Moody's Talks - Inside Economics - Mispriced Markets, Miserable Outlook

Episode Date: December 16, 2022

Greg Jensen, Co-Chief Investment Officer at Bridgewater Associates, Mark and the team this week. We get into the causes and outlook for inflation and prospects for the economy and financial markets. Greg shares his dark forecast with the group.Full Episode TranscriptFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight 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 Sandy, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Chris DeRees and Marissa Dina Talley. Hi, guys. Hi, Mark. So what's going on this week? I'm me. I'm good.

I'm good. You know, I've been on this board of a nonprofit, a CDFI, a community development financial institutions. They're very interesting financial institutions. They marry public government subsidy with private capital to make investments in underserved communities, inner city and rural areas. I've been on this board, believe it or not, 15 years. I've been the lead director for five. Today, and I say this with a little bit of teary-eyedness, was my last board meeting.

Really? Yeah. Wow. They kicked me out. What happened? You resigned or they kicked you out. No, no, term limits. There's term.

We put in term limits. When I joined, there was no such thing as term limits. And, you know, I think it's healthy for there to be, you know, new ideas, new people, new perspectives. And I just termed it out. So, but, you know, it was really a cool, it's a cool organization. They do a lot of really good work, you know, community centers, health care centers. education, food, you know, healthy food. Of course, affordable housing, that's a big part of what they do right now.

And today was the last day. But, but, you know, I had a nice run. I had a nice run. Yeah. But anyway, I'm sure there's another one out there looking for you. Yeah. I just join another nonprofit. There you go.

I feel like I, you know, I feel like I need to, you know, give back in some way. And I joined this, another really cool. nonprofit called the Coolidge Institute, started by a bunch of NYU professors and mostly academics. I don't know why they let me in, but they're, you know, all these academics. And they're focused on data and they're focused on figuring out ways to improve government data and the dissemination of government collected data to the private sector, to, you know, facilitate what the private sector is doing. So I thought that, that's like, right up here, Alex. A strike zone.

Yeah, I can get down and dirty with that, you know, pretty easy. So I was pretty happy about that. But that was my week. How about you guys? Anything interesting going on? Mercer, you look, you look, you look good over there. I don't know what's going on. You look very healthy.

I don't know what's, of course you do too, Chris. I mean, I know. It's me. I'm like this old white guy. You don't look sickly. Oh, by the way. You don't look sickly. You look at you guys are in good health.

You know, I, I, I, I, I, I, Am I not working you guys hard enough? Is that what's going on? I just came back from the gym, so I probably have a post-gym glow, perhaps. That's what it is. That's what it is. Yeah. I think it's just the lighting. The lighting's good, too.

And also the filter that I put on the Zoom. Hey, guys, we got a guest. Greg Jensen. Greg, welcome. Thanks for having me. Yeah, Greg is the COCIO of Bridgewater. And, you know, you're a little bit of an experiment, Greg. I'm just saying, you know, we're economists, and we tend to talk with economists.

And we're, you know, this world of economics. And, you know, you're, you're, you're, you are an economist. I was reading your bio. So you have economics and applied mathematics, which, by the way, makes you a really good economist. If you've got to applied mathematics. But you're a little bit different, a little odd for us. So I'm really curious to see how this conversation goes, you know, whether, whether you're, you think this is a good discussion or not.

But we're very happy to have you. Well, great. It's a pleasure to be here. So how did you, so you've been, I was reading your bio, you've been at Bridgewater, it seems like now 25 years or so. How did you find your way there and find your way to being the chief investment officer, co-chief investment officer of Bridgewater? Yeah, well, it's been an incredible journey.

So I am actually interned. as a Dartmouth junior at Bridgewater in 1995. And Bridgewater was a tiny place in Wonton, Connecticut at the time. There's about 35 employees. And we managed, you know, there were different types of accounts, but in the hundreds of millions of dollars at the time. And I fell in love with two things, you know, that really carried me through today. One was culture of really trying to find out what the best answer is,

wherever it came from. And so even as an intern, I had, projects. I had projects working with Ray Dalio, the founder of the firm. And that was an amazing thing that people really dedicated to trying to figure out how the world works and discussing that to try to understand what's next in global financial markets and economies. And looking at the world that way, right, to try to not just have opinions, but to force your opinions out of your mind, translate them into rules, algorithms that you could use. to predict what was next and then you could learn. So what I've been up to at Bridgewater over those

25 years along with many colleagues is building out a series of understandings about how the market works, doing what we call compounding understanding, but pulling out everything that, you know, now a couple hundred people are thinking about what's going on in the economy and what's happening in markets, pulling out those theories, stress testing, whether if you use those theories across time and across countries, whether they're valuable, and then applying that. So while I'm not a fully trained economist, as you guys are, I'm practically trained in the sense that everything we do, we have a scoreboard on, are we predicting what's next in growth, what's next in inflation, what's next in markets correctly or incorrectly, and then getting that

feedback and building that into our processes. So we're always staring at what we're missing in the world because we've systemized what we think are systems trade all around the world in the most liquid markets on the basis of the understanding that we've built up. And all we do is look down at that process, think about what we might be missing and try to add improvements to it. And that's the process of compounding understanding that's been going on at Bridgewater for many decades now. And that basically thinking about the world and what's causing what and then having to discipline to systemize that with a community of people who are passionate about figuring out what's going on, I think it's an amazing job.

And I went from, you know, an intern to an investment associate at Bridgewater, working on currencies, to running research, to becoming co-CIO for a while, co-CEO as well. And it's been a beautiful discovery about how the world works, losing money, making money in the markets, and then and also a personal discovery of strengths and weaknesses about myself. So that's it in a nutshell. Well, you got a tough job. It sounds like you're an economist that is accountable.

I was thinking that. You're accountable. And Bridgewater, can you characterize how large a firm it is now? How big is it? Sure. So we have about 1,400 employees. We're managing, you know, $150 billion, roughly. And our kind of the biggest head fund in the world.

that wasn't how we started. We started, again, the heart of bridge order is this deep understanding, which could be applied in many different ways, right? We were, when I joined, we had a very small hedge fund as part of it that started in 1991, but we were a currency overlay manager and a bond manager. And over time, because we thought the best way, essentially to extract all of our thinking, was to have everybody in the most diversified mix of our thoughts, which was what we call pure alpha.

