INSIDE ECONOMICS

Mark Zandi:                       Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two co-hosts, Marisa DiNatale and Cris deRitis. Hi guys.

Cris deRitis:                        Hi Mark.

Marisa DiNatale:              Hi Mark.

Mark Zandi:                       What's going on?

Cris deRitis:                        It's been busy.

Marisa DiNatale:              It's really early in the morning for me.

Mark Zandi:                       I know.

Marisa DiNatale:              So not much is going on.

Mark Zandi:                       Yeah. And just to explain, we are going to have a conversation with Rob Fauber, the CEO of Moody's, and we recorded that earlier, prior to this. And for it all to work out, Marisa, you had to get up at what, 3:30 Pacific time?

Marisa DiNatale:              4:30.

Mark Zandi:                       Oh, 4:30.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Oh, okay. Okay. What's the problem?

Marisa DiNatale:              4:30 is the new 7:30. It's like I always say.

Mark Zandi:                       You look great though, for 4:30.

Marisa DiNatale:              Thanks.

Mark Zandi:                       Fantastic. Fantastic. Yeah. Yeah. Was this last week? Were we in this past week? No, it was the week before last when we were in Chicago. We talked about on the live.

Marisa DiNatale:              Yeah.

Mark Zandi:                       And we're going to be in-

Cris deRitis:                        Dallas.

Mark Zandi:                       Oh, Cris and I are going to be in Dallas. Yeah. Is it next week, Cris? I believe it's next-

Cris deRitis:                        Yes.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Another conference. And hopefully we see all of you, or as many as you would like to come to visit us in Dallas. And you're off to-

Marisa DiNatale:              I'm going to Japan for two and a half weeks.

Mark Zandi:                       You're off to Japan. Yeah. That's so cool. Yeah. Very good. Okay. I want to bring in Rob here pretty quickly, but before we have that conversation, thought we could talk a bit about ... We're going to talk about risks. This podcast about risks broadly, and Rob's going to talk about a panoply of threats that businesses and governments face. We're going to, in this first part, talk about economic risks as we're economists. And all of a sudden it feels like there's a boatload of risk. I don't know about you, but you got the UAW strike, which is now more than a week old kicking into higher gear. You've got student loan borrowers who need to start repaying on their debt in October in the next couple of weeks. You got this federal government shutdown that now feels like almost a done deal. There's going to be a shutdown. It's just a question of how painful.

                                                Did you see oil prices? We're back over 90 bucks a barrel on WT, West Texas intermediate. I don't know. And then you got really, the thing that came out of nowhere ... Well, I guess it's not out of nowhere, but it feels like it's in our face now, is higher mortgage rates or higher long-term interest rates. The 10-year treasury bond, I think yesterday got up to four and a half percent. That's getting to a place where it's going to start biting.

                                                So all those things add up to maybe some real pain here and some threat risk to the economy and the expansion as we move towards the end of the year into 2024. And by the way ... I can see Cris is nodding his head.

Cris deRitis:                        I'm not happy about it.

Mark Zandi:                       Yeah. The yield curve inverted about a year ago, and the average length of time historically when the curve inverts and you get a recession is one year. Can't be happening. Can't be happening. But let's go down each of those quickly and talk a little bit about them and how we're thinking about how they're going to play out and the risk around that. And maybe I'll start with you, Marisa around ... This is chronological sort of. UAW strike. That's entrain. How are things going there? And maybe you can just reprise how we're thinking about it and what the risks are.

Marisa DiNatale:              I would say of all the risks that you named, this is the one that I'm the least worried about. We'll see if that's right or wrong, but I'm more worried about those other ones in terms of the impact on the economy. A week ago, the UAW decided to strike against all three big US automakers. One strike at each plant. There's about 150,000 UAW members in the US. This strike could have obviously involved that many people. It didn't. It only involves about a little under 13,000 of those members combined at those three plants. So it's been going on for a week. The fact that it's 13,000 out of 150,000 members certainly mitigates the economic damage that this would do. But actually in 45 minutes, the UAW is going to announce that it may expand that strike if it hasn't made significant strides in talks with the automakers.

                                                A few days ago, the Canadian Auto Union struck against a Ford plant in Canada, and they have worked out a deal. We don't know what that deal looks like. They haven't divulged the details of what that entailed, but they've made some progress there. That doesn't have real bearing so much on the US strike. So the bottom line is we have some historical precedent for this. There was a 40-day strike back in 2019. It didn't really have a discernible economic impact, measurable economic impact when you look at things like GDP. It certainly crimped supply. The good news here is that the US automakers have about 70 days of inventory of autos. So in terms of the price effect on vehicles both new and used, the strike would probably have to go on for significantly longer than that last strike, 40 days, for us to see a real price effect.

                                                If it does, the price effect could be significant if we have more plant shutdowns. If the strike is prolonged, if it goes through the end of the year, we could have five to 10% increases in both new and used vehicles as inventory is drawn down. So there's enough inventory to get us through. There is enough strike funds to get the UAW through a prolonged strike. Particularly if they do this staggered approach where they start adding one plant after another and they keep expanding it over time. Ultimately ... And we've done some scenarios on this. We think if it goes on through the end of the year into the first quarter, we could see maybe one or two tenths off of GDP growth in the fourth quarter. So not a huge economic impact. And I think the risks of that happening are probably pretty low. Like I said, I'm not as worried that it's going to be that extended or that all-encompassing in terms of the number of employees involved. It looks like they're going to do this in a staggered way, which will limit the economic impact. On the other hand, it could drag it out longer.

Mark Zandi:                       Sorry about that. I was on mute. So just one factual question around the inventory. Where did you get that number? The 70 plus? I thought it was 59, 60. That's based on Cox Automotive.

Marisa DiNatale:              Yeah. So it varies from-

Mark Zandi:                       Stellantis has that but not the other two.

Marisa DiNatale:              Right. So the average between the big three is somewhere probably in the 60 range. I think GM has the most inventory. Theirs is like 70. So it varies.

Mark Zandi:                       I think it's Stellantis. I think.

Marisa DiNatale:              Is it? I know Ford has the leanest inventory of the three. Yeah. Sorry about that.

Mark Zandi:                       No worries. No worries.

Marisa DiNatale:              They differ, but they're in that range of 50 to 70 days of inventory.

Mark Zandi:                       Yeah. If you remember back to that AI podcast, I won't go into it in detail, but I got the statistics badly wrong. But I do think it's 59 or 60 days in total for the big three. I believe based on Cox Automotive. But still, to your point, that historically has been deemed to be an appropriate level of inventory. It does suggest that there's a little bit of room here in terms of what kind of impact it might have on prices, because there is still some.

Marisa DiNatale:              Yeah. We can get through. We can get through a month or two probably with this.

Mark Zandi:                       Let me ask. When you first began, you said this is the risk that you're least worried about. Can I ask which one are you most worried about? I'm just curious.

Marisa DiNatale:              Probably high oil prices.

Mark Zandi:                       High oil prices. Okay.

Marisa DiNatale:              Yeah.

Mark Zandi:                       You too, Cris?

Cris deRitis:                        Absolutely.

Mark Zandi:                       Absolutely. Yeah. Okay. Me too. All right, let's move on. Student loans, that's next up. Well, that's happening. We know for sure that's happening in October. How big a deal is that, Cris? This is the resumption of student loan payments.

Cris deRitis:                        Yeah. It's certainly a deal. It's probably not a recession inducing deal. So we estimate about 24 million borrowers will go from receiving forbearance to having to start to make a payment come October. Average payment is around $300 a month so that works out to approximately $7 billion a month or 85, $86 billion annualized. So it's significant, but there are some reasons to believe that the impact on the economy won't be at that level. You do have income-based repayment programs that more borrowers are taking advantage of. So that would reduce their monthly obligation to something that's a little bit more affordable and allow them to continue spending in other ways supporting the economy. You do have a delay in any delinquencies being reported to the credit bureaus for a year. So that also reduces the immediate cost, if you will, of a borrower not making a payment on their student loan. So that also buys us some time here. So the impact could be lessened.

