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At the Money: Woke Investing vs. Values-Based Investing Meir Statman, February 28, 2024

 There’s been criticism of what some call “Woke Investing.” But “Value-based investing” is more politically agnostic than its critics realize. Used by Pro-life investors like the Catholic Church, it aligns capital with deeply held beliefs – be they left or right.

Full transcript below.

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About this week’s guest: Meir Statman is Professor of Finance at Santa Clara University. His book “What Investors Really Want” has become a classic that explains what drives investors.

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Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.

Transcript: Meir Statman

Barry Ritholtz: There’s been a lot of talk lately about socially responsible investing and ESG, what’s been called woke Wall Street in political circles. But is it really woke to want your investment decisions to reflect your personal values, beliefs, and preferences? We know investors seek expressive benefits from their portfolios. They want their money to reflect their values as well as their financial goals.

I’m Barry Ritholtz, and on today’s edition of At The Money, we are going to discuss values-based investing. To help us unpack this and what it means for your portfolio, let’s bring in Meir Statman. Professor of Finance at Santa Clara University. He’s an award-winning expert on investor behavior and financial decision-making.

His book, What Investors Really Want, has become a classic that explains what drives investors. So, let’s just start with a basic definition. What is values-based investing?

Meir Statman: Well, values-based investment is my preferred name to that movement.  That includes values. in investments. It is called socially responsible investing. It is called ESG. Most prominently, it is called sustainability investing, and, so on. Each of them has some deficiencies because they tilt in a particular direction, liberal or conservative values.

Based investing is a neutral term; people care about their values, and many don’t want to separate them from their investments.

I use the analogy of advising an orthodox Jew, if you are a financial advisor, and you say, listen, pork costs less than kosher beef. It tastes pretty good. How about if you eat pork and donate the savings to your synagogue? Well, everybody understands that that is stupid. My point is that for some investors, having stocks of say a fossil fuel company feels like pork in the mouth of an Orthodox Jew.

And if this is how you feel, then by all means stay away from having fossil fuel stocks in your portfolio or any others that really offends greatly your particular values.

Barry Ritholtz: So let’s talk about some of the nuances that you’re describing between SRI or ESG and values-based investing. As I understand socially responsible investing, it’s centered on using your investment dollars to create quote “Positive social change.”

How does values-based investing differ? It seems to be less focused on changing society and more, just being in sync with your own personal belief system. Is that a fair description?

Meir Statman: Not entirely. So, I think it’s very important to distinguish two parts. One that I call “waving banners” and one that I call “pulling plows”.

Waving banners as being true to your values. That is what socially responsible investing was, but pulling plows is about doing good for others. It’s about changing the world for the better, and they are really very different, and people confuse them all the time. And so, when an orthodox Jew refrains from eating pork, they don’t think that they’re going to affect the pork market much or change other people’s diets. They just want to be true to their own values.

The same applies to somebody who stays away from say companies that employ child labor abroad or engage in poor employee relations or whatever that other thing is. They don’t change the world. They are true to their values.

Barry Ritholtz: Your early research in the 1980s found no change really in performance between the socially responsible funds and the broader market indexes. How does that look today? Is there any impact of ESG or SRI on portfolio performance versus the broader market?

Meir Statman: So there are a ton of studies, literally thousands and some find that ESG-type investments do better than conventional ones; some find that they do worse; some find that they’re about the same. So it is really hard to figure out that there are many things that can get in the way.

Periods, for example, in the late 1990s with the tech boom because ESG portfolios tend to tilt towards growth, ESG portfolios did very well and then they slumped in the slump in the bust of the early 2000s.

My own sense overall is that if you are investing in an ESG portfolio, you are going to lag, what you’re going to have in a conventional low-cost index investing. And the reason for that is really fees and expenses.

Barry Ritholtz: So you’ve described value-based investing as a neutral term that allows investors to base their decisions on any specific value. It could be the doctrine of the Catholic Church, it could be environmental, it could be anything. If that’s the case, why has there been so much pushback to this if people just want their portfolios to reflect their personal values, be them left, right, or center? How come there’s so much, uh, so much pushback to this?

Meir Statman: Well, there’s so much pushback because of the politics because of people’s values. That is, people do not take the approach I take, which says your values are yours and mine are mine, and we should not debate them. Uh, when, when you think about a bad value, like, like protecting the environment, well, if you are liberal, you think that’s good.

If you are conservative, you say “Drill, baby, drill” you know. And so poor BlackRock got itself in deep doo doo because they were promoting ESG which, people, interpreted with, reason as tilting left, and they hated it. And, boy, I’ve heard financial advisors talk about it. And financial advisors tend to be Republicans and conservatives. And they are red in the face when they talk about that.

And in fact, BlackRock decided that they are not going to talk about ESG anymore and move on to do other things. They said, look, you can choose whatever we want. You want, we in fact, we have, we have funds that are entirely in oil and gas.  So if that’s what you want, invest in that. But of course, it didn’t do them much good because of course, conservatives understood that they are tilting towards Democrats and they hated it.

Barry Ritholtz: So I’m glad you brought up financial advisors. For my last question, how should financial advisors deal with client preferences for value-based investing?

Is this the same as other client preferences? Low risk, high income, anything along those lines? Or is this completely different?

Meir Statman: It is, and it is somewhat different. So the last thing financial advisors should do when they have a prospect who says, I’d like to hire you to manage my portfolio. But you should know that I care deeply about the environment and I don’t want fossil fuel stocks in my portfolio.

The worst answer for an advisor is to say, “Listen, I’m here to maximize your returns at the given level of risk. I will do that. And then you use the money I make for you to support the environment.” What a client, what the prospect hears, this advisor does not care about me at all. He has some kind of a solution for everyone. He’s going to shove it down my throat. He doesn’t listen to me.

So don’t do that. That is even if you are a conservative and your prospect is obviously liberal. Put yourself in his shoes rather than asking to put himself in your shoes, and start conversations precisely on what are your values? What matters to you?

I just gave a presentation to a whole bunch of financial advisors.  And a woman asked, she said, “You know, isn’t it true that this easier for women to talk about those squishy things of values of family and so on, then, then men?” And I said, “Well, yes, it is true, but you can train yourself to act in this sense, like a woman, even if you are a man.” I said, “I am shy by nature, but here I stand in front of hundreds of advisors and speaking,” and if I might add a commercial for my forthcoming book, “A Wealth of Well Being” what it does, what a book like that does is help advisors and help their clients, uh, make that jump to speaking about things that are more than risk and return and portfolios. To speak about family, about friends, about community, about health, about religion, and all of those things, that especially men find it difficult to make this jump from, we are talking about the policy of the Fed, blah, blah, to, uh, how’s your family doing?

Barry Ritholtz: Really, really interesting. So to wrap up, Many investors want more than just capital appreciation or income. They want their portfolios to stay true to their values. It’s perfectly fine if you want to do this. Just be aware of the factors that are influencing your decision making, including the costs. Be aware of what all of your goals are when you’re managing your money.

I’m Barry Ritholtz. This is Bloomberg’s At The Money.

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Transcript:

The transcript from this week’s MiB: Andrew Slimmon, Morgan Stanley Investment Management, is below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

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This is Masters in business with Barry Ritholtz on Bloomberg Radio.

00:00:09 [Barry Ritholtz] This week on the podcast, I have another extra special guest. Andrew Lemons has pretty much done everything on the wealth management side of the business, starting at Brown Brothers Harriman before going on to Morgan Stanley, where he started out as a client facing wealth manager before moving into Portfolio Manager and eventually creating the Applied equity advisors team that uses a combination of quantitative and fundamental and behavioral thinking to create portfolios and funds that are sturdy and can survive any sort of change in investor sentiment. They look at geography, they look at cap size, they look at style, and they look at sector and try and keep a portfolio leaning towards what’s working best. These tend to be concentrated portfolios. The US versions are 30 to 60 holdings where the overseas versions are just 20 holdings. I, I found this conversation to be fascinating. There are a few people in asset management that have seen the world of investing from both the client’s perspective and a client facing advisor side to a PM and then a broader asset manager than Andrew has. He really comes with a wealth of knowledge, and he’s been with Morgan Stanley since 1991. That sort of tenure at a single firm is increasingly rare, rare these days. I, I found this discussion to be absolutely fascinating and I think you will also, with no further ado, Morgan Stanley’s, Andrew Slim.

00:02:01 [Andrew Slimmon] Thank you. It’s an honor to be here.
00:02:02 [Barry Ritholtz] Well, it’s a pleasure to have you. So let’s start at the beginning with your background. You get a BA from the University of Pennsylvania and an MBA from University of Chicago. Was finance always the plan?

00:02:15 [Andrew Slimmon] I think being in a competitive industry was all the plan. I played tennis competitively in juniors and went on and played in college and, and I always liked the, you know, you either won or lost and what I always liked about this industry, it was all about, you know, did you win or lose? There wasn’t a lot of gray area, and I think that’s what I do love about the stock market and investing in general, because there’s a scorecard and you can’t, there’s no room on the scorecard for the editorials.

00:02:41 [Barry Ritholtz]] No, no points for style or form. Exactly, exactly. It’s just did you win or lose? Exactly. So, so where did you begin? What was your first role within the industry?

00:02:48 [Andrew Slimmon] Sure. So, well, my first role was opening the, the mail at a brokerage firm in Hartford, Connecticut. But I started my career at Brown Brothers Herriman right here in, in New York, in a training program, which was great because they had commercial banking, they had capital markets, and they had the investment management side of the business. And that’s what getting exposure, all those led me to believe, gee, I really am interested in the stock market and how it works and investing in general.

00:03:16 [Barry Ritholtz] So what led you to Morgan Stanley? How’d you find your way to right to

00:03:21 [Andrew Slimmon] Ms? So I, yeah, I was a research analyst at, at Brown Brothers, and I was covering, you know, in healthcare stocks. I, I realized that there must be something more to investing than just what was going at the company level, because I noticed that the things that were moving my stocks on a day-to-day basis, weren’t just what was going at the company level. And University of Chicago where I went, got my MBA was obviously very focused on more the quantitative areas of investing. And I took Fama and French and so forth and Miller and all those that, that taught me that what drives a stock price is more than just the, you know, the company level. And so that’s, that was really how it, it rounded my knowledge of kind of investing the first steps and then coming out of, of business school. It was 91 and it was a recession. And I, I, I had met my wife in business school and she got a job at Kid or Peabody, if you remember that, investment banking in Chicago. And I couldn’t find kind of a buy side opportunity. And Morgan Stanley had a department called Prior Wealth Management that covered wealthy individuals and small institutions in Chicago. And I needed a job and I had a lot of student debt. So I said, Hey, as opposed to going the traditional buy side route, I’ll start in this area covering clients and investing for them.

00:04:49 [Speaker Changed] So 91, kind of a mild recession, mild and really halfway through what was a rampaging bull market. What was it like in the 1990s in New York in finance?

00:05:04 [Speaker Changed] Well, I mean, the thing that was amazing is we would have clients in the late nineties, they would come to us and they’d say, Andrew, I’m not greedy. I just want 15, 20% returns a year.

00:05:15 [Speaker Changed] Right.

00:05:15 [Speaker Changed] And no risk with,

00:05:16 [Speaker Changed] With limited risk risk, limited risk. Right. I knew you’re gonna go there.

00:05:19 [Speaker Changed] And, and that is what was so fascinating about today Yeah. Is today people say to me, Andrew, why would I invest in equities when I can get 5% in the money market? And what a difference in a mindset, which tells you where we are. In the late nineties, we had just gone through a roaring bull market optimism was just so rampant. And the worst year in the business I can remember was 1999, because as an investor covering clients, I was caught between doing the right thing for them, which was avoid these ridiculously priced stocks. Right. Or get on the train because the money is pouring through. And then it all came to an end in 2000, 2001. And I took a step back and said, thank God I never, you know, I I I just didn’t buy in the way some people did, and therefore save people a lot of money. It was a tremendously good learning experience for me to stay true to your values of investing. Ultimately, they work out. You,
00:06:16 [Speaker Changed] You are identifying something that I, I’m so fascinated by. The problem we run into with surveys or even the risk tolerance questionnaires is all you find out is, Hey, what has the market done for the past six months? If the market’s been good, Hey, every I, of course I want more risk. I’m, I’m, I’m more than comfortable with it. And if the market got shellacked, no, no, no. I, I can’t, I can’t suffer any more drawdowns. It’s just pure psychology.
00:06:42 [Speaker Changed] And, and I would go one step further. You know this, you’re in the business, but when you first meet someone, you never know the ones that are going to be truly risk averse or truly can withstand the volatility. And ones that can, some people say, don’t worry, I’m not worried about the drawdowns. And the minute it happens, they’re on the phone to you. And some people, I told you I wasn’t worried and I didn’t call you. Right. And you can never know. Just the first time you meet people who that’s going to be it, it’s

00:07:08 [Speaker Changed] A challenge figuring out who people really are. Not, not easy. So you started Morgan Stanley in 1991. You’re in that, that’s a long time ago. Yeah. You start on the private wealth side. What led you to becoming a portfolio manager with Morgan Stanley Wealth strategy?
00:07:24 [Speaker Changed] So if you think about my career, I learned to be a fundamental analyst. I went to University of Chicago and learned that, oh, there’s quantitative factors that drive a stock price beyond kind of what’s going on at the company level. The third part of my experience was being in prior wealth management, clients wanna believe they all buy low and sell high, but bear, you know, that doesn’t, isn’t the case.
00:07:45 [Speaker Changed] Somebody does accidentally someone randomly top ticks and bottom ticks to market. But nobody does that consistently.
00:07:51 [Speaker Changed] Exactly. And here’s a great example of what, I mean, if you think about the years 2020, in 2021, growth stocks took off. Right? But in 2022 they got crushed. Do you think more money went into growth managers and funds in 2021 or the end of 2022 after they got crushed?
00:08:10 [Speaker Changed] The flows are always a year behind where the market is. Exactly 00:08:13 [Speaker Changed] Right. So, so what I People
00:08:15 [Speaker Changed] Are backwards looking.
00:08:16 [Speaker Changed] What? Well, and that’s because there’s something called the tear sheet. If you were my client, I went to you and said, Barry, I think you should invest in emerging markets because look how terribly it’s done in the last five years. And I can you the tear sheet, you’re gonna go away.
00:08:28 [Speaker Changed] Everybody hates it,
00:08:29 [Speaker Changed] Right? Hate it. So the problem with this business is a stock price does not care what happened in the past. It only cares about what’s happened in the future. But as humans, we all suffer from recency buys. So what I observed in the nineties, it’s a long-winded answer. Your question is no, it’s
00:08:45 [Speaker Changed] An
00:08:46 [Speaker Changed] Interesting, what I observed in the nineties as a coverage offer, you can’t get clients to actually buy what’s out of favor. Right. And the flaw in the whole growth value us international is people frame, oh, maybe I should buy more growth because it’s working well, except it gets too expensive. So the reason I left being in wealth management, I was convinced that I could start strategies using more quantitative, but give us flexibility. So if we could start core strategies so that if growth got too expensive, we could tilt away from growth, or if Europe wasn’t working, we could tilt away from Europe. That gave us more flexibility as an active manager versus saying, I’m only a growth manager. And then I’m always trying to justify why you should buy growth. Or if I’m a value manager, all always justifying why I buy value. Remember, by 1999, a half of value managers had gone outta business in the last three years that just before they took off. That’s
00:09:48 [Speaker Changed] Unbelievable. I, I know folks who run short hedge funds and they say they could always tell when we’re due for a major correction. ’cause that’s when all of their redemptions and outflows it, it’s hit, hit a crescendo.

00:10:01 [Speaker Changed] And so that’s the problem with the dedicated style is you’re always fighting human behavior just at the juncture with which you should be investing. They’re selling, they’re selling their stocks. So,
00:10:14 [Speaker Changed] So let me ask you the flip side of the question. If you can’t get people, or if it’s really challenging to make people comfortable with buying outta favor styles or companies, can you get them to sell the companies that are in favor and have had, you know, an exorbitant runup and are really pricey? Or, or is that just the other side of the same coin? It’s
00:10:36 [Speaker Changed] The other side of the same coin, but, but I think what complicates, is it taxes? Sure. Because people don’t want to sell for taxes. And General Electric was a very important experience in my life in a, you know, back in the nineties, which was, it became the number one stock. Everyone loved it. And, and then, you know, it went through a can’t grow as quickly anymore. So the issue that I see in the industry is stocks never survive as the the number one company. And so eventually they, they decline and people don’t want to take money off the table when they’re the number one or tops because they have big gains. And then ultimately people sold a lot of General Electric with a lot less of a gain. So the trick is, is to reduce the exposures over time. So with, if I’m a core manager and I know that growth is expensive relative to its history versus value, we’ll tilt the portfolio. But we won’t go all into value, all into growth because timing these things is very, very tricky.
00:11:42 [Speaker Changed] So you’ve been with Morgan Stanley since 19 91, 3 decades with the same firm. Pretty rare these days. What makes the firm so special? What’s kept you there for all this time?
00:11:54 [Speaker Changed] Well, you have to remember that when I started in 9 19 91, wealth management was a, was a relatively small part of the, of the firm. And I give James Gorman tremendous credit. He really grew that area because of the stability of the cash flow. I ge I’m a pretty stable cash flow. And then when I progressed to and Morgan Stanley investment management, it was the same concept, which was we value the multiple on stable cash flows is higher than on capital market flows. And so that’s, I’ve kind of followed the progression of how Morgan Stanley’s changed and that’s been a great opportunity. And then I look and say, well, I was able to go from wealth management into the asset management because the firm grew in that era. So it’s a, it’s been a tremendously great firm to be with, but I’ve, you know, my career has changed over time as a firm’s changed over time. Sure.
00:12:47 [Speaker Changed] I, I had John Mack on about a year ago and he described that exact same thing, the appeal of, of wealth management. And part of the reason, what was it, Dean Witter, the big acquisition that was done was, hey, this allows us to suffer the ups and downs in the other side of the business, which has potential for great rewards but no stability. Right. Versus ready, steady, moderate gains from From the wealth management
00:13:12 [Speaker Changed] Side. Exactly. We bought Smith Barney, so on the wealth manage, that was another big one. Right. So then over the asset management side, there’s Eaton Vance E-Trade Wealth Management and with Eaton Vance came Parametric and Calvert. So the firm has grown in the areas that I’ve grown personally. So it’s been a great, great marriage for a long time.
00:13:30 [Speaker Changed] So your experience with General Electric? I had a similar experience with EMC and with Cisco late nineties trying to get people to recognize, hey, this has been a fantastic run, but