And so that's grown in pure alpha is, you know, in the, about $85 billion in pure alpha. We also have defensive alpha that essentially is a product that's tuned to essentially make money to create alpha when markets do poorly. We have all weather, which is the best way we know to mix. If you don't have views in the world, what's the best essentially asset allocation to provide a balanced return stream over time? And so those are the core of things and optimal portfolio that kind of combines our views

on how to build a portfolio with Alpha that's designed to do well when when Beta does poorly. So those are the things. And over, you know, very long term, while with many, many mistakes along the way, have produced more winners than losers. And that's why we do this. Yeah. Hey, can I ask? This might be a question you don't want to answer.

But maybe the first one you will. I got two questions for you. One, what is the best call you ever made in the 25 years of Bridgeport, the one you're most proud of? Well, I think the best call personally was joining and building this community. Oh, no. I knew it. Let me answer your eye. But the reason that I say it that way is, look, we don't make calls like that.

You know, it's not like one, nothing. If we're doing this while, it's no one big thing. Right. that we're systemizing these views and we have views on 150 big liquid markets across the world and any one big thing would be a problem. But I will say, you know, coming into that because it plays into today, I think recently there are many things through the years, but I think, and I know you've thought about this a lot, that the big call coming into this year of recognizing that what was going on with inflation anomalous GDP was,

was much more of a demand-driven thing than the markets were anticipating, that it would be lengthy in its time. And that the Fed, when, I mean, it's almost shocking to realize this, but at the beginning of the year, the terminal Fed fund rate was 130 basis points. And that terminal rate just to define terms is what the market thought the highest the rate would get going forward. The federal funds rate, the key rate the Fed controls would get going forward. Right. And now that's over five, right, in terms of where people expected to get. That's huge in terms of the impact, right? And recognizing that the inflation would cause the tightening and the tightening would then

affect all the markets. That was a big call that we got, you know, the first six months of this year. That was the dominant thing happening. And, you know, I feel good that our process, like this was not a simple thing to understand, a lot of cause-effect linkages in there to understand what was actually causing the inflation, what the likelihood was. And having nailed that well, that was good. Now you come into this, we're moving into this other phase where I don't think,

although it's been over the last three months, that the wiggles in Fed tightening are going to be the dominant influence. But having really pictured that well, recognized what that would mean for financial assets, and the fact that it would impact almost everything, that was a big call. that we got. Let me ask you on that. Of course, at this point last year, Russia's invasion of Ukraine wasn't really on the radar screen. Maybe global oil traders were starting to sniff it out because you could see oil prices starting to move higher. But it wasn't certainly broadly in the discussion. It wasn't until early this year. And of course, Russia didn't invade Ukraine until I believe

February. Doesn't that play a role in the very high inflation that we observed since then? It's played some. I don't think, to be clear, I think it can be overstated that, but how much that did. But I'll say, right, so interestingly, right, when they invade Ukraine, what happens, right? So we're prepared and already doing well up to the invasion of Ukraine for this inflationary period, et cetera. The initial market reaction to the invasion of Ukraine was a treasury route. I mean, you think about how nuts that was. But it tells you something about how markets react to events, right? Stocks fell.

Treasury's rallied on a risk kind of move without the realization of, well, what does this mean? This is a furthering of these major trends, right? You had this huge impact of what we call monetary policy three, but the mixture of fiscal and fiscal policy and monetary policy simultaneously massively hit the world in 2021, creating demand without offsetting supply. flows into 2022. Then you get this acceleration of another big trend that's going on, which is de-globalization. Take a rush off the map in a sense that's happening with China as well.

We can talk about that. It's a complicated question. But you've also de-globalizing. You're de-globalizing supply chains. You're hitting the energy pipelines. Big deal. Added on top. So yes, that accelerated a problem that was big coming into 2021 and then got even bigger with the movement

in Russia. And then of course, as people start to realize the impact that has on some commodity prices, that was going on. But the thing that you're seeing in labor markets otherwise was happening anyway. In fact, to some extent, the inflation caused by Russia slowed down some of the dynamics that were beginning to appear in January in terms of labor markets. And so that accelerated what we think would have happened anyway in terms of a significant inflation and a significant tightening that we expected going into the year. Got it. Well, here we are today, and we got a big CPI consumer price inflation report this

week, this past week for the month of November. And I thought, I just at this point, turn to maybe Marissa. Marissa, that felt like a pretty good report to me. I mean, I don't know that you could have asked for a better report. What did you think? Yeah, it was certainly heartening. And what we want to see. I mean, this was the second month in a row where CPI inflation growth as measured by the

CPA was softer than consensus was expecting. So this was for the month of November. Overall, CPI was up a tenth of a percentage point month on month. And we were expecting point two. Consensus was at point three. So we were closer, but it was still softer than we were expecting. Yeah, exactly. Correct. And we were the month before, too, closer than consensus, I believe. So year over year on the total CPI, we're up 7.1%. And that's now come down to the slowest pace since December of 2021.

Core inflation, so this is X food and energy, was up 0.2 month over month. And that's the slowest pace it's been since August of last year of 21. And year over year. Air Corps is up 6%. Just some of the highlights that I see in it, I mean, energy is now clearly a drag on inflation. Prices were down 1.6% month over month. And that was pretty much across the board with oil, motor fuel, gas, utilities, all down. There was... Just to put a finer point on that. So oil prices spiked when Russia invaded, up to $125, $130 a barrel at the peak back in June. And since then, the fallout here has started to fade, where the world is adjusting to the disruption to Russian supplies. And of course, we got weaker demand coming out of China. It's a big consumer of oil. So we got oil prices back down. And right now we're at what, 80 bucks a barrel,

south of the 80 bucks a barrel, I believe. I mean, so that swing is now benefiting us in the form of much lower energy prices, gasoline prices in particular. That's right. Yeah. And a couple other things I wanted to point out, goods prices are now falling for the second straight month. So month over month, they were down half a percentage point, which was roughly in line with what they were. The prior month, new car prices were unchanged month over month. And used car prices have been falling for five straight months. And those declines and used car prices are getting larger with each passing month. So in November, they were down almost 3% over the month.

Food prices, which we've talked a lot about, they've been persistently, you know, they've been sort of one in the thorns in the side of inflation. They still rose half a percentage point over the month, but it was a slowdown from previous month. And it was the slowest pace since December of 21, if you look at total food. But that was completely concentrated in. food at restaurants. So food at home prices, grocery prices still accelerated slightly. Core services, which the Fed is keyed in on, prices there slowed to, which is good.

