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Jan. 26, 2022 - Viva & Barnes
01:57:15
Sidebar with Joseph LaVorgna - Viva & Barnes Sidebar!
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Time Text
Good evening.
I am not late.
Who said I was late?
I see it.
It drives me nuts.
I think people know that it drives me nuts.
Late again.
I know.
Good evening, everyone.
This is going to be a crash course in economics.
Look, I'll tell you something.
Winston says hi.
It's minus 19 degrees outside in Montreal.
And the dogs don't last very long out there.
And they don't stay very clean out there.
You may notice that I have upped my traditional attire to a buttoned up.
My old tablecloth shirt, which I realized had been at the dry cleaner for seven months, I think.
Seven months.
That's how you know you don't go into the office anymore.
I had more dry cleaning at the dry cleaner.
I had more clothes at the dry cleaner than I had in my cupboard.
Yeah, it's...
Let me see where that effing cold...
It is.
F-ing cold.
But the good thing is it's a dry minus 20, so it's not humid.
If it were humid...
First of all, actually, they say the temperature, what it is, and then what it feels like.
And every time I hear that, I hear Ben Shapiro, his voice in my head, nobody cares about your feelings, just tell me what the temperature is.
It's minus 19, but it feels like minus 27. All right, there is my...
That's my stand-up for the evening.
Okay, tonight's guest...
First time we're having him on, I felt morally obliged to put off the T and put on this.
Joseph Lavornia, who was the chief economic, the person who recommends stuff to Donald Trump.
In my system, when we have a guest, I look up who they are.
I look up for scandals so that I can be familiar with their scandals for the purposes of discussion.
If they've written a book, I try to read the book.
And if they are specialists in a field, I try to understand the field.
I was not able to read any book.
I was watching a bunch of interviews of Joseph talking about the economy, talking about where things are headed.
And I know where my brain starts to shut down when we get into subject matter that I'm not totally comfortable with.
And that because I'm not comfortable with it, it makes me...
Makes my brain shut down.
All right, before we get into it, Joseph is in the backstage.
It's going to be fantastic and interesting, and I know that I've got questions, a lot of which deal with the Federal Reserve.
I've asked a few of them before, but we're going to get into it now.
Standard disclaimers before we go live, people.
No legal advice, no medical advice, no election fortification undermining of the democracy advice.
Stick around after this live stream.
I'm going to put out a Viva on the street about the convoy in Canada that Canadian mainstream media ignored as long as they could ignore it.
And now that they can't ignore it, they've got to spin it.
Superchats.
YouTube takes 30% of Superchats.
If you don't want to support the YouTube beast, you can follow us and watch us live as well on Rumble.
Rumble takes 20% of their thing called Rumble Rants.
If you want to support us...
VivaBarnesLaw.locals.com.
You know where.
Okay.
Neil Young is an idiot.
Keep on rocking in the free world, and he wants to take down Joe Rogan for exercising freedom of speech.
I mean, it's as idiotic and ironic as Rage Against the Machine, now raging for the machine.
Howard Stern, the badass of the radio, now, you know, supporting censorship to some extent, thinking the...
Unvaxed should not get treatment.
Zorozifer says, I used to agree with your don't blame the works, but we have moved past that.
We blame collaborators alongside the WW2, WW2, baddies.
And we need to start blaming these people too.
I was just following the rules.
Be okay for WW2.
Okay, look, it depends.
I appreciate the sentiment.
And I do think analogies are...
Appropriate now, to some extent.
RFK Jr. got into trouble because in his speech, a recent speech, I think it was on Capitol Hill during the Freedom speech, he made an analogy to Anne Frank to the effect that, you know, back in World War II Germany, at least you could hide in attics to avoid the government.
And his hyperbolic comparison was that we live in an era of like biometrics, cellular tracking and everything where you have nowhere to hide.
And even if you can hide, they'll cut off your bank accounts.
You have nowhere to eat.
But then he subsequently apologized for what some people thought to be an insensitive analogy.
And Jake the fake tapper had to run with that like it was nobody's business on the Twitterverse.
Okay.
Look like Albert Einstein.
I love the wild hair.
In the video that I did the other day, people said you look maybe unhinged.
But it's calculated.
Okay.
Barnes and Joseph are in the house.
Keep on rocking in the gulag.
I actually heard that in my head, the way it was supposed to be.
The other thing is, apologizing for something you did on purpose that you meant at the time because people were offended by it, that's a lose-lose situation because the same people who were offended by what you said are going to be offended by your apology as they were on Jake the Fake Tapper's Twitter feed.
Okay, let's do this because...
Yeah, economics was not my strong point.
And in my interview with Gadsad, he asked me what my regrets were, and I hesitated and I hemmed and hawed because I had some in my head that were not that big.
I regret having not gotten an MBA before my law degree.
I would have preferred to have an MBA to philosophy, but if I could do it again, I might just do a two-year crash course MBA because you need to understand it.
Now, with that said, I'm going to bring in Joseph.
I'm going to bring in Robert.
Gentlemen, how goes the battle for both of you?
Great.
Thank you for having me, guys.
Thank you.
It's going to be amazing.
Let me just do an audio check so that everyone in the chat can troll us and say F for audio.
Joseph, just introduce yourself very briefly, and if people feel the audio is too low, I will bring you up.
Joe Livornia, practicing economist, at least on TV.
Hope you can hear me okay.
And Robert, I think people know you, but just say something.
I think all is good.
Looks good.
Okay, there's some super chats, which I'm going to bring up afterwards or take a screenshot.
Joseph, that was a short elevator pitch.
Give us a longer elevator pitch for those of you who may not know, for those of us who may not know exactly who you are.
Sure.
And then we're going to get into some childhood stuff, but not for the purposes of rehashing any childhood experiences, just so people can understand you.
Sure.
I started my career at the open market desk of the New York Fed.
That was back when the Fed wasn't transparent.
They did open market operations.
So I wrote my senior thesis on how the Fed operated, and I got a job working on the open market desk at the New York Fed.
And then when UBS was building out its Fed watching operation, I resigned.
I actually resigned the day that Alan Greenspan decided to do away with open market operations, but I had the job.
So I got employed.
I learned sort of markets and how economic data work and went from UBS to Lehman.
I did 20 years of hard time at Deutsche Bank, which prepared me very well for Washington.
So that was good.
And now I moonlight at a French boutique investment bank where I'm the chief economist.
So I focus on markets and my clients would be hedge funds, many of which you've heard, asset managers, insurance companies, treasurers, state treasurers.
Pension fund managers, etc.
All institutional accounts for the most part.
And, you know, it's been a wild ride and the economics part of it is actually quite fun.
Now, what was it like when you're making the decision about going to work for the Trump administration?
Did you have any concerns that the way aspects of certain people in positions of economic influence and institutional influence, especially in the academy and elsewhere, that there was almost made it to where it was perceived as you couldn't really go work for the Trump administration without great risk or exposure?
to your future professional career.
What was your experience in that respect?
So, I mean, I thought about that.
And I just sort of, you know, my wife made a very good point.
You know, the funny thing about Donald Trump, well, you know him, and that is that he's sort of like, he's a bit suspicious of the experts.
And one of the things he did is demote the Council of Economic Advisors effectively from a cabinet-level position.
So it kind of tells you what he thinks about economics, which a lot of times economics brings a lot of pain onto itself.
But I really wasn't worried because I was working directly for Larry Kudlow.
Larry, it's funny, every job you go through, you have to meet all these different people and all this other stuff.
And Larry, we had lunch in the West Wing in the Navy mess, and he said, Joe, would you like to come work for me?
And my initial reaction was, of course, like, how could I say no?
I said, let me check with my wife who bought me a little bit of time.
And then we negotiated a little bit on a few things.
And then I started.
I really wasn't worried about what the perception was because I thought, you know, people are, you know, look, I'm old enough to know that people aren't going to like you for whatever reason.
Sometimes people hate you because they don't like your market call.
So I didn't think it was a big issue.
And I knew Larry...
Even with money, my liberal friends sort of was well-thoughted in financial circles.
And Steve Mnuchin in Treasury was highly respected.
So I was sort of away, Robert, from all the political stuff, the international stuff.
I felt like I was going to be above board.
And the way Larry carried himself was that he tried to really focus more on policy.
So I really wasn't worried.
And anyway, so that's basically it.
What was it like?
I mean, because there's been different, different people had different impressions.
So for some people, it was a chaotic experience.
For some people, it was an exciting experience.
For some people, it was a mind-numbing experience.
What was your experience like in the Trump administration?
Robert, it's funny.
When I was with the Fed, everybody was somebody's research assistant, meaning everybody always would go down and do this for me.
So I kind of became that person for Larry.
Every time the president wanted Larry to do something, oftentimes he would come down to me.
And sometimes it sort of felt like, okay, I've done this, I did this many years ago, sort of like, I don't want to say below me, but you're sort of working, you feel like it's a greater power.
I mean, I went into work every day and it was just a really unique experience.
It's hard for me to describe.
Because in finance, the pay is good and you can make a good living.
Here, there was no pay.
I was away from my family.
I had to pay for everything.
There's no perks, really.
Everybody thinks there's great perks.
Health insurance wasn't even that good.
But I love the fact that at a very small level, I was at least able to give my best advice on policy as...
You know, as it came out, it was mostly Robert Mackrow.
I mean, there are things that we dealt with that, you know, different fees that FHFA was looking institute on mortgages and certainly worried about what was happening in markets and wanted to make sure that what the Fed was doing kind of made sense.
So we work closely with Treasury.
But I found it to be very collaborative.
I did not find it to be chaotic.
I found that there were very good ideas quickly rose to the top.
I didn't find that.
I mean, sometimes there was dislocations.
I think that's always the case in any administration.
But I found that it ran pretty tight, at least on the economic side.
So I thought it was all actually a very good experience.
And it was funny, you know, sort of from the inside looking out, like it wasn't anywhere near as chaotic and bad as people portrayed.
It really wasn't.
It was actually quite normal.
And the people that I dealt with were very professional in NEC.
It was the National Economic Council that I was part of.
Joseph, if I can back it up a little bit, if I can detect you have a New York accent, correct?
Yeah, a New York accent.
My younger son does as well.
His is much worse.
It's water, and the A's are ERs, and the ERs are A's.
So you're born and raised in New York?
And first of all, how old are you?
You look very young.
Yeah, well, clean living, I guess.
I am...
Well, I'm on the wrong side of 50. Okay, I thought I asked a really bad question.
Because if you mentioned 20 years of experience, you can't be under 50. Born and raised in New York?
Yeah, well, born and raised basically in New Haven.
And I was going to ask Robert if he's a Sally's or Peppy's guy.
Peppy's.
Peppy's, yeah, me too.
But actually, modern now is better, Robert, on State Street.
But Pepe's, I heard, got new ownership.
I don't think it's as good as it was.
But anyway, I was born in New Haven.
And, you know, I applied early.
I wasn't getting into Yale at the time.
One of my friends who actually got into Yale and Harvard was All-State in hockey.
And I went to North Brantford High School.
Was All-State in hockey and football.
And he got in.
And I wound up going to basically maybe the next closest thing to Yale, which is not necessarily a good thing.
Vassar College, a real bastion of conservatism.
It was actually kind of normal back then.
I was an econ major and found that people there actually were quite reasonable.
They were maybe slightly center-left.
Now I think it's gone way too far, extremist.
Anyway, so I was a New Haven kid.
I grew up in Connecticut.
My mother's from Long Island.
So yeah, I've got a little bit of that New York accent.
It comes out at times.
And where did you study and how did you end up?
I mean, because it's a very interesting progression, but how did you end up where you were from studying to work profession to the White House?
Yeah, so basically, for whatever reason, I was just really always interested in monetary policy.
I had this really, really provocative professor that really kind of turned me on to the profession.
And while I was reading a lot of books in my free time that he had recommended, I said, well, I really kind of like this.
And I was going to go back to grad school and basically economics now is all about math and modeling.
