Moody's Talks - Inside Economics - Hair on Fire

Episode Date: August 9, 2024

It has been a hair on fire couple weeks for global investors. Stock, bond, commodity and foreign exchange markets have been buffeted by wild swings.  No better person to discuss this with than Robin Brooks, a senior fellow at the Brookings Institution and formerly of the Institute of International Finance, Goldman Sachs and the IMF. Robin weighs in on the reasons for the volatility, including policy missteps by the Bank of Japan, and considers what it all means for monetary policy and the economy. For more on today's guest: Robin J Brooks - Senior Fellow at Global Economy and Development, BrookingsFollow Robin on 'X'Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn  Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. And I'm joined by my two trusted co-hosts, Marissa Dina Talley and Chris Dorees. Hi, guys. Hey, Mark. Good morning. Yeah, any chit-chat? You know, it has to be good.

You've got to raise the level of our chit-chat. Well, we got a lot of feedback from the audience regarding chit-chat and whether we should continue. And they like it. So we're going to continue. And they didn't say anything about the quality. So, you know, just as long as it's there. So like you've heard from folks, they're emailing you or where you're? Yeah, LinkedIn emails.

Oh, really? Okay. So you're pulling people. You're asking. I didn't ask. Well, I guess we kind of asked on our last podcaster. So informally, but then people have been reaching out. That's right.

So they like the chit chat. Hopefully they like this chichet. I had a question for you, though, Mark. Yeah. On the, I caught a clip of you on CNN related to all this market volatility that's going on. And you recommended people, you recommended people read a book. I did? Oh, yes, I did.

And so which book, which book should people read? Oh, this was, don't look at the stock market, you know. Yeah, exactly. Yeah, it goes up, it goes down, it goes all around, you shouldn't pay any attention to go read a book. Yeah, but which book? That was the question on my mind. I really didn't have, you know, I didn't really have one in any mind. I'd say the Brookings Papers on Economic Activity.

That's what I would say. I'm presaging our guest. Very good. Yeah. Actually, that, do you read that the Brookings Papers regularly? Yeah, I get the emails. Yeah. They're actually my good stuff.

For decades, it's been my favorite journal, yeah, by far. But that will come back to that. I think we should also advertise our conference in Irvine, right? Marcia, you must be gearing up for that. I am. I am gearing up for it, yes. Yeah. I'm in the area, right.

Right. September 5th. September 5th in Irvine here in Orange County. Right. Come one, come all. Excited to see you. Me and Chris and Mark will be there, a bunch of our other colleagues. We're going to talk about, what are we going to talk about?

The outlook for the longer term outlook for the economy. We're going to talk about risks to the economy, productivity, housing, demographics and immigration. The election? Yes, we're going to talk about the election. Yeah. What else? Yeah. That's a lot.

That's a lot. Yeah. Good. Well, we hope you see the listeners there. We've got a guest, Robin Brooks. Robin, good to see you. Thanks for having me on this podcast. It's great to be with you, Mark, and meet everybody else.

Yeah, absolutely. And you're a senior fellow at Brookings. You just joined not too long ago, a few months ago. Yeah, I'm a newbie. But I'm also a returnee. I was at Brookings as a grad student. So since then, I've always had a crush on Brookings and wanted to go back. Do you live in D.C.?

I live in D.C. I actually, from my house, can say, see the rooftop of Jay Powell's house. So I live in Chevy Chase, D.C., in Chevrochance, Maryland. Oh, no, that's interesting. Yeah. Can you go tell him something for us? Yeah, please. Well, I'm trying to channel his thoughts on the yen carry trade unwind.

It's not working so far. Can I ask, you have, it looks like what you have on your wall there behind you. I have pictures of my kids. I have, we've had many au pairs, all of them from Germany, and they made like these photo collages, which I've been told many times they're unprofessional. I don't care. I like them. Oh, I thought you were, you know, looking for a murderer or something, and that was your... You know, you know how you see in those murder mysteries on the back, all these pictures and lines and stuff?

The serial colorboard? Yeah, yeah. I am not yet looking for a murder. Yet. That's good to hear. That's good at here. Well, you've had a story background and career. You want to give us a little sense of that?

I think listeners would be really appreciative of that. Yeah, I'm not sure how storied it is, but I'm born and raised in Germany in the beautiful town of Frankfurt, which everybody loves, especially the airport. I graduated high school in 1990, did my undergrad at LSE, was all set to go work at the Bank of England out of LSE, but spent the summer coding in a time series package called Rats. Oh, sure. And I found that so traumatic that I said anything but this and went to grad school at Yale.

I got my Ph.D. in 98. that of course all those five years were way more traumatic than any time at the Bank of England would have been did a year at Brookings worked as an editor on the BIPIA which you guys mentioned just before and then went to the IMF worked on systemically important countries like Tajikistan in Central Asia. Did you get to visit? I visited many times. Many times, okay.

I have been violently sick in Dushan Bay, which is the capital. I knew that. I knew that. Wait a second. What's the capital of Tajikistan? Chris, do you know? I think it's, if I get this, you've got to be impressed. If I don't get this, you can't think any less of me.

Tash Kent? I think that's Uzbekistan, Mark. But I'm going to give you another shot since we're doing Central Asia right now. What is the capital of Kyrgyzstan? Kurdistan. Kyrgyzstan. Kyrgyzstan. Shoot, I don't know.

