INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics and we're going to talk about climate change and macroeconomic consequences of climate change, and we'll bring in a few of our other colleagues to talk about that. But before we do that, I want to bring in my two co-hosts. Marisa, Marisa DiNatale. Hi, Marisa. How are you?

Marisa DiNatale:              Hey, Mark. I'm good. How are you?

Mark Zandi:                      Good. You're hailing from Southern California today?

Marisa DiNatale:              I am, yep.

Mark Zandi:                      Excellent. Excellent.

Marisa DiNatale:              Made it back from hurricane-addled Florida last week.

Mark Zandi:                      I know. Did you know my home in Florida, the eye of that storm went right over the [inaudible 00:00:49] of my home?

Marisa DiNatale:              Really? Wow.

Mark Zandi:                      And the only damage I had, bizarrely, was the screen. One screen got broken. That was it.

Marisa DiNatale:              Wow.

Mark Zandi:                      Really bizarre. Even the beach was impacted, but very modestly. Most of the impact was north, towards Daytona Beach. That beach got creamed, unfortunately. And you, where were you? You were in Naples, I think, right?

Marisa DiNatale:              I was in southwest Florida.

Mark Zandi:                      Southwest.

Marisa DiNatale:              So last week when that hurricane was hitting the east coast, my flight got canceled so I didn't make it back the night that I wanted to. And then the next day, I spent the whole day in the airport trying to get home. And I did.

Mark Zandi:                      It's a nice airport though.

Marisa DiNatale:              It is. If you have to be stuck in an airport, I guess that's a good one to be stuck in.

Mark Zandi:                      That's Fort Myers airport, I believe, right?

Marisa DiNatale:              Yeah. That's right.

Mark Zandi:                      Not a bad airport. Yeah. Very manageable. And we got Cris, Cris deRitis. Cris is the deputy chief economist. Hey, Cris.

Cris deRitis:                       Hey, Mark.

Mark Zandi:                      I see you have your glasses, the infamous infrared... What are those?

Marisa DiNatale:              Blue blockers.

Cris deRitis:                       They're infrared.

Mark Zandi:                      Yeah, infrared. Can't you see through things with those glasses?

Cris deRitis:                       I can see recession.

Mark Zandi:                      I see recession. Dead ahead.

Marisa DiNatale:              Yes.

Mark Zandi:                      Let's just get this over with. Pull the band-aid off. So what's the probability of recession between now and the end of '23? You were at 67 percent, last we chatted. What are we [inaudible 00:02:13]?

Cris deRitis:                       Oh, it's up.

Mark Zandi:                      What?

Cris deRitis:                       Yeah, unfortunately. I'm feeling even more confident, unfortunately, in our recession [inaudible 00:02:20].

Mark Zandi:                      Oh, really? So what's your probability?

Cris deRitis:                       I'm going back up to 70, maybe 72 percent.

Marisa DiNatale:              Wow.

Cris deRitis:                       Out of five.

Mark Zandi:                      Okay. What changed between this week and last week? You were at 70. Last week, you went to 67 and now you're back up to 72. So what happened?

Cris deRitis:                       Well, just look at the yield curve, Mark. It's inverted the whole way through.

Mark Zandi:                      Okay. I'm highly annoyed at this conversation. All right. Let's talk about this yield curve. Which yield curve are you looking at, by the way? All of them?

Cris deRitis:                       [inaudible 00:02:54].

Marisa DiNatale:              All of them.

Mark Zandi:                      All of them.

Cris deRitis:                       Fed funds to 10-year, three months, one month to 10-year.

Mark Zandi:                      But that's barely inverted and that's just... Bond market goes up and down or all around on a daily basis. But here, let me-

Cris deRitis:                       Okay. 10-year, two-year. Right?

Mark Zandi:                      Let ask you this. Okay, let me ask you this. Let's have a serious conversation about this.

Cris deRitis:                       I'm always serious, Mark.

Mark Zandi:                      I know you are. It's Marisa who's always cutting jokes and off the rails.

Marisa DiNatale:              Somebody has to bring a little levity to the conversation.

Mark Zandi:                      Exactly. Exactly. That's exactly true. We have to have a little bit of levity. Every night, my wife and I watch an hour of TV, and TV's actually pretty good these days if you've got all these streaming services. And the one thing I've learned is, if the TV series or show has no levity, if it's all dark, dark all the time, very hard to watch that. You need some levity in there. And thank God we have Marisa on for levity. But Cris-

Cris deRitis:                       Marisa's a yield curve believer, I believe. Right?

Mark Zandi:                      Is she?

Cris deRitis:                       Proselytizer? Hustle?

Marisa DiNatale:              I wouldn't call myself a proselytizer, but yeah, it's not ever been wrong. Right? It's sort of hard to ignore that.

Mark Zandi:                      No, it depends over what period of time. False positive, so forth and so on. But let's start this conversation this way. And I should say there is some economic data that came out in the week, actually housing related, so we can come back to that and talk a little bit about that. But before we get there, let's talk about the yield curve. If you're a regular listener, you've heard this conversation on yield curve a lot.

Marisa DiNatale:              Ad nauseam.

Mark Zandi:                      Yeah. But just to level set, Cris, tell the listener, what is the yield curve, why an inversion of the curve is historically a prescient leading indicator of recession?

Cris deRitis:                       At its core, the yield curve is just the difference between different rates, different treasury yields, I should say. So typical, we look at the yield on a 10-year versus a two-year treasury or a three-month treasury or a one-month. So you can pick different points along that curve and make comparisons. In a normal, well-functioning economy, that yield curve should be upward sloping, meaning for the longer term that you are willing to lend the government money, you should expect a higher return or demand a higher yield. And that's in a well functioning economy.

                                             When investors are nervous about the future, you can see inversions in the yield curve where the shorter term yields suddenly rise above the longer term. So that's what we're talking about here. Today, the two-year is about, what, 70 basis points above the 10-year? Yeah, I think the three month is maybe 50 basis points. So it's by historical standards, deeply inverted at this point, at least for those portions.

Mark Zandi:                      Measures.

Cris deRitis:                       Measure. Correct. I think you have to go back to 1982 to get this type of inversion that we're seeing here today. Why that matters? Well, this is a bit of-

Mark Zandi:                      Just a caveat there. The one curve isn't that inverted, just on the margin for the last few days, is the 10-year treasury yield versus the federal funds rate, the effective federal funds rate. The so-called policy yield curve.

Cris deRitis:                       Correct.

Mark Zandi:                      Because the Fed sets the funds rate. And I looked today, I think we're at negative four basis points or something, and it's been the last few days. Because a bond market has rallied in the last few days. Since the CPI report was so good last week, the bond market has rallied, meaning long-term interest rates have declined. All rates have declined, but long rates have declined more. And so you have this now inversion by about four basis points. So historically, the policy yield curve, it has led recessions, but it also has had false positives. So you've had inversions where the funds rate rises above the 10-year yield and a recession not ensued. Anyway, just to round that out. So why is it such a good indicator of recession down the road?

Cris deRitis:                       I think just to clarify there, I think the ten-two and the ten-three yield curves, particularly for this level of inversion, have always properly signaled recession. I don't think we've had any false positive for those parts.

Mark Zandi:                      Yeah, I think that's... I don't how many recessions you're going back, but at least in recent decades, let's say. Back to the 1970 recession, I think. '69 recession. Was it '69 or '70?

Cris deRitis:                       1970, yeah. Okay. So why is it prescient? Well, one, I think you hit the nail on the head in terms of just the bond markets. These are one way that investors speculate or put their money where their mouth is, is through these yields. So if you are expecting a recession, you might pile into a longer-dated asset because you just want to protect your capital, versus equities where you might expect that lower profitability is going to erode stock prices so you might be betting through the bond market.

                                             In terms of the real economy though, we believe it's really through the banking system. Particularly hard to earn a spread when the yield curve is inverted. If you're a bank, lending out money long and borrowing short, under that inversion, it's difficult to earn a spread. So in that environment, you would expect that credit would dry up, banks would pull back on the credit they offer to either businesses or households, and as a result, you have a slowdown in the economy, spending goes down and we have a recession. So it's a signaling mechanism from that point as well.

Mark Zandi:                      Okay. So really, two different explanations as to why the yield curve might be a good leading indicator of recession. The first is, it's the collective wisdom of bond investors. And the collective wisdom is saying we're going to have a slower growing economy in the future, recession. That means less inflation, that means a long-term bond is worth more, I'm going to buy that bond, and that sends down long-term interest rates. Of course, short-term rates are pinned high because they're pegged off of what the Federal Reserve is doing and the funds rate. So if the Fed has got its foot on its brakes and has the funds rate high, it's pushing up short-term interest rates and they can't come in as much and you get this kind of inversion. So it's kind of a forecast, a consensus forecast being done by bond investors.

Cris deRitis:                       Correct.

Mark Zandi:                      That's the first explanation.

Cris deRitis:                       That's the theory.

Mark Zandi:                      Okay. Right. I admittedly am out of the consensus. I admit that. On my forecast, although I do acknowledge the recession risks are awfully high and it's a close call, but I think my forecast is just as good as the average bond investor's forecast. And it's different. I have a different forecast. Second explanation-

Cris deRitis:                       So I'm kind of discounting that one, [inaudible 00:10:17], Mark.

Mark Zandi:                      Who cares? I mean-

Cris deRitis:                       Except-

Marisa DiNatale:              So then why has it always been correct? If you look at the ten-two.

Mark Zandi:                      Okay, so that gets to the second explanation. There's something more fundamental. There's got to be some reason why the yield curve is contributing to the prospects for recession, some causal relationship between them. Not just forecast or forecast.

