Former White House Economist Reveals Recession Warning Signs | Joseph LaVorgna

Joseph LaVorgna 0:00
Look, if the Fed cuts a lot, then I do think maybe you maybe you can avoid a downturn, maybe it’d be so mild and won’t, we’ll only know after the fact we were in it. I just don’t think that’s likely.

Eric Chemi 0:12
Welcome to Wealthion. I’m Eric Chemi. Recently, we’ve had some conversations where a lot of people have been bullish, they don’t see a hard landing ahead, they see so many strong positive indicators. But I’m not 100% convinced. And I feel like we need to get the other side of the story. So today, we’re talking to Joe LaVorgna. Most notably, he spent a year serving in the White House is Special Assistant to President Trump and was chief economist of the National Economic Council. He spent decades as a Wall Street chief economist for Deutsche Bank, Natixis and now currently at SMBC-Nikko Securities, you might hear some trading chatter in the background or people walking behind him. For more than a decade, he was also ranked as the top economist in the prestigious institutional investor, all star fixed income survey. So Joe, I know you believe that we’re going to get a recession. The question is not if, but when and how hard it’s going to be. Walk us through what you’re seeing here.

Joseph LaVorgna 1:11
Sure. Thank you, Eric. And thanks for having me the so the couple of reasons why I think there’s a recession, there’s three reasons the first and foremost is the the index of leading indicators peaked back in December of 2021. And it’s essentially fallen for 19 consecutive months. And it’s down 8% year on year. And in the past, every time we’ve had that length of that length of decline. And by the magnitude we’re seeing we’ve, we’ve always had recession. And that’s been the case, even if we go back and look over the years to see the original series before they’ve been changed as this index has changed its methodology a bit. But it’s always been reflective of recessions. That’s number one. Number two, the yield curve. And I like to look at the two year to 10 year spread, that’s always been my favorite, because the two year note has expectations embedded in it of what the Fed will do that interest rate differential twos to 10 year yields last year, earlier this year, I should say got to its most inverted since the early 80s. In fact, if you adjusted for the level of interest rates, the inversion that was around 100 minus 100 basis points was actually bigger than the 200 Plus inversion we had back in the early 80s, when the funds rate was about three, four times as high. So that’s, that’s number two. And number three, the Fed just has not had a very good track record, in been able to raise rates, and basically slow the economy, to the extent it needs to be slowed to get the inflation out of the system. In fact, this has been the most aggressive and rapid tightening cycle we’ve had since the early 80s. So those three reasons to me make, I wouldn’t say they make me a bit of a cynic, Eric, they just consistent with what history shows time and time again, that the probability of a soft landing is very, very low. And that a hard landing is much more likely.

Eric Chemi 2:58
So I keep hearing from the bulls that, oh, but labor is so strong, you can’t find enough workers, there’s all these openings and not enough workers that’s going to keep the recession from happening. And then I’ve heard other people saying, But wait, it’s coming, eventually that dominoes going to fall to what do you see there?

Joseph LaVorgna 3:15
So if you ask, Well, why is the recession taking so long to unfold? If you if you look at the leading indicators, and how long it’s taken in the past summits, has been some long lead times, were quite short, at the very tail end of when, you know, the the index should be okay, come on should happen already. And I think part of the reason why we haven’t had a recession is that COVID, and the shutdown of the economy caused a lot of the traditional relationships in the economy, that modeling if you will to break down. So for example, we saw back in 2021, two very high job openings and a very high unemployment rate that really doesn’t make any sense normally, to have the opposite, you know, low unemployment and high openings or, or low openings and high unemployment rate. Instead, you had both at the same time, elevated unemployment, elevated job openings. So the economy is kind of normalizing. And that’s important. The fact that you’ve had the labor market healthy, though, doesn’t really tell us where we’re going. The one indicator within the labor market that actually is predicted as the unemployment rate. And that now is up 50 basis points from its cyclical trough, which in the past, every time in the post war period, has also signaled the peak in the economy. So it’s taken us a while to get to where we are, but if you believe things are normalizing and some of these old relationships, which have worked many for many decades, they reassert themselves, we believe that the case then that then you will get a hard landing.

Eric Chemi 4:38
What about the idea that the Fed will need to cut next year because of the election? Do you think there’s that much politics involved in it, how they play this out?