                                                And then the other thing I would note is that you do have a lot of borrowers who are prepared to make payments. They're certainly higher income student loan borrowers who completed their degree. They knew this day was coming. They've been either saving up in order to make these payments or they've adjusted their spending appropriately that they'll be able to make the payments without really missing a beat. So from that perspective, I see that the impact could be something closer to say, $60 billion a year all in. That's about two tenths of GDP. So that's not inconsequential. But again, alone, given the positive factors in the economy, it's probably not enough to push us into recession. So clearly something to watch out for. And if you're a business that caters to this student borrower population, if you're a lender or you sell goods and services, you're really into that demographic, obviously it's going to have much more of a bite. But if we're thinking about the macroeconomic consequences, fairly low on the list, I would say.

Mark Zandi:                       Okay. So UAW strike under ... It's hard to handicap the scenarios. But under the scenario where it lasts through October, ultimately much of the production is disrupted, that would be couple tenths of a percent, something like that, I think. And then you're saying student loans, couple tenths of a percent. Okay. So we'll do this for each of these risks and see what it adds up to.

Cris deRitis:                        Yeah. I think that's the issue once you add them up.

Mark Zandi:                       That's the issue.

Cris deRitis:                        Right.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Well, I'll take the next one. And that's the government shutdown. That feels like it's happening. I think pretty high probability. And of course that goes to the fact that the federal fiscal year ends at September. The new one starts October one. And the government lawmakers, the president, Congress have got to sign a piece of legislation continuing to fund the government to keep it open. Right now, there is no legislation. So unless something happens here, the government's going to shut down on October one. We've been here before many times. Historically what happens is people get upset. Federal government employees don't get paid, or at least those that are furloughed, the non-essential workers. Contractors to the federal government, they don't get paid. That ultimately creates all kinds of problems. And the longer it drags on, the more things don't get done that need to get done.

                                                Things that matter, like you're a homeowner wanting to close on a loan, but you can't get flood insurance and therefore you can't close. Or parks. The one often put forward is parks close. You need a permit from the FDA to certify that the plant meets code and therefore the plant can't open. I go on and on and on. And the longer this drags on, the more the disruption and the more the economic impact. But historically, within a couple, three weeks, people really get upset and say, what the heck are you doing? And somebody gets blamed politically. And the group that gets blamed ultimately says, "Okay, this doesn't make political sense. I'm going to back down." And the lawmakers come to terms. They pass some kind of continuing resolution or budget and government reopens and we move forward. There's very little damage.

                                                I think the rule of thumb we have, the heuristic is every week the government's shut down, it's about a 10th of a percent. So in our baseline worldview, we have the government shutting down for maybe two weeks. Something like that. And then that'll cost the economy a couple tenths of a percent. But having said all of that, a boatload of risk around that. Because this Congress feels ... Particularly the House feels particularly dysfunctional. One thing I will say is I've seen a lot of government shutdowns and in talking to people in those shutdowns, everyone seemed to have a clear path to how this was going to ultimately get resolved. This time, not so much. The views here are all over the place, and that just makes me worried that there is no vision to getting this done. So it could drag on for a while. Longer than we anticipate, and that's the risk. So let's call it another two tenths of a percent. So two tenths on the UAW, two tenths on the student loans, two tenths on the government shutdown so another risk.

Cris deRitis:                        Can I throw out another risk of a government shutdown?

Mark Zandi:                       What's that, Cris?

Cris deRitis:                        Another risk of a government shutdown that I think is under the wire is government data will stop as well. That could complicate the Fed's actions if they're not getting the inflation and employment data. Even if they make a decision, it could also complicate financial markets. Investors are going to be in the dark in terms of, well, what is the fed doing here? Why are they not raising? Why are they raising? So I think there's even more risk from a monetary policy standpoint potentially.

Mark Zandi:                       That's a great point.

Cris deRitis:                        From a shutdown.

Mark Zandi:                       Policy makers, the Fed, and investors rely very heavily on really two key reports. One's the payroll employment report that comes out the first Friday of every month, and then the CPI, Consumer Price Index report that comes out mid-month. And if the government shut down the Bureau of Labor Statistics, the agency that puts that data together closes because their deemed to be non-essential, that data does not get ... It's not provided. It's not provided to the marketplace. You're already flying pretty blind given the fog of the data, but that means you're completely blind. Good point.

Cris deRitis:                        Yeah.

Mark Zandi:                       Okay, next up, how about this run up in interest rates, Cris? How big of a deal?

Cris deRitis:                        Yeah. Another deal.

Mark Zandi:                       Another deal.

Cris deRitis:                        You mentioned the 10-year treasury up at four and a half. The spread between 30 year mortgages and 10 years is still up in lofty levels. 300 basis points plus. So we're looking at mortgage rates of seven and a half percent today.

Mark Zandi:                       Oh, is that right? They're up to seven and a half?

Cris deRitis:                        Yeah. I think 7.48 was the last number I saw there. But yeah, very elevated. I don't know that it makes existing home buyers or homeowners even more locked in. They're already locked in. If you have an interest rate of 3%, 4%, you weren't going to move or certainly weren't going to refinance when rates were at 7%. Seven and a half just makes it even more unlikely. So this is a housing market that's going to continue to remain under pressure. There won't be much existing home inventory going on in the market. Home buyers are feeling the pinch. Seven and a half does bite more and more to particularly first time home buyers. It's certainly going to have a cooling effect, a chilling effect on the housing market. The one saving grace perhaps, is that you still have a lot of inventory that is under construction today. So that will continue. So you get some more supply coming online in incoming quarters or months. So maybe it's not an immediate collapse, if you will, or impact, but this is going to continue to grind on the housing market if the higher interest rates persist for an extended period of time.

Mark Zandi:                       Yeah. I was looking at what has driven this increase in rates. And the way we think about it is you can decompose the 10-year yield into inflation expectations, the real short-term interest rate, which is what's the Fed going to do. And then finally, the so-called the term premium. That's the premium bond investors require to buy a long-term bond versus short-term bond to account for the potential risk. And if you go back to early May, the 10-year yield was ... I'm making this up, but it's roughly three and a half percent. We're now at four and a half. We're up 100 basis points, a full percentage point. And of that 50 basis points, a half percentage point is due to the term premium. I think that's a catchall for lots of stuff. It could be because of concerns about the fiscal situation and treasury bond issuance. Could be due to increasing concerns about higher inflation, inflation volatility. Lots of different things that could be going on there.

                                                The term premium is weirdly still zero. Even with the increase, it's still zero. So that may suggest it could go even higher. And then 40 basis points, or almost 50 basis points is real short-term interest rates. So I think that goes to the Fed's decision. This recent bump up more recently is the increasing realization that the Fed, even though they may not raise rates much more, they're not cutting rates anytime soon. And when they do cut, it's going to be much less aggressive than I think investors thought. And so that's getting embedded in long-term rates with a higher real short-term rate.

                                                The inflation expectation is interestingly enough, that's really very modest and not really playing a role here. So the fed has accomplished what it wants to do there and keeping inflation expectations tethered, but this is something to watch. Four point a half percent. So what do you think? If it stays between four and four and half percent, which is our baseline view here, I guess that would be okay. It's not going to change our forecast. It doesn't subtract from growth in the fourth quarter. If it goes much above four and a half though, that's when it starts to do some damage.

Cris deRitis:                        That's right. That's right.

Mark Zandi:                       Yeah.

Cris deRitis:                        If we're talking about the GDP impact, it's on construction. So we saw that housing starts actually fell, but permits are up.

Mark Zandi:                       That was weird. That was multifamily, wasn't it?

Cris deRitis:                        Yeah. There's certainly some volatility here. I think builders have a hedge or an option, if you will. They will build if the conditions permit it. But I don't see that as an immediate impact.