But given my expertise, I was able to get a job at the Fed.
And as I was working, I was going part-time at the NYU economics program.
And as my career advanced, I never really finished.
And I would say, David, that's the biggest problem with economics today is it's all math-driven.
And it's a real problem because we sort of lost sight of the psychology.
The history of the profession.
I mean, some of the great economic works by John Maynard Keynes and Milton Friedman, among others, there aren't any real equations there.
And the profession's gotten way too mathy.
We're trying to model an economy that's basically $40 trillion in size.
When you measure GDP, it's about $20, but that doesn't cover all the business-to-business activity.
So you're trying to model an extraordinarily complex system, not unlike climate.
And it's really hard to do.
And the models, at least in economics, certainly don't really work well.
So basically, I'd say I'm mostly self-taught.
And in most of my career, I sat next to a proprietary trading desk, so people that would make big bets on the direction of market.
So I had a sort of a thirst for betting.
But, you know, in economics, we have what's called self-selection.
You wind up doing things that, you know, sort of fit your personality type.
So I never really thought I'd be a trader, but I like the intellectual curiosity that economics brought.
Tied in with the politics and the history of things.
And I always had an opinion.
So it kind of worked out well for me.
And I just got, I was good at what I did.
And I was able to interpret things really quick on the fly and have opinions that help people at least tactically position and if not make money, certainly not lose money.
That's how I've done it.
So I'd say I'm mostly self-taught.
Now, what about family upbringing in the sense of what did your parents do?
Any siblings?
Anything like that?
Yeah, so my father is, both of my parents are still working.
They teach local community college.
My dad's watching tonight.
He goes, I don't miss Frank Barnes.
They've got him watching him every week.
But my parents, my father's a high school principal, initially started inner city New Haven, and then became the director of Bullard Havens, which is a vocational technical school, largest in the state.
He knows all about trades.
I mean, he had, you know, licensed plumbing, carpentry, beauticians.
Electricians.
So he sort of knows what the value of hard work is.
And my mother was a reading teacher.
So they actually work together.
They work at a community college, still working.
My brother was a former actor.
He's actually, normally would be in Canada studying, going back for alternative medicine.
His claim to fame was that he was Jessica Biel's, Justin Timberlake's wife's, first boyfriend.
And you could IMDB him, but he's had a long, rich acting career.
And my sister, she's in financial services.
I'm the oldest of three.
My brother is about 12 years younger than me.
Sister's in the middle, and she's in financial services.
So you said you worked for Deutsche Bank for 20 years.
20 years.
Hard labor.
Deutsche Bank comes up.
It had come up in the news.
They were involved in some issues, I believe, some lawsuits.
Robert, am I imagining things?
Well, they were Trump's bank for many purposes, so ended up in the middle of a range of those issues.
Then they had their own set of issues inside Germany and Europe, and all the different legal issues have sort of percolated up over the time period.
I was going to start off with the, what was it like working at the Fed early on in your career?
Robert, it was, if you were there for three years, you were a lifer.
I mean, it was really like punching a ticket.
We had a choice at the time.
If you came in at 8.30, you could leave at 4.30.
If you came in at 9, you could leave at 5. And it was sort of like, you know, don't do today when you can save and wait and do tomorrow.
Very bureaucratic.
And it was clear to me after about a year, like, I had to look for something else because I was too, I guess, too ambitious.
I thought I'd go back to grad school and, you know.
That's why I was going to go back and study math on the side because I knew it was so mathy.
But it was not really a place where it was very stultifying, not very rigid.
Nice people, but, you know, paper pushers for the most part.
And what did you think about today's announcement, speaking, going to the Fed, in terms of where they're heading economically and the choices they're making between economic sustenance and inflation concerns?
Yeah.
So, Robert, I mean, Jay Powell did great.
I mean, I would say I bookended.
He started off pretty poorly, at least back in 2018.
And then he did a great job during the pandemic.
But today's press conference, I thought, was not very good.
What's basically happened is the Fed has financialized the economy through extraordinary accommodative policies that really started with Alan Greenspan.
I'd say it was original sin.
I mean, they pumped a lot of money into the system, basically lowered rates following the 87 stock market crash, which is very prudent.
But then the Fed followed that up and eased way too aggressively back in 1998 when long-term capital was going under and the Russians had defaulted on debt.
And that kind of became the blueprint, which they eased again more following the NASDAQ bubble burst in 2000.
They eased again aggressively following the housing collapse.
And then they eased even more during the pandemic.
And during this time, rates continued to fall.
They stayed at zero longer than they ever had in the past.
And of course, the Fed's balance sheet ballooned in what's known as quantitative easing.
So now before the balance sheet might have been only one or two percent of GDP.
Now it's pushing 40. And what Jay Powell tried to do today is try to walk back some of this easing and tell We're going to figure out ways to perhaps let our balance sheet run off quite quickly.
And that's a problem for the markets because they sort of conditioned the markets for all this liquidity.
And unfortunately, Robert...
And David, I don't think the Fed can get out.
I think in for a penny, in for a pound.
And I think they're going to be pushed around by the equity market.
And they're not going to be able to raise rates as much as they're supposed to.
Joe, bear in mind, I'm an idiot.
I'm going to have to back you up a lot here.
I assume maybe there's other people who are not quite as idiotic as me, but understood some of that.
Let's go straight back to the beginning.
It's a question I've asked before.
Robert and I have talked about it.
The Federal Reserve.
I mean, explain what it is and how it even works.
I hear these things.
I don't understand what entity they are that they even adjust interest rates, what they control, how they control it in virtue of what...
Explain it like I'm five.
What is it started and what's it doing on a day-to-day basis now?
Sure.
So, I mean, Robert knows all the history of this, but basically prior to 1913, the Federal Reserve Act, you all used different banks in the U.S. and they all issued their own currencies and somebody had the idea we need a central bank.
We need a central authority.
That is responsible for issuing currency.
Literally, dollar bills and coins.
Or what became dollar bills and coins.
And the Fed was set up for that purpose.
The Fed was set up to provide currency on demand and keep the banking system smoothly functioning.
Because in the past, you had these different crises.
If they had a bad crop in the farm region of the U.S., then the farmers would go bankrupt and there would be bankruptcy.
You'd have all these panics.
So the Fed was designed as a central, effectively, Clearing, not clearing, that's the right way to say it, but basically as a central authority to provide currency on demand as people wanted it.
And over time, David, that morphed into, okay, the central bank is responsible for maintaining the currency and also controlling interest rates, the cost of borrowing.
And people recognize that over time that the Fed could adjust interest rates in a way that would impact economic activity.
So if the economy was soft, the Fed could ease interest rates, causing the economy to grow.
People would borrow, fuel interest-sensitive spending.
So in other words, if rates fell, you could buy a house, you could buy a car, et cetera.
And conversely, if there was inflation, if there was too much money in the system for whatever reason, the Fed could raise interest rates and therefore it would cool demand.
So basically, think of the Federal Reserve as the nation's bank.
The country's bank that controls the level of borrowing, controls the cost of borrowing.
That's gotten much more sophisticated than that, but this is true of all countries.
All countries have central banks.
There's the Bank of Canada.
There's the Bank of Japan.
There's the European Central Bank, the Bank of England.
They all basically do the same thing.
They provide demand for currency in real time to those that want it, but importantly, they're responsible for controlling interest rates, the cost of borrowing, which influences, obviously, consumers, businesses, etc.
If I may stop you there, the cost of borrowing from the Federal Reserve itself.
So that would be banks which borrow from the Feds and have to pay interest to the Feds.
And then that determines how they lend out money to me.
Right.
So what the Fed technically controls, it's what's known as the Fed funds rate or the overnight borrowing rate.
And they control that rate.
Right now it's about 12, 15 basis points.
And they are able to control that rate by going into the market basically every day.
Trading, you know, buying and selling reserves to peg that rate at what they want.
It's that rate that then all other interest rates then are built off of.
So the Fed really only controls the cost of overnight money, but that one little instrument has generally a pretty profound effect across what's known as the yield curve, or the maturity spectrum from overnight borrowing all the way out to 30-year bonds.
So it's that one little rate that's controlled, and most central banks control that as well.
What we were talking about earlier, I said quantitative easing.
What the Fed has done under Ben Bernanke back starting in 2007 is the Fed goes in, David, and actually buys government debt so as to push the interest rate down.
So they're able to more directly control the cost of borrowing because in the old days when they just controlled that overnight rate...
They had assumed market expectations and the term structure would change in a way that the Fed wanted it to.
In other words, you might be able to lower that rate, but what if the long rate went up for whatever reason, didn't do what you wanted?
Now the Fed actually comes in and buys that long-dated debt so as to push yields meaningfully lower.
That's basically what QE, or quantitative easing, is known as.
Ian, have you been surprised from the time you started to where the Fed is now in terms of its degree of impact and activity?
I have, Robert, because, you know, I was always taught, and I still think this is true, that the Fed funds rate, interest rates are a very blunt instrument.
And where the Fed is going now with quantitative easing, and of course, with some of these new Fed nominees getting involved in the climate aspect of it, this is very difficult.
I mean, even Biden, I mean, people didn't notice it today, but they talked about the unemployment rate.
Normally, look at the unemployment rate just in broad terms.
It's 3.9%.
But they're now talking about...
Broad unemployment conditions and inclusive employment conditions.
And what does that mean?
Does it mean if the white unemployment rate is higher than the black unemployment rate, then the real unemployment rate isn't as low as it is?
I mean, I feel like we've got serious mission creep because it's not like the Fed can't predict the economy any better than they have in the past.
If anything, it's gotten worse.
The economy is more complex.
And we're using these tools without exactly knowing what the impact could be on the economy long term.
What we do know is that from an inequality perspective, you might argue the Fed has been the worst institutor of inequality in anything tax policy anybody's ever done, because what QE has done is lift asset prices.
So you've got record asset prices, both housing and equities, largely fueled by quantitative easing.
People basically being crowded out of safe investments, taking risk investments, buying risk, and causing those prices to rise tremendously.
One thing you mentioned there, unemployment rate.
What good is it to measure unemployment rate if it's not directly compared to the labor force?
So the labor force, so the unemployment rate, David, is derived from the labor force.
So it's measured, it's from the labor force.
The issue is if you have people who are what's known as discouraged.
Who decide that they don't want to be a part of the labor force, they drop out.
But I think the problem right now with the unemployment rate, and what I'm guessing is it's being overstayed.
In other words, the unemployment rate is actually not as low as what is suggested, because the BLS Bureau of Labor Statistics actually goes to people's houses to help build their sample.
And then they follow up on the phone.
You can only imagine people not answering the door to somebody they don't know.
To take a survey that they've never heard of before in a world of COVID.
So I wouldn't be surprised if the unemployment numbers are much less accurate than what they appear to be.
I have been surprised that the Biden administration has been surprised by inflation being a persistent issue, given the Fed's policy and a lot of other financial policy around the world and certain aspects of the Biden's own administration's policy.
Have you been surprised that they cannot seem to...
I mean, they seem to be now coming to terms with, okay, this is not a transitory, temporary, one little momentary supply gap issue that's going to be solved next month.
But have you been surprised...
I'm surprised at their unwillingness and their delay in recognizing the reality of inflation.
And now it seems like Biden's even trying to pretend that somehow it's a good thing.
What's your thoughts on that?
Yeah, you're exactly right.
I mean, I know Jared Bernstein, he's an economic advisor.
And Jared and I don't agree on that many things.
But I think he has some reasonable views.
I think he's smart enough to know that the inflation is largely a function of supply chains.
It's also a function, Robert, of the fact we had a $2 trillion stimulus bill last March, which pushed the household savings rate back up to 27%, while a V-shaped recovery had already begun, and you were probably going to get some inflation.
And I think to sort of figure out that we didn't know what was coming, you may not have known the severity of it, is a bit disingenuous or certainly incompetent in the sense that you should have known there was going to be some pricing power.
