INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics and I'm joined by three of my colleagues. We've got Cris, Cris deRitis, deputy chief economist. We've got Ryan, Ryan Sweet, he's the director of real-time economics and Eric, Eric Gaus. Eric, you've not been on Inside Economics. Is that correct?

Eric Gaus:                          That's correct.

Mark Zandi:                      Well, who made that error? That doesn't sound right to me. We've been on the air now, I think almost a year. If not a year, pretty close to a year.

Cris deRitis:                       Coming up, close.

Mark Zandi:                      Yeah. And it's taken a year to get you on Inside Economics. We got to talk to the booker here for these things.

Eric Gaus:                          You keep me busy all the time, Mark. I don't have time.

Mark Zandi:                      Oh yeah. That's what it is? Yeah. You're too busy for Inside Economics. Did you hear that guys? He says he's too busy. He's a busy guy. He's a busy guy.

Ryan Sweet:                      Yeah, he is a busy guy.

Mark Zandi:                      So what's your title exactly?

Eric Gaus:                          I'm senior economist.

Mark Zandi:                      Okay. And you are critical to a lot of the work we do around geopolitical risk, country risk, as we say. There's no difference between country risk and geopolitical risk, is there?

Eric Gaus:                          Yeah, I would say, I mean, geopolitical risk is sort of underneath country risk. Country risk is really broad. I mean, it runs the gamut from everything that could possibly go wrong.

Mark Zandi:                      Okay. Makes sense. So geopolitical risk is a subset of-

Eric Gaus:                          Correct.

Mark Zandi:                      ... what you would call country risk? Okay. Right. Very good. So what other kinds of things would be in country risk?

Eric Gaus:                          Well, we'd look at things like national security risk, which includes things like effects of climate change. It's not geopolitical at all. Social risks, which is mostly the kinds of social unrest locally. So thinking about like an Arab spring type moment, that might precipitate to sort of more unrest. There's of course political risk and tied into there is of course geopolitical risk. We also have three other main dimensions that are more economic. So macro risk, business risks and financial risks, which are more sort of like the currency and bond market side of things.

Mark Zandi:                      Got it. Got it. Before you came to Moody's, you were in an academic, right? Were you at Gettysburg? You were teaching at Gettysburg, I'm sure-

Eric Gaus:                          No. No, that's where Mark was from. But more so nearby a small liberal arts college, Ursinus College.

Mark Zandi:                      Oh, sure.

Eric Gaus:                          And I also taught at Haverford College about a year before I started-

Ryan Sweet:                      The Centennial Conference, which is Haverford, Gettysburg. And where I went to college, Washington College is very well represented here at Moody's.

Eric Gaus:                          Yes.

Mark Zandi:                      Say that again. What's well represented here at Moody's?

Ryan Sweet:                      The Centennial Conference, which includes a bunch of small liberal arts schools. So Gettysburg, where Mark Hopkins taught. Haverford, Ursinus, Eric, Ursinus. And I went to undergrad at Washington College, which is also in the Centennial Conference.

Mark Zandi:                      Oh, I didn't know that. Oh, that's so cool.

Ryan Sweet:                       A little fun fact there.

Mark Zandi:                      Yeah. It is a fun fact. Yeah. Very good. So the Centennial Conference.

Ryan Sweet:                      I mean, a little bit by extension, you can include Cris because Johns Hopkins is D3 in baseball and we would play Hopkins. So Gettysburg, Ursinus and high school would play Hopkins.

Mark Zandi:                      Oh, would-

Cris deRitis:                       Oh, now you got to get the UPenn connection.

Ryan Sweet:                      You can't get the UPenn in there.

Mark Zandi:                      No?

Ryan Sweet:                      That's the... No.

Mark Zandi:                      We're a class of our own.

Cris deRitis:                       There you go. There you go.

Ryan Sweet:                      There we go. Someone's going to call Zoom.

Mark Zandi:                      No, no, no.

Ryan Sweet:                      We need a bigger box from Mark's Area.

Cris deRitis:                       Yeah. I, know.

Ryan Sweet:                      He's not going to fit in soon.

Mark Zandi:                      He's right. Yeah. He's absolutely right.

Cris deRitis:                       He's fighting colonials.

Mark Zandi:                      We're the Quakers.

Ryan Sweet:                      Not the colonial.

Cris deRitis:                       Quakers.

Mark Zandi:                      Quakers.

Ryan Sweet:                      Not the colonials.

Cris deRitis:                       It shows you what I know.

Mark Zandi:                      Yeah. What was I going to say? Oh, Eric, how long have you been with us at Moody's now?

Eric Gaus:                          Up on four years, the summer will be four years.

Mark Zandi:                      Well, fantastic. It's good to have you aboard. And obviously, we're going to be talking about geopolitical risk and there's a lot of risk out there to talk about.

Eric Gaus:                          A lot of things going on. Yeah.

Mark Zandi:                      Lot of things going on. So it's good to have you on board to have this conversation. But before we get to that, I guess we should talk about... there's a few things going on in the economy, financial markets that are just really bothering me. And I'm just going to throw it out there and see what people think and help me understand what's going on. First up, the stock market. What in the world, The Federal Reserve is on DEFCON 1, can't seem to tell us they're going to be raising rates any more quickly. They're just going to ramp things up here. Every speech a Chair Powell has given or another fake governor's given is this, "Well, we're going to be tightening very aggressively here going forward." And then on top of that, we have Russia-Ukraine, and all the uncertainty and macroeconomic consequences of that. None of which are any good. Yet the stock market, no problem. I mean-

Cris deRitis:                       A fly.

Mark Zandi:                      Yeah. What's the deal? Does that make any sense to you guys? What's going on? Anyone got a view? Cris, you got a view on that?

Cris deRitis:                       It's, I agree with you, it doesn't make any real logical sense. All I can think of is that maybe there is a cash on the sidelines. So as soon as you get any type of a little bit of decline, people come in then bargain shop. And that's why it's not reacting, but that doesn't really hold water if you really believe that the rates are going up quickly. So I don't know. I don't know.

Mark Zandi:                      So you as well?

Cris deRitis:                       Yes. Yeah.

Mark Zandi:                      Well, did this... I mean, before I said it, had you noticed this? Was this something like what's going on here in your own mind or-

Cris deRitis:                       Yeah. Yeah. Well, prices are up, but I mean, it doesn't seem to react. It just right, stock market continues on its way.

Mark Zandi:                      And Eric, correct me if I'm wrong, but this is kind of the case across the globe, right? I mean, equity market, it's pretty much everywhere. They're down a little bit from their peaks, but they're all time peaks, but they're not down a lot. They're down in something like the FTSE 250, which is the British equity index. That's down more than the S&P 500 in the US, which that makes some sense, given that they're more closely linked to what's going on in Russia-Ukraine. But markets across the globe seem to be hanging in pretty well. Is that right? I think I got it right.

Eric Gaus:                          That's pretty true. I mean yeah, you're right. They've all slid a little bit, but compared to the sort of enormity of the situation, it doesn't seem like it's the right scale. And I think that's more what you're thinking, right?

Mark Zandi:                      Right. Ryan, any perspective on this? What's going on?

Ryan Sweet:                      I agree with everybody, particularly if you look over the last several months, I mean, valuations, we've been arguing going into this, that the stock market was overvalued and the only thing justifying these high valuations was low interest rates. And now that interest rate rates are on the rise, you would think valuations will start to be readjusted and that the stock market should come in with it. But so far it's holding up. I mean, I don't know how people are that optimistic about earnings growth next year, given that The Fed is, like you said, on DEFCON 1. I mean, I just don't see how the stock market can hold up.

Cris deRitis:                       Is it a lack of alternatives or where else are you going to go?

Ryan Sweet:                      Maybe. But I mean, you have seen a lot of outflows of leverage loans, maybe that money is going into the stock market or people are looking for alternatives like Cris pointed out.

Mark Zandi:                      What's that Ryan? Leverage Loan-

Ryan Sweet:                      The Leverage Loan Market.

Mark Zandi:                      Yeah.

Ryan Sweet:                      If you look at the Corporate Bond Market, the investment grade, corporate bond issue, a lot of demand for investment grade, but high-yield and leverage loans, there's been a really significant slowing and demand for that kind of paper. Maybe they're bailing on that and going... this is all a hypothesis and it could be going into the stock market. Yeah, the $2.6 trillion in excess savings, maybe the retail investors coming in, because it's with the high end income households. I don't know. I mean, we're kind of scrambling for explanations.

Mark Zandi:                      Yeah. Well, it's one of those things, usually when I can't explain, it doesn't last very long. So feels like we might wake up one morning and then Dow Jones is down 1,000 points or something. It just feels that way, just... Here's the other thing, The Federal Reserve clearly wants the economy's growth rate to slow, because they're fearful that the economy is going to blow past full employment. And this high inflation and inflation expectations is going to get embedded endemic and they got a bigger problem down the road with trying to battle that. So they're clearly telling us, point blank, "No questions, no uncertainty, we are going to slow growth." And one of the key ways to slow growth, at least anytime in the near future, is through lower stock prices. I mean, clearly the housing market, that interest rate sensitive and that's showing some cracks. But if you don't get stock prices down, then The Fed's going to even have to step on the brakes even harder. I mean, they're going to win at some point, they'll win this battle, won't they?

Ryan Sweet:                      Do you think it's more important for the stock prices to come down or for them to cause corporate bond spreads to widen, so reduce access to credit?

