Podcast Transcript: Dominique Dwor-Frecaut on US Labour Supply, Inflation and Timing the Bond Sell-Off

This is an edited transcript of our podcast episode with Dominique Dwor-Frecaut, who has worked at Bridgewater, Barclays, RBS, the New York Fed, the IMF and the World Bank and now we’ve hired her to work for Macro Hive. We talked US labour supply, inflation, inequality plus the outlook for Germany and China. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.

Dominique’s Background and Career Path

Bilal Hafeez (01:53):

Welcome Dominique to the podcast. It’s great to have you back. And I always enjoy speaking to you. I have the luxury of being able to speak to you quite regularly now that you’re kind of in the Macro Hive family. So welcome. Now, the first thing I actually wanted to ask you and I didn’t ask this the last time you came on our podcast a year ago was, what is your origin story? Where did you go to university? When you were at university did you think you were going to enter the finance world? And how’d you end up where you are today?

Dominique Dwor-Frecaut (02:20):

So first of all, thank you for having me again. Really looking forward to that conversation. My origin story is a bit random really. I went to school in Paris in one of the grande écoles, where to be perfectly honest, I was a bit bored. It was called Sciences Po. I did economics there but I never saw a single equation in my three years there. I wanted to go abroad. A friend of mine said, “Oh, there is this place in London called The London School of Economics. I hear they have a good program. Why don’t you apply?” I did. I got in. I did my MSE straight after my undergraduate. So when my professors suggested PhD, I didn’t think much about it. I just did it because it was there. And in my last year of PhD, the IMF filled up for the annual recruitment mission and friend of mine (I wasn’t there actually for the presentation) made an appointment for me and I was asked to go to Paris for further interviews and so on and so forth.

I ended up in Washington DC. The IMF was a little too structured and too culturally conservative for me so I did something which is called “crossing the street” because the IMF and the World Bank in Washington DC are on opposite sides of 19th street. So, I crossed the street. At the World Bank, I ended up working on East Asia and being the lone voice predicting the crisis. I was a country economist for Thailand predicting the 1997 crisis.

Bilal Hafeez (04:01):

Oh, country economist for Thailand? That’s interesting. Because of you Thailand so kicked it off. Well, it was kind of a spark during the Asia crisis I suppose.

Dominique Dwor-Frecaut (04:08):

In fact, I remember it very well. I was writing a paper with an economist from the Bank of Thailand who is now one of the most timeless economists in Thailand, Kobsak Pootrakool. And the day the Thais devalued [the currency], I walked into my office at the World Bank and there was an email from him saying, “we have devalued, we need to restructure our paper.” So actually, I was a little bit the lone voice in the wilderness when I was highlighting the risk of crisis. That convinced me that maybe the private sector was a better environment. And that’s how I ended up in Singapore with Barclays and then came back to the US for personal reasons. So, I wouldn’t say that I had charted the course of my career from day one. I think it’s more a combination of interests and opportunity.

Bilal Hafeez (05:03):

Okay. Yeah. And then at Barclays you did research on the sell-side for a while and then you also spent some time on the buy-side as well working for Bridgewater?

Dominique Dwor-Frecaut (05:12):

So when I got back to the US, my first job ever working for a private financial sector employer in the US was Bridgewater. And after that I worked at a couple of macro startups and the New York Fed and here I am, Bilal, absolutely delighted to be working for you. You’re such a great boss keeping me on the straight and narrow and being supportive in every possible way. So, I’d say it was not a straight line, my career, but it ended in a good place.

