Deep Dive Into The Matrix
01:15:26 Share

Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Marissa DiNatale and Chris Drudis. Hi, guys. Hey, Mark. So this is the last podcast of, well, wait. No. The first podcast of 2025. That's right. Right. Wow. We made it to 2025. How was your new year, Marissa? Did you celebrate? It was really nice. Yeah. Yeah. I had friends come down from...

out of town and there was a big group of us it was really fun you stay up i did yeah ah yeah do they have fireworks at in at newport beach no not that i saw i don't think so we watched you know it's funny on the west coast because you don't get anything for the west coast you have to watch times square at r p.m and then it's like it's over nobody knows that whole time celebration at our midnight

Yeah, right, right. That's right. So like everyone's focused on the East Coast, right? Right, yeah. It's very anticlimactic at midnight here. Yeah, that's interesting. I never thought of that. There's no LA celebration? Nothing? No, I mean, nothing that's televised. Nothing akin to Times Square or anything like that. Huh.

Would you ever go stand in Times Square on New Year's Eve to see the ball drop? Absolutely not. I just don't get it. I don't get it. It sounds horrible. You know, the thing that I always wonder about is, can you go to the bathroom? I mean, right? I mean. I don't think so. I think you're kind of. Not easily. Yeah. It's like freezing cold generally, but you can't go to the bathroom. You got a gazillion people in there. I don't know. I just, I don't get it.

It doesn't sound as long as it needs to be. The last 10 seconds, right? But you have to stand there for like 12 hours, right? Probably. Well, that's it. Yeah, that's the other point. It's not like you can just, you're walking in and have to have a whole client. You're in there. Yeah, you have to camp out well ahead of time, I'm sure. And I'm sure there's all kinds of security stuff you have to go through to get in. I don't know that for sure, but I'm guessing that that would be the case. Yeah.

Yeah. Right. Yeah. I never, I just can't comprehend that. I just, maybe that's, I'm just too old or I don't know. I was always too old for that. You know, the funny thing is I remember, I don't remember many new years, but I do remember Y2K.

I remember waiting. Remember Y2K? There was this concern that all the computer code was going to malfunction because of the dates. Everyone in 1900 instead of 2000. And so I waited up just... By the time Y2K happened, I don't think there was a real concern, but I still was quite interested. So I stayed up and

Nothing. There was nothing. Literally nothing. That was a bad forecast. I don't think anything went wrong. Nothing went wrong. Planes did not fall out of the sky. I remember that was the big concern. Oh, yeah, that's right. That was one of them, right? The ATM network was going to go down. Wouldn't be able to get cash. People took out cash before. Right. Yeah. I can remember where I was. I can remember my kids, how small they were. I remember that

That years really quite well. I don't remember. I don't remember what I did.

I had just graduated. You were too young. You were like a kid. You were like 10 years old or something. No, I had just graduated from college. Maybe that's why I don't remember. Right. Good point. So you were the class of 1999? I was, yeah. Oh, that's pretty cool. Oh, wow. That's kind of cool. Yeah. That's very cool. Well, okay. So we're going to talk about...

As one might expect 2025, the year ahead. And I think the way we're going to frame this is we'll talk about the so-called baseline outlook, the baseline meaning in kind of the middle of the distribution of possible outcomes, economic outcomes. Things could be worse. Obviously things could be better. But this, this is our sense of kind of kind of right down the middle of the fairway strike zone. You know, this is what we think is going to happen next.

And then we're going to talk about the risks. Most people, that's where people's minds go. We can't talk about the upside, but I think we're going to talk mostly about the downside here.

what could go wrong. And we'll do that in the context of our risk matrix, which I'll describe. And we're going to show that. I'll bring it up on the screen and we'll put it in the show notes for people to click on so they can see it as well. People love this risk matrix, but I'll come back to that. I also thought it would be fun to call out a surprise. You know, what

what's kind of out there that no one's thinking about or have given much thought to that you think might happen? It's not your baselines, not your most likely outlook, but something that could happen that could be surprising, both on the upside downside. It may not even have anything to do with economics, whatever you think is appropriate. And we'll play the game, the stats game. Sound like a good game plan for the first podcast of 2025? Yeah.

Chris, you're on board with that? Absolutely. Yeah. Okay. I think we're approaching 200 too. 200 episodes? Yeah. Wow. We probably are beyond 200 if you include all the bonus episodes, but in terms of official episodes, weekly episodes. Wow. That's pretty amazing, huh? I think we're right there. Well, a lot of people are listening. We got a...

It was an email, Sarah, or tweet or something from someone in New Zealand that was listening to our conversation around Marissa's trip to New Zealand. And I was saying, hey, I had the best hamburger of my life in New Zealand. And this person was asking, well, where was that exactly? And we think I don't quite remember. But Marissa, you found a great joint of hamburger joint. I don't know if that's the right term in Queenstown. Burg Burger?

Right. That's the real. That's the one you couldn't get into. Right. Because it was. It has lines out the door every day. And I don't know if it's only in Queenstown or if it's in other cities in New Zealand, too. But that was the one that I didn't need there. But because I wasn't willing to wait in the line. Right. Right.

Yeah, I just remember. I wonder if that's the one you're thinking. Yeah, that may be it. Just as a runner up, now that I'm thinking about it, the second best hamburger I ever had was in Moab, Utah. You know Moab? Yeah. Moab, Utah. Yeah. We went down the Colorado. Was it the Colorado? I think I saw it was the Colorado. And there's a great hamburger joint in Moab.

Do you know what the name of it is? I don't. I can't remember. A long time ago. But anyway, but we have listeners all over the world. That's pretty impressive. Yeah, it's pretty cool. Yeah, pretty cool. Okay, so let's talk about the outlook. And Marissa, do you want to give us a sense of your perspective on the baseline? What's the most likely scenario for the economy in 2025? And we're talking about the U.S. economy, I think mostly, right? Okay. Yeah. Yeah, go ahead. I think it's a little bit about the rest of the world, maybe. Yeah.

Yeah. So, I mean, just to kind of level set, I mean, 2024 was a very good year for the U.S. economy. It was actually better than what we were forecasting. If we went back a year from now and we looked at what our forecast was for 2024, looks like GDP growth is going to come in right around 3% for the year. And we were forecasting something closer to 2% for the year if we went back a year ago in

inflation has come in. It's been a little stickier in the past few months, but on the inflation front, we've made significant progress. The job market added about 200,000 jobs a month on average, if you average all the months of 2024. So very solid year. For 2025, we're forecasting...