Mark Zandi:                      Well-

Ryan Sweet:                      I mean, it's probably something-

Mark Zandi:                      ... have you ever seen a situation where stock prices stay strong and corporate bond spreads gap out?

Ryan Sweet:                      No. Yeah, that's a good point. There's a very strong correlation between the two of them.

Mark Zandi:                      Well, for good reason, right?

Ryan Sweet:                      Right. Exactly. But I'm wondering if The Fed pushes hard enough, then one of them will crack first. I don't know which one.

Mark Zandi:                      You follow the Corporate Bond Market really carefully, so what's going on with Corporate Credit Spreads? That's the difference between yields on Corporate Bonds and say tenure treasury, risk free rate, that spread, that corporate bond spread is a reflection of what bond investors need to get compensated for the risk involved, the credit risk, involved in investing in that bond, the risk that bond might default, or they might not get paid in a timely way, has it... What's going on there? Do you similarly surprised there with how-

Ryan Sweet:                      Yeah.

Mark Zandi:                      You are? Okay.

Ryan Sweet:                      So the increase in the bond market volatility, the stock market volatility, and typically those are two big drivers of high-yield Corporate Bond Spreads, but they've widened, not an enormous amount, not an... but part of it is because the stock market is all up. And if you look at since the 1990s, there's a very strong correlation and calls are relationship between changes in the stock market and high-yield Corporate Bond Spread. Like it actually came in over the past week, which was a little bit surprising and we're well below our historical average. So usually a historical average for high-yield Corporate Bond Spread is 500 basis points. I think we're still below 400 basis points.

Mark Zandi:                      Yeah. Pretty interesting. Hey Eric, this may be a question you don't know the answer to, but doesn't stop me from asking it anyway. Historically, do geopolitical events have significant impacts on equity prices on Corporate Bond, spreads on financial markets? Can you see it when we have big events in markets?

Eric Gaus:                          Give you a classic economist answer? It depends. Right, so-

Mark Zandi:                      Ryan says that all the time, by the way. That's his go-to, "Oh, it depends."

Eric Gaus:                          Well, but I think it's somewhat true. It depends on how localized you're talking about. Like clearly, we'll see this for Russia and Ukraine and maybe... like the closer you get to the epicenter of whatever the geopolitical turmoil happens to be, that's where you're going to see more response and that sort of follows intuition. So again, it does kind of depend.

Mark Zandi:                      Well, I guess the Russian stock market was shut down, so-

Eric Gaus:                          Yeah, exactly.

Mark Zandi:                      Its around zero for this mess. So yeah.

Ryan Sweet:                      I mean, the one thing I point-

Mark Zandi:                      It doesn't send ripple out. Go ahead, Ryan.

Ryan Sweet:                      But the one thing I point out is that The Federal reserve has a geopolitical risk index and I recently looked at it and kind of see assess does it affect the economy more or financial markets? It affects financial market conditions much more in the US economy. So far the hit to the stock market, the hit to High-yield Corporate Bond Spreads is in line with what we saw around the Iraq war or less so around 911, but the Gulf War, things like that.

Mark Zandi:                      You know, you just took my statistic.

Ryan Sweet:                      No, you... Sure. You were going to cite the geopolitical risk index.

Mark Zandi:                      I was. I was. I'm not kidding.

Ryan Sweet:                      What is it? What is it, right now? What's the number?

Mark Zandi:                      Four. Four.

Ryan Sweet:                      Four?

Mark Zandi:                      Four.

Ryan Sweet:                      The z-score?

Mark Zandi:                      The z-score is Four.

Ryan Sweet:                      Yeah. Right.

Mark Zandi:                      The z-score is four.

Ryan Sweet:                      Yeah.

Mark Zandi:                      Right? Am I okay?

Ryan Sweet:                      He's looking at where's the di-simplicity.

Mark Zandi:                      Or where's the cowbell. Where's the cowbell.

Ryan Sweet:                      There's no cowbell for that. That is the game in reverse.

Mark Zandi:                      Well, you want to explain that? The whole... Because this is something you do, you put this together. So did you want us to explain that to... And Eric, I should ask, do you look at what Ryan puts together here on the South score?

Ryan Sweet:                      No you can say no. It's okay.

Mark Zandi:                      Oh, that's a no. That is a no. That's no.

Ryan Sweet:                      There's a silence.

Eric Gaus:                          That's someone that comes from the Yucca Valley paper, right?

Ryan Sweet:                      Exactly.

Mark Zandi:                      Yeah. Explain that Ryan or Eric, explain that statistic of what he's said and put into some kind of context.

Ryan Sweet:                      So what The Fed economist did was very similar to what Stanford economists, Bloom and others did for political uncertainty. What they do is they scrape newspapers and look for references to geopolitical risk. I don't know all the exact terms that they look for, but things that are tied to geopolitical risk, like war, sanctions, things like that. And they come up with an index. And what I did was I calculated a z-score, which shows you how far above or below the mean it is. And right now, it's at, as you mentioned, four, which is among the highest sense, I think it was the Iraq war.

Mark Zandi:                      But it was a lot higher than in the Iraq.

Ryan Sweet:                      Yeah it was. We're not there yet.

Mark Zandi:                      I think it was more like... or maybe it was a financial crisis. It was eight. Was it the financial crisis? No. Was it-

Ryan Sweet:                      911. It was 911.

Mark Zandi:                      I'm sorry. 911. Right. It was double what it is now, which I guess makes sense.

Ryan Sweet:                      Because we're not explicitly involved in what's going on with Ukraine and Russia.

Mark Zandi:                      Yeah. Right. Good point. And so what you're saying is based on your analysis, that if you relate that geopolitical risk measure, that z-score, as you describe it, to financial market conditions, stock prices, credit spreads and economic, some measure of economic activity, presumably I guess, GDP or jobs, you find that it's much more important for financial markets than it is for the economy, which I guess makes sense. But right now, no, you can't connect the dots here because financial markets are really not-

Ryan Sweet:                      It's tightening. I think they're tightening. Noticeably over the last month, but-

Mark Zandi:                      Yeah, but...

Ryan Sweet:                      ... not to the degree, maybe that we're thinking that they should have.

Mark Zandi:                      Well, and one day they have a tightened if, forget about Russia-Ukraine, if only with The Fed did what it was doing and every central bank on the planet now is almost every central bank, except the bank of China is kind of tightening policy, you would've expect something, but in... You see some tightening and financial conditions, right?

Ryan Sweet:                      But I would only push back that The Fed would not be on DEFCON 1, Powell would not have said what he said earlier this week. If it wasn't for Russia-Ukraine, which led to higher oil prices, which is pushed up patient expectations.

Mark Zandi:                      Okay.

Ryan Sweet:                      If you didn't have that, it would be more steady city as she goes.

Mark Zandi:                      That's a great point. That's a great point. The reason why The Fed went from DEFCON 5 to DEFCON 1, and seemingly in a few weeks, was in fact the Russian invasion of Ukraine, because that fanned inflation and more importantly, inflation expectations. And thus, I say yeah, that makes a lot of sense. So Russia-Ukraine is one way or the other feels like it's kind of at the root of what's going on here, but still, even despite that, it hasn't had that big an impact on financial markets, certainly not one. It's confusing. It's just confusing the way we had seen more of an impact.

                                             Okay. All right. Here's another one that is bothering me. And I might turn this back on you guys and ask you what's bothering you. But I got... because there's a lot of things that are bothering me now about the eco... all of a sudden. The shape of the yield curve. The yield curve and you know, someone sent an email to Ryan and myself a few days ago about what we thought about what the yield curve was saying. And I characterized my view as I'm a yield curve, what'd I say? I'm a yield curve believer and Ryan's a yield curve denier. Do I have that right, Ryan? Is that roughly right?

Ryan Sweet:                      That's not skeptic.

Mark Zandi:                      Oh, you're skeptic. Oh, that's a better word. You're right.

Ryan Sweet:                      Yeah. Skeptic.

Mark Zandi:                      Yeah. I should have said skeptic. Yeah. That was better characterization, but okay. So who wants... Ryan, you want to describe what's going on with the yield curve and what the debate is about what the yield curve is saying?

Ryan Sweet:                      Yeah. So the yield curve is the difference between long term treasury securities, typically the 10 year treasury yield, and a measure of short term interest rates. So you can look at the two year treasury yield or the three month treasury bill. Historically, the most accurate measure of the yield curve is the 10 year minus the three month. That has only sent one false signal, meaning that it inverted and we avoided a recession and that was back in the 1960s. So right now it's the tail of two yield curves. So the one that everyone's focused on is the 10 year minus the two year. And that flattened quite substantially. I think last time I checked, it was less than 25 basis points.

Mark Zandi:                      I think it was 20 basis points, 22 percentage points yesterday.

Ryan Sweet:                      So it's not inverted yet, meaning that short-term rates aren't higher than long-term rates, but we're headed that way. And if you look at four treasury curve, they expect that to invert in the next six months. On the other hand, the 10 year minus the three month is nowhere near inversion. It's actually the gap between the two of these or the widest in a very, very long time. So you're getting a message tale of two yield curves. So we maintain a probability of recession based on the daily yield curves. So the 10-2 has the probability recession in the next 12 months, close to 20%, the 10-year minus the 3-month, 7%. So it really depends on what yield curve you put more stock in.

Mark Zandi:                      Yeah well, I mean, clearly the 3-month is going to be rising here very rapidly, given-

Ryan Sweet:                      It will be.

