Moody's Talks - Inside Economics - What in the World is Bothering Us

Episode Date: March 25, 2022

Eric Gaus, Senior Economist at Moody's Analytics, joins the podcast to discuss an array of issues that are bothering them, including U.S. stock prices, yield curve, and the labor market. The podcast also provides an update on the economic impact of the military conflict between Russian-Ukraine. The big topic is geopolitical risk.Full  Episode Transcript.Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis 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 three of my colleagues. We've got Chris, Chris DeReedy's deputy chief economist. We've got Ryan, Ryan Sweet. He's the Director of Real Time Economics. And Eric, Eric Gousse, Eric, you've not been on Inside Economics. Is that correct? That's correct. Well, who made that error? That doesn't sound right to me. You know, we've been on the air now. I think, almost a year, if not a year, pretty close. Close. Yeah. It's taken a year to get you on Inside Economics. That's, that's a, we got to talk to the Booker here for these things.

You keep me busy all the time, Mark. I don't, oh, yeah. That's what it is. Yeah, you're too busy for, you're too busy for Inside Economics. Did you hear that guys? He says he's too busy. He's a busy guy. He's a busy guy.

So what's your title exactly? I'm senior economist. Okay. And, you know, you are critical to a lot of the work we do around geopolitical risk, country risk, as we say. There's no difference between country risk and geopolitical risk, is there? Yeah, I would say, I mean, geopolitical risk is sort of underneath country risk. Country risk is really broad.

I mean, it runs the gamut from everything that's, you know, could possibly go wrong. Okay, makes sense. So geopolitical risk is a subset of what you would call country risk. Okay. Right. Very good. So what else would be in country? What are the kinds of things would be in country risk? Well, we'd look at things like national security risk, which includes things like effects of climate change, right? It was not geopolitical at all. social risks, which is mostly the kinds of, you know, social unrest locally, right? So thinking about like an Arab Spring type moment that might precipitate to sort of more unrest. There's, of course, political risk and tied into there is, of course, geopolitical risk.

We also have three other main dimensions that are more economic. So macro risk, business risks and financial risks, which are more sort of like the currency and bond market side of things. Got it, got it. And before you came to Moody's, you were, you were in an academic, right? Were you at Gettysburg? You were teaching at Gettysburg, right?

No, that's where Mark was from. But also nearby, a small liberal arts college or sinus college. Oh, sure. And then I also taught at Haverford College about a year before I started. The Centennial Conference, which is Haverford, Gettysburg,

and where I went to college, Washington College, is very well, represented here at Moody's yeah say that again what what's well represented here moody's the centennial conference which includes a bunch of small liberal arts school so gettysburg where uh mark hopkins taught have her her her sinus eric or her sinus and i went to undergrad at washington college which is also in the centennial conference oh i i didn't know that a little fun fact there yeah it is a fun fact yeah very good so the it's the centennial conference I mean, a little bit by extension, you can include Chris because Johns Hopkins is D3 in baseball, and we would play Hopkins.

So Gettysburg or Sinus and my school would play Hopkins. Oh. And I got to get the UPenn connection. You can't get the UPenn in there. No. That's that now. We're a class of our own. There you go.

There we go. Someone's got to close to. No, no, no. We need a bigger box from Mark's area. I know. He's not going to put in in soon. He's right. Yeah, he's absolutely right.

Fighting Colonials. We are the Quakers. Quakers, not the Quakers, Quakers, not the Colonials. It shows you what I know. What was I going to say? Oh, Eric, how long have you been with us at Moody's now? Up on four years. This summer will be four years.

Fantastic. It's good to have you aboard. And obviously, we're going to be talking about geopolitical risk, and there's a lot of risk out there to talk about it. A lot of things going on, yeah. A lot of things going on. So it's good to have you on board to have this conversation. But before we get to that, I guess we should talk about it. There's a few things going on in the economy, financial markets that are just really

bothering me. And I'm just going to throw it out there and see what people think and help me understand what's going on. First up, the stock market. What in the world? the Federal Reserve is on DEF CON 1, you know, can't seem to tell us they're going to be raising rates any more quickly. They're just going to ramp things up here. In every speech, Chair Powell is given or another Fed governor is given is just, well, we're going to be tightening very aggressively here going forward.

And then on top of that, we have Russia, Ukraine, and all the uncertainty and macroeconomic consequences of that, none of which are any good. Yet, the stock market, no problem. I mean, yeah, what's the deal? Does that make any sense to you guys? What's going on? Anyone got a view? Chris, you got a view on that?

I agree with you. It doesn't make any real logical sense. All I can think of is that maybe there is cash on the sidelines. So as soon as you get any type of a little bit of decline, people come in and bargain shop, and that's why it's not reacting, but that doesn't really hold water if you really believe that the rates are going up quickly. So I don't know. So you're perplexed as well. Yes. Well, did this, I mean, before I said it, had this, had you noticed this? Was this like something like what's going on here in your own mind?

Yeah, yeah. Yeah. Well, prices are up. I mean, it doesn't seem, nothing. It doesn't seem to react. It's just, right. Stock market continues on its way. And Eric, correct me if I'm wrong, but this is kind of the case across the globe, right? I mean, equity markets pretty much everywhere.

They're down a little bit from their peaks, but they're all-time peaks, but they're not down a lot. They're down, like the Futsi 250, which is the British equity index. That's down more than the S&P 500 in the U.S., which, you know, that makes some sense,

given that they're more closely linked to what's going on in Russia, Ukraine. But markets across the globe seem to be hanging in pretty well. Is that right? I think I got that right. That's pretty true. I mean, yeah, you're right. They've all slid a little bit, but, you know, compared to the sort of enormity of the situation, it doesn't seem like it's the right scale. Right.

I think that's more what you're thinking, right? Right. Ryan, any perspective on this? What's going on? I agree with everybody. Particularly, you know, if you look over the last several months, I mean, valuations, you know, we've been arguing going into this. that the stock market was overvalued and the only thing justifying these high valuations was low interest rates. And now that interest rates are on the rise, you would think valuations will

start to be readjusted and that the stock market should come in with it. But so far it's holding up. I mean, I don't know how people are that optimistic about earnings growth next year, given that the Fed is, like you said, on Defcom 1. I mean, you know, I just don't see how the stock market can hold up. Is it a lack of alternatives or where else you're you going to go? Maybe. But I mean, you have seen a lot of outflows of leverage loans. Maybe that money is going into the stock market or people are looking for alternatives like Chris Point. Oh, what's that, Ryan? Leverage loan market. Yeah. If you look at the corporate bond market, investment grade, corporate bond issue, a lot of demand for investment grade, but high yield

and leverage loans, there's been some really significant slowing and demand for that kind of paper, maybe they're bailing on that and going to, this is all a hypothesis. It could be going into the stock market. Yeah, the $2.6 trillion in excess savings, maybe the retail investors coming in because it's with the high-end income households. I don't know. I mean, we're kind of scrambling for explanations. Yeah.

Well, you know, it's one of those things. Usually when I can't explain it, it doesn't last very long. So it feels like we might wake up one morning and the Dow Jones is down a thousand points or something. It just feels that way. Here's the other thing. The Fed Reserve clearly wants the economy's growth rate to slow, right? Because they're fearful that the economy is going to blow past full employment and this high inflation and inflation expectations is going to get embedded endemic, and they got a bigger problem down the road with trying to battle that. So they're clearly telling us point blank, no questions, no uncertainty, we are going to slow growth.

And one of the key ways to slow growth, at least anytime in the near future, is through lower stock prices, right? I mean, you know, clearly the housing market, you know, that's interest rate sensitive, and that's showing some cracks. But if you don't get stock prices down, then the Fed's going to even have to step on the brakes even harder, right? I mean, they're going to win at some point. They'll win this battle, won't they?