                                             I think you're right. That is the most logical way to connect the dots fundamentally between the yield curve and the economy, has to run through the financial system. The way I would phrase it is, credit is the mother's milk of economic activity. And too much credit, that's a problem. That's the financial crisis. You extended out too many mortgage loans, poor underwriting, they blew up. Not enough credit is a problem. It's called the credit crunch. Businesses and households need credit to do what they do. Buy cars, buy homes, expand businesses, that kind of thing.

                                             So when the yield curve inverts and the cost of short-term money, the cost of funds for lenders, rises relative to the rate that they can extend that credit out, that so-called net interest margin you mentioned, they can't make money, so they're going to be less likely to extend credit. And historically, that slows economic growth and ultimately leads to recession. Let me though proffer that maybe, and I know everyone's going to cringe when I say this, but let me just-

Cris deRitis:                       Go for it.

Mark Zandi:                      I'm going to say it. I'm going to say it.

Cris deRitis:                       Not the four words.

Mark Zandi:                      You know what I'm going to say.

Cris deRitis:                       Not the four words.

Marisa DiNatale:              What is he going to say?

Mark Zandi:                      This time is different. I'm going to say it. Maybe. We're going to find out, but maybe. Let me throw out a couple or three reasons why this time might be different, and hear what you have to say. The one reason why this time may be different, and you've heard this many times but let me throw it out there and see how you react, is QE. The Federal Reserve has bought a lot of treasury bonds and other mortgage-backed securities and they're now QT-ing, allowing that to come back down. But it's really about the amount of treasury and MBS, mortgage-backed securities, that they own. And it's close to, what is it? Close to nine trillion dollars. It's quite substantive. They increased that dramatically during the pandemic, on top of increasing it dramatically during the financial crisis.

                                             And of course, the Fed did this because short-term rates got to the zero lower bound. They couldn't lower short rates any further. They didn't want to go negative. They said, "Okay, let's get long-term rates down so let's go buy long-term bonds." So they bought a lot of long-term bonds and brought down interest rates. And so the 10-year treasury yield is affected to some degree by that QE. Now, debatable how much, but it could be 70 basis points. I'm just saying. It might be. It might be 70 basis points.

Marisa DiNatale:              Wouldn't that be convenient?

Mark Zandi:                      Wouldn't that be convenient? I'm just saying. Okay, so I'll stop. That's one thought. How do you respond to that? This time is different in that... I mean, it is somewhat different. Right? The Fed QE-ed, beginning in the financial crisis, and obviously QE-ed big-time in the pandemic. That is kind of, sort of, different than other business cycles when the Fed did not QE, for sure, that they never got to that point.

Cris deRitis:                       Yeah, so when they were actively QE-ing, and then they were manipulating, or certainly affecting-

Mark Zandi:                      Ooh, that's a loaded word.

Cris deRitis:                       Oh, I didn't... I took it right back.

Mark Zandi:                      That's just straight-up monetary policy from... Okay, you took it back. Okay.

Cris deRitis:                       I took it back quickly. They certainly were affecting the long as well as the short.

Mark Zandi:                      Absolutely. Right.

Cris deRitis:                       Yeah. Nothing nefarious, perhaps. But when they were actively involved during the pandemic and during the Great Recession, I think it is legitimate to say, "Oh, well, yield curve effects may be distorted here. We're not getting a true market signal." And you're right. Today it is different. They are holding a lot of securities, but they're not actively dumping those securities or buying more security. So I find it hard to believe that we're not getting at least some signal from the investors out there.

Mark Zandi:                      Oh no, no, no. I'm not saying they are no signal. But this goes to the stock flow explanation of QE. I think the evidence, at least the academic research, the Fed research, shows that it's about the stock, meaning how much they hold, the dollar amount they hold on the balance sheet, not the flow, that matters in terms of the level of interest rates. So yes, the nine trillion is starting to come down because of QT, quantitative tightening. They're allowing the treasuries that they own and MBS to roll off balance sheet through maturity, or in the case of MBS, if there is any prepayment, I don't know. But if there was, they'd roll out that way. But it's really about the stock. So that's debatable but-

Cris deRitis:                       Possible. But how much?

Mark Zandi:                      Okay. All right. Okay. So you would say maybe-

Cris deRitis:                       So how much? We're talking 20 basis points? 30? Again, we're very [inaudible 00:15:55].

Mark Zandi:                      I'm just saying it could be 70 basis points. I'm just saying. All right, here's another thought. Here's another thought. And this one, you probably... I've not heard this. This is a Zandi thought, I think. The reason why an inversion of the curve has such a big impact on credit and ultimately on the economy, is it comes historically, generally, after a period of very rapid credit growth. The economy's booming, credit growth is very strong, underwriting is weakening, and people are taking on a lot of debt. Leverage is increasing, both on the household and corporate sector. And then the Fed says, "Oh my gosh." They step on the brakes, the short-term rates rise, and you get that inversion of the curve and credit flows stop. Banks say, "I can't make money." Financial institutions can't make money. Their net interest margin goes flat or inverts and they can't make money, and they stop selling credit.

                                             And that's a problem after the period of very rapid credit growth because all these folks, businesses, households, that took on the credit, they need to roll that over, in many cases. Particularly businesses. These are short-term loans. They could be a year or three, five years, but they roll over, and when they roll over they need credit. But here, all of a sudden, the curve is inverted. Banks can't make money, no net interest margin. They tighten up underwriting and that business or that household can't get the credit that they need, and that results in a default and delinquency and that's why you have an economic problem. Why you have a recession. Why it leads to recession, why it leads to stress, why businesses lay off workers, in part because of the financial stress that they face.

                                             That is very different than the environment leading up to this period. Credit growth was not booming. In fact, it was very modest credit growth. There is going to be businesses and households that need credit in the current environment when underwriting is tight, but it's not a wave of borrowers that need it. Therefore, we're not going to see the kind of defaults and delinquencies and credit problems that we normally see, that ultimately cause businesses to pull back, households to pull back, lenders to pull back, and we go into recession. Okay, what do you think of that explanation? So this time is different. This time is different in that regard. In that regard.

Cris deRitis:                       Did you want to say something, Marisa?

Marisa DiNatale:              Well, what period are you going back to? Because the curve inverted right before the pandemic too.

Mark Zandi:                      Yeah. Well, that was-

Marisa DiNatale:              So are you including that whole... Are you going back to before the pandemic? Like from the financial crisis up? Or are you just talking about the past couple years?

Mark Zandi:                      I'm going back to 1970. Every recession since 1970, Cris is pointing out, and he's right, that when the two-year and the 10-year invert, you have a recession within 12 to 18 months after that, including the pandemic.

Marisa DiNatale:              Yeah, no, I understand that. I'm saying your argument about, "Credit growth hasn't been that strong recently," what period are you talking about? Are you talking about the past couple years? Are you going back to the financial crisis?

Mark Zandi:                      Yeah, in the lead-up to this. Yeah, during the lead-up. You hear my logic? I'm saying the problem curve is creating, you had all this credit growth before the curve inverted. Go back prior to that. And I'm saying this time is different in that regard, compared to those previous cycles.

Marisa DiNatale:              Sure. Certainly that was true, leading up to the financial crisis-

Mark Zandi:                      And in every other one, if you go back.

Marisa DiNatale:              And in '01, and '90s. Yeah.

Mark Zandi:                      Yeah.

Cris deRitis:                       I agree with that. Certainly businesses and households are much more flush with cash today than they were previously. Actually, this is part of the reason why I actually upped my odds in terms of recession risk, because my fear is that higher income households and businesses may be less sensitive to interest rate increases in this environment because, to your point, they have a lot of resources and therefore the Fed will have to overshoot even more to get the type of sensitivity that's going to slow things down.

Mark Zandi:                      Yeah, but okay, that's a smokescreen compared-

Cris deRitis:                       No, no, but that's the mechanism.

Mark Zandi:                      [inaudible 00:20:32] argument. We're discussing the yield curve and the yield curve reflects what the market thinks the Fed's going to do.

Cris deRitis:                       That's right.

Mark Zandi:                      So the collective wisdom has embodied exactly what you just said. So going back to the curve and the predictive ability of the curve.

Cris deRitis:                       But that's consistent, right? I believe the markets are also anticipating that the Fed will have to be even more aggressive than what we originally thought, because we're not getting the responses from households that we otherwise... Why are we having retail sales this week? Continuing to remain quite strong. That's not the response that the Feds really wanted. They want things to slow down.

Mark Zandi:                      Well, no, no, no. I'm not sure. If I were them, that's exactly what I would want. I'd want things to slow. I mean, real retail's slow.

Cris deRitis:                       [inaudible 00:21:19]. It was well above consensus, right?

Mark Zandi:                      Well, I don't care about consensus. I look at real growth. Real growth. Consensus is, what do I think it's going to be-

Cris deRitis:                       Well, Fed consensus.

Mark Zandi:                      Not what it should be. What it is, not what it should be.

Cris deRitis:                       Fed expectations, let's put it-

Mark Zandi:                      Yeah. But that's different than what you want it to be. If I were king for the day, I'd say that was a pretty darn good retail sales report. That suggests very modest real growth. Because you're over your retail sales were eight percent, inflation is eight percent. That says, "Okay." I mean, these aren't apples to apples, but roughly speaking. So I'd say that's exactly what I want. I don't want consumers to pack it in. I don't want negative because that means recession.

Cris deRitis:                       I don't want negative, but I want moderating.

Mark Zandi:                      Well, that's definitely moderating.