Also a pretty good year. Not as good as 2024, but we're looking at growth that's probably going to be right around 2%, I think, maybe a little bit above 2% for the year. As we move through 2025, I think there's going to be more and more challenges to the outlook, just given some of the policies that the incoming administration is implementing.

and putting forth, namely tariffs. That's going to be, I think, the big challenge for not only the U.S. economy, but the global economy as we move forward. So as I said, growth will average 2%. We think inflation, I was looking at the forecast last night. I mean, inflation, if you look at the PCE, which is the Fed's preferred inflation measure. So this is the personal consumption expenditures deflator.

We should be down to the Fed's 2% year-over-year target probably by the spring, sometime in the spring of this year. I would say end of first quarter, early second quarter, we should be at that target. But as we move through the year and tariffs go into effect around the globe,

we expect inflation is going to tick higher from that 2%. So as we move through the rest of the year, we're going to see inflation rising. And probably the peak of that is going to be, you know, we're going to start seeing the real effects on the back half of 2025. And that's going to continue through probably mid-2026. So you're going to see inflation rising over that time.

which means it has implications for monetary policy, right? So previously we had in our old baseline, if we went back a few months before we knew the outcome of the US presidential election, we were expecting that the Fed was going to do four rate cuts this year. They were basically gonna do one per quarter. So now we think they're only gonna do two, just given what we think about inflation.

I don't know if I agree with the timing of what you have, Mark, on the rate cuts. I mean, that's debatable. I mean, I think that's hard to know because I think the Fed is very data driven and it just depends on what they're seeing in the data and how much they're discounting that given proposed policy. But we think the Fed will cut twice this year to 25 basis point cuts this

one in the third quarter and one in the fourth quarter of this year. So that by the end of the year, we're down to a Fed funds rate of three and a half to three and three quarters. So that's my basic forecast. When you say that you might have a different forecast, what would that be? I kind of think they're going to cut

they're going to do a cut early in the year and then pause and then maybe go at the end of the year. I think I want to get a, get a cut in, um, assuming the data does what we think it's going to do, which is kind of ease off, right. In terms of inflation, the job market data has been holding pretty, pretty strongly. Um, I think they might go ahead and cut early, like in the first quarter and then pause. Um,

Yeah, it's a reasonable... Yeah, I don't... I think markets are more consistent with your...

your expectation at least like a quarter point cut in march or maybe even may something like that yeah but uh okay yeah i'll when i take my crack at the baseline i'll have i'll come back to that but give you my sense of why i'm landing where i'm landing yeah but i'm not gonna argue with you too strongly no yeah i think it yeah i wouldn't i wouldn't argue my point too strongly either yeah um

So that's monetary policy. We have, in terms of the job market, we have the job market continuing to slow in terms of the number of jobs that are created each month. So I said in 2024, we had about 200,000 jobs a month being created. The average for 2025 will be something more like 120, 125 jobs a month being created. And we have the unemployment rate

kind of holding relatively steady compared to where it is right now, just at or above 4%. You might think it would rise more given the slower GDP growth. But remember that one of the policies that President Trump has put forth is a massive curtailing of immigration. And that also includes deportations, right? So we're going to have

a lot less labor supply than we got in the past couple of years. So the labor market will actually tighten a bit, which could mean higher wages as well. And that also goes back to inflation, right? So we have inflation on the tariffs front. We're going to get probably a little bit of inflation in some segments of the economy. I don't think

I don't think the immigration thing is going to be huge for overall inflation, but I think in some industries and some segments of the labor market, we'll see tightening in higher wages because of that. We have oil prices pretty much staying where they are. The last time I looked at it, right around $70 a barrel on West Texas Intermediate.

What about stock prices? I know I put you on the spot, but- I don't think I looked at what we have. Well, in our baseline, they're flat. They basically go flat. Okay. Yeah. And we've seen a little bit of a correction here in the past week or so. I don't know how much to read into that, but okay. I mean, this was a banner year. This past year was kind of a banner year for equity markets. And I know Chris cares about Bitcoin. Got a forecast for Bitcoin?

I don't. I'll leave that to Chris. I'll leave that to Chris. Okay. All right. Good. That feels like a good characterization of the baseline. Anything else? Oh, one other thing, because we did talk about the labor market and immigration. So our forecast for international immigration is

you know, it had peaked at over 3 million, right, a couple of years ago or a year ago. And this was all of the immigration coming mainly across the southern border. That was a lot of undocumented people. The Biden administration put a lot of curtails on that. That has fallen precipitously in the past year or so. We expect with the incoming administration that, you know,

net international immigration falls to under a million by 2026. And the low point, it'll be down to under 500,000, around 400,000 net by 2027. That's lower. That's

That's getting down to where it was, you know, in his first administration, but it's passing that right. It's even less than the immigration that we saw in, say, 2018, which was kind of the post Trump one low point and before covid.

You mentioned tax cuts or regulation. I guess that's because that's a 2026 event, not really a 2025 event. Well, I mean, I think the process starts this year for sure. I think he's going to hit, trying to hit the ground running on a lot of this, but probably when you talk about

So real tax and spend policy, I think that takes a little bit more time to actually feel the economic effects of. So we expect like extension of the TCGA tax cuts. We expect tax cuts on corporations, you know,

And then there's all this spending, right, that's going to happen with the immigration policy. That's going to be hugely expensive. The tax cuts will be the most expensive piece of his fiscal policy. And yeah, I think that's more of a 2026 story in terms of its economic impact. Yep. Okay, good. And on deficits and debt, basically no change there were

Right now, deficits are 6% of GDP, which is awfully high in a full employment economy. No change there, really.

Eventually there will be, right? So if we go out and forecast a couple of years, that balloons to, I think, close to nine or 10% of GDP. And we should say like the 6% is up from about 3% a few years ago. So, I mean, that's gone up quite a bit. Yeah, I don't think we have it quite going to 9%. I think it's closer. It stays 6%-ish kind of in that range. It stays at 6%. Yeah. Okay, despite all of this, it stays at 6%. Yeah, I mean-

So our expectation is that there will be the tax cuts. And as you say, they are expensive, but we get some spending restraint as well. So the net is a small increase in the deficit and is a share of GDP. I think it hangs around six. Okay. All right. I'm not sure what I was looking at. And then I guess we get some revenue from tariffs too. And some revenue from tariffs. Yeah. Right. Yeah. Okay. Hey, Chris, anything you want to add there or any color commentary? Oh, Chris, I didn't talk about the housing market. Maybe you can say something about that.

Yeah, sure. So housing, our housing forecast is pretty flat. There are quite a few headwinds to the housing market in terms of interest rates. That's certainly going to continue to drag on sales growth. We have a lot of new home inventory out there, right? So in terms of new starts and new permits, it's going to take perhaps some time to work off some of that inventory before builders feel really confident. And the interest rate is again going to be a

a bit of drag. So we have moving slowly upward, but mostly sideways when we think about all the housing metrics. Probably the most important one or the one that homeowners certainly react to is house prices. We have those growing very low single digits, right? So a lower pace of growth, not declining on a national basis, but we do expect slower growth there.