Mark Zandi:                      That's going to do it. So it's almost like you really shouldn't... that just feels a little odd to be looking at that as trying understand where the curve is going to be. I mean the two year is a more of a market investor reflection of where The Fed's going. And so it feels like that's probably a better indicator to look at to gauge where we're headed or what the risks are. Would you agree with that? No?

Ryan Sweet:                      I think, yeah right now it is, but like before... if the 10-2 inverts and the 10-3... It's headed towards inversion, but a recession usually follows after the 10-3 inverts.

Mark Zandi:                      Well, although I showed you this chart, if you look back to business cycles, I think going all the way back to the 1980s recessions, we had back to backward rec... the 10 year, two year on a monthly basis, inverted prior to each of those recessions. And I don't think it ever inverted in a recession not happening, it even inverted before the pandemic, right?

Cris deRitis:                       Yeah.

Mark Zandi:                      I mean, and you could say, well, doesn't that mean that this is a false indicator because who could have predicted the pandemic? That's true but I would've argued that the economy was pretty fragile and pretty high probability of going into recession even without the pandemic because of the Trade War. Yeah.

Cris deRitis:                       You did argue that.

Mark Zandi:                      I did argue that. I did argue that. Yeah, exactly. Cris, what do you think of the... so maybe I'll turn to you, can you explain why the shape of the yield curve and when it inverts when short term rates rise above long rates, that is so prescient in terms of recessions, what's behind that? Is there some causal relationship or what's going on there? Why is this such a oppression indicator?

Cris deRitis:                       Yeah. Well, I guess a couple things we could say, first of all, I'll say I am a believer.

Mark Zandi:                      You're a believer.

Cris deRitis:                       Yeah. I'm lonely on my own.

Mark Zandi:                      Are you a strong believer?

Cris deRitis:                       I'm a strong believer.

Mark Zandi:                      Strong believer. Okay. He's with me. We're going to ask and see Eric, is he a believer or denier or a skeptic soon. So get ready. Well, get ready.

Eric Gaus:                          I'll take Cris' normal position. I'm going to be right in the middle.

Mark Zandi:                      Of course. Yeah.

Cris deRitis:                       I'm abandoning that position. So it's all yours.

Mark Zandi:                      How do you describe that then? You're a...

Eric Gaus:                          Well, because it works very well to describe the US, but it doesn't work very well in other countries. And so it may be conditional on the sort of financial system, the structure of the financial system and how that sort of works. So that's sort of my stance on that.

Mark Zandi:                      Or the well-functioning of the Bond Market because you have to have a very liquid...

Eric Gaus:                          Yeah, exactly. Exactly. What the financial system in the Bond Markets look like.

Mark Zandi:                      Yeah. Because we have a liquid treasury market, I mean, and it's risk free. There is no credit risk in there whereas other places you don't have the same liquidity in those markets and there probably is some credit risk in a lot of them. But anyway, distracting from that, going back to Cris, so what's the logic here? What's the intuition?

Cris deRitis:                       In terms of a causal relationship, I would point to the banking system or lending under an inverted yield curve. It's very difficult to make money as a lender. You're borrowing short lending long and now it's more costly in the short term than the long term. So that then has to lead to some type of reduction in credit and that would lead to recession. That's the causal link I would throw out there.

Mark Zandi:                      Yeah. Right. Yeah, you can't make your bank, you make money on borrowing short term at a low rate and lending longer term at a higher rate. That's tied to the yield curve, the shape of the yield curve. And if the curve inverts, that means my borrowing costs rise above the return on my lending and that's my profit margin, I can't make money. I don't lend, I don't extend credit. And the credit's the mother's milk of economic activity, no credit, doesn't goods going on in the economy.

Ryan Sweet:                      That's right.

Mark Zandi:                      Right. There's also, I guess, the intuition might be also a signal, kind of what bonded investors, the collective wisdom of bond investors, right?

Cris deRitis:                       Sure.

Mark Zandi:                      They're saying, look, if I think there's a recession down the road, that means that inflation's going to fall, real yields are going to fall, long term interest rates are going to fall. And so that drives down long term rates relative to where short rates are, because that short rate is more tied to what The Fed's doing and if Fed's got their foot on the brakes, that means should hire short term interest rates and you get that kind of inversion. So it's almost like a reflection of the collective wisdom of folks who think about these things for a living and they're putting their money where their mouth is and presumably they get it more right than... or they get it right every single time and-

Ryan Sweet:                      The wisdom or group think because when they-

Mark Zandi:                      They're self-refiling maybe too.

Ryan Sweet:                      Yeah. That's the thing with the yield group I think is more... that's not appreciated enough is that when it inverts, people assume a recession is coming so we talk ourselves into a recession. So they listen to the Bond Market and that affects the Stock Market and then we just go to confidence weekends and we just go around and around.

Mark Zandi:                      That's interesting, by that argument Eric, that we talk ourselves into recession, that just doesn't feel right to me.

Ryan Sweet:                      Look at Google trends, yield curve searches. When the yield curve's close to inverting, it chops.

Mark Zandi:                      Yeah. Really?

Ryan Sweet:                      Everyone's looking, "First of all, what the hell is the yield curve?" And then we just talk ourselves in a recession.

Mark Zandi:                      I find that so curious, but I mean, I don't know, would that be an interesting study to do and see if we can't figure kind of tease that out.

Ryan Sweet:                      There must be-

Mark Zandi:                      Maybe there's studies out there, I haven't seen them.

Ryan Sweet:                      We could use measures of business confidence versus the yield curve and Google trends, there's lots of stuff we could do with it.

Mark Zandi:                      Yeah. That would be very interesting. So Eric, you said something in the middle, so how do you define yourself? Are you like a yield curve agnostic? Is that what you're saying?

Eric Gaus:                          No. I'm just, exactly the point that I made, like I think in the US it works, but it doesn't work elsewhere. So you can't really say, "Oh, the yield curve is a indicator broadly speaking, it works for the US.

Mark Zandi:                      Okay. So you're saying, you're a US yield curve believer?

Eric Gaus:                          Sure.

Mark Zandi:                      Okay. Well sure means-

Ryan Sweet:                      That was a growing endorsement.

Mark Zandi:                      Yeah. Is the answer yes?

Eric Gaus:                          Yes. Yes. It works. Like it seems to be pretty accurate predictor until it... Yeah.

Ryan Sweet:                      Until it isn't.

Mark Zandi:                      Until it isn't.

Cris deRitis:                       See how he does that.

Eric Gaus:                          Well, until you go someplace else. Like I just, I think about what other countries are doing too, and then you can't look at the yield curve to help you assess what's going on there, right?

Mark Zandi:                      Right. All right. Well, all I have to say is all eyes on that yield curve. One thing I will say is important for folks that are thinking about looking at this as an indicator of where the economy's headed and I think they should, is I think it has to be what I would call a hard inversion in the yield curve. It can't be the two year yield rises above the 10 year yield intraday, or even for a week, or... it's got to be month two or three and it's got to be not a basis point or two, but it feels like it's got to be 10, 15, 20 basis points at least kind of an inversion. So it's got to be a clear inversion, not some temporary thing in the Bond Market.

Cris deRitis:                       See Cris, see how he does it. He puts a lot of caveats on it. A version.

Mark Zandi:                      No caveats, no, no, no. No caveats, that means... Although, having that... Just said what I just said, I have not looked to see whether the curve has ever lightly inverted, not hard invert. Once it lightly inverts, does it always hard invert? Is there ever times where it hasn't done that?

Cris deRitis:                       There's been a couple times, I think.

Mark Zandi:                      Has there?

Cris deRitis:                       Mm-hmm (affirmative).

Mark Zandi:                      Okay. All right. Okay, very good.

Cris deRitis:                       So my question then is, does this condition, The Fed's behavior at this point, if you believe-

Mark Zandi:                      A great question.

Cris deRitis:                       If you believe in this relationship and it might be self-fulfilling, we're not ascribing the causality, does Powell now say, "Oh, I'm not going to raise rates because that would cause the inversion." What's your take?

Mark Zandi:                      Well, I think if I were on The Fed and I needed a rule of thumb to kind of gauge what appropriate policy is, I'd be looking at two things at this point in time, I'd be looking at the 10-Year, 2-Year treasury spread that yield curve and I'd also be looking at my favorite measure of inflation expectations, which by the way, has now changed. It's the ICE measure. I don't know if you follow but ICE, The Intercontinental Exchange, just put out a inflation expectations. Three of them actually, daily based on inflation swaps and I won't go into what that means, but also treasury inflation protects securities, I won't go into what that means. But combining them, and if you look at the one measure they have is five year inflation, one year ahead. So forget about inflation in the next year, because that's influenced by what's going on right now. It's high.

                                             But look out a year from now and look at inflation in that five year period, to me, that's the key measure of inflation expectations. And that has risen quite considerably about as high as it's ever been. And I'd say for that measure, the key threshold is 3%. So if it rises above 3%, I'd say The Fed's not doing enough, it has to press on the brakes harder. But if the yield curve inverts, then they're pressing too hard and their economy is going to go into recession. So those are the two governors. If I had a heuristic rule of thumbs I'd be using, it would be those two things, to try to gauge policy. And it may turn not be the case, you can't do both. There's no way to do it. Inflation expectations are too high and the yield curve is inverted and then that says, "Oh boy, the plane's going to crash in all likelihood or a very high probability of crashing."

Ryan Sweet:                      Well, don't forget The Fed controls both ends of the yield curve now of quantitative easing. So they could actually try to use the balance sheet to raise the long term treasure yields, the tenure by not selling, but reducing the size of their balance sheet, their treasury-

Mark Zandi:                      That's true.

