Unknown: But congratulations to you!
Unknown: five seconds please five seconds.
SPEAKER_06: Good evening and welcome to the Strategic Development Committee and Special Board Meeting
SPEAKER_06: of September 9, 2025.
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SPEAKER_06: the public comment period.
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SPEAKER_06: Written comments will not be read into the record but will be provided to the board electronically
Unknown: and placed into the record of the meeting if the comments are received within two hours
SPEAKER_06: after the meeting ends.
SPEAKER_06: Deputy General Counsel, please conduct the roll call.
SPEAKER_08: Director Herber?
Unknown: Here.
SPEAKER_08: Director Samborn?
Unknown: Here.
Unknown: Chair Buie-Thompson?
SPEAKER_08: Director Herber and Samborn are present.
SPEAKER_08: We have a quorum also present our directors, Tamayo and President Fishman.
SPEAKER_06: Thank you.
SPEAKER_06: Well, item number one is all we have on our agenda tonight and that's to provide the board
SPEAKER_06: with an external presentation with the current economic outlook and we are honored tonight
SPEAKER_06: to have Dr. Varge Nee with us from Sacramento State to give us some insightful comments
Unknown: about the economy.
SPEAKER_06: So with that, we want to go ahead and welcome you.
Unknown: Okay.
Unknown: Nice to be here.
SPEAKER_01: Two familiar faces.
SPEAKER_01: And of course over the years I've stayed in touch with people like John Dostachio and
SPEAKER_01: Paul and I'm not sure how many of you have a long history with SMUD but I still remember
SPEAKER_01: the years with the YOLO annexation.
SPEAKER_01: So I think that might have been the last time I was probably here formally presenting to
SPEAKER_01: the board.
SPEAKER_01: So thank you again for the invite.
SPEAKER_01: So let me get started here.
SPEAKER_01: I've been here not 21 years.
SPEAKER_01: Wear multiple hats.
SPEAKER_01: I'm a full professor of finance at Sac State.
SPEAKER_01: I also produce a local economic forecast which I've been doing for the last 17 years now.
SPEAKER_01: The Sacramento Business Review which is presented in partnership with the business journal.
SPEAKER_01: And so every January, you know, we present our views and the only reason I believe we
SPEAKER_01: are still in business after 17 years is because our team has been more right than wrong.
SPEAKER_01: It's a dangerous game, right?
SPEAKER_01: You're wrong a few times in a row and people don't listen to you anymore, right?
SPEAKER_01: So the fact I'm invited tonight is a positive sign, right?
SPEAKER_01: So I'll take that as a compliment.
SPEAKER_01: Interesting times.
SPEAKER_01: I would say I have mostly good news, some bad news.
SPEAKER_01: Maybe in contrast with what you might be seeing otherwise, you might be hearing otherwise,
SPEAKER_01: that there's a lot of obviously noise with policy issues, policy errors, but I'll see
SPEAKER_01: if I can put my spin on it and give you my views, right?
SPEAKER_01: First things first, the economy is not at a risk of any recession this year for sure.
SPEAKER_01: And even in 2026, my expectation is that if indeed the rate cuts come through, which
SPEAKER_01: I think they're going to come through, we probably will see tailwinds to the economy.
SPEAKER_01: And we had a fairly decent 2025 so far.
SPEAKER_01: 2024 turned out to be better than what most people expected.
SPEAKER_01: In 2025, first quarter, we had a scare because we had a slightly negative GDP growth.
SPEAKER_01: And a lot of people started worrying about their tariffs and the noise surrounding the
SPEAKER_01: tariffs.
Unknown: Q2, the GDP was up 3.3%.
SPEAKER_01: That was a very strong number.
SPEAKER_01: And of course you can argue that had to do with all the imports and exports, the numbers,
SPEAKER_01: the way they played out.
SPEAKER_01: Q3, the estimate is close to about 3%.
SPEAKER_01: And Q4, once again, I think we'll be closing out, I think, on a positive note.
SPEAKER_01: So certainly I think 25 will be okay.
SPEAKER_01: Question is 26, are we going to see something much more in terms of a slowdown or are we
SPEAKER_01: going to see a recession?
