks.
00:11:40:20 - 00:11:44:04
It's only the shocks that
caused the systemic problem
00:11:45:14 - 00:11:47:22
or the shock that happened just before
00:11:47:22 - 00:11:51:10
the recession unfolded that we remember.
00:11:51:10 - 00:11:53:20
All the other shocks we forget.
00:11:53:20 - 00:11:56:05
And the study we've
been doing is basically
00:11:56:05 - 00:11:59:08
how do you assess which
shocks are going to matter
00:11:59:08 - 00:12:01:06
and which shocks won't?
00:12:01:06 - 00:12:02:24
And that's exactly what happened
00:12:02:24 - 00:12:04:29
with the whole regional bank situation
00:12:04:29 - 00:12:07:28
because for us it was a shock
that wasn't going to matter.
00:12:07:28 - 00:12:12:15
- So, from my seat, running
the banking division,
00:12:12:15 - 00:12:14:26
there was much hope for 2024.
00:12:14:26 - 00:12:19:26
And yes, deal activity has
certainly begun to rebound,
00:12:19:26 - 00:12:23:00
but the returns of the market have been
00:12:23:00 - 00:12:27:15
very much concentrated with
the Mag 7, Magnificent 7.
00:12:27:15 - 00:12:30:08
We've definitely seen an
increase in M&A volume,
00:12:30:08 - 00:12:33:04
but it's been concentrated
in larger deals.
00:12:33:04 - 00:12:36:17
And yes, we've begun that
pivot in interest rates,
00:12:36:17 - 00:12:38:10
but they're still, I would say
00:12:38:10 - 00:12:39:15
at the beginning of that journey.
00:12:39:15 - 00:12:42:04
And in some ways I would say maybe 2024
00:12:42:04 - 00:12:45:02
is the year that wasn't.
00:12:45:02 - 00:12:49:08
So, from your seat maybe I could ask you
00:12:49:08 - 00:12:51:00
kind of an open-ended question,
00:12:51:00 - 00:12:54:20
but what are you looking
forward to in the next year?
00:12:54:20 - 00:12:57:01
And by the way, for those
listeners, we are talking
00:12:57:01 - 00:13:00:22
two weeks before the US
presidential election.
00:13:00:22 - 00:13:03:25
- Well, clearly the
election will be pivotal,
00:13:03:25 - 00:13:07:12
but not in the ways that I
think people assume, okay?
00:13:07:12 - 00:13:10:25
Both candidates are very,
very willing to spend money,
00:13:10:25 - 00:13:15:05
and if there is a situation
that unfolds where the House,
00:13:15:05 - 00:13:17:08
the White House and the
House of Representatives
00:13:17:08 - 00:13:19:15
are controlled by the same party,
00:13:19:15 - 00:13:22:24
2025 can be a year of fiscal stimulus.
00:13:22:24 - 00:13:25:02
Right now I think most people
are think, were thinking,
00:13:25:02 - 00:13:28:25
that 2025 would be the year
of monetary policy stimulus
00:13:28:25 - 00:13:31:11
and 2026 would be the
year where fiscal stimulus
00:13:31:11 - 00:13:33:09
would come into flavor.
00:13:33:09 - 00:13:35:05
I think now we're sitting
back and thinking,
00:13:35:05 - 00:13:38:03
"Well, how much monetary policy
stimulus are we going to get?"
00:13:38:03 - 00:13:40:09
So, is there really a
risk of fiscal stimulus?
00:13:40:09 - 00:13:42:19
And yes, if the White House and the House
00:13:42:19 - 00:13:44:19
are in the hands of the same party,
00:13:44:19 - 00:13:46:28
it's easy to buy a vote
or two in the Senate
00:13:46:28 - 00:13:48:24
because you have the tie-breaking vote
00:13:48:24 - 00:13:50:03
with the Vice President.
00:13:50:03 - 00:13:52:15
So, you could easily get something done.
00:13:52:15 - 00:13:54:22
So, 2025 may be a year where we're
00:13:54:22 - 00:13:57:01
surprised by fiscal policy.
00:13:57:01 - 00:13:59:29
And to the extent we're
surprised by fiscal policy
00:13:59:29 - 00:14:02:18
that then becomes an important determinant
00:14:02:18 - 00:14:06:15
as to how much monetary policy
adjustment we're going to get
00:14:06:15 - 00:14:08:17
and where do interest rates go in general?