In fact, the demand that was caused by the excess stimulus, Probably exacerbated the supply chain disruptions because demand was so strong.
But the fact that the administration signed on to that unity plan, if you went through it, it was not very growthy at all, doesn't totally surprise me.
And the fact that they're trying to use antitrust regulation to bring inflation down, even Larry Summers has said that's not good policy.
Larry certainly isn't.
You know, conservative.
So I think they've made some mistakes.
And I also think that Jay Powell made a mistake in the sense that the rate of inflation is going to come down.
And that's what matters for the Fed.
Now, for the household, the household's worried about the price level.
So in other words, if gasoline prices go from $4 to $5 a gallon, that shows up as a 25% price increase.
If in year two, prices are the same or flat.
The economists will jump up and down and say, this is great.
Now we've got no more inflation.
The inflation rate's zero.
But the average household is paying more.
And I'm surprised the administration hasn't acknowledged that sooner.
And I think they could have done things, and they are sort of quietly trying to get more oil online, more production online, because we're back to pre...
COVID levels of energy demand, but production is down.
So that's exacerbated the energy problem.
And energy is very important because not only does petroleum go into a lot of different products, but you need to distribute goods throughout the country.
So I think the administration probably could have been much less hostile towards some of the fossil fuel industry.
I know they want to make a movement.
I respect that.
I understand that they want to move to greener pastures.
But, you know, the existing infrastructure supports fossil fuel and you can't make that transition without hurting lower middle income class families if you're decimating the energy industry, which is what some would argue they did.
Let me ask you another ignorant question, and I apologize if the people in the chat know more than me.
You said earlier, the Fed, in order to control things, buys government debt.
To whom is that government indebted?
Who does the government owe that money to?
What debt are they buying?
The government, the Treasury issues securities, bills, notes, bonds, every week, every month, every quarter, and that is bought by primary dealers, such as my old firm, Deutsche Bank, Goldman Sachs, Bank of America, all the big banks.
They buy that debt at auction.
They hold it.
And the Fed then goes to those banks and then buys it from the banks.
So the Wall Street community effectively is just a broker.
Or the intermediary between the Treasury and the Fed.
But the net effect is like literally the Fed just buying the debt that the Treasury just issued.
And they do that just purely through a computer.
Printing money is just now done electronically.
They just credit so that the banks buy the debt from the Treasury.
The Fed then credits the bank's account at the Fed for the amount that they purchased.
And voila, money is created out of thin air.
In terms of what happened today, you were discussing why it is that the Fed really can't quite seem to hit the right stroke or the right in-between note that they need to make.
Is that because of the politics surrounding the situation, or is it because they didn't quite anticipate that they would be facing this exact conundrum in terms of interest rate and inflation and economic growth?
I think it's all three.
All three.
I mean, in the sense that politics certainly are a factor.
Jay Powell's not confirmed yet.
I mean, he's going to get confirmed.
It's going to be really hard for him, I think, to have been more dovish, which means he's leaning a little bit less hawkish.
Dovish meaning we're not going to be so aggressive in removing this monetary easiness accommodation.
So I think part of it was the politics of it.
Certainly they were blindsided by the amount of inflation moved up.
But again, they probably should have...
Change their tune a little bit over the summer when it was obvious inflation was going to stay high at least for a period of time.
And also, Robert, the way they set monetary policy up, in other words, they've become way too transparent in some ways.
I mean, one of the geniuses about Greenspan was that...
People weren't sure exactly what he meant.
And what that allowed is markets to have some risk premium in them.
And what I mean by that is, if somebody tells you what they're going to do, we're going to keep interest rates low for the next period of time, then what that does is that encourages debt, it encourages speculation, and you're better off people not necessarily knowing what you're going to do, be less predictable.
And this is a process that basically evolved under Bernanke, continued with Janet Yellen, and now it's continuing with Jay Powell.
And it's really an institutional problem.
I don't know how they get out of it because I would do policy much more different.
They can't predict the future.
They have very little ability to impact the future.
And it's really more of an emperor has no clothes.
But they're sort of pretending that we can affect change and we can do these things.
I don't think they can do it.
And my concern, Robert, is that...
Over the next few months, as the Fed tries to raise interest rates and tries to reduce that balance sheet, you're going to see a much bigger hiccup in the stock market and in the credit markets, similar to what you had back in December 18 when Jay Powell said, look, we're going to continue to let this balance sheet run off.
And then, of course, that caused a big kerfuffle in the markets, and then they wound up reversing and then easing rates in 2019.
Which, by the way, President Trump at the time was harping on the Fed.
had been too aggressive, which was the case in raising rates, people were sort of, oh, President Trump is just politicizing the Fed.
And lo and behold, they did go too much and they wound up easing.
So he was right about that.
Okay, getting back to the $2 trillion stimulus package.
This now is $2 trillion, if I'm understanding this correctly, issued by the Treasury?
So what happened was $1.9 trillion.
That was money that was appropriated via Congress.
That allowed the Treasury to effectively borrow money to give people cash disbursements and other payments such as expanded unemployment insurance, etc.
It was done through budget reconciliation, so it was purely a long party vote.
And that was a policy, David, that was given where the economy was last March was not prudent.
We were sort of like, you know, we already had a few shots at tequila.
You're already feeling a bit of a buzz.
But just to be certain, you do a few shots of vodka to really make sure you're going to feel it.
That's kind of what happened.
We overdid it on the stimulus.
And I think we're going to wind up having a hangover this year from all that spending that we instituted.
And yet the Fed's going to try to raise interest rates into what I think is going to be a pretty sharp slowdown in growth.
That's not a good recipe.
That does elevate recession risk.
And speaking on the supply side of the equation, I have been somewhat surprised that the system has been surprised that there would be, I mean, going through any kind of like mass lockdowns, these are sort of unique economic experiments from a public policy perspective, you know, the idea that we could just start an engine and then stop an engine and then we'll just turn it back on and we'll all be back to normal as if nothing will be shaken.
It unsettled me what I was hearing people propose and then some of the policies and now the consequences of ramifications.
And we're seeing it right now, like in Canada and the United States, too, where the way to treat supply chain issues is to do vaccine mandates that are almost going to guarantee to lead to both protest and loss of employment that's likely going to increase supply chain problems, not decrease them.
Yeah.
No, you're right, Robert.
I mean, I remember when we sort of were going to shut the economy down, was it 14 or 15 days?
I don't remember which it was exactly.
I remember going into...
To Larry's office in the West Wing, and I said, Larry Kudlow, I said, we're going to be down 20%.
I couldn't believe it coming out of my mouth.
We'll be down at least 20% in the second quarter.
Of course, we were down 33% at an annual rate, which is shocking.
And, you know, we thought at the time, well, we needed to reopen safely.
But if we don't reopen at some point, there isn't going to be an economy left to come back to.
And actually, what's interesting is, remember the Princess Diamond cruise ship?
We were looking at that data.
That data has held up extraordinarily well, all things considered, in terms of what COVID actually would wind up doing in terms of the health issues and, you know, the infection rate of fatality, or infection fatality rate, etc.
But anyway, when we did reopen, and we reopened in basically May 1, at least most parts of the economy, we thought we'd have a V-shaped recovery.
It's funny because President Trump, he went right from the V to what was a super I. It was kind of funny.
He put it in a speech.
We wrote some comments, and he went...
Not super V, I. And he was actually right.
It did for a while look like an I. But yes, you're right.
I mean, if you hurt the supply side of the economy, you wind up doing irreparable damage.
I think, fortunately, we're only closed for six weeks.
And of course, the virus didn't turn out to be the Spanish flu in terms of its fatality rate.
But yes, these other economies that are...
Keeping themselves closed.
And importantly, also, you know, human capital is part of the productivity equation.
You know, what's happening to school children is really difficult.
And some of these kids may not be able to recoup the lost ground.
So the quality of the workforce could go down.
I mean, you could sort of go into a rabbit hole of just all the negative externalities or negative things that happen when you shut an economy down.
And even if you reopen, only reopen parts of it.
Thankfully, in the U.S. We've come back reasonably well, but as you highlight, there's parts of the world that it still feels like it's May 2020.
Come to Canada, Joe.
It feels like it's May 1930.
To make a hyperbolic analogy, no joke, I just did a video yesterday where you have to show vaccination passport QR codes to enter department stores.
It's the equivalent of Staples.
And it's bone empty because they're implementing these policies.
I mean, I guess it's going to drive business online, but it's going to kill business in person.
Joe, someone had asked, and I don't know if this is a trick question that's going to get me into trouble with you.
Please ask Joe what gold leasing is and in crash.
Gold?
I know people lend money to buy gold, but I don't know what gold leasing is.
Okay.
As long as it's not a trick question.
But Joe, say, some people are asking in the chat.
Audit the Fed.
What would that look like?
How do you feel about Robert's attempts to do that?
And ending the Fed, what would that look like?
Is it even feasible?
And what would be the consequences?
I mean, we can't go back to a gold standard just because the economy's evolved in a way that just wouldn't allow a gold standard to exist.
The thing about the Fed is that it's going to become a political punching bag.
You do need a central bank.
The question is, you know, how...
It's basically a question of competency.
I think one of the big problems, David, with the Fed is that you've got five governors and you've got seven presidents.
They rotate.
19 people in total on the FOMC when it's fully staffed.
You've got forecasts by committee.
And unfortunately, I think you've got way too many academicians.
On the Fed, we need diversity, but we need diversity of thought.
I'd like to see some private sector people in there.
I'd like to see people who run businesses, maybe people who run a portfolio.
Just give different perspective.
So the Fed's not going to go away.
I know Rand Paul wrote the book and the Fed.
It's just not going to happen.
The international monetary system is such that...
All countries need central banks.
They do provide a vital service.
It's just that I think, again, it's more mission creep and the Fed doing things that they aren't really accountable for.
But again, with so many government entities that always grasp for power, they don't want to give it up.
And what's interesting in the crisis, the Fed really made a huge mistake.
They talked about, Bernanke talked about the great moderation.
Remember, subprime wasn't a problem.
Bernanke said basically paraphrasing wasn't a big issue.
And lo and behold, with the Dodd-Frank rules that went into place, it gave the Fed even more power.
And these institutions are very low to ever get rid of it.
So the Fed's always going to exist.
The question is, do they create more policy and competence by...
Going into areas that they shouldn't go into.
And my fear is that's what's going to happen.
And ultimately, we'll wind up probably politicizing in a way that we'll put, you know, maybe a Treasury has a seat on the Fed.
That was the case in the Bank of England, by the way.
They used to have the Chancellor of the Exchequer, which is equivalent to Treasury here, sitting in on the Monetary Policy Committee meetings.
And then in the early, mid-90s, late-90s, they said, let's get away with that because, you know, we don't want to politicize policy.
But this is exactly what's happened because, you know, again, when you when you buy as much debt as they bought and you're trying to lift asset prices, you're driving a wedge between the has and the have nots.
I mean, you can see why it's a problem, but we're not going to get rid of the institution.
What do you think about, I mean, there's discussion floating around about, you know, government digital currencies.
What is your general, I mean, some of the civil liberties side of the concern is what that could mean, and could the government cut off your access to your own bank account effectively if it's a governmental digital currency sort of overnight for political reasons or whatever reasons?
There's no set of concerns, but in general, is that something that's...
Realistic to occur, do you think?
And how do we restrain some of the power abuses that could go with that?
So at some point, the Fed will institute a digital currency.
And I think it'll probably be, Robert, in response to a digital yuan from the Chinese.
And of course, those privacy issues that you mentioned are going to be a factor.
I'm not sure exactly.
I haven't thought enough about what the implications will be once it's instituted.
But it seems like this is where it's going.
Now, I do think the cryptocurrency space could certainly coexist along with a digital currency, but that itself, too, is related to the regulatory structure.
Gary Gensler, who's head of the SEC, is debating labeling a crypto as security, which it's clearly not.
But we'll see.
