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I'm Becky quick of CNBC and your host of The Forum I'll be guiding you through exclusive conversations among some of the world's global leaders conversations previously held behind Club doors but today we invite you in the economic Club of New York serves as the premier forum for nonpartisan discussion dedicated to connecting the world's brightest Minds with preeminent public and private sector leaders a nonprofit 501c3 the club is a 115-year-old platform form for the conversations that help shape the future of our world the economic Club of New York brightest Minds critical conversations Catalyst for Innovation right now there is nobody better to be speaking to than Eddie or Denny who really has had the correct take on markets talking about the Roaring 2020s as people were talking about recession saying that he didn't see what they were seeing why economists have gotten this cycle so incredibly wrong so why what have people been missing so much Ed well I think expecting a recession was perfectly logical it kind of made sense the the Federal Reserve uh increased the federal funds rate by 525 basis points basically from zero uh over a very short period of time from March of 2022 to basically the summer of 2023 it would make sense that uh that kind of dramatic tightening of monetary policy restriction of monetary policy would cause a recession uh along the way I concluded that maybe the FED wasn't just tightening but it was actually normalizing it was bringing interest rates back up to levels that the economy had shown its ability to deal with before before the great financial crisis through the great virus crisis that was what I call the great abnormal period of uh Ultra easy monetary policy uh there's no point in De ating whether that made sense or not but the reality is it's that period's behind us we're no longer in an abnormally low interest rate environment and the economy has proven itself to be perfectly resilient uh in the face of these the level of interest rates we have and I think a lot of that resilience obviously has to do with the consumer the consumer is a big part of the story and over the past couple of years economists have been saying that that's not going to last that consumers had piled up a bunch of excess saving I think there's a Federal Reserve uh estimate that uh $2 trillion was the peak excess savings and now in March of this year the excess savings is down to zero so I guess any day now we should see a pile of economic indicators suggesting that the consumer has got to retrench because they've got to save some more but I think what that misses is the demography of our economy we've seen the the Baby Boomers starting to retire and they're sitting on 76 trillion dollar so on one side you have two trillion of excess savings that's gone to zero on the other side you've got a bunch of baby boomers that are retiring retirement is a dramatic change in one lifestyle you're not saving out of earned income anymore if you're lucky enough you've saved enough so that you can live on interest and dividend income and if you're not then you start to go into the nest EG here and the Baby Boomers are spending and they're spending a lot of services and guess what those are the areas where employment's been very strong so it's kind of been feeding on itself but there's lots of other explanations for why the recession didn't happen but I think that's that's the most important one so taking a step back just there's a lot to unpack there I want to start with the idea of where fed rates are now and that they've been normalized are rates restrictive as Federal Reserve chair Jay Powell says well the FED is not restrictive if you look at the pace of economic growth if you look at the stock market being at all-time high here all-time high around the world uh that matters a great deal not only to our financial markets but to overseas Financial Market markets the dollar has been strong so I guess that's somewhat restrictive but uh it hasn't been so strong as to really restrict anybody's uh exports from the United States so if you look at the inflation rate it has come down and I guess you can say that uh the inflation that the federal funds rate is restrictive enough to bring inflation down but look I think uh what we've learned over the past couple of years is inflation is a very complex process and a lot of what we've experienced in the past couple of years has had to do with guess what the pandemic uh and that has to be factored into people's thinking on how the economy is performing and it's clear I think we all know that there was supply chain disruptions that uh have been emurated and as a result that's helped to bring inflation down but a lot of economists had this notion that the only way to bring inflation down is with a recession and so they thought the Federal Reserve would have to raise interest rates until we got a financial crisis that led to a credit crunch that led to a recession and so far that hasn't happened and yet inflation's come down I think one of the things that economists missed is China we didn't have to have a recession because China has had a significant recession particularly in their property market and as a result they've been trying to stimulate their economy by guess what exporting more particularly electric vehicles and other kind of state-of-the-art green technologies U and those the prices they're charging have actually been deflating so they've been exporting deflation on the good side to the United States and Meanwhile we're just waiting for the service inflation rate to come down particularly shelter and by every indication it should continue to come down so I think when you put all those things together uh you come to the conclusion that well