INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two trustee co-hosts, Cris deRitis and Marisa DiNatale. Hi guys.

Cris deRitis:                       Hey Mark.

Marisa DiNatale:              Hey Mark. How are you?

Mark Zandi:                      So what's going on this week? I'm good, I'm good. I've been on this board of a nonprofit CDFI, Community Development Financial Institution. They're very interesting financial institutions. They marry public government subsidy with private capital to make investments in underserved communities, inner city and rural areas. I've been on this board, believe it or not, 15 years. I've been the lead director for five. Today ... and I say this with a little bit of teary eyed-ness, was my last board meeting.

Marisa DiNatale:              Really?

Mark Zandi:                      Yeah.

Cris deRitis:                       Wow.

Mark Zandi:                      They kicked me out.

Marisa DiNatale:              What happened? You resigned or they kicked you out?

Mark Zandi:                      No, no, term limits. We put in-

Marisa DiNatale:              Oh, there are.

Mark Zandi:                      Term limits. When I joined, there was no such thing as term limits. I think it's healthy for there to be new ideas, new people, new perspectives. And I just termed out.

Marisa DiNatale:              Wow.

Mark Zandi:                      But it was really a cool organization. They do a lot of really good work. Community centers, healthcare centers, education, food, healthy food. Of course, affordable housing, that's a big part of what they do right now. Today was the last day.

Marisa DiNatale:              Well, you had a nice run.

Mark Zandi:                      Well, I had a nice run. I had a nice run. But anyway-

Cris deRitis:                       I'm sure there's another one out there looking for you.

Marisa DiNatale:              Yeah, right.

Mark Zandi:                      Well I just joined another nonprofit because-

Cris deRitis:                       There you go.

Mark Zandi:                      I feel like I need to give back in some way. I joined another really cool nonprofit called the Coolidge Institute, started by a bunch of NYU professors and mostly academics. I don't know why they let me in, but they're all these academics. They're focused on data and they're focused on figuring out ways to improve government data and the dissemination of government collected data to the private sector, to facilitate what the private sector is doing. So I thought that's like-

Marisa DiNatale:              Right up your alley.

Cris deRitis:                       Oh yeah.

Mark Zandi:                      Right in the strike zone. Yeah, I can get down and dirty with that pretty easy. I was pretty happy about that. But that was my week. How about you guys? Anything interesting going on? Marisa, you look good over there. I don't know what's going on. You look very healthy. I don't know. Of course, you do too, Cris. I mean, I don't know if it's me.

Marisa DiNatale:              Well, I interpret that.

Mark Zandi:                      I'm like this old white guy.

Cris deRitis:                       You too, Cris. Oh, by the way.

Mark Zandi:                      By the way, you look good, too.

Marisa DiNatale:              You don't look sickly.

Mark Zandi:                      Yeah, you don't look sickly. You guys are in good health. Am I not working you guys hard enough? Is that what's going on?

Marisa DiNatale:              I just came back from the gym, so I'm probably have a post gym glow perhaps.

Mark Zandi:                      That is what it is. That's what it is, that's what it is.

Cris deRitis:                       I think it's just the lighting.

Marisa DiNatale:              The lighting's good, too.

Mark Zandi:                      It would be good. There you go.

Marisa DiNatale:              And also the filter that I put on the Zoom.

Mark Zandi:                      Hey guys, we got a guest. Greg Jensen. Greg, welcome.

Greg Jensen:                     Thanks for having me.

Mark Zandi:                      Yeah, Greg is the co-CIO of Bridgewater. You're a little bit of an experiment, Greg. I'm just saying. We're economists and we tend to talk with economists and we're this world of economics. And you are an economist, I was reading your bio. So you have economics and applied mathematics, which by the way, makes you a really good economist if you've got applied mathematics. But you're a little bit different, a little odd for us. So I'm really curious to see how this conversation goes, whether you think this is a good discussion or not. But we're very happy to have you.

Greg Jensen:                     Well great. It's a pleasure to be here.

Mark Zandi:                      I was reading your bio, you've been at Bridgewater, seems like now, 25 years or so. How did you find your way there? And find your way to being the Chief Investment Officer, Co-Chief Investment Officer of Bridgewater?

Greg Jensen:                     Yeah, well it's been an incredible journey. So I actually interned as a Dartmouth Junior at Bridgewater in 1995. Bridgewater was a tiny place in Wilton, Connecticut at the time. There's about 35 employees and we managed ... I mean, there were different types of accounts, but in the hundreds of millions of dollars at the time. I fell in love with two things that really carried me through today.

                                             One was culture of really trying to find out what the best answer is, wherever it came from. So even as an intern, I had projects, I had projects working with Ray Dalio, the founder of the firm. That was an amazing thing, that people really dedicated to trying to figure out how the world works and discussing that, to try to understand what's next in global financial markets and economies. I'm looking at the world that way, to try to not just have opinions. But to force your opinions out of your mind, translate them into rules, algorithms that you could use to predict what was next and then you could learn.

                                             So what I've been up to at Bridgewater over those 25 years, along with many colleagues, is building out a series of understandings about how the market works. Doing what we call compounding understanding, pulling out everything that now, a couple hundred people are thinking about what's going on in the economy and what's happening in markets. Pulling out those theories, stress testing. Whether if you use those theories across time and across countries, whether they're valuable and then applying that.

                                             So while I'm not a fully trained economist as you guys are, I'm practically trained in the sense that everything we do, we have a scoreboard on. Are we predicting what's next in growth, what's next in inflation, what's next in markets, correctly or incorrectly. Then getting that feedback and building that into our processes. So we're always staring at what we're missing in the world because we've systemized what we think are our systems trade all around the world in the most liquid markets on the basis of the understanding that we've built up. All we do is look down at that process, think about what we might be missing and try to add improvements to it. That's the process of compounding understanding that's been going on at Bridgewater for many decades now.

                                             That basically thinking about the world and what's causing what and then having the discipline to systemize that with a community of people who are passionate about figuring out what's going on. I think it's an amazing job. I went from an intern to an investment associate at Bridgewater working on currencies, to running research, to becoming co-CIO for a while, co-CEO, as well. It's been a beautiful discovery about how the world works, losing money, making money in the markets. Also a personal discovery of strengths and weaknesses about myself. So that's it in a nutshell.

Mark Zandi:                      Well you got a tough job. It sounds like you're an economist that is accountable.

Marisa DiNatale:              I was thinking that.

Mark Zandi:                      It's [inaudible 00:07:41] accountable. Bridgewater, can you characterize how large a firm it is now? How big is it?

Greg Jensen:                     Sure, so we have about 1400 employees, we're managing $150 billion roughly. Are kind of the biggest hedge fund in the world. That wasn't how we started. We started again, the heart of Bridgewater is this steep understanding, which could be applied in many different ways. When I joined, we had a very small hedge fund as part of it that started in 1991. But we were a currency overlay manager and a bond manager.

                                             Over time, because we thought the best way essentially to extract all of our thinking was to have everybody in the most diversified mix of our thoughts, which was what we call pure alpha. So that's grown and pure alpha is in about $85 billion in pure alpha. We also have defensive alpha, that essentially is a product that's tuned to essentially make money to create alpha when markets do poorly. We have all weather, which is the best way we know to mix. If you don't have views in the world, what's the best essentially asset allocation to provide a balanced return stream over time? So those are the core things and optimal portfolio that combines our views on how to build a portfolio with alpha that's designed to do well when beta does poorly. So those are the things, and over a very long term, while with many, many mistakes along the way, have produced more winners than losers. That's why-

Mark Zandi:                      That's a good thing.