The beautiful city of Bishkik. Oh, Bishkak. I've also been sick there. They're all burned into my mind. Would you recommend? Would you recommend going there? It doesn't sound like he would. No.

He's been sick in all of these places. Well, let me put it this way. The president of Tajikistan is when I went there, there was a guy called Imam Ali Rahmanov. He is still the president. Oh, boy. Wow. I think that's all you need to know about this. That says it all.

Then I went to Wall Street. I worked at Brevin. I worked at Goldman. and I led the foreign exchange strategy team there. I love that job. I love talking with clients. I love the back and forth with hedge fund, asset managers, corporates. I just thought that was so stimulating.

I always during that time was commuting from D.C. to New York. And I kind of decided I needed to make sure I don't miss my kids before they leave for college. And so I came back to D.C. to work at the I.F. Institute of International Finance Finance. There aren't many private sector finance jobs in D.C. This was one of them. So I was the chief economist there. I thought that was awesome, too. And then I've always had a crush on Brookings. And I remember walking through the halls as a 27-year-old thinking, oh, my God, what is up with all these old farts? And now I'm one of them. That's so awesome. That's so funny.

That is funny. Now, how did you lose your German accent? Or, you know, you really don't have one. What is it? Surgery. Surgery. So, you know, when I grew up, Frankfurt was a totally American city. You know, there were GIs everywhere.

I see. So I always had that U.S. imprint. Got it, got it. Well, it's so great to have you. Perfect week to have you, right? Given the volatility in markets, equity, foreign exchange, bond markets around the world, particularly Japan, I don't even know how to ask the question. I mean, what happened?

I mean, it just felt like for at least for a few hours, hair on fire, everything seemed to be going south. What's going on? What happened? Do you have a sense of that? So can I do a little bit of history on the yen and the Bank of Japan? So you guys will remember the global financial crisis in 2008. And so I'm going to start there because it is highly instructive on what is going on now.

obviously 2008 was kind of the starting point for many of the monetary policy experiments that we've had since then, right? QE was in the way that the Fed announced it in March 2009. I mean, it was really a whole new thing. And sooner or later, all major other central banks kind of joined in, and we had this unconventional monetary policy experiment that was intended to keep easy. at the zero lower bound. The BOJ did not join that party. The BOJ under then-Governor Shirakawa kept doing what it had been doing, which was relatively modest QE at very short tenors. It was buying an average duration of around two to three years. Every other major central bank,

remember Bernanke was saying, you know, we're trying to take duration out of the market, flatten the curve, etc. B.O.J. did not. buy that. What happened as a result of the BOJ sitting that out? Interest rates everywhere, especially at the long end fell, very sharply, and interest rates in Japan didn't change because the BOJ was sitting on its hands. As a result, rate differentials moved very sharply in favor of the yen, and you had a very sharp and disorderly appreciation of the yen. And you will remember in the wake of the global financial crisis, the yen hit levels of 75, right? We're around 140 to 150 these days.

So massive. So what I'm saying is the BOJ was going against the rest of the G10 consensus and it cost Japan dearly. It was kind of that policy mistake was the root of a decade of deflation in Japan. this disorderly appreciation, it imported deflation, and costs all kinds of pain. So now think about what the BOJ is doing. We have central banks everywhere around the world that are getting ready to ease. Of course, we have some that have eased already. We have the Fed, which is debating how much to ease, you know, what is the strength of the economy,

etc. But easing is coming. And we have the BOJ, which is going the other way. which is normalizing policy. If you look over the last year or two, the 10-year government bond yield in Japan, the JGB yield, you know,

the target for that used to be zero under yield curve control. We're now around 85 basis points. We've been above one percentage point. And of course, the BOJ also hiked. This is a major policy mistake in the making. the BOJ should not be normalizing policy while everybody else is getting ready to cut because

it's going to play havoc with rate differentials and potentially give you a disorderly appreciation of the yen. So that's what we saw on Friday. We had a payrolls print which, I mean, Mark, you're the U.S. economy expert, which was marginally disappointing. Statistically, it was like a 0.8 standard deviation surprise to the downside. That's not anything that should set anyone's hair on fire, but you have this underlying policy experiment that the BOJ is doing, which is super dangerous. And that's really at the root of this episode. The other thing that I'll say about Japan is Japan is kind of ground zero for all these central bank policy experiments that we've been doing over the last decade, right? We have government debt to GDP, gross debt of 250% of GDP.

