ED HARRISON I’m Ed Harrison for Real Vision I’m here with Lakshman Achuthan, who is the cofounder of ECRI, which is a principal company in terms of business cycle research Thank you for joining us LAKSHMAN ACHUTHAN: Thank you for having me ED HARRISON So I guess– you know, the first thing I want to talk about– and we were talking about this off camera before This is a bit of a rehash because you’ve talked about this before But we haven’t talked about it– LAKSHMAN ACHUTHAN: Mm-hmm ED HARRISON What do you guys do that’s different than what other people do in terms of understanding when a business cycle is at its peak and when it’s at its bottom? LAKSHMAN ACHUTHAN: Great question Thank you Basically, most macro forecasters are probably using some sort of model They might be putting in all of the usual suspects and figuring out the correlations and then extrapolating and making a forecast for growth or for inflation or jobs or whatnot and saying, OK, here’s where we are in the cycle Or on average, the cycle has lasted x years So we’re early or late in the cycle, whatever Now, what we do is, number one, we just don’t use models to forecast turning points because, actually, if you look at the research– and there’s actually quite a bit of research on this– systematically, the largest errors in forecasting– kind of like blue chip forecasting or something like that– will occur around turning points in growth and inflation and jobs, turning points and pretty much anything simple because the models like to extrapolate And they miss the turn And they only see it in the view mirror And that’s why you get these surprises And I think the received wisdom, almost as a result, is that recessions are caused by– it can’t be us It must be something else They’re caused by shocks You know, it wasn’t our fault And now, we’re going to put whatever the shock was into the model And then we’ll be good, right? And you’ve seen that go on for a century, practically And there keep being these surprised kind of turning points What we do is nothing particularly new However, the state of the art is much more advanced than people probably realize And that is we use a leading indicator approach My mentor, Geoffrey Moore, was the father of leading indicators, created the first index for the United States some 60, 70 years ago His mentor, Wesley Mitchell, actually defined what a cycle was back in– 100 years ago or something And these leading indicators are designed to turn ahead of the target So for example, let’s say, you’re trying to predict a turning point in production Well, in theory, new orders could be a leading indicator of production And it makes sense It doesn’t– you don’t have to be a rocket scientist to figure that out But it’s a good solid basis for that idea And then, empirically, you take a look if that’s true And maybe that’s one of your inputs into a leading indicator, in this case, of some production series or production target And we go on and on, trying to find the key drivers And look at them– leading indicators in one group, coincident data in another group, the target, which people actually get confused about, lagging indicators to confirm that what you thought happened actually happened And you can also see some long leading indicators They have very long leads But they might be kind of erratic So you have to have a sequence of indicators in order to know– to get a good feel of where you are Now, that’s very different than a model And everything I just described is state of the art 60, 70 years ago ED HARRISON Let me ask you– so let’s see, if I get this straight So basically, what you can do is you can say, look, here are these long leading indicators We see things that are happening there Let’s see if they’re confirmed by the short leading indicators And then, once they are confirmed, then we can start to look at coincident and then we can start to make a call LAKSHMAN ACHUTHAN: Right, so what happens– exactly And so what happens is your degree of confidence starts to rise And also another way of thinking about it is, if you have a turn in a long leader, when the shorter leaders start turn, up or down– it could be up, too– you have a prior So you’re sitting there A lot of people, if they’re wise to it, might be looking at that Probably not a lot– probably a few are looking at it and wondering, is it noise or not? Again, the big issue here is signal to noise And if you have a prior, you can start to receive something, maybe more of a signal And what we find, after all of this, it’s not that the ideas aren’t there Markets tend to be short leading indicators Most market prices tend to be short leading indicators They are very good indicators I mean, the sources of data is also very important in this era of big data, right? You have hard data, say, the government counts something up

You have market data prices, super important, because there are signals in there that we all know And then you have survey data, which Geoffrey Moore was a big proponent of in the 70s Now we start to have some history from it But the idea that there is some information in the soft surveys is good, too All of that is fallible Just like anything in your portfolio could blow up, any of these could be wrong So you need to diversify your risk, look at all the key drivers of the cycle, which takes some experience, and then put them together in a way where you’re trying to avoid as many biases as you can, one way or the other, so that you can get as clean a signal out of it as you can Now, the leading indicators, such as they were 60, 70 years ago, is one indicator for the overall economy It’s way too simplistic There’s manufacturing There services There’s construction There’s trade There’s all these different things going on There’s many cycles And sometimes you can have a two speed economy, one kind of going up and the other going down