Mark Zandi:                       Yeah. Okay. Let's move on to the last one. The one that worries the three of us the most is the higher oil prices. They've risen. We're now, as I mentioned earlier, 90, 95 bucks a barrel, West Texas or Brent. That would be consistent with I think a little over $4 a gallon for a regular unleaded. Just for context, we were closer to three at one point not too long ago, and the high was five back in June of 2022 in the wake of the Russian invasion of Ukraine and the sanctions on Russian oil. And our baseline here is that we're at the peak in terms of price. We're not going higher here. It can happen in a day or two, but not in any consistent way. The logic being that the price is now being largely set by decisions by Saudi Arabia around their production, and they've been cutting back production in an effort to get prices up.

                                                They definitely want prices to be higher than 80 bucks a barrel. That 80 bucks is key for them. That generates enough revenue for them to cover their fiscal needs. They've got pretty significant fiscal needs and to finance the investment they want to make in their transition away from fossil fuels. Trying to figure out different ways to drive economic growth in their country. My thinking has been that they don't want it much above 90, because if you go much above 90, then you get demand destruction. It hurts near term demand. People have to pull back on using oil, gas and jet fuel and everything else. And longer run, if you stay above 90 for any length of time that just incents a quicker transition over to green energy and away from fossil fuel.

                                                I feel very strongly about the floor. I feel less strongly about the ceiling. I'm not sure the Saudis would have too much trouble if oil got to 100 bucks for a while. That would be tremendous windfall. So I'm not sure about that. But I will say there is now a lot of excess global capacity to produce because of these cutbacks. The Saudis have three million plus in excess capacity. UAE, the United Arab Emirates, they've got a fair amount of excess capacity, and they're actually investing very aggressively in expanding out their productive capacity. You've got capacity sitting in ... Excuse me. In Iran. Sitting there. Potentially a couple million barrels a day. So that feels like that should put a ceiling on price because if price gets too high, I think we will see some of that oil come into the marketplace. But nonetheless, a lot of risk around that. And if prices jump to $100 a barrel plus gas here in the US goes to 4.25, 4.50, or certainly if we get back to five, I don't know. This feels like it's going to be hard to bear.

Cris deRitis:                        Do you see the strategic petroleum reserve being tapped?

Mark Zandi:                       I don't think they can. I think they tapped it back a year ago because prices have been too high for them to really refill it.

Cris deRitis:                        Refill. Yeah.

Mark Zandi:                       I also think there's some physical issues with regard to refilling. It's apparently not straightforward just to refill it. You've got to do some maintenance and things. I heard this from someone in the industry. I don't know that even if you wanted to fill it, it would be straightforward to fill it. There's got to be some work done here to make sure that you can refill it. But nonetheless, that's not going to help here. So I'm worried about that. Yeah. That's number one on my list. You too, Marisa?

Marisa DiNatale:              Yeah. We're talking about these things as if they're risks, but all these things are actually happening to some degree. So I guess when we're talking about the risk, we're talking about out the length of time all these things go ... Not the student loan one. But the UAW strike, a government shutdown. The UAW strike is here. Government shutdown is all but here. High interest rates are here. High oil prices are here. And these things are all happening at the same time so it's just a matter of how severe do they get? We've baked these things into our baseline to some degree so it's just a matter of is it going to be worse than what we're expecting?

Mark Zandi:                       Yeah. No. That's exactly right. We've got a narrative as to how this is going to play out, but a lot of uncertainty around that. Okay. Well, so you add that all up. It feels like-

Marisa DiNatale:              Not great.

Mark Zandi:                       Almost a point on GDP in the fourth quarter, if everything sticks to our script. And our forecast is for about a percent of GDP. It's possible. Q3, no problem. GDP growth is going to come in. Right now it's tracking based on data, 4%. Our forecast, when it's all said and done, is for three, which is strong growth, but you could get a zero. You could even get a negative print potentially under some reasonable scenarios. I don't know. Certainly can't declare victory here-

Cris deRitis:                        Please don't.

Mark Zandi:                       When you're part of the recession. No, no. Not so. Okay. Let me just quickly ... Let's end this part of the conversation because I want to bring Rob into the conversation. Probability of recession in the next year, starting in the next year, NBER, National Bureau of Economic Research defined recession. Marisa, where are you?

Marisa DiNatale:              35%.

Mark Zandi:                       Is that where you've been?

Marisa DiNatale:              It's up a little bit. I think I was at 30.

Mark Zandi:                       30. Okay. 35%. You Cris?

Cris deRitis:                        45.

Mark Zandi:                       That's where you were, right? 45?

Cris deRitis:                        Yeah. Pretty much.

Mark Zandi:                       Okay. Yeah. I saw you hesitate there. You were thinking maybe I should go back to 50, but you're going to stay at 45.

Cris deRitis:                        Well, the labor market.

Mark Zandi:                       Yeah. All right. I'm at 30. 30%. No change. Okay. Okay. Very good. And let's bring Rob Fauber, CEO of Moody's into the conversation. Hey Rob.

Rob Fauber:                       Hey, Mark.

Mark Zandi:                       Good to see you.

Rob Fauber:                       Good to be with you today.

Mark Zandi:                       Yeah. You're a busy guy.

Rob Fauber:                       And so are you.

Mark Zandi:                       But I've been wanting to get you on this podcast for a long time. Can you believe that we've been doing this two and a half years? Hard to believe.

Rob Fauber:                       Yeah. It's incredible. I really enjoy listening to it, actually.

Mark Zandi:                       Oh, really? You're a listener? You're one of those nerdy guys that listen, huh?

Rob Fauber:                       Yeah. But I don't do that well in the numbers game.

Mark Zandi:                       Well, we'll find out because your comms team volunteered you to play the stats game, so we're playing at some point along the way.

Rob Fauber:                       I was afraid of that.

Mark Zandi:                       I'm sure you're great. I'm sure you're going to do great. But I appreciate you coming on. Hey, we've known each other, I was just thinking about this, almost 20 years.

Rob Fauber:                       Yeah.

Mark Zandi:                       Yeah. I remember you led the ... I think this is right. You led the team that purchased Economy.com, the firm that my brother Carl, who's still with Moody's, my best friend, Paul Getman, and myself started back in 1990. You led the way on that, didn't you?

Rob Fauber:                       Yeah. It was the first acquisition that I did after I joined the company. And Mark, it's wonderful to look back on that. Thinking all those years ago. And as we brought Economy.com into the Moody's family and now just step back and think about the integration of all of the content and expertise from what was Economy.com and having you and your brothers still here at the company, it really is a wonderful success story I think.

Mark Zandi:                       I have a memory of that time. I want to just get your take on it. So you knocked on our door. We were a small consulting firm. I think we had probably 50 ... No. Actually we probably had 75, 80 people at the time. And we weren't thinking of selling the company. And I knew Mark Almeda. Paul knew Mark Almeda. He was the former CEO of Moody's Analytics. And he knocked on the door and he said, "Hey, I'm going to be in town. I'd like to stop by and say hello." I said, "Great, fine." So we started having this conversation. Quickly, I'm trying to figure out what ... Something's going on. What's going on here? What's going on here? And then he finally came out and said, "We're interested in purchasing your firm." Which was great. Obviously that made us feel fantastic. But here's the interesting thing. I don't know if you knew this, but three days later, Fitch ... Fitch is one of the other rating agencies. Knocked on the door also and said we wanted to buy your company. Do you remember this? You were probably thinking I made that up.

Rob Fauber:                       You might not have disclosed that to me.

Mark Zandi:                       Oh, is that right? Is that right?

Rob Fauber:                       I don't know.

Mark Zandi:                       Oh, no. Really? Oh, you don't remember that at all?

Rob Fauber:                       I guess I would say Mark, that's the way we try to do the deals though. You try to do them, you develop a relationship with people, you find things that you think makes sense for your company, and then you go out and you talk to those management teams. And we do everything we can to stay out of these auctions. That's a very difficult way to buy any asset. You end up paying the highest price. So it's interesting that they were there.

