Transcript: MIB with Constance Hunter, Chief Economists of KPMG



The transcript from this week’s MIB: Constance Hunter, KPMG  is below.

You can stream/download the full conversation, including the podcast extras on  BloombergiTunesOvercast, and Soundcloud. Our earlier podcasts can all be found on iTunesSoundcloudOvercast and Bloomberg.



ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST: This week on the podcast I have a special guest, her name is Constance Hunter, she is the Chief Economist at accounting and consulting giant, KPMG, she’s also a fishing buddy, I’ve spent some time with her up in Maine at Camp Kotok, discussing all manner of things. She has a really interesting and fascinating career path not the typical economist she started on the buy side as a trader and fund manager, eventually did some work managing alternative investments before she ended up as chief economist at KPMG. This is a really interesting conversation I expect you will find it intriguing. With no further ado, my conversation with Constance Hunter.

My guest today is Constance Hunter, she has been chief economist at KPMG since 2013, previously she was the Deputy Chief Investment Officer for fixed income at Axa Investment Managers where she joined after 15 years on the buy side, investing globally in fixed income, equities, and foreign-exchange, she is a member of the New York Association of Business Economics and 100 Women in Finance, she also participates in the National Committee for US China relations working on track to economic dialogues.

She earned her Master’s degree in International Affairs at Columbia, Constance Hunter, welcome to Bloomberg.

CONSTANCE HUNTER, CHIEF ECONOMIST, KPMG: Barry, it is so good to be here.

RITHOLTZ: So, Constance, let’s talk a little about your background, how did you find your way into finance?

HUNTER: So, a couple of ways. First, my father worked for an investment bank in Philadelphia and so there was investing going on in my family.

RITHOLTZ: That’s where you grew up.

HUNTER: I grew up in Philadelphia.

RITHOLTZ: And then how did you manage to make your way to Manhattan?

HUNTER: Well, I went to NYU but the other influence that got me into finance my very good friend’s father Dan Bongiovanni (ph) was an avid reader and so he was reading a book called the coming economic war with Japan. And I was, this was the early 80s, I was in high school, and —

RITHOLTZ: Let me just set the scene a little bit, the Japanese are dominating exports, they’re buying Rockefeller Center, they are going to take over America.

HUNTER: Take over America, a little bit like China today but we will get back to that.

So I remember, he is readings this book, The Coming Economic War With Japan and the whole concept of an economic war seemed fascinating to me and I was, I don’t know 14 or 15, and so he ended up telling me about the book and borrowed it and I read it, you know, how much of it went over my head but I was hooked, I was hooked that I not only on finance but on international finance.

RITHOLTZ: You end up at NYU, was there a business or international relations in the undergraduate?

HUNTER: So I did liberal arts, so I have a BA in Economics and I felt that that was important I wanted to have that broad philosophical grounding that a good liberal arts degree gives you and being able to think and being able to understand sort of the history of Western thought reading all of the great books that I think a good grounding for someone who is going to spend their career thinking and so that was my undergraduate degree was in economics.

RITHOLTZ: And then you go to Columbia for Masters in International Relations or International Finance.

HUNTER: So it’s a school of International and Public Affairs so my degree is in master of international affairs but I focused on economics and international economics and so I have professors like Jagdish Bhagwati and Arminio Fraga who was an adjunct professor when he was at Soros and then later went on to become the head of the Central Bank of Brazil for example.

RITHOLTZ: So world-famous faculty.


RITHOLTZ: To say the very least, so you come out with this international relations graduate degree, how does that translate to a career on Wall Street?

HUNTER: So interestingly enough I was interviewing at Chase Manhattan Bank, so pre-Chemical Bank merger.

RITHOLTZ: God, so you are talking.

HUNTER: 1994, late 1993 early 1994, I’m interviewing at Chase and they were recruiting for the private bank, and I wasn’t terribly interested in that, and I was also interviewing at Bankers Trust if anybody, we go back in time and member Bankers Trust for auto analyst position to very heavily on economics, international affairs is important, there is obviously a trade component to that so I’m there interviewing at the private bank and I see this research piece and it’s a daily foreign-exchange update on what happened overnight and what is going on with the currencies and it was one sentence maybe two sentences about every single economy in a thought that I couldn’t read today to save my life and I saw this and I thought this is what I want to do, I want to do this. And so I networked my way to the foreign-exchange department and the person who was responsible for that and it turns that they were hiring.

And so person’s name was Chris Iggo, who was also I worked with him at Axa later in my career and he’d interviewed PhD economist with say, well there’s a perfect information and there’s no foreign-exchange markets are, you can’t make any extra money, why forecast them, all the information is already in the price year I was coming in and looking at the economics and the politics and how they are interplayed with one another to impact the foreign-exchange market. So it was really the perfect first job out of graduate school for me.

RITHOLTZ: And it’s funny the two of us are both sitting here holding reading glasses in our hands and you’re talking about fonts, let me mix this up a little bit with you, Mackenzie just came out with a study that said by the year 2030 almost a million jobs will have been replaced by and with technology. What does that tell you about what’s going on in the labor market these days?

HUNTER: Okay so let’s put this in a big context, the U.S. labor market is how many people?

RITHOLTZ: 155 million people?

HUNTER: 48 –150 exactly so this is percentagewise a small percentage of total jobs. It sounds big, right? It’s a little Austin Powers, one million jobs are going to disappear, right? But the reality is — so contextualize it in terms of the whole labor market. There are two other things that need to be highlighted when thinking about this issue and are actually working on some research on this which I can tell you about in more detail. But the first thing is they don’t have about what new jobs are going to be created and that’s a really important thing to think about.

They also don’t talk about the areas where labor shortages and pending labor shortages intersect with the technology. So to let me give you one example is the trucking industry and an long-haul trucking, it’s widely anticipated were are going to have self driving trucks and while they aren’t necessarily — we are not necessarily going to have the robotics to do the loading of the truck, the unloading of the truck, the bringing of the goods into the home.

RITHOLTZ: Well, eventually, who knows.