And on average, you model So these kind of nuances are very, very important The other big thing, which I think people still struggle with today– and I’ve been doing this now 20 years, professionally, and maybe a little more And it’s hard to believe, but people still struggle with the notion that there’s a separate inflation cycle It’s related to growth But the turns in the inflation cycle can vary There can be long and variable lags between the turns in the inflation cycle and growth And even the same with cycles and jobs And so a model– if we go back to the beginning of the discussion, a model is going to want to refer all three of those to each other, pretty explicitly We don’t make those assumptions Yeah, they’re related We know they are, cyclically But there can be periods of inflation free of growth And we nailed it in the late 90s, OK? That can happen It broke a lot of models, all of them, pretty much But it was easy to describe You can have a jobless recovery There’s no rules against that, OK? And so the indicators also showed that And so we have whatever knowledge and equity that we have But we let the indicators, now about hundred of them globally, tell us a story Is there an upturn? Is there a downturn? And very often, at the turning points, those– because of everything I’ve just described– they can deviate They probably will deviate from the consensus if it’s driven by model And so the consensus will be going this way or that way Indicators will turn this way or that way There’ll be a gap And that has to be resolved one way or the other And if it’s a cyclical turn, it’s probably going to resolve towards the direction that ECRI was looking ED HARRISON Interesting, I mean, obviously, the reason that we’re asking the question now– I was telling you before– this is part of what we would call recession watch– LAKSHMAN ACHUTHAN: Yeah ED HARRISON –this particular– because, over the past, I would say year, maybe six months, people have been saying, is there something going on in the markets? Is there something going on in the economy that says that what could be– what looks to be like a slow in the economy could actually turn into a recession? So we’re thinking recession watch And so we’re talking to you to figure out, what do the numbers look like? LAKSHMAN ACHUTHAN: Yeah, I would agree 100% And to let– to set the table here, basically, you have recessions and recoveries, expansions and contractions, and in growth And then there’s another cycle, which is, perhaps, more important to the markets, which are what we call growth rate cycles, accelerations and decelerations in growth And so now, we’re in our fourth growth rate cycle downturn We predicted it back in 2018 that we’re having a slowdown in growth Now, any time– ED HARRISON When were the other ones in this particular cycle? LAKSHMAN ACHUTHAN: Yeah, 2010-11, downturn 2012-13, downturn in 2015-16, downturn And then after– in between those, you had cyclical upturns So the last presidential election, we had a growth cycle upturn happening, following– That actually– it’s interesting because– I mean, now I’m getting in the weeds But it’s interesting because, earlier that summer, the summer of 2016, we had this pretty massive reflation in the leading indicators of inflation, the future inflation gauges They just took off like a rocket That’s a directional call, not a magnitude call But if you remember back then, this is– you know, it’s like ancient history now, 2016

But inflation expectations were near their record low The ten year was pretty darn low at that point And we had inflation– the future inflation gauge go up not only in the US but also in Europe and in Asia And so you had this kind of global reflation And that was a little weird That actually happened before the growth rate cycle upturn started to take hold And you know the story after that And so we have a nice global upturn in growth, ’16 into ’17 into early ’18 It was actually the strongest we were able to determine by the end of ’16 It was going to be the strongest upturn since the recovery out of the Great Recession OK, so that’s saying something But then it rolled over And we’ve had this global downturn ED HARRISON And when things like that happen, when they roll over– just to go back to your process– you know, people are like, why did it roll over? LAKSHMAN ACHUTHAN: Why ED HARRISON And what’s your response to those kinds of questions? LAKSHMAN ACHUTHAN: Well, it gets into the nature of a free market oriented economy It has ebbs and flows It’s not– A free market, you’re going to have bouts of fear and greed, run ups and downs in different components of production, interest rates, demand, debt These are all big drivers of the cycle At some point, prices get cheap enough and demand is pent up enough that, even though everything looks totally nasty, someone buy something ED HARRISON OK LAKSHMAN ACHUTHAN: That’s a trough And you get a turn And the same thing happens at the peak When everything is very euphoric, on the margin, someone can say, you know, I’ve overextended I’m getting a little spooked Or I’m not profitable anymore And all of those– those are all aspects of drivers of the economy And then you have things like the intervention by central banks, so– ED HARRISON So basically, the answer that you’re saying is that you’re agnostic as to what the drivers are Things just go up, and they go down And your job is to show that that’s what’s going to happen LAKSHMAN ACHUTHAN: Well, if we’ve done our job right– and I think we have We’re always trying to improve, obviously But what I’m describing has stood the test of time We have some indicators, going back to the early 1900s, like 1905 or ’06 or ’07, right in there and space So we have these indicators for over 22 countries, including ones that are structurally, radically different than the United States But directionally, they’re