Brian Smedley – Chief Economist at Guggenheim Investments

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The Economic Forecaster – Brian Smedley

Droves of anxious people take to the arid streets of Tatooine. The desert planet recently experienced a decline in GDP and now with inflation on the rise, rash financial decisions made by the population were a real danger. As the crowd continues onward, it is confronted by a stranger. Brown robes shielding him from blistering heat, his head remained hooded and face cloaked. With the wave of his hand, those within range of his voice were pacified, “This isn’t the recession you’re looking for.”

While the Start Wars inspired scene seems a bit cheeky, forecasting the economy is what Brian Smedley does. Brian joined Guggenheim Investments seven year ago to lead a macro economic and investment research team. Basically he helps allocate the company’s investment positions and is pretty good at it too. During our interview I enjoyed learning more about Brian, his take on the economy and most importantly, the opportunity we had to become friends.

 

About Brian Smedley:

Brian Smedley is Chief Economist and Head of Macroeconomic and Investment Research at Guggenheim Investments, the global asset management and investment advisory division of Guggenheim Partners. The firm manages $228 billion in total assets across fixed income, equity, and alternative strategies. Brian leads a team of economists and investment strategists who help to formulate the firm’s global macro and asset allocation views and communicate them to internal and external audiences. Their publications have been ranked among the industry’s most-read and most-shared.

Previously, Mr. Smedley was Head of U.S. Short Rates Research at Bank of America Merrill Lynch. In this role, he published research and investment recommendations related to U.S. Treasuries, interest rate derivatives and money markets, as well as Fed policy and financial regulation. He was ranked 2nd in the Short Duration Category of the Institutional Investor Fixed Income Research Survey.

Mr. Smedley joined BofA in 2010 from the Federal Reserve Bank of New York, where he worked as a senior trader/analyst in the Markets Group with responsibility for FX, commodities, and buyside relationship management. He briefed senior policymakers on a regular basis during the Global Financial Crisis and was involved in the implementation of the Fed’s emergency lending facilities after the failure of Lehman Brothers. He began his career at the New York Fed in the Emerging Markets and International Affairs Group, where he covered Latin America as a senior economist.

Mr. Smedley earned bachelor’s degrees in Economics and Finance from Utah State University, where he graduated summa cum laude with honors in Economics. He earned a master’s degree in International Development Studies from The George Washington University. As a graduate student, he worked at the U.S. Treasury Department and the White House Council of Economic Advisors.

 

Interview Transcript:

Alan 

Can you tell us about what your current role at Guggenheim involves?

 

Brian 

I started at Guggenheim about seven years ago. And I came on board to lead a team called macro economic and investment research. And this team in this role, I function as our chief economist as well. And we’ve got a team of eight economists and strategists. And together our objective is to develop a cohesive view of the economic policy and market outlook. And so we work closely with our investment teams, I report to our global chief investment officer, and we work closely with them to develop the house views. And then those views are implemented across our investment portfolio. So it’s really it’s a pretty broad remit. Across the eight of us, we’re looking at everything from the US Treasury market to investment and investment grade and high yield bonds, commercial real estate, equities, FX, commodities, and pretty much everything in between.

 

Alan 

So what positions did you have previously that helped you prepare for this current role?

 

Brian 

Yeah, so as I mentioned, I came to Guggenheim about seven years ago. And before that, I spent some time on the policy side and then worked on the sell side. Going back to college, I studied at Utah State, I was an economics and a finance major, went to graduate school in Washington DC at GW. And when I finished my program there, I had, I had some limited work experience, had done some internships in DC at the White House for the President’s Council of Economic Advisers at the US Treasury Department. But that was, I was really looking to take my my first full time job, and I ended up getting a position at the New York Fed. And so I started there in the emerging markets and International Affairs Group, as an economist covering Latin America. And then after a couple of years, things really heated up in the US with the emergence of the financial crisis, the failure of Bear Stearns in March of 2008. So shortly after that time, I, I had an opportunity to move to the open markets desk, the markets group, and that was run by Bill Dudley at the time. And so in that role, I was covering foreign exchange markets, commodity markets, and then did some work, sort of as a liaison to the buy side. So part of that effort was during the financial crisis to ensure that the Fed was reaching out to and getting feedback from the investor community globally, to help make better policy decisions and be more informed on market developments. So all told, I spent about four and a half years at the Fed. And then I left that role to go to Bank of America, Merrill Lynch, in 2010, where I worked for five years as a US rates strategist. So my focus there, it was really building on my time at the Fed. But my focus there was on the short end of the yield curve. So we covered my group cover treasuries, interest rate derivatives, like swaps and futures. I was very focused also on money markets. And this is all in the post financial crisis period, of course. So a lot of the Volcker that well, the Volcker Rule, and a lot of the Basel framework and Dodd Frank reforms to the banking system affected the money markets, and the Treasury market. So I did a lot of work on that, in addition to of course, watching the Fed closely. And so after five years of that, I’ve always been a big picture guy. I’ve always been kind of in search of a new learning curve. And so when the opportunity came up for me to move to the buy side and work at an investment firm, like Guggenheim, it was a it was a fantastic opportunity for me to pull together a lot of the things that I was interested in and try to again, try to complete the whole puzzle. And that’s been a lot of fun.

