Today’s Economy: Are we in a recession? with Dr. Christopher Thornberg | Part 1

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Originally from upstate New York, Dr. Thornberg holds a Ph.D in Business Economics from The Anderson School at UCLA, and a B.S. degree in Business Administration from the State University  of New York at Buffalo.

Christopher Thornberg founded Beacon Economics LLC in 2006.  Dr. Thornberg also became  Director of the UC Riverside School of Business Center for Economic Forecasting and Development and an Adjunct Professor at the School.Prior to launching Beacon Economics, Dr. Thornberg was a senior economist with UCLA’s Anderson Forecast. He previously taught in the MBA program at UCLA’s Anderson School, in the Rady School of Business at UC San Diego, and at Thammasat University in Bangkok, Thailand

An expert in economic and revenue forecasting, regional economics, economic policy, and labor and real estate markets, Dr. Thornberg has consulted for private industry, cities, counties, and public agencies in Los Angeles, San Francisco and the Bay Area, San Diego, the Inland Empire, Seattle, Orange County, Sacramento, Nevada, and other geographies across the nation. Dr. Thornberg became nationally known for forecasting the subprime mortgage market crash that began in 2007, and was one of the few economists on record to predict the global economic recession that followed. Well known for his ability to capture and hold audiences, Dr. Thornberg has presented to hundreds of leading business, government, and nonprofit organizations across the globe including Chevron, The New Yorker, Colliers International, the California Chamber of Commerce, City National Bank, the California State Association of Counties, State Farm Insurance, the City of Los Angeles, the California and Nevada Credit Union League, and the  National Steel and Shipbuilding Company, among many others.

 

 

Episode Notes:

 

Narrator  This is The Norris Group’s real estate investor radio show the award-winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever -changing real estate market hosted by author, investor, and hard money lender, Bruce Norris.

Bruce Norris  Thanks for joining us, we have a very special guest Christopher Thornberg, Christopher founded Beacon Economics LLC in 2006. Under his leadership, the firm has become one of the most respected research organizations in California serving public and private sector clients across the United States. In 2015, Dr. Thornburg also became director of the UC Riverside School of Business Center for Economic Forecasting and development and an Adjunct Professor at the School, an expert in economic and revenue forecasting regional economics, economic policy and labor and real estate markets. Dr. Thornburg has consulted for private industry, cities, counties and public agencies up and down the West Coast, and other geographies across the nation. Recent and ongoing projects include housing and rent control studies for the California Apartment Association, and an economic impact study for 2024 LA Olympic Game committee. Dr. Thornburg is a contributor to monthly economic polls published by The Wall Street Journal and writers. He also serves as the chair of the California Chamber of Commerce Economic Advisory Council, is on the board of directors for the LA area Chamber of Commerce, is an executive member of the City, Central City Association, LA. And as a member of the California Association for local economic development. Well known media commentator, Dr. Thornburg has appeared on CNN and NPR, and is irregular, as regularly quoted in major national dailies including Wall Street Journal and New York Times, relief from upstate New York, Dr. Thornburg holds a PhD in music, Business Economics from the Anderson School at UCLA, and a BS degree in business administration from the State University of New York at Buffalo. And I want to just mention that he’s one of my favorite guests because I get to ask him stuff, I don’t know. And I don’t do that very often. Because I don’t want any put anybody in a position where they’re embarrassed. I don’t think I could think of a question that you wouldn’t have a good, good take on. So, thanks for joining us, again, appreciate it.

Christopher Thornberg  Bruce ’twas a wonderful introduction too long, I would say. One mild correction if I may 2028 Olympic Committee because as you remember, we got put off by four years for the parents to get first bite at the apple.

Bruce Norris  Okay.

Christopher Thornberg  But yeah, no, I appreciate that intro.

Bruce Norris  What prompted starting Beacon?

Christopher Thornberg  Here’s the question before that I was working with UCLA forecast and I remember in early oh six, I had a interesting conversation with my boss at the time. And I said I thought real estate was a bubble. It was going to pop and create a mess and he told me I was an idiot. Because by that point, jive, I recognized. Ultimately, if I’m going to have my own opinions, I needed to have my own company. And that’s where I am here I am. 16 years later, we got 20 people, we do all sorts of stuff, as you noted, and it’s been a fun ride. And I been able to be true to myself be true to my, my outlooks. And if I may I’ve been pretty right.

Bruce Norris  Yeah. Well, be honest with you. There’s a lot, there’s a lot at stake right now.