nailing the calls And the reason is because we’re capturing the key drivers, long leaders, short leaders, in these sequences, in these many cycles, for these economies And we are reporting the story And sometimes– No, we’re reporting the directional call that they’re making And then we have to figure out, what’s the story? I don’t always know the story You know, I’m not clairvoyant I don’t necessarily know, oh my gosh, it absolutely was mucking around in the housing debt I just saw the turn Then we have to figure out what it is Where inflation-free growth, back in the late ’90s, we didn’t know exactly what it was We made the call And then we saw it was these waves of imported disinflation from abroad and asynchronous growth around the world at that time, which is actually relevant now Well, coming full circle to right now because we– back in the summer, we had a European growth rate cycle upturn call ED HARRISON And that’s when you spoke to Raoul the last time, right? LAKSHMAN ACHUTHAN: Yeah, yeah Sometime in the summer ED HARRISON And you’ve been proved right since then LAKSHMAN ACHUTHAN: Yeah, and it’s not that the stories– we understand all the stories in Europe and the difficulties And maybe, as we’re trying to figure out what is the story– like you’re saying, what’s the story this time? It may be as simple as they didn’t put their foot on the brake, OK? The ECB never really slowed things down in sharp contrast to the Fed And remember, long and variable lags– the markets may react immediately to or very quickly to hints of what the Fed’s doing or what the ECB is doing or whatever But the economy itself, those have– long and variable lags have an impact on the economy, on the economic growth And there’s vestes juanes stuff and probably got Macron to spend some more money and some

other things happened And they went through some of their auto corrections, emissions corrections, that they had to go through All that’s kind of run its course Plus, they were– they’ve been in a downturn for a while, so some pent up stuff All of those things happen And we have less bad first happens And then you start to get I think what we’ll be on a cyclical basis, at least a sustained upturn Now, a cyclical basis is a few quarters I’m not saying until the end of time They can turn down again What’s interesting is that it’s also happening in Asia ex Japan Japan is its own story where there’s a recession risk But Asia ex Japan, including China industrial sector, is showing the cyclical upturn parts And all of that together has given us what looks like a more constructive outlook on global industrial growth, which is not a country specific call It’s just industrial activity globally ED HARRISON So basically, what you’re saying is you could see, three or four months ago, that Asia ex Japan, Europe, there was a bottoming And taken together, global manufacturing, there was a bottom And now, we’re seeing that this upturn is occurring LAKSHMAN ACHUTHAN: I would say in that sequence I’d say first Europe then Asia ex Japan and then how that was giving the foundation for global industrial growth bottoming And we have leading indicators targeted at each of those cycles, all of those cycles And they were all feeding us and showing us to be looking at that And one thing that’s very important– and I just reference, again, the late 90s, asynchronous recessions– is that it doesn’t– there’s going to be, and there already has been, this conflating of those upturns with an upturn in the US And then, if you have a stronger than expected jobs report, oh yes, definitely right And you start to get super convinced of that And we see that happening ED HARRISON So talk to me about that, especially in the context of the jobs report, because that was a pretty nice jobs report How would you describe it– because we’re telling one story, these guys over here this This is what’s going on We haven’t hit what’s going on the US So what is going on in the US in the context of this super nice jobs report that we got? LAKSHMAN ACHUTHAN: Well, I think we have a slowdown, the slowdown continues So we predicted a growth rate cycle slowdown back in 2018 That continues It’s continued through the end of this year, and it’ll continue into the early part of next year And that’ll actually include a weaker performance out of the jobs market, despite Friday’s number ED HARRISON So jobs– the number of jobs that are being created, non-farm payrolls in various sectors, what are they looking like? LAKSHMAN ACHUTHAN: Well, we did a chart on kind of splitting it out, the cyclical aspect and the non-cyclical aspect So things like education and health care– not that discretionary And as a result if it’s not discretionary, it tends to be less cyclical But everything that’s discretionary, that, if times are tight, I can put it off a little bit, then that’s very cyclical stuff And that’s actually most– the rest of the economy So you could see it was a good looking jobs report Education and health care, I think they’re around 38 or something month high in the growth rates Everything else is around October’s 99 month low in jobs growth And so that’s consistent with what our leading indicators of the employment cycle were saying, that they’re saying there’s still weakness there And that’s also consistent with the unemployment rate Now, I know the headline unemployment rate went to its record low at 3.5% And that’s driven by education and health care and overall statistics there on how the unemployment rate is calculated But if you go into these key sectors of the economy and you do the seasonal adjustment, which the Labor Department does not– the BLS doesn’t do for you, then what you’ll see is that construction sector unemployment is up almost 2% That sounds weird, doesn’t it? ED HARRISON Yeah LAKSHMAN ACHUTHAN: It’s supposed to be this banging economy, right?

