341: 1,000 Years of Global Financial Data with Bryan Taylor

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It's my pleasure to welcome Dr. Brian Taylor. He is president and chief economist at Global Financial Data. They specialize in providing financial and economic data that extends back to, to the 1000s. That's right, a millennium of data and going on up into current day. So we're going to examine a long term history of financial and economic data and this is beyond what any other data provider has ever delivered. So I think you'll find this to be a fascinating interview. Dr. Brian Taylor, welcome. How are you?

Oh, I'm doing fine today.

Good. And you're coming to us from my old hometown area, Orange County, California. You're in San Clemente, right?

Absolutely.

Excellent, Excellent.

A little overcast here today, but it's always beautiful by the afternoon.

Good stuff. Well, hey, one of the things I've been saying on the show for a while now is that interest rates are the lowest they've ever been in human history. Can you elaborate on that for us and talk to us about the long term history of interest rates and are they really the lowest they've ever been in all world history?

Oh, absolutely. The yield on the 10 year bond today is under 1%. And until a few months ago, the yield was never below 1%. In Europe. Interest rates are negative for Germany and several other countries and that simply has not been true. Now this is the culmination of what we call the interest rate pyramid, that from 1940 during World War II up until 1980, interest rates increased from around 2% to double digit levels around 15%. During the past 40 years, they have decreased to the point that now they're under 1%.

Just amazing. So when we talked before, this is actually the second take on this interview because we had some technical problems, as everybody experiences that. When we talked before, you were talking about coming up on to the environment we're in now. And I know you mentioned World War II and even before that and kind of what was going on. So give us a little background there.

Sure. The reason that interest rates were so low in 1940 was that the government wanted to minimize its costs of funding its debt. That during World War II, the government debt exceeded GDP. And so if the government could keep interest rates low, which they did, that would save the government a lot of money. And so they deliberately pushed down interest rates. What that did though, was it created inflation. And so they couldn't keep interest rates low after the war. And then from 1951 on, the market was allowed to determine interest rates and the government ran deficits and one thing led to another and interest rates kept going up and up and up to. So they were at double digit levels. People getting mortgages, had to pay 18 or 20% interest on their mortgage. It was insane.

Yeah, yeah. Well, that was kind of the Paul Volcker era you're referring to now, right?

Yeah, yes, absolutely. And he reversed things.

He broke the back of inflation. He's long been credited for that and just recently passed away, as we all know. Was that the right thing to do, what Volcker did? It was pretty painful at the time.

Yes. And you had to go through that pain because interest rates were going up. There was no end in sight. People thought that double digit inflation and double digit interest rates were going to be around forever. And the only way to change things was to change the psychology. Workers were demanding double digit increases in wages because they were anticipating higher inflation. And until you broke that mentality, until you convince people that inflation was not going to go up anymore, interest rates would not decline. And it worked. There was pain in the short run, but over the long run, you can see the result. Interest rates are no longer at 18%. Interest rates now for mortgages are 3% or even 2%. So it was a success.

So with this engineering of the economy that we have, that's the environment we live in, obviously. Are interest rates too low now or. I mean, there are good and bad effects on both sides of this equation, right?

Yeah. But I do not think that interest rates are too low now. I think that interest rates are going to be at this level of around 1% for the next 10 years. What we did was we carried out an analysis of total returns to bondholders. And what we found was that the interest rate at the bond yield at any point in time is a good predictor of what your total return will be by investing in bonds over the next 10 years. And that pattern has followed through for the past 50 years. And so if you use that analysis, then there's no reason why interest rates will not stay around 1% or maybe 2% for the next 10 years. And that's just a reality that people are going to have to Expect, I know most people expect that interest rates are going to bounce back, they are going to start going up. Our analysis shows that's just not true. People have to get used to an environment in which there's almost no yield on fixed income securities. That's just the new reality.

And that really does hurt savers and older people usually because they're usually the savers living off fixed income or fixed income investments. I should say even. What are your thoughts there?

No, that's absolutely true. I mean, there's no place to hide really. The only place where you could get a decent return would be the stock market. But then that involves taking a lot of risk in terms of the ups and downs of the stock market.

But well, don't forget about income. Property, Real estate is an investment.

But yeah, no, that would alternative.

So basically the powers that be have pushed people in to really taking more risk, whatever the investment is, because they've got to get some yield somewhere. What are the consequences of that for society?

Well, you're just going to have to have a different mentality. I mean, people have expected for years that they can get a fixed rate of return and rely upon that for their retirement. That's just not going to be true in the future. It's also going to affect the government in terms of pensions, that most of the pension plans are expecting higher rates of return than what they're going to get. That means that the government's going to have to borrow more money in order to pay for all of these pensions which they have promised. And it's going to start to create a mess over the next 10 years. How they get out of it I don't know, but it's just a problem they're going to have to face.