Joseph LaVorgna 4:49
If there are politics, I believe the Fed will have to cut rates a lot just to normalize the yield curve. If you make some guesses on what you think the spread should be between the Fed Funds 2 year note. And 2 year note the 10 year note, I’ve estimated the Fed needs to cut 250 basis points to normalize the curve where you’d have a situation where the long rate is got a positive slope to the short rates. Now it’s possible if the Fed cuts that aggressively, we can avoid a hard landing. The problem is that in the past, when you’ve had soft landings, the Feds generally cutting about 75 basis points, not 250 basis points. So I do think that that has to cut a lot. Now politics, I do think will enter into the equation, but only to the extent if the Fed hasn’t moved, and we’re bumping up closer to the election. So for example, if we’re sitting here, and we’re still debating about the strength of labor market, and the extent that inflation is going to moderate, and it’s September of next year, to me, politically, that’s going to be very difficult for the Feds first move to come early in late in the year rather, it’s more likely that if they, they would cut sooner, because if it looks like the data warranted, and part of this is gonna be a data issue, then by going sooner than they could sort of be above the political fray. But if it’s this at the last minute, it’ll be a problem. And I’m sure unfortunately, both sides are going to be arguing that the feds making a mistake, are they cutting too soon? Too much, or they’re waiting too long to move. So either party is going to be pretty upset with the Fed? My forecast is correct. What was your perspective, like working in the White House National Economic Council, you’re probably dealing with the Fed are working like if you are Jerome Powell, what would you be doing differently right now, if you were in charge? Well, I would, I like to Alan Greenspan, sort of non transparent view, which is sort of a funny thing to say people always think transparency is the best thing. But I learned way back when that you sort of want to talk to, to the market, as if it’s a, you know, a teenager, you know, smart teenager, you know, doesn’t have a lot of attention span, mood change can move, mood changes can happen quite quite frequently. And you want to you want flexibility and optionality. And the problem with the SEC giving all these forecasts giving all the data, making predictions, doing things like forward guidance, is that it’s responsible for things which it can I control, meaning the economy, that monetary policy is a very blunt instrument, nor can it forecast the economy. And I’d argue the Feds forecasts are worse than the consensus because how the institutionally the organization is set up, you’ve got five governors, seven bank presidents that voted at times, it’s 12, people voting, you’ve got 19 people on the committee include all the non voters and it takes a while to get to make decisions. And the degree of consensus on the Fed is extraordinary, because economists are known not to agree on many things. And yet the Fed always has these votes that are generally unanimous. So I would do things totally different. But the problem is we’ve moved so far, Eric away from how I would do things that will we’re never going to go back and that transparency is going to persist. And they do think that will make the bed and I’ve said this many years. Well, before I was in DC I had the pleasure of serving for the President. But I always made the point the Fed is opening itself up to a political interference. Because it’s again, it’s countable, for things that you can either predict nor control the like the way you put that it can’t forecast well. And it’s not responsible for it either. Right? So it’s, it’s actually responsible. Yeah, it’s partially responsible. But you know, the old adage is monetary policy was a very blunt tool. And even Chairman Bernanke had mentioned that, you know, QE doesn’t work in theory, but it works in practice. So it shows you that there are a lot of funny things about monetary policy, that it’s not, this isn’t physics, it’s not engineering. It’s not like, Okay, we’re gonna build the bridge. And if it stays that, you know, the math is supposed to suggest it’s gonna hold. Economics isn’t math, it’s a social science. And that means it gets a lot of things wrong, and people need to be adaptive and need to learn. And unfortunately, I think economics has become too mathy. It tries to be too precise. There’s a soul joke about why economists forecast at the decimal place, Eric is because they have a sense of humor. And so when I see these Feds reports, and they’re very deep and detailed, and have distributions of risks of the forecasts, and where it’s skewed, I just think it’s sort of silly. We just simply don’t know. And it’s okay not to know. But nobody wants to be humble anymore. I think the economics profession need some needs a lot more humility.

Eric Chemi 9:14
It reminds me of in college and studying economics, and the idea that you go through all these complicated equations that you need a PhD in order to figure out like, you need a PhD in math to figure out these economic equations. And the idea is, this is what the equations say about normal people’s behavior, right? That normal people take 300 million Americans, none of whom have a PhD in math, but this is their behavior. But we need a complicated equation to solve it. But it means that the people who have this behavior, they’re not optimizing their life around these equations. They’re not thinking through these equations. They’re just doing what they do every day. So why do we need these equations when the people who are making these decisions themselves are not powered by these equations and don’t have the training to make decisions along those lines.