The US Labour Supply Problem and its Impact on Growth for the Rest of 2021

Bilal Hafeez (05:49):

Absolutely yeah. And quite a varied range of experiences, which no doubt explains why you’re so good at your job. Okay, so let’s kind of jump into some of sort of macro themes that you’ve been looking at. Perhaps we can start with your view on the US growth profile for this year where you actually have, I would say, a bit of a non-consensus view. The consensus view is that we’re going to see fairly rapid growth in the early part of this year. So very high growth currently, Q2 and Q3. And let’s just talk about the US as kind of the proxy for everybody else. And then, growth will start to subside in Q4 as we go into next year. And this is all premised around kind of a reopening argument, that we’re seeing the reopening now. And then after you see the big reopenings rush, things will ease up. But you have a view that the growth profile is actually going to look somewhat different from that. So can you kind of lay out your case?

Dominique Dwor-Frecaut (06:39):

Sure. The case is basically about labour supply. I think for the longest period of time, I was one of the V-shapers out there. And what made me change my mind is all the macro data and anecdotal data showing that firms were not able to find workers. So, the data you can see it in the JOLTS [Job Openings and Labour Turnover Survey], if you look at the UV, the Unemployment Vacancy Curve, or if you look at the hires relative to job openings, they’re at a historical low, which is really striking and has been going on since the crisis. They were low by historical standards before the pandemic, but now, they are even lower. And then just walking around I’ve seen the signs for hire multiply, they are even…

Bilal Hafeez (07:38):

And just for clarity, you’re based in California in the US?

Dominique Dwor-Frecaut (07:42):

I’m based In California. So, I was in Portland in Oregon a couple of weeks ago. There were restaurants with signs saying, we’ll pay you $1,000 bonus to cook, who wants to sign up with us? So, as economists, when we are trained, we are taught to think that the supply-side always follows the demand-side and to ignore the supply-side, but it struck me that if we don’t have the supply, if we just don’t have the people willing to work, well, the supply-side is just going to be a constraint.

Bilal Hafeez (08:13):

Why aren’t people filling those roles? Because the unemployment rate is still very high. And if there’s all these openings, why aren’t people going to work? Is it presumably it must be to do with COVID in some way?

Dominique Dwor-Frecaut (08:24):

Again looking at the data, it’s a combination of things. If you look at the participation data, it was a 20 basis point increase in April – 30 basis points for men and no increase for women. And 30 basis points is really at the upper end of the range for participation changes. And so, the difference in male and female participation made me think that it’s really the lack of school openings. And again, if you look at the data, if you look at employment in primary and secondary schools or if you look at employment in children daycare center or Oxford University’s index of states’ school openings in the US – it’s very clear that progress is slow. So the combination of that and women not going back to work made me think that it was lack of childcare opportunities and lack of places where they could send their children.

Now, it doesn’t mean that the benefits paid by the Biden administration are not having an impact. And to be frank, if I was paid minimum wage to do an unpleasant job and the government offered me a replacement ratio of more than a 100%, I’d stay home. So it makes sense. So, I think it’s playing a role but perhaps not that much.

Bilal Hafeez (09:45):

And just on the female participation issue, some people have called the COVID recession a recession for women. Is that a fair characterization? Or was that kind of missing something because, well, I have been generalizing a bit here?

Dominique Dwor-Frecaut (09:59):

So, for sure the collapse in participation has been significantly greater for women than men. And it’s because whether we like it or not, women still assumes the traditional role of the caretaker in society. More women are now graduating from college than men but what the data suggests is that when someone needs to stay home to look after the kids or look after a parent who is sick, it’s typically the woman who does so.

Bilal Hafeez (10:28):

Yeah. And on the school issue, does this also mean that come the summer or after the summer when the next academic year starts, presumably schools will be reopened by then so then things will normalize?

Dominique Dwor-Frecaut (10:40):

Yeah. And that’s basically why I expect the growth profile to be more back-loaded; that we will see the big pick-up after school reopening, so around September, October. And then, we will have more of pickup in growth next year. So, I agree with the consensus view we are going back to trend now about 2%, but I think it’s going to happen more at the end of this year and next year than right now.

The Difference Between Democrat and Republican States on COVID

Bilal Hafeez (11:07):

And just another question on the school reopening and this participation rate issue, can you look at this by state? So for example Texas and Florida, I assume are more laxed compared to say California, where you are. Do you notice a difference there?