interest rates are are neutral they're they're kind of where they should be you know the the so-called real interest rate seems to be uh where we are now because in that kind of environment you're supposed to be getting um a growing economy with uh falling in a stable low inflation which I think we're approaching this really raises the issue of why are people talking about rate Cuts I know you don't think they should be I know that you think that there is no reason to be talking about cutting rates uh from here even Insurance Cuts or midcycle adjustments or any of those types of things so what are you looking for to justify that type of move at a time where jome Powell seems like he's pretty committed to at some point as soon as they have a window of opportunity go yeah I again I don't really understand that I don't I certainly didn't understand why the widespread view was that the markets were anticipating six to seven rate cuts of 25 basis Points each starting in March that was where we started the year and then gradually those started to become fewer and fewer rate cuts and later and later and here we are with economists not talking about higher for longer I would prefer to call it normal for longer and so I I don't have any particular reason to believe that the FED really needs the lower interest rates now of course if you're a believer in the real rate then you look at the FED funds rate subtract out the inflation rate and say you know if we don't lower the uh nominal federal funds rate in an environment where inflation's coming down then we're becoming more restrictive we've seen some fed officials uh Express that view and first of all I'd like to kind of question the idea that the FED funds rate excluding or uh you know subtracting out the inflation rate means anything I mean the FED funds rate is an overnight rate and we're taking out a year-over-year percent change in the inflation rate I mean what does that mean who who possibly acts on that kind of uh variable I mean clearly real bond yields matter but the FED doesn't control real bond yields it controls the the federal funds rate so this notion that uh the FED funds rate might become too restrictive in a in a real sense if inflation comes down I think we have to just kind of wing it and see how that plays out right now it looks as though we've seen quite a bit of decline in inflation and interest rates haven't come down look the the other thing Lisa is you know I think there's been a lot of what I call technical analysis of macroeconomic data people look at charts and say oh look at that the FED funds rate once it Peaks it comes down pretty quickly and plateaus don't last very long and I think what people don't a lot of economists really just don't appre iate is is what causes recessions what causes recessions is the Fed Titans monetary policy to the point where something breaks that's when the that's why the yield curve inverts is people start buying 10 years at uh 10 year bonds at four% and knowing that they could buy a two-year at uh at 5% why would they possibly do that well because they figure they're not great Market timers and at some point past 5% the economy is going to break something will break in the financial system that will lead to a credit Crunch and it's credit crunches that cause recessions the other two explanations for recessions is a spike in oil prices which we had in 2022 but so far oil's been quite calm and of course uh bursting speculative Bubbles and we saw we saw lots of tiny speculative bubbles burst in 2022 stock market had a bare market and yet here we are with the economy doing fine and without an official recession with real GDP and all all-time record high so again I don't understand U why this why po has been signaling that he'd like to lower interest rates if in fact interest rates are where they should be empirically would you like to be a part of the conversations at the economic Club of New York learn more about membership the New York City and National fellows programs and other opportunities for engagement in the club at www.on Club n.org this 5% Target I want to sit on that for a second or not Target but this idea that if longer term rates get to 5% something could break but they could get to 5% right without something breaking and if you have this curve inversion I just want to set it up this way I was speaking with Mike Wilson of Morgan Stanley today sure and he explained what he got wrong this year and why he came in with the bearish view he said welcome to the bull camp hold on not exactly maybe I mean maybe but we'll see there's a lot of asterisks there one of them is he didn't fully uh in his view appreciate just how stimulative the fiscal policy was as well as in some ways monetary policy not just with respect to rates rate policies that is restrictive but with respect to the balance sheet and the repo lines and all of that that really added to right the liquidity profile he said that if Bond investors start to really push back on how we're financing that fiscal stimulus that would cause Equity valuations to come down significantly do you agree well that sounds bearish it was again a very Nuance take car very Nu okay that's fine that's fine look um my my view on on the bond yield is it's normalize it it it's back to 45% that's the kind of range we should be in that's where we were be before the great financial crisis uh the anatomy of the of the bond deal I just wrote about it in our publication quick takes and I said look it's it's pretty simple it's the tips yield the 10year tips yield which we have quoted in the marketplace on a daily daily business uh Daily Business basis uh and that's been running around 2% um and I think it'll continue to run around 2% reflecting an economy that's resilient and growing and the expected