00:14:08:17 - 00:14:13:16
- So, talking about
monetary and interest rates,
00:14:13:16 - 00:14:16:19
the Fed chairs, I think, in our world
00:14:16:19 - 00:14:19:13
and perhaps broader
than the banking world,
00:14:19:13 - 00:14:22:08
have kind of achieved this
celebrity status of sorts,
00:14:22:08 - 00:14:25:06
so to speak, with eyes following
00:14:25:06 - 00:14:27:03
the dot plots and the speeches.
00:14:27:03 - 00:14:31:19
And which chairs, given
kind of your longevity
00:14:31:19 - 00:14:33:22
on the Street, do you think have
00:14:33:22 - 00:14:36:19
navigated crises well and why?
00:14:36:19 - 00:14:39:22
- I think you have to
take it from the regard
00:14:39:22 - 00:14:43:04
of accomplishing what
they wanted to accomplish.
00:14:43:04 - 00:14:45:22
You know, Paul Volcker,
going back to the early part
00:14:45:22 - 00:14:48:04
of my career, was faced with a problem.
00:14:48:04 - 00:14:50:15
And that was basically because we were
00:14:50:15 - 00:14:53:19
targeting interest rates,
which was a Keynesian concept,
00:14:53:19 - 00:14:56:04
and those interest rates are so public,
00:14:56:04 - 00:14:59:02
it became a restriction on the ability
00:14:59:02 - 00:15:02:17
of Fed policymakers to change policy.
00:15:02:17 - 00:15:05:16
And he needed a way to break that cycle.
00:15:05:16 - 00:15:09:09
And so, he opted for
money supply targeting.
00:15:09:09 - 00:15:11:14
Take interest rates out of the picture,
00:15:11:14 - 00:15:13:23
tell everybody we're not
targeting interest rates,
00:15:13:23 - 00:15:15:11
we're targeting money supply.
00:15:15:11 - 00:15:17:02
And because we're targeting money supply
00:15:17:02 - 00:15:19:23
this gave them the opportunity
to do what they needed
00:15:19:23 - 00:15:21:29
to do in terms of interest rates.
00:15:21:29 - 00:15:25:15
It was a great sleight of
hand, it worked beautifully.
00:15:25:15 - 00:15:27:17
And the fact that they
actually accomplished
00:15:27:17 - 00:15:30:21
the deceleration in inflation,
and the fact that inflation
00:15:30:21 - 00:15:33:06
had been so high when it
happened, it then opened
00:15:33:06 - 00:15:34:20
the door.
- Do you remember what it was?
00:15:34:20 - 00:15:36:18
- Oh yeah, I actually
remember when the Fed did
00:15:36:18 - 00:15:41:04
matched sales at 24% one night,
and they closed out at 26%.
00:15:41:04 - 00:15:44:06
Yeah, I remember the four,
my first boss on the Street
00:15:44:06 - 00:15:47:26
retired on the 14 and a quarters of 2025.
00:15:47:26 - 00:15:51:27
So, it is one, no, 2014, excuse me,
00:15:51:27 - 00:15:54:10
the 14 and a quarters of 2014.
00:15:54:10 - 00:15:56:28
So, the reality is I
remember interest rates
00:15:56:28 - 00:15:58:17
very, very well at that time.
00:15:58:17 - 00:16:00:08
I was buying GMAC commercial paper
00:16:00:08 - 00:16:02:23
for my own account at 18.5%.
00:16:02:23 - 00:16:05:01
So, it was a great
interest rate environment
00:16:05:01 - 00:16:07:18
for some people, horrible for
others if you had a mortgage.
00:16:07:18 - 00:16:10:21
But the point really was
he diverted the attention
00:16:10:21 - 00:16:12:05
from the interest rates.
00:16:12:05 - 00:16:15:02
That then gave Alan
Greenspan the opportunity
00:16:15:02 - 00:16:19:13
to be much more flexible
in terms of interest rates
00:16:19:13 - 00:16:22:14
because people remembered
how bad inflation was.
