Is Your Retirement Safe in Today's Economy?, with Dr. Karsten Jeske (Big ERN)

In short

Afford Anything Podcast Episode Notes: Is Your Retirement Safe in Today's Economy?, with Dr. Karsten Jeske (Big ERN)

Episode Overview

Host: Paula Pant
Guest: Dr. Karsten Jeske (Big ERN)
Episode Number: 548
Main Topics: Current economic landscape, Federal Reserve decisions, inflation, unemployment, retirement planning, safe withdrawal rates.

Key Takeaways

Economic Landscape: The episode discusses the complexities of the current economy, including the Federal Reserve's recent decisions to lower interest rates.
Interest Rates: Dr. Jeske explains that markets often anticipate interest rate changes, which can create unnecessary uncertainty.
Inflation vs. Unemployment: The guest challenges traditional economic models, noting that real-world data does not always align with textbook theories on inflation and unemployment.
Investment Strategy: Emphasizes the importance of consistent investing and understanding market conditions rather than trying to time the market.
Safe Withdrawal Rates: Discusses the significance of assessing market valuations when planning for retirement and withdrawal rates.

Detailed Insights

Introduction to Dr. Karsten Jeske

Background:
PhD in economics and CFA designation.
Worked for the Federal Reserve Bank before moving to Wall Street.
Retired at 44 and blogs about retirement under the name Big ERN.

Federal Reserve Decisions

Recent cut of 50 basis points in interest rates.
Discussions on how this abrupt change creates market uncertainty.
The Federal Reserve is politically independent and should avoid creating the appearance of political favoritism.

Economic Indicators

Labor Market:
Unemployment rates appear low, but labor force participation is also a significant factor; many have dropped out of the workforce since COVID-19.
Yield Curve:
Inversions in the yield curve historically signal recessions, but recent uninversion may not necessarily indicate that a recession is avoided entirely.

Inflation and Economic Theory

Challenges the traditional Phillips curve relationship between inflation and unemployment.
Discusses hyperinflation in historical contexts (e.g., Weimar Republic) and critiques modern monetary theory (MMT) for lacking consideration of trade-offs and resource constraints.

Retirement Planning Insights

For those accumulating wealth, timing the market is less important than consistent contributions.
For retirees, suggest lowering withdrawal rates when market conditions are unfavorable.
Advises on the importance of monitoring economic indicators, particularly unemployment claims, as reliable measures of economic health.

Housing Market Discussion

Higher interest rates may lead to increased rents and limited housing supply as builders hesitate to invest in new properties.
Dr. Jeske mentions that higher rates may paradoxically create inflationary pressure in the housing sector.

Mortgage Refinancing Advice

Explains when it might be appropriate to refinance mortgages, especially in light of the anticipated Fed rate cuts.
Indicates that the refinancing decision should be based on current market conditions rather than speculation about future rates.

Final Thoughts

Advice for Listeners:
Maintain a long-term perspective when investing and planning for retirement.
Be cautious with withdrawal rates in retirement, considering current market valuations.
Anticipate potential changes in the economic landscape, including interest rate adjustments and potential recessions.

Additional Resources

For more insights from Dr. Karsten Jeske, visit [EarlyRetirementNow.com](https://www.earlyretirementnow.com).
To explore more episodes, visit the [Afford Anything website](https://affordanything.com/episode548).

Conclusion

The episode provides valuable insights into the current economic situation, particularly regarding retirement planning amidst changing market conditions. Dr. Jeske's expertise offers listeners actionable advice and a deeper understanding of complex economic concepts that affect personal finance decisions.

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Transcript

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0:00The economic landscape has been a confusing mess lately. Here to help us make sense of it is Dr. Karsten Jeska. He has a PhD in economics and a CFA, a Chartered Financial Analyst designation. He worked for the Federal Reserve Bank in Atlanta for a number of years before he switched to working on Wall Street, where he started in early 2008, the worst possible time to join Wall Street. He began blogging about early retirement in 2016, anonymously under the name Big Earn, E-R-N, Early Retirement Now. And he retired in 2018 at the age of 44. Welcome, Karsten. Thanks for having me. Thank you so much for being here.

0:46Welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything. Every choice requires a trade-off, and that applies not just to your money, but also to your time, your focus, your energy, your attention, to any limited resource you need to manage. So what matters most, and how do you make choices accordingly? This show covers five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double-eye fire. I'm your host, Paula Pant. I have a master's in economic reporting from Columbia. And Karsten, you're an actual economist.

1:25Retired, though. Retired, yeah. Hobby economist. Yes, but you actually have a PhD in economics, whereas my training technically is in how to interview you. So I am not an economist. Technically, my training is how to talk to economists. That's my specialty. By the way, your show is about the most basic concept of economics. It's about trade-offs, opportunity costs, and you can do everything. You have to make choices, and the cost of your second choice is your opportunity cost. And so it's in your name almost. Exactly. Talk about economics. Yes. As of the time that we're recording this and when the show comes out, the Federal Reserve has lowered interest rates by 50 basis points, which is the big economic news of the year.

2:12The Fed is going to meet two more times this year, November and December. There are a lot of questions that people have as to what this means. How is it possible that we have had persistently high interest rates for all of 2024, and then all of a sudden in September, we drop interest rates by half of a percentage point? That's a big drop all in one go. And there's rumors that the Fed might still have more cuts to come. If we look at what would be the landing spot where we should be, if we're back into a neutral range. So people are talking about somewhere around 2.5 % to 3%. And you don't want to go there in just one step.

2:59You do this slowly, just like on the way up. We did it slowly and then accelerated all the way to 75 basis points. That was a bit of a shocker, the three rate hikes by 75 basis points. And then they started slowing it down again to 50 basis point hikes and then 25 basis point hikes. So I was a little bit surprised, too, that the first step is in 50 basis point hikes. I thought they also do the 25 on the way down. That's what I thought. Because, well, so we have eight meetings a year. So we could go down by 200 basis points in one year. And then we are in the high threes and the low to mid threes.

3:33Then maybe do a few more. And it takes us only one year at 25 basis points a meeting. and we are there and it didn't seem that there was such a rush that we needed to do the first step of 50 basis point because then it actually creates more uncertainty. Then what is the second cut? Is it also a 50 basis point? Is the economy in such bad shape that we now have to do 50 basis points? Sometimes people overanalyze what the Fed is doing. Obviously, the Fed has certain information that we don't potentially have. But on the other hand, they are looking at the same data releases that we are looking at, right, in terms of payroll employment and the financial data.

4:10So if the Fed surprises a little bit on the upside, doing 50 basis points instead of doing 25 basis points, people might say, well, they know something that we don't know. Maybe the economy is much weaker and that kind of uncertainty. And then the uncertainty about what is the second cut. If the second cut is only 25 basis points and then they do 25 after that, then it would look a little bit of a yanking. The first move is 50, and then they start going down at 25 basis points. It would have potentially looked smoother if they had done 25 basis points. And then if needed, if the economy really starts to unravel, then we can do the 50 basis point moves.

4:48The other thing, obviously, that caused a little bit of a stir is, well, the Fed is politically independent, right? They are not there to help one party or not help the other party. and doing the 50 basis point move before the election, while some people then came out screaming and said, well, this is some kind of election interference or political interference. But I personally think that if they had the intention and the wrong intention of unfairly helping the current administration, they should have already lowered rates well before that. It's not going to make that big a difference right before the election.

