In short
Prof G Markets Episode Summary: What Happens if the Fed is Compromised — ft. Claudia Sahm
Episode Overview In this episode of Prof G Markets, hosts Scott Galloway and Ed Elson are joined by Claudia Sahm, chief economist at New Century Advisors and former Federal Reserve Section Chief. They engage in an in-depth discussion about the independence of the Federal Reserve, the current state of the U.S. economy, and the implications of market concentration among a few high-performing stocks.
Key Themes and Discussions
- Fed Independence
- Importance of Independence: Claudia explains that the core question of Fed independence centers on who sets interest rates — politicians or a group of experts in the Federal Open Market Committee (FOMC).
- Current Threats: The Fed's independence is under scrutiny, especially with actions from political figures like President Trump expressing opinions on interest rates and attempting to remove Fed Governor Lisa Cook.
- Risk of Politicization: If the Fed were to operate under political influence, it could lead to:
- Short-term economic booms followed by inflation.
- Increased unpredictability in economic policies, undermining investor confidence.
- State of the U.S. Economy
- Labor Market Dynamics: Claudia highlights the unique "low hire, low fire" job market where:
- Low hiring rates contrast with a relatively low unemployment rate of 4.3%.
- Immigration Factors: Recent shifts in immigration policy have affected job creation, contributing to the current labor market scenario.
- Recession Indicators: The SOM rule, which Claudia developed, indicates potential recession risks based on unemployment trends, but currently shows no immediate recession on the horizon.
- Market Concentration Risks
- Concentration in the S&P 500: The hosts discuss the dominance of a small number of companies in the stock market, which represent a large portion of market cap and earnings growth.
- Potential Impacts of AI: The conversation touches on the speculative nature of AI investments and the risks of potential market corrections if the high expectations are not met.
- Historical Context: Claudia links current economic situations to historical patterns of overinvestment in transformative technologies, indicating possible future corrections.
Key Takeaways
- The Fragility of Fed Independence: The potential for political influences on the Fed poses significant risks for economic stability.
- Bifurcated Labor Market: While existing workers enjoy job security, new entrants face challenges in securing employment, indicating a divided economy.
- Caution on Market Concentration: The increasing reliance on a few major firms for economic growth may lead to vulnerabilities, especially in the face of technological shifts and market corrections.
- Continued Monitoring Needed: Economic indicators, particularly in the labor market, require vigilant observation as shifts could signal upcoming economic challenges.
Conclusion The episode provides a comprehensive overview of the interplay between federal monetary policy, the current economic landscape, and market dynamics. Claudia Sahm's insights emphasize the importance of maintaining Fed independence to foster a stable economic environment and caution against over-reliance on a few dominant companies in the market.
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Additional Resources
- Subscribe to the Prof G Markets newsletter for ongoing insights and updates.
- Order "The Algebra of Wealth" for a deeper understanding of economic principles and wealth management strategies.
- Follow Prof G Markets on social media for daily financial insights.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:00Support for the show comes from Anthropik, the team behind CLAWord. When you're analyzing market trends or trying to understand what's really driving economic shifts, you need more than surface level takes. Meet Claude, the AI thinking partner that works through complexity with you. Whether you're dissecting earnings reports or exploring the ripple effect of policy changes, Claude helps you dig deeper into the analysis that matters. Try Claude for free at clade.ai slash propgmarkets and see why the world's best problem solvers choose Claude as their thinking partner.
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1:38Today's number 116. That's the age of the world's oldest person, a British woman named Ethel Caterham. Ed, what does oral sex taste like for seniors? I don't know. Depends. you really don't get that i think you've done this before and i haven't gotten it in the past either old people were depends i don't know what that is i don't know what that is that's it all right never mind never mind never mind i'm at a conference and i'm peeing so and this guy rolls up next to me and he starts peeing and he looks over and he says uh not circumcised and i'm like Nope, that's just the wear and tear.
2:19Depends. We should have stuck with the pants.