Marisa DiNatale:              Even core retail sales were strong. Even if you take out food and gas, core retail sales was pretty strong.

Mark Zandi:                      But it's all inflation. It's all inflation. Real growth is barely positive on retail sales. And that's what you'd want, I would say.

Marisa DiNatale:              But it was a sturdier report than I think people were expecting. But you're saying, "I don't care what people were expecting."

Mark Zandi:                      No, no. Consensus is, "What I think it will be." What I'm saying is what it should be, if it was consistent with my policy goals. It was above consensus, therefore it was above what people expected it will be. But that has nothing to do with what it should be, relative to appropriate policy.

Cris deRitis:                       I was referring to Fed consensus or Fed expectations of what it should be. Because that's what matters. If retail sales are coming hotter than the Fed would like.

Mark Zandi:                      Well, yeah. I'm not sure it is. That's what I'm saying. I'm not sure. If I were on the Fed, I'd say-

Cris deRitis:                       I'm submitting, pretty much.

Mark Zandi:                      That felt pretty good to me. That's exactly the report I'd like to see. Okay, let me throw out one other thing. One other, "This time is different." And that is credit quality. The thing is that credit quality usually erodes pretty substantively when the Fed steps on the brakes and the curve inverts and lenders stop extending credit, and then credit problems start to develop in that period of time. Credit delinquencies, defaults, foreclosures. Losses begin to mount, and that adds to the problems that the banking system, financial system face, and therefore they tighten down even more because they have to react or they're responding to the erosion in credit conditions.

                                             Credit conditions now are really good. I mean, really good. Right now, delinquencies are going to rise, but they're rising from incredibly low levels and they may just simply normalize, get back to something that we've typically experienced historically. And of course, and this is "This time is different," the banks are extraordinarily well capitalized. Much more capital than they've ever had. Much greater liquidity than they ever had. Much better risk management than they have ever had. Of course, they're stress testing. And of course we help them out, so that's got to be good. So we're not going to have the same kind of credit issues or credit problems that we... No defaults. I keep going back to the credit spreads in the corporate bond market, BAA-Treasury spreads. You don't see anything. You don't see any problems. So if that's the case, then maybe lenders don't pull back to the same degree that they have historically.

Cris deRitis:                       But they are pulling back.

Mark Zandi:                      They don't need to. They don't need to. They've got plenty of capital, plenty of liquidity, credit quality's not a problem. You don't see the restrictions on credit flows. Therefore, the curve's inversion means something very different today than it means historically. You're going to see the same kind of tightening down of underwriting and credit conditions that you would normally see. What do you [inaudible 00:25:18] that explanation?

Cris deRitis:                       We talked about this last week, right? And C&I lending is tightening up significantly.

Marisa DiNatale:              It's in recessionary territory in terms of the-

Mark Zandi:                      No. No. No.

Marisa DiNatale:              Yeah, it is.

Mark Zandi:                      No, wait, wait. No, wait. No. What you're looking at is a diffusion index that says, "Directionally, I'm tightening." But go look at the actual volume of C&I lending. It's not slowed. It hasn't slowed. C&I lending, commercial and industrial-

Cris deRitis:                       You got to look where the puck is going, not where the puck is today.

Mark Zandi:                      Well, I'm just saying that that's directionally-

Cris deRitis:                       They're tightening, right?

Mark Zandi:                      Yeah, of course they're going to tighten, but it's how much are they going to tighten? I'm just saying... Here, I just gave you a logical framework for thinking about why this time is different. It is different. It is different. It's very different from a credit perspective, isn't it not? It is.

Marisa DiNatale:              Yeah. I-

Cris deRitis:                       It is not the Great Recession. I can see that.

Mark Zandi:                      No, no, no.

Cris deRitis:                       Not a financial crisis.

Mark Zandi:                      It could be any recession. This is very different, from a credit perspective. Mortgage credit, C&I credit, take any kind of credit quality, it's very different than it has been. Underwriting has been very, very good across... I mean, I'm painting with a broad brush and there's things out there we need to worry about. Leveraged lending, we've talked about.

Cris deRitis:                       Personal loans are deteriorating fast.

Mark Zandi:                      What is?

Cris deRitis:                       Personal loans, sub prime auto.

Mark Zandi:                      See, I find that a red herring too. I mean, come on.

Cris deRitis:                       Credit card-

Mark Zandi:                      Add up credit cards, bank cards, retail cards, and all unsecured personal loans. It's a trillion dollars outstanding. It's back to where it was pre-pandemic. It's actually tight. There's not been any significant credit. It's actually very, incredibly low, relative to where you would expect it to be in a more typical time, because of the pandemic. I don't know. All I'm saying... You get my drift. You get my drift.

Cris deRitis:                       We get your drift. It seems to be every data point is-

Mark Zandi:                      This time is different. It is different. Unless you can tell me, and this is what I'm ruminating about, is there some other link or a way to connect the dots between the conversion of the curve and the real economy? I agree with you, it's about credit flows. But is there something else that I'm missing that maybe would have a real economic effect, that I'm just not thinking about? Here's the other thing, and this goes to your forecast, Cris. And I know I'm picking on you, Cris. I'm pricking on you endlessly. But this is-

Cris deRitis:                       No, no. No, no.

Mark Zandi:                      Marisa, your time is coming. I assure you, your time is coming.

Marisa DiNatale:              Sure it is. Yeah.

Cris deRitis:                       What are your odds, Marisa, by the way? Just let me know where-

Mark Zandi:                      Yeah, where do you stand on all of this?

Marisa DiNatale:              I was at 60 percent about a week ago.

Mark Zandi:                      Two weeks ago.

Marisa DiNatale:              Two weeks ago. Right. Yeah, I missed the podcast last week. So I was at 60 percent probability of recession in the next year. I think I'm now at two thirds.

Cris deRitis:                       Oh.

Mark Zandi:                      You went up two?

Marisa DiNatale:              Yeah.

Mark Zandi:                      Why?

Cris deRitis:                       After our webinar.

Mark Zandi:                      But the CPI number was so good. Why would you go up? I don't understand.

Marisa DiNatale:              A lot of other economic data has not been good. Yeah, the CPI was good, the PPI was good.

Mark Zandi:                      What data are you talking about that wasn't good?

Marisa DiNatale:              Name it. Pretty much everything that came out this week was not great.

Mark Zandi:                      What do you mean?

Marisa DiNatale:              But we'll get to that later.

Mark Zandi:                      Well, let's talk about that. Yeah. I'm really curious about what that means.

Marisa DiNatale:              I don't want to give away my statistic.

Mark Zandi:                      Okay, don't do it. Don't do it. Don't do it. Don't do it.

Marisa DiNatale:              Okay.

Cris deRitis:                       Well, housing clearly is going down.

Mark Zandi:                      Well, that's a good thing, right? That's appropriate.

Cris deRitis:                       Okay, it's appropriate.

Mark Zandi:                      I think from a monetary policy perspective, if you're raising interest rates and you want to slow growth, it's got to come out of housing, right?

Cris deRitis:                       Yes. Yes.

Mark Zandi:                      So that's good. Bad news is good news.

Cris deRitis:                       No doubt. No doubt. But the likelihood that we can then pivot and stop that wave precisely, so that we don't cause a recession, seems pretty unlikely to me. But that's the crux of it.

Mark Zandi:                      No, no, no. That's a reasonable argument. I'm just going back, just the technical discussion around the yield curve. Because it's obviously a good point that it's a very prescient indicator. I think we still need to see confirmation of a hard inversion for more than a couple days on the policy yield curve. But that may happen because the Fed's going to raise rates.

Cris deRitis:                       Yeah, [inaudible 00:29:53] couple weeks.

Mark Zandi:                      The funds rate's going up. Is the 10-year yield going to go up with it? We'll have to see. I'm not sure. So it may invert. But it's just around that technical argument that the curve is inverted, therefore, as you said, "I raised my odds because the curve inverted more this week." That's kind of what I'm focused on.

Cris deRitis:                       Yep.

Mark Zandi:                      Yeah. Okay.

Marisa DiNatale:              Mark-

Cris deRitis:                       So if we do get that hard inversion for an extended period of time, do your odds change at all?

Mark Zandi:                      No. Well, will they change? I don't know. I'm not sure. It depends on the economic data and why it inverted. But just because it inverted, what I'm telling you is, I'm not sure the curve is... This time is different. It's not the same. And it may be implying something... Unless there's some causal relationship that I'm missing, there's something going on that I can't quite figure out between the curve and the real economy. But anyway, Marisa, you were going to say something?

Marisa DiNatale:              Why do you put more weight on the 10-year Fed funds, the policy rate curve, than the ten-two?

Mark Zandi:                      I don't.

Marisa DiNatale:              You don't?

Mark Zandi:                      I think it needs confirmation. Every time you've had a recession, the two-year, 10-year inverts, but also the policy curve inverts. Now, the policy curve has... There's false positive. It's inverted and not recession. But every time you've had a recession, the policy curve has inverted. So it's not that I'm putting more weight on it. It's just, we need that to be confirmation that the two-year, 10-year is going to be accurate. Here's the other question I had on that though, because this goes to your forecast. Your thinking is that the recession would hit sometime in... I don't want to put words in your mouth, but this is what I recall. The first half of next year. Kind of, sort of, by midyear we'd have a recession.

Cris deRitis:                       Yeah. Although I might push that out.

Mark Zandi:                      Oh, you would? Okay. Because if you take the literal interpretation of the curve inversion, it's saying more towards the second half of next year, as opposed to the first half or midyear. But you're saying I'm splitting hairs there.

Cris deRitis:                       Yeah. I'm not going to give you the date and time. That's for next podcast.