Greg Jensen:                     We do this.

Mark Zandi:                      Yeah. Hey, can I ask ... and this might be a question you don't want to answer. But well maybe the first one you will, I got two questions for you. One, what is the best call you ever made in the 25 years at Bridgewater? The one you're most proud of.

Greg Jensen:                     Well, I think the best call personally was joining and building this community.

Mark Zandi:                      Oh no.

Greg Jensen:                     On markets-

Mark Zandi:                      I knew it.

Greg Jensen:                     Let me answer [inaudible 00:09:45]. But the reason that I say it that way is look, we don't make calls like that. It's not like one's nothing. If we're doing this well, it's no one big thing.

Mark Zandi:                      I see.

Greg Jensen:                     That we're systemizing these views and we have views on 150 big liquid markets across the world and any one big thing would be a problem. But I will say coming into ... because it plays into today. I think recently, there are many things through the years, but I think ... and I know you've thought about this a lot. That the big call coming into this year of recognizing that what was going on with inflation anomaly GDP was much more of a demand driven thing, than the markets were anticipating. That it would be lengthy in its time, and that the fed ... I mean, it's almost shocking to realize this. But at the beginning of the year, the terminal fed fund rate was 130 basis points.

Mark Zandi:                      That terminal rate, just to define terms is what the markets thought the highest the rate would get going forward. The federal funds rate, the key rate the fed controls would get going forward.

Greg Jensen:                     Right. Now that's over five, in terms of where people expect it to get. That's huge in terms of the impact. And recognizing that the inflation would cause the tightening and the tightening would then affect all the markets. That was a big call that we got the first six months of this year, that was the dominant thing happening. I feel good that our process, like this was not a simple thing to understand. A lot of cause effect linkages in there to understand what was actually causing the inflation, what the likelihood was.

                                             Having nailed that well, that was good. Now you come into this, we're moving into this other phase where I don't think ... although it's been over the last three months. That the wiggles in fed tightening are going to be the dominant influence. But having really pictured that well, recognize what that would mean for financial assets. A, in the fact that it would impact almost everything, that was a big call that we got.

Mark Zandi:                      Let me ask you on that, of course at this point last year, Russia's invasion of Ukraine wasn't really on the radar screen. Maybe global oil traders were starting to snip it out because you could see oil prices starting to move higher. But it wasn't certainly broadly in the discussion. It wasn't until early this year and of course, Russia didn't invade Ukraine until I believe February. Doesn't that play a role in the very high inflation that we observed since then?

Greg Jensen:                     It's played some. I don't think, to be clear, I think it can be overstated by how much that did. But I'll say ... so interestingly, when they invaded Ukraine, what happens? So we're prepared and already doing well up to the invasion in Ukraine for this inflationary period, et cetera. The initial market reaction to the invasion of Ukraine was a treasury route. I mean, you think about how nuts that was. But it tells you something about how markets react to events. Stocks fell, treasuries rallied on a risk kind of move. Without the realization of, well what does this mean?

                                             This is a furthering of these major trends. You had this huge impact of what we call monetary policy three, but the mixture of fiscal policy and monetary policy simultaneously massively hit the world in 2021, creating demand without offsetting supply, flows into 2022. Then you get this acceleration of another big trend that's going on, which is de-globalization. Take Russia off the map, in a sense that's happening with China, as well. Although we could talk about that, it's complicated question. But you've also de-globalizing. You're de-globalizing supply chains, you're hitting the energy pipeline, big deal added on top.

                                             So yes, that accelerated a problem that was big coming into 2021 and then got even bigger with the movement in Russia. Then of course, as people started to realize the impact that has on some commodity prices, that was going on. But the thing that you're seeing in labor markets, it otherwise was happening anyway. In fact, to some extent the inflation caused by Russia slowed down some of the dynamics that were beginning to appear in January in terms of labor markets. So that accelerated what we think would've happened anyway in terms of a significant inflation and a significant tightening that we expected going into the year.

Mark Zandi:                      Got it. Well here we are today and we got a big CPI, Consumer Priced Inflation report this past week for the month of November. I thought at this point turned to maybe Marisa. Marissa, that felt like a pretty good report to me. I mean, I don't know that you could have asked for a better report. What did you think?

Marisa DiNatale:              Yeah, it was certainly heartening and what we want to see. I mean, this was the second month in a row where CPI inflation growth is measured by the CPI was softer than consensus was expecting. So this was for the month of November, overall CPI was up a 10th of a percentage point month on month. And we were expecting 0.2, consensus was at 0.3. So we were closer, but it was still softer-

Mark Zandi:                      Hey, I'll take it.

Marisa DiNatale:              Than we were expecting.

Mark Zandi:                      I'll take it.

Marisa DiNatale:              Yeah, exactly.

Mark Zandi:                      That's our [inaudible 00:15:11] team, the Italian team.

Marisa DiNatale:              We were the month before, too, closer than consensus, I believe. So year over year on the total CPI, we're up 7.1% and that's now come down to the slowest pace since December of 2021. Core inflation, so this is X food and energy was up 0.2 month over month and that's the slowest pace it's been since August of last year, of 21. Year over year core is up 6%. Just some of the highlights that I see in it, I mean, energy is now clearly a drag on inflation. Prices were down 1.6% month over month, and that was pretty much across the board with oil, motor fuel, gas, utilities all down. There was a-

Mark Zandi:                      Just to put a finer point on that. So oil prices spiked when Russia invaded, up to a 125, 130 bucks a barrel at the peak back in June. Since then, the fallout here has started to fade where the world is adjusting to the disruption to Russian supplies. Of course, we got weaker demand coming out of China. It's a big-

Marisa DiNatale:              That's right.

Mark Zandi:                      Consumer of oil. So we got oil prices back down and right now we're at what? 80 bucks a barrel, south of 80 bucks a barrel, I believe. So that swing is now benefiting us in the form of much lower energy prices, gasoline prices in particular.

Marisa DiNatale:              That's right. A couple other things I wanted to point out. Goods prices are now falling for the second straight month. So month over month they were down half a percentage point, which was roughly in line with what they were the prior month. New car prices were unchanged month over month and used car prices have been falling for five straight months and those declines in used car prices are getting larger with each passing month. So in November they were down almost 3% over the month.

                                             Food prices, which we've talked a lot about, they've been sort of one in the thorns in the side of inflation. They still rose half a percentage point over the month, but it was a slow down from previous month. It was the slowest pace since December of '21, if you look at total food. But that was completely concentrated in food at restaurants. So food at home prices, groceries prices still accelerated slightly.

                                             Core services, which the Fed is keyed in on, prices there slowed too, which is good. They rose 0.4% month over month, it was up 0.5% in October. There were a bunch of declines across core services, medical care, health insurance, airfare tickets, hotels, lots of different categories. It was pretty broad based. Then one other thing I want to point out is housing costs because we've had a lot of discussions about that. Both rents and OER, Owners Equivalent Rents, they both accelerated over the month. Now we know from private sector data that we should start to see a slowdown in shelter costs probably in the Spring because we know at least on the rental side, that new lease signings look like they're coming in at slower pace of increase than they had maybe six months ago. So that was the one blemish, if you will, in the report was shelter cost accelerating a bit. But pretty much everything else was down or there was some disinflation there.

