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TIME'S NEARLY UP! LOCK IN THE EARLY BIRD PRICE DISCOUNT FOR THE THOUGHTFUL MONEY FALL CONFERENCE AT ...
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If I have to summarize why my view has become more bullish as opposed to having been bearish for you know most of the last couple of years I think it's because the economy actually had been slowing and decelerating for the past two years and finally we are at a point where most of these policy headwinds are over. Policy uncertainty has diminished. The Fed is ready to cut. fiscal is also turning uh positive next year in terms of the impulse. So all three major economic force that's shaping uh the economy is turning in a positive direction. So I think that that is one reason why uh I think the direction is an acceleration in economic growth from here on. [Music] Welcome to thoughtful money. I'm its founder and your host, Adam Tagert. Much concerns been raised of late about how the economy is slowing and recession risk is rising. But is that really true? Or could we already be through the worst of things with the economy strengthening from here? To find out, we've got the good fortune to talk today with Dr. Anna Wong, chief US economist for Bloomberg Economics. Prior to her current role, Anna also worked at the Federal Reserve Board, the White House Council of Economics Adviserss, and the US Treasury. Anna, thanks so much for joining us today. >> Always happy to be here, Adam. >> Thanks, Anna. I know it's been a busy week for you, so thank you for making time for this. Um, why don't we get to the heart of a question I just mentioned there in the intro there. Um, you know, there's been a lot of concern about um the economy slowing down, whether recession risk was rising back up. We obviously had a lot of fears um throughout the year that inflation was going to pick back up with tariffs and other things. Um we have been seeing the job market weaken uh to the point where the Fed has basically cited it as its reason for blinking and starting to cut rates again. Uh we did not it does not look like we're going to get um the latest BLS jobs data this week because of the government shutdown, but we did just get I think the ADP report which came in at at negative job growth. So you know there's an understandable uh you know scope of people out there that are are worried that the economy is slowing down. You may have a different opinion. So let's let's start there. Do you? I I think um you know, Adam, as you know me, that the way I read the data is I read it as there's a straightup read of the data. You mentioned a negative ADP uh uh this week, which everybody is really focused on because of because there won't be an official BLS report. And you know when you look at these data it would sound like it would look like that the labor market is falling off the cliff but there's also that's a perception but there's also uh the piece that I put more focused on is we we just accept that things are not measured always accurately in the world and you under try to understand how these things are being measured and you adjust for what you think are the measurement errors and you get to the the underlying what's really going on. And I think after I do all those adjustments, I think what what it is at the end of the day is that I think the worst uh is deceleration is over and we are kind of in that right after the worst kind of where the economy is trying to recover is recovering somewhat what but it's still a very fragile kind of recovery. Um, and looking forward, I mean, if I have to summarize why my view has become more bullish as opposed to having been bearish for, you know, most of the last couple of years, I think it's because the economy actually had been slowing and decelerating for the past two years. And finally, we are at a point where most of these policy headwinds are over. Policy uncertainty has diminished. The Fed is ready to cut. Fiscal is also turning uh positive next year in terms of the impulse. So all three major economic force that's shaping uh the economy is turning in a positive direction. So I think that that is one reason why uh I think the direction is an acceleration in economic growth from here on. >> Okay. Um I want to dig into all that. I I I'll give a nod too that um I'm hearing some similarities in what you're saying uh with Michael Canerowitz from Piper Sandler who I just had on the channel here like two videos before this one. Um so it's interesting maybe pattern now I'm beginning to see here. Um when you say uh the fiscal impulse is going to turn more positive next year. Are you talking globally or are you talking US only? I mean, if you're talking US only, tell me why you think the fiscal is going to get bigger than it is right now. >> Yes, I'm talking about US only. So, it is the uh rate of change in the deficit that drive GDP growth, right? And that rate of change is that the deficit is going to get bigger next year from uh the one big beautiful bill. So outside of the uh extension of the tax cuts and jobs act, there are additional things uh where the one big beautiful bill is uh is is actually expanding the deficit. for example, uh the no tax on tips or the uh mega baby accounts or you know, no tax on retire uh certain purchases for retirement uh retirees. And so there and and all a lot of these uh stuff will will happen through uh tax rebate in April. So next April is where well people suddenly have more cash and um and then also at this point the stock market um is creating a positive wealth effect for uh uh the top 20% uh by by household income in this uh in the US economy and those are driving um the the consumption the spending we just saw yesterday that the uh car sales uh numbers really strong um ex exceeding consensus expectations that is just not something that a recessionary uh economy does. In fact, I can list a whole bunch of stuff which which I'm seeing in the data which is not how a recessionary economy behaves. So, >> all right. Um I I definitely want to pull that thread, but real quick, just a question