2:25Listen to me. Markets are bigger than us. What you have here is a structural change in the world distribution. Cash is trash. Stocks look pretty attractive. Something's going to break. Forget about it. I love seeing you laugh uncontrollably, Ed. Yeah, uncontrollably. I can't help myself. I think you're just punch drunk. drunk. These jokes are going to get, they're just getting worse and worse. I just cannot imagine what's going to happen in like five years. I'm running out. Someone needs to buy us and then tell us that we're not allowed to do the jokes anymore. That's how we get out of this. I know it'll make you feel better.
2:57It's time for me to take a victory lap. What did I predict, Ed? What did I predict? You had a great prediction, which we forgot to include in our daily episode. We was taken private for$55 billion, largest take private in history. And it genuinely slipped my mind, and I apologize, you did predict that in 2025, we would see the largest take private in history. Let's play the clip. Private equity firms have almost$3 trillion in capital that they need to deploy. Some big names have gotten beaten up so badly in the market that I think they're attractive. I think biggest take private in history is gonna happen in 2025.
3:40Your reaction, Scott? Well, you know what? I don't like to talk much about myself. What do we have here? We have a ton of capital on the sidelines. We have basically a feckless FTC and DOJ that don't offer review of anything. We have really deep-pocketed entities in the Gulf who are dying to figure out a way to diversify their economy. and we have these companies that are looking, are basically kind of, you know, feel like they've run out of juice or they're not sure how they're going to get from 40 billion to 80 billion. And you have what is historically actually a fairly low interest rate environment.
4:19It may not feel like it's low right now, but historically it is. And so it just kind of all adds up to we were going to see a big deal. In the gaming, I didn't, I mean, it's just another observation And I want to I would love for you to break down a little bit about the deal, because I know you talked about it yesterday. The thing that struck me is that this would have been the biggest news in the world if we weren't dealing with multiple wars and a guy that is that is that is sending our military into our own cities. This would have been hair on fire, CNBC special episode, special hot take from us.
4:55And we it barely even registered. It's like, OK, the regular news doesn't mean much when you have incoming missiles all of the time. So I would love to get your take on what you think this deal means or any specific atmospherics around the deal. Well, I think it was a really good idea by the investors. And yes, there was the Saudis that were involved, but also Silver Lake, which is the big private equity firm, also involved in the TikTok deal. But the thing that struck us, at least, is you've got this industry that is massively exploding. I mean, you've got, I think it's half of the world now playing video games, and that's up more than 60 % in the past 10 years.
5:39and yet despite all of that despite the fact that you have this industry that is just absolutely exploding that is eclipsing uh even television in terms of um revenues in terms of influence despite all of that video games only make up three percent of global ad spend and you know meanwhile you've got your tv which is commanding like a quarter of global ad spend so we think the thesis here is you're just going to see ads pumped into this business because they aren't really taking advantage of all of the attention that they command, and it's a lot of attention. And so our view is this is sort of the perfect private equity play where you take this business that a lot of people have a lot of love and admiration for, and then you figure out, okay, how do we squeeze as much cash as possible out of this thing?
6:29It probably is going to be detriment of the gaming experience. It probably means that your gaming experience is going to be kind of inundated with ads now, as we see on social media. But ultimately, we think it's a good play from an investment perspective, because this is sort of an oil field that is untapped. They haven't figured out how to rinse as many ads as possible out of this business. So, $55 billion, a lot of money, largest take private in history. Our view, from an investment perspective, it's a good one. I thought the gentleman you had on to talk about it was, it was really interesting.
7:04I didn't realize it's sort of the traditional world where EA is strong in terms of consoles and buying games that that world is declining. And it's all about free games and all about mobile. To your point around, if you can capture attention, you can monetize it. It is an attention, I would argue, an addiction economy. I made an investment in this space. I But solely based on, I saw my 11-year-old just obsessed with, addicted to Fortnite. And I actually, I'm not one of these people that's like, video games are terrible for people. I like multiplayer games. It's sort of social. They have kind of missions, achieve successes together.
