The transcript from this week’s, MiB: Mark Zandi, chief economist of Moody’s Analytics, is below.
You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
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This is Masters in business with Barry Ritholtz on Bloomberg Radio
Barry Ritholtz: This week on the podcast. Wow. What a fascinating conversation with a really interesting, intelligent guy. Mark Zandi has been the chief economist of Moody’s Analytics for 20 years. He co-founded a regional analytics shop in the nineties coming out of both Wharton and University of Pennsylvania, where he got his undergraduate and graduate degrees in economics. He buys economy.com in the late nineties and builds out that really a fascinating career, unique insight. You know, we live in a highly polarized, partisan world, whether it’s the fed inflation labor, BLS, the economy. I love speaking to somebody who was an advisor to both the McCain campaign and the Obama White House. He just looks at the world through a set of lenses that are data driven, model driven, and tries to provide the best analysis as to what’s going on where and why. I thought this conversation was great, and I think you will also, with no further ado, moody Analytics Chief Economist, mark Zandy. Let’s just start with your background. You get a bachelor’s from Wharton, a doctorate in economics from the University of Pennsylvania. What was the original career plan?
Mark Zandi: I had no career plan. None. None. No. Never thought about going into markets
Barry Ritholtz: Economics? Like a PhD in economics. Were you thinking academia or just…?
Mark Zandi: Well, I definitely knew, not academia. My father was a professor at Penn. At Penn, and that’s why we all went to Penn because, you know,
Barry Ritholtz: Discounted tuition at that time, which is a long time ago, you’re gonna Tell me it was free?
Mark Zandi: It was free. (Wow). Tax free.( Wow). Tax free. And you know, I have four siblings. (Wow). In fact, he actually, he was pretty smart guy. He bought a Red Stone at 42nd and Spruce, you know, just off campus. And we all lived in that, in that Red Stone.
Barry Ritholtz: Amazing. (Yeah). All right. You come out of college and grad school with a deep background in economics. What inspired you to explore a career in economics?
Mark Zandi: Well, my work was very empirical. My thesis advisor was the guy named Larry Klein. He was a Nobel laureate. Yes. He got it as a result of all the work he did, building macro models, us macro models, and I, I needed to make money when I was in school, so I worked part-time. Hi. His firm is called Wharton Econometrics, you know, after the Wharton School worked
Barry Ritholtz: There, hold on a sec. The school let him set up a program called Wharton Econometrics. A company, a separate company. Yeah. Apart from the school. Yeah, that’s what I’m asking.
Mark Zandi: Yeah. Yeah. I don’t know. I’m sure there was some kind of financial arrangement that he must have paid some kind of royalty or something to, but I’m, I’m not sure, you know, but they, they,
Barry Ritholtz: I don’t think you could get away with even paying royalties today. You couldn’t set up MIT economics or Stanford econometrics? No, you
Mark Zandi: Don’t think so.
Barry Ritholtz: Yeah. I mean, if you do certain research right, and you get a patent Right, they get a piece of it. Right. But setting up a, like, there is such a branding Right. Focus these days. I, I can’t imagine a big school would let you do that?
Mark Zandi: Do that unless you played a really big royalty, I assume. Right. But, yeah. But anyway, so that was a firm, a business economic forecasting business. And so I learned the business as a graduate student, you know, working there to earn money. And I, I also used their main, they at that time was a mainframe. Everyone was on, there was no pc. It was the main, this was 80.
Barry Ritholtz: Was it still the punch cards?
Mark Zandi: Punch Cards for train. You wanted to change the federal funds rate by 25 bips. You’d punch a card, you have a stack of cards, you would take it down to some guy who would put it into the mainframe,
Barry Ritholtz: Takes 12 hours for three minutes. Oh, it take 12
Mark Zandi: And if you messed up, if you hit the wrong, you know, button, then you had to wait another 12 hours to get the answer. Well, how, how much was a quarter appointed increase in the funds rate, gonna do damage to the economy? That kind of thing.
Barry Ritholtz: What was, what was your doctoral thesis on?
Mark Zandi: It was regional economics. It was examining fancy word factor flow, so labor capital and the movement between regions in the country. And that was the basis for the firm. I started in 1990, called Regional Financial Associates. Because at that time,
Barry Ritholtz: So you started your own firm, right? Pretty much right outta school?
Mark Zandi: Pretty much right outta school. Wow. Yeah, with my brother and my best friend. My best friend was also working, he was in the graduate program at Penn, and we were working at Wharton together. We could see there was a lot of problems, you know, with the way it was being run. It was mainframe oriented, and the PC was just coming out. So we were able to use the PC to do the things that we needed to do.
Barry Ritholtz: I remember in grad school using this pokey Mac Classic in 1988.
Mark Zandi: Oh, the Mac, really?
Barry Ritholtz: And the technology was just, Ooh, look how advanced this was. Bear skins and stone knives. Yeah. That’s what it, it reminds me of. Well,
Mark Zandi: We bought IBM’s at the time.
Barry Ritholtz: Yeah. So, so you, you launched this, when does economy.com come along to regional economics?
Mark Zandi: Almost a decade later.
Barry Ritholtz: Late nineties. The internet boom really took off, what, 98 99? 2000, 2001.
Mark Zandi: Yeah. It’s like two years after the irrational, exuberant speech. Yeah. Is when it really became irrational. Exuberant. That was what, 96?
Barry Ritholtz: yeah. Late 96. Yeah.
Mark Zandi: Greenspan speech. In fact, we bought the uur l economy.com, this guy from Quest, he was an executive at Quest, remember Quest? Sure, of course. Yeah. Yeah. One of the baby bells that was spun out of at TA headquartered in Denver, I believe.
Barry Ritholtz: Colorado.
Mark Zandi: It was Colorado. Right. And he made, he squatted on all these names. In fact, when we were negotiating the price for that buying economy.com, he was on a yacht somewhere in the South Pacific. He had made so much money on squatting
Barry Ritholtz: So what did you end up paying for economy.com
Mark Zandi: At the time? It was a lot of money. 250 K. Yeah.
Barry Ritholtz: That is a, and, and you a hundred Xed it eventually. Yeah.
Mark Zandi: It certainly was a good investment,
Barry Ritholtz: To say the very least. Yeah. I know your thesis advisor was, you mentioned Lawrence Klein and Nobel Laureate. Was he an advisor to the firm when you were, when you were first building that out?
Mark Zandi: No, I thought that he was older at that point, and he was, and actually we were competitor now, right? To Wharton. Oh, Whitney Econometrics. I don’t think so. I mean, we weren’t really doing, we were a bunch of guys. Right, right. Yeah. And we got the economy.com. I’m making this up, but we might have had 40, 50 employees, something like that, so.
Barry Ritholtz: Oh, really? So, so what was it like building out what essentially became a.com in the late nineties?
Mark Zandi: Oh, it was a lot. It was so much fun. I mean, I’ve been a startup. I’ve been a small business guy, and I’ve been part, now obviously part of Moody’s, a large multinational. So I’ve seen business from a lot of different angles. And I’ll have to tell you maybe, ’cause I was just young. I mean, I loved being a startup. It was just,
Barry Ritholtz: It’s a lot of fun, especially if it’s working.
Mark Zandi: I can imagine. And we got lucky, you know, the, the interstate banking happened. So all these banks needed to think about their footprint outside of their state. So they needed our, the data and information that we were providing. So if I were a bank in Connecticut and I was thinking about moving into Massachusetts, I now needed to understand the Massachusetts economy. And we would help, you know, Seanette Bank was Connecticut, Connecticut Bank. That was one of our first clients back in the day.
Barry Ritholtz: So how you, you built this out in the late nineties. You survived a.com implosion, because although you were technically a.com, you weren’t a frivolous clicks and eyeball sort of company. It was a real company with real clients and real revenue. Right. Kind of set you apart from Yeah. The pets.com of the world.
Mark Zandi: Well, we were an economic forecasting firm masquerading as a.com. Right. Because we, you know, it [email protected], your valuations were a lot higher. And Sure, of course it was practically speaking, we set up economy.com. Right. That was our, when you came to our site, you came to economy.com. So it was a way to advertise where you go to get our information. So,
Barry Ritholtz: And today you go to economy.com and it forwards you to Moody’s.
Mark Zandi: It does, yeah. How
Barry Ritholtz: Did the relationship with Moody’s come about five, six years later?
Mark Zandi: The CEO of Moody’s Analytics was this fellow Mark Almeida great guy. He was a Philly boy, a Philly guy. He, he, and he and I worked together at Wharton Econometrics, which is Philly based ’cause of Klein and I, he was a data guy. He was in a cube next to me. I was in his young economist working on models and data and forecasting. He was a data person, and so we knew each other quite well. And he went on to Moody’s at that time, was the rating agency. And he did extraordinarily well, became the CEO of Moody’s Analytics when they formed Moody’s Analytics. And he just knocked on the door and said, Hey, are you interested in selling? And the answer was no. ’cause we had no idea what it was worth. Just serendipity. Fitch knocked on the door at roughly the same time within a week or two. I don’t, I can’t connect the dots. Exactly.
