How Global Economic Dynamics Shape Our Future ft. Matthew Klein

[00:00:07] Matt

The whole point of our book, Trade Wars Are Class Wars, is that there are lots of positive sum solutions, and that the idea of like a zero sum framing is completely wrong. Everyone can be better off if we do certain things differently. And I still think that’s true. I mean, the world’s changed in some ways, but in some ways, it really has not changed. And so, I think that’s very much the case.

It’s not enough for me to say that, right? It’s not even enough for it to be true. People have to do things about it.

[00:00:29] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we’ll have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also, understand that there’s a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Here’s your host, veteran hedge fund manager Niels Kaastrup-Larsen.

[00:01:24] Niels

Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle.

We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro-driven world may look like. We want to explore their perspectives on a host of game changing issues and hopefully dig out nuances in their work through meaningful conversations. Please enjoy today’s episode hosted by Alan Dunne.

[00:02:09] Alan

Thanks for that introduction, Niels. Today I’m delighted to be joined by Matt Klein. Matt is the author of the Overshoot Research Service which tracks the global economy. He has been in the markets for a couple of decades. He started at Bridgewater and then was a writer on economics for the Economist, Bloomberg, the Financial Times, and Byron. He’s also the author of Trade Wars Are Class Wars, a recent book with Michael Pettit, and earlier in his career was a research assistant to Sebastian Mallaby on his book on Greenspan, the Man who Knew.

Matt, great to have you with us today. How are you doing?

[00:02:42] Matt

Good. Thank you for having me, Alan.

[00:02:44] Alan

Well, I touched on your background a little bit, but we always like to hear directly from our guests as to how they got involved in financial markets and economics. So, what prompted your initial interest in the global economy and financial markets?

[00:02:57] Matt

So, it was basically kind of luck, to be honest. I was in school, and I didn’t really know what I wanted to do. And I was fortunate that, at that point in time, there were at least some businesses that were willing to take people in, at least as summer interns, who didn’t have a deep knowledge already, I think on the view, not unreasonably, that whatever they already knew was going to be orders of magnitude more valuable than anything that someone might have learned in a couple of years of school. So somehow, I managed to make it through that interview process and was a summer intern and I just found it really fascinating.

I didn’t know a lot, I didn’t really know anything going in. I was given a week kind of an open-ended project assignment to discover and explain what was going on in Poland was my project. And I knew nothing about that. I knew nothing of Poland. I knew nothing about economics or finance really.

And the first, you know, half – five, six weeks it was incredibly challenging. But you know, it turns out if you’re just in it all the time, and you ask enough questions, people were very helpful.

I got sort of a sense for it and learned a bit. And I realized this is just absolutely fascinating, you know, figuring how all the pieces fit together. It’s kind of like a big puzzle. The relationship between the real economy, and the financial system, and markets, and how this all links together was just really interesting to me at an intellectual level.

And then, you know, coming back after, you know, the internship was over. This is in the summer of 2008. So very quickly it became apparent that understanding how these things work was very important. Not just as sort of a way to make money or something that’s interesting, but, at a social level. When these systems break down, they can cause immense amount of harm to hundreds of millions of people. And so, getting it right is very important. And that really became a motivator to understand it better and explain it to people so that we can manage these systems better and have better outcomes for everyone.

[00:04:42] Alan

Good stuff. And obviously you’ve spent time on, I suppose, the asset management side and then migrated more into writing on economics. I mean, it’s an interesting path to take. Not everybody does that. I mean, what was your motivation for focusing more on writing?

[00:04:59] Matt

A couple things. One, I’m not good at trading. I mean, in the grand scheme of things I think I’m reasonably good at writing. So, focus on what you’re good at. And as I said, it’s not just important to understand it for my own sake or for the benefit of a particular firm, but I think it’s sort of a social level, a policymaker level, just at a broad consumer level to understand these concepts.

And so, to the extent that I can help and explain these things in a way that leads to better outcomes for people, I think that’s really going to be where my kind of value add is, where my contribution could be.

[00:05:34] Alan

Very good, well, as I say, you wrote a book, it’s probably two or three years ago now, called Trade Wars Are Class Wars, with Michael Pettis. And I know it was a few years ago, but it seems very timely now, given what’s going on. It feels like we’re about to go into trade wars.

So maybe it’s a good starting point to give us kind of the central thesis of that book and maybe we can talk about how it relates to where we’re at the moment.

[00:05:59] Matt

Yeah, it’s funny that this is still in the news because we wrote this book actually more than five years ago. So, the motivation was, you know, we wrote the book mostly in 2018, 2019. It came out in 2020.

So obviously the motivation then was, okay, you know, Trump is in office and saying all these things about China and Europe and, what was going on. And we were trying to provide an alternative explanation for a way of thinking about how all these pieces fit together.

And now here we are again, Trump’s back in office, and all the stuff’s happening. And so, now the book has become relevant again.

So ,the argument was, essentially, that it is very easy, regardless of your perspective, to think of trade as being about relationships between countries, and that the country is the right unit of analysis. You know, something is good for China or good for the United States, you know, good for Germany, good for Spain. Right.

But that’s not really how the economy works. Right. There are situations where that’s the right way of thinking about it, but a lot of times it’s actually more productive (and this is really the key point of the book) to look at groups within countries and how they relate to each other within the country, and how those groups map onto comparable groups in other countries, and how those groups generally have common interests across countries in ways that are not necessarily what you think of if you go into the sort of national chauvinist rhetoric of, you know, they’re taking our jobs.

And so, you know, in the Chinese case, for example, it’s very easy to make the point and you know, people, you saw this really across the spectrum, oh, the Chinese are taking American jobs. China is doing well, and America is doing badly.

And sometimes you find people who say, oh, this is good because there are more Chinese people lifted out of poverty, and some people who say, this is bad because it’s hurting Americans. But our point is that it’s wrong regardless of whether you think it’s good or bad, it’s wrong.

The better way to think about it is that there are all these internal dynamics within China that really are nothing to do with the rest of the world on purpose, but that because of those internal dynamics of, you know, the particular group of people in China, a relatively small group that has successfully transferred income and spending power from most Chinese to them, that has had a lot of knock-on effects for the rest of the world.

And it’s not so much a deliberate strategy of, you know, the Chinese government wants to do this to foreigners so much as, you know, things are happening in China for their own domestic internal reasons. And then, because all economies and all people are linked together globally through trade and finance, whether we want to or not, that has all these consequences for people in the rest of the world, some of which can be quite harmful.

