Bogleheads® on Investing Podcast Episode 040 – Dr. Ed Yardeni, host Rick Ferri (audio only)

00:00:00.000 | [MUSIC PLAYING]

00:00:10.840 | Welcome, everyone, to the 40th edition

00:00:12.640 | of "Bogleheads on Investing."

00:00:15.160 | Today, we're welcoming back Dr. Ed Yardeni.

00:00:18.920 | Dr. Yardeni is the president of Yardeni Research, Incorporated.

00:00:23.320 | And in this episode, we'll be talking about his new book,

00:00:26.240 | "In Praise of Profits."

00:00:28.320 | We'll also be looking back at 2021

00:00:31.320 | and looking forward to 2022.

00:00:42.840 | Hi, everyone.

00:00:43.560 | My name is Rick Ferry, and I'm the host

00:00:45.180 | of "Bogleheads on Investing."

00:00:47.040 | This episode, as with all episodes,

00:00:49.120 | is brought to you by the John C. Bogle Center

00:00:51.560 | for Financial Literacy, a 501(c)(3) nonprofit organization.

00:00:56.920 | Go to boglecenter.net.

00:01:00.520 | Your tax-deductible contributions

00:01:02.560 | are greatly appreciated.

00:01:04.200 | Today, we're welcoming back our special guest, Dr. Ed Yardeni.

00:01:08.280 | Dr. Yardeni is the president of Yardeni Research,

00:01:11.120 | a provider of global investment strategy and asset allocation

00:01:14.440 | analysis and recommendations to institutional investors.

00:01:18.440 | Dr. Yardeni earned his PhD in economics

00:01:20.660 | from Yale University in 1976, having

00:01:24.240 | completed his doctoral dissertation under Nobel

00:01:26.640 | Laureate James Tobin.

00:01:28.280 | He previously received his master's

00:01:30.200 | in international relations from Yale

00:01:32.240 | and completed his undergraduate studies magna cum laude

00:01:35.040 | at Cornell University.

00:01:36.720 | Prior to opening his own firm in 2007,

00:01:39.320 | Dr. Yardeni was a chief investment strategist

00:01:41.880 | and a chief economist at several Wall Street firms and asset

00:01:46.200 | management firms.

00:01:47.360 | He was also an economist at the Federal Reserve Bank of New

00:01:50.040 | York, and he held positions at the Federal Reserve Board

00:01:52.740 | of Governors and the US Treasury Department in Washington, DC.

00:01:56.640 | He also taught at Columbia University's Graduate School

00:01:59.600 | of Business.

00:02:00.840 | Dr. Yardeni is frequently quoted in the financial press,

00:02:04.020 | including the Wall Street Journal, the Financial Times,

00:02:06.400 | the New York Times, and most recently in a cover story

00:02:09.040 | for Barron's when he was dubbed the Wall Street seer.

00:02:13.480 | Today, we'll be discussing Dr. Yardeni's newest book,

00:02:16.360 | In Praise of Profits.

00:02:18.280 | We'll also be talking about the economy, where we've been,

00:02:22.280 | and where he thinks we may be going.

00:02:25.200 | So with no further ado, let me introduce Ed Yardeni.

00:02:29.160 | Welcome to the podcast, Ed.

00:02:31.080 | Thank you very much.

00:02:32.480 | Ed, thank you for joining us today.

00:02:34.160 | You've published a couple more books

00:02:36.280 | since I talked with you last.

00:02:38.400 | The latest book that you wrote I found very interesting.

00:02:41.280 | It's called In Praise of Profits.

00:02:44.320 | This book is just the latest in a series of topical studies

00:02:48.660 | that you've done, starting with the yield curve,

00:02:51.520 | stock buybacks, Fed watching, two books on Fed watching,

00:02:55.700 | and also S&P earnings and valuation and the pandemic.

00:03:00.360 | And this all followed your original book

00:03:02.640 | on predicting the markets of professional autobiography.

00:03:05.880 | So I want to specifically focus on this book, though,

00:03:08.480 | because I found it very interesting.

00:03:09.720 | It's really something that I think

00:03:11.880 | has been bothering me as an investor

00:03:13.720 | and I think clearly has been bothering you also.

00:03:16.720 | It's about profits.

00:03:19.040 | We've had a lot of discussion in the media,

00:03:21.720 | and I can't get too political in this podcast,

00:03:24.200 | but there's a difference of opinion, if you will,

00:03:28.120 | about profits and where we should be going as a nation.

00:03:32.980 | And what you intend to do with the book is to clear that up,

00:03:36.680 | at least from your view as an economist.

00:03:39.120 | So with that, could you tell us

00:03:42.040 | what the main idea of the book was?

00:03:45.320 | - Sure, I've observed over the years

00:03:47.880 | that profits tend to be the driver of economic prosperity.

00:03:52.880 | I mean, it's really pretty simple and straightforward

00:03:55.760 | to see it, to observe that it's profitable companies

00:03:59.200 | that expand, they hire more workers,

00:04:02.780 | they expand their capacity, so they're ordering more goods,

00:04:06.540 | capital equipment, and so on.

00:04:09.160 | Whereas companies that are not doing so well

00:04:12.120 | or actually losing money have to retrench.

00:04:14.800 | They have to cut back employment.

00:04:16.200 | They have to try to sell off some of their assets.

00:04:20.120 | And the more profitable companies we have,

00:04:22.720 | the better the overall economy is gonna do,

00:04:25.560 | the better overall society will do.

00:04:27.320 | 'Cause again, it's profitable firms that hire people,

00:04:30.800 | and that's the name of the game

00:04:32.120 | when we're talking about economic prosperity.

00:04:34.900 | We're not rooting for companies themselves

00:04:37.440 | to be prosperous and no one else will be prosperous.

00:04:39.600 | And obviously, companies can't be prosperous

00:04:42.440 | if their customers aren't prosperous.

00:04:44.640 | So this is sort of a defense

00:04:47.160 | of what I call entrepreneurial capitalism,

00:04:50.620 | which I think needs to be distinguished always

00:04:54.040 | from crony capitalism.

00:04:55.820 | There's aspects of capitalism

00:04:58.440 | that I certainly don't agree with, don't favor,

00:05:02.380 | and I criticize in the book.

00:05:04.800 | But on the other hand, the entrepreneurial capitalism

00:05:07.720 | often gets kind of wrapped up into that conversation

00:05:10.760 | and gets misrepresented as based on greed,

00:05:15.560 | on selfishness, on exploitation of workers.

00:05:19.360 | And the reality is, that's not the reality of our economy.

00:05:24.360 | - Ed, you touched on right away

00:05:25.840 | on the difference between entrepreneurial capitalism

00:05:28.080 | and crony capitalism.

00:05:30.000 | And I'd like you to dig into that a little bit more.

00:05:33.360 | I mean, what is the difference?

00:05:35.240 | - In a word, lobbyists.

00:05:36.680 | (laughs)

00:05:37.520 | - Okay.

00:05:38.340 | (laughs)

00:05:39.300 | - To keep it real simple,

00:05:40.620 | I am an entrepreneurial capitalist.

00:05:42.620 | I do pretty well.

00:05:43.660 | I've got a small company, I've got employees,

00:05:47.340 | but I'm not doing so well where I have extra money

00:05:51.420 | to hire lawyers and lobbyists

00:05:53.420 | to work with politicians in Washington

00:05:56.940 | to try to protect my business.

00:05:58.860 | - That's what it really gets down to, correct?

00:06:00.700 | - Yeah, politics.

00:06:01.900 | Yeah, I mean, I don't get involved in politics.

00:06:04.500 | I get involved in trying to satisfy my customers,

00:06:07.700 | whereas crony capitalists have done so well

00:06:10.860 | that they forget that it was entrepreneurial capitalism

00:06:14.940 | that gave them their success and their wealth,

00:06:18.100 | and it was their focus on their customers

00:06:20.820 | that made them successful.

00:06:22.300 | And it's sad when entrepreneurial capitalists do so well

00:06:25.620 | that they morph into crony capitalists

00:06:28.340 | by relying more and more on the government

00:06:31.060 | to create regulatory impediments to competitors

00:06:35.220 | to compete with them, to put them out of business even.

00:06:38.860 | - Now, would some of that be in defense of retaining jobs?

00:06:43.140 | - Well, that always is the excuse, right?