Do you think it's more important for the stock prices to come down or for them to cause corporate bond spreads to widen? So, you know, reduce access to credit. Well, it could be both. I mean, it's probably a combination. Have you ever seen a situation where stock prices stay strong and corporate bond spreads gap out? Yeah, that's a good point. There's a very strong correlation between the two.

Well, for good reason, right? Right. Exactly. Yeah. But I'm wondering, yeah, if the Fed pushes hard enough that one of them will crack first. I don't know which one. You follow the corporate bond market really carefully. So what about what's going on with corporate credit spreads?

That's the difference between yields on corporate bonds and, say, 10-year treasury, a risk-free rate. That spread, that corporate bond spread is a reflection of what bond investors need to get compensated for the risk involved, the credit risk involved in investing in that bond. The risk that that bond might default or they might not get paid in a timely way. That's what's going on there. Is that similar to a surprise there with how? Yeah. You are. Okay. The increase in the bond market volatility, the stock market volatility, typically those are two big drivers of high-yield corporate bond spreads.

But they've widened, you know, not an enormous amount, but part of it is because the stock market's held up. And if you look at, you know, since the 1990s, there's a very strong correlation and causal relationship between changes in the stock market and high-yield corporate bond spread. So they actually came in over the past week, which was a little bit surprising. and we're well below our historical average. So usually a historical average for high-yield corporate bond spread is 500 basis points.

I think we're still below 400 basis points. Yeah, pretty interesting. Hey, Eric, this may be a question you don't know the answer to, but doesn't stop me from asking it anyway. Do historically, do geopolitical events have significant impacts on equity prices on corporate bonds? spreads on financial markets? Can you see it when we have big events in markets? Maybe a classic economist answer. It depends. Right. Ryan says that all the time, by the way. That's his go-to. It depends. Well, but I think it's somewhat true. It depends on how localized you're

talking about, right? So, like, clearly, we'll see this for Russia and Ukraine and maybe, like, the closer you get to the epicenter of whatever the geopolitical, uh, thermal ale happens to be, that's where you're going to see more response. And that sort of follows intuition. So yeah, it does kind of depend. Well, I guess the Russian stock market was shut down. Yeah, exactly. Ground zero for this mess.

So, yeah. I mean, it hasn't seen to ripple out. Go ahead, Ryan. But the one thing I point out is that the Federal Reserve has a geopolitical risk index. And I recently looked at it and kind of see assess, you know, Does it affect the economy more or financial markets and affects financial market conditions much more than the U.S. economy? So so far, the hit to the stock market, the hit to high-yield corporate bond spreads, is in line with what we saw around the Iraq War, less so around 9-11, but the Gulf War, things like that. You know, you just took my statistic.

No, sure. You're going to cite the geopolitical risk index. I was. I was, I'm no kidding. What is it? What is it right now? What's the number? Four.

four. Four. The Z score? The Z score. Yeah. Okay. The Z score is four. Yeah.

Right? Am I okay? He's looking at one. Where's the cowbell? Where's the cowbell? There's no cowbell for that. That is the game in reverse. Well, you want to explain that the whole, because this is something you do, you put this

together. So you want us to explain that to, and Eric, I should ask, do you look at what Ryan puts together here on, on, um, on. You can say no, it's okay. Oh, that's a no. That is a no. That is the one that comes from the the Acovelli paper, right?

Yeah. Explain that, Ryan. Or Eric, explain that statistic of what is saying and put it into some kind of context. So, you know. It's what the Fed Economist did. It was very similar to what Stanford economists, Bloom, and others did for political uncertainty. what they do is they scrape newspapers and look for references to geopolitical risk.

I don't know all the exact terms that they look for, but things that are tied to geopolitical risk, like war sanctions, things like that. And they come up with an index. And what I did was they calculated a Z score, which shows you how far above or below the mean it is. And right now it's, as you mentioned, four, which is among the highest sense. I think it was the Iraq War. But it was a lot higher than in the Iraq war. Yeah, it was.

We're not there yet. Which is, I think it was more like, or maybe it was a financial crisis. It was eight. Was it the financial crisis? No. 9-11. I'm sorry, 9-11. Right.

9-11. It was double what it is now, which I guess makes sense. Because we're not explicitly involved in what's going on with Ukraine and Russia. Yeah. Right. Good point. And so what you're saying is based on your analysis that if you relate that geopolitical risk measure, that Z score, as you describe it, to financial market conditions, stock prices,

credit spreads, and economic, some measure of economic activity, presumably, I guess, GDP or jobs, you find that it's much more important for financial markets than it is for the economy, which I guess makes sense. But right now, no, you can't connect the dots here, right? Because financial markets are really not. They've tightened. I think they've tightened, you know, noticeably over the last month, but. Yeah, but not to the degree maybe that we're thinking it, they should have.

Well, and wouldn't they have a tightened, just if, forget about Russia, Ukraine, if only the Fed did what it was doing and every central bank on the planet now is almost every central bank, except the Bank of China is kind of tightening policy, you would have expected, you know, something, but you see some tightening in financial conditions, right? Yeah, but I would only push back that the Fed would not be on Defcom 1. Powell would not have said what he said earlier this week if it wasn't for, Russia, Ukraine, which led to higher oil prices, which has pushed up inflation expectations. So if you didn't have that, it would be more steady as she goes.

That's a great point. That's a great point. The reason why the Fed went from DefCon 5 to DefCon 1 seemingly in a few weeks was in fact the Russian invasion of Ukraine because that fanned inflation and more importantly inflation expectations. And thus, that makes a lot of sense. So Russia, Ukraine is. one way or the other, you know, feels like it's kind of at the root of what's, what's going on here. But still, even despite that,

it hasn't had that big an impact on financial markets. Certainly not one. It's confusing. It's just confusing the way it's seen more of an impact. Okay. All right. Here's another one that is bothering me. And I might turn this back on you guys and ask you what's bothering you, but I got because there's a lot of things that are bothering me now about the all of a sudden the shape of the yield curve the yield curve and you know someone asked

about Ryan sent an email to Ryan and myself a few days ago about what we thought about what the yield curve is saying and I characterized my view as I'm a yield curve what I say? I mean, a yield curve believer and Ryan's a yield curve denier. Do I have that right, right?

Is that roughly right? Skeptic. Oh, you're skeptic. Oh, that's a better word. You're right. Skeptic. They should have said skeptic. Yeah, that was a better characterization.

Okay, so who wants, Ryan, you want to describe what's going on with the yield curve and what the debate is about what the yield curve is saying? Yeah, so the yield curve is the difference between long-term treasury securities, typically the 10-year treasure yield.

and a measure of short-term interest rates. So you can look at the two-year treasury yield or the three-month treasury bill. Historically, the most accurate measure of the yield curve is the 10-year minus the three-month. That has only sent one false signal, meaning that it inverted and we avoided a recession, and that was back in the 1960s.

So right now it's the tail of two-yield curves. So the one that everyone's focused on is the 10-year minus the two-year, and that has flattened quite substantially. I think last time I checked it was less than 25 basis points. I think it was 20 basis points, 22 percentage points yesterday. So it's not inverted yet,

meaning that short-term rates aren't higher than long-term rates, but we're headed that way. And if you look at Ford Treasury curve, they expect that to invert in the next six months. On the other hand, the 10-year minus the three-month is nowhere near inversion. It's actually the gap between the two of these are the widest in a very, very long time.

So you're getting a message, you know, a tail of two yield curve. So we maintain a probability of recession based on the daily yield curves. So the 10-2 has the probability recession in the next 12 months, close to 20%. The 10-year minus a three-month, 7%. So it really depends on what yield curve you put more stock in. Yeah, well, I mean, clearly the three-month is going to be rising here very rapidly, given what that's going to do. So it's almost like you really shouldn't.

that just feels a little odd to be looking at that as trying to understand where the curve is going to be. I mean, the two years, more of a market investor reflection of where the Fed's going. And so it feels like that's probably a better indicator to look at to gauge where we're headed or what the risks are. Would you agree with that? No.