The BOJ through a variety of QE programs holds about half of that on its balance sheet now. The BOJ over the last 10 years has essentially absorbed 100% of net. new debt issuance every quarter. So to think of interest rates at the long end in Japan as a market variable is totally wrong, right? This is basically the government just negotiating with itself. Okay, we're going to set the 10-year yield here. And so the other thing that I would say to people is, look, what really matters on

BOJ policy is not what the BOJ does with the overall. overnight rate, right? We've had a 25 basis point rate hike there. It's completely irrelevant. What matters is the 10-year yield interest rates at the long end. You know, when we do unconventional policy here in the United States, the target is always long rates. Those are what drive financial conditions. Those are what drive growth. It's the same in Japan. And so the BOJ since last Friday has been taking the 10-year yield lower. So they are a little bit spook. by what is going on. And I sincerely hope that they get the message that any kind of normalization of policy is super dangerous to do here. In terms of financial market implications, the size of

carry trade, you know, could there be a financial market crisis from this kind of policy normalization if the BOJ makes some mistakes and keeps going? I really don't think so. We obviously have had a number of episodes now where the yen carry trade was very big. Remember the run-up to the global financial crisis, right? The yen was a funding crisis currency back then. We had a very disorderly yen appreciation at the time. You know, we obviously had major dislocation in financial markets, but no one at the time linked that to the unwind of the yen carry trade. And so I'm actually on that front, relatively blazze. We have had moves in emerging markets in some of the main destination currencies for the yen carry trade, things like mex peso, Turkish lira, Colombian peso,

but they've all been relatively orderly. And so financial markets, I think, are deep enough to swallow this pill. Well, there's a lot to unpack there. It's interesting, you know, just to step back a little bit for the listener. So this, past week we saw the stock market. And of course, most of the listeners are here in the U.S. and they're focused on the U.S. stock market and bond market going on here. And the stock market has been gyrating pretty significantly. And if I recall, was it Monday when it felt like I think Dow was down almost 1,900, 1900 points at one point. It felt really like a floor had fallen out. And most of the conversation here in the U.S. was,

didn't, you know, it was a little bit going back to Japan, but it was mostly about what was going on here. The fact that the economy felt like it was going soft, maybe softer than people thought. Recession risks maybe a little bit higher. And, of course, the Fed had been, is still maintaining its too high. It's a higher for longer interest rate strategy. It wasn't clear when they were going to start cutting a raise. So a lot of concern about that. But it was really U.S. centric.

Every once in a while you heard someone say, like you, you know, you know, what's going on over in Japan, maybe having some impact on us. And but what I'm hearing you say is, yeah, what's going on in Japan is creating, you know, a great deal of volatility, particularly in Japan. If you look at the moves in Japanese equity prices, they've been even substantially greater than they've been here in the United States. But you don't really connect those dots back to here to the U.S. You don't think what's going on in Japan.

It sounds like what you said is what's going on in Japan. it isn't really reverberating back here in the U.S. to the degree that some people might think it is. That yen carry trade isn't playing that bigger role in the kind of the market volatility that we're observing here. Is that is that a, yeah, I think that's, that's, that's right. I think what is going on in Japan is primarily an idiosyncratic Japanese problem. It is linked back to every other advanced economy where debt levels go up. every shock that we get.

Central bank holdings of that debt go up. Every shock that we get. And so, you know, this is a little bit a perspective on what the future might hold in terms of fiscal dominance and so forth. But do I think that the market ructions that we've had recently originated with the yen carry trade on one? No. So to put that in perspective, dollar yen, right, peaked on July 10th. So that's a month ago. And dollar yen started falling, meaning the yen started strengthening from July 11th onward.

What happened on July 11th? We got a CPI print, which was way lower than expected. And so the yen. strengthening that we have seen has been ongoing for quite some time before this sudden volatility that we had. So I would say this was kind of one of those things that was going on in the background. It had been going on in the background for some time. And I think it is fashionable for people, especially in the FX world, to talk about unwind of large positions when no one has any clue what the size of the position really is.

It's like talking about positioning. It's one of those amorphous things. No one really knows. Okay, okay. While we're on Japan, you know, one thing that often comes up in the conversations here around federal debt is, you know, the debt load here in the U.S., publicly traded treasury debt to GDP is about 100%. It's more than doubled since the financial crisis, and all the trend lines here look pretty,

pretty ugly if there's no change in policy. It doesn't feel like there's going to be any change in policy anytime soon. But the folks that argue that this isn't really that big a deal, 100% to debt to GDP rising, they always point to Japan. They say, well, look at Japan. I can't remember the numbers. Maybe it's 250% debt to GDP. No big deal.

Does that, is Japan a good place to look to try to understand what that dynamics here in the U.S. might be? Yeah, so I have this new fitness watch that I got a couple of months ago, and it has like a blood pressure warning. It tells me, you need to start breathing more deeply, or you are at risk of a severe heart attack. And it's that kind of statement, 250% of debt to GDP in Japan. it's totally fine, so we are fine, that usually triggers that kind of blood pressure warning for me. Got it. Okay. So I violently disagree with that.

Oh, violently disagree. The reason for that violent disagreement is that it goes back to what I said about the 10-year JGB yield, the 10-year government bond yield in Japan. Government debt, if you imagine. a scatter plot of debt levels across advanced economies and a 10-year yield. Then in the United States, right, we have debt to GDP around 100%. We have a 10-year bond yield around 4. You know, we have Australia, New Zealand that actually have lower debt levels.

I think they're around 60% GDP, 40% GDP. They have 10-year bond yields around 5. You have Japan, which has a debt load of 250% of GDP with a 10-year government bond yield of 0.85. What does that tell me? It tells me this is not remotely a market price. If the BOJ announced tomorrow, for example, okay, guys, everybody, parties over, we are stepping back from this market, you figure out what the market yield is on this debt, it would be significantly higher. And that would be a massive shock to global markets.

