Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI), explains the reasons behind America’s slowing economy, clarifies why there’s no immediate recession threat, and highlights what the global industrial upturn means for investors in 2025 and beyond.
In this insightful conversation with Maggie Lake, you’ll learn:
- Why inflation remains stubbornly high (“sticky inflation”) according to ECRI’s Future Inflation Gauge (FIG).
- How the shift from services to manufacturing is reshaping the U.S. economy.
- Whether the Fed’s reactive approach to inflation could lead to increased market volatility.
- The critical difference between financial market corrections and a true economic recession.
- Why currency dynamics and tariffs could become major economic factors this year. markets, and get a behind-the-scenes look at ECRI’s influential Future Inflation Gauge (FIG).
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Lakshman Achuthan 0:00
The US economy is kind of like a super tanker. You just can’t turn it on a dime. So what is going on is that we have a slowdown. Okay? The super tanker is slowing down.
Maggie Lake 0:15
Welcome to wealthion. In a moment, we are going to bring you a fantastic conversation I had with Lakshman achitan, co founder of the economic cycle Research Institute, he shares what their models are saying about the economy inflation and what investors might be getting wrong. First though, we’d like you to take a quick minute and check out a poll we are conducting so that we can find out what’s on your mind and figure out how we can tailor our content to best help you, just click on the link in the description below. We can’t wait to hear from
you. Hello. Welcome to wealthion. I’m Maggie Lake, and today I’m joined by Lachman achithan, co founder of the economic cycle Research Institute. Hi. It’s great to have you with us. Good morning. Very good to be with you. So it has been, I think fair to say, a volatile start to the year, and I think many of us are opening those q1 portfolio statements, and we’re not really thrilled with what we’re seeing. So I’d love for you, Lachman, to sort of level set for us, and maybe help us separate the noise from what investors really should be focused on, as we, you know, sort of move into another quarter in another part of the year. And let’s start with the US economy, because it seems like we’re getting a lot of mixed signals. What are you seeing? Is the US headed toward recession?
Lakshman Achuthan 1:33
Yeah, yeah. And we’ve seen a lot of the R word in the in the headlines recently, and so great question to kind of get out of the way. So just to be for fun, I’m going to say yes and no.
Unknown Speaker 1:51
Well, I don’t, you
Lakshman Achuthan 1:52
know. I certainly do not want to be. I want to be, I’m not sure if this is PC, but I want to be a one armed economist. I want to give you the one I don’t want to do on the other hand, but the truth is, we’re going to have another recession at some point. We always do. And the and, and the helpful piece of information is, is that going to come soon, sooner or later? And from everything I’m looking at, it doesn’t look to be imminent. There doesn’t look to be anything that is imminent in terms of a recession. Now, let’s just clarify what a recession is. It’s when output, income, employment and sales all fall. They all have negative growth rates, the levels of those different activities are all falling. That’s a recession. Is that going to happen anytime soon? Doesn’t look like it. Okay. What’s the main reason for it, even though all these crazy things are happening? Well, it’s that the US economy is kind of like a super tanker. You just can’t turn it on a dime. It doesn’t spin around like a jet ski, right? It takes this long, laborious turn. Okay, so what is going on is that we have a slowdown. Okay? The supertanker is slowing down. It’s what we call a growth rate cycle slowdown, instead of a business cycle slowdown, which is a recession. So the growth rate cycle slowdown is what we’re all feeling when we look around, and we anecdotally see things where we say, oh, you know, the coffee shop line is shorter, or something else happened that I saw that seems like quiet. Or maybe, maybe that means that there’s something, well, yeah, there’s a little bit of slowdown. And that’s what’s happening. It’s actually something that’s been in the cards for a little while, as the composition of what’s driving the overall economy is shifting. For many years, it has been the services sector, with a little bit of oomph from the construction sector, that has been moving the overall economy along, and now that that part is is easing a tiny bit, while the manufacturing sector, which had been totally on its back not doing very well for a couple of years, is now starting to get some traction and move to The upside. And all of those things began shifting many months ago. It’s not something recent. I think it’s just becoming we’re becoming more aware of it now and then, in conjunction with headlines, you know, you immediately take one thing and link it right away to the other thing and say, Aha, I know what’s going on, but I don’t think it’s that direct of a link, at least in the short term. So
Maggie Lake 4:41
why is the composition of growth changing? What’s what’s causing that shift? Sort of pulling services down a little bit, pushing manufacturing up?
