« Exchanges at Goldman Sachs

Global Market Shocks from the '87 Crash to Brexit: Lessons for Today

2020-02-18

From the 2020 Global Macro Conference in Hong Kong, Steve Strongin and Jan Hatzius of Goldman Sachs Research sat down for a discussion all about connections: why economic cycles and market cycles are increasingly independent, why economic volatility has declined while market volatility has largely remained the same, and how shocks like political surprises and climate change stand to radiate through each space.

 

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of Goldman Sachs when we discuss developments currently shaping markets industries in the global economy. I'm Jake Seaward Global, had of corporate communications, heard the firm for two days, Besides we're gonna share recent conversation from Goldman Sachs Research: twenty twenty global macro conference in Hong Kong. The panel was entitled global market shocks for the nineteen. Eighty seven crash to breaks it lessons for today, Steve Strong and in your heart, is of Goldman Sachs Research set down for discussion all about connections. Why economic cycles and market cycles are increasingly independent? Why economic until these decline, while market volatility is largely remain the same and how shocks like political, surprised and climate change stand ready through each space now
That conversation hope you enjoy its law, my great pleasure to introduce the strong and the head of global investment research. and senior member of the Farms Management Committee, Steve as Scum, been Goldman Sachs for twenty five years and has run investment research since two thousand and seven. So we lead us through through the crisis and and an end in the turbulent aftermath, and sole really looking for due to Steve's insights about market shocks, economic cycles, I'm gonna, ask him some questions and at the end, will have some time for questions from the audience peace do submit them.
Through the through the app, but let me start with something that I've heard you say many times, namely the distinction between market cycles and economic cycles. What what's your perspective on, how those differ and how they relate to one another. Listen last session spend a lot of time talking about cycles and almost inevitably, as someone has asked about a cycle, they deny us cycle. We used the term cycle the talking about two different things, things that happen a lot and the way things connect to each other. And so we know it when I was a young economists and they were so using stone tablets. They we have. There was a very clear notion of sort of eight industrial cycle inventories, consumer durables and that drove the economic and market cycles. That is the way the world works anymore.
and, to a certain extent, everyone? We see a sort of global cycle today. Right, it tends to have the former. We sign away a more of a general financial problem, then in industrial or economic one. So when I started we had industrial cycles, and then we had oil cycles then we had a couple of banking cycles and then we had the financial crisis, When you look at the patterns we see today, I think what you see is a sort of two things very apparent in the data that the amount of connectivity between different parts of the global economy and for its parts of the markets or actually considerably lower than they used to be not higher. You know, we often talk words, because we're now organised as global investment firms as of the world has become more interconnected. and a human sense. That's probably true. In a market sense,
you know they used to be a line that when the U S conduct you know caught in a cottage sneeze, the rest of the World CUP, the flu. U S got up and down the rest. The world is on fire Japan has gone up and down the rest. The world is, then fine, Europe. I've actually lost count of the crises in the last decade, but the rest, the world did fine, and so one of the things we ve seen is a tremendous increase in their resiliency in a global economy of one part of it to another more diversified and then, when you look at markets partially because of the way people invest today in partially because of the way the regulators changed all of the rules. After the financial crisis, we ve seen a similar kind of independence of market action. They not only today do we see the market act independently of the economic cycle but we see individual markets that we used to think of as highly can acted, operate quite independently, You know we had a day last year,
worthy s? P? Went down by ten percent in a day because a problem in any tee. And high yield traded up concentrated hedge fund positions traded up and they are simply was off a full correction. that's something that would have been unthinkable. Ten or fifteen years ago, We would expect in risk off to take all of those markets together. today, I think when we talk about market cycles, we're talking about specific issues and specific markets related to specific problems, and we talk about economic cycles, we're talking about specific economies and and frankly, when you, together with economic cycles today, we usually explaining why there isn't one. Right, you know they did a survey and one of the earlier sessions about. Are you expecting the recession next year? the year after or some time later
generally a year out? That's right! Yes, but this time too out was the top answer right. And some time later beat one you're right and am anything that reflects the sense of risk. People have I think it also reflects the fact that when you look at imbalances and leverage and miss price markets today, nothing looks that out of sync in the private markets. You know, I think, I think, to easiest things to point out Private equity looks really large, but it's very hard to think about how a private equity problem would radiates to the rest of the markets or into the economy. And sovereign debt, right. I mean, I think if you look at a market and looks misprized, the quickest simplest answer is the sort of long term sovereign debt markets again- it's very hard to think about how that is forcibly correct, corrects would place out and other things