Mark Zandi:                       And I'm not making that up. I'm not. They may knocked on our door. So it was really a weird ... To be frank, Rob, I'm not sure we would've sold without Fitch there because we had no idea what our company was worth. We had literally no idea.

Rob Fauber:                       It's interesting, Mark, because that also says that companies were waking up to the increasing importance of this economic content. And as we were thinking about building out our solutions and our offerings, the thesis was that we were going to take that content and thread it through a number of our solutions. And ultimately, Mark, obviously that's what we've done, and the economics business has been great for Moody's.

Mark Zandi:                       Hey, I got another question for you. I got lots of questions for you.

Rob Fauber:                       I got some for you too.

Mark Zandi:                       Oh, I bet you do. I bet you do. So 20 years. Do I get a gift after 20 years? Does someone Zoom me up and say, you get a gift?

Rob Fauber:                       I will call you, Mark.

Mark Zandi:                       Okay. That's a-

Rob Fauber:                       I'm glad you've mentioned this. I'm going to put a tickler on my calendar after this.

Mark Zandi:                       I was just angling for that. Well, thank you for that. Well, the 20 years has been great. And it's hard to believe we've been part of Moody's longer than we were our own company because we started in 1990 and we were purchased-

Rob Fauber:                       Oh, wow. Yeah.

Mark Zandi:                       Yeah. We were purchased by you, by Moody's in 2005. And It's been obviously fantastic. Great experience. But your career ... And I know you want to talk about a lot of things, and we're going to. We want to talk about artificial intelligence, AI. that's obviously a really important topic. This concept of exponential risk. We're going to talk about that.

Rob Fauber:                       Sure.

Mark Zandi:                       Before we dive into that, I just want to get a better sense of your path to becoming CEO. It's just incredible to watch your success. And maybe you can just give us a sense of your career. Fundamentally, I'd like to know what the secret sauce is. How does one become CEO of a large multinational corporation? And by the way, I've got a theory on that. I always have theories. I'll try my theory out on you, but I want to hear what you-

Rob Fauber:                       Can we start with your theory or should we-

Mark Zandi:                       Oh, no, no, no. I want hear [inaudible 00:34:08] say.

Rob Fauber:                       I guess successful acquisitions must be part of the formula. Look, I joined in '05, and we had only been a public company for about five years. We spun off from Dun & Bradstreet. And I came in to run our corporate development team. And so this was basically focused on the growth of our businesses, mostly through mergers and acquisitions. And so we started with Economy.com. We made several other acquisitions. And at some point, I think it was '07, '08, we said, "Hey, look, we've got a critical mass of these data analytics software businesses, and it makes sense for us to set up another division of the company." So up until then, you might remember, when we acquired Economy.com, there was really just the rating agency. And we realized that there was a lot of demand for all of this content, and we had a very strong customer base with investors. And so that's when we established the analytics business. And as you said, Mark Almeda ran that. I partnered with him and he grew that business. Now interestingly Mark, that business this past year, the analytics business was just more than half of the revenues of the company.

Mark Zandi:                       Oh, I didn't know that. Oh, wow. That is a milestone for sure.

Rob Fauber:                       Think about that growth. It's actually 12%. Well, there's a number for you. I should have used this number. I've wasted it. 12% compound annual growth rate of revenue since the establishment of Moody's Analytics.

Mark Zandi:                       Wow. That is amazing.

Rob Fauber:                       So look, I had the great fortune of being involved in all of that. And that gave me a great opportunity to really focus on the strategy and the growth of the company through a number of acquisitions and partnering with our business people. Then our former CEO Ray McDaniel gave me a call and said, "Hey, would you like to come over to the rating agency?" And I moved over and ran what you would think of as the sales and product team. And I did that for three years. That was also a great seat because due to the separation, the Chinese wall that exists between analysts and sales in the rating agency, I got a chance to focus on the business aspect of ratings. And so I did that for a few years. Then I ran the ratings business. So I had six, seven years in the rating business. It's one of the world's great businesses. Wonderful business. So I had a really nice mix. I was very fortunate of being in the early days of Moody's Analytics and then working in the rating agency and the business side of the rating agency. It gave me a very good experience set and perspective that I think positioned me for this job.

Mark Zandi:                       In fact, I'm hard-pressed to think of anyone else who's had the breadth of your experience. That's pretty amazing. Both on the analytics side and on the rating agency side.

Rob Fauber:                       Yeah. I've been fortunate. Now, I'm not going to let you off the hook.

Mark Zandi:                       Yeah.

Rob Fauber:                       So what's the theory?

Mark Zandi:                       Oh, yeah. This is the theory. And I have a limited sample, admittedly. I know a fair number of CEOs, but I don't know a lot of CEOs. And this goes against TV stereotypes, but I find CEOs ... And this really applies to you. They're just nice people. They're just genuinely nice people. Because it makes sense. You can't be elevated over time through all kinds of different challenges unless you can work with people and people like you. They have to like you. And you're just a nice guy. That seems a little weird if you watch Succession. That doesn't describe the CEO running that company or maybe some modern day similar CEO types, but that's been my experience. The other element to it is you're very nice, but you've got an edge. You've got to make some tough choices and some tough decisions because stuff happens and you've got to pivot, and you're able to do that. And that's not easy to do either. That's my theory. Yeah.

Rob Fauber:                       Okay. Well, I appreciate that. I thought there was going to be some study that you were going to be citing.

Mark Zandi:                       No. No. Yeah. No. No.

Rob Fauber:                       I would say to that, Mark, that times have changed and I think our employees and colleagues want people that are authentic as leaders. And that's not just me, but the leadership of the firm. They want people that are empathetic and just given everything we've all gone through the last few years, I think empathy, starting in the CEO's suite, the C-suite is a really important attribute for leaders of today. Mark, I think we've even talked about it in town halls about how important empathy is.

Mark Zandi:                       Yeah. I know the listener out there is thinking, I'm just sucking up to the CEO. And you know what? Yeah.

Rob Fauber:                       Yeah. Maybe you are.

Mark Zandi:                       Maybe I am. Maybe I am. No. No. Hey, I promise we're going to move on, but I want to bring Cris and Marisa back into the conversation. Maybe because I had an opportunity to ask you a question, Marisa, maybe I'll turn to you. Do you have any questions for Rob? Anything that's been really bugging you that you'd like to ask?

Rob Fauber:                       Oh, boy.

Mark Zandi:                       Not how much you're getting paid. That's probably not appropriate.

Marisa DiNatale:              Yeah, I'm not going to ask that. Thanks.

Rob Fauber:                       We'll take that offline.

Marisa DiNatale:              This video can be edited for content after the fact. I have a couple questions. I do think it's fascinating, your career trajectory, and having seen all different facets of the business. As a CEO, I imagine it's an extremely constantly stressful job. If you think about the next five years and you think about the business and the competitive landscape, what are you most worried about and what are you the most excited about?

Rob Fauber:                       Yeah, Marisa, actually, the answer's going to be two sides of the same coin. So I'm going to start with most excited. There's just a tremendous amount of opportunity for us because of what we do and because of the world around us and what customers need to navigate the world of today. So I'm really excited about the capabilities that we have built out. We've spent about $8 billion over the last five years. $8 billion to build out capabilities well beyond credit to help our customers. So that's really exciting. The flip side to it ... Actually, one thing that does worry me is prioritization. There are a lot of things that we can do. And I actually see you nodding your heads a little bit. At the end of the day, you can't do it all. And it really is important to think about how we allocate and just ruthlessly prioritize. I know that's a phrase we use at the firm. Your time and effort, your expense dollars and your capital dollars. And that's something I think we really got to get right.

Mark Zandi:                       You got this asset called the economics unit. Just saying. In the prioritization-

Rob Fauber:                       Shameless plug.

Mark Zandi:                       Don't forget us. We were at the beginning there, Rob. Yeah. Sorry, Marisa, I interject. Did you want to ask something else?