I think, yeah, right now it is. Yeah. Before, if the 10-2 inverts and the 10-3, it's headed towards inversion, but a recession usually follows after the 10-3 inverts. Well, although I showed you this chart, if you look back to business cycles, I think going all the way back to the 1980s recessions. We had two back-to-backers. The 10-year, two-year, on a monthly basis, inverted prior to each of those recessions. And I don't think it ever inverted into recession not happened.

even it even inverted before the pandemic, right? Yeah. I mean. Right. And you could say, well, doesn't that mean that this is a false indicator because who could have predicted the pandemic? That's true. But I would have argued that the economy was pretty fragile and pretty high probability of

going into recession even without the pandemic because of the trade war. You did argue that. I did argue that. I did argue that. Yeah, exactly. Chris, what do you think of the – so maybe I'll turn to you. can you explain why the shape of the yield curve and when it inverts when short-term rates rise above long rates, that is so prescient in terms of recessions?

You know, what's behind that? Is there some causal relationship or, you know, what's going on there? Why is this such a oppression indicator? Yeah, well, I guess a couple of things we could say. First of all, I'll say I am a believer. You're a believer? Yeah. I'm only on my arm.

strong believer. I'm a strong believer. Strong believer. Okay. He's with me. We're going to ask Eric, is he a believer or a denier or a skeptic soon, so get ready. I'll take Chris's normal position. I'm going to be right in the middle. Oh, okay. Yeah. I'm abandoning that position. It's all yours. How do you describe that then? You're a... Well, because it works very well to describe the U.S., but it doesn't work very well in other countries. And so that, so it may be conditional on the sort of financial system, the structure of the financial system and how that sort of works. So that's sort of my stance. Or the well-functioning of the bond market, right? Because you have to have a very liquid- Exactly. Exactly. What the financial system and the bond markets look like.

Yeah, because we have no, you know, because we have a very liquid treasury market. I mean, and it's the risk-free. It's risk-free. There is no credit risk in there, right? Whereas other places, you don't have the same liquidity in those markets, and there probably is some credit risk on a lot of them. But anyway, distracting from that. Going back to Chris, so what's the logic here? What's the intuition? In terms of a causal relationship, I would point to the

banking system or lending, right, under an inverted yield curve. It's very difficult to make money as a lender. You're borrowing short, lending long, and now it's more costly in the short term than the long term. So

that then leads to has to lead to some type of reduction in credit and that would lead to recession. That's the causal link I would throw out there. Yeah. Right. Yeah, you can't pick your bank. You make money on borrowing short term at a low rate and lending longer term at a higher

rate. That's tied to the yield curve. Right. And if the curve inverts, that means my borrowing costs rise above my lending, the return on my lending. And that's my profit margin. I can't make money. I don't lend.

I don't extend credit. credits the mother's milk of economic activity, no credit, no, no, no, no, no, no, no, no, nothing goods going on in the economy. That's right. Right. There's also, I guess, the intuition might be also a signal, you know, kind of a set, what bond investors is the collective wisdom of bond investors, right? Sure. They're saying, they're saying, look, I, I, if I think there's a recession down the road, that means that inflation is going to fall, real yields are going to fall, long-term interest rates are going to fall, And so that drives down long-term rates relative to where short rates are because that short rate is more tied to what the Fed's doing.

And the Fed's got their foot on the brakes. That means higher short-term interest rates. And you get that kind of inversion. So it's almost like a reflection of the collective wisdom of folks who think about these things for a living. They're putting their money where their mouth is. And presumably they get it more right than, well, they get it right every single time. Is it wisdom or group think? Because when the

You're self-affirling maybe too. Yeah, that's the thing with the yield curve, I think, is more, that's not appreciated enough is that when it inverts, people assume a recession is coming. So we talk ourselves into a recession. So they listen to the bond market, then that affects the stock market. And then we just go to confidence weakens and we just go around and around.

That's interesting. Do you buy that argument, Eric, that we talk ourselves into recession? That just doesn't feel right to me. Look at Google trends. yield curve searches. When the yoke curve is close to inverting, it jumps. Everyone's looking, first of all, what the hell is the yoke curve? And then we just talk ourselves in a recession.

Huh. That's, I find that's so curious. But, I mean, I don't, I don't know. Would that be an interesting study to do, see if we can't figure, you know, kind of tease that out, you know. There must be studies out there. I haven't seen it. You can use measures of business confidence versus the yokeur, Google trends.

lots of stuff we could do with it. Yeah, that would be very interesting. So, Eric, you said something in the middle. So how do you define yourself? Are you like a yield curve agnostic? Is that what you're saying? No, I'm just, exactly the point that I made. Like, I think in the U.S. it works, but it doesn't work elsewhere. So you can't really say, oh, the yield curve is, is a good indicator, broadly speaking. It works for the U.S. Okay, so you're saying you're a U.S. yield curve believer? Sure. Okay. Well, sure means...

That wasn't a growing endorsement. Yeah. Is the answer yes? Yes. Yes. It works, right? Like, it seems to be pretty accurate predictor until it... Until it isn't.

Until you go someplace else, right? I think about what other countries are doing, too. And then you can't look at the yield curve to help you assess what's going on there, right? Right. All right. All I have to say is all lies on that yield curve. One thing I will say is important for folks that are... thinking about looking at this as an indicator of where the economy's headed, and I think they should,

is it, I think it has to be what I would call a hard inversion in the yield curve. It can't be the two-year yield rises above the 10-year yield intraday or even for a week or it's got to be month two or three, and it's got to be not a basis point or two, but it feels like it's got to be 10, 15, 20 basis points, at least kind of an inversion. So it's got to be a clear inversion and not some, you know, temporary thing in the bottom. See, Chris? See how he does it? He puts a lot of caveats on.

No caveats. Yeah. No, no, no, no. No caveats. I mean, although having that just said what I just said, I have not looked to see whether the curve has ever lightly inverted, not hard invert. You know, once it lightly inverts, does it always hard invert? Is there ever times where it hasn't done that?

There's been a couple of times, I think. Is there? Okay. All right. Okay. So my question, then, is, does the, this condition the Fed's behavior at this point, right? If you believe that the question,

if you believe in this relationship, right, and it might be self-fulfilling, right? We're not describing the causality. Do they, does Powell now say, oh, I'm not gonna raise rates because that would cause the inversion? Yeah. Well, I think if I were on the Fed

and I needed a rule of thumb to kind of gauge what appropriate policy is, I'd be looking at two things. I'd be looking at this point in time. I'd be looking at the 10-year, two-year treasury spread, that yield curve. And I'd also be looking at my favorite measure of inflation expectations, which, by the way, has now changed. It's the ICE measure. I don't know if you follow, but ICE, the Internet Continental Exchange, just put out a inflation expectations, three of them, actually, daily based on inflation swaps.

and I won't go into what that means, but also Treasury Inflation Protected Securities, I won't go into what that means, but combining them. And if you look at the one measure they have is of five-year inflation one year ahead. So not forget about inflation in the next year because that's influenced by what's going on right now. It's high. But look at a year from now and look at inflation in that five-year period. To me, that is, that's the key measure of inflation expectations. And that has risen quite considerably about as high as it's ever been. And I'd say for that measure, the key threshold is 3%.

So if it rises above 3%, I'd say, you know, the Fed's not doing enough. It has to press on the brakes harder. But if the yield curve inverts, then they're pressing too hard in their economy is going to go into recession. So those are the two governors. If I had, you know, a heuristic rule of thumbs I'd be using, it would be those two things to try to gauge policy. And it may turn out be the case you can't do both. There's no way to do it. Inflation expectations are too high, and the yield curve is inverted.