hard? To imagine any of the current central banks, did we beginning to work against their own home that market and so I think we will get the market today right, instead of thinking in terms of big cycles, It really becomes important to think of little specific problems in the market, and think of that is the investment. If you take that a little bit further gum that help. sovereign debt trading at very high valuations long term rates, extremely low central banks unwilling to tighten and and heard their their own home market. I mean. Does that mean you you're worried that we might be at risk going back to a higher inflation environment. Where we will we actually our concern that inflation to lower too high. At some point, I think the quick answer. The that question is if you were invested, fundamentals fundamentals today, you know trillion dollar deficits, United States
increases in wages, you'd, be short, bonds, flat, equities and unemployed right. Does that hasn't worked initially, nothing that suggested going you're if you put it in the historical context, and since this actually predates me, I'm pretty sure it's a predate. The audience, The last time we had an environment like this was the early sixties, very low structural inflation rates very well anchored inflation fiscal policies that are probably too loose, but not radically to lose and it began and inflationary trends but the short bond trade was for the lane seventies. Right. So you know in a time frame of the last cycle, right, sick. He too, to seventy nine was last inflationary cycle. Timeline, we're about nineteen sixty six. and everybody wants to put on nineteen. Seventy eights trades raid
kind of reminds me when I was a young economists. All the people who wanted to be sure Gigi bees all of whom are in either other industries unemployed or found other work to do right inflation really move slowly. and so it it's easy to conclude in this market that long term Bonn seem rich It's easy to conclude that inflation will come back some day, the problem with that statement is Sunday Tomorrow- doesn't look very likely the day after tomorrow doesn't look very likely and the year after tomorrow actually look slightly likely. if you think about the political environment- and this may be the most important aspect of the thing about broadly You know your own work has shown that we really see the inflationary pressures and wages. In the current political environment. The notion that central banks are going to act aggressively to stop, wage based inflation
it has to be viewed as is about is unlikely as any other political action. One can imagine from income inequality to the political, this locations of breakfast Europe, trunk, the she's in various countries. very hard to see central banks acting, took wages What what I hear you saying is that you'd be long break even inflation in the bond markets. That's that that seems like the two or more erect translation of the of the combination of gradually increasing inflation pressure on central banks that are going to be very slow in addressing them on a piecemeal basis, absolutely on a professional basis. I it's very hard not to want to be long carry in this environment because it's hard to see what's going to break the carry trades I've won, follow up question on the kind of relationship between markets and economies. If we look at volatile
Forty of the of the economy. Clearly gone down as you, as you said, the elder the stamp of deviation of real GDP growth has fallen. Thirdly, even though we were through the global financial crisis a little over a decade ago, but at the same I'm volatility of financial markets, doesnt seem to have changed very much. What does that tell you about What's your interpretation of that would seem to me that you expect a relationship where market volatility ultimate the tracks economic volatility to some degree, but we don't seem to be seeing that now and I think when all is said and done, it's actually gonna go farther the other way when you look at what has happened in the real economy, There's a lot of structural change in the real economy in the last twenty years, services of a higher percentage.
When you look inside of durable goods, more of the value added inside of durable goods is where and service related entities if you work in employment, in the industrial sector of the economy. Men, Factory labour is a small percentage of industrial labour. So that all of the things we ve historically associated with cyclicality and the economy are smaller? right and then further, not even when you look at areas that still are very cyclical. Those or construction or investment. We ve seen the duration decline in we seem those value added changed. So I think this. simply a reduction in the cyclicality basic level You also seen partial because of that partially because of changes in the structure of goods, a reduction in interest rates, sensitivity, So if you think about the number of things people by debtors,
sensitive to the interest rate home. Housing still is except we see more. Randall still is, except we see more leasing, and still is except the duration of investment has become shorter, so the fundamental interest rate sensitively the economy is probably significantly reduce. I think the empirical work suggestions about point. Seven. What it used to be I think, when we do those estimates again in five years, it's gonna be less than half an hour that's suggests is, if you're going to get the same if you're gonna, if you need to slow the economy you're going to need to raise rates more. So then, I think when we get to the point where economic volatility begins to come back, we're going to see. Market volatility have to rise, actually since early from where it is now.