Joseph LaVorgna 10:03
Yeah, people, I mean, people would, they may inherently one optimize that we know people do irrational things all the time and do things that are good for them. Now, the argument might be an aggregate, you know, the so all these things kind of cancel out. But to me, psychology is very important. And you know, all these models, they, they’re good in terms of giving you a general structure of how you might want to describe how the economy works. But all these models are only as good as the assumptions that underlie them. And then, of course, you have shocks to the system, like you had with the financial crisis, and oh, eight. And again, with the pandemic, in the aftermath of that, we need to again, realize that the standard errors are the confidence intervals around these, these statistically significant predictors that have worked so well in the past are why do you have fat tails. And it would be good to acknowledge that. Moreover, the other issue which I bring up time and time, again, when I talk to clients, and when I can on in the media is talking about the data, the data is not particularly good and never has been good. And arguably, it’s gotten better the response rates on things like the employment survey, or the job openings and Labor Market Survey, those response rates have come down significantly over the past handful of years. So that means that not only making decisions based potentially on flawed models, the data we have isn’t particularly good, and itself can be biased. And I think that’s what’s happening now where the economy doesn’t look as healthy. As the data suggests, we’re seeing employment, for example, Eric has been revised down eight of the last nine months, we’re seeing a gap between the household and employment data of roughly 2 million jobs. And yet we’re making these decisions, and yet the data isn’t particularly good. And arguably, it’s gotten worse.

Eric Chemi 11:43
Do your clients love hearing how bearish you are?

Joseph LaVorgna 11:46
I don’t, yeah. It’s, it’s not that I’m bearish. I feel like I mean, I’m not bearish, though. I’m bearish now. But I look, I’ve got a view of the world and certain every model eventually breaks down. But I mentioned the index leading indicators that mentioned the yield curve and mentioned how fast the Feds raise rates. Do you look at senior loan officer surveys, not a leading indicator how that’s tightening. So you’ve got very high price of credit, at the same time that the availability of credit is declining, it just kind of makes you negative. So but that’s not that’s not always the case. I remember being accused of being bullish coming out of the financial crisis having very negative and oh six and oh seven, and then being bullish, and oh nine and people thinking I was crazy. So you’re kind of used to it, I look, if the Fed, if the Fed cuts a lot, then I do think maybe you maybe you can avoid a downturn, maybe it’d be so mild won’t, we’ll only know after the fact we were in it. I just don’t think that’s likely. And I do believe in the wisdom of crowds. So when I see that yield curve, inverted, it’s telling me that when you’re short fight your short term rate, your financing rate is above what you can lend at meaning because your your funding short and lending long, that in and of itself, should dry up credit. And what we’re seeing now, of course, as the market for private credit, explode, money is moving away from banks, it’s going to other parts of the financial system, where it’s unregulated, where there’s no transparency, and that in and of itself, because its own issue. So I don’t I don’t think I think I’m bearish now, but trust me at some point, you know, when the fundamentals Warren and Eric, I’ll become massively bullish.

Eric Chemi 13:19
I’m curious, what are you looking for? What will change your mind? And then you maybe we’ll save the question for a second, I’m gonna talk about the current situation and the current situation now, we’ve seen the s&p 500 have that sort of fall the first half of this year, come all the way back, come back down again, and then rally all the way back. We know that’s just seven stocks, right. But as a general index, that’s what’s happening. A lot of people will say, look, we’ve already seen the downturn, we already saw it drop 10%. That was the 10% drop on a couple of times. And now it’s back up. That was the move. Are you confident that that was the move? Or do you see 25% drops, you’re coming up with? Where do you sell?

Joseph LaVorgna 14:01
If here’s what I so you’re all you asked about, you know, hard landing, what’s the probability of recession? I would say that, look, the likelihood of recession is still quite high, given the factors that I mentioned. But whether it’s

Eric Chemi 14:14
what is likely highly, What number is that?

