Goldman's Jan Hatzius Believes the Hard Part Is Over

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, I would say the last few weeks, in a very real way, I would say optimism over the soft landing scenario, or at least the end of the raid hikes has become deeply conventional wisdom, I think.

Tracy Alloway (0:30)

I would agree with that, although I think it sort of started in the summer. We saw some inklings of it then, but you're right. It really seems to have crystallized in recent weeks. And of course, the irony is that going into 2023, the consensus was really for recession. We had a number of people who were talking about the outlook for the economy this year and how bad it might be.

And then going into 2024, it seems like we've completely flipped around. So the hills are alive with the sound of soft landings.

Joe Weisenthal (1:01)

Yeah, and I think you're right. Obviously 2023 has broken a lot of people's brains, probably a broader theme, which is that the entire COVID cycle, people have been looking at it through the lens of a traditional business cycle or macro cycle. And it feels like a lot of that just hasn't worked, starting from probably the fast rebound in late 2020

Tracy Alloway (1:23)

Oh, totally. So I feel like the indicator that everyone was looking at in sort of late 2022, early 2023 was the yield curve, the inverted yield curve. And there was this discussion about, you know, this is the traditional harbinger of a recession, but maybe things are different this time for a variety of reasons. And then this year, you know, fast forward to November, sort of late October of 2023, it feels like the other indicator that everyone is starting to talk about or was starting to talk about is the SOM rule. So the idea that, you know, one measure of unemployment, the moving average has been moving up and traditionally this indicates an upcoming recession because unemployment increases non-linearly in every business cycle. And supposedly this was a hard and fast rule, but as we discussed with Claudia on one of our episodes of Lots More, again, maybe things are different this time.

Joe Weisenthal (2:17)

I do think it's important that you bring that up because it does feel like the labor market situation is kind of the fly and the ointment of the soft landing scenario, which is that there's clearly some kind of softening, I guess I would say, in the labor market. And so the question, how far does that go?

When will the Fed have to cut? Should the Fed be taking out some sort of insurance cut sooner rather than later to force all the downturn? All big macro questions. We are nowhere near the end of understanding this macro cycle. And I think we gotta get a better handle on it.

Tracy Alloway (2:47)

The good news about this macro cycle is I feel like 20 years from now, 50 years from now, there will still be studies coming out about exactly what just happened.

Joe Weisenthal (2:56)

Unambiguously, I am confident on that. All right, well, we do literally have the perfect guess to help us understand this moment in macro, what happened in 2023, what we should be looking forward to in 2024 I'm thrilled to welcome back onto the show Jan Hatzius. We've had him on a few times. Jan Hatzius, Chief Economist at Goldman Sachs.

Jan, thank you so much for coming into the studio and coming on Odd Lots.

Jan Hatzius (3:21)

It's great to be back with you, Joe and Tracy. Always wonderful to be here.

Joe Weisenthal (3:25)

Thank you so much.

You put out a recent note and what I really loved about it is that there's this cliche that many markets journalists, maybe even Tracy and myself at times have used where it's like blah, blah, blah happens. Now here comes the hard part. It's just one of those things that people love to say. It's this trope, oh, the easy money has been made. Now here's the hard part. Inflation has gone down. Here's the hard part. You and she said the opposite. You said actually coming up next, there's quite a bit of disinflation in store and that this stage of further declines in inflation should be the fairly easy part, that we've passed the hard part of fighting inflation. What are you, let's start there.

What gives you confidence that actually, regardless of what happens, there's more disinflation in the pipe?

Jan Hatzius (4:07)

You're right. The title of our annual Outlook report, which we published a couple of weeks ago, is The Hard Part is Over.