Mark Zandi:                      I just pointed out the 0.2 on core X food and energy you annualize, multiplied by 12, poor man's way of annualizing. That's pretty close to the fed's target right there. I'm not arguing that we're at 0.2 consistent going forward, but I'm just saying that's consistent with the fed's inflation target on CPI.

Marisa DiNatale:              Yeah, the fed's looking at ... oh sorry, Greg. Just the fed is really ... and Chair Powell said this in his remarks the other day. They're really zoned in on core services, X shelter is what they're looking at because they think that's where they can influence prices through monetary policy that a lot of that demand is coming through wages. That, I think, didn't change if you take out shelter from core services.

Mark Zandi:                      Greg, you wanted to say something?

Greg Jensen:                     Yeah, well there's so much. That was a great rundown, but there so much going-

Mark Zandi:                      There's a lot to unpack there, yeah.

Greg Jensen:                     So much going on. I mean, I'd say the following which is, if you go turn back to somewhere around June, what became evident is the monetary policy started to have an effect on demand and on nominal demand. That the CPI, it was a little quirky, you actually had some strong CPI reports for fluky reasons for a couple months before the last two months that you've had those weaker ones. I think there's a noise in when different things come in, whether it's the used car prices and so on and so forth. That different data, the insurance thing and all these things, if you get into the details. That I do think the last two months probably overstated a little bit, but the ones before overstate the decline, the ones before understated it. Big picture is inflation's decelerating from a cyclical perspective and that is a big deal. It's been interesting because I talked about something we got right, I'll tell you, I think you chickened out in asking, give me something you got terribly wrong.

Mark Zandi:                      That was where I was going to go next. I thought you might not like that question. But glad to hear that.

Greg Jensen:                     So this impact, so what has now happened over the last couple months we've gotten wrong is that we knew, we expected inflation to roll over in a significant way. But we didn't expect the degree of the market reaction. To some degree, the mix between how much is real growth and how much is the fallen inflation. But you definitely had this transition or somewhere around June where you went from a nominal economy that was booming to the tightening, starting to hit hard, hit hard in housing, hit hard in many places. But it's flowed through largely to nominal and largely through demand, we think. I could describe why in a minute.

                                             So now you've got this fallen inflation and the markets are reacting to that kind of reversing the moves in the beginning part of the year saying, okay, well thank gosh real yields don't have to rise more, the fed doesn't have to tighten more, everything can go up. Which if you take the first six months, everything went down totally in line with the real yield and now everything's kind of going up totally in line with the movement in the real yield or fed tightening, whatever measure you want to pick.

                                             What we think is missing and has been a surprise that it's missing is the implications of the tightening to date. Even if the fed stop tomorrow, which they're very unlikely to do. But even if they did, we think that the baked in the cake implications for demand are only beginning to show up and they're big and they're coming, they're not here yet. In that way, today feels like the beginning of last year where last year everybody's talking about inflation, but the market's not pricing it. They're price of the fed to go to 130 and they're pricing stocks to be fine. So nothing's priced in despite what seemed to us, anyway, to be right in our face.

                                             Today I feel somewhat the same way, which is the implications of the degree of tightening to date, the way that's flowing through the world isn't getting priced in. So the actual movement and interest rates is flowing through day to day. But the implications of those movements on the real economy, aren't. Which I think is interesting, I think it's going to be proven to be wrong. But that's kind of what we think. Next year will be the implications of this. The most rapid tightening we've seen since the early eighties and the extremity of that and the extremity of the implications of that, that have been lagged for a variety of reasons. But I think that's really the thing we expect in 2023 is that shift towards that. Part of that will be lower cyclical inflation, for sure. And if you measure, prices of things you can actually measure on a day-to-day basis, everything's deflating. Any real world measure those things.

                                             But that doesn't mean prices for corporations, wages for corporations are still going up because not everybody's negotiating day-to-day. Even though it's true, today's a better day to negotiate wages than six months ago for a company. But it's a lot worse than three years ago. So wages are a trailing indicator, like rents, they reset. They don't reset day-to-day, even though if you were resetting day-to-day, you'd see okay, wages have cooled off a little bit, rents have cooled off a little bit. But it's a lagging cost. So you have companies with lagging costs and declining revenues and probably in our view, the biggest hit to profits you've seen a long time coming that's also not really expected. If you look at the markets, the markets are saying profits are going to be okay. Yes, so maybe a shallow profits decline next year. But off the races in 2024 and inflation's going to come down and no problem. Which leads to the issues with secular inflation as opposed to the cyclical one that's coming down.

Mark Zandi:                      I got so many questions. Oh, okay, you're right Cris, you need to enter into the conversation, but I'm lighting at the bit. Go ahead and-

Cris deRitis:                       I'll be brief.

Mark Zandi:                      Comment. Yeah, okay.

Cris deRitis:                       Greg, you make a lot of sense.

Mark Zandi:                      We've been having a running debate about a lot of what you just discussed. Well first question, just to go one step back before we move forward in the conversation. Demand and supply, which is ... and it's demand and supply, I think we would all agree it's just which is more important. That does make a difference in terms of how you think about inflation and lots of other things going forward. How do you square this demand side argument with the high inflation all over the planet? It's everywhere. It's not just in the US. In fact in Europe, it's more significant than it is here. So how do you square those two things?

Greg Jensen:                     Well, I think, A, inflation's generally global. We can talk more interesting are the exceptions to the inflation, than the fact that a lot of countries are having it. But let's go through the causes. So if you go backwards, not just in the US but the COVID response to the COVID recession, which is probably could have been the worst recession we ever had. You'd close everybody in their room ... I mean, awful if you hadn't had an incredible monetary and fiscal response, other than wartime, unprecedented. In the sense of making corporate balance sheets whole, more or less, particularly for small and medium enterprises, making households, improving their balance sheets. You're never have a recession where households come out with a better balance sheet than they went into the recession, or corporations.

                                             So what did you do? You printed money and the government handed it out. Not literally together, but basically at the same time. So you didn't have to borrow the money, you just produce it. You kept interest rates low and gave everybody disposable income at massive scale through many programs. That was true in the US, that was less true but still very true in Europe. So you created this demand that at the time, you couldn't even supply. Where did the supply come from to create that demand?

                                             Well, everything shifted to goods. China cranked up. So if you said supply of goods increased at a record rate, actually. It wasn't like supply of goods didn't crank up. China's market share went from 22% to 25%. Their exports went up 25% in a course of a year. I mean a massive, for the biggest exporter in the world. Goods production was crazy, but it was still not enough to keep up with the demand that had been created because people's incomes weren't hit. Normally if all the services shut down, you would've less income to spend. Here, you got your income and you spent it on goods.

                                             And goods supply surge, but goods demand surged much more. So the argument on the supply side, the mistake, it's true that led to this gap between demand and supply, led to pile ups at ports and all these problems that looked like supply chain problems. But it's really because demand was in so much excess to supply and supply was higher during COVID than it was pre COVID, if you look at just how many goods were produced.

                                             So I think that's what people miss that. And again, anytime ... and this is true of wars or whatever, if you print money and spend it without creating production, normally the money you spend comes from income, which means you're producing something and you're getting income for it. When you actually just get a check in the mail, everybody simultaneously gets a check in the mail. A different dynamic, which is super important. Another reason long-term inflation matters is governments have now come to the conclusion correctly that the easiest way out of a deflation is this, print the money, spend the money, you'll get out of a deflation. Doesn't matter your demographics, your technology. You do that in enough size, you can cause inflation no problem. And it's been illustrated in my view very clearly.

