Odd Lots - David Woo on What the Economists Got Wrong About the Stimulus

Episode Date: August 19, 2021

David Woo has always been one of the most outspoken voices on the street. A former top strategist at Bank of America, he is now publishing independently at his new site David Woo Unbound. On this episode, he argues that the mainstream economists are getting it wrong, and that inflation will remain uncomfortably higher than what the Fed wants to see. We also discuss the economy more broadly, the virus, and the U.S. relationship with China.See omnystudio.com/listener for privacy information.

I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law, and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars and policy experts to break down what the rulings really mean. We do this every weekday,

then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day, and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthall. And I'm Tracy Alloy. Tracy, you see that inflation print that we just got, that CPI print?

I did. I logged on the terminal, especially at 8.30 in the evening here in Hong Kong to watch it. And it looks like we're seeing moderation in the price increases. Yeah. So we are recording this on August 11th. And we just had the latest CPI report. And indeed, it did show some moderation, particularly on a sequential basis. Inflation readings, the CPI have been quite elevated lately by historical standards.

And there's this whole debate about whether it's transitory or some sort of new regime and what's causing it and so forth. We'll get into all that. But at least for this one month and at least like on a sequential basis, we definitely saw a bit of a deceleration, used car prices, which had been absolutely. soaring. It finally looks like that whole thing is topped out a little bit. Yeah. And we've had such a heated debate over whether or not inflation is transitory or something more permanent. And I think the vociferousness of that debate kind of hints at something wider and more fundamental about the economic situation right now, which is that we're in a really unusual time. The recession that we saw during COVID.

was basically unlike any others. It only lasted for a couple months. In the end, we had record stimulus. And so that kind of means that no one's really sure exactly what the recovery is going to look like. And it's hard to look at previous recoveries in order to make an analogy to today. Yeah. And inflation in particular, like, you know, we get economic data points literally every day or virtual almost every day. But inflation is one of those. that really gets people going in a way that other data points don't. People, you know, we had that recent episode with O'Rico Momandier. People feel it.

They feel it at the grocery store. They attribute it to policies when it's up. They attribute it to policies that they don't like. They attribute it to Fed. They attribute it to spending and so forth. Inflation just, it gets people going. It does indeed. And it's very easy for people to sort of overlay their own thoughts and feelings and biases

on inflation. So people kind of see what they want to see. You know, cherry picking the data is something that goes on quite a lot. And, and again, like, in the current environment, there is a reason that you would strip out some unusual activity in things like used car prices, but then you get into the dangerous territory of are you basically stripping everything out that's actually rising and obscuring what's happening in the market. inflation, ex-inflation. All right. Well, I'm very excited. You know, I said, you know, inflation always gets people going. I'm very excited because we have a guest today who almost never needs any, anything to get him going. He's long been one of my favorite people to interview, talk to him several times on TV, but we've never had him on the podcast before. We're going to be speaking with David Wu, who's formerly the head of global rates, global FX, global EM, fixed income and economic research at Bank of America. He's a veteran there of 10 years and recently left. And now he's a blogger.

He's like us. He's a blogger. He has David Wu Unbound where he talks about all this stuff, macro things, things going on in society, the data and so forth. And always one of my favorite people to talk to. So sort of a perfect person to kick off a sort of like, let's take stock of the macro situation right now. David, thank you so much for coming on odd lots. It's my total pleasure. Thank you for inviting me.

Absolutely. It's always a treat to talk to you, David. Let's start with that inflation print. I'm sure you have been looking at it for the last half hour as have me and Tracy. How would you put it into context? What's your take on it and how does it fit more broadly in where you see the overall inflation situation right now in the U.S.? I think, you know, I think we have to, first of all put things in perspective. I don't think anybody in their right mind thought that the sort of 6%, 7% inflation was sustainable. Everybody knew. you know, that it had to do with these one-off factors like use cars, computers, you know, things that have been affected by supply chain basically breakdown. So therefore, the spike in price to be temporary as supply chain basically came back on track. So the question really is, you know, so if it's not six or seven percent, what is it? Now, the fact is that notwithstanding, you know, basically the sharp drop in basic inflation for use car prices, you know, this month. If you look at the core inflation, it was still up 0.3%.

I mean, that is an annualized rate up close to 4%. I mean, that's like higher than anything we've ever seen, you know, basically, you know, basically in a run-up to COVID and more recently. So I would say that forget about like, you know, basically, whether it is whatever, six or seven, the fact that it is even running at 3%, 4%, that's a problem. Because the point here is that the whole world economy is currently, calibrated on the assumption that the Fed funds rate is going to remain very, very low for a very long time. The only way that's going to be possible is if inflation doesn't become a problem.

You don't need inflation of 5 or 6% to become a problem. All you need is inflation at 3% and the Fed has got a huge headache ahead of them and so with the market. So let's not beat around the bush. I don't really, I'm not, I'm one of these people behind the table saying, oh, we're going to see double-dissue inflation anytime soon. Given that, the whole entire market has been gotten used to the idea that inflation was always going to remain somewhere below 2%, allowing the Fed to basically carry on with this very accommodative stance. If inflation just goes above 2%, if it just goes to 3%, the world is going to have a huge problem. We've been talking a lot about the Fed's new framework on the show and the idea of average inflation

targeting. And I'm wondering, you know, is that something that you buy into? in the sense that you think the Fed is actually going to be more flexible when it comes to inflation? Is that something that could maybe buy it a bit more time and put off a rate rise? Tracy, no, honestly, I think the whole averaging inflation was a gimmick. And I'll tell you what the gimmick was. The gimmick was to basically help them convince the market to drive the interest rate lower. Right?