HUNTER: Eventually who knows? We’re making progress in robotics but just the driving part is certainly something on the and the long haul driving part is something that could be automated young people don’t want to do this job, it’s a very old industry and you know you can’t be on your little dopamine giving device all day when that is your job when you’re driving a truck, and so if we had a self driving truck, that could really help industry that has had to continue to raise wages to get people to even consider working in that field, it is not something people want to do anymore.

And that, we are talking about right there, it’s a it’s a profession that has two and a half million people and so there is a match that is happening in some cases where the disappearing of these jobs is a good thing. The second thing that they don’t talk about is the number of new jobs that could appear, so —

RITHOLTZ: Someone’s got to design and build all those robotics.

HUNTER: Well, and interestingly enough right now there are more people being employed in artificial intelligence and robotics than people that are being than jobs that are being destroyed now I’m not saying that is going to go on forever but if we look back historically to when we had guilds, when artisans produced things, where it took one guy a month to produce let’s say and axe, right?

And he produced all parts of that axe then we moved away from artisans and we had factories and you have one guy producing the handle and one guy producing the top part of that — the metal part of the axe, and then you have multiple people working in a factory and you could produce — you could have 15 people producing 100 axes in a month, and that’s a representative example, those aren’t the exact numbers but the point being that you actually created more jobs because the thing your producing became less expensive you created new types of jobs.

So the idea of a clerical worker, that didn’t exist, hat role of clerical worker people to do the accounting, people to do HR management, people to do building management, all that kind of stuff evolved after we had corporate structure which we couldn’t have until we had specialized jobs. So my suspicion is that we will have new jobs that evolve as a result of the technology that we’re building now.

RITHOLTZ: Let’s jump right into where we are in the modern economy from the perspective of a big accounting and consulting firm, they split the two pieces into different groups is that right?

HUNTER: So we have some regulatory requirements that create Chinese walls and we — there are long list of advisory services that we cannot offer to our audit clients.


HUNTER: But this is a great business model because it diversifies our business, we have audit and tax on and then we have our entire advisory business which is very diverse. So we do things like data and analytics. We do things with the entire business club people and change which when you think about what is happening in the labor force and the way technology is impacting firms and how they are managing for that, how they are retraining their workers and that’s a huge practice for us for example.

And of course risk compliance, all that other stuff that you would traditionally expect someone like KPMG to do. So you originally were on the buy side, you were an investor in fixed income and alternative investments, how has that colored how you see of the world of economics whether it’s for an audit/consulting firm or anyone else, what does coming from the buy side due to your economic perspective?

HUNTER: Well, for me, I think it’s critical to my edge and that is that I spent most of my career using economics to make investment decisions and put money on the line. So that’s a sort of classic saying I would love to find a one-handed economist, right?

RITHOLTZ: You are the one-handed economist.

HUNTER: On the other hand and certainly that discipline I think it’s very important and I think the other thing that it really and that is sort of a chicken and egg thing I noticed this about myself when I was at Chase I noticed that I had an ability to do pattern recognition and see when there might be opportunities in the market as a result of either shifting market data or shifting economic data and matching those two together and doing analysis on them.

So because I had this ability to see inflection points, it pushed me from the sell side at Chase into the buy side. And while I was at — on the buy side that’s really where I had my edge and coming back into doing applied economics or business economics I think when I go speak with either the leaders of our firm or clients when I write research, it’s all oriented towards what inflection point we need to be paying attention to how do you make money off of this inflection point?

So let’s address that precise topic. Where are we in the economic cycle today and where do you see the next inflection point coming both in terms of sectors or chronology?

HUNTER: Yeah so we’re in the happy part of the cycle, we’re in the end of the cycle probably although with that said, I firmly believe our extensions don’t die of old age, right? They need to bump into something and so we have had consecutive months and this consecutive is really important, consecutive months of job growth. If you look back over previous recoveries, that is a streak that is 75 percent longer than the previous record.


HUNTER: So even though people aren’t necessarily happy about the jobs mix that we had in the economy right now, that is still an unprecedented statistic and it has allowed consumers to really feel very confident, we see that in the consumer confidence data, the consumer has been the backbone of the recovery, we haven’t had as much investment for example as in previous recoveries, and so it’s helping a sort of continue that consumption boom but it’s well-founded, household balance sheets are fairly healthy, right?

We haven’t — in fact because of the crisis we actually had a bit of a decline in debt for households mostly in the in the housing sector but it has allowed us to have sort of a balanced recovery for the most part. And so in terms of inflection points, at some point, I know people have been watching and waiting for this.

I expect we are going to see some wage increases and we’re seeing significant shortages in a very important sector and that is the construction sector. So the Association of General Contractors does a survey and there are a number of categories where over 70 percent of their respondents say they cannot find qualified workers and that they have to go ahead and raise wages.

RITHOLTZ: How much of that is related to the fact that during the financial crisis and during the housing collapse, a huge number of immigrants who were actually contractors, builders, electricians, plumbers et cetera, all went home went back to Mexico or wherever because the jobs weren’t here and so you created this void, the economy created this void in that segment of the labor force.

HUNTER: So we lost about 1,500,000 construction jobs and some of them were filled by immigrants, some of them were filled by native-born individuals, and a lot of people started to do new things, they had to pivot to new careers and they haven’t been drawn back into the construction sector. Another thing that we had during the housing boom is we had people forgo higher education and just leave high school and go start doing construction because it was a career where you could make a fair amount of money towards the end of the boom and so those people, a lot of them went back to the university after the crisis and then retooled themselves.

If we get frothy enough again, if the price of labor goes up enough you will draw people into that sector the issue of course is that they won’t have the skills. So some of these some of these jobs are medium-skilled jobs you need to learn how to do a specialty whether we are talking about electricians, plumbers, carpenters see you can’t just walk into that job.

RITHOLTZ: Now that we’re 10 years past the financial crisis, are things beginning to normalize in the world of economics?

HUNTER: Yes, in a way, there’s still a big mystery and so even though I expect some of the labor shortage data that we’re seeing whether it’s national Federation of Independent business or Associated General Contractors, some of his labor shortage I expect to eventually translate into wage increases.

But I tell you, the Fed has been waiting for this for a long time, we’ve all been waiting for this for a long time and there is some slack in the labor market still that is confusing and I will tell you why. Most people that have been out of the labor force for a period of time they are not setting wages, right? They’re not the most desirable people to hire, they have had skills atrophy, they come back in generally if they come back in at a lower wage and it’s not, we haven’t a pickup in the participation rate.