The similar situation exists, in my opinion, in the Eurozone, where Italy has debt to GDP of 140%, Spain, 110. Those yields are below the United States, which has lower debt to GDP. The only reason that that's possible is because periodically the ECB steps in to cap those yields when bad things happen. And so you kind of have an ECB put that markets now have learned to price. And so you have artificially low yields, not as artificially low as in Japan. So, Mark, one of the things I was at a conference recently, and I was asked why vol is so low.

Bonitility. Look across markets, whether you look at implied vol in currencies or rates or whatever, until recently also implied equity vol. You know, these things are at record lows. And part of what is going on is that we kind of have this policy preference at the moment to suppress Vol, right? That's really what we're doing. We're running highly expansionary policies and we're using our central banks to sit on yields.

Okay, well, so the Japanese have been doing this for decades now, right? Why can't the U.S. do it the same thing? I mean, my argument has always been the kind of the, the governor here is inflation, that if you ran that kind of expansionary policy and you'd suppress yields, you'd get inflation. But that hasn't happened in the case of Japan. No, Japan is around 2 or 3 percent. And, you know, the Japan example is really an example where high debt starts to really constrain policy, right? It constrains your policy options. So in the case of Japan, this massive debt load meant that they could not match, even if they'd wanted to,

the central bank tightening cycle that we saw in the U.S. and everywhere else, right? So that meant that rate differentials were basically on autopilot. They had delegated that part of their economy to others, and it meant that the yen basically was completely out of control. It led to a situation where the BOJ was doing easing and the Ministry of Finance, which is in charge of currency intervention, was intervening to strengthen the yen. So you actually have had massive policy dysfunction inside the Japanese government where one arm of the government is acting against the other arm of the government. So when people say to me, well, what's the downside to that? It basically is an illustration that high debt levels really constrained.

policy flexibility, which is kind of an obvious thing to say. But this was a great illustration that, you know, a very material way, you lose control of your currency. And Japan now has lost control in both directions, right? Over the last two, three years, the Japanese yen is the weakest currency by far, weaker than Turkish lira. I mean, you have to think about that. You know, that's certainly not by design. That's certainly not something that Japan Inc. wanted. And now that foreign central banks are cutting interest rates and the VOJ really is itching to normalize it can't, right? I mean, it's super dangerous. So high debt levels, basically the fiscal dominance that it brings are a major constraint on running good policy.

Okay. Very interesting. Hey, let's bring it back to the U.S. and the volatility of the wall here. Kind of just to strike that point home, I think the VICs, which is a measure of equity, volatility. I think on Monday hit a lovely we haven't seen since the teeth of the pandemic meltdown or the teeth of the financial crisis. So volatility came back with a vengeance.

But let me turn and bring Chris and Marissa into the conversation. Chris, and I want to come back and talk about the implications of all this for U.S. monetary policy and the economy. Before we do that, Chris, do you have a similar to? take on what happened here over the last week or any additional insight into what happened and what's going on? No, I think it characterized it

properly. I guess what I might throw in the mix is just the high valuations of the U.S. stock markets to begin with. They were kind of looking for an excuse, if you will, to adjust here and there was a conflagration

of events here with the labor market report. But yeah, I don't know that that was the trigger. It was just, we were susceptible to this type of adjustment or correction here. Yeah, like the S&P, if you look at the price earnings multiples in the equity market, very, very high, credit spreads, very thin. Valuations are still high after all this. Still high. Price spreads are still very thin after they are. But I guess a little less so. I guess a little less so. Yeah, and who knows? This may not be over. May not be over one. But just to say

If the evaluations were a little bit more normal, I don't know, we would have had quite the violent response. Right. Right. Particularly in the tech sector, right? We saw a lot of the volatility in tech stocks and stuff around AI and that kind of thing. Well, those valuations are particularly rich. Right.

I have a question for you guys. The whole episode, which it's not clear to me where it came from, what the trigger was, reminds me, remember Powell's last hike during the previous hiking cycle, this was December 2018. Okay. And we kind of had a market tantrum, remember all the funding issues at the time also. And that led then to in 2019, early 2019, to a total about phase from the Fed and what became the mid-cycle adjustment. And it was like in a setting of the trade war, right?

We had tariffs on China. Like, markets were very unsettled. Does this feel like that to you guys? Yeah, in a sense, yeah, in the sense that I think markets are starting to throw up over U.S. monetary policy. They're saying, look, what are you guys looking at? You know, you got an unemployment rate that is sitting at 4.3 percent, and it feels like it's going higher. And we can debate what full employment is, but it feels like we're starting to blow through full employment. So, you know, you're on one side of full employment. Now you're

on the other. And that would argue for let's normalize interest rates. And then you look at inflation and the Fed is, you know, sticking to the 2% target on the consumer expenditure deflator or at two and a half. I mean, we're within spitting distance. All the trend lines look really good there. And I know you've written a lot about this too, Robin, and I think you feel about the same, feel the same way. And even in, and why are we a slave to the PCE deflator when we know it's wrong? I mean, or some, we were not measuring what's going on because of all kinds of measurement issues, most notably in my mind, the implicit cost of home ownership. So, okay, you've achieved your, effectively you've achieved your goal. So what are you doing here with a

five and a half percent fund rate target? Things are going to start breaking. And they feel they're getting soft everywhere. He can feel it in the labor market under the hood. Yeah, the reaction to the July weakness was overdone, but it's just symptomatic of, yeah, there's an issue here. The labor market is weakening. And then you've got other issues in the global financial systems, you know, strains and stresses everywhere. And, you know, I've heard this argument from the Fed, well, you know, we've got a five and a half percent of funds rate. That's a long way from zero. we can lower interest rates quickly, we can fix it. Well, I'd make the point that once you break it, it's too late.