that maybe some others are wrestling with the way I am. So yes, fiscal spending stimulates the economy. It comes with its own costs though, right? You know, um unless you truly are from the Dick Cheney school of of economics where that deficits truly don't matter. Um so more deficits equals good news next year. And kind of what I'm hearing you say, where is a line where too many deficits become a bad thing? I think the line is where uh there's no foreseeable end to it uh to this fiscal spending. So this bill uh one big beautiful bill depend uh the scoring of this bill has been controversial. Right? So if you look at the entire plan, the Republicans says that the spending part of this bill will be front-loaded between now and 2028. And most of the part where they're taking away the funding to pay for this front-loaded spending and tax cut is in after 2028. So when you score across the 10-year period, which is how CBO scores it, it actually is paid for by the tariff revenues. So as a result, the market when the market participants look at this and they look at the tariff revenues, they're like, uh, it's paid for. And so they're not as alarmed. And that's why you see the longer end of the Treasury yields. They're not blowing out in response to the one big beautiful bill. If anything, the longer end of the yield curve has been dropping in the last couple of months ever since this bill is passed because clearly the market is troubled by other things which is the cyclical slowdown, the perceived cyclical slowdown of the economy and that so the behavior of the longer end of the yield curve are still more influenced by uh short-term behavior of the economy as opposed to worries about uh fiscal sustainab ability. >> All right. So, is it I'm wondering if it's too early for you to say definitively, but did Trump's gambit work? Hey, I'm going to shake the global trade chess board and I'm going to put tariffs on everybody and I'm going to push this big bill through and I'm going to ask to get rid of the the debt ceiling and all that stuff. But trust me everybody, it's not going to be inflationary. We're going to, you know, it's going to pay for itself. It's going to boost the economy. Does it does it seem like maybe that's actually starting to prove out here? >> Wow, you're putting me on a spot right here, Adam. But I know I know. Sorry. >> For your for your long-term viewers, they probably have heard me say that in very beginning that I didn't think that the Trump uh tariffs would be as inflationary as most people think. Mhm. >> Um um I also think that most of it would be absorbed through profit margin. Um so and I also thought that the fiscal uh the one big beautiful bill would be paid for by the tariffs. So I have said all that before. So in that sense um I'm not surprised but I know the consensus have been surprised by this. Uh but at the same time I would say that I would offer more nuances to uh whether we can definitively say that Trump scam bit has worked. First of all tariff pass through. Just because firms um have tried to pass through those tariffs and have failed now that they are offering discounts this year doesn't mean that they won't try to pass through again when the economy is in better shape and they have more p pricing power. I think the part where many forecasts are miss is to think of a tariff pass through as a static one-off thing which is like regardless of what what's the condition of the economy. My argument has been the economy has gone through a significant contractionary income shock in the last six months. There's no compensating offsetting positive demand shock just negative demand shock and as a result firms don't have pricing power to pass those tariffs through. So suppose now the Fed is cutting rates and if if Steve Meyer has his way the Fed will keep cutting and in this case the economy will uh do a V-shaped uh recovery I think um because there are still a lot of pentup investment needs uh and this is coming from AI related stuff but also um a lot of small to mediumsiz business also are um they they also have not been investing in in the last couple of years and there's just a lot of pent up needs to do this. So once interest rate falls and uncertainty falls and there's fiscal uh a tailwind, I think this is where you'll see that firms pricing power will return again uh next next spring and then they might try to pass through again. So not just not not it's not just we're going to see a V-shaped recovery. I also suspect we are going to see a V-shaped inflation uh contour uh along with this recovery just because there's also pent up needs to pass through and uh uh it could be that we we will be seeing some of that next year. >> Okay. Um getting there'd be a ton of threads I want to pull here. I'm trying to figure out which one to pull first. So you said a V-shaped economic recovery. Um, I have also seen in some of your recent tweets that you've said it'll be a V-shaped economic recovery or a K-shaped economic recovery. When you say K-shaped, are you talking more sort of like Michael Canerwitz's a bifurcated economy? Part of the economy does real well, but the other part doesn't. >> Yes. >> Yeah. >> Yes. And I apology I apologize for this cape shaped unintuitive characterization of Yep. What I just meant is uh a bifurcated. You have some that are uh going Vshape and you have some that are just sputtering around. >> Okay. And uh back to the Vshape. Um not only do you see that potentially happening in the economy V or K um but you you see inflation basically picking back up next year for the reason you just mentioned. >> Yes. >> Okay. And there will be implications for the bond market for that. Correct. Um, I will have to punt on that one because I I I think it it's more complicated than that and I'm not a bond strategist so I I will just >> I I I I just think that um it's true that inflation will come I I would think that inflation will uh be on a you know rising through three core PCE deflator will be rising through 3.1% through next year. Um I think whether that affect how bond uh traders price things is in their