HUNTER: But not to the point where you would really expect this portion of the labor force to be influencing wages and so it is perplexing to me, it is perplexing to the Fed, and Janet Yellen has called the lack of inflation a mystery, so we have normalized in some ways but in this aspect of prices and whether on a bill and specifically related to wages, we have — we don’t seem to have normalized although maybe we’re all just misunderstanding the slack that is out there or perhaps one tipping point of higher wages which I think in certain sectors is an absolute given.

RITHOLTZ: You had a number of pretty high profile jobs in the world of finance. Does this tell us anything about women in finance? We know women have been — let me man-splain to you women in finance.

HUNTER: I’m very interested in what you have to say.

RITHOLTZ: Well, we know that women have not been promoted there aren’t as many women on the board level at the C level at managing assets et cetera. It’s disproportionately a boys club although there are signs that that’s starting to change tell us a little bit about your career path and what was it like being a woman in a world where these were for a long time, traditionally male jobs.

HUNTER: Well, I would say that I’m still in a very male-dominated industry in general. Now at KPMG we have a goal of having 25 percent of our partners be women by 2020 and we’re at 20.5 percent now. So compared to Wall Street, that is definitely a better environment and our CEO is a woman.

RITHOLTZ: I didn’t know that, that is fascinating.

HUNTER: Yes, Lynne Doughtie is a woman, she’s fabulous happens to the woman she’s fabulous, she happens to be a woman, she is a fabulous CEO. And so we’ve made a concerted effort and the reason that’s important and the reason I think that it’s taken so long in places like Wall Street that are male-dominated is that there’s a natural in group bias, right?

RITHOLTZ: We tend to hire people who look like us.

HUNTER: And who act like us and share the same interests and so it’s understandable and it pervades everything, it pervades the recruiting practices also pervades what when you look at young women and they look out, well what do I want to be when I grow up? Now I was lucky I had my father was in finance so he never had a bias that I should be in finance, in fact he probably had a bias that I should be in finance, right?

So that, I think, gave me an edge and a unique perspective and approach that I never thought it was odd that I would be in finance or that I would be very successful in finance.

RITHOLTZ: Michelle Myers who is one of the senior economist at Merrill Lynch specifically said at in the current environment, there are now women who are role models whether it’s Muriel Siebert or Lizanne Saunders at Schwab or there is a whole run of different —

HUNTER: Absolutely.

RITHOLTZ: Women you can name but go back a generation there really weren’t a whole lot of role models for women who wanted to go to Wall Street.

HUNTER: Well, let’s focus on this because this issue of role models is really important and it’s one of the things that’s going to propel more women and it’s one of the reasons where you need a certain critical mass because if you are just the token woman, you don’t get really from a firm perspective, you don’t get necessarily all of the diversifying effects and all of the beneficial effects of having a more diverse perspective in your workplace.


HUNTER: But once you hit a critical mass, let’s say it’s 20 percent, 25 percent, you start to have a very different type of conversation around certain things your marketing appeals to a broader segment of the purchasing population, you just you tend to have less fraud, there are all sorts of definite advantages to having a greater mix of men and women in an organization.

RITHOLTZ: So since you joined the world of finance, what improvements have been made towards achieving a better balance of males to females in the workplace?

HUNTER: So certainly in the field of business economics, and it is different in academic economics, I was very fortunate to join the National Association for Business Economics as a young economist, NABE, that is what it is called for short has always had women years within the organization so we had women presidents of NABE, people like Maureen Haver who founded Haver Analytics, Diane Swonk when she was the Chief Economist at Mesirow, Ellen Hughes-Cromwick who used to be chief economist at Ford and I can I could list more.

RITHOLTZ: On and on.

HUNTER: And so that, I saw these women who were chief economist as role models and not and I saw women attending our meetings and now when I have a young woman on my team who used — who I brought in — and you have to start at NABE, young, you’re going to learn so much, it would be great and to me coming from Wall Street, well I thought well NABE is great because we probably have in the membership about 30 percent women and in leadership, probably about 40 percent women, some people on the board of NABE, people who were presidents of NABE, and she is like, it’s still, she sees all men, whereas I see, oh my gosh that is so much improvement.

RITHOLTZ: Because in your frame of reference —

HUNTER: Because in my frame of reference, so this makes me excited for a couple of reasons, one I got to see progress, two, it’s obviously not 50-50 yet and the next generation is to going to make that happen.

RITHOLTZ: The fact that it’s 40 percent women they look at us of this is a remotely what it should be.

HUNTER: Maybe it’s 35.

RITHOLTZ: All right, but still compared to what it was 10 or 20 years ago, it’s miles ahead and the fact that it’s looked at as oh they’re not getting this done is pretty — that’s pretty amazing.

HUNTER: So we now have men who were feminists and mainstream men, people like Justin Trudeau who is the Prime Minister of Canada, right? I’ve heard more and more men say I’m a feminist. And the thing is that it takes both men and women to make this happen, it takes us working together, this is just a woman’s cause, and it’s not even just a man of — men who were fathers of daughters cause, maybe it benefits everybody and so the more men that can out there and say yes, I’m also a feminist, it benefits them, it benefits them financially, it benefits them socially, and we’re starting to see that more and more.

RITHOLTZ: Let me ask you question that’ll give the compliance people at KPMG a heart attack since you brought up Trudeau and Canada. I am absolutely fascinated by the concept that Canada will become the first G-7 country that’s going to completely legalize marijuana. I’m fascinated, I don’t smoke weed, you know I’m not a college kid anymore, but I’m fascinated from an economic perspective what that’s going to do to a country in terms of taxing it, taking money away from the black market and saving countless amounts of money that’s currently spent incarcerating people for simple marijuana expenses, what is the potential economic impacts of something like that there and then the harder question is and what does that do to the United States?

HUNTER: So Canada produces actually a lot of marijuana, it is one of their bigger crops.

RITHOLTZ: I did not know that.

HUNTER: And so it will be to be very interesting now there is a lot of data would suggest that if you smoke or I guess now you can eat marijuana and under the age of 25, but certainly it really is very, very, bad for you —

RITHOLTZ: So brain development for a bunch of different things.