We've been seeing inventory expand. So there are more homes available for sale, but they're hanging around a lot longer. And my expectation is we're going to see sellers coming to the reality that they need to cut price in order to actually sell their property. So that's going to keep a lid on very strong house price growth going forward.

On the flip side, we still have a boatload of demand. Underlying demand for housing remains strong. There's a housing deficit across the country that we'll be talking about throughout the year, I'm sure. So that's going to prevent really a downdraft in house prices or the need for sellers to really fire sale their homes. But nonetheless, I'm not expecting to see the housing market

really rush ahead here. And that's important. I think it contributes to your overall outlook of a slower growth economy, right? If we don't have that home building kind of accelerating, you're not going to get the overall housing, or overall GDP growth. Anything else you think Marissa might have missed or any other aspects of this you want to characterize?

Now, I'll leave some of the risks for the later part of the discussion, but yeah, I think she nailed it. Yeah. Okay. The only thing I'd point out, and this goes to, Marissa, what you said at the start, is that the economy performed, at least in terms of growth, better than we anticipated. It goes to, it did. I mean, when you go back and look at our forecast for 2024 a year ago,

uh we had gdp growth coming in around two and it came in we haven't gotten all the data yet but it's going to come in closer to three that's a pretty big miss on gdp it goes to the supply side of the economy again it goes to we got a lot more growth from the labor force you mentioned the immigration but also productivity growth was much stronger than we anticipated i mean

It looks like it's going to be 2% to 2.5% for the year, which is well above the 1.5%-ish growth we've been getting. It's the combination of just more labor through immigration and greater productivity of that labor. In fact, if you do a little bit of arithmetic...

the potential growth of the economy rate rate of growth of the economy was actually probably closer to 4%. So we expected two, we got three, it could have grown four. And the reason I say that is because the unemployment rate actually rose during the year, right? Remember, we go back a year ago, the unemployment rate was sub 4%. I think at one point, we're at 3536, you know, something like that. We're sitting here now for is it for three, I think it's for three, right?

maybe four, two, four, three, was it four, two? It's kind of somewhere in between there, uh, four, two, four, three. So it's up a half a point, right? So there's this regularity in, uh, economics. It's not, it's not a, uh, a law, but it's kind of regularity called Oaken's law. Uh, you know, uh, after Arthur, it was Arthur Oaken, right? I think it was Arthur Oaken observed this. So, uh, if the,

if you look at the growth rate compared to the potential growth, take the difference, divide by two, that gives you your forecast of what the change in the unemployment rate will be. So you can kind of do the arithmetic here. We grew three. We were, uh,

unemployment rose a half a point. So that implies that the potential growth rate of the economy was four, was four, which is extraordinary, which is extraordinary. And of course, in our forecast, we're just, that's not, we know that's not going to happen again because we know for sure there's going to be less immigration. There already is less immigration because of Biden's executive order. And we know Trump's going to come in and clamp down more, as you pointed out, Marissa. And so we know labor forces growth is going to slow. So that we know for sure the real problem,

wildcard is productivity growth. But, you know, my sense is that probably is going to moderate as well, maybe in part because of the slower immigration, because immigration, the immigrants tend to start companies at a higher rate and, you

and that leads to innovation and productivity gains. So, you know, we may see just because of that less productivity growth, but I think there's other reasons as well. So that's critical to our expectation for, you know, for slowing growth that in fact, you know, the economy's potential rate of growth is going to slow. Any commentary on that? Chris, anything I missed on that that you'd want to point out? No, I think that's- Do you agree with the character that I just said? Yeah, absolutely. Yeah, absolutely. Okay.

And on the Fed, just to complete that thought, that conversation, that part of the conversation, that's a tough one, right? Because-

So tariffs and deportation are what economists would call a negative supply shot, meaning it's going to raise inflation but slow growth, right? So it's going to do both those things. It's like higher oil prices. They add to inflation, cut into people's purchasing power, and they diminish growth.

So if you're sitting at the Fed looking at that, you go, well, what do I do with that? I mean, do I respond to the higher inflation or do I respond to the slower growth? And the answer is in the context of particularly President Trump's policies, because there's so much uncertainty here. No one really knows what, you know, exactly what he's going to do. And that's by design. I think, you know, he's throwing up smoke screens everywhere because he doesn't he's

you know, he, he, he, he, he's in a negotiating stance and he, I think, and doesn't really want to make clear what his policy is going to be or what, and he probably doesn't know what it's going to be exactly. So the feds looking at that and say, Oh, you know, maybe I should just sit on my hands here, uh, do nothing and let the smoke clear a little bit time pass. And let's see what predominates the higher inflation or the weaker growth. And that's,

why I think they're done cutting rates here for a while. You know, they're going to kind of see how things go. And then if you go out to the end of the year, closer to the end of the year, when we have a couple of rate cuts, what I'm thinking at that point is they're going to say, okay, inflation is up.

But, you know, this is going to be this is going to be long lasting. It's not getting embedded in the wage structure. We're not getting into something that's going to be more persistent. But I can see the impacts on growth. Growth are going to be is going to be slowing at that point because of the terrorist deportations and everything else. And so they're going to say, OK, and they're going to say, look.

the so-called equilibrium rate, that rate at which monetary policies knew they were supporting restraining growth, is not where it is. It's not at 4%. That's where the fund rate target now is 4 to 4.25. That's not where it is. It's something south of that. So that also would provide some support to the idea that they start cutting interest rates again towards the end of the year going into 2026. But again, I say that with low confidence. And I think

I always say this, but I, and you, I probably said it many times on the podcast. I'll say it again. We forecast many things. Some things I think we're confident in some, not so much, but,

What the Fed's actually going to do in 2025, I'd say there's not so much camp. It's hard to get it exactly right. That makes sense, Marissa? Yeah, absolutely. Does that help defend the baseline? Yeah. That's kind of my thinking. Okay. Is the risk towards fewer rate cuts if you had to choose a side?

versus more rate cuts. Yeah. Yeah, absolutely. I'd say if I, you know, cause I'm debating, maybe there's no rate cuts in 2025. Right. I think we did. That was part of one of our podcast discussions a few podcasts ago. That's right. Yeah. No rate cuts. Yeah. But you know, that's goes to our forecast philosophy to some degree, right? We don't make big changes in our baseline forecast unless we're very confident in that change. And we use kind of a

Two-third probability rule of thumb. If we feel confident that there's a greater than two-third probability that the change is going to be right, we'll make the change. But we're nowhere, at least in my mind, nowhere close to that at this point. So I wouldn't take those rate cuts out. But if I had to pick one or the other, I'd say no rate cuts in 2025. Make sense? Yeah.