interpretation of whether this is a transitory increase in inflation as the Fed seems to be becoming more inclined to view it or has that increase in inflation be just just reflecting um uh uh an anchoring of inflation expectations? If it's the latter, then uh uh uh bond prices will fall to reflect higher yields in the longer term. But um if if if it's they see it as transitory, they would just wave it off. >> Okay. And and maybe let me ask this question a little bit more specifically. So, uh not everybody, but a number of the people I talked to think that bond yields will come down next year either because they see the economy continue to slow. So, they don't see the same V-shaped recovery that you see. Um, and so it'll just be, you know, slowing economy and whatnot, and that'll be disinflationary. Um, so, uh, and then you also have the administration kind of trying to do everything it can to get borrowing costs down as well. Um, so I guess my question for you is is do you think the what do you think the odds are of bond yields heading sub4 down into some some level that the administration would like to see them at? Would they be challenged by this V-shaped bounce in inflation? >> Yeah, I I think it it would be driven more by growth. how the market perceived growth and if most so now that um the many market participants are having more doubts about BLS data um everybody is taking a more holistic look at the macro data right so we have in blueberg economics we have a growth surprise index that takes into 66 indicators to look at the direction of economic surprise so I think that this economic surprise index is going to keep uh moving up and um what that means is that as long as that happens through through next year, everything else is moving up. I think the market would probably uh believe that in fact growth is still uh the US economy is still growing at a at potential pace or even higher than potential pace. There there would be one outlier though uh in my vision of what happens in next in the next uh year which is the labor market data. So you could have very uh great growth data but you could have a jobless recovery. Recall we have had jobless recoveries before. You know 2008 was a jobless recovery, 2001 was a jobless recovery. And I think part of the reason why the this recovery is this Vshape uh sorry K-shaped where it's bifurcated is on one hand in the labor market what I'm seeing is that big firms are not hiring. They are fixated at uh boosting productivity. They want to do cost cutting to free up uh resources to invest in the next generation of technology. So big firms account for a large proportion of non-farm payrolls. um the survey that provides um uh that calculates the BLS non-farm payrolls um has over 60% of large firms accounting for the payrolls right um whereas in um um you know and so as a result if large firms are not doing much hiring you could see this in the aggregate number but what I'm also seeing is that small to medium-siz firms are now hiring and so tomorrow we are not getting the our usual September payrolls from BLS. However, uh I can see that we are seeing this bifurcated pattern in terms of hiring and what that means is that productivity is also improving significantly at the large firms level and it with the small to medium-sized firm they're hiring I think suggests that there's some early cycle uh dynamics happening. These small to medium firms have really had a very tough time the last two years. They also were not really able to hire back in 2021 when the labor market was really really tight. Only the large firms then were able to hire. And so now that the labor market is loose, the small and medium firms are coming in. And I think that that represents that they do have a more optimistic uh pro uh prospect for the future and that's why they're hiring today. And that's why I think I think that's one sign that I'm seeing of this early cycle dynamics. And so you could actually have given that this um given that it's the large firms that's not hiring and that's that leads to productivity boost, you can have a situation where growth is great. Labor market numbers are not great. However, stock market could keep going up because this means that the large firms profits are going up and you could have inflation going up despite the uh productivity boost because this is a serviceoriented economy. to 75% of CPI is related to service and when the stock market is doing well because of the productivity boost from the large firms the top 20% by income and would be spending and that is what drives CPI up >> right >> okay um gosh it's it's hard not to hear this as if if you're somebody who's been frustrated by this K-shaped recovery that we've been in since co uh it's hard not to hear this as sort of like the beatings will continue until morale improves meaning the top end of the K is just going to keep doing well and better and the bottom half of the K may not right that that that uh uh I mean it's nice to hear that that maybe these smaller companies are starting to hire here but um you know if these these these other companies do great if inflation still picks up that's going to be you know felt much more so by the the bottom part of the K and those folks don't on a lot of assets that are getting over inflated. So, do you have any concerns that yeah, this might look great on average for the economy and the stock market, but on the median level, we're still, you know, falling behind. >> Yeah. And I so the way I I uh I would uh document what happened to inequality over the last uh five years is that I think the pandemic was actually a great flattener because of the the fiscal uh the fiscal spending the American rescue act cares act all those uh fiscal uh stimulus during the pandemic was to give the bottom 50% more money right so in the first two years of the pandemic. In fact, inequality decreased because the the um uh uh the people in the the bottom half are are getting more transfer. And I think that that's um really the core differences between um pol the policy makers who think that government spending through increased