 

Alan 

So who are the key people who helped you get to where you are today?

 

Brian 

Yeah, there’s so many people who’ve influenced me and who’ve played important roles in determining my path really, that I’m so grateful for. I would start with my mom and dad. I grew up in in the state of Utah, and had two amazing parents, three older sisters and one younger brother. My parents were always super supportive of me and our family, and encouraged us to get a good education to work hard and really helped us believe that the sky was the limit. it. And so it started with that encouragement from my mom and dad. There was a time when I was in high school. I graduated in 1998. I remember sitting down with my dad, and he made a comment to me, he had just had a meeting with his financial advisor. And he said to me, “you know, Brian, you should really think about a career in as a financial advisor in finance, because the guy who works for me, he only works four days a week, and he drives a nice car and that could be an interesting thing for you”. So that kind of got the wheels turning. Another person I can think of is Madalyn Tims, who was my finance advisor. I was a dual track economics and finance major. But my finance advisor in a 30 minute conversation, made some recommendations to me, that completely changed my life. And I think she was inspired. I’m so grateful for it. But she recommended that I go to graduate school in Washington, DC, which hadn’t really entered my mind. And so that opened up an entirely new career path for me. I would say to like in the workforce, my first boss, a guy named John Clark, an economist at the New York Fed, there was a moment again in early 2008, I had been working for John for a couple of years, covering Latin America. And they, the bank needed more resources in the markets group to cover financial crisis related things for staff, the new lending facilities, cover market developments, and provide that intelligence to policymakers. And he John came to me and said, “you know, there’s this opportunity to go do a rotation in the market screw for six months, would you be interested?” And that, again, that was another moment, a conversation that unlocked doors for me that I never could have imagined. One other personnel mentioned is Hayley Boskie, who I worked with at the Fed. She hired me onto her team at one point at the Fed. And then she subsequently left and she played a key role in my decision to go to Bank of America where she landed and then ultimately to transition to Guggenheim as well.

 

Alan 

Now, Brian, I understand you’re also an accomplished musician. Did you ever wish that you would have chosen a career down that field of music?

 

Brian 

I am an amateur musician. I, when I was a teenager, I picked up the guitar at the age of 13. There was an old guitar, my mom had bought for my dad for his birthday years before and it was, it was sitting in storage in my closet. And I thought one day, you know, I should pick that up and start to fiddle with it. And I came to really develop a passion for playing the guitar, writing music singing. And so as I got toward graduation from high school, I actually thought, you know, this, this is my passion, this is what I want to do. And so I applied to college as a guitar major auditioned. And that was initially the way I thought I was going to go. But this was also during, you know, the late 1990s. This was the heady days of the NASDAQ bubble, you know, the stock market was on fire, the Internet was new in terms of opening up, you know, online trading. And, and so I opened up a, an online trading account. In my first semester, I switched to a finance major, and I left guitar pretty quickly. And I had so much fun just trading stocks, trying to identify patterns intraday in the computer lab, at college. But I would say, looking back on it now, I, you know, I think I think I made the right decision in terms of, you know, developing a career path that’s, I think, more stable. It’s been very, you know, enjoyable and very lucrative for me. But the other thing, too, that I’ve, as I think about this, one of the challenges that I’ve had with music, as much as I love music, and I love to play music, and I enjoy sitting down with the guitar, one of the things I always struggled with is when I’m trying to compose a song, which I don’t do much anymore. And I try to compose lyrics, I struggle with the fact that there’s not a right answer. Right. And so I’m a perfectionist, too. And so I’m my biggest critic, you know, I’m coming up with a chord progression or lyrics or something. And it’s easy for me to look at that and say, Oh, somebody’s already somebody. This other song already, you know, has already done that. And so, what I love, I think about, you know, economics and finances, the market ultimately, will bear out the truth of your decisions, right, good or bad. And, and there is an objective function, which is to optimize risk adjusted returns. In the field of economics, it’s about accurately forecasting the future and the implications. And so, for me, it’s a more comfortable place to be as somebody who’s naturally inclined To be kind of a perfectionist, you know? So yeah, I, you know, very happy here. But I do enjoy picking up the guitar now. And then.