5:22But I was surprised for that reason because when I was at the Fed, there was this idea, you know, we don't even want to have the appearance of any kind of conflict, of any kind of political favoritism, right? Because this is one of the cornerstones of all modern, well-functioning economies is that we don't have political interference of the central bank. And we don't even want to create this bad appearance. This is why this federal governor system where even a two-term president cannot just replace the entire Federal Reserve Board. So we want to have this political independence, it had a bit of a strange taste.

6:00Why did they have to do 50 basis points? But then, of course, there was also a little bit of political pressure. And again, so maybe political pressure gets to you after a while, or the people screaming at Richard, 75 basis points, because the economy is so weak. So it sounds a little bit like a kid, like, can you give me a pony? Well, they really want a bicycle, but then they ask for a pony. And then because they think if you ask really aggressively, then the compromise solution is what you actually wanted is what you get. So yeah, but I'm glad you bring this up. So that was definitely on my mind.

6:30And again, I'm now a hobby economist. I just do this as a hobby as a retired economist. And it's not worrying me in any way. I'm leading a pretty relaxed retired life. But it definitely occurred to me that that's odd that they did the 51st. Right. Okay. I have several follow-up questions. Before I get to the follow-up questions, I just want to briefly explain to the audience in case people aren't familiar with basis points, 100 basis points is one percentage point. The reason that we use the term basis points is because if you talk about, let's say, going from 2 % to 4%, 2 % to 4 % is actually a doubling, right?

7:09In order to have kind of a uniform language in which we talk about percentage points, we say basis points. Yeah. So to anybody out there who's wondering, what are we talking about? And then the other reason why this is useful, so for example, if you talk about really small percentage point numbers like 0.01, 0.02, then you just call it one basis point or two basis points. We're talking about, say, expense ratios, right? Right. That's 3%, not 0.03, it's 3 basis points of expense ratio at ETF or neutral funds. So that's another way that's... Right. It's not just for the percentage point, it's a finer measurement unit.

7:47So you don't always have to say the 0.0. Yes, it's 0.03. That's like a mouthful to say versus three basis points. Yeah, exactly. But just as a shorthand, anytime you hear us say 25 basis points, we mean a quarter of a percentage point. 50 basis points, that's half of a percentage point. With that established, I want to go back to what you were talking about, because one of the big sort of conspiracy theorist ways in which the Internet lit up after the Fed announced its big decision was, oh, this happened right before an election. But let's pause and look at all of the other things that also coincided with that.

8:29So what we know is that right before the Fed lowered interest rates, the BLS revised the jobs report by 818 ,000 jobs. So previously, we thought that from March of last year to March of this year, we had created 2.9 million new jobs. We actually created only 2.1 million. That was a huge downward revision. That was one thing that happened. The other thing that happened was the European Central Bank lowered its interest rates. and I guess the third thing that happened is the Bank of England announced that they expected inflation in the UK to come down to 2 % within the next two years. We had all of these factors at play.

9:11How much did all of those weigh in? I mean, it looked like everything was just perfectly aligned and then not moving could then also be construed as political interference. So why don't you move? You sit on your hands and you're just waiting because there will be a Fed meeting on election day, Tuesday, and then the announcement is going to be on the Wednesday after election day. So, well, if they had waited until then, it would have also had a little bit of a taste of, well, yeah, that's potentially also interference in politics when you're not doing anything, when everything really is screaming at you that you have to lower interest rates.

9:48I personally never understood why they had to go that high in the first place. So I was screaming on the way up too, why are you raising interest rates so aggressively? Right. It was all based on this issue of low unemployment rates, and that has to be very inflationary. And, well, I mean, of course, what we see right now, unemployment rate is still very low, and inflation rate is coming in. So it's not really following the model that some people at the Fed are following. It's this NARU model, non-accelerating inflation rate of unemployment. Employment rate is below a certain level. So it's not only inflationary, but it's what raised inflation rate month after month, as long as that unemployment rate is below that neutral rate.

10:30And this model, even though it makes sense, sometimes in theory, it doesn't really work in practice. And then there are some other economic theories that also would be very skeptical about this model. And so even on the way up, I was always saying that, well, you know, you're too focused on just unemployment rate. inflation is a monetary phenomenon and not really a labor market phenomenon. And I actually wrote a blog post where, because there's this quote from Milton Friedman, inflation is always and everywhere a monetary phenomenon. And then I put this picture with Jerome Powell and underneath it, and he crossed out monetary and he made it labor market phenomenon.

11:10And because that seemed to be the way of thinking at that time at the Fed, this is why we had to raise interest rates that high. Even though it already looked like that the inflation shocks had worked themselves through the system and we just almost have to sit on our hands now and wait for inflation to come down again, the Fed was still almost exclusively looking at labor market data and everybody was warning. If you look at some of the speeches of some of the governors and Fed presidents, if you read between the lines, this is exactly what they're talking about, the Phillips curve model, right?

11:42There's a relationship between inflation and unemployment. If the unemployment rate is really low, then this has to be inflationary, which empirically it's not really. The way I learned economics, we had a much more relaxed approach to this unemployment versus inflation relationship. So I didn't quite understand why we had to go up so fast on the way up and why I had to keep it up for that long. The Fed was definitely overdue, right? Especially if you're the Fed and you see the European Central Bank move before you, it's almost a slap in the face. because we are usually the leader both into the recession and coming out of the recession, the macroeconomic cycle worldwide.

12:21In the U.S., we are the leading economy almost. We go down, everybody else follows up. If we recover, then everybody else recovers. And in past interest rate cycles, we were moving before the ECB. And so now the ECB is beating us. So what's going on there in Washington? So yeah, I definitely think The stars were aligned to lower rates, and it just happened in September. Right. That's an interesting point because it's a little damned if you do, damned if you don't. Right. Exactly. No matter which decision you make, it will look like election interference to the party that it appears to disadvantage one way or the other.

13:02Exactly. Huh. That's a very good point. I want to go back to your comments about inflation and unemployment, because for most of 2024, what we believed that we were seeing was really strong employment numbers. I mean, historically, what appeared at the time to be historically record low unemployment slash record high employment, despite the fact that we had, relatively speaking, relative to the ZERP era, very high interest rates. It seemed as though the U.S. economy was inexplicably robust. To what extent was that belief true, particularly in the context of the downward revision? Now that we know this downward revision, how should we reinterpret 2024 and the economic, the employment scenario that we have been in and are in?

13:58I think the truth is probably a little bit more nuanced. So if you look at just the unemployment rate, we definitely look very strong. The unemployment rate, just around 4%, right? I think that we had similar unemployment rates in the raging 1990s. And it did not feel that 2023 and 2024 felt even remotely close to the raving 1990s in terms of the economic power and progress. So there are probably some other things going on. One is obviously labor force participation. There's still a lot of people that dropped out of the labor force. So the way we construct unemployment is obviously we ask, have you even looked for employment?

14:41And if you haven't looked for employment for a long enough time, then you fall out of that statistic. No, you're still in the statistic, but you are out of the denominator, right? Where when you look at these are the total number of people in the labor force, and these are the number of people that are looking for work. If you're not even looking, you fall out of that denominator and we could artificially make the unemployment rate look a little bit lower. So that's one. So we have still a little bit low labor force participation rate. Some of this is obviously a demographic trend, right? As people, the baby boomers are now retiring and older people in general have a little bit lower labor force participation.