transfers uh is great for uh uh progressive court uh progre progressive um uh ideals because you can you are you know giving more money to the raising minimum wage and uh uh giving uh stimulus checks, child care, credit, all that stuff. But I think what it showed is in in the long term all those policies become inflationary and this is what we start seeing in uh post 2022. So I would trace today's um the sticky part of the inflation that's related to um services uh um to that you know those policies from three years ago from 5 years ago and and right now um so now after a temporary truce in rising inequality because of the pandemic now inflation has been biting and that is a very uh a a force that tends to worsen inequality because here here then the real income of the lower 50 start to see uh erosion. Right. >> Right. And sorry to interject but just to add that not only have we seen inflation and cost of living but we've seen price inflation in financial assets. So as as much as the bottom half has been getting hurt by the cost of living increase the top half has been getting lifted by the asset price inflation. only after 2022. See, so so there's a story. So after 2022, the asset prices start inflating again because >> the Fed is close to finishing with this uh tightening cycle. Recall in 2022, stock prices fell by 20%, when the Fed started, right? So before the Fed started started raising rates, uh it was great for for this bottom 50 and after that it was not. And whereas the uh the top uh uh income bucket people start to experience asset inflation. I think this five years is a lesson for policies the many policies with good intentions of transferring money to the bottom ended up hurting them and because what needs to happen in order to quash inflation is that the Fed needs to needs to raise rates. Uh and if the and the Fed in this case also is having good intentions too. I mean uh 5 years ago the Fed changed its framework to now include uh inclusive uh full employment right and by inclusive it started targeting these um uh uh minority populations their their unemployment rate and all that stuff and and that's why they decided they need to run the labor market hot. But now we have seen that when you run the labor market hot and there's overall inflation, it actually hurts the people who they're trying to uh help in the first place. So I think both the Fed and the uh federal government uh the direction of the fiscal spending of the federal government ultimately backfired and we we have seen fully the consequences uh in the last three years. kind of proving Reagan's point of the most dangerous words to hear. I'm from the government and I'm here to help. >> I I felt scared when you just said that. >> Um All right. Well, so in talking to Michael, you know, kind of like you, there's a lot of similarities. Um he's seeing some green shoots in growth and I I do want to acknowledge that the the date we're talking the Atlanta Fed GDP now estimate for Q3 is like 3.9%. Right? All right. I mean, that number will bounce all over the place, but it's still it's looking good so far. Um, and um, you know, he said in inflation is moderating, which is good, and that um, rates are are poised to continue to go down from here, especially at the short end with the Fed cutting. And he actually says that he's sort of saying these are becoming Goldilock conditions for for a recovery. And he said one of these Goldilock elements is actually the weakening jobs market. He said if the jobs market is weak that provides the Fed with air cover to come in and cut rates and that will be stimulative to the economy. And as long as the job market doesn't get too weak, right? Um you know then it should be good, right? And the other factor he added here too is low oil prices which undoubtedly have been helping the situation. Um, do you agree with his point there about like enough weakness is is is good, you know, quote unquote good for the economy uh in the job market as long as it doesn't get too weak. Yeah, I read Michael's note last night and that uh he just recently put a very insightful note uh looking at historical episodes where the unemployment rate would rise with stock market because the question is can the stock market keep rising when the unemployment rate is rising? And most people have the most recent uh recessions in their mind when they think if they thought about it 2020, 2008 and 2001. And based on those three, you would think no, the uh stock market would go down if unemployment rate goes up. But Michael showed that in fact there are many other historical episodes where the unemployment rate would go up even as the stock market would go up. And I looked at those uh episodes that he identified and what I found most interesting is that those episodes are the so-called soft landing episodes or the ones where so this is what you you probably mean by Goldilocks. How goldilock has uh can the labor market be in order for uh the stock market to go up while unemployment rate uh is also going up and >> and those episode include the 1950s, the 1960s, the early 1970s um and 1982. And the commonality of this episode is the lack of resolve of the Federal Reserve. And so basically the Federal Reserve in those episodes didn't finish the job and quashing inflation. They just kind of like raised it but the labor market started weakening. They immediately start cutting rates. And in fact the even the 1982 one you would think that well Paul Vulkar was at the helm of the Fed. So how how is it that in fact h you know why why isn't you know why is the stock market going up because even in recall that there was a double dip in the early 1980s the first time around in 1982 Paul Vulker saw that the labor market is deteriorating and he wavered and so that recession was cut shot short really quickly um and it's only later on where inflation flares back up that he decided to go, you know, really all out. Right. Right. Right. So, so um so I think that today's Fed is behaving very similarly as those episode that M Michael Cantrol has identified as where unemployment rate would go up