Lakshman Achuthan 4:51
Yeah, well, one thing is, and the economy is not a market. Obviously, there’s very different things. The real economy. Is very different than a share price or interest rate or a commodity price, but in the real economy, the services sector in particular, where most of us work, almost all Americans work in services of some sort that had been punching above its weight in terms of jobs creation for years post COVID. Now, I know COVID is ancient history. We don’t want to think about it, but what it did was it really messed up or changed very fast the composition of our labor force put a lot of demand on education healthcare, and took a whole bunch of people who were working out of the workforce permanently, and then we had some immigration stuff that slowed down legal immigration. So all of that made for a very tight labor market, in particular in services, where boom, they had a lot of jobs growth, and nobody wanted to fire anyone. Typically, if the economy slows a little bit, many employers say, oh, you know, I’m gonna let somebody go now, all they do is they reduce the hours they hang on to you and so called labor hoarding and you that you might remember that term from a year or two ago, that that’s underneath all of this. The end result is that the services sector growth in jobs was running at almost three decade highs for several years now, that’s revving very hot, and all we’ve done is that’s come off of the red line, and it’s come back down into a more normal growth rate. That’s what’s happened. Okay, from three or 4% growth down to, like 2% growth, something like that. So we feel that in the in the job statistics at the same time, or slightly after, not exactly at the same time, a little a little bit later, you have manufacturing sector start to get some growth, and that is really because of the Global Industrial cycle turning up. And that’s a, you know, to oversimplify it, all of us around the world, none of us really manufacturing anything completely on our own. We all have a piece of it, and neither we’re an early stage component or a mid stage component or a final stage component we all it’s there’s a world factory floor, largely and when the Global Industrial cycle begins to move, it’s reasonably synchronized. It’s the only global cycle that really holds up over time in what we’ve looked at and we’ve looked at it for decades. So we have a global industrial growth cycle upturn, which the US is participating in, and that that gets that gets us some jobs growth. You see a little bit of jobs growth. If you look at the last reports, you see manufacturing’s adding jobs. The difficulty is, is that most people don’t work in manufacturing. Most people work in services. So in the aggregate level, it’s not going to completely offset, it’s only going to like, it’s only going to mitigate it a little bit. The one other thing I’ll toss in here, before we get a answer more questions, is that the manufacturing cycle is a bigger cycle. It has bigger amplitudes in it than services, which is smoother. So services is kind of taking this easing slowdown. Manufacturing is turning up, but it tends to turn up a little sharper. And so we can look forward to getting a little more activity than expected out of manufacturing. That’s
Maggie Lake 8:41
so interesting. So there’s a lot to unpack there, but I’m going to start from the most recent comment. You just said, the global the turn up in the in the manufacturing, the global manufacturing cycle. Does that bode well? Is that a positive indicator for the global economy?
Lakshman Achuthan 8:57
It is. Well, yeah, now the wind is at your back. Instead of being in your face, right? But again, it depends, yeah. So the short answer, again is yes, and then it depends on your local economy. So when we look at global markets, one of the things that is really there’s a global price. Is any, any of these industrial commodities? Okay, so now, does that mean industrial commodities prices are going to go up? Maybe, probably, but the but the difficulty is, and what our analysis doesn’t really provide is what’s happening on the supply side. Right, right? So if everything was perfectly static and hadn’t changed, and you have a global industrial upturn, yeah, oil prices are going to have they’re probably going to rise because the demand, relatively speaking, is going up, or some other metals or industrial inputs. But. But if there was, say, a cartel that could decide when to produce more supply, you know, suppose there was Yeah, then that could, that could mess with it a little bit and, and it works both ways, right? You could, you could also have a strike in a mine, or something like that. And if they, if that combines with more demand boom, you really get a move, but backing away from any any commodity specific issue. The big shift, which I think is ultimately going to manifest in commodity price inflation, industrial commodity price inflation is that demand is cycling to the upside, and so that helps, right? It’s
Maggie Lake 10:46
interesting. You mentioned inflation. I think that’s really important. But so if we’re in this sort of where at least the demand side is a little bit clearer, because that’s also been murky, right? So there have been supply issues and there have been demand issues, and that’s caused a lot of price swings. And we’ve it’s been hard to kind of chart the course. A lot of people talking about the fact that we’ve been in this fog, because it’s hard to see both sides of the equation for getting a little clarity on the demand side of the equation. One of the really persistent themes that I’m hearing from people right now is the end of us exceptionalism, right the end of the US as the sort of engine of growth for the economy, and that positive economic story shifting elsewhere. And of course, the knock on advice on on that is reduce your exposure to us. Go all in on international international markets, the story you’re telling sounds a little bit more nuanced to me, that yes, global manufacturing is turning up. But it’s not like the US is careening into sort of some sort sort of sharp downturn.