15:18So some of this is going on, but there's still a little bit of an overhang, I believe, from COVID. People dropped out and never came in and are still out. So unemployment rate really low is overlooking some – I wouldn't call it – it's not like we have a recession around the corner, but the economy is probably a little bit weaker than it was in 1998 when we had similarly very low unemployment rates. And then earlier we were talking about payroll employment numbers. I mean, they're good, but it's not like we are adding 800 ,000 jobs every month. So it's kind of average growth in terms of payroll.

15:50I mean, it's good, but it's not raving, crazy economic expansion territory. So I would say, yeah, I mean, we're in a solid economic position, but it's not as crazy strong as, say, in the late 1990s. But we're overall in a good economic position-ish. Ish. Ish. Ish. Ish. There are some people who are worried that we are headed towards a recession. And there are some recession indicators such as the yield curve, which the yield curve points to a recession. Can you talk about that? Right, right. So historically, one of the most reliable indicators for a recession. And this is not just an indicator where it starts screaming red when we are in a recession and it just beats everybody else by a few weeks.

16:36So the yield curve inversion, I'll get more into what that actually is and what it means. So yield curve inversion has been a leading economic indicator. It's not just leading. It's sometimes leading by a year or two. So the yield curve inverts, and then we have a recession following. And sometimes it's at the start of the recession, but there have been cases where the recession happened maybe a year afterwards. So it's definitely a very leading economic indicator. And the yield curve has inverted and is now recently uninverted. So now the 10-year is above the two-year interest rate again, thanks to the Fed.

17:14Now, some people say, okay, now we don't have to worry about the recession anymore. No, it's actually wrong because it could mean that we still have the recession. It just happens after the yield curve is already uninverted, which has also happened in the past. So it has been historically one of the most reliable economic indicators. And there are probably some economists sitting somewhere sweating bullets now, and they're kind of almost praying for a recession. because if we didn't have a recession, we would lose one great economic indicator. I'm saying this a little bit facetiously. So it has been a very reliable indicator, and that definitely has been screaming recession for the longest time.

17:56Being the economist, it teaches you some skill how to afterwards explain why your forecast was wrong. One way to make it make sense would be We had almost a recession in 2022. If you remember, we had two back-to-back quarters of negative growth, but that was a little bit more or less for technical reasons. There was something like inventories and net exports. They can sometimes create very big swings in your quarter-over-quarter GDP numbers, even though they're not really lasting factors. So we actually did have two back-to-back quarters of negative growth in 2022, but it wasn't declared a recession.

18:33because a recession is declared differently. The Wall Street definition is two quarters in a row of negative growth. The actual economic definition is a much more nuance. It relies on monthly data. It considers a lot more series. So my personal interpretation would be, well, maybe we did have this very, very close call in 2022 that would have otherwise been a recession, but there was still so much stimulus from the pandemic where people were able to just spend themselves out of the recession or away from the recession. To make this make sense, I would say, yeah, I mean, we had a little bit of weakness in 2022 and the yield curve inversion was right around that time too.

19:14Maybe that's the way to make it make sense. So maybe if I cross my fingers, we don't have to have a recession despite the yield curve inversion. And everybody should be happy because we had an economic slowdown. Maybe not every yield curve inversion creates a full-blown recession maybe this only created a little bit of a scare like we had a little bit of weaker economic growth before that didn't quite become a recession right around the asian crisis in the 1990s 1995 around the right after the mexican crisis there was a little bit of economic weakness but it didn't turn into a recession so we have these kind of close to recessions or economic weakness periods that don't quite turn into a recession because again for a recession to occur really in a bad way the stars have to align perfectly right where the consumer stops businesses stop investing and if only two of the three things that can go wrong then we could escape a recession but then something like 2008 9 2007 8 9 that's when when everything falls apart so maybe 2022 was that narrow escape from a recession.

20:27And that was the correlation with that yield curve signal back then. So when we were talking pre-show, and you said that the indicators that you would personally look at are, you named three indicators. Tell us about that. So imagine I was on a lonely island, and the only indicator I can look at, I have only very little bandwidth, and I have only one indicator I can look at to follow the U.S. economy, I would probably pick the weekly unemployment claims. So what I like about those, because we talked about payroll employment, there's obviously a very important economic indicator. So payroll employment obviously has this issue, right, with these big benchmark revisions.

21:08Right. And even on a monthly basis, right, you get the new number, and then another several numbers are then revised, which means that if I now look back and I draw the data series from some online sources in the FRED database at the St. Louis Fed. And I look at, well, what was the payroll employment number sometime in 1997? Well, what I see today may be different from what people back in 1997 saw. That's a huge problem. Say, if you look back at, well, the people back then would have had different observations than we have today. So as an economist, that's a huge headache. When I was still doing this for a job, it really caused a lot of headaches when doing data analysis and forecasting.

21:51So the nice thing about the weekly employment claims numbers is that they are, I think they are revised once for the previous week and then the new week comes out. But then the data that you see today, it will stay like this forever. So you can actually do some back tests on how did the unemployment claims data look like, say, in the 1970s or in 2007, 8, 9. The numbers that we see today were exactly the numbers that you saw back then. So you can actually say something like, if you try to correlate that to the business cycle, it would be proper to do that. And then on top of that, it is truly definitely a coincidence, maybe even slightly leading economic indicator.

22:31So you see that the unemployment claims already go up either right before the recession or very, very early in the recession, especially the way recessions are announced and defined, or they're defined after the fact. So an indicator that starts going up right at the beginning of the recession is hugely useful because sometimes the recession start is announced six months, nine months after the start of the recession when everybody already knows there was a recession. And so it would be hugely useful for the hobby economists and certainly for the professional economists to have some signals that start moving right around the beginning of the recession.

23:13And so usually unemployment claims start going up. Right now we are still in the 200 ,000s and they have been wiggling around there and not really having any upward trend. So if I had to look at only one economic indicator, that would be the unemployment claims. They look very solid right now. So in that respect, it doesn't look like we're anywhere close to a recession right now. And I should add, so what makes a lot of sense about that is that claims are claims. There's no interpretation there. There's no interpretation and there's no extrapolation either, right? Claims are the actual claims because we know how many people claimed unemployment.

23:51Whereas the reason, for example, why we have the payroll employment number visions is that this is all relying on a small sample. And you have to extrapolate from that sample to the macroeconomy as a whole. And then there are some firms that fall in and out of the sample. Some firms go out of business. and some firms enter business, but you don't know about them. Sometimes during economic recoveries, you are very slow in picking up payroll employment gains because the new firms, the people that collect these data, they don't even know about them. They are not in the sample. Eventually, they come into the sample and they say, oh my God, you just created jobs at a time when we didn't even know you were there.

24:32So then all of that stuff is being added into the sample. So this is how you sometimes get these revisions. And of course, the revisions, they can be on the upside, on the downside. Now, obviously, the people that create these numbers, right, they have gained experience. So they know about some of these effects and they try to undo these effects. But it's not 100 % exact science, right? So they have to extrapolate this. Whereas the claims data, I mean, that is the actual claims. There's nothing to revise unless they found some piece of paper that's lying behind the desk somewhere. But then that's probably a relatively small impact.