And then that says, oh, boy, you know, the plane's going to crash in all likelihood or a very high probability of crashing. Well, don't forget the Fed controls both ends at the Yoke curve now. Yeah. With quantitative easing. So they could actually try to use the balance sheet to raise the long-term treasury yields, the tenure, by, you know, not selling, but reducing the size of their balance sheet. That's true. more quickly, given a little bit more breathing room. Well, that's the reason why people give for not believing in the yield curve today compared

to past three because of the QE. That was your, that's why you're the skeptic. Exactly. Yeah. And there was no reason we were going to have a recession. I do think you were a denier. No, skeptic. Always a skeptic.

You got into Chris's church and somehow he turned you into a skeptic. I feel that. No? No. Everything's documented. minute on economic view. Everything I wrote about the yield curve leading up to the last time bashing it. Okay.

Okay. Very good. All right. Okay. So on this podcast, you got two believers, one skeptic and an agnostic. Or no. A U.S. A U.S.

Yeah. Yeah. Okay. All right. Very good. Okay. All right. One more thing that's really, you know, kind of bothering me.

And I just want to get your take on it. And then what we're going to move on. play the game, the statistics game, and, you know, kind of weave that into the broader discussion about geopolitical risk. And that is, are we at full employment? So you saw the unemployment insurance claims. Hopefully I'm not taking anybody's statistic, but what were they? They were like $188,000. Is that what it was? Or 87. 187. That's close since September, 1969. Oh, my lord. You know, in the unemployment rates 3-8, clearly falling.

We've got close to a record number of unfilled job positions. The quit rate, the percent of the labor force is quitting is very high. Wage growth is very strong. Are we at full employment? And the reason I ask is because the kind of the rules of thumbs that we often use to gauge that, say, not quite. like the employment to population ratio, Ryan's favorite E-pop for prime age workers, 25 to 54, that is still, I think it's 79.5% and it's got to be well over 80, about a percentage point higher than it is today to be considered at full employment.

So the question to the group is, are we at full employment or not? Anybody want to take a crack at that one? What do you think? Eric, do you got a view? You don't have to have a view. No, no, I kind of do. My guess is not, even though the numbers are so strong, only because there are so many people who are still out of the labor force.

I don't know how many can get pulled back in, right? Because of the pandemic, you're saying. Because of the pandemic, exactly. Yeah. So that's the only thing that makes me say not yet, but I'm more, the longer this goes on, the less I believe that that story. Like, it's hard to keep saying that over and over again.

And then... Yeah. Well, the other thing I just looked at is if you look at the number of people that are not in the labor force, but say they want a job is still elevated compared to where it was pre-pendemic, but not by that much. I think it's like a half a million people or so, 750,000. So maybe a little bit, but not a lot. Ryan, what do you think? Are we at full employment?

Not yet. And why do you say that? Prime E-pop, we still have, we could get up to what we saw in the late 1990s, early 2000s. To Eric's point, there's still a lot of people that are not in the labor force, even though they say they may not want a job. If you look at those that are not in the labor force, you know, for other reasons, there's still a lot of shadow labor market slack that we can, we can pull in. And at least since the 1960s, you know, labor force growth.

and nominal wage growth are very strongly correlated. And there's a causal relationship. So we should be able to start pulling more and more people in as nominal wage growth remains strong. So I don't think we're getting there, but I don't think we're there yet. Well, Chair Powell says, I think he said the labor market is unhealthy. Healthy, unhealthy. It's so tight, it's unhealthy. So he would say we're at full employment.

Is that a fair characterization? I don't think he said the word full employment. I think he's just saying it's unhealthy because I think the issue is the labor supply problems. And jobless claims are coming down rapidly because businesses aren't going to lay off workers because they know how hard it is to replace them. Yeah. Okay.

So you're kind of like in Chris's Eric's camp, and that is the pandemic has shoved all these people out. So the labor market is, I guess, for lack of a better term, artificially tight. Correct. Yep. And as the pandemic fades, those folks come in. And the labor market, if it doesn't continue to improve. prove it would not go back. It's not at full employment then. You know, it's abstracting from the pandemic. Chris, what do you think? Were we full employment? I'd agree. I don't think we're there

yet, but we're awfully close. And one gate, I agree with all the explanations. Given another gauge I would throw out is just the income wages does seem as though those are actually slowing in terms of growth rate. So that would suggest that there is more supply coming in, keeping wages from really taking off. So I think, but I think we're on that trend. I think we'll get more people in the labor market. There's plenty of jobs out there. So if we're not at full employment, today, we're going to be there within a few months.

Isn't our assumption by the end of the year that we're at full employment? Yeah. I think that's still pressing that a little bit. But yeah, you know, certainly by year's end. Yeah. Yeah, I think that's still reasonable. Makes sense. Yeah.

Okay. All right. Okay. So those are the things that are bothering me. Many things are bothering me, but we're running out of time. It's kind of like economic psychoanalysis. And I'm sure, I'm going to one of these days I'm going to turn to you and say what it's bothering you. But it's all about me, as you know, on this podcast.

So I needed that bit of help. Let's play the game. The game is the statistics game. We each provide a statistic. The rest of us try to figure out. out what that is through a series of questions. The best statistic is one where it's not too easy that we all get it so quickly, not too hard that we can't get it.

And it would be nice if it's related to something that happened in the last week or related to the topic at hand, which is geopolitical risk. And I'm going to say right up front, I'm not playing the game. At least I'm not giving a statistic. And the only reason why is because I don't have one. I came to this unprepared. And I, because I knew Eric had two.

And actually, I asked him if I could have one of his two statistics. And he told me point blank no. So, you know, I found that a little, you know, what's the word? You know, I have to have one in my back pocket. I don't know what you guys are. Why the hell do you have to have one in the back pocket when I don't have any in my pocket? That's what I'm saying. Anyway, but that's fair enough.

But I'm going to play the game because I play to win, you know, but I'm not going to, I'm not going to give it. Very competitive. You know, Ryan pretends. like he's not, but he is. He is. He's like really competitive. Oh, I'm very competitive. He's like super competitive, Uber competitive. Yes, I'm an extremely competitive person. Yeah. Right. He's my kind of economist. Okay. All right. Who wants to go first? We got to make Ryan go first. All right. So, because he's so good at this damn game. Okay, go ahead, Ryan. I'm going to guess his. What? Go for it. Already you're going to guess it. What is it? Minus 2.2%.

No, I'm not going durable goods. Oh, that was a declining. I catch enough flack for bringing up durable goods on this podcast. I know he does that way too many times. It's a great report. It's subject to big revisions, but there's a lot of good information. It is. Do you now have to tell everybody what it said that came out this week?

I don't know. Maybe Chris is going into it. Like at the end, we can always come back. Oh, that was a head fake on his part. It's like a misdirect. Go ahead. Go ahead. Go ahead. Go ahead, Ryan.

Yeah, so durable goods. Phil. Oh, you want me to give my number? All right, we'll forget durable goods. No, no, no, no, wait. The whole world is now saying durable goods. Why is it so important? So give us a thumbnail quickly.

It's a good, it's a monthly read on orders, you know, orders of various durable goods. So I think aircrafts, autos, machinery, equipment, and also shipments and inventories. So a lot of this data feeds directly into GDP. So we have a good idea of what business investment in equipment is doing after we get the durable goods data. So that's why I pay a lot of close attention to it because it matters for the GDP estimate and getting back to competitive, that GDP number needs to be right. And if you ignore durable goods, you're not going to get it right. And so what happened to the tracking estimate for GDP for came down? We were north of one, a hair north of one, like 1.1% at an annualized rate.

