Preet Bharara:

From CAFE and the Vox Media Podcast Network this is Stay Tuned in Brief. I’m Preet Bharara.

The stock market took a big hit last week coinciding with the fears by some that the United States was heading possibly into a recession. Now that the market has rebounded, some are saying those concerns may have been overblown. Joining me to discuss the economy and its potential impact on the presidential election is Justin Wolfers. He’s a professor of public policy and economics at the University of Michigan, a research associate with the National Bureau of Economic Research, and a non-resident senior fellow of the Brookings Institution. Professor Wolfers, welcome back to the show.

Justin Wolfers:

Pleasure to be here, Preet.

Preet Bharara:

I know you told me to call you Justin, but I will alternate between Justin and Professor Justin, if that works.

Justin Wolfers:

Well, you could also go with Juzzo, bonehead, I answer to bonehead.

Preet Bharara:

Well, let’s see how the interview goes and see if that name sticks. So, we’re here to talk about, among other things, the stock market, and I thought we would begin with a simple question. Could you describe the great recession of August 5th, 2024? Some people are jokingly referring to it as that. I should note for the audience, on Friday, August 9th, four days after the great recession of August 5th, could you please explain to people who haven’t been paying attention or don’t have any skin in the game in the market, what happened on that day?

Justin Wolfers:

What happened on August 5th is I woke up and the front page of the Washington Post and most newspapers was about stocks cratering. And immediately the Republican National Committee and the Trump campaign swung into action. They managed to get Kamala Crash trending, although there was some debate about whether crash began with a K or a C.

Preet Bharara:

Yes.

Justin Wolfers:

Let me focus on what happened in the United States and then I’ll come back and tell you there was something serious, but what happened in the United States was stocks fell 3% in a day.

Preet Bharara:

That’s a lot, right?

Justin Wolfers:

It’s a lot and a little. So, 3%, if it’s the start of something big is terrifying. What had actually happened is on Sunday night, the Japanese market had opened, this is the serious part, the Japanese market had fallen 12%. Now to your question, Preet, that is a lot.

Preet Bharara:

That is a lot. That was the worst crash for them since 1987, Black Monday, correct?

Justin Wolfers:

Yeah. It’s enough that you should lean forward, buckle up and see what’s happening next.

Preet Bharara:

Yeah.

Justin Wolfers:

So, what happened in Japan, which was somewhat serious was stocks fell 12%. And when that happens on an American Sunday night, you worry about what happens when the U.S. wakes up. You wonder about how Wall Street reacts and then how that spreads around the world. That would be serious.

In fact, the U.S. reaction was far more muted. Stocks fell by 3%. People, I guess, were worried they could keep falling, but they didn’t. So, there was a whole lot of attention focused on stocks fell 3%. Now, let’s put that in perspective. It’s not that unusual. Stocks fell by 3% or more 21 separate times under Trump. Now, we did go through the sharpest deepest recession in our lifetimes under Trump. So, even before COVID hit, stocks fell by that much five times. So, it’s unusual but not extraordinary. And then people are like, why? Well, what happened in Japan was very complicated. I’m going to suggest we don’t go into it, but a lot of people had made a bet called a carry trade and they weren’t going to make money anymore, and they got very upset.

Preet Bharara:

We don’t have the time for that.

Justin Wolfers:

No. What happened in the U.S. was on the previous Friday, we’d had a jobs report that was slightly disappointing and Wall Street freaked out. The thing I think any economist tells you is no single data point tells you we’re in a bad place, but Wall Street freaked out and started uttering the R word, recession, over and over and over and over, and taught themselves into a tizzy.

So, by Monday night, you might’ve been legitimately worried. By the next day, stocks had risen 2%. Remember, they’d only fallen three. And so, the Kamala Crash was all of a sudden over. In fact, yesterday they rose another couple of percent.

Preet Bharara:

She can’t even do a crash correctly, can she?

Justin Wolfers:

Well, she’s only the vice president, so it’s very hard for her to get much done.

Preet Bharara:

She can’t even make an easy recession come about. She’s that incompetent.

Justin Wolfers:

I would actually say worst recession ever, as in poorly executed, not long enough, didn’t actually affect anyone, didn’t hurt anyone, didn’t do any damage, and wasn’t caused by her.

Preet Bharara:

Well, it may have hurt people who decided to panic and sell on Monday or Tuesday morning, correct?

Justin Wolfers:

Right. Absolutely. Let me just give your listeners some direct financial advice. When Wall Street panics, realize these are folks whose annual bonuses depend on what’s going on with the Dow, that they’re freaking out doesn’t mean that you should be freaking out. It’s the first thing. Second thing is when Wall Street panics, it’s often because someone there has taken a big bet. Then the networks call and ask them for their view, despite the fact that their view is not going to be about what they actually think is going to happen, they’re going to try and talk the stock market up or down depending on which bet they took. So, they’re almost always lying. And then when all of this happens in a presidential election year, if you were to ask anyone in Washington, at least half of them are going to claim that it’s validation of their ideology and it’s going to cause long-term harm to the American economy and that you need to sell while you can.