Ryan Sweet:                      ... more quickly. Giving them a little bit more breathing room.

Mark Zandi:                      And that's the reason why people give for not believing in the yield curve today compared to past times-

Ryan Sweet:                      That's one of my reasons.

Mark Zandi:                      ... because of the QE. That's Why you're the skeptic.

Ryan Sweet:                      Exactly.

Mark Zandi:                      Yeah.

Ryan Sweet:                      And there was no reason we're going to have a recession.

Mark Zandi:                      I do think you were a denier and-

Ryan Sweet:                      No. Skeptic, always a skeptic.

Mark Zandi:                      You got into Cris' church and somehow he turned you into a skeptic. I feel that. No? No.

Ryan Sweet:                      Everything's documented on economic view. Everything I wrote about the yield curve leading up to last time bashing it.

Mark Zandi:                      Oh, okay. Okay. Very good.

Ryan Sweet:                      Then we can go back.

Mark Zandi:                      All right. Okay. So on this podcast, you got two believers, one skeptic, and then agnostic. Or no-

Ryan Sweet:                      A US yield [inaudible 00:30:47] believer.

Mark Zandi:                      US. Yeah. Yeah. Okay. All right. Very good. Okay. All right. One more thing. That's really kind of bothering me and I just want to get your take on it. And then what we're going to move on, play the game with a statistics game kind of weave that into the broader discussion about geopolitical risk. And that is, are we at full employment? So you saw the unemployment insurance claims, hopefully I'm not taking anybody's statistic, but what were they? They were like 188,000. Was that what it was?

Ryan Sweet:                      187,000.

Mark Zandi:                      187,000, that's close-

Ryan Sweet:                      Lowest in September 1969.

Mark Zandi:                      Oh my Lord. And the unemployment rates 3.8%, clearly falling. We've got close to a record number of unfilled job positions. The percentage of the labor force quitting is very high. Wage growth is very strong. Are we at full employment? And the reason I ask is because the rules of thumbs that we often use to gauge that say not quite like the employment-to-population ratio, Ryan's favorite, EPOP, for prime age workers, 25 to 54. That is still, I think, it's 79 1/2%. And it's got to be well over 80%, about a percentage point higher than it's today to be considered full employment. So the question to the group is, are we at full employment or not? You may want to take a crack at that one. What do you think? Eric, do you got a view? You don't have to have a view.

Eric Gaus:                          No, no. I kind of do. My guess is not even though the numbers are so strong only because there are so many people who are still out of the labor force. I don't know how many can pulled back in, right?

Mark Zandi:                      Because of the pandemic you're saying.

Eric Gaus:                          Because of the pandemic, exactly. Yeah. So that's the only thing that makes me say not yet, but the longer this goes on, the less I believe that story, like it's hard to keep saying that over and over again, and then-

Mark Zandi:                      Yeah. Well, the other thing-

Eric Gaus:                          ... not happen.

Mark Zandi:                      ... I just looked at is if you look at the number of people that are not in the labor force, but say they want a job, is still elevated compared to where it was pre-pandemic, but not by that much. I think it's like 500,000 people or so, 750,000 so maybe a little bit, but not a lot. Ryan, what do you think? Are we at full employment?

Ryan Sweet:                      Not yet.

Mark Zandi:                      And why do you say?

Ryan Sweet:                      How far away? Oh, prime EPOP, we could get up to what we saw in the late 1990s or early 2000s. To Eric's point, there's still a lot of people that are not in the labor force. Even though they say they may not want a job, if you look at those that are not in the labor force for other reasons, there's still a lot of shadow labor market slack that we can pull in. And at least since the 1960s, labor force growth and nominal wage growth were very strongly correlated and there's a cause of relationship so we should be able to start pulling more and more people in as nominal wage growth remains strong. So I don't recall what we're getting there, but I don't think we're there yet.

Mark Zandi:                      Well, the Chair Powell says, I think he said the labor market is unhealthy.

Ryan Sweet:                      Unhealthy. Unhealthy.

Mark Zandi:                      It's so tight, it's unhealthy. So he would say we're full employment. Is that a fair characterization?

Ryan Sweet:                      I don't think he said the word full employment. I think he just-

Mark Zandi:                      He did not.

Ryan Sweet:                      ... it's unhealthy because I think the issue is the labor supply problems and jobless claims are coming down rapidly because businesses aren't going to lay off workers because they know how hard it is to replace them.

Mark Zandi:                      Yeah. Okay. So you're kind of like in Eric's camp and that is the pandemic has shoved all these people out. So the labor market is, I guess for a lack of a better term, artificially type.

Ryan Sweet:                      Correct. Yep.

Mark Zandi:                      And as the pandemic fades, those folks come in and the labor market, if it doesn't continue to improve, it would not, would not go back. It's not at full employment then, it's abstracting from the pandemic. Yeah. Cris, what do you think? Are we full employment?

Cris deRitis:                       I'd agree. I don't think we're there yet, but we're awfully close. And one gauge, I agree with all the explanations, given another gauge I would throw out is just the income wages does seem as though those are actually slowing in terms of growth rate. So that would suggest that there is more supply coming in, keeping wages from really taking off. But I think we're on that trend. I think we'll get more people in the labor market. Plenty of jobs out there. So if we're not at full employment today, we're going to be there within a few months.

Ryan Sweet:                      Yeah. Isn't our assumption by the end of the year that we're at home employment?

Mark Zandi:                      Yeah. Yeah.

Ryan Sweet:                      I think that's totally possible.

Mark Zandi:                      Its finessing that a little bit, but yeah, certainly by year's end. Yeah.

Ryan Sweet:                      Yeah. I think that's still reasonable.

Mark Zandi:                      Makes sense. Yeah. Okay. All right. Okay. So those are things that were bothering me. Many things are bothering me, but we're running out of time, is kind of like echo psychoanalysis. And I'm sure one of these days, I'm going to turn to you and say what it's bothering you, but it's all about me as you know, on this podcast. So I needed that bit of help. Let's play the game. The game is the statistics game, we each provide a statistic. The rest of us try to figure out what that is through a series of questions. The best statistic is one where it's not too easy, that we all get it so quickly. Not too hard that we can't get it.

                                             And it would be nice if it's related to something that happened in the last week or related to the topic at hand, which is geopolitical risk. And I'm going to say right up front, I'm not playing the game. At least I'm not giving a statistic. And the only reason why is because I don't have one, I'm just, I came to this unprepared because I knew Eric had two. And actually I asked him if I could have one of his two statistics and he told me point blank, "No." So I found that a little... What's the word?

Eric Gaus:                          You know I had to have in my back pocket. I don't know what you guys-

Mark Zandi:                      Why the hell do you have to have one in the back pocket when I don't have any in my pocket? That's what I'm saying. Anyway, but that's fair enough. But I'm going to play the game because I play to win but I'm not I'm not going to give any statistic.

Ryan Sweet:                      Very competitive.

Mark Zandi:                      You know, Ryan pretends like he's not, but he is. He is. He's like really super-

Ryan Sweet:                      Oh I'm very competitive.

Mark Zandi:                      You're like super competitive. Uber competitive.

Ryan Sweet:                      Yes. I'm an extremely competitive person.

Mark Zandi:                      Yeah. Right. He's my kind of economist. Okay. All right. Who wants to go first? We got to make Ryan go first.

Ryan Sweet:                      All right.

Mark Zandi:                      Because he's so good at this damn game. Okay. Go ahead, Ryan.

Cris deRitis:                       I'm going to guess his.

Mark Zandi:                      What?

Ryan Sweet:                      Go for it already.

Mark Zandi:                      Already you're going to guess?

Cris deRitis:                       Minus 2.2.

Mark Zandi:                      What is it?

Cris deRitis:                       Minus 2.2%.

Ryan Sweet:                      No, I'm not going durable goods.

Cris deRitis:                       Oh, okay. All right.

Mark Zandi:                      Oh that was a decline-

Ryan Sweet:                      I get it, I catch enough flack for bringing up durable goods on this podcast.

Mark Zandi:                      I know he does have way too many times.

Ryan Sweet:                      It's a great report. It's subject to big revisions, but there's a lot of good information, I think.

Mark Zandi:                      It is and do you now have to tell everybody what it said that came out this week?

Ryan Sweet:                      I don't know. Maybe Cris is going into it. Like at the end, we can always come back.

Mark Zandi:                      Oh, that was a head fake on his-

Cris deRitis:                       Go ahead, go ahead.

Mark Zandi:                      ... a misdirect.

Cris deRitis:                       Go ahead. Go ahead, Ryan.

Ryan Sweet:                      Is it durable goods? Oh, you want me to give my number? All right, we'll forget durable goods. Here's my number.

Mark Zandi:                      No, no, no no, no. Wait, wait. The whole world is now saying, "Durable good, why is it so important?" So give us the thumbnail quickly.

Ryan Sweet:                      It's a monthly read on orders, orders of various durable goods. So we think aircrafts, autos, machinery equipment and also shipments and inventories. So a lot of this data feeds directly into GDP. So we have a good idea of what business investment and equipment's doing after we get the durable goods' data. So that's why I pay a lot of close attention to it, because it matters for the GDP estimate and getting back to competitive, that GDP number needs to be right and if you ignore durable goods, you're not going to get it right.

Mark Zandi:                      And so what happened to the tracking estimate for GDP, for QE.