Mark Zandi:                      Okay. All right. Very good. Well, let's quickly move forward because I want to get on to climate change and the work we've done there. But I guess, looking at the economic statistics this week, it's been on the light side, I think, but mostly housing related. Is that right, Cris?

Cris deRitis:                       Well, you had retail sales and industrial production.

Mark Zandi:                      Oh, that's true. Yeah. Right.

Marisa DiNatale:              And we got a lot of the regional Fed manufacturing surveys this week too.

Mark Zandi:                      Oh, that's right.

Marisa DiNatale:              We got a bunch of them.

Cris deRitis:                       Philly Fed too, right?

Mark Zandi:                      Philly Fed, yeah. Philly Fed. Yeah.

Marisa DiNatale:              Philly Fed, Kansas City.

Mark Zandi:                      Philly Fed improved a little bit, I think.

Marisa DiNatale:              Empire State.

Mark Zandi:                      Yeah. Of all the statistics, Marisa, which would you focus on?

Cris deRitis:                       That would be her statistic.

Marisa DiNatale:              Are we going to play the statistics game? No. Not now.

Mark Zandi:                      Oh, should I wait?

Marisa DiNatale:              Well, the one I'm going to focus on is maybe the one I picked.

Mark Zandi:                      Oh, I see. Yeah, that's a good point. Okay. All right, let's wait. We'll wait. Okay. Anything else on the economy you want to bring up, before we bring in the rest of the team to talk about climate risk? Anything bugging you? By the way, I'm getting more confident that the economy's going to navigate through. I am. I'm just getting more... I don't know if I'm convincing [inaudible 00:33:22].

Cris deRitis:                       What are your odds now? 45?

Mark Zandi:                      50 percent.

Cris deRitis:                       What?

Mark Zandi:                      Just 50 percent.

Cris deRitis:                       50 percent. Okay.

Mark Zandi:                      Same as last week. But the arrow for the risk of which way it would change is now lower, not higher. The economic data feels to me definitively like it's moving in the right direction, beginning with the-

Cris deRitis:                       Interesting.

Mark Zandi:                      ...climate report two weeks ago, last week's CPI report, and I'm telling you, that retail sales numbers, that was good in my view. No real growth or very low real growth? That's exactly... That's the strike zone. That's what you want. But anyway, that's just me.

Cris deRitis:                       Interesting, interesting.

Mark Zandi:                      Okay, let's bring in the rest of the team, and we've got three colleagues that are going to join. For listeners, you're familiar with these guys. First up is Gaurav Ganguly. Gaurav, good to see you.

Gaurav Ganguly:             Good to see you too, Mark, Marisa and Cris.

Marisa DiNatale:              Hey, Gaurav.

Cris deRitis:                       Gaurav.

Mark Zandi:                      Did you hear that conversation, Gaurav? Did I change-

Gaurav Ganguly:             I was fascinated by it. I was absolutely fascinated by it. I was hanging onto every word.

Mark Zandi:                      He's being sarcastic, isn't he, in a British kind of way?

Cris deRitis:                       Well, yeah.

Mark Zandi:                      I'm sure he wanted to jump right in.

Gaurav Ganguly:             Yeah. I mean, this time is different.

Mark Zandi:                      Oh.

Gaurav Ganguly:             Isn't it always?

Mark Zandi:                      I see. I see.

Cris deRitis:                       How he snuck that in. Geez.

Mark Zandi:                      It's good to have you, Gaurav. And of course, Gaurav does a tremendous... He leads all our operations in Europe and the Middle East, but also is an expert in climate risk, so it's good to have you aboard. And Chris Lafakis. Chris, good to see you.

Chris Lafakis:                    Good to see you as well. You gave out a four-word phrase. So I would give out a three-word phrase to your four-word phrase.

Mark Zandi:                      Fire away. No profanity.

Chris Lafakis:                    And that would be, "Famous last words."

Mark Zandi:                      Oh gosh, no one's on my side. Chris, what's the probability of recession through the end of 2023?

Chris Lafakis:                    Yeah, I think that the 65 percent range feels about right, so I'm with Marisa.

Mark Zandi:                      Yeah. Okay.

Cris deRitis:                       Oh, that's strategic. That's strategic.

Chris Lafakis:                    Yeah.

Marisa DiNatale:              One percentage point under me.

Chris Lafakis:                    Yeah. That's right.

Mark Zandi:                      Well, you're saying 66. Are you saying we should change our baseline to a recession, Marisa?

Cris deRitis:                       That's what it sounds like.

Marisa DiNatale:              Well, perhaps.

Mark Zandi:                      Okay. You can think about that. Bernard, are you on my side?

Bernard Yaros:                 I'm definitely on your side, yeah.

Mark Zandi:                      Oh, definitely.

Bernard Yaros:                 I'm even more optimistic than you. I put it at like 40.

Mark Zandi:                      Oh.

Bernard Yaros:                 Yeah, I really think the data has been coming in better than expected. And I think the housing starts... I mean, we can talk about that with the statistics. But I think there's really going to be a glut, especially on the multifamily side, which is really going to help bring down rents. And rents is really the crucial ingredient, I think, to our inflation problem.

Mark Zandi:                      I like this guy.

Bernard Yaros:                 Yeah.

Mark Zandi:                      Yeah, I like this guy. This is Bernard Yaros. Bernard is all things Federal Government. And also, you've been doing a lot of work with the data recently on Economic View. So you've been getting down and dirty with the US data, so it's good to have you aboard. The group has worked on a paper. We just released a paper. What's the title of the paper, Chris? The Macroeconomic Consequences of Climate in Action, I believe. Beautiful title.

Chris Lafakis:                    Yeah. Cost.

Mark Zandi:                      Oh, there you go. Chris is holding that up.

Chris Lafakis:                    [inaudible 00:36:58] trees. But that's okay, because I did too.

Mark Zandi:                      And you and I and Bernard co-authored that paper and I thought we'd begin... Oh, we just released it and we're pretty proud of it. So I thought I'd turn to you first, Chris. Maybe you can give us a summary of it, and then I'm going to turn to Gaurav and he's going to critique it. So he's going to give us his views on what we should have done or not did, or how good it was. We'll get his views. And then, Bernard, I'm going to do the same thing with you and then we'll go into a little bit more detail in some of the numbers. So you want to summarize, Chris?

Chris Lafakis:                    Yeah, absolutely. So what we did is, we were trying to answer the question of what policy makers should do about the issue of climate change, particularly in the US. The issue of climate change is global, but the scope of our analysis pertained just to the US and there were some assumptions around that, that are documented in the literature.

                                             But we ran some simulations. We have this great tool, our global macroeconomic model that we can use for policy analysis. And to answer the question of, "Which scenario are we better off in?", we ran some simulations that considered different combinations of action and inaction. Altogether, we ran four simulations. The first one would be a current policy scenario, and that's one where there's no new legislation, and actually, at the time of us starting on this research, the Inflation Reduction Act, which has a carbon emission mitigation component to it, was not law, so the current policies does not include the Inflation Reduction Act.

                                             The second scenario does include the Inflation Reduction Act. So it's the current policy scenario, plus the climate implication for the Inflation Reduction Act. The third scenario that we considered was a carbon tax scenario, in which a modest carbon tax is levied. That carbon tax is equal to $40 per metric ton in 2020 dollars. That tax escalates at a rate of the inflation rate plus five percent per annum, and it's capped at the value of the carbon price in our last scenario. Our last scenario considers what would be needed to reach net zero carbon emissions by 2050 in the US, and there's a carbon price associated with that.

                                             We use integrated assessment model framework, which is basically looking at abatement curves of various types of pollution, and determining the lowest cost alternatives to energy and what carbon price would be necessary to push the global economy, or in this case the US economy, to those sources of renewable energy production. And using that carbon price information, we constructed scenarios, we ran shocks through our model. We have carbon price in our model, so we were able to observe the macroeconomic fiscal and climate implications of various combinations of action.

                                             At a very high level, that's what we did. If you'd like me to, Mark, I can describe the types of risks that we considered. We considered both acute and physical risk, both chronic and acute physical risk, both industrial transition risk and macroeconomic transition risk, which would be, what are the implications of a carbon tax on the macro economy? The transition risk and physical risk kind of push-pull in some of the scenarios. Where there's maximum physical risk, there's less transition risk and vice versa. And lastly, what I would say is that our conclusion is that in the very long term, it's more expensive to do nothing than to do something. So in the short run, if you don't act, you can achieve some better economic outcomes. But if we're looking at 2100 and beyond, the cost of inaction outweighs, actually, the cost of action.

Mark Zandi:                      Yeah, okay. So just to summarize your summary, just to make it concrete, we ran these four different scenarios under different policy assumptions, to see what kind of impact they would have on the economy, and we used our global model but we were focused on the US economy. When we talk about the economic consequences, there were really, broadly speaking, three. As you said, acute physical risk, so that's the cost of hurricanes and flooding and of fire, that kind of thing. The second is chronic physical risk, and that would be things like sea level rise, heat stress, and it reflects the impacts that that has on sectors of the economy like tourism or agriculture, that kind of thing, which is very obviously dependent on weather. And then the third economic effect that we considered was the transition cost. So because of the change in policy, carbon tax or the IRA, the Inflation Reduction Act, it imposes some cost on the economy in that transition and we accounted for those going forward.