You're not going to be able to fix it. You know, we're going to be in a mess. And so I think, you know, in that sense, yes, investors are saying, you know, what are you seeing that we're not seeing? I mean, why aren't you normalizing interest rates? Now, I think the silver lining in all of this is this cements a rate cut, you know, in September. I would be very surprised if we don't get a rate. cut. You know, I think we're now over the bar for a rate cut and we're going to get it. It's just a

question of how big and what happens after September. But yeah, I think that there's an analog there with regard to what happened back in 2018 and 2019. Does that resonate with you, Robin, what I just said? Totally. Totally. That sounds 100% right. And I think the sentiment in the market in 2018 was similar. You know, the other thing that I find really remarkable about this year is that sort of, I would describe consensus on the Fed as, well, we're going to get 25 basis points in September and then November and December. I think we have three meetings, right? Yeah, we do. And when we came into 2024, I'd have said, no way that they're going to be cutting, clustering the cuts around the election. That's insanely political. I mean, do you have a view on that? I mean, have

Do we have any precedence on cutting this close to an election? And now people are talking about a 50 Bipper in September just before the election. I mean, I don't know. Yeah, and maybe Chris and Maris have done more work here. I mean, I haven't done my own work. I've read work from good sources like you. So maybe I'm regurgitating back what I read that you've written. But if you look at Fed policy leading up to elections, you have.

have as many increases in rates as you have cuts in interest rates. So it's, I think it's evenly balanced. So it would suggest that, at least in modern history, the elections aren't really having a meaningful impact on policy, which as it should be. But I don't know, my sense is, and here I'm stretching, it's just, you know, I speculate for a living. Some speculation is rooted in more things than others. This is high-level speculation that the bar for a rate cut, this go-around, is higher than it is typically. And that is because of the election. It's because of the nature of this election. I mean, very clearly when they cut, they're going to be, former President Trump's going to be all over him. He saw him at his last, the press conference

he held yesterday. He was, he was basically saying, I want to have an impact on interest rates. I want to capture, I'm going to capture the Fed, you know, if I'm president of the United States. And he's very critical of monetary policy. You know, he even said, you know, I made a lot of money. I'm paraphrasing, but this is pretty close to what he said. I made a lot of money. I'm even better than this. And a lot of people on the Federal Reserve Board, therefore I should have some input into the

interest rate decision and process. So, you know, when the Fed cuts interest rates, for sure, they're going to be politicized and they they want to make absolutely sure there's really no question I should be cutting interest rates you know so the my sense is the bars are now no one on the fed is going to say that i mean nor they should they say that you know you're not going to see it in any minutes but i think in the deep recesses of their minds when they're sitting there you know at bed before they go to sleep they're thinking you know i'll we're going to we need up we have to get over a higher bar to get interest right that that's my sense of it i don't know mariso do you have a what do you think of

perspective, that high level of speculation? Yeah, I mean, I, I, we were, we've been looking at Fed rate cuts, you know, last week alongside economic indicators. We were talking about the SOM rule and, um, what's going on simultaneously. And I think this time is like we keep saying, this time is very different, right? It's, we're in such a highly politicized atmosphere that, um, anything the Fed does now is, setting people's hair on fire all over the place. And they're now they've put themselves in a position where they have to cut right in front of an election. I mean, they have no choice at this

point. They could have started cutting earlier in the year. They could have cut at the July meeting. They chose not to do that. And now they're in a position where it's going to happen right in front of an election where they obviously didn't want to be in that position, but they kind I did it to themselves, I think. Hey, Robin, I know you don't do forecasting for a living, but do you have a sense of, maybe I should ask it this way, what do you think the Fed should be doing here? So, first of all, I've been doing an informal count of the number of times people on this podcast have said, set hair on fire.

I know. We're now at three. I started it. I'm so glad that I don't have any hair. I should be saved. I'm right with you. So market pricing before all of this was kind of backloaded for the Fed. Of course, next year we have more meetings than we have left this year.

But markets before these recent ructions were pricing three cuts for the Fed and then around five next year. And that's actually kind of flipped. So market pricing now is four and a half cuts this year. as of now, as of today, just before we hopped onto this podcast and another foreign change next year. So there's slightly more cuts price this year. I don't see it. So I'm I'm like a 25 bipper per meeting. That seems reasonable to me. But I'm not a Fed watcher like you guys. I mean, there was there was some talk of, you know, people calling for the Fed to have an emergency

meeting and cut rates immediately, which seems crazy. A 75, right? It was that guy from Wharton saying 75 bits. Was that Jeremy Segal? Yeah, emergency cut and another 75 years. Yeah. Yeah. Imagine what that would do.

That's hair on fire. Right. Yeah, that's hair on fire. That's the definition. That's the definition of hair on fire. That's hair burned off, I think. That's right. Eyebrows singed along with hair on fire.