Ryan Sweet:                      Came down, we were north of one, a hair north of one like 1.1% at an annualized rate. And then after durables and a few new home sales, it came down to 0.8%.

Mark Zandi:                      Oh boy. Wow, that's-

Ryan Sweet:                      So we're flirting with zero.

Mark Zandi:                      Right. I can just hear people now, it was a stagflation. So that number comes down.

Cris deRitis:                       It's not stagflation.

Mark Zandi:                      That's what we're going to hear for sure.

Ryan Sweet:                      It's not stagflation. I mean, by definition, stagflation is high inflation, high unemployment.

Mark Zandi:                      Yeah. Well, they're going to say-

Ryan Sweet:                      I'm more worried about stagflation this time next year if The Fed keeps doing what they're doing.

Mark Zandi:                      Yeah. That sounds like a podcast. We should go deep into stagflation. Talk about that because people are hand ringing around that. Okay. Oh, so we're playing a game-

Ryan Sweet:                      I think everyone will-

Mark Zandi:                      ... we haven't even got to the game yet.

Cris deRitis:                       What's your number?

Ryan Sweet:                      All right. My number is... Hold on, it just changed. 70.5%.

Mark Zandi:                      It just changed.

Cris deRitis:                       Just changed?

Ryan Sweet:                      Just changed. 70.5%

Mark Zandi:                      Oh, okay, so [crosstalk 00:39:55].

Ryan Sweet:                      This is Bloomberg important development of the week. Most important develop of the week for the US of economy.

Mark Zandi:                      Oh is it... Well, it's got to be a financial market indicator because it just changed, right?

Ryan Sweet:                      Yeah. Mm-hmm (affirmative).

Mark Zandi:                      Okay.

Ryan Sweet:                      Well, it's determined within financial markets. Yep.

Mark Zandi:                      Oh determined within financial markets.

Ryan Sweet:                      We've talked about it on the podcast already. There's a big hit.

Mark Zandi:                      Is it around inflation expectations?

Ryan Sweet:                      It is not. You're getting there.

Mark Zandi:                      Is it around probability of recessions?

Ryan Sweet:                      Yeah. 70.5% probability of recessions. Well-

Mark Zandi:                      I'm just, within the next 10 years. Yeah. That's what I meant. Yeah.

Cris deRitis:                       No. No, that's not it.

Mark Zandi:                      No that can't be it.

Cris deRitis:                       It's not it.

Mark Zandi:                      Some sentiment measure? No?

Ryan Sweet:                      Nope.

Mark Zandi:                      No.

Ryan Sweet:                      Tell me if you want a very obvious quote.

Mark Zandi:                      No, don't give us stories yet. Let's ask Eric, let's call Eric out. Eric, does anything come to mind?

Eric Gaus:                          Nothing's coming to mind right now.

Mark Zandi:                      No bummer. Cris, I mean, it seems like we should be able to get it if it's the most important development of the week.

Ryan Sweet:                      And could be the most important.

Mark Zandi:                      Okay. I think I know. I think I know. It's the market's expectation for a 50 basis point hike in the funds rate at the next year.

Ryan Sweet:                      Very good. Very good.

Mark Zandi:                      Ding, ding, ding, ding, ding, ding.

Ryan Sweet:                      That's great. I was just about to say that this is probably going to be the biggest change to our forecast for The Fed funds rate a long time that we make coming up.

Mark Zandi:                      Yeah, I know you're [crosstalk 00:41:28]. We got a lot to talk about there guys about... Yeah.

Ryan Sweet:                      Because it's 70.5% for June, 61% probability of a 50 basis point hike in... Or no, that's for May, 70.5%.

Cris deRitis:                       No, it's May.

Ryan Sweet:                      June is 61% of a 50 basis point hike.

Mark Zandi:                      I mean they're telling us, they're going to go to the neutral rate, the neutral rate being that rate consistent with a full employment economy, growing a potential with inflation headed towards target by the end of the year. Certainly no later than this time, next year. And that's 2 1/2%. That's what they think it is, that's what we think it is. And they're probably going to-

Ryan Sweet:                      They're 2.4%, but just to be clear.

Mark Zandi:                      2.4?

Ryan Sweet:                      Yeah.

Mark Zandi:                      Oh really? They lowered it. I thought it was 2.5.

Ryan Sweet:                      They lowered it at the last meeting. Yep.

Mark Zandi:                      Did they really? That's weird.

Ryan Sweet:                      But we're going to get there fast.

Mark Zandi:                      So that means, it feel... Yeah, so do you think by the end of the year or by this time next year or what would you say?

Ryan Sweet:                      I think the three of us are going to have a lively debate coming up, but I think 50 in each of the next two meetings and then 25 each of the remaining meetings for the year.

Mark Zandi:                      What's a caveat that they got to calibrate this so that they don't push us into recession. So again, I go back to the two indicators I would look at, I mean, if the curve starts inverting. But of course the curve reflects-

Ryan Sweet:                      Expectations, right?

Mark Zandi:                      ... what you just said, right?

Ryan Sweet:                      Correct.

Mark Zandi:                      So that's embed... So The Fed would have to do even more than that presumably-

Ryan Sweet:                      To invert it. Yes.

Mark Zandi:                      ... to invert it. Yeah. Okay. All right. So interesting.

Ryan Sweet:                      So I think they have it all clear to be really aggressive. I'm just worried that they do it too much.

Mark Zandi:                      Yeah. Right. Hey Eric, did you see how that was done? That was masterful. That was masterful.

Eric Gaus:                          You think they are good?

Mark Zandi:                      Didn't sound like he really meant it.

Eric Gaus:                          Well, I've heard you do this multiple times now on the podcast.

Mark Zandi:                      Do I?

Eric Gaus:                          So I know how you figure out these things. It's impressive.

Mark Zandi:                      Oh, okay. Okay. Got it. Okay. Fair enough. Good enough. Okay. Eric, do you want Cris to go first or do you want to go next?

Eric Gaus:                          Yeah. Because mine's a good segue into the topic.

Mark Zandi:                      Into the topic. Yeah.

Eric Gaus:                          Yeah.

Ryan Sweet:                      Because it is going to be impossible.

Eric Gaus:                          And... Maybe.

Ryan Sweet:                      Yeah, there you go.

Mark Zandi:                      You know something about Ethiopia's dam or something fighting with Egypt.

Ryan Sweet:                      No, no, no.

Mark Zandi:                      No it's not going to be that. The cost of water running through the Aswan Dam, it's something per kilowatt hour. That's his statistic. Yeah. For the one year.

Eric Gaus:                          It should be something that you guys all know, but let Cris go first.

Mark Zandi:                      All right, go ahead Cris. You're up.

Ryan Sweet:                      Go ahead, Cris.

Cris deRitis:                       All right. Well, my statistic was the UI claims for the week.

Mark Zandi:                      Oh, sorry about that.

Cris deRitis:                       We ran over-

Mark Zandi:                      No, no problem. No problem. Well, it was impressive though. So I'll go with a backup.

Cris deRitis:                       Back up being housing.

Mark Zandi:                      What? What's that?

Cris deRitis:                       Backup being housing.

Mark Zandi:                      Minus 4.1%.

Cris deRitis:                       Pending home sales.

Ryan Sweet:                      Yes.

Mark Zandi:                      Oh, see he's-

Ryan Sweet:                      I know.

Mark Zandi:                      ... getting so-

Cris deRitis:                       I'm sorry Mark. I was supposed to let you get a chance.

Mark Zandi:                      Oh my gosh. Oh.

Ryan Sweet:                      They're pretty bad.

Mark Zandi:                      Okay. Well that's a good one. Explain it. Go ahead. Fair, that's a good one.

Cris deRitis:                       Oh, pending home sales, right? So indication of how many additional sales we'll have in future months, it's down 4.1% on the month, down 5.4% on the year. So direct correlation with the, well, to my mind, direct correlation with the increase in interest rates that we're experiencing, that's causing some softening here. Supply is still limited. So that's also a factor certainly. So I think housing market is certainly on the softer side going forward.

Mark Zandi:                      Hey, we talked about this last week with Ivy Zelman and Dennis McGill of Zelman & Associates. I'm increasingly of the view that we're going to get some house price declines and it's not going to be 18 months, 24 months from now. It's going to be sometime within the next year. Just given how... I mean, the rates are skyrocketing. Fixed mortgage rates are going to be 5%, aren't they? Given we're 10 year yields stay covered, if I'm wrong, right? They are at 2.5%, aren't they?

Ryan Sweet:                      Correct. Today, they're up 13 basis points.

Mark Zandi:                      Yeah. So just add 1.5%, we're going to be over 5%. I think the affordability questions here are going to be massive, right?

Cris deRitis:                       It's going to be binding. Yep.

Mark Zandi:                      So are you also coming to the conclusion that we might actually see some... There's certainly transactions that are going to go through the floor. I went there.

Cris deRitis:                       Yes.

Mark Zandi:                      Home sales, were going to go through the floor because of affordability. And then I guess the only reason why you wouldn't see price declines is if investors keep buying for whatever reason. The-

Cris deRitis:                       And there are still other folks on the sidelines.

Mark Zandi:                      Who? Who would buy though? I mean, at these rates and these prices, it just seems... Right?

Cris deRitis:                       Well, I mean the lack of supply has kept people from buying.

Mark Zandi:                      Yeah. True.

Cris deRitis:                       Even though they may have the cash or if they maybe want to buy and 5% is a higher mortgage rate, but still historically speaking, it's not that high. So if you are in that demographic, you're looking for a home and there's some more inventory coming along, you will see some folks buying.