So, there was a lot of very, very bad, very self-interested advice being given out on Monday and Tuesday. The best way for handling your portfolio and your life is … For those listeners who aren’t even aware of anything that happened last week, congratulations. That’s how you’re meant to do it, because as of today, we’re recording on Friday, there is no trace of the Kamala Crash whatsoever. It’s like nothing ever happened. And so, if you checked your portfolio weekly rather than daily, you would’ve saved yourself a lot of heartache. And honestly, my advice is to check your portfolio annually rather than weekly, because in most decades, stocks go up, but in most days it’s about a 50/50 bet. It’s a little bit like Federer actually only just wins slightly more than 50% of all points that he plays.

Preet Bharara:

Right, but it’s the right points.

Justin Wolfers:

But he wins almost all matches that he plays.

Preet Bharara:

Yeah. Look, listeners of the podcast may have heard me say before that I’m very conservative, S&P 500, money market, CDs, dollar cost averaging, and I don’t worry about it, and that’s going back many, many years. So, I’m not giving that advice to other people, but it helps to minimize panic.

You wrote in the New York Times the following, quote, “They’re unpredictable, volatile, and prone to sharp emotional swings. They have short attention spans and find change difficult because they’re frequently scared of new things or overly enthusiastic about them. They’re impulsive, demand attention and throw tantrums when they don’t get what they want. I’m not describing toddlers, but traders.” End quote. Is that unfair to toddlers or traders or both?

Justin Wolfers:

One sense in which I want to argue what I wrote was right, and then I want to come back and give your listeners the argument that I’m wrong. Right? So, the argument that I’m right is financial markets do move a lot and not every squiggle is worth your attention. Now, the sense in which I overstated the case there is financial markets are one of our few forward-looking indicators. When you buy stock in a company, you’re making a bet about its future, not about its past. And if you think about economics, the most important questions are about our future. And so, that’s why it’s really important to pay careful attention to it. Sometimes they’re going to be the first indicator that something’s going wrong.

So, I don’t want to be entirely dismissive. Sometimes your toddler thinks there’s a monster under the bed, and if you look closely, there actually is, they see something you don’t. And so, I want to be glass half full, glass half empty. Everyone hates a two-handed economist, so I’m going to be one. Markets overreact, but they see the future.

Preet Bharara:

No, I appreciate it. I think that’s very good for podcast purposes. I guess this question of whether a recession is looming or not is an interesting one. We’ve also discussed on the podcast a number of times, the fact that at the end of 2022, everybody, pretty much everybody.

Justin Wolfers:

Not me.

Preet Bharara:

Bloomberg, FT, maybe not you, I want to get your view on this, said that the likelihood of a recession in 2023, I think Bloomberg said it was 100%, and we didn’t get one.

Justin Wolfers:

Yeah.

Preet Bharara:

So, in the face of that completely incorrect analysis and prediction, why are people raving about a recession from Monday when they got something so structurally wrong in the past? And is it an impossibility to get it right? And then you can set the record straight as to what your prediction was.

Justin Wolfers:

I’m going to lead with the last one, which is I spent … You would be surprised by that. I spent 2021, 2022 and 2023 taking calls from every media outlet in America where everyone was willing to give them a doom and gloom quote. And I was like, “If you just look at the state of the economy, the numbers are good. The best way of predicting the future is it’s going to look remarkably like the past. So, if things are good, they’re likely to continue to be good. We’re not in a recession.” Said it over and over and over again, very lonely and extraordinarily accurate.

So, what’s going on right now? It might be the same disease that there is one side of politics literally trying to will a recession into being. Within the market, remember, for every time someone’s buying a stock, someone else is selling it. So, there’s someone who’s going to gain when the market goes down. And those folks find it very easy to get booked onto cable TV because they have a much more interesting story than I do. One of the most boring guests you’ve had on this podcast, Preet, because they say, “Well, things might not be exciting. They might just be boring. The economy might just be good.” I mean, it might not be. And you see that’s a very unsexy perspective. So, I actually do think there’s more reason to worry about a recession right now than there was in 2022 and 2023, but that’s because it was absurd in 2022 and 2023.

Preet Bharara:

I’m sorry, wait, I’m sorry, so the people who thought that a recession was coming-

Justin Wolfers:

It was nuts.

Preet Bharara:

… it was nuts. So, can you explain why it was virtually unanimous?

Justin Wolfers:

Yeah, no.