And you know, we talk about that in the Chinese case. We talk about that in a lot of different cases really kind of drilling in particular to China and Europe and the United States and explaining what the global economy, you know, sort of having a broad history of the global economy over the past couple hundred years and a very detailed one of the big three economies, basically from like 1989 to 2019.

[00:08:49] Alan

Yeah. So, I mean, I guess the point is that you’ve got low consumption in, particularly in Germany. I think you talk about Germany quite a bit and China, obviously, and that’s at the root of, I suppose, their current account trade surpluses. Yeah, current account trader surpluses.

And I suppose that your point is that that’s the initial impetus for those surpluses as opposed to a direct decision to be a kind of an exporting nation. Is that correct?

[00:09:20] Matt

Yeah, I mean, if we’re going to zoom out, what is a surplus? A surplus is just there’s more production in one place than is being used in that place. And then it goes somewhere. I mean it has to, right? Otherwise, if it didn’t go anywhere, then it would be staying. It would be like an inventory buildup and then it would show up. It wouldn’t be a surplus. So, a surplus is going somewhere.

And so, the corollary is that there are other places in the world where there is more consumption and investment than production and they’re getting the stuff from the surplus. So, the deficits and the surpluses balance out and it has to be that way. And the question is, well, why do these things happen?

There are a lot of different possibilities depending upon, you know, what point in time you are, where you are. And they’re not all bad. I mean the idea that surpluses and deficits are inherently good or bad, I think it’s just, you know, it depends.

Our point is that the really big surpluses that have persisted over time, over the past few decades, have been concentrated in places where we can identify specific social and political either changes or just systems that make things worse for a lot of people in those countries. And so, if it’s making people in those countries worse off and it’s also having all these negative knock-on effects for people elsewhere, I mean, that’s probably not a good thing. Right. And that’s really what we’re kind of highlighting in the book.

It’s not the case that always and everywhere surpluses are a sign of repressed consumption, and are bad. I mean, maybe it’s a case of there’s less consumption than otherwise could be. But you know, whether it’s good or bad really depends. In this case we can point to, you know, in the German example, they basically, after reunification it was a very hard transition for German society. And you know, a lot of people thought that reunification would be this big boon and it turned out not to be for a variety of reasons.

And business investment really… They had a little tech bubble in the late ‘90s as we did in the United States. But after that you just had this big plunge in business investment. Public investment fell a lot.

You know, there’s a stereotype of Germany from a long time ago. Oh, it’s, you know, everything’s very efficient, very clean, very modern and that’s not true. You have all these situations of bridges that are just falling apart and can’t be used. The trains are really quite poor, broadband infrastructure, schools, buildings are very old and not well maintained.

You have welfare cuts in Germany because of a perception that the government doesn’t have the space to borrow and spend in the way it did. It’s sort of an ideological component as well.

Not necessarily like, you know, what is the ideology they’re thinking? But it’s more that sort of a commitment to an idea. Ideological in the sense that they’re committed to this idea of something rather than like an acute need.

I mean you have a situation where borrowing costs, for a long period of time, were basically negative, but they still were saying, you know, we can’t borrow. And that led to problems for German living standards.

It led also, interestingly, to first you had a situation where businesses were really cutting labor costs, wages, and employment pretty aggressively in German. That led to an increase in profitability, particularly Germany’s family owned companies because they were just selling to the rest of the world. The rest of world is not having Germany’s problems.

But German demand, German spending domestically was quite weak because of the combination of weak business investment, weak hiring, weak wage gains, and the welfare cuts that were going on. It was the government’s kind of triple whammy for people in Germany. And then eventually you had an increase in employment to a degree. So, the corporate surplus shrank a bit after the financial crisis. But that was offset by the German government saying, oh, now we’re going to really tighten our budget.

And so, the net effect was that nothing really changed. The German surplus was still persistent and quite large. And Germans effectively living below their means, leaving money on the table.

And you can see, every country is different, every society is different. You know, we go in a lot more detail in history for different places, but the places where there have been big surpluses, in general, are characterized by kind of similar dynamics. And so, again, the point of the book being like this is just a tremendous waste. Everyone is worse off because of this.

And, of course in this world it’s very easy to blame foreigners and say, oh, they’re taking our jobs and create the sort of nationalist conflicts and blame trade as opposed to, well, it’s not trade per se that’s the problem, trade is the mechanism that transmits these other problems from one place to another place. And that’s the point of the book.

[00:13:47] Alan

Okay, got it. Yeah, no, interesting. I mean with respect to Germany, the classic I suppose perception would be, well, the Germans are very prudent and they like to save a lot. And that’s been the problem. Obviously, then you’ve got the debt break and the government’s attitude towards borrowing.

But you’re saying it’s been as much about kind of welfare being compressed and wages not growing. I mean would wages not be influenced by productivity growth? Is that also a problem or how do you see that dynamic?

[00:14:15] Matt

Well that’s the thing that’s interesting, So, particularly in the period from like you know, 2000, 2007, 2008 is that wages were growing much less than productivity. That’s why you saw corporate profitability rise so much.

And in fact we have a chart in the book, it basically shows this, that the increase in the trade, the current house surplus for Germany, basically perfectly matches the increase in the profit, not profit, it’s like free cash flow or whatever of German non-financial corporations which in turn is directly related to the fact that sales are going up and wages are not. So, it’s not a question of productivity being weak at that period of time.

But the prudent saving, I’ll also just say briefly like they save a lot, but they save quite badly. Is it prudent to save all this money and then it goes into a banking system that then just hoovers up the worst US mortgage bonds and Greek government debt in 2005. And so, it’s not really prudent at all.

[00:15:11] Alan

Yeah, yeah, we had these labor reforms, obviously during that period. You know the, the Schröder I think was 2010 reform.

[00:15:22] Matt
Yeah.

[00:15:23] Alan

Yeah, and so, obviously I guess, German companies benefited from the possibility of cheaper labor in Eastern Europe, but the workers didn’t, which is kind of ironic because the German model of collective bargaining has always been kind of lauded as a good model for all parties. But you’re suggesting that the workers kind of lost out quite badly in that period and that’s, that’s been reflected in these surpluses.

[00:15:46] Matt

They did, yeah. So, the reforms, so the Hartz reforms or Agenda 2010, which came out in like 2004, 2005, 2006. If we’re going to zoom out, what was the effect? It was that the government spent a lot less money on things like unemployment benefits and sort of pensions, unemployment benefits for people who are basically close to the age of retirement. So, the unemployment rolls fell a lot and then you had employment rise a lot.