Mark Zandi:                      Yeah. Yeah.

Cris deRitis:                       But I agree with you. I think we're certainly going to see softening here.

Mark Zandi:                      Yeah. Oh, yeah.

Cris deRitis:                       Definitely certain markets are going to have some significant price declines. I don't know at the national level. Still, I think we'll get pretty close and we certainly could dip below zero, but it might extend a little bit more.

Mark Zandi:                      Well, that's another forecast we should really take a good hard look at. The context of these rising rates. Yeah. Just to make sure.

Ryan Sweet:                      What do you think about existing home inventory down the road? Like a lot of people locked in very low mortgage rates over the last couple of years, for example, my wife and I, like we're not going to move anytime soon unless... Mortgage rates have to go plummet.

Mark Zandi:                      Yeah. Well, Ivy gave us a great statistics. She said, and it sounded consistent with our data, 70% of homeowners with mortgages had coupons. The interest rate on their mortgage was less than 4%. So if you're at 5% or plus, I mean, to make a move is-

Cris deRitis:                       That's a big cost. Yeah.

Mark Zandi:                      ... it's going to be expensive. Yeah. I mean, that's-

Cris deRitis:                       Then with the remote work possibility now, even if you change jobs, you don't need to move like you used to.

Mark Zandi:                      All right. Okay. All right. Well, maybe that'd be something that'd be bothering me 12 months from now if we don't see some price to call lines, because that just feels like it's coming. Okay. That was a good one except it was entirely predictable, Ryan's got you so penned.

Cris deRitis:                       I know.

Ryan Sweet:                      He couldn't say, "No, it's 2%." It could have been new home sales or something in new home sales. It could have been pending.

Mark Zandi:                      Yeah. Yeah. All right, Eric, you're up. You got two of them you said?

Eric Gaus:                          I've got two of them but they're very unrelated. So I'll just go with one first and then we can...

Mark Zandi:                      We can evaluate whether we want to get the second one or not, is what you said.

Eric Gaus:                          That's right. So 3.725 million.

Mark Zandi:                      That's the number of people that have left Ukraine.

Ryan Sweet:                      Yep.

Eric Gaus:                          Correct.

Mark Zandi:                      But that's a good one. That's a good one.

Ryan Sweet:                      That's a good one.

Cris deRitis:                       That's a very good one.

Mark Zandi:                      It's an important one. So like give us a sense of that and what the import of that is.

Eric Gaus:                          Sure. So to date 3.725 million people have evacuated Ukraine, mostly going into Poland. 2.2 million people have fled to Poland and they've sort of scattered to mostly the Eastern European countries. And eventually they're likely to sort of be spread out throughout Europe. To put that into context, in the 11 years of refugees from Syria, which is roughly half the size of Ukraine, it's on the order of 5.7 million people over 11 years. And this is 3.7 million in a couple of weeks, oh well, three, four weeks. So the scale of the number of people that are going to be moving through Europe is massive. And being able to take care of all of these people is going to be a real strain on many economies because they're mostly women and children. They're not necessarily going to be joining the labor force right away. So it could be a very transitional-

Mark Zandi:                      This is like so upsetting to watch this. It's just-

Eric Gaus:                          Heartbreaking.

Mark Zandi:                      ... incredibly upsetting. I can't even imagine what these people are going through. I guess the fortunate thing, at least, from my observation is that the world is embracing these immigrants that they're... at least so far, they seem to being accepted and very different from, and correct me if I'm wrong, if I've got it wrong, but my sense is that when we saw the immigrants leave Syria, there was a lot of resistance to allowing them to come into Europe. Germany was probably the most welcoming, but that had all kinds of political backlash as result of that. But this is very, very different. Do I have that right? Eric, so far as this-

Eric Gaus:                          I think that's right. It's also a very different situation. Syria is mostly an internal civil situation, whereas this is an invasion from an outsider coming... Like, so that does make the situation a little bit different. There's a lot more Goodwill towards people who've been sort of attacked from abroad it seems.

Mark Zandi:                      Yeah. And they're going mostly so far to Eastern Europe, right? Poland.

Eric Gaus:                          Correct. Well, as far as the tracking has been going, it's mostly been just tracking across the border.

Mark Zandi:                      Right. And I guess the US [crosstalk 00:51:05]. What's that?

Cris deRitis:                       It's definitely in the first stop, but I know other countries are seeing increasing volume of refugees as well. I know Italy is taking in a lot in. Spain, France, I mean, they're starting to move further and further around.

Mark Zandi:                      Right. Well, I know the US, our president Biden just announced that the US would accept a 100,000 refugees from Ukraine. I guess that might be just the first group.

Eric Gaus:                          I would hope that's the first.

Mark Zandi:                      Yeah. I hope it's the first one too. Yeah.

Eric Gaus:                          On this scale.

Mark Zandi:                      Right. Yeah. I mean, it feels like this could be really a problem for everyone involved because there... how many 45, 50 million Ukrainians and it feels like there could be millions and millions of more, maybe tens of millions of Ukrainians that are displaced by all this.

Eric Gaus:                          Some of the initial estimates was that were about 10 million or so refugees-

Mark Zandi:                      Will result.

Eric Gaus:                          ... likely result. Yeah.

Mark Zandi:                      Right. Right.

Cris deRitis:                       And given the pace of the Russian economy is there could be Russian economic refugees. I don't know how they'll be viewed but it could be even larger than what we're talking about here.

Eric Gaus:                          The current estimates for Russia are around 200,000. It's not... At this-

Cris deRitis:                       At this point, right?

Eric Gaus:                          Yeah, right. Exactly.

Mark Zandi:                      And is that folks that are dissidents or people that just object and they want out of there? Or is it because of economic reasons they're leaving or what is there?

Eric Gaus:                          I don't have a clarity on why. And again, these are just estimates based off of, I think, mostly anecdotal stuff.

Mark Zandi:                      Yeah. Right. Okay.

Cris deRitis:                       Well, do hear stories of a brain drain-

Mark Zandi:                      From Russia?

Cris deRitis:                       From Russia tech workers that can get out or are leaving because they don't see a future.

Mark Zandi:                      Yeah. You would think, I mean, given... You can see just the crackdown on just free thought, free speech, media, political discourse. It just can't be conducive to keeping the best and the brightest in your country, right? It can't be.

Cris deRitis:                       No.

Mark Zandi:                      No. Right. Okay. Let me ask you again, a question, Eric, that you may or may not know the answer to but I'm just going to ask it anyway. It feels like, and this maybe goes back to some degree to Ryan's geopolitical risk indicator, but I'm asking kind of more subjectively, does it feel like there's more geopolitical risk now than there typically is? I mean, but there's always something somewhere feels like it's going off the rails. There's always risk geopolitical flashpoints. But to as an observer of this, careful observer of this, does it feel like it's more pronounced than it has been, other points in history?

Eric Gaus:                          I don't, is it scale wise? I'm going think it's off the charts. How higher than it's been in the past, but I would say it's elevated largely because when we had the sort of pandemic running into this already, which was already causing tensions between countries for various reasons. And then now that you have something on this scale and it really does sort of... The biggest issue, the thing that you ask, what are people worried about, the thing that I'm worried about is that everybody's got their eye on Russia and Ukraine, they may not see all the other things that are normally going on and sort of historical tensions that are about. So India, Pakistan, Israel, Palestine, all of these things that they're just there always. And they sort of have that baseline geopolitical risk, were elevated above that and I'm worried that somebody forgets about that and something else happened in the background.

Mark Zandi:                      So broadly, it doesn't feel like the level of geopolitical threats risk out there is... it's on the high side, but it's not-

Eric Gaus:                          It's on the high side, but it's not alarm bells ringing, at least not yet. It really depends on what ends up happening with Russia. Like how hard they keep going and what the rest of the world's reaction is, the longer the conflict gets drawn out.

Mark Zandi:                      Yeah. Well I think sticking to Russia-Ukraine just for a little bit, because obviously that's kind of top of mind here as it should be. There's just so many moving parts to this in terms of what Russia has done and is doing in the response from the rest of the world to what they're doing. Of all the things, of all the sanctions that have been put in place, do you think any are particularly in important from a geopolitical perspective, at least both thinking about this in the near term and longer run, is there anything that kind of stands out as unusual or going to have more of an impact going forward?

Eric Gaus:                          I think the biggest one is probably the freeze on Central Bank assets or Russia's Central Bank assets. It's not that countries haven't done that before, so this happened with Syria, this happened with... but mostly smaller players.

Mark Zandi:                      Can you just stop just to make sure I understand what you're talking about. You're talking about the freezing of the Russian reserves. Is that what you're talking about?

Eric Gaus:                          The Russian reserves. Yes, exactly.

Mark Zandi:                      Okay. So Russia had 650 billion in, basically cash, in bank that they collected over the years from selling their oil and they had a surplus in their current account. So they got money and they put into 650 billion, but of that 354 billion, I'm making that up, but it's roughly right, is in Dollars, Yen, Euro, Pounds and the US, UK, Japan, the EU, froze those accounts. So that Russians can no longer get to that cash. That's what you're talking about?

Eric Gaus:                          Exactly what I'm talking about.

Mark Zandi:                      Okay. All right. And you're saying that's a big deal.

Eric Gaus:                          I think it is. So it's more just that that threat is now out there for even bigger players. So before if someone does that to Syria or something like that, that's one thing. I think the threat of it being out there, it just says that there are more policy tools out there from the point of view, from sanctions than in the past.