I don't know exactly when it'll happen.
The Fed has sort of been slow walking this digital currency, but I do think someday it will happen.
But what it means to your other question, I don't know.
What do you think about it?
What's your thought?
I think that it's like anything in terms of, you can see what the necessity and utility of it can be, but the power it can afford is frightening unless there's real somehow meaningful restraints imposed upon it.
Because, you know, it provides a degree of state control and institutional control that goes far beyond what's currently out there.
I mean, you know, the Federal Reserve note is still, there's ways to anonymously transfer it, ways to anonymously have it.
There's not an institutional way for the government to come in and just take it, you know, overnight with a keystroke.
I mean, there's aspects of that in the current system with the way our banking system works.
But the.
Now, that has some bad consequences, of course, in terms of criminality and illicit behavior, but it also has freedom from the state's control that can be important and essential for everyday freedoms.
And I think however it's structured, it's going to be very important what limits are imposed on it that are functional limits and legal limits, because what we've seen from the Fed for the last decade and a half, Is that those limits don't necessarily mean a lot.
And what we've seen from local and state federal governments over the last year around the world and global governments, that a lot of restrictions that people thought were in place, protections that people thought were in place were not there if there wasn't a functional enforcement component to go with the legal limitation.
But I think it's something that there's been too little evaluation of because there's a lot of the public policy focus has been, as you note, on just the practical realities of it.
And there haven't been enough orders.
The people on the civil rights side of the equation paying enough attention to how this can be, you know, managed in a way that doesn't become a threat to ongoing civil liberties.
Right.
You know, my guess is the Fed is more worried about, you know, they don't want to lose the dollar as the reserve currency, which accounts for roughly 60% of all global transactions.
And they want to make sure their security, like their systems are secure.
Really of concern.
I don't think the Fed's even thinking about that.
They're thinking purely, okay, what does this mean in terms of the Treasury's borrowing costs?
Are we going to somehow supplant the dollar as a desirous currency?
And will our systems be safe so that we can't be hacked and things of that sort?
I don't think they're thinking at all in terms of the civil liberty power aspect of it, which for the average American is really what matters more.
Joe, so I've heard people say this.
The Fed is not an official part of our government.
Is it a government body?
Is it a corporation?
Who are the owners, the directors, the shareholders?
What is the Fed?
So the Fed is, well, technically it's a creature of Congress, the fourth branch of government.
Sorry, I said earlier five governors.
There are seven governors.
They all require congressional approval.
However, then there are independent reserve banks.
There are 12 different independent reserve banks spread out across the country.
I believe two-thirds.
Of the boards are private sector people that determine who those presidents are.
So you could argue that basically half of the Fed is sort of totally immune from any sort of political vetting.
But the governors that are based out of D.C., that's congressional approval.
It's the presidents that don't have any congressional oversight or approval.
They're elected by their own independent directors, I believe most of which are from the private sector.
There are these different classes of voters.
I forget the exact particulars of it, but I think you kind of get the jest.
Yeah, I think this is a good super tech question because there's a lot of people that are a fair number of people that are comparing what we're going through to the mid-1970s and then are worried about a stagflation possibility.
And then Biden, of course, Biden's like Jimmy Carter's dumber brother.
You know, there's those kind of illustrations or analogies.
But to what degree the debate that I've seen, I've seen both sides of it.
Is whether a Volcker-style strategy would be the right strategy now, or whether it just couldn't work in the contemporary environment because of some of the changes that you've documented.
Before you get there, what is the Volcker-style strategy?
So Paul Volcker, it was a Saturday, I believe it was October 6th, 1979.
He came out and announced that the Fed was going to change its operating procedures.
This is going to get really wonky, so I'm not going to go there, David.
But what it meant was the Fed was going to basically take interest rates to heretofore unheard of levels.
So the prime rate went up to like 20%, 21%.
And of course, a very harsh, harsh recession ensued.
But this, David, was after basically a decade and a half of high and rising inflation, with the inflation rate up near 10%, 12%, 13%.
So it was sort of done to break the back of the inflation psychology.
Today, we have headline inflation that's at a 40-year high, but it is going to come down.
And I sort of tell my conservative friends that, you know, we just, you know, yes, inflation might be helping your cause in terms of what you think it might mean for the party, but the rate of inflation, anyway, not the price level, but the rate, I mean, the speed with which prices are rising, that...
Increase is going to slow quite dramatically.
Today, the 10-year note is only around 185%, 2%, just under 2%.
When Volcker was in power, it went to 14%.
So it's a much different environment.
We definitely have some stagflation in the sense that your inflation rate is running above your rate of GDP growth.
But this isn't the 1970s.
And it won't be the 1970s.
I mean, if it's the 1970s, that maybe is another cycle or two away, but this isn't the 1970s.
The characteristics are totally different than where they were back then.
Rates were much higher.
Inflation had been in the system for much longer.
You had much less globalization.
You had much less technology.
Much of what most good prices normally are deflating in price, not going up.
So I just don't see the 70s comparison as being very applicable.
And the idea would be you jack up interest rates so that people borrow less so that it takes cash out of the system, which therefore brings down inflation.
Right.
It's like people are saying, you know, people I remember telling me they had like 15 percent mortgages.
You know, today you get a mortgage for 3 percent, 4 percent.
But under Volcker, he raised rates so much that it basically became punitive to borrow any kind of money.
And of course, a capitalist type system that depends on liquidity and credit.
Doesn't work.
It doesn't work when the borrowing cost is that high.
So it was an intentional desire basically to bring about a recession that would break the inflation psychology at the time.
And so your general is that it's really not applicable to the current circumstances, or even if it were, there's limited tool sets that don't make it analogous in terms of its path of progress.
That's right.
I mean, if the Fed wanted to cause a recession tomorrow, they actually have got even better tools to do that because they could take their, you know, the Fed owns $9 trillion of securities.
And if the Fed sold those securities, they wanted to just sell those securities, they would just, I mean, they could collapse the stock market very easily and bring about a depression very quickly.
So they've got the tools to really cause the economy to slow.
I'm worried that the economy already is slowing.
This isn't a very healthy economy.
And the marginal tweaks that they want to do itself can cause a recession because the economy isn't that healthy.
Do you think that we're more likely to face a recession in 2022?
I mean, I remember when I had a debate with people in public policy after Biden won, there was, you know, Sagar of the Rising and some other people that were saying the economy, and I heard a lot of this from Democratic friends, the economy was going to be booming, it was going to be great, it was going to be huge, Biden was...
His approval rating was going to be in the 60s.
Of course, all of those, I was like, I don't think so.
I think we experimented in certain ways and have other policy assumptions with this administration that aren't going to translate like that.
And ultimately, their predictions did not turn out exactly accurate.
But so looking at 2022, there's still some talk that, well, all we got to do is get through these temporary transitory issues.
They recognize they're not as transitory as they were pretending earlier, but there's this sort of pretext or belief that all we got to do is get through Build Back Better and a few other things, and actually the economy will be booming come fall 2022 when the midterms hit and Democrats can rebound.
What are your thoughts about that approach or perspective that some people believe?
Yeah, I mean, to build back better, Robert, most of that spending will be in the outer years, but there is still some spending this year.
So it would only further exacerbate the demand problem.
We've got too much demand and too little supply.
So we need less spending rather than more spending.
I don't think there'll be a recession in 2022 because the yield curve is still...
There's still positive spread between the yield curve, which I know, David, I need to be probably getting too far into the weeds, but basically the indicators that one would look at to see if there's a recession just aren't there yet.
For example, I'll give you a great statistic.
Every time the unemployment rate has risen half a percent from whatever its low was, you've had a recession.
The unemployment rate is still declining.
So I don't think you have a 22 recession, but if the Fed continues this...
Course of trying to raise rates in March and raising rates again in June, raising rates in September, raising rates in December, which is what the futures market is implying, in letting that balance sheet roll off, we'll have a recession in 2023.
Did you just say two seconds ago that the Fed owns nine, did you say nine trillion?
Nine trillion.
So let me ask you an obvious question, and Robert, you can field why this is not an overt potential conflict of interest.
Why does the Fed own stock?
Oh, no.
Securities.
I mean, treasury securities.
Okay.
Treasuries and mortgage securities.
And so if they wanted to liquidate them, to whom would they liquidate?
They'd liquidate them back to the banks where they bought them from.
And to what degree currently do they have that?
Because it seems to me like a lot of decisions that have been made over the last decade have kind of locked them in.
That it seems to me their flexibility is really restrained and we're entering into some interesting territory.
What are your thoughts about that?
Oh, absolutely.
In for a penny, in for a pound.
It's like the Roach Motel.
You know, Hotel California.
You know, you could check in, but you could never leave.
You know, they have the biggest footprint in the market.
To give you an example, prior to the financial crisis, the Fed's balance sheet, you know, securities that they owned, was just under a trillion dollars.
It was about four in change right before COVID, so it went up fourfold.
It more than doubled since the pandemic.
Here's another great statistic.
Since the pandemic, since March of 2020, the Federal Reserve has gone into the market, basically going to these large Wall Street banks, and bought 60% of all of the Treasury issuers I mean, that is a shockingly large number.
So if you look at the growth in the Fed's balance sheet, or the level of the Fed's balance sheet, which was at $1 trillion and $4 trillion, then it went to $9 trillion, which is where it is now, and the S&P 500, it's like a 90% correlation.
They basically move one for one.
So to your point, Robert, about flexibility, the Fed has created this monster.
It's going to be very hard for them to get out without doing some serious damage.
And do you think they should just bite the bullet?
Or is it just impractical that they can politically under the current circumstances?
Well, the fact that they sort of commit, you know, they've laid out their principles of how they want to proceed.
They want to first raise interest rates, then let the balance sheet roll off.
That's the opposite of what they told us back in 2011 when they said, oh, we're going to get our balance sheet down.
We're going to let our balance sheet roll off.
Then we're going to hike.
They wound up doing the exact opposite.
So I think, unfortunately, they're at a spot where they can't really do much.
What I would do is I would certainly let the mortgage portfolio roll off quicker because we already have a very strong housing market.
You've got no inventory.
Migration away from cities to places, there's not a lot of inventory.
I'm in Westchester.
Month's supply of housing in Westchester County, New York, is 1.3 months.
It's never been lower.
So the Fed doesn't need to fuel that boom by buying mortgages.
I would let mortgages roll off a little bit quicker, and I would just sit and wait.
The crazy thing about inflation right now is if you look at what the market is saying the inflation rate's going to be.
It's actually going to be under 2.5% over the next 10 years.
The market is telling you it's not worried about inflation.
As bad as inflation is, what I would do, and if I was advising the Biden administration, I'd be, don't bash the Fed.
Inflation's going to come off.
Try to get the economy operational again.
Don't go so hard after the energy companies.
Don't talk about tax increases.
Try to get more productive supply in.
That'll help obviate and alleviate some of the demand pressures.
And you just don't let the Fed do anything.
But I think what happened when Jay Powell went to the White House in November, I think, you know, he wanted his job, from what I heard.
He was interviewing for it, and basically said, yeah, I'll take care of inflation.
And all of a sudden, he gives this Powell pivot in December.
It's like, all of a sudden, I acknowledged inflation was a problem.
Well, inflation was a problem the whole year.
While all of a sudden, in December, we weren't sure we were going to get re-nominated, then it'd become an issue.
So I think the timing there wasn't great, which comes back to your earlier question about the politics.
Let me ask this question because I had sort of a similar question.
What happens if the banks don't want to buy back the securities the Fed has purchased?
Yeah.
Well, so two things.
One, they have to because they're a primary dealer.
The Treasury will call and kind of berate them.
So it's sort of like they have to do that.
But they'll just mark the price low enough so that it becomes advantageous so they can then sell it to somebody else at a small spread.
So the market will work.
But the point is, it will never even get this far, David, because they're too big a player in the market.
And what we saw today was the stock market was up, and then it proceeded to fall significantly once Jay Powell said, well, maybe this balance sheet has to go down more quickly.