But essentially there was basically a big increase in employment and people are like, oh, it worked great because unemployment fell. But what happened, basically, was that people sort of the age like 55 and up often, you know, went from not working and getting government benefits to working part time, low paid jobs, and then paying social insurance taxes.

So, from the perspective of the government’s balance sheet, it was great. From the perspective of the living standards of all those people, not great from the perspective of economy wide productivity, it probably was a wash.

You know, someone who hadn’t been working for a while, is like 60, and then is forced to take a job, not a well-paid job. They’re doing part time just to make ends meet and not live very well. It’s not really going to be a boost in the economy. And that’s sort of like the overall effect. I mean there are other things that happen, but that’s the main thing.

[00:17:05] Alan

Germany is interesting. We got data today confirming the economy’s contracted for the second year in a row. The Bundesbank is kind of forecasting, I think, 0.1% for next year. So essentially flat for three years, flat to low and contractional over three years and that’s even before tariffs.

So, I mean taking that perspective, not just on the trade surpluses but what you’re saying about how policy has evolved there, I mean what’s the solution in Europe? Obviously, Germany’s problems have been accentuated with the rise of China on one side and then obviously higher gas prices on the other side. It’s pretty bleak picture. Can you see a positive outcome there or how do you see it playing out?

[00:17:46] Matt

I mean the irony is I feel like there’s actually a very straightforward solution, and it’s something that a lot of people do know, it’s just that there are certain people who really don’t want to for I think essentially ideological reasons. So again, the fact that there is a big surplus suggests that the economy is capable of producing plenty. It’s just there, for various reasons, people aren’t buying things. And so, then you just say, you know, domestically, like again, living below your means.

And this is not just true for Germany, this is true Europe wide. And so, what is the solution here?

There are a couple of things we can point to, but I think the simple one is that everyone is afraid, particularly at the government level, of borrowing, of taking out debt, with basically the exception of France. And even there, there’s a push now for essentially a sort of austerity pivot. It hasn’t really happened yet, but I mean, you’re seeing kind of the momentum for that. France is like the one country that kind of didn’t really do this to a degree.

And so, we’re seeing a situation where the economy is not doing as well as it could. There are big surpluses. It suggests that there’s clearly space to do more. And governments are borrowing less than they theoretically would be because they’re afraid, there’s fragmented financial markets.

And so, you could say, okay, well, crazy thought, if Europe as a whole, were able to issue more debt at the European level, and finance public investments and things that everyone agrees that they need to do, whether it’s energy transition or common defense or other things, there are plenty of things that people know that they need to do.

The borrowing capacity does exist in reality and in the markets. It just doesn’t exist or there’s no political mechanism yet for it, although they’ve demonstrated that in certain crises they can do it.

I think this problem would solve itself pretty quickly. They’re just are choosing not to, essentially.

And so, what’s frustrating as an outside observer is seeing that the possibility exists and that it’s not being taken. But on the other hand, I mean, it’s hopeful because there are people who recognize that it could be different. And it requires a change of mind. It’s not like some deep, intractable social problem that prevents it. It’s really just a sort of mindset issue.

And, you know, I was hopeful that in 2021, with the German elections there, that the government, the coalition government then would fix some of these things. And I was hopeful in part because, you know, the Greens were very transparent, saying they thought the debt break was a bad idea. The SPD was more reticent. But on the other hand, Olaf Scholz, before he became Chancellor, he was the finance minister in the last Merkel government.

And that was actually when you started to see public investment begin to turn up in that period, like 2018, 2019. So I was, okay, maybe, like, there’s a lot. And even the Free Democrats, Christian lenders, ultra libertarians, whatever, they were basically saying, yeah, investments are too low. And there was a sense that there’d be some compromise where they wouldn’t borrow on the government’s balance sheet.

They would create these off-balance sheet vehicles to get around the constitutional debt break. So very much like, you know, they follow the letter but ignore the spirit. And there was hope that this would happen. And I was hopeful this would happen. And it didn’t really happen.

I mean, it seemed a little bit at first. Like after Russia invading Ukraine, there was this sense, I mean, you have Lindner basically saying, yeah, we’re going to spend 100 billion euros on defense. There was some criticism, I think, from the CDU at the time. He said, this is an investment in our freedom, like we have to do this. It was like, okay, if this guy is saying that, then that that’s encouraging that maybe the taboo has been broken.

And now here we are three years later, and that’s not really the view anymore from them. But on the other hand, there does seem to be a change of mind within the CDU about this was a mistake.

Merkel in her memoir, I think, very disingenuously saying, oh, well, we should reform the debt break to allow for investments. And that would be okay. Which completely ignores the actual history, which is that they had a debt law before the debt break was put in place. And that debt law specifically said that borrowing for investments was fine and exempt from any debt rule.

And the whole point of the debt break that Merkel put in place was to get rid of that and say you couldn’t exempt investments because the view at the time was, well, this was a gimmick, and a lot of the investments are wasteful and so we have to put a limit on. So, for Merkel to come out now and say that we should, whatever, I mean, I’m glad that she’s changed her mind.

But also people within the CDU, who are more active and potentially like the next chancellor, Mertz, also said, we need to think about making more room for investments. So, I feel like this is one of those, like only ‘Nixon goes to China’ things. The CDU comes out and says we’re going to fix it so maybe it will actually change. And that’s then the optimistic take, I think.

And you know, there have been people for a while talking about the European level doing stuff. They’ve been proposing this idea, and I think it could happen. I don’t know when, I mean it always takes longer than you think. But I like to be hopeful that this actually can be fixed which would be great for Europeans, so they don’t have to deal with this nonsense going forward.

[0:22:44] Alan

It definitely makes sense longer term. And as you say, debt to GDP in Germany is only about 60% and German yields are only about 2 1/2% or so of 10-year yields. I mean, if they did make that change now, ironically, I don’t know, it remains to be seen how it would be accepted by bond markets. I mean bond markets are generally on edge at the moment, but maybe it’s good segue into bonds at the moment.

I mean obviously, US yields have been rising. We’ve had a chat of whether it’s a reverse conundrum or not, but certainly yields have been going up and term premia have been rising. What’s your take on developments in the bond markets? Are you concerned about the rise in yields?

[00:23:23] Matt

I’m not concerned about the US. I think there are some other countries like the UK where I don’t fully understand those dynamics there. And the UK bond market has some interesting idiosyncrasies because of the extent to which pensions play a role.

