Deciphering the Global Economic Puzzle | David Rubenstein

0:00Look, as a manager of people, as an employer, as an entrepreneur, and as even an investor in startups, I can tell you the most important thing for your business is the quality of the quality of people. you hire. The best part is that great candidates are already on LinkedIn. Employees hired through LinkedIn are 30 % more likely to stick around for at least a year compared to those hired through the leading competitor. And I will tell you that the great thing about LinkedIn is that you're not just looking at random people. You're able to see the people who your friends and trusted peers and colleagues who they trust and who they've hired in the past and who they recommend.

0:42And hiring doesn't have to be complicated. Realistically, when you have a business to run, you don't want to spend hours on hiring. You want to hire the right person as quickly as possible. That's why LinkedIn Jobs AI Assistant suggests immediately 25 great big candidates daily so you can invite them to apply and keep things moving. Hire right the first time. Post your job for free at linkedin.com slash altature. then promote it to use LinkedIn Jobs' new AI assistant, making it easier and faster to find the top candidates. That's linkedin.com slash Altachirk. Post your job for free. Terms and conditions apply.

1:24I wanted to understand what is going on in the economy, in the United States, in the world. Are we in a massive crisis? Like some people suggest, are we doing okay? Did the Fed raise interest rates too much? What's going on with the US dollar and oil? What's going on with unemployment? Are we going to enter a recession? And of course, no one has all the answers. And I've done a lot of reading on this. And you, the listeners, and I have already had these discussions a little bit. But I brought on a guy who is definitely one of the, he might not consider himself this, but he's definitely one of the experts in the world.

2:00He's David Rubenstein, been on the podcast several times before, runs the Carlyle Group, which is one of the biggest private equity funds on the planet. I mean, he manages about a half a trillion dollars. So he sees where the economy is going. He's got a half a trillion dollars worth of investments, which means trillions of dollars worth of businesses overall that he's involved in, and that he's got his finger on the pulse of. And he's been in and involved with the economy and the political system since the 70s. So there was no better person to call and say, what is going on? And David was nice enough to come on and answer all the questions I had.

2:39So here's David Rubenstein.

2:44This isn't your average business podcast, and he's not your average host. This is the James Altucher Show.

3:01So, David, I really wanted to just ask you about your opinions on the economy. Just from my own perspective, everything seems to me, with my limited experience, more unpredictable than I've ever seen it before. This time, things are different in terms of the circumstances that led up to this. You've said that the Fed might raise their inflation rates. You've been at times optimistic, at times pessimistic. Like, what's your overall feeling? My general view is that the Federal Reserve is being very cautious, as you saw from J-PAL's most recent statement in Grand Tetons' retreat in Jackson Hole. I think that he's very afraid of being seen as too dovish and saying, well, we've conquered inflation.

3:49it's down to 3 % or so, and we can definitely next year reduce interest rates. He made it clear that we're not out of the woods yet, and therefore the market is assuming the chance of another 25 basis point increase this year is reasonably good, though it's not guaranteed. The Fed does not want to be in the embarrassing position of saying inflation has gone down, we can begin lowering interest rates, and then they have to backtrack. That's the last thing they want to do, it destroys their credibility. So their credibility is premised on and basically taking us in the direction that they said they're going to get us to, and that is 2 % and inflation rate.

4:30I think that's very difficult to do, but certainly we're not there yet. So I would expect that probably another 25 basis point increase at some point this year, and probably not a lowering at least until we're past the first two quarters of next year. Well, you know, I'm curious because before the pandemic or right around the time of the pandemic, like March, 2020, the fed's biggest concern was deflation. They couldn't seem to lower interest rates enough. And so at some point they decided, Hey, we don't need to be at 2%. We're going to, we need to be around there. We're going to overshoot a little to try to get inflation rather than deflation.

5:09And then of course they overshot too much. Could it be that they're overshooting too much on the downside, given that we really don't know the actual future effects of the recent rate hikes. Well, of course, as the Japanese and others have learned over the years, getting out of deflation is much more complicated than getting out of inflation. I think the Fed did not want to increase interest rates at this level to get some inflation into the system. I think the COVID basically scared the policymakers in the Trump administration and the Biden administration into taking action because they thought the economy would be so slow and so low that they had to inject enormous amounts of liquidity into the market.

5:54They did so thinking it would be transitory, and then it turned out it wasn't transitory. So then they have to live with the consequences of injecting so much money through various programs into the economy. So at the moment, as we talk today, I'd say there's always no complete consensus in Washington, but I'd say a reasonable consensus is that we may have dodged a bullet on a hard landing. Now, there are some people who say a hard landing is inevitable and that when every time you increase interest rates as high as they have done here, you ultimately get a so-called hard landing or a recession.

