Odd Lots - Why You Can’t Blame The Fed For Ultra-Low Interest Rates And Soaring Asset Prices

Episode Date: June 11, 2020

One of the characteristics of the pre-crisis (and perhaps also the post-crisis) economy is the presence of very low interest rates, and financial asset prices that are expensive by historical standards. Of course, a lot of people are inclined to blame the Fed for this. But the real issue precedes the Fed, and in fact the Fed (and other central banks) are only responding to political decisions that depress consumption, investment and inflation. On this episode, we speak with Jon Turek, the author of the Cheap Convexity Blog, about how policies all around the world that suppress consumption and encourage exports are the real policy choices that lead to low rates and expensive financial assets.See omnystudio.com/listener for privacy information.

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And I'm Tracy Allaway. So Tracy, obviously, still in the middle of this ongoing crisis. And I think, like, one of the big questions that I've wondered about or something I've been talking about for a while and thinking about is whether it would lead to any substantive, meaningful economic policy. changes going forward that causes the economy to look at different than it did pre-crisis? Yeah, I think that's right. I think there is a sense or a desire that after the worst economic crisis in decades or

possibly in modern history, you would want to see some sort of change, something to happen to the global economy so that the next time something like this occurred, you wouldn't see as big of a knock-on effect on the economy. but do you ever get the sense that things sort of become more entrenched rather than change? Yes, it does feel like that. And I have to say, like, I don't know like what the future holds, but, you know, today we're recording this June 4th. I'm less, I think it's, you know, I feel less confident today than I would have say in early April that this crisis will lead to some sort of major change. in policy, you know, some sort of major demand side change or major change in how the world

trades. Like, it's not over, and we still don't know the lingering effects at all. Unemployment remains sky high still. So there are, like, incredibly serious issues. But at the moment, the sort of policy momentum that maybe it looked like we might see in late March or early April, it feels less strong today. And it feels like, just as you say, the sort of inertia, the entrenchedness of the existing system may yet survive. Yeah, I feel like that's always a risk after a big crisis and tends to happen quite often. I should just mention that, you know, this is the week we're seeing a lot of social unrest and mass protests in the U.S. So the policy conversation is sort of drifting further away from economics.

True. And also just, you know, the within the context of the social unrest, I think important to point out just like how incredibly difficult it is to predict anything in the future, let alone, you know, two weeks ago, not many people were anticipating this. So things as they say is kind of a cliche are very fluid in anything that happened. Yeah. Okay. Yeah, I agree. All right. I'm glad we agree. So that big. said, like, if we're going to talk about plausible changes or what could change, it's worth discussing what the regime, what the system was like before. And of course, we've done a lot of that with like our recent interview with Matt Klein, Adam 2's sort of, Brad Sensor. A lot of these discussions have centered around this question, what could change, but also understanding the set of conditions that we saw before we got into this crisis that created.

the economic and market backdrop that we saw. Yeah, I think that's right. And certainly one of the big focuses for us in recent episodes has been, in particular, the dynamic between the U.S. economy and the Chinese economy as well. And you mentioned Matt Klein there. That was a great episode where he really dug into it. But we've also discussed that relationship in the context of the financial system, savings and balances, and that sort of thing. And it is, It is basically a bedrock of the way the global economy, the global financial system works. But I don't know. I feel like people forget it sometimes.

Totally. So I think it's worth, again, continuing to dive deep into what this system currently looks like. And in particular, this combination that we've seen for a while of very mediocre growth rates, just in terms of GDP, very mild inflation everywhere, despite the sort of effort. among central bankers to get it going, almost no effect. Extremely low nominal policy rates. The Fed hiked a few times and then had to backtrack on them. And then also the boom and asset prices and the fact that stocks,

despite a lot of stuff prior to the crisis being just sort of mediocre, just this incredible 10-year bull market with a huge concentration of asset inflation, so to speak, among like growth stocks and tech stocks. So I think today we're going to try to pick apart what that setup was like because I think it's important for people to understand the connection between all these things as they think about what could change or what could go back to normal and what that would mean for market. Yeah, although I have a feeling this is going to be one of those things where we come out the other side thinking just about how difficult it is to actually unpick that entire system that you just described. Okay, let's do it. Okay, so today our guest, he wrote a great blog post in the middle of May called the Global Savings Glut, a modern policy failure that really connected a lot of these dots. I want to bring in John Turrick. He's a student and a macro trader and the author of the cheap convexity blog.