7:45I'm less down. Of all the things my kid does on a screen, I'm least worried about video games. And there's been some research showing that in nations that have really high penitent, there's no correlation between video game usage thus far and violence. Although most recently, it appears that a lot of these shooters were way too into video games. Having said that, I made an investment in 2022 in Epic. And I was so excited about it. My son literally yells out these battle cries. I'll hear from four floors down, I'll hear, or, yeah, and I know he's, I mean, I know he's playing a video game with his friends, and I just find it, I remember the first time he did that, I got, whatever he's doing up there, I've got to invest in it.
8:33And I found out, and Epic has this thing called Unreal Game Engine, and the lesson here is the following. I think I am down 40 % on my most recent mark on Epic, and it's because something that I think a lot of us fail to realize is that there's two sides to the prospects of an investment and that is it can be an amazing company it is still possible to lose money in 2022 I looked at I think everything I invested in in 2022 of the five investments or six investments I've made I think all but one are underwater because just as important as the underlying asset is the price you're paying for it. Exactly.
9:13So I made an investment in a Yellow Pages company that ended up being one of my best investments because quite frankly, we were able to get in at like one and a half times EBITDA. And we knew the Yellow Pages was going away, but it wasn't gonna go away in 18 months. And I was so excited about Epic and everyone was so excited about digital because we were all at home spending all of our money on digital platforms that everything just skyrocketed and almost every, all the vintages in the venture capital community that were deployed in 22 are really struggling. So lesson here is that there's two sides.
9:47You can get very intoxicated. I had a chance to invest in Warby Parker. This is one of my better decisions. And it was the last private round before they went public. And this is, I love Warby Parker. I'm wearing them now. I like the management team there, you know, Wharton guys. I just think the amazing supply blockchain, story, differentiation, great stores. I just absolutely love this company. And they were raising money in the private markets of like$2.5 or$2.7 billion or something. And I looked at it, I'm like, no fucking way. I mean, that's just crazy in terms of multiple revenues. And five, seven years later, the company has a market cap of$3.3 billion.
10:31And if you look at dilution or there's just no way anyone made any money in that round, or maybe they got their money back. And I think there was real downside there. So again, everything, at some point, everything is a good deal. And at some point, everything is a bad deal. And I'm hopeful that this deal inspires a substantial tick up in valuations across the whole sector. And it is, some of the data on the sector is just striking. We spend so much time obsessing over movies and strikes and Bob Iger and Jimmy Kimmel. They're literally pimples on the elephant of games, of video gaming. This is just such an enormous industry with so much potential upside.
11:15Are you a gamer, Ed? I certainly used to be. I've decided I'm not going to get a console because I'm worried I will get addicted. I'm a little worried because GTA 6 is coming out. And from what I've seen, that's going to be one of the most remarkable video games of all time. I don't know if you've seen the commercials for this game, but it looks unbelievable. It's called GTA 6? Grand Theft Auto 6. Oh, really? I thought that was a new GLP-1 job you'd take to stop jerking off to porn or something. Grand Theft Auto. I never played Grand Theft Auto. I've sometimes thought, okay, well, maybe I'm going to have to get that game because it's going to be this giant cultural moment and I can't miss out.
11:51But I am worried I'm just going to get addicted. I was just totally addicted to FIFA when I was a kid. Love FIFA. I was addicted to Call of Duty when I was a kid. I mean, I remember asking my mom for Call of Duty. She said, absolutely no shot. And then she realized that all of my friends had it. And she was like, okay, well, I can't let him be a loner. So she let me get Call of Duty. I got totally addicted. So I used to be a gamer, but I don't do it now because I know that it'll be a problem and I'll probably get worse at this job. I think everyone has a certain level of addiction in their life.
12:22And I think it's important to do an assessment of addictions. And that is things you do beyond their utility that start to infringe on other parts of your life. you used to be addicted to Grand Theft Auto. You gave that up. What addiction have you replaced it with? What are Ed Elson's addictions? I think my addiction is just Instagram Reels at this point. I'm on Reels the minute I wake up. I'm on Reels when I go to bed. And if I lose focus while I'm working, I'm on Reels. I think that's my big addiction right now. I get a feeling you have that addiction too. I'm freaked out that anyone that actually picks up my phone and sees my Explorer page is going to go, This is a pervert obsessed with killer whales.