HUNTER: Precisely — so unless they can manage that part of it which I think will be challenging.

RITHOLTZ: Well, they do a pretty good job with that with alcohol and with cigarettes certainly with 21 you know, you’re not keeping weed away from kids today regardless so — and they have to be smarter about labeling gummy bears so it doesn’t look like candy and that sort of stuff. So when we look at Colorado and Seattle and California, they’ve all done a pretty mediocre job, it’s kind of hey it’s a case of first impression they eventually figured out if you make the stuff look like candy and leave it around, guess what? Kids are going to eat it.

But you know they kind of learned that lesson already.

HUNTER: So assuming Canada addresses that part of it and handles it well and then it it’s like you said, the benefit is twofold and I don’t know the size of the market in Canada or their incarceration rate for this sort of thing but you get rid of the cost of incarcerating so then you have more people in your labor force, that’s always a good thing when we have these population declines, and then you also have the economic benefit of this industry and we base it on the rest of the sin industry, right? It’s pretty large.

RITHOLTZ: Let’s talk a little bit about the state of the economy today and there are so many different things we could go over, I have to start with the issue of the Federal Reserve tightening, normalizing, first what should we call what the Federal Reserve is doing?

HUNTER: Well, they are definitely raising rates so they are tightening.


HUNTER: They’re selling assets off of their balance sheet.

RITHOLTZ: Are they selling them or are they letting them just roll off when they mature?

HUNTER: Both, my understanding is they’re doing both that is in effect a tightening, now there’s debate about this.


HUNTER: Right. Is it the stock of the Fed’s balance sheets that is the size of the balance sheet or is it the flow, that is change and generally speaking, the Fed thinks it’s the stock, Wall Street thinks it’s the flow. The Fed might end up being right or I think the Fed is being proven correct because we look at tenure yields and they are much lower than they were for example in 2014 but that’s due to a confluence of factors.

RITHOLTZ: Are you surprised that Wall Street looks at the flow as opposed to the balance sheet? That is how the Street gets paid so of course that’s what matters to them, it is a little classic confirmation bias. So what about the idea of the Fed is in so much tightening as were still at very accommodative rates and they’re just getting off their emergency footing, this is really normalization.

HUNTER: So I went back and looked at real ten-year yields right over the last four decades averages about 2 percent, say there’s wide variations but the average is about two percent.

RITHOLTZ: So in other words, when you say real.

HUNTER: Real, adjusted for inflation.


HUNTER: Ten-year yields. We are now at almost zero.

RITHOLTZ: So still very accommodating.

HUNTER: It is by that metric we are still pretty accommodative.

RITHOLTZ: Emergency footing, there is really no awaited to describe that. By the way, I find myself having to always define real for because some people anytime I mention real, I always want the audience to hear after inflation after inflation adjusted let’s talk about the yield curve historically an inverted yield curve was a sign of an impending and recession not immediately but a year or two later and a lot of people were all up in arms over the flattening yield curve as the Fed is tightening what do you think about what’s taking place in that part of the curve?

HUNTER: So a few things. One is we may very well be a year and a half away from the next recession, that is very possible; but you also have to look at what’s going on globally in terms of central-bank balance sheets. So if we look globally right, now we have $14 trillion of central-bank balance sheets, now the Fed is about four and half, 4.3 I think to be exact.

RITHOLTZ: Trillion.

HUNTER: Trillion. And so we have the Bank of Japan and the ECB both with significant balance sheets to just to put this in context the Feds balance sheet is 23 percent of the US economy the ECB balance sheet is 38 percent of the of the European economy, the EU economy, and I’m sorry, the monetary union part and Japan’s balance sheet is 91 percent of GDP, the Bank of Japan’s balance sheet. So these are very, very significant amounts of capital and they’re influencing bond markets all over the world but especially the ten-year yield.

RITHOLTZ: So let’s talk about that you have the United States which really seem to get hit by the financial crisis first and then it spread globally and you also have the United States as the first to really aggressively respond to the financial crisis and then Japan and then Europe, how unusual is it to have the three major economic centers on of the world plus China all sort of out of phase with each other in terms of economic fiscal and especially monetary policy?

HUNTER: Well yes, it’s both the monetary and the fiscal, I think that’s really important because Europe did fiscal tightening after the great recession.

RITHOLTZ: Posterity right into the teeth of collapse, turns out not especially great policy.

HUNTER: Well that and then the ECB raised rates prematurely if you recall, and that coincided with the Greek crisis and spilled over into widening bond yields in Italy and Spain and Portugal, Ireland, now a lot of these economies have come out the other side, they’re on the upswing.

So really since Draghi did his whatever it takes speech in 2014, and since they really started growing the balance sheet, you have seen consecutive months of jobs growth, you have seen consumption, you have seen bank lending expand, I mean to get to negative rates to do it but you still saw bank lending expand and that helped give the European economies legs. But like you said, they are not synchronized with and the fiscal and the fiscal austerity has waned, right? They’ve moved through that.

So I would say there may be two or three years behind us in terms of the business cycle and if you look at Japan.

RITHOLTZ: How about in terms of the monetary cycle, how far they behind the US that is sort of coming off its —

HUNTER: I would say about two years behind, maybe 18 months to two years, well Japan is its own special case, and it’s own special case because it’s demographics are so much worse.

RITHOLTZ: Terrible.

HUNTER: Right so their working age population began to decline in 1993 which is right about the time their debt bubble burst.

RITHOLTZ: Right, 89, 90 what was a peak in the of the Nikkei, 89?

HUNTER: I think it was 89 and so it took a little while for the debt bubble to fully burst, and then, they of course have a longevity, so you have people living in retirement for longer, so that’s a drag fiscally, and it’s also disinflationary or deflationary.

RITHOLTZ: It’s that damn healthy lifestyle and low red meat diet that is causing that issue and almost zero immigration so it’s a fairly uniform society and culture.

HUNTER: But even with that said 2010 is the year the European the Europe’s working age operations started to decline real and our working age population is merely growing at a slower rate so we’re growing at 0.3 percent a year and —

RITHOLTZ: It’s probably nothing, right? Flat.