                                             So that's where the demand versus the supply thing really started, and that increase in the balance sheet. So if you now take that through today, that increase in the balance sheets for households is what's allowed savings rates to continue to fall despite the normal driver of savings rates being interest rates and wealth effect. Savings rates continue to decline, they've declined massively supporting growth. And they continue to be quite low and falling, which I think is a stress on the system going forward. Because a lot of that wealth has shifted hands, in terms of who has it at this point.

                                             But I think that's why we see it as much more demand than supply. Just going in and looking where the dollars that were used to purchase assets came from. The global part of that is not a big surprise when you combine in currency moves. The dollar surges and the rest of the world's currencies collapse. So that's driving inflation in those countries. And the US is such a source of demand that global demand sucks things in. Now that then spirals, in the sense that it's falling into labor markets, it's started to hit labor markets in Europe, it hit labor markets in the US, you've got those wage gains. And in Europe more so than in the US, but both you have really important colas. You have things that are linked to past inflation, which create spending in the future based on backward looking inflation. Which is another aspect of the spiraling. So the labor market and essentially government payments that are tied to inflation are the things that create the ongoing nominal demand at those new higher levels. That's the part that continues to flow through.

Mark Zandi:                      So Cris, do you buy into Greg's argument here? Or would you push back on this? I mean, this is not the way I would explain the inflation dynamics. I'm big fan of Occam's razor, the most straightforward explanation is the explanation. But how would you respond to ... or do you buy into what he's saying?

Cris deRitis:                       I do buy into much of it. I don't know that it was discounting supply effects altogether, but I do think there are certainly some significant supply shocks. I think the Ukraine war was not just a small one. I think it was a certainly significant reason why inflation did kick up in 2022. So I wouldn't want to discount that. But I think that certainly that the demand story is a significant part of it.

Greg Jensen:                     Yeah, well and if you take core inflation coming into the year before the attack, so I agree there's a supply story going on simultaneously. Although an aggregate, very interesting how elastic global supply ended up being when you look at it relative to global demand. But the point that before the six month ... if you annualize the six month inflation rate entering 2022, so before the Ukraine invasion it was 5.8%.

Mark Zandi:                      I'd say that supply too though, Greg.

Greg Jensen:                     Yes.

Mark Zandi:                      That's the delta way over the virus, taking out supply chains and causing vehicle prices to go north and shortages.

Greg Jensen:                     Yeah. Then just think about how many vehicles were bought. So then this is what I would ask you to look at in that is, okay, was it? Were there fewer cars?

Mark Zandi:                      Sold? By a lot.

Greg Jensen:                     What's that?

Mark Zandi:                      The sales of vehicles are way down.

Greg Jensen:                     I think you're talking about new cars.

Mark Zandi:                      New cars, way down.

Greg Jensen:                     [inaudible 00:31:44].

Mark Zandi:                      They couldn't sell them because they couldn't supply them. There was no production because there was no chips.

Greg Jensen:                     But the demand for the cars and such. But anyway, it goes way beyond cars, was incredibly high. And the chips, why did they run out of the chip production? They shifted around what they were producing the chips on. But why did they run out of the chip production?

Mark Zandi:                      The chip plants in Malaysia shut down because COVID.

Greg Jensen:                     I think, again, if you go through it, the dollars spent were so much higher than those impacts. I'm not saying there weren't some, and there always are shutdowns of different things and there were more during COVID than normal. But if you, again, look at the dollar spent on those things and in aggregate, the supply produced. I think that's how you'll get to which one it drove. I'm not sure the other way to do it, I'm not sure what's Occam's Razor, I'd say. To me the more Occam's Razor thing is look at all the dollars-

Mark Zandi:                      I love that.

Greg Jensen:                     That were created and spent. And where did you think they went? How would production possibly keep up, even if it was increasing at 2% if the money available to consumers was surging because money was printed and handed out in that manner.

Cris deRitis:                       We also had some structural shift during that time, as well. People moving away from public transportation, towards card. So it's not just the-

Greg Jensen:                     Yeah, that's true.

Cris deRitis:                       Stimulus money, it's also preferences shifting and demand.

Greg Jensen:                     All of those things definitely were happening and mattered. This comes to, and a lot of things are changing, some of which deflationary, some of inflationary. But the most important thing that is happening on a going forward basis is that the global labor market is much less arbitrable than it was over the last decade. That should be a big deal as you go through this, when you can't arbitrage global labor nearly as much.

                                             So that's part of the story of, I'd say the secular reasons inflation's likely to average significantly above two is one is the de-globalization. Globalization's been a big part of what caused inflation. We get into how to measure that. But a big part of what caused the low inflation rates for so long at reasonable growth rates. And de-globalization of supply chains happening very quickly. The second part of that, probably quicker than globalization happened for what it's worth. On top of that, you have the policy response that what are they going to do if you do go into low inflation and weak growth? I think we all know what the policy response is going to be and that's a huge change from the policy responses we've seen over the last 30, 40 years in the develop world.

Mark Zandi:                      Well I want to advance the discussion a little bit and talk a little bit about ... I want to come back to the fed, but before I do that, before I forget. Talk about markets a little bit and something that's confusing me about markets. If I look at the bond market, the treasury market, and I look at the shape of the yield curve that seems screaming, we got our problem dead ahead, the recession. Curve inverts, short-term rates rise above long rates. That's happened to a very significant degree historically. We can talk about the intuition, but historically that has presided recessions with a high degree of accuracy.

                                             Now I look at the equity market and the equity market's down ... depends on the day, I don't know what it is today. But it's down say 20 to 25%. That doesn't feel like that screaming recession. That feels like just a shift in multiples related to the run-up in interest rates. And a lot of it's tech stocks that we're all juiced and now they've come back down to earth. It doesn't feel like the market's discounting bad times ahead with big declines in earnings. If that were the case, we'd be down, I don't know, 30, 35%. Correct me if I'm wrong, but I think that's the average or median peak to truck decline in equity prices going into recessions. Two questions, one, did I characterize things correctly? And two, if I did, how do you explain that? What's your thinking around that?

Greg Jensen:                     Yeah, well I think, A, the markets, in our view, are making some of the biggest pricing mistakes that we've ever seen on [inaudible 00:35:54]-

Mark Zandi:                      Oh, interesting. Okay.

Greg Jensen:                     So I sort of agree with what you're saying. I don't think those things are reconcilable, but if you did reconcile them-

Mark Zandi:                      I see.

Greg Jensen:                     I think you basically ... we're trying to reconcile them, what you have to think is you get this very rapid decline inflation. You get a very moderate recession and you get a very rapid easing. That's the record, the kind of perfect Goldilocks, minor recession caused by this. Fed reacts to it super quickly and we move on to better times and that you get strong growth from there. That's the only way, I think, all that market pricing could be right. And it's possible, it's possible. I don't think it's highly likely, but that's basically what the markets are saying.

                                             To us, that looks really wrong. I think there's a series of things that are wrong about it. That, A, like you're saying, I think the earnings recession is much deeper than that. I think the fed is going to be very slow, unless you get a very clear signal. The fed is going to be slow. They generally are, when inflation's higher, coming off high inflation, it's going to take a lot of evidence. Way past it's actually true for the fed to believe that they've got the inflation thing whipped. So unless there's major growth downturn, they're not easing quickly. They're going to play this out. And why even ease if the economy's not weakening much?