So I actually think that, when all is said and done, we're going to have decided that economic volatility has fallen by twenty or thirty percent, and market volatility has gone up by twenty or thirty percent. As the balancing point, And that's going to represent some really interesting possibilities in the marketplace. I don't. I want to be very careful about that forecast, though, because in order for that to become real you need the stresses in the economy to have grown to the point where the workers are again having to perform a balancing function, and that's just true today, you know when you look been a wage pressures or credit pressures. It's very Clear, the central banks are not the balance point in that equation today. Nor are they interested in becoming the balanced point in that equation today. So thinking adsense, we're still away is away from that increased involved, but it coming someday, yeah
oh god, especially as far as interest rates are concerned, because interest rates are the primary balancing balancing mechanism and hats, a reason, maybe later in the cycle, to see more of the of the water. That's right, but we have the two largest central banks in the world. Talking about the fact they need to take account of income inequality and is ready to monetary policy and then you anything about wage growth. It's gonna take a lot before these central banks become activist, anti inflation, central banks. Again, but even without aggressive monetary policy tightening and so far, we ve only seen in all very kind of gradual cycles. we ve seen some very significant bouts of market volatility that we are not that. Front from what we ve seen in an economically much more volatile environment and in the past although I think the source of that,
isn't about the discussion. We are having I think the source of that has to do with reduced liquidity, I think we have a situation where very small market behaviors. Can generate fairly large price volatility You know go back to that that eighty s episode right. We basically how to unwind too, VIC's. Eighty ass, I got it, percent, moving the Essen came now, It only lasted twenty four hours, That's a lot of volatility. We have flash crashes on a fairly regular basis, the flash crashes and overnight limit. It goes goes beyond that. You they were talking about crowded trades risk. Parity came up right now classic example- and I think it goes to the fact that we have a lot of people who ve been there.
said in fairly low liquidity, trades in very patient methods. and that works writer till it doesn't, and I think we, the market volatility we have seen is when you hit those moments Finally, the weekend has to give up and there's no buyer. I don't- Ngos have been dealing with the economic volatility. I think they ve been clearing the technical issues. its investor behaviour, that is, that is behind the scum changes and liquidity policy. Where would you put policy in that car? Oh, if you spend a lot of time, thinking about regulation and liquidity in and this like, it's sort of interesting when you, when you talk about policy and liquidity, you have to get a regulation, not policy. It's not central bank policy. That's driving this! It is a fact that post, crisis
most central banks became. Skeptical of balance sheet in terms of our region You know I gotta occasional academic conferences, And if you go to an academic conference nowadays, there's gonna be at least two or three papers on the fact basic arbitrage, equations, no longer work right, You know I was one in Europe last year where they were discussing the fact that current interest rate parity no longer hold this. the most basic, cheapest, simplest arbitrage that you teach. The first year financed students and it no longer works. and no longer works, because balance sheet has become too expensive to put on the trade. And so the markets at the micro level are much less healthy than they used to be you know, I was joking with with some of the younger group about the fact that no one you know no one knows when an on the run off the run traders and just to prove the point
We have to explain to a few people went on the run off the run. Trade was When, when I started right long term capitals, gonna was the largest hedge fund in the world. and the only trade they did was on the run off the run traits. Nowadays we have to explain new people what it is So, let's switch gears to an issue that you basically spend your first decade add Goldman Sachs on Guard, namely commodities. Guy you hired as the head of commodities research. in ninety. Ninety four and the market, at least, is one where we actually have seen a reduction in involuntarily. Yes and I'm curious about you, perspectives on the outlook for oil prices, bull, in terms of the level and in terms of the the variation around the fundamental level
in light of all the structural changes that we see in the in the in the oil market over the last ten fifteen years. So, let's framework for a moment, in the middle of issues between the? U S and IRAN, The bond market moved more than the oil market something that still actually confuses me a little bit, yeah or market musil. Unless it moves for a couple reasons. Less the first one is that both semantics demand and supply have become more elastic. For a variety of reasons having to do with climate change technology, a lot of investment has gone in to substitute demand for classic petroleum, right. If you look at the electrical generation industry, there's a lot of non fossil fuel based generation today that wasn't there twenty years ago enabling switch between them is higher
Interpretation, doesn't look different. On the other hand, the amount of transportation demand in the economy, relative GDP has declined, and then the supply side supply. Side of fossil fuels is far more elastic than it used to be. you know when when I started from when you started to develop a field too. When you could deliver a new fossil fuels was about a seven year process in size, Today, that's about a six month process with hey back during this less than a year and a half. and so, when you see price bikes today it is the system can actually adopt and produce new oil. Well before you would run out of inventories. and similarly there's more inventory, storage and