I think we got a title for the podcast brewing here somehow, some way. So one of the key questions with regard to the subsequent, the path for future rate hikes is what is the so-called equilibrium interest rate, the so-called R-star, the rate at which policies neither supporting or restraining economic growth. You know, it's one thing if it's, you know, the funds rate is just below five and a half percent. It's one thing if it's five percent, another thing, if it's four percent, is another thing of three. Robin, do you have a perspective on that at all? Well, so Mark, you and I, I think, are

firmly in the dovish inflation camp. You know, so I think trend inflation here, we're back to 2%. In other words, we're back to the status quo ex ante before all the COVID madness began. I am not a big fan that structurally the COVID, the post-COVIDness, COVID equilibrium is in any meaningfully way different than what we had before. So if you believe that, you know, Janet Yellen, when she was fed governor, it was on record as saying the R-star is around zero. So the neutral is around two, two and a half. Okay.

Very good. So we got a lot of cut. They got a lot of cutting to do. They got a lot of catching up here to do then. Yeah. Okay. Let's play the stats game. And then we'll come back.

and there are a bunch of different topics we can tackle. But I want to play the stats game. And the game is we each put forward a statistic. The rest of the group tries to figure that out with clues and questions to Dr. Reasoning. And if the stat is, we don't want it to be too easy. We don't want Marissa to get it right away. We don't want it to be too hard because I get very frustrated if I can't get it. And if it's close, if it's something apropos to the topic at hand,

all the better. So with that, tradition has it. And Robin, so you can see how this game is played. We always go with Marissa. So, Marissa, you want to go first? Sure. My statistic is 51.1. ISM services survey. Non-man survey. Non-man infection. The answer is yes. Right. Wow. It's not the top line. That qualifies as too easy. I'm just saying. Yeah, but you didn't really get it. It's not the top line index. Is that the employment? Yes. Oh, the employment index within the ISM non-manufacturing.

Oh, I would. Oh, no, no, no. See, Robin, what happens here? You know, Robin, what happens is we give the wrong answer. They take the credit for it. It's so rude. That was very impressive. Yeah, it was impressive, Mark.

It's the employment component of the ISM non-manufacturing index. And I picked it because it rose above 50, which means employment is expanding in the services sector. And this is actually the first time it's been above 50, not in contractionary territory, since January of this year. That's just weird. Yeah, it is weird. But I picked it kind of to highlight that as we're talking about volatility and we're talking

about the market overreaction, I would say to the jobs report last Friday, we've gotten actually some good reports on the employment front this week. Jobless claims fell, right, as well yesterday. So, and then we've seen the market swing back. We've seen interest rates rise a little bit. It's just this kind of crazy overreaction to all these statistics. And this is just another one that says, you know, maybe the job market isn't collapsing, right? Maybe it's cooling, great. Maybe it's cooling, gracefully as we thought it would. And all of this has been an overreaction to some extent. Okay.

Yeah. So on the ISM non-man survey, the Institute for Supply Management, it's a diffusion index, percent of positive responses is less negative. I just find it less valuable. Month to month it's jumping around all over the place and it just doesn't make a whole lot of, it's not intuitive. It doesn't line up with, you know, other data. Take the, you mentioned the employment component of the survey.

That's been well below 50, meaning that would be consistent with contracting employment, I think. And it obviously has not been the case. Do you, I mean, I guess maybe it's hard data and it's soft data. It's sentiment mixed in there as well. And maybe that's what's making it a little odd. Do you think? Yeah, I think that's possible. I mean, this used to be one of the things we would look at all the time, right?

Especially when we were forecasting what the employment report was going to be. be. We always look at this index as a good indicator of the jobs report. And I think, like you said, I mean, in the service sector and at least in the jobs data from BLS, we haven't seen a contraction in service sector employment, nothing even remotely close to it. I've been downweeting that series, that particular measure. But anyway. Yeah, I think that's fair. And then we should also mention the ISM does a manufacturing index. So this is the non-manufacturing covering the service sector. They also do a manufacturing index, which has also been pretty downbeat, right?

And that is more akin to what we've actually seen in manufacturing in terms of production and employment levels. But the service sector one seems a little out of step with- Yeah, I think this goes to all surveys. All surveys, to me, feel like they got a problem. You know, everyone's got this kind of overlay they're putting on these surveys. just general, I'm unhappy kind of overlay. And then, you know, the political overlay on top of that and then the media overlay on top of that,

I just don't know that these surveys, I think they're becoming less, more squarely, less useful. It'd be my sense of it. Well, and the other thing, and I don't know if this is true about ISM, but survey response rates have dropped off very dramatically, particularly since the pandemic. And now we're seeing, I mean, like that when we got the jobs report, on Friday, the establishment response rate was just above 50%. That's terrible. As I was saying, one thing I've noticed with our own business survey is that there's a much higher percentage of

responses that are neutral. So you can you can respond positively to the question, negatively to the question, or have a neutral response. And the neutral responses are now a much higher share of overall responses than has been historically the case, at least post-pictus. pandemic. So I found that another indication that these surveys are getting a lot more difficult to interpret. But anyway, hey, Chris, you want to go next? Sure. I'll give you two numbers related. $1.343 trillion and 5.6%. Wow. Mercy, you want to lead the way on this one? Is it international trade related, Chris? It is not.

