Modern Monetary Theory & Global Growth w/ Richard Fisher Former Dallas Federal Reserve Bank CEO and President

View Transcript

Ryan Morfin:

Welcome to Non-Beta Alpha. I’m Ryan Morfin. On today’s episode, we have former Dallas Fed Bank CEO and president Richard Fisher talking to us about his view on global growth. This is Non-Beta Alpha.

Ryan Morfin:

There’s a lot of talk about modern monetary theory. What does that mean to you and do you buy into that?

Richard Fisher:

Well, what it means to me is monetizing the debt and creating inflation. The professor that came up with this [inaudible 00:00:57] comes from Stony Brook University. I have no gripe with Stony Brook University. It’s just too appealing to the hyper-progressives, and I think we have to be careful we don’t abandon the common sense. If you lend money, it has to be paid back. If you lend it, you should lend it at a rate of return that incents you to lend it. And we can’t just take, more important than all of that, we can’t take incentive out of people to work.

Richard Fisher:

My parents came to this country with zilch, just the American dream. My father would have died before taking public monies. And he had some really awful jobs to claw his way up from scratch. So, he used to say, a job gives me dignity. And if you’re just on the Dole, which unfortunately is sort of the ultimate outcome of having a guaranteed income for everybody and a certain guaranteed cashflow, et cetera, which is what we’re talking about here with M and T. I think it takes away what made our country great, which is drive and ambition and reward.

Richard Fisher:

So if they’re talking about a modern monetary theory, which just underwrites everybody, I think it’s a mistake. This is more than just a social correction. This is just dis-incentivizing everybody. I do believe in taking care of the poor. I believe in our Sun Gard employment programs. I wish they were better administered. I do think we need to take care of those who are disadvantaged, but we don’t have to take care of everybody because otherwise there’s no incentive to work. If there’s no incentive to work, you can’t build an economy. You can’t build an economy, you can’t be a powerful force.

Ryan Morfin:

It’s a poverty trap, for sure. So, you think Jerome Powell and the FMMC, they aren’t going to go anywhere near negative rates? You don’t think that the U.S. will ever get there?

Richard Fisher:

No, they would destroy it so much in this country. Again, I want you to go back and look at the banking index for European banks. Banks cannot make money in this environment. In a zero interest rate environment it’s a tough now. It’s almost impossible. You don’t have a trading book and it’s impossible with negative interest rates. Money market funds, what will happen to the money market funds? So, no, I don’t think our capital markets are structured for it.

Ryan Morfin:

I’ve spent a lot of time looking at macroeconomic models when I was at University of Chicago and one of my favorite indicators was the productivity growth metric as a indicator for growth. How do we measure that today? Are we doing it correctly? How do we expand that in the country?

Richard Fisher:

It’s a very good question because I don’t sense that we have a full grip on it. And then remember, we’ve had a change, forgive my economic talk here. A change in the production functioning economy. We’ve gone from manufacturing to a service sector led economy that is driven by electronic means and different forms of communication. Unless people spend all their time looking at their cellphone and looking at cartoons or playing games. I don’t know about you, but my productivity is skyrocketing for the ability we can instead of flying to see you and spending all that time and money, we can have a dialogue right here. This was unimaginable years ago.

Richard Fisher:

So we have a different structure than we had before. I think we’re able to ramp things up better, even our manufacturing functions or our distribution functions and consumer goods for example, are much more efficient than they were before. That would lead me to conclude that output per worker properly measured should be going up, not down or not flat. I do think you’re right, that’s what we should be looking at. The question is, are we measuring it correctly? I think a lot of work has to be done on this.

Ryan Morfin:

You mentioned that the risk of inflation bearing its head over time and we’ve had very low consumer inflation, but I’ve talked to friends of mine who are central bankers in the Middle East. And they’ve said that they’re really quite worried that the inflation has actually been showing up in the stock market, which causes me concern. Do you think it’s been injected like steroids into financial assets and it hasn’t bled out into the rest of the economy? Is there a risk that, that eventually does bleed out into the rest of the economy?