13:03It's either some hot young woman or a killer whale jumping up. That's it. That's my life. This is the guy who's the role model for struggling young men. Orcas and hot women. That's what life's all about. My addictions are, I have two addictions, and I think it's important to keep track of them. I consume a lot of alcohol and THC, but I don't think I'm addicted to it. Although last night I was so dying for a beer and I usually don't drink alone. And I had a beer alone. I usually don't do that. And also, I think I told you occasionally I get nervous. I shotgun a beer behind stage and I go on to speak.
13:36That's definitely alcoholism. You've never told me that. Is that true? Are you kidding? For some reason, especially Bill Maher, they put you in a little dressing room and they have alcohol in there. And I shotgun a beer before I go on.
13:50You actually shotgun? You do a shotgun? Not like the can, like Will Ferrell. Okay, okay. You just pound it. I don't do a beer bong, but I actually have, for some reason, they have Amstelite and Heineken, two medical brands. I close the door so someone doesn't think this guy's got a problem. I crack open the beer and daddy just downs it. And then it's like, okay, it's go time. I like that, actually. That's very good. Anyways, but I don't think those are my addictions. My two addictions are I'm addicted to money. I think way too much about it. And it infringes on the quality of my life now. I've spent so much time trying to get economic security.
14:26I can't get off this hamster wheel. And I think way too much about it. And I'm in my head about it and obsessed about it. And if my stocks go down one day, it bumps me out, even though it has no impact on my life. Anyways. And the second thing is the affirmation of strangers. uh i will be bummed out about performing poorly on some stupid fucking show where i get you know negative comments and i'm spending all day saturday with my kids and i'm not engaged with my kids because i'm worried about what you know dog lady madison thought about my appearance on pierce morgan that's definitely an addiction anyways when did that addiction show up for you the affirmation of others one.
15:07Did that coincide with becoming a public figure or has that always been there? It was when my dad abandoned me.
15:16I think the need for the affirmation of others had something to do when my primary role model decided to move to Ohio with a stewardess from Continental Airlines. I mean, I think that has something to do with it. You know, just going out on a limb here. I think that probably Oh God Oh God Hold me Ed Hold me That wasn't a fair question for me was it The biggest take private ever Oh God Anyways Yeah No it's You know I think I'm a bit of a My ego is way too fucking big I'm a bit of a narcissist Insecurity Wanting affirmation from strangers Not getting enough of it I don't know Let's move on, but just my final question.
16:07I know that you're going to Chelsea Benfica tonight. Oh, yes. How did you get the tickets? And I mean, I asked that because I know that you're going to be in the box. And I'm jealous of you. So give me some info. So this is a flex. I met one of the owners at a conference. And I mentioned Chelsea in my talk. And he texted me and said, would you and your son like to come to a game? And my son is thrilled. and I'm super excited and I just hope is Cole Palmer injured? I hope not. He's injured. Oh, nothing's ever perfect. And we're not doing very well. We had a terrible loss to Brighton over the weekend.
16:46Yeah, we're not doing well but I'm super excited. My prediction for you is you're going to switch from you went from Arsenal sorry, no, you went from Chelsea to Spurs to Arsenal. My prediction for you is you're going to become a Crystal Palace fan by the end of the year. I like Crystal Palace. I do. I like Crystal Palace. I want to go smaller team. It's so cliche to go to one of the big three. I want to go with one of the underdogs. I want to go with one of the smaller teams. Yeah. That's my prediction for you. Wish me luck.
17:17We'll be right back after the break. If you're enjoying the show so far, be sure to give Prof G Markets a follow wherever you get your podcasts.
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19:28Yeah, you won. Do that, doing that, did that, done. Now you can do that, do that with Acrobat. Now you can do that, do that with the all-new Acrobat. It's time to do your best work with the all-new Adobe Acrobat Studio.
19:47We're back with Prof G Markets. Okay, here is our conversation with Claudia Sarm, Chief Economist at New Century Advisors and former Section Chief at the Federal Reserve. Claudia, thank you very much for joining us on Prof G Markets. Thank you for having me. Happy to be here. So we want to talk about the Fed with you because you worked at the Fed for over 12 years. You understand all things Federal Reserve. This is a very interesting time for the Fed right now. I think the big question mark for the Fed probably at the moment is this question of independence. How independent is the Fed really? Is its independence being eroded?