25:10So that's the nice part. Exactly as you said, the claims data, these are the actual numbers. And there's nothing to extrapolate, nothing to estimate. It's the actual number. So follow claims if you want a more accurate indicator. And it comes out every Thursday morning. Every Thursday morning? Yes. So job data can be revised upward or downward. It feels as though it's only ever revised downward, though. That's when you hear about it and people scream if it's revised upward. And I think there have been some studies and it might have been biased at some point. And I think, again, I mean, these people that work in these institutions, Bureau of Labor Statistics, the Census, Bureau of Economic Analysis, they do the GDP number, BLS is the employment number.

25:56So these guys are very good at what they do. and they maybe should invite one of these guys because they know a lot more about the nitty-gritty details. So I would not know what to do if they were to throw me into that job, but they do this. This is not political. These guys are highly skilled and they have an extremely difficult job. So trying to gather data and do this the right way. And so if it's any consolation, so I've heard from people from other countries, is the United States data collection is the envy of the world. I mean, it's not perfect, but it is the envy of the world. So I know people who work in similar capacity in Germany, and there's a lot of, we call that sausage maker, right?

26:41So it's two things you don't want to know how it's made, a sausage and statistics, right? This is the word, this is the sausage making. It would turn your stomach when you see what's put into a sausage, right? And the same sometimes in statistics and what kind of assumptions you have to make. And so I've heard people from other countries, including my native Germany, who said, yeah, everybody has these challenges, but I think in the U.S., we definitely have very good processes to, say, override some of these potential data biases that might come out.

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30:03I want to bring this towards how it affects the average listener. The question of are we going into a resection has very obvious impacts for the average listener. The question of will interest rates continue to decline has impacts insofar as people are trying to figure out, should I refinance my mortgage? What would you say to the average person who's listening, who's trying to figure out the answers to those questions? Should I refine my mortgage? Should I buy a house now or wait? Should I be afraid that a recession is going to come around the corner? And should I be thinking about that when I'm investing or when I'm planning my retirement?

30:43Right. So, I mean, first of all, because I'm in the FIRE community, right? So, you talk to two different people. You talk to people who are currently saving and accumulating, and you talk to people who are retiring or who are in retirement or close to retirement. And so I always tell people, if you are still accumulating, don't even try to time any of this. So there's never a bad time to start saving for retirement. So, for example, I had two great turning points in my life. One was I graduated from university and I started working in 2000, right at the market. Right at the dot-com. The dot-com crash afterwards, and I started saving in my 401k plan, and I started saving at the absolute worst possible time, right?

31:34Because there was a market peak. It took basically seven years to get to a new all-time high for the S &P 500. Actually, inflation adjusted. It took from 2000 all the way to 2013 to get to a new all-time high. Inflation adjusted, but dividends reinvested. It still worked out very well for me because I started at the market peak, but then I also did the dollar cost averaging. through the trough and on the way up. And then the other turning point was, as you mentioned, I started working for BNY Mellon in March of 2008. And that was the week that Bear Stearns failed. And then six months later, Lehman Brothers failed.

32:11And so it was a little bit of a scary time, but we actually maneuvered this very well and very intelligently. Did you interview at a couple of places that failed? I had three places where I interviewed. It was Lehman Brothers, AIG, and BNY Mellon. And I wisely picked BNY Mellon. And yeah, so I was actually at some point very interested in AIG. I mean, obviously AIG survived, but of course they then had trouble paying bonuses. And I think it probably still would have worked out okay in the end. Now Lehman Brothers obviously would have been very bad. But yeah, I was at BNY Mellon. So BNY Mellon was a very conservatively managed company.

32:50And even though you're in asset management, how does an asset manager get paid? you get paid by and if your AUMs go down 50 % well then your revenue goes and then performance fees even worse if your portfolio is performed very poorly then you get essentially zero performance fee so your performance fees go down by 100 % and your AUM fees go down by 50 % that would be a problem but we were actually quite smart and we survived this very well so I had a very good time at BNY Mellon from 2008 to 2018 so the long-winded answer So I had these two big points where I started making contributions to my retirement stash.

33:28And then I had a big pay raise going from Federal Reserve to Wall Street. And then I jacked up my contributions to my, I mean, not just the 401k, but also taxable accounts. And I did that right around the next peak and then went through that trough again. And it worked out spectacularly well for me because exactly. So I had this sequence of return risk in my favor. if the bad returns happen right at the beginning of your accumulation phase that's actually good because then you do that dollar cost averaging and then on the way out is almost a slingshot yourself out of that trough so i always tell people if you are new to fire there's never a bad time to invest if the market is up you should invest if the market is totally unraveling you should definitely start investing that time and you may not exactly grab the trough but just dollar Forecast average yourself through that.

34:19But I obviously have to give a little bit of a warning to my early retiree buddies, right? Because right now we are, again, at a market peak. We are at no matter what you look at, whether you look at the CAPE ratio or trailing price earnings ratio, looking forward 12-month price earnings ratio, everything looks very richly valued. And you can never forecast the turning point, but you can talk probabilistically, just like an economist too, right? So even in finance and in personal finance, I like to talk probabilistically. You definitely have a higher probability of some bad sequence of return risk just because we are at very high equity valuations.

35:01This could be right before the next recession. And now, again, I personally don't think that there's anything screaming, looks like a big recession right around the corner. But it should be on your radar screen. We have a higher than average probability of something bad happening because of that. I'm not saying it's 100%, but I always tell people what the probability of, I mean, you just pick any number, any month out of a hat over the last 100 years or so, the probability of being in a recession, I think, is about 13%, right? So just completely unconditionally, without knowing anything, we should have a 13 % probability of having a recession.

35:39And then, obviously, we have also some bear markets. Every recession has a bear market. And then you also have some bear markets sometimes in between. These are usually not the events you have to worry about as a retiree, right? Because for sequence of returns, it has to be a deep bear market and a long bear market. Right. 2020 probably didn't do much. But, yeah, something like the Great Depression, the 1970s, that would have done a trick on your retirement planning. Quite amazingly, it looks like if you had retired in 2007, you also had a deep and long recession. But because the recovery was so spectacular and lasted for so long, well, we don't know yet what will be the result for somebody retiring in 2007 and hazard horizon until 2030.

36:28But numbers look pretty good, more than halfway through that episode. and if you're in fire, you probably are still accumulating. Don't worry. Just keep plowing money into your accounts. If you are retired, yeah, I mean, probably. I'm never telling people you should not retire. I mean, you should retire, but maybe lower your withdrawal rate a little bit based on how richly equities are valued right now. And again, so 4 % rule, yeah, maybe take it down to 3.75 % or 3.5 % just to be sure. Forever or just temporarily until? The question is, what do we mean by forever, right? So it can take a long time for the uncertainty to work out.

37:11So some of the worst retirement cohorts were actually not the ones that retired in the 70s, but in the 60s, right? So we had this market that was a little bit lackluster in a limbo state. So some of the worst retirement cohorts are in 1964, 65, and 68. they kind of bubbled around a little bit and very slowly drew down their their portfolio and then boom the 1970s happened and then is one recession after the other and so it would have taken from 1964 to 1982 to get to the bottom of your portfolio and then you had this very nice run-up again in stock so yeah potentially you lower your withdrawal rate a little bit and i can't make you promises that this is only going to be for two to three years.

