Greenwich Economic Forum 2022: Fireside Chat with Wilbur Ross

okay so we're rounding this is the last session of the day I think all of you know this is a fireside chat with former Commerce Secretary Wilbur Ross I'm going to make a quick introduction he's going to be moderated in conversation today by Jerry Baker who is editor at large at the Wall Street Journal his weekly column for the editorial page free expression appears in the Wall Street Journal each Tuesday please welcome Jerry Baker and secretary Ross [Applause] um yeah uh good evening welcome everyone thank you very much indeed for being here it's a pleasure to be here well Wilbur as you heard this is built as a fireside chat but um as far as I can tell from the schedule we are the only thing standing between these good people in a cocktail hour well and I'm glad we don't have a real fire so we'll try to make it uh Lively and stimulating but not so gloomy given the current economic environment that everybody goes off to cocktails in desperate need of a drink okay um but look you had an extraordinarily long and successful career in investing and of course in in government most recently uh Secretary of Commerce in the Trump Administration so you're very well placed to give a perspective on these macro and economic and financial trends that we're that we've been talked been talking about here today and that we're going to talk about in the next half an hour so let me stop if I may with you with the topic that's I think on top of everybody's mind which is the economic Outlook um the U.S economy Contin seems to be continue to grow there's contradictory signals on this obviously we had negative GDP uh growth in the first two quarters very slightly but the labor market seems in reasonably good shape consumer spending uh still is still continuing and yet of course we're all dealing with uh these remarkable Financial developments obviously financial markets itself and of course above all the Federal Reserve aggressively raising interest rates and according to Jay Powell the chairman uh set to do uh quite a lot more so where do you stand on where the U.S economy where the U.S economy in particular is right now I saw Jamie dimon yesterday saying he thought a recession was likely in the next six to nine months um do you think we can the Federal Reserve can pull off this um attempt to suppress inflationary pressures without tipping the economy into recession my best guess is we're in for a protracted period of stagflation and I don't think it matters whether it exactly tips into a recession by one or two percent or goes a little bit above and is a little bit positive and it's going to be basically flat economy for some time to come inflation I think is a lot to the economy like what an infection is to the human body if you deal with it quickly when it shows its first signs very easy to get rid of it very simple medication does it when you let the inflation infection grow and fester for a long time gets hard and sometimes the Curative impact also has bad side effects I think that's what we're going into here by analogy with the body but is it Armageddon is it a Great Depression no I don't I don't think so I just think it's going to be very soggy but very inflationary and the reason I think the inflation will be so hard to get rid of is we should really look at the components and think each one which is going to be strong in terms of inflationary pressure which is not I think to paint with a very broad brush and just say this is what inflation will be it's really not the right mindset for looking at it as you know 32 percent of the CPI is shelter shelter costs are definitely going to go up in the next year or two there's a lag factor between when prices of real estate go up and when they're reflected because about a third of the home of the home residence is divided into two categories the rentals well rentals have been going up at an enormous rate but most leases are three years so they're only going to start getting the full effect as they get out into next year and similarly well the prices of houses probably won't go up very much in the next year or two in general the impact of the former increases and the fact that some folks still have variable rate mortgages so their interest rates are going to go up and property taxes for sure especially in most urban areas are also going to go up and the labor market still seems tight right I mean again there's no relieving so far of those pressures we see the unemployment rate fall again uh last month um you know payroll growth was down a little bit but with with with pay with with average hourly pay rising at about five percent and prices core prices rising maybe at six percent there may there's still a lot of pressure in the labor market on wages to catch up there is and that will continue you know this isn't the first year where real wages have gone down real wages have been under pressure for quite a few years and I think middle class America was sick and tired of having inflation outpace nominal wage gains so you're going to see enormous pressure there you might have noticed today the railroad workers decided apparently to turn down what I thought was an extremely Lush contract with the railroad so God knows what they'll end up with for a new contract what does this leave the fed the market again still seems to be thinking fed funds goes up you know another 75 basis points uh next month and then another 50 at the end of the year and then maybe we get to between four and a half and five and the general expectations seems to be that's about as far as we need to go the FED thinks it does all that according to its latest forecasts with unemployment Rising you know to four and a half percent by the middle of next year I think all the evidence is to go back to our original question that when the unemployment rate Rises by that much in that short a period of time that's pretty negative for the economy that does suggest a pretty sharp reception well it does I think a buffer to that however is the big gap between available jobs and unemployed people that's almost as wide as it's ever been so the first million or so available jobs that go away nobody's going to be bothered by them maybe even a couple million jobs can go away and nobody will be bothered by them so that I think is a big buffer that has not typically been present at this stage in in an economic environment the other thing is labor force participation has been