HUNTER: Yes, absolutely but it’s problematic but it’s definitely better than if it was outright declining like you have in Japan so that — and Japan is now declining at a rate of 0.3 percent per year.

And that puts Japan in a very, very special case, and something and their debt to GDP ratio is 198 percent.

RITHOLTZ: Nobody else is even close.

HUNTER: Nobody else is even close but I will tell you something that they’re doing, so if you look at the debt held by the public versus the debt held by the central bank, because they have been purchasing so much of the debt, the held by the public has gone down to 120 percent of debt to GDP.

RITHOLTZ: Down to.

HUNTER: Yes and I’m glad we introduced the concept of real versus nominal before because if you look at their nominal growth rate, it is about 200 basis points above their 10 year yield and that is allowing them to obtain greater and greater fiscal health.

So they’re using this negative rate policy and this extreme balance sheet example, again, balance sheet expansion, again 91 percent of their GDP, all right, they are using this to refinance their government debt effectively.

RITHOLTZ: At a much lower rate.

HUNTER: Well, at negative rates.

RITHOLTZ: Negative rates.

HUNTER: So imagine you are corporation and you are over indebted and you can’t default but over time you can refinance your debt with negative rates.

RITHOLTZ: Meaning you get paid for your debt.

HUNTER: Basically.

RITHOLTZ: Which is shocking you know you hinted something I want to expand on because it’s so fascinating when we talk about the declining labor force we really have to discuss the falling fertility rates in the falling I forgot the replacement percentage what it’s called, just the declining birth rates effectively in Japan, in Europe, and up until recently the United States was marginally positive I think we just slipped negative also in terms of our birth rate —

HUNTER: Replacement rate.

RITHOLTZ: Replacement rate of new birth versus deaths, the US population is becoming fairly stable and it’s outright shrinking in Europe and Japan, what does this mean for the economy 10 20, 30 year since?

HUNTER: Yes, so it’s very challenging, and let’s not forget China’s working age population started to decline this year, right?

RITHOLTZ: Now, how much of that has to do with the one child.

HUNTER: A lot of about it was the one child rule, so they haven’t been at replacement rate for decades now and even though that rule has been overturned, people are not rushing have more than one child, it’s not like the minute that was overturned in the next year you saw whole bunch of two and three child families.

RITHOLTZ: Not a baby boom right away.

HUNTER: Right now that may change they may need to do things and create incentives for that but that it it’s not going to change overnight and so — and then we have South Korea, their working age population started to decline so this is a phenomenon a lot of a lot of different places, it is starting to impact emerging markets, more in Asia ex-India than in Latin America or Africa.

RITHOLTZ: Because I thought of this is the developed world issue not an emerging markets issue, are you saying that this is even spilling —

HUNTER: Fast forward 15 years and it’s going to be — look at Mexico, their birthrates are declining and it’s one of the reasons we have — there are two reasons we have fewer Mexican immigrants into the US and why the flow is actually going the other direction.

RITHOLTZ: First the wall and then what is the other reason.

HUNTER: So as their birthrates have declined they’ve needed more labor in their own economy, right? So there are just fewer people to come here?

RITHOLTZ: Are their wages going or they —

HUNTER: And their wages have been going up a little bit more.

RITHOLTZ: So not the wall.

HUNTER: Not the wall. And actually the flow has actually gone the other direction for several years that is an aside.

RITHOLTZ: Since the financial crisis actually.

HUNTER: Yes, since the — and which loops back in there when we were talking about housing earlier.


HUNTER: Right. So anyway we’re digressing massively here so let me get us back on track.

RITHOLTZ: Something about the yield curve I think we started with.

HUNTER: Yes and so this disinflationary or deflationary pressures are also distorting the shape of the yield curve so you have, you have a completely new demographic phenomenon that aside from a brief period during the great depression when we had a declining working age preparation for a little blip of time, about seven years, we’ve never had before and we’ve never and while we had that we did not have the longevity that we’re having now, right?

So the combination of these two things is disinflationary.

RITHOLTZ: Disinflationary meaning you are not seeing inflation go up and the rate of inflation is going down.

HUNTER: Correct.

RITHOLTZ: Not outright deflationary, just five percent, four percent, three percent, two percent inflation or 1 1/2 percent these days.

HUNTER: Right. Correct.

RITHOLTZ: So what does that tell us that the future economy looks like? If you had to draw a conclusion from the disinflation in the system is that informing us of anything?

HUNTER: So a few things to say about that. One is that I’m going to introduce the concept of potential GDP and so in its simplest form potential GDP is the sum of the growth rate of the working age population plus the growth rate of productivity, and historically, if we look back 50 years, we had average working age population growth of 1.6 percent average productivity growth of 1.8, quickly gets us to a 3.6 percent potential GDP. We now have a working population age growth rate of 0.3 percent and until recently productivity during the recovery was averaging 0.8 so that the 1.1 percent potential GDP. Now productivity has picked up to 1.5 so that gets us up to about a 1.8 percent potential GDP which is the growth rate that you can grow without inducing inflation in the economy, it’s that mythical beast equilibrium.

RITHOLTZ: Let me ask you a question about productivity because this is an ongoing question that I keep wrestling with and every time I have an economist in front of me, I feel obligated to ask the question. In the real world we are all experiencing a massive amount of personal productivity gains, software the ability to walk around with a powerful computer in my pocket that’s 10 X what the — or 100X what the astronauts took to the moon is an amazing productivity enhancer. And I’m not big on Facebook so I don’t get the productivity killing aspect of it although I guess Twitter substitutes for that.

But in the office, what we’re capable of doing in terms of communicating with clients and doing screen shares to show them different charts and documents and this and that it feels like we’re doing so much more with a handful of people versus 100 people that was required a few years ago, it makes me ask the question do we have a productivity problem or do we have a problem in measuring productivity?

HUNTER: It depends on the industry, so in finance, you are in an industry where there’s been huge measured productivity gains, so what you’re saying makes sense, it is what is shown in the data and it is true for other financial services firms. This is something that is puzzling everybody because we can’t change the birthrates. So we are only going to get saved by increasing productivity.