And then after durables and a few new home sales, it came down to 0.8%. Oh, boy. Wow. So we're flirting with zero. Right. I can just hear people now. This is stackflation. So that number comes down. It's not stocklation. That's what we're going to hear for sure. It's not stagnation. By definition, stackplation's high inflation, high unemployment. Yeah. I'm more worried about stackflation this time next year if the Fed keeps doing what they're doing. Yeah. That sounds like a podcast. We should go deep into stackflation. Talk about that because people are hand-wringing around that. Okay. Oh, so we're playing the game. We haven't even got your number yet. All right. My number is, hold on, it just changed. 70.5%. It just changed?

Just changed? Oh, okay. So, so he's looking at a Bloomberg screen. The most important development of the week. Most important development of the week in the U.S. for the U.S. for the U.S. economy. Oh. Oh.

It's not, well, it's got to be a financial market indicator because it just changed, right? Yeah. Okay. Well, it's, yeah, it's, it's, determined within financial markets, yep. Oh, determined within financial. We've talked about it on the podcast already. There's a big hint.

Is it around inflation expectations? It is not. You're getting there. Is it around probability of recessions? Yeah. 70.5% probability of recession? I'm just within the next 10 years. Yeah, that's what I'm,

Yeah, no, that's not it. No, that can't be it. Sentiment, some sentiment measure? No? Nope. No? Tell me if you want a very obvious clue. No, don't give us to his yet.

Let's ask Eric. Let's call Eric out. Eric, does anything come to mind? No one's coming to mind right now. Bummer. Chris, I mean, it seems like we should be able to get if it's the most important development of the week. And it could be the most important.

Okay, I think I know. I think I know. It's the market. its expectation for a 50 basis point hike in the funds rate at the next. Very good. Very good. Ding, ding, ding, ding, ding. That's great.

I was just thought to say that this is probably going to be the biggest change to our forecast for the Fed funds rate in a long time that we made. Yeah, I know you're coming out. We got a lot to talk about there, guys. Because it's 70.5% for June, 61% probability of a 50 basis point hike in, or no, that's for May, June is 61% of a 50 basis point. Yeah, I mean, they're telling us, you know, they're going to go to the neutral rate, the neutral rate being that rate consistent with a full employment economy, growing at potential,

with inflation, you know, headed towards target. By the end of the year, certainly no later than this time next year. And that's 2 and a half percent. That's what they think it is. That's what we think it is. And they're probably going to go higher than that. Two point four percent, but just be clear. Yeah.

Oh, really? They lowered it? They lowered it at the last meeting. Yeah. Did they really? That's weird. But we're going to get there fast. So that means, yeah, I feel, yeah.

So do you think by the end of the year or by this time next year or what would you say? All right. I think the three of us are going to have a lively debate coming up. But I think 50 in each of the next two meetings and then 25 at each of the remaining meetings for the year. What's a caveat that they got to calibrate this so that they don't push us into recession, right? So again, I'd go back to the two indicators I would look at. at. I mean, if the curve starts inverting, but of course, the curve reflects what you just said, right? Correct. So that's embed. So the Fed would have to do even more than that, presumably.

To invert it, yes. To invert it. Yeah. Okay. All right. So I think they have it all clear to be really aggressive. I'm just worried that they do it too much. Yeah. Right. Hey, Eric, did you see how that was done? That was masterful. That was masterful. That was masterful. It didn't sound like he really meant it. well i've heard you do this multiple times now on the podcast so i know how you figure out these things it's impressive okay okay okay got it okay fair enough good enough okay uh eric do you want chris to go first or do you want to go next yeah because mine's a good segue into the into the topic yeah yeah good thinking it's gonna be impossible and maybe yeah you know it's something about Ethiopia's dam or something fighting with Egypt.

No, it's not going to be that. The cost of water running through the assuan dam, you know, it's something per kilowatt hour. That's his statistic. Yeah. It should be something that you guys all know, but let Chris go first. All right. Go ahead, Chris.

All right. Well, my statistic was the UI claims for the weeks. Oh, sorry about that. We ran over. No, no problem. No problem. Well, it was impressive, though. So I'll go with a backup.

Backup being housing. What's that? Backup being housing. Minus 4.1% Pending home sales. Yes. Oh. I know.

I'm sorry, Mark. I was supposed to let you get a chance. Oh my gosh. Oh. They're pretty bad. Well, that's a good one. Explain it. Go ahead.

That's a good one. Pending home sales, right? So indication of how many additional sales we'll have in future months. It's down 4.1% on the month, down 5.4% on the year. So direct correlation with the, well, to my mind, direct correlation with the increase in interest rates that we're experiencing. That's causing some softening here. Supply is still limited. So that's also a factor, certainly. So I think housing market is certainly on the, on the softer side going forward.

Hey, you know, we talked about this last week with Ivy Zellman and the Dennis McGill of Zellman Associates. Yeah, I'm increasingly of the view that we're going to get some house price declines. And it's not going to be 18, 24 months from now. It's going to be, you know, sometime within the next year. Just given how, I mean, the rates are skyrocketing. This is, you know, fixed mortgage rates are going to be 5%, aren't they? Given we're 10 year yield stayed, if I'm wrong, Ryan, they're at 2.5%, aren't that? Correct.

today. They're up 13 basis points. Yeah, so just add 1.5%. We're going to be over five. I think the affordability questions here are going to be massive, right? It's going to be binding. Yep. So are you also coming to the conclusion that we might actually see some, there's certainly transactions are going to go through the floor. I went to the home sales. We're going to go through the floor because of affordability. And then I guess the only reason why you wouldn't see price declines is if investors keep buying, you know, for whatever reason. You know, the investor, other other folks on the sidelines. Who would buy though? I mean, these rates and these prices just seems, right? Well, I mean, the lack of supply has kept people from buying. Yeah.

Even though they may have the cash or if they may want to buy. And, you know, 5% is a higher mortgage rate, but still historically speaking, it's not that high. So if you are in that demographic, you're looking for a home and there's some more inventory coming along, you will see some folks buying. Yeah, yeah. But I agree with you. I think we're certainly going to see softening here. Oh, yeah.

Definitely certain markets are going to have some significant price declines. I don't know at the national level still. I think we'll get pretty close, and we certainly could dip below zero, but it might, it might extend a little bit more. Well, that's another forecast where you should really take a good, hard look at, you know, in context of these rising rates, yeah, just to make sure. What do you think about existing home inventory down the road? A lot of people locked in very low mortgage rates over the last couple of years. You know, for example, my wife and I,

like, we're not going to move anytime soon unless mortgage rates have to go plummet. Yeah. Well, Ivy gave us a great statistic. She said, and it sounds consistent with our data, 70% of homeowners with mortgages had coupons, the interest rate on their mortgage, was less than 4%. Right? And so if you're at 5% or plus, I mean, to make a move is... It's a big cost. It's going to be expensive.

Yeah. And with the remote work possibility now, even if you change jobs, you don't need to move like you used to. Right. Okay. All right. Well, maybe that'll be something that'll be bothering me, you know, 12 months from now if we don't see some price declines because that's...

It just feels like it's coming. Okay. That was a good one. Okay. Except it was entirely predictable. You know, Ryan's got you so penned. I know. There was two.

It could have been new home sales or something in new home sales. It could have been pending. Yeah. Yeah. All right. Eric, you're up. And you got two of them, you said?

I've got two of them, but they're very unrelated. Oh. So I'll just go with one first and then we can. We can evaluate whether we want to get the second one or not. That's right. Okay. So 3.75 million. That's the number of people that have left Ukraine.

Yep. Correct. But that's a good one. That's a good one. That's a very good one. It's an important one. So like give us a sense of that and, you know, what the import of that is. Sure.