Barry Ritholtz: A bidding war. right?
Mark Zandi: Yeah, exactly. So we were able to get a price. Right, right. And I do remember him saying to me, Hey, mark, what price would it take for us to end this, this negotiation? And to this day, I gave, he, I gave him a price. He, and he said he took it right away. And I go, too, little, too low.
Ritholtz: Well, if you Google it, it says $27 million. Yeah, yeah. But I have no idea how accurate that is. Yeah. E everything that I find through AI and search, I always seems to have a little asterisk with it. You don’t, you don’t know what’s especially private, stuff like that. So, Moody’s Analytics is a division of Moody’s, the big rating company. It’s, it’s a, a group within, is that right?
Mark Zandi: Yeah, it’s, there’s Moody’s, the rating agency, and then Moody’s Analytics. More recently they’ve been, we’ve been moving together, but it’s still, I’m still in the entity. Moody’s Analytics.
Barry Ritholtz: So what was it like going from a startup to a large multinational con?
Mark Zandi: I can tell you it was great because we were allowed to remain independent in every respect, except for some of the back office kind of things that legal, hr,hr,
Barry Ritholtz: Which no one wants to do anyway.
Mark Zandi: Yeah. Sales. And that’s the key reason why we sold, was because we were mostly us and we were trying to go global. And that’s hard. It’s very expensive. We set up an office in London and Sydney and it was difficult.
Barry Ritholtz: And they have a giant client base with,
Mark Zandi: Oh, they’re everywhere.
Barry Ritholtz: Clients all over the world. Yeah. That has to be a huge benefit to Oh yeah. A small startup. It allows you to really supersize
Mark Zandi: And a Salesforce all over the world. Right. And, you know, Moody’s a respected institution, but overseas it’s highly respected if you go into many emerging markets. Right. Rating debt, sovereign debt is really, really critical. And so when a Moody’s or an s and p says something, it really does move markets. And, and so it helped us raise our credibility. We had no credibility overseas and this allowed us to gain some credibility overseas
Barry Ritholtz: Right away. Yeah. Speaking about gaining credibility in 2005, you wrote a piece, where are the regulators, the runaway housing market needs tougher regulatory oversight, very prescient analysis warning about, Hey, you can’t just give mortgages to people regardless of their ability to actually service that debt. What drove that analysis? That was really the first time I became aware of you as an economist.
Mark Zandi: Yeah, I remember that piece. I’m a macro guy, but my area of expertise is housing and housing finance. I was watching the housing and mortgage finance markets very carefully at
Barry Ritholtz: The time, which a lot of Wall Street didn’t really seem to be paying much attention
Mark Zandi: No, no, no.
Barry Ritholtz: My mom was a real estate agent. That’s the only reason why is that? Right? I was paying attention to this space. And that’s probably how I found you. ’cause we were having regular conversations.
Mark Zandi: So interesting. Yeah. And you, so regional financial associates, banks, regions, you know, obviously it’s real estate and housing are kind of top of mind. They write a lot of mortgages. Yeah. They make HELOC loans and other things against it.
Barry Ritholtz: And they were losing market share to these unregulated non-bank lenders, the private label securities market market.
Mark Zandi: Yeah. And of course, and the regulators were my client. So the FDIC for many, many years was my largest client by far and away. Wow. Yeah. So I, you know, I was looking at this space from the prism of housing, housing, finance, and also from a regulatory perspective. And I could see this was, you know, a problem.
Barry Ritholtz: So something was totally, totally a afoot.
Mark Zandi: I did have one, I’ve had, I had a number of periods of doubt in that, in that lead up to the crisis. One was the Fed under Greenspan asked me to come in and brief them on housing. ’cause I, I was a housing guy and I give this talk and it was pretty dark. And at the end of it saying that we’re gonna have a problem, I didn’t think we were gonna have a problem to the degree we had the problem. But I knew there was a problem coming. That was the message of the talk. And when I finished, I didn’t get a single question from one fed member.
Barry Ritholtz:Really? Not one.
Mark Zandi: So there was this just a pro se discussion, or I, I was confused stu them into silence. I was totally confused by the whole thing. , there was a guy, ed Gramlich, who was of course, do you remember him? And
Barry Ritholtz: Sure. A hundred percent. He was kind of a naysayer.
Mark Zandi: Very much so. Yeah. He was in the camp of, Hey, you know, you have to be able to, the the history of finance Yeah. Is not based on the Securtizers ability to sell their product. It’s based on the borrower’s ability to service the loan. If you take that step out, you’re asking for trouble.
Barry Ritholtz: He very famously was the fly in the ointment and also very Right. Passed away before everything blew up
Mark Zandi: Yeah, that’s right. That’s right. But he even, he didn’t say anything. So I walk out of that meeting and I’m going, ah, I’m, I’m, maybe I have this all wrong. So points in time. I had my doubt. But it became clear by 2006
Barry Ritholtz:. So, so after the crisis in 08, 09 or eventually post financial crisis, you become an informal policy advisor to the Obama administration. Tell us how that came about outside nonpartisan economic advisor.
Mark Zandi: Well, that was the time when the administration was trying to figure out, how do I respond. Obama administration had just come the crisis that occurred September oh eight, he was in office by January of oh nine. They used that period to try to figure out how do I respond to this mess? What do I do? You know, both from a coming a fiscal policy perspective. From a regulatory perspective, from all angles. And I had done a lot of work on estimating so-called multipliers of different policies. So if you do this, you know, what is the impact on the economy if you do that, what is the impact on the economy? Now that’s widespread, that kind of work. Lots of people do that work, do it much better than I do. But at the time, there, there just really wasn’t anyone looking at it that way. And trying to estimate those multipliers. So they used those multipliers in trying to design the response, the, the, the stimulus, so-called stimulus package that they put in place in, in January 20th, 2000, in 2009,
00:15:23 [Speaker Changed] Arguably knowing near large enough to drive a recovery in the economy quickly.
00:15:30 [Speaker Changed] Well, yeah. And I, I think that’s the lesson that the, the Biden administration took coming outta the pandemic. Right.
00:15:35 [Speaker Changed] Even the Trump administration, the First CARES Act. Yeah. The first two CARES Act. Were under President Trump. Right.
00:15:40 [Speaker Changed] Biden gets into office March of 2021. 2021, he passes a, the American Recovery Act, $2 trillion in, you know, obviously it was very large, a lot of criticism. Even Larry Summers was all over it saying it’s too large. Right. But I think the Biden administration was looking back at the Obama administration and saying, Hey, look, the Obama administration was, we, we will come up with this package and if we need more, we’ll get it. They never got it. So the economy struggled for 10 years after the financial crisis. Right. And so the Biden administration saw that, and they said, Hey, we probably should go for a bigger bite of the Apple because we may not get another bite, and therefore let’s go for a bigger
00:16:15 [Speaker Changed] Package. Right. And that was over the next 10 years. And that came into the environment where the first CARES act under President Trump was the largest fiscal stimulus since World War ii, at least as a percentage of GDP. Then there was the CARES Act two under Trump, and then a whole bunch of,
00:16:35 [Speaker Changed] I think at CARES Act three. And then you come in with Biden. So if you tell Cares
00:16:38 [Speaker Changed] Act three was Biden, which was short term and drop, but all, most of the other legislation under Biden was on, was over 10. The infrastructure bill. Yeah. The, the Inflation Reduction Act, those are all 10 year legislation. So it feels very much like the 2010s was the era of monetary stimulus. And the 2020s seems to be the era of fiscal
00:17:02 [Speaker Changed] Stimulus. You know, I hadn’t thought of it that way, Barry, but that’s a really good way of putting it. Yeah, exactly. I mean, the Fed had to work really hard back in the 2010s. ’cause they weren’t getting any support from fiscal policy. That was government shutdowns. That’s right. The treasury debt limit battles fiscal policy was contractionary. And so the Fed had to step in and provide a lot of support. And this
00:17:19 [Speaker Changed] Go around. Right. The Congress did not, you know, they seemed to have forgotten everything we had learned from Keynes. Yeah. And they remembered it in 2020. It, it’s kind of amazing. ’cause I recall being at a dinner with a number of people, including some Nobel Laureates in economics. And when I said, oh, I think they’re trying to cause a recession Congress, they are, they know how this works. They’re just, you know, they, they want to submarine this administration. It was very much poo-pooed by the people there. And then eventually it’s like, oh, this has become much more partisan. And I, I wasn’t making a partisan argument. It was just an observation. Hey, we know how this works. We’ve done giant fiscal stimulus, whether it’s tax cuts or spending, we know what the impact is refusing to do it. I can’t come up with an, a better explanation other than we want to tank the economy and
00:18:13 [Speaker Changed] Get this guy out. Well, the explanation of face value was of course, deficits in debt. Right. We wanna reign that in.