Mark Zandi:                      What do you think it means in terms of the dollar's reserve currency status? So the dollars, I think, probably accounts for, I think 75%, 80% of all reserve because it's the bulk of... global trade is still done in dollars. Oil trade for the most part is still done in dollars. In that status of being a reserve currency gives us tremendous economic benefits. One of which is what we just saw, the US can exercise significant power by freezing those dollar reserves and influence political decisions and the policy decisions based on that power. But by exercising that power, it signals to everyone that, well, these reserves are under US control effectively, at the end of the day, if you do something that the US doesn't agree with, the US can freeze those assets. So do you think that means that it degrades the viability of the dollar as a reserve current?

Eric Gaus:                          I think it's going to be pretty hard to shape the dollar as a reserve currency, maybe on the margin slightly, but I doubt it. And one of the reasons why is that, it wasn't the United States acting unilaterally, they weren't the only central bank to do this. And so it's not as if they're just being punitive and sort of saying this to everyone, it's really the central banks as a whole are imposing these sanctions on Russia. So from that perspective, maybe there are a few places that are a little bit worried about it, but I don't think in the grand scheme of things, it's enough to shake off the dollar status as a reserve currency.

Mark Zandi:                      Yeah. What do you think Cris? Same kind of sense of that?

Cris deRitis:                       Yeah. I'd agree. I'd agree.

Mark Zandi:                      Yeah. Okay. All right, Ryan, any other...

Ryan Sweet:                      No objection.

Mark Zandi:                      No. Okay. Okay. Any other of the sanctions that stand out or anything the Russians have done that stands out to you in terms of something that's just particularly unusual or... I mean, the scale was unusual obviously.

Eric Gaus:                          Yeah. The scale and the speed with which everything went into place. That's what I found actually pretty impressive that... and one of the bigger things that I think is less mentioned though, is how quickly multinational firms have responded. I don't know how long that will last so that they have responded to these kinds of situations before and relatively quickly sort of stepped back again. But I was sort of surprised to how quickly it's also been put into place.

Mark Zandi:                      You know, I wonder if the fact that these conflicts now are front and center, we can see real time what's going on. I mean, I saw this amazing video that someone was taking from their phone that showed Russian troops coming up to an apartment building, coming into the apartment, coming right up to the person's door knocking, or I don't know if they were knocking, they wanted to get in and you could watch this real time and they had a huge machine gun that they were bringing into the apartment building.

                                             And the fact that you can see that and you can feel it viscerally means that people, employees of companies are going to say, "Hey, this is not good and I don't want to be part of a company that has anything to do with this." So that going forward, this becomes kind of more standard operating procedure. If someone does something like this and you can see it, that you're going to see this kind of reaction from the private sector, because it is so front and center. I wonder if that's a new dynamic that's going to play out going forward.

Eric Gaus:                          Yeah. That's exactly what I mean. That's one of the surprising things. And again, the speed with which that happened. Largely owing to videos like what you were describing.

Mark Zandi:                      No-

Cris deRitis:                       The self sanctioning is what you're talking about, right?

Eric Gaus:                          Yes. Yes.

Cris deRitis:                       The non-government, right? We could buy oil, it's not illegal, but you have companies choosing not to.

Mark Zandi:                      Well, you just saw the rating agencies, Moody's just announced, I think yesterday, that... was it yesterday? Yeah, yesterday that they pulled ratings on Russian companies, Russian debt. So just another example of that. Okay. So another aspect of Russia and Ukraine and the geopolitical risk is China. China has been seemingly supportive of what the Russians are doing, or at least providing some financial support to what the Russians are doing. How do you think this changes this event and the China support for Russia changes the dynamic, the pretty vex dynamic between the US and China. Do you think it has an impact or what kind of fallout will that play have?

Eric Gaus:                          It almost seems as it's a continuation on what was already happening, which was sort of this decoupling of the US and China and sort of spheres of influence developing on either side there. My hope, I don't know if this is going to work out so well, but again, because of how quickly the sanctions were put in place, how much of it was multinational firm, self sanctioning, that may give China, I would think, a little bit more pause in some of their more aggressive foreign policy types of actions. Because if they step too far out of line from what people find acceptable, like Putin did in Ukraine, then they might find themselves in a really tricky spot and more isolated than they expect.

Mark Zandi:                      Yeah, this does bring up a broader point. And this is a dynamic that was occurring even before Russia invaded Ukraine. And this is this decoupling that you mentioned. So I think it's fair to say that between the time China entered into the World Trade Organization in 2001 up and through pretty much the financial crisis and even beyond that to some degree, in the '90s, we saw this increasing globalization of the economy, more global trade, more global foreign investment, FDI, Foreign Direct Invest, as well as investments in debt secure and equity, immigration, all these things seem to be accelerating. And they, I think it's fair to say and I'm curious if you think you have a different take on it, that it was a net positive for the global economy. It certainly lifted hundreds of millions, if not billions, of people out of poverty in places like China and other emerging economies, but it also helped to fuel growth.

                                             Now there was winners and losers from all this. And of course there was a backlash to that. And that's what we've have been observing ever since president Trump would be a good example of that backlash, similar kind of political dynamic in other countries. And now China and our pushback on China, feels like we are going in the opposite direction, or certainly the increase in globalization has come to an end. Do you think that's a fair characterization of how things have played out and where we're headed?

Eric Gaus:                          I think it's a great characterization. That was actually my other statistic to a certain degree.

Mark Zandi:                      Okay. What was that?

Eric Gaus:                          So I'll say the statistic first, because I think it's worth seeing whether you guys can get this one, because this one's a lot harder than my other one.

Mark Zandi:                      On this context.

Eric Gaus:                          30.5%. And I'll even give you... It's a percentage of GDP, but I won't tell you.

Mark Zandi:                      That global trade as a percentage GDP?

Eric Gaus:                          Imports as a percentage of GDP. 30.5% in before the pandemic, so 2019 Q1.

Mark Zandi:                      Okay. Ryan, did you see how that was done? I mean, I'm not even going to take credit for that.

Ryan Sweet:                      I think you guys are Kahoots.

Mark Zandi:                      What is that?

Ryan Sweet:                      I think you guys are emailing beforehand.

Mark Zandi:                      No.

Ryan Sweet:                      I'm very skeptic of that one.

Mark Zandi:                      No.

Ryan Sweet:                      That was impressive. That's impressive.

Cris deRitis:                       That was very impressive.

Mark Zandi:                      So because Eric thought that was a hard one.

Eric Gaus:                          I did. Well, we were sort of going in the conversation.

Mark Zandi:                      You're right. You're right. You're right. You're right. Not fair.

Eric Gaus:                          So there was a list that you had of like four or five things that you could have gone to, I think.

Mark Zandi:                      All right.

Ryan Sweet:                      But if you notice throughout the podcast, you started off cold, then you warmed up and now recently you've been on fire. So I'm wondering what's going on. We're have to launch some investigations.

Mark Zandi:                      It's conspiracy series. This is how it starts is. That's how it starts.

Cris deRitis:                       He's denying the world with the yield curve. He's looking for conspiracies everywhere.

Mark Zandi:                      Yeah. How it starts. Anyway, so how do you think it's going to play out? I mean, do you think the US and China are going to decouple here, continue to decouple? How do you think this is going to play out and what is the import of that?

Eric Gaus:                          We'll circle back to that, but I do want to talk about the globalization a bit.

Mark Zandi:                      Oh yeah, sure.

Eric Gaus:                          So the statistic is just the most recent value that we have given the number of economies that we cover. But what's really interesting about it is the value in 2001 was 22.8%, 23% say, that went up to 28.7% in 2008, and it's only gone up another 2% since then. So basically, it went gangbusters between 2001 and the financial crisis, so globalization was taking off exactly to your point. And then it's basically sort of flatlined a little bit and sort tapered off post-financial crisis to this idea of decoupling and some of the other sort of more... Countries have become more inward looking instead of outside because of some of the differences between who were the winners and the losers in this real quick globalization push.

Mark Zandi:                      Yeah. Right. And do you think the de-globalization, the decoupling, you expect that to continue?

Eric Gaus:                          So I think certainly the direct links between US and China will probably several more, that would be my best guess, but globalization itself, in terms of the interconnectedness of all the economies will probably continue to increase just at a slower pace. I mean, it's really hard to get that genie back into the bottle. Like once people start having the internet and have seeing other people with things that they want too, somebody's going to figure out a way to make that happen. So it strikes me particularly with work from anywhere. Like there are just too many things that are driving globalization. It may go more slowly, firms may be more cautious given supply chain problems. All of these things, I think, put the breaks on a little bit, but don't stop globalization from progressing.

Mark Zandi:                      Yeah. No, my sense is that, at least for the foreseeable future, when I say that, the next few years at least, I just, I don't think there's any stopping this decoupling that's going on. The pandemic just reinforced it. I mean, as you pointed out, the supply chains, they're coming back in and governments are very focused on trying to ensure that they have what they need in their borders or pretty close, if it's not in the US, it's got to be in Canada, maybe Mexico. Because for things like chips, like a chip manufacturing would be kind of the poster child for this. But other important sophisticated, instrumentation, pharmaceuticals, other key strategic, metals, that kind of thing, I just think there's just no going back.

