(Watch, Listen, or Read) Whistling Past the Economic Graveyard?

An Interview with Kerry and Linda Killinger

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Richard Helppie

Hello, and welcome to The Common Bridge - The Common Bridge - where we discuss, in a fiercely nonpartisan way, the issues of the day and hopefully try to forge a little compromise or at least middle ground, try to bring the heat down from these polar extremes. Of course, the economy affects everybody and we hear lots of headlines and lots of fear tactics. Today we've got a couple of experts returning to talk about the economy. We have Kerry Killinger and Linda Killinger. Welcome back to The Common Bridge. It's really good to see you both.

Kerry Killinger

Thanks, Rich, great to be back.

Linda Killinger

Thank you.

Richard Helppie

Kerry was the chairman, the president and chief executive officer of Washington Mutual, the sixth largest depository bank in the country prior to the financial crisis of 2008. He's lived a lot of business history, as he shared with us on prior episodes and in the great book that Kerry and Linda have authored, "Nothing is Too Big to Fail." I highly recommend that. Linda was vice chair of the Federal Home Loan Bank of Des Moines and chair of its audit and finance committee. She was also a consulting partner in international consulting accounting firm, and strategic planning and merger and acquisitions for financial institutions. We'll have more on their bios. Today they run the Kerry and Linda Killinger Foundation. It's an organization that helps local communities thrive by promoting government fiscal responsibility, encouraging civil discourse and promoting the distribution of wealth, opportunities and privileges within society. Today, though, what we're going to talk about is the economy and the book that Linda and Kerry authored, "Nothing is Too Big to Fail," [which] had a number of prognostications about bubbles being burst. Now we're a little bit downstream from there so time for a little update, I think.

Kerry Killinger

Well, thanks, Rich, and certainly, it's a real pleasure for us to be back with you. We literally listen to your podcasts every time they come out. I think it's one of the best ranging thoughts with, as you say, pretty well down the metal trying to say, let's come up with policy solutions to a lot of different things that I think makes a lot of sense. So I hope you're gaining more and more traction, I encourage more and more people to listen to your podcasts. They're terrific. I think the last time we had a chance to visit with you, we were really kind of midstream, worrying about some things that were going on in policies. That's frankly, the reason why we wrote this book, because we were so concerned that some of the policies the Federal Reserve and the US government were taking us down were likely to lead to asset bubbles and a potential piercing of those, and also to a rapid rise in inflation. We saw that the Federal Reserve was instituting loose money policies for over a decade and then they doubled down on that in COVID. They increased our money supply something like 35%; the entire amount of money in the history of the United States was put out in a two year period. They accompanied that with keeping interest rates way below the rate of inflation, basically zero, for a number of years. They went out and started buying a bunch of mortgages and treasury securities themselves and that bid up the prices of those kinds of securities causing asset bubbles everywhere. So our biggest concern is that stock prices were getting vulnerable, getting a little high priced, from what we could see. We saw housing and thought that was entering a bubble status and could break at any time. Then we said commercial real estate had a similar trajectory. And some of the more speculative securities, particularly Bitcoin, SPACs became hot for a while, there were the NFTs, (Linda Killinger: and unfungible tokens.) Yeah, and so we had a lot of this stuff going on that really was concerning us. You put that together with the Federal Government deciding it was going to incur a bunch of billions and billions of deficits, and they were kind of honing in on about 500 billion or more of deficits per year before COVID. And then when COVID hit, they just went crazy with spending programs. That caused our budget deficits to go to record levels, and of course, the federal debt to go to an enormous level. So just as a preamble, our concerns were that bad things happen, or tend to happen, after you have those kinds of expansive growth in money supply, and you have such loose spending by the government. So sure enough, what's happened is, it's kind of played out the way we were fearing. One is that the rate of inflation was going to jump up and it basically did, from less than 2% to...at one point it was probably close to a 10% annualized rate. For all of last year, it was about 6.5%, but still way above the 2% target the Fed has. The other thing is that it looked to us like economic growth was going to be mediocre at best. Now, we fear - and we'll get into details if you'd like - that most of the drivers of the economy, consumer spending in particular, is about to implode. The consumer has been stretched to the hilt. Again, if you think real simplistically what happened, the consumer got flushed with cash when the government gave them all that free money for COVID. (Richard Helppie: Right.) It was remarkable to watch, overnight consumers went from a normal savings rate of about between 5-10%, it went to 33% of their income because the government gave them all that free money. So naturally, what the consumer did is went out and spent a whole bunch and that helped stabilize the economy but, guess what, the consumer got hooked on that. Now they have not only spent all that money, so their savings rates are now down to 3.5%, we have spent all of our savings plus we are finding that wage growth is less than the rate of inflation. They're continuing to get behind a little bit and now they're racking up credit card debt to record levels to try to hold in there a little bit. So one of the things when you hear all the commentary from the Biden administration, or all those trying to push their political agenda, saying god, things are great, everybody ought to be happy because unemployment is low. But people are really feeling the pain on this. There are some statistics out this morning.