SPEAKER_01: Europe is still struggling at this point in time.
SPEAKER_01: China has slowed down a lot.
SPEAKER_01: And all those obviously have a major impact on the United States as well.
SPEAKER_01: But in general, I would say my expectation is that if things play out the way I expect
SPEAKER_01: them to, we'll see GDP growth to be fine in 26.
SPEAKER_01: So we should see a positive growth.
SPEAKER_01: The rate cuts in general, if the federal funds rate gets normalized at 3%, because right
SPEAKER_01: now we are still at 4.25%.
SPEAKER_01: For some of you, just to put that into perspective, the last 20 years literally has been a zero
SPEAKER_01: interest rate policy, not just in the United States but globally.
SPEAKER_01: And that is reversing now.
SPEAKER_01: So you can see that in a lot of ways, I would say it's very positive, we are normalizing.
SPEAKER_01: And if you can normalize the rate to about maybe 3%, most of the math that I have seen
SPEAKER_01: on my end shows that a GDP boost to the growth rate is going to be about 2.2%.
SPEAKER_01: So that's a fairly substantial boost, given that we are expecting the GDP to grow about
SPEAKER_01: maybe 3% next year.
SPEAKER_01: But obviously rate cuts are also going to be inflationary.
SPEAKER_01: We already have inflation that came in a little hotter than usual this last month.
SPEAKER_01: We saw inflation, not spike, but definitely came in higher than what we thought was going
SPEAKER_01: to be coming in at.
SPEAKER_01: So yes, rate cuts will be inflationary too, but maybe at the most about 1%.
SPEAKER_01: So that's the expectation that you might see inflation go up a little bit further from
SPEAKER_01: here.
SPEAKER_01: The most recent reading we just saw was 2.7% for the CPI and 3.1% for the core.
SPEAKER_01: So again, just to put this into perspective over the last 30 years, 40 years, maybe 50
SPEAKER_01: years or more, our average inflation for the last century is close to about 3.3%.
SPEAKER_01: It's only in the last 20 years that we have seen inflation be under 2% most of the time.
SPEAKER_01: And that is not a good thing actually, because we were deflationary.
SPEAKER_01: We were deflationary here in the United States.
Unknown: We were deflationary in China.
SPEAKER_01: We were deflationary in Europe, primarily because China, Japan, Europe, United States
SPEAKER_01: all have an aging population.
SPEAKER_01: And so that had a massive deflationary impact on demand in terms of global demand.
SPEAKER_01: So again, inflation has gone up a little bit, but nothing to be scared about, nothing to
SPEAKER_01: be worried about too much.
SPEAKER_01: There are some people who are obviously very worried about how inflation is following the
SPEAKER_01: same pattern that we followed in the 1970s.
SPEAKER_01: So you can see, for example, the first time it spiked, then it came down, and then it
SPEAKER_01: spiked again.
SPEAKER_01: And the second time, the spike was much higher in the 1970s.
SPEAKER_01: I would be very surprised if this happened again.
SPEAKER_01: So I'm fairly confident in my mind that that's not going to happen because most of the forces
SPEAKER_01: we see today globally, nationally, even regionally are fairly deflationary.
SPEAKER_01: Technology is very deflationary.
SPEAKER_01: Everything that we are seeing right now, especially with AI and all that stuff, is
SPEAKER_01: going to be very deflationary.
SPEAKER_01: Service sector inflation is higher, the goods inflation.
SPEAKER_01: So you can almost argue that in a lot of ways, a lot of people were very scared about what
SPEAKER_01: tariffs are going to do to the goods inflation that hasn't played out so far.
SPEAKER_01: Services inflation is the reason why inflation overall is still high.
SPEAKER_01: And then, of course, there are three major drivers of inflation that nobody really wants
SPEAKER_01: to talk about most of the time.
SPEAKER_01: Nothing else seems to be under control quite a bit.
SPEAKER_01: But if you look at housing, you look at health care, and you look at education.
SPEAKER_01: From a policy standpoint, those three are hard to argue that they are not extremely
SPEAKER_01: inflationary.
SPEAKER_01: And, of course, being part of the education industry, I'm the first one to admit, education
SPEAKER_01: is highly overpriced and overrated in many ways.