Lakshman Achuthan 11:47
I’d agree, yes, and when we look at the relative strength of Now, let me put global industrial growth on hold just for a moment and just talk about overall economic strength, say, for the US, Europe, Asia, and then we’ll talk about China as a separate issue. The US looks pretty good. It’s not like we’re horrible against Europe or Japan, for example. I think we look totally competitive and pretty good on growth, but it’s slowing from really, really good to pretty good. So back in December of 2024 we were calling the US kind of Goldilocks. You had really good growth and inflation pressures, while sticky, had been shifting a little lower. It’s about as good as it gets. Yeah, and you saw the markets price it pretty quick, right? And then, and then here we’ve got, well, no, inflation still sticky, and our growth is slowing. And so therefore, man, you know now we have to it’s not so exceptional globally. Meanwhile, Europe had been beaten down like crazy, right? I mean, both in terms of talking about its economy and its markets. And while they have a lot of issues structurally, they do have a old very big industrial base. It’s they’ve been making things for a long time. In some countries, they’re particularly good industrialists. They’re having to retool for the new economy, and so on and so forth. Germany, but France is a big industrial place. Italy’s big industrial place, and they’re going to benefit from a global industrial upturn. And so if you’re a value investor, those those that are left, you know they’re going to go hunting and start looking for stuff and and I think you see some of that happening now. There’s, there’s another nuance I said, Put China on the side for a moment. I want to bring it back our initial call of a global industrial upturns from last from the end of last year. And this is again, a super tanker stuff. It takes a minute for that to turn so it’s not like it’s over. None of this is over. We’re in the midst of this. So as the Global Industrial upturn is is getting a grip. It starts actually, without China, which is remarkable, because China is about a third of global manufacturing capacity. Yeah, right, but it begins without it, and China structurally. Now I’m looking at it over what is their intentions over many years, they don’t want to be a manufacturing floor anymore. They did that. They policies really shift away from that to domestic consumption and services. But, you know, beggars can’t be choosers, right? When you’re in a lot of trouble, and they have a lot of trouble, they’ve got a housing issue and some other issues with that, that they’re dealing with, they may have. To go back to what works, whether they it’s a policy or not. And so if global industrial growth is going up, Chinese exports are going to participate. They’re going to start to get dragged into it. They have been dragged into it. Now you have China joining the Global Industrial upturn, which I think makes the case a bit stronger, is all I would say. I don’t want to make it to, you know. But I think that, to me, it’s another, it’s the final piece of a puzzle there, which comes in. So
Maggie Lake 15:26
it’s interesting, if China does, does join in, does that change the inflation scenario for you? Because there was a time when China exported a lot of deflation to the rest of the world, you know. It sort of, you know, kept prices down. What? How are you thinking maybe let’s take a step back before you answer the China influence. How are you thinking about in the inflationary environment? So if we’ve got a global economy that’s sort of going to get some lift from manufacturing, and China’s just beginning to participate in that, what does that mean for the inflationary outlook for the world economy, and then we’ll talk about some specific challenges that countries might face,
Lakshman Achuthan 16:05
right? Um, there’s a lot in there. I’m just thinking, I don’t
Maggie Lake 16:11
like how to separate it all we have. Well, the Fed just said, Let me, let me be more specific. The Fed just said inflation is transitory again. And everyone was kind of like, did they really use that word again? Because we know what happened last time they talked about that. So I think there’s a lot of skepticism. And I’m hearing people ask, certainly, people who write in ask all the time, are we in a stagflationary environment? Are we going back to the 70s? Are we going to have this sort of persistently high inflation, which we know caused a lot of angst for a lot of people and voters, they just do not want these high prices. So there’s a lot of, I think, skepticism and fear that we’re in this inflationary environment and policymakers are not addressing it. Yeah, I think
Lakshman Achuthan 16:51
that’s probably healthy to feel that way and to be a little skeptical, and to be a questioning of policymakers, and both the Fed and Washington, before I even get into it. Look everybody I think is trying their best, right? I just want to say that to begin with, whatever they think is the best thing to do. Now, when you look at cycles, I just have to step I’d say one more step back before I get into this. When you look at cycles or cycles in growth, and there cycles in inflation, those are two different things. They do not equate together. That’s a huge difference in the way that ecreee looks at the world, compared to Wall Street, for example, which are using very nice, very good models that extrapolate things and literally link inflation and growth together in the algorithms. Now we do not do that. What we do is we believe that it’s pretty complicated, the market economy, and a part of the reason it’s pretty complicated is because we’re all involved, all human beings, which are very driven by fear and greed. Basically, we’re not that rational at the end. I mean, maybe ultimately, but we have a lot of knee jerk reactions, and as a result, very hard to model in an algorithm. So rather, we observe that growth and inflation are cyclical. There are certain patterns that present themselves at the cycle turns, not necessarily in between. So our approach of looking at it is very different than a model builders. And when we’re looking at those patterns, to recognize that the peaks and the troughs in a cycle of growth, or separately inflation, we have these leading indexes. And so now I’m going to, now I’m getting to what is this future inflation Gage. The future inflation Gage is an indicator that we use for decades now to forecast turning points in the inflation cycle. It came into prominence, and we have them for 11 countries around the world, plus a couple of emerging markets. So we have a pretty good global picture on on the direction of inflation for the major markets. But let’s stick with the US. To keep it simple, this indicator came into, I guess, on people’s radar screen because Greenspan was a student of my mentor, Jeffrey Moore, and in the 1990s in the middle of the 90s, there was a really weird fed moment where they hiked rates in early 94 caught everybody offsides and a bunch of stuff blew up. It was a preemptive move on inflation. So now this relates to Powell and transitory. So here you have Greenspan, and this is Greenspan circa 1990s I am not ascribing this to Greenspan in other decades, okay, but Greenspan circa 1990s was preemptive. 