00:16:22:14 - 00:16:25:06
Over time, as inflation kept on going down
00:16:25:06 - 00:16:28:04
and monetary policy began
shifting more and more back
00:16:28:04 - 00:16:30:18
to an explicit interest rate environment,
00:16:30:18 - 00:16:33:24
this has then created
a renewed process here
00:16:33:24 - 00:16:36:10
where I think the market
is back to the point
00:16:36:10 - 00:16:39:20
where the interest rate
decisions are so politicized
00:16:39:20 - 00:16:42:03
that this Fed is actually transiting us
00:16:42:03 - 00:16:47:03
from an interest rate policy
to a forward guidance of policy
00:16:47:07 - 00:16:50:08
that allows them to be more variable
00:16:50:08 - 00:16:51:21
in the interest rate environment
00:16:51:21 - 00:16:54:06
that's discounted in the marketplace.
00:16:54:06 - 00:16:57:06
And I think this is Jerome Powell.
00:16:57:06 - 00:16:59:10
So, I give him a lot of
credit for what he's doing
00:16:59:10 - 00:17:02:26
in that regard because
going after forward rates
00:17:02:26 - 00:17:05:08
allows him to not necessarily
change the current
00:17:05:08 - 00:17:07:22
Fed funds rate, but affect the economy
00:17:07:22 - 00:17:10:26
through the forward structure
of interest rate expectations.
00:17:10:26 - 00:17:13:14
- Is that what you mean when you say
00:17:13:14 - 00:17:16:28
that the Fed is dominated
by political economists
00:17:16:28 - 00:17:20:06
as opposed to academic economists?
00:17:20:06 - 00:17:21:20
- There's twofold to that.
00:17:22:21 - 00:17:26:05
The concept of being academic economists
00:17:26:05 - 00:17:30:19
versus a political economist
really comes down to
00:17:31:18 - 00:17:32:29
the way in which they're approaching it.
00:17:32:29 - 00:17:36:17
The academic economist
was really, really steeped
00:17:36:17 - 00:17:41:10
in the old days in terms of
the concept of monetary policy,
00:17:41:10 - 00:17:42:26
the importance of monetary policy,
00:17:42:26 - 00:17:44:23
the need to control inflation
00:17:44:23 - 00:17:46:27
because we had to battle stagflation,
00:17:46:27 - 00:17:49:03
and that was public enemy number one.
00:17:49:03 - 00:17:51:03
And it really got out of hand.
00:17:51:03 - 00:17:53:09
And again, that's the reason
why I went to graduate school.
00:17:53:09 - 00:17:54:17
The world was a mess.
- Right.
00:17:54:17 - 00:17:57:28
So, the net result is for
all of us who are of that ilk
00:17:57:28 - 00:17:59:26
that became a real problem.
00:17:59:26 - 00:18:04:02
Over time as inflation came
down economists have varied
00:18:04:02 - 00:18:08:14
their interests away from these
concepts to other concepts
00:18:08:14 - 00:18:10:20
where they could write dissertations on.
00:18:10:20 - 00:18:13:12
First it went from being you were writing
00:18:13:12 - 00:18:16:00
about macroeconomic theory,
then you were writing
00:18:16:00 - 00:18:18:09
about econometrics in dissertations,
00:18:18:09 - 00:18:20:26
then you were writing
about financial theory
00:18:20:26 - 00:18:23:03
because the capital asset pricing model,
00:18:23:03 - 00:18:24:29
Black-Scholes were all coming about.
00:18:24:29 - 00:18:26:12
Then we got into the whole concept
00:18:26:12 - 00:18:29:01
of using mathematics for
financial engineering.
00:18:29:01 - 00:18:31:19
After we were done with that,
well, where do you really go?
00:18:31:19 - 00:18:34:08
You started going into social economics,
00:18:34:08 - 00:18:36:11
and we started looking at welfare.
00:18:36:11 - 00:18:40:12
With the economy seeing this
divergence between lower-income
00:18:40:12 - 00:18:43:13
and upper-income households,
it became a hot topic.
00:18:43:13 - 00:18:46:02
It became an easier way
to write dissertations.
00:18:46:02 - 00:18:47:20
And when you look at the people
00:18:47:20 - 00:18:50:29
that are in the senior positions
at the Federal Reserve,
00:18:50:29 - 00:18:52:00
you look at the staffs,
00:18:52:00 - 00:18:53:17
you look at the members of the Board,
00:18:53:17 - 00:18:57:07
a lot of them wrote their
dissertations, if they did them,
00:18:57:07 - 00:18:59:28
on political economic theory.