the growth engine isn’t there. The trend has been broken. Don’t be afraid to ring the bell. And I’m not an active trader. Yeah. I’m a long-term holder. Getting people to sell their winners is not easy
00:13:54 [Speaker Changed] To do, is very, very hard. But, but also when stocks get very, very big, companies get very, very big. It just gets tougher to grow. In my experience, and this has nothing to do, GE just in general is when companies get big, usually the government starts looking into their business ’cause they might dominate too much. And so it’s a combination of why over time, and I know this is hard to believe given the last couple years, why the equal weighted s and p does actually outperform the cap weighted s and p because companies, mid-cap companies that are moving up, it’s easier to grow. That
00:14:30 [Speaker Changed] Hasn’t, what has it been 25 years since the Microsoft antitrust 00:14:34 [Speaker Changed] Boy? And that’s, that’s
00:14:35 [Speaker Changed] That’s that’s amazing. How often are equal weight s and p outperforming cap
00:14:40 [Speaker Changed] Weighted? It outperforms about half the time. It certainly had, I mean think about last year and through October, the cap weighted had outperformed the equated by 1100 base points.
00:14:50 [Speaker Changed] Wow. That’s a lot.
00:14:51 [Speaker Changed] But the thing that’s fascinating about this, Barry, and, and again, you know this is that it’s always the first year off of bear market, low investors sell. So retail flows were negative from the low of October 22 until for a year. And that’s until
00:15:06 [Speaker Changed] November 23. Exactly.
00:15:08 [Speaker Changed] But if you go back to 2020, March of 2020 flows were negative until February of 21. So it always takes about a year,
00:15:17 [Speaker Changed] February of 20. That’s amazing. ’cause from the lows in March percent, it was a huge set
00:15:22 [Speaker Changed] Of gains and net flows from mutual funds. ETFs were net they’re always negative the first year because of that rear view mirror recency bias. The reason why that’s relevant, Barry, is because when investors finally said, I can’t, I shouldn’t sell anymore, I should buy, they’re not gonna buy what’s already worked. They’re looking for other things. And that’s when the equated really started out before. Huh,
00:15:42 [Speaker Changed] Really interesting. So let’s talk a little bit about your concept of applied investing. What does that mean? What, what does applied investing involve?
00:15:53 [Speaker Changed] Okay, so there’s the theoretical story about it and then there’s the practical story. And I’m sure you’ll get a kick out of the practical, but the theoretical is that I don’t believe that a stock price return comes purely from what’s going on. Fundamentally, you have to decide should I own growth value, large cap, mid cap us versus non-US any stocks return about two thirds of return in any one year can be defined by those. So we have to get that right first. And that’s the quantitative size. So

we use factor models to say, Hey, should we own growth stocks or value stocks? And so we tilt our portfolios quantitatively based on which of those factors are sending a signal that they’ll work in the future.
00:16:36 [Speaker Changed] So, so let me just make sure I understand this. Geography size, sector and style style are the four metrics exactly you’re looking at and trying to tilt accordingly into what you expect to be working and away from.
00:16:50 [Speaker Changed] Exactly. And the goal of that is to keep people in the game flip side is, you know, things are out of favor. They can stay out of favor. The problem in this business is styles and investing can stay out of favor longer than the client’s patient’s duration.
00:17:06 [Speaker Changed] Ju just look at value in the 2010s, right? I mean if you were not leaning into growth, you were left way behind.
00:17:13 [Speaker Changed] Exactly. And what I observed from my time being advisor is at the end of the day, clients don’t really care whether they own growth or value. They don’t care whether they own European US, they want to make money and they don’t want ’em go backwards. And if all you keep saying is yes, but you know, my value manager has outperformed the value index. And they’re like, yeah, but the s and p is going through the roof. Right? So you have to have some flexibility in your approach. So I wanted to start a group that at the core would use those quantitative metrics, but pure quantitative takes out kind of the fundamentals of investing because a certain portion of a stock’s return comes from what’s going at the company level. And the other thing is, if all I did was focus on the quantitative, you’d end up owning 300 securities. So
00:18:01 [Speaker Changed] Let’s, let’s
00:18:02 [Speaker Changed] Talk about SA and an SMA can’t do that or you don’t drive enough active share.
00:18:07 [Speaker Changed] MA is separately managed, managed, managed account account. Let, let’s talk about active share because your portfolios are fairly concentrated. The US core portfolio is 30 to 60 companies. That’s considered a modest holding, a concentrated holding. Tell us about the thinking behind that concentration.
00:18:28 [Speaker Changed] So it’s funny, going back to that first job at Brown Brothers, you know, at, in the time in the eighties, no one knew about passive investing. But I observed that, you know, they’d have these portfolios and they’d have kind of two or three stocks in every sector. So you’d end up with, you know, a hundred or 150 stocks and you know, they, it, not that they did poorly, but they never really, you know, it was really hard to drive a lot of active, you know, performance.
00:18:51 [Speaker Changed] Everything is one 2%.
00:18:52 [Speaker Changed] And at the time it wasn’t really, there wasn’t really passive investing. But then as, as time progressed, all these studies came out and said, well actually the most excess return in active management comes from managers that are very, very active. Right? And if you own a hundred, 150 stocks and you’re the benchmark is the s and p, you’re not active. So it was clear to me that we needed very concentrated portfolios but control the risk. And so that’s why we run these limited portfolios. The applied term is, so it gave some quantitative approach to what we do. But here’s the

practical Barry, which is when the firm came to me and said, okay, you’re gonna become an asset management arm, you gotta come up with a name for your team. I knew that these firms show asset management companies alphabetically.
00:19:44 [Speaker Changed] So applied investing right
00:19:45 [Speaker Changed] There, I wasn’t gonna be Z applied. 00:19:48 [Speaker Changed] Right.
00:19:49 [Speaker Changed] I wanted to be at the top of
00:19:50 [Speaker Changed] The list. That’s very, that’s AAA exterminator always the first one. Exactly. To pull in the phone book. So let’s talk about two things you just mentioned. One is active share, but really what you’re implying are that a lot of these other funds with 200, 300 or more holdings, they’re all high fee closet indexers. What’s the value
00:20:10 [Speaker Changed] There? Right. And that’s why as an active manager, I have nothing against ETFs. I think it’s done great for the industry because shame on funds that own lots and lots of securities. You’re not doing a service to your investing. But at the end of the day, if I marginally underperform, not me, but in general, you know, it will take time to lose your assets. You know what’s right for the money management firm is not always what’s right for the, so the right thing is choose passive strategies, but there’s a place for active image, but it’s gotta be active
00:20:42 [Speaker Changed] Core and satellite. Exactly. You have a core of a passive index, but you’re surrounding it bingo with something that gives you a little opportunity for more upside. Exactly. Huh. Really, really interesting. So if the US holdings are 30 to 60 companies, the global portfolio is even more concentrated about 20 companies?
00:21:00 [Speaker Changed] Yeah, I mean, so, so taking a step back again, one of the, you know, remember I run mutual funds, but I start in the separate managed account business. So what it, what means is they would wealth manage would implement our portfolio for individuals by buying stock. And one of the things that I observed is that clients pull from the market faster than they pull from stocks. So in other words, when you’re worried about the market, if it’s about the market, some macro story, well do you wanna sell your Microsoft? Oh no, I like Microsoft, but I’m worried about the market. Okay, well owning individual securities is really powerful because it actually keeps people invested.
00:21:46 [Speaker Changed] There’s a brand name there that they relate to a
00:21:49 [Speaker Changed] Brand. Exactly. So people are more likely to pull from the market. So I believe in owning stocks, but the problem is, again, it goes back to, but if you own 200 stocks and they don’t have any wedded, so could we start a strategy? We started this oh eight where all the securities would be on one page.
00:22:04 [Speaker Changed] That’s amazing. So your global portfolio also has some international US companies. So in addition to things like LVMH and some other international stocks, you have Microsoft, you have Costco. Correct. What’s the thinking of putting those giant US companies in a global portfolio?
00:22:21 [Speaker Changed] It goes back to Barry, that concept, which is clients don’t care really where they make their money. And the problem with the, the benefit of global, a global strategies, I can own

some US stocks and an international only I can’t own. And what happens if the US just so happens to do better than the rest of the world, then international doesn’t work as well. So it just gives us more flex. It’s that flexible flexibility to go where the opportunity set is.
00:22:51 [Speaker Changed] And to that point, your fund, the Morgan Stanley institutional global concentrated fund, which does have US stock trounce, the, the MSEI exactly X us, because the US has been outperforming international. That’s another style for 15. Since the financial crisis, the US has been crushing absolutely everyone else.
00:23:14 [Speaker Changed] But think about this way also, if I can own 20 stocks, okay, but they’re not all correlated to each other, right? So they’re, they have a lot of different themes. Like I really like this, the, the, the infrastructure stocks right now. But I also think there’s a place, as you said, Microsoft, but luxury brands only a few stocks, but have a different theme. Then I can control the risk in the portfolio. You,
00:23:38 [Speaker Changed] You’re diversified high act to share, but concentrated 00:23:41 [Speaker Changed] High act to share, but lower kind of risk.
00:23:44 [Speaker Changed] So when I look at the Morgan Stanley institutional US core, the description is we seek to outperform the benchmark regardless of which investment style, value, or growth is currently in favor. So your style agnostic, you want to just stay with what’s working.
00:24:02 [Speaker Changed] Exactly. And Philip Kim is the other portfolio manager. We’ve worked together 14 years. I started these quantitative models and then he really took it to the next level. And this was what has the likelihood of outperforming for the next 12 to 18 months from a style standpoint. That’s how we bias the portfolio. Things could get just too expensive, things get too cheap, but we need to see some migration in the opposite direction and then we buy us accordingly. We want to stay in the game.
00:24:29 [Speaker Changed] What about the Russell 3000 strategy? That’s not, it’s obviously more concentrated than the Russell, but it’s still a few hundred stocks. Tell us what goes into that thing. Well
00:24:39 [Speaker Changed] We noticed that our, just our quantitative factor model alone was doing well right beyond just adding the stock to buy. So we wanted to start a strategy that would add a little bit of excess return versus just buying an ETF that was just focused on that factor models. But we would diversify away the stock risk.
00:25:01 [Speaker Changed] Really intriguing. So let’s talk a little bit about Slimmons take, which is not only widely read at Morgan Stanley, it’s also pretty widely distributed on the street itself. Towards the end of 2023, you put out a piece, a few lessons from the year, and I I thought some of these were really fascinating. Starting with the s and p 500 has produced a positive return in 67 of the past 93 years, the market produced two consecutive down years, only 11 times. That’s amazing. I had no idea.
00:25:35 [Speaker Changed] Well, I mean, think about it. The, the, the likelihood over time in any one year, the market’s going to go up and if it, if it doesn’t go up, that’s irregular. But then to have another year in a row is very, very irregular. So that’s, that’s why I began 2023 saying, Hey, it’s, it’s highly likely it’s gonna be a good year just purely based on, based on the odds. And then you layer in that whole recency bias rear view mirror and people were way too negative.

00:26:02 [Speaker Changed] Yeah. At the end of 2022, the s and p peak to Trth was down about 25%. You point out there were only eight instances since 1960 where you had that level of drawdown and the average one year return was 22% following that.
00:26:21 [Speaker Changed] So I’ve put out a piece in September of 2022 saying, market’s down 20%, you should add money down 20%. And of course I felt like an idiot, you know, a month later because, and then the market was down 25%. And I produce a piece saying the average return is just over 20% if you buy into down 25%, which doesn’t necessarily mean it stops going down. Right? But what’s amazing about that is, you know what, the return off that October 22nd low of 2022 was
00:26:49 [Speaker Changed] 30 something. 00:26:50 [Speaker Changed] No, 21%. Oh 00:26:52 [Speaker Changed] Really? Dead on
00:26:53 [Speaker Changed] Right. Dead on in line. It’s uncanny how these things repeat itself. And that’s Barry again, it goes back to, you know, your experience, my experience is the macro changes, but behaviors don’t. Right. That’s the consistency of this business and that’s what I’m fascinated
00:27:08 [Speaker Changed] With. Human nature is perpetual. It’s, it’s, it’s Right. No, no doubt about it.
00:27:11 [Speaker Changed] And that’s what gave me confident that the fun flows would turn positive at some point in the fourth quarter because it was a year off the low.
00:27:18 [Speaker Changed] I really like that. Be dubious when a stock is declared expensive or cheap based on a singular valuation methodology like pe this is a pet peeve of mine. The e is an estimate at someone’s opinion. How can you rely on something, especially from someone who doesn’t have a great track record of making
00:27:39 [Speaker Changed] This forecast. It’s the, I think that’s the biggest error investors make over time is, well this stock is, you know, as you said, this stock is cheap or this market, think about Europe. Mar Europe has looked cheaper than the US for a number of years. The flaw in that is the e is a forward estimate. And it’s turned out that the E for Europe hasn’t been as good as what’s expected. And the E for the US especially the Nasdaq, has been a lot higher than was expected. So the denominator has come up in the us which makes a PE lower and the denominator come down you, which made it look more expensive.
00:28:18 [Speaker Changed] So that, that’s always amazing is if the estimates are are wrong to the downside, well then expensive stocks aren’t that expensive and vice versa. Exactly. If the estimates are too high, cheap stocks really ain’t cheap. Right.
00:28:31 [Speaker Changed] I watched that. But we also watched revisions and I’ve learned, learned also from being, you know, cynically in this business. Companies don’t always come clean right away and say, oh, our business really bad. It’s the, they drip out the news, right? Usually one bad quota follows another bad quote. I mean it’s very rare. So be careful that, and analysts are slow to adjust their numbers. Anytime someone says, I’m cutting my estimates, cutting my price target. But I think it’s bottomed,
00:29:00 [Speaker Changed] Right?

00:29:00 [Speaker Changed] Yeah. Be careful.
00:29:02 [Speaker Changed] Yeah. To that’s always, always amusing. I thought this was really very perceptive. Over 37 years in the investment business, I have become convinced that the most money is made when perceptions move from very bad to less bad. I love that because if you’ve lived through the.com implosion or the financial crisis or even the first quarter of 2020, you know how true that is.
00:29:26 [Speaker Changed] Think about last year, you know, it’s the old saying by Sir John Templeton bull markets are born on pessimism. They grow in skepticism, they mature on optimism and they die on euphoric. Well, we had a bear market bottom in October of 2022. And so we came into last year, 2023 with, it’s gonna be a hard landing, it’s gonna be bad. And so there’s high levels of pessimism. And now as you advance into the fourth quarter fund flows turned positive as people realize, well maybe it wasn’t gonna be so bad. We’ve moved into the skepticism phase. So that’s why the biggest return year is always the first year off the low because that’s the biggest pivot and it has the least volatility. We didn’t have a lot of volatility last year
00:30:16 [Speaker Changed] And, and we saw that in oh 8, 0 9 and we saw that in 2020. 2020. It was really, it was really quite amazing. The flip side of this is also true, which is most money is lost when things move from great to just good.
00:30:33 [Speaker Changed] Well, again, if I go back to kind of growth investing, it got expensive and the growth rates of companies wasn’t quite as good and you know, in 2022 and the Fed started raising rates and that was problematic. It was no different. It reminded me a little bit of the.com bubble. What brought down the.com bubble is that companies just couldn’t report the earnings that were expected. And you had plenty of time to get out. But the problem is, what I saw in the.com bubble, people wanted to kept buying these stocks as they’re going lower because they were, you know, rear view mirror investing. They were the previous the the loves. And what’s amazing is think about, I said before half the value managers went outta business in 99 by the year 2008. Do you know what the biggest sector of the s and p was? Financials they grew from nothing to 30% of the SP. So value worked all through the first period until we know what happened in great financial crisis. It
00:31:27 [Speaker Changed] It, it’s amazing that muscle memory when you’re rewarded for buying the dip for a decade, it’s a tough habit to break. Exactly. Exactly. So, so here’s another really interesting observation of yours. Whatever the hot product is rarely works the next 12 months.
00:31:43 [Speaker Changed] It’s because a hot product invariably pushes oftentimes valuations to extreme. And one of the things that we got very right in 2023 was in 2022 Bear Market, what did people buy into the lows of Bear Market? They bought defensive stocks, dividend oriented, low volatility type strategies became very popular in 2022 during a bear market. And so we could see that the defensive factor, safety became very expensive. So as we came out of this bear market, what lagged consumer staples, healthcare, utilities, all the safe things. So hot products pushes things to extreme and that usually, you know, unwinds itself badly
00:32:34 [Speaker Changed] Historically, once the fed stops hiking rates, equity rallies last longer and go higher than anyone expects. Explain the thinking
00:32:43 [Speaker Changed] Then. So I think it’s good news for this year, but also worries me about this year is if you look at the history of the period of time when the Fed said we’re done hiking till we’re

going to cut that period does very, very well for equities. And we are kind of at a, a juncture where it, we’ve done pretty well. But if they’re not gonna cut rates until the summer, I think there’s more room to run for stocks. Now the flip side is, I hear a lot of people talk about when the Fed cuts the perception that that’s gonna be good for equities. I’m not so sure about that because if you look back in history, when the Fed cuts markets tend to go down initially not up. And you could argue yes, but Andrew, that’s because usually when they’re raising rates it’s an economic cycle, right? And therefore if they’re cutting, there’s a problem. And this time it was all about inflation. But what worries me is when the Fed does announce they’ll cut will people say, oh, they know something you don’t know. There’s a problem out there. And I think there’s an that will increase the anxiety. And so I think that’s, we’re in a good period right now, but it worries me when they do cut, will it be people start to worry about, there’s some, there’s a problem in the economy.
00:33:59 [Speaker Changed] See I I I’m a student of federal reserve history and I I could say with a high degree of confidence, they don’t know anything that you don’t know. They, they look at the same data, they’re populated by humans, none of whom have demonstrated any particular sort of prescient. And if we watched the past decade, they were late to get off their emergency footing. They were late to recognize inflation, they were late to recognize inflation peaked. And now it feels like they’re late to recognize, hey, you guys won, you beat inflation. Exactly. Take a victory lap. Right? They, they seem to always be talk about backwards looking. They always seem to be behind the curve. Right.
00:34:38 [Speaker Changed] But I just think the stock market is an emotional beast. Sure. And you know, and I look last year and the Bears people were too pessimistic every time they pop their head out of the den, they got stampeded. And so they’ll have a better year this year and I think it will scare investors and cynically, I can’t help but think, well people missed most, a lot of people missed last year and now they’re starting to get back in and after a very low volatility year, there’s always more volatility the next year. And so it’s inevitable it’s gonna be more, it doesn’t mean it’ll be a bad year for equities, it just will have more gut wrenching periods.
00:35:10 [Speaker Changed] I love this data point since 1940, markets have always gone up in the year when an incumbent president runs for reelection 17 for 17. Now if we break that down, what you’re really saying is, hey, if an incumbent isn’t running, the economy really has to be in the stinker roo and the stock market is following. But anytime an incumbent is running typically means we’re we’re doing pretty okay. Well
00:35:37 [Speaker Changed] And remember I said didn’t get reelected, just ran for reelection. Right. And so what happens, and I see it this year, is when presidents run for reelection, they want to juice the economy, they want the economy going well, right? And we have, Joe Biden has in his pocket the Infrastructure Act, the CHIPS Act and the Inflation Reduction Act. We own, the reason why we own industrial stocks is because they are telling us that the money is just starting to come in from the government. And these projects are getting just getting off way. We’ve seen this with the chips act, the money is just started poor. Right. That’s why the market tends to do well because the economy stays afloat during a reelection year. And
00:36:20 [Speaker Changed] And the really interesting thing about all this, you know, it’s funny, the 2020s is the decade of fiscal stimulus, whereas the 2010s were monetary stimulus, the first three cares acts. That was a, just a boatload of money that hit the market, hit the economy all at once. Each of the