and you see, because a decline rates so that same shale. You see oil supply disappear fast through the news do so that today the oil market trades a lot more like an industrial market and a lot less like at all natural resources market, so have also gone balls gone price levels. You're your expectation, I'm kind of a medium medium term, so the in the industrial process in creating oil today would suggest you're, probably gonna stay between thirty and eighty further, saleable future. Occasional of out of that and most of the time in the middle part of that right now, you already mentioned climate change and environmental issues. Scum, obviously very closely related joyless very difficult to talk about commodities these days, without also talking about climate change and
The environment is a long standing interest of yours, both professionally and also from our perspective. You ve also spend significant amount of time. Recently. thinking about climate change specifically and various mitigation strategies What are the main lessons lead? You ve learned from looking At this in more detail or work over the past year, so I think, there's there's three areas. I think people have to pay attention to our new so getting enough attention. First, and in this is easy to say this week, I think the actual dislocations from climate change are not there's much attention from investors as they need to Jeff Korean. I wrote a piece like seventeen. Eighteen years ago, about why volatility was more Importantly, the average temperature. The extremes of cold extremes of a heap extreme
Of drought will end up having more impact on the commodity markets. Is hard not to look at the headlines from Australia today, Stand. That's not an abstract notion right there, the kinds of issues we are seeing in the western part of the United States, what we are saying in Australia, a real, and they're gonna have real implications for the economy. Now people sometimes get upset about this. those are not necessarily negative. You know what one at one of the things that you learn when you are commodities analyse Isn't that events raise GDP you know when, when you you know, when you burn out a large chunk of a country that doesn't go in the GDP, illustrating that GDP is not a great measure of welfare, not a great measure welfare. So when it burns down, there's no impact when you rebuild its positive gdp. right. So one of the things were going to see. I think in countries locally and more broadly, is
the dislocations and adjustment to climate change forced european investors I think the other aspect of its people, paid a lot of attention to the where that's going to happen, You know when you think about drought and fire, you get the western United States, you get Australia, When you think about population displacement, you begin to think about South EAST Asia. Begin about Bangladesh You be innovative at certain sections of Africa and worthy enough Siberia. people in Siberia, but is kind of turning into a giant puddle. You people used to build on permafrost Turns out the concept of permafrost is now someone antiquated
Are we seeing that already is this? Is this is a reality and not just that is a reality you you are today having to wreak relocate alaskan villages because they are falling into the ocean. You are having to relocate communities in Siberia because they are melting. Seen areas like this and green and so I think, that's not as a media to people The second thing, I think is People haven't come to grips yet with that sort of make nice, good sounding green strategies? Don't get you where we need to get. Right, a lot of the sort of yes she's sustainable. Investing, which has become a big theme Then, if you did everything homage to do list, would represent less than half of the solution. We means in the end, that's not going to be the dominant paradigm of how we address this. At some point in the process were probably gonna get to a carbon price, and this is
Coming from you, as somebody has been active in the environmental movement for a lifetime, and maybe you can read the IPCC reports that they ve been circling this statement for ever. Right. You know if you read, it is like. If everyone in the world listens to us and they do everything, we say, we think we can get to zero. Ok, That would be great now, let's put an investors touch of cynicism and that right What percentage of people are really gonna? Listen, how fast today going to act against their own self interest. And how conservative, in those forecasts, When you make those adjustments you get to where the IP cc report, God this last time, which is that sequestration in car were removal some period of negative emissions is probably gonna be necessary if you throw in the fact that climate change has been operating faster than those forecasts, those numbers climb,
and, if you put in full cynicism, if we think about climate change. The way we invest. And we started looking at the countries that probably won't adjust called climate. We think about the fact that most of the emerging markets will probably decide they're gonna put in air conditioners in refrigeration and grow. Before they take climate change that seriously If we take into account that certain areas disproportionately suffer, and so the ones. Don't programme are going to make the same adjustments. You begin to see why it is that, in the end, we're gonna need a different kind of global response. This require coordinated actions is going to require carbon price choir, real investment in new technologies and new solutions Living thing were beginning to work at most carefully and climate side is sort of. Two part question:
I suppose that combine solution to climate change fails. And we do get a carbon price. What is that investing environment going to look like And when you get that one which you realize you can end up with some globalist taxes, maybe trade, maybe on fossil fuels? Maybe an income consistent with the issues on income equality and you're gonna, start financing conservation and seek restoration, out of the global fund, and we're gonna end up with a fairly large technical investment in climate solutions. but you're not gonna, get a large technical investment in climate solutions. Until somebody's actually paying you to do it To me, the scariest part of the current response to climate. Is that we have focused on the emitters to give us the solution,