00:18:19 [Speaker Changed] Right. Except for giant tax cuts and big spending. O other than that, you know, it’s, everybody is a deficit hawk when they don’t control the White House. That’s a great point. And it’s, it doesn’t matter if you’re Republican or a Democrat, when your guy loses, suddenly the debt matters. Yeah. And it’s been going on my entire adult life. It’s so transparently
00:18:40 [Speaker Changed] Political.
00:18:40 [Speaker Changed] And that’s where, where,
00:18:41 [Speaker Changed] Where, where we are on the deficit debt.
00:18:43 [Speaker Changed] For sure. So I wanted to ask about your relationship with John McCain. Yeah. ’cause I, I find this both fascinating and hilarious. Yeah.
00:18:51 [Speaker Changed] Yeah. Well, perhaps it equally as interesting. My friend Kevin Hassett asked me to come help out the McCain campaign. You know, now Kevin is the head of the National Economic Council and Donald Trump, he was at a EI, the American Enterprise Institute at the time
00:19:06 [Speaker Changed] And name consistently floated for potential figure roles. Yeah.
00:19:12 [Speaker Changed] And this is well before Obama came on the scene. I didn’t know President Obama at all, and I knew McCain and I, I admired him mostly around foreign policy. That’s obviously where his expertise was. But I also felt like he, they needed real help. The campaign needed real help on economics. And I was the guy who took all the incoming information about the economy and translating that into what does it mean for the economic activity and what, how should we, the campaign respond to that. Well, I wasn’t paid, I wasn’t officially part of the campaign, but that’s the kind of support I provided. But, you know, obviously when the crisis hit Senator McCain, that wasn’t his strong suit. Right. Again, he was foreign policy. He wasn’t economics. He kind of struggled across the finish line and never really grabbed on, I I can recall briefing the campaign saying, we got a real problem here. This is a, this is gonna be a mess. And there was, you know, complete kind of, no, there’s not. It’ll be, everything will be okay. And so there was a little bit of tension at the end of that campaign. It
00:20:13 [Speaker Changed] Feels like he just encountered some unfortunate timing because between the war in Iraq and the crisis, I think the Bush administration had made any mainstream Republican unelectable in 2008. And the Democrats put up a charismatic guy. Yeah. I don’t think McCain would’ve been anything but a really good president. Right. And in any other year, a really strong candidate. Right. Kind of shocking the way this plays out. Yeah. But you are often painted as this. Oh, that’s, Andy is a lib. Like he was a, a, an advisor to both McCain and Obama. That’s more of someone trying to serve his country, not a partisan.
00:20:58 [Speaker Changed] I have always provided advice when asked from both sides of the aisle. So, you know, sometimes more from the D side at times more from the R side. But I’ve done both. Clearly the political center of gravity has shifted here. And McCain, even McCain, I’m not sure where that kind of lines up in the political spectrum. But yeah, I’ve always been non-partisan. I tried my very best to be non-partisan. And even now it’s, it’s tough to talk about the economy as an economist in the, given all of the things that are going on with economic policy, tariffs and immigration and doge, generally when I address a group, I start saying, I, you know, I know I’m gonna sound political. I don’t mean to be political. I’m doing my very best not to be political, so please forgive me. And that generally people take that in and, you know, forgive me if I overstep in some way in their
00:21:45 [Speaker Changed] Mind. It, it’s tough to be an honest criticizer of policy without people. I, it’s kind of a lazy accusation to say, Jacques, this is partisan. Well, no, we could talk about tariffs. We, we tried ’em in 1930, didn’t work out great. Why do we think it’s gonna work out well this time? Right. That’s not partisan. That’s just, that’s the factual situation. That’s right. If you wanna make a, an argument for why a consumption tax on consumers of imported goods is an efficient, effective way to either lower the deficit or raise capital or realign global trade, have at it. But understand there’s a body of of history that informs us what happened the last time
00:22:32 [Speaker Changed] We talked. Totally. It’s so interesting because on almost every issue, economists debate and the debate is reasonable. Right. Economists,
00:22:40 [Speaker Changed] Reasonable people can disagree.
00:22:42 [Speaker Changed] Oh, yeah. And economists think about the second, third, fourth, fifth order effects of these things and how they platter of time. So it’s very not at all unusual to have these knockout drag down fights between economists over issues, but on tariffs, broad-based tariffs. It’s not much of a debate.
00:23:00 [Speaker Changed] Right. There’s a pretty big consensus. Right. Hey, the world isn’t flat. We, we figured this
00:23:05 [Speaker Changed] Out a already. Yeah. Yeah. So, so I feel like I’m on pretty sound ground when I say I’m not a fan of these broad-based tariffs.
00:23:11 [Speaker Changed] The phrase that always comes up with me on these sort of things, these accusations of partisanship, is the Overton window. You could be middle of the road or, you know, maybe center left or center Right. But when the entire framework shifts far to one way or another, it suddenly looks like you’re an outlier, even though you were kind of centrist. It’s
00:23:34 [Speaker Changed] Kind of how I feel. Yeah.
00:23:35 [Speaker Changed] Right. The wings have, have expanded and suddenly what, what seems like it’s pretty middle of the road. I isn’t any, any longer coming up. We continue our conversation with Mark Zai, chief economist of Moody’s Analytics, discussing what the firm is focusing on in the 2020s. I’m Barry Riol. You’re listening to Masters in Business on Bloomberg Radio. I am Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Mark Zandy. He’s chief economist of Moody’s Analytics. Previously he co-founded economy.com and hosts the Inside Economics Podcast.
00:24:23 [Speaker Changed] I bet you say that to all the economists.
00:24:24 [Speaker Changed] Everybody is my extra special guest. I get, get grief about it because once I painted myself into that corner, Hey, my ordinary guest is this bum. Let’s talk about your Moody’s experience. We talked earlier about, you know, your warnings on housing and, and home financing. And what ended up happening with subprime securitization. Moody’s was one of the biggest rating agencies. I criticized them in Bailout Nation. Tell us what it was like when you joined the firm in oh five, and you are wagging a finger about these sort of things. Did you get any sort of pushback? What, what was it like stepping into a firm that indirectly was a focus of, of some of your analytical critiques?
00:25:12 [Speaker Changed] Yeah, I got pushback. You did? I did. Yeah. I mean, I, I wrote a paper on the subprime mortgage space and did everything but say, you know, these securities should be downgraded, house price declines, credit risk, defaults, foreclosure, these are the losses. But I didn’t take it the next step and say, okay, what does this mean for ratings? But I wrote that paper and it went to the CEOA great guy and the C-E-O-C-C-E-O
00:25:38 [Speaker Changed] Of analytics or the CEO EO of Moody’s. No, Moody’s. Full
00:25:41 [Speaker Changed] And full Moody’s.
00:25:42 [Speaker Changed] Right.
00:25:43 [Speaker Changed] And this, of course, I just had sold my company to them. So this is all brand new. He didn’t, who, who is this guy?
00:25:49 [Speaker Changed] What’s
00:25:50 [Speaker Changed] His, what’s he doing xy Andy. What? That’s 00:25:52 [Speaker Changed] The back of the alphabet. We never get to his stuff.
00:25:54 [Speaker Changed] Yeah. He goes and he goes, why is he talking about subprime mortgage? What does that have to do about the economy? And at the time, that was a reasonable question. The best thing that ever happened. Yeah. Bernanke gave a speech called
00:26:05 [Speaker Changed] Contained
00:26:06 [Speaker Changed] Subprime mortgage. Right. And he remember in that speech and he said, don’t worry, this is not a problem. But because he wrote that speech, I could send it to the CEO, gave, I said, look, this is why I’m talking about it. Right.
00:26:17 [Speaker Changed] The, so if the head of the Fed is talking about it, I I should be treated talking. Yeah. Right. What was he vice chair or just a governor back then, or was that as chairman?
00:26:24 [Speaker Changed] He was chair, I think at the time. He was, yeah, he was definitely chair to the CEO’s credit. He said, okay, you know, you publish it and it’s the best thing that ever happened to Well, one of the things, best things that happened to Moody’s, because when the Financial Inquiry Commission, you remember the Financial Inquiry
00:26:39 [Speaker Changed] Commission? Sure. FCIC. Absolutely. Yeah.
00:26:40 [Speaker Changed] They,
00:26:41 [Speaker Changed] They, and that I have that book. It’s like this thick sitting on a show.
00:26:44 [Speaker Changed] Oh, yeah, yeah, yeah, yeah. I I was, I was that report, I testified I was the first Yes. Panel. Oh really? Those panelists. Yeah.
