The Chris Voss Show - The Chris Voss Show Podcast – Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk by Philipp Carlsson-Szlezak, Paul Swartz

Episode Date: July 7, 2024

Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk by Philipp Carlsson-Szlezak, Paul Swartz https://amzn.to/3zruzcg An essential new guide to navigating macroeconomic risk. The shocks and crises of recent years - pandemic, recession, inflation, war - have forced executives and investors to recognize that the macroeconomy is now a risk to be actively managed. Yet unreliable forecasting, pervasive doomsaying, and whipsawing data severely hamper the task of decoding the landscape. Are disruptions transient and ephemeral—or permanent and structural? False alarms are costly traps, but so are true structural changes that go undetected. How can leaders avoid these macro traps to make better tactical and strategic decisions? In this perspective-shifting book, BCG Chief Economist Philipp Carlsson-Szlezak and Senior Economist Paul Swartz provide a fresh and accessible way to assess macroeconomic risk, and a corrective to prevailing thinking and practice. Casting doubt on conventional model-based thinking, they demonstrate a more powerful approach to building sound macroeconomic judgment. Using incisive analysis built upon frameworks, historical context, and structural narratives - what they call "economic eclecticism" - the book empowers readers with the durable skills to assess continuously evolving risks in the real economy, financial system, and the geopolitical arena. Moreover, the authors' richer and more nuanced approach reveals that the all too common narratives of economic collapse and decline are often false alarms, while the fundamental strengths of our current "era of tightness" become visible. With rational optimism rather than gloom, Shocks, Crises, and False Alarms speaks to the key financial and macroeconomic controversies that define our times - and provides a compass for navigating the macroeconomy. Rather than relying on blinking dashboards or flashy headlines, leaders can and should judge macroeconomic risks for themselves.About the author Philipp Carlsson-Szlezak is BCG's Global Chief Economist and a Managing Director & Partner in the firm's New York office. He is a regular contributor to Harvard Business Review, World Economic Forum Agenda, and other business publications. You can read Philipp’s latest thinking in his Fortune column. Philipp was previously Chief Economist at Sanford C. Bernstein where he covered the economy and markets for institutional investors across the global asset management industry. Earlier in his career, he worked for the OECD and McKinsey & Company . Philipp studied at LSE and has a Ph.D from Oxford University.

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Chris Voss won the TikTokity and all those crazy places on the internet. As always, the CEOs, billionaires, White House presidential advisors, Pulitzer Prize winners, the most brightest, brilliant people are on the show as always the ceos billionaires white house presidential advisors pulitzer prize winners the most brightest brilliant people are on the show except for me i'm just some dumbass with a mic but we have the greatest guests ever today we have an amazing young gentleman on the show with us today his latest book is coming out july 9th 2024 it's called Shocks, Crises, and False Alarms. How to true, I'm sorry, let me recut that. Shocks, Crises, and False Alarms. How to assess true macroeconomic risks, or what I do every Friday. Philip Carlson is on the show with us today. He's going to join us and give us the insights on what's going on in the world, damn it,

and why maybe, I don't know, we shouldn shouldn't give up yet yet being the main point there philip carlson is the bcg's global chief economist and a managing director and partner in the new york firm's office he is a regular contributor harvard business review my first love of business world economic forum agenda and other business publications World Economic Forum Agenda and Other Business Publications. You can read his latest thinking in his Fortune column. And he was previously Chief Economist at Sanford Bernstein, where he covered the economy and markets for institutional investors across the globe and asset management industry. Welcome to the show. How are you, Philip? I'm great. Thanks for having me.

There you go. I'm trying to read your bio around a camera that's on the screen, so I'm just having all sorts of fun. So welcome to the show. Give us dot coms. Where do you want people to find you on the interwebs? Just any Google search will turn up plenty of stuff I published and wrote over the years. I'm not on Facebook, never was. That was very uncool for about 15 years. Now, it's a bit or slightly less uncool or maybe even a little bit cool. There is a website for the book called shockscrisisfalsealarms.com. So shockscrisisfalsealarms.com, which has all the resources around the book in one place. So people can go to that as well.