Linda Killinger

The latest polls that we've seen show that more than 44% of the American public now feels that they're worse off financially than they were before the pandemic.

Kerry Killinger

So that's a result again...normally, with an unemployment so low, the way it is right now, people ought to be pretty happy, but the people in the street know what's really going on. They've seen their credit card debt get up high, they've seen prices rise much faster than their wages, they're now out of savings. The other thing that held them on for a while was the escalation in their home prices. They were tapping the home equity and lots of good stuff there. Well, that's all rolled over to the negative now; home prices have declined nationally about 3% in the last last six months, and everything we see indicates housing is probably going to decline in value by maybe 10% or some number like that nationally over the next year or two. If that happens, again, I think it'll be another thing that's going to constrain the economic growth quite a bit.

Richard Helppie

It's really interesting, particularly how well researched your book is and how you laid out this case and now we're following that road map. Again, I want to recommend the book, "Nothing is Too Big to Fail" by Kerry Killinger and Linda Killinger, it's been nominated for a Pulitzer. I hope that you get that well-earned Pulitzer. If there's a ceremony, I'll be there covering it live - just let me know the date. You were doing a lot of what we're trying to get done on The Common Bridge, which is get information out there. My perception of people, and particularly Americans, is that we can be treated like adults and given information and try to figure out solutions, [instead] being told, now, now, everything's okay. When you make a bunch of new money, and then the supply chains are fouled up while you've got more dollars chasing fewer goods, that's textbook inflation. Now the next part of this sad saga is, well, hey, inflation is down to 5%. Well, it's comparing it to already high prices so yeah, maybe the rate of climb has slowed down, but now we have high prices, and they're kind of stuck there. Can the wage growth keep up with that? Clearly not from the data you have. (Linda Killinger: Yes.) Is there any chance of the air being released slowly out of the bubble? Some people might call that a soft landing and you see that a lot.

Kerry Killinger

Well, obviously, we hope so, we'd like to see everything have a soft landing. But that seldom is what happens. I would just say that our analysis right now would indicate that the stock market has corrected some; the Dow Jones Industrial Average is down about 7% from its peak, and the NASDAQ is down about twice that amount. So they've had a decent correction. Some stock prices, like Tesla or Meta or some of those high-flyer companies, their stocks are down about 50%. We have seen things like Bitcoin, down two thirds in value. So some of the bubbles are being let out a little bit more slowly. We still think that stocks are probably currently valued about, I'd say, about 20%, above normal range of where they would be. So it'd be very easy to see a 20% or more correction in the stock market here.

Linda Killinger

There's also a possibility of a 10-20% correction in housing prices in the next year to a year and a half, something like that, and sometimes those corrections go real fast.

Kerry Killinger

I think that's the one I'd probably emphasize the most right now. What happened with housing, you went through an absolute speculative bubble coming out of the pandemic. People were staying around home a lot and they said, I'd like more space, so that put demand into it. Interest rates were kept at super low levels and made them extraordinarily affordable. It became the spec-ie thing to do so you had market after market ended up in bidding wars. Then you put on top of that institutional buyers who were coming in and buying, in many markets, 25% or more of all the houses traded; being done not to live in, but by pure investors. That was a pure speculative bubble going on. Then when interest rates started going up...we have a rough rule of thumb that affordability of housing, for every 1% change in interest rates leads to about a 10% change in how much of a house you can buy. When rates are going down, that's terrific, you can buy more and more house with the same payment. But when rates start going up, it becomes a very difficult and limiting kind of thing. So mortgage interest rates have increased to roughly 3% in the past year and a half. That would normally translate to housing prices coming down about 10-20%, because of the affordability thing, and that has not happened yet. As I said it's down about 3% so far but all the evidence suggests to us that in many, many markets, we're going to see more than a 10% correction as things start to stabilize again. I hope that bubble gets pierced in an orderly [way] and deflates nicely, but you never know. That's the one that affects almost everybody in the country. Again, if housing prices start falling for whatever reason, it has a compounding effect through the economy. As people lose confidence, they want to spend less and less, their home equity - they can't draw equity out of their homes anymore to pay for some of their purchases. As you know, when you start into that negative price spiral it can be pretty severe like it was in 2008 Great Recession.