Christopher Thornberg  Oh, yeah.

Bruce Norris  And so it’s kind of fun to have this discussion, because a lot of it hasn’t occurred yet.

Christopher Thornberg  Absolutely. You know, it’s interesting. I like to tell people that from, I don’t know, after the big calls of the Great Recession, both the downturn and the recovery, forecasting got really boring for about six, seven years. Most of the, most of my forecasting in the latter part of last decade, most of my forecasts can be boiled down to ‘No, really, it’s fine.’ They’ve been really, it was, it was’no, it’s fine.’ It’s fine. It’s all I said, because we kept, we kept inventing crises that didn’t actually exist. Now, you know, what’s interesting is, is I’m a little bit of a smarter economist, now, you know, I’ve been I’ve been reading some books a little bit more about what we might want to call human thinking and how it interrelates with the overall economy and you go back to that period of time, where we kept inventing crises, and I would call it miserabilism, this tendency to constitute ourselves how terrible everything is, when in fact it’s not. Well, it turns out that, that was not a trite observation, nor was it shall we say, singular, to the last decade. Robert Shiller, the Nobel Prize winning economist, wrote a book a couple of years ago now called near bit of economics. And he makes a simple point, which when you think about it makes total sense. First of all, data has been around for not even 100 years data analytics, data analysis has been around for, you know, in any substantial way in the last 50, since we had enough computing power to deal with all this data, whereas the stories we tell ourselves have been going on since the dawn of civilization since the dawn of self awareness, we are story based creatures. And the history of economic business cycles is a history of when the story the narrative, become substantially disengaged from basic economic realities.

Bruce Norris  Absolutely. On both sides, high and low.

Christopher Thornberg  Yes, exactly exactly right. And it drives all sorts of important changes in the economy, and drives all sorts of policy decisions, for better or for worse. And, of course, what it helps us understand is A. why we kept telling ourselves how terrible everything was when it wasn’t. And then equivalently, when things did get a little rough in 2020, when, of course, the pandemic hit, we took what was clearly a serious, shall we say, human condition, human problem, that is to say, this pandemic, but we we basically turned it into a depression causing crisis in our minds. Now, what’s interesting about this is it. You’re right from the get go when the pandemic hit, I said, I know this is serious. I know the numbers are big, I know it’s scary. But the history of humanity is littered with these kinds of events. And there’s no evidence of that cause depressions, none. In fact, depressions are, are basically recessions, with deflation thrown on top.

Bruce Norris  Right.

Christopher Thornberg  That’s, that’s what a depression is. Not anything having to do with pandemics. So, the question is, why did we suddenly decide that this one was going to cause depression? And when I say we, I’m not talking about humans in general, I’m talking about my professional economists. Because, you know, one of the things here about the narrative world is economists are supposed to be the antidote. The problem is, we’re not. Economists are the worst, when…

Bruce Norris  You’re supposed to only look at statistics, not an option. But you got right in there.

Christopher Thornberg  And they’re all about this, just about as much as the narrative is, as everybody in Washington DC for everybody on Wall Street, as the case may be. And so they ran around telling these ridiculous scare stories. Did they believe it? They just want to get into the headlines, what were their motivations, couldn’t tell you. But what they did, was set off one of the most outrageous uses of stimulus this nation has ever seen.

Bruce Norris  Absolutely.

Christopher Thornberg  I mean, they they did the equivalent of of just giving our economy and a massive a dose of a stimulant called cash. And what’s, what’s interest, what’s interesting as you think about where we are today, with the ridiculous claims that we’re about to fall into recession, when, when you look at the economy with anything resembling an objective eye, our economy right now is clearly overheated, clearly overheated. And we’re this economy is straining at capacity, unemployment to 3.6% industrial production at an all time high level, the trade deficit is now 5% of GDP. This economy is vastly overheated. And yet we’re sitting around panicking about a recession that’s…

Bruce Norris  Interesting.

Christopher Thornberg  Yeah, it’s, it’s, it’s an interesting world. Now, mind you, I do think we’re going to have a recession. But it’s not the next 12 months, Bruce, not the next.

Bruce Norris  Okay. And that’s because people have got to several trillion dollars of excess money to say I can go through that first.

Christopher Thornberg  Several trillion? Let me, let me, let me, let me correct that modestly.

Bruce Norris  Okay.