I don't wanna be mean or cynical or nasty. But facing a global problem. if I was gonna pick two industries to address it, it wouldn't be the utilities in the car companies. I kind of one tech, companies and drugs companies and biologic companies who specialized and innovation to be the ones focused on this. Not tellers, as I think, that's a change. It's going to happen. and it's gonna be a really critical changing the way we think about climate. You know today it is a regulatory problem, It is an emissions problem. I feel, it's gonna become a technology problem in a price and a club marks, ethical investment of how do we get the carbon dioxide out and how do we fix the problems of fires and how do we fix the problems with trout and that's a much more classic investing brother so That sounds more like
subsidy for clean. Clean energy all cut carbon solutions rather than attacks on on emissions, I mean, obviously you could have. You could have been but you see you put the emphasis a lot more on the on this issue: Those then are more than on them. Now I got. I definitely do you know what wait when you look doing this by conservation, What you realise is that, politics that are going to be really hard? You know it Even if you look at the countries where there is true commitment to climate. At least the words. Are there right? France can't raise the gasoline tax Germany. Lower their speed limit Every time they put a try to put a new wind farm in Germany, you get local protests. And now you know in Scandinavia, there's still a certain amount of of acceptance of this.
But you know what you know if there's anywhere in the world, you probably don't need to address climate change. It Scandinavia I is one of the great ironies of the people most willing to like go. There are the people who most least need to worry about right. You know what we really need to do now is. One of my colleagues has been looking at sort of on the ground climate adjustment, so the United States, the group of people who most need to change their behaviour are so were all individuals in hot climates. What does that mean? as an economic extraction. That sounds great That basically means that somebody living in a trailer in Texas, needs to give up their pick up their air conditioning and their barbecue. now. I don't know how many of you ever spent time in Texas But I gotta tell you the odds of people, giving up air conditioning barbecue and pick up trucks and Texas. I would not want about the planet on,
and so I think, when you look at the reality, the notion that instead we're going to come up with so near time signed an article last week couple days ago. Actually every accommodation you're, an American, you start getting your days mixed up. Was on living bricks, This basically was a mixture of Knox, gelatin bacteria and heat ethically sucked in carbon and made a brick wall. So the claims solutions we're gonna end of needing to solve this problem. right and they're gonna be really creative you know you- and I were talking about this earlier If you look at the last time, the world was facing a crisis like this in form, It was the beginning of the last century. and the primary concern was. Environmental impact of animal based transportation
and they were forecast in the New York Times about the fact that on a ten year forward basis the city streets of New York City would probably be a couple feet deep in emotion look. The map was perfectly reasonable It turned out. The solution was not a different horse. the solution turned out to be the model t and that, The kind of energy and fought we're going to need to generate and that's part of the reason why I think the carbon price is the essential element is not because you know, standard the universe. You Chicago prices are the answer externalities. We need the perfect price. Its How do we free up the whole world? all of the creative thinkers to protest? paid to solve this problem in a way we're we're not constraining the solution to our own preconceptions. So you think that,
carbon removal and storage is likely to be an important part of the answer. Is it This also other solutions you know, solar GEO Engineering is one that gets gets a lot of attention, but you u forecast. I think, especially on the carbon removal and storage. I have, but be careful. Has even I focused on car removal because it's easier thing to explain. but a big part of the point is I dont want to prejudge this illusion. Right I have two prejudices and this process that I'll admit of prejudices. the notion that utilities in car companies are going to figure. This out, I find strain My credibility and I think the answer they were going to do this through suffering is be politically impossible and
When I think about solutions, I think about things that are actually going to be like the change from forces to model to the model, to car things that actually both solve the problem and make us better off right, that's the reason now. You know that also can be new forms of energy. There truly clean, it can be compound systems of where we could do removal of cheap rates. I have a hunch- and I don't want to just if I don't want to give it any higher comment than a hunch. That given this is primarily a biologically driven problem right now biofuels are a biological process but it would not surprise me if absolution turns out to be biologic in nature to one of these, I brought up the living brick, ok but we don't know you know I we were talking about so early part of my career. You mention commodities spend an enormous amount of time explain to people the peak oil. Was it