38:01Because sometimes you have to be flexible. So if you're flexible, you just lower your withdrawals by a little bit if we are in a bear market. But some of these drawdowns in your portfolio and some of the historical cohorts, they would sometimes not just last for the recession, but it's a much longer episode because it's not just a buy-and-hold portfolio would have already recovered, but your portfolio with the withdrawals would not necessarily recover that quickly. So then sometimes you might have to reduce your withdrawals, not just two or three years, but maybe 15 years or 20 years, which sounds really scary.

38:39So this is why I am not a huge fan of flexibility. Obviously, we want to be flexible, but it's not the panacea to retirement risk. But again, it's a long-winded answer and then getting already into safe withdrawal rate rabbit hole here. So I would say if you are in retirement or close to retirement, maybe don't be too aggressive with a safe withdrawal rate. Yeah. And then housing, obviously, is a whole other topic, right? I mean, there seems to be that. Before we move to housing, I want to ask one more question about retirement. So to a person who's listening right now, who's thinking, I'd like to retire at the end of 2024 or I'd like to retire sometime in 2025.

39:22but I'm worried that there might be a recession and I might be retiring into a recession. What would you say? Yeah, it's a huge concern. The one good thing that came out of it, if we have a recession between now and 2025 and you retire at the bottom of that recession, I mean, at least you didn't retire right at the peak of the market. So the blessing in disguise would be that if the recession is already underway, at least you have the heads up and you have some certainty, sometimes it's good to have certainty even if it's about a bad outcome. Imagine the stock market is down, right? And your portfolio is down.

40:02At that time, you also want to reassess, well, maybe now I don't have to do 4%. I can do 5 % or 6 % because stocks are so clobbered that you don't have to go with the 4%. Remember, the 4 % rule is calibrated to something where if you had retired right at the beginning of some, right before some really bad market event, like the Great Depression or the 1970s and 80s, then the 4 % or maybe something like 3.8 % would have still been okay to retire. This is how the 4 % rule is calibrated. If your portfolio is already down by 30%, well, it's unlikely that we tag on another Great Depression on top of that, right?

40:45So you should also compare your retirement portfolio now as no longer, say, September 1929. Maybe then you should calibrate your retirement until maybe December 1930 or whenever the market was down by about 30 % back in 1929 or whenever the market was down by 30 % sometime in the 1970s. And then from there, well, what would have been the safe withdrawal? It would be much higher than 4%. So your portfolio is down, but then you can also, you have this additional adjustment. You can say that, well, conditional on being down so much, well, probably now I can do maybe 5%, 5.5%. So I definitely propose that.

41:31So my niche in the FIRE community is that we should customize your safe withdrawal analysis, first of all, to your personal parameters. Do you have any additional cash flows in retirement? Do you want to leave bequest? Do you want to give to your kids or charities along the way? Do you expect pensions and social security later in retirement? That can make a huge difference in your safe withdrawal rate. And then the other dimension is not your idiosyncratic, but your macroeconomic parameters at the time of retirement, right? What are equity valuations? What are bond yields? and if we find ourselves in a place like today where equities are very expensive and have a little bit lower safe withdrawal rate in the beginning and also I mean good thing right now is bond you so look much more attractive than just five years ago right so you probably want to have some diversifier right so you have either 60 40 70 30 75 25 seems to be seems to be a pretty good compromise and having some fixed income.

42:35So some safe fixed income, right? I mean, don't fall for this trap. Oh, I'm just going to do, instead of having 40 % government bonds, I'm going to put 40 % high yield bonds because they yield more. But they're also going to have a lot more correlation with the macroeconomy. So take something that is a true diversifier, something like a U.S. Treasury, say a 7 to 10 year ETF, I think then it should be safe. So lower safe withdrawal rate and make sure you have some diversifying assets in your portfolio. Speaking of the diversifying assets, I have two follow-up questions there. Because my first follow-up question is, explain the year 2022.

43:13Because that is a year when stocks and bonds moved in tandem, in lockstep, which a lot of people mistakenly assume that they wouldn't. The second follow-up is given that sometimes what we think is a diversifier might move in lockstep, in correlation with other assets, where would a person draw down from? If a person has a 60-40 portfolio split, which bucket do they pull from? Sure, sure. In some way, it was a surprise to a lot of people that we had this positive correlation between stocks and bonds, which for the longest time we had negative correlations, right? Especially around the big turning points.

43:53So we go into a recession. And so this happened during the dot-com bust, during global financial crisis, certainly during the pandemic crisis. And again, speaking like an economist, right? So economists distinguish between two types of macroeconomic cycle events, right? One is a demand shock. One is a supply shock. So a demand shock would be something like there is some external shock that just lowers demand and that causes a recession. So it hammers the stock market. But at the same time, because it lowers inflationary pressures, it's also good for the bond market, right? Because low inflation means the Federal Reserve is going to lower interest rates.

44:35And so it's going to be good for the bond market. So in that kind of environment, we have maybe not deflation, but we have disinflation pressures. And that's going to be really good for the bond market. So bond market and stock market are very negatively correlated. So bonds are a perfect hedge against weakness in the stock market. But obviously in the U.S., we've had two – well, it depends on how you count it. If I count the 70s and 80s as one big event, that's one where both stocks and bonds suffered simultaneously. And the reason was we had energy price shocks and they were inflationary. So they put a damper on U.S.

45:14production. Production became more expensive. So it's basically like a negative technology shock. At the same time, this is bad for bonds. First of all, inflation is bad for bonds. And then what the Fed did about it was almost even worse for bonds. But of course, the good thing about it was that, I mean, what Paul Bolker did, where you raise interest rates, you get inflation out of the system, and then everything normalizes again. And there's a saying in German, it's better a horrible end than endless horror. So it's better to have a painful end than endless pain, right? So this is what Volcker did.

45:48You raise interest rates, and it's, at least in the short term, very painful for both the stock and the bond market. But long term, it's actually good because, you know, we have a recession, but then it's, again, clean slate for the stock market. The stock market can expand again. And then, basically, starting in 1982, we had this fantastic long bull market for bonds because interest rates moved down, and so bonds did really well. And we basically had a mini version of Paul Volcker in the 2020s, right? We had an energy shock. I mean, just an external shock that caused prices to go up because everything became more expensive.

46:26Energy prices went up. And then to deal with the inflation shock, the Fed had to raise interest rates. So we had a bear market. And then, knock on wood, we didn't have that recession, even though we had something, as I mentioned earlier, a little bit in the ropes, but we weren't quite down. And at the same time, we also had a very bad bond market. And I mean, we knew that that party had to come to an end, right? Because if we start at something like double digit, definitely the 10-year was in the double digits. And you walk that all the way down. And I think at the lowest point, the 10-year yield was below 1%.

47:01I think the lowest point was something like 0.5 or 6 or 0.7%. You walk this duration effect down, right? So the interest rate goes down. There's a duration effect. It's actually good for bond returns in the short term. But then, of course, you have lower yields going forward. But the short-term sugar high you get out of that is that the bond price goes up. If you have a fixed interest rate and market interest rates go down, then the value of your bond goes up. We knew that party had to come to an end. And finally, it did. And in hindsight, it makes perfect sense that it had to do that. But it caught people on the wrong foot, right?

47:38And it caught people. If you thought you and I, we were surprised about it, right? There were some very sophisticated people working at banks because there were some banks that went out of business over these interest rate hikes, right? A bank has really two jobs, right? One is managing credit risk and one is managing duration risk, right? Because they have short-term liabilities and long-term assets. So if interest rates go up too much, assets go down in value potentially, right? whereas your depositors, they don't demand less back from their checking account or from their CDs. So this is how some of these banks went underwater and eventually even out of business.