And if anything, certainly, I would expect the construction guys to be super, duper busy But their unemployment rate has actually been on the rise noticeably And if you switch over to manufacturing, it’s almost a 1 percentage point rise in the unemployment rate And so those are that more cyclical sectors of the economy And we’re seeing– ED HARRISON And over what time frame is that happening? LAKSHMAN ACHUTHAN: Several months I think it’s over half– it’s like four or five months It’s– I think what really happened– those are the cyclically sensitive areas They really jerked down the unemployment rates there on the Powell pivot because everybody was like, wow, it’s cheap Let’s go like crazy And then they probably went too far And now everybody’s backing off And you see that in leading indicators, that– we actually have to talk about the Powell pivot That’s a whole– ED HARRISON Yes, we do LAKSHMAN ACHUTHAN: –huge thing ED HARRISON Yeah, definitely LAKSHMAN ACHUTHAN: But you see that in the indicators and the patterns when you just said in recent months where they, basically, call this a slowdown And then they lift a little bit into in ’19 but nowhere near new highs or anything It’s kind of like down and up like this And so you like, where’s it going? And that pop is all this risk on I mean, the markets are important Market prices are important They are drivers of the economy, too And the market related kind of inputs into indicators have supported them But then when you look at consumption, so the story is, OK, I’ll give in Manufacturing is slowing ED HARRISON But consumption is holding up LAKSHMAN ACHUTHAN: But consumption is holding us up And if you look at that, you could look at like real consumption, real retail sales, or real PCE, personal consumption expenditures And they’re down from last year And they’re higher– ED HARRISON Their growth rate is down LAKSHMAN ACHUTHAN: Their growth rate is down from last year And there’s a real recessionary freak out back in December in consumption And then it snaps back But the overall trend this is down And I think there’s even something to be said about what’s going on in that data because most people, most of the population, is kind of tapped out I mean, they’re living check to check Then you get to middle to upper class, and they have a– or middle class And they have home equity and homeownership And there, it’s good that home prices stabilized They were decelerating But they kind of went flat They’re not taking off But they’re not a negative That’s good And then the wealthy, certainly– people who have– let’s say, people who have a lot of exposure to the markets equities and stuff are feeling pretty good And it’s really super telling when you see that jerk down in consumption at the end of last year because it reveals how much of it is dependent on the more affluent spending And so if, for any reason, the more affluent pullback, there’s not a lot of support for spending growth And that’s just– that is kind of– we’re still decelerating on that score Now, going over to the Fed– ED HARRISON Yes because I wanted to– when you talked about December, immediately, what came to mind was– and we were talking about this offline before, you were saying to me that there was– the numbers that you looked at in 2018 were telling you that, actually, you know what? This growth rate cycle that you think is going to continue? It’s rolling over These cuts that– these hikes that you’re making, going from three hikes to four hikes in 2018, actually, maybe it should be two hikes It seems like the Fed wasn’t reading the tea leaves correctly LAKSHMAN ACHUTHAN: Yeah, and I hear this every once in a while I’ll turn on the TV and listen And I’ll hear, ah, yeah, it’s kind of like the 90s, mid-90s That’s what we’re talking about, mid-cycle adjustment I’m like, you guys don’t even know– you have no clue what happened in the mid-90s, OK? And I do actually because I was there I was a little kid I cut my teeth at the desk of Geoffrey Moore And Alan Greenspan was chairman And he was looking at inflation cycles, which they’re not doing And so the mid-cycle adjustment in the mid-90s was all about the future inflation gauge and when it was running up and when it was running down And you see preemptive hikes And you see pre-emptive cuts That’s what happened there It wasn’t– that was exactly what happened there And I can get into chapter and verse on that But it’ll take awhile So I will assert that And then we go to 2018 And we have an inflation cycle downturn and a growth rate cycle downturn Now, without being someone with a long history of central banking theory, you don’t want