Richard Helppie

Well, both of those sectors, both real estate and public stock markets, are sensitive to interest rates. But I think as we go beneath the surface, there are a couple of other things. So in the stock market, one of the things that drove some of the investment in stocks is that there were no returns available in credits. When interest rates were so low, why buy a bond at 1% when you could buy a dividend paying stock that was paying 3%, 4% or 5% and that made a better investment. Well now, when you look at some of the most safe credit issues; right now you're getting 4.8%. Someone's going to look at that and go, I'll take the 4.8%. That's less money now going into the stock market. With the housing market - and I don't know what the statistics are on this - but in the housing crisis of 2008 and beyond there were so many adjustable rate mortgages re-setting and people were forced out of their homes because they couldn't afford the new interest rate. My understanding is we have more fixed rate mortgages out there, so if people are able to stay put, they can just live with that old mortgage rate. How this plays out, I think to your point, the speculators, people buying for investment, are going to say, well, I can't get that big outsize return buying residential real estate so I think I'll pull the investment, that starts changing the dynamic of that market.

Kerry Killinger

I totally agree. That's why I'm not saying housing bubble has to burst, it may well deflate over a period of years and not be anywhere near as severe as what it was in 2008 and 2009. We don't have a lot of adjustable rate mortgages so that's not going to be as much of an issue. But I would argue that even in the last recession, the biggest problem was not those adjustable rate mortgages - that may have helped get things started - but what really happened is when housing prices fell, for whatever reason, they fell 30% in some markets, every type of mortgage - including every fixed rate mortgage - became risky, because the people's equity got wiped out overnight. Once your neighborhood starts declining in value and your house goes down and you have to get out for whatever reason and sell, then that brings everybody else's down. It just kind of cascades down for a while. Again, I don't think it's as severe by any means is what it was then but the risks of a 10% or more pullback nationally, I think it's very, very possible.

Richard Helppie

I would concur. Similarly, in the stock markets, the S & P is still trading at a multiple above historical norms. I think there's room for that to come down. I was in meetings with economists earlier in the week where they were presenting and they were saying, well, the S & P may be 40-50 at the end of the year, in other words, pretty flat from where we are at this point. That all affects, obviously, capital flows. One theory that I have, and it's a personal theory, is that while we may have had a whole generation now of business people who thought zero interest rate programs were normal, those of us that maybe started our career a little bit earlier, we thought, well, we always have to factor in the cost of money. Many people I know that run business enterprises, when they do their forecasts they factor in a cost of money and they look at the zero interest rate - that was just upside to the model. Maybe we're better equipped for interest rate increases than anybody forecasted. Have you got a view on that?

Kerry Killinger

Well, a couple of points I want to make before I forget on that point, with interest rates - again, they have gone through quite an increase in the last last year or two as the Fed changes policies - one of the thoughts I wanted to complete, first on the housing front, as you mentioned remembering way back when. Back in the mid 80s these were periods where interest rates were double digit on your mortgages and the affordability of homes became very difficult because of very, very high interest rates. But home prices were still fairly low, the affordability index that factors in those today is now back to the level it was then, which is the worst affordability that we've had in decades. But this time, interest rates are not in high double digit, interest rates are still relatively low. The problem is housing prices have jumped up so high that affordability is as bad as it's been. And that's another factor I just want to close out, of why housing could easily go through a correction. It's affordable to the least number of people today, as it was since the 1980s. Anyway, just wanted to complete that thought.

Richard Helppie

I think that's a great historical parallel, because in the 1980s, when mortgage rates were so high and affordability was out of reach, ultimately, the interest rates came down to make it affordable again. But now we're talking about the value of the asset itself being too high, which means that the affordability is going to come out of that homeowner and the resale market is going to feel that. In spot checks I've done around I've noticed now that there are many price decreases, homes are staying on the market longer and when you look back at the sales history, you see somebody bought the house in 2021 or even 2022 and attempted to list it for a fancy profit and now they're backing down. To me, that's just a sign that there's a speculator in there. Now, what would be the good news in this for a conservative consumer - financially conservative consumer, I'm not talking about political ideology here - that husbanded their resources, saved their money, have got a reasonable amount of debt for their income, wouldn't some of these lower prices benefit them?