Joseph LaVorgna 14:16
75 80%? I mean, I mean, it’s like if you were if you’re in Vegas, or you’re making a bet you would have a reasonably high degree of confidence that you’d be right courses, always rescue could be wrong, but but I’d say 75 80%. And that’s come down a little bit because the longer the economy goes without a downturn, the more likely some of these excesses could gradually be could be unwound. So anyway, so the reason I about the equity market, why I think the equity market could go lower, or Russia coming back. The other point about the depth is that we don’t know about recessions. We don’t know what recessions look like, or how deep they are, because we’re not sure what the policy response is when we’re in it. So for example, If we look back at oh eight, and you look at the data, we had GDP data, payroll data, it was a milder recession up to September of oh eight than what we had seen in a one. And then what happened, Lehman failed. And the Congress didn’t pass tarp one, which is a Troubled Asset Relief Program. And then, of course, the economy collapsed Later that month, and from October through April the following year and recovered when the Treasury had to pass the banks on the stress test. So it was extraordinarily mild downturn got worse. Take the pandemic, the pandemic was a collapse and output that you hadn’t really seen really ever. over a six week period. The administration gave income support economy started to reopen in May and you had a sharp V shaped recovery, which by the time I was argued, I was too bullish. My, my colleague and boss Larry Kudlow, we were getting by, you know, you’ve talked about I shape recovery. So that was V shaped recovery. But what was the policy response? If you get a situation next year, let’s say we’re, it’s not clear what the economy’s doing, and the Fed waits and holds off, it’s worried about inflation picking back up like it did in the 70s, which we could talk about, because I don’t think there’s, I think the parallel the better parallels the 40s. And the Fed waits, well, it can make a situation much worse. And if there’s divided government come in 25, and there can’t be a fiscal response in response to a weaker economy, then you could easily have a mild situation get much worse. So I think there’s a hard landing, but we don’t know what it’ll look like, what the policy response is, whenever it happens. So I think that’s very important. Regarding stocks, the issue I have with equities, and you know, we had about a 23 24% correction from the September where are the January 22. highs to the October 22 lows is that you market, if we have a recession next year, the equity market didn’t make it’s, it’s, it’s bought in in October of last year, the equity market doesn’t lead by that much. Now it’s possible, you could argue that, okay, given the fact that you’ve had time to absorb some of these excesses commercial real estate has been in a funk for a while residential investment spending has been slowing, manufacturing has been weak, we’re working inventories off won’t be a big downturn, it’s hard for me to think that a 10% correction, it would be enough. So I think you could easily make a fundamental story where you could get it roughly 20% drop from here. If there is a recession, if it’s really mild, maybe it’s slightly less, but I do think you can see clearly well sub 4000 s&p 500. And against that backdrop, Eric, you’ll see a big rally in duration with 10 year yields moving down well below 4%, close to 3%. And that’s typically what causes these equity markets to then recover and very powerfully and sustainably when the equity risk premium becomes positive, not negative as it is now. And bonds become so expensive that people naturally want to allocate back into stocks. But we’re not there yet.

Eric Chemi 17:49
I feel like this has been an argument a lot of people have had, let’s say all year, right? There’s been a consensus from a lot of economists that we’re going to see the soft landing, but we’re wrapping up 2023. And, and basically they’ve been proven wrong so far. So what’s going to make 2024 different because I, I think intellectually everything you’re saying makes sense. It’s like what you said like QE it doesn’t work in theory, but it works in practice. I feel like the bulls argument doesn’t work in theory, but it has been working in practice. So sure, what’s the change next year?

Joseph LaVorgna 18:21
Part of things say, Okay, well, why is why haven’t you had a recession? I mean, there’s the normal lags. I mentioned these indicators, some of some of it just takes time. Number one, and maybe the most important is that when SVB failed back in March, the Fed provide $400 billion 400 billion that’s a huge number and liquidity immediately, and had drawn from the financial crisis and, of course, the COVID playbook, and move with such alacrity that you’ve got to give Jay Powell and the Fed fed folks credit, of course, you could argue that monetary policy was the cause of the regional bank crisis, because because of forward guidance, and people not believing that it would raise rates as much as it said it would even when they began raising rates and Mark 22. A lot of banks and institutions got long Treasury duration, and of course, have massive realized and unrealized losses because of that. But leaving that aside, the Fed did react quickly, and it stabilized something we would be in recession. Now, if not for that quick move that provided all that liquidity, number one. Number two, we had had a lot of government spending more so than many people thought this year. In fact, I made the calculation, if you took the pre COVID trend, we we spent an additional 3.2 trillion from January of 21 to present and that accounted for a lot of the aggregate demand boost that offset tighter money that households are paying. However, in the last couple of months, what you’ve seen is the rate of government spending slow, slow quite dramatically. So that that’s unlikely, in my opinion to repeat next year. And then of course, I mentioned earlier that, you know, takes a while for the economy to normalize, following the pandemic and I mentioned the the labor market labor market, you know, being strong but being unusually weird and 21 and even early 22 With high unemployment rate and high job openings, right. But here we are now with the unemployment rate rising, continuing claims higher. We’re seeing household employment, which tends to be more reflective of what’s happening attorney points in the payroll data weaken. So I think the contours of the of the slowing are still very much present. And it does feel a little bit like oh, wait, when we got to oh, wait, Eric, and why we had a recession, the Fed cut rates a lot, and we’re not going to have one and, and we wound up having one. So I think there are some similarities there.

Eric Chemi 20:29
I look at some other other forecasts that Goldman’s been bullish all year, D Mackey at point 72, one of the best on the street, they’ve been Bush, what are they missing, though? If you were sitting in a room with them, what would you say in terms of okay, I understand these points, but you’re missing x.