48:15And some very sophisticated people, and they forgot that they have that second duty, which is managing duration risk. And this skill apparently got lost over all these years when everybody thought, well, you know, interest rates can only be low and can only go down. and then when the party ended, then you see this Warren Buffett court when the tide goes out, you see it was swimming naked. And there were a few banks, I think in California and New York, that they were swimming naked, essentially, financially speaking. That's the first question. So yeah, I mean, it makes perfect sense. We have normally, in the US, by the way, we are extremely blessed to have this kind of bond market and stock market, right?

48:57Where normally we have a negative correlation between stocks and bonds. Not every country has this benefit. So there are some people who did some safe withdrawal rate simulations going back all the way, so do it internationally, and going all the way back to 1900. Guess what happened to countries, say, in Europe in the 1930s and 40s? They all got wiped out. There's no diversification between stocks and bonds. If your country is overrun by your neighbor, Right. The entire country fails. By the way, that's not a supply shock. That's whatever shock you want to call that, right? Your neighbor overruns you.

49:34Yeah. And we don't have this in the U.S., right? We have a stock market and a bond market. And our bond market is really the safe haven of the world, right? If things go sour, normally money rushes into our treasury market. And so, first of all, the Fed lowers interest rates and people rush into our treasury's market. But yes, I mean, obviously we knew that party had to end for a while. And in some way, I have to say, I would have obviously hoped that no bank fails, right? But considering how little damage it did in the end when the Fed then raised interest rates by multiple rate hikes, even 75 basis point rate hikes, three in a row, considering how quickly that went up, it's amazing that it didn't cause more damage.

50:22So knock on wood, that worked out relatively well. Yeah, so again, don't rely too much on this negative correlation. I think the next recession we probably can rely on, there will again be negative correlation between stocks and bonds. The next recession is probably going to be a demand shock recession again. And Fed will lower interest rates, help out the economy. It's going to be good for bonds. and I'm almost certain that this past inflation shock, it will subside and there's still a few pockets, right, of all places, right? It's housing, obviously, right? Why is housing going? Because property prices went up so much and then who is the marginal landlord?

51:06Is the marginal landlord is somebody who buys a property at these elevated prices today and potentially has to finance or refinance at today's mortgage rates. So you have no choice but to jack up the rents because interest rates are so high. So in some way, everywhere else, higher interest rates will slow down inflation and the economy because it cools economic activity. In housing, that's the one place where potentially the Fed with higher interest rates causes more inflation because higher interest rates. So think of an interest rate as your rental yield is also an interest rate. Right. But what you demand, somebody pays you to rent your house from you.

51:46And just like any market rate, it responds to incentives from the bond market and from the Fed. I mean, not directly in one-for-one, but eventually higher interest rates sneak into the rental market. And well, guess what? If the Fed now lowers interest rates, I cross my fingers that that last pocket where we still have strong inflation in the CPI numbers, where you should look into the details, I cross my fingers that that will also go down eventually. So because these higher interest rates, while rental inflation is so high, and the Fed says, well, we have to raise interest rates to get inflation out.

52:22It sounds a little bit like the beatings will continue until morale improves. So the high interest rates will continue until rental inflation comes down. No, it should be the other way around. You should lower interest rate. Everywhere else, inflation has actually subsided for the most part. And you have still this one pocket in rental inflation. Well, guess what? In order to get rid of that, you want to lower interest rates now because you've solved it everywhere else. Now solve the rental inflation issue with the lower interest rate. I can see that actually working on two fronts because not only do landlords have to raise the rent in order to accommodate higher interest rates that they're paying, but in addition to that, fewer builders build, which then curtails housing supply, which then adds to the supply crunch or exacerbates the supply crunch.

53:11That too. It's a multiple. You're basically being attacked from multiple sides. And I cross my fingers that lower interest rates, some of our worries will subside in that respect. And you obviously, you're closer to this area. So yeah, absolutely. I agree with that. It's also the housing supply that is being curtailed by these crazy high interest rates. Right.

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54:53For someone who's listening who's wondering, should I refinance my mortgage? I've locked in a mortgage at a high interest rate. I would like to refinance. The Fed is likely to make a series of rate cuts. So at what point along that series does it become rational to pay for that refi? First of all, almost everybody I know, either they have no mortgage or they have the mortgage that they're locked in at 3%. But yes, absolutely, there are now people. Plenty of people. Slowly, they all come in, and they have mortgages at 7.5 % to 8%. Now, the fact that the Fed started its rate cut, so it doesn't mean that you should wait until they do more rate cuts because, I mean, we're talking about relatively efficient markets.

55:41It's probably one of the most efficient markets, bond market, and there's futures markets for bonds, for the Fed funds rate futures. In some way, the market has already priced in. Not just the first rate cut, but a whole sequence of rate cuts. So one amazing thing is the saying applies here to buy the rumor, sell the news. So by the time... I've never heard that. In a stock market, right? I've never heard that. Buy the rumor, sell the news. So imagine you think there is some stock that's going to come out with some great news. Right. You buy it at that time, and then the stock market goes up and up and up.

56:19And then they announce the great news. Guess what? That's the time to sell because sometimes after the market overreacted a little bit and then it fizzles after that, after the good news. So you capture the anticipation. And you capture the anticipation. And then when it's announced, then you get rid of it. And then you look for the next edge. You have somewhere else with some other stock. So this is what people say, buy the rumor, sell the news. And then, well, of course, if it's bad news, then it's actually the other way around. So you short the rumor and then you buy it back when the news is announced.

56:50Something like that has happened with the rate cut. So the Fed lowers rates, and then you look at longer-term interest rates. That was already priced in. And so we were recording this in the last week of September. And I noticed the last few days, the 10-year rate has gone up again, right? So something like that is happening here again. So when the Fed lowered the interest rate, so that was the right time to maybe refinance. And now, actually, interest rates have kind of moved sideways. ways and now the last few days are going up again. So if you believe that the Fed will lower interest rates and they will lower rates to where everybody believes we'll end up, or the final lending place would be somewhere around 3 % probably, that's probably priced in.

57:37And if you already have a good rate, I would probably refinance now. Of course, what could happen is that we have not just a soft lending, but we have a recession, a full-blown recession, where the Fed will not just go to that neutral rate, but they have to now go again below neutral. We have been below neutral for the longest time. It shouldn't take us a lot of convincing to go back there again, down to 1 % or 0%. Now, if that happens, obviously, well, then you might refinance again. But I wouldn't wait for that. So if you believe that interest rates are more attractive again, I don't think that we're going to go back to 3 % or 4 % interest rates anytime soon.

58:18I think the Fed has killed that rumor pretty convincingly. But I definitely hope, I mean, there could be a little bit more room to go. If you look at historically, what's the difference between the 30-year mortgage rate and the 10-year treasury? Well, why isn't it the 30-year? Well, it actually turns out the average mortgage, the duration, especially if you deal with the optionality because people paying off their mortgage before, they don't even hold it for 30 years. So it's actually the comparison, and the best is the 30-year mortgage versus the 10-year treasury yield. So the spread between the two is still a little bit above where it was historically.