legislation packages you mentioned, that’s spending over a decade, that could be a pretty decent tailwind for a while.
00:36:43 [Speaker Changed] Very interesting between listen to Wall Street and what you listen to companies. And so I’m a company guy. I listen to companies and I’ll give you a great example. Right now people think the consumer is getting tapped out, but on the Costco call the other day, they say they see big ticket purchase items. Reaccelerating, well wait a minute, I thought the consumer well, which is it? Which is it? Right. And you know, and so the the point of this is, is that I go back to listen to what companies say. And I suspect as food inflation starts to come down and people have jobs, they actually could start to go buy, you know, higher ticket purchases. So,
00:37:15 [Speaker Changed] And we’ve seen some uptick in credit card use, but it nothing problematic with the ability to service that debt still seems to be very much intact. Correct.
00:37:24 [Speaker Changed] And that goes back to last year, one of the reasons I, the other reason I was optimistic is I kept hearing our companies say to me, I’m being told the recessions around the corner, but our business seems to be doing well. We don’t see it. Right. We
00:37:34 [Speaker Changed] Don’t see it. That’s really amazing. So, so let’s talk a little bit about who your clients are. You obviously are working with all the advisors at Morgan Stanley, but you’re managing mutual funds. Who, who are the buyers of, of those funds? Are they in-house? Are they the rest of the investing community? Who, who, who are your clients?
00:37:53 [Speaker Changed] Yeah, I mean, so that’s when, when I left being advisor in 2004, I started this group within Morgan Stanley. Wealth management with the products were only available to financial advisors at Morgan Ceiling. But when I left to go into Morgan Ceiling investment management in 2014, the purpose of that was to make my products available beyond Morgan Ceiling wealth management because I was getting calls from consultants and institutional investors saying, how do we get access to these funds? And I’d have to say, well you have to go through an advisor. So, so that, I wanted to broaden out the reach beyond. So I would say we’re on a number of platforms, you can buy our funds through the self-directed route. And so we’re broadening out the, the distribution. And you mentioned the slim and take before. That is a, a methodology that we use to reach out to our investor base.
00:38:49 Obviously I’d love to talk to each of every one of ’em, but I can’t. But I’ve learned in this business, if you communicate in a way that they can understand, and I don’t mean understand in, you know, in, in a bad way. Like, but writing a six page diatribe about why my stocks are so great and why the rest of the market stinks. No one’s gonna read that. They put it aside and say, I’ll read it tonight, then they don’t. But if you can provide short bullets of what’s going on in the market, why people should be bullish or bearish, you provide them with talking points. And that’s what we really try to do within the firm, but beyond the firm as well.
00:39:24 [Speaker Changed] Yeah. I I, one of the reasons I like lemon’s take is you really boil things down to brass tack. You’re not afraid to use third parties in some of your competitors research. You, you cite other people on the street when they have an interesting data point or, or, and and I very much appreciate that. ’cause a lot of people sort of take the, if it wasn’t invented here, it doesn’t exist to us.

00:39:51 [Speaker Changed] Yeah. I mean look, I’m, I’m, I want to grow the assets. I want to perform well, but I value the responses from the those who sit on the front lines dealing with clients every day because they’re the ones that feel kind of the emotional side of the business. Sure. If you sit back in, you know, my office and all, I’m looking at a company and just evaluating whether it’s PE is appropriate and earnings, you’re missing a huge part of this business. It’s a behavioral business. And so having access to advisors and listening to their feedback is so important.
00:40:27 [Speaker Changed] So you serve on Morgan Stanley’s Wealth Management’s Global Investment Committee. What is that experience like? I would imagine that’s a huge amount of capital and a tremendous responsibility. It
00:40:39 [Speaker Changed] Is a huge amount of capital and it drives kind of asset out suggested asset allocation for advisors. They don’t necessarily have to pursue it that way. My input is obviously on the equity side, but they have people in the, on the re the fixed income, high yield alternatives. And they all provide inputs into framing and overview. So I’m really, I sit in Morgan Stanley investment management, but I do provide that context and I think they like to have me on ’cause I actually have skin in the game and I run money for a, a living and I’m not always there saying you gotta buy growth or you gotta buy value. So I’m of agnostic. I’m just trying to figure out where the kind of the ball’s going. Do.
00:41:20 [Speaker Changed] So in the old days you used to speak with retail investors all the time, a as a pm Do you miss that back and forth because there is some signal in all of that noise, whether it’s fear or greed or Sure. Emotion. How, how do you, how do you operate being arm’s length away from that?
00:41:41 [Speaker Changed] I, that is a big concern I have is losing that access. So I still, I’m going to, I’m speaking in an event tonight with a, you know, a room full of advisors. So, and then, you know, we’re, we’ll, we’ll get together afterwards and I’ll listen to what they have to say. So I’m always interested in feedback that I get from advisors. Obviously I can’t spend all day talking on the phone. That’s the big reason why I left being an advisor was I recognize, hey, being an advisor, you gotta talk to your clients so forth. You can’t manage money and worry about both quarter can both. You can’t do both. And anyone that thinks you can, I, you know, it’s, it’s crazy and I really wanna develop these models, but I I, so, so all these communication ways, like slim and Take is a way to be in touch with advisors, encourage them, Hey, you think you, you disagree, send me an email. You know, I’m happy to, happy to hear from you because I think that’s very important. Huh. Really,
00:42:35 [Speaker Changed] Really
00:42:36 [Speaker Changed] Interesting. I really, behavioral finance, you know, the, the longer I’ve been in this business, I’ve been in this business a long time. It’s the behavioral finance that’s the consistency of this business. Geopolitics changes, right? But how people react is, is not, doesn’t
00:42:52 [Speaker Changed] Really change. Right. You, you, you can’t ch control what country is invading what other country. But you can manage your own behavior. Exactly. And people have a hard time with that. Exactly. It’s really interesting. I, I know only have you for another five minutes, so let me jump to my favorite questions. I ask all of my guests starting with what have you been screaming these days? Tell us what’s been either audio or video, what’s been keeping you entertained?
00:43:15 [Speaker Changed] Yeah, I, so if I think about my career, no one took me aside and said, this is how you manage money, right? Like, think about it. I learned about fundamental research, I learn about

quantitative, I learn about the practicality of being in wealth management. And so I’ve always researched and watch and what does that got to do with your question is I’ve learned my way to being successful portfolio managers. So I’m obsessed with kind of always learning along the way. So I, you know, when I watch podcasts it’s always about, whoa. Or, or, or listen to podcasts or watch, you know, things. It’s, it’s always how to advance my knowledge base. Now I did play tennis, you know, in college and so I love all those, you know, break point, first tee, you know, the Formula one. I love all those things. But, but you know, as my wife gets frustrated with me, ’cause I’m probably gonna not gonna sit down and watch a three hour mindless movie because it’s kind of like not, not advancing.
00:44:13 [Speaker Changed] Huh. Really, really interesting. Tell, tell us about your mentors who helped to shape your career.
00:44:19 [Speaker Changed] So I mean, again, I look at points along the way were invaluable When I got to Morgan Stanley, Byron Ween, who, you know, I barely knew, but he was the first person that I recognized had this very good touch of fundamentals, but also the psychology, right? And so he was a great mentor even though he never really knew me, but listening and reading and understanding him was really important. But then I had a guy who ran our department named Glenn Regan, who had come from studying money management organizations and I didn’t know how to start a money management organization ’cause it was a team within and how do you grow and diversify. So there’s been different people along the way that have really shaped me. I came outta University of Chicago, gene Fama told me buy cheap stocks, but then William O’Neill said, yeah, but that doesn’t work and you need to have some momentum to, you know, like, he didn’t tell me that you
00:45:14 [Speaker Changed] Need a little can slim in that you
00:45:15 [Speaker Changed] Need to, you know, you had a little can so you need to cancel. Exactly. So there’s been people along the way that have been great influences on me that have mentioned me at the right time in my career.
00:45:26 [Speaker Changed] What are some of your favorite books and and what are you reading right now?
00:45:29 [Speaker Changed] I just finished same as Ever by Morgan Housel. Again, this concept of behavioral. I will eat up, you put a behavioral, anything about behaviors in front of me, I read it so like, you know, Richard Thaler mis misbehaving or you know, think fast, think slow, all those boats of books. Daniel Crosby is another one. All those books I just, but I just finished that and I just love it because again, all he spends the whole book is about these things. They just don’t change over time.
00:45:56 [Speaker Changed] Human nature, human perpetual, 00:45:58 [Speaker Changed] Human nature. Huh.
00:45:59 [Speaker Changed] Really interesting. I’ll tell you
00:46:00 [Speaker Changed] The last story. So, or I was tell a story. I was, I was on the floor of the New York stock change the day that Russian invaded Crimea. And one of my stocks was down ni my biggest position was down 8% that day. And I said, they don’t have any stores in Crimea. Why is the stock down? Well, because it was geopolitics. Well, you know, and within three days the stock came ro back. So I, it

it’s, all it points to is sometimes fundamentals dislodged from, you know, the, the stock prices. And you have to understand that there’s a hu behavioral element.
00:46:32 [Speaker Changed] My favorite version of that story was, are you familiar with Cuba? Yeah, sure. So Obama announces we’re gonna normalize or start the process of normalizing relationships with Cuba. There’s a stock that trades under the symbol CUBA having nothing whatsoever. And it runs up 20% on just on the announcement. Correct. Because some algorithm picked up Cuba and bought it. And off, off we go. Correct. Amazing. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in either investment management or finance?
00:47:07 [Speaker Changed] Yeah, so it’s interesting. I have four kids that are, you know, in the process of or have just come outta college or in the process of, and one of the dangers I see today is kids come outta school and they think they know exactly what, what they wanna do. You know, and then, and I’ll say, you don’t know your, what your capabilities are when you’re 22 years old. I mean, I was an introvert when I was 22. I’ve, I’ve realized in the early thirties I knew how to communicate. So I’m, I always say get into, if you can get into a firm that has a lot of opportunities, you know, today there’s less training programs, but those types of things with lots of opportunities. ’cause you don’t know what you’re gonna be good at and what you’re good at. Always follow what you think you’re interested in as long as it makes money, because that’s ultimately, but you don’t know initially. So I always encourage people initially don’t come out and say, I want to do this the rest of my life. You don’t know, that’s too narrow. Try to go to something broad. That’s the first advice. And, and I see today where people too narrow in their focus.
00:48:08 [Speaker Changed] I think that’s great advice. People, most of the folks I work with who are very successful, they’re not doing what they did right outta school. And to imagine that that’s gonna be your career. Very much misleading. And, and our final question, what do you know about the world of investing today that you wish you knew 30 plus years ago when you were first getting started?
00:48:29 [Speaker Changed] Well, I think, you know, 30 years ago I thought it was all about just what’s going at the company level. And then I realized, oh wait, that doesn’t really, you know, drive most of the stocks return. So you have to understand more about the broader implications of companies. I think 30 years ago there was less dissemination of fundamental news. Broadly today it’s much, you know, it’s much broader. So having information access fundamentally is more, more difficult. So I think the, the business has changed. But again, I go back to, I think the, the biggest change in my, how I think about it is behaviorally I’ve come to the real, that being an advisor sitting on the front line, I view that as a very key part of what’s shaped my career. Understanding that, you know, again, it doesn’t matter that the company didn’t have any stores in Crimea.
00:49:22 It went down for, you know, quite a bit. Or your Cuba story. I mean that, there’s just a behavioral element to this in investing, investing business. And look, you know, again, I go a, a great example which I mentioned before, which is it didn’t matter what growth stocks you own in 2022, they all went down, right? And so was it all the companies did poorly, no growth got too overbought. And so it had a correction. They all came back last year. You know, so understanding kind of those behaviors. I love that Warren Buffet quote investors frame their view looking solidly in the rear view mirror. Understanding that and having the ability to tack against that. That’s really what’s what’s worked for me over time.

00:50:03 [Speaker Changed] Hmm. Fa fa really fascinating stuff. Thank you Andrew for being so generous with your time. We have been speaking with Andrew Schleman. He’s managing director at Morgan Stanley Investment Management, where he is also lead portfolio manager for the long equity strategies for the Applied Equity Advisors team. If you enjoy this conversation, be sure and check out any of the 500 previous discussions we’ve done over the past nine and a half years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast. Sign up for my daily reading list@rithu.com. Follow me on Twitter at ritholtz. Follow all of the Bloomberg family of podcasts on, on Twitter at podcast, and be sure to check out my new podcast at the Money short. 10 Minute conversations with Experts about the most important topics affecting you and your money at the money can be found at the Masters in Business podcast feed. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Meredith Frank is my audio engineer. Atika Val Brown is my project manager. Shorten Russo is my head of research. Anna Luke is my producer. I’m Barry Ltz. You’ve been listening to Masters in Business on Bloomberg Radio.

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• Google reneged on the monopolistic bargain: A funny thing happened on the way to the enshittocene: Google – which astonished the world when it reinvented search, blowing Altavista and Yahoo out of the water with a search tool that seemed magic – suddenly turned into a pile of shit. Google’s search results are terrible. The top of the page is dominated by spam, scams, and ads. A surprising number of those ads are scams. Sometimes, these are high-stakes scams played out by well-resourced adversaries who stand to make a fortune by tricking Google: (Pluralistic)

• The Return Grift Is Over. As it turns out, there are a lot of online shoppers who return things almost as frequently as they place orders. And online retailers, many that built free returns into their business strategy, finally seem to be reaching their limit. Which makes sense: In 2023 alone, people returned $743 billion worth of merchandise. (The Cut)

• The Hot New Luxury Good for the Rich: Air The wealthy have different houses, different cars, different lifestyles from the rest of us. These days, they also want to breathe different air. (TNR)

• The cruelty of crypto: Selling itself as the new American dream, crypto exposes the vulnerable to fraud and scams, and loads risk onto the poor. (Aeon)

• Private Equity Payouts at Major Firms Plummet 49% in Two Years Distributions to fund investors falling amid deal drought Fund investors zeroing in on a new metric for PE investments. (Bloomberg)

• ‘AI Girlfriends’ Are a Privacy Nightmare: Romantic chatbots collect huge amounts of data, provide vague information about how they use it, use weak password protections, and aren’t transparent, new research from Mozilla says. (Wired)

• No focus, no fights, and a bad back – 16 ways technology has ruined my life: While some technological advances are nothing short of miraculous, there are plenty of downsides, too … (The Guardian)

• A loophole got him a free New York hotel stay for five years. Then he claimed to own the building: For five years, a New York City man managed to live rent-free in a landmark Manhattan hotel by exploiting an obscure local housing law. But prosecutors this week said Mickey Barreto went too far when he filed paperwork claiming ownership of the entire New Yorker Hotel building — and tried to charge another tenant rent. (AP)

• Trump’s G.O.P. Is a Confederacy of Fakers: They are all trapped in a performative doom loop that has nothing to do with acting on our real interests. It’s only about performing for Trump and for his base to get more clicks, to get more donations, to get more votes, to get elected and then perform again for more clicks. Rinse and repeat — the actual world be damned. It is all fake. Only our enemies are not fake. (New York Times) see also 10 Republicans who treated the Biden bribery claim like gospel: While some of them might be faulted for repeatedly airing an unsubstantiated claim, others went quite a bit further. Below are 10 examples, in reverse order of brazenness.  (Washington Post)

• Trump’s hubris has brought about the downfall of his family’s business empire: Even the giant fortune Trump inherited from his father did not stop him from steering the family’s dynasty on to the rocks (The Guardian)

Be sure to check out our Masters in Business this week with Andrew Slimmon, Managing Director at Morgan Stanley Investment Management, where he leads the Applied Equity Advisors team. His Slimmon’s TAKE is a popular and widely read commentary among Morgan Stanley advisors and on The Street as well. He also serves as Senior Portfolio Manager for all long equity strategies and is a member of Morgan Stanley Wealth Management’s Global Investment Committee.

Share of private consumption spent on services is still 2%-points below its pre-pandemic level

Source: Torsten Slok, Apollo

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To learn how these reads are assembled each day, please see this.

The post 10 Sunday Reads appeared first on The Big Picture.

• How Russian Spies Get Flipped or Expelled, As Told by a Spycatcher: Caught a Russian spy? You may try to flip them first, perhaps offering work as a double agent—all with the help of the British, the French, or the Americans. If it doesn’t work out, you can still expel them and send them home to Moscow. In an in depth-interview, former Hungarian counterintelligence officer Ferenc Katrein—once a director of operations at Constitution Protection Office (AH)—goes into detail about how allied security agencies work together to identify and disrupt Russian intelligence activity under diplomatic cover. (VSquare)

• Is the State Here to Stay? After decades of deference to the market, states are exerting greater control over capital. In the face of climate change, it may be too little, too late. (Boston Review)

• You Say Bitcoin Is Digital Gold? Maybe It’s Digital Pearls: Almost every previously disruptive technology has ended up being disrupted. Bitcoin could be too. (Wall Street Journal)

• The State of the Culture, 2024: Or a glimpse into post-entertainment society (it’s not pretty) (The Honest Broker)

• The Great Compression: Thanks to soaring housing prices, the era of the 400-square-foot subdivision house is upon us. (New York Times)

• Biden’s EV Dreams Are a Nightmare for Tesla and the US Car Industry: Designed to cut China’s influence over global metals markets, the Inflation Reduction Act has also made life more difficult for US carmakers. (Bloomberg)

• Why Are There Suddenly So Many Car Washes? Fueled by private equity and a subscription-based business model, the auto wash industry is flooding the US with new outlets. Some towns and cities have had enough. (Bloomberg)

• How Israel’s war went wrong: The conflict in Gaza has become “an era-defining catastrophe.” It’s increasingly clear what — and who — is to blame. (Vox)

• Simone Biles Talks Marriage, WAG Life With Taylor Swift, and the Paris Olympics: The GOAT American gymnast is embracing a big new chapter, after Tokyo, the twisties, and finding true love with Jonathan Owens. (Vanity Fair)

• Can Saudi Arabia Buy Soccer? Saudi Arabia is spending an unfathomable fortune to lure the biggest stars of global football (Ronaldo! Benzema! Neymar!) to its upstart league. So GQ ventured to the kingdom to discover what the gambit represents. Is this the future of the world’s most popular sport? The vanguard of sportswashing? Or something way bigger? (GQ)

Be sure to check out our Masters in Business this week with Andrew Slimmon, Managing Director at Morgan Stanley Investment Management, where he leads the Applied Equity Advisors team. His Slimmon’s TAKE is a popular and widely read commentary among Morgan Stanley advisors and on The Street as well. He also serves as Senior Portfolio Manager for all long equity strategies and is a member of Morgan Stanley Wealth Management’s Global Investment Committee.