Richard Fisher:

Well, we obviously have the markets, if you’re talking about trading markets, particularly equity markets trading near all time highs. Some would argue we’re trading two standard deviations out of the norm on the high side. And that should correct to some level. Let me just give you the simplest explanation of what we did and then I think it puts us in perspective what we did when I was at the fed.

Richard Fisher:

By cutting rates to zero in the 2008, 2009 timeframe, and then hammering down the yorker through our operation twist and then declaring large amounts of quantitative easing. There was a simple mathematical proposition and it was, you can now discount the present value of future cash flow, which is what all investors should be doing, literally to infinity. That’s the math. And you may recall that we went to zero, we said all the right things and then we started QE one. We took the balance sheet to a trillion, a quarter billion, from 700 or 800. And we did it by the last week of February of 2009.

Richard Fisher:

The S and P bottomed at 666, the devil’s number. So we called it, the book of revelations number. And it’s been on a tear ever since. So this was felt to be important because all the capital markets were strained. There was a feeling that unless we lifted the equity markets from their very, very low levels, that you wouldn’t have an impact on the rest of the economy and it wouldn’t lead to a spur of growth and consumption the unemployment et cetera. It worked. That’s the math.

Richard Fisher:

Now we’re pouring on more money when we’re not at 666. We’re trading at an all time high and we’re trading at highs in terms of multiples as well. So it begs the question, have we hyper inflated these markets and even maybe a bigger question is, but the market is now dependent on cheap money provided or guided by the fed. And what happens when that stops? I would say we are vulnerable here. I don’t know where it ends. We got scared on March 23rd, if your memory of we’ve got hammered. A good time to buy by the way as a trader. But you’re right. I think we have seen that fixed income markets are the same way.

Richard Fisher:

These are the lowest interest rates over interviews with history, for the key marker bonds in the world, the treasuries. So we have had some inflation, obviously, perhaps severe inflation in the asset trading markets. It also is one of the problems with what we did. And even Jay Powell spoke about this in our meetings. When he first came on board in 2012, June of 2012 was his first meeting. That we have to be careful here, that we are creating a put. And if the fed reacts every time that things get weak, then we create a trap for ourselves and we could pull the legs off the table very easily.

Richard Fisher:

And that’s at risk here presently as well. I do find a whole generation. I’m 71 years old. I started a debacle of 1974, ’75 on Wall Street. That’s when I started out there. I’ve seen this several times now, but I’ve never seen the central bank underwrite this degree of pricing and these kinds of multiples before. So to me, that just says at some point, the bigger you get, the harder you fall. We’ll see.

Richard Fisher:

I do think we’re going to have a lot of volatility here. I also believe it is prudent to go back to the old way of investing, which is not just buying markets, which so many young people do that not been in these debacles before, but rather doing fundamental analysis. And if you do, you have some security, as you understand what’s behind your investment.

Ryan Morfin:

Yeah. I believe active management is going to become critical going forward. I think everybody’s over correlated to the index and ETF. And so we’re seeing wealth management advice be really a sought after real wealth management advice be sought after skillset today. One question for you is, what’s a factor that you focus on for macro economic growth models? What’s most important to you?

Richard Fisher:

Do you put a gun to my head and said, you can only talk about one variable. It’d be unemployment claims. Because again, remember what drives our economy, consumption. If people don’t work, they can’t spend. They don’t work, they can’t stay to spend later. So I look at the unemployment stats and unemployment claims, and that tells me a big chunk of what I need to know.

Ryan Morfin:

And does U6, I’d be the gaping out of the U6 number, does that bother you given the jobs numbers on the headline? Look, like we bounce back faster, but the underemployment is worrying.