Shocks, crises, and false alarms. Like I said, that's just Fridays around here. Give us a 30,000 overview, Philip, of what's inside your new book. Yeah, the book is about what's wrong with economics and how it's failing us, particularly people in the real world who take decisions, executives, investors. Look, crises can and do happen,

but for every true crisis, there are many false alarms. And what the book does, it cuts through a lot of that noise. It provides readers with tools, how to look at the economy in a more calm, calibrated way, and leans against a lot of the doomsaying narratives out there. There's essentially a story of rational optimism at the heart of the book, and it's targeted at certainly the decision makers that I interact with in my job, but it's really accessible for anyone interested in the economy, in markets, and the wider world. Now, what makes your book more smarter than the guy who's holding the cardboard box standing on the street corner saying the end is near? That guy's been around a long time, and the end is near the end is you know that guy's been around a long time and the end still hasn't arrived i mean look the book takes even in the title you know the the thing about the false alarms is there for a reason we are certainly in in a public

discourse and a culture public discourse that is that is decidedly negative and we've just gone through a long series of false alarms just the last few years, right? We had predictions of the worst recovery you could possibly get after the pandemic hit in 2020. And that wasn't true, you got a really crisp, fast, strong recovery. Then we had sort of the meltdown stories of inflation was going to be like the 1970s, you know, wage price spirals forever grinding higher, really sort of a structural turning point. And that was not true. It's come down real fast, not over, but it's come down real fast. Then you have sort of rising interest rates. And people said, you're going to get emerging market crises, like in the late 1990s, Asian financial crisis, those types of problems that didn't happen. And of course, the inevitable recession of 2023 that we're still waiting for.

Mind you, it's not just that we narrowly escaped it, Chris, right? I mean, this is hands down a non-recessionary economy by a wide margin. So lots of false alarms that we need to learn to live with. I would agree. I owned a mortgage company for 20 years. And so I had to make my living predicting what Alan Greenspan was going to do to me on any given Fed meeting. And I was pretty good at predicting what he would do with the economy. And he was a pretty good manager.

So watching the Federal Reserve for a lot of years and understanding economies and how much it affected a portfolio of mortgages was really important. But, you know, and I've understood M1, M2 money policy and what makes the world go round and the Fed. But we really are kind of in a different world now, aren't we? Post-COVID, partially maybe because the squeeze on the amount of employees we have considering the baby boomers are retiring. Is that one of the things that has kind of put us into a different sort of economy than what we're used to or what the Fed's used to for that matter? So what the book argues, and I've written about for quite a while, is the era of tightness, particularly tightness in the labor market. We have a mismatch structurally between

demand and supply. Supply is not enough. Demand is rather high. And that may seem like a bad thing, but actually it's also a good thing. When there's scarcity in the labor market that forces firms to do more CapEx, they invest more, they move to the technological frontier that pushes up productivity growth. So all of that is not necessarily bad at all. What's also interesting is that this era of tightness is not a COVID product. It predates COVID. It really started around 2017, the labor market turned tight. And then the pandemic hits and you have this brief interruption where unemployment spikes is through the roof, and then it comes down almost as fast as it went up. And so I really believe that we're in a structural such condition of tightness. Labor market is not exhibiting the kind of slack that we had in the 2010s or the earlier parts of the 2010s. And as I argue there, there's a lot of good stuff that comes with tightness. Yeah, because normally the Fed seem

to have, and you can correct me if I'm wrong because you're the professional, but there seem to be this thing where it's like, okay, we'll raise interest rates, they'll lay off a bunch of people, and then the economy will cool, and then we just go in this vicious circle. But now it's very different where they've increased rates and it really doesn't seem to affect employment that much. I know that for, I think it's for every seven boomers that are retiring, I think it's a tradesman number. For every seven high-end tradesmen that is retiring, you know, in the boomer, baby boomer era, there's only one person to replace them in trades.

And usually that person is new. They're not journeymen. And so that's a kind of a concern for markets. I know there's squeezing in the markets in the medical field. It's just basically, you know, I heard all my life that the boomers, when the boomers off the market, you know, things are going to get weird because there's less of a support to come in from previous generations. But evidently boomers and some Gen Xers left early over COVID. Is that true?