But I mean in the US case I don’t see it being a problem. I mean there are some people who say, well, if you take a very narrow window of time, from mid-September to now, it’s like, isn’t it strange that the short rates have gone down by about a percentage point and then long rates have gone up by percentage point? That’s weird. And this is reverse conundrum we’re talking about.

And of course, referring to almost exactly 20 years ago when Alan Greenspan was saying, oh, we were raising rates at the short end a bunch and long rates are going down. And so that’s a conundrum. And I think in both cases this is really just overthinking it.

You know, back then you had a very steep yield curve implying that short rates were priced to go up. So, if they go up to the extent that it’s priced in, I mean, this is sort of relatively basic bond math here. That’s not new information. Right.

And, and now I think it’s the reverse. Right. You go back to mid-September when people say that things have been acting strange. The 10-year note was at like, I don’t know, 3.6% or something, 3.7%. And now it’s you know, 4.7%, give or take, and then short rates.

But the thing is, the short rates, you had a crazily inverted yield curve. So, if the short end was at, you know, 5.5%, and the long end was 3.7%. I mean, that’s very strange outside of imminent recession. What is priced in is that short rates are going to fall a lot, and pretty quickly.

And so all the short rates have to do are not fall as much as what’s priced in, and then long rates would rise somewhat. And in fact, if you look at that period, which, again, it’s not like this is ancient history, right? This is, you know, four months ago. There were people worried very much about the state of the job market and thinking like, maybe there’s a problem.

They were talking about the need for emergency rate cuts. Between data revisions and just what happened in the next couple months, it turns out that was just wrong. I mean, this happens. In fact, you can see it very clearly.

The Fed, every quarter they put out their summary of economic projections. And one of the things that they do, which is interesting, it’s in the back, but they poll the policymakers and they say, do you think the risks to unemployment or inflation or whatever are broadly balanced, tilted to the upside, or tilted to the downside?

And you can see that in the June summary of economic projections, they thought that, basically, unemployment risks were broadly balanced. There was no real risk to the upside.

They were not concerned about unemployment rising by the time you get to September, because basically there’d been a pop in the unemployment report for July and a little bit for August, suddenly the mind has changed.

And so, at the September one, they’re like, the risks overwhelmingly are tilted to the upside. Unemployment is higher than what they projected back in June. And so, they’re understandably concerned. They wanted to be in front of it and like, that’s fine. And markets were reacting to that.

And then you get to December and then they’re back to being pretty blase about everything. And so, people were like, oh, December was this hawkish cut, right? I don’t see it that way.

I think if you bake in the fact that they were very concerned about unemployment. Then they became less concerned as the data basically show that they were unreasonably concerned back in the Fall. Basically what they’re saying is like, you know, if unemployment is bad, we will do something and if it’s not, we don’t have to worry about it. Which I think is actually a pretty consistent model.

And in fact, you know, I wrote about this a month ago, or whatever. If you compare the interest rate trajectory and the inflation trajectory from the June forecasts and the December ones, when we supposedly became more hawkish in December, actually, what you see is that they’re willing to tolerate more inflation, they’re willing to tolerate more real growth, and they have a projection for lower interest rates in December than they did in June. But they were like marginally more concerned about unemployment in December than they were in June.

So that’s, that’s, I think, the dynamic and that’s, I think, what’s affecting the rates. So, you can break out what’s going on with rates now, and people point to the model estimates of the term premium. We can’t actually observe the term premium, we can only estimate it, and it says, okay, like the 10-year yield has gone up basically and it’s all term premiums. Okay, great.

First of all, one big caveat is most of the time it looks like that. It’s very confusing, but the standard term premium models, any volatility in 10-year rates looks like it’s a term premium. So, it doesn’t necessarily tell you a lot. I mean maybe it’s right, but it’s not unique information for now.

The other thing that’s interesting is that if you look at shorter term forward rates. So, you take the 2-year treasury yield and you take a 1-year treasury yield and you say okay, what’s the one year rate one year forward? That’s actually moved more than either longer term forward rates like five year 5-years, or the 10-years as a whole, or anything like that. So, it seems like it’s actually much more like a near term policy dynamic than you know, term premium stuff.

At least as far as I can see, just sort of the simple mind of thing. And so, and that rate moved up a lot more between mid-September and, and now.

And so, there could be other exclamations, but the simplest one, as far as I can say, it’s about that people were afraid about the growth outlook and now they’re not. And that flowed through to estimates of near-term Fed policy and then that flowed through to longer rates and that’s sort of where I’m at.

[00:28:38] Alan

Yeah, no, I think you’re right. I mean, I think if you look at software futures or Fed funds futures, I mean about a year out there was about a change in rates of about 1.25% or so. So, a reassessment. So that’s kind of consistent with a stronger economy.

I guess maybe a couple of things, I mean, well, firstly on that, I mean, is that consistent with your take on the economy at the moment? As you say, go back to July, first week of August, you know, a lot of panic, people calling for 75 basis point emergency cuts, the SAM rule gets triggered, suddenly we have a string of better payroll numbers. ISM services number is looking better. Everything, you know, looks a lot better. So clearly people were probably too pessimistic back then.

And obviously we’ve got an incoming president with a new policy agenda. So, I mean if you were trying to forecast the economy a year out, do you think it’s going to be stronger or weaker this year factoring in everything?

[00:29:35] Matt

Oh, that last part’s tricky. I mean forecasting year out, I don’t know. But I will say that at the time, last summer, I was saying that we shouldn’t overreact to this and that if you kind of dig into the components of the unemployment rate increase that had been freaking a lot of people out, actually it’s like weird pieces of unemployment that aren’t usually the most reliable indicators of cyclical conditions. And it is gratifying to see that actually seems to be what happened and that those are the things that came back.

And so yeah, I think overall, the data have been pretty consistent. I mean we’ve also seen inflation, by the way. I mean, you have the inflation numbers as of today. If you strip out some of the noisier components, things like, groceries, and gasoline, and rent is not noisy but it’s but there are some weird dynamics there, and you say, okay, well like what about everything else?

Okay, inflation in 2024 and inflation 2023 were the same. There was no change. And you can say that’s fine because it’s not that fast relative to the target. I mean it’s faster but not like crazy fast, but okay, like that didn’t change.

And by the way, like if you were doing this kind of rigorous analysis of not just looking at the headline numbers but kind of breaking out like what’s going on? What are the things you should be paying attention to?

I mean this was clear throughout the year that we’re heading for that outlook of like, you know…

In the beginning of 2024 there was this big spike in prices and people were like, oh, we should ignore that, that’s noise. Okay, fine, but if that’s noise, if it really were noise, then price increases in the following months would be so much smaller that the net effect from December 23rd to whenever it is now, would still reflect disinflation. And that hasn’t happened.