SPEAKER_01: Tuition has been going up 8%, 9% per year on average when the rest of inflation was
SPEAKER_01: under 2%.
SPEAKER_01: And unlike many other industries where there's a warranty, there's a guarantee, in the education
SPEAKER_01: industry we're still struggling with a lot of people who graduate but can't find jobs.
SPEAKER_01: So there's no warranty there, hey, by the way, can I have my tuition money back?
SPEAKER_01: So those are the three culprits behind inflation, if you really want to think about it.
SPEAKER_01: If I stripped housing out right now from the current CPI numbers, the CPI actually is below
SPEAKER_01: 2%.
SPEAKER_01: It goes to about 1.7, 1.8.
SPEAKER_01: So we are already very deflationary, not counting housing.
SPEAKER_01: Confidence is low, we can see that.
SPEAKER_01: Business confidence is low.
SPEAKER_01: Consumer confidence is low.
SPEAKER_01: Primarily again because there's a lot of noise around the policy issues.
SPEAKER_01: Since the new administration took over, we have seen tariffs being very confusing.
SPEAKER_01: We have seen on-off kind of conversations.
SPEAKER_01: One day something is put in place, the next day it's taken back.
SPEAKER_01: So obviously there's a lot of uncertainty going forward but again, like I said, for
SPEAKER_01: us in my world, I'm very unemotional about some of the policy issues.
SPEAKER_01: Once the noise settles down, I think we have to be clear about what the true impact is
SPEAKER_01: going to be.
SPEAKER_01: And so some of the charts I'm going to walk you through.
SPEAKER_01: Consumer spending, which was fairly strong until recently, you can finally see signs
SPEAKER_01: of slowdown now.
SPEAKER_01: You can clearly see that things are changing now.
SPEAKER_01: Yes, there's a slowdown across the board.
SPEAKER_01: The last couple of days, you've also seen the job numbers come out that basically point
SPEAKER_01: in the same direction that there's a massive slowdown in the economy happening.
SPEAKER_01: One of the things that I said months ago, and I said that in January too, and I want
SPEAKER_01: to say that again, time and again there has been a lot of negative talk about the U.S.
SPEAKER_01: The U.S. economy, the U.S. dollar, U.S. investments, that especially with what's been happening
SPEAKER_01: with tariffs, that the rest of the world is going to walk away from us.
SPEAKER_01: That they are basically reducing the investments in our markets, they are reducing their dependence
SPEAKER_01: on the dollar being the reserve currency, they are no longer going to rely on U.S. being
SPEAKER_01: the anchor economy for the world.
SPEAKER_01: We saw that happen just for one month actually.
SPEAKER_01: And then you can see in the last three months, everything has reversed again.
SPEAKER_01: Once again, the world has come back.
SPEAKER_01: They are once again investing in our markets.
SPEAKER_01: So you can see that little orange thing going down happened for one month, but everything
SPEAKER_01: else is once again picking up, whether it's investments in the treasury market, investments
SPEAKER_01: in the bond market, agency bond market, and even in the stock market.
SPEAKER_01: So you can see that the rest of the world is coming back again to the table.
SPEAKER_01: And again, I remind people, primarily because sometimes it gets missed in the noise, today
SPEAKER_01: the market gap of one company, Nvidia, is larger than the entire German economy.
SPEAKER_01: And Germany right now is the beacon for Europe because Europe is struggling.
SPEAKER_01: And we are still, like everybody watching Germany, one company is larger than the entire
SPEAKER_01: German economy, the entire German stock market, and the entire British stock market.
SPEAKER_01: So think about that.
SPEAKER_01: So it's a $4 trillion plus company right now, and Microsoft is right behind it.
SPEAKER_01: So we underestimate the power of the financial markets in this country sometimes.
SPEAKER_01: The world is still investing in more in the US markets.
SPEAKER_01: That chart is not going down.
SPEAKER_01: You can see that chart is still going up further in 2025.
SPEAKER_01: So we are right now at 18% plus in the equity markets where the rest of the world is putting
SPEAKER_01: the money.