Marisa DiNatale:              Yeah. Can I ask a more personal lighthearted question?

Mark Zandi:                       You can ask anything you want. He can tell you I'm not answering it, but go ahead.

Marisa DiNatale:              Actually, Joe told me that if I got up at 4:30 to do this podcast, that I could ask you anything.

Mark Zandi:                       Joe, just so everybody knows is on the comms team. And if you're not in a large multinational, comms means communication teams. The communication team. In fact, Rob, I think that's why we haven't been able to get you on. Joe's been nervous about Zandi, what he's going to say. I think that's what's going on.

Marisa DiNatale:              Rightly so.

Mark Zandi:                       He should be.

Rob Fauber:                       He's an anxious mess right now.

Marisa DiNatale:              I was reading your bio on Mint and it says you're an avid hiker and outdoorsman and traveler. And I was wondering, A, do you actually get to do any of that stuff when you're CEO, and B, what's the last great personal trip you took and were able to enjoy?

Rob Fauber:                       Yeah. I do get to do that stuff, Marisa. I think this is really important that we all take time to recharge. In fact, I just sent a note this morning to my team because one of my executive team members is on vacation for the week, and I asked my team to take him off of CCs and to not do the one-to-one meetings with him this week, and just everybody to make sure we give him a chance to take a vacation. And CEOs need breaks too. And I think it's important for a few reasons. One, it's just good for me to be able to recharge, but two, it's a very important signal to the rest of the firm. And we don't have a workaholic on top of the firm. I'm a father, I'm a husband. I've got different roles that I play. I want to be a present parent. And you're right, I love to run and bike and hike. I actually find that when I'm out on a trail or I'm riding 25 miles on the bike, that's a great time to think. So I actually think it's really, really valuable time.

                                                And so I want to make sure that I do it and set the example for the rest of the firm. In fact, I don't know what this says about me that one of the highest engagements I've ever gotten on a LinkedIn post was when I posted that I was going on vacation. People seem to be thrilled. To answer the second part, I took a wonderful trip with my family. I have a wife and two kids. And we went hiking in the Dolomites from a hut. It was just incredible.

Marisa DiNatale:              Good. Well, I'm glad to hear that because I'm about to leave for a two and a half week vacation, Mark. FYI.

Mark Zandi:                       I understand. You're off to Japan. Are you going to Tokyo?

Marisa DiNatale:              I am. Yeah.

Mark Zandi:                       Yeah. Yeah.

Rob Fauber:                       Good for you.

Mark Zandi:                       I'm headed in that direction in a few weeks too. You're on vacation, so don't worry. I'm going to leave you alone.

Marisa DiNatale:              Yeah. I'm on vacation.

Mark Zandi:                       Yeah. Hey, we got to get down to business, but Cris, I want to give you an opportunity too, to pepper Rob here. Any questions?

Cris deRitis:                        Sure. Sure. So now that I know about the Dolomites, I would definitely go down that route. That's one of my favorite places on Earth as well. But the question I have is really in the other direction that Marisa was looking at when she was looking more short term. Moody's is 114 years old. What do you see Moody's becoming over the next 114 years? I think over the last 114, essentially been doing roughly the same thing. Rating businesses. Do you see that continuing or pivoting? What's your vision for the long term?

Rob Fauber:                       Yeah. So the rating business, it's the endowment, it's the foundation. I'd say the rating business is more relevant than ever to the market, our views. And so we've been building on that. We use this phrase, Cris, calling ourselves an integrated risk assessment business. And people have been asking, what does that really mean? I think we're going to get into it a little bit when we talk about exponential risk, but we're moving from a firm that focuses on credit risk that has a multifaceted view of risk to help our customers. And so we've built out these capabilities. The analytics business is now more than half of the business. And I think you're going to see that trend continue. That's where there's a lot of growth opportunity for our firm. So that's how I tend to think about it. There's just a huge customer need to help our customers with this multifaceted view of risk.

Mark Zandi:                       Cris is used to long-term forecasting with this climate risk analysis we do. Believe it or not, we forecast out to 2100. 2100. Yeah.

Rob Fauber:                       Those are probably pretty accurate forecasts.

Cris deRitis:                        I'll let you know. I'll let you know.

Mark Zandi:                       He'll let you know.

Rob Fauber:                       Cris, I have a hard time forecasting issuance one year ahead.

Mark Zandi:                       Oh, there's nothing harder than that. Believe me, I've tried. That's like, forget about it. Well, that's a good segue into the conversation. The way I in my simplistic worldview of Moody's is historically in times past we were about credit risk. We would provide the data, the tools, the analysis, the analytics to investors to allow them to make judgements around the risk that a company or a government that issues a bond would default on that bond. And that drove the train for ... Well, really up to when you bought us back almost 20 years ago. And since then, the acquisitions that have occurred have been around expanding out the portfolio of risks that we are able to help folks grapple with. And there's a gazillion risks. And that gets to this vision you have that you've now dubbed exponential risk. Let me ask, did I get that roughly right? And maybe can just dive in there and give us a better sense of what you mean by exponential risk.

Rob Fauber:                       Yeah. You did get it roughly right. Mark, I always like to kind of start with the customer lens. And if you think about our customers they're most of the world's largest banks, insurance companies, corporations, government agencies. And you think about the world that they're dealing with. There's all sorts of different kinds of risks that they're having now to deal with and also an understanding that a lot of these risks are very interconnected. Because the world is so interconnected, they can have knock on impacts. It can have a domino effect. We've certainly seen that. Again, think about what organizations are dealing with. It's not just financial stability and credit worthiness. It's you want to understand the reputational profile. ESG, carbon transition, physical risk related to climate change, data security, cybersecurity, financial crime. All of these things companies are having to manage.

                                                And so really a common theme with our customers is wanting to have more of a 360 degree view of who they're doing business with. Who am I lending to? Who am I investing in? Who are my customers and who are my suppliers? And there's also a desire to understand how these risks then interconnect and what the knock on impacts of these risks can be. And I think covid was the ultimate example of that. If you think about what went on, obviously it impacted every person, every country, every company, every industry. It impacted US-sino relations. There was massive fiscal and monetary stimulus that led to inflation interest rates. So you think about all the knock on impacts from one virus.

                                                There was another example the other day that just recently I thought was pretty interesting, where Clorox had a cyber attack. And suddenly the concern becomes, well as we're entering flu season and potentially an uptick in covid cases, and what happens when Clorox plants get taken down? So that's the kind of thing that companies are dealing with and that's why, as you said, Mark, we've built out all of our capabilities around this. And I'll give you one other example I think is interesting. I was talking to the head of digital transformation at this big European bank, and they said, "At the time that we make a loan, we have to answer three questions. Can we do business with this company? Do we want to do business with this company? And will they pay me back? And Moody's, you've helped us with the third for a long time. We need help with all three at the time we make the decision and for the life of that loan."

Mark Zandi:                       So is it your thinking that the risks that businesses and governments face are greater today than they have been in times past or they feed on each other to a greater degree than in times past? Has something changed in terms of the risk environment that we're all operating in?

Rob Fauber:                       I think so. Think about cybercrime. There's been an exponential increase in cyber-attacks over the last decade. Actors have become much, much more sophisticated. And so you think about the nature of the attacks, Mark. It used to be there'd be a breach of some database, there'd be a leak of some information. Think about today. There are attacks on physical infrastructure that are having ... Remember the colonial gas oil pipeline. That was a cyber-attack. The other day, there was a hospital that actually shut down due to a cyber-attack. They have closed permanently. I'd say-

Mark Zandi:                       Is that right? They had to close down because-

Rob Fauber:                       They closed permanently. They could never get back up and running and they were already under some financial duress and they closed permanently. The same is true for financial crime. If you think about what's going on and think about the environment we're in now with needing to do sanctions enforcement. Much different than it was a decade ago. Russia, Ukraine changed the game in that regard. And then I would say also, Mark, think about for consumer companies and customer preference and the importance of understanding your labor practices, those things can really impact your brand if you get it wrong. So you find out that you're manufacturing shoes at a place that's using forced labor, you may find there's a customer boycott, which has been enabled by the rise of social media. So I do think there has been an increase in these things. And also I think regulators are now saying, well, now we want to focus on how organizations are managing those risks. So you've seen the SEC focus on disclosures around cyber-attacks. You're very familiar with this. Bank regulators wanting to understand the impact of climate change on bank lending portfolios. So the regulatory drivers for companies to need to understand these risks. And again, I know the work you all are doing around climate adjusted probabilities of default and stress testing and so on.