00:06:45.780 | Is the reason that the government

00:06:47.980 | needs to subsidize my business,

00:06:50.020 | or the reason the government needs to protect my business

00:06:53.700 | from both domestic and foreign competition

00:06:56.100 | is because if the government doesn't do that,

00:06:58.300 | then I'm gonna have to shut down

00:07:00.860 | and all these people that I employ will lose their jobs.

00:07:03.660 | I mean, that's a valid concern.

00:07:06.380 | But if we let that determine who the winners are

00:07:10.220 | and who the losers are,

00:07:11.740 | then it's not gonna be the customers

00:07:13.300 | that make that decision.

00:07:14.220 | It's gonna be politicians and companies

00:07:17.260 | that interact through lobbyists

00:07:19.260 | that will decide who succeeds and who doesn't.

00:07:22.220 | And that's fundamentally to the detriment

00:07:25.220 | of who I'm trying to satisfy

00:07:28.020 | and make as well off as possible, and that's consumers.

00:07:31.740 | Sometimes it's better to let the market make the decisions,

00:07:35.140 | even if it's painful,

00:07:37.260 | because the ultimate result is good for consumers

00:07:40.500 | and good for even the employees that may lose jobs

00:07:43.900 | and find them with companies that are better managed

00:07:47.580 | and better aimed at satisfying their customers.

00:07:51.620 | - More sustainable, perhaps.

00:07:53.020 | - Yeah.

00:07:53.860 | - What I took away from your book,

00:07:55.540 | and I hadn't really realized this,

00:07:57.660 | huge number of S-corps, sole proprietors,

00:08:02.660 | partnerships relative to C-corp.

00:08:05.940 | - Right.

00:08:06.780 | - And the breakdown of national income

00:08:10.460 | between the large C-corps,

00:08:13.900 | well, not all of them are large,

00:08:15.500 | to S-corps and solo practitioners.

00:08:17.860 | So could you elaborate on that?

00:08:20.220 | - Yeah, well, in corporate profits,

00:08:23.460 | the data that comes out with GDP,

00:08:26.260 | that is the corporate profits

00:08:27.980 | of both C-corporations and S-corporations.

00:08:32.340 | C-corporations tend to be large, but not always.

00:08:36.300 | There's plenty of small C-corporations,

00:08:38.820 | but they're owned by shareholders,

00:08:41.100 | and they pay out dividends, and they're taxed twice.

00:08:44.580 | They're taxed on their profits,

00:08:46.420 | and then the shareholders are taxed on their dividends.

00:08:49.740 | S-corporations are so-called pass-through entities,

00:08:53.580 | and what that means is that they're owned

00:08:55.540 | by fewer shareholders, which is one of the requirements,

00:08:58.980 | and if they pass the IRS requirements

00:09:01.980 | for filing S-corporations as pass-throughs,

00:09:04.900 | then their profits show up in the national income accounts,

00:09:08.380 | but their profits are then paid out as dividends

00:09:11.500 | to their small number of shareholders,

00:09:13.980 | and then the shareholders pay their personal income taxes

00:09:18.020 | on those dividends.

00:09:19.100 | So they're pass-throughs, and there are quite a few of them,

00:09:22.700 | and there's even more sole proprietorships

00:09:25.660 | that are owned by only one person,

00:09:28.220 | and also are pass-throughs.

00:09:30.100 | Whatever profit they have is passed through

00:09:32.980 | to their proprietor.

00:09:34.180 | They don't pay any corporate tax.

00:09:36.340 | They just pay personal income tax on proprietor's income,

00:09:40.380 | and then there's partnerships,

00:09:41.660 | which are also included in the data,

00:09:43.700 | and when you add them all together,

00:09:44.860 | you find out that pass-throughs,

00:09:46.660 | including S and proprietorships and partnerships,

00:09:50.340 | the pass-throughs account for more than half

00:09:53.660 | of payroll employment in the United States,

00:09:57.660 | and they've been growing very rapidly,

00:09:59.540 | which is an indication to me

00:10:01.740 | that a lot of people are entrepreneurial

00:10:03.860 | in spirit and in action.

00:10:06.580 | A lot of people have decided

00:10:07.860 | they don't want to work for somebody else.

00:10:09.380 | They want to have their own company,

00:10:11.100 | and they start their own company,

00:10:12.900 | and as long as they succeed,

00:10:14.660 | at some point, they probably need to hire people.

00:10:17.180 | In the old days, the United Kingdom was often described

00:10:20.580 | as a nation of retailers, of small shops, of shopkeepers.

00:10:25.380 | We really have continued to evolve

00:10:27.820 | into a nation of proprietorships

00:10:29.700 | and S corporations and partnerships.

00:10:32.420 | Those are all entrepreneurs.

00:10:33.940 | Very few of them are in a position

00:10:35.900 | where they can go hire lobbyists

00:10:37.940 | and get political about their business.

00:10:41.060 | - So as these entrepreneurs are successful,

00:10:44.300 | and they start to grow,

00:10:46.260 | and they start hiring people,

00:10:48.380 | and some of them become publicly traded companies,

00:10:53.100 | it seems like at that point,

00:10:55.540 | they tend to become villainized in many ways

00:10:58.660 | because of this thing called income inequality.

00:11:02.340 | In other words, the people who grew that company

00:11:05.260 | and went public, and yes, they became wealthy as a result,

00:11:10.260 | somehow don't deserve that wealth,

00:11:13.740 | and that wealth needs to be shared

00:11:15.380 | with the "stakeholders" as opposed to the shareholders.

00:11:20.380 | Can you talk about the difference

00:11:22.660 | between stakeholders and shareholders?

00:11:26.340 | - Well, first, with regards to the income inequality issue,

00:11:30.780 | a lot of the income inequality we see in our society

00:11:33.660 | has a lot to do with demography.

00:11:35.660 | Frankly, simply with age.

00:11:36.980 | I mean, young people don't earn very much,

00:11:39.300 | and older people tend to earn a lot more,

00:11:41.500 | and that kind of makes sense

00:11:42.820 | that that's the way it should be

00:11:44.140 | 'cause young people aren't experienced.

00:11:45.900 | They may be very well-educated,

00:11:47.660 | but they aren't particularly experienced,

00:11:49.660 | particularly in the business

00:11:51.340 | that they eventually wind up joining,

00:11:54.580 | and older people have more skin in the game

00:11:56.900 | and develop more,

00:11:58.220 | so it's true that there's income inequality,

00:12:01.060 | but a lot of it's related to where you are

00:12:04.860 | in the age profile,

00:12:06.820 | and it's generally younger people

00:12:08.980 | that go out on their own and start companies

00:12:11.860 | and take some risks,

00:12:13.940 | and if they're successful,

00:12:15.220 | then they start to hire,

00:12:17.060 | and if they're very successful,

00:12:18.620 | they start to enjoy some significant wealth,

00:12:22.140 | and odds are they're going to reinvest

00:12:25.220 | a good part of that wealth back into their business

00:12:27.540 | and hire some more people,

00:12:29.540 | but as they do that,

00:12:30.540 | their companies become more valuable,

00:12:32.220 | their shareholders in their companies.

00:12:34.020 | They might even go public,

00:12:35.900 | which increases potentially the value of their company.

00:12:39.620 | I mean, very few entrepreneurs are going to go public

00:12:42.540 | unless a Wall Street investment banker tells them

00:12:45.500 | that your stock price is going to value your company

00:12:49.460 | a lot more than you realize,

00:12:51.340 | and so yeah, they get wealthy,

00:12:52.860 | and most of the wealth inequality

00:12:55.340 | is related to equity ownership of businesses

00:12:58.900 | by sole proprietors,

00:13:00.220 | as well as equity ownership of publicly-traded companies

00:13:04.340 | like C-Corporations,

00:13:06.620 | but as you said,

00:13:07.780 | when we look at the notion

00:13:10.140 | that entrepreneurs are robber barons,

00:13:12.620 | which is sort of historically

00:13:15.420 | what entrepreneurs have been described as being

00:13:18.540 | once they've succeeded,

00:13:20.420 | completely misses that their success

00:13:23.580 | originated from the fact

00:13:25.060 | that they provided goods and services

00:13:27.820 | that were wanted, that were needed,

00:13:30.700 | that were highly prized by their customers,

00:13:33.820 | by their consumers.

00:13:34.700 | It's their customers that made them rich.

00:13:36.660 | They didn't rip off their workers.