RITHOLTZ: Although some Nordic countries are actually running PSA’s to encourage people to go on vacation the South of France and leave their birth control at home, I mean there are literally television commercials for that, I don’t see that happening here, that said —

HUNTER: But that is still a long-term prospect, it is 21 years until you see benefit from that maybe 26 given the current education rates. So it’s not an immediate solution, we need to do something in the intervening years and the only savior then is productivity because so many people are focusing on this, one of the things that the OECD did was they did a study on the diffusion of technology throughout firms, so it may be, Barry, that you guys are really advanced and early adopters of technology.

RITHOLTZ: No doubt about that.

HUNTER: So but the diffusion is important so they looked at the productivity at the firm level, so not the economy wide level, at the firm level of the frontier firm so that’s the top five percent versus everybody else and if you look at these graphs, it’s really alarming, the gap is really, really wide and it’s wider in services than it is in manufacturing.

RITHOLTZ: It makes sense.


And the question is will we get to a point where this gap closes, like what is the cause of this lack of diffusion and is there tipping point where we can start to see the wider diffusion?

RITHOLTZ: Meaning that a handful of firms are especially productive and the rest of the economic force on firms and businesses are lagging in productivity.

HUNTER: Yes, are really not reaping the rewards of the technological advances we’ve had over the last 15 years.

RITHOLTZ: You know, there is a have and have no way of structuring or looking at just about every aspect of our economy, it is so bifurcated and that duality exists in so many places it’s fascinating I had never heard of this diffusion between productivity but I guess it makes some sense because you would think the early adapters of technology and other productivity enhancers would see not only a gain but a giant differential against their competitors who aren’t adopting the newest technology.

HUNTER: We’re actually studying this at KPMG so we’re taking the OECD work and we’re expanding it and building a knowledge database of a multitude of different firms across different countries across different sectors and hopefully we’ll have some research out on that in the next 6 to 9 months.

RITHOLTZ: We have been speaking with Constance Hunter, she is the Chief Economist at KPMG if you enjoyed this conversation, be sure and check out our podcast extras where we keep the tape rolling and continue to discuss all things economic, you can find that it iTunes, Overcast, Soundcloud, Bloomberg or wherever finer podcasts are sold. We love your comments feedback and suggestions, write to us at

Be sure and check out my daily column, it’s on, you can follow me on twitter@ritholtz, I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.

Welcome to the podcast, Constance, thank you so much for doing this, I have been looking forward to this for a while, I give economists a lot of grief for both making terrible predictions or predictions that turn out not to be accurate and for the most part missing the financial crisis which we talked about earlier, you’re not big into making a lot of predictions, I don’t really — I see more as analyzing the situation than doing the usual Wall Street forecasts so I have to ask why are economists so bad at making forecasts and how did they miss the financial crisis?

HUNTER: Well, and you probably also know that I didn’t miss the financial crisis.

RITHOLTZ: That’s right, that’s correct.

HUNTER: So I was short a lot of things that went down.

RITHOLTZ: Which is always fun.

HUNTER: Which was — it is actually nerve-wracking to be honest with you and people give you so much grief for it.

RITHOLTZ: Totally.

HUNTER: I remember when I first started shorting UBS and they have this activist investor in there, you don’t know what you’re doing, it’s going to go up, and you know, you’re constantly second-guessing yourself.

so on a short than a long, right? Because the nature of things is to go up for the most part over the long term and everybody that works for the company, their entire goal is to make everything go up.

There are — they make new plan every year that — they are incentivizing their employees, they are cutting costs, like every single company is focused on that as well. And so that is the nature of things so it’s very nerve-wracking to be short. But nevertheless —

RITHOLTZ: That and the theoretical infinite losses kind of hangs over your head a little bit.

HUNTER: That and the theoretical infinite losses or the actual infinite losses that can occur people have you know, what that was that famous teams expression the market can remain irrational a lot longer than you can remain solvent.

RITHOLTZ: For sure.

HUNTER: So in answering your question, I think it is because of several things, first models I’ve been working on shocking my model to give it a recession because I think that we’re going to see some labor shortages that those labor charges are going to cause wage increases. That those wage increases are going to push up inflation.

That that increase in inflation, increase in prices will reduce demand, that reduction in demand will help spur us into the next recession plus as wages go up as there are shortages, we’re going to get to a point I would imagine when you can’t find someone at any price.

And so you want to expand your business but you just can’t.

RITHOLTZ: At any price.

HUNTER: Well there are some professions where we — for example with all this technology, you can’t find data scientist at any price, there is a handful of them, there is a handful of programmers that are really top-notch and so everybody is competing in this space for the same talent and it is a very new set of skills.

RITHOLTZ: So isn’t that just temporary, aren’t we going to see more people coming from India and China and more graduate degrees and people moving to the space just because it’s so lucrative?

HUNTER: Sure, but that doesn’t mean that we are going to see shortages of that labor over the next couple of years, it takes time for those trying to get training for people to move into a profession —

RITHOLTZ: A decade long process for sure.

HUNTER: Yes, six years, a decade something like that, so the first thing is that when I have to do is shock this model because it just kind of bump, dump, goes along on trend and would never forecast a recession unless you made it forecast a recession, right?

So you have to look for tipping point. So there are three things that allowed me to call the financial crisis and I didn’t call it as big as it ended up being, because I was just large but I’ve done this my whole career, the same with the Russia crisis, right?

So the thing that allowed me to call the financial crisis was I was looking at mortgage equity withdrawal —

RITHOLTZ: A giant.

HUNTER: Well, not only was it giant but if you look historically, it used to be a random walk around 150 billion a quarter, we go up, we go down, basically run amuck, you couldn’t — there is now way to predict it.

RITHOLTZ: It was a modest number that practically and in the US $15 trillion economy is a rounding error.

HUNTER: But also its pattern was some quarters were up, some were down, it was a random walk, it wasn’t like it was 150 billion every quarter got withdrawn, it was up and down.

RITHOLTZ: It wasn’t on trend the way it became.

HUNTER: Right so we started withdrawing more and withdrawing more and withdrawing more to the point where we had withdrawn $3 1/2 trillion and you could just see that this there’s no way it could keep going, it made no sense, it made absolutely no sense and then if you look at the demographics that made no sense either because you could see that the working age population started to decline in 2000.