Mark Zandi:                       I guess the other aspect of this is we're just a more globalized economy and so the risks come at you from all over. Moody's, we know that because everywhere on the planet and so the problems can come from anywhere. I remember we write analysis, the economics team writes analysis for different economies around the world, and we try to be very fact-based, data based, model based. It's very quantitatively driven, a lot of the analysis. And we have a very involved editing process. But nonetheless, we wrote a piece about ... I can't remember exactly what it was about, but it was about India and Indian elections. And the Indian government got really upset by this. And even Modi I think said something about it and it dragged Moody's in. So it can come from anywhere at any time. And you're going, what? Really? I think that's the point.

Rob Fauber:                       Mark, think about if we had a severe earthquake in Taiwan. Think about the global ... Now, the global implications of that around semiconductors.

Mark Zandi:                       Let me ask you this. There's a whole panoply of threats, risks. From credit risk, you mentioned cyber, you mentioned supply chains, you mentioned sanctions, you mentioned reputational risk, regulatory risk. Is there in your thinking, a risk that is underappreciated that businesses face that is actually more serious than people think or focused on? That may be an unfair question. I'm just curious if anything strikes you as underappreciated as a threat.

Rob Fauber:                       Yeah. Maybe I'm going to turn that question just a little. I'll tell you one place where we're seeing more and more interest starting to pick up. And this is something that we had thought would be the case a few years ago, but is around understanding the physical risk relating to climate change and severe weather and companies really wanting to understand that. And Mark, I think one place that that's particularly interesting is as the banking industry wants to understand that. Because if you think about for forever, weather risk has just been insured by the global insurance industry. But now banks are finally waking up to the fact that, hey, I may be underwriting a 10-year loan that's secured by a piece of real estate. What if that piece of real estate is in the hills of California and it's got a one-year insurance policy? And so I need to understand the physical risk relating to weather and potentially climate change over some period of time, the life of that loan, make sure I price that risk appropriately. And it was interesting. I had this discussion a few years ago with a group of banks at one of our conferences actually. You may have been there actually out in Arizona.

Mark Zandi:                       Oh yeah.

Rob Fauber:                       Yeah. The banking ... And people were looking at me like, "That's not really a risk for us because all of this stuff is insured." I said, "Well, for now it is."

Mark Zandi:                       Yeah. Great point. And you're absolutely right. That seems to have come on the scene incredibly rapidly. It wasn't even in the conversation a couple, three years ago, and now it's like, it really matters.

Rob Fauber:                       That's right.

Mark Zandi:                       If you live in Florida or California in particular. Oh, here, I got a question for you. And this is only because I watched Cris give a talk at one of our conferences last week. Guess which state has the highest homeowner's insurance premiums in the country? Oh, Marisa, you can't answer that question either. You were at the conference. Oh, you don't remember.

Marisa DiNatale:              I remember what state had the lowest homeowner's insurance.

Mark Zandi:                       Right. Go ahead. Tell us who was lowest.

Marisa DiNatale:              Hawaii.

Mark Zandi:                       Hawaii.

Marisa DiNatale:              Which is very counterintuitive, right?

Rob Fauber:                       Wow.

Mark Zandi:                       Counterintuitive.

Rob Fauber:                       Yeah. I would not have guessed that.

Mark Zandi:                       Yeah. And not anymore probably. Unfortunately. Nebraska has the highest-

Rob Fauber:                       Nebraska.

Mark Zandi:                       Yeah.

Cris deRitis:                        Oklahoma.

Mark Zandi:                       Oh, is it Oklahoma?

Cris deRitis:                        Oklahoma. Nebraska's number two. I need to pay closer attention to your-

Marisa DiNatale:              You were in the right area of the country.

Mark Zandi:                       Thought it was Nebraska.

Cris deRitis:                        They were both in red on the chart.

Rob Fauber:                       Because of tornadoes and severe convective storms?

Mark Zandi:                       Correct.

Cris deRitis:                        They have some flooding in the east too.

Rob Fauber:                       Don't hold me to this stat because I don't know I have this correct. I thought something like 70% of the losses this year in the United States have been due to severe convective storms and tornados.

Mark Zandi:                       Really?

Rob Fauber:                       Yeah. So not hurricanes.

Mark Zandi:                       Yeah. Interesting.

Cris deRitis:                        That's right.

Mark Zandi:                       We're all in on this because our regional economic work really ... And we do a lot of work for the real estate industry, and they're clued in on this as an issue and so we're spending a lot of time on it. And of course, Moody's purchased RMS right? The big insurance analytics firm.

Rob Fauber:                       That's why we did it is we want to have world-class weather and climate modeling capabilities and thread that through all of our solutions in the ways that the customers need it.

Mark Zandi:                       Right. Well, let's move on. We're going to get to AI shortly, but let's play the game. The statistics game. I'm really curious to see how this goes. I'm nervous. A little bit nervous.

Rob Fauber:                       You're nervous? I'm nervous.

Mark Zandi:                       You're nervous. And just to remind the listener, the stats game is we each come up with a stat, the rest of the group tries to figure that out through clues and questions, deductive reasoning. The best stat is one that's not so easy that we get it immediately, one that's not so hard that we never get it. And one that's apropos to the conversation would be a plus. And Rob, you're the guest, but tradition always has it we begin with Marisa. Marisa, what's your stat?

Marisa DiNatale:              You're not giving this to Rob just because he's the CEO.

Mark Zandi:                       No, no, no. I'm letting him warm up. Letting him get in the groove.

Marisa DiNatale:              Okay. My stat is 14.45%.

Mark Zandi:                       Is it an economic statistic that came out this week?

Marisa DiNatale:              Yeah.

Mark Zandi:                       Is it related to the financial obligations ratio?

Marisa DiNatale:              It is the financial obligations ratio.

Rob Fauber:                       That is impressive.

Mark Zandi:                       Hey, Rob. Okay, now, Rob, that's got to be-

Marisa DiNatale:              It's a high bar.

Mark Zandi:                       Yeah. It's got to be impressive.

Rob Fauber:                       That's very impressive.

Mark Zandi:                       Oh, there you go.

Cris deRitis:                        Staged. It was staged.

Mark Zandi:                       Now he's sucking up. He's sucking up to me now. You want to explain Marisa?

Marisa DiNatale:              Sure. This is a measure of household debt and other financial obligations like the share of household income that goes to debt payments, car leases, rents if they're not a homeowner. So it represents the stress or the debt burden of a household. This fell in the second quarter unexpectedly, and it's the lowest it's been since the end of 2021. And if you look back at the whole series, it's extremely low. It's still near an all-time low. The data go back to 1980. So this goes to a lot of what we've been talking about recently about why the economy's been so strong, why it hasn't fallen into a recession yet. And one of the reasons why we think it will not is that even despite the higher interest rate environment, there has been a pullback in demand for lending for some categories of borrowing for consumers and households look really solid in terms of their financial situation. So just the fact that it's still falling through the first half this year I think despite that we're in a high interest rate environment and likely not moving from that for a while is pretty remarkable.

Mark Zandi:                       Yeah. I was surprised. And Rob, that's a good example of exponential risk I think. That goes to household credit risk. But it also highlights the difficulty in assessing risk because that statistic is down the middle of the distribution and you've got to look at the tails of the distributions because there's a boatload of folks at the low end of the ... Low income that obviously that financial obligation ratio doesn't really express the financial pressure they're under right Marisa?