Dominique Dwor-Frecaut (11:20):

Yes. You can map it by state absolutely. As you would expect there is a difference between the blue and red states, which, by the way I think is a positive thing because you have a competition between states to have a more efficient policy response to COVID. So hopefully, this competition is going to speed up the reopening. If you look at the data on immunization in Israel, for instance, there is no question the Pfizer and the Moderna vaccines work. If you can get a large enough share of your population immunized, there is no danger. You can go back to a normal life. And so, there is no reason to keep schools closed at this stage. So the competition I think is very positive.

Bilal Hafeez (12:11):

And I know you’ve been looking at COVID and the impact on the economy very closely over the past year. What are yours of general thoughts about the red state, blue states way of dealing with this all in terms of the Republican and Democrat states? What are the general patterns that you’ve observed in terms of COVID deaths, economic activity? Are there other patterns that you’ve identified?

Dominique Dwor-Frecaut (12:32):

Oh, absolutely. The pattern in terms of excess death is really the more reliable way of looking at the impact of COVID because you often have comorbidities when someone dies including COVID and it’s really hard to assign that to a specific morbidity. So, I find that excess death relative to historical averages from all causes is probably the more reliable measure of the impact of COVID. And to me what’s absolutely fascinating is that red and blue states have followed very different strategies, with blue states usually adopting much more stringent restrictions, more lockdowns etc. But when you look at excess deaths since the beginning of the pandemic, there is no marked difference. To some extent, I think it reflects the fact that we control much less than we think we do. We don’t really understand fully how this disease is transmitted.

We also control behavior less than we think. For instance, the US never had a single period of US-wide coordinated hard lockdowns. It’s more that states have decided to lockdown at different times. And because US constitution says states cannot impede movements of US citizens across states, lockdowns never worked. So, we have an institutional setup in the US where, in my view, the lockdown has a lot of negative economic consequences without obvious positive health consequences. Also, there are things that suggest that red states have found better points than blue states in terms of tradeoff [curve] between health and economic impacts.

Can Inflation Move Higher?

Bilal Hafeez (14:30):

Yeah, that’s very interesting. And I think during the Trump years at least, everything got so politicized with Trump so that people that obscured the objective analysis of events as they were unfolding. So this is an example of one of those things. Okay, now if we moved back towards macro, do the big debate we’re having in markets is obviously on inflation and I’ve had many guests on our podcast who are looking for inflation. Many people are saying we’re underappreciating inflation risks. They’re saying that the view that the Fed knew that we were going to have a temporary spike in inflation is incorrect. We’re actually going to see a permanent shift up in inflation. What’s your view on that?

Dominique Dwor-Frecaut (15:12):

I’d say that for once I’m with the Fed on this one. Which is not to say that I’m not expecting an increase in inflation, but for different reasons and circumstances. I agree with the Fed that the spike in inflation we are seeing is just COVID-related. For instance, this temporary decrease in the supply of labour caused by schools that are not yet reopened. Even [semiconductor] chips are also temporary shortage. And to me, when we talk about the big inflation coming, if you look at the price of the SOX Index which is Philly Fed Index of semiconductor firms that buy, sell or design semiconductors, it’s been falling for a month despite the shortage. Why? Because there is this expectation of a big increase in capacity investments that’s going to bring down the cashflow but big increase in capacity investment longer-term, which will prove dis-inflationary.

So, I’m with the Fed on the impact of COVID on inflation, but longer-term, I think inflation is likely to make a comeback for structural reasons. Essentially, I think that since the Volcker recession of the early 1980s, we have moved into a low inflation environment largely because there has been a structural change in the relative power of workers and producers. Basically, workers have lost a lot of market power so you have a flat Phillips curve. Even when there is no unemployment, wages are not moving much and productivity gains go to producers. While on the other side of the bargaining table, you’ve had producers who have become more concentrated, so they’ve gained more market power and they are getting a bigger share of income. As we all know, the share of workers in national income has been declining for decades. And I think this is very dis-inflationary because the propensity to save out of profits is significantly higher than the propensity to save out of wages.