Is inflation coming? I mean, it's already here. Many would argue grocery prices are certainly at a five decade high. We know that, but what's the outlook for inflation?

I think inflation is going to remain low. I do not see any return to the high inflation of the 1970s. You just have a lack of demand out there and that's what's really controlling the prices more than the inflationary factors of less supply.

So I mean, if they pump enough money into the economy though, can't they just create inflation no matter what? You look at what's happened to housing just in the past two months, I mean, the market is off its rocker. It's just unbelievable how housing is just going through the roof right now in terms of demand, there's very little supply that's got to lead to inflation ultimately. Right. With these incredibly low interest rates or no?

Well, no, not necessarily. If you look at Japan, Japan has been trying to create inflation for a decade.

I know, but I hate that Japan example because Japan doesn't have a population. They're just going. I mean, they've got a demographic problem that is probably never been experienced before. I mean, Western Europe and Russia are next, but Japan is the worst of the worst in terms of demographics, and they don't have any immigration. So it's like this closed system and a population that is in massive decline, and as they age, there's no younger workers to support those older retirees. It's very imbalanced. If Japan doesn't start either making babies or having immigrants, that country's over.

Yeah, no, it's true.

So, so does that apply, then? I mean, you know, I just want to draw that out from you if I can.

No, I mean, I agree with you completely, but I mean, that's where the United States and Europe are headed. I mean, they're projecting that the population for the world will peak in a few decades and start to go down. And that's the reality. And, you know, I mean, I see no reason why the stock market 50 years from now won't be very much different from where it is today simply for that reason. In Japan, you not only have a lack of increase in the population, but no increase in gdp, you know, no increase in the profits. And unfortunately, that's where the United States and Europe is headed now. The United States is much better off than Europe or Japan.

Europe is a mess.

It's just delaying the inevitable. Maybe it'll happen here in a few decades rather than today or in the next decade. It will happen in Europe. I mean, if you look at the European countries, some of the stock markets for France and England and other countries are still below where they were at 20 years ago.

Right? Yeah. And I agree with you that that problem is coming, but it's a ways away in terms of the demographic problem in the US The US has still got a healthy trajectory for a few decades, but that is ultimately coming. You're absolutely right. I totally agree. And it's a worldwide problem. You know, the Malthusians have convinced everybody not to have any kids. And so, you know, that's. That's where we're going. There's very low birth rates in many, many parts of the developed world. It's just the way things are. That's a real change. But take us through history a little bit, and especially because Your data goes back so far. And that's what I just love about what you. Too many people are looking at such short term analyses of everything. Let's just look back 102 years. We don't need to go back 1000. But talk to us about the Spanish Flu. And of course started in Kansas City probably. So I don't know why it's called the Spanish Flu, but.

What happened economically and what was the recovery like from that? And does it apply to our world today or is it just a completely different thing?

Well, in a lot of ways it is a completely different thing because you have to remember that the Spanish Flu not only happened throughout the world, but it happened in 1918 in the middle of World War I. And World War I acted as a tool to spread the Spanish Flu from Kansas City to Europe and to the rest of the world. So if you want to look at it from an economic point of view, I mean, prior to the coronavirus coming into play, you had international trade, you had huge amounts of imports and exports throughout the world. But the world in 1918 was more of a closed economy because of World War I. And so on the one hand, that did help the Spanish Flu to spread, but on the other hand, part of the worry is that now there's less travel, there's less interaction with the rest of the world, and that's what's really hurting us badly. But. And that's why the economy went down so dramatically. But you know, as some people have said, this is the first government induced recession. And that's just the reality of it, because at some point you have to stop the flu from spreading. Europe has been effective in doing that. The United States has not. And until we can find a way to stop the flu from spreading with a vaccine, it will continue to hurt the economy. Now, the stock market has not responded in the way that I think a lot of people have expected. But that's mainly because the stock market is looking out several years in the future when the stock market is anticipating that we will have dealt with the Spanish Flu rather than looking at the immediate picture, which is quite dire.

And you meant to say coronavirus, I think. Yeah.

Right.

Okay. So in other words, the stock market is showing optimism, or is that just a result of the massive money pumping, printing that is going on. Is that real optimism or is it just induced by the Fed and the government?

