Joe Cass   00:00:00

Hello, and welcome back. My name is Joe Cass. I'm the Senior Director here at S&P Global Ratings, and I'm the host and creator of the FI15 podcast. So on this episode, we are very happy to have Larry Summers, former Treasury Secretary in the Clinton Administration and former President at Harvard, alongside Paul Gruenwald, our Chief Global Economist at S&P Global Ratings. So a quick reminder that the views of the external guests are their views alone, and they do not represent the views of S&P Global Ratings. Okay. Great. let's get into it. Larry, would you be able to kick us off with your view on the state of the global economy right now? What are your biggest areas of concern?

Larry Summers   00:00:36

I'm going to focus on the U.S. economy, and I think the big question is: can we achieve the proverbial soft landing? The numbers have been good for the last several months. Unemployment has stayed low, growth has been stronger than most people expected, and inflation, even while that's happening, has been a bit lower than most people expected. So I think the chances have probably increased. But the painful truth remains that history teaches us that from high inflation with low unemployment, what Samuel Johnson said about second marriages is true for soft landings as well: they represent a triumph of hope over experience. And history also teaches us that slowdown processes are rarely contained. If unemployment goes up a few tenths of a percent, it almost always goes up by a couple of percentage points. So right now, I've got concerns both about a hard landing and about no landing. On the hard landing side, there's some evidence of growing fragility on the part of consumers, as COVID savings run out, as credit flows slow, as refinancings become necessary, and as there are substantial uncertainties about the walls of debt that many businesses are going to face as they refinance borrowing from a few years ago. The prospect is that even if budget deficits remain problematic, the kind of fiscal expansion we saw between 2022 and 2023 is not likely to be repeated. So there's a lot of uncertainty, I think, despite current strength, about the medium-term hard landing prospect. At the same time, I look at developments in labor markets, with the UAW strike still ongoing, high vacancy-to-unemployment rates, health insurance rates accelerating, continued tightness in many rental markets, and the feed-through impacts of increased oil prices—particularly increased diesel prices. And I think the prospect that inflation is on a secure glide path down to the Fed's target is also pretty uncertain. So I think that the ability to achieve a soft landing remains very much in doubt, significantly because of the policy errors of overstimulus several years ago.

Joe Cass   00:03:30

Great. Thanks, Larry. So Paul, very similar question to you. So what is the S&P Global Ratings view of the macro economy and what are our primary concerns?

Paul Gruenwald   00:03:39

Yes, well, I agree with a lot of that. I think, not just in the U.S., but globally, we've seen a surprising amount of resilience in service sectors, fueled by strong labor markets. So, we're seeing a bit of a wedge globally between the manufacturing part of the economies, which tends to be more interest rate-sensitive, and the services part. But the challenge is going to be to bring core inflation down to Central Bank targets in a smooth way. I agree that the soft landing is kind of mythical. It is our baseline case right now, but I think if we had to put some distribution around the base case, we're probably a bit more worried at this point that inflation is likely to not be fully under control. So, if we had to deviate from our baseline, we would think that means maybe more central bank rate hikes, rather than sort of a hard landing in the near term. And we are seeing this globally, right? I know we've got different cyclical positions around the world. The European economy looks like it's close to zero growth, and some of the other advanced economies are still reasonably strong. But we had the same issue where central banks kind of missed the initial inflation impulse. They got behind the curve, we had a steady rise of rate hikes, and we seem to be leveling off now. But the resilience of service sectors in the face of these stiff rate hikes is something we see globally. But maybe just one other thing, since I'll take a little bit more of a global view than Larry. We are watching China very closely. It looks like the authorities are not going to bring out the big toolkit. They seem to be sort of adjusting around the margins with cuts in reserve requirements and some easing of regulations around housing. But China has been the number one driver of global growth for several decades, and it looks like the authorities are going to struggle to get their 5% growth target this year.

Joe Cass   00:05:41

Thanks, Paul. And Paul, I mean, most, if not all, economists around the world, they use this word transitory when describing this high inflation in recent couple of years, it has proved to be fairly persistent. So why was the consensus view transitory for so long?