Kerry Killinger

I think the likely scenario we'll see moving forward is that we will keep interest rates...they are going to be...probably for the ten year treasury, not too far off from where it is today, it may go up a little bit, but it's going to start to stabilize. Short term interest rates, as you know, have come up quite a bit. You are going to see, for people that want to be conservative, they have better alternatives now, you can put money into treasury bonds or treasury instruments, you can put them into corporate bonds, you can put them into CDs at a local bank, or whatever it might be, and it's a better alternative. Again, I think on the stock market front, I think, yes, it's going to likely have a continued correction at some point. But we're all going to keep getting excellent opportunities to buy good dividend paying stocks and have a certain amount there. I don't think we're all going to go out and speculate as much as we did in some of these crazy instruments that were going on a couple of years ago. I think you can afford to be fairly conservative, I still think it's not a great time to put a lot of risk on the table. Again, there'll be other points in the cycle when something gets washed out in price, and it's just a screaming buy, it's a great time to take on more risk. Right now, I'd still recommend to most people to be conservative, diversified, kind of stay the course, don't worry about the stock market moving every day, don't over-extend yourself in paying a peak price for real estate - for a house more than you can afford, hoping that it's just going to keep rising in value - because I think that play is going to be much more difficult. For most people, I think, just good, fairly conservative, diversified investment portfolios make sense. Not a great time to take on risk with lots of debt, in my opinion and I would not over-play homes and buy more home than you need and do it just from a pure investment side.

Richard Helppie

Go ahead, Linda, I was going to ask you because you were the statistical backbone of this great work, "Nothing is Too Big to Fail." Did you sit back in your chair at all over the last few months and go, I told you so, or we were a little off on that one? What kind of impressions have you had now after the publication of the book, again, leading up to Pulitzer Prize nomination?

Linda Killinger

The thing I worried about the most is it what happens to the middle class in this country. That was my major concern on the first book and it continues to be my concern. During the pandemic, what's gone on in the last few years, the top 10% did very, very well, they increased their wealth substantially. The bottom 10% actually increased a little bit because there's a lot more government program to help people out in that area. So they did pretty good, they had more net worth coming out of this. But the thing I'm concerned about is in the middle class - 80% of America - who lost wealth during the last few years. They're the ones that will be facing homes that are lowering in price. They'll be facing maxing out credit cards and that's very expensive debt. What's happened in other areas, there's going to be more layoffs this year. So my concern is still the middle class, how employment is going to roll out for the rest of the next couple of years and that will make the middle class more fragile.

Richard Helppie

Indeed, it's a risk and we don't have enough re-training to get people into jobs that can pay a better living wage. If people can't sell their house, because of the downdraft in home prices, they're going to be stuck. I was just reading today about some of the small towns that people moved to when they could telecommute. Now that it's ìback to the office,î they've got to sell those and are leaving a wake of empty homes behind them. I think about all the middle class jobs that go with [that], things from day to day life; grocery stores and other places where consumers spend.

Linda Killinger

That's really been interesting. We've talked to a lot of CEOs, and three, four months ago they were all complaining about no one wants to come back to work, we can't find people who want to work, everybody wants to work at home, and they were finding it a hard time hiring enough people. There's been a real change. Now CEOs are saying things are finally settling down, more people want to work, more people need the money, and then their rate of layoffs. So there's been a better viewpoint about getting people back to work.

Kerry Killinger

I think one of the things the government did not realize when they did all the COVID stimulus is that that would be part of the cause of labor participation rates falling dramatically in the country. People became so accustomed to the checks and the government programs. Probably on their personal, they did more soul searching of work-life balance when they started spending more time at home and when they saw the commuting not being as required as it used to be. The net result is that the participation rate in the labor force fell from about 67% to only 62%. That's one of the reasons why the unemployment rate is so low right now, there are just not many people that want to work. I will put out the warning that that worm seems to have turned a month or two ago and businesses now feel they are back into a control position. They're more and more demanding employees come into the office a certain amount of time, they now feel it's easier to hire people than what it was. Many larger corporations are actually doing fairly significant layoffs right now. At least the people we have chatted with have said they now feel that they have the upper hand, that negotiation has shifted from being in the employees' hands over to the employers' hands. So it'll be interesting to see how that plays out. One of the other side benefits - I think it's a good thing for the economy in the long run as this happens - it's also fueled a dramatic growth in small businesses. Our new business formation rates are actually at very high levels. Part of that is that people may have decided that they really don't want to work for this large company where I have to commute into the office and do this and this, maybe I can open up my own shop or do something there. So small business formation in our country is at a very high level, which I think is a good thing long term.