00:13:39.220 | They didn't rip off their customers.

00:13:41.700 | I mean, people like that

00:13:42.860 | don't stay in business for very long,

00:13:44.780 | not in a free marketplace

00:13:46.020 | 'cause the consumers walk away from them

00:13:48.300 | and their workers walk away from them.

00:13:50.340 | They only stay in business

00:13:51.460 | if they got political clout and political support,

00:13:55.420 | but we have some of that,

00:13:56.860 | but we also have lots of entrepreneurship,

00:13:59.260 | and what we have to understand about entrepreneurs

00:14:02.340 | is that they are driven by the profit motive

00:14:06.100 | to bring us goods and services

00:14:08.020 | that improve our standard of living.

00:14:10.420 | That's the way they're gonna get rich.

00:14:12.300 | So first and foremost,

00:14:13.620 | their top concern isn't a selfish concern,

00:14:16.740 | isn't that how am I gonna get rich?

00:14:18.980 | It's how am I gonna satisfy enough consumers

00:14:22.380 | so I first will stay in business

00:14:24.180 | and I won't lose everything I put into it.

00:14:26.700 | Then all of a sudden they say,

00:14:27.820 | "My goodness, I've done it."

00:14:29.100 | And the customer is just coming in

00:14:31.660 | and it's gone viral.

00:14:33.300 | People are talking to each other and saying,

00:14:35.420 | "This is a good product."

00:14:37.140 | And suddenly I'm rich.

00:14:39.820 | Now, some of these people who get very rich,

00:14:41.700 | what do they do?

00:14:42.700 | As I said, they put it back in their business.

00:14:44.820 | Others get so rich that they become venture capitalists.

00:14:48.380 | They send some of their money to firms in Silicon Valley

00:14:51.820 | and say, "Okay, that's a pretty good idea.

00:14:53.820 | "I'm gonna invest in that."

00:14:55.340 | And so they are the wellhead of prosperity.

00:14:59.180 | They are the wellhead of risk-taking

00:15:01.580 | and the willingness to try to come up

00:15:04.260 | with goods and services

00:15:05.660 | that increase everybody's standard of living.

00:15:07.940 | - You talk in your book about upward income mobility.

00:15:11.780 | - Well, I think most Americans are aspirational.

00:15:15.300 | Most Americans would like to do better.

00:15:17.620 | And I think a lot of upward income mobility

00:15:20.260 | has to do with an entrepreneurial capital system.

00:15:23.140 | It provides the opportunity

00:15:24.940 | to have upward income mobility.

00:15:27.580 | Work hard, provide what your employer needs you to provide

00:15:32.900 | to make their business succeed,

00:15:36.380 | or do that as an employer.

00:15:39.420 | Work hard, motivate your employees

00:15:42.140 | and sell good products and services that consumers want,

00:15:46.420 | and you wind up enjoying upward income mobility.

00:15:50.500 | Now, upward income mobility tends to occur

00:15:53.140 | during periods of prosperity.

00:15:54.940 | More people wind up making more in an economy

00:15:58.980 | that's growing and prospering than one that isn't.

00:16:01.580 | We actually get the worst income inequality

00:16:05.100 | and the worst wealth inequality

00:16:06.780 | during periods of prosperity

00:16:08.140 | when the rich are getting richer.

00:16:10.300 | But why are they getting richer?

00:16:11.540 | Well, because people are buying what they're selling

00:16:14.540 | and they wind up doing extremely well.

00:16:17.780 | But again, it's like the Henry Ford insight.

00:16:21.380 | Henry Ford decided to raise the money he pays his workers

00:16:25.700 | 'cause he wanted to make sure he had enough customers

00:16:28.660 | who could afford to buy his cars.

00:16:30.860 | We're well past that point in our economy and our society,

00:16:34.740 | but it's definitely in the best interest of entrepreneurs

00:16:38.780 | to come up with outstanding goods and services

00:16:41.540 | that'll make them prosperous,

00:16:43.700 | and then to share their prosperity.

00:16:45.700 | The market kind of forces them to do that.

00:16:48.340 | Maybe they don't do it completely by design

00:16:52.500 | or they're not completely motivated to do that,

00:16:55.460 | but the market definitely forces them

00:16:57.780 | to share the wealth with their employees,

00:17:00.940 | with their shareholders, and with society at large

00:17:04.340 | by providing these goods and services

00:17:06.540 | at lower and lower prices.

00:17:08.740 | - When we're listening to the news media

00:17:11.860 | about income inequality,

00:17:14.620 | what we're not told, it appears,

00:17:17.460 | is that there are different ways to measure income.

00:17:21.500 | And just using a minimum wage, for example,

00:17:26.220 | is not a great way to measure income.

00:17:29.740 | - Right.

00:17:30.980 | - Just using income is not a great way

00:17:32.660 | to measure wealth, either.

00:17:33.820 | I know a lot of people who are multimillionaires

00:17:35.700 | who are getting Affordable Care Act tax credits

00:17:38.340 | because their income is low,

00:17:40.740 | and the government says if you have low income,

00:17:44.020 | then you are in poverty or some level of poverty,

00:17:46.900 | even though it doesn't measure wealth.

00:17:49.500 | So could you talk about the problems of measuring income

00:17:53.180 | and the different ways of which we should be measuring it?

00:17:56.980 | - Well, on the progressive side,

00:17:59.820 | I've observed over the years

00:18:02.140 | that they do like to show

00:18:07.140 | that there's data that support their position,

00:18:09.580 | but they always seem to use the same series

00:18:12.580 | over and over again without recognizing the flaws

00:18:16.500 | in the data they're using.

00:18:18.740 | And I think it's mostly because the data supports

00:18:20.860 | their story, and as long as it supports that story,

00:18:23.340 | the data must be good.

00:18:24.340 | But I've done a lot of work on income data

00:18:27.580 | and concluded that one series that they particularly like

00:18:30.860 | is one put out by the census to measure poverty,

00:18:34.340 | and that is it's median household income.

00:18:39.340 | So it's the household in the middle, if you will,

00:18:42.220 | median household income, and that's divided by the CPI.

00:18:47.220 | Now, there's several problems with that.

00:18:50.740 | For starters, the census data is based on surveys.

00:18:54.220 | They ask people, how much money income do you have?

00:18:57.580 | Are you making?

00:18:58.780 | And so they're basically asking,

00:19:00.900 | collecting data on an income series that is pre-tax,

00:19:05.340 | so it doesn't include any of the tax credits

00:19:07.900 | that progressives have succeeded

00:19:10.180 | in putting into the tax system,

00:19:12.100 | doesn't reflect the progressiveness of the tax system,

00:19:15.620 | doesn't reflect non-money sources of income

00:19:19.260 | like Medicaid and Medicare and food stamps.

00:19:22.780 | So you're never gonna win that debate

00:19:25.460 | because that series is always gonna show

00:19:29.660 | that the median household isn't doing very well

00:19:33.260 | if you don't factor in all the programs

00:19:35.820 | that the progressives have successfully provided.

00:19:39.900 | In the book, I try to be balanced.

00:19:41.780 | I try to be fair to the progressives.

00:19:43.900 | They've accomplished a great deal.

00:19:45.660 | I mean, social security,

00:19:46.820 | nobody argues about that really anymore.

00:19:49.460 | And we've got Medicaid and Medicare.

00:19:51.860 | There's a lot that they've accomplished,

00:19:53.460 | but if they don't show that in the data that they're using,

00:19:57.420 | they're always gonna be finding fault with the system.

00:20:03.180 | And so that's one problem.

00:20:04.740 | The CPI tends to be upwardly biased.

00:20:07.380 | It's widely recognized by economists

00:20:09.220 | that it's upwardly biased.

00:20:10.740 | And there are other measures that economists,

00:20:12.580 | particularly the Fed has endorsed

00:20:14.900 | the personal consumption expenditure deflator

00:20:18.460 | as an alternative to the CPI.

00:20:21.100 | And when you use that indicator,

00:20:23.420 | you find that real incomes have increased

00:20:26.620 | about one to 1.5% per year since 1995,

00:20:31.620 | whereas the data series that the progressives

00:20:35.980 | have been promoting basically stagnated

00:20:38.340 | over that whole period.