Paul Gruenwald   00:06:02

Well, there were some people who spotted that quickly. It wasn't the entire profession. But I can think of a couple of reasons. One, to be fair, COVID really whipsawed a lot of economies, right? We shut down the services sector. There was a big jump in demand for durable goods, and then we reopened the service sector. We had all this pent-up demand in the fiscal stimulus. So that kind of threw economies around. But I think also, there's a fair degree of hysteresis in the profession. People had gotten used to central banks missing their inflation target on the low side and having rates at or near zero. So I think a lot of folks just had some trouble getting their heads around the possibility that we could have a period of sustained inflation above central bank targets. And maybe the third issue is those of us in the market, we've always got one eye on the consensus, right, and kind of sticking your neck out a couple of years ago was maybe not something a lot of people were comfortable. But I think we've all learned the lesson. Those of us who have been around for a while and maybe haven't been through a burst of inflation that it can happen, right? I think we all got attuned or maybe again, a little bit of hurting there with the view that inflation was well and truly tamed and wouldn't be an issue again.

Joe Cass   00:07:15

Thanks, Paul.

Larry Summers   00:07:16

I think it's a real mystery why the forecasts were so off. In the spring of 2021, I was pretty clear that when you inject $150 billion a month of fiscal stimulus into an economy with a $50 billion GDP gap, and at the same time, the Central Bank pledged to keep interest rates at zero for three years, and at the same time, the Central Bank bought $120 billion of long-term securities, including mortgage securities into a housing bubble, and at the same time, you had a pandemic that could only operate to constrict supply—it seemed to me very clear that the overwhelming likelihood was that you'd have the kind of experience we had in the late 1960s when we tried to have guns and butter, only on a much larger scale. And I think that it is always a mistake in economics to be overly guided by continuity with the recent past. Basically, since we hadn't had major inflation in 40 years, almost everybody who was commenting hadn't seen major inflation and therefore, they kind of wrote off the possibility. I had earlier in my career written off the possibility of economies finding their way into the liquidity trap because I'd never seen it before. But having made that mistake once, I knew enough not to make that mistake again. I do think this is a bit of a black mark for economics and finance as fields, that the prevailing judgments were so wrong. And at the same time, I think the people who, and there are many, who are looking to make political criticisms—that somehow policy was politicized—are probably wrong. Because, as wrong as what the Fed was saying was, it was tracking a consensus of apolitical people in the markets. So I think it's better to think of this as an analytical, rather than a political, failure.

Joe Cass   00:09:41

Great. Larry, on the topic of inflation, what do you think the future could hold? And how do you think central banks will manage ting this inflation to their own preconceived targets?

Larry Summers   00:09:54

Look, I think that no central banker wants to be remembered as Arthur Burns or G. William Miller. And so I think there will be a strong tendency as long as there is responsible political leadership to have independent central banks that keep inflation at relatively low rates. But I suspect we're headed into a world where it's going to be harder than it has been before.

Joe Cass   00:10:27

Great. And Larry, just to change tack a bit here. To what extent are you currently incorporating environmental sustainability into your economic thoughts and your work?

Larry Summers   00:10:40

Look, I think that anyone concerned with economic policy has to be concerned with the climate change issue because it's so profound for humanity over the medium and long term. And the design of policies that can contain climate change is a crucial preoccupation for me. I'm engaged in an expert group advising the G20 on how the World Bank and the other multilateral development banks and the international financial institutions can do more to address climate change. I don't think environmental issues loom terribly large for short-term conjunctural forecasting of the kind we've been talking about so far. They matter, but they are probably not as consequential as what happens to basic oil and natural gas prices.

Joe Cass   00:11:45

Great. So Paul, we've been talking macro here. And as an economist, you're working very closely with the senior Ratings credit research team. How does your kind of macro view feed into our credit view?