$1.3 trillion. Yep. And 5.6%. Yep. These are economic statistics, Chris? Yes, they came out this week. Oh, their government statistics? Yes.

Is it consumer credit related? It is. So the, you're specific. Is it the new debt? It's not new debt. No, not new debt. And a delinquency rate? No.

You're close, though. It is the increase in... It is dead outstanding. For autos. No. Auto dead outstanding. Bank, it's not bank card debt outstanding, right? No.

It's revolving, correct? You're using the Fed survey, so it's revolving credit? It is revolving credit. Ah, okay. $1.34 billion of revolving credit outstanding. That's a high, right? Lots of concern about consumers potentially taking out a lot of bank card and other debt. Do you know what the 5.6% refers to them?

It's not a delinquency rate? It's not. It's a share. Is it, it's, oh, it's a share, 5.6%. Is it a debt service, kind of some kind of debt service measure, consumer debt service or something? No, close to. No? I'll get, I'll, okay.

I'll intervene. It's the share of personal income. So it's that one point of share of personal income, five point six percent. That is still well below what it was in 2019, which was 5.9. So although, yes, consumers are taking on more debt, we should be concerned, certainly have certain pockets of consumers taking on more debt. The economy has grown in this time as well, though. There's more income. So, again, yellow flag, certainly keep it on the radar screen.

But I don't see this as an imminent threat at the moment. Right, right. So I did see we got the Equifax data-based data for July. Did you see that? Did you see that data? I didn't, no. I saw that just got reported. Yeah, I was just looking at it.

So we get all the clear files in the country every month, and this is data based on that. And it's for the month of July. I think the Fed data is for the month of, is it June or is it? No, excuse me. Yeah, it's June. It's not July, right? That's right. It's lagged.

Yeah. Yeah. And the overall growth in household liabilities is if sold debt, you know, everything from credit cards to student loans to mortgages, the auto, the whole shoot and edge, it's only growing 2% year over year. So, you know, very modest growth. And, of course, income is growing four or five percent-ish. So to your point, the amount of debt. outstanding relative to income continues to, it's not an issue, at least not in aggregate. Correct.

Yeah. Okay. Okay. Good. Hey, Robin, do you want to, you want to pay the game? Yes. First of all, I'm so impressed. You guys are doing an amazing job in terms of picking statistics.

So I've been feeling the heat. My statistic is 0.2%. Is it an economic? It's an economic statistic. It came out this week or recently? No, it is going to come out next week. Oh, CPI? This is the consensus

Consensus expectation for core CPI next week. Ah, yeah. Yeah. Do you guys have a forecast for that? we do. We have a crack team of guys who and women who do this. But I haven't asked them for the CPI, but I'm, if it, for the, for their forecast. But point two would mean, you know, right down the strike zone, wouldn't it mean that for inflation? Absolutely. I think the June print, you know, we were discussing that earlier in the podcast was super low, right? And there are a number of things that all broke low. So I was curious what the consensus is for this CPI print. And point two, given how low the June data point was, would still be phenomenally low. Right.

And, you know, we're so into this that we're looking at the second and third significant digit. So I'll get back to you on that. Yeah, right. But point two, that would be annualized, what, 2.4-ish. and on CPI, that's consistent with the Fed's 2% target, right? Absolutely. The definitional difference. Yeah, that's a good one.

Good one. All right, I got a good one. You ready? Yep. I'm ready. 35,025, 35,000, apropos to the conversation during this podcast. It is a financial statistic or number.

It has to do with equity prices. 35,025. Think global. You guys know, really, you're that stumped. I'm so surprised. Think about where we started the conversation. About Japan. Japan.

Okay. That's the, uh, it's the, uh, it's the, Mika index. Is it the Niki? Okay. Yeah, 35,025. That's, uh, as of the close today. I guess Japan's already closed.

Yeah, right, it closed. Just for context, it's down 17% from its recent peak. The peak was 42,224 back when I guess the yen hit 160 was very strong. That was about a month ago, July 11th. But still, you know, at one point, Monday. It was down 25%. So it's, you know, made it two way back, but it's still down seven. But here's an interesting thing. Despite all the ups downs all around, so you want to guess how, you know, what the index today is relative to a year ago?

8%. Still up. Yeah, 8, 9%. Yeah. Yeah. And just, just another data point that'll blow your mind, at least blue mine. If you, you know, go back in time, then Nikai was at 37,000. 7,724 on December 8th, 1989. So, you know, we're at, you know, 35,000 today. And it's still below what it was back in 1989, just to give you a sense of things. That gets to your point, Robin, about how they're scary. Scary. Scary. Yeah, bungling things. Yeah, bungling things. Anyway. Okay, good. Well, you know, if the listener, you have a discerning ear, you can hear that my voice sounds a bit different than what it was at the beginning of the conversation. We've lost power.

We've got that hurricane remnants of hurricane. Is it Dorothy? I think creating havoc. Debbie. I've lost internet. Debbie, Debbie, Debbie, Debbie, you know, Debbie, Dorothy, you know. Same difference. Oh, geez.

Now we're going to be in trouble. We're going to be in trouble. But let's move the conversation, Robin, back to you. and, you know, this is kind of an open-ended question that I ask lots of folks, because I get asked it all the time, what, you know, what out there in the world are you, makes you really nervous that, you know, could come out of left field, so to speak, bite us, and, you know, we're not really focused on it to the degree that perhaps we should be. Is there anything out there that, you know, And there's so many geopolitical things going on.