And on top of that, typically, in a labour market, the people who are paid more tend to have their pay indexed to profits while the people who have lower wages tend to have their pay driven by labour market slack. So when you’ve had this increase in the share of profits in GDP, you’ve had also this elongation of the scale of wages and greater inequality. And again, people who make more money save more. So, once they get a greater share of income, that share of income goes into demand for financial assets rather than demand for goods and services.

I also think we’re reaching the end of the political sustainability of this increase in inequality. And to me, US politics at the moment are absolutely fascinating because what’s happened is that the blue-collar workers have becomes the swing voters that both the Democrats and the Republicans are trying to woo – these are the people who will decide what is the color of the next Congress. And they have different ways for going about it. I’d say the Democrats want to influence the distribution of power very directly with laws that support unionization and collective bargaining. They are also implementing a program of public spending that is more targeted to low-income Americans. On the other hand, Republicans are trying to raise the share of workers by being more protectionist, by bringing more jobs home and by expanding the overall market shares while restricting the competition from abroad. But the endgame is the same. Both parties are trying to redistribute income. And that I think could very well revitalize growth and revitalize inflation as well.

How Income Inequality Drives Asset Markets and the Economy

Bilal Hafeez (19:32):

And is this your base case? So in some senses you are saying that we are going to see higher persistent inflation based on this premise then?

Dominique Dwor-Frecaut (19:41):

Absolutely. But I think it’s going to take us a while to get there. For instance, if the Republicans win the midterm elections, we’re going to have a big fiscal cliff because they will refuse to sign off on another large deficit just as they did under Obama. So, the Republicans holding the Senate will make for tighter fiscal policy than if the Senate remained Democrat.

Bilal Hafeez (20:08):

And was it your sense then when Trump came into power, he had his fiscal stimulus which was more tax cuts and he was more protectionist at least in terms of sentiment. Did you think that ended up helping blue collar workers? Did it sort of result in this narrowing of inequalities?

Dominique Dwor-Frecaut (20:28):

So, yes and no. There is no question that there was rebound in the workers share of national income, but I felt it was more cyclical than structural that we really ended up with tight resource utilization. But the fiscal policy and in fact there was a study done by the Congressional Research Service, the fiscal policies of the Trump administration benefited many upper-income households, the tax cuts. And what those upper-income household did is that they raised their savings. So if you look at the tight balance against a budget deficit, you can see clearly that under Trump the budget deficit widens but not much happens to the external balance which as you know is the overall savings-investment balance. Because the tax cuts benefit many upper-income and household and corporates, and what those did is to increase their savings. So net-net, there was no increase in overall savings relative to investment as shown by a fairly constant external balance.

Dominique Dwor-Frecaut (21:37):

So that’s why by the way I think we will take a bit longer to get to that higher inflation environment if we have red White House or red Senate than if Senates and White House remain blue. But I think the historical trends are there. I joke that when I was a student in France, when in your last year of high school you had to study philosophy. And at the time, all of the philosophy teachers were Marxists. So I had to sit through lecture about Marxism which I thought was fairly boring but in a way it’s Marx revenge because it’s a capitalist system generating a crisis of excess supply in a way.

Bilal Hafeez (22:24):

Yeah. I always found Marx’s analysis is quite good as a critique of capitalism but its solutions tend to be quite poor.

Dominique Dwor-Frecaut (22:32):

Oh, I’m not saying that the solution needs to.

Bilal Hafeez (22:35):

What I’m saying is there is some value in the Marxist analysis in terms of the power dynamics within an economy and the kind of inherent destabilizing force that capitalism brings about.

Dominique Dwor-Frecaut (22:44):

Oh, great. I wish it could have been said in a more concise way.