SPEAKER_01: Housing market is right now slowing down a lot.
SPEAKER_01: And you can see it's trying to figure out how to adjust to the high rates.
SPEAKER_01: The mortgage rates have been fairly sticky.
SPEAKER_01: In my opinion, they're going to stay sticky.
SPEAKER_01: But clearly, I think we need to pay very close attention to what's happening there because
Unknown: both existing home sales, new home sales, have come down a lot.
SPEAKER_01: And they are right now weak.
SPEAKER_01: Home buyer as well as home builder confidence is at fairly low levels.
SPEAKER_01: So you can see that's not helping the housing market.
SPEAKER_01: Home buyers wanting to buy in this current market is hitting all time lows.
SPEAKER_01: So you can see right now, once again, there's a huge weakness in demand.
SPEAKER_01: The first time home buyers as a share of the total market that used to be pretty good at
SPEAKER_01: one time has dropped off.
SPEAKER_01: So you can see now we have fewer first time home buyers.
SPEAKER_01: It has dropped to almost under 25%.
SPEAKER_01: And it used to be at 50%.
SPEAKER_01: So imagine we have seen a massive withdrawal from the market by the first time home buyers.
SPEAKER_01: And again, you can say there are multiple culprits there.
SPEAKER_01: But primarily, I think the rates have been fairly sticky.
SPEAKER_01: My generation still is used to paying 9%, 10% in the 90s for the first homes.
SPEAKER_01: The current generation was getting used to 2.5% and 3%.
SPEAKER_01: So they're still trying to figure out if the rates are going to change.
SPEAKER_01: The job market has cooled off a lot.
SPEAKER_01: So I think this is the reason why for most of you who attended my forecast in January,
SPEAKER_01: and I made the forecast poorly at that time, that we will see three rate cuts this year.
SPEAKER_01: And a lot of people thought I was a little wacky to make that call because 95% of Wall
SPEAKER_01: Street at that time was saying no rate cuts and maybe a rate hike because inflation was
SPEAKER_01: still going up.
SPEAKER_01: I feel fairly vindicated because we will see three rate cuts, I'm pretty sure, and one
SPEAKER_01: coming in next week.
SPEAKER_01: It might be 50% of 50 basis points because right now the job market is extremely weak.
SPEAKER_01: We saw the number come out yesterday.
SPEAKER_01: We actually now lost more than a million jobs than we thought we did, right, because that
SPEAKER_01: number came in much lower when it was revised.
SPEAKER_01: Unemployment rate hasn't picked up a lot.
SPEAKER_01: But at 4.3%, it's still recessionary.
SPEAKER_01: So at the moment you cross 4.1%, it becomes recessionary, right?
SPEAKER_01: California is doing worse, 5.5%, not a surprise.
SPEAKER_01: We are the largest state in the country.
SPEAKER_01: We are the largest economy in the country.
SPEAKER_01: Sacramento is doing worse than California.
SPEAKER_01: We had 5.6%.
SPEAKER_01: And again, this is my mantra for the last 16, 17 years.
SPEAKER_01: Sacramento has not been able to do a better job bringing in the high tech jobs and replacing
SPEAKER_01: the jobs that we lose with HP or Aerojet and now Intel, right?
SPEAKER_01: So Intel has announced massive layoffs and Folsom-Adorado Hills is feeling the brunt
SPEAKER_01: of that.
SPEAKER_01: So I think Sacramento has a long way to go before it can reasonably celebrate the fact
SPEAKER_01: that, hey, you know, we are bringing in jobs here.
SPEAKER_01: We have not done a great job, clearly.
SPEAKER_01: Employees are being asked to be back into the office.
SPEAKER_01: The quick rate drops.
SPEAKER_01: Say if you get fired, right, or if you are at risk of losing a job, it's hard to find
SPEAKER_01: another one.
SPEAKER_01: This is going to have a damping effect on our economy because many of my neighbors in
SPEAKER_01: El Dorado Hills, for example, where I live, they were used to the fact they were working
SPEAKER_01: from home because they were employed in the Bay Area.
SPEAKER_01: Many of them are now being asked to hit the road four times a week or five times a week.