00:20:39.180 | You're still gonna hear progressives

00:20:41.420 | just kind of blurred out, unchallenged,

00:20:44.220 | that the data confirms that the average family,

00:20:48.060 | the median family has seen their income stagnate

00:20:52.180 | for decades and that all of the benefits

00:20:56.500 | of economic growth have gone to corporations

00:20:59.740 | and the wealthy.

00:21:00.740 | And that's just not correct.

00:21:02.180 | It's just not true.

00:21:04.740 | The reality is there has been no stagnation in real wages.

00:21:09.940 | - One thing that's in the sites of the proposed tax bill

00:21:14.940 | is this idea of corporate buybacks

00:21:19.580 | and how stock buybacks are a bad thing

00:21:22.740 | and that this money should be going to the workers

00:21:27.220 | and the stakeholders instead of the shareholders.

00:21:30.580 | You wrote a whole book on this.

00:21:31.740 | Can you tell us some insight?

00:21:33.500 | - Well, we don't really have particularly good data

00:21:37.140 | on buybacks.

00:21:38.460 | What I do see is that when we look at the S&P 500

00:21:42.580 | and we look at the growth rate on a year over year basis

00:21:46.060 | in earnings per share versus the total earnings,

00:21:50.060 | aggregate earnings of these corporations,

00:21:53.580 | what we find is that it's not much of a difference.

00:21:56.620 | In other words, are companies really spending

00:21:59.860 | hundreds of billions of dollars to buy back their shares

00:22:03.700 | and on balance, the S&P 500 winds up only getting

00:22:07.980 | a boost of about 1% per year from this buyback activity.

00:22:12.980 | Now, the problem is that's the macro picture.

00:22:16.420 | When you actually dig down and look at the S&P 500,

00:22:20.060 | there are in fact lots of companies

00:22:22.140 | that buy back their shares

00:22:24.100 | and that significantly increases their earnings per share

00:22:28.820 | because there are fewer shares outstanding.

00:22:31.180 | But then there's also a lot of other companies

00:22:33.180 | where the buybacks don't seem to be having that effect.

00:22:37.180 | What we don't really have good data on,

00:22:38.940 | but we know anecdotally it exists,

00:22:41.620 | is companies do pay their employees

00:22:45.060 | some of their compensation in stock and in stock options.

00:22:49.900 | And it's not just the top three or four or five people

00:22:52.780 | that are part of these plans.

00:22:55.420 | And I think what happens is when companies like that

00:22:58.580 | pay out compensation in stock to avoid dilution,

00:23:02.740 | to avoid reducing their earnings per share

00:23:05.940 | because there's more stock being issued as compensation,

00:23:10.260 | they turn it right around and take the money,

00:23:12.580 | the cash that they didn't pay out as cash for compensation

00:23:16.940 | and buy back the shares so that net net,

00:23:20.660 | it doesn't have an adverse impact

00:23:22.780 | on their earnings per share.

00:23:24.540 | And I think there's quite a few companies that do that.

00:23:27.660 | So I don't think we wanna discourage companies

00:23:30.860 | from paying some of their compensation in stock

00:23:34.060 | because it does give employees skin in the game

00:23:37.420 | and it does give them a benefit.

00:23:39.700 | I mean, the reality is the stock market

00:23:42.420 | has been trending higher for years

00:23:45.180 | and employees who've been benefiting compensation plans

00:23:50.180 | by getting some of their pay in stock

00:23:53.140 | have done extremely well.

00:23:54.500 | And I don't think we wanna discourage that.

00:23:57.340 | I also don't think that Washington should get involved

00:24:00.940 | in micromanaging corporate financial matters.

00:24:04.140 | It should really be up to corporations

00:24:05.900 | to deal with that.

00:24:07.380 | Having said all that, I do recognize

00:24:10.020 | that there is a problem of some CEOs

00:24:12.140 | being egregiously overpaid.

00:24:14.660 | So again, it's not as though I disagree

00:24:17.300 | with everything progressives have to say.

00:24:19.580 | I think they are right that there are some CEOs

00:24:21.900 | that are egregiously overpaid,

00:24:23.900 | but I think it's really up to the shareholders

00:24:26.500 | or if Congress wants to get involved in that area,

00:24:31.500 | they've already have done that and messed things up.

00:24:35.220 | It was back in Bill Clinton's administration

00:24:39.380 | that Congress were very concerned

00:24:41.380 | about CEOs making too much money.

00:24:43.500 | And what they did is they said,

00:24:44.900 | okay, up to a million dollars in compensation per CEO

00:24:49.140 | is tax deductible to the corporation.

00:24:51.620 | Anything above that isn't.

00:24:53.260 | So corporations started issuing stock and stock options

00:24:57.020 | to these CEOs who got famously rich

00:25:00.460 | thanks to this progressive legislative change.

00:25:03.660 | So beware of what you wish for,

00:25:05.740 | beware of unintended consequences

00:25:08.380 | when you meddle around with the economy.

00:25:10.380 | - But unlike stock that's just bought back

00:25:12.820 | to increase earnings per share,

00:25:14.340 | stock that's bought to basically get reissued to employees,

00:25:18.780 | this is an expense item.

00:25:20.580 | - Yes.

00:25:21.420 | - This doesn't get away.

00:25:22.260 | - That's correct, it's an expense item.

00:25:23.940 | Let's just take, I don't know,

00:25:25.980 | somebody who's making 100,000,

00:25:28.220 | you give the employee 10,000 or 20,000 in stock.

00:25:32.660 | So instead of paying out 10 to $20,000 in cash,

00:25:35.900 | you take that cash and go and buy the stock in the market

00:25:39.140 | so that you're not diluting earnings per share.

00:25:42.140 | So absolutely, the full 100,000 is expensed

00:25:45.900 | from the corporate income statement.

00:25:48.020 | - So mostly you think what half of all stock buybacks

00:25:51.860 | are basically expensed like it would be a salary?

00:25:54.620 | - It's hard to say.

00:25:55.980 | The data I've seen, which is very flimsy data,

00:25:58.900 | is something like 20, 25% of employees

00:26:02.260 | get some sort of stock compensation,

00:26:04.660 | which is a pretty large number of people.

00:26:08.060 | You can't account for those kind of numbers

00:26:10.700 | with just a couple of the people at the top.

00:26:13.460 | - But overall, you do know,

00:26:15.060 | you did see that stock buybacks in the aggregate

00:26:18.020 | maybe increase earnings per share by 1% per year.

00:26:21.820 | - Correct.

00:26:22.780 | - But what percentage of the stock market

00:26:25.180 | is being bought back every year?

00:26:26.460 | Was it at 3%, 4%?

00:26:28.180 | - Something like that, yeah.

00:26:29.900 | - So could we-- - Yeah, I mean,

00:26:30.740 | the market cap is huge.

00:26:31.980 | - So could we reasonably say then

00:26:34.580 | that at least half of all buybacks, maybe even more,

00:26:39.580 | is just going towards compensation that's expensed?

00:26:44.140 | - It's a real possibility.

00:26:45.580 | I just don't, I like to have the data to make my point.

00:26:49.660 | I mean, I'd love to say that and say,

00:26:51.940 | this insight proves my point,

00:26:55.980 | but I can't really prove it with the data.

00:26:57.900 | So at this point, I'd rather just say

00:27:01.140 | that what I do believe is,

00:27:03.020 | I have some data confirming the story,

00:27:06.100 | is that something like 25% of working people

00:27:11.100 | get some participation in a stock compensation plan.

00:27:17.380 | - Okay, fair enough.

00:27:19.060 | But this is a target now of Washington.

00:27:20.980 | I mean, some people in Washington have decided

00:27:23.980 | that stock buybacks, for whatever reason,

00:27:26.500 | are not a good thing for America.

00:27:28.380 | - Yeah, they believe that the corporations

00:27:31.020 | should be taking that money

00:27:32.220 | and spending more on capital equipment

00:27:34.940 | and productivity and wages.

00:27:36.940 | They've often compared the amount of money

00:27:40.220 | that's spent on buybacks to corporate profits

00:27:43.180 | and said, "My God, it's 100%.

00:27:45.060 | "100% of corporate profits is going to buybacks."

00:27:47.980 | And buybacks plus dividends

00:27:50.780 | account for 100% of corporate profits.

00:27:52.820 | What they don't seem to appreciate

00:27:54.460 | is a basic accounting statistic in corporate finance,

00:27:57.740 | and that is corporate cash flows

00:28:00.100 | equal to after-tax corporate profits plus depreciation.