89% of US household debt is fixed rate (mortgage, student, and auto loans) and 11% is floating rate (credit cards, HELOC, and other types of debt).

Source: Torsten Slok, Apollo Global

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The post 10 Weekend Reads appeared first on The Big Picture.

This week, we speak with Andrew Slimmon, managing director at Morgan Stanley Investment Management, where he leads the Applied Equity Advisors team. He is also the lead senior portfolio manager on all long equity strategies for the applied equity advisors team, as well as a member of the Morgan Stanley Wealth Management Global Investment Committee. He began his career at Morgan Stanley in 1991 as an adviser in private wealth management, and later served as chief investment officer of the Morgan Stanley Trust Co.

Slimmon describes his concentrated portfolios — either 30 US stocks or 20 global stocks — as a way to avoid closet indexing. Owning 150-200 names invariably creates a portfolio with a low active share — meaning it is an expensive index-like product.

His approach combines quantitative strategy with behavioral economics.  He explains how his popular Slimmon’s TAKE is a way to stay in touch with his investors.

A list of his favorite books is here; A transcript of our conversation is available here Tuesday.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business next week with David Snyderman, Global Head of Alternative Credit + Fixed Income for Magnetar Capital. The firm is a multi-strategy and multi-product alternative investment management firm, managing $14.9 billion in client assets, and has created over $11 billion of net P&L across all strategies since its 2005 inception.

Andrew Slimmon’s Favorite Books

Same as Ever: A Guide to What Never Changes by Morgan Housel

Misbehaving: The Making of Behavioral Economics by Richard Thaler

Thinking, Fast and Slow by Daniel Kahneman

The Laws of Wealth: Psychology and the secret to investing success by Daniel Crosby

The post MiB: Andrew Slimmon, Morgan Stanley Investment Management appeared first on The Big Picture.

A quick note to answer this question:

What happens after markets make a new all-time high (after a year w/o one)?

Check out the table above, via Warren Pies. He spoke with Batnick and Josh earlier this month.

Going back to 1954, markets are always higher one year later – the only exception was 2007. That was after housing had peaked, subprime mortgages were defaulting, and the great financial crisis was about to start.

This is the 15th time markets have made ATH highs after 12 months. Excluding 07, returns have ranged from 4.9% to 36.9% a year later, averaging about 14%; the bull market that followed ranges from 9.7% to 350%, with an average of 85%. Drawdowns following ATH tend to be shallower than other periods as well.

Peter Mallouk points out that investments made on days of all-time highs outperform investments made on all other days,

Technicians will tell you All-Time Highs are bullish because there is no selling resistance; behavioral economics suggests it’s bullish due to FOMO and plain old greed.

Ask yourself this: Is 2024 more akin to 2007, or most other markets where new all-time highs were made?

See also:
Nothing is More Bullish than All-Time Highs (Michael Batnick, February 3, 2024)

All-Time Highs in the Stock Market are Usually Followed by More All-Time Highs (Ben Carlson, February 8, 2024)

Previously:
How Bullish Were You in 2011? (November 29, 2023)

The Most Hated Rally in Wall Street History (October 8, 2009)

Bull & Bear Markets

The post All-Time Highs Are Historically Bullish appeared first on The Big Picture.

How well do you understand yourself? For investors, it is an important question. We’re co-conspirators in self-deception and this prevents us from having accurate self-knowledge. This does not lead to good results in the markets.

Full transcript below.

~~~

About this week’s guest:

David Dunning is a professor of psychology at the University of Michigan. Dunning’s research focuses on decision-making in various settings. In work on economic games, he explores how choices commonly presumed to be economic in nature actually hinge more on psychological factors, such as social norms and emotion.

For more info, see:

Professional Bio

Google Scholar

Twitter

~~~

Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.

Transcript:  David Dunning 

The financial writer Adam Smith once wrote, if you don’t know who you are, this is an expensive place to find out. He was writing about Wall Street and investing and his insight is correct. If you don’t know who you are — and if you don’t understand what you own, how much leverage you’re undertaking, how much risk you have — this is a very expensive place to learn that lesson the hard way.

I’m Barry Ritholtz, and on today’s edition of At The Money, we’re going to discuss self-insight, our ability to know ourselves and understand our abilities. To help us unpack all of this and what it means for your portfolio, let’s bring in Professor David Dunning of the University of Michigan.

He is the author of several books on the psychology of self. And if his name is familiar, he is the Dunning in Dunning Kruger. Welcome, professor. Let’s just ask a simple question. How come it’s so hard to know ourselves?

David Dunning: There are many, many reasons (and thank you for having me). Well, in many reasons, there are problems in knowing ourselves in terms of our character and in knowing ourselves in terms of our competence. In terms of our character, we overplay how much agency we have over the world. We’re not as influential as we think.  And in terms of confidence, we overestimate how much we know.

Now now each of us knows a tremendous amount, but by definition, our ignorance is infinite. And the problem with that is our ignorance is also invisible to us. That creates an issue.

Barry Ritholtz: So what other roadblocks and detours are there on the path to knowing thyself?

David Dunning: Well, it’s the invisibility of our flaws and our foibles. Some of it is the world – it’s not a very good teacher.  It doesn’t tell us. Its feedback is chancy. Often, its feedback is invisible. What doesn’t happen to you as opposed to what does happen to you. What people tell you, to your face is different from what they’re saying behind your back.

So the information we get, our information environment is either incomplete or it’s misleading. And beyond that, we’re co-conspirators. We engage in self-deception. We protect our egos. We are active, in the duplicity in terms of getting to accurate self-knowledge.

Barry Ritholtz: We’ve discussed before, any decision or plan we make requires not 1, but 2 judgments. The first judgment is what the item we’re deciding about is, and the second judgment is our degree of confidence in assessing whether or not our first judgment was valid. Which is the more important of the two

David Dunning: It should be the second 1, but we tend to focus on the first 1. We tend to focus on our plans, the scenario.  And we tend to ignore or neglect the second one, the fact that life happens and life tends to be unexpected.  Um, we should expect the unexpected,  We should be sure to think about what typically happens to other people and have plan Bs and plan Cs for when those sorts of things can happen. Or at least have plans for unknown things that can happen because the 1 thing we know is that unknown things will happen.

And everything in the past has always been slower than we expected. We should expect everything in the future is going to be expected, but we tend to overweight, give too much attention to our plans and not think about the barriers and not think about the unknown barriers that are certainly gonna hit us in the future.

That’s why what I mean by, the fact that we tend to give too much weight to our agency in the world, not give credit to the world and its deviousness in thwarting us.

Barry Ritholtz: So let’s talk a little bit about how illusory our understanding of our own abilities are. Is it that we’re merely unskilled at evaluating ourselves, or are we just lying to ourselves?

David Dunning: We’re actually doing both. I mean, there are two layers of issues. One  layer of issues is, we’re not very skilled at knowing what we don’t know. I mean, think about it. It’s incredibly difficult to know what you don’t know.

You don’t know it! How could you know what you don’t know?  That’s a problem. We’re not very skilled at knowing how good our information environment is, how complete our information is. That’s one issue.

The second issue is what psychologists refer to as the motivated reasoning issue, which is just simply then we go from there and we practice some motivated reasoning, self deception, wishful thinking. We actively deceive ourselves in how good we think our judgments are. We bias our reasoning or distort our reasoning toward preferred conclusion.

That stock that stock will succeed. Our judgment is absolutely terrific. This will be a wonderful investment year. There’s nothing but a rosy stock market ahead for us.

That’s the second layer. But there are issues before we even get that second layer, which is just simply, uh, we don’t know what we don’t know. And it’s very hard to know what we don’t know.

Barry Ritholtz: So we live in an era of social media. Everybody walks around with their phones in their pockets. They’re plugged into everything from TikTok to Instagram to Twitter to Facebook.  What’s the impact of social media on our self awareness  of who we are, has it had a negative impact?

David Dunning: I think, social media has had all sorts of impact, and I think what it’s done is create a lot of variance, a lot of spread in terms of the accuracy of what people think about themselves and the positivity and the negativity of what people think about themselves. There’s just a lot of information out there and people can truly become expert if they know what to look for.

But there’s also a lot of possibility for people to come truly misled if they’re not careful or discerning in what they’re looking at. Because there’s a lot of misinformation and there’s a lot of outright fraud in social media as well. So people can think that they’re expert, because there’s a lot of plausible stuff out there, but there’s a lot more in the world that’s plausible than is true.

And so, people can think they have good information where they don’t have good information. That involves issues like finance, that involves issues like health, that involves issues like national affairs and politics, that’s an issue.

But it’s possible to become expert if you know what to look for. So there’s a lot of variance in terms of people becoming expert or thinking they’re expert and becoming anything, but.

In terms of being positive or being negative, there’s a lot of  tragedy on the Internet. So by comparison, you can think well of yourself.  And it is a fact that when people go on the Internet, what they post are all the good things that happen in their life, all the good news that’s happened to them, but that’s the only thing they post. And if you’re sitting there in your rather good news/bad news life, you can think that you’re rather ordinary or you can think that you’re rather mundane when everybody else is having so much more of a best life than you are, you can think that you’re doing much worse than everybody else. So the Internet just can create a lot of different impacts on people that’s both good and bad, truthful and untruthful. It just turns up the volume and everything.

Barry Ritholtz: Yeah, we certainly see, um, social status and wealth on display. You never see the bills and the debt that comes along with that. That that that’s a really good way of describing it.

Talking about expertise, I cannot help but notice over the past few years, especially on social media, how blithely so many people proclaimed their own expertise. First, it was on epidemiology, then it was on vaccines, then it was constitutional law, more recently it’s been on military theory. Is this just the human condition where we’re wildly overconfident in our ability to become experts even if we don’t have that expertise?

David Dunning: Well, I think it is. Aand if it’s not all of us, at least it’s some of us. That is we have a little bit of knowledge and it leads us to think that we can be expert in something that we’re quite frankly not expert in.

We know a little bit of math. We can draw a curve and so we think we can become expert in epidemiology, when we’re a mathematician or maybe a lawyer or maybe we’ve heard a little bit about evolution. And so we think we can comment on the evolution of a virus when we’re not — we don’t study viruses, we’re not an epidemiologist, but we know a little bit and once again we don’t know what we don’t know.

So we think we can comment on another person’s area of expertise because we know nothing about the expertise contained in that other person’s area of expertise.  A philosopher friend of mine, Nathan Ballantyne, and I have written about “Epistemic Trespassing,” where people in one area of expertise who know a little bit about something decide that they can trespass into another area of expertise and make huge public proclamations because they know something that looks like it’s, relevant, looks like it’s informative, and it has a small slice of relevance,  but it misses a lot in terms of really commenting on things like international affairs or economic policy or epidemiology.

But people feel that they have license to comment on something that lies far outside of their actual area of expertise.

Now, some of us give ourselves great license to do that, but I do want to mention that this is part of being human because part of being human – part of the way that we’re built is every day we do wander into new situations  and we have to solve problems, we have to innovate, we have to figure out how do I handle this situation. So, we cobble together whatever expertise, whatever experience, whatever ideas we have, to try to figure out how do we handle this situation.

This imagination is how we’re built. That’s part of our genius, but it’s a genius that we can over apply. And what you’re seeing in Epistemic Transpassing is a flamboyant way in which this genius is over applied  in the public domain.

Barry Ritholtz: So wrap this up for us, professor. What do we need to do to better understand ourselves, our capabilities, and our limitations?

David Dunning: Well, I think when it comes to understanding information like the Internet,  lik, reading someone who might be an epistemic trespasser for example or someone who is  making grand statements about epidemiology or foreign policy or whatnot is – maybe it would be good to familiarize ourselves with the skills of journalism. And actually, I wish  schools would teach journalism skills or at least fact checking skills more prominently in the American education system.

That is as we progress in the 20 first century, dealing with information is going to be the skill that we all need. Finding experts and evaluating experts – Who is an expert? – is gonna be a skill that we all need. Figuring out if we’re expert enough is gonna be a skill that we all need. And a lot of that is really about being able to evaluate the information that we confront and a lot of that really boils down to fact checking and journalism. So,  finding out how to do that, I wish we have a little bit more of those skills, as a country or at least that that that’s  the the nudge that I would give people.

Barry Ritholtz: Really, really very fascinating.

So to wrap up, having a strong sense of self moderated with a dose of humility is a good way to avoid disaster on Wall Street.  Adam Smith was right. If you don’t know who you are, Wall Street is an expensive place to find out.

I’m Barry Ritholtz, and this is Bloomberg’s  At The Money.

The post At the Money: Why Self-Insight Is So Important   appeared first on The Big Picture.