It kept not happening and people will be like, oh, well, if you look at like you know, May 24th to November 24th, okay, well, thank you. That’s not useful information.

And so yeah, I mean, I think basically we’re in the side of a relatively benign steady state of pretty robust growth, pretty strong labor market. Inflation, it’s a little faster than what the Fed targets but not crazy fast and not accelerating but not slowing either. And I think that’s why the rate outlook is what it is.

I mean, one way of zooming out that I like, if you look at something like the one year 1-year rate, or you look at like the 1-year rate two years ahead, you know, similar things, it’s basically been range bound. I mean with some volatility, but it’s been range bound for like three years, two and a half years, basically since like mid ‘22.

And you know, you can see how SOFR has moved relative then and basically now is like the first time they’ve kind of stabilize or like both spot SOFR and SOFR futures are kind of lined up with where like the 1-year rate two years ahead is, and before it wasn’t.

I mean it’s like okay, like maybe we kind of settled into a nice natural neutral spot. There’s room to go either up or down based on sort of the prior range. But it’s like okay, we kind of been hanging out in this spot and it seems like things have been okay.

I mean, things could certainly change, right? As you said, like there is a large possibility of significant policy disruption on lots of things in the next, you know, year. I mean I have no idea where it’s going to go.

I think it would be presumptuous to have a claim but assuming things don’t happen in that regard though, like, I don’t know why it’s not obvious to me why things would necessarily change.

[00:32:57] Alan

I mean it sounds like the economy’s doing fine, policy is probably now close to neutral if that’s the case. And you know, 2-year yields, as you say, if you look at that one, they’ve kind of fluctuated around, but they’re about bit more than 4.24% at the moment. But they were at this level in September 2022, so they’ve kind of been up and down around this level.

So that would kind of suggest that, as you’re saying, these are roughly the right parameters for the economy barring kind of some unforeseen dramatic policy event, is that fair to say?

[00:33:29] Matt

Yeah, I think that’s right. I mean, I don’t know, feels like famous last words, but I mean it’s been true.

I don’t know, I’ve been saying this for like since the end of 2022, and people were worried about a recession then. I’m like, I don’t see it. Right. I mean, maybe. And then, so far, it’s been pretty good.

Yeah, obviously things could change, but I mean it’s not like there’s something obvious, that can really be like, ooh, that doesn’t look good. I mean the fact that consumer spending has been holding up as well as it has, even though we’ve seen this big slowdown in consumer borrowing and people were afraid of what that would do. And the answer is, well, a lot of the borrowing was not necessary for the spending.

I mean the spending basically tracks, you know, kind of organic wage growth more than anything else. And organic wage growth is still pretty good. So, if that changes, it’s different. Right, but it hasn’t.

[00:34:14] Alan

So, you do get, you know, various reports that point stress, like credit card delinquencies or things like, you know, leveraged loans, defaults. In the last couple of weeks, I think the FTA had stories on both of those. I mean, are they just kind of part of the landscape at the margin but not influencing the kind of the core outlook? Is that what you would say?

[00:34:38] Matt

Yeah, I mean, credit card delinquencies and auto delinquencies are kind of weak spots. And there are different explanations that I’ve seen for them.

One is that, in the prior couple of years, there had been this huge expansion of credit to people who maybe necessarily either the volume of credit was too large or they, I think, were a little too generous in who they extended credit to. And so, this is sort of a, I want to say natural, but like an expected response.

If delinquencies were unusually low, then a normal economy… You know, a normal economy always has a certain amount of delinquencies, right? I mean, if lenders never have any delinquencies, then their view is that they’re not being aggressive enough in lending.

So, to a certain extent, some of what we’re seeing is just sort of payback from an earlier period. I don’t know how much of it. I mean, obviously, that’s something to be watching. But I mean, one thing that’s interesting, the New York Fed puts out this household debt and credit report every quarter.

And if you look at things like what is the total stock of credit card debt relative to incomes or relative to credit limits or anything like that, it’s quite low. The Fed board has a monthly thing on credit, credit balances are quite low relative income, relative to consumption. So even if there are these delinquencies, which potentially indicate something problematic, you know, it’s not an aggregate problem.

I mean, if you look at not just credit card but basically consumer credit, so all debt by households, basically excluding student loans because that has its own weird dynamics, we’re basically at multi decade lows relative to income or consumption, which is remarkable. And so that suggests, I mean one way of looking at it is that actually there’s a huge amount of room to expand borrowing if a lot of people felt like it was compelling to do so, and there’s a chart I like to do.

Whereas, if you look at the long history from like 1947 or 1952 to 2012, there’s a pretty stable relationship between household net worth to income, that ratio, and the household saving rate. So basically, when people feel rich relative to their day-to-day income, then they will save less and if they don’t, they will save more.

And that relationship broke down in 2012. People became much more conservative than you’d expect. But if that relationship had held, the household savings rate now would be something on the order of like -6.5%. You know, it’s the combination of debt not having gone up as much as you would expect it over the past five, six years and home values and stocks having done so well, like a whole Bunch of things. Right.

And so, from that perspective, and again, you look at things like what’s consumer credit outstanding relative to income or relative to consumption, I’m not saying this is going to happen, but like there’s a sort of this latent firepower that’s quite large. I think that’s also, probably, if I were to guess, like one reason among many why Fed officials are like, we don’t need to cut rates more.

Who knows, if rates were to fall again a bunch, some of that might get unleashed. I don’t know, maybe not all of it.

[00:37:38] Alan

Is that reflecting a demographic or is it reflecting the kind of the inequality, I mean, is that increasingly concentrated in the top, top 5%, 1%?

[00:37:50] Matt

Well, I don’t know. Is the short answer.

I don’t think it’s the inequality point just because a lot of the data we have on wealth concentration is that it has not been going up over the past 10 years. I mean, it’s high and it has certainly gone up over a long time over a longer history. If you go back 50 years, it’s gone up a ton, but over the past ten years, not really. So, I don’t think it’s that.

I think sort of the simplest explanation, it may not be sufficient, but it’s the simplest one, is that after the housing bust, both borrowers and lenders, there was both a psychological change and a regulatory change and a whole bunch of changes and just on both sides being more conservative.

And I think that, I don’t know if it explains all of it, but I think it helps explain a bunch of it, that people are just not going to monetize those wealth gains to the same extent.