They rose 0.4% month over month. It was a 0.5% in October. And there were a bunch of declines across core services, medical care, health insurance, airfare tickets, hotels, lots of different categories. It was pretty broad-based. And then the one other thing I want to point out is housing costs because that's been, we've had a lot of discussions about that, both rents and OER owners equivalent rents, they both accelerated over the month. Now we know from private sector data that this should start, we should start to see a slow down in shelter costs probably in the spring, because we know at least on the rental side that new lease signings look like they're coming in at, you know, slower pace of increase than they had maybe six months ago.

So that was kind of the one blemish, if you will, in the report was shelter costs accelerating a bit. But pretty much everything else was down or there was some disinflation there. I just pointed out the point two on core X food and energy, you annualize, you know, multiplied by 12. poor man's way of annulizing, that's pretty close to the Fed's target right there. I'm not arguing that we're at point two consistent going forward, but I'm just saying that's consistent with the Fed's inflation target, right, on CPI. Yeah, the Fed's looking at, oh, sorry, Greg, just the Fed is really, you know, Chair Powell said this in his remarks the other day.

They really zoned in on core services X shelter is what they're looking at because they think that's where they can influence prices through monetary policy, that a lot of those, a lot of that demand is coming through wages. So, and that, I think, didn't change if you look at, if you take out shelter from core services. Greg, you wanted to say something? Yeah, well, there's so much. That was a great rundown. There's so much going on. I mean, I'd say the following, which is, if you could turn back to somewhere around June, what became evident is the monetary policy it started to have an effect on demand and on nominal demand. And that the CPI, it was a little quirky.

You actually had some strong CPI reports for fluke reasons for a couple months before the last two months that you've had those weaker ones. I think there's a noise in when different things come in, whether it's the used car prices and so on and so forth, that different data, the insurance thing and all these things if you get into the details, that I do think the last two months probably overstated a little bit the ones before, like overstate the decline, the ones before, understated it. Big picture is inflation is decelerating from a cyclical perspective. And that's a big, that is a big deal.

And it's been interesting because I talked about something we got right. I'll tell you, I think you check it out and asking, give me something you got terribly wrong. I was where I was going to go next. I thought you might not like that question. Yeah. So this impact, right? So what has now happened over the last couple months, we've gotten wrong, is that we knew we expected inflation to roll over in a significant way. But we didn't expect the degree of the market reaction and to some degree the mix between how much is real growth and how much is the fall in inflation.

But you definitely had this transition or somewhere around June where you went from a nominal economy that was booming to the tightening starting to hit hard, hit hard in housing. that hit hard in many places, but it's flowed through largely to nominal and largely through demand, we think. I could describe why in a minute. So now you've got this fall in inflation. And the markets are reacting to that, kind of reversing the moves in the beginning part of the year saying, okay, well, thank gosh, real yields don't have to rise more. The Fed doesn't have to tighten more.

Everything can go up, right? Which if you take the first six months, everything went down totally in line with the real yield. And now everything's kind of going up, totally in line. with the movement in the real yield or Fed tightening, whatever you measure you want to pick. What we think is missing and has been a surprise that it's this missing is the implications of the tightening today,

even if the Fed stopped tomorrow, which they're very unlikely to do. But even if they did, we think that the baked in the cake implications for demand are only beginning to show up and they're big and they're coming, they're not here yet. And in that way, today feels like the beginning of last year where last year everybody,

He's talking about inflation, but the market is not pricing it. The price of the Fed to go to 130, and they're pricing stocks to be fine. And so nothing's priced in despite what seemed to us anyway to be right in our face. Today, I feel somewhat the same way, which is the implications of the degree of tightening to date, the way that's flowing through the world isn't getting priced in. So the actual movement in interest rates is flowing through day to day. But the implications of those movements on the real economy aren't, which I think is interesting. I think it's going to be proven to be wrong.

But that's kind of what we think next year will be the implications of this, the most rapid tightening we've seen since the early 80s. And the extremity of that and the extremity of the implications of that that have been lagged for a variety of reasons. But I think that's really the thing we expect in 2023 is that shift towards that. And part of that will be lower cyclical inflation for sure. but and if you measure prices of things you can actually measure on a day-to-day basis, everything's deflating, rents, any real-world measure of those things.

But that doesn't mean. Prices for corporations, wages for corporations are still going up because they don't, not everybody's negotiating day to day, even though it's true. Today's a better day to negotiate wages than six months ago for a company, but it's a lot worse than three years ago. And so wages are a trailing indicator, like rents, they reset. they don't resent day to day, even though if you were resending day to day, you'd see, okay, wages have cooled off a little bit, rents have cooled off a little bit, but it's a lagging

cost. And so you have companies with lagging costs and declining revenues and probably, in our view, the biggest hit to profits you've seen a long time coming. That's also not really expected. If you look at the markets, the markets are saying profits are going to be okay. Like, yes, maybe a shallow profits decline next year, but off the races of 2024. And inflation going to come down and no problem, which leads to the issues with secular inflation as opposed to the cyclical one that's coming down. I got so many questions. Okay, you're right, Chris.

You need to enter into the conversation. I'm just writing it a bit. I'll be brief. Yeah, you're okay. Greg, you make a lot of sense. We've been having a running debate about a lot of what you just discussed. Well, first question, just to go one step back before we kind of move forward in the conversation. demand and supply, you know, which is, and it's demand and supply, I think we would all agree.

It's just, you know, which is more important. And that does make a difference in terms of how you think about inflation and lots of other things going forward. How do you square this demand side argument with the high inflation all over the planet? It's everywhere. It's not just in the U.S. In fact, in Europe, it's, you know, more significant than it is here. So how do you square those two things. I think, A, inflation is generally global. We can talk more interesting are the exceptions to the inflation than the fact that a lot of countries are having it. But let's go through the causes, right? So if you go backwards, not just in the U.S., but the COVID response to the COVID recession, which is probably the worst recession we ever had, you close everybody in their route. I mean,

awful. If you hadn't had an incredible monetary and fiscal response, that's other than wartime, unprecedented in the sense of making corporate balance sheets whole, more or less, particularly for small and medium enterprises, making households, improving their balance sheets. You never a recession where households come out with a better balance sheet than they went into the recession or corporations. So what did you do? You printed money and the government handed it out, right? Not literally together, but basically at the same time.