Joseph LaVorgna 20:46
Honestly, I don’t know, I sort of make it essentially don’t try to talk to anybody. So if they’re not be not be biased, of course, then you have to fight against your own confirmation bias. I just have a structure of how the economy works, sort of like you have to kind of have a view of how the economy works. You have to view how monetary policy works, how fiscal policy works. And then of course, what we debate about is, where are we in the business cycle? And I think we can agree on the first three phenomenon. But we may not agree on where we are in the cycle. And it seems to me that the data suggests that we’re much, much later cycle, but why they have their views, Eric, I don’t know maybe that’s a maybe we should have a debate and say,

Eric Chemi 21:27
Yeah, we should have a debate. Somebody was talking to me the other day about, oh, well, it’s the baby boomers, they’re all retiring. This is different from 30 years ago, because they’re out of the workforce. Now. They’re, they’re retiring every day, there are not enough people to replace them. So that means unemployment will be very low. And anyone who wants a job will be able to get a job at this time is different. What do you think about that? Yeah,

Joseph LaVorgna 21:53
I mean, I don’t believe in this time is different. I mean, history rhymes, right. It doesn’t repeat. I mean, it seems to be one of the stories why you know that some of maybe my counterparts elsewhere might argue is that your financial conditions a reason you’re seeing interest rates decline in the equity market rally. And I think that’s a common argument. The consensus, I think that’s wrong for the following reasons is that you shouldn’t look at financial conditions for investors, we should look at financial conditions for US households. So if you look at the weighted average cost of borrowing for households, to include mortgage rates, and credit cards, auto loans and personal loans, what you see is that borrowing course costs around a multi decade high, at the same time that banks are, are becoming less, providing less credit, now some credits coming from elsewhere. But in general, we’re seeing very, very high borrowing costs. We also when we look at the consumer, that consumer durables, spending is way above its pre COVID trend, there has been no payback there. I feel like we’ve satiated a lot of that demand, and that this tightening financial conditions for 70% of the economy, which is the US consumer is tight. And therefore it’s just a matter of time, before you start to see the slowing. And again, the part of the reason why it’s hard to predict these things I mentioned date, I mentioned how the economy operates, the Fed behaves and where we are in the cycle. recessions are very hard to predict. Economists aren’t good at it. And we’ve been through this before. And and therefore there isn’t a simple timeline or roadmap we could follow, you know, what would change to make me more more bullish, I need to see the yield curve normalize I, I just cannot believe in a capitalist based system, that that short rate could stay perpetually above the long rate without causing dislocations, or not causing the Fed to ease massively. So I’ve one variable, one assumption that I would be wrong on our need to see change would be that curve of the 10 year note went to 6%. And the Fed funds rate stayed where it is. And the two year note was that was that 550. That kind of makes more sense. But of course, the problem there is if rates went up that high, the uplighter premium would be so much that the tightening in markets would be even greater mortgage rates wouldn’t be up at 7%. They’d be at like 9%. So I guess the way I see the world, it’s hard for me to the model, I use the foundation, it’s hard for me to change it in a way that would allow me to quickly switch which is which is not what I think I’m supposed to I’m not a trader, I’m not a strategist. So instead of just a solid, fundamental core underpinning, and it served me well for a long time, and I’m hesitant to abandon that approach yet.

Eric Chemi 24:32
You got to stick with your view for a while. You can’t just change it every week. If the Fed does cut rates, but doesn’t that suggest they’re cutting rates because there’s a recession, right? That forcing your shorts if they cut, but they’re only going to cut if something bad happens?

Joseph LaVorgna 24:46
Well, here’s the thing. So So one of the things I’ve been very, I believe that inflation was largely transitory. To me the episode that’s more applicable today isn’t the 70s but rather the four So when you had a similar dynamic unfold where you had a huge increase in aggregate demand, while aggregate supply shifted to the left, in other words, the labor force shrunk effectively, because people were at war. And it was a little bit like how what happened during the pandemic, where people were shut in and government spent trillions of dollars, not unlike what happened during World War Two, and we saw inflation back then, well, almost 20%. And then within a couple years collapse and actually went negative. So I think, to me, that is probably the better, better analog. So if inflation comes down, and as that real funds rate gets bigger and bigger, maybe the Fed just cuts and cuts a lot. And that’s how we don’t have recession. And maybe that helps stabilize equity. So they don’t maybe correct as much. I guess that would be one of the ways I could be wrong. But the problem is the people who have the soft landing, don’t have as much cutting as I believe necessary, so as to avoid the very thing that they’re not predicting.

Eric Chemi 25:58
You mentioned transitory inflation, I want to attach Did you say you believed it was transitory? You did?