                                             So I think that picture is pretty unlikely and creating some great opportunities and you've got all kinds of differences all around the world as policy decisions are quite different and big balance payments changes and all these things. So it sets up this incredible macro landscape, I think. But anyway, the main reconciliation would be this great drop in inflation without growth getting hit very much and profits being okay, that would be the best you could say for reconciling them.

Mark Zandi:                      But you're saying most likely the equity markets just mispriced and that means we're going to see some declines in equity prices so far.

Greg Jensen:                     Well yeah, we're bearish on both.

Mark Zandi:                      Bearish.

Greg Jensen:                     Both equity and treasuries. So bearish on equities because we do think the profit thing's going to be hard and on nominal bonds because that price in easing is probably optimistic. Again, as we come back. I do think cyclical inflation's coming down. But what's been so interesting in this period is, no secular inflation. There's no worry about secular inflation, breakeven inflation rates, like the nominal bond. You go, why is it at three and a half? You have to believe no problem for inflation in the long run. It's only a short run problem.

                                             The market believes that with such confidence that it's pricing in lower inflation now long term than it was at the beginning of the year. Interesting. And I think mostly mistaken in the sense that yes, it's right in the short term, that cyclical inflation's coming down here. But probably wrong given the structural. So you could see this environment where inflation comes down a bit, but not as much as you would think for the cyclical conditions. Cyclical conditions deteriorate, not terribly because you also have the benefit of not having a financial cascade, in the sense that probably ... I mean, the financial system has approved a lot since 2008. You don't have as much of the riskiest things going on, on leverage as you did. Although you have some of that.

                                             But it's still relative to the history of the world. Debts are high. So it's not 2008, but debts are high in a lot of the rest of the world. There's a lot of short-term debt that's getting repriced. There's a lot of areas where you'll probably see things popping. But likely one thing after another and growth is weak but not horribly weak. So we're thinking the US is down two next year and Europe's down three roughly around those areas.

Mark Zandi:                      2% real GDP.

Greg Jensen:                     Real GDP decline.

Mark Zandi:                      2%. Wow.

Greg Jensen:                     Yeah.

Mark Zandi:                      That is bearish. Yeah. Interesting.

Greg Jensen:                     Yeah. And what's interesting about that is ... look, maybe we're wrong. But if you take this level of tightening, you take the starting point of the savings rate and what's happening in the housing market, et cetera. I mean, these are the worst conditions that you've had. So of course you could say, well recessions are rare, why would you be confident? Well so are tightenings of the magnitude that we just went through. So are the sets of conditions globally that are going on are remarkable.

                                             The fact, I think most people are getting confidence out of it not happening yet. Probably in our view, overconfident, it does matter, the momentum in the economy matters. But when you look at the causes, what's thinking and where the weakness is coming, this is how it works. Interest rates rise, you start to see it in the interest rate, important sectors that's hitting as hard as it ever has. You start seeing the bubbles at the extreme collapse. Then that keeps moving towards the center. So if you take the crypto collapse and the tech, the high [inaudible 00:40:47] tech, all that money that was getting burnt in those money burning engines, were somebody else's profits.

                                             That money was flowing into compute, that was money was flowing into the core S&P 500 companies because all that money that got spent, got spent somewhere. So when you look at the history of how these things, the tightening happens, you had an extreme tightening. The next thing that happens is interest rate sectors and bubbles collapse. The third thing that happens is that then starts to impact everything else. Every cycle has this lag time. The only reason that we mistake the lag time is you think, okay, well stocks have been going down for a while, but like you said, it's only because real yields went up. Actually, expected profits haven't even begun to decline yet. So that chain of events is classic. We're following that classic domino. So I think that's likely. Now the argument on the other side is that-

Mark Zandi:                      Can I say, I make the argument on the other side. It's so interesting to me because I think about the bond market and the equity market and I ask you how to square it. And you say, well the equity market's wrong and we're going to see you sell off. I do the exact opposite of you. I say the bond market is wrong and here's all the reasons why the yield curve is biased or not telling us exactly what it has historically. So very interesting, different perspectives. I'm going to throw one other market-

Greg Jensen:                     But I would just say I think they're both wrong for what is right. I think buy market-

Mark Zandi:                      That seems to be consistent with your two-

Greg Jensen:                     Yeah, except that I think the fed's going to have a harder time easing than is priced into that curve. Certainly I think the both can't happen. So I would agree with, the being bearish of both has the ... like I do, I can imagine a world where growth does hang in there and you end up with higher anomal yields going from three and a half to five or something in a normal yield curve. In which case, stocks are probably going to fall too. Meaning that the discount rate effect of bonds normalizing to a normal yield curve and the fed not tightening, you'd have to have a really great profit situation to offset that.

                                             So I think there's a possibility bonds go three and a half to five, if for the reasons you're saying. Which is, okay, we're wrong about the growth and it keeps fumbling along and the Fed doesn't go anywhere and they go to five and they stay there. You get a more normal yield curve priced in. Or you have the other scenario where the growth is quite weak, the earnings come, now the fed starts easing, but that's already priced in. It got eased just to stay on track for [inaudible 00:43:20].

Mark Zandi:                      Let me throw one other market at you, trying to use it as a way to interpret what investors are thinking about where the economy's headed. That's the corporate bond market. So if you look at the difference, the spread between interest rates on corporate bonds take junk corporate bonds. The bonds issued by companies that are kind of on the financial edge, have a lot of leverage, and where investors are nervous about they might not get paid in a timely way on that bond.

                                             Those spreads, those differences are nothing unusual there. I mean, the average ... if you go back and take a look at the difference between the yield on the high yield corporate bonds and tenure US treasuries, back to the late nineties when the high yield market was put on the planet. The average ... I think you have to exclude the GFC because things just blew out then. But just take that out. It's 500 basis points, five percentage point difference. That's high yield, corporate bonds give you five percentage points more than 10-year treasury yield. That's average. There's no indication of any inkling of any kind of concern from the corporate debt market. So that would be more consistent with the equity market saying, "Hey, I'm not worried about a recession here." Is that interpretation correct? Or do I have that wrong? Or how do you interpret it?

Greg Jensen:                     Yeah, I'd agree with you. I think that ... and it's even a bigger problem, I'd say in Europe. But I agree with you that those spreads look narrow relative to the volatility of what's next and aimed with as many things moving. Like corporates are a slightly different than equities in the sense that it's a lot about pricing to tail, how much of a tail? How many things are going to be in the tail? Because you don't get the upside, you only get essentially the downside.

                                             It's interesting, with the amount of volatility caused by this very rapid tightening, whatever you think of inflation, the prices of many things are moving simultaneously. There's a lot of volatility for costs and revenues for corporations that would generally lead to a very big tail. It's not being priced in to a significant degree. I think that's another likely mispricing.

Mark Zandi:                      Oh cool. Okay, so you're expecting spreads the difference to gap out here at some point. When investors realize, oh, we're going into recession, earnings are going to get crushed, businesses cash flow are going to get hurt, they're not going to be able to make their debt payments, at least in a timely way. We're going to see equity prices go down and the spread in the corporate bond market go up.