                                             And the bottom line is that interestingly enough, under every scenario... And we simulated the impact on the economy out through 2100, so a long period of time. Obviously, a lot of assumptions that go into this. But what we find is, in all scenarios, the economy, and we measure the economy by real GDP, is actually lower than if there was no climate change. Okay, big deal. That's pretty obvious. But the conclusion is, the sooner you take action, the lower the cost to the economy, the less of a hit to GDP in the future. And then the third basic result was, of all the policies, efforts, steps that we considered, carbon tax seemed to be, particularly one that's phased in slowly over time, the most efficient way, the optimal way of doing this. It results in the least amount of lost GDP economic damage out there in the forecast. Is that roughly right? Did I get that right?

Chris Lafakis:                    That's it.

Mark Zandi:                      Okay.

Chris Lafakis:                    You got it.

Mark Zandi:                      All right. Okay. Now, there are a lot of assumptions that go into this. Do you want to just quickly enumerate the two, three, four key assumptions that... There's a lot, but the two, three, four key assumptions that went into the analysis?

Chris Lafakis:                    Sure. I think that the main one is that we give credit to policy makers for mitigating physical risk in these action scenarios. So we calculate chronic physical risk, we calculate acute physical risk under all of the four assumptions, and based on the amount of emissions reduction of the policy action, we reduce the hit to macroeconomic activity from chronic and acute physical risk. And so we do that the most in the Net Zero 2050 scenario. We don't do that in the current policies scenario. The biggest assumption is that we assume that all of the various countries decarbonize at the same rate as the United States, and that's clearly a very big assumption and probably not how the world works in practice.

Mark Zandi:                      Well, it's not how the world's going to be in practice, but it's a working assumption here.

Chris Lafakis:                    That's right. So if we have the Net Zero 2050 scenario that we considered, the emissions reduction is predicated on all of those countries reducing emissions, adopting Net Zero 2050 as well, and that's not going to happen. But we made that as a simplifying assumption because it's very hard, if you don't make any assumptions like that, how much credit should you give US policy makers for mitigating chronic physical risk? So that's the first one.

                                             And then the second one is that we assume that policy makers will provide as much aid for natural disasters as they have historically. So we looked at all of the extreme weather events in the United States, dating back to Hurricane Hugo, and we said, "Okay..." All of the major ones. "What was the economic loss according to NOAA? What was the federal appropriation? What percentage of the economic loss was the federal appropriation?" When you do that, you get around 46 percent. There's also some state aid and so on and so forth. So 46 percent.

                                             And so when we were disaggregating acute physical risk, what we first had to do was determine, how big is the hole? And then, how is it going to burden the various sectors of the economy? The sectors of the economy that would be affected by acute physical risk include the public sectors, through the provision of aid, consumers if they're not insured and they lose property or they lose rental avenues. Businesses, it's the same version of the consumer argument, just on the other side of the foot, and then the insurance sector because they have to raise premiums but they also have to make these large payments.

                                             And that's one key piece of acute physical risk, is that over time, if Hurricane Harvey hits, maybe insurance premiums will go up a little bit. But if Hurricane Harvey hits three years in a row, there's going to be a lot of insurers that are going to walk away from that market entirely, and the ones that don't will significantly raise the cost of insurance and that gets cascaded down through the entire economy. So we assumed that the Federal Government spends a lot of money dealing with the fallout of natural catastrophes, particularly in the current policy scenario that includes maximum physical risk. We also calibrated to the NGFS assessments, the expected value. There's a range of losses and there's a chart in the piece that you can see the range of-

Mark Zandi:                      NGFS being the Network for Greening the Financial System, that's doing a lot of work in this area. So we did use some of the information and data that they had provided.

Chris Lafakis:                    That's correct. And they have a distribution of losses according to chronic physical risk, because we really haven't seen this maybe before. We can tell you what's going to happen if there's a tax cut, but in terms of projecting out to 2100 and accounting for physical risk, we have models, but there's a larger amount of uncertainty there. And so we took the expected value, so the midpoint of this distribution there, for our own analysis. The estimates for loss according to chronic physical risk under the current policy scenario are more severe, if you take something like the 90th percentile or the 95th percentile losses.

                                             And then lastly, what I would say is that we assumed that 60 percent, approximately, of the revenue collected by the Federal Government in the two tax scenarios, the Net Zero 2050 and the carbon tax scenario, are returned to consumers in the form of a dividend payment. There's obviously different ways that lawmakers could go about mitigating the damage done by their policy to certain income groups or certain regions in the United States, that they probably would need to do in practice if they were implementing even a modest carbon tax. But that's the percentage that we assumed, because we wanted it to be revenue neutral and we didn't want to crowd out private investment in the very long term. That's actually what happens in the current policy scenario, is that the federal outlays get so large and the loss in revenue is so disruptive that debt rises substantially and interest rates rise as a consequence of private investment getting crowded out, and so that fiscal dynamic is a feature of our current policy scenario.

Mark Zandi:                      Got it. I'll just mention one other and then I'm going to bring Gaurav into the conversation. A border adjustment. You want to mention that very quickly? That's a key assumption.

Chris Lafakis:                    Yeah. The carbon border adjustment mechanism is something that is becoming mainstream and I think that it's going to be very, very... Almost nearly impossible for any country to pass any meaningful carbon price or carbon tax legislation that does not include a carbon border adjustment mechanism because the outcry from industry... Essentially, if you don't include a CBAM, you're making your domestic industry non-competitive, or you reduce their competitiveness relative to the international competitors.

                                             What that means is, what the border adjustment is, is that if you are a producer of fossil fuels in the United States, you get taxed when you extract those fossil fuels. You have to pass along the tax to your downstream. And if you do pass along the tax, that leads into inflation, eventually, for the macro economy. But if you export the fossil fuels that you extract, you get a rebate for the tax, and the same thing applies to further downstream.

Mark Zandi:                      Got it. And of course, there's a lot of other assumptions, but those are the top three, five. Gaurav, you weren't specifically working on this research but you do a lot of research in the climate risk area. What's your sense of this, as a neutral observer? Anything here that struck you as interesting or stands out or even surprising?

Gaurav Ganguly:             Let me start by saying, and this is clearly a biased comment from me, but I think it's a great paper. It's really well laid out. It's very simple.

Mark Zandi:                      Now, is that British sarcasm? Did you hear British sarcasm there?

Gaurav Ganguly:             No, this is the real thing. This was the real thing.

Mark Zandi:                      This was the real thing. My ears aren't quite used to the... Okay, go ahead.

Gaurav Ganguly:             No, no, no. Totally the real thing.

Mark Zandi:                      That's the real thing.

Gaurav Ganguly:             This is a great paper. It's really well laid out. It's really easy to read. There's so many assumptions that go into making climate scenarios that it's really easy to not see the forest for the trees. But I think some really good messages come out of this paper, and I liked reading it a lot. Some things that I liked and some things that I think are avenues... It's really difficult to model climate change and model the economic consequences of climate change, as Chris Lafakis knows all too well. So it's not really about what's wrong with this paper, as where do we need to go from here to make pieces of research like this more complete, I think, is the best way I can put this.

                                             So a few observations from me on what I've taken away from this paper. First of all, it's great to see some real world analysis and see some comparison of what's actually happening in countries. Take the US and the Inflation Reduction Act, which is a big piece of legislation and which is a big step forward for the US. If you compare it to the EU, which has its climate action plan and the European Green Deal. That's been years in the making and it's been passed into legislation, and the EU has been moving along for some time now on this path, and it's great to see the US embarking on the Inflation Reduction Act. And it's great to see a piece of work that actually highlights the impact of the Inflation Reduction Act. So I liked that very much.

                                             I also liked to see the comparison to a simple, conceptually elegant economic tool called carbon tax. That's not the way the world works. The world is not implementing a simple, conceptual, elegant tool like a carbon tax. The world is actually doing a whole bunch of different things, and the IRA shows you that actually, the US is taking a very different path to a carbon tax. The EU, which does actually have an emissions scheme, it doesn't tax carbon, but it has a cap and trade scheme. These two are, theoretically at least, interchangeable. But even there are a whole bunch of other measures in place where the EU has phase-out laws. Internal combustion engines are going to be phased out by 2035. So there are lots of different schemes in place. It's really good to see a piece of work that actually uses a carbon tax, and it's a great way to show how you can actually decarbonize an economy using a very simple conceptual lever.

                                             The other great thing about using the carbon tax is that there's a big criticism that's usually levied against carbon taxes, which is that a carbon tax is regressive, i.e, it hits the poor harder. But you guys have shown how you can get around that problem by having a dividend payment. This is not an insurmountable challenge to using a carbon tax. Using a carbon tax is not, it's brought out in the paper again but I'll make the point, communicating over a period of time. This is really quite important, to have well telegraphed policy that's communicated over a fairly lengthy period of time in order to decarbonize an economy. Decarbonizing an economy can't really work effectively in a jerky way. It's not going to happen overnight. It's a long process. It needs policy that's well thought through, well telegraphed, and goes out over a period of time, and that commitment stays, most importantly.

                                             And finally, I suppose the other point about the carbon tax is that it shows the way in which decarbonization works. I mean, implicit behind this assumption that you start with a low carbon tax and then ramp it up over time, is the idea that actually the cost of abatement varies depending on which sector of the economy you target. There are some sectors of the economy that are easier to decarbonize and hence require a lower carbon tax, and other sectors of the economy that are incredibly hard to decarbonize and ultimately, will require a much higher carbon tax if that is to happen. Take steel and cement, for example.