Joseph LaVorgna 26:04
I believe? No, I believe I believe that was transitory. I’ll give you a for instance, the inflation rate peaked at 9%. In June of 22. That was the same month the Fed raised the funds rate 75 basis points. So it’s 175. Literally, when inflation peaked effectively the same month, the funds rate was at 1%. Never before have we ever had inflation. The Fed is the Fed was done hiking in July, I believe they are we’ve never had a period Eric where the inflation rate P 13 months before the peak and the Fed funds rate only a couple of times as as inflation peaked before the Fed funds rate happened three times 5757 84 and 18. And the average lead time was only five months, this is 13 months. So what that means is with monetary policy given us long and variable lags as real rates continue to rise, the Fed is going to need to cut, so maybe they cut their insurance cuts. And that’s why they don’t have the soft landing. But it has to be more than 100 basis points of easing that’s baked into the market. Mark has 100 basis points or cuts next year. I think that’s not enough. I just said IDC, the Fed not cutting when they should risking a much deeper downturn and 25. And up because the election gets in the way, or they wind up cutting a lot and it happens a lot sooner. And the spark would at this point likely be further rising unemployment. But also you need you would need negative payrolls, you’d need negative jobs. So won’t cut rates, even though inflation has come down a lot. They won’t cut rates with inflation still well above two.

Eric Chemi 27:34
What do you think was the biggest blunder by mainstream economists in recent years? Because I look back about the massive stimulus programs that we saw a couple of years ago, should someone have stood up and say this is going to cause inflation? Right? Did you know The idea of was it transitory or not? Were the massive stimulus programs appropriate? Did anyone correctly analyze the v shape rebound? So you were also talking about the Great Depression? 2.0. But that didn’t happen? Does it feel it made a massive miss in the industry?

Joseph LaVorgna 28:05
I think, you know, unfortunately, we’ve broken down Eric into tribes, and you’ve got conservative leaning economists and liberal leaning economists Leachco to go down the wrong path. I don’t I like to say as a street practitioner, I swear I’m forced to like, to the extent maybe other people can’t, but don’t be as biased. I need to be correct. I need to have a good thought process. So some people did foresee the the inflation to in back in 22. To his credit, Larry Summers did and argued about it and kind of got iced out by by by the administration.

Eric Chemi 28:41
But I’d say it eats you alive if you go against them. Right.

Joseph LaVorgna 28:45
Yeah. But so but the answer give answer to your question. That’s non political, because I want to be as unbiased as I can and be objective. I’d say probably the assumption at home prices couldn’t, couldn’t decline back in the early 2000s. And I never believed that. And apart I would show people if you if I showed you a chart of a price, and you saw these exponential increase in price, it didn’t matter what it was. And he sort of started to see things weaken. You know, the Chartist or technical analysts in me would say, I think that thing could correct, right, whatever could go up. 20% certainly could come down. And we made the assumption because it had never happened before that it wouldn’t happen. And too many economists. Too many economists fell for that. I also think that economists oftentimes don’t look at at market price signals in psychology. And again, they probably they focus more on these, these big macro models of how the world is supposed to work, when in reality they do. They’d be better off talking to people in business and industry and thinking, and what are they thinking? What are they saying? And I don’t think we do that enough. There was a good book, written by I think, was Christopher liner called the Lords of easy money and there was a time when he was dissenting. He didn’t want to continue to do quantitative easing. Brian Bernanke challenged him What model do you have? And his point was, I’m actually talking to people in the real world. And I think too often so I think economics needs humility. Too many people just have a disdain for the common person or the person that doesn’t have a PhD, or isn’t math and doesn’t speak in a language that basically insulates them. I mean, it’s language that economists use. It’s just a barrier to entry to keep wages high. And I think we need more proof in the pudding. You know, what’s your thought process? How good is your forecast? How often people want to listen to you. And I think economists continually make, make those mistakes, a very insular group and generally just hang around themselves and debate themselves. I read something a long time ago that said that the economics profession, I can’t find where I saw it. But the economics profession was like one of the worst disciplines in terms of like, quoting or borrowing from other other disciplines, meaning like historians would take from political scientists, and sociologists, and economists, but economists wouldn’t draw from other other academic research places. And I think that’s my own experiences. Personally. That’s the case. So we’ll see.

Eric Chemi 31:01
I’ll ask a crazy question. It’s doesn’t matter. That’s true. If we had just done nothing for COVID. No, shut down. No stimulus. As I talked about normal people. Everyone says, Everyone got COVID. Anyway, right. We lost so many lives anyway. But at least we could have avoided all the economic and financial problems, the massive debt, the massive inflation, the hard landing, that’s coming yesterday, if they had just literally done nothing said, Everyone put on a mask, go back to work, whatever is gonna happen is going to happen. But we’re not going to waste trillions of dollars. Would that have been a better call?