58:56So I guess the only reason why somebody might want to hold off with the refinancing is that, well, the 10-year yield has already pretty much normalized. Maybe there's a little bit more to go between, because the gap between the 30-year mortgage and the 10-year yield, that might have to come in a little bit more. But will it happen? Will it never happen? Are we now in a riskier environment where basically people who sell mortgages, they demand a bigger spread because there's more risk and more uncertainty with Fed policy? So long-winded answer. If you're thinking about refinancing, the rate cuts are all priced into the 10-year rate now.

59:37So the only reason why you didn't want to do it is the cost is so high that you don't want to do it twice and you kind of cross your fingers that, well, maybe there's some more way to go in that 30-year mortgage versus 10-year treasury spread. When you say that the rate cuts are already priced in, I don't think I fully understand that because wouldn't it still be the case that if the Fed lowers interest rates, let's say that in November they lower by another 25 basis points, and in December, let's just say hypothetically, they lower yet another 25 basis points, that not mean that mortgage rates would be cheaper in January?

1:00:13And again, so imagine we knew for sure exactly what the Fed would want to do, right? We're at somewhere around 5%, and the Fed funds rate will go down to 3%, and we'll go down pretty deterministically down to 3%, and that will stay at 3%, not just for the foreseeable future, but I'm talking about the entire next 10 years, maybe even 30 years. Forever, yes. Right? And you are absolutely right. If you now look at what is the average Fed funds rate over 10-year rolling windows starting today, it would already be pretty close to 3%, right? Because the path from 5 to 3 is going to happen pretty quickly, and then it's going to be 3 % for pretty much the following nine years, give or take a few months.

1:00:55So you are right. If you roll this window through, you will see a little bit of a decline of that 10-year average. but the 10-year average today is already pretty much as close to the 3 % as it will get. So yes, I agree there might be a little bit of additional reduction, but if you look at how the 10-year rate has moved from, I think it just barely intraday went over 5 % at some point before, maybe a year, a little over a year ago, and now it's below 4 % and something like 3.7%. So that 1 % move, right, that's all pricing in expectations about rate cuts. So that is priced in and rational actors are going to, they're not going to lose money over that, right?

1:01:48So they know Fed is going to lower rates, so it has to lower even some of the longer term interest rate. This is the reason why, for example, the 10.2 has uninverted. Has uninverted. And then sometimes this can move really quickly, right? Because everybody is wondering, well, when do the rate cuts, when do they happen? When do they happen? When do they happen? And then when you get close to when it's happening and the Fed signals that, then you get this cascading effect when expectations really shift a lot. Because before this kind of middle of the year, there were only very modest expectations for rate cuts.

1:02:22Now it's pretty much once you get to the first rate cut and then you start seeing the path down, because the Fed doesn't want to do anything like piecemeal, right? Where we say we do one rate cut and then we do nothing for a number of meetings, right? And then we do another rate cut and then nothing. So when the Fed does a rate cut, it usually means it's the first rate cut in a whole sequence of rate cuts. And once that happens and that expectation is priced in, you get really, really large swings in the definitely in the 10 year, it's a five year and two year, maybe 30 years also because of the much bigger duration.

1:02:58But I mean, it's definitely I think a 30 year year is still about 4%. But I mean, definitely the 10 % has moved quite a bit exactly for that reason, because we got closer to that point where that new path down is happening and it's priced in. And by the way, I don't want this to sound like that the 10-year rate is just the average of the future Fed funds rates because there's usually a little bit above that. So it's a term premium. And if you look at the average expected Fed funds rate over the next 10 years, that has definitely moved a lot. And that has taken down the 10-year yield. And I'm not saying the two are the same because there's a spread, but the Fed policy definitely impacted the 10-year yield.

1:03:39Now, you mentioned that spread is a little bit larger than it historically has been. Do you think that that's a signal that lenders are seeing mortgages broadly as more risky? And will that trend continue? Well, I can't put words in people's mouths, but it's definitely significantly more. And I haven't looked it up recently. I probably have to double check that. But yes, I mean, absolutely. There's some rumblings, right, about, for example, and this is more on the commercial side that people are maybe a little bit overextended. Maybe some of that is bleeding into residential mortgages too. People just demand higher risk premiums in that sense.

1:04:17And again, I have never done this, neither personally nor for BNY Mellon, but the way I understand it is that, I mean, obviously a lot of mortgages are just refinanced and repackaged by some of these Fannie Mae and Freddie Mac back in the old days, if you remember that. And there's now, so they are repackaged into, so they're basically mortgage-backed securities. and people gobble those up. But I mean, imagine you're a bank and you have a mortgage on your balance sheet. Well, how do you hedge that? You hedge that with a 10-year treasury future. So the two should be correlated. So the fact that we have this bigger spread, I mean, obviously tells you that the market demands a higher premium to handle mortgages for, and that's even true for residential.

1:04:56Now, if you look at housing and you look at rental yields, So what you can get as rent relative to the value of a property looks a little bit like housing is a, I wouldn't say it's a bubble, right? The word bubble is used way too often, but it looks a little bit hotly valued. If I were a lender, I would probably also demand a little bit of a premium. And I mean, obviously you always demand a premium, but now I would probably demand a higher premium than during other times. It makes sense, so both from a housing valuation point of view, and then I think banks are obviously also probably more conservatively managed.

1:05:39And so I think it makes sense that there is a bigger spread now. Now, could it still come in a little bit more and approach some of the levels that we had before? Of course, it's obviously possible, but I wouldn't bet that we return to the good old days where the 10-year rate was really low and the spread above the 10-year to get you to the 30-year fixed rate mortgage. That was also really – so we will probably not see 3 % mortgage rates again anytime soon. Right. And I think the Fed has also signaled that pretty clearly. Okay. Final question, and this is actually just something I'm personally curious about.

1:06:17Can you explain the Weimar Republic and the hyperinflation of the Weimar Republic and what happened and what can we learn from it? Right. Basically, it's in the interwar period between the First World War and the Second World War. Yeah. So Germany was, again, a republic, but it was obviously, it never got fully on its feet after the First World War, right? Because other, in the U.S., we had the roaring in 1920s, right? It's very economically successful. So some of this was true worldwide, but Germany was hampered by being the loser of the First World War. Yeah. So they had, I mean, first of all, as a loser of a war, and Germany never had much destruction inside of Germany, right?

1:07:07Because the First World War broke out, a lot of the fighting took place in, I guess, Netherlands and Belgium. And so the destruction within Germany wasn't that big. But then again, you had obviously war debts to pay. There was the Versailles Treaty that was very, very crippling, basically, economic sanctions on the war loser. which was essentially the opposite of what happened after Second World War. So after Second World War, and so if you ask anybody in Germany, they will all be very eternally grateful to especially the Americans. So Germany loses the war to America, and America being as gracious and forgiving as it is, in many instances, not just with Germany, said that, well, we actually don't want to do the same thing as the Versailles Treaty again, and we want Germany as a partner, because our next battle will be with the Soviet Union.

1:08:07People already knew that back then. Anybody who had any kind of foresight knew what was going to happen eventually. And so instead of doing the same thing as we did after the First World War, with crippling sanctions and basically destroying the economy and in some way also the society, because it caused unemployment, high inflation. So it definitely did a trick to the mind in the German society and the economy. So instead of doing that, we rebuild Germany and we basically get rid of the old leadership, obviously, but there's some good and decent people and some democracy-loving people in Germany, and we make them partners instead of crushing them.