                                             Cross-border adjustments, the CBAM. Really important piece, again, I think. Shows you some of the difficulties of implementing a carbon tax. I really don't see countries just coming together and globally implementing carbon taxes in the individual countries, in a way that it all works and a border carbon adjustment is not required. I just don't see that happening. So any country that wants to effectively decarbonize has to introduce some kind of border carbon adjustment, not just for the reasons that... It's not just about the future transition that Chris mentioned, that if a country imposes a carbon tax and that creates a negative cost for domestic industry. It's also the fact that countries with current account deficits are currently importing carbon. China is the world's biggest emitter, but it actually exports its carbon emissions to countries like the US that import a lot from China.

                                             So putting in a carbon tax right now means that current imports from China would be subject to a carbon tax, and that would be the right thing to do in order to decarbonize consumption in the US, because emissions per capita on a consumption basis in the US are far higher than emissions per capita on a production basis. So carbon border adjustment is something quite important. Downsides of a carbon tax, and what's not in this piece of research? Again, this is hard one. So again, I repeat, it's not a criticism of the research. Carbon tax is [inaudible 00:58:04]-

Mark Zandi:                      You can do that too.

Gaurav Ganguly:             [inaudible 00:58:05] the economy.

Mark Zandi:                      Criticisms are okay. I'm really good at doling out criticisms. Feel free.

Gaurav Ganguly:             It just [inaudible 00:58:08] because nobody's got an answer to this.

Mark Zandi:                      Okay. Okay. Fair enough.

Gaurav Ganguly:             Carbon taxes don't apply to every sector of the economy. And I'll mention a few where-

Mark Zandi:                      Yeah, good point.

Gaurav Ganguly:             ...it's really difficult to apply carbon taxes. Things like agriculture, livestock, deforestation, waste management, poor land use. It's very difficult to actually measure emissions from these sectors and these areas of the economy, and so it's very hard to monitor and effectively put a carbon tax on them, and they usually require alternative policies. So if you want to have a scenario of effective decarbonization carbon tax, we'll always need to be supplemented. You'll also need to supplement the carbon tax with alternative policies because there are implementation frictions. The paper assumes that implementation challenge is overcome. In real life, that's probably not going to be the case. There will be a lot of frictions. So finding the appropriate mix of policies that help implementation to be overcome will be important. And that's, again, I think a future piece of research.

                                             There was one interesting thing that I've found, and I don't know what you guys think about this, but I was looking at the Inflation Reduction Act and the Net Zero carbon tax on chart 10. So I'm just advising everyone listening to this to go and read the paper and look at chart 10.

Mark Zandi:                      You can Google it, right?

Gaurav Ganguly:             What's that?

Mark Zandi:                      You can Google it.

Gaurav Ganguly:             Yeah, you can Google it.

Mark Zandi:                      Zandi, The Macro Cost of Climate Inaction. And you can get to it.

Gaurav Ganguly:             And when you get through the paper and you get to chart 10, you'll see the difference in US real GDP, and I'm looking at it now, policy scenario versus no climate change scenarios. You've got all the different policy scenarios out there and you show the Inflation Reduction Act, the carbon tax scenario, and the Net Zero carbon tax. And what I see from there is that in the Inflation Reduction Act, there's very little transition risk. And in the Net Zero carbon tax, there's much more transition risk. But in the Inflation Reduction Act, there is correspondingly much more physical risk, and in the Net Zero carbon tax, correspondingly much less physical risk.

                                             So what that tells me, from my naive reading of it, is that the IRA policy is actually minimizing the costs to the current economy, putting a lot of cost on the future. So it's intergenerationally quite inequitable. We're simply putting a lot of cost on future generations to bear, because physical risks will be felt much later in the century and will be borne much more by later generations. Whereas a Net Zero carbon tax, actually telegraphing policy now, being committed to it, and getting out to Net Zero by 2050 feels, on an intergenerational basis, the right thing to do. We are not going to leave the burden of climate change to our sons and daughters and their children to bear. It's something we are going to take on now and deal with now. And that was, for me, what I took from that chart.

Mark Zandi:                      Interesting.

Gaurav Ganguly:             That this is not enough. This is simply continuing to push the problem out to future generations. So those were a few thoughts from me.

Mark Zandi:                      Very good. And I'm going to bring Bernard in, in just a second, on the Inflation Reduction Act, because that's what he's spent a good amount of time on. Bernard, maybe you can react to what Gaurav said, in addition to everything else you want to talk about. But I have this very simple way of thinking about climate risk, and it makes me feel better about things and makes me sleep at night easier. And that is, the solution to climate risk is pretty simple from an economic perspective. Just tax the carbon. Put a price on it. Yeah, there's all kinds of complications like the border adjustment and the dividend and so forth and so on. But you put a price on something, good things happen. People use less of it. That means less carbon. People figure out ways to new technologies and innovation to get around it, to use less of it.

                                             And we've got a lot of experience with that. Go back to the fossil fuel industry. You go back, I can remember 2008, I think it was July 3rd, 2008. I'm making that up, but I'm within a day. Oil prices hit their all-time high and everybody, Goldman Sachs on down, was saying, "Peak oil. We're running out of oil." At that time, it was, I don't know, $130, $140 a barrel. "We're going to $250. That's where we're headed." And because prices were so high and the energy companies could make so much money, they invested and they came up with fracking, and fracking changed the whole landscape very significantly.

                                             It just goes to the point that if you put a price on something and people can make money on something, they figure it out. So yeah, I understand all the political issues with taxing carbon. It's very difficult to do it politically. But at the end of the day, when push comes to shove, if we have to solve climate change, you just price it. Is that just too simple a way of thinking of things? Gaurav?

Gaurav Ganguly:             No, I completely agree with you.

Mark Zandi:                      Good. Okay.

Gaurav Ganguly:             Best way to make an economy work effectively is to let prices work their magic. Prices have information. Prices send a signal. They motivate people to do things.

Mark Zandi:                      Yeah, okay. And this is the big difference between the carbon tax scenarios and the IRA. The other simple way of looking at it is, the carbon tax is a stick. "I'm going to hit you over the head if you use carbon and therefore you're going to use less carbon." And of course, you can understand the political problems with that. When you start hitting people over the head, they get pretty upset and they say, "I don't want to do that, and by the way, I'm going to vote for the other guy and I'm going to give them money so that you can't do that." And so forth and so on. So the IRA, ingeniously, I think, although when you think about it for a second, maybe pretty straightforward, it's all about carrots. Is that right? Incent people to do things by giving them tax credits and government spending, that kind of thing. Is that fair, Bernard?

Bernard Yaros:                 That is entirely correct. It's largely all about carrots. If I were to split the IRA into three components, you've got tax credits, you've got about $270 billion in tax credits, which largely are trying to incentivize the production of clean energy, the investment in renewable energy projects, and then also trying to address climate change through other avenues like carbon sequestration, clean fuels, and also clean energy manufacturing, very much in the spirit of the CHIPS Act. And then there's also a lot of carrots extended to households and businesses for investing in energy efficiency at home and in commercial structures, and also a lot of clean vehicle tax incentives as well.

                                             So it's really the tax credits that really do the heavy lifting. You also have direct spending by the government, but to a lesser extent. That's closer to about $120 billion over the next decade. A large chunk of this is really reducing emissions from agriculture and forestry. There's a lot of grants, loans, and rebates, and also it taps into the procurement might of the Federal Government to really promote the adoption of clean energy, and also incentivizing a lot of energy efficiency improvements in residential and industrial structures. It addresses air pollution. There's a lot of investment also in climate resilience, which isn't emissions reductions, but it really helps the economy, especially in coastal communities and regions that are prone to droughts, to weather the ravages of acute and chronic physical risk going forward.

                                             When it comes to the sticks, it's a very minor share of all this. There's about $20 billion over the next 10 years that you could consider to be pay-fors or revenue raisers. So most notably, you've got the Superfund Tax that they're going to be imposing on crude oil and imported petroleum, and the revenue here is obviously going to be used to defray the cost of cleaning up hazardous waste sites. There's also going to be a methane emissions reduction programs, which would be a fee on excess methane emissions from the oil and gas industry. So that's really targeting methane leaks that really plague the natural gas output. So the vast majority of this is really carrots and only a very tiny portion of this are sticks.

                                             Again, I don't think this is the most efficient way of addressing climate change as the carbon tax, as we've been discussing. But there's still a lot to like in the way these programs are set up. So I'll start first with the tax credits, because that's really the main impetus of this legislation. The duration is very important. So these clean energy tax credits are really in place for a decade or more, in some cases close to two decades. And that's very important for clean energy developers and investors, who in recent times, they've been facing nonstop lapses and just last minute extensions of clean energy tax incentives.

                                             And then there's just a lot more flexibility in these tax credits than before. So in the federal tax code, the two tax credits that are really do the heavy lifting in terms of incentivizing clean energy production is the Investment Tax Credit, which is just an upfront credit against the investment cost of a clean energy product, and then there's the Production Tax Credit, which is a credit for every kilowatt hour of energy that's produced by renewables. One really good point here is that the solar energy previously was only eligible for the Investment Tax Credit, but now it's going to be eligible also for the Production Tax Credit. And this matters because as the cost of solar declines, that's going to make the Investment Tax Credit less valuable versus the Production Tax Credit.

                                             And then I think the last piece, this has gotten a lot of also good feedback generally, from what I've seen, is it makes it much easier to monetize all of these tax credits. Because remember, the Production and the Investment Tax Credits have generally been non-refundable and if you want to benefit from a non-refundable tax credit, you have to have a tax liability and that's something that tax-exempt entities like public power agencies, local governments, rural electric cooperatives, nonprofits, they don't have. So the IRA makes these essentially refundable for tax-exempt entities, and it also makes these tax credits for others who aren't tax-exempt transferable. So that means that developers can transfer their credits to a third party in exchange for cash.