with the stock market in the sense that today's Fed seems to be kind of relaxed about the inflation target. The Fed is supposed to be targeting 2%. They have been off the target above the target for almost five years now. And uh according to the projections, they would be uh above the 2% target even out to 2028 for eight years. And as you could see in their behavior recently, the labor market deteriorated a little bit and they're immediately jumping into action to cutting rates. And so I think that so my own estimation of the Fed's reaction function is that they have shifted in a dovish direction is as if they're targeting 2.8% as if I mean acting as if they are doing that uh instead of um the 2%. So, so I think um I think there will in this sense the a very important piece of uh that that can govern the macro direction in the next year is what the Fed will do and given the more dovish shift in reaction function. I think the Fed will accommodate uh the labor market and so there's a likelihood that um higher likelihood that uh Mike's optimism is well placed I think based on the read read on the Fed alone. >> Okay. And let me ask you this. Um it one might say well look if the economy is starting to strengthen then why are we cutting into that? you know, why don't we let the, you know, wouldn't that maybe in danger of of eventually getting the economy overheated and returning inflation and all that stuff? I did hear you say that this is sort of a fragile economy here. So, I guess my question for you is, is do you think the current Fed approach strategy to cut from here is appropriate given the conditions on the ground? I think given what they're seeing in the data, they might feel like they should do this because we just got a negative ADP data, right? A negative 32,000 shockingly weak. And the last two months of NFP from BLS also have been surprisingly weak. So based on what they're seeing, I could see why they probably want to uh buy some insurance with cutting. and also it fends off some political heat from Donald Trump. Right? However, if uh going to to the point that I made the in the beginning of this podcast, I mentioned that if you adjust for the measurement errors, um what I'm seeing is that in fact things are looking better than what the ADP is suggesting and that there is actually some rebound. So I'm seeing the momentum of the labor market actually improving. Uh and I'm seeing also that there's a lot of pentup AI related investment that needs to happen the moment that the Fed lowers interest rate. There are just a lot of impulses that's been bottled up. And you know going back to 2021 that was also what I saw back then. The reason why that that inflationary uh wave came so fast was because there was actually a lot of bottled up stuff before the pandemic that bottled up demand that wants to happen and so it hence it was so inflationary. >> Okay. But just to ask my question again, um, is it a I know you think from their own point of view, the Fed thinks that their strategy is appropriate, but from your point of view in terms of a recovery that economy that should continue to strengthen from here, is cutting warranted right now? So I from my perspective is different than the Fed's perspective only because the Fed has a also need to be mindful of its institutional invest uh independence right so the Fed's risk management objective while they wouldn't admit it probably incorporate some incorporated some considerations of political independence and and so whereas from my perspective I I am just thinking if I were purely based on what I'm seeing in the economy. And what I'm seeing is that if they cut very sharply, the inflationary pressure will flare up. So, it's not appropriate. >> Okay, great. That's where I was going. Thank you. Um, all right. Let me um I want to ask about you know what are some curve balls like what are the what it given that maybe growing optimism you know are are are there curve balls you're worried about that that could derail this. Um but before we get there I want to pick up a conversation that we had I think the last time you were on because I've cited it an awful lot and I'm curious if your thinking on it has shifted. Um, I remember, and correct me if this is memory is incorrect, but I remember that you were kind of concerned about the implications of the student loan debt going into repayment because that's the one kind of debt you got to pay. You know, you decide not to pay it, the government's just going to take it out of your wages, right? Um, and uh, you know, a subst substantial amount of borrowers out there. A substantial amount of them clearly can't even repay these things right out of the gate. And we saw delinquency rates shoot up, right? And we're going to see defaults start to shoot up as a result of that. But we're seeing this danger of sort of a contagion spreading into other types of consumer debt, right? As you rob from Peter to pay Paul. Okay, I had to pay the government loans, right? Now I can't. now I'm going to be delinquent on my auto loan or my credit card loan or maybe even starting my mortgages. So, we were kind of in the early days of that repayment um process. We're further along now. Um what's your attitude on that now? How how big of a concern if at all is it for you? Yeah, I think it's it is a concern because you uh but whether it has devastating macro consequences uh that will that will more than offset the positive impulses of the e economy. I am not so sure. Um so so for this is the K-shaped econ recovery right you have this in this student loan borrowers which tends to be um most of those debt is I I believe in concentrated in the age group in their 30s and 40s the sandwich generation >> uh those and the ones that are going delinquent particularly are those who didn't finish the college degree so they borrowed uh funds but didn't complete those are the ones most at at risk of delinquency and and so I think that segment of uh we calculated that that segment uh probably would shaved off up to point at most 8 percentage point point from personal spending uh PCE personal consumption