00:26:50 [Speaker Changed] Amazing.
00:26:51 [Speaker Changed] And of course, the CEO was a later panel with Warren Buffet. Warren Buffet was the, is a shareholder in Moody’s. I think he still is a big shareholder. The lawmakers were questioning them and the CE could say, Hey, look, here’s, here’s the study.
00:27:05 [Speaker Changed] Hey, can I tell you something? A little, a little self-awareness.
00:27:09 [Speaker Changed] And so that, yeah, I’ve been there for 20 years. I love Moody’s. And, but that really helped a lot. Right. In every respect. It helped my credibility.
00:27:19 [Speaker Changed] Helped the company’s
00:27:20 [Speaker Changed] Credibility. Yeah. Help the company’s cred established a set of ground rules that I’m able to write about, think about, talk about anything that I think is important about the economy. All that was established in that point. Now that, that’s getting tested at different points in time as we move along here. But, and we’re in a trying time now, but that was very, very important to my successful stay at Moody’s for 20 years.
00:27:43 [Speaker Changed] I, I wish I could remember who wrote a criticism in response to the Bernanke speech about subprime. ’cause the line was subprime is contained. Yeah. And the response, it could have been Alan SSON and Barron’s, it could have been James Grant, could have been Josh Rosner, Chris, Chris Waylan. Oh, great. Yeah. But it was, yes, subprime is contained to planet Earth. The rest of the solar system is safe. Right. And I, it was one of those lines where, damn, I wish I wrote that. That just, I, I might have been Ableson or Grant, but that
00:28:15 [Speaker Changed] Sounds like a Jim grant.
00:28:17 [Speaker Changed] It, it very much does. It’s sort of dry. Is he still writing Jim Grant? I think so.
00:28:21 [Speaker Changed] Yeah. You know, we kinda lost track.
00:28:23 [Speaker Changed] Yeah. It, it happens. Especially in this era of substack where Right. Your inbox is just overflowed with, with stuff. So you got some pushback, but they cleared it. I gotta ask, what was your experience like at Moody’s during the great financial crisis? It had to be 24 7 work plus terrifying everything.
00:28:46 [Speaker Changed] Oh, it was an amazing scary, I can remember a few scary mo real scary moments in, in my mind. You know, when I get, I got a call from a CEO of a major retailer saying that, you know, if we don’t do something, he’s going to not be able to make payroll, you know, on. And I’m saying, I’m thinking to myself, he’s telling me this, so we got a real problem.
00:29:08 [Speaker Changed] Well, he wants you to tell DC Yeah, that’s,
00:29:11 [Speaker Changed] That’s exactly what it was. DC That was exactly what it was. I did,
00:29:14 [Speaker Changed] Didn’t the Bush administration, I don’t remember if it was Hank Paulson or, or Bernanke have conversations, maybe it was the CEO of, of Ford or gm, Hey, we have money, but our credit facility is frozen. We can’t get at our money to make payroll.
00:29:30 [Speaker Changed] Right. Well, there was so many things going on. I remember this commercial paper market was, had frozen and Yep. Completely frozen. And of course that’s key to making payroll for a lot of these
00:29:40 [Speaker Changed] Companies. I, I have a buddy who was on a derivatives trading desk, and he always pushes back when I use the word frozen, he’s like, Hey, I dunno what you’re talking about. We were trading billions of dollars a day in paper. It was just discounted 30, 40, 50%. Oh, there you go. So there was liquidity, but there was a haircut involved.
00:29:58 [Speaker Changed] Well, and also just trying to find out, was it 30 or was it 50 or was it 75? You don’t know. Yeah, you don’t know.
00:30:04 [Speaker Changed] You really don’t know the that that led to the line. There’s no such thing as toxic paper. Only toxic prices.
00:30:10 [Speaker Changed] There you go. Yeah.
00:30:11 [Speaker Changed] So, yeah, absolutely. So, so that experience had to be just mind blowing.
00:30:16 [Speaker Changed] Well, and also from coming just a purely academic perspective for an economist, I mean, this was just an incredible time. One, once every century you see something like this and you, there’s so much that you’re learning while you’re doing. And it, it was not only just economics, it was also political economy. You know, how do, what, what should lawmakers do and how should they do it? And, and all the moving parts there. So it was a very amazing time. And that’s when I wrote that first book was I, it’s not a great book, Barry. And there is a, I wrote, did write a chapter, chapter seven on the rating agencies, but I did not put it in ’cause I was part of the rating agency and no one would’ve believed me. Anyway.
00:30:58 [Speaker Changed] Now you’ve been there 20 years. The financial crisis is more than 15 years in, in the rear window. Tell us a little bit about what Moody’s Analytics is doing here. And now.
00:31:12 [Speaker Changed] We’re very simple business. My part of Moody’s is a very simple business. We produce economic forecasts in scenarios.
00:31:20 [Speaker Changed] Yeah. But that’s not really a simple thing to do. There’s a lot of inputs and a lot of moving parts.
00:31:26 [Speaker Changed] There is, but the actual business itself is very simple. And the, the, one of the things that has been kind of a tailwind to our work has been the regulatory environment. Right. The financial institutions all over the globe need to do stress tests, capital planning. It’s even now embedded in the loan loss provisioning Cecil here in the US as an accounting framework that requires forward looking projections. If R nine overseas, climate stress testing, all those things require a very disciplined, comprehensive approach to economic forecasting. And so that’s really been key to key to the business here over the last 10, 15 years.
00:32:12 [Speaker Changed] So that’s kind of interesting. Your clients, are they necessarily Wall Street investing firms? Are they government institutions or non-governmental agencies?
00:32:23 [Speaker Changed] All, all of the above. All
00:32:24 [Speaker Changed] The above. When, when I think of climate stress testing, I, I, I just was involved in this silly debate about climate change. And my answer is, Hey, my opinion is irrelevant. Go talk to an insurer if climate change is a hoax. Yeah, great point. And and what, what are your experiences doing climate stress tests for you? Look how hard it is to get insurance in places like Florida. Like how significant is something like that to the sort of research you would sell to a private entity like insurance?
00:32:56 [Speaker Changed] Yeah, it’s, it’s critical. So house prices, go look at house prices in Florida, we’re talking about the west coast of Florida. They’re falling and they’re falling because homeowner’s insurance costs are rising because of the cost of, of hurricanes and other storm damage. So the insurers take that all in. They raise a homeowner’s insurance and that depresses demand and, and price. And of course that has all kinds of implications for mortgage credit risk for if you’re an mortgage insurer, if you’re in the mortgage business, in any, in any kind of respect. So that’s a great example of where, you know, the kind of economic forecasting is really critical to what’s going on in real life. And, and particularly with climate, it’s real. It’s, it’s happening. There’s damage and insurers are trying to figure that out. And they’re now building that into their premiums. And it’s having a real impact in, right now it’s more concentrated in places like Florida and Texas and California. But it’s gonna become more of a, a problem in other parts of the country. You know, pretty quickly,
00:33:56 [Speaker Changed] Huh? To to, to say the very least, we’ve seen fires in California. We’ve seen flooding in the Mid-Atlantic states. Well,
00:34:04 [Speaker Changed] Let me, here’s a good factoid for you or I’ll ask you, I’ll ask you guess which state has the highest homeowner’s insurance costs in the country?
00:34:13 [Speaker Changed] So the two that come to mind immediately are Florida and California. But the question makes me
00:34:19 [Speaker Changed] Think of
00:34:20 [Speaker Changed] Wonder are, are we talking about places like Texas or car, the Carolinas,
00:34:26 [Speaker Changed] Nebraska,
00:34:27 [Speaker Changed] NBRA ’cause of tornadoes?
00:34:29 [Speaker Changed] Well, yeah, in convection, convective storms, the, the, the, the big thunderstorms that come along and they drop a lot of
00:34:37 [Speaker Changed] That hail.