The Impact of More Active Fiscal Policy on Growth and Inflation

Bilal Hafeez (22:48):

Yeah. No, I hear you. And now on this fiscal issue, many people are looking at the fiscal stimulus that we saw last year and actually this year as well in terms of the checks people have been guessing. And people are saying that we’re in a new paradigm for fiscal. So not just in terms of that we’re seeing a stimulus but in the nature of fiscal, that we are coming closer to MMT, we are becoming closer to universal basic income. What do you say to that?

Dominique Dwor-Frecaut (23:19):

One of my favorite podcasts (besides yours of course) is Luigi Zingales’ Capitalisn’t, who compared MMT to The Laffer Curve of the Left. So, let’s ignore the acronym for a second and think, what is MMT? It’s basically the Central Bank funding the government deficit. In that sense, QE is MMT. The only reason we are not calling QE MMT is that central bankers are assuring us with QE that they are independent. It’s only by accident I think Clarida use the term “Copacetic Coincidence”. Basically, they’re telling us that MMT is a terrible thing. But you could argue that if you look at the facts, they’ve been practicing MMT since 2008. No. It seems to me the issue is really with this excess savings – that the economy has a tendency to be in a low inflation, low demand equilibrium. For instance, look at capacity utilization indicators, they’ve been going down since GFC.

Bilal Hafeez (24:30):

Actually, just that point you said excess savings, you mean for the US? Or are you talking global?

Dominique Dwor-Frecaut (24:35):

Oh, desired savings. I was thinking in about Keynes’ argument about excess savings: if you want to save a lot, since your consumption is somebody else’s demand, so if everybody wants to save a lot at the same time, then the economy ends up with fairly low output.

Bilal Hafeez (24:55):

But at the same time the US has a current account deficit. So it has the opposite of excess savings. It has under savings, no? It’s a net borrower from the rest of the world.

Dominique Dwor-Frecaut (25:03):

Definitely. But relative to the US own trajectory, our growth and inflation are lower and capacity utilization is lower in the US now than 20 years ago. Now there is no question that compared with other countries the US has always been the consumer of last resort.

Bilal Hafeez (25:24):

Understood. Yeah. So in some sense what we’re saying then is that the current account deficit is smaller than otherwise would be if there wasn’t this excess desired savings.

Dominique Dwor-Frecaut (25:35):

Absolutely. And also, in terms of current accounts you also need to think about the relationship with the capital account and the fact that the US has a world currency and has the biggest financial markets. So, you have this structurally positive capital accounts or financial account to use model terminology; that also explains why the US tends to have a negative-

Bilal Hafeez (26:01):

Yeah. It kind of goes back also to the Michael Pettis argument about the Anglo economies tend to have very open financial markets and tend to be very open to receiving capital flows from rest of the world to the UK, US and so on. So, yeah. Okay. I think I’ve interrupted you there but you were saying that we’re kind of, well the US has been in this kind of low growth, low inflation equilibrium rut.

Dominique Dwor-Frecaut (26:22):

And you also had for the longest period of time the view that fiscal policy should not be used for stabilization purposes. I remember when I was at the World Bank and doing program countries, the orthodoxy was that you manage the economy with monetary policy. You use fiscal policy to fund long-term infrastructure plans. So, I think you’ve also had this imbalance in the policy mix between fiscal and monetary and too much burden placed on monetary policy as “The Only Game In Town”, to quote Mervyn King. And so that explains how central bankers ended up doing MMT (sorry QE) basically to reflate the economy.

And an additional issue, a big issue, which we don’t discuss enough, is basically the asymmetry in the mandates between fiscal and monetary policy. Most central banks have an explicit legal mandate to stabilize the economy while I think no country in the world, except maybe one of the Nordics has a mandate for Parliament to use fiscal policy to stabilize the economy. So the result is that by law, central banks have to mop up after politicians basically. And so, they end up having to provide so much stimulus that the only way they can do it is by buying bonds and those bonds happen to be the bonds that are funding the government deficits.