So to date, 3.75 million people have evacuated Ukraine, mostly going into Poland, 2.2 million people have fled to Poland. and, you know, they've sort of scattered to mostly the Eastern European countries, and eventually they are likely to sort of be spread out throughout Europe. To put that into context, in the 11 years of refugees from Syria, which is roughly half the size of Ukraine, it's on the order of 5.7 million people over 11 years. And this is 3.7 in, you know, a couple of weeks, well, three, four weeks, right? So the scale of the number of people that are going to be moving through Europe is massive. And being able to take care of all of these people is going to be a real strain on many economies

because they're mostly women and children. They're not necessarily going to be joining the labor force right away. So it could be a very dangerous situation. This is like so upsetting to watch this. It's heartbreaking. It's incredibly upsetting. I can't even imagine what these people are. are going through. I guess the fortunate thing, at least from my observation, is that the world is

embracing these immigrants, that they're, you know, at least so far, right? They seem to be being accepted. Very different from, and correct me if I'm wrong, if I've got it wrong, but my sense is that when we saw the immigrants leave Syria, there was a lot of resistance to allowing them to come into Europe. Germany was probably the most welcoming, but that had all kinds of political backlash as a result of that. But this is very, very different. Do I have that right, Eric, so far? I think that's right. It's also a very different situation, right? Syria is mostly an internal, you know, civil situation, whereas this is an invasion from an outsider coming, right? So that does make the situation a little bit different.

There's a lot more goodwill towards people who've been sort of attacked from abroad, it seems. Yeah, and they're going mostly so far to Eastern Europe, right? Poland. Well, as far as the tracking has been going, it's mostly been just tracking across the border. Right. And I guess the U.S. What's that? It's definitely the first stop, but I know other countries are seeing.

increasing volume of refugees as well. I know Italy is taking in a lot, Spain, France. I mean, they're starting to move further and further around. Right. When I know the U.S., President Biden just announced that the U.S. would accept 100,000 refugees from Ukraine. I guess that might be just the first group. I would hope that's the first group.

Yeah, on this scale. Right. Yeah. I mean, it feels like this could be really a problem, right, for everyone involved, because there's how many, you, 45, 50 million Ukrainians, right? And it feels like this could, there could be millions and millions of more, maybe tens of millions of Ukrainians that are displaced by all this. Some of the initial estimates was that were that about 10 million or so refugees would likely result.

Right. And given the pace of the Russian economy, there could be Russian economic refugees. I don't know how they'll be viewed, right? But it could be even larger than what we're talking about here. But our estimates for Russia are around 200,000. It's not at this point. At this point, right? Yeah, right, exactly.

And is that folks that are dissidents or people that just object and they want out of there? Is it because of economic reasons they're leaving? Or what is that? I'm not, I don't have clarity on, on why. And again, these are just estimates based off of, I think, mostly anecdotal stuff. Yeah, right. Okay. Well, you do hear stories of a brain drain, right?

So from Russia. From Russia tech workers that can get out or are leaving. Because they don't see a future. Yeah, you would think. I mean, given, you can see just the crackdown on, you know, just free thought, free speech, media. political discourse, you know, it just can't be conducive to keeping the best and the brightest in your country, right? It can't be.

No. Right. Okay. Let me ask you, again, a question, Eric, that you may or may not know the answer to. I'm just going to ask it anyway. It feels like, and this maybe goes back to some degree to Ryan's geopolitical risk indicator, but I'm asking kind of more subjectively, does it? feel like there's more geopolitical risk now than there typically is. I mean, but there's always

something somewhere feels like it's gone off the rails. There's always risk geopolitical flashpoints. But to you, you know, as an observer of this, careful observer of this, does it feel like it's more pronounced than it has been, you know, other points in history? Scale-wise, I don't think it's, you know, off the charts, you know, are higher than it's, been in the past, but I would say it's elevated largely because when we had the sort of pandemic running into this already, which was already causing tensions between countries for various reasons. And then now that you have something on this scale, and it really does sort of, one, the biggest issue, the thing that you ask, what are people worried about? The thing that I'm worried about is that

everybody's got their eye on Russia and Ukraine, they may not see all the other things that are normally going on and sort of historical tensions that are about. So India, Pakistan, Israel, Palestine, all of these things that are just, they're just there always. And they sort of have that baseline geopolitical risk there. We're elevated above that. And I'm worried that you sort of, somebody forgets about that and something else happens in the background. So broadly, it doesn't feel like there's the level of geopolitical threats risk out there is it's on the high side, but it's not. It's on the high side, but it's not alarm bells ringing, at least not yet.

Right. It really depends on what ends up happening with Russia, like how hard they keep going and how what the rest of the world's reaction is the longer the conflict just drawn out yeah well you know i think the sticking to russia ukraine just for a little bit because obviously that's kind of top of mind here as it should be uh there's just so many moving parts to this in terms of the sanction with terms of what russia's been doing what russia has done and is doing in the response from the rest of the world to what they're doing of all the things of all the sanctions that have been put in place do you think any are particularly important from a geopolitical perspective

at least both thinking about this in the near term and longer run is there anything that kind of stands out as unusual or going to have more of an impact going forward uh i think the biggest one is probably the freeze on central bank assets of Russia's central bank assets. It's not that countries haven't done that before. So this happened with Syria. It's happened with, but mostly smaller players. Can I just stop just to make sure I understand what you're talking about? You're talking about the freezing of the Russian reserves. Is that what you're talking about? Yes, exactly. Okay. So Russia had, what, $650 billion in basically cash in the bank that they collected over?

over the years from selling their oil and they had a surplus in their current account. So they got money and they put into $650 billion. But of that, $350,400 billion, I'm making that up, but it's roughly right, is in dollars, yen, euro, pounds, and the U.S., UK, Japan, the EU, froze those accounts. So that cash, the Russians can no longer get to that cash. Is that, that's what you're talking about. exactly what I'm talking about. Okay. All right.

And you're saying that's a big deal. I think it is, right? So it's more just that that threat is now out there for even bigger players, right? So, you know, before, you know, if someone does that to Syria or something like that, that's one thing. I think the threat of it being out there, it just says that there are more policy tools out there for sanction, from the point of view from sanctions than in the past. What do you think it means in terms of the dollar's reserve currency status? So the dollar is the, I think probably accounts for, I think, 75, 80% of all reserves because it, you know, it's the bulk of global trade is still done in dollars.

Oil trade, for the most part, is still done in dollars. And that status of being a reserve currency has tremendous, gives us tremendous economic benefits, one of which is what we just saw. The U.S. can exercise significant power by freezing, you know, those dollar reserves and influence policy, you know, political decisions and policy decisions based on that power. But by exercising that power, it signals to everyone that, well, these reserves are under U.S. control. effectively at the end of the day, if you do something that the U.S. doesn't agree with, they can freeze, the U.S. can freeze those assets. So do you think that means that it

degrades the viability of the dollar as a reserve currency? I think it's going to be pretty hard to shape the dollar as a reserve currency, maybe on the margin slightly, but I doubt it. And one of the reasons why is that it wasn't the United States acting. unilaterally, right? They weren't the only central bank to do this. And so it's not as, it's not as if they're just being punitive and, you know, sort of saying this to everyone. It's really the central banks as a whole are imposing these sanctions on Russia. So from that perspective, maybe there are a few places that are a little bit worried about it, but I don't think in the grand scheme of things it's enough to shake off the dollar status as a reserve currency.

Yeah. What do you think, Chris? Same kind of sense of that? Yeah, I'd agree. I agree. Yeah. Okay. All right. Ryan, any other? No objections. No. Okay. Okay. Any other of the sanctions that stand out or anything the Russians have done that stands out to you in terms of something that's just particularly unusual? I mean, the scale is unusual, obviously. the scale and the speed with which everything went into place, right? That's what I found actually pretty impressive. And one of the bigger things that I think is less mentioned, though, is how quickly multinational firms have responded.