Yeah. Okay. Yeah, absolutely. All right. Let's turn to the risks. And as I said, we tend to focus on the downside risk. Why do we do that, Marissa? That's what most of our clients care about is the downside. I guess as a prudent planner, you should be focused on the downside, right? If things turn out better than anticipated. Great. That's just icing. That's icing, but I wouldn't plan on it. And I'm going to

We don't normally do this, but I'm going to, in fact, I don't think we've ever done it, but I'm going to share my screen and show our risk matrix. And I should say that if you're on YouTube, you can see this. If you're not on YouTube, and that's most of you,

uh, in the show notes, uh, for the podcast, there will be a link and you can click on that link and go to the, I guess to the PowerPoint and see the, see the risk matrix. It's, I've got it up on the screen now and people love this. And when I, I don't know about you, uh, Chris Mercer, but when I give a talk,

And I go to the matrix, people get their phones out. They're taking pictures of this thing. Right. Yeah. I want to put trademarks, Mark Zandi down there. I I'm going to take credit for, is it Chris? Was this my idea? I'm not sure. I don't know. I don't know. I think it was my idea. No, no, you don't say so. I see. This is what happens. Oh,

I thought it was my idea. Maybe a joint effort? A joint effort, okay. But I want credit. Can I get credit? Can someone give me credit? Okay. Well, the X axis, the horizontal axis here is the severity of the risk. And I kind of, Chris, I'm curious if you characterize it the same way. I kind of think of this like the present value of the loss to the economy if the risk were to occur. So it accounts for not only...

the loss at the time the risk takes place, but also the timing of the risk, right? So for example, if you go to the southwest corner of the chart, you see climate change transition risk, right? That's a risk, but that could play out over a much longer period of time. So it's more to the left of the X axis, a lower severity. I don't know, is that how you think about it?

You do. Okay. Yeah. Yeah. Okay. And then the Y axis, the vertical axis is the probability of risk. And obviously that this is all very subjective and we debate this. I mean, we have a, what we call a U S macro meeting every month. We actually had it yesterday, yesterday morning. And, and,

we debate this. We talk about this and we debate it. And this is the, this is, we use this as a basis for constructing our scenarios, our alternative scenarios. So we have this baseline scenario in the middle of the distribution of possible outcomes. And then we focus on scenarios on either side of that distribution and to help us

do that, we use this risk matrix. We identify the risks that are kind of most significant, high severity, high probability, and use that to fashion a narrative that is the basis for those scenarios. So for example, to give you a sense of probability of risk, you can see in the north

West part of the matrix, low income household financial distress. So obviously many lower income Americans are struggling with the previously high inflation. They took on a lot of debt, credit card debt, consumer finance loans, their debt service burdens are up and they're having a great deal of difficulty. You can see that in credit card delinquency rates, consumer finance delinquency rates.

And there's a lot of stress there, but you can see it's low severity. So, you know, high probability it's happening. This is a reality, but low severity just because the bulk of the spending is done by folks in the top part and middle parts of the distribution of income. And so even though low-income households are struggling, it's not to a degree that it's going to overwhelm consumer spending broadly and the economy more broadly. Right.

Uh, uh, you can see in the Northeast part of the chart, and this is where I think we're going to mostly focus high probability, high severity. That's, you know, that's what matters most, uh, you know, uh, uh, you know, to the outlook going forward. And we'll talk a little bit about those in just a minute, but I'm going to stop there and just turn it back to you guys. Did I characterize this? Uh, well, would you add anything, Chris, would you add anything? Yeah.

No, I think you described the process here. I think I would stress the subjectivity. I get a lot of questions about how this is constructed and how we determine the points or the placement of each of the risks on this matrix.

And I have to explain that we're talking about a lot of risks that have never happened historically, or maybe once, twice, something similar has happened. And therefore, there's no frequentist model we can put here. So it is more of a subjective interpretation, but that doesn't make it any less valuable. It's a very useful place to start the discussion. And as you said, during presentations, often

People have different opinions and their business may have a very different risk profile. So some of these risks for them individually are of higher probability or higher severity. So I think it's a very useful device just to organize your thoughts around risk. And Marissa, anything else?

No, I think that's right. I mean, I get asked the same question. Are there actual numbers that you can put to this? Like, is there an actual decline in GDP associated with some of these things? And the answer for most of them is no, but we do use it to construct the narratives and the way we think about our alternative scenarios that we produce every month around the baseline, right? So some of the risks that are

more probable and have a bigger economic impact, we think we often incorporate those into our alternative scenarios as part of that narrative.

Yeah, if you're on YouTube, you can see some of the risks are colored, green, red. I don't see any blue ones this month. But if you're in blue, if you're a risk that's colored blue, you're new to the matrix during that month. So we didn't add anything to the matrix this month in our discussion yesterday. If the bullet...

risk is in green, it's moving in the right direction, lower probability, less severity. So for example, oil price spike, that we feel is still a high risk, high severity if it were to happen. Say there was a problem in the Middle East disrupting global oil supply, but we're less worried about that today than we were a month ago because of events in the Middle East.

And then if the risk is in red, and you can see there are a few of those, it's going in the wrong direction, either high probability, higher severity, or a combination. And I see major cyber attack and terrorist event. You know, those are very amorphous things. So it just goes to a general level of angst, you know, around. And it goes to events. You know, you can just, there's been more cyber attacks and more attacks.

As we saw in New Orleans and Las Vegas, there's a lot of terrorist attacks, and so something to worry about. Okay, so why don't we do this? Why don't we each pick, let's say, one, maybe. Let's try one, because I think I have a feeling it's going to take a while to go through all this. And I do want to get to the game, and I do want to end with...

you know, what's the big surprise. So each pick one of these to discuss and I'll turn to you Marissa first, which one do you want to focus on? This is tough. So I actually am increasingly more worried about some of these amorphous risks in the past couple months, things that I typically, when I would present this, I wouldn't really talk about. I would focus on the economic and the financial direct risks, right?

But things like the cyber attack and actually another global pandemic, I'm increasingly more worried about those things happening. And maybe those are the surprise things that happen, right? Because they can't

be forecasted. And it's also ambiguous what kind of economic impact they may have, right? It really depends on what it is and where it is and how it plays out. But just given what we've seen with the China hack on the US Treasury Department, we just found that out. Well, yeah. What was that? I read the headline, but did we have any more information as to what they hacked?