Definitely a must read. And he's going to help us sort of put all these pieces together. So John, thank you very much for joining us. Hey, guys. Thanks for having me on. Much appreciated. Big fan. Thank you. So let's start, you know, the title of your post is a modern policy failure, but we're not even, this wasn't even in reference to the massive crash that we've seen or the massive unemployment that we see right now. You're just talking essentially about the conditions that we saw in terms of global growth and global demand pre-crisis. What is the policy failure in your view? Yeah. So I think that the policy failure is definitely more of a macro backdrop that

kind of stemmed from the fact that we had this era before the financial crisis where, you know, there was a lot of global integration. China sends the WTO and kind of global, there's a global trade boom. And that worked until really 2009 and it had a brief reemergence after the London G20 meeting and China promised to stimulate. But it's really a trade that kind of fizzled out as the global demand impulse from China structurally weakened. I think someone you've had on the podcast before, Hjong Shint for the BIS has done an amazing chart of goods exports relative to world GDP and basically showed that that kind of, it topped

out in 2009. And since 2011, it's been in the steady decline. And kind of the interesting thing in that backdrop is that major economies like East Asian economies in Europe have still had exports as percentage of GDP at their highs. So in Europe, it's still 40% in East Asia. It's 30%. And that's structurally disinflationary when so much of your growth composition is tied to something that's really in decline. And then I think this is kind of factored into the policy response has not been. in how do we change the growth composition? The policy response is how do we reinvigorate the thing that we're kind of betting on, which has been exports, which is why you've kind of seen this weird

bifurcation between monetary and fiscal policy in places like Europe and Asia where they're running fiscal surpluses and pretty expansionary monetary policies because monetary policy is much more exchange rate driven. And if you're really, if your emphasis is to kind of stimulate external demand, then the way as that is like to improve your terms of trade by weakening your exchange rate. And it's been like kind of an ever-chaise lower as this, you know, this, this structural impulse of demand that kind of weakens has been met by just steadily declining, you know, exchange rates and even negative, and from negative interest rates in a lot of jurisdictions. And it's kind of been the wrong response. I'm not saying that monetary policy shouldn't have

acted because I did not have the assumption that fiscal policy is always a rational actor. But I think that there's kind of been this overlay of that countries are very focused on being able to import aggregate demand instead of creating it themselves. And that's kind of been on this bias that they had from the turn of the 2000s in China's Ascension WTO, they could always import aggregate demand. And that really hasn't been true for a while. So I want to dig into this, and especially the way that currencies actually factor into this, and especially the U.S. dollar. But before we do, I have a sort of backup question, which is, why did you decide to take up this particular topic?

Like, it's sort of as big picture as you can possibly get when it comes to markets or the financial system. And it's unusual to see someone go, like, I'm going to wake up today and write about the global savings glut. Yeah. Well, I think there are a couple things that were really, like, kind of jarred my interest. One was Brad Setser's work at Council of Foreign Relations has been, like, very eye-opening in terms of, like, kind of these imbalances. And then I think my original point, which I really struggled with, was kind of from the monetary policy side, And especially in 2019 when the Fed was seemingly cutting rates preemptively, like they were, they were very low unemployment.

Inflation wasn't exactly a target, but, and they were cutting rates and the curve was flattening, even though the economy was doing reasonably well. So this kind of all jarred my interest is kind of like trying to understand what was going on, I guess, at a more, more meta level. So you mentioned one of our previous guests, Professor Shin, he's been on talking about why the dollar obviously matters for the global economy, and in particular why a strong dollar is so painful for the global economy. And there are shades of that in your blog post as well.

