For the full interview please listen to the most recent CM Group- Free Lunch Podcast, Episode 66 “Talking Inflation, Interest Rates and Market Cycles with Paul Eitelman”
Colin and Steve: It seems like we're always in a market cycle just by the definition of a cycle and today we're going to spend some time digging into that as we interview Paul Eitelman. Paul is the Director, Chief Investment Strategist for Russell Investments, and he's joining us from beautiful Seattle, Washington. Welcome to the show Paul.
Thanks Paul for joining us. Let's just jump in. Tell us your story. How do you end up where you got to today?
Paul: My career has had a bit of an arc to it. I actually started out as an aspiring Economist, so I started my professional career at the Federal Reserve in Washington, D.C. in the summer of 2007. It was a unusual time to join the US central bank. It was right on the cusp of the biggest financial crisis in decades. I think that was a really fascinating experience for me to be around really smart people like Chairman Ben Bernanke and a lot of the professional Economists at the Federal Reserve trying to do our best to kind of save the US economy from what looked to be a really, really bad financial disaster and had a lot of strains on the banking system. That was a fascinating experience for me and I gained some strong foundations around macroeconomics, economic theory, central banking. From there, I transitioned into the private sector as an Economist and Investment Strategist. I spent three or four years in Manhattan working for JP Morgan. I was a Senior Economist in the private bank there, helping their ultra-high net worth clients. Then over the last six years or so, I've worked with Russell Investments. I've increasingly transitioned from just doing economics to now also being responsible for our investment strategy in North America. Not only thinking about the economic outlook, but what is our views on the US equity market, interest rate strategy and a whole range of other things. So that's my arc. It's been a progression of things, but in short, a gradual shift from economics to a bit more into the private sector and markets.
Colin and Steve: I’m curious to hear what the difference is from the Federal Reserve days 2007/2008 to where it is today with the current crisis or current pandemic that everyone's trying to deal with. What are your thoughts about that?
Paul: Well, I think there are some similarities and there are some differences. The Fed had been faced with some really big challenges. Both the global financial crisis were so severe that the Fed's normal toolkit was not enough to support the economy. So in both cases, they cut interest rates, at least the overnight interest rate, all the way down to zero. But that wasn't enough. In 2009, for the first time, Ben Bernanke started this novel new experimental monetary policy framework where they started buying assets, specifically Treasury securities, on a really large scale, with the hope of not just keeping short term interest rates at zero to support the economy, but also influencing longer term interest rates lower, as well to help boost consumer activity and business borrowing, etc. That was really experimental and unique, and a bit scary for a lot of people a decade ago. But because COVID was so dramatic in terms of shutting down entire industries in the US global economy in the span of just a couple of months, the Fed had to rely on a lot of those same experimental tools again this time around. If anything, I think their response was stronger this time, for good reason. Not only did they cut interest rates to zero and relaunch a quantitative easing program, but the scale of it was unlimited in scope. Powell said, “I will buy as many Treasury securities as it takes to make sure markets are functioning here”. That was a really historic and important backstop for financial markets that were really struggling in the spring of 2020. And they even went a little bit further.
I think the innovation this time around was extending the support beyond sort of safe fixed income securities and actually buying corporate bonds. That was, I think, a historic and unusual effort to make sure that the borrowing costs for businesses were manageable during a time that a lot of companies had their revenues dropped to near zero. I think at the highest level, what the Fed has had to do is everything they possibly could to make sure that households and businesses could survive to the other side of the pandemic when we had vaccines become available and the economy could start to return to normal again. I think they've been pretty successful with that. With respect to the United States economy for example, if you're measuring it by real GDP, it’s back slightly above pre-COVID levels again – an almost complete recovery in the United States. There's still a lot of people that think Chairman Powell would like to get reengaged in the labor market again. They're going to stay accommodative for a while here. But it was an awful recession and it's been an impressive and awesome recovery in terms of the speed of growth, subsequent to those lockdowns. I think that's the difference. This is unlike 2008/2009, where we had a pretty slow recovery because households had to manage down their balance sheets. They had a lot of debt that they had to work through and economic performance was pretty poor. Today, we're seeing some of the strongest economic growth rates in 30 or 40 years and so the Fed's accommodative now. But the big question is, when are we going to have to start to change tack because we don't want to generate too much strength and overheating and inflation? That transition is happening a little bit faster this time.
For more questions and answers with Paul Eitelman please refer to our Podcast.
Stay safe, stay happy, stay well!
-The CM Group