So they hacked into desktop computers of Treasury Department staff. They didn't apparently get anything that was classified or extremely sensitive, and it was, I think, quickly, you know,

but I haven't actually read anything about it in the past couple of days. I don't know if there's more information, but I mean, that's pretty scary. Right. Maybe one of those things that they're not going to really tell it. No one's going to tell you what actually happened. Right. Right. Um, but stuff like that. And then with the, on the global pandemic, I mean, just given, you know, California just declared sort of a couple last week state of emergency on, um,

The H1N1? The H1, I think it's H5N1. Oh, H5N1, yeah. H1N5 or something, right? Yeah, right. Yeah, so that stuff, again, which sort of creeps in the background of this risk matrix, and I tend to ignore it when I talk about it, it just seems like that stuff is worrying me a bit more than it has. Right. And as you say, it's pretty hard to...

Kind of get your mind around it and certainly quantify it, right? I mean, even to put it into our narratives to generate a scenario, it's pretty tough to do. And the other thing about cyber that I think at least I've learned trying to do scenarios around cyber. So we have in the past tried to construct scenarios where some kind of cyber event happens

results in a macroeconomic problem. You know, there's cyber events that affect companies, obviously, and cyber that could even affect an industry like the colonial gas pipeline, you know, that had impacts on a region. But it's hard to connect back to something that will affect the economy in a broad sense. And

We kind of settled on a couple different scenarios. One was, you know, if the payment system got hacked, like, you know, suppose you couldn't go to your ATM or more importantly, couldn't use your credit card, your debit card, that would be, and you couldn't get paid because a lot of it is, you know, you get paid electronically. Most, many people do. That would be a problem. That would be scary. And the one thing that it seems obvious, but I didn't think about until we did it,

is, you know, if it's a big payment process or a big bank that runs into trouble, that's one thing, but it could be

a rash of smaller banks get affected, right? Because the smaller banks obviously can't spend the same resources, don't have the same resources as the big guys to invest in protecting themselves from cyber. But so they could get more easily hacked. And if it's, but if it's one, no big deal, but let's say there's 10 to 15 to 20 and it's starting to mount the,

that are getting disrupted, that could be disturbing or disconcerting. People could start pulling their deposits and moving their cash to the bigger banks and that could create a lot of difficulty. The other...

And here, I'm a bit proud of this. We identified the ports as a source of vulnerability to cyber. So many, if not all, the ports use cranes that are Chinese cranes. This is across the globe, but here in the U.S. as well. And we ran a scenario where those cranes were hacked.

and inoperable. So the port system was disrupted to a significant degree, and that had macroeconomic consequence. And of course,

the Biden administration has issued executive orders to the ports to make sure that those cranes are safe and are not subject to a hack. They subsequently did that after the study that we did. But, you know, again, I'll end by saying it's hard to connect the dots back from a cyber attack to the macro economy. It's got to be pretty significant.

Yeah. And I will say that in talking to our clients who are, a lot of our clients are mid-size regional banks and credit unions, they are very focused on this. They are very worried about this. I mean, it's every time I do a talk with them or I do focus groups with them, they

are very keyed in on this and run all kinds of scenarios and investing a lot in preventing cyber attacks and coming up with contingency plans for it. So again, going back to your original comment, this risk matrix could look very different depending on where you sit in the economy, what you do, what business you're in, what you're keyed in on. And I know that a lot of the regional banks are very keyed in on that.

no chris i know you're you're the reason why that terrorist event bullet uh or risk got in red why it got pushed to a higher i think we pushed up in terms of probability it's not severity but in probability what was your thinking there well actually even before the latest uh

events in New Orleans and Las Vegas. There's certainly a lot of global tension out there, a lot of smaller groups that are certainly dissatisfied to say the least. And so terrorism becomes unfortunately a risk that rises in that case. We have a lot of asymmetric type of situations across the globe. So clearly terrorist events

could arise. Recently there was this, I don't know if you recall, there was a DHL shipment in Europe. I think that's really what raised my eyebrows. Not too long ago, there was a package that was sent and it seemed to be testing the system, if you will, that did contain an incendiary device that went off in the warehouse. Had that gone off on a plane, of course, it could have been a catastrophe. So

That's why I think we need to be heightened, have some heightened awareness. It's just so asymmetric, right? One lone person can create so much damage in a very short period of time and that can erode confidence if we think about the economic consequences.

erodes confidence. People could change the behavior, right? That certainly could have far-reaching implications. And that's where I think also on cyber, I'm worried, you know, there's increasing state sponsorship of cyber attacks. And certainly it's become another, it's another way that warfare is being conducted. So, you know, that certainly is something to be

are concerned with. We do have to pay attention. Again, confidence can get eroded, but then we could have some real physical impacts. Right now the Northeast is going through this cold spell. Imagine that the electricity gets cut off or some of the utilities get cut off for some period of time. That could create some real havoc once again and enter the psyche

of the public, even people who aren't affected directly. It just starts to weigh on them, just like the pandemic in a way. And they start to change their behavior and that could have some real negative consequences. Yeah. And just before we move on, just to put a stake in the ground, I do, I agree with you, Marissa. I think this bird flu, it should be on the radar screen. I was listening to Scott Gottlieb. Remember the

Former FDA director during the pandemic, and he's sounding the alarm bells. So I think we need to watch that carefully. And it sounds like, don't want to be alarmist and don't want to overstate anything, but it sounds like this might be a more serious virus than even the COVID-19. So something to watch. Okay. Chris, what do you want to call out? What risk do you want to call out? Yeah, I'll call out the stock market sell-off. Ah, okay.

And I'll take issue with the fact that it's colored in green. Ah. That it was downgraded. I'm not convinced that it should be or should have been.

The only reason it did, I think we did because I think we lowered it in terms of probability because I want it to be a little lower than the crypto crash probability because we have crypto crash on there, right? I would have made crypto red and pushed that. Oh, I see. Okay. You pushed it up. Okay. All right.

Even with your Bitcoin holdings, you would have done that? I mean, you're going to incite a sell-off here all on your own, given your holdings. I think about the greater good, Mark. The greater good. Got it. Got it. Got it. But yeah, I'm worried about stock market valuations, especially in the US. We had, Marissa mentioned it was a good year in terms of appreciation last year, but we're at pretty lofty levels when you look at...

price levels compared to earnings or even projected earnings. We're really pricing for perfection here or some type of major technological breakthrough or something like that. So I don't know. I worry that we could get a sell-off that could lead to some reduced consumption because you do have all those

higher income spenders out there who have been supporting the economy to a large degree. And so, yeah, I would say that's certainly something to watch here. Marcia, are you as concerned as Chris? Or should that have been, would you have put that in red, the stock market? I don't think I would have put it in green. I don't know if I would have put it in red, but yeah, it actually seems more likely to me than a couple months ago.