                                             And this is important because under the current system, there's a lot of tax equity financing where you've got an investor that provides capital for a clean energy project in exchange for the right to claim these green energy tax credits and depreciation deductions. And the IRA, I don't think it's going to do away with that, but it's going to provide other alternatives to tax equity financing, which has high transaction costs that can be very prohibitive, especially for smaller scale developers, and especially for developers of more cutting edge clean energy technology.

                                             So those are some of the things that I really like. There's others, but there's still, again, there's a lot of risks and assumptions that we're making, as we discuss in the paper, obviously. We've been talking ad nauseam over the past couple of years about labor supply constraints and global supply chain disruptions. Those are obviously concerns that could also constrain the amount of emissions reductions that we're assuming. But I would think-

Mark Zandi:                      And I guess there's domestic content rules too, right?

Bernard Yaros:                 Exactly.

Mark Zandi:                      Another issue.

Bernard Yaros:                 Exactly. But I would say the biggest risk in our IRA scenario, in which we're being a bit too over-optimistic, would be that we don't expand transmission lines across the United States faster than the historical average. So decarbonizing the US economy to the extent that we're expecting or we're modeling under the IRA, really involves extending the existing grid that we have, to areas where you've got abundance on wind and other renewables that can then be transported to where they need to go through transmission lines. But these transmission lines, they're going to inevitably cut through state lines, and just the process of securing property, land rights, permitting, just planning and siting these interstate electricity transmission lines, is just a very difficult task. You have to contend with the whole array of state authorities, also grassroots opposition.

                                             One of the other outside sources that really helped us, informed our analysis, the REPEAT Project. They're from Princeton. They recently did another scenario where they were looking at a scenario in which transmission expansion does not occur, or occurs as slowly as it has historically, and they're basically saying that the emissions reductions could be anywhere as much as 80 percent or 25 percent lower than what they would forecast in a scenario where there's no constraints at all in transmissions. So this is a big risk. Fortunately, the bipartisan infrastructure law addressed this. They proposed some reforms, and the IRA also provides some grants to accelerate the siting and permitting projects of transmissions. But I think that's really the big risk when I'm looking at our IRA scenario.

Mark Zandi:                      That's very comprehensive. I want to go to the game quickly. Before we do that, do you want to respond to Gaurav's point about intergenerational effects, that this pushes the pain off into the future? I'm not sure I get that, but how do you react to that?

Bernard Yaros:                 Yeah, I see the point from the perspective of acute and physical risk. We are benefiting the economy of today to the detriment of, I think, future generations. But I still think-

Mark Zandi:                      Can you explain that, guys? I can't quite get my mind around that. Why is that the case?

Bernard Yaros:                 Because there's less transition risk today. There's less of a financial cost.

Mark Zandi:                      Oh, I see. Oh, I see. Okay.

Bernard Yaros:                 But I was really thinking about a lot of this really from the fiscal perspective, because even under the Inflation Reduction Act, we still benefit future generations from a reduced federal debt burden. I look a lot at the Federal Government outlook. Every six months, we get a report from the Congressional Budget Offices that's warning about the long-term sustainability of the budget. And historically, we're always worrying about aging population, about the rising cost of medical care, and then just issues with long-run potential growth.

                                             But I think we really should add to that list of worries for the federal budget, climate changes. I think that's another thing that I think our paper really showed. By reducing a lot of the economic losses and the burden on the government, you really have significant reductions in the debt to GDP ratio over the long-term. That does benefit future generations and it does help mitigate the worst fiscal effects. And for the Congressional Budget Office, from what I've seen, they do incorporate climate change, but they're really looking only out through 2050. What we're really showing is that it's really in the back half of this century where the fiscal costs, in tandem with the environmental costs, really rise significantly.

Mark Zandi:                      Yeah, very good. I think that was very comprehensive review of that paper. So hopefully listeners will take a look and find it of some value. Okay, we're going go to the game before we call it quits. Marisa has been biting at the bit here. Is it biting at the bit? Is that the right-

Marisa DiNatale:              Chomping.

Cris deRitis:                       Chomping at the bit.

Mark Zandi:                      I knew it was chomping at the bit. Well, biting sounds okay too, actually. Biting at the bit. Chomping at the bit with her statistic. And of course the game is we, each of us put forward a statistic, and I'm not sure we're going to all of us have time to do that, but we put a statistic forward. The rest of us try to figure it out with clues and questions, deductive reasoning. And the best statistic is one that's not so easy that we all get it so fast, but one that's so hard we never get it. And bonus if it's relevant to the topic at hand. But fire away, Marisa.

Marisa DiNatale:              Okay. It's not relevant to the topic at hand.

Mark Zandi:                      Oh, okay.

Marisa DiNatale:              I'll just put that out there right now. Minus 0.8 percent in October.

Mark Zandi:                      And this was a statistic that came out this week?

Marisa DiNatale:              Correct.

Mark Zandi:                      Is it in the retail sales report?

Marisa DiNatale:              No.

Mark Zandi:                      Okay. Is it in the industrial production report?

Marisa DiNatale:              No.

Cris deRitis:                       Is it one of the Fed regional?

Marisa DiNatale:              No.

Cris deRitis:                       Regional Fed report.

Mark Zandi:                      Is it in the PPI report?

Marisa DiNatale:              No. That didn't come out this week.

Mark Zandi:                      Didn't it?

Marisa DiNatale:              Or it did come out this week.

Mark Zandi:                      It did. It did.

Marisa DiNatale:              Did it?

Mark Zandi:                      Yeah, I thought it did. Yeah.

Marisa DiNatale:              No. Was that last week?

Mark Zandi:                      It came on Tuesday. The CPR was last week.

Marisa DiNatale:              Oh. You're right.

Mark Zandi:                      Yeah.

Bernard Yaros:                 It was favorable.

Mark Zandi:                      Bernard knows. He forecast it.

Marisa DiNatale:              It was favorable. That's right.

Mark Zandi:                      Was it this week, Bernard, or was it last week?

Bernard Yaros:                 It was this week I forecast it.

Marisa DiNatale:              Oh yeah, it was-

Mark Zandi:                      I was this week. This week.

Marisa DiNatale:              Monday or Tuesday?

Mark Zandi:                      It was Tuesday, I think. Okay. Well, this is getting tough. Is it housing related?

Cris deRitis:                       Is this something Bernard should know?

Mark Zandi:                      Ah. Because Bernard's tracking all the real-time economic data. That's right.

Marisa DiNatale:              As an economist, Bernard should know. Sure.

Chris Lafakis:                    Oh, okay. It's not one [inaudible 01:16:47] tracking.

Marisa DiNatale:              We all should know.

Mark Zandi:                      Well, can you give us a hint?

Marisa DiNatale:              When we were talking about the probability of recession and indicators, you asked me one of my favorite ones to look at. This is one of my favorite ones to look at. It is surrounding the conversation about the yield curve and how predictive it is about recessions. This one is also quite predictive of recessions.

Mark Zandi:                      Minus 0.8?

Cris deRitis:                       Is it the Empire State Manufacturing Index?

Marisa DiNatale:              No. Come on. I thought you guys would get this.

Mark Zandi:                      Really?

Marisa DiNatale:              Right off the bat. Yeah.

Mark Zandi:                      Wow. Minus 0.8.

Bernard Yaros:                 It's the conference board leading indicator.

Marisa DiNatale:              Yes. It is.

Mark Zandi:                      Ah. Very good.

Marisa DiNatale:              It came out this morning. It came out, actually, right before we started talking.

Mark Zandi:                      Oh, that's why I haven't had a chance to look.

Marisa DiNatale:              Yeah. It came out at a little after 10:00.

Mark Zandi:                      And this is the leading indicators [inaudible 01:17:50].

Marisa DiNatale:              That's correct. That's right. So this is the conference board's leading economic indicator index. It is pretty good at predicting recession over a six to nine month period. The decline in October was the eighth consecutive decline over the month, and it was the largest decline that we've seen in one month, abstracting from the pandemic. So if I take out March and April, 2020, it was the largest decline we've seen since March of 2009, which was the last month of the Great Recession. It's pretty dour. It is well into recessionary signaling territory, like well below it.

Mark Zandi:                      I'm guessing, what's driving that? Stock market, permits for housing, for sure.

Marisa DiNatale:              Yeah. Housing is in there.

Mark Zandi:                      The yield curve. Yield curve is in there.

Marisa DiNatale:              The S&P 500 is in there. The yield curve is in there. The Michigan Consumer Confidence Survey is in there. And these things, as we know, have all been bad.

Mark Zandi:                      UI claims.

Marisa DiNatale:              UI claims are great. But yeah, that's in there.

Cris deRitis:                       But deteriorating, right?

Mark Zandi:                      Are they?

Marisa DiNatale:              Deteriorating is-

Cris deRitis:                       [inaudible 01:19:01].

Mark Zandi:                      Yeah, that's true. They're not helping lift-

Cris deRitis:                       They're not helping.

Mark Zandi:                      Yeah. They're not helping lift the [inaudible 01:19:07].

Marisa DiNatale:              They're still incredibly low.

Mark Zandi:                      Or can I ask it this way? I think there's, speaking from memory, eight different indicators that are included?

Marisa DiNatale:              Think there's 10.

Mark Zandi:                      10.

Marisa DiNatale:              Yeah.

Mark Zandi:                      Okay. 10.

Marisa DiNatale:              There's 10 different indicators.

Mark Zandi:                      Of the 10, are there any that showed any kind of positive in the month?

Marisa DiNatale:              That's a good question. I didn't look at each individual indicator. But if I look at... There's new orders-

Mark Zandi:                      Because that's what I want to focus on, to say.