Richard Helppie

As an entrepreneur, I'm certainly in favor of that. It's difficult sometimes just to make it on a wage. If a person's talented and wants to take the risk there is no unemployment for people that fail in a business so people tend to work real hard. I know that I've faced a few nights with payroll coming up and wondering how I was going to get there, so that's reality. But you know, we talked about the government stimulus and how people reacted, I hear very, very few people complaining saying they shouldn't have spent all that money. I was listening to another podcast with a gentleman that was an expert about the federal deficit; he's very concerned. He said that the spending in 2020 he thought was good spending, although it led to trillions of dollars of debt at the federal level, but did not like the spending of 2022 - the Inflation Reduction Act of 2022 - under the theory that it was just too much debt, it was going to crowd out private investment. How concerned do we need to be about the deficit and the federal debt?

Kerry Killinger

Well, I think we have to be very concerned about it. At the end of the day, the capital markets can discipline us more than Congress, or regular politics. If we wake up on Monday morning and the capital markets don't rule over all of our debt, and say, yeah, you have free access to it, or if they demand huge increases in interest rates, because they think we're a credit risk, that is a very hard discipline tool. I think 31.5 trillion dollars of debt, given the size of our GDP, we are now up to a higher level than what we were in World War II when that was a very short term expenditure just to pay that war off. We're now stuck into this thing. I think that whole crowding out is for real, I think that we are at the limits. I don't want to get into exactly how you get there but I just think that we've got to be thoughtful and somehow get the annual budget deficits down into about the $500 billion range, plus or minus. I think we can live through those things. But I think this year after a year of a trillion dollars of deficits is going to be a real problem for us. It appears to me anyway, politically, we're getting pretty close to that realization and that we'll start to see less one way movement of just raising the amount of those deficits every year. We'll see how that plays out. It's always easier for a politician to spend than to not spend, right? I mean, the way our congressional process goes and getting all the money allocated to their pet projects, and all the things that have to go on. And on the other side, always trying to [figure out] how do I get as many tax cuts as I can and the like. I understand all those arguments, I just want them to come together and somehow get that annual deficit down to about 500 billion or less and I think we'll be fine.

Linda Killinger

One of the things that has concerned us is that over the past few years, ever since the financial crisis, the Federal Reserve has been, in many ways, politicized. There's so much pressure in the last few years to keep interest rates low; it's good for politicians, people feel happy because they can buy everything on a low interest rate and it really boosts the economy. Well, we've got another presidential election in two years and I think there's going to be a lot of pressure to try to lower interest rates. I think Congress and the president will probably, like they have in the past, put pressure on the Federal Reserve to start reducing interest rates so the economy will perk up. That might be a short term solution and great for an election if you want to get elected, but on a long term basis, that's not healthy. The Federal Reserve has been, over the last two decades, keeping interest rates too low for too long. So if people feel too good about buying things then you get all the asset bubbles building up, pushing prices higher and higher. Then when they finally realize that it's too much, too late, then they dramatically raise the rates too high, too fast and that causes a hyperinflation.

Kerry Killinger

I think the key on that, Rich, is going to be - if we talk in a year from now, sometime in next year - I think the Fed's likelihood is to have a resolve for the next few months. I think it's going to stick, they're trying to get the inflation rate down to 2% or below. I think inflation is going to come down but I don't think they have rates high enough or have done enough at all to get it down to 2%. So it's probably still going to be above that. Now, when we get into a political year, as Linda said, every politician is going to be calling, they're going to be yelling at the Fed to drop interest rates. The Fed has become more and more politicized. I think it's very possible that they will succumb to lowering rates, probably prematurely before inflation has actually come down. That's going to be the big thing we're going to want to watch the rest of this year into next year.

Richard Helppie

It seems like everything our political system touches gets messed up in some way versus the independence of the Federal Reserve, regardless of what one's view about the Federal Reserve itself is; at least let it be independent and guide the economy. Again, from my point of view, introducing cost of money back into the equation is going to hurt for a while. I think there are steps to mitigate that pain, as Linda you referred to programs for people in the lower rungs of the economic scale. But I think ultimately, it's necessary medicine. Then when we look at the debt and the deficit, it just makes no sense to me at all. Like we're not going to lift the debt ceiling on money we've already spent and we're going to hold the economy and the country and the world financial system hostage until we get...and I'm still waiting for the blank to be filled in about okay, what is it that we get?