Christopher Thornberg  So, basically, we saw something on the order of 7 trillion in fiscal stimulus, $5 trillion in quantitative easing. That cash being thrown at the economy caused financial markets to jump like crazy home prices up 35% stock market got to the second highest P/E ratio ever with the exception of early 2000. Well, that, all that excess financial market, if you will money poured back into households. And here’s the big number. In two years, Americans picked up a cool $32 trillion and new net worth, 32 trillion 125% of annual output in the United States a new net worth in two short years.

Bruce Norris  Wow.

Christopher Thornberg  Now, of course consumers are going crazy. They are rich and they want to if you will spend some of that wealth on their current well being, and they are out there like crazy. Try throwing money at everything in sight.

Bruce Norris  Here’s the funniest sentence I’ve ever heard to back up what you just said.

Christopher Thornberg  Yeah.

Bruce Norris  A friend of mine bought a new boat, as many people did, right?

Christopher Thornberg  Oh, yeah.

Bruce Norris  He told me a couple of months ago that he could actually sell it for a profit. And I said, I don’t think that sentence has ever been uttered in mankind.

Christopher Thornberg  Yep, yeah, that tells you a lot. Well, you know, what’s interesting, too, is there’s an old expression, you know, it’s the simpler, you can get these complex mathematical models. And this is nonsense. The vast majority of good economics can be summed up in a couple sentences, right? And, you know, what they say is, inflation is the consequence of too much money chasing too few goods, period. And that describes our nation to a tea. And what’s amazing to me, is when clearly inflation is being driven by the excessive amount of demand, you have a crew of supposedly very bright economists, so, are at least people who interact with very bright economist in the case of Jerome Powell, but or Janet Yellen, or, or any of these folks and people on the board. And what did they say, oh, it’s been caused by oil prices? No, it’s It’s because of grain. No, it’s, it’s because of supply chain problems. No, no, no. It doesn’t work that way. Take, for example, gas prices, everybody’s angry. Everybody’s upset about gas prices. But to be clear, for all the enormous increase in gas prices we’ve seen over the last year, do you know how much vehicle miles driven has declined?

Bruce Norris  Very little.

Christopher Thornberg  None at all.

Bruce Norris  None at all.

Christopher Thornberg  Hasn’t declined a bit. So, if gas prices are going through the roof, and we aren’t changing our behavior, it’s pretty clear this is a demand situation, not a supply one. Now, the supply problems just get magnified in that kind of atmosphere. But you have to start with the basic idea. This is driven by the demand curve, not the supply curve. But of course, no one in politics wants to say that out loud. No one ever got reelected saying to their constituents, oh, by the way, you’re overspending, and you’re not as rich as you think you are.

Bruce Norris  Okay, well, that brings up. Obviously, I never, I never get to follow what I and I, and it’s great, because I listened to what you’re saying and go, Okay, well, that’s, that’s an interesting point, the 70s inflation, let’s, let’s run back to that. And tell me, tell me what was different about that, because that was kind of an astonishing time to enter the world of real estate, I bought something in the early, you know, like 73. And it naturally went up had nothing to do with me. And then I bought some more stuff, and it went up. And if I had been a renter, my outcome would have been very different. Right?

Christopher Thornberg  Yeah.

Bruce Norris  So, so, to own an asset during that stretch. But you know, what was really interesting looking at those charts over the years, was interest rates went from 17, sorry, seven and a half to 15. In about eight years, and prices during that journey tripled. So, that’s why, you know, when you hear people say, Well, you know, if interest rates go up, it’s going to kill prices. Well, you know, there’s a history the opposite of that, too. So, let’s make sure we get the whole story.

Christopher Thornberg  Okay. That was that was, Wow, you just opened it. Yours opened an entire book. So, sit back for a second.

Bruce Norris  Okay, no, I’m excited.

Christopher Thornberg  It’s a great question. Okay. First of all, 70s is our best template for what’s going on right now. Although we got to be cautious because it’s slightly different. The 70s was kicked off when Nixon took the United States out of the Bretton Woods system, we went to a global Fiat standard. And the Federal Reserve, which for the first time had true monetary independence, because before that, they had largely been, of course, maintaining the value of the price of gold. That’s what they had to do. Now they had options, you could do what you want and they immediately started overdoing it. They were printing money, too rapidly. Now, what’s interesting is about that it was year after year after year of printing a little too much a little too much. And it kept getting worse and worse and worse. This time around is a little different because Jerome Powell didn’t come in and basically turn on the hose a little too high. Rather, what he did was dump about, about 17 Olympic sized pools of money into the middle of the economy in two years. So, it’s modestly different right? I mean, actual M1 has not been growing spectacularly. This is all about the bond buying programs have been and all the money that they’ve injected into M2. So, so you already see that it’s a little different, but The consequences of inflation are the same. And yes, the net result of that is going to be prices and interest rates going up. Now, here’s the one thing I want to basically this is, this is where you got to separate, what I would call real from nominal. When you said interest rates went from 7% to 15%. You have to account for inflation.