So you can see it shifting demographic demand if you were looking for it. But you have to be open and searching for the things that are going to be an inflection points and then you have to have the conviction to shock your model.

RITHOLTZ: In other words come up with some set of XO genius or maybe normal economic shifts that tip an economy into a recession.

HUNTER: Or into a big growth period as well. And so I think you have to be willing to look for those things and understand inflection points but that is not the way most people study economics necessarily and I’m fortunate that I have this pattern recognition skill combined with a lifetime of investing.

RITHOLTZ: Time spent on the buy side.

HUNTER: That has honed that skill.

RITHOLTZ: So the other question I didn’t get to that I have to ask you about we really haven’t touched upon China and let’s talk a little about China for a moment. What do you see going on in China, is it a growth area, is it a risk, does China become the biggest economy by far just extrapolating trends out for forever? What is the role of China in the modern economy?

HUNTER: So China is a big economy and it’s the same size as the US, obviously, their population is much larger so the per capita GDP is smaller so they are big but they’re not rich, right? They are not first world economy obviously the coasts are rich, you have multiples — because it’s so large, you have many different China’s right but if we just think about that for a second, their sheer size and makes them an amazing market and if we think about it in the context of what’s happening with artificial intelligence and data analytics, you have huge amounts of data there and which is an interesting situation given our modern focus on platform companies and the network effect right?

So you have that sort of on steroids in China and it’s interesting to watch. However like any economy, imbalances develop and China is still a command economy, it is not — let us not mistake it for a market economy, it has some features of the market economy but it has many more features of a command economy.

RITHOLTZ: They’re essentially planned communist regime that seems to dabble in capitalism.

HUNTER: Precisely.

RITHOLTZ: So I just had to touch upon that as I know it’s that such a fascinating area.

HUNTER: So I think China is going to see some bumps in the road that are going to surprise people over the next 2 to 3 years.

RITHOLTZ: Do those bumps in the road have the potential to tip any major economies into a recession?

HUNTER: Yeah I think they might and so if you look back in 2014 we were at three percent almost on the ten-year, if you use the and PMI index at 79 percent of the world was growing and if you look at what happened in China, China’s demand shifted downward and so when I look at, I look at whole host of —

RITHOLTZ: And we saw that across commodities a specially.

HUNTER: Well, specially, and so if you look at China’s imports and you use the OECD data and this is important because they get the real number, not the nominal number because obviously for commodities, there is a huge fluctuation in nominal price changes, and they compile the data using all China’s trading partner so they don’t rely on the Chinese data collection. And this is important because we all know that there are some question marks around China’s data collection.

RITHOLTZ: They make Bernie Madoff look like he was actually using real numbers, that’s what you can’t say but I can say.

HUNTER: I cannot say that. So in any case, what we saw was a big year-over-year decline in imports in 2015 and this impacted all of the commodity producers, Australia, Russia, South Africa, Brazil, you name it and we felt only 61 percent of the PMI reporting countries experiencing growth.

RITHOLTZ: So let’s in the last —

HUNTER: And so it would have a massive impact I guess to answer your question, it could have a very significant impact on global liquidity and global demand.

RITHOLTZ: All right so now in our remaining minutes let’s jump to our favorite questions. Tell us about the most important thing people don’t know about your background?

HUNTER: So this is a tough question to answer.

RITHOLTZ: I mean one question is you know Genos or Pats, I can ask you that.


RITHOLTZ: Okay so that could be, but I bet everybody —

HUNTER: And with, not without.

RITHOLTZ: Okay so that is easy.

HUNTER: You know about Philadelphia, you know what we are talking about here.

RITHOLTZ: I’m really curious to see if people email what the hell was she talking about.

HUNTER: You can Google, there is an NPR story about this with or without.

RITHOLTZ: With and Pats got it.

HUNTER: So I think people don’t know because it’s been some time has passed that I used to invest in the former Soviet Union, I have traveled all over the former Soviet Union, I have been a mile underground in the Norilsk Nickel Mine.



RITHOLTZ: You know, I look at the Soviet Union as an organized crime family with the standing army attached, is that is that an exaggeration or?

HUNTER: Well back when I was there, it was in the hopeful days of Glasnost and Perestroika and Yeltsin was president, he was trying to reform, now was there some corruption? Yes. Were there oligarchs? Most definitely.

RITHOLTZ: Are you surprised at the way Russia has changed to under Putin?

HUNTER: Not really, you know, when he first came so Yeltsin hand-picked him which is interesting.

RITHOLTZ: That’s shocking.

HUNTER: And Putin came into power and let Yeltsin live like and just says, well you know pre-Gorbachev this was not the way of Soviet power transition, or Russian power transition so —

RITHOLTZ: He was a drunk old man at that point though wasn’t he?

HUNTER: He was pretty harmless but you could control but it was a very different approach, a very, very different approach, and remember they had — they were just coming off the default and devaluation. Right? Oil was about $20 a barrel so we had to do something to get the economy going and to do things and coming off that crisis and what happened in his first decade in power really improved people’s lives so the loyalty that he has among Russians who remember that time period is very, very high/

RITHOLTZ: Some people have said that he is actually the wealthiest man in the world and is worth $300 billion.

HUNTER: I have heard that from a lot of reliable sources.

RITHOLTZ: Really so it’s not Bezos. Bezos is number two. That’s fascinating.

Early mentors — tell us about some of your early mentors.

HUNTER: So I think my earliest mentor was probably my father who had me calculate Saber metrics —

RITHOLTZ: For baseball?

HUNTER: Yes, that is how I learned statistics.

RITHOLTZ: That is fascinating.

HUNTER: He would, this is back when people would read the Wall Street Journal and look at all the stock metrics on the back of the back pages of the journal so he taught me what a PE was and dividends —

RITHOLTZ: This is pre-Moneyball.

HUNTER: Pre-Moneyball, this is the 70s.

RITHOLTZ: So you are literally doing this with baseball stats or with Wall Street —

HUNTER: With baseball stats. 1976 Philadelphia Phillies World Series.

RITHOLTZ: Rollie Fingers?

HUNTER: That’s right.

RITHOLTZ: I remember that. I am old enough to remember that.

HUNTER: That is impressive, you are going to have more googling and more questions.