Well, because for the people out there that can't see this, we have attached a pretty high probability. Yeah, that's true. It is high. It is high. In all fairness. I mean, it's not like it's low in the matrix. It's pretty high in terms of probability. Absolutely. Just under a crypto market crash in low income household distress. So, you know, we're basically saying...

you know, buckle in here. There's a good chance we're going to get a good sell-off. And when I say sell-off, it's not, we're down 10% and next week we're up back up again. It's we're down 10, 20% and we stay down for a while. Yeah. Yes. Right. Okay. All right. But so Mercy, you're equally as nervous. I don't, I mean, I think it could go either way. I don't think I would have put it green, but I probably would have kept it where it is and kept it black. Yeah. Yeah.

All right. Yeah. No, I'm totally with you. I don't think the green means anything. That was just a, in my mind, a calibration relative to the other risks in the matrix. I mean, the market is very richly valued, bordering on frothy speculative. I think that would be a stretch. It's not Y2K internet bubble-ish, which that was speculation, but it's

It's definitely on the high side of anything that you consider to be fair value. And I saw a chart. By the way, Marissa, I'm going to be sending you this. Try to replicate it. I saw this chart. I think it's based on the conference board survey. They ask, and I may have that wrong, but I think that's right. What is the probability that stock prices are going to rise as opposed to fall? And there's a record share of respondents saying,

well over 50% say they're going to rise. Typically, it's closer to a third. So everyone is poised for the market to go higher, and that's the best bear indicator when everyone's so bullish. There'll be a lot of disappointed people. Yeah. Potentially. And of course, it has been driven, the market's been driven by the so-called Magnificent Seven. A lot of that is AI-driven. Yeah.

But those are real companies, and they're making a boatload of money. And so I think their prospects are very good. But the market, the investors have discounted all of that and then some. And if anybody, any one of those guys stumbles just a little bit, and you saw, I won't name names, but there was one company that last week, it's an EV company. I'm not going to name names, but it's an EV company.

didn't perform quite up to expectations. It got crushed. Now, of course that could be changed tomorrow, but I'm just saying, you know, everyone is anticipating a lot of good news from those companies. And if it's not quite as good as the euphoric views that people have, you know, the market could, you know, have a problem there. And I think Chris, you make a great point that high income households, high net worth households, let's say folks in the bot, the top third of the distribution, certainly the top fifth of the distribution, uh,

you know they're they're spending aggressively their saving rates are down the the so-called wealth effects are are strong they feel wealthy and they're spending more out of income and because they save and spend a lot they're driving the train a consumer spending train and that's driving the us economic trade which by the way is driving the global economic train you know so if the stock market goes down and stays down and people feel less wealthy and stop drawing down saving and start

saving more, that could be an issue pretty quickly. So I agree with you. I think that should be part of any narrative that goes to the scenarios that we construct.

And why do you think a crypto market crash is slightly more likely than a stock market crash? Is it just- Is there anything to speculate? That's just raw speculation in my view. The stock market, that's- It's not real stuff. It's real stuff. Those companies are making money. It's not that. They're making a lot of money. They produce things that people-

you know, create value, you know, create services and value. The crypto, regardless of what people say, I mean, there are use cases in broken economies where the fiat currency doesn't work. It certainly is useful for drug dealers and, you know, black market and maybe remittances. I get that.

but it's not a currency. It never will be on the current technology because the value of this thing goes up and down and all around, and that's not conducive to it being a store of value or a medium of exchange, and that's a currency. So I view this as just largely speculation. And if it's largely, it's a Ponzi scheme. And at some point, like we saw back not long ago when it took a dive, I expect to take another dive. But as you can see,

You can't see, but if you could see the matrix, low severity, right? Because who cares? It's a couple, 3 trillion. I don't know what it is worth now, 4 trillion, but in the grand scheme of things, not enough to move the dial in terms of what people are going to do with their spending and what it means for the economy. That reminds me, we need to get someone on to talk about crypto again. We haven't done that in a while.

We need to get back talking about crypto again. Okay, I want to call out the risk that is front and center. It's in the northeast part of the matrix, high severity, high probability is a bond market meltdown.

And by the way, that dovetails with the stock market sell-off as well. Bond market feels, I think we've talked about it, so I won't belabor the point, but the market is very fragile in my mind. High volatility. When I started watching the bond market three decades ago, the 10-year treasury yield moved a couple basis point in a day. That was a big deal. Now it's moving 20 basis point, feels like it, in an hour. And that goes to a lack of liquidity in that market as that market has changed over time.

the big broker dealers that make the market are not expanding their balance sheets to be consistent with the amount of treasury debt outstanding, which has been ballooning going back to those big deficits and for lots of reasons and capital liquidity change in business model, that kind of thing. And so the market is highly volatile and the, and the who owns the treasury, the bonds are changing too. They're moving away from,

the Federal Reserve through quantitative tightening. It's moving away from central banks like the Chinese and Japanese are moving away from it for various reasons. The banks are more cautious because of what happened to their bond portfolios back in 2023 during that crisis. And so what's left, what's filling the void are hedge funds. And of course, hedge funds are, as you say, as one would say, very price sensitive. They're there when

It looks good and they're out of there immediately en masse when things are bad. And I suspect, you know, at some point we could see, you know, a lot of selling in that market. And of course, the Fed's cuting and then throw into the mix the budget deficits and the prospect for even higher budget deficits going forward under the Trump tax plan. And, you know, debt limit battle come in. I'm not sure how graceful that's going to go, given the

thin majority of Republicans in the House. I mean, and a lot of those folks, I said they'll never vote for a debt limit increase. You know, they eventually will, I think, but we'll see. So I can go on and on and on, but it feels like to me the bond market is, you know,

on the verge of real, a real, it's already sold off, right? It's up a hundred basis points in the last three months, right? We're four, five, four, six, which is on the high end of the range that it's been in for a long time. But what I'm talking about in this scenario is where the bond market sells off five, five and a half, 6%. And of course, if that happens, the implications for the stock market are obvious, you know, crush the housing market. I think that's the fodder for, you know, broader macroeconomic issue. Yeah.

What do you think? Did I make a case for that risk? Should that be in our baseline? Are you convinced? No. No. Okay. Not quite. Not quite. Yeah. Anything I missed on that one? Would you add anything to that scenario? More of a question. Are you equally concerned about other bonds, corporate bonds or municipal bonds, or is it just the treasury market?

Well, the Treasury drives the entire market, obviously. But yeah, I am. The spreads, so-called spreads, the difference between yields on corporate bonds and Treasuries are paper thin. And that goes to the amount of

the compensation investors in corporate bonds want for the credit risk they're taking in those corporate bonds relative to those treasuries. And if you look at the kind of high yield corporate debt yields, those are companies that are lower quality, riskier, more likely to default on their debt. Those spreads are about as thin as they've ever been in history, in history. I mean, that gives you a sense of

of how fragile that market is. So yeah, I think if there's a sell-off in the bond market, treasury market, these other markets are also at risk. There's distinctions to be made. I think the CMBS market, that's commercial mortgage-backed securities market, that's already sold off to some degree. Spreads have widened because of the concerns around CRE, so less nervous there. But broadly speaking, yeah, I think the bond market, treasuries and market more broadly are vulnerable here in the current environment. Yeah.