And so you didn't have to borrow the money. You just produce it. You kept interest rates low and gave everybody, disparate. disposable income at massive scale through many programs. And that was true in the U.S. That was less true, but still very true in Europe. And so you created this demand that at the time, you couldn't even supply. Like, where did the supply come from to create that demand? Well, everything shifted to goods. China cranked up. So if you said, supply of goods increased at a record rate, actually. It wasn't like supply of goods didn't crank up. China's market share

went from 22% to 25%. Their exports went up 25% in a course of a year. I mean, massive for the biggest exporter in the world. Goods production was crazy, but it was still not enough to keep up with the demand that had been created

because people's incomes weren't hit. Normally, if all the services shut down, you would have less income to spend. Here, you got your income, and you spent it on goods. And good supply surge, but goods demand surged much more. So the argument on the supply,

side, the mistake, it's true that that led to this gap between demand and supply led to pile up supports and all these problems that look like supply chain problems. But it's really because demand was in so much excess to supply. And supply was higher during COVID than it was pre-COVID. If you look at just how many goods were produced. So I think that's what people miss that. And again, anytime, and this is true, wars or whatever, if you print money and spend it without creating production, the money you spend comes from income, which means you're producing something and you're getting income for it. When you actually just get a check in the mail, everybody simultaneously gets a check in the mail, a different dynamic, which is super important. Another reason long-term inflation matters is

governments have now come to the conclusion correctly that the easiest way out of a deflation is this, print the money, spend the money, you'll get out of a deflation. It doesn't matter your demographics, your technology, you do that in enough size. You can cause inflation, no problem. And it's been illustrated it might be very, very clearly. So that's where the demand versus the supply thing really started. And that increase in the balance sheet, so if you now take that through today, that increase in the balance sheets for households is what's allowed savings rates to continue to fall, despite the normal driver of savings rates being interest rates and

interest rates and wealth effect. Savings rates continue to be to decline. They've declined massively supporting growth. And they continue to be quite low. and falling, which I think is a stress on the system going forward because a lot of that wealth has shifted hands in terms of who has it at this point. But I think that's why we see it as much more demand than supply, just going in and looking where the dollars that were used to purchase assets came from. And the global part of that is not a big surprise when you combine in currency moves.

The dollar surges and the rest of the world's currencies collapse. So that's driving inflation in those countries and the U.S. is such a source of demand that global demand sucks things in. And now that then spirals, right, in the sense that it's falling into labor markets, starting to hit labor markets in Europe. It hit labor markets in the U.S. You've got those wage gains. And in Europe, more so than in the U.S. But both, you have really important COLAs. You have things that are linked to past inflation, which create spending in the future based on backward-looking inflation. which is another aspect of the spiraling. So the labor market and the essentially government payments that are tied to inflation

are the things that create the ongoing nominal demand at those new higher levels. And that's the part that continues to flow through it. So Chris, do you buy into the Greg's argument here? Or would you push back on this? I mean, this is not the way I would explain the inflation. dynamics. You know, I'm a big fan of Occam's razor. The most straightforward explanation is the explanation. But how would you respond to or do you buy into what he said? I do buy into much of it. I don't know that he was discounting supply effects altogether, but I do think there

are certainly some significant supply shocks. I think the Ukraine war was not just a small one. I think it was a certainly significant reason why inflation did kick up in 2022. So I don't want to, I wouldn't want to discount that. But I think that certainly that the demand story is a significant part of it. Yeah. Well, and if you take core inflation coming into the year before the attack. So I agree. There's a supply story going on simultaneously, although an aggregate, very interesting how elastic global demand, global supply ended up being when you look at it relative to global demand. But the point that before the six-month, if you annualize the six-month inflation rate entering 2022, so before the Ukraine invasion, it was 5.8% already.

I'd say that supply too, though, Greg. That's the delta way over the virus, taking out supply chains and causing vehicle prices to go north and shortages, right? Yeah, and then just think about how many vehicles were bought. So then look at, so this is what I would ask you to look at in that is, okay, was there, were there fewer cars? sold by a lot. What's that? The sales of vehicles were way down, right? I think you're talking about new cars.

New cars, way down. Some of the new cars supply. They couldn't sell them because they couldn't supply them. There was no production because there was no chips, right? But the demand for the cars and such, but anyway, it goes way beyond cars, was incredibly high, right? And the chips, why did they run out of the chip production, right? They shifted around what they were producing the chips on.

But why did they run out of the, the chip production. The chip plants in Malaysia shut down because they're COVID. I think again, if you go through it, the dollars spent were so much higher than those impacts. I'm not saying there weren't some and there always are shutdowns of different things and there were more during COVID than normal. But if you, again, look at the dollar spent on those things and in aggregate the supply produced, I think that's how you'll get to which one it drove. And I'm not sure the other way to do it. I'm not sure what's Occam's Razor. say, to me, the more heck of praising thing is look at all the dollars that were created and

spent. And where did you think they went? How would they just, how would production possibly keep up, even if it was increasing at 2% if the money available to consumers was surging because money was printed and handed out in that manner? We also had some structural shift during that time as well, right? People moving away from public transportation towards car, right? So it's not just the stimulus money, right?

It's also preferences shifting. And all of those are definitely were happening and mattered. And this comes to, and a lot of things are changing, some of which deflationary, some are inflationary, but the most important thing that is happening on a going forward basis is that the global labor market is much less arbitrageable than it was over the last decade. That would be a big deal as you go through this when you can't arbitrage global labor. nearly as much. And so that's part of the story of this, I'd say, the secular reasons inflation is likely to average, above two, significantly above two, is one is the de-globalization. Globalization

has been a big part of what caused inflation. We'd get into how to measure that, but the big part of what caused the low inflation rates for so long at reasonable growth rates. And de-globalization of supply chain is happening very quickly. And the second part of that, probably quicker than globalization happened for what is worth. And on top of that, you have the policy response that what are they going to do if you do go into low inflation and weak growth. I think we all know what the policy response is going to be. And that's a huge change from the policy responses we've seen over the last 30, 40 years in the developer. Well, I want to advance the discussion a little bit and talk a little bit about, I want to come back to the Fed.

But before I do that, before I forget, talk about markets a little bit. And something that's confusing me about markets, if I look at the bond market, the treasury market, and I look at the shape of the yield curve, that seems screaming, we got a problem dead ahead, recession, right? Curve inverts, short-term rates rise above long rates, and that's happened to a very significant degree. Historically, and we can talk about the intuition, but historically that has presaged recessions with a high degree of accuracy.