Because they're going to tell you, oh, well, even when the inflation, goes about 2%, we're not going to hike rates anytime soon. Therefore, you know, the market. So in some sense, it was stronger for guidance than what Yowland introduced, whatever, five, six years ago. The point here is that inflation really starts to go up from 2 to 3%, 3 to 4%. You think the Fed is going to be sitting there, putting their thumbs? Because they're going to be very nervous about the return of inflation expectations.

You know, it took, just think about what Volker had to do to crush inflation expectations. in the early 1980s. It had to basically bring the engineer a recession for the U.S. economy to crush inflation expectation. Inflation expectation, I mean, you know, anything, you know, economists don't know that much. Honestly, the truth is economists know much less that anybody give them credit for.

If there's one thing they know and they're afraid of is basically inflation expectation is like a Pandora's box. Once you open it, it's going to be difficult to close it. So this is why if inflation starts to edge higher, Forget about the whole idea of inflation, averaging inflation target. The Fed will go. They will have no choice but to go because they realize what would be at that stake. Because if they don't go and the inflation expectation goes up and then having to bring it down down the road is going to be that much more costly.

This is why I think, you know, the whole inflation averaging business was nothing more than just empty talk at the end of the day. Well, okay, so as we point out, even if you strip out used cars, there's sort of this underlying inflationary pace right now that's well above, that's enough above, in your view, enough above 2% to create a problem. How come? Like, what's the explanation for it? So, I mean, you know, we can all look at the data, but we need a theory to explain it or to understand where it's going. Why is it? Yeah, I mean, Joe, you asked, that's the right question. That's exactly the right question.

And I'm going to tell you the answer. I mean, for it, I write about it actually in my own blog, which is this, right? The last 20 years, I don't have to tell you, Keynesian School of Economics has been on the ascendancy. I can tell you, this wasn't always the case because 20 years ago when I got my PhD at Columbia in economics, you know, at the time, it was the neoclassical school of economics that was in vote. And these had been the main schools of economics that had been, you know, in rivalry for much of the last 50 years, you could argue. Now, what is the essential difference between the Keynesian School versus the neoclassical school? In your classical school, by the way, is the Chicago School.

You can think about it that way. The main difference is the Keynesian School emphasizes negative demand shocks, whereas the neoclassical school emphasizes negative supply shock. Now, what is a negative demand shock? The net demand shock is like, oh, the dot-com bubble bursting in 2000. Okay, which unleashed this massive negative wealth effect. Negative demand shock is like, oh, September, you know, basically 11 that crush confidence and caused people to pull back their spending.

Negative demand shock is like what happened in 2008 following the collapse of Lehman Brothers, which basically caused all the banks to pull back in terms of their credit lending, which basically forced a negative demand shock. And then the Keynesians argue, and rightly so, when you have a negative demand shock, The right thing to do is to basically engage in proactive, fiscal and monetary expansion to offset the negative demand shock in order to bring the economy back to employment equilibrium. This is why the last 20 years,

the reason why Keynesian economics did so well was because one after another, all these shocks, as I said, the dot-com bubble bursting, September 11, 2008 were all negative demand shocks. Now guess what? What is COVID, you might ask? I can tell you if COVID's anything at all is not a negative demand shock. In my view, it's a negative supply shock.

And by the way, just think about this. I mean, how is it affecting supply? I don't have to tell you, right now, for example, you look at, you know, global freight prices. Global freight rates for containers going through the roof right now. It went basically double last year. It doubled already this year showing no signs of moderation. You know why?

Because right now in Asia, where basically the pandemic is basically breaking out, once again, and then countries are not allowing these containment ships to offload their cargoes. So as a result, thousands of ships right now around the world are being stranded at their ports, not being able to offload their cargoes, not to mention the sailors, the crew. Now, that's a negative supply shock to the extent that COVID is actually, you know, has basically reduced ability of the economy to basically to respond to increase demand. Now, what else is basically a negative supply shock? Think about this.

All these women, we have seen a massive drop in labor participation rate of women in the United States in the last basic 18 months. Why is that? They're not even looking for a job, these women who just simply left the labor force. Because it's very simple. Because as long as COVID right now, it's like, well, there's no vaccine for children. As a result, women are now having to stay home to look after their young children who cannot go to school. Now, if COVID is going to be here to stay, you know what?

Or that for that matter, if we don't have vaccine anytime soon for children, guess what? You're going to see a large part of labor force basically disappearing. That's a negative supply shock. Let me tell you this. If you look at a very basic economics supply and demand shock, which all your viewers have heard about, and that's why they're listening to this program, a negative demand shock is deflationary. But guess what? A negative supply shock is inflationary. Your supply curves move to the left. It pushed down employment. It push up prices.