So you raised an important question, but in practice, they're never going to be able to let that balance sheet go down anywhere near as much as they think.
Because they're the big buyer.
And everybody knows if they've got a trillion to go, they've got another four trillion behind it because they...
What, $5 trillion since the panic began?
So they're kind of stuck.
They've been predicting that QE was supposed to be just temporary.
They've been predicting for a little more than a decade that this is going to be rolling off the cheap anytime soon now.
But the markets have recognized, no, you're not really going to do that.
No, the markets are very smart.
Well, exactly.
And I think that the other question is, how much has Fed policy ended up skewing the market's incentives to create, I mean, as you were mentioning earlier, the importance of having some risk, some skin in the game?
As Taleb would put it, how much have they distorted?
A lot of the criticisms of the policies over the past decade especially has been that they've distorted certain aspects of the markets that now no longer allow the markets to be the sort of safety signal or check on the system that would otherwise be present but for the disparate role of the Fed.
What are your thoughts on that?
I still think there is information.
Embedded in the Treasury market, meaning the spread, the difference between where the long rate is and the short rate.
Where I see the Fed having really distorted things is probably more in the credit markets.
If you look, for example, high yield or what's known as the junk buy market, you know, those spreads normally would be 600, 700 basis points.
So, for example, David, if you had a borrower that was a good borrower at 4%.
If they were like a non-investment grade borrower, you'd slap on a 600 or 700 basis point spread.
They'd be borrowing at 10 or 11 percent.
All this QE has distorted things because investors are reaching for yield because they've got benchmarks that need to beat.
If you're running a retirement fund, you've got certain assets and liabilities.
You could match your liabilities, but you need a return on your assets.
You know, meet the demand of those retirees at some point to provide them benefits.
So you had this massive collapse in the spread.
So high yield spreads now are like inside 400 basis points.
That's unheard of.
So that's where I think a lot of the distortion is, where you've gotten people going in parts of the market because they need some yield.
There's no yield anymore.
You can't earn any yield at the bank.
You can't earn any yield buying a single A. Rated corporate bond, you have to go really take risks, you know, go down in credit quality.
So what's happened with the Fed's policy is they've inflated these markets.
So I'll give you two statistics.
Number one, if you look at U.S. households' exposure to stocks, it's never been higher.
It's significantly above where it was in 2006 before the crash and significantly above where it was.
If you look at total stock market capitalization to GDP, it's never been higher.
So you've got this financialization, as I said earlier, of the economy.
These asset markets are the tail that's wagging the dog, which makes it very difficult for the Fed to do anything.
However, the moment the Fed backs away, you see markets quickly react.
So there is some information there.
The one thing, Robert, I'll be watching is if the equity market goes lower, but you're not seeing the high yield market.
That'll tell me the stock market is more in correction mode.
If you start to see credit deteriorate and there's issues of rolling over debt, that then becomes a problem.
We do okay when we lose equity.
We don't do okay when we lose debt.
I'll give you, for instance, I remember the commodities firm Amaranth in the early 2000s, big commodity player, $7 billion hedge fund.
The equity fund, they basically blew up in a week and disappeared.
Long-term capital, $7 billion hedge fund.
Doesn't make a payment to somebody else because the system is based on trust and interconnectivity.
The system basically imploded.
So, you know, there's still accurate market price mechanisms that are there, but the Fed definitely has distorted things.
When you say exposure to securities, that means that the average American home now owns more stock in their investment portfolio.
Yes.
Okay.
And the average family?
Or the average American has two primary investments or three maybe retirement stocks and primary residence?
Yes.
Real estate is, well, it depends.
Real estate and housing are almost the same, David, about roughly 23-24% of the household balance sheet.
Okay.
And to what degree should we be concerned about China's real estate problem and bubbles?
Is there a chance that there's...
Various U.S. financial institutions and others that have ties to it, that that would impact us?
Or is it something that's not necessarily our concern?
Yeah, I would say the latter, Robert.
When Evergrande, a Chinese real estate company, had some problems last year, if you look even within the basket of the Chinese high-yield market, anybody that was in the Chinese market that wasn't tied to real estate was performing okay.
And then you look at the U.S. high-yield names.
They performed okay.
So I don't see that right now as being a problem.
Having said that, China is slowing.
Their inflation rate was very high.
It's come down.
They're slowing, and their central bank is actually easing policy.
Now, to what degree do you think?
You mentioned earlier a digital yawn.
To what degree do you think China is, as Trump saw it, the most important economic competitor, economic threat, depending on how one interprets it, or how much of that is overstated?
No, I think President Trump was, I think, very clever and very astute to recognize China both as a partner, but really as a strategic adversary in some sense.
And I'd like to know what you think about it, but it seems to me that if there's one similarity between the Biden and Trump administrations is that they've kept all those tariffs in place vis-a-vis China.
Yeah, I mean, it's been...
I think there was a lot of predictions of doom and gloom from sort of the...
The free trade, pure free trade crowd, and the people who also wanted to justify and excuse the decision to have China as part of the WTO without thinking through all the consequences.
Many of the critics of NAFTA ended up more accurate than the proponents of NAFTA, at least in terms of its domestic manufacturing impact and labor impact.
But that took some time for people to acknowledge.
I think there was some surprise that...
That Trump's strategy actually seemed to, that worked better than some people in the markets believed or wanted to believe.
And it's been interesting seeing their unwillingness to really deviate from it because in part of it, I think it's success.
And probably maybe the most underappreciated aspect of the success.
It was such a departure from the Clinton, Bush, Obama regimes on trade policy.
But it was one, you know, people like Kevin Phillips, the book I have behind me, you know, he was talking about the risk of the financialization of the economy, the demanufacturing of the industrial Midwest, you know, all the way back to the 80s.
You know, the and a lot of what he forecast and foreshadowed ended up being true.
And a lot of it just came from what you were mentioning, the importance of understanding from an economic perspective, both human behavior and history.
And, you know, saw the same replication of old mistakes being made by prior governments and states and countries and nations.
And that we were repeating a lot of it.
Now we're kind of in the middle of it.
And the question is, how do we dig ourselves out of it?
And one was trying to come up with a more confrontational approach to China as needed or necessary on certain economic space.
I mean, all the China trying to buy U.S. agriculture at massive rates.
I mean, I had those complaints coming to me eight years ago from farmers who were concerned about China's disparate role in buying up aspects of U.S. food supply in the sense in agricultural production.
I think Trump was really ahead of the curve on that aspect.
But what's interesting is the Biden administration has continued the policy, but there's been very little public discussion of it, which has been interesting.
Do you think that they'll continue to recognize that there's conflict with China and there needs to be an aggressive, proactive approach?
Or will they revert back to the Obama-Bush-Clinton administration, much more deferential policy, especially given Peter Schweitzer has his new book out about The unfortunate ties between the Biden family and some Chinese money deals.
What are your thoughts on that?
I'd say, Robert, it probably doesn't get any better than it is now, meaning just sort of keep the tariffs in place and you won't remove them.
So I don't think we're going to think this through much more than they already have.
And maybe for the reasons you just cited, there's these conflicts that perhaps don't allow them to do more.
I don't know that that's the case.
But I do know with President Trump, you know.
China was a strategic adversary in the sense that there was demanufacturing, but also by lowering the corporate tax rate and making the U.S. competitive.
At the same time, we were aspiring for energy independence.
All three of those things worked together because the intention and hope was you'd bring capital back, which did happen, and you'd re-onshore and get rid of the outsourcing, especially those high-paying manufacturing jobs.
Because the thing about economics, which is useful, is a science.
The marginal buyer sets the price.
So if you bring back a handful of high-paying manufacturing jobs, basically everybody else in that community has to compete with that labor, which also in that marginal rate rises.
But it all works well.
It all works in sync if you're dealing with China at the same time you are allowing companies to exercise or be influenced by a low tax rate and also a cheap cost of energy.
They all work together.
And the current administration seems like they don't want to do that, certainly on the energy side.
And it looks like, I think, on the tax side, most of the tax hikes are dead.
But someone was telling me the other day that Kristen Sinema may not push back as hard on higher corporate rates and higher marginal rates, but I don't know.
In particular, it seems like our climate economic policy is economically counterproductive.
And it seems like people are unwilling to acknowledge on some aspects of what I call the apocalyptic environmental movement.
Because you have people like Bjorn Lundberg who's saying, look, there's a very economical and smart policy way to mitigate certain environmental long-term concerns without sacrificing working class wages, incomes, and prospects around the globe.
because that's who they're often talking about suppressing is African economic development and Latin American economic development in the name of environmentalism.
They don't want to admit that, but that's what's going on often.
But how much do you think the economic profession and some of the people on the political left that have embraced this environmentalism, how much have they really adequately and accurately economically priced the consequences of what their thoughts and plans and policies are?
I don't think very much, Robert.
And the book that Bjorn wrote, I forget the title of it, but that was an excellent book because I thought he took a very balanced approach and tried to do the cost-benefit.
It doesn't seem like right now that's what we're doing.
Sarah Bloom Raskin, who was a governor under the Obama administration, had made a comment on the effect that she would not have lent to the oil and gas companies during the crisis.
That would not have been good policy.
It would have undone all the good they were trying to do by providing credit to the system, which is hemorrhaging because of the pandemic.
So I don't think, Robert, we really look at the cost-benefit analysis of this stuff.
And my guess is we won't.
And I think, unfortunately, you know, given how much money we're likely to throw at these new technologies and the whole ESG investing, et cetera, I'm not sure it's really going to pay for people to necessarily do the proper cost-benefit analysis, knowing full well that whatever your forecasts are, you could drive a truck through them.
You know, statistics, the standard error on these things are massive.
I mean, if you want to know, you know, good science I've always thought is predictive.
So go back and look at the predictions and how accurate have they been?
If they haven't been very accurate, then the science isn't very good.
Joseph, I'm going to read some Super Chats, which were, I say, legitimate questions because I may not understand if they're not legitimate.
Matthew Hammond asked, will Trump recommend ending baseline budgeting where automatic increases are guaranteed for every budget item?
Yeah, no, that's something that...
No, that's not going to change.
I mean, the thing is, we had budget sequester.
I forget the exact particulars.
Basically, things were limited to how much they could go up.
This was when Boehner was Speaker of the House, and it lasted for a couple years.
Congress can't help itself.
They're always looking to spend money.
That's not going to change.
No.
The answer is no.
And similarly, I've told people when they've asked about the theater around raising the debt ceiling, I've said...
Congress is never going to cross that bridge.
You're exactly right.
Yeah, all right.
That's, you know, it's great.
I mean, I get, you know, some senator gets to make some hay for a couple of days, may look independent and proud, but, you know, it's theater in the end.
Kabuki theater, Robert.
Exactly.
Were you surprised at how much the, like, some people that go from the real world to Washington...
Are often shocked by the disconnect in the sense of, you know, a lot of, there's not a lot of skin in the game in parts of Washington.
There's disincentives and distorted incentives throughout a lot of Washington bureaucratic policy.
There is, as you were mentioning, like the, I mean, when I worked in legal aid, but the thing that struck me was how number one reason they loved it, the same reason you mentioned the Fed, is that, you know, is it 830 to 430 or 9 to 5?
There was no 9 to 9, you know, but none of that.
They weren't there for the conscientious stuff.
How much were you surprised at the culture of Washington and how dysfunctional the bureaucracy can be?
I did my homework and kind of talked to some senior people, senior roles in the State Department and elsewhere that were in other administrations.
And they sort of said that the way they described it, I don't mean to be crass, but it was sort of like constipation.
Like, if you get a little bit out...
You're doing well.
So I kind of knew that.
But I also knew my role was kind of unique because I was working for Larry.
Larry was working for the president.
And one of the things that I sort of talked to Larry about was like, well, can I have chief in my title?
Because the people on Wall Street, that's like a title.
I guess it means something.