The transcript from this week’s, MiB: Bill Dudley, NY Fed Chief, is below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

~~~

This is Masters in business with Barry Ritholtz on Bloomberg Radio

00:00:09 [Barry Ritholtz] This week on the podcast, what can I say? Bill Dudley, former New York Fed President, multiple positions at Goldman Sachs on the Federal Reserve at the New York Fed. Really a masterclass in how monetary policy is not only made but executed and put into actual operations. There are few people in the world who understand the interrelationships between central banks, the economy, and markets like Bill Dudley does this, this is just a master class in, in understanding all the factors that affect everything from the economy to inflation, to the labor market, the housing market, and of course, federal Reserve policy. I, I could go on and on, but instead I, I’ll just say with no further ado my conversation with former New York Fed President, bill Dudley.

00:01:10 [Bill Dudley] Great to be here, Barry. It,

00:01:11 [Barry Ritholtz] It’s great to have you. So I feel like I have to call you Bill.

00:01:15 [Barry Ritholtz] Bill. That’s how,

00:01:15 [Barry Ritholtz] Because that’s what I always hear you described as not a William. Yep. Let, let’s talk a little bit about your background. You get an economics PhD from California, Berkeley in 82, and around the same time you become an economist at the Federal Reserve Board from 81 to 83. Tell, tell us a little bit about that role.

00:01:34 [Bill Dudley] I, I was there in the, what’s called, called the financial studies section, which is one of the very small places in the Fed that is not macroeconomics driven. It’s microeconomics. So we worked on things like payments policy, you know, regulatory policy. So all, all sorts of micro issues, not macro issues. It was a pretty interesting period because the, the congress had just passed what’s called
the Monetary Control Act, where they were forcing the Fed to charge for all its services to, so, so, so to sort of level the playing field with the private sector. So we had to figure out how are we gonna price all these services in a way that we can still sort of stay in business and be a viable competitor to the private sector. Huh.

00:02:11 [Barry Ritholtz] That, that’s kind of bizarre. I would imagine in 1982, the Fed was a much smaller entity than it is today. What was a day in the life of a Fed economist like back then?

00:02:23 [Speaker Changed] So, I was working on issues, you know, on payments. I worked on issues on, you know, some, some, some, some of them were quite esoteric. So, for example, the treasury was thinking about moving to direct deposit, but they wanted to know how much it was gonna cost them because direct deposit, they, they, they, they, the money clears, you know, sorry, almost instantly, right? When you write a check, you get check float, it takes time for the checks to come back to the hit the treasury account. So they wanna know how many days does it take a, a treasury check to get back to us. So we actually set, set up this project where we went out to the reserve banks and sampled checks
to find out how long did it actually take someone to get their treasury check and deposit it somewhere and have it get back to the Fed and debit the treasury of the county. It turned out to be like eight or nine days on average,

00:03:07 [Speaker Changed] And, and on a couple of billion dollars, that float is real money.

00:03:10 [Speaker Changed] It’s real money. So we wanted to make sure that under PE people understood what the cost was. Now, obviously, it’s a good thing to do. I mean, it does cost the treasury money, but it’s a much more efficient and more reliable payments medium.

00:03:23 [Speaker Changed] Did you overlap with Chairman Paul Volker when you were there?

00:03:27 [Speaker Changed] Yes, I did. I didn’t have a lot of interactions with him. I remember one time though, I did do a briefing of the, of the Board of Governors, and at the time they had, they had this very long table in the board in the main, you know, board of governor’s meeting room. And Volcker sat at one end and the, the briefer sat all the way at the other end, which was made it sort of complicated because Volcker had a, usually had a cigar stuck in his mouth, and he would actually quiet, like, and you could like straining to hear them. The, the senior staff was ready to rescue you if you said something inappropriate. I mean, right. They set the bar, the tension bar so high because you, you actually couldn’t actually do a briefing until you’ve actually taken a course.

00:04:08 [Speaker Changed] No kidding. So

00:04:08 [Speaker Changed] That means like, you’re not exactly relaxed when you’re going to, to brief the governors. I’m, it’s not a lot of give and take. It’s very, it was a very formal process

00:04:16 [Speaker Changed] And even without a cigar in his mouth, I only got to meet Tall Paul once, but he’s kind of gruff and mumbles, like not a clear projecting voice, kind of a, a horse mumbling voice. I can imagine with a cigar in his mouth, who could even tell what he’s saying.

00:04:31 [Speaker Changed] Well, I seem to have, have gotten it good enough. And you know, what’s interesting about that? I didn’t really have that much interaction with Paul over the next, you know, 15, 20 years. But once I got to the Fed, we started to actually see each other on a much more regular basis. I got involved with a group of 30, Paul was a member of the group of 30, and we gradually became pretty good friends. So it started like very slow and started it matured like fine wine.

00:04:56 [Speaker Changed] He’s a, he’s a fascinating guy. And what, what an amazing career. So before you come back to the Fed, there’s a private sector interval. Tell us a little bit about the 20 years you spent at Goldman Sachs, where you not only became a managing director and a partner, but you know, really very much rose through the ranks.

00:05:16 [Speaker Changed] Well, first I went to JP Morgan. I was their, the regulatory comm, JP Morgan at the time had one regulatory commiss. And so when the job came open and they approached me at the Fed, I thought, boy, if I don’t take this job, it’s not gonna be available, you know, a few years later. So I went to JB Morgan and I worked on a lot of bank regulatory matters, and that’s why I’m still very
interested in bank regulatory issues. But that seemed to me like not a really great long-term career. ’cause as you know, bank regulation changes very slowly, and I sort of wanted a faster tempo. So Goldman Sachs had me into interview for a macroeconomics job, and I thought, well, I don’t really know a lot of macroeconomics, but I do know about how the Federal Reserve operates, how the payment
system operates, how the plumbing works, how reserves, you know, move through the system. And I
think they liked the fact that I knew about how things worked at sort of a micro level. So they hired me
to do macroeconomics.

00:06:11 [Speaker Changed] You were chief US economist for, for a decade over a, a really fascinating period, really, the heart of the bull market. Tell us a little bit what you remember from that role in that era.

00:06:27 [Speaker Changed] Well, I remember how, how, how it was a period of sort of stars for, for, for, for equity analysts, much more than it is today. And one of the biggest stars was Abby, Joseph Cohen Sure. Who was the equity analyst for Goldman Sachs. So trying to find some space between Abby and your audience was a little bit challenging. But, but, you know, we, I focused mostly on fixed income and foreign exchange. So there was sort of room for me to, to, to do my business. Probably the highlight of my career at Goldman Sachs was that, I can’t remember exactly the year, but it was in the early two thousands when people in the markets were, couldn’t figure out if the Fed was going to move by 25 basis points or by 50 basis points. And unlike today going into the meeting, it really was 50 50. 00:07:13 Right. And Lloyd Blankfine called me up the night before and sort of said, you know, we have a lot of risk on, on this notion that they’re gonna do 50. How do you, how do you feel about that? And that was my call. I said, I, I told Lloyd, I said, I don’t know what’s gonna happen, but the probability of 50 is a lot more than 50 50 at this point. Next day I had to go to Boston for a client meeting. It was really sort of sad because I wasn’t on the floor at the time that the announcement came, but apparently people stood up and cheered for me,

00:07:40 [Speaker Changed] And it was a 50 point mark.

00:07:41 [Speaker Changed] Yeah, yeah. So I got that, that, so that, that was probably the highlight. And I sort of got to miss the best part of it actually.

00:07:47 [Speaker Changed] So, so after, you know, more than 20 years at Goldman, you joined the New York Fed in 2007, overseeing domestic and foreign exchange trading operations, 2007, that, that’s some timing. It’s really, it’s after real estate rolled over, but it’s kind of before the market peaked and the real trouble began in oh 8, 0 9.

00:08:11 [Speaker Changed] Yeah. Well, I had about I seven months of calm and then chaos started in August of 2007. I remember it really well because I just finished building this house in West Virginia and we, we were taking occupancy in early August, and it was, it was literally the same day that BMP Paraba shut off redemptions from some of their mutual funds, caused all sorts of chaos in Europe. And then the
question is, well, what are we gonna do about adding liquidity in the us? So, didn’t get outta the house, my new house for the next two days as we tried to figure out how to calm markets after the BNP Paraba event

00:08:48 [Speaker Changed] And, and the US market kept going higher. I don’t think we peaked till like
October oh seven, something like that.

00:08:53 [Speaker Changed] Yeah. People didn’t really understand the, the, the consequences of
subprime, you know, I thought

00:09:00 [Speaker Changed] For years, I mean, literally for years if you mentioned it, you would be
mocked on tv.

00:09:05 [Speaker Changed] Yeah. I mean, you know, one thing I am proud about when I joined the Fed
is in January, 2007, that was my first briefing of the FOMC. And I, I actually talked about how this could
turn out poorly. You know, that subprime was being supported by, you know, subprime was being, you
know, the credit was flowing to subprime, subprime was enabling people to buy houses. Home prices
were going up as, ’cause home prices were going up. Subprime wasn’t a problem, right? But at some
point, supply was gonna increase in response to the higher home prices. And once prices stopped going
up, subprime was gonna start to go the wrong direction. I said, this is a possibility. I didn’t say it was
going to happen, but I said it was a possibility. So I was sort of pleased that I got off on the right track.

00:09:48 [Speaker Changed] And, and then in January, 2009, we we’re deep into the financial crisis.
We’re post Lehman and post a IG you get named 10th president, CEO of the New York Fed. Again,
fantastic timing. What was taking up your attention right in the midst of, of the CRI financial crisis?

00:10:08 [Speaker Changed] Well, you know, that was a tremendously fortunate event for me. I always
tell people like, B Barack Obama had to become president. Tim Geitner had to become treasury
secretary, and then the board of directors in your fed had to pick me. So it’s sort of like a low probability
times, low probability times low probability. So I,

00:10:25 [Speaker Changed] So sometimes it works out. Yeah,

00:10:26 [Speaker Changed] Sort of a bank, a bank, a triple bank shot. You know, a lot, lot of things we
were focused on at the time was trying to provide support to financial markets. So, if you remember, we
were, we were still rolling out various facilities like the, the, the term asset backed, the lending facility,
for example. We were running the commercial paper funding facility. We were trying to figure out how
to do stress test, the first stress test of banks, right? So that was a big job in the spring of, of 2009. And
those stress tests were probably the critical turning point in the financial crisis. I remember the, the day
after we published the stress test, and for the Fed, we were actually pretty transparent about what we
did and what our assumptions were. And here’s the results. Bridgewater published a piece, and I think
the headline said something like, we agree.

00:11:13 And I, and I said, okay, we’ve, now that’s, that’s really important because if our analysis is
viewed as credible, and we have the tarp money being able to supply the capital that’s needed, then
people can start to rest assured that the banking system is, is gonna stabilize and, and it’s gonna stop
deteriorating. Now, it also helped that the economy was showing signs of bottoming out, right? So it
didn’t look like we’re just heading down into a, a deep hole. But, you know, it was very touch, touch,
touch and go there in the first part of 2009. And there, you know, there were still some major financial
firms that were pretty darn shaky. I mean, Citi was pretty shaky. Morgan Stanley was pretty shaky. Some
of the banks were still pretty shaky. So it, you know, until you actually hit bottom and start to pull up,
you’re really wondering, are you gonna get through this in, in one piece?

00:12:00 [Speaker Changed] So, so the Bridgewater piece raises a really interesting question. The New
York Fed is kind of, I don’t know how to say this first, amongst the regional feds, because you’re located
right in the heart of the financial community. What is the communication like back and forth between
the New York Fed and major players in finance, especially in the midst of a crisis like that?

00:12:29 [Speaker Changed] So the New York Fed is sort of unique among central banking entities
because most central banks, they, they do the policy and strategy and the operations all in the same
place. But in the Fed is split. You have policy done in Washington, the operational implement
implementation of that policy. Almost all of that takes place at, at the New York Fed. So the New York
Fed is sort of the eyes and ears of, of the Federal Reserve for markets. I think that, you know, one thing
that helped me a lot during the financial crisis is I knew a lot of people on Wall Street. And so when
something was happening, I could call up people I knew and and just ask their opinion, recognizing that
oftentimes their opinion does have a touch of self-interest. Sure. So you need to talk to three or four
people to sort of triangulate and figure out what you think is really going on.

00:13:15 I mean, I’ll give you an example of one thing that really struck me during the, that period, I
called up someone and I said, here, here’s a complex, you know, CDO obligation, you know, with, you
know, with all these different mortgages and all these different tranches, how long would it take you to
actually go through that and value it appropriately to come up with a appropriate valuation? He said, oh,
it’d take at least two or three weeks, really? And I thought, oh boy, we’re in big trouble. Wow. You
know, if you don’t really know what things are worth when you’re going through a period of financial
stress, that’s gonna be, make things much, much more difficult,

00:13:49 [Speaker Changed] I would’ve guessed they would break that up into five parts, give it to a
bunch of juniors, and they’d have an answer in three hours

00:13:55 [Speaker Changed] At the most. Well, it’s, it scared me. Wow. It scared

00:13:56 [Speaker Changed] Me. I, I, I can imagine. So, so from the New York Fed, you ultimately end up
as vice chairman of the FOMC helping to formulate US monetary policy. What was that like going from
New York to, to dc?

00:14:14 [Speaker Changed] Well, it wasn’t such a big change because I had already been going to the
FMC meetings and briefing the, the, the, the, the FMC members as

00:14:21 [Speaker Changed] As president of the New York Fed. You have a seat on

00:14:23 [Speaker Changed] That. What what what what happened though is, is as I sort of switch sides,
so there, so the, the, the day that Tim Geer was named Treasury Secretary was basically the day before
an FOMC meeting. And I literally didn’t know when I went down to Washington that Monday evening,
whether I was gonna be briefing the FOMC participants or whether I was gonna be an FOMC participant
myself. So I actually prepared two sets of notes. Here’s my briefing notes, if I’m, I’m the so manager, and
here’s my remarks if I’m the president of New York Feds. Wow. So I was ready for both.

00:14:56 [Speaker Changed] And what happened that day?

00:14:57 [Speaker Changed] He was, he was named on that Monday and so on Tuesday I was, I was the,
I was the president of New York Fed. Wow. And, you know, I didn’t, you know, so I, and I, when I got
back to New York on, you know, I think Thursday morning, I, we had a town hall and I gave my first
remarks to the New York Fed people and had a very simple message for them. Best idea wins because I
was really struck by how hierarchical central banks tend to be. And I wanted to sort of push aga against
that idea and basically say, it doesn’t matter where the idea comes, if it’s the best idea, that’s the idea
that should win out.

00:15:34 [Speaker Changed] Huh. Ma makes a lot of sense. And, and since then, you, you’ve gone on to
do some work reforming L-I-B-O-R as the benchmark for rates. Tell us, I always get the name SOR the
new one that replaced it. sofa. Yeah. So, so tell us a little bit about the work you did. ’cause L-I-B-O-R
was probably the most important number, certainly in credit, maybe in all of finance.

00:16:00 [Speaker Changed] So LIBR for while was there was a real question whether Central banks were
gonna take this on or not. And I remember I was in Basel for the BIS meetings and I wrote a one page
memo to, to Ben Bernanke, to hand to Mervin King. Mervin King was the head of the, sort of the
policymaking group at the BIS at the time. And the memo was basically arguing why Central banks
needed to own the L-I-B-O-R problem. ’cause if they didn’t own it, it wouldn’t get fixed. It’d be a problem
again. And then the central banks would be blamed for, well, why didn’t you fix that problem? So I don’t
know how much import that memo had, but I was very pleased to see the central banks take it up. And
as you know, it was a huge undertaking, which took, you know, many, many years to complete.

00:16:44 [Speaker Changed] And, and, and for those people who may not be familiar with the London
Interbank offered rate offered rate literally was a survey where they call up various bond debts and say,
so what are you charging for an overnight loan? And eventually traders figured out they could game that
by, let’s just call it, talking their books, so to speak, in a way that would move the L-I-B-O-R in their
direction. You could, you could do a bunch of things with derivatives and eventually L-I-B-O-R kind of
spiraled outta control the new improved version. How do we prevent that from taking place? What,
what were the structural changes?

00:17:26 [Speaker Changed] Well, the, the problem, I mean, the problem of of L-I-B-O-R was that you
had a small cash lib i bor market that was, was referencing a very large futures market year at dollar
futures market. And so you had a situation where you could take big positions in the euro dollar market,
affect the price and the cash market and actually make a profit. So the sort of the tail was wagging the
dog for SOFR, the secured overnight funding rate for repo. You have a big repo market. I mean it’s, you
know, hundreds and hundreds of billions of dollars. So the idea, and it’s a real market. I mean, there’s
real transactions that are traded and you can sort of track what the prices are and where trades are. So
it’s, so it’s almost impossible to imagine someone manipulating the this so, so R market.

00:18:07 [Speaker Changed] Huh. Really, really interesting. So, so first, before we start talking about
policy, I have to ask, you’re at Goldman Sachs for 20 years and, and you get the phone call to join the
New York Fed. What was that like? Was that a tough call or was that an easy decision to make?

00:18:24 [Speaker Changed] Well, what happened actually is Tim Geer called me several months earlier
and said, would you like to come over to be a senior advisor? And I said, I’d love to be a senior advisor to
you, Tim, but what do I do with the rest of my, you know, 40, 50 hour work week? And he didn’t have a
really good answer for that.

00:18:39 [Speaker Changed] Was this a full-time gig? I means he was economies position.

00:18:42 [Speaker Changed] He, he, he was per, well, I didn’t, when I left Goldman, I didn’t really know
what my next thing was. So I did not have the next job. I was just assuming that I would, I, something
would come along that would be

00:18:51 [Speaker Changed] Right. Fair assumption.

00:18:52 [Speaker Changed] It would be interesting. So he, he offered that. And I thought, well, you
know, I I, you know, Tim and I had a very good relationship and you know, I, I sort of liked the idea of
working for him, but I thought a senior advisor was a little bit too informed. And a couple months later
he came back and said, can you run the markets group at the New York Fed? That’s completely different.
You’re running the group that actually implements monetary policy, oversees market analysis, deal deals
with the primary dealer community. That was a real opportunity. So that one I didn’t have to think very
hard about.

00:19:21 [Speaker Changed] And, and what’s, what, not long after Tim gets elevated, you, you take the
role of New York Fed President, what’s a day in the life of New York Fed Pres? Like

00:19:33 [Speaker Changed] There’s a lot to, to do because the New York Fed does lots of different
things. So you, you know, we have supervision, we oversee some of the largest financial institutions in
the world from a supervisory perspective. We’re the international arm of the Fed. So pretty much every
two months I would go to B to to the BIS in Basel, be part of the Bank for International Settlement
meetings. New York Fed President as, as well as the chairman of the FO of the Board of Governors is on
the board of directors of the BIS. As Alan Blinder once joked to me, he says, New York Fed is the only
only institution that’s treated it like their their own country because they have this board of directors
position. You know, there’s lots of things and, you know, payments their Fed, New York Fed runs fed
wire, the, the New York Fed runs Central Bank International Services for a bunch of foreign central
banks.

00:20:24 They have, I don’t know, three, $4 trillion of custody assets from foreign. Wow. So there’s a lot,
there’s lots of pieces to the Fed, and then there’s a research department and there’s a lot of outreach to
try to get information about what’s really happening in the world. I mean, the one thing that I did that
was probably a little new from the Fed’s perspective is I tried to broaden out the, the people that the
New York Fed was talking to historically, the New York Fed had typically talked mainly to the primary
dealer community. So that’s where they obtained their information from. And I thought that that was
too narrow. We need, we need, we need a broader set of perspectives. And so I hired a, a woman
named Hailey Bosky who came in and, and literally built out a whole operation so we could actually
interact not just with the sell side, but also with the buy side.

00:21:10 And so we started an advisory group of people, you know, hedge funds, pension funds,
insurance companies, you know, buy side investors. And so we have them in periodically to talk to. And
so we got a much broader network of information that we could sort of take on board. And I think that’s
valuable because, you know, where you sit really does influence your perspective and you sort of wanna
understand what biases and, you know, self-promotion sometimes that people are talking their book
that you want to be able to make sure you, you don’t get to fooled by that.

00:21:42 [Speaker Changed] Now, you could go back not all that far in the Fed history, and there was
none of this communication. There wasn’t transcripts released, there wasn’t a reporter Scrum and, and