Greg Jensen:                     Yeah, I think so. In the US what happened, which is interesting and protects the corporates a little bit. Is that they termed out the debt. It's very long term for corporate debt in the things you're looking at, the publicly traded corporate bonds. So there's a much bigger problem in private credit, I think. Where private credit is much more short term, often off the short rate and the prices are not as evident of what's happening there.

Mark Zandi:                      Can I say that? Can I just interject just to make sure I understand. Is that the same terminology as saying leverage loans? The leverage loan market is the same-

Greg Jensen:                     Yes.

Mark Zandi:                      As private credit? Okay, fine. Okay, go ahead.

Greg Jensen:                     Well, yes, I mean, leverage loans a big part of that market. But that I think is at more risk, although it's less transparent, so it's a little less obvious what's going on. So I'm not sure. But what has happened in the traded corporate bond market is generally the terms are big, which helps them from a rollover risk perspective. There's not as much debt rolling at the worst possible time.

                                             Now that's not going to help if you have negative profits and such, but it takes more. Like the worst case and the things that really come burning at you is when you have to refinance and there's no capital available. It's not that kind of downturn. It's not where you get no financing available and that even good credits get strained. But I do think you're going to see a much bigger pile of bad credits than you get in the most normal downturns, given the volatility of everything that's going on and the movement and rates.

Mark Zandi:                      Do you think that this is a potential systemic risk? I mean, something that it's just not going to hurt the investors in these loans and securities. But it starts to hurt investors such a degree that it affects the provision of credit more broadly and thus the economy more significantly. Is it a systemic risk? Or is this just a problem for that particular market?

Greg Jensen:                     Yeah, I think we have the slow systemic risk building. Again, it's not as pointed because most of those things aren't held nearly on as much leverage. The true systemic risks are when assets are held on leverage and now you've got to sell them and you get this downward cycle. You've got a lot of money still if you take private credit funds, et cetera, they have draws on a lot of capital that they're able to buy things if they get significantly mispriced. So I do think you have this more gradual problem that actually makes the whole thing play out more slowly. So we're used to these very rapid recessions, very rapid declines. I think this is a more gradual, but therefore slower for the fed to react.

                                             And the bottoms in these cycles, I mean, maybe this'll be different. But you've never had a bottom in the equity market when the fed hadn't started cutting rates. You don't get bottoms in to tightenings and not just like slowing from 75 to 50, which everybody's getting super ecstatic about. But actually turning around and easing. Usually the bottom of the equity markets six to nine months after they turn around and ease. So if you took the usual, when does that make the bottom in the equity market and the bottom of the economy follows that. So if you did it kind of typical, if you say, "Okay, I think the fed might start cutting rates six months from now." Probably the fastest you could see it. But let's say, unless there's a stock crash before then, six months from now. And then the easing starts six months from now, and typically the bottom of the equity market's nine months from there, that's 15 months out from now. The economy is typically three to six months after that. So that's 21 months or so from now.

                                             I think it's likely even to be longer than that, that's a long gradual recession. All the function of the fact that rates have been rising, assets have been falling and the fed's not close to easing. Normally they'd be easing by now, given what's happening in the financial markets. If inflation wasn't so high, they certainly wouldn't be tightening. So having this tightening that's still going on into that, that leads to this long recession. Which back to the credit thing, just means this longer period of economic downturn, that grinds out companies. Rather than it being a financial credit problem, it's an economic credit problem.

Mark Zandi:                      Got it, got it. Let me ask one factual question, I think it's factual. So, you're down 2% real GDP next year. What's the terminal funds rate in that worldview and that kind of expectation? Is it 5%? Because that's where the market is right now, around 5%. We're at four and a half, I think, four and a quarter to four and a half. I think markets are pricing four and three quarter to five, probably closer to five. Are you there? Are you higher than that? Where are you?

Greg Jensen:                     Yeah, we think that's about right. I mean-

Mark Zandi:                      About right.

Greg Jensen:                     What's going to happen. And then there's the timing thing. I think largely it's going to happen because the fed, based on their past errors is going to wait for clear evidence. I think that's going to leave them ... they have a couple more tightenings. I think the evidence is going to be slowly, it's not like we're going to get whacked one day and it's going to be crystal clear. So somewhere in there. So if you take the very short end of the yield curve, we're basically neutral on that. We're bearish on the long end because the market's pricing in this huge decline in rates. So, even though we see that weak growth, we think the tightenings going to be slower than that. Plus, it's a matter of diversifying the positions. If you're wrong about growth, the likely outcome is that that bond pricing is really wrong.

Mark Zandi:                      Got it. Hey, let's play the game, the statistics game. And the game ... I know some listeners out there are getting annoyed at me for repeating this every single week. But just for those that are new and we have lots of new listeners, as well. We each put forward a statistic, the rest of the group tries to figure that out through clues and questioning, deductive reasoning. The best statistic is one that is not so easy that we all get it very quickly, not so difficult that no one gets it ever. You get extra credit if it's apropos to the discussion at hand. So Marisa, I'm going to go to you first. What's your statistic?

Marisa DiNatale:              Minus 0.6% in November.

Mark Zandi:                      Is it in the CPI report?

Marisa DiNatale:              No.

Greg Jensen:                     To say import prices.

Marisa DiNatale:              No.

Mark Zandi:                      Yeah. That would've been ... man, if they got that right off the bat.

Marisa DiNatale:              I probably would never go to that release.

Mark Zandi:                      Whoa. Is it a-

Greg Jensen:                     I think it's also true though, I think I might also be right.

Marisa DiNatale:              It may be, yeah.

Mark Zandi:                      That's probably true.

Marisa DiNatale:              Probably is.

Cris deRitis:                       Typical.

Mark Zandi:                      Yeah, that's probably true. Typical. Yeah. Is it from a release this week?

Marisa DiNatale:              Yes.

Mark Zandi:                      Okay. Retail sales?

Marisa DiNatale:              No.

Mark Zandi:                      Industrial production?

Marisa DiNatale:              It is in that release.

Mark Zandi:                      Okay. See how I do this, Greg?

Greg Jensen:                     You're just narrowing it down.

Mark Zandi:                      Yes.

Marisa DiNatale:              He just grinds it ... names every release.

Mark Zandi:                      Minus 0.6, that's top line industrial production.

Marisa DiNatale:              It's not, no.

Mark Zandi:                      Oh, it's not.

Marisa DiNatale:              It's not top line

Mark Zandi:                      Manufacturing?

Marisa DiNatale:              It's manufacturing. Yep, it's manufacturing industrial production. Utilities, which is another component of this was way up. So total industrial production was down minus 0.2, but manufacturing was down minus 0.6. Which is the first decline in five months. Pretty large coming from durable and non-durable goods. And motor vehicle production was down 2.8% over the month, which is quite large. I picked this because it kind of-

Mark Zandi:                      But that is month to month, right? I think-

Marisa DiNatale:              Yeah. Yeah, that's month to month. That's true. Yeah, and manufacturing IP year over year is still up a bit. It's still up about one and a quarter percent. But I picked it because we were talking about CPI and goods prices are now falling. It's squares with a lot of the other data on the manufacturing sector, all the regional manufacturing surveys, the ISM are showing weakening in the manufacturing sector. It's just sort of this emblematic of the demand for goods falling off and being replaced by services now.

Mark Zandi:                      Well I think manufacturing we can say is in recession, probably. Because the ISM purchasing manager surveys below that so-called-

Marisa DiNatale:              50.