to tighten into a cyclical downturn in growth and inflation ED HARRISON Yes LAKSHMAN ACHUTHAN: Exactly That’s all we were saying Please don’t do that And they did that in September ED HARRISON And again in December LAKSHMAN ACHUTHAN: And everybody, just all the bond kings and queens, were yapping about, you better be prepared for 5% 10 year yields You know, how’d that work out? ED HARRISON It didn’t LAKSHMAN ACHUTHAN: And no, and I think a lot of people got led down the path on that one And if you’re looking at cycle indicators, you didn’t have to go there But we did So in September, there was a hike In December, there was that hike And then they gave it all up And to a degree, Yellen tried that it back in– LAKSHMAN ACHUTHAN: –cycle, too, but just not quite as much Now, that’s the real setup And there’s no inflation cycle upturn And there’s no growth rate cycle upturn now And so I know the Fed’s going to meet this week And they’re going to– they’re expected to come out kind of, we’re not concerned about inflation We’re not concerned about anything Everything’s good to go And what we find– with not a lot of samples, I have to say But looking at the past five episodes of the Fed tightening after the future inflation gauge turned down, what you see is, if they do that, if they tighten after the future inflation gauge turns down, you get a recession I’m not going to predict a recession based on that But that’s an interesting thing to be aware of There’s a long and variable lags ED HARRISON So you know, let me just back up one second because, just before, you mentioned something about the Greenspan and inflation and how he was looking at inflation and how Powell and the Powell Fed, they weren’t– and actually, they even jacked up rates too much in 2018 Can you be a little bit more explicit about what you were thinking on that? LAKSHMAN ACHUTHAN: Sure, Greenspan was Geoffrey Moore’s student Number one, so there’s a little teacher-student relationship there And Dr. Moore was all about cycles and inflation cycles And Greenspan– ED HARRISON And that was the good Greenspan LAKSHMAN ACHUTHAN: Yeah, this was Greenspan, circa ’90s, OK? And we have this– it’s the one memorable moment of a pre-emptive inflate– a Fed hike and cut It’s something cyclical You want to actually move ahead of the cycle to smooth the cycle, not after the cycle Then you’re pro cyclical If the cycles turn and you move, you’re actually going to make the cycle bigger So in ’94, the Fed surprised the bond market with a rate hike And a couple of funds blew up It was a big deal But it was based on the future inflation gauge running up And he says, I’m doing it preemptively And then, in ’95, the future inflation gauge is coming down And he preemptively cut And we had, in retrospect, a pretty long darn good expansion and all those things Now, Powell, more recently, say, last year, is saying, hey, I remember the 90s I want to kind of– that felt good I want to do that, too I’m going to do this– all these things And we were like, yeah, it didn’t happen the way you think It was really about leading indicators of inflation, the future inflation gauge And now we can go in the minutes and see that McTeer and others on the board were talking about, I want to see the forward looking data ED HARRISON That’s what they were saying in the 90s LAKSHMAN ACHUTHAN: That’s what they were saying in the 90s It was very different They weren’t looking– they were moving away from the models and willing to look at cycle indicators and I think because of this relationship between Greenspan and Moore But now the story is quite different And you see the mistake that was made where they hiked in September of ’18 They hiked in December of ’18, even though all those forward looking indicators that Greenspan had been watching were moving clearly to the downside And so what I think happened in the 90s is extremely different than what the Fed thinks happened in the 90s And I think it’s– even at its very base, it’s just the idea that there are cycles in inflation that are different than cycles in growth And just that basic concept is very difficult for someone, who’s running a big model where they want to equate growth– not equate, but relate growth to inflation And so here, for what it’s worth, the Fed is saying, hey, we’re going to let it run hot But they’re still in the model framework because there’s something about it running hot It’s in a cyclical downturn ED HARRISON And so, basically, you’re saying on some level– I mean, some people would say that, yeah, you’re saying what Donald Trump is saying LAKSHMAN ACHUTHAN: Well, yeah, it was funny