Richard Fisher:

Yeah. I’m sure that’s a difficult thing to measure right now, by the way, because you’re not sure who’s [inaudible 00:10:39] and who’s not. You want to bring U6 down as much as possible. These are just remind your guys it’s people that are looking for work, but can’t find it essentially or are employable and can’t find jobs. So there also is the risk of disincentive here of getting a job if you’re underwriting unemployment, to the degree, the new steps that have been taken. I don’t know where the right mix is, but I’ve heard business operators saying, “I can’t get people to come back to work because they’re getting more through unemployment now with a $600 extra benefit.” So I think the data’s a little bit sloppy here right now. I’m not sure how bad U6 really is, or it could all snap back once these incentive programs not to go back to work or taken off the table.

Ryan Morfin:

What secular forces or trends should we be watching to determine what the new stable state of the U.S. economy is going to look like? Do you think our supply chain is moving back to the U.S. even though it’s maybe at a higher cost?

Richard Fisher:

I do think it’s back. There isn’t motion to move it back to the United States. But I think the major factor is to what happens in the e-world and the internet and with 5G. We are now used to remote communications and remote work. One of the things we’ve gone through at Barclays, for example, where I’m senior advisor after 911, and I wasn’t there at 911, I was in a previous career. But to take all those people and just aggregate them and have them trade these large portfolios in fixed income and make banking transactions funds was really difficult because you couldn’t have in that downtown. Those downtown buildings in Manhattan, it would have been bombed. Now we have the electronic means to do it.

Richard Fisher:

So it’s not, I think a major thing is happening here. The highly dense metropolitan areas will be depopulated. People will be able to commute from further away. And those that commute from further away may need to have a different educational skill set than what we’ve had thus far. This is a whole chain reaction that works the way through the economy that COVID has accelerated. I think it’s going to happen faster than people think.

Richard Fisher:

I’ll give you an example. Even in China. If you’re buying foodstuffs in China, what you do is you go online, you send a signal to the supplier, let’s say it’s PepsiCo company, I’m on the board of, or X, Y, Z, or B Cherry or whatever the name of the Chinese company is. And then it is delivered to you. It’s called C… Excuse me, O2O, Online-To-Offline. If I believe, if you look at the Chinese statistics of the growth with that mode of delivery system in the last three months, it’s probably accelerated 50 to 60 to 70%. That’s a new way to do things.

Richard Fisher:

So the e-world changes the way we operate, the way we structure, the way we position our workforce, the way we deliver our products, the way we warehouse those that have to be delivered, the way we entertain. There are huge changes taking place in our economy right now and I think a smart investor is going to be able take good advantage of that, which I know is what your guys are going to do.

Ryan Morfin:

Absolutely. Absolutely. So how do we address innovation in the U.S. economy? I mean, we’ve got immigration trends right now that are not maybe increasing our human capital education policy may be failing us in K through 12 and maybe there’s an education bubble and higher ed fueled by cheap student debt. I mean, how do you look at America’s ability to innovate in this e-world?

Richard Fisher:

Well, there is the American way and we always come up with something. You touched on two very important things. So we’re about to wrap up here, but now again, I’m the child of immigrants. I’m willing to bet, you’re the child of immigrants.

Ryan Morfin:

I am.

Richard Fisher:

We all are [inaudible 00:14:43] ultimately. I mean, no one was here originally unless you’re native American. And that has been, the genius has helped drive our [inaudible 00:14:51]. We bring brain power. It could be the Italians that came in to build the New York subway system, which people tend to forget about. It can be the Indians that have come in to help in our high tech sector or the Russians or the Hispanics or anybody, including my parents who came from Australia and South Africa with nothing.

Richard Fisher:

I really do worry that we’re cutting off our nose to spite our face by having a, an indiscriminate immigration policy, but also by cutting it off. This America first stuff, even Donald Trump wasn’t a native American, by the way. So, that’s one thing. And then the second thing, I do think the Achilles tendon here for us is our primary and secondary education system. If we don’t improve that, we cannot compete with the Chinese. When Mao was in power, even through Xi Jinping, there were a total of a million university students in China, and then they were taught Mao thought, which was useless.