Mark Zandi:                      50. And now industrial production seems to be slumping. We haven't seen job declines though, yet, in manufacturing, have we? No. They're still adding to payrolls, I believe.

Marisa DiNatale:              Right. I meant to look at that. No, I don't think we've seen declines yet, but we'll see.

Mark Zandi:                      It's coming.

Marisa DiNatale:              We'll see when the data gets benchmarked, too.

Mark Zandi:                      While I have you and this reminds me, can you explain the impact of severance, the so-called severance packages that people in the tech industry that are getting laid off are in financial ... we're seeing certainly anecdotal announcements, lots of them. From the tech sector, from financial services and of course mortgage finance, white collar kind of jobs and corporate headquarters. These folks get generally severance packages for at least three months, maybe as long as six months. If you're getting a severance package, will you show up as ... does that affect the employment numbers or the unemployment insurance numbers at all? Do you know?

Marisa DiNatale:              Yeah, I think ... I know something about it.

Mark Zandi:                      I know you know, I'm leading you. I know you know.

Marisa DiNatale:              Yeah, you probably wouldn't ask.

Mark Zandi:                      Because I asked you the question before.

Marisa DiNatale:              It wouldn't be an interesting podcast if you asked me and I don't know.

                                             Yeah, so when you look at the payroll survey, the current employment statistics survey, the count of jobs on employers payrolls. The trigger there is just who is on the payroll, who is getting paid. So if you are getting a severance package, which in financial services, Wall Street firms, which have even today announcing were layoffs, is typical to get for six months, maybe even longer. You're on the payroll, you'll show up as employed from the employer's perspective. Because I think where you were going with that is, jobless claims are still incredibly low. I mean they fell again this week, they're down to-

Mark Zandi:                      211,000-

Marisa DiNatale:              211,000.

Mark Zandi:                      Yeah.

Marisa DiNatale:              That was going to be my other statistic, if somebody took the IP one.

Mark Zandi:                      Well, damn, I wish you had picked that one. I would've gotten that right away.

Marisa DiNatale:              Yeah, so we don't see it yet. We're not seeing all these announced layoffs showing up in the unemployment insurance claims. If you're getting severance, not going to file for unemployment insurance. In fact, I'm not sure if you even can file for UI if you're getting a severance pay. So it could be that there are more job losses out there and they just haven't shown up in the statistics yet because of the severance.

Mark Zandi:                      Yeah, I think that's to Greg's point, that it's coming. The weakness.

Greg Jensen:                     Yeah. And a lot of things in the labor market are interesting because of how slow it's going to be in lag. You, A, just went through the shortage of labor that slows things down. You've got on top of that, the shift to services from manufacturing, which is super labor intensive. A labor intensive shift, even at the same growth rate. And third, you've got, I think, this more politically conscious firms that are going to be wary. They're certainly like, how do you square buybacks with laying people off or whatever? Things that were more normal in past US recessions.

                                             It's a little bit of a European reification of the recession in the sense that one of the things that created the real negatives in US downturns were the very, very fast rate of firing. But that also created the faster rebounds. If Europe, the rate of firing for a bunch of regulatory reason is much slower and the recessions, as a result, go longer. You take this from the fed perspective, they're looking square at employment, and employment is going to lag, is going slow, the wages are going slow. So if you're looking at that, understandably, you're staring at that, you're missing what's happening. Which is probably also going to lead to a much worse profit drawdown than economic drawdown.

                                             Some of that makes sense. We've had the opposite for so long, where profits and corporations have done better than the economy. The refinancialization where labor does better in the downturn than corporates could be a rebalancing of what's been going on for the last 30 or 40 years. And that's part of deglobalization causes that, as well. That's how I think it'll play out. That the layoffs are coming later for a variety of reasons than they have in a typical US downturn.

Mark Zandi:                      That's interesting. That's very interesting. Hey, you want to do another one? Cris, you want to give us your statistic?

Cris deRitis:                       Sure. Well first let me say, Greg, you can come back anytime. Arguing all my points here. 44.6 is the number.

Mark Zandi:                      44.6.

Marisa DiNatale:              Is it a regional ISM survey?

Mark Zandi:                      How can he delay on that one?

Greg Jensen:                     Either it is or it isn't.

Mark Zandi:                      Is it the NFIB survey?

Greg Jensen:                     Yeah.

Cris deRitis:                       No.

Mark Zandi:                      National ... it's not the small business survey. Okay. 41.6.

Cris deRitis:                       44.6.

Mark Zandi:                      Oh, 44.6.

Marisa DiNatale:              And so it's not one of the regional.

Cris deRitis:                       It's not a regional fed.

Mark Zandi:                      It's the fed.

Cris deRitis:                       It's not the fed.

Mark Zandi:                      Oh, it's regional.

Cris deRitis:                       It's not regional.

Greg Jensen:                     Well it applies to a region of the world.

Marisa DiNatale:              This is so confusing.

Greg Jensen:                     It applies to a region of the world.

Mark Zandi:                      I think he's misdirecting us. He's like throwing up smoke over there.

Marisa DiNatale:              Oh, it applies to a-

Cris deRitis:                       It's so easy that I wanted to-

Mark Zandi:                      Oh, I see.

Cris deRitis:                       Throw in a little dust, little sandstorm.

Mark Zandi:                      And is it from a release this week?

Cris deRitis:                       From a release today.

Mark Zandi:                      Oh, what came out-

Cris deRitis:                       This morning.

Mark Zandi:                      Oh, it is regional employment and unemployment came out today.

Greg Jensen:                     No, no.

Cris deRitis:                       No.

Mark Zandi:                      Well, nothing else came out today.

Cris deRitis:                       The region is the US. That's just to be clear.

Mark Zandi:                      Oh, I don't know. Any other hints you want to give us? That came out today? I didn't think anything came out today.

Greg Jensen:                     Did home builders or something like that?

Cris deRitis:                       No.

Mark Zandi:                      You can't give us a-

Cris deRitis:                       How about S&P?

Mark Zandi:                      S&P. Not the house price index? No. Case-Shiller, no. S&P. S&P is a competitor of Moody's.

Marisa DiNatale:              Are you talking about-

Greg Jensen:                     Yeah, they're bad.

Mark Zandi:                      They're bad. I'm in a little lost. It's probably really pretty straightforward. S&P. Is it related to the stock market in some way, Cris?

Cris deRitis:                       No.

Mark Zandi:                      Bond market. We can't hear you, you're on mute. Yeah, I don't know how that happened.

Cris deRitis:                       US Composite Purchase Managers Index.

Mark Zandi:                      Oh. Oh, you know what? Oh that's why, because I don't follow that.

Cris deRitis:                       You don't follow that.

Mark Zandi:                      Yeah, I don't follow that. So what did it say? Is that for manufacturers?

Cris deRitis:                       Oh, that's the total. And then they have a split by for manufacturers and services. So 44.6 is the aggregate, it's down two points from November. Anything below 50 indicates contraction. So clearly slowing. And then both the services and the manufacturing components were down. Services at 44.4 and manufacturers is at 46.2. So there's contraction across the board.

Mark Zandi:                      So this is much more pessimistic view compared to the ISM, the purchasing manager surveys that we typically look at. Which manufacturing just fell below the 50 threshold and service companies are well above 50. They're actually quite strong. How do you ... they're just, I guess measuring different things somehow. But they're two very different perspectives.