Paul Gruenwald   00:11:59

Yes. Well, first of all, we do a regular forecasting exercise, but unlike the IMF, where I used to work, it's not just top-down—it's also bottom-up. My small team supports about 1,600 to 1,700 credit analysts, and they're working on sovereign credits, banks, and corporates. They need a macro view to do their committee work. What we do on the forecast is obviously put out a rigorous macro view with the narrative, but that finds its way into the committees of all the rating analysts. The sorts of things they're focusing on now are higher-for-longer interest rates. We're thinking about firms that have been surviving for many years on what we could call abnormally low interest rates, and wondering whether they'll be able to deal with an interest rate structure that's higher. Larry mentioned it earlier, but we’ve got maturity walls coming up. We keep track of how much firms need to refinance and when those obligations are coming due. We've got a wall starting in late 2024. As we keep pushing our forecast forward and the slowdown forward, if we go into that wall with higher rates, that’s going to matter as well. That wasn’t an issue a year ago when we started thinking about a slowdown. Then, if we’re in a higher-rate world, and we look across all the sectors that we cover, we’ve got certain sectors that are more sensitive to interest rates, such as commercial real estate and maybe consumer durables, and less sensitive sectors. When rates were at or near zero, we didn’t really have any of these issues. But now that we're getting into a possibly different world, we’ve got to think about how the macro and the credit come together. Those are some of the key things we're looking at in our quarterly forecasting rounds.

Joe Cass   00:13:51

Great. Thanks, Paul. So Larry, 28 years old, you became one of the youngest tenured professors in Harvard's history. But soon thereafter, you were diagnosed with Hodgkin's lymphoma cancer. How did this diagnosis and ultimately successful treatment of cancer change your view on economics and also your broader world view?

Larry Summers   00:14:15

I suppose ever afterward, I've been a bit of a man in a hurry because that experience reminded me that none of us know how long we have to make whatever dent in the universe we're going to make. I hope the experience of my extreme vulnerability during that period, and all the support I received, made me a more compassionate and caring person—both in how I relate to family and friends and in how I approach public policy issues. One of the sub-themes in my career has always been work on global health issues. I was privileged to initiate the World Bank's report on global health in 1993, which sold 100,000 copies. But in some sense, only one reader mattered more than all the others: Bill Gates. It was that report that got him interested in the topic of global health, where he has been able to make such a spectacular difference. Lastly, whenever I hear about a friend, a friend of a friend, or an acquaintance who has been diagnosed with cancer, I make a call. I tell them, "When I was diagnosed forty years ago, I couldn't go more than five minutes without thinking about cancer. But as you can, I hope, see, it has hardly defined my life. Over time, you will go first for ten minutes, then for an hour, then for a day, and eventually for a week without thinking about cancer. It need not define yours either."

Joe Cass   00:16:33

Fantastic. Thanks for sharing that, Larry. So Larry, what economic view or opinion do you believe to be true that few others would agree with you on?

Larry Summers   00:16:45

I believe very strongly in resisting the tendency to extrapolate trends. I believe almost all the big mistakes in markets are made by people who did today what they wish they had done yesterday. They buy after things have gone up, sell after things have gone down, and lend money to things that have gone up, and, therefore, the loans have all been repaid. I think the same thing is true in economic forecasting. I wrote a paper several years ago called Asiaphoria Meets Regression to the Mean, the point of which was that it was a mistake to extrapolate rapid growth rates forward confidently. I've been saying for several years now that I think history will record that prevailing American judgments of Russia in 1960 were badly wrong from an economic point of view, prevailing American judgments of Japan in 1990 were badly wrong, prevailing American judgments of the tigers of Asia in the mid-1990s were badly wrong, and prevailing American judgments of China in 2020 will prove to be badly wrong. So, a tendency to resist trend-following forecasts is, I think, something that, with respect to markets, forecasting economic variables, and theories of how the world works, I’ve always tried to bring to the table.

Joe Cass   00:18:34

Great. Thanks, Larry. So Paul, you spent a lot of your career in Asia coming back to the U.S., I think, just before the pandemic. So in your experience, how has the region changed over the past, say, two, three, four years?