RITHOLTZ: That mustache, who could forget that mustache?

HUNTER: And then I had really amazing professors at Columbia so we had a class that was taught by two gentlemen who were at George Soros, running money for George at the time so it was Arminio Fraga and Robert Johnston, Robert Johnson is now with INET, Institute for New Economic Thinking and Arminio Fraga went on to be the head of Brazil Central Bank and then has started a fund called CAVIA, I think, and it’s been around for a decade or more.

So these were two people who really a little confirmation bias on my part but they really solidified this idea that you need to read widely on a lot of different subjects, you need to be a student of history, you need to be a student of people, you need to understand as many different financial crises as you possibly can so this was right after the and Nordic banking crisis so we were going to what was the cause of that Nordic banking crisis?

And so was it was those were to really just big, big thinkers who had a very strong influence on the way I practice economics and the way I invest.

RITHOLTZ: So I’ve interviewed almost 175 people here I can’t tell you how often the issue of being well-rounded, being well read, comes up over and over and over again from people and if you read what Charlie Monger and Warren Buffett and Howard Marks has said this and Cliff Asness has said this and Bill McNabb of Vanguard is time and time and time again people say if you are not well rounded, well read, if you are just focused and a tiny niche within finance, you won’t be able to do that job well because you need to be outside of that specialty in order to develop skills in that specialty which lead me to everybody’s favorite question, tell us about some of your favorite books and what you’re reading now.

HUNTER: Okay so I am actually rereading a book that was my mother’s book called the Worldly Philosophers which is —

RITHOLTZ: I know that book.

HUNTER: Yes, it’s a great book about all of the sort of foremost economists that are the basis of economic theory, right, so Adam Smith, Keens, I think that he has a chapter on Veblin —

RITHOLTZ: Heilbroner is the guy who wrote that.


HUNTER: Yes, it’s a great book and then I love reading biographies and I love reading autobiographies.

RITHOLTZ: Give us some of your favorite biographies, there are a few great ones around.

HUNTER: There are many great ones so one of one of my favorite biographies that I read a long time ago was called West With the Night by Beryl Markham and she was a female pilot in East Africa in the 30s and she made money taking people on hunting trips, it is a great book and one of the things that she talked about in the book was how the elephants would know that the planes were coming and that it meant that they were to be shot and they would literally take she talks about how the largest female elephant would often hide with her head in a tree you couldn’t see if it was a male or female you couldn’t see the tusks while the whole rest of the herd including the bull would go off away from where the plane was and then when they were far enough away, the female elephant would bring her head out and they would be circling above kind of waiting and waiting and it turns out it was the female and not the bull.

RITHOLTZ: And they want the bull with the tusks.

HUNTER: They want the bull with the tusks and now they had lost the herd, so this intelligence that these animals possess and just the way she tells the story and so I just think again to go back to your point of being well-rounded and the different ways that people think creatively and the different life experiences and things you can learn it’s just endless.

RITHOLTZ: Any other modern — any modern biographies looking at or want to read? I have a giant stack of things I’m dying to —

HUNTER: My reading list, I purchase at a much greater rate than I could possibly ever read.

RITHOLTZ: I call that the bought to read ratio. I actually mentioned it.

HUNTER: Bought to read ratio, I think I’m about 10 to 1, maybe I’m a 20 to 1.

RITHOLTZ: I actually went back and made a list of everything I purchased in the previous year and then how much I read and you end up with like a 3 to 1 ratio for every three books you bought this year you’ve probably read one.

HUNTER: I’m definitely at 10 to 1, so I’m definitely at 10 to 1.

RITHOLTZ: So twice I year, I do here’s my favorite books for the winter here are my summer books and in the fall I said you know what let me just go to my bookshelf and pick 10 books that I want to read that I haven’t read that are sitting there and it’s embarrassing, it’s like how have I not read this so I have —

HUNTER: It’s a first world problem though, Barry. It’s a good first world problem it’s a very good first world problem.

RITHOLTZ: I have — so I will give you, I’m going to reference okay so I have I have Grants, I have Springsteen and I have Galileo on my bookshelf.

HUNTER: I want to read Springsteen’s biography.

RITHOLTZ: Let me get to my last two questions my favorite two questions that I have to ask you because you and I keep digressing. So a millennial comes to you and they say they want this thing you have a career in finance or recent college graduate, what sort of advice would you give them?

HUNTER: Okay so you need to have rapacious curiosity.

RITHOLTZ: Rapacious curiosity, okay.

HUNTER: Yes, and you indulge your curiosity, you need to read, you need to learn, you need to really enjoy finding out about the world. It helps if you are doing something you are infinitely curious about, if you’re not curious about it, you are not going to be engaged, you are not going to love it, and you can’t only do what you love every job has parts that are that are annoying or tedious see need to do those two.

You need to do what I call play the scales so it doesn’t matter, so play the scales.

RITHOLTZ: Just learn the basics.

HUNTER: And practice the basics over and over and over again so I still go and make my own graphs sometimes.

RITHOLTZ: By hand.

HUNTER: Well not by hand, no. In Haver analytics, but I still go in and immerse myself in the day to do my own reviews calculations just because it keeps — you keep your fingers in the dirt so to speak and then I would say get in before the boss and leave after the boss.

RITHOLTZ: Wow. All right, and the last question that our favorite question what is it that you know about economics and investing today that you wish you knew 20 years ago when you started?

HUNTER: Everything, knowing, just the amount of knowledge you have and how that becomes cumulative, it’s so valuable on and knowing the history just having at your fingertips having experienced crisis of what I experienced with the Russia crisis as we were approaching the dot com crisis that was raising rates, I said, you know what I think I’ve seen this movie before. I know how this is probably going to end, right?

And so every experience becomes cumulative and it helps you if you let it.

RITHOLTZ: We have been speaking with Constance Hunter, she is the Chief Economist at KPMG, if you enjoyed this conversation look up an inch or down an inch on Apple iTunes and you could see any of the other 175 such podcast we have recorded previously.

We love your comments feedback and suggestions, write to us at I would be remised if I did not thank my crack staff that helps to put this together, Taylor Riggs is our Booker, Medina Parwana is our recording producer, Michael Batnick is our head of research and (Atika Valbern) is our business director. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.

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