Bluford (Blu) Putnam is Managing Director and Chief Economist of CME Group. He is responsible for leading global economic analysis and monitoring developments in the price patterns, volatility and correlations of futures and options markets.
Prior to joining CME Group, Putnam gained more than 35 years of experience in the financial services industry with concentrations in central banking, investment research and portfolio management. He started his career as an economist with the Federal Reserve Bank of New York and later moved to the Chase Manhattan Bank. He has served in London as Morgan Stanley’s Global Bond Strategist and Kleinwort Benson’s Chief Economist. Moving into portfolio management, he has held positions as Chief Investment Officer for Equities and Asset Allocation at the Bankers Trust Company in New York and President of CDC Investment Management Corporation.
Prior to joining CME Group, Putnam gained more than 35 years of experience in the financial services industry with concentrations in central banking, investment research and portfolio management. He started his career as an economist with the Federal Reserve Bank of New York and later moved to the Chase Manhattan Bank. He has served in London as Morgan Stanley’s Global Bond Strategist and Kleinwort Benson’s Chief Economist. Moving into portfolio management, he has held positions as Chief Investment Officer for Equities and Asset Allocation at the Bankers Trust Company in New York and President of CDC Investment Management Corporation.
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NewsTranscript
00:00 let's just start like, you know, right at the top. Let's
00:03 start with the inflation outlook and has it already
00:07 gotten back to 2%? Oh, yeah. You can flip to that chart. So,
00:13 here's the deal. The reason we're not at 2% on all the
00:17 metrics. There we go. The reason we're not at 2% is
00:21 something called owner equivalent rent and we've
00:24 talked about that before. I mean, everybody OER. This is
00:29 where it's it's 25% of the headline inflation number.
00:33 It's huge and you know, it's a fiction. You rent your house
00:38 to yourself. You pay yourself the money and that money
00:41 actually gets counted in personal income statistics and
00:44 supposedly you can spend it. Give me a break. That's not
00:46 going to happen. So, you know, I don't like taking things out
00:50 of the CPI and stuff but you know, this one's a fiction. So,
00:53 if you take it out, we're at we're below 2%. We've been
00:58 below 2% for 3 months. We've already hit the feds targets.
01:02 You know, and I think the market over the last couple of
01:05 weeks has really come to realize that inflation is not
01:09 the issue. We're not going back to six, 7% inflation. You
01:14 know, we're we're in great shape on the inflation outlook.
01:18 Okay. So, go ahead. So, are we so is it like green light by
01:21 stocks then like if the feds done and we're in great shape
01:25 on inflation, doesn't that just mean the economy is going to
01:27 boom? What are your thoughts here on the overall economy
01:30 then? Well, I think you need a yellow light. A yellow light.
01:35 Okay. Yellow light. Um here's the the problem. Inflation, you
01:41 know, if I'm you know, if you take my view that inflation
01:44 really has come down to a very reasonable level, then what
01:49 you gotta worry now is about slow down in the economy and
01:52 you also have to worry about the fed staying higher longer.
01:55 The fed doesn't buy the story that I just gave you, okay?
01:59 They're looking at core inflation is still but little,
02:02 you know, between three and three and a half all because of
02:05 the shelter problem and so they could keep rates higher for
02:09 longer and and we're all going to see a slowdown in the labor
02:13 market in 2024. I mean, labor force isn't growing as fast as
02:16 it was. The the post pandemic recovery has really played out.
02:21 You know, we're we're going to be creating probably just
02:24 between fifty and 100 thousand jobs a month on average next
02:27 year. Much lower. Um so so you only get a yellow light for
02:32 equities because the green light is bond yields are are
02:36 lower so you can buy equities. Uh the yellow light is well,
02:40 wait a minute. Profit growth is slowing. The economy is
02:43 slowing. Let's let's at least be slightly cautious. So, we
02:47 shouldn't look for the the kind of, you know, market that we
02:51 had 2009 through 2021. Well, you know, we had zero interest
02:57 rates in QE and I think they had a huge effect on the market.
03:01 Uh so, I wouldn't uh I wouldn't go back there. This is an
03:04 interesting chart. The gray line is the nominal GDP. So,
03:10 that's real GDP plus inflation. The blue line is
03:13 corporate profits for the whole economy. This is an SMP. This
03:18 is GDP data for every company in the in the country and you
03:22 can see in the 80s and 90s, uh corporate profits didn't grow
03:26 all that fast and then after we got 1% rates from Greenspan and
03:30 0% rates for uh from Bernanke and Yellen and Powell, you
03:35 know, corporate profits took off. You know, when capital is
03:39 virtually free, companies go for growth and when they go for
03:43 growth, they get some. Uh by the way, that era is ended.