6:28But at the moment, we don't seem to be going in that direction because the unemployment rate is very low. The GDP is holding up. We don't see evidence of massive concern about the ability of the consumers to be willing to spend money. And so as a result of this, you're probably going to have GDP this year at somewhere around 1.5%, 1.7%, which is better than you would get if you were going to get into a hard landing. I interviewed a person recently named Jeremy Grantham, who you probably know. He's a fairly bearish person. Generally, he's always looking for bubbles. And he did tell me in the interview I did with him that he thinks we still will have a recession at some point as a result of all the increases in interest rates.

7:15But most people would say right now the consensus so-called is that we may have dodged a recession or a so-called hard landing, but it's still a little early to tell. Yeah, I mean, it's interesting because unemployment is at historic lows. Could it be the case that people are just completely leaving the workforce? They're either retiring if they're older or they're doing more freelance and kind of what you call it side hustle type jobs as opposed to participating in the workforce. There's three things that people should think about. First, the unemployment rate appears to be very, very low in light of how high interest rates are going.

7:56Typically, if you increase interest rates, you get unemployment to go up as employers stop hiring. The reason it probably hasn't happened here are three reasons, I think. One is that a lot of people dropped out of the labor force, workforce, when COVID came. Older people, 55 and older, basically, they stayed home and then they didn't want to go back to the office and they ultimately retired. Younger people went back to school or started living with their parents and they haven't really rejoined the labor force. So as you know, we usually have about 66 % of adult males and females in the labor force and now we've got about 62%.

8:31So we have a smaller percentage of theoretically eligible workers in the workforce. Second, we don't have a lot of immigration going on right now. So let me put it in this terms. For a population to stay the same, a population needs to have women of childbearing age have 2.1 children on average when they're in their fertile years. Our population, and women in the United States are reproducing at 1.6 children per woman of fertile age. So we're reproducing at a lower rate than we would just to keep the population the same. And we're not letting immigration come in very much. And so immigration has been thwarted under the Trump administration and the Biden administration.

9:15You don't have a lot of legal immigration. And as a result, a lot of the jobs that would normally be filled by immigrants, place jobs at restaurants, service stations, pharmacies, and things like that, drugstores, foodstores, you don't see those jobs being filled so much by new immigrants anymore because the new immigrants aren't here. And that's another factor. A third factor is that you have to remember what the unemployment rate really is. It's a compilation of how many people look for a job in the last 30 days. And so the data may not be completely accurate. it. But I know from my own experience in business now, it's very hard to get employees at certainly the lower economic levels of compensation to come to work and to hire these people.

10:04So a lot of factors are going on that probably make it unlikely that we're going to have high unemployment anytime soon. Right. So I don't know if I really count those numbers in some sense in terms of whether we're going to be in a recession or not. I mean, another way to look at it is with interest rates having moved up so fast, the cost to buy a home for a middle-income family that requires a mortgage has basically doubled. Yes, dramatically higher. And as a result of that, developers, to the extent there are still real estate developers who have money left, what they're really doing is building rental housing and apartments, not so much houses for sale because it's easier now to get people to rent something because people are having a hard time getting mortgages.

10:51And right now, people who have mortgages and want to sell their houses and move elsewhere are having a hard time doing so because they can't find the many buyers out there that can get a mortgage. And also, you know, these people can't really easily get new mortgages themselves at the rates that they could, that they would have to pay today if they were buying a new house. So the housing market is very, very slow and very inactive at the moment. The rental market is where you're seeing much more real estate activity. Right, but the housing industry and building homes is a huge part of the economy.

11:23It has historically been, and that's why people are worried about whether we're gonna go into some kind of, quote, recession, in part because real estate often leads you into a recession. And one of the things we haven't yet seen really good data on is, how bad is the urban office market? For example, in large cities, New York, San Francisco, Chicago, you have very high rates of people not coming to work. In other words, they don't come to work. They work at home five days a week or three days a week or whatever it is. Employers have had a hard time getting employees to come back to work. And it may well be that we're at the beginning of a four-day or three-day in-the-office work week that's permanent.

12:06And if that's true, then what you're going to see is that fewer leases are going to be renewed at the space that people had because they're going to need less space. And they're going to also be able to try to get them at lower rents. So you're going to have a very big distressed real estate debt market soon because the debt on major office buildings in New York, Chicago, Los Angeles, Houston, they're going to have very high default rates, let's say. And they're already beginning to have default rates. And the banks don't really want to take back the debt at this point. But at some point, they may be forced to do so.

12:39And so what will happen then? I mean, when all these commercial real estate investors and developers start going bankrupt and the banks don't want the bill. I mean, in San Francisco, they're literally just handing over the keys and saying, you take it now. We can't deal with this. Well, typically what you do is you can't service the debt. You're foreclosed by the bank. The bank takes it back, and then they ultimately sell it probably at a 15%, maybe 20 % discount to what they had carried it for. Today, one of the reasons the banks don't want to take the debt back and they're not rushing to take it back is the discount would be 35 % or 40%, if not 50%.