Preet Bharara:

Should they all find other work?

Justin Wolfers:

Yes. I mean, I’m-

Preet Bharara:

Send your letters to Justin Wolfers.

Justin Wolfers:

I’m not normally given to statements like that, but by the way, if anyone wants to have fun, google Jamie Dimon recession. The man just has said the word recession over and over and over three or four years in a row, yet still, we listen to him as if he has a clue.

What was happening in the economy through this period is very simple, which was COVID had created a massive recession and then you bounce back, back towards where you were, very quickly, and that’s what was happening. So, the actual numbers were actually extraordinary. It was one of the fastest, most persistent, most widespread, most joyful economic booms we’d ever had, probably the fastest, the strongest. And people are saying recession.

I can tell you why they had a theory. They had a theory that well in that boom, inflation rose, so therefore, the Fed has to do something about inflation. And their theory was what the Fed’s going to do is try to slow the economy, which is true, in order to get inflation down. The Fed was aiming for what it would call a soft landing. If you have extraordinary growth and a fair bit of inflation, if you just bring it back to pretty good growth, you might get inflation down. That’s a soft landing. The problem in 1981, going back a long way, was the Fed actually caused a massive recession in order to bring inflation down.

So, these folks all made the assumption that the Fed was going to make a mistake, fair enough, we all make mistakes, and they knew which mistake it would be. They were all confident the Fed would do too much too quickly and destroy the economy. Now, the thing about mistakes is it’s also possible the Fed would make the opposite mistake. In some sense, maybe that’s what they did, of not doing enough and keeping the economy growing too strongly.

And so, the thing you have to remember is that I think economists are so used to bad news, we are trained to look around the next corner for what might go wrong. As a result, we’re unbelievably bad at looking around the corner for what might go right, and that’s more or less what happened. So, honestly, I teach at a very good economics program, and I’ve started to think maybe we should teach people how to be optimistic, yet still an economist, because I think that’s what’s missing in our internal makeup.

Preet Bharara:

Is there any danger that at certain times talk of recession by people who are prominent and who have large followings, notwithstanding what the structure of the economy is and what the fundamentals are, that just that talk can be a self-fulfilling prophecy, or are we protected against that?

Justin Wolfers:

Let me give you two answers. So, one is it’s easy to see that if, say former President Trump said, “The economy’s terrible, you should definitely all stop spending. You need to really tighten your belt because, wow, Kamala’s going to crash it again.” If enough people believed him, they would tighten their belt and that would cause a recession. So far, there’s very little evidence that there’s enough people who believe him that that creates that sort of a problem.

Preet Bharara:

Right.

Justin Wolfers:

But there’s some people who do. So, let’s move from macroeconomics to microeconomics and people, which is there are people at his rallies who need to make investments in order to make their businesses grow. Or, maybe it’s time to buy grandma’s house and move her into a retirement community. There’s all sorts of important economic decisions each of us makes every day. And what he’s doing is he’s filling those people’s minds with stuff that I think he knows is garbage. And that leads some number of people, I don’t know if it’s hundreds, thousands, or millions, to make terrible life decisions with really important consequences for their family. And so, this is not a game, this is people’s lives. And no public figure should be using economic numbers, economic logic in order to make other people’s lives worse.

Preet Bharara:

I want to talk about the intersection of politics and the economy generally in the market in particular. If I remember correctly, and I may be wrong about this, but I think it’s the case that Democrats predicted back in 2016, if Donald Trump was elected president, the market would crash. And it did not.

Justin Wolfers:

I was one of those people.

Preet Bharara:

Well, and so, you do have an occasional error. And then the same was said by Trump about Biden in 2020, the market would crash, and it did not. The people today who are on either side of the ideological spectrum who are saying, “If Trump gets elected, market will crash.” Trump is obviously saying, as you’ve mentioned already, that the market is already thinking about crashing because Kamala Harris may become the president. Should all of those predictions and warnings be utterly and totally ignored by the public on either side?

Justin Wolfers:

Let me draw some distinctions between, there are different types of statements, some of which are more and some of which are less responsible. So, the bold-faced assertion, “If my opponent is elected, markets will crash.” I mean, politicians on both sides have said nonsense like this forever. And politicians who have a propensity to lie shouldn’t be taken seriously.

I was one of those people who predicted a Trump crash, but I’ll tell you, I actually was making a slightly different statement. I had observed through the 2016 election campaign that every time something happened that made it more likely that Hillary would win, that markets rose. And every time something happened that made it more likely Trump would win, markets would fall. It was a very systematic pattern. So, when Hillary destroyed Trump in the first debate, in fact, the U.S. stock market rose quite dramatically, literally minute by minute as it was occurring.