description of a technology in decline. They would eventually be displaced by a new technology that wouldn't be in decline, and I peak oil to be just a dumb idea and my colleagues, we clearly sitting over there. Who is one of them? We spend a great deal of time discussing what the neck Technology would be we did. A great job I don't wanna put too fine a point that I think that team did an incredible job of describing the process by We would eventually discover the new technology. As it turned out. The new technology to solve the problem was an old. analogy, Called fraction. and are also turned out. It wasn't on our list of potential technologies. So we got the process right. to get the answer right. And that's me is really critical. When you talk about climate change here, the odds that we know the former? The answer is really low. I think the odds there is an answer is a lot higher,
the odds of finding that answer, if there is a price to invest against, is way higher. Let's move to another topic, namely disruption. You ve, in a number of papers about disruption in business and the and the economy and its increasing impact. Scum, can you Explain why the amount of disruption that was seeing seems to have increased. I think that's something that we know many investors would would would agree on, but when we get the productivity numbers. Productivity growth is significantly slower than it was periods when disruption seem to be much less of a future, of our all our everyday lives and in business and markets United fashion experience. With this, I agreed to Vienna panel in my alma mater at the university Chicago, and I was two professors of me and the two professors of experts and productivity and they got up and they start explaining why innovation had declined
and why the world had slowed down in terms of new products Then I'm sitting at the end of the panel going ok, I think virtually every person in business thinks this was working. The other way right You know Facebook came from nowhere streaming, cable decline. I think it has to do with the nature of modern technology. You'd have the session not the session. Just before this, when the two back, I think, is almost entirely the answer to this question modern technology bout custom answers to individuals, not about efficiency in the old economic sense, one of the papers that you referring to something called survivor's survivors Guide and one of the sections of it is it is One of the different between this description model in tv and the advertising model,. If you're using tv to advertise the old networks you The least common denominator programme,
You want the programme, everybody watches, so they do, stick in the ad and show it to the most people. and so in those days you got tv shows, like France today. you're trying to get the next subscriber. Right so now you want the tv show that somebody wants to watch. but if somebody who doesn't wash the shows you ve already sold them and that's what gets you niche programming right. So, instead of trying to do friends, you're doing russian dolls, and we ve done analysis. Supportive of the marginal market of these new tv shows. If you look at Netflix or the other streamers there now trying to find the next twelve people who want the next weird show because if they showed people they already have subscribing one more show that zero profit.
but if they could find a show that gets them ten more viewers. Now they have marginal viewers ship now for Productivity standpoint The way we do economic statistics? That's a complete disaster. We now putting resources into the smallest audience possible instead of the largest audience possible right and that just look bad and the stats on the other, from an economic welfare standpoint, it's great can partially and through the question, audience this sort of thing thought experiment accordingly economic statistics, we driver, all income, inequality, debate, the merge person is supposed to be willing to trade. The current consumption bundle with your cell phones, you're stray mean and your matter who care flat. For the phone you had ten years ago and then not phone. You had thirty years ago. I don't think you can get anybody take those traits
and that unwillingness to go back to nineteen. Seventy five consumption bundle, is basically a demonstration, we're not doing the statistics right and I think, using a measurement issue and in the end, it's a measurement issue, but is a deeper measurement issue. Then we're not doing the statistics right is it Statistics are designed to measure macro efficiency they're not measure there not designed to measure individual fit and so consumer surplus is not part of GDP, but so too extent. We made everybody happier by being able to watch tv programmes. They really like. That doesn't going to GDP. So we may need to think about what we measure, but it's not Six are wrong. Is there we ve Shelly graduated to all new kind of economic existence? before I go to audience questions one one last question for me, which is
in a one aspect of the current environment. That's particularly noticeable is just the income. role of politics, relative to kind of economic bullet volatility, and we see that in all domestically in the? U S with them of the drama surrounding the the Trump Administration or on the geopolitical stage. If you look at the Middle EAST, The korean peninsula is a just my impression, or is politics just a greater source of volatility nowadays than it was when you when you start your career and if it is there, any The ways that you could share, how we as investors are analysed, should should deal without a mean. Is it? Is it it profitable to just spend a lot more time on political analysis and write a lot more about politics for mark economists or or or strategists
How do you? How would you deal with that? So I think one of the problems for us is that political cycles run different time frames than economic cycles you asked the question is a more political now than when I started and the answer is. It is far more political now than when I started, On the other hand, if we go back to when I was a middle school that was actually worse from a political why you know it's not without a lot of people who remember it but in nineteen sixty eight States. We both assassinated a major social rights later and a major pillars. oh candidate, the National Guard shot college students in Ohio The political convention in Chicago turned into a bloody riot there were street riots in the streets of Tokyo. sitting in Hong Kong, The fact that the issues we have seen in Hong Kong in the last twelve months are awful.