Paul Gruenwald   00:18:48

Well, maybe Larry's previous point is a good segue into that, right? One of the dangers is using your Excel spreadsheet to just drag over your last cell and copy it. But no, I originally went to Asia for two years. I was in the IMF, and I was going to be the country rep in Korea. This was 2001, and we ended up staying for seventeen. I went to Hong Kong and then Singapore after that, and I ended up working in banking for a while and S&P. I do remember my first trip to China, where the bike lanes were totally full, and the highways were pretty empty. You could see the Chinese authorities kind of prebuilding all of the infrastructure. Back then, I think China was exporting T-shirts, sandals, and backpacks. We've come a long way. We've got China now producing more patents than the United States and challenging, at least in some of the sectors like solar and some of the cutting-edge stuff. So, it's been quite remarkable. Yes, I think the rise of China was really the big thing. Now China is the largest trading partner for almost everyone in the region. We've got complexities around China being the largest trading partner but a lot of political and security ties to the United States, and we're still trying to figure out how to put those two regions together. It was a great experience to be away for a long time. My two boys got to grow up in Asia and come back to university in the U.S. Coming back to New York right before the pandemic was a little bit of bad timing, but I think it all worked out in the end. It's been a great experience, and I wouldn't trade that for anything.

Joe Cass   00:20:30

Great. Thanks Paul. So Larry, between your time at the Clinton administration and the Obama administration, you were President of Harvard for 5 years. So interested to know what was that experience like? And what memories stand out from your time there?

Larry Summers   00:20:47

Well, there are many differences between academic life and life in government. As a scholar, the worst thing you can do is sign your name to something you didn't write yourself. As a government official, it's often a mark of effectiveness to do so as frequently as possible. As a scholar, when you work on a problem and you can't find a good answer, what you do is work on a different problem. You don't have that luxury as a government official. I had supposed when I was in Washington that Washington was so political. There were always people playing politics and trying to take you down. I thought things were very different in the university. Having been President of the University for five years, I no longer feel that way. The university was a very political place. But ultimately, what was really most satisfying to me about having the chance to lead a university like Harvard was that universities are places that are able to take such a long view. When we were able to eliminate student contributions for any family with an income below $60,000, and then have others compete with us by emulating that, we were doing something about opportunity that was going to affect the country going forward decades as those students' careers played out. When we were able to launch a stem cell institute at a time when the government wasn't willing to support embryonic stem cell research, we were changing the path of science and, indeed, changing the path of humanity. So I found the fundamental long-run aspects of what universities do to be the most exciting part of being a university president. And that's why I got a PhD in the first place. It's why I embarked on a scholarly career. I'm someone who believes very powerfully in the power of better ideas—not immediately, not overnight, not always—but I do believe that ultimately, the power of ideas trumps the idea of power. And if you have that belief, you have to think that universities are awfully, awfully important places for our future.

Joe Cass   00:23:41

Great. And Larry, I have to ask you this question. So you are portrayed in the movie, the social network, which is a biopic about the founding of Facebook. And there's a scene where the Winklevoss twins come to your office as President of Harvard saying that Mark Zuckerberg essentially stole their idea. So interested to know, was that scene true to what really happened? And what was your general opinion of the meeting and of the movie as well?

Larry Summers   00:24:08

I liked the movie. I thought that recognizing that it was a movie and things were caricatured, it did capture my recollection of that meeting with the Winklevoss' who came into my office in a very, very aggressive way with what seemed to me to be a quite implausible demand that the university get involved in their commercial dispute with a fellow student. And the movie portrays me as being rather dismissive of their demand, in part because of the way in which it was framed as a demand. And I think that's a fair characterization.

Joe Cass   00:25:05

Great. So Paul, as an economist, part of your responsibility is to map out these kind of different scenarios and suggest one is more likely than the others. What's the most challenging aspect of this process when presenting a vision of the future to high-level investors or C-suite company executives?

