Economic Inform for 2024

Steve created those 2023 charts weshowed you as part of the year in review for The New York Times.So great charts. We've borrowed them from you, Steve, butgive us a sense of going forward. You had the ones that define 2023.Let's talk about what it looks like from your point of view.24. Let's start with the first.When you had inflation and rates right now is a lot of higher rates.Inflation seems to be coming down just in the United States as well as aroundthe world. Inflation is definitely done better thanany of us thought.

The economy is remains stronger, even inthe context of out of a low unemployment rate and inflation coming down.I think it's important to note, as Larry Summers has done repeatedly on yourprogram, that for all of the celebration, we're not at 2% yet.Wage growth is still running at around 4%.If you assume one or even one and a half percent productivity, it implies thatunderlying rate of inflation of around three, which is what core inflation isroughly running at. So the question is, does it get to two?I don't believe the Fed is going to raise interest rates again unlesssomething really untoward happens.

But I think it would be really hard forPowell to start cutting rates with inflation, not yet even at his target.The market obviously has assumed substantial rate cuts this year.Most of the people I know and talk to, including my own colleagues, I thinkgenerally we feel that the idea of six rate cuts, 125, 250 basis points of ratecuts this year seems pretty unrealistic to us.And therefore, you have to raise the question, what's the implication of thatfor the market, which obviously looks very closely at what the Fed and whererates are in terms of an alternative investmentplace.

So how does it inform your decisions assomeone who oversees investment of a lot of money about equities?Because earlier a year or more ago you were on this program saying you're notso excited about equities because the rates are high, they're going to gohigher and that's going to really cut into the value of equities given thediscount rate. At this point, do you feel better aboutequities, given the fact that you think probably it's not going to go a lothigher? Well, first, you're nice enough not toget to my face about last year, but I'm going to do a mea culpa and say, I thinkI don't think almost anybody I know in.

The investing business expected whathappened, obviously at the Magnificent Seven.But even aside from that, the S&P and the markets performed much better inlight of high. You know, those rates right now are kindof where they were a year ago. But the market is depending on how youwant to measure it, anywhere from 15 to 20 5 to 40% higher than it was.So that's kind of an odd development, frankly, relative to history.Anyway, look, looking ahead, I think we feel thatrates are not going to go up any more. You did have at the end of the year anice surge and things like biotech.

Stocks that have been hit hard by rates.So we're we're cautiously optimistic or at least not scared about the marketthis year because we don't see the Fed raising rates again.Corporate profits are projected to be up a little bit, not a huge amount.The S&P multiple is still high, but it all seems kind of manageable in the US.What about growth in the US for the moment?Because a year ago many economist were predicting recession.Didn't have it last year. Not clear at all.We're going to have it even in 2024 at this point.What are you looking at for growth for.

United States going forward?I have no more wisdom than than any economist does.I think the consensus is for a small amount of growth, something less than1%. The problem with predicting recessions,it's a little bit like the old Roadrunner cartoon.You're running and running around and you look down and there's nothing belowyou. If you look back, I think you would findthat more often than not, people did not say we were in recession until we werewell into the recession. And so I just there are signs of theeconomy starting to weaken a little bit.

The jobs market is weakening a littlebit. Retail sales are weakening on aninflation adjusted basis a little bit. You do see signs of stresses andstrains, savings rates, credit card usage, subprime auto delinquencies,things like that. I'm not predicting a recession.I'm just saying that we're we're close enough to the edge that it could easilytip either way, in my opinion. One of the things that you focused on,including in your charts for The New York Times, were on wages, andparticularly what happened with labor unions, which was a big story in 2023.Right now, last time I checked, real.

Wages are actually going up somewhatslightly in the United States as opposed to going down.That's, on the one hand, bad for margins for corporations.On the other hand, good for consumers because they have more money supply hasbeen, as you look into 2024, beyond, what do you think is going to happenwith wages? Yeah, look, there's no question thatpart of why the economy was so strong in 2023 relative to what people expectedwas because there was more purchasing power.Inflation came down a lot and wage and wage growth went up a little bit.And secondly, you have this very large.

Budget deficit, trillion dollars.So the government's doing its part in terms of wages.I think you're going to see continuing upward pressure on wages.I don't see a wage price explosion. I think I do think that expectationshave been managed well by the Fed's rate increases and other other things.And so you don't see an economist would say an on anchoring of inflationaryexpectations. They seem to be under control.So I think we're going to continue to see wage.Growth in the four, four and a half, maybe 5% range.And then therefore, you're going to.

Continue to see inflation maybe in the3% range. And then the question will be, what isthe Fed do about it? I believe the Fed'ssummary of economic projections would have inflation pretty close to two bythe end of next year. I'm not 100% sure we're going to getthere. And as I said, I don't see them raisingrates. I just see them delaying rate cuts if wedon't get there. Steve, one of the things you focus on isimmigration. You do it in the charts for the year endof 2023.

You've written otherwise for the YorkTimes that immigration. Immigration is an issue.Certainly politically, we have a lot of people come across the border.We have northern cities, including run by Democratic mayors, really upset aboutit. At the same time, we need a certainnumber of workers coming in. Give us your views on where we're goingwith immigration in this country. Well, I got into the state of it becauseI was looking at China, and China's population is projected to fall from1000000004 to 770 million by the end of the century because of their fertilityrate.

And the fact that they have they haveemigration. 300,000 Chinese a year leave and nobodycomes because the monocultural society we take in a million a year legally.And if you just want to maintain our population, given our fertility rate,you have to take in 4 million a year or else our population will start todecline. So we need these people.We have a 3.7% unemployment rate. They're not going to take away Americanjobs. But it is it is the most divisivepolitical issue. And frankly, President Bidendidn't say open borders, but he conveyed.

A sense that we wanted people to comehere. Back from the first day of hisinauguration. And the result is you have 3 millionpeople a year now crossing the southern border and going through our crazy,convoluted system. And the Republicans, therefore, have nopolitical incentive really to solve this problem.Biden owns it. The country, even including Democrats,are very unhappy with our immigration policy.And I there could be a deal in Congress. I think they're going to announcesomething this week, but I'm not that.

Optimistic it's going to get passed.And finally, Steve, because you take a longer view as an investor, are we justgoing to in a period where investors have to have lower expectations?We had an extraordinary period of essentially, I will call it free money,and that benefited us in all sorts of ways, including investors, I would say.There's a lot of talk right now that we just have to lower our expectationsabout what returns and regular expected returns will be going forward.Do you share that view? Sure.And I share it for the reason you said, but I also share it.And I don't have these numbers in my.

Head by the following point.If you look back at what the market did in a five year period or a ten yearperiod starting each year, you will find that in years where the PE ratio was aselevated it is today, the market's performance in the ensuing five or tenyears was pretty modest. It was positive, but it was sort of lowmid-single digits is my recollection. And so a lot of this is where you startfrom and we're starting from a very high level.And so, sure, I think our expectations are fairly muted.And you and I have had a lot of conversation.I think last time we're doing a lot more.

In credit because if you can make 10% invery senior well secured credit versus what we think the market's going to do,we are still shifting our dollars in that direction.

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