Joseph LaVorgna 31:33
Here’s what I would say to you. I remember back during the housing crisis, there were too many people who lost their home. There was too much. There was too much loss disruption. Yes, I get the moral hazard issue. But, you know, again, economists, you know, coming back, we don’t operate in a vacuum. You’re talking real lives, people, politics do matter. And you have to be sensitive to that. I mean, even Sweden that try that harsh approach. They definitely had a softer touch to many of the countries, but they certainly weren’t hands off. And, you know, hindsight is great, but we don’t have it in real time. So I do think that there has to be a a political response, or political consideration for you dealing with people. So I guess that’s how I would answer it. I mean, and hopefully, you know, we’ve learned from what happened, then we’ll take a more targeted, thoughtful approach. But this is why I also believe Eric, we need more more debate. We need more disagreement. Disagreement is healthy, let’s not make things personal. We make things oftentimes too personal. Let’s debate the policy. Because we need pot good policy. And I want to be able to persuade people that that my policy is better. And if it’s not, I want to be in a position where if I’m not attacked, then I could be persuaded. And we’d be we’d be better off for it.

Eric Chemi 32:56
You had a front seat, like you mentioned working with Larry Kudlow with President Trump, how has that informed your views on the current economy and the process for how these decisions are being made.

Joseph LaVorgna 33:06
What’s interesting is that the government moves very slowly. And it doesn’t matter what your political framework is, it just it moves very slowly. So a lot of inertia, you got to chip away and make little, little tiny, tiny changes. It’s interesting, because when you do something totally different, the vernacular, the language is totally different. So it takes a while to get used to how people operate and think. And it’s interesting how Washington folks look at Wall Street and finance. And now the finance people look at Washington and Wall Street, it’s like almost each look at as two totally separate worlds. So I, I found it very interesting and fascinating. Unfortunately, a lot of my time was spent during the pandemic. So a lot of work became COVID related and trying to get the economy back and looking at data and seeing, you know, how the economy was improving. But I thought it was always important to be accessible, to be honest. Do what you said, you know, say what you mean? Mean what you’re saying and get things done on time. Find that in DC people you know, it’s it’s full, it’s politics. So it’s a it’s definitely a different world. But it but it was fascinating. So I, I, I enjoyed my time. When I read about DC now I have a little different angle, sort of like when you’re in college, you take an econ or poli sci class and kind of a good foundation. So you kind of really read between the lines and kind of know what’s going on. But unfortunately, Eric, all the good stuff we’d have to keep offline.

Eric Chemi 34:29
We’ll do that after we hit record. Would you go back if Trump wins again, and they said, Hey, come back, do a job here. Would you do that again?

Joseph LaVorgna 34:38
Maybe and I really like where I’m at. And, and I enjoyed and I don’t know, I’d have to I’d have to wait and see see where we are when we get to that potential point in time. A year is a long way away. And the answer is I don’t know.

Eric Chemi 34:53
You don’t know. What should investors do? someone’s listening to this watching thing, okay. They believe you YOUR Story, do they? Do they get out of the market? Do they move into T bills? Do they just sit on bonds? What should they do for the next 12 months.

Joseph LaVorgna 35:08
Jeremy Grantham, you might say some people call him a well noted bear, he made an interesting point made it a few many times. But he’s runs GMO, big asset manager out of Boston. And he said publicly look, he goes on negative, but you have to be in the market. Because you don’t have a business. If you’re not in the market, you can’t be in T bills, or gold or some other asset you think is safe, you have to have some exposure to the market. But that exposure, though, Eric, really depends on the person, how old they are, what their risk tolerances are, certainly fixed income has, provides a very attractive return that it hasn’t provided in 15 years. So that’s an asset class people want to look at, when you could buy a six year investment grade, or sorry, at a 6% yield on investment grade corporate paper, that’s a very attractive return. So I mean, I’m gonna sound like an economist now. But it really depends. It really depends on numerous things, especially the person, so you can’t give a one size fits all approach. I will say that the one advantage that financial advisors have is that is that they are or some can singularity, if you, if you will, is that they help you take the emotion out. And it’s very hard, everybody can get emotional when it’s their own money. So I think that’s what you really want to work against. And that’s where you want to be careful. That’s why people who either dollar cost average or have a certain set of house asset allocation, and kind of don’t make the decision making on a whim generally do better. So I think I kind of gave you an answer. But I’m hesitant to be specific, because all cases are different.