Bruce Norris  Correct.

Christopher Thornberg  Because that’s the real interest rate. And when it was 7%, the inflation rate was 8%. And real interest rates were negative 1%.

Bruce Norris  Right.

Christopher Thornberg  And then Volcker came in stop printing M1 so rapidly, that’s how we fixed it. It didn’t, there was no quantitative easing, there was no balance sheet at the Fed, they simply stopped printing M1 at the same rapid pace that sat back and waited for a couple of years until they had a sufficient impact on M2 to bring down inflation. Well, yes, when you did that the federal funds rate medium went to 20%. Interest rates go up, because there was wasn’t enough cash in the economy at the same time inflation started to slow down. And so you went from a real interest rate of like negative 1% to a real interest rate of 8 or 9%. And Zirin is where, if you will the cooling of the economy begins. That is when you’re pulling, pouring cold water on the excesses of the economy. And yes, you’ve diminished demand, thus you diminish inflationary pressures on the economy. And in that case, it was a long, painful process. And what’s interesting about that, is you have to again, think about the stories and the narratives and the political pressures that were being exerted. Volcker came in and did the right thing, by the way, who hired Volcker? Jimmy Carter. By the way, as you pointed out, that if you take a step back and look at history, objectively, Jimmy Carter almost assuredly was one of the best presidents we’ve had in the last 60-70 years, which I realized you’re like, what? The guy the peanut farmer was a joke. First of all, he wasn’t a peanut farmer. He was a nuclear engineer. He had a PhD in Nuclear Physics, which he got through the Navy, the man ran nuclear submarines. He was not a peanut farmer. Okay. And the second thing is, he’s a guy who inherited inflation from Ford and Nixon, and realize he had to do something about it. And he hired Volcker, who did the right thing and lost Jimmy Carter’s job. You know, and what’s amazing is the story we’ve told ourselves is Oh, Reagan came in and saved everything, nonsense. Reagan came in, and basically free rode on getting inflation out of the system. The 70s was a lost decade real growth was, was awful over the course of the 70s. Part of that was deindustrialization. But the real problem was inflation. Because one of the big misunderstandings about inflation and recent inflation hurts consumers. No, that’s no consumers are pushing inflation. You have to start there. Demand is pushing inflation. The problem with inflation is it’s like, it’s like the economy moves into a massive fogbank. We can’t see, you can’t see ahead. You can’t see behind. How do you invest? How do you plan? How do you save, take an industrial developer, it’s four years from beginning to end. That means four years, you have to have a rough idea of your cost of capital, your cost of labor, your cost of materials, that kind of demand there might be in the midst of that fogbank, those, those entry points are almost impossible to predict. Thus, you make a lot of bad investments and investments that don’t happen at all..

Bruce Norris  That’s right, you’re just gonna do it.

Christopher Thornberg  …and the economy just goes…so you get rid of inflation. You take the tough period you get through the recession that inevitably follows and boom, the economy wakes up the fog bank is gone. I can see clearly now that, anyway, you get my point. The, the net result of this, of course, is the economy took off and we had an amazing 1980s. Because we got over we recovered from the 1970s it wasn’t because Reagan was a genius. Reagan was a slightly addled be right actor. But we had a minimal legacy as governor of California, but he looked good. He had a nice hair. So, you know, in American politics that may be sufficient.

Bruce Norris  The value of the dollar went through a lot of gymnastics in the in the 70s and then a late 70s and 80s it just took off.

Christopher Thornberg  70s, 80s..

Bruce Norris  Oh, it went down,but…

Christopher Thornberg  …getting in the 80s it took off…

Bruce Norris  70 to 81 went crazy 85.