[00:38:40] Alan

Yeah, I mean, you don’t hear as much about kind of home equity loans as we did back in kind of five or six time period, that type of thing. So, yeah, it doesn’t seem to be a feature of the landscape.

Another kind of interesting feature of the economy of late has been the rebound in productivity growth. And it was very weak for a number of years, and then Covid distorted it, and now we’re seeing definitely in the last two to three years stronger productivity growth. But there’s kind of a difference.

Some people saying it’s just a normalization, maybe it is a Covid effect, others saying, no, it’s actually the digital economy. We’re seeing the benefit of that, maybe AI, although possibly too soon for that.

I mean, you know, we talked about Greenspan, the reverse conundrum, but obviously back an earlier decade, and you worked on the Greenspan book, so you must have gone through lots of materials on this. I mean, is there a parallel now with the late ‘90s or not? Or are we too quick to make that parallel?

[00:39:32] Matt

So, one parallel I think that actually could be relevant is that this is the first time since then that we’ve had several years in a row of companies dealing with basically a full employment or close to full employment job market. And there are a lot of things you can think of that motivates productivity increases. But, I think a relatively simple one and a powerful one is, if you can’t hire more workers to do something for you, and if the workers you do have, have enough options to leave that you can’t reliably squeeze them on wages, then you have to come up with ways to improve efficiency to make good investments; either process efficiencies or, or actually or physical investments that are going to really improve your productivity and make progress there.

And I think, really, since the post pandemic reopening and the ‘90s, the second half of the ‘90s were the only two times that we’ve had that in quite a while, at least in this country. And so, I think that’s probably a big part of it.

You know, that having been said, you know, to your point, it’s hard to see it conclusively in the data that this productivity boom is happening. So, if you look at levels, as opposed to year-to-year stuff, what you see is that in the very beginning of the pandemic there was a reported spike in productivity. But of course, that’s because you had a disproportionate decline in employment among low paying jobs. And mechanically, the way productivity is calculated, that looks like an increase in productivity for whoever’s left.

So, the average wage of employed people goes up a lot when all the low wage people, or not all, but like a bunch of lower wage people are dropped out. And that’s not improving anyone’s well-being. Right? That’s just basically fake.

So, what’s more interesting is, those people get rehired and of course productivity looks like it falls. And you say, well that’s bad, but it’s not really bad. All you’re having is just this weird composition effect.

And so, you kind of zoom out and you say, okay, where are you by like 2023 when things look more normal? And there you say, okay, productivity is rebounding, but essentially, if you were to draw a simple trend line from either, you know, the years before the pandemic or even before the financial crisis and just draw, what was that? Either like a 2005, 2006 or whatever, or like 2017, 2018, you’re basically on the trend line.

And it’s only really in like, the second half of 2024 that it looks like it’s coming off of that trend line with some acceleration and that could be great. And maybe that is indicative of something, but it’s only a couple of quarters. And so, I don’t know.

Obviously, that changes your perspective or could change your perspective with, like, what is the sort of potential growth rate? What is the GDP growth rate? Is that a sustainable thing that we’d target that would lead to certain kinds of… But I don’t know.

I mean, there are plausible reasons why you would expect some kind of degree of productivity growth that’s faster now than we’ve had in the past, but it’s hard to say whether it’s happening yet.

[00:42:26] Alan

Yeah. Okay. I mean, as you say, there are two key drivers of growth, productivity being one, the labor force being the other.

And, you know, there’s been a lot of immigration the last number of years, but now the policy seemingly will be deportations, less immigration. So, do you see that as being real? Will that radically impact the growth of the labor force? And could that be something that will choke off growth in the economy?

[00:42:49] Matt

It could. I mean, this is again, where we have so little knowledge of what’s actually going to happen. I mean, the thing that was talked about during the campaign was that we’re going to deport between 15 to 20 million people, which is an enormous number and, by the way, much larger than estimates of people who are here who came to the United States illegally.

Because they’re saying, like, we’re including, you know, some people who are legal residents, but their parents came illegally or something like that. Anyhow, I have no idea if this is going to happen. If it did happen, that would obviously be a huge impact. Right.

20 million people out of a population of, you know, 340 million. I mean, that’s not nothing, especially if the workforce is 160 million, give or take, of employed labor, number of employed workers. Presumably, a lot of people who would be deported are people who are either in the workforce or who are of working age, these are large numbers.

And just mechanically, as you said, I mean, fewer people means… You know, if growth is hours worked times, hour per hour, there’s going to be fewer hours worked with fewer people. So that would have a big impact.

The interesting, slightly trickier question is what does that mean, not for the aggregate, but for living standards of everyone else? Because those aren’t necessarily the same thing. I suspect that it would still, you know, be a negative effect in-so-far as business investment is predicated on the growth of the overall market.

And if you think the market size is going to shrink, and then grow much more slowly in the future, you know, you’d expect somewhat less investment on the margin than you would have had before. I don’t know exactly how that plays out.

You know, there are a lot of kind of particulars to be thinking about in terms of, you know, who would be deported versus what they’re doing now versus where, what kind of jobs they are missing. But I suspect that it would be very disruptive, for sure, and what the impact would be.

And so, of course, now you have people saying, well, it’s not going to happen because it’s going to be so disruptive. But who knows? I have no confidence on how that’s going to play out.

[00:44:47] Alan

So, I mean, another area where this debate kind of impacts is housing, because you’ve got different views on housing. One view on housing is that, well, if you get all these people deported, there’ll be less demand for housing, so that will ease housing inflation.

And then obviously housing has been a big kind of unknown or uncertainty with respect to the inflation debate. People have been waiting for kind of rents to catch up or catch down or whatever you would say. And we see more downward pressure on rents. It’s been very slow to happen.

And at the same time, there’s kind of a view I heard, I think it was Mary Daly speaking on another podcast that she was saying, actually when they cut rates, you see more housing activity and more housing production would actually, obviously, weigh on prices or would kind of cool the housing market. So, paradoxically, lowering rates, that would seem to suggest would help ease inflation.

So, a lot of, you know, conflicting factors going on there. I mean, obviously there’s a structural lack of housing in the US as there is in many economies. Do you think we’re going to see that downward adjustment in rents that people have long awaited – inflation adjustments?

[00:45:51] Matt

I mean, we have in a certain extent, right? I mean, there’s been a huge… So, I mean, I just pulled up my spreadsheet now. If you look at rents in the second half of 2022, they were rising at about a 9% annualized rate. You look at them for the full year for 2023, so in other words, December 22nd to December 23rd, they were rising about 6.5%. And then this past year, like 4.5%. So there has been a big slowdown already.