stuck and still no better than where it was a couple years before the pandemic occurred every percentage point in labor force participation is over 2 million people so if the participation rate went up just one percentage point that brings a huge amount of new supply of labor you think the FED got this badly wrong do you think this talk all through last year that inflation was transitory the failure to raise rates until the beginning of this year they were still doing quantitative easing until the beginning of this year even as inflation was hitting six seven eight percent is this going to rank as a really serious historic fed mistake well I think one of the problems with the FED is that it uses obsolete models and it's a problem with models in general the problem with all these models is they always make the implicit assumption that tomorrow will be a lot like yesterday but an inflection points exactly the reason it's an inflection point is tomorrow turns out to be very different from yesterday and anybody in his right mind who would think that the same economic recovery that came from prior recessions which were induced by economic causes that the same conditions would Prevail in this unique recession which was not caused by the economy the economy was very very strong when the pandemic hit this was caused by an exogenous Factor the pandemic so the what I could never understand is why the FED didn't understand there would be a very big Snapback and I also didn't understand why the federal government didn't get it once you removed the singular cause there was no reason for the jobs not to come back and we didn't need the last trillion dollars or so of money coming in so I think this is a self-induced stagflation that we're going to be going into what about markets and how do you see the markets itself no one in this room needs reminding this has been a terrible year for markets equities you know the U.S has to keep the to the US for the moment that you know s p down 25 now the NASDAQ down more than 30 I think in my newspaper reported that this has been the worst year for bonds I mean unusually at the same time uh as equities I think in more than 100 years we're seeing that the 10-year treasury you know back around four percent again do you think where do you stand again sorry to keep coming back to Jamie Diamond but Jamie dimon I noticed yesterday in addition to forecasting a recession said he thinks the market could have the equities could have another 20 to fall uh do you think you know looking ahead to the we've got an earnings season coming up which is clearly going to be quite challenging we've got this continuing uncertainty about what the fed's going to do with interest rates we've got some of these other uncertainties of financial markets are we past the worst yet or do you think there's more to come no but I think we're getting close to it Market never discounts the same thing twice and right now it's discounting bad times once bad times really occur then it will start discounting the recovery to Good Times so markets by the nature try to be anticipatory and sometimes they get it right sometimes they get it wrong um but as to Powell in the interest rates I believe that he does not want to go down now here's a bug clearly from the Federal Reserve well the chart maybe the China or the Chinese maybe the Chinese will but I'm going to get on to China maybe it didn't look Chinese I'm sure you've dealt with a few Chinese bugs in your science no no they're bugs tend to be more electronic yeah yeah sure anyhow um Powell having totally blown what he should have done earlier I think is going to be extremely tempted to overshoot and I don't think he wants to go down in history as the one Federal Reserve president who could not chairman who could not solve inflation if it happens to cause a recession well so what recessions come every now and again been a long time since we had a true economic recession rather than pandemic I think it can shrug that off from a reputational point of view how do you see the financial system the stability of the financial system forgive me for saying this but you've you know you've lived you're old enough to have lived through a financial a few Financial crises in your time when you see these dramatic movements particularly in interest rates that is often a time that creates distress in financial markets we've seen a little bit of this in the UK with the dramatic move in uh in guilts in the UK and the bank of England having to step in to stabilize um and help out some of the Pension funds are a little bit exposed there you know the old Warren Buffett's saying about you know when the tide goes out we see who's been swimming naked are we gonna do you think we might be a in for some of that in the next few weeks and months well I think the UK situation is a little bit unique in that the policies of the new prime minister and the policies the bank of England were antithetical to each other and if there's one thing the market hates it's confusion and uncertainty markets can adjust to good things they can adjust to bad things they hate to deal with uncertainty so I think that's a little more even of us self-inflicted wound than what we had here but remember too in the sunny days there were great excesses of tremendous excesses um I I have a spack as as I guess every living adult American does and [Music] um that was last year's Greenwich economic foreign conference a year and a half ago I predicted that spax would be where people would lose an inordinate amount of money even though I was doing one it's not that there's anything wrong with this back concept it's merely a mechanic it was abused and so was the General market so part of the region we've had such big declines is prices got to where they never should have been and so a lot of the correction is not even economically based it's just the psychology has changed because the way markets relate to inflation for the longest while nobody talks about inflation nobody cares then suddenly one morning everybody woke up and had a simultaneous Nightmare and said oh my God inflation and then everybody worries about inflation about the dollar that's obviously causing a lot of distress around the world a lot of Emerging Markets getting hit very hard by the strength of the dollar have been some calls in some parts of the world for something to be done as there always is in these circumstances maybe another Plaza Accords do you see this as anything