Paul Gruenwald   00:25:25

Yes. Well, it's really about translating your forecast into a narrative, right? So I would say 90-plus percent of the people I interact with in the market have had little or no training in economic forecasting. So I need to be able to tell them stories, right? I could be the best, most accurate forecaster in the marketplace, and if I can't convey that idea to our investors or our issuers who are paying our bills or just the C-suite of S&P Global in a way that resonates, then I'm not going to be effective in doing my job. And that's difficult, right? It's like practicing the elevator speech when you're going to a job interview. You've got 60 seconds or maybe 90 seconds at the beginning to convince someone that you've got something to say, you've thought about it rigorously, and you understand how it can map into their universe. So we spend a lot of time on narratives. And I think the trick here is to make sure that, again, for the 1,600–1,700 rating analysts who are my internal stakeholders at S&P Global, they kind of get the forecast but can understand it in a narrative way that will have an impact on the work they do, whether they're a rating analyst or working somewhere else in the company. And that's a skill for everyone. The young folks on my team come in they're all technical hotshots but it's something you have to learn as you go through your career and move on from being a pure technical contributor to someone who's got a face and a voice in the market. So it's something we all have to learn, but I think it's really important, in the end, to be able to tell stories. You've got a rigorous analytical foundation underneath what you're saying, but you need to tell a story in a kind of compelling way that's going to be useful to the listener.

Joe Cass   00:27:12

Thanks, Paul. And Larry, you've hosted meetings with U.S. presidents countless times over the years. What communication techniques do you adopt to try and focus their mind and convince them on what you believe to be maybe the focal point of an argument or an issue?

Larry Summers   00:27:31

You try to bring up something that is arresting. A story is usually worth five data points, and an anecdote is often worth three charts. So I think you try to make a point in a vivid way that will cause it to be remembered. The most important lesson in communicating to busy, powerful people is not to try to communicate too much. Focus on only what they actually need to know. When I’ve had the opportunity to send many memoranda to presidents or edit ones drafted by others, my staff often heard me say, "Too much damn liberal arts." The President doesn’t need the history of how the banking regulatory system was designed in order to get a recommendation on who to appoint as the Comptroller of the Currency. Always try to focus on what is most important. In general, effective communication depends on understanding the other person’s perspective and adapting what you’re saying to their concerns rather than simply restating your own more loudly. I noticed that people who were most effective when they came to see me in government asked what I was worried about and tailored their pitch to address my concerns. The least effective people thought their objective was to deliver their whole piece uninterrupted—they missed the opportunity to be persuasive. Whenever anyone said to me, "I’ve read the briefing paper. So what do you want to add?" I always understood that as a sign not to repeat the content of the briefing paper. However, many communicators struggle with resisting the urge to over-communicate.

Joe Cass   00:30:04

Great. And Paul and Larry, just briefly, I wanted to talk to you about social media. So Paul, firstly, for you on LinkedIn. I know you've got this LinkedIn newsletter. It's been incredibly successful over a short period of time really. So what is it? And why did you decide to start this thing? And what kind of relationship do you have with the LinkedIn readers?

Paul Gruenwald   00:30:25

Well, it really wasn’t my decision. I was just posting content, and during COVID, as often happens during market turbulence, people wanted to know what S&P Global was thinking. My engagement numbers spiked for a couple of weeks, and LinkedIn reached out to me, asking, "Hey, do you want to start a newsletter?" I checked with my communications team, and they were like, "Well, duh, of course, it's a great idea." So, I started the newsletter, and I think we’re up to around 125 issues now. But it's not so much about just my thoughts—it’s more about what we’re doing, or where we are featured, like on CNBC or Bloomberg. We also aim to support other parts of the business. We have credit colleagues, and we’ve been putting out views on decentralized finance, stablecoins, and sustainability. It’s evolved into a platform not just for me and my team, but for the entire business. We’re using it as a public forum to showcase S&P Global. As for my relationship with the readers, hopefully, they’re all hooked. I try to publish the newsletter every Friday morning, between 7:30 and 8:00, with a few weeks off around the holidays. We track the performance metrics, and the numbers are trending up. However, as I explained to my team recently, it’s not the steady upward trend that matters to me. It’s when volatility hits the market—when things get unpredictable—that’s when people turn to us for insights. That’s when our numbers spike, and to me, that’s the most fulfilling part of it: being the go-to source during times of market turbulence, not just having a steadily growing readership.