Well, it's definitely induced by the Fed and the government. However, I think what the stock market is doing is trying to anticipate what the post Coronavirus world will look like. What will be the companies that are successful? What will be the sectors that will not do well? No, energy is doing very poorly. Consumer staples in a lot of cases are doing poorly. So there's this massive reorganization of the economy that's occurring and the stock market is trying to anticipate that. Now they're probably overestimating the good side to companies like Amazon, Apple, the Fang stock, and underestimating the negative impact to companies like J.C. penney and others. But I think that that's what's going on. The stock market is trying to anticipate where we're going to be five years from now, what sectors are going to succeed and which ones will fail.

Yeah. So when we look at that, actually, let's just talk a little bit more about the Spanish flu, if we can. What was that like post Spanish flu? 1918. In 1920 we had the roaring twenties. And for a decade everything was roaring, if you will. And then of course, the Great Depression. Is that how we're going to come out of this? Is that going to be, you know, are we going to have the Roaring Twenties again, you know, starting in a year or so?

Well, I mean, it's certainly possible. I mean, the. Not after the Spanish flu was controlled back in 1918, the stock market did start to bounce back. I mean, if you look at the Dow Jones Industrial Average back then, it really sort of tread water in 1918. But then once the war was over, the Spanish flu was taken care of, then the market bounced back. And I anticipate that that's what's going to happen here, that once we find a cure for the coronavirus and people can see that, you can have music concerts again, you can go out, you can do things that the market will bounce back. You know, I've been predicting for decades that we're going to have a great bull market in the 2000s. Because if you look at the 20s, for every decade in history, you have had a massive bubble. You had the South Sea bubble In the 1720s, you had the bubble for the South American stocks in the 1820s, you had the roaring twenties in the 1920s. And you've had sort of a plateau here in most of the world. So you have laid the foundations for a large amount of growth in the 2000s. And so that is our prediction that we will have a bubble in the 2000s. I've written several articles on that path.

So just to be clear on that prediction, the prediction is coronavirus is either treated or there is A vaccine and everybody feels safe again. And then we go into a booming economy. And how long would that last?

Oh, I think it would last several years. It would last probably for most of the decade, especially since the Fed now is feeding money into the economy. Bonds do not provide an alternative. And so people will put their money where it works. And the stock market and real estate is where it's working. I mean, you're going to have a massive realignment of the real estate market because now people, more and more people will work from home. And I mean, that's what's happening at our company. And so people don't want to be stuck in a place where you're in an urban environment that you hate to be in. Why not be out here in San Clemente on the beach if you can work from home?

I totally agree with you about that. That is a massive shift and that does not bode well for high density urban environments. Cities are really going to hurt very badly. As I've been saying the past several months, the two biggest danger zones are elevators and then mass transit. Those are the things that all the environmentalists want. They want people in high rises and little boxes and taking mass transit. And I think there's going to be. Well, I think there already is a huge rebellion against that and a major, major push. Just a mass migration, really, to the suburbs.

No, I agree completely. And that's just going to be the reality and the readjustment that's going to take place.

Yeah.

So it can't be reversed.

Do you think that continues though, after there's an effective treatment or vaccine?

I think it will, yeah. I mean, because most people prefer to work from home. I mean, that's just the new reality.

Right, right. And not just that, though. I think there's going to be a level of ptsd, a post traumatic stress disorder about this. Because even when. Let's just remember, folks, even though it didn't affect most people's lives, it was nothing like the doomsayers had predicted. But you know, remember your thoughts about swine flu and H1N1 and you know, even mad cow disease. And everybody knows there's another thing coming. This is just the history of the world. There's always something and you know, say there is no virus concern, maybe it's just civil unrest. And now we've got that. And guess where that is. It's in all the high density urban areas. So yet another reason to get out of those areas. And people have discovered that they just don't need to live in A city anymore, because the technology has solved that problem for us.

And there's just going to be an anticipation. What if it happens again? I'm going to be prepared. I'm not going to take chance.

Right, Yeah, I agree with you. I agree completely. Well, what else can you tell us about history of the last thousand years? I mean, you know, most of my guests cannot talk about that effectively. They can talk about what happened in the 70s and, you know, the Great Recession in 2008, but they're not going to talk to you about the bubonic plague. There's another one. Right. Or whatever else. Right.

And we actually have data on bubonic plague. We have data on housing prices that go back to the 1200s. And what's interesting was during the bubonic plague, of course, one third of the population got wiped out. But of course, one third of the housing did not get wiped out. So there was the largest drop in housing prices in history.

That's 1200 A.D. okay, so you lost a third of the population. Oh, in the 1300s. Okay. And you lost a third of the population. And you didn't have, I guess, a housing shortage back then. So that was a significant loss of demand. And then the existing supply was still there. Tell us more about that.

Yeah. And so it actually took several centuries for housing prices to go back to the level that they were at prior to the bubonic plague.