94 he hiked. In 95 he eased. And that is suspiciously around a very long expansion and some good growth without a lot of inflation. Information, okay? And there’s been a lot of stories written about that, but I know that that happened, right? And he linked it to this future inflation gage Greenspan did now, the directional move on the fig now, so I’ve just given you some credibility for the fig. But now I want to talk about what’s the thing today. The thing came down, really hard in 23 into 24 and then flatten out like a pancake. It’s kind of weird. I just have to tell you, I’ve been watching this thing my entire professional life. It doesn’t really come down and go flat. Doesn’t happen. There’s a lot of stuff going on that is pushing it to the upside and pushing it back down and and so what the thing has done is it’s been in this flat range now for and dare I say, sticky, I’m so sorry, but we’ve been saying this for a long time. It’s been in this flat range for well over a year. At the end of last year, it started to ease, and then now it’s popped back up. So what we were hopeful that it was starting to ease into a more persistent Goldilocks, but things happened, and now, now it’s moving up. Part of what’s helping the fig up as some commodity price inflation, but it has exposure to all kinds of bottlenecks in the system. It has exposure to exchange rate stuff and credit stuff and and these are all key drivers of the inflation cycle, and the mix of them is telling us that I couldn’t say what Powell said, that it’s transitory based on the thick so let me, let me kind of tie those two together. There it’s I don’t want to predict the predictors. I’m trying as best as I can to kind of share with you the story of the predictors, and it started to get a little softer, and now it’s popped back up. It’s staying sticky, and I don’t know exactly where it’s going to go from here. I have suspicions, but I don’t know
Maggie Lake 22:16
that’s problematic for folks who believe that or and the fed the markets pricing in fed easing so that that’s a problem if you want interest rates to go lower. Scott Pisces talked about wanting them lower.
Lakshman Achuthan 22:31
Yeah, this is, you know, we’ve seen this movie before. You go back a little over a year, and I think the market went to six or seven cuts in 2024 didn’t happen, right? So, and it works the other way, by the way, the Fed was hiking in 2018 and the fig was not going up. And we were like, yeah, they’re not that doesn’t look good. And the market fell 20% in December 2018 and they backed off. You had the famous the first Powell pivot. So I do think the Fed is trying to do the best it can. But if you I don’t want to bore everybody with this, but if you dig into what they actually say and what they say they’re going to do, they do these whole studies on how are we forecasting inflation? They did one a couple of years ago, and they concluded we’re not going to even try. Yeah, okay, we’re going to give up. Now that’s a problem if the environment you live in is cyclical. If you think about it, your engineers on the call here, you don’t even have to be an engineer. Just think about it for a second. You have a second. You have a cycle. It’s going up and down, let’s say, in inflation and the economy, you could see watch them both, and your job is to as the Fed is. It’s like stable growth and inflation, right? They have two mandates. So let’s not let jobs tank and let’s not let inflation go crazy, either way up or down. And if your tool is primarily interest rates that work with a long and variable lag, you can’t wait until the cycle moves and then say, oh, now I’m going to do something, because that means, if something’s accelerating to the upside, and then you stomp on the brakes, you’re going to get these jerky moves, which is more amplitude in your cycle, instead of less amplitude in your cycle. So I find it kind of I don’t know what the right word is. It’s, it’s, I think they can do better in anticipating inflation,
Maggie Lake 24:48
yeah, well, it sounds like they need to do better, because otherwise they’re going to create volatility when they’re when they’re trying to damp it down. Is? That is the is, is the bond market. So the Fed, you know. Maybe needs to do a better job. Do you think the bond market’s been adequately pricing that I mentioned that they’re pricing in fed easings, but you haven’t seen you’ve seen those yields staying above 4% keep backing back up toward 5% at moments again, because they seem to be sniffing out something about inflation and being skeptical that it’s going to go down. Do you feel like the bond market seems adequately priced, or at least the right theme for inflation for
Lakshman Achuthan 25:27
now? Yeah, it’s your mix of growth and inflation which is going to hit the long end. And I think it’s adequately I mean, I wouldn’t have too much of an issue with it. I have spent years waiting for bond market vigilantes to show back up, and they don’t. So I’m not going to hold my breath here. Maybe they will now, but I will continue to watch the fig. If the fig made a sharp move up, then I would expect some real fireworks. But that has not happened yet, and so. But there are some vulnerabilities, if, for any reason, the dollar got a lot weaker, or if commodity price inflation started to move, or if the economy didn’t weaken as much as people expect, which is kind of our call, those are all things that are a little tighter, but I don’t want to predict the predictors. Like, I know these things, I’m watching these cycles and growth, but I want to wait and see what the fig says. I do not want to predict the predictors. Yeah, I don’t think I know more.