But anything out there that you're observing that feels like, hey, I wish we were paying more attention to that? Well, first of all, it's been a great thing on this podcast. I've loved it. What was such a fun conversation. So thanks for having me. You know, I've pivoted towards sanctions and sort of security related issues recently. But really, that is more. reflection of my fixation on, you know, we, our politics these days is so kick the can and we have so

many burning issues and honestly it kind of drives me nuts. You know, whether it is climate change and I really worry about my kids, what kind of world my kids are going to grow up and we know what the solution to climate change is. It's like Econ 101. We know what the solution to negative externalities is you tax them and the reason we don't is because we like our standard of living and we're going to kick the can and hope the problem doesn't become too bad i think there's endless problems like that i think the large deficits that we run the debt monetization that we do the poor weak implementation of sanctions the fact that we don't confront autocratic regimes the way that we need to confront them i see it all as a symptom

kind of of weakness and, you know, of greed quite honestly. That really worries me. And I think I don't know how to fix it. Every election we have one soon is an opportunity to do that. Maybe this one will fix it, but I think chances are it probably won't. And it's not just a U.S. issue. Everyone in the advanced economies is doing exactly the same thing. It really worries me and it kind of depresses me too. Well, so you mentioned the fiscal situation and how do you think that kind of plays out here? I mean, you know, maybe I'll frame it this way. I mean, if you go back into the financial crisis, there was, in the wake of it, there was a lot

of concern about how rapidly that the nation's debt load had risen. And you got that piece of research that came out of Rogoff and Reinhardt, actually pegging the kind of the cliff event happening around a 90% debt to GDP. Here we are at 100%. And interest rates are still low. You know, we have a 4% 10-year treasury yield. Do you have some kind of framework for thinking about when that sustainability becomes a real issue? I mean, is it, is it 110% that GDP, 150% that you should be? Or is that even not the right way of thinking about that sustainability?

When are we going to get to a place where, you know, something really goes off the rails here because of our fiscal issues? So I think these thresholds and putting a number on is obviously difficult. But let me say the following. If the BOJ were not in the market, the 10-year JGB yield would be much higher and Japan would be having a fiscal crisis right now. If the ECB were not leaning on government bond yields for Greece, Italy, Spain, all of those countries would be having debt crises. We have had a series of accidents in bond markets recently. We had the LDI blow up in the UK back in September and October. 2022. That summer, we had a blow up in the Eurozone and the ECB had to do a bunch of heavy lifting.

And of course, we had the treasury market blow up here in the United States in March 2020. So now put that together with debt issuance last year, which I think was around 9% of GDP, 80% of which was funded by very short-term issuance. Now, I recognize that perhaps there were some. extenuating factors, but the fact that issuance was so heavily skewed to very short bills issuance, I think, again, tells you know, yields all else equal would be a lot higher if we were issuing the way we normally do in normal times. And we didn't do that last year. So I think we are at the danger zone, the fact that other countries outside of the United States that don't have

our exorbitant privilege are already having to step on yields to cap yields aggressively. I think it is obviously keeping U.S. yields lower than otherwise. All this stuff is correlated. So I think we're in the danger zone. And, you know, 100% of GDP coupled with Mark, you mentioned this before, this is super important, a trajectory, which is terrible. You know, this is really bad. Markets are forward-looking.

And, you know, this just isn't. no time to be kicking the can. It really is no time. And in the end, these are intergenerational transfers. We are living at the expense of our kids. That's what blows my mind. It makes no sense to do this, literally. So let me stop there before I go on an old man rant. Yeah, well, let's end the conversation, though, with that last point you made about, you know, where policy seems to be headed and a lot of where's headed is going to be determined by this election that's dead ahead, you know, we're three months away. How do you think about that in the context of the economy and performance and Fed policy and

everything else? I mean, when I said what would what, what's the one thing that could derail is my mind immediately goes to the election. Am I overly pessimistic here? I mean, is that something you worry about as well? So I became a U.S. citizen in 2008 and I am massively proud to be American.

Like, you know, I chose this country and I genuinely believe it is a good country and the best country. I sound like a cheerleader, but I'll take it. So I'm optimistic. I do, I do, I am dismayed at the dialogue, how people speak about each other. I'm on both sides and how people dismiss each other, the main calling that happens. I find that appalling.

And I, again, I don't think that's unique to the United States. you know, Germany, Europe, I mean, we've just had a slew of European elections where extreme parties on the right were a big threat. So, but I do think that we, you know, somehow a politician needs to emerge. She reminds people that we have more in common than stuff that divides us. And I really think that this country has the capacity to come up with someone like that. I'm just not sure it has done so yet. Got it. Got it.

Well, on that patriotic note, Robin, I really want to thank you for spending some time with us and really appreciate the insight. And thank you. And hopefully we'll get you back on at some point in the near future. Hopefully when the markets are a little less volatile.

Or maybe not. Maybe that's a good thing we got you on when markets are volatile. Thanks for having me on. Take care. Absolutely. Absolutely. And dear listener,

I hope you enjoyed that conversation, and we'll talk to you next week. Take care now. Bye-bye.