00:34:38 [Speaker Changed] The hail does tremendous damage. Yeah,
00:34:40 [Speaker Changed] Yeah. You know, we just had a mild storm and this little branch smashes the windshield of the truck. And I’m waiting three weeks to, to replace it. And when I asked the ins, we have glass coverage, and I asked the insurer about this, they’re like, you have no idea how backed up everything is. And yeah, there are delays in getting dumb things like windshields. Right. So all that stuff plus all the pandemic shortage of automobiles and things like that, that’s driven automobile insurance up. I never would’ve guessed Nebraska. That’s an amazing,
00:35:15 [Speaker Changed] Yeah. Isn’t that interesting? And, and, and also,
00:35:17 [Speaker Changed] Who’s number two or three? I’m curious who’s right behind them? Oh,
like we are a
00:35:21 [Speaker Changed] Florida, they’re, they’re up there. They’re up, they’re definitely up there. Top 10. Yeah. Top 10. The state that had the lowest, and this is I’m sure gonna change when we get more up to date data is Hawaii, but
00:35:30 [Speaker Changed] Well, you just had the, there,
00:35:31 [Speaker Changed] The fires. Fires. So that’s gonna change. But that, that had been the case. But the other thing is, overseas climate is a real issue. Just go to Indonesia, whether Right, the central bank is, you know, a client and they, they’re doing a lot of climate assessment because Jakarta is increasingly underwater. Right. So literally
00:35:51 [Speaker Changed] Not, you don’t mean negative cash flow, you mean
00:35:54 [Speaker Changed] Literally under sea. Water is, sea level is rising and there’s there’s there it’s doing real damage. And so you have to consider that. So here in the US it’s a, an issue overseas is becoming in some parts of the world, existential,
00:36:07 [Speaker Changed] You know, the, I’m trying to remember if this was wired or the Atlantic, but there was a big piece a year or two ago about Miami and the flooding risk from Miami. And this is very surprising. It’s not the seas coming over the land, it’s that so much of South Florida is built on the sort of limestone Yeah. Base. Yeah. Which is very porous to water. And so the flooding is not storms surging over the coastline, it’s bubbling up water bubbling up from Right. Literally it’s like a crazy, I never, you know. Yeah. It, it, there’s so many random factors that if it’s not your space. Yeah. Wow. Like I never would’ve guessed Nebraska and I never would’ve guessed Southern Florida’s. Well
00:36:52 [Speaker Changed] That’s why those sinkhole Right. That’s why the, the sinkholes are a real problem because where in Florida? No kidding. Yeah, because the bubbling up it undermines the, the, the ground.
00:37:01 [Speaker Changed] Huh. That, that’s, that’s unbelievable. Coming up, we continue our conversation with Mark Zandy, chief economist at Moody’s discussing the state of the economy today. I’m Barry Ritholtz, you’re listening to Masters Business on Bloomberg Radio.
00:37:26 I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My better than average guest this week is Mark Zai. He’s the chief economist of Moody’s and hosts, I’ll take it, hosts my extra special guest. You called me out on it. So you know, con O’Brien’s podcast, he makes everybody say their name and I feel blank to be Conan O’Brien’s friend. And it’s kind of a funny, throw it to the guest to fill that in. And I forgot her name. She was on shrinking Jessica and former Daily Show. She said, I feel pressured to say anything about being Corn Bride and Fred. So I kind of painted myself into the corner. Maybe I’m gonna have the guest. Oh,
00:38:14 [Speaker Changed] You did a great job getting out of it. So
00:38:16 [Speaker Changed] No, maybe I have the guest say, what sort of a guest are you this week? So let’s talk about the state of the US economy today. How do you assess where we are? What indicators are most concerning to you? And then we will drill down more specifically.
00:38:32 [Speaker Changed] The economy’s struggling. I think it’s on the precipice of recession.
00:38:37 [Speaker Changed] Precipice of recession. Yeah. What does that mean? Does that mean 50 50 chance this year? ’cause we’ve had economists forecasting recession pretty much since 2022. Not me.
00:38:49 [Speaker Changed] Not me. I haven’t been. So this is, so this is a
00:38:52 [Speaker Changed] Change. You’re now starting to get more cautious. This as nervous
00:38:55 [Speaker Changed] As I’ve been since.
00:38:55 [Speaker Changed] And you’ve been robust. You’ve seen this as a robust economy the past few years.
00:39:00 [Speaker Changed] I have. Yeah.
00:39:01 [Speaker Changed] So the switch is, is significant. It is. So what, what is driving that?
00:39:06 [Speaker Changed] And I have to be humble. I, because the, what a LC economy’s pretty obvious it’s economic policy and it can change quickly. Therefore you have to be humble here because policy can change and we may not, the economy may find its footing as a result and we avoid recession. So there’s a lot of, I hate using the word, but it’s the only word I can think of. It’s uncertainty. I mean, there is a lot of, of that in, in economic
00:39:31 [Speaker Changed] Forecast. I, I steer clear of the U word and, and
00:39:34 [Speaker Changed] What do you say?
00:39:35 [Speaker Changed] Just lack of clarity.
00:39:36 [Speaker Changed] I can like
00:39:37 [Speaker Changed] That because I think it’s, yeah, I think it’s not as pregnant as
00:39:40 [Speaker Changed] UNC
00:39:41 [Speaker Changed] Uncertainty. Yeah, yeah. Lack of clarity. But, but no doubt about that. Yeah. We’ve seen CFOs talk about withholding CapEx spending and even families postponing trips to disneylands
00:39:53 [Speaker Changed] And the data. Say it. So GDP growth, the value of all the things we produce, that was barely 1% in the first half of the year. Right. Consumer spending has gone nowhere all year long. Manufacturing’s in recession. Constructions in recession, transportation distribution is in recession.
00:40:09 [Speaker Changed] Not, not, you’re not saying this is growth rate is slowing, you’re saying this is in the
00:40:14 [Speaker Changed] Red In the red in red, yeah.
00:40:16 [Speaker Changed] Manufacturing, construction. Why is construction in the red there such a demand for housing.
00:40:22 [Speaker Changed] Home building is weakening very rapidly. Really
00:40:25 [Speaker Changed] That a function of high rates and mortgages? Or is that a function of, hey, we can’t find people to build these houses to say nothing of. We’re going to Home Depot and deporting the guys looking for workouts.
00:40:37 [Speaker Changed] It’s affordability. People can’t afford the new homes.
00:40:38 [Speaker Changed] That’s all it is. Yeah. It’s just affordability.
00:40:40 [Speaker Changed] And, and the builders have done an admirable job trying with incentives, interest rate, buy downs to keep the market going and maintaining construction levels. But that’s over the, they’re not able to do it. The this
00:40:52 [Speaker Changed] No more buying down rates. No.
00:40:53 [Speaker Changed] So now we’re seeing single family home building come down for the first time. Multifamily has been coming down for, for, for at least a year. Right. ’cause it got overbuilt. All these luxury towers going up in New York and Philly
00:41:04 [Speaker Changed] And Chicago, Palm Beach. It just up
00:41:05 [Speaker Changed] Vacancy rates. Rates are too high. Rents are too weak. The commercial non-residential side is also very weak. The only strength is data centers. Clearly. Clearly. Yeah. And that, that, even with that though, if you look at overall construction spending, it’s like over, was it $2 trillion? It’s declining.
00:41:22 [Speaker Changed] It’s declining. So I was on the impression that medical facilities, warehouses, things like that were still fairly robust. You’re telling me that’s no longer
00:41:32 [Speaker Changed] The case. It there’s different They’re in Yeah. Yeah. There. I you know, healthcare is fine. Data center’s, booming offices are way down. Multifamily ISS down residential, single family’s way down. So you add it all up and now public instruction’s starting to roll over. Right, right. Because you had that big lift because of the infrastructure legislation that was passed a few years ago
00:41:53 [Speaker Changed] Still. But it’s still on Some of it is still on ongoing. It’s, it’s
00:41:55 [Speaker Changed] High. But the, you know, that the, it’s now rolling over. It’s a high level of spending, but you’ve now passed the peak. Right. And spending, it is now starting to come in and we’re not gonna see any more infrastructure spending on the public side for, you know, quite some time. Really? I
00:42:06 [Speaker Changed] Don’t think so. I thought that would continue on for a couple of years. Wasn’t that like a five or 10
00:42:10 [Speaker Changed] Year legislation? It’s, it’s an elevated level.
00:42:12 [Speaker Changed] Oh. And then it starts the tail down. But
00:42:14 [Speaker Changed] What really matters for growth is the change in Gotcha. And you’ve passed the peak. Yeah. It’s coming now starting.
00:42:19 [Speaker Changed] So you’ve talked about everything. We haven’t gotten to labor
00:42:22 [Speaker Changed] Jobs, by the way. That’s,
00:42:23 [Speaker Changed] That’s my next question. Yeah. Tell us about the labor market. It it,
00:42:26 [Speaker Changed] It’s consistent with the economy of struggling. The job numbers are showing very little job growth in recent months. And I would not be surprised in the next few months, assuming we get the data from the rural labor statistics, we can count on talk about that. But assuming we actually get the data, we could actually see some, and that we would not be surprised if we saw some negative numbers, you know, actual declines in employment.
00:42:48 [Speaker Changed] So, so Jim Bianco said something the other day that really kind of surprised me. First time in US history, we are actually seeing negative population growth. Not, not caused by a war or anything, but immigrants aren’t coming to the country and people are being deported. And by the end of 2025, we may have a lower total population number than we had at the end of 2024. What does that mean for the labor market?