But that was an issue because you've got CEA, you've got people at OMB, you've got people at Treasury.
And, you know, the title matters.
So that was something that they were able to give me.
And, of course, you know, can I do TV and can I get, you know, can I get the message out, which they let me do.
But, you know, because they can't give you, unless you control a budget or you have a lot of people work for you, basically it's like kind of access to power.
And the titles and all those things mean a lot.
Like when I was at the Fed, there was an elevator for the officers that only the officers can take.
And they had a dining room only the officers can eat in.
This is at the New York Fed.
So D.C. wasn't that unusual.
I had to revert back to when I was a younger man.
But I sort of felt like I was well prepared.
So it really didn't surprise me.
But the way you describe it is exactly right.
I mean, it's bureaucratic.
It's slow moving.
It's not nine to nine.
Well, my impression when I went to D.C. was two years ago.
Is that D.C. felt like it looked like Vegas with real buildings and it looked like the Vatican, except God had been replaced with the government.
And the way you describe your experience at the Fed, yeah, you're part of a very important, meaningful infrastructure, but it's one that I think the government thinks it has replaced God because it has become God for a bad, not for a good.
So without judgment, Joe.
But I want to bring another comment from this from Matthew Hammond also.
Who says, why does the U.S. government pay back money to the Fed who buys debt with printed money?
Is this not a double tax with reduced purchasing power and taxes?
I don't understand that question.
Yeah.
So, I mean, so, by the way, I want to just...
Dave, you've talked about...
That's how I've described sort of that White House campus as sort of like Las Vegas because there's like...
There's the haves and the have-nots.
So I'd walk around with a blue badge that gave you access all over.
The cabinet people, they didn't have to wear any badges.
Then you have people that had green badges.
They couldn't go in certain spots.
So you kind of knew, like when you're in Vegas, you kind of know who the high rollers are and who aren't.
So the way you describe that area is so perfect.
On the Fed, it's not a double tax.
What it is is just, I mean...
You're debasing the currency.
It's not a problem if there's a lot of excess supply in the economy.
In other words, if you're printing money to try to stimulate demand, either by making people wealthier through asset prices or lowering interest rates and encouraging them to borrow, it's not such a big issue.
The problem, of course, they've had is that all this money that they bought indirectly via the Treasury...
What do you think the future of the housing market is?
Like, I'm, you know, I bought a house in Vegas.
It's, I consider its value crazy.
You know, I get the various emails that say, your house is now worth, you know, pitching, and everybody's.
I mean, and there's open real estate advertisements right now with people basically promoting it.
Saying, hey, maybe it's a bubble, so you better sell now, which is fascinating to see it put in those explicit terms.
What do you think it's near and some future is?
I'm pretty bullish, Robert, on real estate.
I mean, I remember my old boss had hired me at Deutsche Way back when and said, you know, bull markets always last longer than you expect.
And the housing fundamentals are excellent in the sense that you've got no inventory.
And it looks like the millennials are finally buying.
Granted, the baby boomers are downsizing.
But to me, the fundamentals are really, really healthy.
And, you know, we haven't had enough building yet for there to be a bust.
And we haven't yet had the leverage in the system.
Because you should remember during the...
Before the financial crisis, you had, you know, ninja loans, you know, no documentation loans.
I remember reading an article in LA Times that said, if you could fog a mirror, you could, those are just a quote from a loan officer, if you could fog a mirror, you'll get a loan.
So we haven't had any of those excesses.
So I think this could run for a number of years.
So I mean, I think if somebody's looking to buy, a reason not to buy, if you think you're going to be in your house for seven years, at least seven years, I think you're supposed to buy, provided that you're, Your after-cost, you know, what your after-tax, sorry, your disposable income isn't more than, say, 35%.
You're going to your housing.
I think you're supposed to buy.
I think it has a long way to run.
Just out of curiosity, what is the guarantee or the security on a Ninja loan?
Well, there was no equity.
You didn't get to put any equity down.
And some people actually borrowed money if they qualified based on certain income characteristics, David.
They were able to borrow money to make the down payment.
And the reason was that we never had a national housing crisis.
And we could package these mortgages so if the Vegas market goes down, we'll package it with the New York market and the Miami market and the LA market.
Because even if one area goes down, we know that all these markets combined together are going to be fine.
Which worked historically, but when you leverage something 10, 20, I mean, Lehman Brothers was leveraged 30 to 1, 40 to 1, Bear Stearns 30 to 1, 40 to 1, where they were basically, they bought these securities at massive leverage.
The people who were buying the homes, as I was saying earlier, had no money in, in some cases.
So it was, you know, that really caused the boom.
And I think this time, you know, we haven't gotten there yet.
Maybe we do at some point, because sometimes memories fade, but I just don't see it.
To me, the fundamentals are pretty healthy.
And what's your thoughts about in the sense of how environmental and zoning policies in liberal cities and areas might actually further help increase housing prices because it will continue to shrink supply?
Yeah, no, that's right.
Yeah, I mean, the thing is, if there's a limited amount of supply, I mean, in New York, you could build up, but people got smart and realized now they're buying air rights.
So that's even limited in some instances.
So I think, Robert, what happens is...
You'll get probably more sprawl, more movement to other cities.
I mean, the work-from-home story is pretty fascinating.
I mean, I've been working from home now for the past six, seven weeks.
We'll be going back soon.
But even then, I imagine I won't be going back as much, and I won't be traveling as much.
In my job now, before I went to the White House, I came back to my current firm.
I was traveling once a week all over the place, South America, Europe, Canada.
I can't imagine that travel persisting.
And people who have gone to summer houses or weekend houses have basically plopped themselves there.
I think it's going to be a while before they really want to come back in.
And therefore, I think, you know, those places that become very expensive, those places that you might not have thought of living in, I think that's when you'll see the next boom come.
This is not a question.
This is a comment from Phil Harrington.
Says, Louis Rossman did a blog on Deutsche Bank's proposed tax on people who work at home after they are able to return to the office and pronounce Deutsche Bank as douche bank from start to finish.
Okay, I didn't get that part.
Let me get one, I say, serious question.
Serious.
Can you ask Joe what his opinion on the hedonics adjustment for CPI?
Consumer Price Index.
Yes.
According to the original CPI measurement, we have higher inflation now than in the 70s.
Much easier to change a definition just like what the Fauci juice is.
Yeah.
Okay.
So basically, hedonic adjustment means quality adjustment.
So what that means, David, let's say you're going to buy a...
A Toyota Camry.
And they say it costs, I don't know, $40,000.
But, you know, and then 10 years ago, it only cost $30,000.
So it's up $10,000.
But let's say that this new Camry has a really, the standard equipment, much better sound system.
And you've got anti-lock brakes.
You've got 50 more horsepower.
Even though you're paying 10 grand more.
Now that you did, say, 10 years ago, the quality is so much better that actually, in price-adjusted or quality-adjusted terms, you're not paying more for the vehicle.
You're actually paying more, but the BLS hedonically adjusts it away.
If they just run a mathematical formula based on the various characteristics of the product, and it's gone.
It's like you buy a shirt, a wrinkle-free shirt.
So what if you're paying twice as much?
If you're paying twice for your wrinkle-free shirt that didn't exist 10 years ago, but it's three times as good, the BLS treats it as like a one-third price decline.
Does that make sense?
Yeah, you know, that I understand.
So even though it costs more, it's better.
It's proportionally better than the cost has increased.
Fine.
Right.
So in the CPI, it actually will show up, won't show up, that price increase won't show up in the CPI.
In some cases, it may show up as a decline.
And that happens with a lot of...
The BLS does a lot of these hedonic adjustments with technology, like computers and cell phones, because the quality has gotten so much better that you can't even compare the equipment today versus 10 years ago.
It's like a light year away.
Now, to what extent do you think, and probably give a basic explanation of it for the audience, But how much is modern monetary theory really impacting parts of the Biden administration?
Because, I mean, it's been a strong trend within parts of academia, but the degree to which it's influencing real governmental policy has been less clear.
But there have been little inklings of it here along the way.
Is it something that is really becoming popular within policymakers' world?
And what are some of the risks of that?
Because aspects of modern monetary theory, when I hear it...
Yeah, I think it's quackery.
I mean, economics is, you know, it's an interesting science.
I think it gives you a structure of thinking.
It's not as predictive as I would like.
And the MMT stuff, I just think, is, you know, cuckoo stuff.
It's one of the few things I might agree with Paul Krugman on.
And certainly the inflation that we had this year is a function basically of people thinking that there's no cost to any of these government actions because in theory, the government could just tax to lower the inflation.
I think it actually has had some influence on the administration, at least, Robert, to the extent they think it's a free lunch.
And economics does have some things that make sense, and free lunch is one of those things that doesn't exist.
There's always a cost, and we're seeing the cost of partly the lockdowns, but also, more importantly, the success of spending.
Which has driven inflation higher than it's supposed to.
And MMT would not suggest that was going to happen.
Now, they may say otherwise, but I don't believe them.
Are you surprised at AOC-style ideas having popularity with more and more of the millennial generation of Democrats in the sense that I hear some of these policies and I'm like, they have not thought through the economic consequences of this at all.
It sounds like Che Guevara, we're going to make a new man in Cuba and we're going to industrialize overnight and all of a sudden we're going to be a mini-American in Cuba and that lasted about a year before it completely imploded.
And they never figured out how to work the sugar industry in Cuba.
Yeah, no, very sad.
I mean, look, I understand that maybe the tax advantages that Amazon was going to get, maybe it was egregious.
I don't know.
I wasn't privy to those negotiations.
But it seemed like we should have at least had that conversation because that district in New York was going to get a lot of high-paying jobs and was going to help increase the tax base.
And it was sort of like, nope, Amazon's bad.
We're not going to do it.
We don't want it.
And I think that was sort of sad because the people in the district weren't getting hurt by it.
So I think, you know, you could you could lean left in economics.
You can lean right.
But I think some of these policies, Robert, are just they unless you're really a, you know, a Marxian economist, they just they don't make any sense.
And by the way, history has proven they don't work.
Well, speaking of history, this might work us into the next Super Chat, which I missed earlier.
This is from Tony Nieves, and it has a funny typo because I thought it was a deliberate typo.
It says, Which I think was he talk about the Jekyll Island meeting and the central bank experiment done across Europe first, the response to the Tax and Tariffs Act 1914.
Which one of you might know what Tony Niaz is even talking about?
Well, I mean, it really goes back to the old debate.
I mean, we've had a long political historical debate about do we have a central bank or not?
And what are its policies?
I mean, we went through basically kind of three experiments pre the Federal Reserve Act of 1913.
And I think now the Federal Reserve Act was sold as a way to control big banks.
And I think one of the fair criticisms, The Creature from Jekyll Island, those kind of books is like, eh, some of the people that were involved were going to be the ones in control.
It was my old argument with Ralph Nader.
Nader, Ralph, often believed, you know, the client, great guy, but he often had, he was shocked that the government agencies that he helped create ended up being captured by the very powerful institutions he thought they would be able to control.
And I think it goes to Joe's point earlier that, you know, once you give any governmental agency this kind of power or control, the ability to get it back is just counter to its own survival self-interest.
And consequently, you tend to have a hard time getting it back.
That was Robert Kennedy's point this past weekend in the debate and discussion in D.C. It's like, once you give government this power, good luck trying to get it back.
It ain't going to give it back voluntarily.
And I think that's where some of the criticisms of the Fed has come, along with the fact that it's hard to still, to this day, for me to explain to someone what the Fed actually is.
And it would be kind of a loose sense, central bank, etc., but they designed it in such a way and have instituted policies, and particularly policy creep.
I mean, it's like, okay, who are we exactly?
Now all of a sudden we're buying things and we're selling things and we got balance sheets that are 10 times bigger than they were 10 years ago.
How was that part of the original plan?
It doesn't seem self-apparent.
And then you've got a lot of congressmen and senators that are either playing for cheap shots or mostly intimidated, don't know exactly what to do.