So, what I said at the time was, this is markets acting as if they are really going to rally if Clinton wins and crash if Trump wins. And that was basically true actually, when Trump was elected round about midnight that night, markets were cratering. And then round about two or three o’clock on election day 2016, 2:00 or 3:00 AM, a few big traders on Wall Street walked into the office and basically said, “You know what? We’re getting big tax cuts. Buy, buy, buy.” So, it really was Wall Street wanted one candidate and then changed its mind. That Wall Street can change its mind so much maybe suggests that we should give it a little bit less credence as we think about these things.

Preet Bharara:

Relatedly, what do you make of the more recent full throated, loud, enthusiastic support of Trump on the part of people who are in big tech and venture capitalists? Is that logical for them because of the tax cut issue?

Justin Wolfers:

I think it’s logical, and I think it’s about social dynamics. So, in 2016, it was quite clear that Trump was so racist, so outside the mainstream, so likely to be a terrible economic manager. His economic perspectives were so discredited that it was simply not okay in certain parts of society to be pro-Trump. And I live in a small liberal college town, and that’s absolutely the case in my town. That was also true in Silicon Valley.

And then, what has happened is a small number of tech bros have broken pro-Trump, that somehow they feel cool, they feel macho. They are going to get their big tax cuts if they get it. Now, if I find I’m going to end up going to Sun Valley or one of these billionaire conferences, and there are a few other billionaires who are pro-Trump, it doesn’t feel so lonely anymore. And so, I think they’re really just weighing up the, “Yeah, I like the tax cuts.” Versus, “No, I don’t want the social sanction.” And somehow the social sanction has changed and we have an increasing number of both finance and tech bros who are coming out pro-Trump.

Preet Bharara:

Last question and then I’ll let you go. So, there’s still about 85, 86, 87 days until the election. Do you expect more days of great volatility like August 5th or you think there’s a chance we might be fairly stable in the market between now and the election?

Justin Wolfers:

I think if you were to look over the longer time horizon, so how much do I expect stocks to change between now and election day? The answer’s going to be not all that much. Will we have days of volatility? Yes, quite a lot. And then I’m going to give it a subtle answer, which is, I’ve done some research on this. It turns out that the value of overall stocks don’t actually go up or down that much depending on whether it’s a Democrat or a Republican likely to win the election. But there are specific stocks that do very well under one versus the other. So, if you’re thinking about specific stocks, it’s going to cause immense volatility, right?

So, if you were an oil drilling company on days in which Trump looks more likely, your stock is likely to rise. If you were a green manufacturer on days in which Harris is likely to win, you’ll see your stocks rise. So, big changes at the individual stock level, much smaller at the level of the overall market.

Preet Bharara:

I lied, I have one more question because it just occurred to me.

Justin Wolfers:

Wonderful.

Preet Bharara:

The presumptive vice presidential nominee for the Democrats, Tim Walz, it has been reported this week, does not own any stocks, does not own any bonds, does not have any kind of investment whatsoever other than, I guess, some modest amounts in a teacher’s pension fund. Smart or unsophisticated?

Justin Wolfers:

Tim Walz is living a life like most Americans. When you move from being a teacher to being in the governor’s mansion on about $100,000 a year, all you’re hoping for is a reasonable pension. So, his financial strategy is appropriate for how little or how much, however you want to describe it, he’s earned through his lifetime. I think what’s wonderful is that Tim Walz is filling in a 1040EZ. His taxes look like yours and mine. And so, when it comes time to think about how to change the tax system, I think he’s got a lot more insight into the finances of most Americans than any of the other candidates.

Preet Bharara:

Fair enough. Justin Wolfers, thanks again for being on the show. Really appreciate it.

Justin Wolfers:

A great pleasure.

Preet Bharara:

For more analysis of legal and political issues making the headlines become a member of the CAFE Insider. Members get access to exclusive content including the weekly podcast I host with former U.S. attorney, Joyce Vance. Head to cafe.com/insider to sign up for a trial. That’s cafe.com/insider.

If you like what we do, rate and review the show on Apple Podcasts or wherever you listen. Every positive review helps new listeners find the show. Send me your questions about news, politics, and justice. Tweet them to me @PreetBharara with the hashtag #AskPreet. You can also now reach me on Threads, or you can call and leave me a message at 669-247-7338. That’s 669-24-PREET. Or you can send an email to letters@cafe.com.

Stay Tuned is presented by CAFE and the Vox Media Podcast Network. The executive producer is Tamara Sepper. The technical director is David Tatasciore. The deputy editor is Celine Rohr. The editorial producers are Noa Azulai and Jake Kaplan. The associate producer is Claudia Hernández. And the CAFE team is Matthew Billy, Nat Weiner, and Liana Greenway. Our music is by Andrew Dost. I’m your host, Preet Bharara. As always, stay tuned.