00:43:16 [Speaker Changed] Yeah. I mean, at the end of the day, if you’re a full employment and we’re close 4.2% unemployment rate, the only way you can generate a job is if you’ve got someone to fill the job. Right. You need a labor, you need someone who’s working. So if the labor force isn’t growing, and right now it’s just flat, it really has, well actually if you look at,
00:43:35 [Speaker Changed] Well, you could have job openings, but just they’re unfilled. Get the, that’s data. And that’s,
00:43:39 [Speaker Changed] That’s right. But it’s not a job until you fill it. Right. So you could actually, and right now labor force is declining if you believe the data, believe the precision of the data. But the level of the labor force in July, the last data point is higher, is lower than it was back in January. And so that would suggest that it’s gonna be very difficult for the economy to, to generate jobs. And it’s very possible we start getting job loss and just negative numbers.
00:44:06 [Speaker Changed] So, so what are, what odds are you putting on a recession? And we, we’ll talk about inflation and tariffs in a moment, but what odds are you putting on a recession in Q4 2025 or Q1 2026? I,
00:44:19 [Speaker Changed] I, I think our baseline outlook, my baseline outlook has no recession, just a weak economy. We kind of struggle the way
00:44:27 [Speaker Changed] Through like a sub 1%. GDP and a slightly.
00:44:30 [Speaker Changed] It’s a 1%, it’s actually 1% on the nose year over year through Q4 of this year, Q1 of next, which is historically below the economy’s potential. Right. No job growth.
00:44:39 [Speaker Changed] Zero like a zero BLS print every month.
00:44:42 [Speaker Changed] I think I have average monthly job growth in
00:44:45 [Speaker Changed] Sub 100. Oh
00:44:46 [Speaker Changed] Wait, wait, like 20 5K Really? 25 50 K, something like that. Yeah.
00:44:50 [Speaker Changed] That, that’s a, you know what’s shocking about this sort of discussion is regardless of who you voted for or what your political affiliation is, there’s no debate. The first quarter, 2025 was a very robust economy with markets hitting all time highs. And here we are eight months later, revenue is high, profits are high expectations of, of forward growth in the stock market is high. I know the old joke is stock markets have predicted none of the last four recessions. Right? Right. But what are all time highs and this ongoing enthusiasm for growing corporate profits? What, what is that saying about the
00:45:38 [Speaker Changed] Economy? Yeah. And that’s the reason why, one reason why I don’t have a recession in the baseline, the equity market is held up. Although obviously a big part of what’s going on in the equity market is related to ai. And that has nothing to do with the business cycle. That’s
00:45:50 [Speaker Changed] It’s ai and half of the s and p 500 revenues are overseas. So it may not be reflecting US
00:45:56 [Speaker Changed] Growth. And also you got tax cuts, right? So if you just assume a
00:45:59 [Speaker Changed] Stimulus, fiscal stimulus, you have pe
00:46:01 [Speaker Changed] Constant PE multiple. If you raise after tax earnings, you should get a higher price. So if you, if you abstract from those things that are independent of the economic cycle, the stock market at best is flat from, from where it’s at the beginning of the year. And that that’s the economy. It’s flat, it’s, it’s gone nowhere. Now the
00:46:17 [Speaker Changed] Economy is flat, but it, it mean the stock market can still elevate off a flat economy with tax cuts AI spending. Exactly.
00:46:24 [Speaker Changed] International. And that’s my sense of what’s happening. What’s what happen. So what’s going on in the equity market is actually, I think, consistent with what we’re observing in the economy. Now, if the stock market starts to head south writ large, and we see non-AI part of the market starting to go south here, I think that’s a strong signal that we’re we’re going in, that we’re going into. And, and the equity market is not only important as a signal, but increasingly it drives economic activity because the bulk of spending in the economy today is done by folks in the top part of the income and wealth distribution.
00:47:00 [Speaker Changed] Top 20% is half of all
00:47:02 [Speaker Changed] Spending by our calculation, the top 10% account for, oh say you’re right. It’s top 20% account for 50% of the spending. Right,
00:47:09 [Speaker Changed] Right. Top and the top 10% is most of that and
00:47:12 [Speaker Changed] Most of that. And the top 5% is most, most of that. So, so
00:47:15 [Speaker Changed] Very not a well distributed consumer spend. It’s it’s high-end. High-end and luxury goods. Which, you know, that’s top 2% like that, that that skew is very, the good news is if you go buy a private jet, you can depreciate all of it in year one of, there you go. The I didn’t know that. Thanks to the thanks to the new tax bill. Bill. Yeah. But that’s sort stuff. So I remember when Bush did his accelerated depreciation, which I wanna say it was depending on the item, it was three to seven years instead of 10 to 20 years. 20. Right.
00:47:58 [Speaker Changed] Being
00:47:58 [Speaker Changed] Able to depreciate these luxury goods, maybe that’s a factor in driving some higher
00:48:04 [Speaker Changed] Spending. Yeah. And that should also help the construction markets too, right? Because
00:48:08 [Speaker Changed] You would, you would think, right? Yeah,
00:48:10 [Speaker Changed] I’d take some
00:48:10 [Speaker Changed] Time. Real estate’s a little different. Yeah. So I don’t know if you could depreciate all of your build out in year one, but I’m going to guess it’s not a 20 year depreciation schedule. You probably can do it. Right. I should really ask one of my tax guys what the depreciation schedule is for new construction. ’cause you would think that would encourage more building and we desperately need more single family homes
00:48:35 [Speaker Changed] And that, and that may be the way out of recession. Not only the, it is really get more fiscal support. Right. And that, and we, we will likely get another reconciliation, a piece of BBB. The bill big beautiful bill was reconciliation. They’ll take another, they have another shot at that on the other side of the fiscal year.
00:48:51 [Speaker Changed] October.
00:48:52 [Speaker Changed] Yeah. That’s when the new fiscal year begins. And so they could come up with more stimulus. Yeah. Right. I you’ve heard talk of a stimulus check, you know, I’ll pay for the, we will take the tariff revenue and I’ll rebate some of that back to Americans in the form of a check. And that would, that that would be stimulus for sure. And that would support
00:49:10 [Speaker Changed] The economy. Listen to work. The last Trump administration, he wrote a check. Exactly. And when people were stuck at home. Right. And you know, I I try and be non-partisan when I look at those sort of things. It turns out Keens was onto something a century ago, wasn’t he? Well,
00:49:25 [Speaker Changed] Particularly if the economy’s not at full employment. If you’re, if you’re flat on your back like you were in the pandemic or the financial crisis, you provide stimulus, then you don’t get the crowding out. You don’t get the higher interest rates, you don’t get the inflation, but you get the growth.
00:49:37 [Speaker Changed] So, so, but
00:49:38 [Speaker Changed] You’re now, we’re now closer to full employment. So that’s a bit of a more dangerous game, right. Because if you overstimulate and you’re in full employment, you’re gonna get the inflation already inflation’s an issue given the tariffs and the immigration policy.
00:49:49 [Speaker Changed] So let’s talk about tariffs before we get to inflation. What’s your perspective of the impact of both the policy and the way it’s been implemented?
00:50:00 [Speaker Changed] Well, I’m not a fan of broad-based tariffs. I mean strategic tariffs, no problem. I can, I can kind of get that, but broad-based tariffs. So, you know, we’ve been there, we’ve done that. You mentioned the 1930s, in fact, you can go back a hundred years before that under Andrew Jackson. And we tried broad-based turfs and it didn’t work out so well. It takes about a hundred years for us to forget the mistake and do it again. So I- I-I-I-I don’t think this is gonna end well. It, it, it’s raises inflation by definition. And then we’ll see more of those pass those prices pass through to consumers over the next six, 12 months as the time passes here. And it lowers growth. It’s, it’s pushes the economy towards stagflation and, and the immigration policy, highly restrictive immigration policy. And I, and I get the, the need for addressing the southern border.
00:50:45 [Speaker Changed] We’re we’re talking about legal immigration, not illegal
00:50:48 [Speaker Changed] Immigration. Exactly. It’s very restrictive. And that does, that reinforces the higher inflation and the weaker growth. So you’ve got two policies that are very substative of working together to raise inflation work. Weak, weak economic activity. So
00:51:03 [Speaker Changed] Reducing legal immigration contributes to higher inflation. Explain that.
00:51:07 [Speaker Changed] You’re in a very, go back to the labor force. Tight labor market. Gotcha. Just
00:51:12 [Speaker Changed] Less bodies, higher weights.
00:51:13 [Speaker Changed] You’re constructing a lot of businesses. Ag we know that. Restaurants, construction. Yeah. Leisure, hospitality, elder care, childcare, all those things. And it will ra it presumably will raise costs, labor costs, you’ll see wages rise and add to inflationary
00:51:29 [Speaker Changed] Pressures. So, so we keep hearing from the Fed that they’re data dependent, things are ambiguous. There’s no clear, necessarily clear path to future policy. Is that a reasonable response given everything that’s been going on? Because it seems odd to, to say, on the one hand, we’re at risk of recession. On the other hand, there’s a chance of increased inflation. Sounds a lot like seventies era stagflation. It
00:51:58 [Speaker Changed] Is stagflation.