Richard Fisher:

If you look at the number of STEM students that they have now, and the effort they put into this and how hard they work and how their incentive to do it. We don’t have that in our country. We may not be able to. We don’t have a central demand command economy, but we have to improve our primary and secondary education system. Unless we do that, we’re doomed. And on that happy note, I just want to tell you, it has been fun for me. Thank you.

Ryan Morfin:

Well, sir, thank you so much. You’ve been very generous with your time and we appreciate you joining us and we hope to see you soon when you return back to Dallas. It is hot down here. So veil sounds like a great idea.

Richard Fisher:

42 degrees this morning. It’s sunny and beautiful.

Ryan Morfin:

Fantastic. Well thank you so much, sir and we appreciate your time. Thank you for watching Non-Beta Alpha. And please remember to leave us a review on Apple podcast and our YouTube channel. This is Non-Beta Alpha and now, you know.

Speaker 3:

All price references are market forecasts correspond to the date of this recording. This podcast should not be copied, distributed, published, or reproduced in whole or in part. The information contained in this podcast does not constitute research or recommendation from Non-Beta Alpha inc, Wentworth Management Services, LLC, or any of their affiliates to the listener. Neither Non-Beta Alpha inc, Wentworth Management Services, LLC, nor any of their affiliates make any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast and any liability, therefore, including in respect of direct, indirect or consequential loss or damage is expressly disclaimed.

Speaker 3:

The views expressed in this podcast are not necessarily those of Non-Beta Alpha inc or Wentworth Management Services, LLC, a Non-Beta Alpha inc, and Wentworth Management Services, LLC are not providing any financial, economic, legal accounting or tax advice or recommendations in this podcast.

Speaker 3:

In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Non-Beta Alpha inc or Wentworth Management Services, LLC, to that listener nor to constitute such person, a client of any affiliates of Non-Beta Alpha inc or Wentworth Management Services, LLC. This does not constitute an offer to buy or sell any security. Investments and security may not be suitable for all investors and investment of any security may involve risk and the potential loss of your initial investment. Investors should review all risk factors before investing. Investors should perform their own due diligence before considering any investment. Past performance is not indicative of future results. Investment products, insurance and annuity products are not FDIC insured, not bank guaranteed, not insured by a federal government agency may lose value.

 

Share This Episode

Subscribe To Our Podcast!

COPYRIGHT 2020 ALL RIGHTS RESERVED. THIS DOES NOT CONSTITUTE AN OFFER TO BUY OR SELL ANY SECURITY; INVESTMENTS IN SECURITIES MAY NOT BE SUITABLE FOR ALL INVESTORS. AN INVESTMENT IN ANY SECURITY MAY INVOLVE RISK AND THE POTENTIAL LOSS OF YOUR INITIAL INVESTMENT. INVESTORS SHOULD REVIEW ALL “RISK FACTORS” BEFORE INVESTING. INVESTORS SHOULD PERFORM THEIR OWN DUE DILIGENCE BEFORE CONSIDERING ANY INVESTMENT. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. INVESTMENT PRODUCTS, INSURANCE AND ANNUITY PRODUCTS ARE NOT FDIC INSURED/NOT BANK GUARANTEED/NOT INSURED BY A FEDERAL GOVERNMENT AGENCY/MAY LOSE VALUE. SECURITIES OFFERED THROUGH CABOT LODGE SECURITIES, LLC [CLS] MEMBER FINRA / SIPC 200 VESEY STREET, 24TH FLOOR, NEW YORK, NY 10281, 888.992.2268.

Recommended For You

Want to join our show?

Would you like to be a guest on the Non-Beta Alpha Podcast? Please click below and let us know that you are interested in being a guest on the podcast and we will get back to you shortly.

Skip to content