Participation is how economists look at this. And it did drop. So people exited the labor force, and they've come back, though. So participation has fully recovered, and particularly when wage growth is strong as it is, that draws people back in. So, yeah, there is a structural turnover in a generational sense, but essentially we have pretty good participation, but demand is just even higher. So demand is just booming and that's because the economy is strong and that's a good thing. There you go. It beats a weak economy. That's for sure. I lived through the 1970s. I've lived through several recessions now. I'm sure you have too. Tell us a little bit about

yourself. People like to get to know the author a little bit. How did you grow up? What got you into the businesses that you're in and studying the things that you study? I was born in Switzerland, but I also grew up in several other countries. And so comparing, contrasting, you know, anything from education system to health care to, you know, how countries and economies are run always interested me. So add to that sort of a passion for storytelling, debating, arguing, and it's sort of a natural choice. I ended up studying economics at college. That was around the turn of the century. And I mentioned that because that's when economics as a discipline was riding high. Economists, they felt really good about themselves and they thought

they had figured it all out. And I remember economists sort of strutting around and bragging how, you know, we're going to fix this economy, just like a surgeon fixes a broken body and, you know, just, just parachutes into Eastern Europe and we're going to turn these into like brilliant economies. And I, it never really sat well with me. I always thought this was, was too pseudo scientific and some, in some way ended up going to grad school, getting a PhD, where I branched out a lot beyond economics. And even so, when I finished my education, I wanted to go into business. And so I wanted to learn how the real business world works.

I joined two of the biggest consulting firms, first at McKinsey, then at BCG, had a career there. And then, you know, research came calling again. I even there, I started doing research again, I veered back into economics, and I transitioned into finance, I worked on Wall Street on the sell side of Bernstein churning out tons of research. And, you know, I continue to do that. Now I'm back on the BCG platform, but I continue to, you know, write research. And of course, I interact with executives day in, day out, debating with them what they see and what they're worried about. And yeah, that's my little path through the economics world, sort of bringing together finance, macro, business perspectives, and how I look at this stuff. There you go.

So what prompted you to write this book? What was the motivator for it? Partly the false alarms that are already sketched, and particularly also the negative discourse that surrounds the economy at all times. All coverage almost is always veering into the negative. There's always the downside that is emphasized. And it does stick with the audience. Executives are very smart people. Investors are smart people.

They don't spend their time, you know, thinking about the economy. They have other things to do. They're running stuff, right? But what they read in the headlines and how that is portrayed there, you know, it makes an impression on them. And I often find myself seeing a lot of those narratives

and how they're seeing the economy, what their baseline expectations are. And so when I wrote, when I started writing the book with my co-author, Paul Swartz, it was really bringing together years of these experiences and feeling that the discourse in the economy is just too negative. And it's, you know, as I said, for every true crisis, there's so many false alarms. And we want to give people some tools to decide for themselves, cultivate their own judgment, and not having to outsource it to a headline or to a model, God forbid, that, you know, spits out a number that you can basically throw away.

There you go. I've ordered it on an Audible. I'm definitely going to be reading it because I get caught up sometimes in the, you know, you go on TikTok or any part of social media and X and, you know, it's those guys carrying around the cardboard box. The world is burning and tomorrow it ends and we're going to go civil war. We're all at each other's throats. And I don't know, it's going to be zombies and we're going to be eating each other's flesh. And that's next week.

It's only natural, right? Yeah. I mean, it's what people click on. It's eyeballs and clicks. And there is a reason why the downside is highlighted. If it bleeds, it leads. That's what we like to say on Fridays around here. That's usually Friday nights when the vodka shows up.

Anyway, I don't know what that means. But no, I'm glad that you put this out there because there's so much panicked information, misinformation. I mean, I've seen TikTok channels that are spreading the most weirdest stuff. I remember when I was growing up, and you've probably seen these books, but my father had a lot of great books. He had George Bernard Shaw, Napoleon Hill. He had a lot of these great books from back in the day. And then he had these conspiracy books in his library and i remember going through

them and there were these books that like the world's gonna end next year and here's what you need to do and i would be like it's been a couple years and that didn't happen and then what i would find is there he would be buying the subsequent books that would be just basically recycled reprints of the doing. And there would be like 10 of these books. And I'd just be like, they're just like trying to hit the miracle claimer button and just recycling all this shit. You know, Chris, there's a logic to this in a way. If you predict all negative outcomes, eventually you're going to strike something. You know, a broken clock is right twice a day.