Back in October, fall of ’18, we had made our inflation cycle downturn call Jamie Dimon had made his call that you should be prepared for a rate, the 10 year at 5% So we were on opposite ends And Barrons stepped in and said, hey, why, Trump might be right about the Fed Now, we’re not political We’re decidedly nonpartisan But we’re going to call the cycle direction the way it is, whatever it is It doesn’t– and then the rest will work itself out And the inflation cycle was clearly in a three piece downturn There was no argument from a cycle perspective on that at all And we see what’s happened with rates and with the economy and with the Fed and all their explanations for what they’ve done ED HARRISON Would you be willing to make a call with regard to where the Fed could go– or should go going forward? Because a lot of people were saying, they’re going to do a dovish hold coming up But it seems, if they over tighten, then, perhaps, they’re still too tight LAKSHMAN ACHUTHAN: Yeah, I was just looking at the charts You know, that’s kind of late 80s into 90s talk where, hey, we cut a lot And we go on hold for a while It’s not about going on hold What it’s really about is– in these five episodes that we’ve looked at, which isn’t really enough It’s a small sample size But what it appears to be is you have to cut right when the inflation cycle indicators of have signaled the downturn Pausing, holding, all these things are kind of irrelevant It’s how– it’s a stitch in time saves nine It’s really the timing of this stuff, not I’m going to just sit back and take the middle road And so I– look, on balance, they should probably be easier right now because the cycle is still moving to the downside ED HARRISON Now we’re thinking 2020 When I spoke to you on the phone a few days ago, the first thing I asked you was, it doesn’t seem like you were talking about a recession But does that mean that we’re out of the woods for 2020? LAKSHMAN ACHUTHAN: So anytime there’s a cycle slowdown, growth rate cycle slowdown, you’ve got to be on recession watch So I’m glad we’re having this discussion And we’re there And this is appropriate Now, for an outright recession forecast, we would need to see pronounced pervasive and persistent declines in the levels of our indicators We don’t have that at the moment So it’s not imminent, OK? Is it off the table? Is the recession off the table because jobs came in strong on Friday? Absolutely not None of these leading indicators have turned up in a way that’s pointing to a reacceleration in growth Business, investment, all these things are still moving to the downside That story is not over But when we look at the lag of– tightening after the cycle has turned down, which is what occurred, that has real impact And if we look at– for various reasons, I’m kind of looking at late 80s early into 90s, there’s some similarities I’m seeing there in our data The leading employment indicator turned down Our indicator turned down in a way that’s kind of similar to what’s happening now And the Fed, at that point– it was in Greenspan’s very early years as chairman– tightened into a slowdown And a year– I think it’s 13 months later So after we had our inflation cycle downturn call, the Fed kept hiking back because they thought, after the crash, that everything was good right Everybody was afraid, I think, in late ’89 And then once we got through late ’89, they thought, OK, we’re good to go And that actually was when the recession risk– got up And so it was a 13 month lag then So here, let’s say, the mistake kind of was around last fall We’re coming up on that It’s not a way to predict I don’t– we don’t lag our data and do stuff like that But in 2020, sure I think a recession is not off the table at all in 2020 And so there is no green light on that score We do have green lights, as I mentioned, in Europe, Asia ex Japan, maybe even global industrial growth getting its legs But that does not mean the US can’t still cycle down between now and whenever it catches something on those cycles In the 90s, we saw asynchronous growth ED HARRISON That was exactly what I was going to ask you about, is this concept that, if they’re turning it up, we’re going to turn up or, at least, with a lag But that’s not necessarily the case LAKSHMAN ACHUTHAN: Not necessarily the case So often, I mean, many decades, we do see some synchronicity

And certainly, on the manufacturing side, you can understand why But for much of the 90s, we saw periods where, say, the US would go into recession in the beginning and the end of the decade And then Europe and Japan would take turns in the middle And you’d have this asynchronous growth where we were not all synchronized And so the idea that Europe can turn up while the US still slows and, maybe, faces some recession risk is fine It’s perfectly acceptable to the way cycles work There’s no rules against that And so we would say, before we start to call for a US upturn, we would want to see it in the indicators The one sector in the US where there is some cycle– some upturn showing up is in financial services sector And a come down in rates will help you do that So that’s kind of understandable ED HARRISON So when we were talking earlier and we were talking about long leading, short leading, coincident, and then, eventually, lagging, where are we in that process right now in terms of those indicators just for the US? LAKSHMAN ACHUTHAN: Deceleration there We see a few upticks and long leaders and maybe, even in a few like financial services, leaders, shorter leaders But in order for it to be an upturn, not my hopes or anything like that, but rather just an objective upturn, it has to be pronounced in those leading indicators It has to persist And it has to