1:08:54But, I mean, after the First World War, they did that other approach, right? We are going to completely crush Germany. And then under this crushing debt, well, what do you do? You do what, if you have to spend money and you don't have the tax revenue, well, you have the temptation of doing what we talked about earlier, right? What is one of the hallmarks of a stable economy is an independent central bank, right? Right. And you had the opposite, obviously, in the Weimar Republic, right? So you basically used the printing press to create money to spend. And that causes hyperinflation. And it doesn't really – because it's one of the oldest stories in economics, right?

1:09:39If you just print more money, then more money is chasing pretty much an unchanged number of goods and services. You can't just print yourself out of a recession. So that caused a lot of economic hardship. And then, well, very sadly, obviously, economic hardship also creates demand for crazy extremist political parties. And in some places, it went to communism, like in Russia. And in Germany, well, very sadly, it went into a different branch of socialism. It's called national socialism. And very sadly, we had that disaster. And yeah, so I was not very good in history. So I was more of a math geek.

1:10:26So don't take my expertise here as the last word. But that's basically my little five cents on German history. So the hyperinflation, how was that? Because basically any time that I hear, you know, we started this conversation by talking about inflation. Right. And any time I hear about areas that have had very significant inflation. Right. Generally I hear about Zimbabwe. Right. Venezuela. Venezuela. Yeah, exactly. Germany. Hungary. Yeah, yeah. And then the Weimar Republic always comes up. Are there lessons from that period of hyperinflation that we should be understanding today? Okay, so again, I don't want to wade too deep into politics or anything.

1:11:13But I mean, there are obviously in the US, there is a movement that's called modern monetary theory, NET. And yeah, I mean, I always warn that that is basically Weimar Republic 2.0, right? So there are some people who say, well, just because in the past we've had relatively benign inflation, well, why don't we just do this? The U.S. government, why do we even issue debt? Why don't we just print the money and then we don't have to pay interest on the debt? And, of course, well, the answer is, well, that has been tried and it has been tried in Zimbabwe and the Weimar Republic. And so there's no easy way out of it.

1:11:54So obviously we have limited resources, and above all, the government also faces that problem of limited resources and opportunity costs and making choices and trade-offs. And the modern monetary theory is basically viewed as some way to avoid this issue. And of course, you can't avoid it. It's just the same way you can't avoid gravity. And you can come up with some other theories, but the gravity will be there. And this is probably one of the, there are a lot of disagreements in economics about little nitty gritty details, but I have never heard from any mainstream economist who would say that this is a good idea.

1:12:35So the people who propose this modern monetary theory, and again, I might get some hate mail after I say this, but I would not consider them real economists and real classically trained economists. and it seems to me more like an ideology amount of science. So you kind of put the cart before the horse. Usually if you're an economist, you try to answer questions and you don't want the answer already known. So you have an open mind and then you want the data to educate you about something and then find an answer. You don't want to look the other way around. I have an answer and then I look for something.

1:13:16How can I justify that answer? And this is a little bit how MMT looks to me. And again, the disasters of inflation in the past, maybe Weimar Republic, they had to find it out the hard way. Maybe there weren't any big inflationary periods before that. But, I mean, definitely by the time we get to Venezuela and Zimbabwe, we have enough sample points in history and economic history that using the printing press to spend for the government is probably a bad idea. And so we shouldn't repeat these mistakes. And probably the very early mistakes, well, maybe they weren't mistakes. They were just people honestly thinking about this.

1:13:55And by the way, this might have been the only way you can really spend because you were under basically sanctions from the Versailles Treaty and everything. And they had really no other choice. But nowadays, we should definitely know more and not repeat these mistakes. True. I have to say, when I first learned about modern monetary theory, I was, it seemed so naive. I was shocked that it wasn't some type of a fringe theory. When I first heard about it, like, essentially the theory is just print money. Just solve all your problems by hitting the printer button. It sounds so naive that I was convinced this must be some kind of a fringe theory.

1:14:38I was surprised to see that it has become as big as it is. Right. And I mean, it's definitely it caters to a certain view that government obviously likes to spend money. Right. And they will they will never reject any proposal to spend more. And this is if somebody sells you this idea that, oh, we basically got rid of a budget constraint. Right. And that definitely resonates with some people. But, I mean, it definitely doesn't resonate with economists. They're definitely not mainstream economists, right? Because, I mean, budget constraints, this is one of the fundamental ideas that resources are limited and we have constraints and we have trade-offs.

1:15:21Right. And the same is true for the government. It's actually probably more so true for the government that we can't afford everything. Yeah. We just have to make some choices. and I think we are better off by following some of these simple principles in economics and if we get rid of them, don't tell me we didn't warn you, right? We will have basically Weimar Republic or Venezuela 2.0 or 3.0 or 4.0. Yeah, that's a good way to think it. It's the afford everything. It's the rejection of the truth that there are trade-offs. Awesome. Well, thank you so much for spending your time. Thanks for having me.

1:16:06Where do people find you if they'd like to learn more about you and your ideas? I have a blog, earlyretirementnow.com. Actually, so my claim to fame is Save Withdrawal, and it's obviously, but... You have a 36-part series. 61 parts as we speak, and I'm working on 62 and 63. And this has slowed down, obviously, because I've been blogging since 2016, right? So including the Safe Withdrawal Rate Series, I published that first part in 2016. It's not that this will ever be completely finished, because there will always be some small side issues that come up. But I definitely wrote a lot about the major issues.

1:16:44But again, I also write about other stuff. I do a little bit of option trading, which would be a whole separate hour of conversation. And then I also occasionally write about this economic issue. That was particularly popular during a pandemic, so 2020, 2021, 2022. I wrote a little bit more about that. Yeah, so these kinds of blog posts are always very popular, or just general personal finance questions, not necessarily related to, say, withdrawal rates. So come check me out. And I'm on Twitter, too, but mostly I'm on my blog. Very nice. And you're enjoying yours? Yes, very much. Well, thank you for coming on the show with us.

1:17:26you are so full of knowledge. Welcome back anytime. Okay. Thank you so much. That's our show for today. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. Y 'all are awesome. I'm so happy that you're part of the Afford Anything community. Make sure you're following this podcast on your favorite podcast playing app, and I will meet you in the next episode.

From the publisher

#548: Economist Dr. Karsten Jeske talks with us about the current economic landscape. Karsten, who retired at 44, breaks down the Fed's recent decisions and how they might affect our finances.

He explains how markets often anticipate interest rate changes before they happen. Karsten challenges traditional views on inflation and unemployment, telling us that textbook models don't always match reality.

Karsten shares his personal investing experiences, covering both market highs and lows. He emphasizes the value of consistent investing regardless of market conditions.

For those eyeing retirement, Karsten dives into safe withdrawal rates. He advises paying close attention to current market valuations when planning. On the topic of mortgages, he offers clear guidance on when refinancing makes sense.

We also touch on economic history, discussing the Weimar Republic's hyperinflation. Karsten uses this to critique modern monetary theory, expressing skepticism about unrestricted money printing.

Throughout our conversation, Karsten explains complex economic concepts in accessible terms. He draws on his background as both an academic and a Wall Street professional to provide well-rounded insights.

Karsten, also known as Big ERN, is the author of EarlyRetirementNow.com, where he writes about safe withdrawal rates and personal finance while enjoying his retirement.

For more information, visit the show notes at https://affordanything.com/episode548
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