00:28:04.940 | And depreciation is huge, much bigger than corporate profits.

00:28:08.300 | So companies have been spending,

00:28:10.780 | we've got record capital spending going on,

00:28:13.500 | even as we've had sizable buybacks.

00:28:16.180 | So where did all that money come from

00:28:18.460 | for the capital spending?

00:28:20.100 | And the answer is, well, it's cash flow.

00:28:22.540 | It's cash flow, to a large extent,

00:28:25.140 | based on the depreciation allowance,

00:28:27.300 | which is essentially a tax shelter

00:28:29.460 | so that you can write off assets that are depreciating

00:28:32.940 | and have money to reinvest in newer equipment.

00:28:36.900 | - The proposal that went to the Senate recently

00:28:40.540 | said that there will be a 1% tax imposed

00:28:45.180 | on all corporate buybacks, with some exceptions,

00:28:48.260 | stock that goes into an ESOP plan and a few other things.

00:28:51.820 | Don't you think that if that actually passed,

00:28:54.900 | that corporations would change the way they do things

00:28:58.060 | as far as compensation to their employees,

00:29:01.060 | that 25%, which is currently getting stock?

00:29:03.580 | - No, it's a piddling number,

00:29:05.300 | but it's really just opening the door

00:29:07.740 | to Washington having more say

00:29:10.380 | in the way corporations manage their finances,

00:29:13.260 | which makes no sense whatsoever

00:29:15.220 | since very few politicians in Washington

00:29:19.300 | have ever managed a company

00:29:21.300 | or should have any say in managing a company.

00:29:24.140 | Again, it gets to the concept

00:29:25.500 | of shareholder versus stakeholders.

00:29:28.460 | Congress, I guess, views itself,

00:29:31.420 | or some politicians view themselves as stakeholders

00:29:34.980 | in every corporation in America,

00:29:36.740 | that somehow they have a right to meddle

00:29:39.500 | and to tell corporations what they should be doing

00:29:42.780 | with their finances, with their employment,

00:29:45.180 | with their capital spending, with their productivity.

00:29:47.860 | But that makes no sense.

00:29:49.380 | That's not the way the system's supposed to work.

00:29:51.620 | It's supposed to be a capitalistic system,

00:29:53.860 | and shareholders should be the ones overseeing

00:29:56.820 | what their businesses are doing.

00:29:58.900 | - The name of the book called "In Praise of Profits,"

00:30:01.660 | and it's just a treasure trove of some great information

00:30:05.180 | about income and the measurement of income

00:30:08.740 | and different profits and the uses of profits and so forth,

00:30:12.380 | and it just adds to your knowledge about how America works.

00:30:17.380 | And I think that the best thing,

00:30:19.260 | I guess I can just sum it up with just one line

00:30:22.020 | that you wrote actually in the last page of the book.

00:30:25.820 | And you basically said,

00:30:26.860 | "Most Americans have never been better off

00:30:28.900 | "than they are today thanks to record profits

00:30:31.500 | "and record productivity,

00:30:33.140 | "which are fueling widespread prosperity."

00:30:36.540 | Do you wanna comment on that?

00:30:38.020 | - Well, that line really does encapsulate

00:30:40.940 | the whole point of the book is that we should praise profits

00:30:44.940 | rather than curse profits.

00:30:46.140 | Profits is not a four-letter word.

00:30:48.860 | Profits really is the source of economic prosperity.

00:30:52.500 | The profit motive drives businesses

00:30:55.420 | to provide the very best goods and services

00:30:58.300 | at the lowest price relative to the competitors.

00:31:01.540 | But it's important that they have competitors.

00:31:03.540 | It's important that we don't corrupt the system

00:31:05.980 | with crony capitalism, with too much politics.

00:31:08.820 | I mean, it's kind of too late for that.

00:31:10.060 | It's already happened.

00:31:11.340 | But it's important that we allow entrepreneurs

00:31:14.300 | to constantly challenge that system,

00:31:15.980 | to come out of nowhere with better goods and services

00:31:18.780 | at lower prices and say,

00:31:19.940 | "See, I can do this better than these big companies

00:31:22.980 | "who've been established and doing it for a long time,

00:31:26.020 | "and yet aren't giving you the kind of quality

00:31:29.300 | "or prices that the consumer really should have."

00:31:33.020 | So yeah, the whole focus of the book

00:31:35.980 | is that we need to have a lot more respect for profits

00:31:39.300 | and a lot better understanding of the role of profits

00:31:42.260 | in creating the prosperity that we've all enjoyed.

00:31:45.460 | And I would hope that some people

00:31:47.580 | would re-examine their assumptions,

00:31:49.900 | 'cause it's widely believed that Americans aren't well-off,

00:31:54.420 | that their incomes have stagnated,

00:31:57.340 | that their standard of living is pathetic,

00:31:59.620 | and that income inequality has gotten so bad

00:32:02.380 | that only a few people really are enjoying the benefits

00:32:05.540 | of this great country, and that's just not so.

00:32:08.940 | - Well, thanks, that's a great summary.

00:32:10.620 | Let's get into the economy.

00:32:13.420 | - Sure.

00:32:14.260 | - And what happened in 2021?

00:32:17.540 | Where are we now?

00:32:18.900 | And where do you think we're going in 2022?

00:32:21.700 | And let's start with corporate profits.

00:32:24.380 | - Right.

00:32:25.220 | The corporate profits have been remarkably strong.

00:32:28.540 | They've come back dramatically on a year-over-year basis.

00:32:33.020 | In the second quarter, we were up like 90%.

00:32:36.180 | That reflects the fact that they were extremely depressed

00:32:39.180 | during the second quarter of 2020 because of the lockdowns.

00:32:44.180 | But it's really quite extraordinary

00:32:45.740 | the extent to which corporate profits have made a comeback.

00:32:48.420 | Corporate profit margins have gone to all-time record highs,

00:32:52.940 | and the stock market anticipated that.

00:32:55.940 | And as you might recall,

00:32:57.340 | there were a lot of people in the media

00:32:59.060 | who were kind of like looking at the stock market

00:33:01.300 | and said, "This is not right.

00:33:03.060 | "I mean, why is the stock market having such a good time

00:33:05.700 | "when the economy is doing so terribly?"

00:33:07.980 | And the reality is corporate profits

00:33:10.260 | underneath of all that were rebounding dramatically.

00:33:13.420 | And as corporate profits rebounded, guess what?

00:33:15.340 | Companies started to bring back their employees

00:33:18.420 | and started to expand again.

00:33:19.940 | And so it's all come together rather nicely.

00:33:22.220 | I think 2021 is a year where the demand shock

00:33:27.220 | that was created by excessively stimulative fiscal

00:33:32.660 | and monetary policies created a supply disruption shock.

00:33:36.300 | I think that's really what's been happening in 2021

00:33:40.060 | is it's not that suddenly the supply chain system

00:33:43.500 | kind of collapsed for no good reason.

00:33:46.140 | It just got overwhelmed by demand.

00:33:49.020 | Look, people had cabin fever from the lockdowns.

00:33:52.140 | And as soon as the lockdowns were gradually eased,

00:33:55.700 | they went out and bought a lot of goods.

00:33:57.500 | They couldn't buy services, so they bought a lot of goods.

00:34:00.300 | And then the government sent three rounds of relief checks.

00:34:03.100 | And I think the first one was necessary.

00:34:05.700 | The second one, not so much.

00:34:07.100 | And the third one, I think, created the demand shock

00:34:11.140 | that has led to the supply disruptions.

00:34:12.940 | Just way too much demand relative to the supply system.

00:34:16.300 | So the supply system has been disrupted

00:34:19.020 | and the result has been higher inflation.

00:34:21.620 | This whole business cycle that we've had

00:34:24.060 | since we hit a bottom in the second quarter of last year

00:34:28.980 | has been like a business cycle on steroid and speed.

00:34:33.020 | We had a horrible recession last year

00:34:36.060 | that only really lasted two months,

00:34:37.700 | which was March and April.

00:34:39.380 | We've never had a lockdown recession.

00:34:41.500 | And then we've had this extraordinary recovery

00:34:44.060 | to the point where we were back to

00:34:46.020 | where we started pre-pandemic in record GDP territory

00:34:50.020 | by the second quarter of this year.

00:34:52.820 | And now, as part of this accelerated business cycle,

00:34:56.700 | we're seeing something we haven't seen

00:34:58.020 | for a very long time.