Now, I look at the equity market. But in the equity market's down, depends on the day. I don't know what it is today, but it's down, say, 20 to 25%. That doesn't feel like that screaming recession. That feels like just a shift in multiples related to the run-up and interest rates. And it's a lot of its tech stocks that were all juiced, and now they've come back down to Earth. It doesn't feel like the market's discounting bad times ahead with big declines in earnings. If that were the case, we'd be down, I don't know, 30, 35 percent, which you correct me,

if I'm wrong, but I think that's kind of the average or median kind of peak to drop decline in equity prices, you know, going into recessions. First, two questions. One, did I characterize things correctly? And two, if I did, how do you explain that? What do you think, what you're thinking around that? Yeah. Well, I think to, like, A, I think the markets, in our view, are making some of the biggest

pricing mistakes that we've ever seen on our pressure. So I sort of agree with what you're saying. I don't think those things are reconcilable. But if you did reconcile them, I think basically we're trying to reconcile them. What you have to think is you get this very rapid decline inflation. You get a very moderate recession and you get a very rapid easing, right? That's the record, the kind of perfect Goldilocks, minor recession caused by this. Fed reacts to it super quickly.

And we move on to better times and that you get strong growth from there. That's the only way I think all that market pricing could be right. And it's possible. It's possible. I don't think it's highly likely, but that's basically what the markets are saying. And ain't to us that looks really wrong. I think there's a series of things that are wrong about it. That, A, like you're saying, I think the earnings recession is much deeper than that.

I think the Fed is going to be very slow, unless you get a very clear signal. The Fed is going to be slow that generally are when inflation is high or coming off high inflation. It's going to take a lot of evidence way past it's actually true for the Fed to believe. that they've got the inflation thing whipped. So unless there's major growth downturn, they're not easing quickly. They're going to play this out and why even ease if the economy is not weakening much? So I think those are, that picture is pretty unlikely and creating some great opportunities. And you've got all kinds of differences all around the world as policy decisions are quite

different and big balance payments changes and all these things. So it sets up this incredible macro landscape, I think. But anyway, the main reconciliation would be this great drop in inflation without growth getting hit very much and profits being okay. That would be the best you could save for reconciling that. But you're saying most likely the equity market is just mispriced and that means we're going to see some declines in equity prices. Yeah, well, yeah, we're bearish on both equity and treasuries. So bearish on equities because we do think the profit thing is going to be hard in equity on nominal bonds because that price in easing is probably optimistic. Again, as you come back, I do think cyclical inflation is coming down.

But what's been so interesting in this period is no secular inflation. There's no worry about secular inflation, break even inflation rates like the nominal bond. You know, why is it at three and a half? You have to believe no problem for inflation in the long run. It's only a short run problem. The market believes that with such confidence that is pricing and lower inflation now long term than it was at the beginning of the year. Interesting. And I think mostly mistaken in the sense that, yes, it's.

it's right in the short term that cyclical inflation is coming down here. But probably wrong given the structural. And so you can see this environment where inflation comes down a bit, but not as much as you would think for the cyclical conditions. Cyclical conditions deteriorate, not terribly because you also have the benefit of not having a financial cascade in the sense that probably, I mean, when the financial system has improved a lot since 2008, you don't have as much of the riskiest things going on on leverage as you

did, although you have some of that, but it's still relative to the history of the world, that's our high. So it's not 2008, but that's our high in a lot of the rest of the world. There's a lot of short-term debt that's getting repriced. There's a lot of areas where you'll probably see things popping. But likely one thing after another, and growth is weak, but not horribly weak. So we're worth it in the U.S. is like down two next year and Europe's down three roughly around those areas. Two percent.

Real GDP. Real GDP decline. Two percent. Wow. Yeah. That is bearish. Interesting. Yeah.

And what's interesting about that is, you know, that look, maybe we're wrong. Maybe. But if you take this level of type, you take the starting point of the savings rate and you, and, you know, what's like what's happening in the housing market, et cetera. I mean, these are the worst conditions that you've had. So of course, you could say, well, recessions are rare. Why would you be confident? Well, so are tightnings of the magnitude that we just went through. So are the sets of conditions globally that are going on are remarkable, you know,

and that the fact I think most people are getting confidence out of it not happening yet. I'm probably in our view overconfident. It does matter. The momentum in the economy matters. But when you look at the cause is what's sticking and where the weakness is coming, this is how it works, right? Interest rates rise. You start to see it in the interest rate, important sectors. That's hitting as hard as it ever has.

You start seeing the bubbles at the extreme collapse. And then that keeps moving towards the center, right? So if you take the crypto collapse and tech, the high tech, all the losses that those ended, all that money that was getting burnt in those money burning engines, were somebody else's profits. That money was flowing into compute. That was money was flowing into the core S&P 500 companies because they spent all that money that got spent somewhere. So when you look at the history of how these things,

the tightening happens. You had an extreme tightening. The next thing that happens is interest rate sectors and bubbles collapse. And the third thing that happens is that that then starts to impact everything else. And every cycle has this lag time. and the only reason that we mistake the lag time is you think, okay, well, stocks have been going down for a while, but like you said, it's only because real yields went up. Actually, expected profits haven't even begun to decline yet. And so that chain of events is classic.

We're following that classic domino. And so I think that's likely. Now, the argument on the other side is that. Can I say, I make the argument on the other side? I'm like, it's so interesting to me because I think about the bond market and the equity market and I ask you how to square and you say, well, the equity market's wrong and we're going to see a sell off. And I do the exact opposite of you. I say the bond market is wrong. And here's all the reasons why the yield curve is biased or not, you know, not telling us, you know, exactly what it has historically.

So very interesting different perspectives. I'm going to throw one other market out. But I would just say they're both. I think they're both wrong for what is right. I think the bond market. You'll curve you. That seems to be consistent with your two. Yeah, with the,

except that I think the Fed's going to have a harder time easing. Yeah. Then is priced into that curve. Certainly I think the both can't happen. So I would agree with you. Being bearish of both has the better. Like I do, I can imagine a world where growth does hang in there.

And that whole thing and you end up with higher, nominally goes going from three and a half to five or something in a normal yield curve, in which these stocks are probably going to fall too, meaning that the discount rate effect of bonds normalizing to a normal yield curve in the Fed not tightening, you'd have to have an really great profit situation to offset that. So I think there's a possibility of bonds go three and a half to five for the reasons you're saying, which is, okay, we're wrong about the growth

and it keeps coming along and the Fed doesn't go anywhere, and they go to five and they stay there, and you get a more normal yield curve priced in, or you have the other scenario where the growth is quite weak, the earnings come. Now the Fed starts easing, but that's already priced in. God, it's just to stay on track for bonds. Let me throw one other market at you and trying to use it as a way to interpret what the investors are thinking about where the economy is headed. That's the corporate bond market.