Can you walk us through what role currencies play in your argument? One of the interesting things is that there's this kind of in this duality in the global economy between the financial markets and the real economy. And I think actually the dollar is exactly what encapsulates. that because the dollar's kind of been, okay, so now we have this world where policymakers around the world are trying to reinvigorate this external demand, but everyone's doing it, and there's seemingly a structural lapse in aggregate demand, and they can't see export their deflationary conditions. So there's a lot of, naturally, there's a higher

propensity to save when nominal GDP is not really going anywhere. And as we've seen kind of, as these like kind of two positions coexist where you have lower nominal GDP, weaker exchange rate, and kind of, and no real fiscal impulse, you get very high savings rates from public and private sector. And what happened, especially in a lot of these economies, is that these get exported. And they get exported basically to the place that's able to absorb them. I think Matt Klein in his new book, which has been excellent, called it The Sink. And that's really been, and that's really been what happens. So what happens is you get places like Japan where they're trying to basically weaken the end to grow exports, even though, you know, that hasn't been a winning strategy. But what

happens is that the BOJ buys up the G&GB market. They all know around 50% of it. And then there's not that much corporate impulse and saving rates are high there. So you end up having for a big saving sector, you end up having domestic assets on life insurer balances that are 25 times the size of the investment-grade bond market. So you kind of get these factors that basically say that are short kind of global trade because there's a high savings. And that kind of gets exported when it's too big for the local market. And then this is what I really found it got interesting,

is that this kind of had this exporting of financial assets to the U.S. who was the most able to absorb it, either for growth reasons or they were expanding corporate and public sector balance sheets is that it had an economic cost because the economic cost was that the U.S. brought back onto the world a stronger dollar, which kind of reinforced these dynamics of lower global trade, lower nominal GDP growth, lower, you know, neutral interest rates, and things like that. And then there's the other side. The dollar is also a reflection of a lack of global trade because the dollar has much less made. The North American exports as a percentage of GDP or like 14% where it's 20, 30% in Asia, 40% in Europe.

So the dollars kind of become a reflection of a lower nominal GDP, lower global trade world, but it's also a culprit in it in the work of Professor Shin and Gita Gopinath or the IMF that it's the dollar inflicts pain on the global economy, either via the Titan credit channels or as a global invoice. 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 your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you

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Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So I want to get to the connection between all of this and asset prices, particularly the boom in the stock market. Before we do that, I want to talk about ZERP and the ultra sort of low nominal policy rates that we've seen most notably out of the Fed. And everyone hates it, right? Like gold people, they complain about it. Bond investors are always complaining about it. Bankers are always complaining about it. They're just like nobody seems to be. to really be a fan of super low interest rates, for whatever reason. We don't necessarily need to get into that, but it's like people hate the Fed and we all know that. But kind of like one of your

points in that in this piece, and I think it's one of the most subtle things, is that the Fed is a passive player, that essentially these policies of export-led growth, overproduction, weak demand, really just don't give the Fed many options. And so the Fed, Ed's Zirpness is really a consequence of policies that preceded. Yeah, absolutely. I think one of the things was when Bernanke kind of introduced the idea of the global savings got in 2003, and he was kind of explaining the flow of funds and why money comes into the U.S.

And it was the same time that Greenspan was kind of struggling with like why we have escaped velocity, why his term premium compressing. And what Greenspan called at the time as the conundrum is pretty easily explained by these slows. I mean, one of the things that's been pretty remarkable in the 2010s to 2020 decade is that if you kind of just aggregate, you know, surplus net international investment positions, they kind of just even out with the U.S. deficit. They're both about, you know, you take Germany, Japan, Switzerland, Korea, Singapore, and it bases Taiwan, and it equals out to the U.S. deficit. And the way that kind of factors in is that into monetary policy is that there's two ways for the global R-Star community. And the law back Williams estimate, there's two big components. There's the demand for safe assets, which factors into R-Star.

And as we know, based on this backdrop, there's been a lot of that. So that is a compressor of R-Star. And then the other part is, is like we live into like a very interconnected global economy. if Europe and Japan are experiencing very low growth, there's only a certain level that the U.S. can kind of feel. So this is basically repressed neutral interest rates, which is basically how the Fed kind of gauges where it is. I mean, we don't know it in real time what the level, what the, you know, what our star is. But the Fed's level of accommodation is only relative to where it is, relative to neutral interest rates. So I always hear and you've highlighted on Twitter a lot is that, oh, the Fed's level.