Bilal Hafeez (27:54):

Yeah. Understood. And so in terms of the specific packages that we’ve seen from Biden or Biden/Trump, the first wave you could say emergency fiscal, and now we’re talking more about infrastructure. And I know in the US, there’s a big debate about the semantics of infrastructure in the fiscal – is it really infrastructure or not. What’s your sense of the ease to propose packages that Biden has announced? It looks like in total, it’ll be close to $4 trillion in terms of the two packages. Presumably some of it will get watered down but what’s your sense of the implication for the US economy off those packages? Will it be cyclically positive? Will it improve the US’ trend growth? What’s your take?

Dominique Dwor-Frecaut (28:34):

So the easiest part of your question to answer is the one on long-term growth. Anyone who has just traveled from Manhattan to JFK knows something about the state of US infrastructure. We get the occasional bridge that collapses and it makes one page of the newspaper but it’s like the tip of the iceberg. The infrastructure in this country is abysmal. Plus, there is an enormous need to improve cyber-security. As we are seeing we are getting more and more incidents (at least that we know about, that gets reported by the media) that are getting more and more consequential. So, there is an enormous need that would have a long-term positive implication.

Now, the cycle I would argue that the administration will get something passed essentially until the midterms. The Administration has control of Congress. It can get things passed in the Senate with a simple majority through reconciliation. Apparently, it can use a Senate parliamentarian, that is a career official who decides on what conform or does not conform with Senate laws and procedures, has established that the Democrat could use reconciliation as often as they wanted. So, they will get something passed.

They will get the centrist Democratic senators to support something. The bottom line is that in measures to race to keep the majority in the midterms started the day after or the night of the Georgia elections, Senatorial elections. And so we are not going to have a fiscal cliff next year. Whether it’s the normal run-of-the-mill budgets or whether it’s infrastructure expenditures, the Administration will make sure they’re passed. Because the Democrat want to keep Congress, they will make sure that especially if the pace of the recovery this year is disappointing, they will make sure that there is no fiscal cliff.

Bilal Hafeez (30:42):

At the same time, if we look at the fiscal impulse, presumably that would be negative next year given how large fiscal stimulus was this year, it will be a smaller fiscal stimulus next year. So from a kind of an impulse perspective you’ll end up with a negative fiscal impulse which could then be a drag on growth, presumably.

Dominique Dwor-Frecaut (30:58):

Absolutely. But the other side of the coin, private demand will pick up. So, you will have rebalancing of the economy away from public sector demand to private sector demand. In fact, as we discussed earlier, the recovery will really be in full swing only in the last quarter of this year and over in the first half. So, you will have a bit of a handover from stimulus to private demand. So, I still think we are likely to have growth for both times next year.

Outlook on Germany and China

Bilal Hafeez (31:30):

And do you have any thoughts on some of the other major economic blocks, so China or the Eurozone?

Dominique Dwor-Frecaut (31:36):

On the Eurozone, I had been skeptic for the longest period of time. But I think what could be really a game changer is the election is in Germany. Because you could have an end to austerity in Germany and in the rest of the Eurozone. And if you look at the polls, it’s clear that the Greens are on an upward trajectory. Now they are polling higher than the CDU. I think it will be tough to reverse before the elections because what is happening in German politics measures reflects very deep-rooted weaknesses of the Merkel tenure and in particular, under-investment in infrastructure.

Again, the fact that there is a digital gap in Germany, (it’s hard to imagine but in German, one of the difficulties of implementing the COVID response was simply communications between the Central Ministry of Health in the federal government, the länders, and the private practices because everybody uses faxes). It’s not in the global consciousness but it’s a fact. And you have really a strong reality in Germany between the very large, very modern corporations like Volkswagen, Audi (the corporations we know about) and the mittalstands, the famous small mid-size family run companies that have not kept up with digitalization.