00:18:59:28 - 00:19:02:25
And that's what they want to
play with these days.
00:19:02:25 - 00:19:05:25
They want to try to move
the levers around to see
00:19:05:25 - 00:19:10:11
whether they can craft a better
macroeconomic environment
00:19:10:11 - 00:19:13:18
that lifts all ships as
opposed to just some.
00:19:13:18 - 00:19:16:26
- I can argue that it's
happening in other areas
00:19:16:26 - 00:19:18:11
of the government as well.
00:19:18:11 - 00:19:20:24
Antitrust is one, but that's a topic
00:19:20:24 - 00:19:23:07
for another podcast perhaps.
00:19:23:07 - 00:19:28:02
So, in September, so it
was a little bit ago,
00:19:28:02 - 00:19:31:02
the CEO of the Eurasia Group spoke
00:19:31:02 - 00:19:35:05
at the Mizuho Dealmakers
Forum and he commented,
00:19:35:05 - 00:19:38:13
he grew up in Iran during the revolution
00:19:38:13 - 00:19:41:04
where he saw firsthand
the impact of politics
00:19:41:04 - 00:19:43:02
on the overall economic activities
00:19:43:02 - 00:19:44:22
and people's lives broadly.
00:19:44:22 - 00:19:49:18
And he said that, if I'm
quoting him correctly, that,
00:19:49:18 - 00:19:53:07
"We are currently in a
geopolitical recession
00:19:53:07 - 00:19:57:24
that can last generations, and
that people feel disconnected
00:19:57:24 - 00:20:00:25
from their governments
and their democracies."
00:20:01:27 - 00:20:04:14
Not going to ask you to
comment on his, but again,
00:20:04:14 - 00:20:07:09
given the fact that we
are in this election year,
00:20:07:09 - 00:20:09:04
and I think you mentioned
one of them before,
00:20:09:04 - 00:20:11:28
but maybe from your
perspective what are one
00:20:11:28 - 00:20:15:11
or the two, three things
that you think
00:20:15:11 - 00:20:18:06
that are the most important
topics, so to speak,
00:20:18:06 - 00:20:20:09
in this economic cycle?
00:20:20:09 - 00:20:21:23
- Yeah, I think the important topics—
00:20:21:23 - 00:20:24:08
- Not economic cycle, pardon
me, the election cycle.
00:20:24:08 - 00:20:27:08
- Okay, in terms of the
election cycle I think
00:20:27:08 - 00:20:31:08
what really is manifesting
itself is the fact
00:20:31:08 - 00:20:33:24
that we do not require the news media
00:20:33:24 - 00:20:36:08
to be fair and unbiased.
00:20:36:08 - 00:20:38:29
Which to be honest with you,
it goes back to Ronald Reagan.
00:20:38:29 - 00:20:43:05
Because when Ronald Reagan
deregulated the airways
00:20:43:05 - 00:20:45:28
that was one of the things
that went by the wayside,
00:20:45:28 - 00:20:47:23
and the net result is we have wound up
00:20:47:23 - 00:20:50:21
with a polarized news system.
00:20:50:21 - 00:20:54:17
And we've also wound up with
the evolution of technology
00:20:54:17 - 00:20:56:25
to a 24-hour-a-day,
00:20:56:25 - 00:20:58:20
365-day-a-year
- News cycle.
00:20:58:20 - 00:21:01:16
- news cycle, which needs information
00:21:01:16 - 00:21:04:05
to continue to attract audiences.
00:21:04:05 - 00:21:06:04
And therefore it has continued to lead
00:21:06:04 - 00:21:08:28
to more and more sensationalism,
00:21:08:28 - 00:21:11:20
which I would say has
almost become tabloidism
00:21:11:20 - 00:21:14:02
of the entire news media.
00:21:14:02 - 00:21:17:07
And I think that's a key aspect
of what's going on in here.
00:21:17:07 - 00:21:20:14
So, it's hard for people
who are new to this,
00:21:20:14 - 00:21:23:18
or even ones who grew up with
it to understand what is truth
00:21:23:18 - 00:21:25:10
and what is not truth.