that requires a policy response or we're just gonna have to suck it up well I I think IMF World Bank and other such entities are going to do what they always do which is bail the people out and I think it's in a ways sad that that happens not that I would like to destroy the emerging countries I wouldn't but we have done nothing despite all the repeated crises and Emerging Markets we have done nothing to reform their behavior they continue to mismatch their borrowings with their own currency and anytime you're in an inherently unstable weak currency and you choose to borrow money in dollars you're looking for trouble and until we teach those countries that that's a wrong approach it's going to be the same cycle same cycle same cycle look at Argentina I forget how many times they've defaulted but sure enough then a new face comes in new Central Bank governor and all of a sudden they're borrowing dollars all over again so if we don't learn from history as the wise man said we will be doomed to repeat it Karl Marx I think anyway um he's coming back into fashion two in some parts of the world um what about taking the longer term View um do you think that we've seen this extraordinary period since the since the global financial crisis of extraordinary stimulus from central banks in particular to some extent from from fiscal authorities too but you know the Federal Reserves balance sheet hitting 9 trillion we've got used to this era of essentially zero effectively zero interest rates in fact in Europe they've had negative interest rates um uh for quite a lot of the last last few years is that uh Are We Now is this what we're seeing now is not just a kind of cyclical reaction but are you do you see this as maybe you know a resumption of what we used to think of as kind of financial normality the days of the days of free money are essentially now over well I think the days of free money probably are over but they had to come to an end there just is no free lunch it's just not possible and when you have every major economy operating at budget deficits how you would think that that wouldn't percolate its way through into higher interest rates is just silly look at some of the specific issues issues you dealt with as Commerce Secretary now let's talk about International International economic and trade environment um right now I mean the Trump Administration I think it's fair to say was the first U.S Administration to take a pretty radical departure with regard to trade generally in the in the sort of Cold War post Cold War area era but particularly with regard to China took a very hard line with China imposed tariffs on a lot of Chinese Goods um it does seem as though the buy Administration came in saying it was going to undo a lot of that and it was going to look for a more multilateral approach to dealing with China but in practice it hasn't now I know the president is still considering whether to lift the tariffs on China and we're going to maybe hear about that in the next few weeks or so but do you think that we are now in a fundamental U.S China the two most important economic powers in the world are now in a an out out um relationship of confrontation if you like of economic I don't I want to get onto the political stuff here but but of economic of a much we used to talk about economic partnership previous administrations talked about partnership do you think it's now rivalry and confrontation how would you characterize the the relationship between I think the prior administration's characterization of it as a partnership were simply incorrect it never has been a partnership China is bound and determined to be the factory floor for the world they are bound and determined to overtake us so the idea that this was a Cooperative thing is silly it's just not corresponding to the facts and I don't blame the Chinese they've done a wonderful job lifting their people out of poverty into some semblance of middle class and the job they did going from 80 percent Rural and 20 Urban to being more or less 50 50 in such a few decades is unparalleled in the world so it's it's a great success story and the only real success story of of central planning that I'm aware of the unfortunate thing is we were by definition had to be the main target of their efforts because we're the big boy on the street and for example when President Clinton uh supported China's ass session to the WTO that might have very well have been a good idea but the way it was done was wrong because he did it under the assumption that if they joined WTO they would automatically play by the rules well they didn't and unfortunately they never built in an enforcement mechanism so that if they didn't play by the rules they would be punished that was a grievous error and one that we're going to pay the price for for decades to come now last week last Friday the bind Administration announced new restrictions on um on chips and semiconductors uh trade with with China is it now in the U.S interest again it was considered for a long time in the US interest to have a strong growing Chinese economy great for us business it was great for for US exports it was great for investment um is it now in the actually now do you think in this era of new competition is it in the US interest actually to try and keep China down well I think there are two as you probably know I spent a lot of effort during the prior Administration campaigning for the chips act and imposing export restrictions on semiconductor and other high-tech for two reasons one is the economic reason we right now in the U.S consume half of all the chips in the world we only fabricate something like 13 percent so we're around three quarters dependent on Imports of chips everything from the most simple commodity ones to the most sophisticated ones that's a terrible point of vulnerability and the best signal to show how vulnerable it makes you I believe that a lot of the reason why the Russians weren't able to re-equip their tanks and their planes and everything else as we as we cut them off from semiconductors because none of the modern weapons of war work without semiconductor so that's one two the next War if their heaven forbid is one I believe is going to be some combination of cyber and space both of which are extremely dependent on semiconductor so I think from a national security point of view as well as from an economic point of view we cannot be that dependent on foreigners so I spent literally two years