And in general, the infrastructure in Germany is crumbling. Once there was a need to go to internet-based schooling, schools didn’t have the bandwidth. Literally you didn’t have the computers. So there was criticism of the Black Zero of the balanced budget without thinking much about the longer term needs of the economy. And it seems to me that in the short-term, it leaves Germany in a precarious position in terms of competitiveness.

But in the longer term, it’s generated in its own reaction with basically political change and that I think is going to usher the rebalancing of the policy mix again towards more fiscal. And not only in Germany but in the rest of the Eurozone because the Greens wants their own Green deal and they are going to support more joint issuance to fund that. And I think it would be very beneficial to the Eurozone because you’ll share prosperity, you will weaken the argument of the Euro-skeptics. So I think these elections are super important and possibly a game changer. And then of course, we will have a redistribution of excess savings around the world which would be a very interesting thing to look at.

Bilal Hafeez (34:28):

Okay, that makes a lot of sense. And then on China.

Dominique Dwor-Frecaut (34:31):

So, China is another of my biases; I’m a little pessimistic there. So first of all, the demographics are not great. And I think the demographics make for a society with a mediocre growth and inflation as older people save more. So, you have this high level of desired savings which end up making for weak demand growth. Then you have the financial hangover which China has been able to postpone the consequences of a breakneck financialization. But you can only do so for so long. Then, China has a problem of image with its treatment of the Uighurs and of Hong Kong. And it’s a bit of an issue when you are dependent to that extent on global demand. And it’s only going to get worse. Plus, the US is making gains in trying to build a coalition against China.

And then my concern is that when you have a really authoritarian regime, this regime can get isolated and it becomes a challenge to figure out what is going on the ground. So, if for instance, you have financial imbalances, you have a dip in growth, you have the beginning of a systemic NPL problem, I’m not sure that given the structure of incentives that the central governments will get all the information it needs to make good decision from the people on the ground. So these are my biases. I stand to be corrected. I do think that political change in Germany could be very positive for the future of the Euro area.

Timing the Next Big US Bond Sell-off

Bilal Hafeez (36:23):

Okay. And I know that you aren’t kind of a market strategist, but I know you do have a view on bonds. What’s your kind of big picture view on US bonds?

Dominique Dwor-Frecaut (36:32):

So, my big picture view is that there is a good chance we could see a sell-off in the fall – not so much out of inflation fears but much more due to the rebalancing of the fiscal policy mix. And let me explain why. If you look at the relationship between bond yields and GDP growth, it tracks quite closely. The two are really well correlated. But if you break that relationship between GDP deflator or say PCE and breakevens on the one hand, and real yields and real GDP growth on the other hand – you can see that inflation and break-even track quite closely, because of the TIPS contracts, but there is a widening gap between real growth and real GDP and at present, the gap is the widest it’s ever been. And in my view, it reflects the fact that markets are probably pricing too much QE. That nominal yields are too low because the market think that central bank will do QE forever.

And it seems to me that as the economy recovers and as we see the impacts of the Biden packages, there’s going to be a realization that there is less of a need for monetary stimulus, that monetary policy is no longer the only game in town. And there will be fewer bond purchases. And this is when we could have nominal and real yields move up quite a bit. And I would argue that Secretary Yellen was thinking along those lines when she said last week that with the fiscal stimulus, at some point there might be a need to normalize monetary policy. I think she very much has this framework that stabilizing the economy is done through both fiscal and monetary. And if fiscal becomes more active you have less of a need for monetary. So, that could be a bit disruptive.

Dominique’s Productivity Hacks and Book Picks

Bilal Hafeez (38:43):

Yeah, no that makes a lot of sense. Certainly, real yields just look incredibly low right now. So, I’m kind of sympathetic to your argument. Well, now I think it’s time for us to go back to the personal. And one thing I like to ask my guests is how they manage or how you manage your information and research flow. It’s quite easy to be overwhelmed and what’s your kind of routine to stay on top of things?