Linda Killinger

Another thing that we've talked about in the book that is still even more true now, is how our Federal Reserve policies are pretty much copied by the rest of the world. If we raise interest rates, the rest of the world raises interest rates and vice versa. So now you have an even more fragile economy in the European countries. It is completely not understandable what's going on in China, they're even more fragile. Then with the Ukraine war, we don't know how that's going to scale up but if all the Europeans and our country and others in this time have to put even more money - and I support Ukraine a whole lot, don't get me wrong - but that's another thing that makes it dangerous to be in the position that we're in.

Richard Helppie

Linda, you mentioned China, and that's a topic that we talked about in our prior podcasts, prior episodes of The Common Bridge, and talked about overbuilding of assets of residential and such. Now we learn that China's population has shrunk by some 850,000 people; there are not very many US cities of that size. So how's China doing and where are the risks in the Chinese part of this?

Kerry Killinger

Well, China is going through a very difficult economic period right now led by those problems in real estate. As we mentioned, as you said in our book, there were somewhere between 50 and 60 million unoccupied new housing units in China. People couldn't afford them, they were just built in order to keep the economy vibrant, or keep jobs going. The Chinese government also manipulates prices so they basically cause prices to go up every year like this, regardless of supply and demand. It was the primary requirement, if you had a retirement plan, you had to put it into housing. So in the last few years, as I recall, 75-80% of all housing in China was being built for people buying their second, third and fourth house; it wasn't for their primary housing. It became kind of an investment tool for their retirement plan with prices they thought were going to go up forever despite the people not able to afford those apartments and the like. So anyway, that has all turned the other way now. In the last several months, prices across China in real estate have been plummeting. There have been some very high profile companies that normally would have been bankrupt if it was in the United States, the Chinese government has had to come in and rescue and just try to keep it stable. Then they went through the lockdown for COVID, which really screwed up their manufacturing base for a while. And now that they've let that back up, that in conjunction with a declining population, they're simply going to have very low GDP growth for quite some time. They have that speculative real estate bubble which is in the process of deflating; we'll just have to find out how enormous it is. So if I'm looking at the risk around the world, China is right up there in addition to worrying about Ukraine and Russia and how that plays out. I think just other geopolitical, in general...Asia is going to continue to do better than Europe. I think Europe's in for a very long difficult period of low population, low productivity, low economic gains, for quite some time. Asia will be better off. Many feel - what I've been reading - is that the next decade will be more the decade of India than it will of China, that China has kind of overplayed its hand and may be under a lot of pressure and that if they do it right, India will have population growth, wind at their sails a little bit for their economy and growth. And if they can pull up productivity and do all the things you have to do to take yourself from a third world country to a more modern one, that may well be the economic powerhouse of the future than even what China was.

Linda Killinger

China has a much higher - almost twice as bad as the United States - debt to GDP. One thing that we've noticed in traveling and interviewing people through China is that there are two China's; there are the very, very large cities that are doing much better in their financial centers, where people have had no problem buying the apartments and in growing wealth, but there are a lot of people in the rural area, in rural cities, where it just hasn't worked out as well. That's where a lot of the empty units are, in the rural areas. So they really have a two China problem. It'll be interesting to see how they unwrap that.

Kerry Killinger

Well, they have spent hundreds of billions of dollars on un-economic projects around the world too, they have to work through. On our travels we've been through a lot of seaports that China built that are basically empty. There might be one ship in the entire thing.

Richard Helppie

Is that in Australia, in North America, South America, where?

Linda Killinger

We've seen that all over. We saw it in South America, Asia, we saw it in many places in Northern Africa and in southern Europe, where the countries that needed more help went to China to borrow money to build infrastructure. Well, if they default on those loans, then China can take over that infrastructure. It will be very interesting.

Kerry Killinger

I think the ones most interesting will be throughout some of the Asia countries and on into Africa. The old Silk Road, it was a very interesting strategy on China's part. Instead of spending so much money on military they said, we can basically conquer the world, it's a lot more economic, let's take those monies we otherwise would have spent on military and put them into development projects in countries that have no way to ever pay them back. Well, that basically gives them control of that country in a lot of respects. So they've done billions and billions and billions and billions in that area. Now, those are starting to come home to roost because several of those countries literally are in very deep difficulty now. So China is going to have to decide, do they enforce their covenants and basically take over those facilities, or do they somehow do a work-out with them. It was another fuel of growth for them that was positive, now it's going to be a negative. And by the way, when they were doing all that - both that and the real estate - they didn't do it with equity, as we know it, they basically went out and borrowed to the hilt. So the Chinese and the Chinese companies borrow to record levels on a world level to pay for all this. Again, as you know, whenever you have leverage going through rapid growth and things go the other way, you're setting yourself up for potential risks there.