Maggie Lake 26:32
It’s important for for people listening to be aware of that, though, because, you know, there are a lot of people that maybe don’t have hedges on for inflation in their portfolio are that are exposed in a way that if we do see growth and inflation running hotter and higher, they’re kind of not ready for that, because they’ve been positioning for something that where we’re in a falling rate environment.
Lakshman Achuthan 26:52
Yeah, and I think it’s part of it might even just be sheer boredom. You’ve been sticky for so long you want to make a bet one way or the other, but I think the correct call at the moment is more sticky and and that’s, I think the the more solid kind of game changer for 2025 is global industrial growth upturn. That seems to be the thing that’s the clearest in our indicators, and no imminent recession that can change we check in in six months. I could be saying something different if the leading indicators deteriorate on growth. But you the key thing is, is this murkiness? I agree. I don’t know what’s going to happen with geopolitics. I don’t have a particular insight with that, and I think we’re all suffering from that. And so what I’m doing is sticking with the tried and true indicators. Look these indicators, to be clear, some of them have been around over a century. I mean, they’ve been running real time since the 50s or 60s, 1950s or 60s, but they we can have do an out of sample, I mean, an in sample, but not fitted. Look all the way back to the early 1900s which is important, because some of that predates the Fed. Let’s say the Fed was out of it or something. You had depressions, you had panics, you had all kinds of weird stuff. You had all that crazy tariff stuff happened. It’s all in there. You had big shocks, right? So like Pearl Harbor, or some, some bank failure, or the 87 crash and and how do the indicators perform through some of those admittedly shocking moments? So here we have a 10% decline. 10% something decline. I don’t know exactly what it is. It’s in that neighborhood. And what does that mean? Well, I could tell you that during growth rate cycle slowdowns, especially in the Qt, kind of era, post GFC, 10% corrections are concentrated during those growth rate cycle slowdowns. They tend to not persist too much. And now I’m going back many years, because there’s a reaction function of some sort that comes out of either Washington or the Fed and and while it was a little more subtle this time, I think there was an adjustment with the Qt stuff in the last meeting, right? And so that’s a little reminiscent of what they was happening big time, post GFC, yeah.
Maggie Lake 29:43
So it’s interesting, you it’s, I think that’s a really important point to bring up, because it kind of feels right now, like, you know, it always feels like this is totally different, and chuck the models right out the window. So it’s, it’s interesting to sort. Understand that there is this sort of decades long bulk of data that we should pay attention to instead of just getting whipsawed by the news, right? That’s what we sort of started out talking about. But how do you if you’re thinking about these models, these long view models, and the supertanker of an economy that takes a while to change. How do you think about the huge political moves that are happening? How do you make sense of that? And you know, do how do you figure out what their impact is? Because even though we’ve seen maybe tariffs in the past, and we’ve seen geopolitical uncertainty in the past, I mean, the pace of what’s coming out of Washington is incredible right now and kind of unprecedented. The nature of executive order is unprecedented. The fact that people are talking about maybe this is a changing world order where we’re going from a move away from globalization to a multipolar world that seems like it would be very different than what we’ve been in since the 50s. How do you take all of them in the moment, things that are happening, and to figure out how to make sense of it based on your modeling?