SPEAKER_01: And they're literally now trying to figure out should they basically leave the job or
SPEAKER_01: the house.
SPEAKER_01: And in most cases, they're going to leave the house because the job is very difficult
SPEAKER_01: to replace in Sacramento, especially if you have a high six-figure paycheck.
SPEAKER_01: There are limited six-figure paychecks in the Sacramento area.
SPEAKER_01: More people unemployed today than the number of job openings.
SPEAKER_01: This is a massive shift.
SPEAKER_01: Two years ago, we had twice as many job openings as the number of people looking for jobs.
SPEAKER_01: Today we have more unemployed people than the number of job openings, right?
SPEAKER_01: So massive shift.
SPEAKER_01: Job growth is clearly declining.
SPEAKER_01: And in fact, the numbers keep getting revised.
SPEAKER_01: It's going to be even more shocking to us as to how bad the job market is.
SPEAKER_01: This is the prediction I made.
SPEAKER_01: I'm going to stick to my prediction again.
SPEAKER_01: I need to see the Fed funds rate normalized from 4.25 to 3%.
SPEAKER_01: The last 20 years, we were at 0%.
SPEAKER_01: I'd like to see us at 3%.
Unknown: 4.25% is not sustainable.
SPEAKER_01: 4.25% means the real rate is more like 2.5%, 3%.
SPEAKER_01: It's not sustainable.
SPEAKER_01: The 10-year treasury, my prediction is, is going to fall somewhere between 4.5% and 5%,
SPEAKER_01: if it can settle there.
SPEAKER_01: This is the best chance of normalizing our markets in the last 20 years because what
SPEAKER_01: we saw in the last 20 years was completely abnormal.
SPEAKER_01: So if we can normalize the 10-year treasury between 4.5% and 5%, I think that would be
SPEAKER_01: great.
SPEAKER_01: If that happens, the mortgage rates typically have 150 basis point spread, 200 basis point
SPEAKER_01: spread on that.
SPEAKER_01: So we will not see the mortgage rates come down below 6 or 5.5%, too much.
SPEAKER_01: So I would say the mortgage rates, we have to get used to them being sticky and staying
SPEAKER_01: at about 5.5%, 6, 6.5%.
SPEAKER_01: So that's going to be a challenge for the housing market, obviously for the first time
SPEAKER_01: home buyers going forward.
SPEAKER_01: This is a quick educational thing on why, what's so broken structurally that needs
SPEAKER_01: fixing.
SPEAKER_01: We say, well, why is the new administration all over the board?
SPEAKER_01: And what are they trying to fix?
SPEAKER_01: Is something that badly broken that needs fixing, right?
SPEAKER_01: And of course we can talk about it.
SPEAKER_01: The last 20 years, like I said, we put too much cheap money on the table.
SPEAKER_01: We have $37 trillion in public debt outstanding today and rising.
SPEAKER_01: Our economy is only $30 trillion.
SPEAKER_01: So we're already exceeding 100% of our economy in terms of public debt.
SPEAKER_01: That's not sustainable.
SPEAKER_01: I put so much cheap free money on the table in the last few years.
SPEAKER_01: Just COVID alone, we put $10 trillion on the table as free money.
SPEAKER_01: That's not sustainable.
SPEAKER_01: Our deficits have been widening and every time our trade deficits widen, they basically
SPEAKER_01: take away from the US GDP.
SPEAKER_01: So if you know the math behind it, you will probably see easily why trade deficits are
SPEAKER_01: not the best things that can happen to the US GDP growth.
SPEAKER_01: The rising deficits in terms of even the spending by the government have been going out of whack.
SPEAKER_01: You can see they have been rising and the US federal debt has been rising and they've
SPEAKER_01: been spending more money than they have in their pockets.
SPEAKER_01: This is the national debt of the United States.
SPEAKER_01: I just told you $37 trillion and still rising and that's not sustainable.
SPEAKER_01: In the year 2000, when China had just been admitted to the World Trade Organization,
SPEAKER_01: the United States was the largest trading partner for literally most of the world.
SPEAKER_01: So everything in blue here shows that the United States was the major trading partner
SPEAKER_01: for these countries.