So if you look at the difference, the spread between interest rates on corporate bonds, take junk corporate bonds, slow the bonds issued by companies that are kind of on the financial edge have a lot of leverage and where investors are nervous about not they might not get paid in a timely way on that bond. Those spreads, those differences are nothing unusual there. I mean, the average, if you go back and take a look at the difference between the yield on high yield corporate bonds and U.S. 10-year U.S. Treasuries, back to the late 90s when the high-yield market was put on the planet, the average, I think you have to exclude the GFC because things just gap, you know, blew out then, but just take that out.

It's 500 basis points, you know, five percentage point difference. That's high yield corporate bonds. You give you 5% more, 5 percentage points more than 10 year treasury yield. That's average. There's no indication of any inkling of any kind of concern from the corporate debt market. So that would be more consistent with the equity market saying, hey, you know, I'm not worried about a recession here. Is that interpretation correct or do I have that wrong? Or how do you interpret it? Yeah, I'd agree with you. I think that, and it's an even bigger problem in

Europe, but I agree with you that those spreads look narrow relative to the volatility of what's next and aimed with as many things moving. Like, corporates are slightly different than equities in the sense that it's a lot about pricing the tail, how much of a tail, how many things are going to be in the tail, because, you don't get the upside, you only get essentially the downside. And it's interesting, right, with the amount of volatility caused by this very rapid tightening, whatever you think of inflation, the prices of many things are moving simultaneously. There's a lot of volatility for costs and revenues for corporations that would generally lead to a very big tail. And it's

not being priced in to a significant degree. And I think that's another likely mispricing. Oh, cool. Okay. So you're expecting spreads the difference to gap out here at some point. When equity prices, when investors realize, oh, we're going into recession, earnings are going to get crushed. Businesses cash flow are going to get hurt. They're not going to be able to make their debt payments, at least in a timely way. We're going to see equity yields, equity prices go down and the spread in the corporate bond market go up. Yeah, I think so. Of course, in the U.S., what happened, which is interesting and protects the corporate. a little bit is that they termed out the debt. It's a very long term for corporate debt in the things you're looking at, the publicly traded corporate bonds. So there's a much bigger problem in private credit, I think, where private credit is much more short term, like often off the short rate,

and the prices are not as evidence of what's happening there. Can I say that? Can I just to interject, just to make sure I understand, is that the same terminology is saying leverage loans, the leverage loan market, is the same as private credit? Okay, fine. Yeah. Well, yes. I mean, leverage loans a big part of that market. But that I think is at more risk, although it's less transparent. So it's a little less obvious what's going on. So I'm not sure. But I think there's become, but what has happened in the in the court traded corporate bond market is generally the terms are big, which helps them from a roll over risk perspective. There's not as much debt rolling at the worst possible time. Now, that's not going to help if you have negative profits and such, but it takes more like the worst case and the things that really come burning. you is when you have to refinance and there's no capital available. It's not that kind of downturn.

It's not where you get no financing available and that even good credits get strained. But I do think you're going to see a much bigger pile of bad credits than you get in most normal downturns, given the volatility of everything that's going on and then the movement in rates. Do you think that it's a potential systemic risk? I mean, something that, you know, it's just not going to hurt the investors in these loans and securities, but it starts to hurt investors such a degree that affects the provision of credit more broadly and thus the economy more significantly. Is it a systemic risk? Or is this just a problem for that particular market?

Yeah, I think we have the slow systemic risk building, but not, again, it's not as pointed because most of those things aren't held nearly on as much leverage. The truth's systemic risks are when assets are. held on leverage, and now you've got to sell them and you get this downward cycle, right? You've got a lot of money still. If you take private credit funds, et cetera, they have draws on a lot of capital that they're able to buy things if they get significantly mispriced. So I do think you have this more gradual problem that actually makes the whole thing play

out more slowly. So we're used to these very rapid recessions, very rapid declines. I think this is a more gradual, but therefore slower for the Fed to react. And the bottoms in these cycles, I mean, maybe this will be different, but you've never had a bottom in the equity market when the Fed hadn't started cutting rates. Like, you don't get bottoms into tightenings and not just like slowing from 75 to 50, which everybody's getting super ecstatic about, but actually turning around and easing. And usually the bottom in the equity markets, you know, six to nine months after they turn around in ease. So if you took the usual, like when does that make the bottom in the equity market? or the bottom and the bottom of the economy follows that.

Right. So if you did it kind of typical, you say, okay, I think the Fed might start cutting rates six months from now, probably the fastest you could see it. But let's say, unless there's a stock crash before then, six months from now. And then the easing starts six months from now. And typically the bottom of the equity market is nine months from there. That's 15 months out from now. And the economy is typically three to six months after that.

So that's 21 months or so from now. I think it's likely even to be longer than that. That's a long gradual recession, all the function of the fact that rates have been rising, assets have been falling, and the Fed's not close to easing. Normally, they'd be easing by now, given what's happening in the financial markets. And if inflation wasn't so high, they certainly wouldn't be tightening. And so having this tightening that's still going on into that, that leads to this long recession, which back to the credit thing just means this longer period of economic downturn forward that grinds out companies rather than it being

a financial credit problem. It's an economic credit. probably. Got it, got it. Let me ask one factual question. I think it's factual. So you have a, you're down 2% GDP, real GDP next year. What's the fun terminal funds rate in that worldview and that kind of expectation? Is it 5% or is? Because that's where the market is right now around 5%. We're at 4.5. I think, 4 and a quarter of 4 and a half. And I think markets are pricing 4 and 3 quarters to 5, probably closer to 5. Yeah. Are you there? Are you higher than that? Where are you? Yeah, we think that's about right, about what's going to happen, right? And then there's the timing thing, right?

I think largely it's going to happen because the Fed, based on their past errors, is going to wait for clear evidence. And I think that's going to leave them. They have a couple more tightening because I think the evidence is going to be slowly on what. It's not like we're going to get whacked one day and it's going to be crystal clear. So somewhere in there, right? So if you take the very short end of the yield curve, we're basically neutral on that. We're bearish on the long end because the market's pricing in this huge, decline in rates. And we're, so even though we see that weak growth, we think the tightening is going

to be slower than that. Plus, you don't want it. It's a matter of diversifying the positions. If you're wrong about growth, what's the likely outcome is that that bond pricing is really wrong. Got it. Hey, let's play the game, the statistics game. And the game, I know some listeners out there are getting annoyed at me for repeating this every single week, but just for those that are new, have lots of new listeners as well. We each put forward a statistic. The rest of the group tries to figure that out through clues and questioning, deductive reasoning. The best statistic is one that is not so easy that, you know, we all get it very quickly. Not so difficult that, you know, no one gets it ever. And you get extra credit if it's apropos to the discussion at hand. So,

Mercer, I'm going to go to you first. What's your statistic? Minus.6% in November. Is it in the CPI report? No. To say import prices. No. Wow, that would have been, man, if he got, if they got that right off the back, I probably would never go to that release.