00:34:59.500 | And that's a real pickup in inflation.

00:35:01.820 | - Well, that gets right into my next question.

00:35:04.220 | Chairman Powell and others have been talking about

00:35:07.060 | this transitory inflation versus permanent inflation.

00:35:10.180 | Of course, they've been trying to get the inflation rate

00:35:11.740 | up to 2% for a long time.

00:35:13.620 | But this transient inflation seems to be pretty sticky now.

00:35:17.100 | Can you comment on that?

00:35:18.780 | - Yeah, it's gone from being transitory to being persistent.

00:35:21.460 | And the transitory story was being promoted

00:35:25.380 | by Fed Chair Jerome Powell, who said that,

00:35:28.220 | "Look, when you do year-over-year comparisons

00:35:30.540 | "and you're comparing prices in March and April this year

00:35:33.820 | "to March and April last year, guess what?

00:35:37.380 | "It's gonna show a lot of inflation

00:35:38.740 | "'cause prices were depressed in March, April,

00:35:41.180 | "May, June, July of last year.

00:35:42.940 | "So those year-over-year comparisons

00:35:45.140 | "are gonna be distorted by what he called the base effect."

00:35:48.380 | But once you got into September, October readings,

00:35:50.980 | you couldn't make that argument anymore.

00:35:53.340 | And so he switched, he pivoted to a new concept,

00:35:57.380 | which is, well, it's clearly supply chain disruptions

00:36:00.980 | that are causing a more persistent inflation

00:36:03.980 | than had been anticipated by him and others earlier in 2021.

00:36:08.980 | And now the pitch is, well,

00:36:11.020 | when these supply disruptions get sorted out,

00:36:13.820 | inflation should moderate.

00:36:16.100 | And that kind of makes sense.

00:36:17.500 | The problem is the longer that they persist

00:36:20.780 | and create inflationary pressures, prices,

00:36:24.100 | the more that those pressures then get into wages,

00:36:27.620 | the more there's a risk of a wage price spiral

00:36:30.500 | comparable to what we had in the 1970s.

00:36:33.300 | I don't think that's where we're going.

00:36:35.260 | 1970s productivity collapsed.

00:36:37.780 | I see a tremendous boom in productivity in the years ahead.

00:36:41.340 | But for the here and now,

00:36:42.860 | we are having unintended consequence

00:36:45.780 | of the Fed's ultra easy monetary policy

00:36:48.380 | and the tremendous stimulus provided

00:36:51.820 | by the fiscal authorities that was deficit financed.

00:36:55.500 | All that's created a demand shock,

00:36:58.300 | which has then created a supply shock,

00:37:00.540 | which explains why we have an inflation problem right now.

00:37:04.020 | And it's distressing because, you know,

00:37:05.900 | people are seeing their wages going up in their paychecks

00:37:09.900 | 'cause workers are in high demand.

00:37:12.540 | But at the same time, a lot of those wage increases

00:37:15.860 | are getting offset by price increases.

00:37:18.340 | - When I first interviewed you,

00:37:21.020 | that's been a couple of years ago,

00:37:22.500 | we talked about your book, "Fed Watching for Fun and Profit."

00:37:27.060 | And you came up with the four Ds for inflation,

00:37:32.060 | detente, disruption, demography, and debt.

00:37:36.860 | So first, could you explain those four?

00:37:38.780 | And then also, is there a fifth one now called disease?

00:37:43.820 | - Well, perhaps.

00:37:44.940 | In terms of the four Ds, starting in the early 1980s,

00:37:49.060 | until we got to the pandemic environment

00:37:51.300 | of seeing inflation making a comeback,

00:37:53.500 | I was arguing that there were some major structural forces

00:37:57.860 | that were keeping a lid on inflation

00:37:59.660 | and were bringing inflation down,

00:38:01.740 | creating what some people described as disinflation.

00:38:04.100 | I was an early disinflationist, I think it was in 1980,

00:38:08.060 | I wrote a piece called "On the Road to Disinflation,"

00:38:11.540 | arguing that Paul Volcker

00:38:12.860 | probably would break the back of inflation

00:38:14.820 | and that we'd see lower inflation, not higher inflation.

00:38:18.340 | And the four Ds, detente is the first one,

00:38:21.580 | it's just, I need a word that starts with a D,

00:38:24.060 | so to explain globalization.

00:38:26.380 | So globalization occurs during peace times,

00:38:29.940 | markets become more integrated,

00:38:31.900 | companies and businesses and countries

00:38:33.820 | trade more with each other.

00:38:35.340 | And during peace times, you get more global competition,

00:38:37.780 | which is fundamentally disinflationary.

00:38:40.740 | Then in a competitive global economy,

00:38:43.780 | companies are under a lot of pressure

00:38:45.580 | to increase their productivity

00:38:47.540 | to offset the competitive advantage of their competitors.

00:38:51.140 | And so productivity is enhanced

00:38:54.260 | through technological disruption,

00:38:55.900 | so the D is in technological disruption.

00:38:58.540 | And then there's demography,

00:39:00.980 | which is a constantly evolving story,

00:39:03.140 | but the way it's been evolving in recent decades

00:39:06.220 | suggests that we're not gonna have very much

00:39:09.380 | in the way of population growth.

00:39:11.340 | And meanwhile, populations are gonna get older,

00:39:14.100 | more geriatric,

00:39:15.220 | and that that is inherently disinflationary.

00:39:18.620 | And finally, central banks

00:39:21.980 | try to offset all of these disinflationary forces

00:39:25.420 | by encouraging people to borrow more,

00:39:27.660 | so they kept interest rates low,

00:39:29.460 | they provided very easy monetary policy,

00:39:32.340 | so we did in fact see debt accumulation.

00:39:35.620 | But at some point, debt becomes a burden on growth

00:39:38.740 | rather than a stimulus of growth.

00:39:40.660 | At some point,

00:39:41.500 | a lot of consumers have already done their borrowing,

00:39:43.420 | a lot of homeowners have already done their borrowing,

00:39:45.860 | and trying to encourage people to borrow more

00:39:48.260 | just doesn't seem to work.

00:39:49.940 | And meanwhile, if you provide easy credit conditions,

00:39:53.100 | you may very well create deflation

00:39:55.180 | because you may allow marginal companies

00:39:58.260 | to stay in business,

00:39:59.620 | companies that should go out of business,

00:40:01.100 | but for the fact that they can refinance their debts

00:40:03.620 | very cheaply as a result of ultra easy monetary policies.

00:40:07.180 | I don't know what to do with the disease concept

00:40:09.940 | you just introduced,

00:40:11.420 | 'cause it's not clear how this is all gonna play out.

00:40:14.220 | It certainly looks as though the pandemic

00:40:16.020 | has had some impact

00:40:17.380 | on contributing to the supply chain disruptions

00:40:20.660 | to the extent that port workers

00:40:22.260 | have been ill and couldn't work,

00:40:25.660 | and that certainly could be contributing to inflation

00:40:28.460 | rather than disinflation.

00:40:30.220 | So, a lot of things changed, possibly fundamentally,

00:40:34.340 | possibly for a while,

00:40:36.260 | as a result of the pandemic.

00:40:38.020 | And right now, I think we clearly have an inflation problem,

00:40:42.220 | but looking beyond that,

00:40:43.700 | I think technological innovation

00:40:45.900 | is gonna be a source of disruption

00:40:48.580 | and is going to lead to more productivity

00:40:51.500 | offsetting these inflationary forces.

00:40:54.220 | - You touched on interest rates earlier,

00:40:57.100 | and interest rates now are persistently low

00:41:00.660 | given the high inflation rate.

00:41:02.340 | You were predicting, if I recall,

00:41:03.980 | that the 10-year Treasury should go over 2%,

00:41:06.540 | probably even getting close to three,

00:41:08.500 | if I'm not mistaken, by maybe next year.

00:41:10.820 | But it hasn't.

00:41:12.580 | I mean, it's been persistently stuck here, it seems.

00:41:17.340 | Can you comment on, number one, what's going on?

00:41:20.300 | And number two,

00:41:21.140 | you still have that prediction for next year?

00:41:23.340 | - No, I mean, I scaled it back.

00:41:26.980 | It just didn't work out.

00:41:28.780 | And so, I scaled it back to,

00:41:30.820 | well, maybe we'll get to two.