fed's like, you know, going like, especially in 2019 when the Fed was cutting for quote unquote seemingly no reason is, is that they were cut, you can almost make the argument that if our star was falling as it was last year, which we do know in retrospect, that the Fed was cutting to stay, does avoid hike? And this is kind of something that I've been thinking about a lot of, especially in Christian Forbes from the ex-Bank of England, MPC member, has done a lot of work that's like a lot of these factors have become globalized. She does it in terms of the global Phillips curve. But basically, and then this was a very prevalent topic of Jackson Hole this year where they

basically did a paper and they decomposed the variance in neutral interest rates. And a large component now, as opposed to the 70s and 80s, is that global R-Star is just as prevalent as, you know, your domestic factor. So yeah, the U.S. had a 3.5 percent unemployment rate and inflation not far from target. But so many countries didn't, and their demand for safe assets were pulling R-Star down, that you could almost make the argument. I think the Fed was correctly making the argument that they were cutting to avoid tightening. And this is why they couldn't get the yield curve steeper,

even though they were cutting into a relatively benign economy. I have what's possibly a dumb question, but you mentioned demand for safe assets. So obviously, if you have a glut in global savings, people are going to want to put those savings into assets, which aren't going to default or suddenly disappear. So that's where the demand comes from. I've written previously about a shortage of safe assets in the financial system.

I'm just wondering if you suddenly had more safe assets, you know, and we're probably heading that way because lots of countries are issuing government debt at the moment. But could you solve this problem by impacting the supply rather than trying to impact the demand side? Yeah, I think it is. I think it is possible, but I think the demand side also has a lot of, you know, feedback loop elements to it, that if, you know, if the corporate sector was more comfortable, that they would issue more investment-grade product at home, and that would kind of incentivize. The thing is that I'm not, I'm unsure about how, you know, this round of global issuance

affects, you know, demand for safe assets and maybe kind of localizing excess savings is, is that a lot of the government stimulus so far has been kind of, we want to do this, but we're also not letting term premium go anywhere. So there's been a lot of, you know, countries doing YCC or, you know, massive QE programs kind of implicitly to keep the shape of the yield curve the same or explicitly. So it's possible. I think it is possible. But I think a lot more of it will come from the demand side than, you know, the supply of safe assets. So one of the, let's get, I want to talk about. about the market, and Tracy opened it up to that in terms of this demand for various assets.

And one of the striking things about the last decade was this sort of like, some people call it a barbell in which we saw incredible demand for extreme safe assets. So Treasury is obviously with yields just going lower and lower and other sort of equivalent, but also a tremendous demand for risky assets at the same time. And in particular, sort of tech companies and company incredible valuations on companies with like sort of secular growth opportunities. Talk to us about that split because it's not intuitive that people are buying the riskiest stuff and also buying the safest stuff at the same time. How is it all connected?

So I think that it is because a lot of this safe supply has kind of had two impacts on financial markets in the way that the safe supply is reduced because there's either this, there's this excess savings that wants to soak it up that's pretty much price and sensitive. And then there's also governments, you know, in central banks who are basically, you know, doing policies like quantitative easy, that are also kind of taking the supply out of the market. And this was very prevalent when countries like, you know, Germany and East Asia and even the U.S. really until 2017, 18, were running pretty tight fiscal policies. And I think that that kind of naturally moved these players, Taiwanese life insurance companies, Japanese life insurance companies, big pools of excess

savings out the risk curve. Now, most of them were still, you know, like even if they were moving into investment grade by markets or CLOs or even high yield to some extent, they still were kind of in, you know, relatively safe assets. But the way I think it ties, into this surge in valuation, especially for like U.S. tech companies, is that this kind of force, these disinflationary pressures of excess savings as that results from, you know, lower nominal GDP and demand for safe assets, is that it basically allows all these natural growers who are kind of, you know, I wouldn't say insensitive to, you know, real economic activity, but are definitely have much less beta to it than, you know, traditional cyclical companies.