00:21:25:10 - 00:21:26:06
- Right.
00:21:26:06 - 00:21:27:01
- Especially with the way it's presented
00:21:27:01 - 00:21:28:18
in so many different forms.
00:21:29:24 - 00:21:33:12
Do I think it is a long-term
phenomenon, yes, I do.
00:21:33:12 - 00:21:35:27
But I think over time
we're starting to see
00:21:35:27 - 00:21:38:13
that certain aspects of this do better
00:21:38:13 - 00:21:42:04
from a financial standpoint
and certain aspects don't,
00:21:42:04 - 00:21:45:05
and I think we will weed out
the better from the worse.
00:21:45:05 - 00:21:46:22
So, I'm a little bit more optimistic
00:21:46:22 - 00:21:48:19
that it's not going to take decades,
00:21:48:19 - 00:21:50:07
but I don't think it's
something that's going to go away
00:21:50:07 - 00:21:51:22
in the next three to four years.
00:21:51:22 - 00:21:55:09
- So, maybe to wrap it up,
00:21:56:17 - 00:22:01:17
for those thinking about a
career as a chief economist,
00:22:02:03 - 00:22:03:18
what advice would you give someone
00:22:03:18 - 00:22:05:10
coming into the profession?
00:22:05:10 - 00:22:07:22
- Mathematics, mathematics, mathematics,
00:22:07:22 - 00:22:09:12
because it's all mathematics.
00:22:09:12 - 00:22:13:03
When I started, when I
applied to graduate school
00:22:13:03 - 00:22:16:06
for economics, I didn't
really have the credentials
00:22:16:06 - 00:22:19:27
to go into a graduate
PhD program in economics.
00:22:19:27 - 00:22:21:23
But they needed mathematicians
00:22:21:23 - 00:22:26:02
because the economics
was evolving rapidly,
00:22:26:02 - 00:22:28:10
and the mathematics was evolving rapidly,
00:22:28:10 - 00:22:29:16
and they needed people.
00:22:29:16 - 00:22:31:11
They could teach you the economics,
00:22:31:11 - 00:22:33:03
the math was the hard part.
00:22:33:03 - 00:22:36:00
And since then it's gotten nothing more
00:22:36:00 - 00:22:38:05
than more mathematical.
00:22:38:05 - 00:22:41:19
And therefore, if you
want to do this for a living,
00:22:41:19 - 00:22:43:28
and if you want to do this in our industry,
00:22:43:28 - 00:22:47:11
you need to understand
all of the products.
00:22:47:11 - 00:22:48:15
And that's important.
00:22:48:15 - 00:22:50:06
And the bulk of these products
00:22:50:06 - 00:22:52:06
are financially engineered products.
00:22:52:06 - 00:22:55:15
And unless you can understand
financial engineering,
00:22:55:15 - 00:22:57:19
and again, I lived through
the whole growth of this.
00:22:57:19 - 00:22:59:28
I remember when the mortgage market
00:22:59:28 - 00:23:03:19
was a function of Fannie Mae
and Ginnie Mac prepayment books
00:23:03:19 - 00:23:05:10
that were sent out once a quarter,
00:23:05:10 - 00:23:08:16
and you sent somebody to DC to
go to the information office
00:23:08:16 - 00:23:12:01
to buy the books in cash
and then run to a payphone
00:23:12:01 - 00:23:14:11
to call in three or
four prepayment numbers.
00:23:14:11 - 00:23:17:08
So, it's evolved
dramatically, and the point is
00:23:17:08 - 00:23:19:06
it's all mathematics.
00:23:19:06 - 00:23:20:23
The entire market is mathematics.
00:23:20:23 - 00:23:22:10
- We'll end on this note.
00:23:22:10 - 00:23:23:10
- Cheers.
00:23:23:10 - 00:23:25:03
- Thank you so much for joining us.
00:23:25:03 - 00:23:25:28
- Pleasure.
00:23:25:28 - 00:23:27:13
- Pleasure's all mine, thank you.
00:23:28:10 - 00:23:30:19
Thank you for joining us on this episode
00:23:30:19 - 00:23:32:13
of "Storytellers in Business."
00:23:32:13 - 00:23:35:28
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