03:48 Okay, everyone talks about deficits, right? And uh the
03:52 huge deficit we have and growing as we speak. How much
03:57 do budget deficits matter for the economy and the markets? You
04:01 know, it's really an interesting question because a
04:04 lot of people do focus on budget deficits and the larger
04:07 the deficit, they think that's an easier, more expansionary
04:11 policy. Eventually, bond yields would have to rise. Maybe you
04:15 get inflation, things like that. I don't believe any of
04:18 that. I don't believe that budget deficits matter very
04:20 much for the economy and for inflation. What I do believe is
04:25 that expenditures matter. What the government spends. If the
04:29 government spends a lot of money like the $5 trillion
04:32 they spent during the pandemic, we're going to get inflation,
04:36 okay? But that's spending. It hasn't totally gone away
04:40 because we're spending more now but it's predominantly
04:43 military spending. Military spending is 90, 95% spent in
04:48 the United States. So, it's still been stimulated,
04:51 stimulative in 2023. Um but when I when I look at fiscal
04:56 policy, I think we're going to have a very tight fiscal
05:00 policy over the next 10 years but I define tight is virtually
05:05 no growth in discretionary expenditures by the government.
05:10 Now, if you define tight or loose based on the budget
05:13 deficit, you're going to think, wow, the budget deficit is
05:16 getting huge. It's a trillion dollars a year already and
05:19 growing. Uh interest, excuse me, interest expense is a
05:23 trillion dollars a year and growing. Fastest growing item
05:25 in the budget but the budget deficit is just telling you
05:29 that the government has to issue more debt and yeah, maybe
05:32 that pushes bond yields a touch higher but I it's it's not a
05:36 big thing. It will be a, you know, maybe in 15 years, 10
05:40 years, I don't know. At some point, it's going to be too
05:43 large and we're going to have a huge problem but we're not at
05:46 that stage yet. Uh one thing that that markets need to
05:51 exhibit for for me is like lower, lower volatility. I
05:55 mean, these bonds are trading like, you know, bonds and
05:59 related equities to that or just there's a gap and it's
06:03 just all over the place. I like stability. I want to keep
06:07 rates right here. I don't want a recession. I don't want to
06:09 see 6%. I don't want to see 3%. Our large abrupt price
06:13 gaps increasingly, are they going to continue? Oh yeah, you
06:17 put up an interesting graphic I like to show here. This is a
06:20 pot of water boiling and you know, we understand what a
06:24 liquid is. So, we understood what the, you know, the economy
06:27 look like in 2010, 2015, whatever and we understand a
06:31 gas to some extent. We understand what a new state of
06:33 the economy might look like but man, when you go from one
06:37 state to the next, you're in transitions. We're going to
06:40 transition to higher rates. We just finished the transition
06:43 out of the pandemic. We got climate transitions. We got
06:46 geopolitical transitions. All of the chaos of the transition
06:51 is at the surface. The little bubbles, that's where the chaos
06:55 is and that's the hardest thing to predict. Uh and so, I don't
06:59 think you have a chance at consistently lower volatility
07:03 for a while. We got too many transitions going on. And then,
07:08 will that continue into the FX market? We're not FS experts
07:13 here but the entry rate differentials between you know,
07:18 across the globe here, is that going to, is that going to
07:21 wreak havoc on the markets? Well, I don't think what
07:25 happens in FX has too much to do with US equities. Um but I
07:30 do think we get a lot of FX volatility. You know, the the
07:33 Federal Reserve was first to raise rates. The ECB followed
07:39 but they're going to end up at a lower peak rate. Bank of
07:42 Japan hasn't even started. Um you know, they're still at their
07:46 policy rate is minus ten basis points and they will raise
07:49 rates in 2024 but very very slowly. So, we're going to end
07:53 up with some pretty solid wide interest rate differentials.
07:58 And that tells me that we'll have a lot of instability in
08:02 foreign exchange. Okay. In the last week or two, you know, the
08:06 the dollar's been just a touch weaker against the Euro and the
08:10 yen just in the last three or 4 days and that's because of you
08:13 know, the the more optimism about inflation and maybe the
08:16 Fed can cut uh but longer term, I think US rates are going to
08:21 end up higher than European rates and way higher than
08:23 Japanese rates. Yeah, let's get into China. Of course, their
08:27 demographics have been struggling and overall
08:30 struggling, right? Uh we've been seeing where's the demand?
08:34 When is it going to come back? Are we going to see it? Um so
08:40 these are interesting charts. They're called population
08:43 pyramids. The one on the left is 1990 for China. Uh the young
08:47 people are at the bottom working ages in the middle
08:50 retirees at the top. Nineteen ninety is the sweet spot for a
08:54 fast growing economy. A lot of young workers, no retirees.
08:57 Then you go to 2020. The growth in the young people is zero and
09:03 you got a lot of retirees. So, you know, that that sweet spot
09:06 is gone and then if you look at the future, they have even,
09:10 they actually have a shrinking population in China after about
09:14 twenty twenty-five and uh and a massive increase in uh the over
09:19 sixty-five cohort. It's going to be a slower, much much slower
09:24 growing economy and that's before I even talk to you about
09:27 property market, debt overhang, uh 20% youth unemployment, all
09:32 these headwinds for China. Uh but China had three decades
09:36 where it could grow at 10% and they built infrastructure. They
09:41 used all that labor. They moved people from the rural to the
09:45 urban. They did lots of things right. Um but now, it's not
09:49 really right or wrong anymore. They're just way older. Uh
09:53 nothing wrong with getting older except that uh you're a
09:55 little less productive. In fact, uh you tend to retire. So,
09:59 uh you know, that that economy is not going to be a 10%
10:04 economy. It'll in fact, it'll probably be lucky to be a 3%
10:07 over the next 10 years.
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