00:51:59 [Speaker Changed] What does that mean for where rates could go over the next couple of meetings? It seems like a 25 BIP cut is sort of locked into September. Right. And I don’t know how much of that is, Hey, let’s just throw a virgin in the volcano and make the, make the president happy. But they’re in credible reasons, in both directions. This isn’t like a one-sided debate. I
00:52:24 [Speaker Changed] I I think the, their decision to stay on hold was the right decision. ’cause they don’t know what do I respond to the inflation that I know is coming or the weaker growth that is in train. I, I just, and I don’t know what, where the policies are. I don’t, I have no sense of where the tariffs are gonna land, when they’re gonna land there. I don’t know what’s going on with immigration policy. So let’s just sit on our hands and just let this thing unfold a little bit before we can move on. Policy businesses are done roughly the same thing. They’re saying, I don’t really know, therefore it’s not, I’m gonna cut, but it means I’m not gonna expand. I’m gonna sit on my hands. And that’s why the economy has gone sideways here since the beginning of the year, but here we are now, and if I’m, you’re at the Fed, and I think their, the, their kind of, their weights on their, their, their goals are, are shifting.
00:53:08 They’re putting more weight on the economy than on inflation. They’re thinking is inflation because of the tariffs will be more one off. They won’t be persistent, which I think is a reasonable thing to think, but we will have to see. But we know the economy’s weakening, particularly the job numbers. And I, and I, again, going back to, we’re gonna get some negative numbers here, and I think that’s what they want to avoid, particularly in the context of the political environment, because there’s a lot of stuff coming outta Washington about reevaluating the fed’s, the Federal Reserve Act of 20 of 1913, their independence. And if you’re at the Fed and you’re seeing that the, the last thing you wanna do is go into a recession and get blamed for the recession in the context of all those, kind of, that political
00:53:49 [Speaker Changed] Overlay to, to say the very least. So, so we haven’t really talked about integrity of data, but since you alluded to it earlier, let’s bring it up. You know, I’m a big fan of George Box. All models are wrong. Yep. But some are useful. Yep. And so my experience over the past, I don’t know, 15 years, whenever I have a question about how something is put together in either a BEA or BLS data point, I just pick up the phone and call them and they eventually route you to the person, oh, here’s in charge, the person who developed the birth death model, or here’s the person in charge of, of survey data. They couldn’t be more forthcoming, transparent, and helpful. Totally. And I, I’m kind of surprised at some of the crazy stuff I hear from people. I just heard a bunch of stuff about the M-I-B- M-I-T billion price project. Yeah. Which ended up getting picked up by somebody and they were talking about how great that is. And I’m like, Hey, when you track this against CPI, they’re almost identical. So they’re both different models. One is a little more skewed to the weighting of how consumers spend money. The other is just scraping all these data points, but they end up in the same place. How do you think about the integrity of data from the BLSI?
00:55:11 [Speaker Changed] Right now I think it’s gr I think it’s fine. There’s problems particularly with survey responses, but everyone’s
00:55:20 [Speaker Changed] Response. But that’s true everywhere. Look at University of Michigan. Sentiment data has been absolutely plummeting for 10 years.
00:55:24 [Speaker Changed] And the answer to that isn’t cut budgets. It isn’t to cut staff. It is to put more resource in to help try to figure out how to improve those response rates. But even in the employment data, the payroll employment data that we’re focused on, the response rates by the third month is the first month, the response rate’s 65, I’m making this up, but roughly speaking, 65%, 70%, which
00:55:44 [Speaker Changed] Is below what it used to be.
00:55:45 [Speaker Changed] It’s down from where it was by the third. It’s 90, 95%. So it’s still a very, very good survey. But we all, we, as a result of the low response rates, we always get revisions to the data. In more typical times when the economy’s moving in a straight line, those revisions are small. When you’re at an inflection point or a turning point, like I’ve been arguing, we are, you get these big revisions. In fact, there’s information in the revisions. It’s not, it’s not a a bug, it’s a, it’s a feature. It’s saying, Hey, the economy’s weakening. And so the response rates, the responses we’re getting after, after the first month are weaker than the ones we got in the first month. And therefore we’re revising down the data. That signaling that’s a, that’s a strong tell that the economy is struggling and potentially at a, a
00:56:28 [Speaker Changed] Turning point. So, so you are saying the July non-farm payroll, and I, I don’t wanna put words into your mouth. We had a July non-farm payroll that was pretty punk that came out the first week in August. But the revisions were substantial for the prior two months. This isn’t just a noisy data series or somehow partisan wrangling. This is a warning shot across the bow. Hey, the economy is starting to transition into a weaker state. Exactly. Pay attention. Is is that a, that’s the
00:56:58 [Speaker Changed] Point. That’s the point. It’s not that the data is any worse than it has been historically. There’s anything nefarious going on. It’s, that is the nature of the, of the data and it’s telling us something. There’s real information there. And so I, you know, I do, the thing I worry about the most is if there’s a decision to not release the data as timely as it’s being released today, the employment numbers that we’ve been talking about are the most timely data that get released. The Friday of the first
00:57:25 [Speaker Changed] One. Oh, the quarterly nonsense that came out. That just seems
00:57:28 [Speaker Changed] Yeah, that really makes me nervous
00:57:29 [Speaker Changed] That that’s, I I think Wall Street would’ve a hissy fit. You do if that happened. Yeah. The, the, you know what people talk about the, the, the Powell put? Yep. I I prefer the expression, the the Trump collar. Yeah. When the, when the market’s near all time highs, he’s emboldened and rolls out stuff. When the market’s down 15, 20%. That’s a floor. All right, we’ll pause this for 90 days. Yeah. Because rightly or wrongly, and I think there’s more to this than we, we give President Trump credit for. But when the stock market is doing well, he takes that as his report card. And when the stock market is doing poorly, it makes him unhappy. And his bias is towards doing something, anything. What do we have to do to get the stock market back on track? Right. He doesn’t care about polls. He cares about one poll. And that’s the Dow Jones Industrial average. Yeah. Or the Nasdaq or the s and p. Yeah. Yeah. Kind of focuses his
00:58:27 [Speaker Changed] Attention. Yeah. Yeah. That’s a nice way of putting it. The Trump collar. Yeah.
00:58:30 [Speaker Changed] So, so I don’t wanna make you late for lunch. I have one more question before we get to our speed round. Our favorite questions. Oh. And, and it, it’s a curve ball question, which is, what are investors and economists not talking about, but perhaps they should be. What, what do you think is an important topic, and I don’t care. Policy assets, geographies, what’s getting overlooked, but shouldn’t,
00:58:57 [Speaker Changed] I’d say fed independence. Not that people aren’t talking about it, but they’re not focused on it. Like they should be focused on it. I think this is a real, potentially a real significant problem. And they’re, the, the, the independence of the Fed is critical to a well-functioning market economy, like our own, we know that from our own history. You can see what happened back in the seventies and eighties and or looking overseas. Sure. And we need to preserve that independence. And it’s not only about the actual independence, it’s the perception of independence. That’s really critical. And I, I just doesn’t, it doesn’t feel like to me, you follow markets more closely than I do. May maybe have a different view, but I just don’t get the sense markets are focused on this like they should be at this point in time. Huh.
00:59:39 [Speaker Changed] Pretty, pretty interesting take. All right. Let’s jump to our speed round. Okay. Feel free to, all right. Bang through these as quickly as you want. And we’ll get you to lunch on time. Starting with, who are your mentors who helped shape your career?
00:59:52 [Speaker Changed] Well, I mentioned Dr. Klein, the Nobel Laureate. He clearly was a, a key person in my professional life. My father professor of engineering at Penn, by the way. He will, he will claim he, he was the first to use neural nets back in the day. Huh. So for, for the studies he was doing. But I’d say those two folks are, those two, two men were the key to my, to my professional development.
01:00:20 [Speaker Changed] Let’s talk about books. What are some of your favorites? What are you reading right
01:00:23 [Speaker Changed] Now? It sounds hackney now, but you know, Barry, I like, I just love Alexander Hamilton by Chernow. I mean, I, that was, why is that
01:00:30 [Speaker Changed] Hackney?
01:00:31 [Speaker Changed] Well, because now everyone,
01:00:32 [Speaker Changed] The book doesn’t have any wrapping in it. People should be aware if they go get this book. Yeah. It’s a deep historical dive. It’s not a entertaining bunch of show tunes.
01:00:42 [Speaker Changed] I Oh, yes, that’s for sure. But it’s very entertaining. I I, at least from a nerdy kind of perspective. I think
01:00:48 [Speaker Changed] Cher now has a new book coming out this fall, doesn’t he? Or did it come out already?