is that they find themselves kind of cannibalizing the world with, you know, three percent borrowing rates. And when the discount rate for them gets that low relative to how they can naturally grow, you can get these massive expansions of multiples. And they're probably end up somehow getting justified just by kind of how low the discount rate gets. And then it's, I think these factors have kind of fed on each other. And it's the same thing like these, you know, these, you know, tech versus Russell or tech

versus EM or whatever, all these things, they kind of chart against the level of the dollar. And the level of the dollar is almost charted with the level of, you know, the average global neutral interest rate. So I think a lot of these factors are interconnected and it kind of comes from this world of low nominal GDP excess savings and then how tech kind of benefits from that, even in terms of flows or activity. So we have this phenomenon in a low nominal GDP world. like companies that are sort of growth insensitive. And so a company like Netflix, which probably doesn't need a booming economy to get people

to subscribe to get onto it, they can borrow really cheaply. There's a huge demand for their earning stream. One of the conversations, and it's less macro than some of these conversations, but one thing that we talk about from time to time is the so-called like the death of value stocks and people who are looking for cheap opportunities in the market, why they're always disappointed. In your view, does it come down to essentially value isn't going to work as a strategy until we have policies that actually boost nominal GDP, that as long as there's this growth shortage out there, then you have this love for an asset like Netflix, and until we get

meaningful macro change, then some of these just sort of more cyclical companies that may trade at sort of seemingly cheap price to earnings ratios just aren't going to be in favor? Like, is that basically a macro question in your view? Yeah, absolutely. I really do think it is this kind of growth value, all these things, interest rates have kind of all the dollar, but kind of all become lump summed a little. And I think it does make sense because a lot of these value companies are much more,

you know, dependent on the level of economic activity. But I do think that like there are kind of first signs of promise that a lot of these dynamics will begin to change, not by choice, but more by force. And we can get into that, I guess. But yeah, I definitely think that the growth value, that those kind of dynamics are very rooted in this kind of high asset prices, low nominal GDP world. Well, let's talk about that. Because what you're basically describing is the sort of feedback loop where you have low economic growth that generates a bunch of savings and all those savings go into U.S. financial assets and that sort of keeps the dollar high, which then generates lower growth and the cycle begins again. When you have that kind of doom loop, I guess it's hard to get out of it. So do you see the prospect of change on the horizon?

Yeah, the doom loop is really the best way to describe it. And I do think it is possible. There are definitely early signs. I'm not going to, I wouldn't say it's all systems go. But one of the things that is interesting about this crisis is that it's made actors who have been very hesitant and reticent to kind of use bazookas. It's made them kind of forced to. And I think it's kind of, I think one of the main factors of the past five years has been that. the response to weakness in demand has been so bifurcated between, you know, Europe, Asia versus the U.S.

and the U.S. has been able either on the monetary side, but more importantly, like, to do a massive fiscal expansion at, you know, what at times we thought was levels of close to full employment, whatever that means. So there was kind of this, this kind of added to the divide of not only was the U.S. able to absorb this excess savings, but it was also kind of justified on relative growth rates. And this also really impacted the dollar feedback loop because it was also, it was just a reflection of, you know, the relative growth dynamics. But what's happening now, which is kind of interesting, is that countries who would have been very hesitant to kind of change their, you know, economic structuring in terms of their composition of growth are kind of being forced to now. So we kind of start hearing things like, you know, Moon and, Prime Minister Moon in Korea is kind of talking about this new deal. where Korea has previously been running, you know, budget surpluses and exports are still, you know, 45, 50 percent of GDP. And now they're talking about ways, how do they generate aggregate demand post-COVID.

And we seem to have some, you know, green shoots in terms of European politics and Germany passing, you know, another round of stimulus. And these are all things that kind of two years ago, you would say would be the U.S. doing them only and, you know, Korea and Europe and Japan figuring out a way to get how to get their currency lower. And that really hasn't been the case this time around, kind of because there's no terms of trade advantage when no countries can trade with each other. So that's been in terms of a structural development, unfortunate as it is, is kind of been

welcome in terms that like countries now really because there's global trade broke down not only for structural reasons, just, you know, practically when there's a pandemic. So the only way to kind of generate demand is internally. And that's kind of focused people, you know, policymakers. I mean, it was not that long ago when, you know, Olaf Schultz, the finance minister in Germany, was saying that, no, there's no need for fiscal. There's, you know, the economy's fine. And now, you know, Germany's tripping over themselves to pass additional fiscal measures.