 

Alan 

So Brian with I’m going to switch topics, you’re coming back to this economy with inflation at a 40 year high. What’s your take on this economy? And it’s a follow up? How did we get here?

 

Brian 

Yeah, it is. It is extraordinary. Alan. Obviously, this is a situation with inflation. We haven’t seen in forty years. And how we got here is very unique relative to that period in the 1970’s. I would say, look, there are many factors on the supply side and on the demand curve and demand side, but I would say, you know, just a thought experiment for our listeners, if you took econ 101, basic economics understanding, think back to your supply and demand curves. And the demand curve slopes down, the supply curve sloped up what happened through the pandemic, as that we shifted the demand curve out into the right, and we shifted the supply curve into the left. So what happens in that context is the price level goes up. Okay. And both curves, I think, have been in motion. So, you know, you could go back to, of course, the fact that we have several effective vaccines that were started to be rolled out in late 2020, had a huge impact in the recovery. But also, of course, we have very, very aggressive fiscal and monetary stimulus. And part of the mistakes that in hindsight, we did far too much on the fiscal and the monetary side. It wasn’t that obvious at the time. And part of the reason is because economists, you know, we’re looking back at the last 20 years of history, really 10 to 15 years in the United States and even longer for Japan, and saying, the cost of inflation being too low of aggregate demand being too weak, or very high. It’s hard. Japan has struggled for decades to get inflation up to 2%. And they’ve done huge fiscal stimulus record monetary easing. And so, you know, in the initial stages of the pandemic, it was critical, the packages that were passed on a bipartisan basis, but in later 2020 and early 2021. I think that’s when we overshot the mark. Right, as the vaccines were coming on board. And, and in the end, we dumped way too much stimulus on an economy that was already recovering. And that has really, look, I don’t, you know, just to point specifically to the Fed, where I worked, you know, many years ago. You know, Jay Powell said in October of 2020, to Congress and to the world, that the costs of doing too little, were greater than the costs of doing too much that they we could handle a situation where we overstimulated. So we are now living in a world where we have to clean up the Fed specifically has to clean up the excessive demand impulse that we’re living through now, it’s also important to talk again, about the supply side. And there’s a bunch of things from global supply chains to the energy crisis in Europe, brought on in large part by Russia’s invasion of Ukraine, to zero COVID policy and China, which is gumming up supply chains, and logistics. But another really important supply problem is around the labor market. We have too few workers in the US and in other parts of the world, most of the world to meet the demand for goods and services. And this, we’ve been on this track in the United States for more than two decades. It’s been on it’s been a process over many, many years that we’ve seen a deceleration in the growth rate of the working age population, we have an aging workforce, people are retiring, pretty rapid pace. And so that’s been exacerbated in the last five years by a slowdown, a big slowdown in immigration and flows. And we really are reliant on immigrant workers to help meet the needs of our economy. And also the pandemic. You know, tragically many people have passed away from COVID or other complications. And other people have chosen to maybe retire or are sitting on the sidelines. And so we have a major labor supply crunch. Okay, so what the, you know, the problem here is that with the labor market extremely tight, that’s putting upward pressure on wages, and that wage pressure is feeding through into underlying inflation, and then you layer on top of it, the more well, let’s not use the word transitory, but the more exogenous factors like what happened in the in the in the new and used car market, right, what’s happening with semiconductors, what’s happening with energy and food, but the core of the problem, I think, is a shortage of workers. We also have a shortage of housing units. We’ve been on are building housing for since really 2006, when, you know, things peaked, and we needed a period of time where we were, you know, cutting back on new home construction, clearly to absorb the overhang. But that’s continued year after year. And so we’ve got it, we’ve got a housing shortage as well.

 

Alan 

Bright. And there’s a lot of individuals that are concerned, obviously, with all this change the new economy and the labor shortage, the supply chain shortage, and in there, they’re looking for direction. As a professional forecaster, where do you think things are headed? Are there steps people can take now to prepare for the future? And if so, what would those steps be?

