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In Mizuho | Greenhill’s Beyond The Obvious podcast channel, we uncover the value that others miss.
Our podcast is a source for the latest discussions on topics related to capital markets, dealmaking activity, business leadership and more.
Delve into insights from our investment & corporate banking thought leaders to hear their unique perspectives on current trends and market influences.
Learn how industry icons and influential figures began their journeys, overcame adversity and rose to success.
Discover insights that look deeper.
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,
00:00:12:00 - 00:00:14:08
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,
00:01:39:07 - 00:01:43:17
experiences to share with
us in conversation today.
00:01:43:17 - 00:01:44:29
So, with that, first of all,
00:01:44:29 - 00:01:46:13
I'd like to welcome you
Steve to our podcast.
00:01:46:13 - 00:01:47:17
- Thank you, boss.
00:01:47:17 - 00:01:50:25
- 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
00:01:56:13 - 00:02:00:09
and information that the Fed,
the regulators, our clients,
00:02:00:09 - 00:02:03:22
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.
00:02:16:07 - 00:02:18:21
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.
00:02:41:16 - 00:02:44:18
And the decision was take a menial job
00:02:44:18 - 00:02:46:08
at one or two institutions,
00:02:46:08 - 00:02:48:24
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,
00:02:51:09 - 00:02:54:04
and go take a job there or do
something else with my life.
00:02:54:04 - 00:02:56:29
And I decided, well, I
really like academia,
00:02:56:29 - 00:02:59:14
so let me go off to graduate school.
00:02:59:14 - 00:03:03:04
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.
00:03:10:05 - 00:03:12:25
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,
00:03:17:19 - 00:03:19:26
and economics had the
beginnings of math in it.
00:03:19:26 - 00:03:22:03
So, it had equations, it had curves,
00:03:22:03 - 00:03:23:27
so I decided to go with economics.
00:03:23:27 - 00:03:29:00
- 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
00:03:55:21 - 00:03:57:08
quantitative-oriented background,
00:03:57:08 - 00:03:59:01
even in the economics community,
00:03:59:01 - 00:04:02:17
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.
00:04:31:00 - 00:04:33:27
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
00:04:37:22 - 00:04:41:08
in terms of their
company-specific analysis
00:04:41:08 - 00:04:43:14
to macroeconomics.
00:04:43:14 - 00:04:47:23
And that was really a
real clear dividing point
00:04:47:23 - 00:04:50:19
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.
00:04:56:03 - 00:04:57:16
And that also then led me
00:04:57:16 - 00:05:00:18
to how I got into doing equity strategy
00:05:00:18 - 00:05:03:00
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.
00:05:11:01 - 00:05:12:21
- 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
00:05:15:06 - 00:05:17:28
of tracking the economy
through its cycles,
00:05:17:28 - 00:05:21:05
and this experience clearly gives you
00:05:21:05 - 00:05:23:07
invaluable insights and perspectives.
00:05:23:07 - 00:05:26:08
So, looking back over the years,
00:05:26:08 - 00:05:30:02
there have been a few
significant economic events,
00:05:30:02 - 00:05:34:15
but maybe focus a little
bit around the recent
00:05:34:15 - 00:05:39:15
regional banking crisis and
maybe your perspective on that
00:05:39:15 - 00:05:42:12
and what people got wrong,
particularly just given
00:05:42:12 - 00:05:46:10
that initial fear of
perhaps a systemic failure.
00:05:46:10 - 00:05:50:08
- Yeah, I think the whole point
of the credit risk analysis
00:05:50:08 - 00:05:54:07
is to understand that there
are cyclical components
00:05:54:07 - 00:05:58:09
to credit and there are
secular components to credit.
00:05:58:09 - 00:06:01:04
To put it differently, credit is a symptom
00:06:01:04 - 00:06:04:06
of an aging expansion,
credit deterioration,
00:06:04:06 - 00:06:09:04
or it can lead you to a
reversal in economic outcomes,
00:06:09:04 - 00:06:11:17
i.e. you can have a
systemic credit crunch.
00:06:11:17 - 00:06:13:06
And understanding the difference
00:06:13:06 - 00:06:15:28
between the two of those is critical.
00:06:15:28 - 00:06:19:27
And the regional bank
environment was one where I think
00:06:19:27 - 00:06:22:03
it was clearly evident upfront
00:06:22:03 - 00:06:25:24
that what we were looking
at was idiosyncratic risk
00:06:25:24 - 00:06:29:27
and more of a problem in a
few companies, individual,
00:06:29:27 - 00:06:33:12
a few banking institutions,
than it was as a systemic basis.
00:06:33:12 - 00:06:35:13
Because if you were studying the credit
00:06:35:13 - 00:06:38:18
of the underlying balance
sheets for the household sector,
00:06:38:18 - 00:06:41:24
the non-financial corporate
sector, or the banking industry,
00:06:41:24 - 00:06:44:08
you walked away and said
well, the balance sheet
00:06:44:08 - 00:06:47:14
of these banks, the assets
they have on their books
00:06:47:14 - 00:06:49:13
are their loans, effectively.
00:06:49:13 - 00:06:53:21
And these loans are being
given to high-credit borrowers,
00:06:53:21 - 00:06:56:10
so we don't really have
to worry about the credit
00:06:56:10 - 00:06:57:19
of their loan book.
00:06:57:19 - 00:07:00:23
So, what happened with these
institutions was basically
00:07:00:23 - 00:07:05:13
they mistreated their liquidity portfolio.
00:07:05:13 - 00:07:09:26
And no credit crunch
has ever been generated
00:07:09:26 - 00:07:13:03
by a bank mismanaging
its liquidity portfolio.
00:07:13:03 - 00:07:15:23
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
00:07:22:02 - 00:07:24:29
to make sure they're there
for what they need to be.
00:07:24:29 - 00:07:26:22
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.
00:07:34:22 - 00:07:36:03
- 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.
00:07:46:06 - 00:07:48:09
- 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,
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and it was clear it was
accumulating in the household space.
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And all the argument that was being given
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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,
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all of that didn't sit well,
especially in an environment
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where we were creating
no documentation loans.
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We were giving people 120% loans to value
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based on the idea that home
prices continue to go up,
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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
00:08:26:15 - 00:08:28:03
would work out well.
- I just re-watched
00:08:28:03 - 00:08:30:03
"The Big Short" on a flight back
- Yeah.
00:08:30:03 - 00:08:31:17
from the West Coast, so yes.
00:08:31:17 - 00:08:34:07
- And again, it's interesting
because many people saw it
00:08:34:07 - 00:08:36:26
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
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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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