be pervasive It has to be the majority of the drivers contributing to the rise And that’s not satisfied As of today, it’s not satisfied And so there’s no upturn Until you see what we call the three P’s to the upside, we just don’t have that ED HARRISON Now, we’ve not talked about– you were talking about Japan being a different story But one of the big things that we haven’t talked about so far is China Where is equity on China? And just more generally, I think I was asking you this before, why is it that I don’t hear equity’s name when we’re talking about Europe and Asia? I usually think of equity in the US But what are you guys doing in those economies? LAKSHMAN ACHUTHAN: I think it’s just we haven’t done a sufficient PR push on what we’re actually doing there Look, we’ve been– Dr. Moore– this is probably the longest running economic experiment that I’m aware of, since the early 80s, developing international indicators that are comparable to the ones that we were running in the United States, internationally And so I think many– like, everybody talks about leading indicators now Everybody’s got their leading indicator Or you can go to the OECD or the conference board And the issue there is that all of those indicators, pretty much– I mean, I’m sure there’s someone who’s not doing this But all the ones that you might think about are made by model builders And so what’s a model builder going to do? They’re going to optimize their index or extrapolate something or estimate something and probably run into some trend adjustment issues in the data There’s all kinds of hairy statistical stuff around cycles And you get what you get, which are these indicators that look good historically but, in real time, fail And our real time track record is exemplary on the directional call of growth or inflation on that score And when we developed the first ever leading index for China– this has to probably be 10, 15 years ago OK? It’s a really long time And remember, Dr. Moore, before the late ’70s, dated every single US recession So all those shaded areas, he selected those So we use the same methodology that the NBER used to use to date cycles And we’ve done it internationally So you have a really good objective chronology base that is used by all the major central banks, for example, when they’re doing cycle analysis to look globally And the indicators, our leading indicators, are also comparable And so now for China, our Chinese leading indicators, eyes wide open on all data issues, are comparable to the US And actually, our approach, in a way, is much more forgiving to some of the concerns you might have about the quality of the data And our Chinese leading industrial production index, boom, has moved to the upside It’s got a clean three Ps– it’s got a clean three Ps upturn

So the markets tend to focus on PMIs Those are short leading indicators I think, more recently, they’re a little clearer to the upside But in the last few months, they’re kind of going in different ways And yeah, signal to noise– what am I looking at? And in the context of the earlier move in the Chinese leading industrial production index, we were looking for signal and kind of knew that And that actually is continuing So it doesn’t mean the overall Chinese economy is off to the races There are some other issues in the broader economy indicators No recession there, and the industrial component will get a little bit of traction here ED HARRISON So the– I guess my final analysis there would be that the US is probably the laggard of all the countries that we’ve mentioned except for Japan LAKSHMAN ACHUTHAN: Yeah, and just another– just for the storytelling part of it because you have to have that Human beings love story part, right? So why did we– why are we lagging a little bit? Another component there, if you remember back in ’17, we had those big hurricanes So we had the rebuild, which was a nice jerk to the upside And then we got the tax cuts, another one off Both of those are non-cyclical events, kind of jerking us higher when everybody else started to roll over Another reason why we’re lagging OK, now, in Japan, they’re about to enter– I think they’re at risk and maybe about to enter their fifth recession since the GFC So GFC– then they had three other recessions, full blown recession And now, they’re here they are on the brink of a fresh one The data’s all mucked up because they had their sales tax increase in October So it draws a little bit of consumption forward So some of the coincident indicator data goes this way, and then it will give up And the leading indicators there remain quite bad A little bit of more storytelling here– this is the third time they’re making this policy mistake of the sales tax increase ED HARRISON Yeah, definitely Each time LAKSHMAN ACHUTHAN: And so they did it in ’97, which we were screaming, there’s a recession How could you be– don’t do this now And I remember, back at the time, there’s a large mutual fund that can’t go short And they’re like, whoa