a q and a. There wasn’t even an announcement of change in interest rates. You had to follow the bond
market to see when rates changed. What are the pros and cons of being so clear and so transparent
with market participants? Is the risk that maybe we’re too clear?

00:22:13 [Speaker Changed] Well, I think there’s a strong argument in favor of transparency as opposed
to opacity. And, you know, this has been debated within the Fed for many years. I mean, Alan
Greenspan, Paul Volcker definitely preferred to be opaque. I mean, Alan Greenspan famously said, if you
understand, if you think you understand what I said, then I wasn’t, wasn’t unclear enough or something
to that effect, right? So I, the, the value of transparency is, is if, if is that if markets understand how the
Federal Reserve is gonna react to incoming information, the market can essentially price in what the Fed
hasn’t even yet done. And so that can make monetary policy work much more rapidly. So let’s think
about it today. So the market is pricing in roughly five to 6 25 basis point rate cuts between now and the
end of the year. So that means monetary policy is easier, even though the Fed reserve hasn’t cut rates
yet. So the,

00:23:06 [Speaker Changed] They do some of the work for the Fed for

00:23:08 [Speaker Changed] Them. Yeah. And, and it makes it, and it also means that as new coming
information is coming in the market can reprice. And so that can cause the impulse of the economic
news to be filtered into financial conditions much more, more quickly. I’m a big believer in financial
conditions as a framework for thinking about monetary policy. You know, 20 something years ago, Jan
Hottes and I introduced the Goldman Sachs Financial Conditions index, and it took about 20 plus years
for the Federal Reserve to sort sort of endorse it. I mean, Jay Powell talks about financial conditions a lot
more than any other chair of the Fed ever has. The reason why financial conditions are so important is in
the United States, the economy doesn’t really run on short-term interest rates. It really runs on how
short-term interest rates affect long-term rates, mortgage rates, stock market, the dollar credit spreads,
you know, we have a big capital market compared to other countries.
00:23:58 And so short-term rates are not really the driver. Now, if short-term rates and financial
conditions were, you know, rigidly connected, so if I move the short term rate by XI, I know exactly how
much financial conditions are moved by y you wouldn’t have to worry about financial conditions, but
there’s actually a lot of give between the two. And so financial conditions can move a lot, even as short-
term interest rates haven’t changed very much. I mean, good example is just the last three months, last
three months since the end of October till now, financial conditions have eased dramatically. I mean, the
Goldman Sachs financial Conditions index has moved by about a one point half per points, which is a big
move for that index, even as the Fed hasn’t done anything in terms of short term rates. So
00:24:39 [Speaker Changed] Part of the problem with everybody anticipating Fed actions is there’s a
tendency for many people, sometimes most people to get it wrong. Wall Street has been anticipating a
Fed cut for, what is it now? This, we’re in the seventh month, eighth month of, hey, if the Fed’s gonna
start cutting any, any day now, what does it mean when anticipating Fed actions almost becomes a Wall
Street parlor game and there’s less focus on, on what’s happening in the broad economy and more focus
on, well, what does the second and third derivative of this mean to this economist advising this Fed
governor and the impact on the FOMC?
00:25:23 [Speaker Changed] I mean, sometimes I think you’re right that there’s almost too much focus
on what’s gonna happen at the next meeting. I mean, you know, when you go to the press conference
now, if Powell’s just asked multiple different varieties of the question, okay, so what would cause you to
move at, at, at, at the March meeting or at or at the May meeting? And of course, Powell’s not gonna
answer that question, you know, because it depends, it depends on how the economy evolves between
now and then. So I think, you know, one of the problems I think you, you have is that the Fed Reserve
does publish a forecast, the Summary of economic projections, which is the forecast of all the 19 FMC
participants. So that gives you an idea of what they sort of think is gonna happen at any given point in
time. But those forecasts are, you know, not particularly reliable. And so as
00:26:06 [Speaker Changed] All forecasts are
00:26:07 [Speaker Changed] On, yeah, it’s all four kind stars. So you, you don’t want to, you don’t want
to take it sort of literally, but it, you know, like right now there’s a bit of a, a gap, right? The feds is
talking about three rate cuts in, in, in 2024, and the market’s got five to six priced in. So you know, what
will happen is the economic news will come out and that will drive, make the Fed either go more quickly
or more slowly, and that that will, will, what actually is, is important. So I, I always tell people, focus on
the data more than what the Federal Reserve says beyond the next meeting.
00:26:39 [Speaker Changed] Although, to be fair, and I find this perplexing, say what people will say
about Jerome Powell, he has said what his position is, is he has said what he’s going to do. And then he
has done exactly that for the past three years. And it’s almost as if Wall Street just doesn’t believe him.
Like, no, no, we’re not gonna cut this year. You got, you got three or four quarters, settle down, no, no,
go cut next month says Wall Street. He has said what he meant and then stuck to it. And yet the street
seems to doubt him.
00:27:10 [Speaker Changed] Well, there’s two reasons why the market could disagree with the Fed. One
is they could misunderstand the Fed’s reaction function. So you give them the Fed have set of economic
data, how are they gonna react to it? But it also could be a disagreement about how the economy itself
is gonna evolve. The Fed might be more optimistic or more pessimistic on the economy than than
market participants right now. It’s really hard to sort of say, what, what’s the, what’s the disagreement
about, does Wall Street think that economy is gonna be weaker than the Fed does, or does the, or or
does the market just think that the Fed is going to be more aggressive than the Fed thinks at this point?
00:27:44 [Speaker Changed] Right. Sometimes it just looks like pure wishful thinking.
00:27:48 [Speaker Changed] I think sometimes the markets are just gets ahead of itself. It’s almost like
there’s, we’re now talking about easing, so the bell’s about to go off and I don’t want to miss out. And so
I’m gonna be pretty aggressive about positioning for that. And I, I think there’s a little bit of, you know,
and sometimes things tend to go too far because people get caught off size and then people have to
close out the, the trades that went wrong. And so everyone’s sort of moving all, all at once to the other
side of the boat. And so things can get overdone at the end of the day though. I mean the Fed Reserve,
you know, writes the story, you know, the market has to converge to what the Fed ultimately does. And
so this is why the Fed’s not particularly worried about when the market prices in more or less because at
the end of the day, the Fed’s view is, you know, we’ll do what we need to do and the market will have to
come along with us.
00:28:32 [Speaker Changed] It, it, it, it’s inevitable. So. So we mentioned Jerome Powell, he’s been as
clear as any Fed Chief in history. What are your thoughts on how the modern Federal Reserve
communicates with markets and the public today versus how they used to do it? I you don’t even have
to go that far back 20 years ago. I think
00:28:51 [Speaker Changed] It’s, as I said earlier, I think it’s a lot better way of communicating. ’cause
then markets can understand what the Fed is up to. They can interpret economic information in real
time and figure out what that means for the likely path of short term rates. So financial conditions can
move long before the Federal Reserve actually acts. Now, obviously, you know, there’s, there’s, there’s a
risk in all this because what the Fed says may not be borne out by the economic information. And so I
think the important thing in all this is not to take what the Federal Reserve says as gospel when they
have a forecast, that’s their forecast today and that forecast will change as the incoming information
warrants it. I think where Poll has done a really good job is being very clear about his commitment to
getting inflation back down to 2%. Because the biggest risk over the last couple years was that people
would start to doubt the Fed’s willingness to be tough and, and, and, and finish the job. And if that were
to happen, inflation expectations would’ve become unanchored and that would’ve made the Fed’s job a
lot more difficult. One of the great developments of the last couple years is even though we did have a
period of very high inflation, long-term inflation expectations really stayed un anchored through that
entire period. And so Paul deserves quite a bit of credit for
00:30:05 [Speaker Changed] That. So, so we’re recording this a few days after his 60 minutes interview,
broadcast some things that I took away from that. First, it’s a complicated job with a, a lot of moving
parts. And second, the Fed as an institution is apolitical. It, it, they serve the public, not any one branch
or any one party of the electorate. I thought he was very intelligent and reassuring. What was your
reaction to that interview?
00:30:34 [Speaker Changed] I thought it was a very good interview and I thought he actually broke a
little bit of new ground when he talked about the, you know, the fiscal sustainability issue. And he also
talked about the importance of the US role in the world in terms, I
00:30:48 [Speaker Changed] I picked that up also in terms of, I thought that was the first time I’ve heard
of Fed Chief talk about liberal democracy is an important aspect of global leadership.
00:30:57 [Speaker Changed] Yeah, exactly. And so I thought that was a, a inter, a very noteworthy, a
new, new piece. I thought the rest of it was, you know, pretty much tracked, you know, his remarks at
the press conference, you know, I think that, you know, it’s good for him to get out there and sort of
demystify the Fed. I mean the, the Fed is, you know, not so, you know, easy for the average person to
understand. And so going on 60 Minutes is, is a, is a good idea from from, from time to time. I thought
he did a, you know, I thought he did a good job. I thought he was very, very clear. You know, this, this is
not the first Fed chair that’s been on 60 Minutes.
00:31:32 [Speaker Changed] Bernanke has done it, right?
00:31:33 [Speaker Changed] Yeah. Bernanke has done it. I, I’m not, I can’t remember if Janet Yellen did it
or not, but
00:31:37 [Speaker Changed] I’m, you know, she definitely did it as treasury secretary. I don’t remember
if she did it as
00:31:41 [Speaker Changed] We’ve been very lucky in terms of the leadership of the Fed. I mean to
have, I mean, Greenspan obviously, you know, was on sort of without parallel and then, and then to
have Bernanke Yellen and Powell in a row, those are three exceptionally good Fed chair. I mean, my
only, you know, critique of the Fed and you know, I write for Bloomberg and you know, sometimes I,
you know, I say what I, what I think and let the chips fall, they may, the one, the one I think mistake the
Fed made, you know, over the last few years was they were really, really late to get off the dime in
terms of starting to tighten monetary policy.
00:32:12 [Speaker Changed] Now, isn’t that historically true? Is it? So the Fed throughout the 2010s
were late to recognize, hey, we don’t have to be on emergency footing anymore. Not only were they
late to start tightening in, in 2001, they they 2021, they were late to recognize inflation peaked in 22. I
mean, it’s, you could easily make the argument that they could have begun cutting any this meeting, last
meeting two meetings ago. Take the past six months of inflation we’re at 2%. Yeah,
00:32:42 [Speaker Changed] I think the reason why they’re not cutting it is, is, is there’s really two
reasons for that. Number one, the economy’s a lot stronger than they thought it was gonna be. And so
that means the risk of waiting is a lot lower than they thought it was gonna be because the economy,
you know, grew three three over 3% in the fourth quarter. The Atlanta Fed GDP now forecast for the
first quarter is over 4%. I mean, obviously it probably won’t be that strong when all the data comes in,
but the economy has a lot of momentum and so the pressure on the Fed to cut rates because of
weakness and growth, weakness in the labor market just isn’t there. And that allows them to be more
patient. The second thing is important is, is a little bit of delay is not gonna have a huge consequence
because look what’s happened to financial conditions over the last few months, they, they ease
dramatically. So the Fed’s already getting a lot of additional support to the economy without actually
having, having to cut, cut rates in some ways. The Fed can sort of have its cake keep, you know, show
that they’re tough minded and they’re gonna get inflation all the way down,
00:33:37 [Speaker Changed] Let the market do the work
00:33:37 [Speaker Changed] For ’em and, and, and, and, and, and, and, you know, they can have their
cake and eat it too. And have the market basically ease financial conditions and provide support to the
economy. So I think it’s, you know, it’s worked out very well from the Fed’s perspective.
00:33:48 [Speaker Changed] So, so you mentioned you, you contribute to Bloomberg opinion. One of
the criticisms that took place in the prior administration was then President Trump kind of haranguing j
Powell to cut rates and you wrote an op-ed tell after you had left the Fed saying the Fed shouldn’t
enable Donald Trump. In other words, the independence of the institution is much more important than
any one rate cut or rate hike at, at any time. Te tell us about that. That generated a, a lot of controversy.
00:34:25 [Speaker Changed] Yeah, I think people, you know, I probably didn’t say it the way I needed to
say it. It was really more of a thought experiment about how, you know, if the Fed Reserve really cares
about the country, they just need to, you know, and the economy, which is their mandate, they just
need to do the right thing and, and let the chips fall where they may. I think that, you know, the, the
Trump administration’s attacks on the Fed, I think are really, you know, counterproductive for the
Trump administration and they’re also damaging to the Fed because if the Fed is viewed as politicized,
that basically reduces people’s trust in, in, in the Central bank. And I think if the Fed Trust in the Central
bank is reduced, that makes the Federal Reserve less effective as the institution. One reason why I think
the Fed, you know, doesn’t take politics into consideration.
00:35:12 And in, in my experience, I was at the FMC table for 11 and a half years, never talked about
politics, never a consideration in terms of monetary policy decisions for very simple reason. If you start
to take politics into consideration, you’ve politicized the Fed and if you politicize the Fed, you’ve
basically compromised the independence of the Fed and its ability to be effective. So you just don’t want
to go down that path at all. And I think, you know, I think Jay Powell completely understands that. And
you know, I, I gave him a lot of credit. I mean, when, when Trump was attacking him, pretty vociferously,
Powell did not rise to the bait. He, he was completely silent. He just did his job. It’s gotta be tough to be,
you know, being beaten up publicly by
00:35:55 [Speaker Changed] The president.
00:35:56 [Speaker Changed] But he showed a tremendous amount of discipline and I think that basically,
you know, enhanced the credibility and independence of the Fed.
00:36:03 [Speaker Changed] So that comment we were discussing earlier that he made on 60 Minutes,
here’s the quote, there’s a real desire for American leadership since World War ii. The US has been the
indispensable nation supporting and defending democracy, security arrangements and economic
arrangements. We’re the leading voice on that. It’s clear the world wants that. I would want the people
in the US in the United States to know this has benefited our country enormously. It benefits our
economy so much to have this role. And I just hope that continues. Am I reading too much into that to
say, hey, this is an argument against President Trump who is trying to realign the world and pull back
from US leadership? I
00:36:50 [Speaker Changed] Think it’s, I think it’s a, something that j Paul very much believes in, that US
engagement in the world leads to better outcomes, both in a security perspective, economic
perspective, absolutely essential for, for addressing issues like climate change. And I think he was just
expressing his opinion. Obviously if, if there is a next Trump administration and they, they decide to file
fo follow a very isolationist policy, I imagine that, you know, Powell will not agree with that, but I think
he’ll be very silent about the fact that he doesn’t agree with it because he won’t want to, you know,
engage in that political process because that will compromise the independence of the Fed. So, so to
your point, this was pretty, you know, this is a, a step out for Powell relative to what he said, but there
was nothing in there about who was in favor of what,
00:37:43 [Speaker Changed] It’s not a political statement, it’s not a political state. It’s a fact that, hey,
this US leadership in global economics has done nothing but benefit the country. Yeah.
00:37:52 [Speaker Changed] It’s his opinion that this, this is in the US’ interest, it has been in the US
interest, it’s in the US interest today, and it’ll be in the US interest in the future. That’s his, his view. And
I have to say, I, I very much agree with it. I,
00:38:04 [Speaker Changed] I don’t disagree. And if there are some candidates that don’t have that
belief system well is that being political or is that just, here’s a historical fact, this is what’s helped the US
Well,
00:38:14 [Speaker Changed] I think he’s allowed to, you know, have his, have his beliefs and I don’t think
that, you know, his, his, his belief that he’s expressed as should be viewed as a controversial one. I think
that’s, that’s, that’s something that, you know, a a a a, a high number of people in the country, I think
would, would, would, would support.
00:38:34 [Speaker Changed] I, I don’t disagree at all. So, so let’s talk a little bit about the, the history of
the Federal Reserve, starting with the dual mandate price stability, namely inflation and and
unemployment. How does the Fed balance those two and what are the data points that they follow
most closely?
00:38:55 [Speaker Changed] So the Fed’s due mandate was actually established by Congress, not by the
Fed Congress in the Humphrey Hawkson Act. Basically said, here’s what we want the Fed to do. We want
want, we want to have the maximum sustainable employment in the country consistent with price
stability, which the Fed then subsequently defined to be 2% inflation. And so the Fed basically is trying
to manage the economy with both of these goals in mind. And sometimes one of the goals turns out to
be more significant because the fed’s doing more poorly on, on, on, on, on, on that side. So over the last
couple years, the problem was not that, that that the economy was far away from full employment. The
economy was either at full employment or maybe even a little beyond full employment when we saw
how tight the liver market was, especially in 2022.
00:39:42 So the fed’s focus was on inflation because if inflation was well above the Fed’s 2% objective.
What’s happened recently is inflation’s come down. And so the Fed can start to talk about both sides of
the mandate, not just the inflation side, but also the, the, the labor market side. And so now you’re
gonna see a lot more balanced messaging from the Fed. Now the good news from the Fed is that things
are going really, really well. You know, you know, the inflation on a six month change basis for the core
PCE deflator, which is the fed’s, you know, preferred measure of inflation is tracking 2%. So all we need
is another six months of the same as, as chair Paul said in his press conference. And we’re basically at
the fed’s 2% objective. And the labor market’s doing gangbusters, frankly, I mean payroll employment
growth over 300,000 last month. So we have sort of the best of both worlds. Inflation’s come down and
the labor market is still very, very robust. So, you know, it’s, it’s interesting when you look at polling
results of, of Americans, they’re, they’re very unhappy about the economy and what they’re unhappy
about is how much prices went up over the last four,
00:40:49 [Speaker Changed] Four years. Not current rate of inflation exactly, but absolute prices. It’s
00:40:52 [Speaker Changed] A price level problem, not an inflation rate problem. ’cause if you look at
the, so-called misery index, which economists like to talk about, very low about, which is the sum of
inflation plus the unemployment rate. It’s really at a historically low level. Yeah. So, you know, I think
what’s gonna happen over time is, is if we keep inflation, you know, around 2%, some of the
unhappiness about the price level will gradually fade away. People just sort of start to accept it and then
people will start to assess the economy in a more favorable way for, for the Biden administration,
there’s a little bit of race going on, right? Will this change in, in, in set sediment occur fast enough
relative to the November election,
00:41:33 [Speaker Changed] They, they got seven months to hope that the polling data, the economic
data is going in favor,
00:41:39 [Speaker Changed] Consumer consumer confidence. So it does, does seem to be improving,
right? I mean if you look at the most recent consumer confidence surveys, it does look like consumer
confidence is improving. So people are starting to, you know, understand that the inflation rate does
seem to be much lower, but they’re still very unhappy. ’cause you know, when you go to the grocery
store, you just remember that this thing that I bought for, you know, $3, you know, four, four years ago
now costs four 50, right? And you know that just every time you go to the grocery store, you go to the
gas station, you see it, you’re reminded by about the higher price level.
00:42:10 [Speaker Changed] I I see it more in the grocery store than gas stations. Yeah, I agree. ’cause
gas is three and change and 20 years ago gas was three and change. Yeah, that’s been flat for two
decades. But food prices definitely have, and shelter prices have moved up. So before I get to 2%, ’cause
I have a lot of questions about that. Let, let’s talk a little bit about the, the labor market. So first we’re,
again, we’re recording this February, 2023. We just had a giant number, a giant upside surprise in
payrolls. When the Fed looks at at that number, are they thinking, well, you know, it’s January, there are
a lot of one-time adjustments and seasonal effects. Or are they saying, Hey, this labor market is really
booming, we can sit back a little bit,
00:42:56 [Speaker Changed] A little bit of both. I mean, in other words, you get, you, you understand
that the data is noisy and so reality is not exactly what the data is, is telling you the data is, you know, is
sampled, you know, they’d go out and poll people. And so there’s sampling bias also in the winter.
Things get very affected by the weather, right? As you go from, you know, warm weather, you know,
warm winter weather months to cold winter weather months when you go from rain to snowfall. So the
Fed basically doesn’t take one month as sort of gospel truth. They look at the, the, the pattern and the,
and the underlying trend. And you know, on that underlying trend, labor markets looks quite strong. So
the Fed is taking a signal from that and that’s one reason why they’re more patient about cutting,
cutting interest rates. ’cause they sort of feel like, you know, we can wait a little bit longer and the risk