expenditure >> um but what we are seeing offsetting partly that is this wealth effect from the continued stock market um um uh rally, right? And the we just got some uh new uh auto purchases data yesterday, very very strong, which suggests that uh those people who are benefiting from the wealth uh stock market are actually filling the gap on those people who are pulling back a spending from student loans. >> Okay. So, so you've probably seen the same charts I have of like you know the top 10% uh is makes up about 50% of all consumer spending and then the bottom I don't know the next 20 to 50% makes up the next big chunk and then then the remaining 50 remaining 60 or whatever it is >> pretty small percent I hate to say >> yes the yes but the I think the issue uh uh that one should be concerned about is from the a financial stability perspective which is that of these loans suppose that this uh the del delinquency spill over to credit cards. >> Yeah. >> And or it also spill over to you know manifest itself in some bankruptcy of some non-financial firms that turn out to be carrying all these consumer debt in their their uh um uh in their balance sheet. and those consumer loans and terms were repackaged into other type of uh tranches of loans kind of like 2008 right that's the contagion I was referring to yeah >> right that you don't know where these bad loans are until they turn bad because right because I cannot tell you which corner of the financial system are these exotic things in and until then then you realize uh oh there's contagion right but in terms of a macro how uh whether directly Are they a macro uh headwind? It's not obvious. They are only if it becomes a cascading financial stability issue. Uh which is hard to tell every priori. Uh that's the job of super uh bank supervisors. Um that until then um I would just say my baseline is so far that is not having a visible impact on um macro aggregates. >> Okay. All right. That's good to know. And again, just to make sure I heard you right, it sounds like that top 10%, top 30%, whatever, they're increasing their spending enough um because of the wealth effect that it's making up for any reduced spending of the the really strapped people below the line. Um, so you're you're you're not seeing it as a macro threat like you said, but you're open to the fact that there could be a credit risk uh if some of these lenders get overextended and then we find out that you know people who depended on them are exposed as well. But we won't really know that apparently until the bodies start floating to the surface which by the way we did have a couple recently we had another firm. Right. >> Yes. Yes. Yes. And also Adam at the end of the the day I think the most important uh driving force of the economy is the policy right even if there's a credit event what matters and whether that will spill into a hard landing event event is the reaction of the Fed and the Treasury or other policy maker if the Treasury bails them out if the Fed unleashes liquidity lines so to backs stop the uh uh you know frozen credit um in the market, no problem. So it's it's really about the policy response. >> Okay. And and sorry sort of like what we saw with Silicon Valley Bank and the other banks that failed, right? A very swift response, right? Yeah. >> Right. Exactly. So So if the the Fed is very ready to step in, uh no problem. >> Okay. Um, of course it's hard for people not to hear that and just think, okay, you know, too big to fail and, you know, bailouts for anybody that, you know, was a bad actor is just going to continue to be business as usual. >> Yeah. I'm not I'm, by the way, I'm not saying I think what the Fed is doing it would be right. I'm just saying as long as they're doing that, then you could keep seeing this party go on and on. >> Go on. Okay. All right. and and and and Adam, sorry, just just to be clear, m Michael Cantro's view that the party can go on. >> Again, let me stress it's conditional on a very accommodative Fed. If the Fed decides to say, suppose that Donald Trump suddenly appoint Kevin Walsh as the central bank chairman next spring, Kevin Worsh is a very hawkish person. He's like a persistent hawk um and an inflation hawk. He he even was worried about inflation in 2010. So if you have somebody like that leaving the Fed, it might be a completely different situation. My baseline is that the Fed will be populated by people who are uh more inclined to accommodate any labor market weakness. >> So that's really interesting. And again, I should remind the audience that you used to work at the Fed. Uh I think um >> yes. >> No. Okay. Did you work at the Fed? Oh, yeah, you did. You worked at the Federal Reserve Board. Yeah. Um Okay. Um and the Treasury and the White House Council of Economic Advisors. So, a you really know systemically how all this works. >> Um but but yeah, on that point, I mean, I know that Worsh has been one of the lead horses for a while. I don't know if he still is or not. Um, I know that there's a tremendous amount of respect for him, but I would definitely say the storyline right now, the dominant story line is that Trump is trying to pack the Fed with, you know, doves and people that'll do whatever it takes to get the policy rate down as low as possible. Um, and presumably, you know, help the administration intervene on the administration's behalf whenever it needs it. Um, I think you said your default assumption is that it'll be a more dovish Fed going forward. Um, but, uh, how accurate do you think that current storyline is? Um, or maybe the other way, what probability do you give Trump maybe surprising everybody and putting in somebody like a worse? H you know it it really it is uh when you look at the Fed history it certainly is is not at all obvious that a president who tries to influence um um the Fed by appointing somebody who supposedly is dovish that person will act dovish um for example um in uh the 1950s when um Chairman Echoes was demoted in favor of somebody who President Truman thought would be more inclined to monetize fiscal debt. Well, it didn't play out that