They are similar to what you saw in Tokyo in the nineties. Sixties, and so the kinds of political upheaval we seen today does have historical precedents. They are in our recent ones. Unfortunately, there is still room for this to get worse before it gets better. Now from it from a standpoint, I have very different view of this. I think it is virtually impossible to make money on politics. I think political risk is why you learn how to do fancy risk management because I don't think it's possible to have insight too many of these processes there there, maybe somebody here who has sufficient psychiatric background do have in since the current Eu S, president right but I am not a bad person Nor have I met that prison
Nor do I know anyone who foresaw what were seen in Hungary No you don't. I wrote a couple of papers. before tromp was elected about economic dislocations in urban environments, verses rural environments. A paper called speed economy, which is based a document with documented that urban, citizens were doing well in rural runs, we're doing bad We looked and documented similar things for the UK for Europe and other places that, Dichotomy sits at the heart of the current political stress, On the other hand, that's nice. And its analytic. Didn't produce any forecast that you can use for anything right, you know, I don't know anyone who got the bricks forecast forecast right, the appalling
I don't know anyone who understood the trunk was gonna. Let's get elected and so the people who are worried about from getting elected thought he was gonna drive the market down twenty, not up whatever it's been you know, I don't think anybody would have guessed that the primary economic action over the Trump administration would have been reduction in corporate tax rates. Could guess lot of things, did that wasn't one April, We have put the infrastructure bill higher on the list, It's a problem with politics. Is your The forecast, the actions of a small number of individuals. Who are not being guided by the broader opt malady of society that lousy, sharp ratio at a very deep level. and so I think, from that standpoint you learn, is an investor to protect yourself from now on. Didn t? You don't go into it.
yes, there's apocryphal stories of people, Why, so, you know people walking out of moral agro in going long, the equity market and things of that sort, I can't imagine either of those actions, but that's ok, now on the other hand, there has been one reliable political trade in this environment. Which is the unwind trade that in environments like this the market has pretty consistently sold itself on occasions. Some really weird stories, right. You know, you know that who s markets have sole themselves twice that China is going into recession. You have to be pretty far away from China to be able to buy that story. But the fact of the matter is they managing events themselves that not only was a true. It was going to drive a global economy down right now,
by the front part of their trade, probably not a good trade, the back part of their trade. That eventually we gotta figure out a wasn't true. That was a good trade. right, and so I think that probably the most consistent money, that's been available in macro trading has been on wine, a politically generated beliefs. worries about a large economic impact when that was scar, went when it look pretty clear that probably wasn't going to guess. You know every time we convinced ourselves in Europe was on the on the edge of dissolution. That was a good trade. Every time We ve convinced ourselves that China was on the verge of collapse. That was a good trade right beaten now that the? U S, s head, some smaller ones that are equivalent, and I think that basic logic that politics. Probably won't actually cause the world. A collapse has been a pretty
good trading, all the problems you gotta wait for everyone to be stupid before you can do it You know that's kind of work, on that note, thank you very much to do Steve and that concludes day one of the of the conference. That concludes. Episode of exchanges of Goldman Sachs. Thank you for listening and if you enjoy the show, we hope you subscribe on Apple podcast and leave a rating or a comment in two.
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Transcript generated on 2021-09-17.