Joe Cass   00:32:15

Cool. Thanks, Paul. And Larry, I know you have kind of around about 300,000 followers on X, formerly Twitter. But interested to know which individuals do you like to follow? So which individuals when they kind of make a statement on markets, do you always make a point to read or listen to?

Larry Summers   00:32:34

That kind of question invites me to generate a few ingrates who will say, 'Of course, I mentioned them,' and others who will be annoyed that I didn’t mention them. So, I think I'll pass on that opportunity and just say I try to read and follow widely—both people who have similar perspectives to mine and people who have a far more leftist, Keynesian perspective than I do, and people who have a far more Austrian economics, libertarian, conservative perspective than I do. I think the most important thing about following and reading is remembering that you learn much more from those whose views you instinctively recoil at than from those who cause you to say, 'Way to go.' And so, I try to always discipline myself to read the people who are going to cause me discomfort in my views.

Joe Cass   00:33:44

Great. And Paul, if you ask kind of a lay person on the street to name a famous economist, they might say, Smith, Keynes, Freedman, Ricardo. But who are the individuals you look up to in the financial community?

Paul Gruenwald   00:33:59

I was going to pick someone nonfinancial because you kind of threw that question over, Joe. So let me tell you your story.

Joe Cass   00:34:04

Yeah sure.

Paul Gruenwald   00:34:04

Right. So, I live two blocks from Central Park, and they’ve got free movies in the summer. About a month ago, we saw that there was a free movie. It was about the chef José Andrés, and it was called We Feed People. So, we went over to Central Park, sat down, dusk came, and the movie came on. I just learned this wonderful story about this famous, world-beating chef at the top of his profession who really gives himself to helping people in need from natural disasters. He brings his team out there. They’ve got to do logistics. They’ve got to manage people. They’ve got to do planning. And whether it’s an earthquake or a flood, he gets in there with the same passion he brings to his own kitchens, and he just cooks for people. It’s a documentary, so he’s looking at the camera. But he’s saying, 'This is a very basic need,' and he’s getting into these niches before the official sector gets in there to help. But this is a guy who doesn’t need to do this, right? He’s an accomplished, world-beating chef, but he’s taking a big chunk of his time and resources and going in to help people in need. I just thought it was super inspirational. So, I’m trying to look outside of the economics profession when I can. But I just thought it was a wonderful example of someone who didn’t need to do something but really threw himself into it and has tried to help others by doing good. I thought that was fantastic

Joe Cass   00:35:24

Great. Thanks, Paul. So Larry, last question for the podcast goes to you. So typically on this podcast, we interview leaders, influential individuals from the world of finance and beyond really. So this isn't you giving endorsement, but just thinking about everyone you've met or worked with or even seen from afar, who do you think would be an interesting potential future guest I should ask to join the show.

Larry Summers   00:35:49

I've learned an enormous amount over the years from my good friend, Bob Rubin and my former boss at the Treasury Department. He's been watching financial markets and public policy for many decades. Of a quite different kind, I think one of the best economics books written over the last several years was by my student, Brad DeLong, entitled Slouching towards Utopia that gives a really quite different perspective on how there was a once-in-human history sea change towards a growth reality sometime during the 19th century. And I think he would be a very interesting guest for you as well.

Joe Cass   00:36:37

Great. Paul, you are nodding. I'm assuming you've read that book, too.

Paul Gruenwald   00:36:41

I read Brad's book. I like the way he calls the year 1870 year 1, and then he sort of takes it from there on all the innovation that happened in the late 19th century. It was a fantastic way of looking at the world.

Joe Cass   00:36:51

Great. Fantastic. Well, thank you so much, Larry and Paul, for your time today. Everyone watching, everyone listening. See you next time on fixed income in 15.