Okay. Marissa, anything to add on that? Do you agree, disagree? Am I overstating the case? I agree. I mean, I do think there's less of an appetite to hold U.S. government debt by foreign governments. I wonder, and we get this question all the time. We get the same question about the U.S. dollar.

in general, right, as a currency, it's certainly the world's reserve currency. It has been, I don't think that there's any immediate risk of that changing, but it's sort of this, you know, it's sort of a similar vein there. I mean, what would you say about that? Because that's probably one of the biggest questions we get, frequent questions. Do you think there's any risk of the dollar changing?

fading in terms of being a reserve currency. Well, it's the same reasons that you're talking about, you know, the reluctance to hold us debt. Yeah. I mean, I think that's, that's what saves the treasury from 10% yields. I think because global investors say, Hey, where do you want me to go? You know, what do I do with this? What do I do with this? I mean, cause there's other sovereigns around the world have similar, if not worse issues than we do.

So, you know, I think that argues for why we don't see even higher yields. I don't think that's enough to argue we don't see a sell-off, but I think that's a reason why they don't sell off even more because there's just nowhere to go. And of course, in a world of higher tariffs, that also supports the dollar. So, you know, particularly with emerging markets where investors are going to be nervous about what those tariffs mean for those emerging economies, and that drives

capital money into the United States and makes it makes it less likely that we see a bond market meltdown. But I don't think it includes that possibility occurring. OK, let's let's move forward. Let's do the game, the stats game.

We each put forward a stat. The rest of the group tries to figure it out through clues, deductive reasoning, questions. The best stat is one that's not so easy. We get it immediately. One that's not so hard. We never get it. And if it's apropos to the topic at hand, the outlook and the risks, then that's even better. So Marissa, you're up. What's your stat? My stat is 19%. 19%. Is it related to one of the risks we've been talking about? Yes. Is it one of the...

Is it related to the stock market? No. Is it related to financial markets more broadly? No. Okay. It's a risk though, 19%. Chris, any ideas? Spending share? No. No. Fiscal, related to the fiscal situation? No. No. Monetary policy in some way? No. No.

No. Sounds like we're not even warm. Well, I mean, think about the risks I picked to call out. Yeah. Cyber? Is it related to cyber? Terrorist? Terrorist? No. No, you chose global pandemic. Ah, pandemic? Is it, Marissa? The pandemic? Global pandemic? It is related to that risk, yeah. Oh, why did she do that, Chris? Well, I mean, it's a 19%...

Yeah. You know, she doesn't say yes. She just kind of looks at it. Yes, it's related to the pandemic risk. Okay. Oh. Is it a probability of occurrence? No, this is a economic statistic that came out in the past week that can be tied back to this risk. Oh, egg prices.

It is. I'm just going to tell you. Chicken prices. It's year over year prices received by farmers for livestock and related products. The egg and poultry price is

received year over year are up 42%. And this goes directly back to all these problems with, yeah, H1N1, you know, the avian flu problems in the, with dairy cows. Yeah. So this is a, this is data from the USDA, monthly data from the USDA. So this is for the month of November. So this is 19% increase over,

over the year on prices for- Livestock and related products. That's right. So anything that would be affected by the bird flu. Yes. Yeah. And conversely, if you look at crop prices, stuff that we grow, vegetables, food, soybeans, that stuff, that's actually down over the year by over 6%. So really the issue is with animals and animal crops. This is an unfair question, but how does that translate into consumer-

19% is what? Does that add a 10th or two to CPI? Do you know? I don't know. I don't know the answer to that. Really curious. Okay. That's a good one. We should have done better. Chris should have done better on that one. Yeah. Chris should have. Right. Chris, you're up. What's your set? $3.46.

I know what that is. Is that natural gas prices? That's exactly right. Yeah. Now that's a cowbell right there. That's a synthetic AI related cowbell. We don't do cowbells anymore because these, these mics, you got these professional mics. They don't let the cowbell come through. So now we have to do an AI interpretation. They have a cowbell filter. Cowbell filter. They have a cowbell. You know, who got these mics? They should have tested out for the cowbell effect.

Sarah. Sarah. Figures. Anyway, okay. So are you impressed, Chris? I'm very impressed. All right. Fire away. Why'd you pick that one? It's up 14% over the last month, the price of natural gas, 36% over the last year. I think this is something we need to pay close attention to as we think about risks this year in terms of inflationary...

risk factors here. I think energy, although oil prices may have stabilized, there's other factors here that or other markets that could impact inflation. Now we have the closure of the pipeline through Ukraine from Russia to the remaining couple of countries in Europe that we're still getting Russian gas. And we have, as I mentioned earlier, this cold snap in the United States and in Europe as well. So that certainly could send

natural gas prices upward. So, you know, again, not something I put in the baseline as a risk factor, but certainly something to watch if we do get another energy price shock here.

Well, actually, we had higher natural gas prices in our baseline for some of these reasons that you articulated. But I think you're right. The risks here, they go even higher, particularly in the context of US LNG, liquefied natural gas. I mean, European natural gas prices are obviously a lot higher because they've been cut off from Russia and they're trying to find other sources. And that really hasn't impacted...

U.S. natural gas prices to a significant degree, at least not yet, because there hasn't been enough LNG, enough ability to take the natural gas we produce here, liquefy it, put it on a ship and send it over to Europe. But that's changing. There's been a lot of investment. I think with the Trump administration, Biden put some restrictions on that to try to keep the natural gas here and keep prices down. But

But it doesn't sound like Trump's going to do that. So that could lead to more LNG, more exports of natural gas from here to other parts of the world, particularly Europe, where prices are a lot higher, just to play that arbitrage in price, right? If we're three bucks, I don't know what natural gas prices are in Europe now, but last I looked, they were at least double what they are here. And so you could easily see people taking advantage of that and driving up natural gas prices up here. So yeah, I think that's a really good one.

Let's keep an eye on. Okay. I got one. My stat is 26. And a big hint is I'm not going to tell you the units because if I did, that would probably give it away. And it's related. Go ahead. No, I was just going to say one more hint. It's related to the risks we've been talking about. This is a stat that came out this week. It's a stat that is perpetually updated. It's always- Related to the stock market. It is.

Is that the PE ratio? Yeah. Yeah. Price earnings multiple. Yeah. That's a 12 month trailing earnings PE. So you take the price, stock price divided by earnings, corporate earnings. And in this case, it's trailing. And of course, trailing has been strong. Businesses are making a lot of money and earnings growth has been strong.