Wow.

And you know, really, if you were a worker, you were just living in heaven almost because you were in high demand, because there were not as many workers available in the labor pool as there had been prior to the bubonic plague. And so everything shifted. Feudalism came to an end in part because the bubonic plague and those are the long term impacts that you can see. I mean, you're talking about low interest rates. Well, the last time that interest rates were this low was back in the 1800s. And so if you really want to study what's going to happen in the future in the economy, you have to go back to before World War I, when interest rates were low, and see how the economy reacted when inflation was low. I mean, the anomaly really has been over the past eight years when interest rates and inflation increased dramatically from the 1940s to the 1980s and then decrease dramatically. You're just simply not going to have that pyramid that you've had in the past. You have to look out of what's going to happen in an environment where there's little increase in demand because there's little increase in population and your interest rates are low, your inflation is low, it's going to need to have a complete change in the mentality. And the only way that you can understand this is, is by looking back to the Pre World War I World, which we've collected data on. Our data for the stock market goes back to 1601. So we can look at four centuries of the behavior of equities throughout the world to understand how they have responded to different environments. And that's really the advantage of having several centuries of data, is that you can look back to what happened 100 years ago or 200 years ago when you have circumstances that come up that haven't really occurred for centuries or decades. If you're only looking back over the past 20 years, you don't have a full picture of the world and how financial markets are going to react to new circumstances now.

But that almost seems to contradict what you were saying at the beginning of the show. I mean, interest rates are actually lower now, but they were very low then, I guess, and now they're even lower. Right?

Correct.

Yeah, correct. In those two instances, you talked about 1800s and pre World War or about World War I, I think you said.

Well, yeah, well, interest rates were low and declining throughout the 1800s. They bottomed out about 1900 and then steadily rose, really for most of the 20th century. And then they declined towards the past 40 years. And we think it's going to return to the situation in the 1800s where you have low interest rates. You have to look at how commodity markets, how real estate markets, how other markets existed in an environment of low interest rates and low inflation, which we anticipate is going to happen in the next 20 or 30 years.

So reliability of data, when you go back over such a long, long time, I mean, you're talking about housing prices in the 12th century. How do we know? I mean, that data just cannot be very reliable. Right. How do we even know?

Well, there were monks back then, and monks keep track of all of the prices that their monasteries had to pay. And that's our source of the data for, you know, the 1700s, the 1800s. All of these data is available from newspapers. And so we go back to the London Times or the Amsterdam Courant or other papers, and we take the data directly from the newspaper. So it'd be similar to going to the Wall Street Journal today.

Sure.

So we have gone back to the original sources that monks have provided us, that newspapers have provided us, collected the data, organized it into a digital format, and then Provided us the centuries of data that we have.

Yeah, fantastic. So 800 years ago, it would be monks that we're talking about, and they weren't all over the world. When we talk about housing prices, in what areas? I mean, it's a big world, obviously. What areas are they addressing? They can't be addressing a worldwide market, right?

No, it's mainly Europe, mainly France and England is where the data come from. The English monasteries collected this data back to the 1200s. There were local city governments in France as well as monasteries that collected it. So, yes, I mean, the data is localized to France and England and Italy. And then we use that to extrapolate to the rest of the world.

Sure.

Yeah.

Very interesting. That's fascinating. What else do you want to share with our listeners? Maybe something. I haven't asked you just anything.

Well, we just know that it's important to have an understanding of the past in order to anticipate the future, that the world today is similar to where it was 100 years ago. And if you don't look at the past, if you don't look at stock market, commodity prices, other factors over a long period of time, you're not going to be able to anticipate where we're going to be over the next 10 years. I mean, I think everyone's prediction of higher interest rates and higher inflation is just wrong. I think that we have a new era in which the government is trying to ensure that we don't have high inflation, that we do keep things under control. And that's my contrarian analysis of the market.

Yeah. And you say it's contrarian because usually low interest rates create inflation. You're saying this time it's different, right?

Yes, this time it's different.

Okay. And just to completely understand you, why is it different this time?

It's different this time because interest rates will remain low.

Right. But that would cause inflationary pressure or.

No, no, no.

Okay.

The lower interest rates are response to low inflation, not vice versa. So we anticipate that inflation will remain low. If inflation remains low, interest rates remain low. And that's in part because of the lack of demographic growth that is out there and the lack of GDP growth that will come from that.

Okay, good stuff. Give out your website.

Our website is globalfinancialdata.com and there are hundreds of articles and blogs that I have written that are up there under the Insights section for people to look at, read and understand and learn from the past to understand the Future.

Good stuff. Dr. Brian Taylor, thanks for joining us.

Thank you.

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