20:29That's certainly the question that investors are most interested or anxious about. So I will just start there. What is the state of the Fed's independence right now? So first of all, when I think of Fed independence, I mean, this really boils down to a question of who decides what interest rates are going to be, what the federal funds rate is going to be. Is it going to be politicians? I mean, we know President Trump has been very clear what he thinks the federal funds rate should be, something like 1%, under 2%. Or is it going to be a group of technocrats, right? So the Federal Open Market Committee, these people are experts.
21:05They're not politicians. They're not elected officials. They're the ones that cast the votes. They're the ones that decide what is the federal funds rate. Okay, so it's really a question about who controls interest rates. And the Fed is in a period of transition right now. We've seen the first of President Trump's second term nominees, Stephen Meyer, and joined the board at their last meeting. And, you know, there's all eyes on who's going to be the new Fed chair, right? And that's a very standard way that the politicians have an influence. But at the end of the day, that doesn't really control interest rates.
21:40We right now have an independent Federal Reserve. They are still setting interest rate policy. They are not following the president's guidance on what the federal funds rate should be. And yet we are at a moment where that independence is under threat. And I think particularly the threat escalated when the president in August attempted to remove Fed Governor Lisa Cook from the board. And this is going through the courts. The Supreme Court will issue, a ruling on whether she can be removed or not, as her case proceeds. And that's really a step. If the president is successful, we'd be moving into a world where the Fed very much is controlled by the president.
22:25Just to play out what the economy would look like if the Fed were truly not independent, if it were under the influence of politics and the president, what exactly is the risk there? What happens, say Trump has control over the Fed, what is the downside? What is the risk? There are, you know, modern examples of central banks where politicians take control. Turkey is one. Argentina had an episode as well. And the typical concern is when politicians take control of monetary policy, when they're the ones that set the interest rates, often they'll hold the interest rates really low to try to get the economy going.
23:07like boost demand and really have a great, you know, a real boom. The problem is that boom often leads then to inflation and other instabilities and then say you'd have to raise the interest rates to get the inflation under control. So the typical concern is that it would end up being inflationary. And President Trump is also I mean, he's talked about ultra low interest rates as his goal, and that probably at this moment would have some inflationary effects. Now, I think the other thing that maybe, you know, as Mark is trying to grapple with these possibilities that maybe isn't talked as much about is it could just get really chaotic.
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23:50Like if we think about what's happened with trade policy, it used to be that if we had trade, you know, there'd be negotiations and there'd be treaty. Like it would be a long process. And we're at a place now where the president shows up on true social some evening and, you know, blasts out four new sets of tariffs. That unpredictability, because then it really comes down to what does this one person want? Like, we've gotten used to a Fed that responds to data and the Fed that has Taylor rules. It, like, has things that we're used to interpreting and the markets are used to thinking about. And it would really be a whole new world of just, what does the president want today?
24:29Yeah, when you think about the signals that we've had that we are moving away from Fed independence, I mean, if I were to just sort of map them out, one, it's the tweeting or the truthing. basically saying and shouting about how interest rates need to come down, interest rates are too high, Jerome Powell's too late, he's a dummy, he's a moron. So you've got all of that. That seems new, I guess. You've got firing Lisa Cook, or the attempted firing of Lisa Cook. It looks like it isn't going to go through. Maybe it'll go through. We're not sure. And then you've got the appointment of Stephen Myron, who is still in the White House, still in the administration, but his position is sort of being temporarily put on hold, but he isn't giving it up.
25:19So it appears that he's kind of doing two jobs at the same time. Those are the big three that I've seen. I'm just wondering, is there anything else that would indicate that we are seeing the erosion of Fed independence? And if not, what do those three things tell us about where the Fed is headed? So the other one I would add that's come into a discussion, a concern, involves the Reserve Bank presidents. So every five years, the Reserve Bank presidents need to be renewed. So in most of that process is at the district level, you know, the board of directors for, say, the Atlanta Fed or the Chicago Fed.