way. The the two people, the next two people that Truman installed, Macob and uh Martin turned out to be the father of Fed independence thereafter. Um, and I believe, do you remember who uh uh which president appointed Vulker? Was it Jimmy Carter? I think so. Yes, Jimmy Carter appointed Paul Vulkar. But Jimmy Carter was the president who oversaw this whole period of uh uh unanchored inflation expectations by pursuing KCM policies and a lot of the policies that were very inflationary. Um, and yet he got us Paul Vulkar. So, I think I think that um if Kevin Hasset were to be appointed the Fed chairman, I I I right now I I I think that Kevin Hass is actually a very open-minded person. He also used to be at the Fed. It's not obvious to me that he's um the boogeyman who uh who's so loyal to Trump that he he would just keep lowering interest rate even though um inflation is flaring up. Um similar with Stephen Meyer. So Steven Myin, yes, he has pushed for a very low interest rate recently, but at the same time, from what I've read of him and what I know of his argument, how he thinks in the last couple of months, I would also I also think that Steve Myin is a very um intellectually very um flexible individual who I mean they both they are both there to serve the country. If they see inflation flaring up, I think they will do the right thing. Maybe I'm in the minority here. >> Well, we'll see. And you know, I mean, we even have um evidence. >> I mean, to be clear, they they might seem they Kevin Hassid, Steve Myin, and any Trump appointees like even Chris Waller might be perceived as just cowtowing to Trump by pushing for uh lower interest rate. But the truth of the matter is there's an institutional bias within the Fed to favor uh with a group think to favor uh Keynesian policies. So policies that tend to be favored by uh Democrats and in fact as you probably know the uh donation record within the Fed is like 90 over 95% uh Democrats. And so it's actually I in my mind I think it's actually healthy to introduce these diversity of views uh uh just to stimulate a debate right so clearly Steve Meyer's argument did not move anyone at the FOMC however it steered the conversation it opened up the the range of the debate to consider cutting whereas before there was not even uh it was like a small range of policies to be considered Um but right now he just opened it up and I think it's a healthy thing. >> Okay. That's actually really fascinating. Um and like I said, you know, to your point about sometimes the Fed chair just doesn't do what what the president who put him in assumed he would. We only have to look at Trump's first administration. >> Yeah. Exactly. Yeah. >> So every every time the president tried to put somebody in who they thought would be uh uh friendly to the policy didn't end up that way. >> Yeah. So, okay. Um, all right. Well, look, uh, I we're coming up near the hour, so I've got to wrap it up to be respectful of your time. Um, I've I've got one curveball question for you, but before I ask it, to set the context, okay, you see a potentially um recovering mark uh economy from here, um, what what kind of market outlook do you have at this point in time? Does that does that de facto mean good market next year because of a recovering economy or will the two perhaps be as less correlated? >> Sorry to disappoint you Adam. I'm not a market strategist. I'm an economist. So I I have to refrain from giving market advice but generally I think uh I agree with Mike Michael Canro's uh hypothesis. I I think there's something there. >> Okay. And just to refresh people who haven't watched that video, Michael Michael's market outlook is um this is all generally pretty good for the markets. Um and he thinks it's it's healthy in the sense that he sees a broadening out of the sectors of the economy that are starting to get some love because, you know, of late it's really just been the high-tech, you know, capital investment part of the economy that's that's gotten a lot of benefit. um and and now we're starting to see, you know, other parts of the economy start to get some sunshine and and and uh hopefully fare better from there. So, he thinks that um in general the the the market will do okay, but it it it probably won't be the um big tech hyperscalers driving all the growth going forward the way they have for the past couple years. He thinks they'll probably still do okay, but he thinks the better returns will be um elsewhere in the market. it'll be sort of in the lesser loved parts of of the stock market that that hadn't been getting much sunlight. So, the smaller cap stocks and even a lot of the S&P 493 outside of the MAG7. So, um he he said uh you know, you're you're you're probably going to find better returns as an active investor next year, you know, investing in these areas that are starting to really recover. Um probably more so than you will if you just try to ride the existing big tech trend that's been going on the past couple years. You don't have to agree with any of that. Um, and I just wanted to make sure folks knew what Michael's current outlook was. So, let me ask you this then. Um, and it's it's a market related, but I think you can still have a a opinion on it as an economist. Um so much of the current market valuation right now is around AI and um if you look at the market valuation metrics um a lot of them are at all-time extremes um or close to it or at some cases you know definitely at um and so to a certain extent were something to happen to the AI phenomenon that would definitely have a pretty big market implication and it could actually have economic implications from the negative wealth effect that would follow. And we're seeing I mean almost like a week doesn't go by now where somebody who's really high up in the AI ecosystem saying you know this thing's in a bubble. Um so do you have any concerns about um kind of an AI correction maybe sort of similar to the dot correction where it's like look we're not saying the internet isn't going to return phenomenal returns over time. It sure did. it just didn't deliver them on the