Greg Jensen:                     I mean one of the interesting things, and this comes in the NFIB or whatever is these surveys, a lot of them are getting screwed up by views on inflation, too. If things are good or bad, it's a growth view and an inflation view-

Cris deRitis:                       Good point.

Greg Jensen:                     Not just a growth view. So we've had to, in our processes, recognize that and recognize what indicators that we would normally find reliable are actually less reliable. Unless you can split out what the person is really answering. Are they answering about the general macroeconomic environment? Which has an inflation component and growth component. And things that in normal inflation periods will look a lot like growth, actually end up looking different.

Cris deRitis:                       That's a great point.

Greg Jensen:                     I don't know if that's going on here, but it's certainly been an issue with surveys.

Mark Zandi:                      Yeah, you're right.

Cris deRitis:                       So I think the interesting part ... sorry, actually in the details. They talk about declines in new business, declines in exports, declines in business confidence. So understanding those components, but some improvement in input prices. So commodity prices are down. So businesses are benefiting from that standpoint, but they're pessimistic when it comes to new orders. Employment, at least the manufacturers in this survey indicated were basically flat. They're not replacing people who quit, but they're not actively laying off in large numbers.

Mark Zandi:                      Well I guess the other thing about these surveys, they're sentiment driven. It's kind of a quasi sentiment survey, as well, because it's qualitative as opposed to quantitative. Or there're parts of it that are quantitative, but parts of it that are qualitative. So if people are feeling ... they're not feeling good, that'll be reflected in kind of a weaker kind of ISM number. To square the S&P number with the ISM numbers, I'm not sure how to square those two things. We're running out of time. Did we want to do one more or? I've got another question for Greg.

Greg Jensen:                     I'll give you one real quick here.

Mark Zandi:                      Okay, go ahead.

Greg Jensen:                     But this will be a little bit impossible.

Mark Zandi:                      Oh no.

Greg Jensen:                     Because it's a year to date number, but the year to date number is 4.1%.

Mark Zandi:                      4.1% year to date.

Cris deRitis:                       Is it related to inflation prices?

Greg Jensen:                     Nah. Because it's a little bit of a construction, you're not going to get it. So I'll just tell you about it, it comes back to this, which is-

Mark Zandi:                      Oh, he's taking pity on us. You see that?

Cris deRitis:                       Not even giving us a chance.

Mark Zandi:                      You want to put us out of our misery immediately.

Greg Jensen:                     It's the S&P 500 through yesterday adjusted for discount rates. So it's up. If you adjust for the discount rate and essentially what the long-term outlook for profits have done.

Mark Zandi:                      Interesting.

Greg Jensen:                     Stocks are up 4.1%, which is interesting. Anyway, there's a lot of assumptions you have to put in to do that. But by and large the picture's right, which is stocks are not down if you think of them as a return stream of future earnings. There are only down because the discount rate is up and they're actually, if anything, the profit expectations implied in the price have gone up this year, which is-

Mark Zandi:                      That's really cool.

Greg Jensen:                     Interesting with everything we're talking about.

Mark Zandi:                      That's really cool. That's really cool.

Cris deRitis:                       And we would not have gotten that.

Mark Zandi:                      No, I would not-

Marisa DiNatale:              No way.

Mark Zandi:                      Have gotten that. No, my mind immediately go to the year to date S&P, but that's got to be down-

Greg Jensen:                     Yeah, the year to date down-

Mark Zandi:                      20.

Greg Jensen:                     Is almost down 20, right? And so it's up four on that basis is just an interesting thing when you think about what it all means.

Mark Zandi:                      Hey, I want to end the conversation this way and I'm not sure it's fair, but I'm going to go ahead and do it. So your view of the world is very different than mine. Not as different as Cris's world view or Marisa's. It's going to be a struggle next year under any scenario, but I think we have a fighting chance to avoid recession with a little bit of luck and some tough policymaking. So we're on different ... we have pretty different views. What would have to happen, Greg, for you to change your mind to think, "Oh no, we're not going into recession. We're going to be able to make our way through without one." And it's probably unfair, if you asked me that question, I probably, I don't know how to answer that. But I'm going to go ahead and ask you that question. See how you parry that.

Greg Jensen:                     Well I think it's a critical question. What's so great about what we do. I mean, it's also really hard about what we do is you're either right or you learn something. So those are the two options and-

Mark Zandi:                      I love that.

Greg Jensen:                     Both can be really good.

Mark Zandi:                      Can I have a job, Greg? Can I have a job? That sounds like a real fun job.

Greg Jensen:                     Yeah. So look-

Mark Zandi:                      See how he didn't answer, he didn't answer me. Did you notice that, guys?

Cris deRitis:                       He's getting there. He's getting there.

Greg Jensen:                     No, no.

Mark Zandi:                      Okay, go ahead.

Greg Jensen:                     I'm building up here-

Mark Zandi:                      Okay, okay, okay.

Greg Jensen:                     If we're wrong, what I think we'll have learned. So a lot of it hinges on the thing you're saying, which is okay, is it possible that the inflation went up largely for supply reasons? Inflation comes down largely for supply reasons. This isn't a demand effect of the interest rates. That the economy is actually not that vulnerable to this tightening. That it would be super interesting. It's possible that for some reason structurally, the economy's less sensitive to interest rates than it's been overall of history.

                                             But that's what I feel like we'd have to learn. Which is actually doesn't matter, you take real rates from negative up to one and a half percent. You take nominal rates from zero to five, people don't shift into cash, the savings rates don't rise. So to me, the things that would surprise me, that I'll be monitoring is savings rates don't end up rise. And that the inflation comes down without a large shrinking in demand. Those are the flags we're looking at. Certainly your side, Mark, the markets ... like your side got more powerful over the last seven weeks. The inflation stats consisted with that and the way the markets have reacted to that this week, a little bit the opposite way. But the last seven or eight weeks.

                                             I think that'd be super interesting, if really that we learned that degree of tightening. The market reaction to that, the wealth effect, the cracking of the bubbles, all doesn't end up in a recession. I mean, that would be fascinating, I think. It's an interesting world that we've got something really wrong and that's what we do. We then go stare at those things and then rebuild our processes to say, okay, well why would that be? Why is it so different than all through history when those things happen? So that's what we'll be looking out for and constantly looking out for. We certainly like to make money in markets, say you get humbled all the time. So if you can't change your mind, I don't think you can stick around in markets very long.

Mark Zandi:                      Oh yeah.

Greg Jensen:                     Because man, we're wrong all the time. So I said things probably more authoritatively than I mean them because we're always wrong. Really, if you can't survive being wrong, you can't survive.

Mark Zandi:                      I'm with you. That was a great answer and a great conversation. I totally agree with you, your last point about you got to be humble. Goodness knows economists like me have been wrong about many things over the years. But it was wonderful to have you on, really enjoyed it. And I'd love to get you back just to tell you, I told you so.

Greg Jensen:                     All right, let's schedule that. I think we'll know a lot. If we-

Marisa DiNatale:              You have to wait 24 months though.

Greg Jensen:                     Nah, if we do this this time next year, I think I'll be surprised-

Mark Zandi:                      Okay, yeah.

Greg Jensen:                     If we don't have a view of which one of us was right.

Mark Zandi:                      I agree with you. The moment of truth is at hand on this particular issue. But thank you so much, Greg. And thank you dear listener for listening to us and we'll talk to you next week. Take care now.