26:01They do a review of the president and make a recommendation as to whether that president should continue in their role or not. And the board of governors, so the seven members in D.C., they have to sign off on that. They also sign off whenever a new president is put in place. Typically, this is kind of a rubber stamp. I mean, the process is done very well at the district level, so it would be very strange for there to be a problem that's unearthed when it gets to Washington. But it has been pointed out that if if come and the renewal is in March of next year. So when we get to that point, if there were a majority of loyalists on the board, you could also have a way to start removing Reserve Bank presidents.
26:49I mean, these things like never should be talked about as possibilities, but it's something that has been a concern. And I think that's one of the reasons why this whole like how quickly could the president get, quote unquote, control of the board in terms of a majority has taken some extra urgency because, as you know, the Federal Reserve, it's a complicated system. You have the seven governors in D.C. They're all nominated by the president, approved by the Senate. Then you have 12 reserve bank presidents. So there's the districts and five of those 12 vote at any given time. And for a lot of the monetary policy decisions, you need a majority of the Federal Open Market Committee.
27:30So it's kind of like the question of the math. Like, how do you get the people? And one of the protections for the Fed to be independent of politics is that the board in D.C., they serve 14-year terms. And so every few years, there should be a governor position come open. But no president comes in on day one, gets to, like, pick a new Fed, right? Like, it's spread out over time. They have long terms. Their tenure is protected. They're only supposed to be able to be removed for cause. And so that's a key way that the Fed is shielded from some of the the president says, do X. And the Fed says, no, we're not going to do X.
28:13And they say, well, you're fired. Right. And we're we are moving towards that space. Now, it really a truly big decision point will be what the Supreme Court has to say about exactly how strong are those protections of tenure. Can the president remove a sitting governor for unproven allegations? Like, does the president get to determine what causes? Do you have any predictions on that? What do you think they'll say? The appeals court said no. Now go back up to SCOTUS. It's interesting because there are many agencies that have been considered independent, so the Fed is among those, that the president has removed their leaders.
28:55So the National Labor Relations Board, the Federal Trade Commission, right? So there have been agencies where the president has been removing independent leaders of those agencies sooner than their terms would normally be up. The Supreme Court has stood by that. What's interesting is in one of the earlier cases this year, the Supreme Court, and they didn't really have to, but they went out of their way to say, hey, the Fed is special. Right. It's not like all the other independent agencies. The removal there has to be for cause. You can't the president can't just remove. And frankly, if the president can decide what for cause is without judicial review, which is what the White House is saying, that really isn't for cause.
29:39Yeah, they need to prove she's guilty. Yeah, it's like that's kind of at will. So I feel like the Supreme Court has planted the flag. And I do really believe that if Lisa Cooks, if the president's able to remove her, she will not be the last. person removed by the president. I mean, over the weekend, he was tweeting out a cartoon or a true social post of a cartoon of the president firing Powell. I think it's difficult for many of us to discern the signal from the noise regarding the U.S. economy right now. Can you do your best to give us sort of your overview of the cliff notes on the state of the U.S.
30:12economy? At any moment in time, the U.S. economy,$30 trillion plus. I mean, we have a very dynamic economy. It's hard to read the tea leaves at any point in time. I think some of the aspects of the economy right now that are curious or maybe unusual is we've had, and I think some of this is still a little bit of an after effect of all the turmoil that we went through with the pandemic and the economy. But I mean, we're getting well past that. But I think in particular, one area that's been of concern is in the labor market, right? And we have, we've seen the hiring rate has really fallen back down to levels that are much more like the early years after the Great Recession, which was not a good labor market, right?
31:06But at the same time, the unemployment rate is 4.3%. This is, you know, it's not the cycle low, but it's historically a relatively good unemployment rate. So you have a very low hiring rate. The layoff rate is also extremely low. So we have what has been kind of coined the low hire, low fire jobs market. And what that means is you get a very bifurcated experience. For workers who have a job, basically like their job, they're in a good place. Companies are not laying off their talent. And some of that I think, you know, businesses had a really hard time in like the early recovery from the pandemic being able to hire.