13:18And therefore, they would have to reflect that on their balance sheets, whereas right now they might be marking it down by 10 % or 15 % or 20%, not fully to where the market would take it. So the banks are not dying to take these buildings back right now, but at some point they probably will. At some point, the regulators will say, you've got to recognize the real value of the mortgage. It's a big problem for banks and it's a big problem for the real estate developers. I mean, one of the things that happened in 2007, 2008 is that banks started to realize the potential losses from the personal real estate market.

13:52And that's what all these banks then went out of business, all these derivatives collapsed. Could something similar happen in commercial real estate? Well, it could. I'd say when the government... Right now, the major banks in the United States have more real estate on their books than they really want. But it's not easy to dispose of it. At some point, I suspect you'll see a market in distressed debt in real estate, in commercial buildings that hasn't yet happened yet in any major way. In terms of being analogous to what's happened before, it's possible. I don't know. When the S &L crisis happened in the late 80s, that was a situation where it had so much real estate that the government, in fact, had to take it over and ultimately sold it.

14:38It turns out it probably had lower prices than they probably should have. In 07-08, you saw a lot of people buying back debt at discounts, and they made money in the end. Right now, though, we're talking about debt at discounts that are so much higher than what we saw in 07-08 that it's not quite clear what's going to happen. It's one thing to say that debt is worth 85 % of what it once was, but to say it's worth 50 % is another factor. And the reason it's so much lower in terms of the value is this. One, interest rates are higher. So when interest rates go up, almost by definition, the value of a building goes down.

15:12And secondly, people are coming back to work, as I noted earlier, at lower levels, and therefore you don't need as much office space. So when people are going to renew leases, they're not going to renew them at the same space that they probably had before. Right. So is this kind of a problem that we're closing our eyes to or is there going to be potential solutions? Well, people are not closing their eyes to it, but I'd say it's not yet on the front pages of the newspapers as a crisis because you have a lot of people, you know, have other problems to worry about. But I think in the real estate community, if you talk to people in the real estate community, they see this as potentially one of the bigger crises they've ever seen in commercial real estate.

15:58Right. And so what could happen, like compared to 2007, 2008, and the economy almost collapsed. However, maybe, you know, the Fed under Bernanke developed a playbook, which is get more involved early. Well, we'll have to see where we are when the crisis hits. it's not likely to hit in a dramatic way for another one or two years because it's going to take a while for this to play through the system. At that point, the interest rates may be lower, and therefore the problem may be ameliorated by lower interest rates to some extent. But I think the biggest factor overall is that fewer people are going to work in offices than before five days a week.

16:39Now, some of the financial service firms in New York are telling their people they have to come back five days a week and some other employers amazon recently said we want you back five days a week but getting employees to come back five days a week in a very tight labor market isn't often that easy to do because employees can go elsewhere

17:12look as a manager of people as an employer as an entrepreneur and as even an investor in startups i can tell you the most important thing for your business is the quality of the people you hire the The best part is that great candidates are already on LinkedIn. Employees hired through LinkedIn are 30 % more likely to stick around for at least a year compared to those hired through the leading competitor. And I will tell you that the great thing about LinkedIn is that you're not just looking at random people. You're able to see the people who your friends and trusted peers and colleagues, who they trust and who they've hired in the past and who they recommend.

17:55And hiring doesn't have to be complicated. Realistically, when you have a business to run, you don't want to spend hours on hiring. You want to hire the right person as quickly as possible. That's why LinkedIn Jobs AI Assistant suggests immediately 25 great fit candidates daily so you can invite them to apply and keep things moving. Hire right the first time. Post your job for free at linkedin.com slash altature, then promote it to use LinkedIn Jobs' new AI assistant, making it easier and faster to find the top candidates. That's linkedin.com slash Altachirk. Post your job for free. Terms and conditions apply.

18:31Shopify's point of sale system helps you sell at every stage of your business. Need a fast and secure way to take payments in person? We've got you covered. How about card readers you can rely on anywhere you sell? Thanks, have a good one. Yep, that too. Want one place to manage all your online and in-person sales? That's kind of our thing. Wherever you sell, businesses that grow, grow with Shopify. Sign up for your$1 a month trial at shopify.com slash listen. Shopify.com slash listen. So could this lead to a potential deflation if banks start suffering, perhaps lending less, commercial real estate starts, you know, trading all distressed debt?

19:12And a lot of those employees you mentioned aren't necessarily going back to office buildings. A lot of the Amazon employees are going back to warehouses, for instance, where real estate's not really in a crisis. I would say historically, the United States hasn't struggled with deflation that much in recent years because it's been a reasonably dynamic economy. Japan had a very bad decade or so of deflation because the economy wasn't growing very much and wasn't a lot of entrepreneurial activity. I think in the United States, deflation is not one of our one, two, three, or four, five biggest problems we have to worry about right now.