inflation premium that you add on top of that I think is uh where where it is about now two two and a half% uh that gives you you know four four and a half percent uh you know can widen the range and get 5% in there but I think all that is uh is has reflects a normal interest rate environment now of course some things are going to blow up along the way maybe in downtown office buildings that have to be refinanced that's already been happening I think it's so important to realize that a lot of this exposure isn't just to the banks but there's a lot of private money invested in these kind of um assets and uh for them it's it's a haircut on a rate of return it's not suddenly that they can't lend I think there could be problems with some of the small Banks but we're not seeing it I mean it the the FED really stabilized that whole situation in the past an inverted yield curve accurately predicted a financial crisis a credit Crunch and a recession this time around the yield curve is inverted yield curve is accurately predicted a financial crisis we had that last March on March 10th it was a Friday on March 12th it was a Sunday the FED came in with a liquidity facility that stabilize the situation really well you know Lisa the FED is really good at playing whack-a-mole in the credit markets ever since the great financial crisis and the great virus crisis the feds figured out how to create liquidity facilities to keep things from blowing up so if financial crisis don't turn to credit crunches you don't get recessions in in that kind of SC scenario so I I think you know I may be pushing my luck here but I think the economy can live with 5% by the way we had 5% uh last uh October at the end of last October and that's because we had some really sloppy auctions I mean clearly I'm not going to put lipstick on the pig of the federal deficit uh but Janet Yen I I I went to Yale six six years after Janet Yen was there and I owe her a lot because I studied from her Xerox notes and got me through Tobin's class but Janny Janet yellen's very clever and on November 1 the treasury announced well if you don't like our bonds we're going to sell less of them in options or we're give you more bills over the past year $2.5 trillion dollars of marketable Securities have been issued by the treasury 1.9 trillion of that was bills bills are really easy to to finance and money market funds are sitting in about a half a trillion dollars worth of repos that depending on the uh incentives could easily be converted into treasury bills so for the here and now I don't see a real problem with the bond yields suddenly gapping up to 5% and higher and causing a Calamity for the economy does that mean that you think that stocks can actually continue to climb even if treasury yields on the long end get to 5% well I think we've seen that the stock market has learned to live with high interest rates or normal interest rates I I should say I have to remind myself that these are are normal because we're all used to such a low interest rate environment but yes I think the stock market is doing quite well here I think the stock market started to Discount what I've been calling a roaring 2020 scenario since the beginning of the decade didn't look too smart there for a while with the pandemic and all the other calamities that have occurred here but I think the stock market started to Discount The Roaring 2020 scenario I know exactly when November 30th 2022 which is when open AI introduced um uh chat GPT and artificial intelligence has been the rage ever since but I'm not uh you know I'm I'm not I'm not of the belief that AI is the only reason why the Market's up but there's a lot of other technologies that are very user friendly they're cheap and they lend themselves to increasing not just the physical power strength of humans as previous technologies have but most importantly it's increasing the power of the brain it's augmenting the brain and so I think the potential for productivity gains is just tremendous over the rest of the decade and I think it's productivity that's going to be the answer here and and and to Mike Wilson's issue about the federal deficit I think it is a problem I think debts a problem but if we get better than expected productivity will get better than expected growth lower than expected inflation the FED might very well in that situation at some point decide why not lower interest rates and take some of the pressure off the deficit they're not supposed to be concerned about fiscal policy but it it might be an issue um so along the way here it looks to me as though there's certainly a case to be made for a strong stock market and as you know Lisa I've been talking about 5400 for the S&P 500 by the end of the year uh and I'm kind of working it out it might be by the end of next week the way way things are going we're already at 5,300 and 5400 looked pretty delusional about a year ago uh now I'm also talking about 6,000 on the S&P 500 in 2025 and 6,500 by 2026 and then I up the anti here and I'm talking about 60,000 on the Dow by 2030 and 8,000 by um 2030 so I've thrown a lot of numbers at you hoping that you won't remember these numbers if if they're wrong and if they're right I'll I'll bring him to your attention you've been listening to The Forum by the economic Club of New York a nonprofit 501c3 dedicated to connecting the world's brightest Minds for critical nonpartisan conversations be sure to subscribe now to be alerted to Future new episodes would you like to be a part of the conversation at the economic Club of New York learn more about membership the New York City and National fellows programs and other opportunities for engagement in the club at www.on club.org I'm your host Becky quick thanks for listening
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