Is it, is a real? I think it's also true, though. I think I might also be right. It probably, yeah, it probably is. Typical. That's probably true. Typical. Is it from a release this week?

Yes. Okay. Retail sales? No. Not industrial production. It is in that release. Okay. See how I do this, Greg?

I just names every release. That's top line industrial production. It's not. No. It's not top line. Manufacturing? It's not. manufacturing. Yeah, it's manufacturing industrial production. So utilities, which is another

component of this was way up. So total industrial production was down minus point two. But manufacturing was down minus point six, which is the first decline in five months, pretty large, coming from durable and non-durable goods and motor vehicle production was down 2.8% over the month, which is quite large. I picked this because it kind of month to month, right? Yeah, yeah, that's month to month. That's true. Yeah, and manufacturing IP year over year is still up a bit.

It's still up about one and a quarter percent. But I picked it because we're talking about CPI and goods prices are now falling. It squares with a lot of the other data on the manufacturing sector, all the regional manufacturing surveys, the ISM are showing weakening in the manufacturing sector. just sort of this emblematic of the demand for goods falling off and being replaced by services now. Well, and I think manufacturing we can say is in recession, probably, right? Because the ISM purchasing manager surveys below that so-called 50. And now industrial production seems to be slumping.

We haven't seen job declines, though, yet in manufacturing. Have we? No, they're still adding to payrolls, I believe. Right. I meant to look at that. No, I don't think we've seen declines yet, but we'll see. It's coming. We'll see when the data gets benchmarked, too.

While I have you, and this reminds me, can you explain the impact of severance, the so-called severance packages that people in the tech industry that are getting laid off or in financials? We're seeing certainly anecdotal announcements, lots of them, from the tech sector, from financial services, and, of course, mortgage finance. blue, excuse me, white collar kind of jobs and corporate headquarters. Then these folks get generally severance packages for at least three months, maybe as long as six months. If you're getting a severance package, will you show up as in as you'll, where do you, does that affect the employment numbers or the unemployment insurance numbers at all?

Do you know? So, so it's, yeah, I think I know. I know. I know you know. I'm leading you. I know you know. Yeah, you probably wouldn't ask it. It wouldn't be an interesting podcast if you ask me and I don't know.

Yeah, so when you look at the payroll survey, the current employment statistics survey, the count of jobs on employers' payrolls, the trigger there is just who is on the payroll, who is getting paid. So if you are getting a severance package, which, you know, in financial services, Wall Street firms, which have even today announcing more layoffs, is. typical to get for six months, maybe even longer, you're on the payroll. You'll show up as employed from the employer's perspective. So because where I think where you were going with that is jobless claims are still incredibly low. I mean, they fell again this week, right? They're down to like

$21, $21,000. $21,000. That was going to be my other statistic if somebody took the IP one. Damn, I wish you had picked that one. I would have gotten that right away. Because, yeah, so we don't see it yet, right? We're not seeing all these announced layoffs showing up in the unemployment insurance claims. And if you're getting severance, you're not going to file for unemployment insurance. In fact, I'm not sure if you even can file for UI if you're getting severance pay. So it could be that there are more job losses out there and they just haven't shown up in the statistics yet because of the severance. Yeah, I think that's to Greg's point, right?

that it's coming. Yeah. Yeah. And a lot of things in the labor market are interesting because of how slow it's going to be in line, right? You just went through the shortage of labor that slows things down. You've got on top of that the shift from the shift of services from manufacturing, which is super labor intensive shift, even at the same growth rate.

And third, you've got, I think, this like more politically conscious firms that are going to be wary. They're certainly like, how do you square buybacks with laying people off or whatever, things that were more normal in past U.S. recessions. You got, it's a little bit of a Europeanification of the recession in the sense that one of the things that created then real negatives in U.S. downturns were the very, very fast rate of firing, but that also created the faster rebounds. And if Europe, the rate of firing for a bunch of regulatory reasons, much slower, and the recessions as a result go longer.

And you take this from the Fed perspective, they're looking square at employment. And employment is going to lag, is going slow. The wages are going slow. And so if you're looking at that, understandably, you're staring at that, kind of missing what's happening, which is probably also going to lead to a much worse profit drawdown than economic drawdown. And some of that makes sense. We've had the opposite for so long where profits and corporations have done better than the economy, the refinationalization, where labor does better in the downturn. then corporates could be a kind of rebalancing of what's been going on for the last 30 or 40 years. But that's, and that's part of de-liabolization causes that as well, that's how I think it'll play

out that the layouts, layoffs are coming later for a variety of reasons than they have in a typical U.S. down term. That's interesting. That's very interesting. Hey, you want to do another one? Chris, you want to give us your statistic? Sure. Well, first let me say, Greg, you can come back anytime.

I'm arguing all my points here. 44.6 is the number. 44.6. Is it a regional ISM survey? How can you delay on that one? Either it is or it is. Is it the NFIB survey? Yeah.

National, federal. It's not a small business survey. Okay, 41.6. 44.6. Oh, 44.6. Oh, big difference. And so it's not one of the regional. It's not a federal.

It's not a Fed. It's the Fed. It's not a Fed. Oh, it's regional. It's not regional. Well, it applies to a regional of the world. This is so confusing. It applies to the world. I think he's misdirecting us. He's like throwing up smoke over.

It's so easy that I wanted to, you know, oh, I see. Throwing a little, little dust. little sandstorm. And is it from a release this week? From a release today. Oh, what came out today? This morning.

Oh, is regional employment and unemployment came out? No, no. No. Nothing else came out there. The region is the U.S. That's just to be clear. Oh. I don't know.

Any other hints you want to give us? That came out today. I didn't think anything came out today. Did Home Builders or something like that? No. How about SMP? S&P? Not the house price index.

No, K Schiller, no. S&P is a competitor of Moody's. Are you talking about? They're bad. They're bad. I'm a loss. It's probably really pretty straightforward. S&P.

Is it related to the stock market in some way, Chris? No. Bond market. We can't hear you. You're on mute. Yeah, I don't know how that happened. U.S. composite purchase, managers, index.

Oh, you know what? Oh, that's why, because I don't follow that. You don't follow that. Yeah, I don't follow that. So what did it say? Is that for manufacturers? So that's the total. And then they have a split for manufacturers and services.