31:53Like there were labor shortages, there were issues. And so you have this kind of people, businesses hang on to their workers. We're not losing workers. So that's very good if you have a job. But if you are someone who is, say, finishing your education, coming out into the labor market, if you are among those who become unemployed, it has been. And this is not just a new thing. This is probably almost two years now. We've had this aspect of the people coming in are the ones having a really hard time. Now, you know, how that resolves itself can go different directions, but it is it's a it's a vulnerable setup.
32:28because say something were to happen in the world that pushed up the layoff rate, you know, I mean, there are all kinds of various, you know, economic calamities. You would be laying off workers into an environment that has a depressed hiring rate. And so then the unemployment rate, which now is pretty low, could move up and it could move up very quickly. Overall, it's not a bad labor market, but it definitely, depending on who you are as a worker, makes a big difference. The other piece that's been really important in recent years is we've had some big swings in immigration, so in our labor force.
33:08And that means that there was quite a bit of job creation in the past two, three years that was related to an inflow of immigrants. And I mean, whatever the politics and the social aspects of it, like it was a piece that was helping the immigrants were helping boost economic activity. And since last summer, so towards the end of the Biden administration, immigration restrictions began and they've really intensified under the Trump administration. And so we've seen this shift from an inflow of immigrants to a real pullback in terms of immigration. And where that shows up, at least in part, is when we look at, you know, the job creation numbers, which in the last three months, the U.S.
33:52economy produced less than 30 ,000 jobs a month on net. We have like almost 160 million workers. That's nothing. I don't see a recession on the horizon. I think these are real, you know, the labor market's something to be concerned about and the Fed's trying, you know, lower interest rates and get ahead of things. And that makes sense. But overall, you look at the economy and it's still powering forward. We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com slash subscribe.
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37:15We're back with ProfG Markets. So we have 10 companies representing 40 % of the total market cap of the S &P. 70 plus percent of the earnings growth has come from these 10 companies. Do you see any risks around concentration of market value and earnings growth coming from such a small number of companies? And one of our theses here is that if we were to see an unwinding or a significant drawdown in the markets and that might trigger a recession, that it would likely be a realization or a sobering of the market's perception of the potential of AI. Have you given any thought to this increasing concentration across a small number of stocks and what impact AI mania, AI, irrational, you know, irrational or rational exuberance might have on the economy and the labor markets?
38:10With artificial intelligence, we're still in early stages of the technology and certainly very early stages in how that technology is going to be applied. There's big expectations. That's why the valuations are what they are. We do know from history when there are transformative technologies that happen, you know, things like the railroads, electricity, right? Like the historical record is such that you do see a period of kind of overinvestment or exuberance. And there's a correction. If the technology is what its proponents think it is, like over the long run, it will come out as a positive. But it is the case that it's at least historically, and I'm not like predicting that the bottom is going to fall out, But it's hard for these new technologies, for the real-world applications to move as quickly as the expectations.
39:09And I think we've certainly seen at various points, like in the news cycle, things will come up and people doubt the AI trade. And so it wouldn't be surprising to have it have a period that in the end will look like a bump in the road, but at the moment will probably feel like more than a bump. And, you know, the wealth creation, whether it's concentrated or not, this like looking at households and their balance sheets, we really have seen a pretty notable increase in household wealth. And it's not just through the mortgages. I mean, you know, this isn't equally shared, but it is a piece to it.
39:50And I think that if there were to be an event that called into question the wisdom of some of the investments being made in AI, it probably would be sufficient to cause, you know, destroy enough wealth quickly enough to cause a recession. But when I kind of talked about like this isn't a good environment to have something bad happen because we've got this low hiring. I mean, some disruption within the AI space that vaporizes a certain amount of wealth in a short period of time, that is exactly the kind of thing that could happen. Claudia, you have an economic rule named after you called the SOM rule, which I've read about a lot in the past.