at least a day a week arguing with Taiwan semiconductor that they should put their state-of-the-art Fab making the very smallest semi-chips in Arizona and they finally did and we finally gave them the quid pro quo which was the chips Act that's really important because they are the world leaders in in the technology close number two is Samsung but in my view tsmc is the most advanced well we need not just a large quantity of semiconductors we need to be the leader in the technology because if we're not it's going to restrict most other technological advances that we otherwise would make so I don't like Central planning I don't like countries have industrial policy but in this case it was necessary because it wasn't an accident that we became so dependent on outside here's what happened the chips were invented remember back there used to be called transistors here in the U.S in the 1960s but as other countries China and others caught on they decided to subsidize Big Time Manufacturing of chips so we're in the peculiar position we still have the best design capability but we've lack the ability to implement the designs that we make that's a terrible anomaly is the the last 30 years or so we saw extraordinary growth in globalization growth of global trade direct and indirect investment huge volumes growing at extraordinary rates but in the last few years obviously political pressures covid and supply chain disruptions some of the other changes that we're seeing is is if we passed the high water mark of globalization do you think I think probably so in fact one of the many things that the left we criticized me for when I was in office was saying that I think the Advent of covid will ultimately result in some de-industrialization of China and it's turning out that that is the case because when you make these attenuated Supply chains where you make it here you assemble a part there you another part here another part there every time you add a point like that you've added a point of vulnerability and and think that people in the quest to save the last two pennies Overlook the problem of complexity and the inherent problem of supply chain vulnerability I think what's happening now is a long overdue correction when people are saying well maybe the last penny isn't worth the fragility that it creates in my business structure a quick question on energy um energy markets we've seen I think it's fair to say the Folly of some of the policy making that's been going on around the world particularly in Europe but to some extent also in this country uh with the disruption in energy markets and the um the very difficult winter that is likely to be in store do you what do you think are the lessons of that do you think that um you know how is that how is that affecting governments how does that affect businesses how does it we've just had a panel here on ESG um are we do we need to fundament is this is this a kind of is This Been a wake-up call for all of those people who've essentially been saying no no we can you know the the US can you know close down its fossil fuel Industries and actually promote sustainable fuel I mean what's what what's your overall impression of well I I believe in climate change as a problem so let me start with that um statement but one has to be careful about the timing of things it is not rational to think you can get rid of energy from fossil fuels anytime soon it just isn't going to happen can't happen so our policy of being very constrictive on fossil fuels is frankly what has led to a lot of inflation gas prices didn't just start going up when Russia invaded Ukraine now that exacerbated it but it surely didn't start there and now we're in the ridiculous situation we have this self-created problem here and in Europe and yet um what are we doing to solve it we do tokenism things like you selling off part of the petroleum reserves the Strategic Reserves we now apparently the government is talking with Venezuela of all places to ship us oil well if we have complaints about China and their human practices and we have complaints about Russia why on Earth are we toying with helping Maduro in Venezuela this is totally crazy and I think what it demonstrates if you have one wrong policy the way to correct it isn't to introduce another wrong policy that creates other problems all that does is compound the original problem that we had further I think it was very ill considered that when this Administration first came in in the very first week they canceled a lot of armament sales particularly Fighters and air defense systems that our Administration was selling to the Saudis and other relatively friendly Arab countries so what does that lead to now when the this Administration called the Saudis to help out in oil how do you think they reacted people don't think through that it was the right thing to be concerned about the terrible killing of that journalist but I don't think the right way to solve that was to create a huge problem a huge friction for a long time with an essential Ally that we need to prevent drastic inflation and fuel prices final question secretary Rosen forgive me for asking this but you served obviously in the Trump Administration perhaps we might call it the first Trump Administration um I'm wondering are you expecting uh the president the former president seems to be uh for all as far as we can tell very much intent on running again polling suggests he could probably win do you expect there to be um a second Trump Administration after 2024 and will you be a part of it you notice he saves the really tricky question till toward the end that's a great journalistic technique and I'm gonna give the subject's response which is ducking your question but no I mean I was just seriously would you you welcome uh Donald Trump a second Trump term well I I think we have two years till the next election a lot of things are going to be different in the next two years things will be different in terms of the democratic side there'll be different in terms of this side uh it's two lots of Eternity uh to go that that far ahead you dumped that question as effectively as you've been ducking that fly that's been uh that's been stalking you throughout the whole of this session uh it's actually uh Wilbur Ross it was dubbed the fireside chat we didn't have a fire but we thanks we had plenty of heat and light thanks to the your intellectual candle power so ladies and gentlemen thank you thank you thank you thank you