00:41:32.620 | I thought we'd get to 2% by the middle of this year.

00:41:35.740 | And we were going in the right direction there

00:41:38.780 | when we got to 1.7% in March.

00:41:41.020 | And then all of a sudden,

00:41:42.980 | it started coming back down again for no obvious reason.

00:41:47.220 | Maybe the bond market had more concerns

00:41:49.460 | about the underlying pandemic

00:41:51.780 | as being fundamentally deflationary.

00:41:54.300 | And then bond markets really have been globalized.

00:41:57.740 | So now we've got bond yields at zero

00:42:00.220 | or slightly negative in Germany and Japan.

00:42:02.540 | So maybe they just keep buying our bonds at 1.5%,

00:42:06.700 | which is why we haven't gone to 2%.

00:42:09.780 | But of course, the Fed also has been buying bonds like mad.

00:42:14.100 | And I think, well, but here they've announced

00:42:17.540 | and they've started to taper,

00:42:19.060 | and yet we still don't see a 2% handle.

00:42:22.220 | I think we will sometime next year,

00:42:24.620 | but I don't know that we're gonna see 3%.

00:42:26.620 | I think the Fed is gonna be even more liberal next year

00:42:30.820 | than they were since the pandemic started,

00:42:33.500 | continuing to be more concerned

00:42:35.220 | about the labor market than inflation.

00:42:37.660 | And so I think there will be a couple of rate increases

00:42:40.780 | next year, two, not three.

00:42:43.260 | And then I think the Fed will actually move the goalpost

00:42:46.340 | and say that their inflation target is 3% instead of 2%.

00:42:50.060 | - Interesting.

00:42:51.020 | The Fed has been buying a lot

00:42:52.220 | of treasury inflation-protected securities as well.

00:42:54.540 | I think they own 20% of the market now.

00:42:56.300 | - Yes, they do.

00:42:57.780 | - Why are they doing that?

00:42:59.060 | - I don't see any point in it whatsoever.

00:43:01.420 | I mean, the less that they meddle

00:43:04.220 | in capital markets, the better.

00:43:06.700 | So what are they doing in the TIPS market?

00:43:08.660 | The TIPS market could actually give us some guidance

00:43:12.220 | on what inflationary expectations are doing,

00:43:15.340 | but you can't come to that conclusion

00:43:17.300 | when the Fed's such a heavy player in that marketplace.

00:43:21.220 | It's a mystery.

00:43:22.300 | I mean, other than them believing

00:43:24.940 | that if they're gonna buy bonds,

00:43:26.940 | they should buy them across the maturity spectrum

00:43:29.380 | and as well as in some of the esoteric bonds like the TIPS,

00:43:33.580 | but it makes no sense.

00:43:34.660 | There's no reason for it.

00:43:36.340 | - Let's go overseas for a bit

00:43:37.540 | and tell me what you see in Europe

00:43:39.340 | and then go across the Pacific

00:43:41.180 | and tell me what you see in China.

00:43:43.980 | - Well, Europe has a demographic problem.

00:43:46.940 | Their populations are aging.

00:43:48.940 | Their populations aren't growing very rapidly.

00:43:52.860 | They're trying to have policies

00:43:55.540 | that are consistent with a nationalistic policies

00:43:59.660 | covering all the region of Europe,

00:44:02.340 | or at least the Eurozone,

00:44:04.660 | and yet they still have a lot of nationalities.

00:44:07.500 | I mean, they still have nation states there

00:44:10.460 | that don't necessarily all agree

00:44:12.580 | on what policies should actually be.

00:44:15.580 | And so there's a lot of inconsistencies,

00:44:18.060 | a lot of tensions in the way that system is designed.

00:44:21.980 | They've got a monetary union,

00:44:23.340 | but they don't have a tax union.

00:44:24.620 | They don't really have a fiscal union.

00:44:26.500 | It's only as a result of the pandemic

00:44:28.420 | that they started issuing Euro bonds for the region.

00:44:32.620 | I think Europe got some major issues

00:44:35.340 | in terms of stimulating their economy.

00:44:38.260 | And I don't view it as a particularly vibrant

00:44:41.180 | or dynamic economy.

00:44:42.780 | They don't have the same kind of mix of histories

00:44:45.660 | that we have here.

00:44:47.180 | We certainly have a lot more in healthcare

00:44:49.540 | and a lot more in technology and finance

00:44:51.700 | than they do.

00:44:53.140 | There's venture capital here.

00:44:55.220 | There's a lot of wealthy people

00:44:56.340 | that reinvest their monies in new innovations.

00:45:00.660 | It seems to me as though we're more innovative

00:45:03.780 | than the Europeans are.

00:45:05.140 | So by comparison to the U.S.,

00:45:09.060 | I think there's a lot of room for improvement

00:45:11.820 | in the way things operate in Europe.

00:45:14.380 | With regards to China,

00:45:16.140 | China's got a very, very serious fundamental problem

00:45:20.700 | also with their demography,

00:45:22.020 | and they worsened it with the one child policy.

00:45:25.260 | When we look around the world,

00:45:26.740 | fertility rates have collapsed below replacement

00:45:29.780 | just about everywhere except India and Africa.

00:45:32.380 | And they'll probably go to below replacement there too,

00:45:36.580 | because I think it's all related to urbanization.

00:45:39.380 | In agricultural communities, kids have an economic value.

00:45:43.260 | In an urban setting, kids are all cost.

00:45:45.860 | And where are you gonna put them?

00:45:46.940 | I mean, people live in apartments.

00:45:48.380 | They live in small houses maybe.

00:45:50.900 | And so we've seen fertility rates collapse,

00:45:52.940 | and that's particularly occurred,

00:45:54.860 | it's occurred around the world.

00:45:55.820 | It's occurred in China.

00:45:57.100 | And the Chinese made that much worse

00:45:58.660 | with the one child policy,

00:46:00.340 | which was only lifted in 2015.

00:46:03.980 | And now only this year they said,

00:46:05.740 | "Okay, you can have not just two children,

00:46:07.620 | "but you can have three children."

00:46:09.100 | But it's too late.

00:46:10.420 | Demographic damage has been done.

00:46:12.580 | And we can see that in inflation-adjusted retail sales,

00:46:15.900 | real retail sales growth, which I monitor every month,

00:46:18.700 | has plunged from about 18% in 2011 to zero recently.

00:46:23.700 | So the demography is really haunting them

00:46:28.940 | in terms of consumer demand.

00:46:31.580 | And then of course, their whole property bubble

00:46:34.500 | seems to be ready to burst.

00:46:36.140 | And if it's not gonna burst,

00:46:37.340 | they're gonna try to manage to take the air out of it,

00:46:40.180 | which is gonna take a lot of growth out of their economy.

00:46:43.220 | So they're becoming more and more dependent on exports,

00:46:47.140 | which is becoming less and less reliable,

00:46:49.580 | at least exports to countries

00:46:51.820 | that they're having political tensions with,

00:46:54.500 | like the United States, like Australia,

00:46:56.940 | and maybe some others.

00:46:59.260 | So I think China's operating

00:47:00.860 | from a fundamentally weak demographic position.

00:47:03.740 | And I worry about what that might imply

00:47:08.060 | in terms of their military aggressiveness.

00:47:10.500 | - Wag the dog, right?

00:47:11.420 | Create a diversion.

00:47:12.500 | - Yeah.

00:47:13.540 | - Let's get into back to the United States

00:47:15.180 | and let's talk about an area that you discussed

00:47:17.620 | on one of your podcasts recently,

00:47:19.380 | where you're going to begin to focus

00:47:21.020 | this whole idea of productivity.

00:47:23.460 | And where do you see us becoming more productive?

00:47:26.100 | And you're gonna start to focus a lot on that

00:47:27.700 | with your research.

00:47:29.300 | - Well, the productivity story, I think, is a huge story.

00:47:33.020 | I think it's the story that will make

00:47:35.700 | or break the decade ahead here.

00:47:38.660 | If this is the 1970s all over again,

00:47:40.900 | then productivity will be collapsing

00:47:43.900 | during the current decade.

00:47:44.980 | But that's not what I see.

00:47:45.940 | I see productivity having bottomed around 0.5%

00:47:49.980 | at an annual rate during 2015,

00:47:52.980 | now running around 2%,

00:47:55.100 | which is a significant improvement.

00:47:56.700 | And I think it's gonna go to 4% within the next few years.