I don't know how long that will last, right? So they have responded to these kinds of situations before and relatively quickly sort of step back again. But, you know, I was sort of surprised at how quickly it's all sort of been put into place. You know, I wonder if the fact that these conflicts now are front and center, you know, we can see real time what's going on. I mean, I saw this amazing video that someone was taking from their phone that showed, you know, Russian troops coming up to an apartment building, coming into the apartment, coming right up to the person's door, knocking, or I don't know if they were knocking. wanted to get in. And you could, you could watch this real time. And it had a huge machine gun that they were bringing into the apartment building. And the fact that you can see that and you, you can

feel it viscerally, means that people, you know, employees of companies are going to say, hey, this is not good. And I don't want to be part of a company that has anything to do with this. So that going forward, this becomes kind of more standard operating procedure. You know, if someone does, you know, does something like this and you can see it, that, that you're going to see this kind of reaction from the private sector because it, you know, it is so front and center. I wonder if that's a new dynamic that's going to play out going forward. Great. That's exactly what I mean.

That's one of the surprising things. And again, the speed with which that happened, largely owing to videos like what you describe. No, the self-sanctioning is what you're talking about, right? Yes, yes. The non-governmental, right. We could buy oil. It's not illegal, but you have companies choosing not to, right?

Well, you just saw the rating agencies. Moody's just announced, I think, yesterday that, was it yesterday? Yeah, yesterday that they pulled ratings on Russian companies, Russian debt. So just another example of that. Okay. Okay. So another aspect of Russia, Ukraine, and the geopolitical risk is China. China has been seemingly supportive of what the Russians are doing, or at least providing some financial support to what the Russians are doing. How do you think this changes, this event and Russia, China's

support for Russia, changes the dynamic, the pretty vexed dynamic between the U.S. and China. Do you think it has an impact? Or, you know, what kind of fallout will that play have? It almost seems as it's a continuation on what was already happening, which was sort of this decoupling of the U.S. and China and, you know, sort of spheres of influence developing on either side there. I, my hope, I don't know if this is going to work out so well, but again, because of how quickly the sanctions were put in place, how much of it was more.

multinational firm self-sanctioning, that may give China, I would think, a little bit more pause in some of their more aggressive foreign policy types of actions. Because if they step too far out of line from what people find acceptable, like Putin did in Ukraine, then they might find themselves in a really tricky spot and more isolated than they expect. Yeah, this does bring up a broader point, and this is a dynamic that's occurring even before Russia and veda Ukraine. And this is this decoupling that you mentioned. So, you know, I think it's fair to say that between the time China entered into the World Trade Organization in 2001 up and through pretty much the financial crisis that even beyond that to some degree, in the 90s, we, you know,

we saw this increasing globalization of the economy, more global trade, more global foreign investment, FDI, foreign direct investment as well as investments in debt securities and equity, immigration, all these things seem to be accelerating. And they, I think it's fair to say, and I'm curious, do you think you have a different take on it, that it was a net positive for the global economy. It certainly lifted hundreds of millions, if not billions of people out of poverty and places like China and other emerging economies. But it also helped to fuel growth. Now, there was winners and losers from all this. And, of course, there was a backlash to that.

And that's what we have been observing, you know, ever since. President Trump would be a good example of that backlash, similar kind of political dynamic in other countries. and now China, in our pushback on China, feels like we are going in the opposite direction. Or certainly the increase in globalization has come to an end. Do you think that's a fair characterization of how things have played out and where we're headed? I think it's a great characterization. That was actually my other statistic to a certain degree. Oh, okay.

So I'll say the statistic first because I think it's worth seeing whether you guys can get this one, because this one's a lot harder than my other one. It's 30.5%. And I'll even give you, it's a percentage of GDP, but I won't tell you. That global trade as a percentage of GDP? Imports as a percentage of GDP. 30.5% in before the pandemic, so 2019 Q1. Okay.

Ryan, did you see how that was done? I mean, I'm not even going to take credit. I think you guys are cahoots. What's that? I think you guys were emailing before. I know. I'm very skeptical. That one.

That one's impressive. That's impressive. That was very impressive. And so, because Eric thought that was a hard one. I did. Well, we were sort of going there in the conversation. You're right. You're right.

You're right. So there were, there was a list that you had of like four or five things that you could have gone to, I think. All right. But if you notice, throughout the podcast, you started off cold and you warmed up and now recently you've been on fire. So I'm wondering what's going on. We don't have to launch. Conspiracy theories.

This is how it starts, you know? That's how it starts. He's denying the world with the yield curve. He's looking for conspiracies everywhere. Yeah, it's how it starts. Anyway, so what do you do you, how do you think this is going to play out? I mean, do you think the U.S. and China are going to decouple here, continue to decouple? How do you think this is going to play out?

And what is the import of that? Let's circle back to that, but I do want to talk about the globalization bit. So the statistic is just, you know, the most recent value that we have, given the number of economies that we cover. But what's really interesting about it is the value in 2001 was 22.8, 23%, say. that went up to 28.7% in 2008, and it's only gone up another 2% since then. So basically, it went gangbusters between 2001 and the financial crisis, right? So globalization was taking off exactly to your point. And then it's basically sort of flatlined a little bit and sort of tapered off post-financial

crisis to this idea of, you know, decoupling and some of the other sort of more, countries have become more inward looking instead of outside because of some of these, you know, some of the differences between who were the winners and the losers in this real quick globalization push. Yeah, right. And do you think the global, the de-globalization, the decoupling, Is that you expect that to continue? So I think certainly the direct links between U.S. and China will probably sever more. That would be my best guess, you know. But globalization itself, in terms of like the interconnectedness of all the economies,

will probably continue to increase just at a slower pace. I mean, it's really hard to get that genie out of the back into the bottle, right? Like once people start having the Internet and seeing other people with, things that they want to, somebody's going to figure out a way to make that happen. So it strikes me, particularly with work from anywhere. There are just too many things that are driving globalization. It may go more slowly. Firms may be more cautious given supply chain problems, right? All of these things, I think, put the brakes on a little bit, but don't stop globalization from progressing. Yeah, no, my sense is that, you know, least for the foreseeable future, when I say that the next few years at least, I just, I don't think there's any stopping this decoupling that's going on.

The pandemic just reinforced it. I mean, as you pointed out, the supply chains, they're coming back in. And governments are very focused on trying to ensure that they have what they need in their borders are pretty close. You know, if it's not in the U.S., it's got to be in Canada, maybe Mexico. Because, you know, for things like chips, you know, like chip manufacturing would be kind of the poster child for this. But other, you know, important sophisticated instrumentation, pharmaceuticals, other key strategic metals, that kind of thing. I just think there's just no going back. And then China is, you know, China feels like it's going to be a problem.