So if everything in the economy is always teetering on the edge of collapse, if you wait out long enough, you're going to get lucky and something's going to be exactly right. Look, I mean, I'm not here to poo-poo macroeconomic risk. It's real, but there's a distribution, right? And the tail end of the distribution is there to be taken note of, to be studied, to analyze. It's not there to move the tail risks into the middle of the distribution or pretend that it's in the middle of the distribution.

And that's what's happening, essentially. Really, really big crises can happen, but the bar is pretty high for those to to roll around is there anything you see on the coming future that you're concerned about i mean the fed's still holding a lot of debt from from from covid i think they're still holding the largest amount of debt they've ever held in trillions aren't they eight trillion twelve trillion you know i think sovereign debt is exactly one of those things that need a little more calibration and a sober view. And the book has a chapter just on sovereign debt and how we view that. Essentially, we say, you know, measuring the amount of debt, the trillions of dollars or the debt to GDP ratio doesn't tell you much about sovereign debt risk at all.

It doesn't tell you whether we're going to have a crisis here or not. If you want to know about sustainability of debt, you have to look at the relationship between the growth rate of the economy versus the interest rate. If the growth rate is higher than the interest rate, you're servicing whatever debt pile you have fairly comfortably. So in the 2010s, it was extremely favorable because rates were so super low, that even though growth was also kind of meek, you know, the spread between growth and rates was so favorable growth was easily outperforming interest rates. And you know, the amount of debt wasn't wasn't that big a deal. So what it really comes down to, do you believe that in the future, interest rates will be higher than the growth rate? If you believe that, and I, you know, I can't prevent anyone from believing that it's fine that's a reasonable thing

to to to you know analyze and to think well if you believe that you should be very worried or at least worried about the debt if you think that growth will out will be higher than interest rates i think you should let your blood pressure come down a little i'm not saying deficits are great i'm not saying we need more debt on the contrary less is less is better yeah but that that doesn't mean that we have a debt crisis in 2025 if we add more debt some people point to that you know the fed printing money in in 2008 my understanding is they did a great job of of slowly dispersing that over years and like you said probably with the interest rates and everything but it ended up not being a big deal because you know we they you know it was a bet on the u.s economy and eventually came back and and they were able to slowly just wash that out that the fed was

storing from 2008 but this was a lot more i think that they had ever held yeah but but you know this is an interesting example you you raised chris because when when the fed started printing money the doomsayers came out and said there would be hyperinflation yeah and why did they say that an interesting example you raised, Chris, because when the Fed started printing money, the doomsayers came out and said there would be hyperinflation. And why did they say that? Because there is this very strong belief and adherence to models. There's this desire, this overpowering desire that there's this omniscient model. And if only you believe in this model, we're going to know the future. In that case, it's called monetarism. This is Milton Friedman, sort of the quip that has hammered into generations of econ students that, you know, something like inflation is always and everywhere, a monetary phenomenon. You know,

you printed all that money. And it's not just that you didn't get hyperinflation, you struggled for the entire 2010s to even reach 2% inflation, which is exactly the opposite of what the model predicted. And this is a big theme in the book. You know, the model's economics just isn't a science in that way. It doesn't function like physics or chemistry. And if you think that there is some really smart model that gives you an answer, no, you're going to have to build your own judgment. And you're going to have to draw on a lot of different disciplines to come up with something more robust than we're going to get hyperinflation when we print money. It's just not true. There you go. Yeah. I mean, the Fed handled it really well. I think, do you kind of feel like the Fed kind of waited too long before they started jacking up interest rates or do you think they played that card right? No, they did. And you

can fault them for this, but ultimately they rose to the challenge. And a lot of the hysterical coverage at the time about the 1970s and we're going to go on a spiral, a wage price spiral, it was really sort of believing the Fed is asleep at the wheel completely and they will never act or they don't get it. It wasn't realistic. I mean, they cranked up the interest rate real hard and fast