01:00:51 [Speaker Changed] Well, I’ve got the, I’m reading the one on Washington.
01:00:54 [Speaker Changed] Is that, is that his latest?
01:00:55 [Speaker Changed] That might be. I think that’s his latest. Yeah, I think so.
01:00:57 [Speaker Changed] He, he is an amazing writer. And,
01:01:01 [Speaker Changed] And I like that period in economic history
01:01:05 [Speaker Changed] To, to say the, the, the very least. It’s, and I,
01:01:08 [Speaker Changed] It’s don’t fascinating. I don’t normally read self-help books, but I, I like this book Outlive. I know everyone else has read it by 3, 4, 4 years ago. So now I’m hanging,
01:01:17 [Speaker Changed] Is it worth reading? It’s, oh, mark Twain is his name.
01:01:21 [Speaker Changed] Oh, mark Twain.
01:01:21 [Speaker Changed] That’s right’s. I ha it’s, it’s a twain. Big to Yeah. It’s sitting on my nightstand gathering dust. ’cause it’s so,
01:01:28 [Speaker Changed] I don’t know how he does it.
01:01:29 [Speaker Changed] So intimidating. Yeah. Deep, deep research. Yeah. Outlive.
01:01:34 [Speaker Changed] Oh yeah. So it’s an easy book, a summer book Right. When you’re on the beach. It, it, it’s a how do you live your life? Well, long run. And it’s a lot of, it’s just intuitive. It’s not non-intuitive, but there’s some things in there that I found useful in terms of the test you should take. And I love the, the hanging you, A big part of, of, of the work is around the strip grip strength. And so one of the ways you improve your grip strength is by just literally hanging from go try it. Okay. It’s, it’s, I’ve
01:02:08 [Speaker Changed] Been, he’s, by the way, you don’t have to
01:02:10 [Speaker Changed] Do, he
01:02:10 [Speaker Changed] Says chin ups or pullups. You just have to hang it. This is
01:02:12 [Speaker Changed] Hang You think this is easy. And he says, men, if men can do it for two minutes, that’s great. Women. One minute I’ll tell, tell you, I, I can’t get to, I literally cannot get to two
01:02:21 [Speaker Changed] Minutes. I, I can’t imagine I can, I Im not gonna do 10 pullups. Yeah. But I, I would be surprised if I couldn’t hang for right. For two minutes. But yeah, try
01:02:31 [Speaker Changed] It. Try it,
01:02:31 [Speaker Changed] Try it. Especially that, that’s, that’s interesting. Yeah. Yeah. Alright, so we’re talking about books. What about streaming? What are you watching you
01:02:38 [Speaker Changed] Listening to? Well, I, I, my wife and I watch something every night. Usually half hour to an hour. And
01:02:42 [Speaker Changed] We’re we’re the same. It’s a post pandemic is
01:02:45 [Speaker Changed] Hang there. What?
01:02:45 [Speaker Changed] It’s, yeah. Yeah. Because when you’re stuck at home, you couldn’t go out. Right. Didn’t we all
01:02:49 [Speaker Changed] Sort And I’m highly annoyed with all these streaming services. I like, like, come on, hand me a break. I mean, so,
01:02:55 [Speaker Changed] So what, what are you streaming these days?
01:02:57 [Speaker Changed] Well, I got, you got any suggestions? Yes.
01:02:59 [Speaker Changed] Yes, I do. I have plenty.
01:03:01 [Speaker Changed] I just finished disclaimer. Did you watch disclaimer?
01:03:03 [Speaker Changed] No, I, I love a good suggestion. Disclaimer.
01:03:06 [Speaker Changed] Yeah. It’s Kevin Klein and what’s her name? Cape Blanchet. Oh, no
01:03:11 [Speaker Changed] Kidding. It’s
01:03:12 [Speaker Changed] Short six seven. I love
01:03:14 [Speaker Changed] Those. We watched Department Q, which was a limited series.
01:03:17 [Speaker Changed] Department Q is good. Really
01:03:19 [Speaker Changed] Interesting.
01:03:19 [Speaker Changed] Yeah. Actually I watched that. That was very good. This is one I liked a lot. It’s the ending is the acting is great. Yeah. The ending is a little contrived. They need to do two more episodes or
01:03:28 [Speaker Changed] Something. I’ll give you three interesting things. We’ve been watching my wife this down, my wife got me sucked into Killing Eve, which is an espionage thriller. Oh, I heard this. We just, it’s four seasons. We just started the second season Killing Eve. Everybody in it is great. It’s a little, it’s a little, you know. Right. Some of it is, it’s not terribly gory. Right. People, people get killed. Yeah. It’s assassin. I’m okay. And yeah. You know, I don’t like the police procedurals where they show you all the it when it’s too realistic. Yeah. Like, we tried to watch The Pit. My wife is like, I’m out. Yeah. All right. I get that. So, so Killing Eve has been really interesting. That’s, that’s a good one. And you know what’s fascinating about the, the Gilded Age is it’s four stories. Old money, new money. Ah, the staff in both of these houses across the street. Right. And then the old Money Secretary, who is a black woman, and then her whole family and that storyline. But what’s amazing is all the issues. It’s 150 years
01:04:35 [Speaker Changed] Ago. Yeah. Same it today.
01:04:37 [Speaker Changed] It’s wealth inequality, it’s status, it’s economic mobility and it’s tribal. And it, it’s so fascinating. Gilded
01:04:46 [Speaker Changed] Age. The
01:04:46 [Speaker Changed] Gilded Age gr really?
01:04:48 [Speaker Changed] That’s a good one too.
01:04:49 [Speaker Changed] Interesting. Yeah. I I didn’t wanna watch it. To me it
01:04:51 [Speaker Changed] Just was a down abbey kind of thing, or
01:04:52 [Speaker Changed] Kind of, it looked like another soap opera. Yeah. But amazing cast, you get sucked into it, period. That’s on HBO. And so, so you
01:05:01 [Speaker Changed] Said three,
01:05:02 [Speaker Changed] You third it if, well, department Q was the department Q was the limited.
01:05:07 [Speaker Changed] That was a good one.
01:05:08 [Speaker Changed] If, if you like the, that’ll be back. I think if you like the espionage sort of thing, that one kind of unfolds really slowly. Yeah. And deliberately. But Killing Eve is much, it’s much faster and crazier and more interesting. And it, it’s mostly takes place in Europe, which makes it funner. You know, it’s MI six. Yeah. I, I won all sorts of awards. This, like, I got, she saw it Ready and when she was, she, I walk in and, and like, what’s this? She’s like, just watch 10 minutes of the first episode. All right. And we started watching it and sucked right in, so.
01:05:50 [Speaker Changed] Oh, that sounds good. Yeah, definitely. Watch that. And it’s four seasons we need. That’s,
01:05:53 [Speaker Changed] That’s right. So it gives you plenty. And I, you could bang out two a night very, very comfortably. Our final two questions. What sort of advice would you give a recent college grad interested in a career in economics and finance?
01:06:08 [Speaker Changed] Just show up.
01:06:09 [Speaker Changed] Show
01:06:09 [Speaker Changed] Up. Just show up. Do
01:06:10 [Speaker Changed] The work. Show up, show
01:06:12 [Speaker Changed] Up. Huh. I, I guess the other thing I’d say is I tell my kids this, every point of contact matters, every relationship, every phone call, every email, every teams meeting. Because things come around, you know, you meet somebody in one way, they’ll come back 10 years from now. And if they, if you did the right thing, if you were attentive to their, their needs and interests, it’ll, it’ll benefit you in the long run. It’s not easy to do it. It takes energy, but every point of contact matters.
01:06:51 [Speaker Changed] Huh. Really interesting. And our final question. What do you know about the world of economics today? You wish you knew way back in the 1990s when you were first starting out?
01:07:01 [Speaker Changed] Well, I didn’t, I thought everything could go back. Back to your point about box and models. I think ev I thought everything could be solved with a model. It’s like, you guys, come on. This is just arithmetic, you know, mathematics. We could, we could, we should be able to do this. No, you know, the world is a very messy place.
01:07:22 [Speaker Changed] Really, really good stuff. Mark, thank you for being so generous with your time. We have been speaking with Mark Zandy. He is the chief economist of Moody’s Analytics. If you enjoyed this conversation, check out any of the 550 previous discussions we’ve had over the past 11 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcast. And be sure and check out my new book, how Not to invest the ideas, numbers, and behaviors that destroys wealth and how to avoid them. How not to invest at your favorite bookstore. Now, I would be remiss if I did not thank the crack team that helps put these conversations together each week. Meredith Frank is my audio engineer. Alexis Noriega and Anna Luke are my producers. Sean Russo is my researcher. Sage Bauman is the head of podcasts at Bloomberg. I’m Barry Riol. You are listening to Masters in Business on Bloomberg Radio.
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