Twenty six. I was looking at the data back to the 20s. I think we've got data on the S&P P.E. rate, P.E. ratio in abstracting from recessions because in recessions, earnings go down and those P multiples jump. The only other time that's been higher than it is today is 2020.

Why 2K? Why 2K? Right. Remember the back to speculation. So and on a forward basis, because, you know, some folks say, well, the market's looking forward. It's not, you know, looking back, obviously looking backward.

The P multiple, price earnings multiple, this is 12-month forward earnings projections, which are actually quite optimistic, pretty optimistic earnings expectation, double-digit earnings growth, which I think is a stretch. But nonetheless, 23, and that's the multiple,

on a forward basis, that's extraordinarily high as well. So just to Chris's point, you know, the market feels, you know, very stretched here, you know, very vulnerable to anything that doesn't stick exactly to script. Okay, good. So that was good. So let's, let's end the conversation. Our first podcast of the year with what,

out there would be really surprising, you know, that, uh, would, you know, it's not consensus. Uh, uh, you know, I'm not saying this is your forecast, but you know, it's on the, it's on your radar screens. People should be thinking about focused on, um, Chris, you want to go? I know this is a hard question, but actually I get variants of this question all the time. What keeps you up at night? You know, kind of the question, um,

This can be a positive thing or a negative thing. It can be related to the economy or whatever. As I said, it could be Taylor Swift, whatever you want it to be. But what's your big surprise, Chris? So I think the big surprise in 2025 will be Mark Zandi coming out of the shadows. Improv comedy act. Yeah.

I know you've been practicing on the side, in the background. I think this is the year, Mark, to break out and take the show on the road. You think so? Yeah. Improv comedy. So he needs a troupe. Are we his troupe?

I guess that would make us his troop. I was just listening to this guy, Nick Borg. Is it Borghese? Do you know what I'm talking about? The standup comic? Yeah. He is so funny. Nate, Nate Borghese. Nate Borghese. Yeah. I would to be Nate Borghese. Actually his humor, the way he thinks this feels like the way I think.

the way you comment some people it's so interesting but not there's like zero probability this is as funny as i get this podcast that's it really this is this is pig zandy pig zandy funny i'd like that's it if if if you like if you like this then we're good if you don't like this i don't know that you're not going to get that surprise i don't know the zany zandy oh yeah there you go well you know who's really funny

So much funnier than I am. My brother, Carl.

who we all work with. Carl is funny. Isn't he funny? He's hilarious funny. When he gets going, he can definitely do stand-up. In fact, we got to get him on the podcast to show you how funny he is. I just think that would be very entertaining. That would be the surprise for 2025. That's an unattainable surprise. That's right. Marissa, what's your surprise? Related. I'm totally going off subject.

script here, but I'm going to piggyback off what Chris said. I think Mark Zandi tries an edible on the podcast. Oh, we're back to this again. The problem is I'm sitting here in Florida. Isn't it against the law in Florida? Yeah, probably. You can come to California. Someone could come knocking on my door and arrest me. Yeah, come next time you're out here. Free reign.

Oh, that's right. California, Newport Beach. You got to leave out there in Newport Beach. Totally legal. Yeah. Well, you know, I this is a bit of a non sequitur, but a sheriff did knock on my door back in 1990. My my wife answered the door. She was pregnant with our first kid. And I was being served of being sued because we started a company, Carl. I and Paul Getman, our best my best friend.

our best friend and we, uh, the company we left sued us. I can't even remember why, you know, some, some stupid they lost, but a cop, big cop looked like he was six, 10 comes to the door. My wife, who's like five, two opens the door and he goes, I'm so sorry to do this, ma'am, but I'm serving your husband with these papers. And I come to the door and of course I was mortified, but, uh, that's kind of scary. Isn't it kind of scary? Yeah. Yeah.

Yeah, so I don't want any cops knocking at the door. So I got to be careful with that edible. Got to be careful with that. You do. You got to just do it in the right place. You know, my surprise was like a serious surprise, not this

Should I give it to you? Now I feel inadequate. I feel inadequate. I should have come up with a better one. Once you open that door. Once you open the door for non-serious. I know. So maybe I won't even tell you what my, I'm going to tell you what my surprise is. We should end on a serious note. Going back to interest rate, Chris, I think the surprise could be the Fed raises rates in 2025. Yeah. Yeah.

That would be a surprise. I was going to, so my serious one was going to be the Fed keeps cutting. Ah, but that wouldn't be that bad. I was going to go in the opposite. Yeah. I was going to go in the opposite direction. Yeah. Yeah. I just have this, again, certainly not my baselines, but I just have this nagging fear that we're all missing something here about, you know, growth and inflation and could end up the Fed has to start cutting.

raising rates. And that way, talk about a stock market sell-off. Yeah. You think the risk is inflation. Yeah. It's some combination of going back to that negative supply shock, higher inflation, lower growth. The high inflation I'm sure is going to happen. I mean, I feel confident. The slower growth I'm less sure about. And so because of the high-income consumers, if they're driving the train, they don't give a damn about

a little bit higher inflation. All they care about is my stock portfolio and my house price, and they could keep on spending. At the same time, the potential growth rate of the economy is slowing,

you could get some meaningful inflation and you get some meaningful inflation. It's not rooted in not only in tariffs, but it's rooted in the labor market. It's in wages and the labor market more broadly. Fed could say, oh my gosh, I got to start tightening again. And if this go around, they start to tighten and the yield curve inverts, I'd say, hey,

I might be a believer in, I'm stretching the scenario here, but that's my surprise. That's my surprise that things could go in a very different direction here. I might be getting a new Fed chairman under that. Yeah, exactly. Yeah, absolutely. That's the other issue that would be brought up in that context for sure. You want me to offer my serious? Yeah, yeah. Am I hearing? We can end on a more positive note. Yeah, okay. Upside risk is that we actually get a

comprehensive immigration deal. I think that could be a real positive going forward here. Yeah, that's a good point. Yeah, that's a good one. Yeah, nothing would be better for the economy in long-term potential growth than a rational immigration system, for sure. Yeah, absolutely.

By the way, just an advertisement. I have been tweeting and I'm on blue sky. Did I tell you I'm on blue sky? Yes. Yeah. About both the stock market, uh, and immigration policy. So, uh, if you're interested, are you interested, Chris? No, absolutely. But I don't want to sign up for that. Yeah. Anyway. Uh, all right. Well, that, this was a good conversation. I, you know, I've been, uh, let me get out of this, uh,

sharing this risk matrix. Anything else before we call it a podcast? No? Happy New Year. Happy New Year. Yeah. Happy New Year to both of you. It's a pleasure working with you guys. I tease you all the time and try to make fun, but I really value our relationship. And you as economists, you guys are great and great to work with. So thank you for that.

And with that, we're going to call this a podcast. Take care, everyone. Bye-bye.