                                             And then China's feels like it's going to be a problem. There's a lot of issues there around electro property, access to markets, cyber security. And then we've got all the tensions around Taiwan and Hong Kong, lesser degree in Hong Kong now, the Uighurs, civil human rights, it just feels like to me that this decoupling will continue for the foreseeable future. And to the extent that not that I think it's a good thing, I think it's unfortunate because I do believe that globalization is a huge positive for the global economy, but I think we need to embrace it at this point and figure out how to do it in a way that is least damaging and as graceful as possible, we just have to... it's just the reality of the situation that we're in at this point. And we've got to figure out how to do it the best way possible. Any response to that view?

Eric Gaus:                          No, I think that's a... I basically agree. So what I mean is when I hear you say decoupling, I think you're thinking specifically of China and US, right? Those specific tensions are most-

Mark Zandi:                      Mostly-

Eric Gaus:                          ... specifically.

Mark Zandi:                      Yeah. Mostly. Yeah. Because that's the other... you make a good point because it could result in increased relationship strengthening of our global ties with our trading partners in Europe, for example.

Eric Gaus:                          Exactly. Yeah.

Mark Zandi:                      Or even Latin America.

Eric Gaus:                          Well, and in Latin American and in Africa as sources of raw material.

Mark Zandi:                      Yeah, that's a good point. Okay. Let's, because we're running out of time, maybe I thought we'd end the conversation this way. Each of us identify a current geopolitical risk or threat that's kind of top of mind for them, what they think is particularly important that... it's certainly been in the news, all these things have been in the news or maybe you have one that isn't in the news that you think we would focus on as potentially being an issue or a problem or at least highlighting something that's going on, that's important. Does that sound like a reasonable way to end the conversation? Okay. And maybe I should begin with you Eric, I'll go with you first. So what would you point to? What geopolitical risk do you think we should be focused on that we're not?

Eric Gaus:                          So I think there are a lot, I think almost all of them revolve in some sense around what's going on in Russia-Ukraine, because it is very disruptive and it's sort of pressuring other countries to act in different ways that they may otherwise not have. So I think that that's really important to sort of stay at the outset and I'm sure everyone's going to have something that's somewhat related. So I think the refugee situation is probably going to be the biggest situation for the next, say three years, at least. Because it's just about navigating where all of these people are going to be going, how do you integrate them into the host country and what's going... and how did the countries decide who gets which refugees, that's a huge political mind field and it's something that we should all be sort of watching and paying attention to.

Mark Zandi:                      Okay. Okay. Fair enough. Ryan, what is the geopolitical hotspot threat that you would point to?

Ryan Sweet:                      Like would NATO and Ukraine and NATO and Russia, would that apply as a... would you consider that a geopolitical-

Mark Zandi:                      Hotspot? Yeah.

Ryan Sweet:                      Yeah. Because whether or not NATO accepts Ukraine, they would have enormous implications for the relationships with Russia and everything like that.

Mark Zandi:                      Yep. Yep. That would be a good one. Okay. Cris?

Cris deRitis:                       The top of mind for me is actually food, food prices fall out from the Russia-Ukraine crisis on fertilizers, all sorts of crop prices, I think this could have significant global repercussions. We have countries in the middle east that depend directly on wheat from the Ukraine and it's not clear that they'll be able to get sufficient harvest this year. And then just the ripple effects, just all prices are up everywhere. And that certainly could spark some, both domestic and international tensions between countries.

Ryan Sweet:                      There was talk of food shortages at the NATO conference.

Cris deRitis:                       Where Ryan?

Mark Zandi:                      Yeah. I think it's very real.

Ryan Sweet:                      Yeah, they said the possibility of global food shortages is...

Mark Zandi:                      Yeah. Well I think there's, I'm going to get this wrong, but to give rough order a magnitude, there's I think 50 countries across the globe, roughly that get more than a third of their grain exports from Russia and Ukraine. And those exports aren't going to be happening to a significant degree. So that is a problem. The one that comes to mind to me is related... is Iran, the Iranian, we've had a lot of trouble with Iran over the years. And we've had an agreement that Obama administration agreed to Trump canceled that agreement.

                                             And it feels like we're going to get another agreement on Iranian nuclear development. And if we get a deal, that could be a key critical kind of a game changer because the Iranians can export, I believe up to 2 million, 2.5 million barrels of oil a day. And if that oil starts to flow in earnest, that could be a big deal to oil prices, which going back to the start of our conversation, that is really up the significant factor for what's going on here in our economy and everything else. So that would be... I think, there's a lot of potential negative geopolitical risks and threats, but that would be a potential positive upside if we actually get that. So no one's-

Ryan Sweet:                      Another positive one?

Mark Zandi:                      ... counting on it. But we could get-

Ryan Sweet:                      Another positive one is that maybe this global, a number of countries becoming more unified working together, the UK and the US reduced their tariffs on one another. So if the US and Canada can work out a deal on softwood lumber. So hopefully this use of tariff starts to diminish.

Mark Zandi:                      Yeah. We could be underestimating how much this brings the rest of the world together and working together. Yeah, yeah. You're right. That's a good point. Okay. Very good. Eric, just an open-ended question before we end, anything I missed? Anything you want to bring up?

Eric Gaus:                          When it comes to this-

Mark Zandi:                      The unknown unknowns, I know that's key to folks that look at geopolitical risk, the unknown unknowns. So what's the unknown thing that I didn't ask you about?

Eric Gaus:                          Well, I think the big thing is just, and again, the thing that I'm worrying about the most is that people are focusing so much on Russia and Ukraine that something else slips through and it's usually going to be in a place that we don't talk about too much. So that's the thing that I sort of worry about, but-

Mark Zandi:                      And what are they? Just give me-

Eric Gaus:                          ... we don't know where that plane come.

Mark Zandi:                      ... a quick, three things. What are they? What are-

Eric Gaus:                          India and Pakistan, Ethiopia and Egypt, which they're building a dam in Ethiopia, which is affecting the waters that flow through the Nile into Egypt, which Egypt speaking about wheat, pulls in 70% of their wheat from Russia-Ukraine. So they're in a tight, tight spot. So those are the two big ones that I-

Mark Zandi:                      Two big ones. Okay. Very good. Okay. So guys, we're going to implement a new feature on our podcast and that is, we are going to start answering some questions. So from listeners, this is somebody who follows me on Twitter. Oh, by the way, @Markzandi, @Markzandi, you can pose questions there or economy.com or help@aeconomy.com or you know how to reach us, just let us know your question. So here's the question and this is going back to last week's podcast on housing markets and this is probably how it's going to work. We're going to do a podcast, people are going to ask questions and next week we'll take one of the questions or two of the questions and respond to it.

                                             And I thought this was a good question, it's about... Here, I'll just read it. The person says, "Interesting discussion," this was about the podcast last week on housing with Ivy Zelman and Dennis McGill, "At times, I got lost trying to understand what signals we should be watching out that will help define the overall markets," I think they mean the housing markets, "Direction. You folks see so much data that we as average investors can't keep up with. Can you just give me a few key indicators that would be helpful to watch to gauge what's going on in the housing market?" What do you think, Cris? What would you point to?

Cris deRitis:                       I think it's a great question. I think it depends a little bit on your horizon. So for thinking about longer term or underlying fundamental trends and looking at demographic affect data, household formations, population growth, immigration, those would certainly be the factors that would determine how much housing we should have. Actually, one of my favorite measures that very few people look at is just the ratio of housing stock to population or housing stock to households. That you would assume that there would be some type of equilibrium there. And we could see that those in the measures are elevated right now.

                                             But shorter term, I'm certainly looking at some of the measures that we've cover on the podcast like the pending sales, if you want to get a sense of what the direct is going forward, looking at interest rates, certainly and then if you're looking at just construction, supply demand, dynamics, how many households are being formed currently versus the amount of construction that we are creating at the moment, some estimate perhaps of second homes and lost home to get a sense of how much underlying demand is there versus the amount of supply that's coming. I don't know Mark, what's your take?

Mark Zandi:                      I would say simply the mortgage rate and the change in the mortgage rate. And I have in my mind that in the long run, when everything is functioning appropriately, the mortgage rate should be somewhere between 5.5% And 6%. We're still well below that. So the level is still low by historical standards, but it's also the change that matters. And so we were below 3% on the fixed more. In fact, we were as low as 2.65%, I think, back at the low during parts of the pandemic. And so it's almost doubled since then, or will soon be doubled.

                                             In a very short period of time, that's going to do a lot of damage. So I think that's a pretty good leading indicator where the housing market is headed over the next 6 months, 12 months. So watch out for the 30 year fixed rate mortgage. I look at the Freddie Mac rate that comes out every week. You can go to Freddie Mac's website and then you can see it plain as day. And to me at this point, at this juncture in the business cycle and the housing cycle, that's the indicator to watch.

Cris deRitis:                       Yeah. Well, I would add to that. Just in terms of speculation right there, we have some other measures we look at in terms of flips and investor activity. So if you're looking at something or you want to get a sense of what's happening in the near term, I would certainly pay attention to some of those other indicators that we've been tracking.

Mark Zandi:                      Got it. Okay. Very good. What do you think? That's a good idea, this new feature to answer a question, do you think it's a good idea?

Cris deRitis:                       I like it.

Mark Zandi:                      You like it? Okay.

Cris deRitis:                       Yeah, absolutely.

Mark Zandi:                      Right. We'll with the... Folks out there, listeners, tell us what you think and fire away with questions were... And by the way, I did not give these guys this question in advance, so we're not doing that, but anyway. Okay, with that, we're going to call it a podcast. Thank you, everyone.