40:30The rule states that, quote, when the three-month moving average of the national unemployment rate is 0.5 percentage points or more above its low over the prior 12 months, we are in the early months of recession. How did you come up with this rule? What is its significance? And does this tell us anything about where we are in terms of recession risk right now? I came up with this recession indicator for a project I was doing with several colleagues on how to fight the next recession. And it was a whole volume on what are called automatic stabilizers. So putting fiscal policy on autopilot, tying them to economic conditions, not to Congress getting its act together and passing stuff.
41:12So kind of getting a plan ahead of time. I'd worked on a proposal to do stimulus checks, something that the U.S. government has done in every recession in recent memory. But like if we wanted to design this ahead of time, do it really thoughtfully, when would we know it's time? like send out the checks and to get them out quickly because often fighting a recession, if you can get in at the early innings, that's the time where you can make a difference. So really the project was about how to fight recessions, but, you know, it was a volume where they wanted some specifics, like, you know, what would be the real plan here?
41:41And so the SOM rule was, I mean, I was just putting together an indicator that would reliably say we're in a recession. It's time. Send out the checks or enhance the unemployment benefits or, and, you know, because it was something that was meant to be in legislation, it needed to be simple, transparent. I mean, it's using the unemployment rate. That's, I mean, a lot of the reason we fight recessions is unemployment. Rising recession is very bad. It's not a forecast. It was meant to like the recession is here. And the logic of it is just that even small increases in the unemployment rate can often be bad news, right?
42:20Because the unemployment rate, it tends to at first rise fairly slowly. Half a percentage point increase is really not much of anything, right? But once it gets historically, once it was past that threshold, it just keeps going. So in a typical recession, you're talking about two to three percentage points of increase in the unemployment rate. So it had, you know, worked really well historically, worked in the pandemic. I think anybody could have known we were in a recession in March of 2020. But then actually last year, you know, it didn't work. It triggered last year. And this was a case where the unemployment rate is, it's the number of unemployed people out of the labor force.
43:03As I mentioned before, with immigration, we had some really big swings in the labor force. We had a period right after the pandemic where we had labor shortages, people dropped out of the labor force. Then we had the big swing in immigration. And so the unemployment rate was just, you know, pushed up just enough from that, that it triggered briefly last year. And at the time I said, this is not a recession. Look around at all the other indicators. You know, no indicator is perfect. It was exactly, you know, the moment at which the summer would break. As for what's happening right now, the unemployment rate has risen a bit in the last few months, but it's really been pretty steady within a range over the last year.
43:48The effects of immigration are kind of working in the opposite direction. So we have, because we're losing, you know, workers, we don't have the same labor force growth, so it kind of pushes down on the unemployment rate. So I'm watching it. It is nowhere near triggering, but it probably, given what's happening with the labor force won't be the first indicator of a recession. But the idea, and I think this goes more broadly than just looking at the unemployment rate, it's often with the macro statistics, how much are they changing and how fast are they changing? So even small changes, if they appear to be getting some momentum, that's often the tell that things are starting to go south.
44:30I don't see that right now in looking at the SOMO or looking at a lot of the other indicators I do, but it's certainly worth, I mean, it's always worth keeping an eye on. Claudia Somm is chief economist and New Century Advisors, the founder of Somm Consulting, and a regular contributor to Bloomberg Opinion. She created the Somm Rule, a recession indicator based on increases in the unemployment rate. Previously, Claudia was a section chief of the Federal Reserve, where she oversaw the survey of household economic and decision-making. Before that, she worked for 10 years on the staff's macroeconomic forecast.
45:01For more of her work, you can subscribe to our newsletter, Stay at Home Macro. That's a great name, Claudia. I very much appreciate your time and keep up the good work. Thank you. Thank you so much.
45:15This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our research team is Dan Chalon, Isabella Kinsel, Christina O'Donoghue and Mia Silverio. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.
45:51Thank you.
46:01And the dark flies in love.
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From the publisher
Ed and Scott are joined by Claudia Sahm, chief economist at New Century Advisors and former Fed Section Chief, for a conversation on the Fed’s independence. Claudia weighs in on the health of the U.S. economy, the growing concentration in the stock market, and where she sees recession risks right now.
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