Lakshman Achuthan 31:13
So first, I agree those these seismic changes may be happening, and perhaps we’re switching into a new regime of sorts, globally, in terms of the economy and how it’s it’s organized, that the impact of that or the pace of that change, or What it means in the next quarter or two makes its way into the leading indexes. So the the the inputs that go into the leading indexes are hard data, market data and soft data, and so those are very we spend a lot of time figuring out how to what to watch, and then how to put it together, so that we’re getting a clean signal. That’s a lot of research that we do. And if sentiment tanks, or if something happens with real economy, or something happens with the markets, it’s going to impact real data. That’s going to impact the real economy, then that’s going to filter in and impact our leading indexes and have us, we believe, usually looking the right way in terms of direction, I’d say a secondary issue is magnitude. It’s not the strength of the indicators, it’s more the direction of which way to look, and, and, and in a in a world like you were just describing where there’s, it’s not an America centric kind of global economy, but it’s a there’s a multi region kind of global economy, to my ear, that sounds like these cycle changes and differences are going to become more prominent, not less prominent. And one of the things, one of the big insights from cycle research, is that free market oriented economies have inherent cycles. So that even applies, say to China, which is has a lot of Central Command, but but the majority of the activity, they’re open enough on to the global economy that they are having cycles for India when we’re doing the work for India decades ago, before the 1990s you didn’t see the types of cycles that were we used to make decisions. You saw a whole mess. It was very messy. But as the economy became liberalized, the sequences came into into alignment, in a way, and so we could at least make the directional changes. So I don’t know. I certainly do not know everything. I just know that directionally speaking, there’s not a recessionary trap door right in front of us. We’re slowing down. Inflation is going to stay sticky compared to the rest of the world. We’re not horrible. We’re just slowing from being very, very good. And there may come a time when the current type of uncertainty with the headlines, becomes recessionary. It’s just not today. If the Cycle Indicators, the way that you get a recession is that the Cycle Indicators cycle down hard enough that the way we describe it a window of vulnerability is. It opens up on the economy within which bad stuff can be exceptionally painful when, when the window of vulnerability is closed, you could have a whole storm going on, and the economy can cruise through it. And so the the change in effect is when these forward looking drivers, if they move down strong enough that a window of vulnerability opens up. The same thing that happened six months ago that wasn’t recessionary could be recessionary now, again, this is going into the academics of academia forecasting recessions, but a lot of times they’ll end up on, oh, the recession was caused by a shock. Okay? And if you think back about recessions, you know, there’s a story about a shock that was there that was associated with the recession. Actually, their shocks are happening all the time. It’s just which are the recessionary shocks? And the way that you can see when a shock is going to be recessionary is when the window of vulnerability opens
Maggie Lake 36:01
up. That’s a fantastic way to look at it, because we can visualize that, and I think we all can feel that too. You just get a little bit yourself, right? You get a little more uneasy. You’re not sure about your job. You feel like, like you want to be a little more conservative, because you feel vulnerable to something happening. And then, of course, Murphy’s Law, usually when is when something happens, do you? So do you don’t see it does not feel like the US is in a vulnerable the economy is in one of those vulnerable states right
Lakshman Achuthan 36:26
now, not, not today, not while we’re talking is there anywhere in the world that looks vulnerable? I wouldn’t know. I wouldn’t call out anybody. I think, I think it’s more it feels more like troughing stuff than peaking stuff for the time being, and that, you know? I mean, I’m not a politician, but maybe, hey, when everything’s going great is when you do the weird stuff, I you know, and because you can get away with it, I don’t know. I
Maggie Lake 36:58
would suggest that they have a plan. I don’t know, just like a lot of I always, I always laugh, because it’s like, yes, you’re right. But is that, is that what’s happening anywhere? I’m not really sure, because it seems kind of reactionary in a lot of places in the world.
Lakshman Achuthan 37:13
You know, it does. It does. I mean, I’m trying to tie, I know the audience is very interested in the markets. And I would just say that during growth rate cycle slowdowns, you can have corrections. It’s not unusual. It doesn’t mean there’s a recession. Empirically, when we look over growth rate cycle slowdowns since the GFC going back to 0709, they’ve been short. They haven’t persisted. And in retrospect, you might say, oh, there was a policy reaction. You know, there’s a lot of liquidity. There was a lot of something that happened to help it out. So we didn’t see them persist before GFC, during a growth rate cycle slowdown, you would see the correction persist a while, even though it wasn’t a bear, markets are typically associated with recession.
Maggie Lake 38:05
I think you raised an interesting question. Which people are asking is that, you know, have we create? Are we in a situation where, whether it’s a politician or a monetary authority, that we’re not allowed to have recessions, or they’re unpalatable, or, you know, they cost you your job, and so they’ll do whatever, even if it doesn’t seem fiscally wise to prevent any kind of recession. Does it feel like we’re in a world where there are no such things as recessions anymore?