That's what happened in 2008, where they were, okay, we'll sign whatever.
Please, God, don't let the system collapse because it's still mumbo-jumbo to it.
Too many of them.
It's what happens when information becomes inaccessible.
And that's a point of shows like this and others, to get people to have enough literacy to be able to understand it.
A better level of what's taking place in the world, because that's a big functional problem, is the degree of political literacy amongst our own political leaders is such that they don't know how to manage or monitor or meaningfully protect certain core rights and liberties against government agency Crete, because they become the expert institutions whose expertise ends up being deferred to in determining their own scope of power, which magically always tends to get bigger.
And I would just add one thing to what Robert was saying about getting rid of the Fed.
I mean, that was a famous comment, David, by Milton Friedman, who argued that the business cycle was almost always a function of the Fed, you know, basically being too easy for too long and then ultimately then too tight.
And he thought they should just be replaced by a computer that would set the growth in the money supply equal to the economy's growth rate.
You don't even need the Fed.
I think, unfortunately, that...
Because of things like financial innovation, that isn't feasible.
But that was an argument that was around for many decades.
Absolutely.
And to what degree do you think, because you mentioned one other key way of reforming the Fed's policy approach is institutionally and structurally by ensuring more diversity of thought that includes diversity of sources of where these people practice everyday life.
That when you get stuck with a lot of regulatory bureaucrats that operate within their own little and bubbled world.
I mean, I was in 2002 working for a public interest law firm.
We were suing big banks on the grounds in the subprime industry because we were identifying all these problems on the ground.
You know, they were, you know, a daughter taking out.
And especially what you were mentioning earlier, all these fly-by-night operations set up because they didn't have to hold the note, because they could turn around and flip it, because of the bundling effect that they thought actually provided protection, but actually incentivized very questionable frontline actors who no longer could be held liable or were gone.
They were going to fly by night because they could be gone overnight.
They would set up a little retail lending shop.
And they didn't have the same ethical limitations.
I mean, they loved Ninja loans.
But not only that, they would go out and strip equity.
They would hire some 22-year-old blonde to bring out a couple of six-packs to the 65-year-old widower.
And suddenly, all of a sudden, he's got an 80% loan on his property that didn't have any loan on it a week before.
And we were on the front lines of it, just as a public interest law firm, dealing with it on the foreclosure side when it translated, like, how are these loans happening?
How are these, these are not economically...
Sage policies.
These are not something a normal bank would get involved in.
And then you realize this unique set of structuring went in place and ended up trying to advocate to people why we should change.
But one of the things that we found was the lack of real-world experience in a lot of policymaker, regulatory, bureaucratic role decision-makers, including various commissions and agencies and boards that were involved.
So to what degree do you think it's possible for the Fed to incorporate a much wider range of economic experience and thought on the Fed board?
What would that look like?
I mean, the first thing I would do is if there are eight meetings a year, I'd probably have six or four.
Because the economy doesn't change that much every six weeks.
And by having fewer meetings, you would have to tell people what you think.
Because a lot of times things don't change.
But the Fed always feels like it has to say something.
So I'd have fewer meetings.
But on the diversity side, it really is basically, Robert, who is appointed to the Fed jobs?
And in the past, it's always been PhD academicians.
And it's like a pencil.
They're very good at one little, very narrow thing.
Don't have really any experience in the real world.
They don't understand risk as businesses take it.
There's a book I just got, and I forgot the title.
I wish I had it.
But I read it.
There was a book review in the Wall Street Journal, and it was basically talking to a company.
The company was saying, look, if you keep rates too low for too long, we're just going to refinance our debt.
We get paid more for doing that than basically taking a risk.
And the academic models won't say that.
They'll say, well, if you just lower the cost of money, at some point, eventually, people will put it to our productive assets.
That wasn't the case.
So I think you just need diversity of opinion and view.
I don't say you're going to change it other than just a gradual, slow change.
But again, a portfolio manager, a business person, somebody who's run a company, just not somebody that's never been in...
I mean, there are a lot of people, I don't want to bash anybody, but there are a lot of people who've got great resumes.
They've always spent their entire life in the public sector, which is fine.
My parents are public school teachers.
But I just feel like we need...
You need people with some practical experience that don't care about a dynamic, stochastic growth model and all this other mumbo-jumbo to sound like a physicist.
Well, it reminds me, my favorite version of the problems of the professions of economics and bureaucrats is from the movie Back to School with Rodney Dangerfield, where he's in there with the economics professor and they're designing these products.
He's like, we're going to have this and we have this.
And Rodney Dangerfield's like, well, you've got to pay off those people and you've got to realize who these people are and then you've got to deal with this.
And then at the end, you know, the economics professor is agitated and shuts him down.
And he says, well, where are we going to, you know, make our product?
And Rodney Dangerfield says Disney World, you know, wherever else fictional things take place.
But it was always that kind of version.
And there's just too little of that at key governmental rules of people with real world.
I would pick a mayor out of the phone book quicker than I would from the roster at Yale.
And I think that's wise because you have people with much more diverse life experience that's critical and essential that would translate a lot better that would have said, hey, maybe if you just...
Print money, for example, maybe we'll have an inflation problem.
Things with this basic common sense, but that has evaded people who have been locked in.
Particularly, it seems to me, the mathematical model revolution, which has even dominated parts of Wall Street with the quants and all the rest, that has misplaced, that's allowed these people to live in bubbles.
And to even be further distant from the real world because some of their mathematical models worked in certain context.
I mean, for certain ways in terms of making money on Wall Street, but was not a realistic way to actually predict or preview or make good policy prescriptions for the future.
Yeah, I totally agree.
And President Trump, I think, was very good at sort of bringing that real world aspect of experience.
And I think that's made his policies very effective.
Partly for that reason.
I think he always viewed the experts with some suspicion.
I think in many cases it was warranted.
I was just typing in the chat how I love how you say President Trump and not out of reflex.
I like it.
It's a good way of doing it still.
Now that's my question.
What do you know of the next plans for 2024?
What do you think is going to happen?
If things change, do you have a role to play in any future Republican administration?
On the latter question, David, I hope so.
I would love to.
I really enjoyed my time.
It wasn't long in part because I went at the very end of the administration and everything was COVID-related.
So I hope so.
I hope I get the chance to do it.
I really enjoyed it.
I have a lot of friends and people.
Don't necessarily have the same political views that I have, and everybody was actually very supportive, which was a very good experience for me, at least in my personal life.
So if I get that opportunity, I'd relish to do it.
I do have some strong opinions on 24, and I think I know the answer, but I'd rather tell it to you guys privately.
Good enough.
Another person had asked, do you have a podcast?
do you have an information platform where people can actually get into the weeds of this, uh, above and beyond, uh, you know, a two hour live stream?
The only thing, David, I mean, I have it sort of hokey.
I've got a Twitter handle.
I sort of like Twitter and I don't like Twitter for a lot of different reasons.
It's fairly wonky.
It's at Livornianomics.
I don't do podcasts.
I mean, I've thought about it.
I mean, you guys do this all the time.
That's a tremendous amount of work.
I actually have a...
A full-time job.
I do some stuff with the America First Policy Institute.
So, I mean, maybe at some point, but I just don't really have the time and I feel like if I was going to do it, it has to be done right.
So, the answer is no.
It's a good thing because you make a mistake on the internet.
The internet never lets you forget and it never goes away.
Sorry, Robert, you were going to say something.
Oh, yeah.
So what is your typical day like?
In other words, what source of information are you looking at for making the assessments that you're looking at?
What do you find trust and confidence in, in terms of reliability of information in Intel?
How much are you looking at underlying data versus other people's interpretations of that data?
So, Robert, I mean, I basically, I'm a publishing analyst, so I'll write daily commentary.
It comes in a couple of different forms.
In terms of my research product, it's very chart heavy, charts, tables, things like that.
I try to make one point and try to hammer it.
So right now it's been why the economy is going to slow and going through various ways that the data suggests it will.
And a lot of times, you know, if I get questions, it's from clients or salesmen or salespeople, traders that are saying, I've got a question.
What do you think?
And that's a good idea.
I'll answer that question.
I'll put it in a research note.
So I would say most of my time is involved paying attention to markets, looking at the bond market, the stock market, foreign exchange markets, writing research commentary, basically for institutional portfolio managers on things that I think are important.
So one would be, obviously, the economy.
We have data all the time, so a lot of work goes into, to the extent possible, predicting these numbers, which I think oftentimes random number generators.
The interpretive side is important.
Okay, retail sales are very soft.
What does that mean?
Okay, employment, non-farm payrolls are downshifting.
What does that mean?
And then I'm getting on a lot of calls.
Normally, I'd see people one-on-one, and we'd talk about the economy, talk about risk in markets.
They'd ask a lot of the same things you're asking.
What do you think about this?
What do you think about that?
It will probably be confirmed.
Lael Brainard have a different view.
Is Raskin going to go tough on the banks from the supervisory side?
They're just general macro questions, which is why...
I've always liked economics because it blended a lot of different things.
It was almost kind of like analogous to sports radio.
People always just want to talk macro.
Most of my days just involve talking macro.
We think of the stock market.
We think of interest rates.
I love it.
I make a living doing it, so it's kind of fun.
Now, what do you think about the whole...
Two aspects.
The Robin Hood revolution.
Because I didn't even realize it was really happening until I'd run into an Uber driver or someone who used to be an Uber driver.
And they said, I just took my STEMI check, took off, and decided I was going to be a stock investor and listen to TikTok people tell me what to make money on.
What do you think about that whole phenomenon?
Because it seems like it has a lot of risk buried into it.
Sounds a little bit like late 1920s activities in parts that got us into a little bit of trouble back then.
And then secondly, what do you think about this sort of populist revolution of people sort of aggregating together to fight certain hedge funds in the sense of the whole GameStop phenomenon and I just like the stock and all the memers that became investors?
What do you think about both of those sort of phenomenon that have happened over the last couple of years?
I think they're kind of interconnected, Robert.
I mean, I've got a bunch of hedge funds buddies and we thought it was kind of hilarious that retail was always thought to be the dumb money.
And in the last few cycles, they've been the dip buyers.
It's been the institutional hedge funds that have sold.
So I kind of like these trading platforms that make it a little bit more democratic.
I kind of like the populist view.
And I'm not saying you should take your stimulus check and go bet, because it's not really investing, it's gambling.
But I kind of like it.
I kind of like the fact that commission costs are going down, people have access.
I mean, you're not supposed to be down 30%, 40% in a month if your book is balanced correctly.
So I kind of like it, sort of like Revenge of the Little People.
So I don't think it was a bad thing.
Well, I'm going to be the conspiratorial guy here.
What about if the Robinhood apps were actually to counterbalance the democratizing of information, which is itself nothing to do with the apps themselves, which I think are meant to capture people.
Rather, the Reddits, for all of its foibles, democratizes information and the internet itself.
I feel that those apps are scams that are intended to basically trap loser money as the house does in Vegas.
Where they know to target certain things, they will cut people off when a stock is outperforming or is underperforming.
And so those apps are actually to counterbalance what is actually the democratizing of information for retail investors like myself.
Yeah, I would take the opposite of you, David, because the big institutional investors always have access to that.
They have access to all this information in terms of talking to their dealers, their coverage.
What liquidity was in the market?
How the market was positioned?
And I sort of feel like now there's so many places where you get information, whether it's on Reddit, whether it's on Twitter.
I mean, the FinTwit, there are a lot of really serious people on there that give a lot of really good information that I'm sure some of you guys follow.
So, yeah, I don't think that's the case.
I think actually information now, if you know where to find it, is very accessible.
And it's not just accessible to the...
The well-to-do and the powerful, as was the case.
When I started in finance, people didn't even have Bloomberg screens.
People didn't even know what prices were.
I did charts.
You couldn't do it on a Bloomberg.
It was very basic.
So you had great information advantages.
So I kind of liked the way things have evolved.