They're looking, you know, they're looking to prevent European fragmentation in terms of bond yields. It's like, so I think there are positive developments. And this is kind of where this, you know, what I've called the, the imperial circle part two kind of breaks down is where countries are investing in domestic demand and then the world kind of can as it exits you know this horrible period is it kind of exits on even footing because you know south korea is investing in domestic demand japan's investing in domestic demand europe is australia is so it's kind of that we all kind of had a popular a pop up Sorry. We all kind of had a proper demand impulse that kind of allowed us the global economy to exit on an even footing. And it hasn't been on an even footing pretty much since the financial crisis.

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Subscribe today wherever you get your podcast. So the disappearance, and you used Matt Klein's term earlier of the sink, the demand sink, and the U.S. was kind of the consumer of last resort for all of these export-oriented nations. That's gone away. I mean, we'll see if and when the U.S. returns as a consumer of last resort, depending on the robustness of the recovery. But it's essentially that condition, the disappearance of robust external demand that forced all these countries to address their own internal demand. And it allowed them to do it simultaneously because they didn't have to worry about undermining each other on a currency front. they actually, they can all sort of jump at the same time. Right.

And one of the things that's really interesting now is, and it's still early, of course, is that because so much of the policy response now is more focused on the fiscal side and monetary policies much more so become more, just an enabler of fiscal expansion, is that that's positive for the currency. So these guys are not saying, you know, they're not saying, oh, wow, you know, neuro really worries me at 112 and a half or wherever it is today. Is that like because this response, the monetary response, we know what that does for the currency, but usually fiscal response actually strengthens the currency because you're, you know,

improving your medium terms prospects for growth or potential growth. So that's kind of been an interesting element that's very new. Because really what we were seeing, and especially after the 2016 Chinese devaluation in that in the 2018 trade war is that the only response was kind of currency based. I mean, Europe basically was saying, you know, we'll cut further negative. And you have that Ali Wren speech in August of 2019 where he's basically saying there's no, you know, there's no reversal rate, don't worry about it. And the only point of that to say is you're just trying to get your currency weaker to

adjust to, you know, the external demand environment. And that's kind of been where policy was for the last few years. we've had this negative rates to me is just a trade-off between internal and external demand. You're basically sacrificing your credit channel, your domestic credit channel, so that you can have more terms of trade competitiveness. And now we're kind of seeing basically by force, I'm not going to give these guys that much credit, is that they've had to focus on their domestic demand impulse and they know that they're not going to get out of this, even post the healthcare part of the crisis, is they're not going to get out of this by, you know, China just importing a bunch of goods. So the focus now is becoming much more strategic and whether

it lasts, I guess we'll see, but there are promising signs that there's kind of this global fiscal impulse that seems to be here to stay. So just that last point, I mean, I said in the beginning that I was kind of losing a little bit of, I felt less confident that there was going to be some big structural change post-crisis. But you're saying, but maybe I was too pessimistic. And you think, maybe we really are seeing it and I'm being sort of blind or taking it for granted or maybe have a two U.S.-centric focus where it's not clear that anything's going to change. But A, you say it's there in terms of a shift and you think it could be this start? Like what are the, what would you look for to see if this is the start of a sustainable change

in how global economic policy operates? Like how would you, when would you feel is like, wow, this is really different? Yeah, I mean, I think one of the things that's definitely starting to see is that the relative weakness in the dollar. Because as we said, kind of the dollar has been the fulcrum instrument for pricing all of these kind of, you know, external backdrops and dynamics. So I think the dollar is definitely is definitely one of them. And I, listen, I don't, I'm not, I'm not convinced either. But I am starting to be a bit more optimistic that a lot of these kind of more who were relatively prudent actors are kind of starting to embrace more fiscal expansion, which is really needed in a

world where, you know, global trade isn't going to bail anyone out. Whether it lasts or not, I don't know. But, you know, it's because of how, you know, because of how big it could be, as long as the expected value keeps moving, then it'll have a significant price effect. So it does seem that the seeds are there. Whether it lasts or not, I don't know. Well, this will be the thing to watch. John Turk, really great to get your perspective. My only complaint is, I wish you'd write more because I really do think your blog and your Twitter feed is some of the best stuff out there right now and more people should read it. So, thanks for joining us.