Dominique Dwor-Frecaut (39:06):

So, my routine is to get up very early since I live in LA if I want to catch up the New York data analysis, I need to be up before 5:00. So, what do I do? I read the news mainly the Wall Street Journal. I have a look at Bloomberg. I look at our chats. The Macro Hive chats are fantastic and I think any new investor would find it really valuable to have access to that collective expertise. So, I look at the charts, I have one website which I look at, it’s a little slanted politically but they often have interesting takes on thing. It’s called Naked Capitalism. So, there you are, full disclosure.

And I read the news with a filter. Through talking to our colleagues, I get a sense of what is important at the moment. And whenever I come across something and think, okay bottom line. Does it make me change my beliefs about the world? For instance, what made me take this view on the NFP – I was reading articles in the newspaper about how businesses really could not find workers and that they’d never seen-

Bilal Hafeez (40:20):

And just for the benefit of our listeners, Dominique was very bearish on the last labour market reports. She was looking for a very low payrolls number based partly on the latest supply issue. And the consensus I think was looking for very high number of almost like a million. And it turned out to be much lower, closer to 250.

Dominique Dwor-Frecaut (40:37):

So, I walk a lot. I read a lot. I try to see what people are thinking. I walk a lot because that’s… I run also and that’s where I digest thing. I avoid Twitter. I sometimes go on Twitter to look for confirmation of things I cannot find in the mainstream medias. But I have a low confidence on Twitter so it’s definitely not my go-to place. I go there sometimes to find free posts by people who have their walls on their research. But I’m not much of a Twitter person. Yeah, so it’s more about time management than finding your secret source that’s going to give me an edge.

Bilal Hafeez (41:22):

No, that sounds really good. And then finally I love books and so I always like to ask guests about books as well. So, is there any book or books that have really influenced you either personally or your work over your career?

Dominique Dwor-Frecaut (41:35):

Recently, I loved the John Kay-Mervyn King’s Radical Uncertainty. I’ve been a follower of John Kay for many years because he’s philosophizes about the market economy being a laboratory for experiments and has a sort of a deep skepticism of grand theories that explain everything. It really very much fits with my view of the world. I guess I love the book because they describe to me my way of thinking much better than I had perceived it. So that’s more of a recent read.

Medium-term, the books that probably influenced me most or I liked most was this book by a biologist. It’s called The Social Conquest of Earth by Edward Wilson. This is basically a guy who was along with Richard Dawkins a big proponent of the selfish gene. And he changed and I thought it was fantastic because he changed. He was in his 80s or 90s, but he’s now thinking of selection more as a group level. So, he thinks that as individual, we survive better in groups than on our own, but within a group if you are freeloader, you do better than other people in that group. And I thought it was really cool description of a lot of social dynamics.

So, there we are. I also have this desire or yearning for the grand theory of everything. So, it’s really with my grand theory of everything. And also, what I like to buy the book is that it made me think of human being that just one example of a living things among many and perhaps become more aware that our specie has appropriated so many natural resources and crowded out everybody else which I think is a big ethical dilemma. So, I loved that book on many-

Bilal Hafeez (43:46):

Okay, I haven’t read that book but I know the author Wilson. And so, I will read that book now.

Dominique Dwor-Frecaut (43:51):

It’s short. Much shorter than the Kay-King book. It’s bit on the long side but really worth it. I really learned a lot.

Bilal Hafeez (44:04):

Great. Okay that’s it. That’s excellent. It’s a great wide-ranging conversation with you as usual. And if people wanted to follow your thinking and your work, where’s the best place they can see it?

Dominique Dwor-Frecaut (44:15):

No question. Macro Hive is a great place to get lot of inputs on different things from different perspective and yeah, that’s also where you find my stuff.

Bilal Hafeez (44:27):

Great, excellent. So, with that, thanks a lot Dominique. It’s great having you on. And yeah, we’ll see how the rest of year whether it’s unfolds as you expect.

Dominique Dwor-Frecaut (44:35):

Thank you.