So when you are basically when the Fed and the U.S. government unleashed massive fiscal stimulus to try to offset a negative supply shock, all it's going to do is basically push up inflation. That is, by the way, and I'm telling you this, this is why the neoclassical school framework thinking about recession, about prices is the more relevant framework in this particular point in time because of COVID. I would say, I'm not saying that COVID is only a negative supply shock because maybe there's a little bit of negative demand shock, at least in the beginning when it first hit, when it hurt confidence and so on and so forth. But I think the longer this thing drags out is becoming more of a negative supply shock. And then yet the Fed and the Biden administration continue to respond to COVID as though it were a negative demand shock.

And that, in my view, is going to be a very, very dangerous game to play. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews.

All the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful. enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. Then on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead.

Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. Can we dive into the demand side a little bit more? So I remember early last year, people were talking about how this would permanently scar consumers,

particularly in America, you know, this huge global crisis, people losing their jobs, having to stay inside, a really sort of unique and terrible experience for a lot of people during a global pandemic. How would you classify U.S. consumers now? Because if anything, it seems like they've emerged on the other side of this much more prepared to spend, it looks like. Exactly. Because the honest truth, Tracy, the, I mean, the one thing I wouldn't have forecasted. I mean, you know, like you have like a Martian who just landed on. planet Earth looking at what's happening in the last year.

I guarantee you nobody, no genius, okay? No Nobel Prize, the comments could have predicted what? Which is that somehow after the biggest basically crisis they hit the world in 100 years, that somehow U.S. household balance sheet has improved and their cash flow is improved. I don't have to tell you. U.S. household net worth as a short of disposable income is now an all-time high. Because we've seen a massive rally in the stock market, unbelievably. we've seen a massive appreciation in home prices.

So as a result, Americans who own stocks and houses are far richer today than they were a year ago, ironically. At the same time, COVID has driven down interest rate as a result. Debt payment as a share of disposable income for American is basically at an all-time low at the same time. Meanwhile, if you don't have any money, guess what? You know what? For one thing, the banks are begging you to borrow. if you look at actually the senior loan officer survey, the willingness of bail you to let you money credit card for people who have no money

is at all time high right now. On top of that, you know what, if you really do have any money, you know what, Biden has promised to basically make sure you do not miss the party right now. You know, I don't have to tell you, the big news the last two weeks was the fact that, you know what, Biden has decided to suspend the moratorium. I mean, basically extend the moratorium on eviction. Again, if you cannot pay it, rent, no problem.

You can stay on and go on a vacation. Meanwhile, okay, and worry about paying rent down the road because we're going to make sure you don't get evicted. Meanwhile, last week, of course, they also came under pressure from the liberal way of the Democratic Party. Now you cannot pay your student loans. They've also extended the student

loan moratorium until basically October. So, and then now there's talk about maybe possibly extending the enhanced benefits, federal basically unemployment insurance benefit to make sure. I mean, think about this. I mean, the amount of benefits the people were getting, including the enhanced benefit, most of the people who lost your jobs were actually

getting more money from the benefits than what they were earning before. So you tell me, which American has actually lost out? Sure, some people have lost your family. That kind of thing. It's all very sad. But economically, yeah, basically because of policy, which I think we're going to have to pay for dearly down the road has made sure everybody's better off. So against this backdrop, yeah, I'm not surprised Americans are basically, are about to basically spend some serious money. What do you mean? So people say that a lot, we're going to have to pay for these policies down the road. And that's always, you know, I've heard that all my life long before COVID or any of these, you know, I heard it about TARP and I heard it about all this. What does that mean

specifically to you because although it's true that there has been this massive by historical standards fiscal expansion, some of it is coming to an end. We've seen a reduction in the unemployment insurance expansion. Most likely, I think most people do not expect that to be continued, though I guess there is some debate. We still do have a significant employment hole, although that does seem, you know, by some estimates, there's still a little eight million jobs. short of where we would be had it not been for the crisis. So what do you actually see as the, what is paying for it look like? Let's look at the numbers here. So, I mean, forget about anything else. Let's look at 2020, right? 2020, the global economy contracted by 3.6%.

Okay. The economy was growing about 6% before that. So the forgotten output last year was about 10% of global GDP, which comes to about $9 trillion, right? That was how much global GDP foregone basically lost, if you like. On top of that, based on the IMF's number, $15 trillion of fiscal spending has now been taken out by governments around the world to finance whatever they're firefighting. So $15 billion, $15 trillion plus $9 trillion is $24 trillion, not just for 2020. You say, well, what's 24 trillion dollars? These days we talk about trillions as though there were nothing.

Let's put that in perspective. Okay. Let's put that in perspective. I know people realize this. But you know what? If you look at the combined wealth of the 2,75 billionaires in the world. So if you take all the billionaires in the world, you add up all their money, it's only $13 trillion, by the way.

Okay. So even if we were to confiscate all the money from all the richest billionaires in the world, not enough to basically even fill the hole. Now, another way to look at this, you say, well, what can you buy with $24 trillion? You might be that way. Now, think about this.

You know, you could argue today the most, you know, the ultimate symbol of wealthiest days is to buy sports teams and luxury real estate. But you know, you could buy the 50 most valuable teams in the world. I'm talking about, like, from the Lakers to, I don't know, United, you know, basically, Manchester United. You can buy the 50 most valuable teams in the world for just $170 billion. Compared with the $24 trillion I just told you is the sum that, you know, that cost the world basically from COVID just in 2020.