Richard Helppie

We've had Robert Greenfield from Australia, and he's traveled and done business extensively through Asia and the East and he talks about how the Chinese have methodically gotten mines, and control of strategic metals, and things, and ports. But it never occurred to me until this podcast that they've got to be economically viable. Doesn't this make a case for China to want to modernize and open up its economy again? It seems like some foreign investment from outside of China would do a world of good for them versus other things you hear about China, like let's go started an expensive war against Taiwan.

Kerry Killinger

You're right. Absolutely, from an economic standpoint. I can't comment what their thoughts are from a political or national expansion, war kind of thinking, but China has to get their economy fully opened. They're still a great manufacturing center - we in the US want to buy all their stuff because it's cheap and we have a big demand for it. I think that now that they've opened up from COVID, that's going to be an area of major focus for them. I think, from a pure economic standpoint, it would be really foolish to see them to do something with Taiwan. If they do something with Taiwan or they do more on the military front, that's not coming out of economic self-interest, from what I can see, that's really out of some political agenda they feel they need to execute. Obviously from the world's standpoint, I think we all hope that they think very carefully about that.

Richard Helppie

Indeed, I know they built some amazing aircraft carriers and supplied a fairly big military.

Linda Killinger

Evidently some big balloons. [Laughter.]

Richard Helppie

Some balloons, and amazingly, I recorded a conversation with Justin Higgins - who's the host of Politics and Media 101 - just yesterday recorded him and we were talking about the balloons and what the story was...at the time it was that there was one balloon in recent days. But oh, there were three during the Trump administration; well, that story got reversed, no, there weren't any. Well then an unnamed source at the Department of Defense said, there might have been some, kind of...maybe, over the border, which of course gotten blown up by that part in the media machine as lots of balloons under Trump. It's insane the way our political polarization and our so-called news system has blown that up around partisan lines. Clearly, there was a Chinese spy balloon over the United States of America, the president of the United States, the Commander in Chief, told the Air Force to go take care of it; they did, seems like a pretty good thing. But some people can't leave well enough alone. It makes me a little crazy.

Linda Killinger

Well, you can politicize anything now.

Richard Helppie

Indeed. This has been a great conversation. In our prior conversation, we talked about fine art and collectibles, that there really isn't a safe spot in the economy today or a very reliable store of value. If you were advising a young family starting out or perhaps a mid-career professional or even indeed somebody leading up to or in retirement, what kind of basic economic message might you give to people in those circumstances?

Kerry Killinger

Well, I think I'd get back to the basics of saying, if you're 20 or 30 something, you've got to be investing for a 50 or 60 year time horizon. Focus on that long term and don't worry about some of the short term fluctuations. Over the long run, you're always better to have more of your retirement plans or any of your invest-able funds into equity-oriented vehicles. Stocks are usually the best way to play that. Homes, over the long run, have been a good way, something that can appreciate along with inflation. Don't always keep your money just in fixed income safe vehicles; those become more and more appropriate as you get older. The other thing you've got to do is don't try to time the market, don't think you're smart enough to buy at the low and sell at the high or get caught up in the fads of buying this stock or that stock that somebody's recommending and the like; so I think diversified portfolios that have an emphasis on equity kind of vehicles. In today's world, I also encourage people to not just be in US equities, there are good programs to allocate out a certain amount around the world, because sometimes some markets are better than the others. And don't change those very often, let them compound over the years and try not to put yourself in a position where you need to tap those funds during that long period.

Richard Helppie

Right there is the key. I'm talking about young people starting out the way my wife and I did, where we were at zero. If you're 20 something and you're healthy, and maybe you've developed some marketable skills, is the watchword still, "live below your income" (Linda Killinger: Yes.) so that you can start to accrue some cash, even though it might lose spending power, so that then you can invest it; take advantage of 401-ks or any savings programs that your employer might have available, put off purchases, think about where your money's going if you're spending for conveniences and a lot of services - may be pull back on that.

Linda Killinger

The other thing, Rich, I think is really important in every era, in every financial crisis, this kind of the same thing occurs; you get a lot of unregulated instruments that might increase really fast, like the Bitcoins and the fungible tokens, and SPACs, that are sort of like get rich quick schemes and they're nothing more than the tulip bulb kind of investments. It's sometimes hard that - we know so many people in the categories that you described, people just starting out their 20s and 30s, or even midlife, even people starting to plan for retirement, where they get so enamored with the cryptocurrency and everything. A lot of those instruments are unregulated. When they start to unwind, it's nearly impossible...investors don't know who the people are that run some of those organizations and they get into trouble, like the latest one - FTX - they crash fast and people can't get their money back, unless you've got a lot of extra money to to gamble on that.