Okay. So 44.6 is the aggregate. It's down two points from November. Anything below 50 indicates contraction. So clearly slowing. And then both the services and the manufacturing components were down, right? Services at 44.4 and manufacturers is at 46.2. So there's contraction across the board.

So this is much more pessimistic view compared to the ISM, the purchasing manager surveys that we typically look at, which manufacturing just fell below the 50 threshold and service companies are well above 50, right? They're actually quite strong. How do you, they're just measuring different things somehow, but they're two very different perspectives. I mean, one of the interesting things, right, and this comes in the NFIB or whatever is these surveys, a lot of them are, getting screwed up by views on inflation too. Like if things are good or bad, it's a growth view and an inflation view, not just a growth view. And so we've had to, like in our processes, recognize that and recognize what indicators

that we would normally find reliable are actually less reliable unless you can split out what the person is really answering. Are they answering about the general macroeconomic environment, which has an inflation component and a growth component. and things that in normal inflation periods will look a lot like growth actually end up looking different. So I don't know if that's going on here, but it's certainly been an issue with surveys. Yeah, you're right.

So I think the interesting part are actually in the details, right? They talk about declines in new business, new declines in exports, declines in business confidence, right? So understanding those components, but some improvement in input prices, right? So commodity prices are down. So businesses are benefiting, yeah, from that standpoint, but they're seeing, they're pessimistic when it comes to new orders. Employment, they, at least the manufacturers in this survey indicated were basically flat, right? They're not replacing people who quit, but they're not actively laying off in large numbers.

Yeah. Well, I guess the other thing about these surveys, they're sentiment driven. It's kind of a quasi-sentiment survey as well, because it's qualitative. as opposed to quantitative, or there are parts of it that are quantitative, but parts of it that are qualitative. So people are feeling, they're not feeling good. That will be reflected in kind of a weaker kind of ISM number. But to square the S&P number with the ISM numbers, I'm not sure how to square those two things.

We're running out of time. Did we want to do one more? I've got another question. I'll give you one real quick. Okay, go ahead. All right. But this will be a little bit impossible. It's a year-to-date number.

but the year-to-date number is 4.1%. 4.1% year-to-date. Is it related to inflation prices? No, it's a, because it's a little bit of a construction, you're not going to get it, so I'll just tell you, but it comes back to this. Oh, he's taking pity on us. You see that.

He doesn't even give us a chance. He doesn't want us to put us out on misery immediately. Yeah, it's the S&P 500 through yesterday, adjusted for discount rates. So it's up if you adjust. for the discount rate and essentially what the long-term outlook for profits have done, stocks are up 4.1%, which is interesting if you, you know, anyway, there's a lot of assumptions you have to put in to do that.

But by and large, the picture's right, which is stocks are not down. If you think of them as a return stream of future earnings, they're only down because the discount rate is up and they're actually, if anything, the profit expectations implied in the price have gone up this year, which is interesting and everything we're talking about. That's really cool. That's really cool. And we would not have gotten that. No, I would not have gotten that.

No, my mind immediately to go to the year to date to S&P, but that's got to be down. Yeah, the year to date down money is almost got to have plenty, right? And so it's up for on that basis. It's just an interesting thing when you think about what it all means. Yeah. Hey, I want to end the conversation this way. I'm not sure it's fair, but I'm going to go ahead and do it. So your view of the world is very different than mine.

Not as different as Chris's worldview or Marissa's. It's going to be a struggle next year under any scenario, but I think we have a fighting chance to avoid recession with a little bit of luck and some debt policymaking. So we're on kind of different, we've pretty different views. What would have to happen, Greg, for you to change your mind, to think, oh, no, we're not going into recession,

you know, we're going to be able to make our way through without one. Is there, and it's probably unfair. If you ask me that question, I probably, I don't know how to answer that. But I'm going to go ahead and ask you that question, see how you, how you parry that. Well, I think it's a critical question, right? Like, what's so great about what we do? I mean, it's also really hard about what we do is you're either right or you learn something. So those are the two options.

I love that. I love that can be really good, right? Can I have a job? Greg, can I have a job? That sounds like a real fun job. So, so, look, he didn't answer me. You noticed that guy? He's getting there.

He's getting there. No, no, I'm not building up here. If we're wrong, what I think we'll have learned, you know. And so a lot of it hinges on the things you're saying, which is, okay, is it possible that inflation went up largely for supply reasons? Inflation comes down largely for supply reasons. This isn't a demand effect of the interest rates, that the economy is actually not that vulnerable to this tightening, right, that it would be super interesting. It's possible that for some reason, structurally, the economy is less sensitive to interest rates than it's been over all of

history. But that's what I feel like we'd have to learn, right, which is actually it doesn't matter. You take real rates from negative up to one and a half, you know, to one and a half percent. You take nominal rates from zero to five. People don't shift into cash. The savings rates don't rise. So to me, the things that would surprise me that I'll be monitoring is savings rates don't end up rising. And that the inflation comes down without a large shrinking in demand. Those are the flags we're looking at. And certainly your side, Mark, the markets, like your side got more powerful over the last seven weeks. The inflation stats consistent with that.

and the way the markets have reacted to that this week, a little bit the opposite way, but the last seven or eight weeks. And I think that would be super interesting. You know, if really that we learned that that degree of tightening, the market reaction to that, the wealth effect, the cracking of the bubbles, all doesn't end up in a recession. I mean, that would be fascinating, I think. It's an interesting world that we've got something really wrong. And that's what we do.

We then go stare at those things and then rebuild our problems. to say, okay, well, why would that be? Why is it so different than all through history when those things happen? And so that's what we'll, you know, we'll be looking out for and constantly looking out for. And we certainly, like to make money in markets, you get humbled all the time. So if you can't change your mind, I don't think you can stick around in markets very long because, man, we're wrong all the time. So I said things somewhat probably more authoritatively that I mean them because we're always wrong. And really, if you can't survive being wrong, you can't I'm with you. That was a great answer and a great conversation. And I totally agree with you.

Your last point about you got to be humble. You know, goodness knows economists like me, I've been wrong about many things over the years. But it was wonderful to have you on, really enjoyed it. And I'd love to get you back just to tell you, I told you so. All right. Let's schedule that. I think we'll know a lot. If we do this, this time. You have to wait 24 months, though. If we do this this time next year, I think I'll be surprised if we don't have a view of which one of us was right. I agree with you. The moment of truth is at hand on this particular issue. But thank you so much, Greg.

And thank you, dear listener, for listening to us. And we'll talk to you next week. Take care now.