Do you know you can buy all of Manhattan's land for $1.7 trillion? Again, COVID causes $24 trillion. Do you know what? You know what it is? I figured it out. You know, you know what $24 trillion really mean? with $24 trillion, we can basically feed the 700 million people in the world who suffer from chronic nourishment. We can provide clean water and basic sanitation for everyone in the world.

We can provide education for all the children in the world who are not able to attend schools. On top of that, we can protect all the endangered species from extinction, okay? Which only costs us about $76 billion a year. In other words, just the cost of last year is basically forgotten GDP and the fiscal cost is enough to make the world a much better place. In other words, the way I think about this is, okay, is that now we, as though that before the crisis, there was nobody went hungry at night, nobody went without clean water, all the children went to school, animals live in total peace. And now guess what, after COVID just one year, 700 million? people are going hungry every night. More than a billion people don't have any safe water.

Basically, about 500 million people are not going to school when they should. And then guess what? Animals are dying left and right. That is the cost just in 2020. Not to mention beyond. Now, I can tell you something else.

You might say, well, when are we going to pay this price? That obviously, you know, is immediately tied to the whole inflation story. The reason why, yes, Allen, and this is why I have no respect for people like Yellen. She keeps talking about, oh, well, if interest rates are zero, then there's no cost. Well, let's just take on more debt if the interest rate zero.

But she's assuming that inflation is never going to go back up. I just told you, if COVID turns out to be a negative supply shock, then everything they're doing right now is going to be pushing up inflation. And pushing up inflation, unless they want inflation to go out of control, which I don't think they do. The Fed will have no choice by the raise interest rate. When it starts a rate is interest rates, that's when, that's the day we start paying for, basically, the cost. And it's going to be a big cost. I want to ask a slightly different question based on that Yellen comment. But, you know, you were at BAML for a very long time, I think about 10 years.

And your new blog is called David Wu unbound. Is the suggestion that, I don't know, that you were sort of bound in terms of what you could say when you were at Bank of America, Merrill Lynch? Tracy, you know, let me tell you something. You know what really basically sort of like the day of reckoning for me at Bank of America, you know, by the way, you know, I mean, I don't want to say, I have only good things to say about Bank America. I was there for 10 years.

I did great. The bank treated me great. I couldn't be any happier. That's the honest truth. So my leading Bank of America has nothing to do with how the bank treated me or anything like that. I have always taught that they pay me much more than after. actually I was worth, but nevertheless, you know what? I'm not going to complain. Now,

I'll tell you what really got to me. It's a sort of sequence of events, one of which was what happened in January, February this year. Now, I don't have to remind you, right? You know, the one point, whatever, six trillion dollar fiscal stimulus package that got through very quickly in January as soon as the new administration was sworn in. Now, that one point, six trillion, I can tell you, any reasonable economists will tell you, it was not just excessive, it was probably unnecessary. Now, it's very interesting to me how many economists came out speaking up against it. Obviously, not a single one on Wall Street. But literally, you know, the people who spoke up against it are like Olivia Blanchard, who is the former chief economist at the IMF, who's not retired.

Who doesn't care anymore? I mean, he has no, he doesn't have to pay the political price for saying things that may not be politically correct. I can tell you who other person came. John Cochran, who used to be at Berkeley, who's now at Hoover Institute, who's been banished already to the North Pole, if you like, who basically wrote about it. In other words, to me, what was shocking in January and February was that we just decided to write this massive check that was completely unnecessary,

and yet not a single academic economist, okay, really spoke up with the exception of a few honest and courageous people. They didn't mind to be canceled because either they were already in a retirement or they were already basically in North Pole. They've already been canceled. So from that point of view, this is what read, there was a wake-up call for me.

Because then I realized that the whole cancel culture has gone much too far. I can tell you so many of my professor friends, you know, classmates at Columbia who are now basically teaching a major university Ivy League, who tell me they do not dare to speak up today because they might lose their job, they might lose their tenure,

they might have students basically complaining about them. That is the climate today in America. And it is starting and it was getting onto Wall Street. And I said, you know what? I got to do something about this. Because I benefited from Wall Street. I mean, I've spent 20 years on Wall Street. One thing I learned more than anything else on Wall Street is that Wall Street is about the celebration of differences. Just think about this. Every day, people are going on your show, you know, debating about A and B is inflation going up, inflation going up, inflation going down. You know what? Wall Street is about the celebration of differences. If somebody today is buying Tesla stock is because somebody else is selling it. So I wanted basically,

I decided to set out on my own in order to basically bring this very important lesson from Wall Street that has been a very big part of my success to basically the general public. That's what I want to do. On this question of like who gets to criticize, I mean, the stimulus, I mean, also Larry Summers was a critic of some of the size of the spending. and, of course, he continues to have a significant media platform. Jason Furman, former official within the Obama administration, critic, also listened to. I mean, I think that there really are economists who, to use your term, they're not banished to the North Pole who have been criticized. But I want to, you know.

Can we just basically answer that question? If you read, for me, Larry Summers has no credibility whatsoever when it comes to this. because he has been, if you, I don't have to tell you, I don't mind you, Joe, you remember this as well as I do. For the last 10 years, he's been advocating massive fiscal stimulus. Remember, he was the one was talking about stagnation. Doesn't that give him more? In theory, why?