Lakshman Achuthan 38:32
Well, no, I my whole work, is that that’s not going to happen. We’re going to still have recessions. And I’m not saying that. I’m saying that based on the US and international markets us for over 100 and something years, and international markets for at least 60 years, looking at the market oriented economy, so based on that experience, I would say no, we’re still going to have recessions. But what is interesting, what caught my ear when you were saying that, is that it’s sent after the GFC, all of a sudden, a recession, which is a feature. It’s not a bug, okay? This is a feature of a free market oriented economy. It’s literally you need them, okay, after the GFC, the policy conclusion seemed to be that a recession was Armageddon, and that this was somehow a bug that you had to get rid of, and I think that’s a real fundamental kind of question to be thought through, because while there’s a lot of collateral damage around recessions, and I do not wish that on anyone in the system. We have the excesses that are just not healthy for an economy to grow on a sustained basis, get kind of pruned during recession, and it sets you up for healthier growth, and by healthier growth. You know, you could say stuff that, you know, gets into the middle class or or lower wage earners as well. I mean, you could look at it that way, these boom busts that we had. So we used to have jungle variety recessions, right? And now we’ve had garden variety recessions for most of our experience. And then we ran into the GFC, and we were like, Oh, my God, that’s so horrible. How could that happen? We’re never going to have one again. Well, that’s actually, that’s not the way it works, right? I mean, it we’ve, we’ve, we used to have these jungle variety recessions. They were actually pretty normal, um, and as we moved away from an industrial economy to a service oriented economy and non discretionary services, it got smoother as we there’s a lot of automatic stabilizers that went in. So it used to be when you lost your job, you didn’t have any money. Now I’m not saying unemployment insurance is a lot to live on, but it’s something it’s not zero, right? So these types of stabilizers take off the lows, but then here we are. We’ve, you know, we’ve taken on a lot of debt, yeah, post GFC in the view that recessions are Armageddon and all of that debt tight, it kind of limits us now. And
Maggie Lake 41:45
why am I thinking of AI and all of the VC money chasing AI when you’re talking about these sort of boom you know, when you take away the recession and you’re you’re not sort of forcing some discipline on capital, do you worry that it feeds is that what feeds something like a bubble? And I’m not suggesting AI is, but this is the question haunting everyone is, you know, are we in the beginning of a bursting of a bubble? Because there’s no consequence to that. Yeah,
Lakshman Achuthan 42:10
that’s, I mean, that was certainly a feature in the.com bubble. There was the so called Greenspan put after 87 there was this feeling that you could get out over your skis, and you wouldn’t, you would be too big to fail. You’d get bailed out. And we’ve all seen those stories, right? And the feeding at the you know, the government does something special for some little slice of the business, and that is a slippery slope, because it’s that relationship between risk and return. You need the risk part to really allocate properly. And if you remove the risk, then you know, you could be a little bit more flippant in how you allocate your your capital. So that, I think that is probably something to think about. How are
Maggie Lake 43:06
you thinking about AI from a productivity point of view? Because productivity is the miracle, right? It’s the non inflationary, you know, the miracle that helps you get non inflationary growth. But we kind of, you know, we’re at the beginning of this. Are you plugging that into your models? How are you thinking about productivity? Well,
Lakshman Achuthan 43:26
we think about it a lot for all the reasons you just mentioned, and it does work its way. It is. It is captured by our leading indexes. The problem is, it’s really hard to measure and it’s extremely hard to forecast. I don’t even know if productivity growth is forecastable. We can opine about it and say, Isn’t it obvious that I could do this thing with chatgpt, and I could do whatever and I’m faster, or I could do machine learning, and it’ll optimize something, okay? And that may, in fact, even make you and me and listeners more productive. I’m not saying it doesn’t, right, but, but does it make the US workforce, or the global workforce writ large, more productive? That’s unclear. And, and, and it it certainly doesn’t. Do it quickly. One of the things I would point out is that, for something like services, very hard to measure productivity. Manufacturing a little easier, because you can kind of count things, and it’s, you know, I mean, we’re pretty productive. We produce a hell of a lot with a lot less people, um, construction, we’re not productive at all. It’s like negative, it’s really bad. And that’s a decent sector of the economy,
Maggie Lake 44:52
yeah. Why is that? Do you do? We know why that that is lagging so much because presumably it would have access to some of the. Same tools that do we know why productivity so poor? I don’t
Lakshman Achuthan 45:04
think we really know. Again, productivity is a tough one. You could say there’s capital investment, which we don’t do a great amount of. Okay, so we were horrible at capital investment. All our stuff is pretty old, relatively speaking. I mean, we’re a young country, but it’s still 106 years old.
Maggie Lake 45:20
That’s a really good candidate. Then
Lakshman Achuthan 45:24
there’s education, you know, because you need the workforce for using some of these new information tools as to be educated to do so. Then there’s, I’m sorry, but I got to go back to COVID, it was a big deal. What happened with the jobs market? And you took, I’m not a construction guy. I’ve watched construction guys. Some of my friends are construction guys, but I just would have not but, but you can see there’s a huge difference between somebody who’s 50 and who’s been building and has a wealth of experience and someone who’s young,
Maggie Lake 46:07
yeah, we lost the pipeline of a lot of critical workers, and you get
Lakshman Achuthan 46:11
this huge hunk of serious knowledge that she’s like, Yeah, this is not worth it to me. I am checking out, and the young guys are coming in and, you know, to make a choice to be a construction worker in today’s economy, not a tip. There’s a lot of people who go in different directions. I’m going to build an app. I’m going to do this in that right? And so I don’t know exactly what’s going on. I think there’s something in the training of the workforce, something. And then there’s, of course, and I must say this, there’s regulation. While I’m not inherently against regulation, it could all of these things can, or, you know, are probably good in moderation. Yeah, right. And so, so all of those things are in there, yeah. And I don’t know exactly which one you could pick.