Marisa DiNatale:              Yeah. And I think some other statistics that we saw highlight what you're saying this week. We were looking at savings rates across different cuts of demographics, and we see that this one and a half trillion of excess saving that's out there, 70% of it is with households that are high income people that are over 55 years old. So younger households, lower income households really don't have that much saving left. It really is concentrated. So when you dig into the details ... It's important to dig into the details.

Mark Zandi:                       Yeah. And the student loan borrowers are going to start repaying and we'll see how ... There's an example of an event that can have all kinds of knock-on effects so we'll see how that plays out. Rob, you want to go next?

Rob Fauber:                       Okay.

Mark Zandi:                       You're up.

Rob Fauber:                       All right. 23.

Mark Zandi:                       Ooh, 23. Is it related to the economy?

Rob Fauber:                       It's related to something we've talked about on this podcast.

Mark Zandi:                       On this podcast. 23.

Cris deRitis:                        23.

Marisa DiNatale:              Is it related to a climate event?

Rob Fauber:                       It is.

Mark Zandi:                       Oh, a climate event. 23 hurricanes in the last year?

Rob Fauber:                       Getting closer.

Marisa DiNatale:              Tornadoes.

Rob Fauber:                       In the last year.

Mark Zandi:                       It's been in the last year.

Rob Fauber:                       So you've narrowed it. You got the right time period.

Mark Zandi:                       But not hurricanes. Is it some kind of physical risk?

Rob Fauber:                       Event.

Mark Zandi:                       It is.

Rob Fauber:                       Yeah.

Mark Zandi:                       Globally or in the US?

Rob Fauber:                       US.

Mark Zandi:                       US. 23.

Marisa DiNatale:              Should we just start naming different ... Wildfires.

Mark Zandi:                       Yeah. If it's not hurricanes-

Marisa DiNatale:              And it's not tornadoes.

Mark Zandi:                       Named storms? No. Flooding events?

Rob Fauber:                       Weather events above a certain threshold.

Mark Zandi:                       Oh, that makes sense. That makes sense. Over a certain dollar amount of damage.

Rob Fauber:                       Yes.

Mark Zandi:                       Yeah, yeah, yeah.

Rob Fauber:                       So 23 weather events this year in the US over-

Mark Zandi:                       A billion?

Rob Fauber:                       A billion dollars.

Mark Zandi:                       A billion dollars. That's interesting.

Rob Fauber:                       The 23 is a record. Not surprising, right? The 23 is a record, but the absolute dollar amount of damage is not a record. In fact, 2017 was the biggest year. So far this year it's something like about $60 billion from these weather events, these 23 weather events. And in 2017 it was about 385 billion. If you remember, it was Harvey, it was Maria, it was Irma. You had three huge really impactful hurricanes.

Mark Zandi:                       Yeah. That's a really good one. That's a really good statistic. Did you have another one? I think Joe has sent you another one. No?

Rob Fauber:                       This is all I got, Mark.

Mark Zandi:                       You tapped out. You're tapped out.

Rob Fauber:                       I'm totally tapped out.

Mark Zandi:                       That was a good one though. That was a really very good one. Cris, you want to go?

Cris deRitis:                        Sure. 1.66 million.

Mark Zandi:                       Is it economic statistic that came out this week?

Cris deRitis:                        It is. It is.

Marisa DiNatale:              Housing related?

Cris deRitis:                        Nope.

Mark Zandi:                       Is it UI related? Unemployment insurance related?

Cris deRitis:                        It is. It is. Come on. Now you got it.

Mark Zandi:                       Okay. Huh. 1.66 million. It's not continuing claims.

Cris deRitis:                        It is indeed continuing claims.

Mark Zandi:                       Oh, okay. Rob. Rob, I'm just saying-

Marisa DiNatale:              He's on fire.

Rob Fauber:                       Hold on. Is somebody using a copilot?

Mark Zandi:                       We thought Marisa was doing that at one point actually.

Rob Fauber:                       She was so good at this?

Marisa DiNatale:              Yeah.

Mark Zandi:                       Because Marisa, she's really good at this game. She is really good at this game.

Marisa DiNatale:              But copilot doesn't have the most recent information, so it really wouldn't help here.

Mark Zandi:                       Glad you pointed that out. You pointed that out. Yeah. You want to explain Cris? Why'd you pick that?

Cris deRitis:                        Yeah, 1.66 million is the lowest level in continuing unemployment insurance claims since January. So they had spiked to 1.85 million in April. And seeing the level come down is indicating that this remains a very strong labor market. The folks who are getting laid off, even though they're relatively few, given the initial unemployment insurance claims, they're getting jobs fairly quickly. So we're keeping this level down and this is consistent with the narrative, the slow session soft landing narrative where perhaps the number of job opening declines, but the layoffs remains quite low. So this is a positive sign along with the financial information that Marisa cited there.

Mark Zandi:                       Hey Rob, there's a theory that I want to just test it out on you from your perspective. That businesses in general are very reluctant to lay off workers because the labor market's been very tight for quite some time. Pre-pandemic, it was very tight, during the pandemic obviously excruciatingly tight because of the pandemic. Post pandemic, tight. And businesses are looking forward and they're seeing the demographic trends aging out of my generation. Weaker immigration are going to keep labor markets tight and therefore they know that their number one business problem, not always, but through the thick and thin, is finding talented workers and retaining those workers. And as such, they really don't want to lay off. They'll do other things. They'll hire a little less aggressively. They might slow down filling those unfilled positions. They might cut back hours if you're in a manufacturing or construction. Hard to do that in a Moody's. But a construction manufacturing firm might use less temp help. And that's one reason why we're not seeing layoffs and one reason to be optimistic that we won't suffer a recession because it's hard to see recession without layoffs. What do you think of that theory? Does that resonate with you? How do you think about that?

Rob Fauber:                       I tend to think about, Mark, you mentioned the importance of attracting and retaining. I mean it's certain talent. The way I think about it, there are certain job families that are in particularly intense demand, at least from where we sit. We're in the knowledge worker economy, which is different than retail or manufacturing, so I can't quite speak to that. But what we do see is really intense demand for certain job families. Not surprisingly software engineering, but also things like compliance and audit and those kinds of jobs. And so it's interesting, despite the fact that we've seen turnover come down at the company, I think we still think of it as a very, very competitive labor market and putting a premium on retaining that talent.

Mark Zandi:                       Yeah, it's a theory that's hard to prove one way or the other. Right? But it's kind of a narrative that's out there that people are using. Okay. Do you want me to give a statistic or are we getting long in the tooth here? Should we move on? Because I do want spend a few minutes on AI. Do you have a few more minutes, Rob? Do you want another stat or do you want one more?

Rob Fauber:                       You all can dazzle me with your deductive reasoning.

Mark Zandi:                       I've got a hard one and it pertains to the first part of the conversation where we talked about the immediate risks to the economy and you remember student loan payments and UAW strike and so forth and so on. So here's the stat, and I'll help you out if you can't get it, but 22.

Rob Fauber:                       That's very close to mine.

Mark Zandi:                       I know. That's why I was a little nervous about that. You had my stat.

Cris deRitis:                        Did it come out this week, this number?

Mark Zandi:                       No, it's kind a historical stat. Kind of like Rob's stat.

Marisa DiNatale:              Is it a time measure?

Mark Zandi:                       No. The number of times this has happened, 22 times over history.

Marisa DiNatale:              The number of times the government has shut down?

Mark Zandi:                       Ding, ding, ding, ding, ding, ding, ding, ding.

Cris deRitis:                        Okay.

Mark Zandi:                       Yeah, yeah. Ding, ding, ding. That is great. See, I told you, Rob. She's like-

Rob Fauber:                       This is unreal.

Mark Zandi:                       She's amazing. She's amazing. And there's no way she could have typed that in to Bard or something to get-

Marisa DiNatale:              Hands up here. Hands up.