And in fact, if you look at the component, I mean, it’s a smaller component in terms of its CPI weight, but it’s, arguably, the more tied to actual market transactions, which is the rents paid by tenants as opposed to the owner’s equivalent rent. That rose in 2024 at 4.3%. But it’s almost exactly the same growth rate that we saw in the typical workers hourly wage in 2024, which is generally how these things play out.

So, in a sense, I mean, you could say, well, it’s still faster than it should be. It’s still faster than it was pre pandemic. I mean, fine, but it’s not wildly out of line at this point, and especially not wildly out of line given the fact that wage growth is still faster than it was before the pandemic. I mean, I still like looking at the measures of CPI that exclude rent just as a sort of a sanity check, just to get a sense of change over time.

But I just think it’s important to note there actually has been a big slowdown already. Will there be more? I don’t know. But I mean, there has been a big one there.

I think, you know, in terms of your point, your question about, you know, what would deportations do? I mean, this is in general, right? People, however they get here, contribute in general, both to supply and the demand. I mean, it’s actually kind of funny, right? It used to be the thing was, oh, we don’t want people here because they’re going to depress workers wages and take, you know, take jobs. But the argument against that was always, well, they come here, people come here and they jobs and that puts downward pressure on wages. But they’re also spending money and that creates upward pressure on wages, right? Because they’re spending money and buying things, you need more people to work. And the net effect tends to be a wash. Maybe for specific sectors, places, not so much, but that’s how it should be.

[00:48:12] Alan

Right.

[00:48:14] Matt

And then you have this housing argument, which is the backwards version. It’s just, oh, people come here and they bid up house prices. Okay, well, it’s weird to say that they push down wages and bid up house price at the same time. Maybe there are multiple things happening. Like, you know, you’re pushing down wages, but you’re also buying stuff. I think the net effect is probably a wash.

I think if you were to, quite frankly, if you deport 20 million people, especially the kinds of people they’re talk about deporting, I think that would actually have a very negative effect on housing supply.

I don’t know about the breakdown between people who came legally versus not, but like people who were not born in the United States, however they’re defined, play a very large role in the construction and building trades. And that is not a secret. That is well known.

So, the impact of removing a large chunk of them, I think would be, I don’t know, would that be worse than the impact on the housing demand side? I don’t know. But like, I think the idea that it would make housing more affordable if you kick a lot of people out, I think is naive. I don’t think it would work that way.

I don’t think cutting rates would help either, by the way, because what we saw, the problem is like rates go down and building goes up. That’s true. But also you see, again, there’s the demand side on too. People who had been living together then are more likely to, household formation goes up where people say, I want more space. And so, the net effect is a lot more ambiguous in terms of…

I mean, it’s not as if housing affordability improved in ’21, ‘22 when rates went down and homebuilding went up. House prices also went up a lot. So, these things tend to cancel out. I mean, I think there are things that can be done to improve housing supply, but using the rate channel, I don’t think is necessarily the thing.

[00:50:12] Alan

We talked about bonds kind of earlier on and it sounds like you’re of the view, there’s nothing unusual going on in the bond market, I mean, relative to what we’re seeing in the economy. But I guess there is that view out there, I mean, taking the kind of the reverse conundrum idea. The conundrum was all based on the global savings and those savings coming into the US, buying Treasuries, putting down bond yields.

So, the fear at the moment, I guess, is that if we’re seeing less global savings being directed to you, and obviously given the geopolitical picture, there are concerns that we could see that from China and from elsewhere at a time of rising deficits. So curious to get your thoughts on that argument. Do you think that’s a risk longer term? And how, in terms of the dollar thing, we’ve heard kind of conflicting views coming out of the incoming administration.

At times Trump has been negative on the dollar, then more recently less so, and then obviously got Bessent coming in, has kind of given the markets some confidence that it might be a kind of a pragmatic, market friendly approach. But still, I suppose there are kind of underlying fears of maybe there might be a case for some kind of adjustments later on.

Any thoughts on all of that? Have we got to wait for random tweet from, from Trump or, or do you think there’s kind of a kind of a philosophical, ideological approach coming from the new administration?

[00:51:39] Matt

Yes, there are a couple things in there. I guess the first one I would point out is that I don’t think the reverse conundrum is tied to people fleeing US assets simply because the dollar has been rising from time to time.

There is an interesting thing, actually, that just came out today that someone sent me, which I thought was basically making the case, well, maybe people are moving into gold. And that could be consistent with the dollar rising against other fiat currencies. Although still, you know, it doesn’t quite fit the story of people are fleeing the dollar specifically.

The other thing, of course, that relates to this is, again, like if you saw foreigners really being repelled by the US financial system, you would not be seeing what we are seeing, which is a persistently large, in fact widening US trade deficit and current account deficit. Because mechanically those deficits are only possible if foreigners, on net, are buying more US assets than Americans are buying foreign assets.

[00:52:39] Alan

They could be buying stock.

[00:52:44] Matt

Why do that if you think that the US government is really going to screw you.

[00:52:50] Alan

No, yeah.

[00:52:51] Matt

Why would you buy that? I mean, so, I think it’s still not consistent with that. Right.

I mean, in terms of your point about what Trump wants, I think that is a very open question and I think completely unanswerable because on the one hand, some people are like, well, we need to weaken the dollar because it’s overvalued and it’s hurting our manufacturing sector, which is actually, I think, a coherent and defensible view. But then you also have Trump himself saying things like, well, if you abandon use of the dollar, we’re going to penalize you with tariffs.

We want the dollar to be strong. So, I don’t know. I think the simplest explanation is that there is no coherent position, certainly not yet. And I don’t know, you know, what we’re going to see.

I mean, one thing that’s interesting is that one thing we saw last time, and we’ve seen a little bit of it now, is that imposing tariffs or threatening to impose tariffs makes the dollar, tends to make the dollar go up, which is, of course, interesting at two levels.

One, on the one hand it means that tariffs are less inflationary than one might immediately think, because the import prices aren’t actually going as much as you think.

And the other thing that makes it kind of interesting, though, is on the one hand, if you think tariffs are good because it’s going to change relative prices and improve your domestic manufacturing competitiveness, that won’t happen either. So, we’ll see what actually ends up being done.

But I mean, that’s kind of an interesting wrinkle to be thinking about in terms of what the policy is going to be.

And so, of course, the coherent thing would be what some people are saying is you need tariffs, and separately, you need other things to make the dollar go down or prevent it from going up.