Doesn't that give him more credibility as someone who? No, I don't think so because I would say that they were following his blueprint. In fact, if you actually read his Washington Post article, it was pussyfooting around. It was like it was nothing. It was not like, you know, he really came out forcefully. He felt that he had to basically say something. That's the feeling I got. Certainly, I, you know, again, go back to read an article and see if you actually,

Larry Summer says it's not someone who puts a foot around. He basically makes sure that you hear him when he speaks. And in the way he wrote that article, I thought there were too many ives. Anyway. Just going back to this question, you say, okay, there are all these critics of the stimulus who had secret felt like they couldn't say anything and because of, you know, whatever. In your characterization cancel culture.

That being said, okay, let's look at what's actually happened. Well, it is true that we have had some elevated inflation prints. And there's probably reason to think that even if there's a cool down, we are going to get them. They may remain as such for a while. We also see an extremely robust labor market recovery, nearly two million jobs in the last two months. We did see a massive hit to incomes. And I know that we've focused a lot, say, on this show about a lot of the supply chain disruptions. And we've talked a lot about containers as well as you have.

But on the other hand, small business incomes, service sector incomes absolutely decimated for several months. And we don't really have the counterfactual of what it would have looked like without the PPP program and the expanded UI. But huge swaths of the economy, their incomes at least for several months after the virus hit, would have basically gone to zero. And that would have crushed their spending and that would have crushed rents. And, you know, you talked about some of the eviction moratorium. On the other hand, there are millions of landlords who probably wouldn't have been able to collect any rent had it not been for the UI. and some of these programs. So why is it not reasonable to say,

I mean, that there were really truly shocks to both the demand and supply, and that the supply side is absolutely not sorted out, that the demand side has more or less remained smooth thanks to the ongoing fiscal expansion. Right. You asked a very good question. And again, I don't want to sound overly political.

I would argue, in my humble opinion, I think Secretary of Mnuchin was probably the best Secretary of U.S. Trash Rukh had a very, very long time. Okay. One of the reasons, I mean, he did a lot of great things. He's just someone who was just obviously a bit of an introverse. He didn't know how to basically, you know, do his own PR. Now, and because the association with, you know, with Trump, you know, people didn't want to give him any credit for anything he did. But he was the one who came up with PPP.

If you think about PPP, okay, PPP was basically a supply-side response by the last administration, right? Because the whole idea was, well, these businesses are going to go bankrupt. You know, and there's a cost to companies going bankrupt because, like, you know, it's easy for companies to go bankrupt, but it would be difficult for these companies to come back, okay? Therefore, the whole PPP, okay, the payroll basically a program was to help, small business survived the shock. And then Mnuchin also understood that, you know what, there will be some money that was going to be stolen in that process, right? Because as we know, like a lot of companies

basically fake there, whatever, you know, payrolls and basically got the money that they shouldn't have, it doesn't really matter. But that was a good example of a supply response to help basically mitigate the real, basically the long-term cost of the crisis by preventing a large number of businesses from simply going bankrupt. That was the right policy. But what happened earlier this year when Biden and with he basically endorsement of Yalan Senate check to everybody again for $1,200, that is not the supply side policy. Especially at the time already, U.S. household savings was like 8%, 9%, 10%. You know, if people had that kind, were sitting, if you look at average saving raise, it's never been higher. So Americans were sending on some savings, if they're not

spending it was not because they didn't have the money, presumably because, you know what, there was no place to spend it because, you know what, they wanted to go out the restaurant. The restaurants are closed. Maybe they bought all the computers they have. And you can see what's happening right now, by the way. This last month, you know, you saw the non-phone payroll number last week. This is the fourth month in a row. The hospitality and leisure created more jobs than all the other private sectors combined, my friend, because Americans are rushing out to basically eat out and basically hit the road on vacation, so on so forth. So from that point of view, again, what I'm saying is this. I'm not saying that any fiscal response is wrong. I have no

doubt that last year, the aggressive fiscal response was correct. It was calibrated. And I loved the PPP program because that made a lot of sense to me. And on top of that, there was also more persuasion placed on the banks, not to foreclose, okay, on basically businesses. Well, for that matter, mortgages. These were supply-side response that was basically pushed by the last administration. This administration came in. The first thing they want to do is spend more. They give people who didn't need the money to spend more. That's what I've got a problem with. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to

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the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. I'd like to widen out the conversation a little bit more because we've been focusing a lot on the U.S., but, you know, I'm over here in Asia. And one thing that's been happening here is we've seen a resurgence in COVID cases. the Delta variant is spreading in Malaysia, Indonesia, Vietnam, places like that.

We have some cases in China again. And I'm watching the PMIs, and they seem to be rolling over for some very important economies in terms of the global supply chain, but also potentially demand. And even China is getting close to that 50 mark that is the difference between expansion and contraction. So how much does China and broader Asia matter when it comes to the global recovery? And how much does, I guess, the variations in the economic recovery complicate the global picture? The difference between Asia and the rest of the world is very simple.