19:47Right. Although before COVID hit, I mean, that was what the Fed was worrying about because they couldn't really inflate things. Right. But that's different. I mean, the world's changed. And so as a result of having inflation hit as high as 9%, now it's probably at a core rate of maybe 3.5 % or 4%, so-called core inflation. But deflation is not something we have to worry about today. And does it worry you on the inflationary side, the BRICS countries considering currencies other than the U.S. for purchasing dollars and purchasing oil? That is a potentially serious problem for the United States in this sense.

20:30We are the only reserve currency in the world. We don't have a sovereign wealth fund, unlike many other countries, but we have the printing press. and we can print as many dollars as people are willing to buy. And for the last 50 years or so, we've been the only reserve currency and people have been willing to buy our dollars. They've been willing to buy it so easily from us that we've run up about$32.7 trillion of debt. So how can you run up that much debt? Well, you run it up because people are willing to buy your dollars. If the dollar goes down in value, in part because there is another reserve currency, yes, we surely will have a problem.

21:06I don't see that in the near term. I don't see any currency really competing against the dollar in a serious way in the near term. But, you know, 10 years from today may be different. But in the next five years or so, the dollar is likely to be the only reserve currency. Yeah. Is it fair to say, like, for instance, a few weekends ago, India bought oil in rupees. But is it fair to say that Saudi Arabia and other countries don't really want to hold rupees that much compared to the dollar? I think that's an understatement. Yes, that's true. Look, India has been buying a lot of oil, and I think China has as well, at discount rates from Russia.

21:45And sometimes they've been buying them in rubles. But if buying them in 20 % discounts, what they're doing is the oil ultimately is being refined in the United States or elsewhere and sold back to the United States or in Europe at the market rate. So, you know, for India and China, the Russia need to find markets has really made it profitable for a lot of people in the oil business in India and China. But in terms of them replacing the dollar as kind of the reserve currency to buy oil with, you don't think that's happening? Well, in the reserve currency world, to be a reserve currency, you have to have enormous amount of public disclosure.

22:25And that's one of the reasons the Chinese have said for many years, they don't really see the need to make the RMB a reserve currency. They don't want to disclose all the kind of things you have to do if you're a reserve currency. People might from time to time buy oil in other currencies, but I suspect they will quickly convert it into dollars as soon as they can. You know, on the optimistic side, the one thing it seems in each case of a recession that the U.S. always has going for it is that we innovate new industries out of nothing. And so, you know, the internet, biotech, genomics, right now AI, does this give hope for, you know, the increases in productivity that each one of these new industries gives us, does that give you hope that we can sort of weather any sort of economic crisis?

23:16Well, the United States, you're correct, has found many new ways to innovate and make our economy more productive. AI will probably be a quantum leap in productivity when it's fully implemented in many ways. I don't worry about the U.S. economy in that respect. I think the United States economy will innovate sufficiently to overcome some of these challenges. But there's always a difficult transition period of time. And some people will lose their jobs. Other people will get jobs they wouldn't have otherwise had. So, you know, the transition is always difficult. In China, one of the curses that people give to other people is to say, may you be condemned to live in a time of transition because transitions are so difficult at times.

24:04And it will be for workers in the United States and many people who have to transition and learn new job skills. Right. So the U.S., by innovating in productivity, is essentially, maybe it doesn't need as large a workforce, or maybe it doesn't need the inflation that usually comes when you don't have these increases in productivity. I'm just trying to think if the innovation itself is replacing what typically lower interest rates or higher money supply would do. Well, innovation is no doubt a factor that can overcome some other challenges they'll have in the economy. and the United States has been the leader in entrepreneurial activity for sure.

24:43But, you know, it's just hard to tell during a transition period of time who's going to benefit and how much the United States will benefit. As Warren Buffett likes to say, nobody's really made any money over the last hundred years or so betting against the United States economy. When you tend to bet against the United States economy, you tend to lose. Now, there's no guarantee the United States economy will be the biggest in the world in our lifetime and probably China will surpass us at some point. But I think the United States economy is still in reasonably good shape and likely for the next 25 to 50 years to still be a dynamic, large economy, one of the most important, if not the most important in the world.

25:20What about the debt? Like you mentioned the$32 trillion in debt. Like when does, for my entire life, I feel like people have been saying the debt is a problem, the national debt is a problem, but it never really has been a problem. So what is the issue? What could be a problem? Okay. There are five ways to solve this problem. Number one, you increase taxes. Well, that's very unpopular. Number two, you cut spending. Even more unpopular, particularly because 85 % of the budget is defense spending, entitlements, and so forth. So it's very hard to cut an interest. Number three, you can go to the IMF and say, we need a bailout.