But again, we haven’t really seen anything concrete on that yet. That would require, almost certainly require legislation, which who knows if that would happen.

[00:54:23] Alan

I mean, the argument has been put forward that the tariffs are really just a bargaining chip. And, you know, obviously to kind of put pressure on foreign powers to buy more US goods or make adjustments. And even in Europe, there’s already been talk of, you know, I think even Lagarde has said, you know, Europe should buy more whatever it is, LNG or whatever it is, from, from the US.

I mean, if things turn more nasty, obviously, the US is the biggest market. It provides defense to Europe. It seems to hold most of the cards. At the same time, as you say, the US has big deficits, foreigners provide a lot of capital to the US. Is that a bargaining chip, do you think, for foreign governments?

There was a speech from Macron last year where I think he talked about the need for Europe to galvanize its own resources more, which seemed to encourage more use of European capital in Europe. I mean, is that a possible route that we see more, I suppose, capital wars as well as trade wars and class wars?

[00:55:25] Matt

I mean, war is a strong word. I mean, I think Macron is right in the sense, and this is what I was saying earlier, Europe as a whole is leaving a ton of money on the table by living, you know, Europeans living below their means and producing all this stuff that they send abroad.

They don’t necessarily have to. I mean, they could send the same amount of stuff abroad and then import more. Right. Like, I’m not saying you have to export less, but on a net basis. Right. Like Europeans…

So, you know, conveniently, if that policy change were to come about, it would be something that I can imagine people in the Trump administration would be happy with. But, regardless of whether they’re happy or not, like, it’s good for Europe and so they should think about that independently.

It would be true regardless of who’s in the White House. I think the bargaining chip position, I’ve read this too, but it doesn’t make sense to me, Right? So the standard theory, and this seems to be what happened last time, is you do the tariff or you threaten the tariff, the dollar goes up. If no one else does anything else, there’s no leverage.

All you’ve done is hurt your own exporters, you’ve hurt foreign consumers to an extent, but you hurt your own exporters arguably more. And so, like, the logical thing is to not retaliate.

And it’s not because of some, like, psychological thing about what retaliation does, it’s because the tariff is actually harmful to your own domestic export industry. And it probably hurts your export industry more than it could possibly help your importers, because it wouldn’t. Right? I mean, not your importers, but the producers that compete with importers.

And so, the logical thing is to do nothing. And, you know, if you’re a foreign government, you let your currency depreciate.

I read this, I read Bessen in saying this, and maybe I misunderstood what he was saying, but what it sounded like he was saying on the transcript was basically, we want other countries to, you know, make their currencies more valuable, the dollars more valuable. So, we’re going to use tariffs as a threat, but it’s not a very good threat if the impact of the tariff is to make the dollar more expensive. I mean, that’s the opposite. Right. It’s like shooting yourself in the foot. It’s not a useful tool for that kind of negotiation. So, I don’t understand how that would work.

I mean, maybe there’s some other plan people are talking about, but as stated, that makes no sense.

[00:57:34] Alan

And what about the possibility of some kind of Plaza type Accord been has also been muted. Is that, do you think that’s a plausible scenario?

[00:57:42] Matt

It depends what it is we’re talking about and with whom, as part of it. Like, I mean, again, if you look at the internal dynamics of Europe, the internal position of China, Japan, for that matter, Korea, like all these countries, you could look at them independently.

You know, imagine there’s no US, you just look at what’s going on internally and what their positions are, and you could easily come up with a whole bunch of recommendations for things that could be different. And those differences would very conveniently have positive effects for the US if, if the US Is targeting the trade balance. Right.

I think one thing that’s interesting is that it would potentially create an inflation impulse for the US that would be unwelcome at this point in time, which is a different, you know, complication here. But if all you care about is the trade balance in the US, you’d say, okay, great, like you should all do this. And so, you know, you don’t need a Plaza Accord. Right. You can just have them do their own thing. It would provide space for the US to change other things. So, you could imagine some big bargains.

But like no one wants to do any of those things. Like the people in those, for various reasons, they don’t think they need to make changes. They don’t want to make those changes.

I mean, as I said, like just focusing on Europe, if Europeans with very obvious needs for spending more on public goods, a very obvious case for higher levels of business investment, a very obvious case that the economy is running below potential, is not able to make these changes purely for its own sort of narrow, parochial reasons. Like, I don’t know why an international dialogue would make it more likely. Yeah, that’s sort of the negative case there.

[00:59:11] Alan

As you’re speaking, you could see how, you could give us some kind of a deal where it would actually suit Europe, as you say.

[00:59:15] Matt

Yeah, there are plenty of things that would. I mean, the whole point of our book, Trade Wars Are Class Wars, is that there are lots of positive sum solutions and that the idea of a zero sum framing is completely wrong, and that everyone can be better off if we do certain things differently. And I still think that’s true. I mean, the world’s changed in some ways, but in some ways it really has not changed.

And so, I think that’s very much the case. It’s not enough for me to say that. Right. Like, it’s not even enough for it to be true. You have to do things about it.

[00:59:37] Alan

Good. So, if I’m conscious, we’re just coming up in time and we do like to ask our guests, before we wrap up, for advice that you might have for people who are just starting off on their path in the markets or studying economics or want to learn more about macroeconomics. You know, what are the things that were influential on your career so far and any things that you would recommend or suggest to people?

[01:00:00] Matt

Oh, man. Well, I mean, a general thing is, you know, be curious and ask a lot of questions. Hopefully you can find people who will engage with you and you’re probably going to get a lot of different answers. I mean, one thing that makes this interesting is that there are not necessarily settled answers for basically any question.

And you can have a lot of very intelligent people looking at a lot of the same information, coming up with different interpretations, and that’s okay. And I think part of how you learn is you engage with all those different perspectives and you see all different ways of thinking about it. You’re almost like, coming to a right answer, but at least you can come to some kind of plausible way of thinking about yourself and just constantly engaging. The great thing about markets and economics is there are constantly new things happening all the time.

And so, you also get some sort of live reactions to how, you know, economic news filters into market reaction, things like that. And so, there are lots of opportunities to learn, and follow, and gain experience relatively quickly if you really want to absorb as much as you can and really immerse yourself in it.

[01:00:54] Alan

Very good. Well, thanks very much for coming on today. So be sure to follow Matt’s work. He is the author of the Overshoot, and that’s where you can keep abreast of his latest thoughts. As you can hear from today’s conversation, it’s very much a macro driven world.

So, from all of us here at Top Traders Unplugged, thanks for dialing in and we will be back soon with new content.

[01:01:17] Ending

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