that we’re taking is very slow because look at how strong the US labor market is.
00:43:51 [Speaker Changed] So, so let’s talk about not one month, but the past couple of years of the
labor market, you have enormous number of people who are out on disability. We’ve reduced legal
immigration for, for jobs dramatically. Early retirements have been taking place a giant uptick in new
business formation. So that’s a big group of people who aren’t in the hiring pool, they’re actually running
their own firms. It seems like all the issues that have been taking place in the labor market, including the
wage size side, is that we just don’t have enough bodies to put to work in the United States.
00:44:31 [Speaker Changed] I think that was true a year ago. I think it’s l less true today. If you look at,
you know, the ratio of unfilled jobs to unemployed workers that peaked at around two to one. Yeah,
00:44:41 [Speaker Changed] It was u it was a a a almost record high
00:44:44 [Speaker Changed] And now it’s about one and a half to one. So the labor market’s still really
tight, but it’s not quite as tight. You also think we got a a a, a big positive surprise last year in terms of
labor force growth,
00:44:54 [Speaker Changed] Meaning people coming back into the
00:44:56 [Speaker Changed] Label, people coming back into the labor force and, and also immigration,
legal immigration into the US picked up dramatically last year. I mean, so essentially we didn’t have
much legal immigration at all during the covid period, right? And then all of a sudden we get a big
bubble of that in in 2023. And so what you’ve had is big strong growth in payroll employment, but it
hasn’t translated through into a decline in the unemployment rate. So looking at the unemployment
rate, the labor market is no tighter than it was a year ago, which is, you know, was a huge positive
benefit to, to the US economy and to the Fed because if we’d had that growth in payroll employment
without the increase in the labor force, the labor market would be too tight, wages would too high and
the Federal Reserve would still be worried about it too. High inflation. And,
00:45:43 [Speaker Changed] And we’ve seen wages go up, I think for the past six months, real wages are
actually growing faster than inflation
00:45:50 [Speaker Changed] Agenda. Well that’s one reason why the economy is staying, you know,
relatively strong. I mean as inflation comes down and novel wages, you know, inflation comes down
maybe little bit less slow, more slowly, real, real, real incomes increase and that supports the consumer
spending. So I think the unwinding of goods, price pressures, which is really the big driver of why
inflation’s come down, that’s sort of a windfall for consumers right now. And so that’s actually sustaining
real consumer spending and,
00:46:20 [Speaker Changed] And that shift from goods back to services, which is more or less where we
were pre pandemic is certainly easing prices in that, in that sector.
00:46:30 [Speaker Changed] Yeah, I mean all the supply chain disruptions that we had, you know, a few
years ago caused by that shift in demand from services to goods that just sort of overwhelm the capacity
the world to bring those goods to the US in a timely way. That’s, that’s, that’s, that’s all unwound at this
point.
00:46:46 [Speaker Changed] So, so let’s talk about the 2% inflation target. Your colleague Roger
Ferguson in the Council on foreign relations last year criticized the 2% inflation target as something that
randomly originated from New Zealand. And surprisingly it came not from an academic study, but from
an offhand comment during the television interview in the 1980s, I is Ferguson Wright, is this really just
a big, silly round number?
00:47:16 [Speaker Changed] Well it’s true that the Reserve Bank of New Zealand started by, you know,
picking the 2% number and then other central banks followed. But I think there are some logical reasons
why they followed 2% was low enough that it inflation wasn’t gonna be sort of important component of
people’s thinking in terms of their consumption investment decisions. 2% inflation in the US I think the
Fed could argue that that was mostly consistent with price stability. You know, prices are only going to
double at 2% inflation compounded every 35 years. So, so, but you’re right, it was arbitrary. They could
have picked a different number, they could have picked, you know, 3% or 1%. The reason why you want
to have a little bit of inflation is it is it really allows you to do two things. Number one, it provides a little
bit of grease in the labor market ’cause people don’t like their normal wages to be cut, right?
00:48:08 And, but relative wage rates have to change. And so if you have a little bit of inflation, it makes
the labor market work more efficiently in terms of allowing wage adjustments that allow workers to be
distributed appropriately. So that’s the first thing. The second reason why you want a little bit of
inflation is that if you have a little bit of inflation, the the nominal federal funds rate can be a little bit
higher. And so when you go into an economic downturn, the Federal Reserve has more room to cut
interest rates before they hit the zero lower bound for interest rates of zero. So people who are arguing
for a higher inflation target today are basically arguing like it would be better to have even more room
for the fed to cut rates. ’cause if the inflation target was three rather than two, the peak federal funds
rate and the cycle would be at one percentage point higher so the Fed would have more room to cut
rates.
00:48:55 I think there’s virtually no chance that the Fed’s gonna change their 2% inflation effective,
virtually no chance. And there’s a couple of reasons for that. Number one, congress sets the mandate
for the Fed and they define it at price stability. The Fed has stretched that a bit to call that 2% inflation. I
think stretching it a little bit further to call it 3% inflation, that’s a bit of a stretch. The second reason I
think that they’re not gonna move from 2% inflation is it’s taken the fed a long time to get inflation
expectations anchored around 2%. If you move from 2% to 3%, all of a sudden inflation expectations
become unan anchored. And it’s not obvious that you can get ’em re-anchor back at 3% because if
you’re willing to change the target once, why wouldn’t you? Why couldn’t you change the target again,
especially in a situation where the fed us is running a massive fiscal deficit, huge fiscal problems. And
people always wonder, well, one way out of a fiscal mess is to, is inflation and to monetize the debt. So I
don’t think you’re gonna do it for that reason. And the last reason why I don’t think they’re gonna do it is
there’s plenty of room to cut interest rates, right? Federal funds rates over five point a quarter percent.
So if the economy gets in trouble over the next year, the Fed has plenty of room to cut rates before they
get to the zero lower bond for
00:50:10 [Speaker Changed] Interest rates, they could do three 50 basis point cuts. And you’re still way
above target.
00:50:14 [Speaker Changed] Exactly. So I, it’s just not gonna happen. This is sort of an academic debate. I
I don’t think it’s a true federal reserve
00:50:20 [Speaker Changed] Debate. Really, really interesting. So, so let’s talk a little bit about different
Fed policies over the past decades and, and how those decisions have aged. Let’s start with last decade.
The 2010s fed rates were essentially zero the whole time, and yet we couldn’t get CPI to budget above
2% the whole decade following the financial crisis. What made that so challenging for monetary policy
makers?
00:50:50 [Speaker Changed] Well, I think the problem coming outta the great financial crisis was how
much damage was done to people’s balance sheets and to their, you know, credit scores and their, their,
00:50:58 [Speaker Changed] When you say people, you mean households, you mean corporations,
households, or everybody?
00:51:01 [Speaker Changed] Households mostly, but also businesses. Just a tremendous amount of
damage caused by that very deep recession. You know, think of all the households who came out of that
period where, where the, the value of their mortgage was higher than the value of their home. Think of
all the people that were delinquent on their, on their obligations, and so then got bad credit scores and
then that reduced their access to credit. So there were a lot of headwinds. The other thing that
happened was fiscal policy that was eased pretty dramatically when Barack Obama became president.
That got clawed back very, very quickly in 2011 and 12. So there were fiscal headwinds that we haven’t
faced this time around that also held the economy back. So you’re absolutely right. The Fed’s challenge
during that period was to make monetary policy accommodative enough to support the economy
sufficiently to keep inflation at 2%. Now the Fed fell a little bit short of their inflation objective, but you
know, if you really look at where we were, you know, on the eve of the pandemic in February, 2020, it
was a pretty good place. Right?
00:52:02 [Speaker Changed] And the fact that it took a decade is says more about the lack of fiscal
spending of Congress than what the Fed did. And you had
00:52:10 [Speaker Changed] A very long expansion. I mean, the reality of the expansion would’ve kept
going except for the Covid pandemic. Hmm.
00:52:16 [Speaker Changed] Really interesting. So, so let’s talk about the prior decade, the two
thousands. You had a speech around 2014 where you said the Fed was late in recognizing how long they
kept rates low for, and that the liftoff from oh four to oh six should have happened faster and sooner.
Tell us a little bit about what the lessons were from that episode and what the Fed should have done in
the early two thousands.
00:52:47 [Speaker Changed] So there’s been a big, big debate going on for many, many years about, you
know, how should the Fed respond to financial imbalances in the economy? You know, how should they
respond to sort of incipient bubbles? The Greenspan view was, it’s very hard to recognize bubbles. It’s
not clear how you reign them in. So the best thing to do is just sort of let the bubbles take the, run their
course and then clean up after the bubble collapse. It’s, and you’re in the bus period. My view has been
very much that no, that’s, that’s not a great strategy because the bursting of the bubble can cause a lot
of financial knock on effects. And so better to identify the bubble in real time and try to sort of reign
that bubble in. And I think, you know, if you look at the 2004, 2007, eight period, boy, it would’ve been
really good if we’d done something about subprime mortgage lending, about mortgage underwriting
standards.
00:53:43 If we’d done that, we would’ve had a much smaller housing bubble and we would’ve had much
less damage when that bubble collapsed in, in 2008. So my view has always been, let’s, let’s try to be a
little bit more proactive. Now, the problem with, with being proactive is, you know, how do you know
it’s a bubble? And the reality is you don’t. And so it’s very hard to convince people to take proactive
steps to deal with sort of incipient problems because you can’t really be sure with a hundred percent
confidence of what’s actually going on.
00:54:14 [Speaker Changed] Huh. So you’re really pointing out two issues. First, I wanna say the, the Fed
had taken rates under 2% for about three years and under 1% for a year. So that was pretty
unprecedented until, you know, the post financial crisis here. But you’re also pointing out to the Fed as
regulator and, you know, to, to cast blame. Greenspan was very much a anti regulator.
00:54:41 [Speaker Changed] Sorry, LA A little more, a little bit more LA there.
00:54:43 [Speaker Changed] Yeah. Okay. And, and he allowed a lot of non GSE non-traditional banks to
make all sorts of loans. It’s not like he gave them permission, he just didn’t really regulate them. And
that’s where a lot of the really sketchy and the Fed and subprime came from. And
00:55:03 [Speaker Changed] The Fed actually did have some authority in terms of regulating the
mortgage market authority that they didn’t really use. Nick Graham luck was a governor at the Fed, and
he sort of brought his concerns to
00:55:12 [Speaker Changed] Oh boy, did he,
00:55:13 [Speaker Changed] To Alan Greenspan. And, and nothing really, really happened. I mean, I, I
mean, even when I was at Goldman Sachs, you know, and, and working with my successor Jan Hostage,
we were very focused on how this mortgage, this housing bubble was fueling consumption through
what was called mortgage equity withdrawal. People were basically taking their, you appreciated gains
in their houses and they were pulling it out in terms of, you know, HELOCs, home equity loans. And we
felt that that was also contributing to stronger consumption. And this was gonna potentially end quite
badly.
00:55:45 [Speaker Changed] Ed Grl was an unsung hero of that era. ’cause he really identified what was
going on in real time and not in a, you know, hair on fire histrionic way. He was very sober and
thoughtful and academic and, you know, had, had Greenspan paid more attention to Gromek could
have been a very different outcome.
00:56:06 [Speaker Changed] Well, I think he would’ve had a, a smaller bubble. Maybe he’d have less,
you know, financial innovation you could weight against some of the triple A-A-C-D-O stuff. I mean, you
know, that, that, that’s an, that was, I mean, some of the innovations in the financial industry in terms of
products also contributed to the, to, to the bubble for sure. Right. ’cause you managed to sell all these,
you know, you, you, you took a ba a bunch of bad subprime mortgages, then you tranched the cash
flows and turned these, these subprime mortgages into 70% AAA rated securities. And so that sort of
kept the whole thing going. So the financial engineering was also an aspect of the problem, right? That
contributed to the, to the bubble.
00:56:46 [Speaker Changed] The, the rating agencies changed their model. They were being paid by the
underwriters instead of being paid by the bond purchasers. That’s a big factor that Yeah, I think a lot of
people overlook. Alright. So we could spend forever talking about the financial crisis, but I want to get to
the 1990s, and we’ve referenced the maestro. I was on a trading desk back then, and I always thought
Greenspan was way too solicitous. I’m not sure if that’s the right word. He was way too concerned about
how Wall Street perceived him. I, is that a fair criticism of Greenspan? Because it felt like he was much
more accommodative of short term market reactions. Anytime there was a problem for, for a laissez
fair, Randy. And he went right to, you know, the interventionist policy. So we had the long-term capital
management issue. We had the Thai crisis and the Russian ruble crisis, and every time there was a
hiccup in the markets, Greenspan didn’t hesitate to cut rates.
00:57:54 [Speaker Changed] I think that’s, you know, fair. But at the same time, I think Greenspan, you
know, did a reasonable job of keeping inflation control. So the consequences of, you know, of of coming
to the market’s aid to sort of sort of smooth out market dysfunction, you know, didn’t have a really
negative consequence for inflation. So I think he sort of got, mostly got away with it. But I, I agree with
you, he was probably a little bit more willing to address relatively, you know, small, not large, not
persistent movements in markets that maybe the Fed could have looked, looked past, you know, that
said, I mean, you know, his track record was, you know, really good. I mean, I think the, the, the blind
spot was really just more about not having this view that we can identify bubbles and we should deal
with bubbles in real time rather than waiting for the bubble to burst. And that was, that was his big
mistake. If, you know, if you think about when, when Ben Bernanke came in in 2006, you know, the die
was already cast, right. In terms of what, what was gonna happen at that point. It’s just what no one had
yet recognized it.
00:58:59 [Speaker Changed] Yeah, no, there’s, there’s no doubt about that. And in fact, by oh six, real
estate had peaked. You saw it in the home builders and the banks and the brokers. Like there were
market signals that there was problems, but the overall stock market kept going until, you know, late oh
seven. So let’s talk, you mentioned earlier about surveys. I always look at surveys as scance, because A,
people don’t know, and b, even when they know about what’s happening today, it tends to be on a lag.
And then lastly, they have no idea when you ask, Hey, where’s inflation gonna be five years from now?
That that seems to be like about as silly a nobody has any idea, much less a lay person. Why do we put
so much emphasis on inflation expectations?
00:59:52 [Speaker Changed] Well, I I don’t think that, I mean, I think you’re right that people don’t have
a really good sense of, we, and we talked about earlier price level versus rate of inflation. But it’s
interesting to see how their views change over time. So it’s probably not the level of what they perceive
inflation’s gonna be over the next 10 years. That’s interesting. It’s whether they think it’s higher or lower
than it was, you know, a month ago, six months ago, a year ago. The reason why inflation expectations
are so important is that if people think inflation expectations are truly gonna be higher, then that’s
gonna set the wage setting process and wages are gonna be higher. And if wages are gonna be higher,
that’s gonna feed into prices and that’s gonna cause actual inflation to be higher. That,
01:00:31 [Speaker Changed] That was a very 1970s problem. That seemed to be what, why inflation was
so sticky. Yeah. And we had such a hard time until Volcker came along getting, getting outta that cycle.
01:00:43 [Speaker Changed] And one good thing is too, we have other ways of measuring inflation
expectations now that we didn’t have 30 years ago. We have the re, you know, tips markets. So we can
look at tips, shields versus nominal treasury yields, and we can sort of calculate what are people willing
to pay for inflation protection. And that gives us a sense of how much inflation is embedded into the,
into, in, in people’s expectations. Market expectations Do,
01:01:04 [Speaker Changed] Do the inflation expectation surveys and the spread between the tip shield
and treasuries, do they correlate well or are there occasional big divergences?
01:01:12 [Speaker Changed] I I think they, I think they correlate well in the large, but I don’t think they
correlate well at all in the small, I mean, one example is people look at tip shields and they look at
what’s called the five by five forward rate. So what, what’s inflation gonna be five years from now for
the next five years? And that five year forward inflation rate moves along round with current oil prices.
So when oil prices go up or down, it seems to affect the, the, the people’s inflation expectations through
the tips market five years from now, which makes no, you know, no sense. Part of the problem is, is also
the liquidity of the T market is different than the liquidity of, of the nominal treasury market. And so
that also can cause some noise in terms of your measurement. But, you know, two separate sets of, of,
of, of, of numbers. And then you also have the, you know, professional forecasters, you know, what do
they think? So that’s a third set. And so you look at these three pretty disparate sources of information
on inflation expectations, you can get a pretty good sense of, you know, is it broadly stable or is it
moving in a, in a, in a, in a bad way.
01:02:10 [Speaker Changed] So, so let’s talk about the biggest part of CPI, which is shelter. When we’re
looking at inflation, we really wanna know what shelter costs are. The way BLS, the way the Bureau of
Labor statistics measures shelter is owner’s equivalent rent. And and full caveat, everybody’s aware
there’s issues with this and there are some changes coming, but, but let’s talk a little bit as it’s been for
the past couple of years, it’s survey based, Hey, what could you rent your property for? Seems to be a
funny question. So it’s laggy versus realtime measures. And yet this is the single biggest part of, of CPI
George Box famously said, all models are wrong, but some are useful. I, is this a, a model that is both
wrong and useful?
01:03:00 [Speaker Changed] Well, I I think you’ve underscored some of the shortcomings of owner’s
equivalent rent as, you know, both in terms of timeliness and also in terms of, you know, it’s not even a
cash outlay that people are making. So, so when you’re sort of thinking about what’s happening to
people’s real incomes, you’re sort of imp inputting a cost that they don’t actually really incur. So when
you’re sort of thinking about how much can people actually afford to buy, well, I’m not really renting my
house from myself, so, so it’s a, so you’re absolutely right. It’s,
01:03:26 [Speaker Changed] You, you have a budget line for shelter, but
01:03:29 [Speaker Changed] It doesn’t include, you’ve already sort of, you’re, it’s right.
01:03:31 [Speaker Changed] It’s already in your budget.
01:03:32 [Speaker Changed] It’s already in your budget. Exactly. So I think this is one, one reason why
the Fed puts more emphasis on the personal consumption, ex expenditure deflator, because it has a mu
much lower weight for shelter. But you’re right, the, the lags here are sort of crazy. So one reason why
we’re gonna see lower core PCE deflator and lower core CPI over the next 12 months is because rents
did come down and then with a lag of about a year or so, it
01:03:57 [Speaker Changed] Is it that much, I always thought it was a couple of six months, a quarter or
01:04:00 [Speaker Changed] Two. It’s, it’s six months, at least six months because so, so like, because
the rents only pre reprice periodically, right? So
01:04:06 [Speaker Changed] Every year or two, every
01:04:07 [Speaker Changed] Year or two. And so they have to reprice before they get into the, so it’s, so
it’s that lag bec, you know, if rents repriced instantaneously, then everything would be sort of up to
date, but rents re price slowly when you know the lease comes due. And so it’s lagging behind reality. So
this is something that’s gonna probably feed into the core PC deflator and keep inflation a little bit lower
over the next six to 12 months. But is it really, you know, real in terms of what’s actually actually
happening to inflation on the ground? It’s probably, you know, gonna be a little bit misleading.
01:04:39 [Speaker Changed] So, so there are a couple of real estate entities. The Apartment list index or
Zillow does a realtime index case,
01:04:45 [Speaker Changed] Case Schiller,
01:04:46 [Speaker Changed] Right? So even K Shiller is a little bit of a, a lag, not as much as owner’s
equivalent rent. But the interesting thing is, the real time indices have showed falling real estate prices
the past, I dunno, three months, four months,
01:04:59 [Speaker Changed] It hasn’t gotten into the CPI yet.
01:05:01 [Speaker Changed] Right? And it, so it’s interesting. It’s
01:05:03 [Speaker Changed] Coming, it’s coming.
01:05:04 [Speaker Changed] That’s, that’s gotta be very optimistic to think, hey, even all these people
are concerned about reacceleration of inflation, we know the biggest part of CPI is gonna to keep
drifting lower. That’s gotta be positive for future fed policy,
01:05:21 [Speaker Changed] Right? But your question is, is it temporary or is it more persistent? So to
figure that, who those, to figure that out, we have to look at the housing market, right? So how is the
housing market performing? Well, the housing market actually looks like it’s starting to come back,
right? Why is it coming back? Because mortgage rates have fallen by, you know, one percentage point.
And so that’s actually stimulating in the housing sector. So I think the interesting question is not like just
what’s the next chapter as this stuff feeds through the CPI, it’s, what’s the chapter after that based on
how quickly does the housing market recover in response to lower interest rates?
01:05:51 [Speaker Changed] So, so Powell was asked, I I think it was on 60 minutes, about the
commercial real estate. So as opposed to coming up every year or two, you have leases that go 5, 10, 20