Eric Chemi 36:45
Let’s say someone’s got a 10 year horizon, right? Let’s say they’re in their 40s. So they’re still going to be working, they don’t need it for retirement, they they just want to maximize your return versus risk. So so it’s it’s we don’t have this time limit on the end, if you if you had that perspective on it. What would you say that

Joseph LaVorgna 37:01
you very seldom find periods where equities don’t outperform bonds over a 10 year period. So you certainly want some equity exposure. But I’m not sure you’d want to be all in and stocks as maybe you might have been in 2009, when you looked at the trailing 10 year return on stocks had been negative and generally guaranteed, guaranteed, with quotes around it, that the market would recover quite sharply at a 10 year forward returns would look good. But a lot will depend on inflation and where interest rates go. But I would say again, you need exposure, the old rule of thumb was 100 Less your age would be your equity allocation. So if you’re 30 years old, you should have at least 70% of your money in equities, diversified equity funds and 30% in fixed income, or some other combination of fixed income and perhaps alternative. So I’ve always sort of used that as a benchmark. But again, it depends sort of what your goals are. If you want to take risk. People can be more aggressive, but as you know, risk and return you can’t they’re inseparable, more risk higher return vice versa.

Eric Chemi 38:04
Oh, I appreciate that. I’ll try to pin you down on this last version of the question. If you got, let’s say you want a small amount in the lottery, you want 100,000? You want a million, not the Mega 100 million, but you got the little you got four out of five balls, right? So you get 100,000 or a million? Would you be buying s&p 500 here at almost all time highs? Or would you say? Leave it in some bonds, corporate or treasuries, wait six to 12 months? And then pick it up? Do you think s&p is going to be lower 12 months from now you could buy better that

Joseph LaVorgna 38:34
I will put some money in the stock market? Well, first, here’s what I would the first thing is that I pay down debt. Because, again, the payment your interest rate is that the liability doesn’t change. So I would pay down debt number one. And number two, yes, I would put some money in the stock market. Yes. Because again, you don’t know you’ve got, you know, even though I could tell you at 75 80% chance that the economy is gonna go into recession. And that would imply the equity market being lower, but you know, maybe it’s, it’s down 20% In the first six months, and then it’s up 30%. After that. So 12 months forward, your equity is a little bit higher than where we are now. So being invested also as a hedge in case you’re wrong. So this notion that you should not be in the market, because you’re going to be able to time it in both sides, I think is extraordinarily difficult. Very few investors could do that. So you definitely want exposure in stocks, and has to be based on your risk parameters. Now if I won the lottery, maybe I’d put more money in stocks because I’d be looking at his house funds. It’s basically money I wasn’t expecting to get that I’ll put majority of it in the equity market. Versus if it’s more harder and on labor maybe I’m a little bit more risk averse with that money. Now behavioral psychologists may tell you that repave your cars they tell you that’s that’s irrational. But then that comes back to our irrationality of, of people. We do think sometimes it doesn’t always make sense. Maybe only to ourselves.

Eric Chemi 39:53
Yeah, no, you’re so right that we’d have to have a whole other conversation. Yeah, that’s so weird. Where can people find you? Is it social media? Is there a newsletter? I know you’re on Twitter, if everyone wants to dig deep with Joe, where can they do that?

Joseph LaVorgna 40:06
I you know, thank you Eric. I don’t Yeah, I don’t I’m on social media a little bit. I don’t tend to go on a lot. I feel like it’s the risks outweigh the rewards. I try to be very neutral. But I would say if you could, you could Google me and if, if you’re a client, I’m at joseph.lavorgna@SMBCNikko-si.com And and I could put you on my on my research mailing list, that’s probably be the best way to get me.

Eric Chemi 40:40
That’s a long email address.

Joseph LaVorgna 40:42
I did. joseph.lavorgna@SMBCNikko-si.com

I got a lot there. If you’re absolutely right.

Eric Chemi 40:54
They gotta get you like a little short one. Right. Like just like, you know, Joe. It’s something a little nickname version of

Joseph LaVorgna 40:58
it. Yeah. Yeah, I know. I need Yeah, I get to talk to my boss about that.

Eric Chemi 41:03
This has been great. Joe, thank you so much. Thank you, Eric, for people listening. And we’re just talking about consistently Aires financial advisors. You’re hearing all this, you’re trying to figure out what to do. You can go to wealthion.com There’s a little short form there we can connect you with investment professionals that Wealthion endorses is no obligation. It’s free. This is just a public service to try to help as many people as possible. Get your finances straight. Get your family’s finances and investments on trucks. You’ll see that short form it wealthion.com And look if you’ve enjoyed this episode with Joe and I like it, subscribe, share, let other people know this helps the algorithms send it to more people so more people can enjoy and listen and learn as well. So thank you for watching. Thank you for listening, and we’ll see you next time.