Maggie Lake 46:59
I think, I think it’s probably a combination of all of them. It makes sense. And by the way, whenever there is a very big problem, there is a very fantastic business opportunity. So leaning into AI, there’s, there’s the sector that you want to disrupt. I think that for young people, that might be 100% Yeah, that’s really, that’s super interesting. So um, Lachman, as we close out, first of all, I think it’s really important at the beginning that you made a distinction between the real economy and the markets, because there are two different things. And I think we’ve all been feeling, you know, when I said it’s been volatile, we feel bad we’re opening our portfolio. Part of that feeling is based on what’s happening in the markets, as opposed to the real economy. Do you worry that volatility in the markets can become something that impacts the real economy. How should we think about that? Or should we try to separate out when we’re thinking, oh yeah,
Lakshman Achuthan 47:49
no, it totally it totally can. The longer this goes on, I think it again. I don’t want to predict the predictors, but I could imagine it weighing on the leading indexes, because the uncertainty means that you may hold off on a capital investment, which we probably need, that you, that you so you’re hesitant to take a bigger bet that where you might see an opportunity and you probably buy a little more insurance, which is that’s costly. It’s costly. So these are less productive kind of things over time. Now, again, a super tanker doesn’t change on a dime. Doesn’t turn direction on a dime. But if you, if you keep uncertainty and you hold back on investment for extended period of time, I could certainly imagine it weighing on the leading indexes, but I would my process is to be as objective as I can be, and to wait to see it in the Leading indexes. And let me just say that that my general experience, I’ve been doing this since 1990 is that, yeah, the market rarely gets ahead of you, and even if it does a little bit in the big picture, it doesn’t matter in terms of decision making. And I’d much rather have some conviction in the way, in the direction I’m looking that
Maggie Lake 49:24
makes a lot of sense, which is why we’re separating out some of the noise that might come from the markets. Keep, keep your eye a little bit on the fundamentals. We’ve had a lot of we’ve had a lot of momentum, momentum trading, you know, is, is really in the driver’s seat now. And I asked somebody about, you know, the fundamentals? They said, well, that’s fine. That’s a fundamental story. But right now it’s really hard to fight momentum again, like when we’re when we’re looking at the markets, you know, what is your advice to people as they’re trying to figure out, do I jump on the train, or should I be fix it fixed on the economic. Fundamentals and not lose sight of that. What’s the relationship between those two things? Look
Lakshman Achuthan 50:04
I’m built more towards the economic fundamentals of direction, so I’d say no recession, but I have to allow for corrections so I can have exposure there. But with that knowledge, inflation sticky, so I need an inflation hedge. Okay, I’m not going to give up on that, and I’m glad I have it. It has served us me Well, right? And and then finally, this global industrial growth thing, yeah, I’m happy to play along on that. That feels pretty good. It gives me something to do when you because sometimes you want to do something, you’ve had this inflation sticky the whole time. You’re like, Okay, I got that. You’ve got a little bit of exposure, because there’s no recession, but you have to be wary of corrections. So what else am I going to do? Where can I get my where can I go along and get some more fun? And that may be in the global industrial growth upturn, that’s where I would look.
Maggie Lake 51:02
I love that. And tariffs should we be concerned about? Which? Yeah,
Lakshman Achuthan 51:08
yeah. Look, April seconds, a big day. These are always, you know, it seems to be, we just have to be resigned that you’re going to just have more and more of these headlines. I so therefore I tend myself to look more at the actions than the words. So I want to see what actually happens. And tariffs came on in 18 and you had currency adjustments, and so we’re having some currency I think currencies are interesting. You know, that’s how the valuation.
Maggie Lake 51:40
And some people think that’s, that’s a policy objective,
Lakshman Achuthan 51:44
yeah, yeah. So then your inflation hedges can help you there, if they’re right, if they’re the right ones. I mean, now for nothing, gold is up. So, so you can you, can you? I think currencies will be interesting this year. That’s another interesting spot in here, because it can, it can nullify, in certain cases, tariffs, as it did in 2018 I’m certain, I’m certain the administration has learned from that, so they’re going to try to navigate around that as best they can. So we’ll see. You know, there’s been talk of a Mar a Lago accord. What does that mean? Is it real? Isn’t it real? I don’t know, right? We got to watch,
Maggie Lake 52:28
right? And, you know, currencies is not something that everyone watches, like that, that no, you know that’s that’s going to have to be something we insert into our
Lakshman Achuthan 52:36
framework. I think, I really think so. And going back to what you said, if we’re going from America defines the global economy to different regions make up the economy boom. Now we’re back in currency land. Lakshman,
Maggie Lake 52:46
this was so fantastic. So wonderful to catch up with you and sort of get our feet firmly planted back in the fundamentals.
Lakshman Achuthan 52:52
Thank you. It’s a pleasure. Thanks so much.