They’re a client of ours And they’re like, whoa, are you serious? All our people on the ground are saying everything is hunky dory You know, it’s all good to go We kick the tires And we say here’s the recession, leading indicators, blah, blah, blah, all those sequences, pronounced pervasive persistence, window of vulnerability If there’s a shock, it’s a recession This is a government created shock of a tax increase And they said, well, huh, we can’t go short JGBs are at 2 and 3/4 ED HARRISON We can go long LAKSHMAN ACHUTHAN: That all seemed paltry then Remember, this is ’97 ED HARRISON Right, right, yeah LAKSHMAN ACHUTHAN: That seemed like really low And they’re like, ah, OK And they loaded up Awesome trade Awesome trade, the gift that keeps on giving So then they did it again in 2014 We had a recession call They jacked sales taxes There was another recession right there And now, they’re doing it this time, the third time around Although they just announced some attempt at pushing out fiscal And that seems to be the name of the game now And I don’t want to discount that 100% on the US Let’s come back to the US for a second Whatever the Fed is doing is supportive, whatever you want to call it It’s not QE or something But it is supportive of the markets ED HARRISON Right, not QE LAKSHMAN ACHUTHAN: Whatever you call it They say it’s not QE Don’t look here There’s nothing to see But it’s expanding the balance sheet So that’s supportive You also have a pretty impressive deficit spending And the dealer banks are caught in the middle And all that stuff’s happening But suffice it to say, there’s some debt spending I remember– it had to be a year or more ago– we were doing a presentation And we reached back to something we had talked about earlier, which is what we call the Red Queen effect, if you go back to Lewis Carroll and Through the Looking Glass And the Red Queen says, you have to run twice as fast to get anywhere And it reminds me of the debt growth And I think it was last year– the statistics are a little dated I might have mentioned this to Raoul a few months– over the summer But last year, the global debt growth was 10 times greater than the global GDP growth That’s what it’s taking to get what we have So to maintain that– I mean, you can do the math How can you maintain that kind of debt growth? Or if you want to get anywhere faster, can you grow more debt growth? That’s kind of the world we’re in here among which we’re having these cycles

And so here, on the one hand, you– then you have these– you to have some sort of cognitive dissonance You have the best economy ever and the unemployment rate low and all of this and massive support being given to get that kind of growth Something doesn’t add up ED HARRISON So I think that’s a perfect juncture to ask, and wrapping it up, 2020– what’s your outlook for 2020? Not in terms of this is going to happen or that’s going to happen, but these are the things that we at ECRI are looking at And these are the things that you should be looking at LAKSHMAN ACHUTHAN: Well, I would not– I think the number one warning is don’t conflate the cycle in the US with what’s happening in Europe or Asia ex Japan or even global industrial growth Those can turn up while we still decelerate That is entirely possible And it’s kind of interesting because– you know, I don’t know that this is going to happend but I’m going to watch it– is on inflation Of course, you know, the Fed will come out and say that, we’re not worry Don’t worry about it Even if inflation comes, we’ll let it run hot Blah, blah, blah They’re going to– that’s what you have coming now And you know, maybe But I’d love to watch the future inflation gauge That thing has served me well Just to draw a mental picture, it rose for three months, went down for a month, then ticked up It’s not a three piece upturn But it’s not plunging anymore And so we have to keep an eye on that Those could be your surprises next year I think recession risk is still on the table It’s not a green light in the United States I’d be more optimistic in terms of growth in Europe and Asia ex Japan and global industrial growth, which is industrial commodity inflation ED HARRISON Excellent And I think that– I know that you’re a macro guy, so you’re not going to make calls on that But for the people who are watching, obviously, those are some things to be thinking about in terms of how they want to position themselves in the markets LAKSHMAN ACHUTHAN: I would say absolutely And look, it is entirely possible that our indicators light up to the upside for the US And we have the fourth growth rate cycle trough since the last recession Entirely possible And I’m as interested to find out as anybody if that is going to be the case I’m just– I’m not waving a green flag just because of Friday’s jobs report I still see some weakness there ED HARRISON Lakshman Achuthan, Thank you very much LAKSHMAN ACHUTHAN: Thank you It is my pleasure

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