Mark Zandi:                       Yeah. The government has shut down 22 times since the '70s when the current budget process was put into place. And do you want to, Marisa, take a stab at how many times ... Oh, well I'm going to stop right there. I had another step, but I think I got it wrong. I was thinking to myself, that can't be right. But yeah, 22 times. That's hard to believe. And here we might be on our 23rd time and obviously a real very significant threat to the economy here in the near term. Hopefully they figure this out.

                                                Okay, let's move forward. Let's talk about AI, Rob. It's this thing that's ... Actually, we had this fellow Martin Fleming on last week. I don't know if you caught that. I thought he was great. Or was it two weeks ago we had him on?

Rob Fauber:                       Yeah, a couple weeks ago.

Mark Zandi:                       Two weeks ago. We had UAW last week. He was a former chief economist at IBM and he's at the Productivity Institute and really provided a lot of insight. Actually made me feel better about AI. But that has come on the scene very ... And listen, my thinking, very quickly and very aggressively. Do you think this is a game changing kind of technology or is it ... There's other technologies that have come on and moved on. I think of blockchain. Not that there isn't real applications for blockchain and that that's an important technology. It is. But it doesn't feel like anymore, this game changing thing. Do you think AI is game changing?

Rob Fauber:                       I do.

Mark Zandi:                       You do? Yeah. Because?

Rob Fauber:                       First of all, one of my developers said the new language of coding is English. So think about that. It's a tool that everyone is able to use. You don't have to be a computer programmer to be able to get enormous value out of large language models using these ChatGPT models. And Mark, we deployed it to all of our employees at the company in a safe, secure environment. And it's been incredible to see the innovation that it has unleashed. And for a business like ours, let's go back to the conversation we had about all these different risks. To be able to query our data, our models, our research on demand, and to be able to get insights across credit and climate, for instance.

                                                Today, we have credit research on our website, we have climate models in our RMS workflow software, but we're going to be able to allow customers to be able to query all of that together. To be able to bring those insights together. So this idea that we were talking about this multifaceted view of risk, I think generative AI is a game changer in terms of enabling that and then delivering it back in a simple natural language user interface. So for us and our customers, I do think it's a game changer. In fact, that's why we partnered with Microsoft earlier this year because we thought that part of what we wanted to do was to really revolutionize the way that research is consumed by the investment community.

Mark Zandi:                       Economists kind of look at AI through the prism of what it means for the productivity of the workforce. And one thought ... There's a lot of debate about this, and it's a really important debate from a macroeconomic perspective. If it significantly raises productivity growth, that has all kinds of implications about the size of the labor force, about income and wealth and fiscal. I mean I can go on and on and on. One debate or argument or concern is that AI ultimately will be very productivity enhancing. It'll make us all better at what we do. Meaningfully better. But getting from here to there, it could be actually hurting productivity because you've got to make big investments. As you say, it's data. You've got to invest in data. You've got to invest in people. You've got to find the right people to be able to implement it. You've got to invest in the computing power because this all rests on the ability to operate at a very high pace. And all of that may impede productivity growth before it actually kicks in. No? Yeah?

Rob Fauber:                       I don't know if it's impeding productivity growth. I mean you're the economist. But I look at some of the other big technology cycles, I mean, okay, so when the internet came out, people had to make investments and had to convert to digital business models and so there was a period of transition. And then when the iPhone came out and people had to move to making everything mobile. So I don't know about the productivity aspect, but certainly there's going to be a period of investment. You're right. The same is true here for the exact reasons that you talked about. And maybe I'll flip this back to you. One thing that's on my mind is just the very rapid pace of the introduction of this technology and the application of this technology. And we've seen it before, as you go through technology cycles, you have new jobs created and then you have other jobs that are made obsolete and it just feels like this is going to happen even faster than in other technology cycles. You think about it, we weren't even really talking about ... This wasn't a podcast topic in January, I'm sure, right?

Mark Zandi:                       Yeah. Right.

Rob Fauber:                       How do you think about that? Because that feels like a bigger societal and economic issue.

Mark Zandi:                       Yeah. My sense is ... And you pick the internet. I think that's a great analog. I think we all saw the internet, we saw the potential immediately and go, oh, this is a game changing thing. You weren't quite sure how, but you knew this was going to change the way we lived and the way we worked. And it took time before it really kicked into gear. And the other thing is one difficulty of incorporating internet into business practices was you had to change the way you organize yourself within a company and that takes time and energy and can be counterproductive at least initially because you're all trying to figure it out and how to organize yourself. And that it was ultimately when new businesses formed and they optimized around the internet, that things really took off.

                                                That they didn't have the legacy of the former whatever structure. They could de novo say, this is the way we're doing it. And as a result, they had enormous ... And that's when you got new products and really game changing things that you couldn't imagine before. That's when they really started to happen. And that's kind of the analog that I'm thinking about here, that it's going to take a little bit of time to figure it out and for new businesses to form and to optimize around it. But having said that, it feels like it could be kind of a cliff event. For example, we're working to try to figure out how to improve the analysis we do with AI and it's not easy. And we've been trying for a while. Even before ChatGPT, we've been ... You know this better than I. All throughout the company, but in the economics world, we contracted with OpenAI well before OpenAI was in the common parlance.

                                                And it's not easy, but I have this sense that once you kind of figure it out, boom, then things change really quickly. When I say quickly, within a few weeks, things change dramatically. So there might be more of a cliff event here than I'm anticipating. But I think the internet's a really good analog, and I think most economists are using that as their analog for trying to assess how this is going to play out.

                                                Let me ask you one other question though, and I asked this of Martin Fleming. You hear all these dark voices like Sam Altman, the founder of OpenAI or Elon Musk and there's many others. Do you worry about that? About the dark side here and how are we going to set up governance around this and make sure that it's not a problem?

Rob Fauber:                       Probably, again, I would worry about it with the internet and it's early days, and I think part of the challenge here is this, as you said, it feels like it's moving even faster to me. This is one of the most widely adopted applications in history, so it's in everybody's hands. And look, people are going to use the technology for bad as they always do. I mean, you see what's going on with cyber criminals and all of that. So this will be no different. There will be people that will figure out how to do bad things with this. I think it's incumbent on the policymaking community and business to figure out what are the principles and frameworks for responsible use. That's something we're giving real thought to, Mark. And look, we have a ... You know this because you certify to it every year. We have a business code of conduct. So we're already hard at work on thinking about what does a code of conduct look like that's applied to AI. Thinking about the purpose of these tools, the accountability, the transparency, the security, all of those kinds of things. I think we've got to make sure that businesses and policymakers are focused on this.

                                                And I would say to get this right, you've got to have a framework that ... Because this is ultimately going to get regulated, but you've got to have a framework that still allows innovation because there's tremendous potential, but at the same time mitigates the negative uses of the technology.

Mark Zandi:                       Right. Well, I thought this was going to be 45 minutes. We're on an hour now. I really appreciate it though. We can go on and on and on, but I know you're going to catch a plane to ... I'm not sure where you're going, but I'm sure hopefully-

Rob Fauber:                       Undisclosed location, Mark.

Mark Zandi:                       Undisclosed.

Marisa DiNatale:              A black site.

Mark Zandi:                       There you go. There you go. But I want to thank you for taking the time and really appreciate everything you do. So thank you.

Rob Fauber:                       Yeah. Well, thank you for having me and Marisa and Cris, it was great to be with you. And I assure you I am very wowed by your prowess with the numbers game. That was a big take away from me.

Mark Zandi:                       There's no way ChatGPT, Bard is going to replace that. I assure you.

Rob Fauber:                       We got the best in the business.

Marisa DiNatale:              Job security.

Mark Zandi:                       Got the best in the business.

Rob Fauber:                       Shameless plug. All right.

Mark Zandi:                       Shameless, shameless.

Marisa DiNatale:              Thanks Rob.

Cris deRitis:                        Thank you. Thank you.

Mark Zandi:                       Well, with that dear listener, we're going to call this a podcast. Talk to you next week. Take care now.