Christopher Thornberg  85 and then they had some accord and they sat down and then he settled it down again, there’s still a lot of mysteries around that. We don’t, be part of it had to be America as the safe haven, America as a reserve currency, the world, the early 80s was a turbulent time in the globe. We had our problems in the 70s. We shrugged them off at 182. But their early 80s was we had a horrible problem in Latin America, there was a lot of inflation kicking around Europe, early 80s was globally a mess. And a lot of people were putting money in the United States, by the way, that’s what’s going on right now, what’s most amazing about the place we’re in economically, is, you know, we have the globe, we have at the national level seven 8%, annual inflation rate a 10 year bond is at 3%. We have a 5% of GDP trade deficit. Everything I just said, tells you that the dollar should be going down. And it’s not it’s going up, it’s appreciating, in fact, relative to some currencies, the euro, the yen, the pound, the dollar is crazy high for no reason. But again, you have to think that the global uncertainty is pushing people to the US is causing people to ignore the problems here. They don’t seem to be cognizant of the economic realities here. But that’s part of narratives right.

Bruce Norris  Now, a strong dollar does what for inflationary tendencies?

Christopher Thornberg  Actually is probably diminishing it at some level, right?

Bruce Norris  Yeah.

Christopher Thornberg  Because it’s making it cheaper for us to buy stuff overseas.

Bruce Norris  Does it cause inflation for them? Does it cause inflation for them, since?

Christopher Thornberg  No, no, no, no, no, not at all. No. Inflation is a global phenomenon right now, largely because most of the world overdid it.

Bruce Norris  Right.

Christopher Thornberg  The European Union engaged in quantitative easing for no particular reason, not as aggressively as we did the UK, lots of quantitative easing, not as aggressive as us. But basically, this was kind of a standard practice among central bankers. And as a result of that, we do have global inflation, the worldwide money supply is increased at a dramatic pace, and ergo prices have to catch up. It’s as simple as that.

Bruce Norris  Okay, I just had a thought and it slipped my brain that’s not good.

Christopher Thornberg  For my life.

Bruce Norris  When we have, we kind of have that 70s where, that was a long, that was a long decade of inflation. Like you said, that was sort of like never solved until Volcker. So, you had about eight years of stuff that we’ve had 12 months of and we’re freaking out. That was like eight years ago.

Christopher Thornberg  Can I, can I go the next step on you on that? Yeah, sure. I pick up the paper and, or I turn on my internet and the headlines we’re seeing coming out of papers today, maybe want to throw my computer across the room. I mean, how many articles say something up, ‘Americans are being crushed by inflation’, ‘Americans being pushed to the brink by inflation’. Listen, there’s no doubt that some people are suffering, right? We know that. But for every person suffering, there’s, there’s four other households out there spending, trying to spend every penny they make over the last couple of years. And it’s a preposterous assertion, but even goes so silly as to what let’s, let’s let’s, take this in context. Yes, we’ve had one year of inflation on top of by the way, for years of very low inflation. Remember, we were worried about why prices weren’t going up rapidly enough.

Bruce Norris  Right.

Christopher Thornberg  Over the last five years, Americans have seen about 15% inflation in five years, till about 3% per year. Okay.

Bruce Norris  The stall stepped in one year.

Christopher Thornberg  Yeah. In 1979. Americans have been through 53% inflation in five years.

Bruce Norris  Yes.

Christopher Thornberg  53.Were a 15. They were at 53.

Bruce Norris  Right.

Christopher Thornberg  And this goes back to I think, what worries me the most about where the US is right now. If you said to me, Chris, what scares you the most about our economy today? Its consumer, the consumer sentiment survey. University of Michigan Consumer Sentiment Survey has been dropping like a rock. It is now, right now where it was in 2008.

Bruce Norris  Wow.

Christopher Thornberg  Now, let’s let’s put this in context. In 2008, in the midst of the Great Recession, there were five people looking for a job for every job opening. Today, there are two job openings for everybody looking for a job. Back then earnings were falling, today earnings are at a 30-year high pace of increase. Back then home prices were falling today. They’re increasing, back then net worth was falling, today, it’s gone up by 32 trillion. In other words, from any objective standpoint, you look at the data, the fact of the financial obligation ratio, what we’ve really seen in terms of price increases over the last five years. And you go, wow, Americans outside of the federal debt are the most prosperous they’ve ever been. The opportunities available to American workers are better than they’ve ever been. We should be having parades. And we’re not, we’re angry. Everybody’s angry, Bruce.

Narrator  For more information on hard money, loans and upcoming events with The Norris Group, check out thenorrisgroup.com. For information on passive investing with trust deeds, visit tngtrustdeeds.com.

Aaron Norris  The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.

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