immediate scale that everybody was assuming in 1999 to support those those asset valuations. >> Okay, I I will answer this question in two ways. Number one is since my specialty is in macro, I I'll focus more on the GDP and growth implication. So what we are seeing um in GDP figures in the last year is that um AI related investment has supported GDP growth by about 1 percentage point in the first half of this year. So without the AI uh related contribution uh it would have been this first half of this year would have been zero close to zero right um and so so and this uh the AI related capex is just uh this is just the beginning of it um as it shows up in GDP last year we didn't see it this clearly only in starting in the first quarter are we starting to see it clearly so what we try to answer is could the AI related capex grow at this current rate. So it has to keep going at this rate in order for it to keep contributing so positively to GDP growth. And the answer we arrived at uh is uh likely yes until next year at least. And why is that? Well, it's because I we interpret the uh dampening of this AI related sentiment re uh recently as related to um people are more cleareyed about the feasibility of AI and becoming well well in their AI is not going to be sci-fi reaching that sci-fi level that people had in their fantasy. It's going to be much slower. However, the second phase of AI uh would be the adoption and usage in other applications, right? And we think that this second phase is as data center intensive and energy intensive uh can support that level of investment uh in order to continue to add to GDP and we are seeing still shortages in data center and uh electricity power grid and given that shortage it means that there's positive incentive for firms to be investing and so from a macro perspective we a case for continued investment related to the infrastructure of K a AI right uh so that's part one uh part two in terms of the market which part of the AI market is huge right there's the hyperscalers and there's a whole bunch of small caps and midcaps who are increasingly adopting AI right so is the bubble in the hyperscaler or or are we talking about a bubble in all the AI related stocks out there and again I'm not a uh equity market specialist but how I would apply economic reasoning and intuition to analyze this question is basically uh there is a AI related stock bubble if the profit margin growth of these AI related firms are not on a path for their to break even in their EPS right a bubble like the dotcom bubble is is one where you see a lot of firms who actually have negative EPS who who are not making a profit yet fetching skyhigh valuations right >> but right now what you're seeing in these many of these small caps AI related firms is increasing accelerating profit margins so it's not like the profit margins is tanking yet it's like you're seeing like 60 70 80% profit margin um and so they are actually some of them are on track to break even in the EPS and and I think I would um I would advise for those who are adi uh trying to gauge what stage of the AI bubble or if there's a bubble is to calculate the break even of the um profit margin for for breaking even eps and look at the path of the actual profit margin of these small caps to uh medium cap midcaps AI related firms and see whether they're on track or or is it really uh ridiculous? >> Okay. Um well, it's a great economist answer. Um and and certainly what I take from part of what I take from your answer there, Anna, is is there's some there there question is is is is there enough there to uh support today's asset valuation prices? But, you know, TBD and do your homework as you're saying. All right. All right. Well, look, as we as we wrap up here, um is there anything burning brightly on your radar, either as a uh you know, an opportunity or a concern that I haven't thought to ask you about yet. >> Adam, you've always asked the most important questions, so you got it all. >> Ah, you're so kind. All right. Well, there is one last very important question to ask you, Anna, which is for folks that have really enjoyed this discussion and would like to follow you and your work in between now and your next appearance on this channel, where should they go? >> So, you can follow me on my Twitter account, Anna Economist, or you can find our work on the Bloomberg terminal by typing BEC Go, where you can access all our coverage of the global economy. >> All right, fantastic. And as usual, Anna, when I edit this, I'll put those up on the screen so folks know exactly where to go. Folks, the links will be in the description below this video as well. All right. Well, folks, please uh join me in thanking Anna for coming on the program and being so generous with her insights by hitting the like button and then clicking on the subscribe button below as well as that little bell icon right next to it. 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Uh lastly, if you would uh like to get some professional help in figuring out how to position your portfolio uh to u ride the trends of the future, especially if they happen the way that Anna thinks they might from here, uh then highly recommend that you uh get that advice from a good professional financial adviser, one who takes into account the macro issues that we talk about here at Thoughtful Money. If you've got a good one who's doing that for you, great. Stick with them. But if you don't, or you just like a second opinion from one who does, consider scheduling a consultation with one of the financial adviserss that Thoughtful Money endorses. To do that, just fill out the very short form at thoughtfulmoney.com and uh the firms will be in touch with you shortly. Again, these conversations are totally free. Uh there's no strings attached. There's no um uh commitments uh involved. It's just a free service these firms offer to help as many uh people as they can. All right. And with that, Anna, again, it's always such a pleasure. Thank you so much for coming on. >> Thank you, Adam. >> All right, and everybody else, thanks so much for watching.