Marisa DiNatale:              The one out of the 10 that showed positive. Yeah.

Mark Zandi:                      Exactly. That's the one I want. That's the most important one. That one.

Marisa DiNatale:              The bright side.

Cris deRitis:                       Well, there were three that increased.

Mark Zandi:                      Okay. What were they, Cris?

Cris deRitis:                       [inaudible 01:19:48]. Interest rate spread.

Mark Zandi:                      Okay.

Cris deRitis:                       Manufacturers' new orders for non-defense capital goods.

Mark Zandi:                      Okay. Those are two. Yeah.

Cris deRitis:                       Manufacturers' new orders for consumer goods.

Mark Zandi:                      Oh, okay. Those seem like low on the list of-

Cris deRitis:                       In terms of importance.

Mark Zandi:                      Yeah. Importance. Yeah. Too bad. Okay. All right, that was good though. We should have gotten that. Although it was this morning. That was the issue. I've been on Zooms all morning.

Marisa DiNatale:              Yeah, I snuck in and grabbed that one.

Cris deRitis:                       Nicely done.

Mark Zandi:                      Nicely. Very, very tricky. All right, who wants to go next? Gaurav, you want to go? Do you have a statistic you want to throw out there?

Gaurav Ganguly:             Yeah, I can come up with a statistic. It's not a conventional economic indicator, but it is linked to the paper we just discussed.

Mark Zandi:                      Okay. Fire away.

Gaurav Ganguly:             And the number is 52. It's not the meaning of life because that's 42. Okay?

Cris deRitis:                       Yes. That's where my mind went.

Mark Zandi:                      Exactly. Yeah, that's what I was thinking.

Gaurav Ganguly:             The meaning of life, the universe and everything, as we all know, is 42. My number is 52.

Mark Zandi:                      52.

Cris deRitis:                       A number that came out this week.

Gaurav Ganguly:             It didn't come out this week. It came out in, I'd guess, the last month or so.

Cris deRitis:                       And it's climate [inaudible 01:21:00].

Gaurav Ganguly:             And it's a number that you wouldn't find very easily, I've got to confess. You've got to read a fairly dense report to get to this number.

Marisa DiNatale:              It's climate related.

Chris Lafakis:                    Is it the number of countries-

Gaurav Ganguly:             And it's climate related.

Mark Zandi:                      Go ahead, Chris.

Chris Lafakis:                    Is it a number of countries?

Gaurav Ganguly:             No.

Mark Zandi:                      Not the number of countries that did something.

Gaurav Ganguly:             It's specifically related to a very important concept in that climate paper, the one that you have to-

Marisa DiNatale:              Carbon tax.

Gaurav Ganguly:             Carbon. Yes. Carbon, but not the tax.

Mark Zandi:                      There's some kind of physical... It's physical related, right?

Gaurav Ganguly:             Right. Correct.

Mark Zandi:                      So something in the physical environment.

Gaurav Ganguly:             Correct.

Mark Zandi:                      If you get above 52 degrees C, you got a real problem, or something. Your body breaks down.

Gaurav Ganguly:             No, no, no. But you're right, it's related to the physical environment, but it's not temperature.

Mark Zandi:                      What's that called? You know what I'm talking about.

Gaurav Ganguly:             The wet bulb. Yeah, yeah.

Mark Zandi:                      The wet bulb.

Gaurav Ganguly:             We talked about this. Wet bulb.

Mark Zandi:                      Yeah, the wet bulb. What's that temperature? Do you know? Is it temperature?

Gaurav Ganguly:             Yeah, there is a... Gosh, I [inaudible 01:21:57] what that number is.

Mark Zandi:                      It's think it's 52 degrees C, I'm just saying.

Gaurav Ganguly:             Is it 35? No, it's not 52C. And that's not the probability of recession, at least not my probability of recession. Should I just-

Mark Zandi:                      Yeah, fire away.

Cris deRitis:                       Go for it.

Mark Zandi:                      Put us out of our misery.

Gaurav Ganguly:             It's the median estimate of gigatons of CO2 equivalent, for all greenhouse gases emissions by 2030. So that's the number. 52 gigatons of CO2 in emissions in 2030, if all signatories to the Paris Accord implement all their pledges. That's where we'll get to.

Mark Zandi:                      Cumulatively?

Gaurav Ganguly:             Annual.

Mark Zandi:                      Annual? Oh, wow.

Gaurav Ganguly:             In 2030, the annual emissions will be 52 gigatons of CO2 equivalent for all greenhouse gases, if all signatories to the Paris Accord implement all their pledges. In 2019, that number was 54.5. So if all pledges are actually put into effect, then we will bend the emissions curve by 2030, as a world.

Mark Zandi:                      Oh goodness. That sounds like a lot of gigatons.

Gaurav Ganguly:             That's a lot of gigatons. We will blow through-

Mark Zandi:                      Even if we do what we probably won't do, it's still a lot of gigatons.

Gaurav Ganguly:             It's still a lot of gigatons. And it basically tells us that we'll still blow through 1.5 degrees, which is the ambition of the Paris Accord.

Mark Zandi:                      That's 1.5 increase.

Gaurav Ganguly:             Degrees Centigrade.

Mark Zandi:                      Above its pre-industrial era. And that's kind of the bogey here, but it feels like we're going to blow right through that.

Gaurav Ganguly:             We're going to blow through that.

Mark Zandi:                      Unfortunately. In fact, I think in our baseline forecast for the US or global, we're assuming 2.5 degrees C, aren't we?

Bernard Yaros:                 Yeah, we're-

Gaurav Ganguly:             And that, by the way, is exactly what the UN comes up with. Its Emissions Gap Report, which is, by the way, this very dense report from where I picked out this fantastic statistic. So the UN Gap Report for 2022, and it's a great report which they compile every year, look at all these NDCs and they lay out how much they think temperatures could go up by if various things get done, and the median estimate for global warming by 2100 is 2.5 degrees.

Mark Zandi:                      Yeah. Okay. So we're right down the strike zone here. Yeah. Okay, let's do one more because this is getting pretty long in the tooth. And let's go to Bernard in honor of his... Because he's recently taken on more responsibility at Economic View and is really focused on the realtime statistics. As you can tell from his-

Marisa DiNatale:              Which is why he is the only one so far who's gotten a statistic.

Mark Zandi:                      Yeah, I know. And you can tell from his description of the Inflation Reduction Act, he is very detail oriented, which is really a good thing. But fire away, Bernard.

Bernard Yaros:                 So it's negative 4,000.

Mark Zandi:                      Negative 4,000. Is it a statistic that came out this week?

Bernard Yaros:                 Yep.

Cris deRitis:                       Related to climate?

Marisa DiNatale:              Is it climate related?

Bernard Yaros:                 No, no, no.

Mark Zandi:                      No. Is that the decline in initial UI claims?

Bernard Yaros:                 Ding, ding, ding.

Mark Zandi:                      Oh, okay. Now, that is pretty impressive. Gaurav, what would you say? No sarcasm.

Gaurav Ganguly:             I'm speechless. I'm speechless, Mark.

Cris deRitis:                       Overhand in softball, right there.

Mark Zandi:                      What do think everyone...? Come on. Come on.

Chris Lafakis:                    Actually, I was thinking UI claims before you said it.

Mark Zandi:                      Oh, how rude.

Chris Lafakis:                    I'm just more reserved.

Mark Zandi:                      He's more reserved. Yeah. I think the word is humble. Humble. I am anything but humble, given the opportunity.

Bernard Yaros:                 The reason why I brought this up is because we've been getting a lot of questions about all the steady drumbeat in the news about tech layoffs. There's just been nonstop from Meta, Amazon, all the turmoil in Twitter right now. So I think some people have been incorrectly saying, "Oh, all of these tech layoffs are an impending sign of doom or recession." But I would really push back, especially... People are also saying, "What's going to happen to jobless claims?" Because by our account, there's been close to 40,000 job cuts in tech just this month, as of yesterday. And obviously, if all of those show up in jobless claims, that's going to really push jobless claims close to the break-even level, which would be close to zero or lower growth in jobs.

                                             But I think a lot of these, if you look at the information sector right now, job openings are very high. They're off their peaks, but they're still very high. So I would assume a lot of these people are really going to find jobs pretty quickly. Also, a lot of these folks are also going to be getting three months or so severance pay, so that's also going to be enough of a financial backstop to bridge them over until they find a new job. So I don't really see this as... Tech is not really an area of the labor market that I would look for signs about a forthcoming recession. I think temporary help is a much better indicator of labor demand.

Mark Zandi:                      And I should say, you are doing a lot of writing now on the daily indicators and you wrote this up in your release yesterday.

Bernard Yaros:                 Yeah, yesterday. Yeah, exactly.

Mark Zandi:                      Yeah. And it's really well done. Kudos. I mean really. I enjoy reading it, which is... I don't enjoy reading much, but I really enjoy reading that. So that was very, very good. Okay, I think we're going to call it quits. Are you okay with that, Chris Lafakis and deRitis? Did you notice Cris was drinking Wawa coffee?

Marisa DiNatale:              I noticed that. A very large one as well.

Mark Zandi:                      A very large one. I think he wants to be more associated with the everyday man.

Marisa DiNatale:              He's offsetting the glasses.

Mark Zandi:                      And the lattes he drinks, a little sippy thing he has.

Chris Lafakis:                    Is it hazelnut latte?

Cris deRitis:                       I just like coffee in all its forms.

Mark Zandi:                      Very good. Very good. Well, thanks, everyone, for spending an hour and a half with us. I thought that was very informative and we'll talk to you next week. Take care now.