Asia was fighting a different matter than the rest of the world during the entire COVID pandemic. And Asia was successful, you know, in terms of their strategy coping with COVID by simply, you know, pursuing an elimination strategy, right? I don't have to tell you. Great example was Taiwan, right? And now Australia. I mean, they were just, they basically shut down their whole country so that it was impossible for anybody to even get in. I mean, I should know this. My parents live in Taiwan.

I can tell you it was impossible. So as a result, Asia became too complex. complacent. They were able to contain, keep the basically COVID at bay by keeping it outside basically their countries. They didn't aggressively trying to get vaccines. And that's, of course, the big story. Right. So, and then what is really happened. I've always said China got super lucky. I don't know if China,

if, you know, if the virus was biologically engineered or not. I don't really care. What I think is China got really insanely lucky last year. Because we all know. the virus, okay, once it got out of China on its way to Europe, became literally 100% more contagious. By the time it started spread in Europe, it had already mutated. It was a much more infectious, basically, virus, that anything the Chinese had to deal with in last January and February in China.

And ironically, you know, the mutation that has been happening now, you know, from basically in Europe and then, you know, with, you know, the, um, the alpha, the beta, the gamma, in South Africa, Brazil. Now, the Delta is now finally reaching Asia. And all of a sudden, you know, the Asian basic elimination strategy doesn't work. And rightly so doesn't work. I never thought what's going to work. Because now you've got, you know, basically the Delta, which is 50% more basic contagious than the alpha.

The alpha was basically 100% more contagious than the Chinese. This is what's really going on. But I'm not terribly worried about this. And I'll tell you why I'm not terribly worried about this. If you look at the experience of alpha, gamma, beta, and their delta, they all follow a very similar pattern. And you have to look at the countries of origin for each of these basically varying. Okay?

And basically in the UK, South Africa and Brazil, following the outbreak of alpha, beta, and gamma, in India, which is the home of origin of Delta. the number of new cases collapsed. And it's pretty fascinating because even India, what, you've got something like 20% vaccination. Okay? So that's pretty impressive.

The numbers have completely collapsed in India. Let's look at the UK. UK is another good example. UK, you know, because of close ties with India, was the first Western country to get hit by Delta. And the number of cases basically went flying. And guess what? It's been coming down a lot.

more than 70% is now stabilizing. Okay. This is also the reason why I think the U.S. story is going to follow a very similar pattern, which is that I think probably in the next few weeks we all to see basically Delta cases also starting to peak. In Asia, I think the reason why the economy has been hit is because once again, these economies are still trying to deal with basically Delta using yesterday's medicine, which is by trying to shut down the economy, We tried to basically eliminate.

That is not a winning strategy. The only strategy that works now is to basically, and this is why I think the UK approach is going to be really, really important because I don't tell you, UK saw massive increase in cases and they decided to basically reopen the economy, relax all restrictions. Because they decided, you know what, let's elimination strategy doesn't work. Let's just basically pursue a strategy of coexistence. okay if you get everybody vaccinated you know what maybe we don't have to close if not many people are dying and in fact if you look at the mortality rate in the UK it's about 0.2% which is about double that of a flu okay for vaccinated people

I think that's what it is so I think it's basically Asia strategy worked in the beginning it stopped working once Delta became much more contagious and yet Asia continues to try to basically control it as though we were fighting. the original virus. I think just like everybody else, there's going to be a learning curve. I think even Asia's going to get there. And when they get there, we're going to decide that maybe we can live with this. Now, of course, I want to say this

one big of course, which is, I have no idea what's going to happen later this year, I mean, during the winter, because I don't tell you, alpha, gamma, delta, and basically gamma, all developed during late fall and early winter and early spring. The fact that Delta

became more infectious, now, you could basically define basically vaccination, I can tell you, I'm in Israel right now. And then, you know, the immunity rate is now less than 40% among people who receive two shots. Okay. So from that point of you, who knows what's going to be the next mutation? Is that going to basically, you know, basically become not only more contagious, but also more virulent? That is a different story. But right now, given, if we're just talking about Delta right now, I wouldn't want to be basically overly concerned about this being enough to derail the global recovery. Let's go back to what does this mean then for the supply side?

And your view is that by and large, the disruption COVID is a supply side story. And look, you know, I think if any listener to odd lots would to some extent agree, because we do a lot of episodes on supply side disruptions, shipping containers, all of that. So to some extent, there is a large agreement. If, you know, we have these sort of ongoing waves. We don't know further mutations. We, you, as you say, these sort of like completely stamp it out strategy as a failure against a mutation as virulent as, that spreads as easily as Delta. What is the prospect for supply side normalization?

Like, when do we see container rates normalize or what would it take for container rates to normalize? things like that. I think it depends on different sectors, right? You know, obviously, like, for example, we all know that, you know, the supply crunch in semiconductors, right? That was one the reason why, like, computer prices went through the roof. But computer prices starting to come back down a bit, right? That's one of the reasons why, like, use car prices went through the route because there were no new cars, because, like, certain chips that were not available, so certain new models were not available. And then actually what happened this week, this month, is the reason why use car prices started to basically moderate prices

is because new models are being rolled out. That's why like new car prices has been going up. But I do think so these these are temporary shocks, by the way. These are temporary supply shocks. I'm not too worried about them. I'm much more concerned about potential permanent supply shock, negative supply shock. What are those? Let's think about this.