years. So this seems to be taking place in slow motion, but it seems like commercial real estate is a, a
genuine risk factor certainly for, for some of the regional and community banks. How should we be
contextualizing what’s been taking place with remote work and work from home and the slow return to
office process that still has lots of vacancies in in urban centers?
01:06:30 [Speaker Changed] Yeah, I mean, I would define it more narrowly than commercial real estate.
I would define it as office building space, because that’s really where you have very high vacancies rates,
very underutilized resource and prices are coming down, especially for, you know, class B and class C
buildings. Not the, the best stuff coming down quite significantly. You know, you, you’re absolutely right,
this is sort of a slow burn rather than a fast burn because the problem typically arises not, you know,
immediately it, it, it arises when the mortgage has to be, or the commercial real estate loan has to be
refinanced. As long as the income on the property covers the interest on the loan, the, the, the, the
borrower isn’t gonna default when the loan comes due though, the lender typically says, Hey, your
building is worth, you know, 40% less than it was before. I’m sorry. We’re not gonna lend you as much
money. You need to come up with more collateral. And at that point, the, the, the, the borrower might
say, I don’t have the collateral, the building’s yours. And so then that, that crystallizes in a loss for the,
for, for the, for the commercial bank. I think there are definitely commercial banks that are gonna have
trouble due to their concentrated commercial office building portfolio. But I don’t view this as big
enough or fast enough to really be, you know, systemic from a financial stability perspective. Huh.
01:07:50 [Speaker Changed] Real, really interesting. All right. We’ve talked about the housing market,
the office based market. One question we really haven’t gotten to has been the stock and bond markets.
They’ve been very co chaotic the past couple of years. How does the Fed think about stock or bond
market volatility? How does that impact decision making?
01:08:10 [Speaker Changed] Well, I think as Paul has said many times, you know, monetary policy in the
US works through financial conditions. And two key components of financial conditions are the bond
and stock market. So if the bond market yields are low, the stock prices are are high and rising, that’s
making financial conditions more accommodative and that’s actually supporting the economy. So the
fed’s gonna take that into consideration. So, you know, we talked earlier about why the Fed isn’t moving
yet, because they wanna be confident they’re gonna actually achieve their 2% objective. They’re not
moving yet because the labor market is strong, but they’re also not use moving yet because financial
conditions have eased a lot, right? And so the market’s doing quite a bit of work for the Fed, even before
the Fed actually has cut, cut interest rates. So the Fed, you know, I don’t think, I think it’s important to
understand that the Fed doesn’t really target financial market prices. So people sometimes say, well, if
the stock market goes down, the Federal Reserve is gonna react to that. No, the fed’s gonna react to the
stock market. If, if the Fed thinks the stock market’s gone down far enough, persistently enough to
affect the real economy to impede the ability of the Fed to achieve its, its inflation and employment
objectives. The Fed doesn’t care about the stock market itself. It cares about how the stock market
affects the real economy. So,
01:09:24 [Speaker Changed] So sometimes you get a market crash and the economy shrugs it off 19 87,
1 day 23%, the economy couldn’t care less. And then even the.com implosion, which was modest on the
Dow and the s and p, if you consider 30% modest, it was brutal on the nasdaq, which was, you know,
something like 81%. But we had a very mild recession in 2001. So does that basically argue for less
intervention by the Fed or does the subsequent Fed intervention, is that what prevented this like oh one
from becoming much worse?
01:10:06 [Speaker Changed] Well, I think oh one was really, you know, also,
01:10:08 [Speaker Changed] You know, nine 11 on top
01:10:09 [Speaker Changed] Of nine 11 was really a significant event. And that I think provoked a more,
more, much more aggressive fed, I think the Fed, you know, is aware of what’s the mar bond market’s
doing, aware of what the stock market’s doing, because that affects the transmission of monetary
policy, the real economy. But they don’t have a view that we need to tar target a particular level of the
stock market or the bond market. That never comes up as an issue. You know, it’s not like the fed, you
know, if the stock market went down 10% tomorrow, it’s not like this, the Fed would go, oh, we need to
change monetary policy. If it went down 25, 30% and stayed persistently lower, that would probably
have implications for the economic growth and that would then affect monetary policy. But it’s all
through the effects on economic growth. Paul has talked about this, it’s, it’s, it’s the persistence of the
change in financial conditions that matters. It’s not what the stock market does over a day or week. It’s
what the stock market does over six months or a year. That really matters.
01:11:03 [Speaker Changed] So before I get to my favorite questions, I just have to ask really what
you’re focusing on today. You joined the PRIs, Princeton Griswold Center as a senior advisor, you chair
the Bretton Woods Committee, you serve on the group of 30 and Council foreign relations are, are you
still doing all those actively today? Tell us what, what’s keeping you busy these days,
01:11:27 [Speaker Changed] Those things. The Bretton Woods Committee, I’m the chair and we’ve been
broadening out the work that we do at the Bren Woods Committee. I mean, to just give tell you what
the Bren Wicks Committee is about. It’s, it’s basically dedicated the notion that international
cooperation and coordination lead to better outcomes. So along the lines of what Powell said in his 60
minutes interview, and basically trying to build strong international institutions that can facilitate
cooperation on, you know, important issues like, you know, financial stability, climate change, digital
finance, health trade, where countries working together can lead to better outcomes. So the Brad and
Woods committee, you know, we, it it’s been growing. The work has been expanding. We’re doing work
on digital finance, climate finance, sovereign debt, future of the multilateral financial institutions like the
World Bank and IMF, what should their role be going forward? So it’s pretty exciting. And I spend, you
know, quite a bit of time on it.
01:12:27 [Speaker Changed] What’s the group of 30?
01:12:28 [Speaker Changed] Group of 30 is a is a group of people. It’s a, it’s a, it’s an organization that
was set up several decades ago of, of, of, of people that are either currently very senior in academia
policy or were involved in academia and policy at a very senior level. You know, people like Paul Volcker
was a member of the, of the group of 30, Jean Kla is a, is a current member of the, of the group of 30 a a
people of, you know, Mark Carney. Is, is, is, is the, is the, the person who’s in charge of running the
group of 30 from a, from a, from a member perspective. So there’s a lot of senior people that focus on
important issues of the day. So for example, a number of months ago, the group of 30 asked me to lead
a project on, you know, financial supervision reform, you know, what should we do in terms of the
regulatory policy with, with respect to the banking system in light of what happened in March of, of
2023 with respect to Silicon Valley Bank and a number, number of other banks. And in January we, we
published a report and we basically argued for a number of reforms that need to be made. And, you
know, I’ve been talking to people at the Fed elsewhere and trying to get some traction for some of the
proposals that we’ve made. Huh.
01:13:42 [Speaker Changed] Really interesting. All right. I know I only have you for so much time. So let
me jump to my favorite questions that we ask all, all of our guests. Starting with what’s keeping you
entertained these days? What are you watching or listening to?
01:13:56 [Speaker Changed] I usually, you know, stream things, you know, television series that strike
my fancy, you know, right now, you know, right now it’s a little bit of a, you know, sometimes it’s a little
bit of science fiction like foundation or
01:14:08 [Speaker Changed] Are you, do you watching the second or third season of Foundation? No,
I’m,
01:14:11 [Speaker Changed] I’m like, I’m in the second season of it. Right? Sometimes it’s things like
Poker Face, which is on Peacock. Another one I’m, we’re watching my wife and I now Mr. And Mrs.
Smith
01:14:22 [Speaker Changed] Just started on Amazon,
01:14:23 [Speaker Changed] Just started. So, you know, it’s, you know, we usually watch one show a
night that’s, that’s,
01:14:28 [Speaker Changed] That’s us also. So that’s
01:14:29 [Speaker Changed] Sort of our tolerance.
01:14:30 [Speaker Changed] I never, I would,
01:14:31 [Speaker Changed] And it’s a, it’s a great way to just sort unwind. At the end of the day,
01:14:34 [Speaker Changed] I would not have pegged you as a sci-fi fan, and I’m gonna give you the two
recommendations I give everybody. Okay. One is on Amazon Prime, the Expanse, which is, I did,
01:14:45 [Speaker Changed] I did read, I did watch about five, five
01:14:48 [Speaker Changed] Of the seasons. Did you like it? It got a little wacky at the end. Yeah, I,
01:14:50 [Speaker Changed] I sort ran outta gas after about Yeah. The fifth, fifth season. But I did, I did
watch a lot of, a lot of that
01:14:56 [Speaker Changed] Fascinating political. And then the other one was, it’s only two Seasons
Altered Carbon. It’s really good. Okay.
01:15:04 [Speaker Changed] I haven’t seen that one.
01:15:05 [Speaker Changed] Fascinating story and filled with all sorts of really in interesting as a sci-fi
geek. Those are my two
01:15:13 [Speaker Changed] Favorites. Do you like for all mankind?
01:15:16 [Speaker Changed] Haven’t seen it.
01:15:17 [Speaker Changed] So that one is about the sort of alternate space race between Russia and
the US where Russia actually gets man on the moon first and then it follows sort of the develop of the
NASA program over, over the subsequent several
01:15:29 [Speaker Changed] Decades. How is the series?
01:15:30 [Speaker Changed] It’s quite good. It’s
01:15:31 [Speaker Changed] Quite good. Oh really? I’m gonna, I’m gonna add that, add that to my list. I
am a sucker for a great space venture. Let’s talk about some of your mentors who helped shape your
career.
01:15:43 [Speaker Changed] So the most important one by far, I think was my professor at Berkeley.
James Pierce. He worked at Yale, then he went to work at the Federal Reserve Board in Washington. He
was the Associate Director of research. And then he went to Berkeley and I was his research assistant at
Berkeley for, for five years. Wow. Which is a very long stretch as being someone’s research assistant.
And he sort of got me interested in policy and got me sort of knowledgeable about what the Federal
Reserve was all about. And so I think the reason why I went to the Fed Reserve rather than went into
academia is because of, of his counseling. And he became a, a, a a, a really good friend. But there are a
lot of, you know, there’s a lot of other people along the way, but he’s the one that sort of com you
know, stands out.
01:16:27 [Speaker Changed] Huh? Let’s talk about books. What are some of your favorites and what are
you reading right now?
01:16:33 [Speaker Changed] Right now I haven’t really gotten into anything particularly that’s like
grabbed me. I just finished Andy Weir’s book, hail Mary. I don’t know if you’ve, that’s the science fiction
one.
01:16:44 [Speaker Changed] I have not read to yet.
01:16:45 [Speaker Changed] I don’t read a lot of science fiction, but every once in a while I get a a, a
hank ring for it. I, I, I typically read more things that are like thriller detective kind of things. Like, you
know, I’m not a, I I I took a lot of literature when I was in college. Same. But I don’t read a lot of heavy
literature now because I usually, by the end of the day, I’m, I’m, I’m, I’m a little wiped out. And, and, and
to read really good literature, it takes a, it takes quite focus. It takes a lot of attention. So I like things like
Dennis Lehan, I think he’s, he, he does really good stuff. Don Winslow,
01:17:15 [Speaker Changed] I know the name for Yeah,
01:17:16 [Speaker Changed] For sure. He does some really good stuff. So I like the stuff that’s like a little
bit, you know, better than, you know, sort of Lee Child, you know, a little bit deeper. Oh, sure. You
know, Lee Child’s entertaining.
01:17:29 [Speaker Changed] My wife is a giant Lee child. She spread everything.
01:17:31 [Speaker Changed] Le Lee Child is entertaining. But, but every story is sort of along the same,
same lines. So, so that’s the sort of stuff that I, I like to read. And I, and I read a fair, I read a fair amount,
01:17:43 [Speaker Changed] The sci-fi book I have sitting on my nightstand that I’m almost afraid to start
is the Three Body problem. And it’s, each book is 900 pages. Oh wow. And there’s three books. It’s, it’s
actually by a, a Chinese author and it references the inability to forecast the location of heavenly bodies
of planets. Moon stars we could calculate too. Once you bring a third one in, it’s just, it’s gone. The
outcome is I’ll,
01:18:13 [Speaker Changed] I’ll, I’ll take a look at that.
01:18:14 [Speaker Changed] It’s fascinating. Have
01:18:15 [Speaker Changed] You, have you read Ted Chang?
01:18:17 [Speaker Changed] I
01:18:17 [Speaker Changed] Know the name. He’s, he’s a short story writer. He writes Short Story of
fiction. He’s got two books, science fiction. It’s fabulous.
01:18:25 [Speaker Changed] What what’s
01:18:26 [Speaker Changed] It’s very, it’s very intellectual stuff. It’s, it’s, he, he write, he he writes
sometimes in the New Yorker magazine.
01:18:31 [Speaker Changed] So there’s a book of his, I’m trying to remember. He,
01:18:35 [Speaker Changed] He’s, I think he’s had two volumes
01:18:37 [Speaker Changed] Of all
01:18:38 [Speaker Changed] Exhalation Short stories. Yeah. All short stories. I’m the, the, the movie The
Arrival was based on Yes. Was based on one of his
01:18:45 [Speaker Changed] Short stories. So the one I just got is Stories of Your Life and Other tales.
Yeah. It’s fabulous. But the one before that is Revelation ascendancy. Yeah. So it’s so funny you
mentioned that literally just, and I gave that to a few friends for holidays. His stuff
01:18:58 [Speaker Changed] Is great. ’cause
01:18:59 [Speaker Changed] It’s really, really, I’m excited that
01:19:00 [Speaker Changed] It’s really mind bending.
01:19:01 [Speaker Changed] That is like the book I bring on planes where, all right, I got an hour to read.
Let me, let me go through a chapter, really. And there’s this really fascinating collection of short stories.
I, I’ll never remember it, but I’ll, but I’ll email it to you. Diary of an interstellar refrigerator repair
meeting, something along those lines. And it’s, it’s brilliant science fiction, but it’s also surprisingly
amusing and funny. It’s, it’s, if you like those, I think you’ll, you’ll appreciate that they’re not, it’s not all
the same story. They’re kind of like, just very loose set in the same universe, but unrelated type of Yeah.
Stuff. But really, really fascinating. And our final two questions. What sort of advice would you give a
college grad who is interested in a career in either economics or central banking or, or monetary policy?
01:19:56 [Speaker Changed] Find an interesting job. Build your human capital. Once you find that your
human capital is, is no longer going up at a particularly rapid rate, find a new job. I mean, I was very
lucky ’cause I jumped around in my career and I, and I feel like every place I moved, I, I learned a new set
of skills and information which sort of helped me do better at the next endeavor. So I think it’s really
important not to get stale. And, you know, and the second really most important thing is find something
that you, that you can be, you know, that really interests you. That you can be enthusiastic about it.
’cause if you can’t go to work and be enthusiastic about it, you’re not gonna do very well and you’re not
gonna be very happy. I mean, ideally, you know, you like your work and the difference between work
and pleasure starts, starts to blur. And you don’t really aren’t resentful when there’s more, you know,
demands for your work. I mean, during the financial crisis, you can imagine I worked pretty long hours,
but I wouldn’t have had it any other way. I mean, it was absolutely a fascinating period of time. And
yeah, it was work, but, but I, I got a lot out of it.
01:20:58 [Speaker Changed] My, my wife describes me as being gainfully unemployed, which is exactly
along those things. I, I would do it if I was getting paid or not. So it, it works out really well. And, and our
final question, what do you know about the world of investing today, markets investing monetary policy
that you wish you knew 30 or 40 years ago when you were first getting started?
01:21:22 [Speaker Changed] Well, I mean, when I first started investing, I started investing in 19 74, 75.
And I have to say, I was so naive about investing at that time. I didn’t really understand, you know, you
know what, what really drove stock market valuation, you know, what determined the success of
companies, you know, you, you learn a lot by doing it. And I, I, and I personally think a lot of people
over, over invests in, in the sense of making transactions. I found over time that, you know, I have good
ideas once every like five, 10 years. And, and, you know, you have to wait for that good idea to, to, and
then implement that investment thesis. You know, well, one thing I’m good at it, coming out with ideas,
but I’m terrible at, at, at trading on them. You know, like Bob Rubin a number of years ago at Goldman’s,
you know, you know, you know, suggested that, well, maybe you should, you know, should actually start
trading things. Try, try that. I said, no, Bob, I don’t think my, my risk tolerance is, is, is right for that. And
the second reason not to do it is that if you start trading things, then it sort of leaks into your
interpretation of, of, of information and events. Sure. ’cause you then you start to talk your book and try
to contribute, you know, this is the reason why the 10 year bond yield should fall. Because, well,
01:22:36 [Speaker Changed] ’cause I have a position.
01:22:37 [Speaker Changed] ’cause I have a position and that’s, you know, I, and I said to him, no, you
don’t really want me to do that because one, I wouldn’t be very good at it. And then I might lose some
of my, you know, ob objectivity with quotes around it.
01:22:47 [Speaker Changed] I, I do like the idea of low frequency trading as a,
01:22:50 [Speaker Changed] Yeah. I mean, I think for most people buying an ETF on a broad based stock
market and then putting it away for 20 years is the right
01:22:58 [Speaker Changed] Approach. Can’t, can’t really disagree. Bill, thank you for being so generous
with your time. This has just been absolutely delightful. We have been speaking with Bill Dudley. He is
the former US economist for Goldman Sachs and head of the New York Fed, as well as his many policy
roles at the Federal Reserve. If you enjoy this conversation, well be sure, check out any of the 500 or so
we’ve done over the past. Hey, it’s almost 10 years. You can find those at iTunes, Spotify, YouTube,
wherever you find your favorite podcasts. Sign up for my daily reading list@riol.com. Follow me on
Twitter at ritholtz. Check out my new podcast at the money short, 10 minute conversations with experts
about the most important elements of your earning money, spending money, and most importantly,
investing money. I would be remiss if I did not thank the correct team of people who help us put these
conversations together each week. Kaylee Lapper is my audio engineer. Atika Val is my project manager.
Anna Luke is my producer. Sean Russo is my researcher. I ‘m Barry Ritholtz you’ve been listening to
Masters in Business on Bloomberg Radio.

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• Palm Beach Is Having a Category 5 Identity Crisis: The aura of a sandswept playground of like-minded people of means. The appeal of a mild winter. (Annual average: more than 230 days of sunshine.) Lower taxes. The promise of a pandemic-era refuge from all the COVID restrictions up north. The presumed immunity from the daily horrors of life in all those messy blue-state towns—in favor of a supposedly safe, sheltered community in a state that sells itself as a last bastion of “individual freedom.” Together, these draws—and the bright, if tarnished, brand of a local resident named Trump—have proved a powerful magnet for MAGAs with money and the nouveau riche of all stripes. (Vanity Fair)

• The Brutal Reality of Plunging Office Values Is Here: Commercial-property deals in the US are starting to pick up — at deep discounts that are forcing lenders around the world to brace for souring loans. (Bloomberg) see also A $560 Billion Property Warning Hits Banks From NY to Tokyo: Lenders face debt maturities, lower values after thaw in deals Multifamily also a focus following change in New York rent law (Bloomberg)

• You paid more in income taxes last year than a corporation with billions in profits. Working Americans, for the most part, pay federal income taxes. Salaried workers have a portion of their pay withheld for federal income taxes every pay period. Small business owners and independent contractors are required to submit payments to the federal government throughout the year based on their projected income. These federal taxes amount to a significant percentage of workers’ earnings, an effective tax rate of ~13.6%. But some massive corporations with billions in profits have a much different experience. (Popular Information)

• He Grew Up in the Shadow of the ‘Wolf of Wall Street.’ Then He Got Into Debt Settlement. Ryan Sasson built a business that reaped hundreds of millions of dollars in fees for helping people negotiate down their debts. But former clients — and prosecutors — say it was exploitative. (New York Times)

• The Life and Death of the American Mall: The indoor suburban shopping center is a special kind of abandoned place. (Atlas Obscura)

• Is the Media Prepared for an Extinction-Level Event? Ads are scarce, search and social traffic is dying, and readers are burned out. The future will require fundamentally rethinking the press’s relationship to its audience. (New Yorker)

• Kara Swisher Is Sick of Tech People, So She Wrote a Book About Them: Silicon Valley’s top pundit dishes on her memoir Burn Book, immature billionaires, and whether she’s actually mean. (Wired)

• GoFundMe Is a Health-Care Utility Now: Resorting to crowdfunding to pay medical bills has become so routine, in some cases health professionals recommend it. (The Atlantic) see also The Albatross Around America’s Neck: How health-care opacity neutralizes competition and fuels a corporate race to corner health-care markets. Purchased influence has led to regulatory capture, shaping legislation to consistently favor the health-care industry’s interests. (Health Care Un-Covered)

• The Legal Coup: New Documents Reveal How Trump Lawyers Sought ‘Chaos’ to Force SCOTUS, or Whoever Else, to Anoint Trump. (TPM)

• Why Americans Suddenly Stopped Hanging Out: Too much aloneness is creating a crisis of social fitness. (The Atlantic)

Be sure to check out our Masters in Business this week with Bill Dudley, former president and chief executive officer of the Federal Reserve Bank of New York, where he also served as vice chairman and a permanent member of the Federal Open Market Committee. He was executive vice president of the Markets Group at the New York Fed, where he also managed the System Open Market Account. Previously, he was chief US economist at Goldman Sachs (the firm’s first) as well as a partner and managing director.

Real estate agents are less busy

Source: Torsten Slok, Apollo Global

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