Richard Helppie

Right. And I think we talked earlier in the episode about the business formation, that it is a form of investment. If you're building business, you're building equity in that business and hopefully it's providing an income. So if you're starting out and you don't have a big savings, now's the time to try to live frugally, maximize your earnings, put work in, and try to create a little bit of a portfolio. Let's say you've done that right and now you're looking at retirement, and you're saying gosh, we're not getting enough return out of the S & P 500 - in fact, that went negative last year - what kind of advice would you give somebody who is, say 55 plus, that is either looking at retirement or in retirement?

Kerry Killinger

Well, the thing I'd keep in mind is if you're 55, you need to be thinking about 30 year time horizons or more. One time, when you were 55, you figured well, at best I only need to worry about 10 years, now you need to worry about a longer period if health care can improve and we can all live healthy lives and like. But saying that, I think if I was at 55, I would still have a majority of my portfolio in conservative equities - common stocks - probably 60 or 70% in that. I probably would have 30% in something like high quality corporate bonds and maybe 20% in more liquid, lower returning, but safe kind of things. Over the long run, those kinds of waiting on portfolios will produce excellent results. The one thing that really struck me the other day, I was doing some long term studies and it showed that over the long run, it didn't matter very much if you bought at the top of the stock market or at the bottom, that 10 years out the returns were basically within a percent or two. So people that are always worrying about just finding the low time to buy or the high time to sell - no, the smart thing is own equities over long periods of time and have the exposure, but never force yourself into selling at bad times and don't get caught up in speculative crisis at the other times. Let that compound, because corporate earnings over a long period of time simply grow faster than the rate of inflation and if you have an instrument tied to that, you're going to do really well. That's why when I'm at 55, I want to worry about 30 years. If I'm 75, I may be worrying more about 10 years, then by that period you probably want to have the majority of your assets in fixed income or things that are much less risky.

Richard Helppie

And your debt under control or manageable, if it exists at all.

Kerry Killinger

Dump the credit cards, (Rich Helppie: Indeed.) or pay them off every month. Actually, if you want the best credit card...I'm an advertisement for Amazon [laughter] because I like buying...I do a lot of stuff there. But their credit card is a 5% cash back on every purchase I make on Amazon. Of course we pay it off every month but what a great transaction of getting 5% off on something as long as you're disciplined enough to never let that credit card balance accrue to an interest.

Richard Helppie

If there are those are in a position to do that, I highly recommend that they look into that. As we move to our close is there any thing that we didn't cover today that we should have talked about? Any policy items in particular or any watch force?

Kerry Killinger

I think we're going to be into quite a political season for both getting through the State of the Union short term and then on through the presidential elections. You're going to hear politicians go to the extremes of glass half full or half empty, and the like; people need to put that on the back burner and just look at what's going on. The high likelihood is that the economic growth over the next two years is going to be very anemic at best. Some will play it up that we're in a recession, if you want to be a negative on one party or if you're on the other side saying no, no, we're into growth. Well, plus or minus zero isn't going to matter, it's going to be pretty close. I also expect the unemployment rate to rise. It's at too low a level right now to sustain long term normalcy in the economy. So unemployment is going to rise, inflation is going to come back down. But don't think it's a big victory if it comes down from 10% and gets stuck at 5%, which it might. If it stays at four or five, that's still a problem, the Fed's going to have to tighten a lot more. Hopefully the Fed will find a way to get it down to 2% range, and they do that, God bless them and we'll all be pretty happy. But next couple of years economic wise is going to be a very slow growth period for this country. There are still lots of risks and I wouldn't be at all surprised around corrections in housing prices, the stock market and the like. Still a good time to stay as much out of debt as you can. As you said, live within your means, try to be conservative on that front and just don't take a lot of unnecessary risk.

Richard Helppie

Linda, any final comments for our audience?

Linda Killinger

No, I think we've covered everything.

Richard Helppie

We've been talking today with Kerry Killinger and Linda Killinger. They are the co-authors of the Pulitzer Prize nominated book, "Nothing is Too Big to Fail." It is a mighty read, but I'd recommend it. I've read the book cover to cover, probably need to go back and read it again. It is the antithesis of the soundbite world that a lot of us live in, but it's well worth it. There are always going to be problems, there are always going to be policy solutions with the proviso that we think about it and work together to solve it. And with that, this is your host, Rich Helppie, with our guests, Kerry Killinger and Linda Killinger, signing off on The Common Bridge.

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