Number one, as I said before, you know, you know, if COVID is going to be here to stay, okay, if it becomes the new normal, you know what? I do think many more women are going to end up staying home, simply because I do think that especially younger children, this is going to be a major issue. Okay. And especially not, certainly not before the vaccine becomes widely available, which may not be the case for many years, by the way, who knows? Okay. I can tell you that from experience, because both of my basically daughters and Israel have very young children, my grandsons, you know, they have not been going to kindergarten for a very long time. As a result, both of my basically daughters having to quit

their job was certainly kept back on their work in order to basically look after the children. That's one major issue. I think another major issue is that COVID, if it's going to be here to stay, is also changing the skills that are required by employers. Okay. You can see very clearly in the data, you know, unemployment rate for basically people with college education has pretty much gone back to, it's almost not exactly, but very close to getting back to what we wore before the crisis. Whereas people with only a high school degree, that is much less the case, which takes. tells you that there's no doubt that it makes a big difference whether you can work from home, well, you cannot work from home. If you cannot, if COVID is transforming the economy in terms

of the skill requirement, a very big part of our labor force may simply become unemployable. That's a negative, basically, supply shock. Other supply shock, think about this, I think, you know, there's no doubt my mind. You know, one of the things that you know, Joe, like I really care a lot about is the U.S. trying to trade war. Okay. There is no doubt. Nobody wants to say this, but I think the U.S.-China relationship has gotten 10 times worse under Biden than under Trump, by the way. And there is no doubt. I mean, this is why it's actually interesting. Like, you're thinking of the U.S. economy is on fire. The Chinese basically is actually struggling in export. Now, in the past, including doing 2010, the 2010-2015 recovery, it's like, well, U.S. was growing

and then they were sucking all these cheap imports from China, therefore keeping basically prices very low. Now this is not longer the case. Okay? So basically what worries me much more is basically this kind of thing, is a permanent supply shock that basically shifts the labor supply curve basically in. And then because of the disruption in global trade, a lot of which has become so politicized that I don't see we're going to be able to overcome them anytime soon. That is also going to reduce the aggregate supply, okay, for the global economy.

So from now, a point of view, a lot of the advantages that were previously associated with globalization and so on and so forth, it's just not going to help us that much this time around on the inflation front. So I have a dumb question on this point, but it's something that I've been thinking about because Joe and I have been talking so much about the supply issue. So there's this idea of the bullwip effect and that, you know, a shortage in support. means that a company is going to over order in the next round, and then that leads to sort of overcapacity and things like that. But I'm wondering, is the response to supply issues, can that be good for the wider economy? For instance, if people decide that China is too risky, for whatever

reason, whether it's COVID or something like the trade war, and they start building manufacturing capacity closer to home, like in the U.S. That would seem to potentially be a good thing. You're right. I mean, it depends for who. But just let's be very specific, right? Let's just say right now, you know, the U.S. determined to basically shut down the entire semiconductor, basically production okay in China, right? I mean, the U.S. decided that we don't want China to be in this business as all because it's going, it threatens the U.S. hegemony too much, right? I mean, it's not even at this point, it's not even about whether they steal from us, they don't steal from us, or they spite from us, is now it's like,

well, we don't want them to basically threaten our competitive, basically, our technological adrimony in the space. Therefore, we don't want them to be in that space, period. Which means basically, you know what? You'll have to basically build these plans somewhere else, right? Which means some companies will have to pour a lot of money into that, which means, can you imagine in the extreme case where everything that we're currently buying from China, we now have to basically build production capacity somewhere else to build the same thing. You don't think that's going to be very expensive. I mean, sure.

I mean, you know what? You've got to basically think about that from that point of view, which is relative to where we are. Because again, this comes back to the whole inflation story. Okay. The only reason why the stock market is trading where is trading right now. The only reason why house price has gone up so much. I mean talking about today, yesterday, what I were talking about the last 20 years. We've seen

a massive, okay, rally in the stock market, in basically home prices, in wealth in general. And that's all because of disinflation as a result of globalization that allows central banks around the world to really cut interest rates to unbelievably low level. And by cutting interest rate to very low level, you are reducing the discount rates, okay, that prices or risky assets. because by reducing the future discounted cash flows to today. That's why you've seen this massive asset price appreciation. Okay. So now you're telling me who cares about that?

Who cares about the disinflation? Let's embrace a little bit of inflation. Then what happens to asset prices you tell me? Okay. So from that point of view, you know, the debt, the wealth, basically the explosion of the last 20 years was all thanks to, you know, globalization, which is about the integration of the Chinese economy and the global economy that kept global prices low, that allow interest rates to glow,

they allow the kind of, you know, you could argue the globalist, the elites basically benefit within that because they're the ones who are sitting on, they own most of the wealth that benefit on the price appreciation of these assets. But nevertheless, we got to be very, very careful to think of that. That's why Trump, even though he started the trade war with China, he had a very defined objective. He wanted China to play fair. He wanted China to respect U.S. intellectual property, he wanted, you know, all these concession-bbed Chinese. And from that point of view, that's why I always thought that the first agreement, the face-one agreement, was a very significant agreement. Yeah, I was probably the only person

on Wall Street to have read the entire 100-page document to me is still a spectacular agreement. I think it should go down in history as one of the most important milestones. Unfortunately, Trump lost the election, and that agreement is not worth nothing. Okay? But the point here is that that had a very defined objective, which could potentially of you still put the U.S. and China into win-win position, these of each other. I can tell you for the last, all throughout 2018, 19, when I was going to China, in big corporate offices, in government offices, people will come up to me and whisper my ears, you know, David, Trump is a great man. These are Chinese people telling me Trump's good, because they're saying

that, you know what, reforms had been stalling in China for the last 10 years under Xi Jinping. And thanks to China, thanks to Trump, the pressure is on China to once again accelerate reform. and that's what Trump did. And this is what people don't realize. In the end, China agreed to the face one agreement because ultimately the reformers got back into the privacy because of pressure from Trump.