Thank you so much for having me. Thanks, John. That was great. Tracy, I really liked, obviously I like that conversation, but I like the sort of clear marker that John laid down, which is that we are seeing a sort of early signs of. governments around the world, Europe, overall, Germany in particular, Japan, Korea, do more aggressive actions on the demand side, which they've been reluctant to do for a long time. And I feel like that is going to be something very, like, meaty that we can continue to watch. Like, maybe they'll, by December, they'll be like, okay, we did enough fiscal expansion and

we need to go into retrenchment mode, because that's often how these governments operate. they get nervous or whatever. But it definitely feels like that is just a huge storyline to watch whether this starts to shake their focus on the sort of pure export-led growth model. Yeah, I was going to say, like, what we tend to see is as economic recovery actually starts, the impetus for that sort of fiscal expansion starts to ebb away. So it'll be interesting to see whether or not that happens this time or whether or not an unemployment crisis of this scale has maybe changed the conversation around that. I don't know.

I tend to think that people get easily distracted and new problems will come up. And 2020 has basically been a lesson in our inability to predict what's next on the horizon and what's next on the sort of global news agenda. So who knows what people will be talking about then? Yeah, no, who knows? I think probably a lot does depend on the degree to which the U.S. bounces back. And because if the U.S. were to have a sort of V-shaped recovery, you know, as of recording this, the market, the stock market increasingly appears to be pricing in something close to resembling a B. If the U.S. has this great recovery and we have this demand for goods for the rest of the world, it's extremely easy for me to imagine the export-led country is sort of just going back to the

model that was, I guess, working for them up until this crisis. But if it, if not, then, you know, then it seems very plausible that they will continue to focus on cultivating domestic demand. But this is, in terms of like the big macro questions we're going to be watching, to me, this feels like one of the huge one. Yeah, absolutely. And already you can see a lot of export-oriented economies sort of betting on the first outcome, the V-shaped recovery in the U.S. and a bounce back in demand. So, for instance, in China, we have a lot of factories that are getting back to work and producing at the same scale that they were before the coronavirus crisis, but of course, demand hasn't quite recovered in other parts of the world. So it'll be interesting to see whether that bet pays off

or whether or not they're just sort of, you know, it's a knee-jerk habitual reaction to the way things have always been. I guess the other thing that's kind of nice about this is that this is a weird thing to say. But if there is not a V-shaped recovery in the U.S., then I guess the upside is that potentially we see the first steps of rethinking attitudes towards fiscal expansion and sort of rethinking the doom loop that John was describing. Maybe that's the very, very small silver lining in that kind of pressing outcome. Yeah, absolutely. I mean, look, I want to see a V-shaped recovery in the U.S.

from the perspective of getting people back to work. But I do agree that, look, if there's going to be a moment where things change, this could be it, to have some sort of to go on a new sort of more sustainable growth path. The other thing, you know, we didn't, the one thing we didn't really talk about much with John actually is China's own, sort of skipped around China itself, which is, of course, at the center of a lot of this tension analysis. And I've seen, like, folks like Michael Pettis pointing out that so far it's not clear,

and maybe you have a better perspective than I do. Like, they're not really revving yet on the domestic demand side. Like, they're obviously the industrial production, that's come back. But in terms of demand, still feels like very much like credit-oriented, reluctance to go too heavy on fiscal, et cetera.

Like, that's got to be a big part of, this question of whether they will, they themselves will sort of retilt their economy towards more domestic demand or not? Yeah. Well, I mean, I think Matt Klein made the argument quite convincingly that China has always had a demand problem. And if anything, the coronavirus crisis just sort of accentuates it. It is pretty interesting to watch what's going on with the economy right now. And all signs at the moment are pointing towards a supply driven recovery, if there is much of a recovery at all. But again, interesting one to be watching at the moment. Absolutely. Okay, well, this has

been another episode of the Odd Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me at The Stallwork. And definitely follow our guest, John Turrick. He's at J. Turrick 18. Follow our producer, Laura Carlson, at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts under the handle at podcasts. Thanks for listening. A lot of short daily news podcasts focus on just one story. But right now, you probably need more. On Up First from NPR, we bring you three of the world's top headlines. every day in under 15 minutes because no one's story can capture all that's happening in this big

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