And look, the buy-and-hold investor has done extraordinarily well.
I mean, Jack Bogle was right in the sense to just buy a low-cost index fund, and those people have done it, have done extraordinarily well, and have outperformed most hedge funds that they've had.
Very high fees and poor performance.
So I'm going to take the opposite side to your conspiratorial view.
But then again, I'm an optimist.
Well, and I'll tell you what, I think you may have actually convinced me because you raised very good points is that the information to which I was referring was already accessible.
Yeah, I could be swayed.
That was a very...
Very good.
Speaking of sort of where certain institutional investors and others are, I've seen some analyses that certain pension funds, I mean, particularly maybe CalPERS in California and Illinois and some state funds in particular, but that because of some of the price points that they need to hit, that they may be at major risk over the next 10 years.
What are your thoughts on that?
Yeah, I don't think they're...
I mean, the thing is they...
They've lowered their returns, their liabilities.
I mean, the problem is, about getting too detailed, David, I don't want you to roll your eyes, but if interest rates fall, the net present value of your liability stream is higher, and if you can't get a good return, your future assets are going to be worth less.
So basically, these large institutional players like CalPERS and CalSTRS, they manage money for the California teacher system, they need to...
Have good returns and the equity market historically will give you a 9%, 10% return with dividends.
That's likely going to be compressed in part because you've had Already big returns.
So what they're doing is they're going off into alternative spaces to invest.
Private equity has been a big beneficiary.
Direct lending, basically investing in entities that will lend.
They'll cut the middleman out and lend directly to people.
You get higher interest rates there.
That's probably going to continue.
I think the reason that you're getting a good return is there's a liquidity premium you're capturing.
In other words, you'll get paid more because you can lock your money for a period of time.
But those big institutions...
I think are in reasonably good shape.
And, you know, their weight to these alternative investments is relatively small.
I just think the problem is going to be, you know, they're all assuming a 7% return in perpetuity, and that's probably too high.
So I think they're going to just continue to have to adjust their expectations lower, which just unfortunately means the people who are going to be retiring may not be getting the benefits they expect.
But I don't look at their robber as being any systemic issue.
In terms of any particular TV shows or films, I often cite that as not only my version of the literary canon for understanding political, social, economic, and cultural life, but also can be useful in certain contexts for really helping explain something that maybe a book won't or a class won't in the sense of...
I love shows like Billions.
In Law, there's about four or five shows that are good.
I always reference the James Elroy trilogy for understanding aspects of American politics and power and alternative interpretations of past events and predicting future events.
What are your thoughts?
Shows like Billions?
Are they way off the mark?
Are they shows that are really capturing how the industry works on a day-to-day basis?
Are there any particular TV shows or film that you think are good, whether it's Wall Street or others?
Yeah, I mean, I don't watch Billions, but a lot of my friends do.
I think it's well-written, but I think it's sort of contrived.
But I think it's, you know, as accurate as any TV show possibly could be.
I mean, the movie Wall Street is great.
It's antiquated.
I think Wall Street's really good.
I mean, Boiler Room was sort of an interesting tale on how, you know, sort of, you know, these little bucket shops would operate sort of, you know, illegally.
But it's hard to say.
There really aren't that many.
I'm trying to think that...
You know, the one movie that I like the most, but it really wasn't a finance movie.
I mean, it relates to your question.
It was the one with the movie with Michael Douglas and Gwyneth Paltrow.
He's like a hedge fund guy and, you know, he's losing money.
I forget exactly.
I forget what it was called.
Murder or something.
You know what I mean?
What was it called?
I can only think of Wall Street and Trading Places.
Trading Places.
Actually, you know what?
So let me tell you something.
So Trading Places, Robert.
So that's really great because even to this day, it's sort of like...
Everybody rushes to go to the bathroom right before 8.30 a.m., first Friday of the month, just as they were in trading places ahead of the crop report.
When the Secretary of Agriculture reads the date, I mean, that actually is very accurate.
And in terms of the Duke brothers having cornered the market, we actually saw that last year.
We saw some very notable hedge funds have spectacularly horrendous performance because they were betting interest rates to rise.
And they leveraged those bets.
And when rates didn't rise, they got margin called and really got carded out.
And some funds were down 20%, 30% in a given month last year, which is extraordinary.
So actually, David, thank you.
I'd say trading places, probably trading places on Wall Street is probably why they're classics, actually do a very good job of sort of explaining kind of market architecture and what can go wrong in the market, either through greed or through just a lack of prudent risk-taking.
And I think the movie you were looking for, Joe, was A Perfect Murder.
A Perfect Murder, yeah.
That's right.
I think I just like the fact that Michael Douglas was like a Wall Street guy because I so loved Wall Street.
But it really wasn't so much finance related.
How much do you think the culture of Wall Street, how much of it has it changed over the past 10 years?
How much has the quant influence changed things?
How much has some of that, from the sort of, you know, my impression when I first was around some of the Wall Street guys is it was kind of work hard, party hard kind of environment.
It was an interesting crowd there.
But that was a particular crowd that happened to be around.
But how much does, you know, quant nerds sitting at home behind their computers, you know, looking at some eclectic fact like the weather on a particular day, It means this particular set of stocks within the industry is going to do well.
How much of it has changed in that direction?
Robert, a lot of it's changed.
I'll tell you, the peak of the market was, I think it was even, I've got a disc.
I think it was January, sorry, July 14th, 2007.
I was at a Deutsche Bank event.
We had hired the Rolling Stones for a private concert.
Mick Jagger was not more than 10 feet from me.
And I was with about 300 other bankers.
And we looked around and said, man, this can't get any better than this.
And it was about three weeks later, some money funds at BNP Paribas went, you know, went kaput.
And that kind of started the whole process in motion.
And what that meant was, of course, with all that leverage, regulatory apparatus that, you know, we have no regulation, too much regulation.
And a lot of these banks, even though they've got big balance sheets now, it's not the same thing.
The banks don't take anywhere near as much risk.
There's no proprietary trading.
And all of that, I think, all that liquidity, all that leverage went to private markets, private equity in particular, where there wasn't a regulation.
So the business now is much different.
It's much more sterile, certainly a lot less fun.
It's a lot less profitable.
The return on equity in the banks, I think the other day, Goldman was saying, I think they were talking about 15% ROE if they can.
Period of time, which is very good.
They're a very well-run company.
But like pre-financial crisis, it was like 25, 30, 40. I mean, the numbers were staggering.
So the business totally has changed and evolved.
You'd say maybe it's evolved in a more professional manner, but it was a lot of fun because people would take risks.
And I just like the fact that there was a lot more adrenaline.
We did things, Robert, more, you know, everything now is electronic for the most part.
Back then you had more, you know, broker yelling, traders yelling.
I see people yelling back and forth.
I mean, I talk fast and I like that environment.
So the technology has taken a lot of that away as well.
It's sort of like the New York Stock Exchange.
You see it on TV.
It's not, you get these bursts of activity.
It's all really show.
All this stuff can be done by a computer now.
So it's totally different.
Much less fun.
Joe, I think we're going to keep it under two hours for sure because it makes it easier to transpose this into podcast format.
I mean, I guess I had one question.
How long did you actually serve with the Trump presidency?
Like, was it months or years?
About 11 months.
Let's see.
That's a long time in the Trump presidency.
And the only reason it ended was because the Trump presidency ended.
Were you with Donald Trump the night of the election?
No, I was actually here in Westchester.
I have two young kids and I had the opportunity to go back, so I would take every opportunity to go back that I could.
And D.C. was pretty closed and it wasn't like, you know, it was going to be hard to navigate from place to place.
So I wound up, I was here and I went to sleep and I woke up at like, went to sleep at 11, I woke up at like 2.30.
And I was totally nonplussed by what had happened.
In fact, I was watching Robert and Richard Barris did some great work.
And I was just, I couldn't figure out what it was at three o 'clock.
I didn't know exactly what happened.
But I was here.
Had the president, had Trump remained president, I mean, my hope was I would have stayed.
I mean, I don't know that that would have happened.
But I enjoyed my experience in D.C. And I think whatever one's politics are, if you ever have a chance to serve country and see it up front.
If it never happens for me again, I'm blessed to have done it.
I really enjoyed it.
And if it came up again, you would do it again?
Absolutely.
Yeah, for sure.
Yeah, it was fun.
I really enjoyed it.
And what do you think was probably the most common misapprehension in the sort of Wall Street banker world of Trump compared to your work experience with him?
He listens and he can be very decisive.
Yeah, agreed.
The press just don't do him justice.
It's kind of sad.
Now, you could argue maybe he brings some of it on himself, but he also doesn't get a fair shake either.
So it is what it is.
Do I even dare ask this question?
Historically, political leanings and has your opinion of the world changed having seen the media response to Trump in the last five, six years?
Yes, everything.
You know, when I got married, you know, I got married, had kids, you know, I always thought my learning curve was exponential.
And I think the last couple of years, David, I feel like, oh, my God, like, I don't know anything.
I mean, there was a, I think it was Naval Ravikant on Twitter.
It said something like, you know, sometimes it takes people their entire life to know they don't, to learn they don't know anything.
I feel like I don't really know anything.
So it's been an experience.
It's a humbling experience, too.
But this is why you try to do the best job you can and carry yourself in a way that you can live with.
And, you know, you were saying, you know, you didn't find any salacious material on me.
That's because I lived the straight and narrow and hopefully I can continue to do that.
You're clean because had there been any dirt on you, Lord knows someone would have found it because anyone affiliated with Trump, they found the dirt on it.
So this was amazing.
I think a lot of us are going to go back and rewatch this a few times.
People can follow you on Twitter.
And other than that, you Have a day job, which means that you're not necessarily a public figure in that sense.
Have you thought about maybe providing internet advice or guidance to people who might want to acquire some of the knowledge that you have?
Sure, I would be happy to do that.
Yeah, I would be happy to.
Another thing I just want to say, my wife had come in earlier.
She said, let them talk.
I get very excited.
I know Trump is not an apologist.
I am.
But I just want to say that I hope I didn't trample anybody by talking too much.
That's the goal is to provide useful, interesting, insightful information that ordinary everyday people don't have access to and to try to make it more accessible to people so that they have a better basic public education in the old school way.
In the American Revolution, we did it in our local taverns.
That's where Thomas Paine's book was read to many people.
Couldn't read themselves, but that's where they got their news and information and helped precipitate a revolution that brought us to where we're at today, and that's how it can continue.
So yeah, I think it's fantastic.
It's been a great interview, a great process, a lot of learning information for lots of people, and so I think it's beneficial at multiple levels, so appreciate it.
Oh, my pleasure, Robert.
This one question, because three people, Super Chat and non-Super Chat asked, What's your opinion of the big short?
I haven't seen it, but I think I know the book.
I know a lot of those people in that book.
I don't want to say by name.
A couple of which I'm actually pretty good friends with.
I'm not a huge fan of Michael.
What's his last name?
Michael Lewis.
He hates Wall Street.
He has an old bitterman.
Liar's poker, all that.
His description of the characters, oh my god.
It's so...
Brilliant.
I love it.
That's a great book.
Okay, and that will end it, people.
One question people were asking, I am not going to be in Ottawa this weekend.
I want to be somewhere else.
It's not a family vacation.
It's not a question of vacation.
But it will be known when it's on social media.
If you go to vivobarneslaw.locals.com and check out Art of the Day, you might have an inference.
It's going to be amazing.
Suffice to say, I tested negative.
For COVID today.
So, with that said, people, Joe, fantastic.
Let's do this again.
I'm going to put a list of questions, like the 101 questions.
You've got my email, David.
I'd be happy to.
It's amazing.
Everyone in the chat, thank you for everything.
Convoy stuff, stick around for Aviva on the Street.
I pre-recorded it.
I'm going to finish editing it after this stream.
And it's going to be talking about the Canadian Convoy for Freedom.
Joe?
Robert, stick around.
We'll say our proper goodbyes.
And that will end this broadcast, people.
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