00:48:00.300 | And I think the technology revolution

00:48:02.460 | that started in the 1990s is ongoing.

00:48:06.020 | I think the technologies have become more powerful,

00:48:09.940 | more user-friendly, cheaper, easier to implement,

00:48:13.620 | and really lend themselves to being used

00:48:17.900 | in just about every business.

00:48:19.620 | I tell people, when you look at your stock portfolio,

00:48:22.780 | ask yourself if every one of your stocks

00:48:25.100 | is a technology stock.

00:48:26.380 | And they look at me and say, "You're kidding.

00:48:27.980 | "You don't want me to put 100% of my portfolio in tech."

00:48:31.180 | I said, "No, what I mean by that

00:48:32.260 | "is you wanna own tech for sure,

00:48:34.100 | "but you wanna make sure that the companies

00:48:35.700 | "that you own that are not in tech

00:48:37.780 | "are using tech to increase

00:48:39.980 | "their productivity and efficiency."

00:48:41.940 | So for example, these days,

00:48:43.340 | people talk about fintech and medtech

00:48:45.780 | as being sub-industries within those sectors.

00:48:49.580 | And that's the way I'm looking at things.

00:48:53.100 | The big story really for productivity

00:48:55.500 | is the big story in the demography.

00:48:58.060 | We've got very little growth in the labor force,

00:49:01.180 | very little growth in the population.

00:49:02.980 | And that's really the key to understanding

00:49:05.540 | why productivity is bound to make a comeback.

00:49:08.100 | Companies, I think, started to realize before the pandemic

00:49:12.300 | that there was something wrong in the labor market.

00:49:14.220 | There's not enough workers.

00:49:15.980 | And the unemployment rate got down to 3.5%

00:49:18.700 | before the pandemic.

00:49:19.860 | And so there's a real shortage of workers.

00:49:21.940 | Pandemic hits, then everything is wild for a while.

00:49:26.140 | And now people have come up with all sorts of explanations

00:49:28.500 | of why people haven't been coming back to the labor market.

00:49:31.900 | But the reality is the underlying demography

00:49:34.780 | of senior baby boomers retiring

00:49:37.780 | and not being replaced by many more younger people,

00:49:42.940 | but barely by being replaced by younger people,

00:49:45.900 | we're seeing that the labor force growth is about 0.5%.

00:49:49.700 | And the arithmetic of real GDP is very simple.

00:49:51.900 | It's labor force growth plus productivity growth.

00:49:55.060 | So if there's no growth in the labor force,

00:49:57.300 | there's no growth in real GDP,

00:49:58.660 | unless there's productivity growth.

00:50:00.740 | And I think companies are already scrambling

00:50:03.340 | to use technology to increase their productivity.

00:50:06.020 | And 4% productivity growth would be marvelous.

00:50:10.820 | It would be a very bullish scenario.

00:50:12.860 | - I want one last question.

00:50:14.020 | It has to do with energy.

00:50:15.420 | You've made comments recently

00:50:17.020 | about the potential future rise again of nuclear power

00:50:22.020 | and also cold fusion.

00:50:24.340 | I just want to touch on those.

00:50:25.580 | And what would they mean?

00:50:27.180 | - Well, I'm an economist.

00:50:28.540 | I've trained as an economist.

00:50:29.700 | And my main complaint about economists

00:50:32.700 | and the way economists are educated

00:50:35.420 | is if you go back and look

00:50:36.580 | at your introductory Economics 101 textbook

00:50:39.900 | written by Paul Samuelson,

00:50:41.620 | you'll see that economics is described

00:50:43.980 | as the science of optimally allocating scarce resources.

00:50:48.820 | It's a pretty depressing concept

00:50:50.420 | that there's only so many resources out there

00:50:53.620 | and it's up to economists to come up with systems

00:50:57.860 | that optimally allocate those resources.

00:51:00.820 | And I can fundamentally disagree

00:51:02.460 | with that definition of economics.

00:51:04.180 | I think economics is about technology being used

00:51:07.660 | to overcome what appears to be scarce resources.

00:51:11.180 | The way we know things are scarce

00:51:12.980 | is through the price mechanism.

00:51:14.700 | When prices go up for something,

00:51:16.300 | well, there's some scarcity there.

00:51:19.420 | And then some entrepreneur says,

00:51:20.620 | "I know, I got an idea for how I could overcome that

00:51:23.700 | "and come up with something better, smarter, cheaper

00:51:27.420 | "to deal with that scarcity."

00:51:29.380 | And it's technological innovations

00:51:31.700 | that really make the difference.

00:51:32.740 | And I think that's gonna be a big surprise

00:51:36.500 | with regards to all these concerns about climate change

00:51:40.300 | and about fossil fuels and so on.

00:51:42.660 | I'm just been fascinated recently,

00:51:44.980 | there seems to be a breakout of new technologies

00:51:48.380 | that may very well allow for the commercialization,

00:51:51.820 | not of nuclear fission power,

00:51:54.500 | but nuclear fusion or cold fusion power.

00:51:57.380 | And if that's the case, that would be truly miraculous

00:52:01.020 | because fusion generates energy without any emissions.

00:52:05.740 | It's clean, it's very, very cheap.

00:52:08.780 | And that may be my next book

00:52:10.300 | is trying to map out how something like that

00:52:14.340 | would impact the course of our economy

00:52:16.940 | and the financial markets.

00:52:18.660 | - And the world.

00:52:19.740 | - Absolutely, absolutely, be a game changer.

00:52:22.980 | - Well, Ed, thank you so much again

00:52:24.220 | for being our guest on Bogle Heads on Investing.

00:52:26.660 | I really enjoyed the talk today.

00:52:28.700 | - Thank you.

00:52:29.540 | - I really enjoy reading your information.

00:52:31.700 | I know your work is for mainly institutional investors,

00:52:35.540 | but if an individual investor wanted to follow you,

00:52:37.980 | how would they do that?

00:52:39.020 | - Well, yeah, the reason it's for institutional investors

00:52:42.060 | is because we spend a lot of time and money

00:52:46.180 | given our very best efforts.

00:52:47.500 | And it's the market that is especially attuned

00:52:50.580 | to what we do.

00:52:51.420 | But individual investors are welcome

00:52:53.020 | to at least try it for four weeks.

00:52:54.940 | Go to yardeni.com, Y-A-R-D-E-N-I.com.

00:52:58.460 | And at the top of the website there,

00:52:59.980 | there's a form to fill out a trial.

00:53:02.460 | Other than that, I do post quite often,

00:53:06.140 | almost daily actually, on LinkedIn.

00:53:08.460 | And then that's shown on Twitter as well.

00:53:11.420 | So I do provide quite a bit of insights that way.

00:53:14.660 | I kind of view myself as having a day job,

00:53:18.300 | which is how I feed the family,

00:53:20.380 | and then having an evening job writing these books

00:53:23.580 | and providing some information on LinkedIn

00:53:27.660 | to the general public,

00:53:28.740 | because I have learned a lot over the years,

00:53:31.140 | and I'd like to share it with people

00:53:33.140 | and get their opinions,

00:53:34.860 | and maybe tweak some of my own thoughts

00:53:37.300 | at this point in my life.

00:53:38.620 | I got plans for more books.

00:53:41.140 | - Well, thank you so much again for being our guest,

00:53:43.260 | and hope you have a happy holidays.

00:53:45.140 | - You too.

00:53:45.980 | Best to everybody.

00:53:47.460 | - This concludes "Bogle Heads on Investing,"

00:53:49.540 | episode number 40.

00:53:51.180 | Join us each month as we have a new guest

00:53:53.660 | and talk about a new topic.

00:53:55.340 | In the meantime, visit bogleheads.org

00:53:58.140 | and the "Boglehead" wiki.

00:53:59.820 | Check out the "Bogleheads" new YouTube channel,

00:54:02.860 | "Bogleheads" Twitter, "Bogleheads" Facebook,

00:54:05.780 | and find out about your local "Bogleheads" chapter,

00:54:09.380 | and tell others about it.

00:54:11.100 | Thanks for listening.

00:54:12.460 | (upbeat music)

00:54:15.060 | (upbeat music fades)

00:54:18.140 | (upbeat music)

00:54:20.720 | [BLANK_AUDIO]

Bogleheads® on Investing Podcast Episode 040 – Dr. Ed Yardeni, host Rick Ferri (audio only)

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