and they responded late. Yes, you can fault them for that, but ultimately they did the job that they're there to do. There you go. So let me spin something by you on a hypothetical basis. There's a lot of interesting things going on in the political market. Some people say, let's just, we'll play it this way in theory. Some people say that there might be a changeover from democracy to something more authoritarian and usually under authoritarianism there's usually a grasp at the levers

of federal reserves a grasp at manipulating markets um you know we saw that with what's his face in venezuela to president yeah chavez and i remember watching that whole thing go down going this is gonna be interesting in your book you know talking about the balance of macroeconomics what's the survivability of our economy for things like this i mean obviously you can't see in the future but do we need to sweat that you know our economy could go overnight into the toilet i think it took venezuela quite a few years to pull that off. I'm always very reluctant to mention Venezuela and the United States in the same sentence. It's not a great pairing, but I understand the gist of the concern. You're essentially saying central bank independence matters, and you're right. And you wonder, will we make inroads in

the future? Will there be changes? Will future administrations lean on the central bank and try to bring it under its remit, perhaps outright? That would be bad. That would certainly be bad. I don't, as you say, I don't have a crystal ball. I don't know what a second Trump term would do. Certainly Donald Trump leaned on the Fed more overtly than virtually any president before him. It has happened before. It's not unheard of. And sort of the central bank independence is an absolute, right?

There's always an exchange between the Fed and politicians. And there's always conversations. There's the famous Nixon tapes where Paul Volcker was instructed at the time on what to do at the Fed, which he then revealed in his memoir. When was that? 2019, I think it came out. Anyway, the point is, it's a concept in flux. Central bank independence is on a spectrum, I think, is high quality today. Biden reinforced that and he said explicitly, I'm going to stick with Powell. I want to i want to not sort of create the impression that i'm that i'm playing with that will there be a change i hope not could there be

a change yes and then it would be a matter of degree not kind it's not like flipping a switch and then it's suddenly under the control of the government you would probably over time try to take more influence on that fed in the future and and i i would not welcome that i think that would be a negative. I think the banks have some leverage there, don't they? The people who run the biggest banks in this country would probably put a little bit of fight over having the Federal Reserve come into the control of an authoritarian. Yeah, it would be a societal conversation, and there would be, I'm sure, lots of pulling

and pushing from different directions. But the president can appoint the Federal Reserve Chair. It's at his discretion or hers. Good to know. Because when I'm in the camp of all the moderate Democrats, I'll at least know the economy is running well. So there you go. Final thoughts as we go out to fill up on telling people to pick up the book and where to go to get it and your dot coms you can buy the book anywhere you can buy books at

you know all the amazons and barnes and nobles of this world i think it's available globally you can find lots about the book on the internet there is a website specifically for the book called shocks crises false alarms dot com has podcasts, articles that we author, press mentions about the book, a bit of a repository of all the resources. And yeah, that's available from July 9th. That's Monday. Philip, you've achieved that I'm going to sleep better at night

and not get so panicked whenever I see all the doom and gloom and the weirdness of politics and the weirdness of everything. Because, I don't know, I mean, the economy seems to go pretty well in Russia for the most part, I think. I'll hear that. I'd love to hear that you're going to be sleeping better. It will definitely make a difference. And I'll be passing this around and talking to people because, you know, I'm surrounded

by hair on fire people on Facebook who are like, the world is ending. And you're just like, here, read Philip's book. Thank you very much for coming on, sir. We really appreciate it. Thank you for having me. There you go. Folks, start up the book where refined books are sold. Stay away from those alleyway bookstores. You might get a tetanus shot. Shocks, crises, and false

alarms. How to assess true macroeconomic risk out July 9th, 2024. Thanks to our artists for tuning in. Go to goodreads.com, Fortress, Chris Voss, LinkedIn.com, Fortress, Chris Voss, Chris Voss, one of the TikTokity, and all those crazy places on the internet. Thanks for tuning in.

Be good to each other. Stay safe. We'll see you guys next time. That should have us out.