And I thought that this was going to lead to basically a happy ending for both sides because at the end of the day, you know what? That's what we all want. I mean, Tracy, you're sitting in Asia. But now with Biden, it's like, wow, gloves are off. So from that point, we're now moving from

an economic conflict that was ultimately well defined under the pre-ministration that we were getting close to basically resolving to now ideological contests, which can never be resolved at this point. And that is, if you're telling me, if that's what you want to basically start building all these expensive plans outside China and hire people, like that kind of, yeah, you're going to create some jobs, but you're going to create a lot of inflation. Well, David, like I said at the beginning, it's always interesting speaking to you always provocative and really, really appreciate your insight. Thanks for coming on an odd lot. No, not at all. I mean, thanks for putting up with me. And I, you know, I love coming on to Bloomberg

because I know that you guys are willing to contemplate, you know, there are other alternative views out there than the mainstream ones. It was great. Thank you. Thank you so much. Thanks, David. Thank you so much, guys. You know, obviously, where to start. David has pretty some, you know, out of consideration. As you asked the good question, did he feel bound previously, sort of out of consensus perspectives on a lot of stuff. But, you know, on a lot of things, like, I think his views are worth taking seriously. At least several of the points are like, you know, this is worth thinking about and debating.

I like David Wu unbound. You know, he was always sort of outspoken while he was at Bank of America, Merrill Lynch, And he seems to have taken that to a new level just then. But so for instance, his points about China kind of decoupling from the global economy, I would totally agree that that is an underappreciated risk or thing that is actually happening now in the global market. And it reminds me a lot of in early 2020 when the COVID outbreak first happened and China basically shut down, its entire economy and the U.S., or at least the U.S. markets, just ignored it completely. And it was like, well, we spent the past two or four years worrying about the trade war with

China. And, you know, that was all anyone could talk about. And now China has basically closed off. And U.S. markets are doing absolutely nothing, not responding to it at all. And eventually they did in March, of course. But like, I kind of feel a similarity with the current situation. It's not going to be like as sharp as it was in March, but I do think at some point people are going to wake up to this dynamic. Yeah, no, I agree. And I think your assessment that it has not been fully appreciated, I think I saw a tweet from you and last night or this morning about some of this rolling over in the PMIs. That like, just like the sort of like the absolute effect of the slowdown. And then the ongoing.

supply chain disruptions that that's going to cause. And, you know, we joke about this. It's not really a joke, but our very first episodes were talking about COVID as a supply shock story, like the first one we did with Dan Wong back in early March 2020 or maybe February, probably February 2020 was like, well, what's it going to mean for Apple and so forth? And it's interesting, the degree to which we just like, oh, it's going to normalize. you know, container prices are going to crest and so forth. And this idea that, well, maybe there is like this sort of like deeper thing going on that's not about to crest. And David's point about how the approaches that Asian countries took to completely stamp out the virus in the beginning may not be as effective with the more transmittable Delta variant, extremely interesting. Yeah.

The other thing I found interesting was his contrasting of, you know, a demand side shock or recession versus the supply side and the idea that a lot of the things that policymakers are doing right now end up boosting demand and not really solving the supply issues. And so that accelerates inflation. That seems like a reasonable risk to me. Yeah. I mean, look, I think that I guess, the question is, all right, we, you know, people in all different camps, you know, the supply side camp, the more demand focused Keynesian camp, we all like sort of like point to the same things, right? It's like, well, okay, there's the semiconductors and the containers and so forth.

The question, I guess, is the degree to which, and I guess we didn't really get into it, but is the degree to which the demand side policies have exacerbated the problem. So it's like, okay, everyone can accept that there were these supply-sad shocks, and we can see it in the data in which categories. But, like, you know, all right, used cars. Was that really because of, like, stimulus or expanded UI or the chip shortage, et cetera? So there's still a question of, like, waiting of the different factors. And look, millions of people did lose their jobs. That is a fact. Yeah. Yeah, that is very, very true. Well, I'm sure this isn't going to be the last time we talk about this topic. And, of course, as you noted in the...

the intro, inflation does tend to get people going, especially David Wu. Should we leave it there? Let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall.

You can follow me on Twitter at the stalwart. Follow our guest, David Wu on Twitter. He's at David Wu Unbound, although it doesn't look like he's ever tweeted, but maybe he'll start. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at Podcasts.

Thanks for listening. I'm Francine Lacqua, an award-winning journalist. And I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one. right way to be a leader. Make decisions. A poor decision is always better than no decision.

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