 

Brian 

Yeah. Look, I would refer back to a recent speech given at the Jackson Hole symposium, which was, you know, just here in late August, by Fed Chairman Jay Powell. There were other important papers, academic papers presented and speeches given by you know, ECB members and Bank of International Settlements. There was a common theme, which is grappling with this reality, the new reality of what we would call binding supply side constraints or less, you know, we transitioned from a period of supply side tailwinds, which helped keep inflation low helped us keep the economy humming along, and low interest rates for quite a few years, to now possibly more long lasting supply headwinds. Like we’ve talked about a few of those. And so the game plan as I see it, and I think I think this was essentially laid out by chair Powell, in his speech is that the Federal Reserve has to take, again, they have to take responsibility to bring inflation down. They can’t allow it to persist at high levels for a sustained period of time, because then it becomes really self reinforcing. People embed that inflationary psychology into the decisions they make a business’s do households do, etcetera. And that makes it more persistent. And the Fed can’t tolerate that. So what is the game plan as I think they’re spelling out, the Federal Reserve is going to use their tools, raising interest rates, shrinking their balance sheet, using their guidance about the future path of the economy, about the future path of monetary policy. Those tools are intended to what we say tighten financial conditions, which is economist speak for, make the stock market go down, make bond prices go down as interest rates rise, make credit spreads, widen, you know, affect confidence, investor confidence, consumer confidence, possibly bring, you know, real estate prices down certainly rental inflation, the Fed wants to cool off and, you know, push the dollar up, these are all part of the financial conditions channel of monetary policy, what is that supposed to do? Right, the Fed can affect the hiring decisions, the kind of pricing decisions that people make, but they can try to tilt the playing field, so that people feel incentivize, or disincentivize, to hire and spend and invest. And so what they’re going to try to do by essentially punishing the markets is going to, you know, discourage people from spending investing, the Fed needs to loosen the labor market, as they say, which means push the unemployment rate up. And the only way you can do that is if you, you know, if you bring down aggregate demand, so that businesses, employers, governments, you know, reduce their demand for labor law, maybe layoff some of their marginal workers. So basically, a painted a picture where the Fed is going to use its tools to essentially push the economy into a recession. They don’t, they’re careful about advertising, you know, advertising that as the goal. But that has to be the solution, a period of restrictive monetary policy, tighter financial conditions, lead to lower valuations for markets, that will cool off this economy and hopefully bring inflation down so that it doesn’t turn into a, you know, 15 year battle, like happened from the late 1960s Until the early 1980s. So, so that’s kind of the game plan. As I see, I think it’s going to take several years for this to play out. In terms of what people can do, look, I think it’s a time to number one, you know, get your financial house in order, you know, make a plan that might mean developing a budget. from an investment standpoint, I think it certainly means looking for opportunities to de risk traditionally, you know, fixed income does well in an environment where we’re heading into a recession. But again, we don’t know how high the Fed is going to need to raise interest rates and what that may do for bond returns but I think now’s the time to, you know, to rein in a little bit of the optimism in terms of, you know, equity allocation, for example. And it’s an opportunity, this is a time to seek to avoid losing money. And I do think there will be great opportunities to invest at better valuations. But we have to see this plot process play out first. There was no question in the first half of the year, because we saw GDP decline, that maybe you know, we’re already in a recession. You know, there’s a there’s a phrase in Star Wars, you know, where they say they say, these are not the droids you’re looking for. They’re trying to hide the droids, you know, from. In this example, this is not the recession you’re looking for. Okay. Well, no, it’s a recession, we know, the Fed is getting the job done, when the unemployment rate is rising. Right. And more recently, it’s continuing to fall. So as that process plays out, and as markets, you know, if markets correct, the way I’m describing, I do think there’ll be a great opportunity on the other side of this.

 

Alan 

Brian, one last question, then, okay, and I’m going out the economy, I want to talk about passion projects you’re working with in your in your spare time, are you willing to share that with us?

 

Brian 

Yeah, yeah. I mean, I’m one of those people. Alan, you may be the same where I’m always I’ve always got a thought going on in my head. There’s always a narrative, something I’m thinking about a project and what I think what I spent a lot of time thinking about, and working on my spare time, is, you know, trying to develop tools to help me make better investment decisions. Obviously, my role at Guggenheim, that’s a big part of what we do, we’re monitoring the economy and the markets day to day, but we’re also trying to develop kind of an infrastructure, a set of tools that we can use to guide our investment teams, I spend a lot of my own personal time thinking about how I can do better and be better and making my own investment decisions. How, how can I overcome my own cognitive biases, that might lead me to, you know, make bad investment decisions, which, which all of us, you know, all of us face that. So what I what I’m spending a lot of time thinking about is developing, you know, a model several models to help, you know, make better decisions that, for example, how do you build the most an optimal equity portfolio? How do you select, you know, the different constituents of that portfolio? How do you weight them? How do you know when it’s time to reduce your, you know, market exposure, or to add market exposure? So those, what do we call a systematic strategy is stuff that I find very exciting. I’m always looking for patterns for models that I can apply that again, hopefully, in a way to kind of help us see the future, right, just how, just how a meteorologist that’s tracking a hurricane is going to use data and models and historical experience to try to predict the path and the implications of a major storm. In a sense, that’s what I that’s what I love doing and thinking about how I can be a better investor is something that I’m very passionate about.

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