There's a lot of issues there around intellectual property, access to markets, cyber security. it just doesn't feel. And then we've got all the tensions around Taiwan and Hong Kong, a lesser degree Hong Kong now, the Uyghurs, civil, human rights. It just feels like to me that there's, that this is, this decoupling will continue for the foreseeable future. And to the extent that, not that I think it's a good thing,

I think it's, you know, it's unfortunate because I do believe that globalization is a a huge positive for the global economy, but I think we need to embrace it at this point and figure out how to do it in a way that is least damaging and, you know, as graceful as possible. We just have to, it's just the reality of the situation that we're in at this point, and we've got to figure out how to do it the best way possible. Any, any response to that view? No, I think that's a, I basically agree, right? So what I mean is when I say to come, when I hear you say to come,

coupling. I think you're thinking specifically of China and U.S., right? Those specific tensions are those specific links. Yeah, mostly, yeah. Because that's the other, you make a good point, because it could result in increased relationship strengthening of our global ties with our trading partners in Europe, for example. Exactly. Yeah. Or even Latin America. Well, and in Latin American in Africa, right, as sources of raw materials. point. Okay, let's, because we're running out of time, maybe I thought we'd end the conversation this way. Each of us identify a current geopolitical risk or threat that's kind of top of mind for them, what they think is particularly important that it's certainly been in the news, all these things

have been in the news, or maybe you have what that isn't in the news that you think we should focus on as potentially being an issue or a problem, or at least highlighting something that's going on that's important. Does that sound like a reasonable way to end the conversation? Okay. And maybe I should begin with you, Eric. I'll go with you first. So what would you point to? What geopolitical risk do you think we should be focused on that we're not? So I think there are a lot. I think almost all of them revolve in some sense around what's going on in Russia, Ukraine because it is very disruptive and it's sort of pressuring other countries to act in different ways that they may otherwise not have. So I think that that's really important to sort of

state at the outset. And I'm sure everyone's going to have something that's somewhat related. So I think the refugee situation is probably going to be the biggest situation for the next say three years at least. Because it's just about navigating where all of these people are going to be going. How did you integrate them into the, you know, post country and what's going? And how did the countries decide who gets which refugees? It's, that's a huge political minefield. And it's something that we should all be sort of watching and paying attention to.

Okay. Okay, fair enough. Ryan, what is the geopolitical hotspot threat that you would point to? Like, would NATO and Ukraine and NATO and Russia, would that apply? Would you consider that a geopolitical hotspot? Yeah. Because whether or not NATO accepts Ukraine, I would have enormous implications for the relationships of Russia and everything like that.

Yep, yep, that would be a good one. Okay, Chris. The top of mind for me is actually, food, food prices, right? To fallout from the Russia-Ukraine crisis on fertilizers, on all sorts of crop prices. I think this could have significant global repercussions, right? We have countries in the Middle East that depend directly on your Ukraine, wheat from the Ukraine, and it's not clear that they'll be able to get sufficient harvest this year.

And then just the ripple effects, just all prices are up everywhere. And that's, that's good. That certainly could spark some both domestic and international tensions between countries. There was talk of food shortages at the NATO conference. Where, Ryan? I think it's very real. Yeah, they said the possibility of global food shortages. Yeah.

Well, I think there's, I'm going to get this wrong, but, you know, to give a rough order of magnitude, there's, I think 50 countries across the globe, roughly, that get more than a third of their grain exports from Russia and Ukraine. So, and those exports aren't going to be happening to a significant degree. So that is a problem. You know, the one that comes to mind to me is related is Iran. The Iranian, we've had a lot of trouble with Iran over the years, and we've had an agreement that the, that Obama administration agreed to, Trump canceled that agreement. And it feels like we're going to get another agreement on Iranian nuclear development. And if we get a deal, that could be key, critical, kind of a game changer, because the Iranians can export, I believe, up to two, two and a half million barrels of oil a day. And if that oil starts to

flow in earnest, that could make a big deal to, that could be a big deal to oil prices, which, you know, going back to the start of our conversation, that is, you know, really a significant factor for what's going on here in our economy and everything else. So that would be, I think, there's a lot of potential negative geopolitical risks and threats, but that would be a potential positive upside, you know, if we actually get that. Another positive one. Another positive one is that maybe this global, you know, a number of countries becoming more unified working together.

The UK and the U.S. reduce their tariffs on one another. So maybe the U.S. Canada can work out a deal on, you know, softwood lumber. So hopefully this use of terror starts to diminish. Yeah, we could be underestimating how much this brings the rest of the world together and working together. Yeah. Yeah, you're right. That's good point. Okay, very good. Eric, just an open any question before we end. Anything you want to bring up? When it comes to the unknown unknowns.

I know that's key to folks that look at geopolitical risk, the unknown unknown. So what's the unknown thing that I didn't ask you about. Well, I think the big thing is just, and again, the thing that I'm worrying about the most is that people are focusing so much on Russia and Ukraine, that something else slips through, and it's usually going to be in a place that we don't talk about too much, right? So that's the thing that I sort of worry about, but you don't know where that can come. Quick, three things. What are they? What should, what are? India and Pakistan, Ethiopia and Egypt, which they're building a dam in Ethiopia, which is affecting the waters that flow through the Nile into Egypt, which Egypt, speaking about wheat, pulls in 70% of their wheat from Russia, Ukraine.

So they're in a tight, tight spot. So those are the two big ones. Two big ones. Okay, very good. Okay, so, guys, we're going to implement a new feature on our podcast, and that is we are going to start answering. some questions. So from from listeners, you know, this is this is somebody who follows me on Twitter. Oh, by the way, at Mark Zandi, at Mark Zandi, you can pose questions there and or economy.com or help at economy.com or you know how to reach us, just, you know, let us know your question. So here's

the question. And this is going back to last week's podcast on housing markets. And this is probably how it's going to work. We're going to do a podcast. people are going to ask questions, and next week we'll take one of the questions and or two of the questions and respond to it. And I thought this was a good question. It's about, here I'll just read it. The person says, interesting discussion. This is about the podcast last week on housing with Ivy Zellman and Dennis McGill. At times I got lost trying to understand what signals we should be watching out that will help to find the overall markets, then they mean the housing markets direction. You folks see so much data that,

we as average investors can't keep up with. Can you just give me a few key indicators that would be helpful to watch to gauge what's going on in the housing market? What do you think, Chris? What would you point to? I think it's a great question. I think it depends a little bit on your horizon.

So if we're thinking about longer term or underlying fundamental trends, and looking at demographic data, household formations, population growth, immigration, right? Those would certainly be the factors that would determine how much housing we should have. Actually, one of my favorite measures that very few people look at is just the ratio of housing stock to population or housing stock to households, right? That you would assume that there would be some type of equilibrium there, and we can see that those in the measures are elevated right now.

But shorter term, right, I'm certainly looking at some of the measures that we cover on the podcast, like the pending sales, right? If you want to get a sense of what the direction is going forward, looking at interest rates, certainly. And then if you're looking at just construction supply demand dynamics, how many households are being formed currently versus the amount of construction that we are creating at the moment, some estimate perhaps of second homes and lost homes, right, to get a sense of how much underlying demand is there versus the amount of supply that's coming. I don't know, Mark, what's your take? I would say simply the mortgage rate and the change in the mortgage rate. And I have in my mind that in the long run, when everything is functioning appropriately, the mortgage rate should be somewhere between five and a half and six percent. We're still well below that.

So, you know, the level is still low by historical standards. But it's also the change that matters. And so we were below 3 percent on the fixed more. In fact, we were as low as 265, I think, back at the low during parts of the pandemic. And, you know, so it's almost doubled since then or will soon be doubled. That in a very short period of time, that's going to do a lot of damage. So I think that's a pretty good leading indicator where the housing market has headed over the next six, 12 months. So watch out for the 30-year fixed-rate mortgage.

I look at the Freddie Mac rate. That comes out every week. You can go to Freddie Mac's website, and then you can see it plain as day. To me, at this point, at this juncture in the business cycle and the housing cycle, that's the indicator to watch. Yeah. Well, I would add to that just in terms of speculation, right? We have some other measures we look at in terms of flips and investor activity, right? So if you're looking at something or you want to get a sense of what's happening in the near term, right?

I would certainly pay attention to some of those other indicators that we've been tracking. Got it. Okay. Very good. What do you think? That's a good idea. this new feature to answer a question? You think it's a good idea?

You like it? Absolutely. All right. We'll see what the folks out there, listeners, tell us what you think, and fire away with questions. And by the way, I did not give these guys this question in advance. So we're not doing that. But anyway. Okay, with that, we're going to call it a podcast.

Thank you, everyone.