SPEAKER_01: So obviously most of the global map here is blue.
SPEAKER_01: Fast forward 2020, you can see most of the global map turned red.
SPEAKER_01: That means the United States was no longer the major trading partner for these countries.
SPEAKER_01: China is now.
SPEAKER_01: Now, if you say there's nothing wrong with that, it's hard to argue that, but if you
SPEAKER_01: see the problem, then we got to try and see if we can address it because we do have widening
SPEAKER_01: deficits that are again not sustainable in my opinion.
SPEAKER_01: The good news is in the last two or three years, our dependence in China has come down.
SPEAKER_01: So we can see, for example, 13% of the US imports now are from China when at one time
SPEAKER_01: almost 25%, 30% of our imports were coming from China.
SPEAKER_01: But that now makes Mexico and Canada leading economic partners.
SPEAKER_01: So now those two countries are amongst the top countries that we do trades with.
SPEAKER_01: On the tariff front, there's a lot of noise, right?
SPEAKER_01: And obviously we're going to probably see 10% plus effective rates for sure, going forward.
SPEAKER_01: But even then, the United States still has one of the lowest tariff rates in the world.
SPEAKER_01: So if you look at country by country as to where the tariff rates are, we still have
SPEAKER_01: some of the lowest rates in the whole world.
SPEAKER_01: We are much more vulnerable to China, not in terms of trade.
SPEAKER_01: Actually we are more vulnerable when it comes to a corporate America.
SPEAKER_01: So if I see this, if you look at this chart, roughly $295 billion is a deficit with China.
SPEAKER_01: On the flip side, we have $1.16 trillion coming in through S&P 500 companies like Apple and
SPEAKER_01: other companies that do business in China that is at risk right now.
SPEAKER_01: Because if China wants to slam the doors on Apple, for example, and stop allowing Apple
SPEAKER_01: to sell phones in China, that could be a huge risk to corporate America.
SPEAKER_01: So we see that on both front, straight front and corporate America, we see this risk going
SPEAKER_01: forward.
Unknown: Will tariffs necessarily be passed on to the consumers?
SPEAKER_01: And actually I found a very nice chart that shows that not all the tariffs are simply
SPEAKER_01: getting passed on to the consumers.
SPEAKER_01: There's a lot of parties involved in the tariffs, whether it's middlemen, middlewomen, or whether
SPEAKER_01: it's the consumer, whether it's the producer, whether it's the wholesaler.
SPEAKER_01: There's a lot of folks involved, and eventually I think you will see probably tariffs be
SPEAKER_01: absorbed in multiple ways.
SPEAKER_01: This is a chart that scared me because it shows you, for example, our dependence on
SPEAKER_01: China.
SPEAKER_01: What percent of our total imports or specific goods come from China?
SPEAKER_01: So when you look at baby carriages, umbrellas, stainless steel, water bottles, fireworks,
SPEAKER_01: right?
SPEAKER_01: Our Fourth of July is dependent on China.
SPEAKER_01: But this is worse.
SPEAKER_01: 95% of the ibuprofen that we consume here comes from China.
Unknown: 91% of the hydrocortisone comes from China.
SPEAKER_01: So when you talk about national security and national importance, right, hopefully this
SPEAKER_01: chart is a wake-up call that we can't have everything that we truly value coming from
SPEAKER_01: China, right?
SPEAKER_01: Overall, if in the worst-case scenario the tariff effective rate settles at 22%, which
SPEAKER_01: I think is a high bar, I'm thinking more like between 10% and 20%.
SPEAKER_01: So let's say I'm hoping the best-case scenario might be 15%, overall effective rate.
SPEAKER_01: Let's say it's 22%, which is right now what we are seeing on the table.
SPEAKER_01: The GDP impact is going to be minus 1.5%.
SPEAKER_01: Those are my estimates.
SPEAKER_01: Those are my, that's my data.
SPEAKER_01: The impact on inflation is going to be 1.5%.
SPEAKER_01: So when people say inflation will be badly impacted by tariffs, my guess is about 1.5
SPEAKER_01: is going to come from tariffs.
Unknown: And it's going to be a one-time sticker shock because it's not like it's a continuous increase
SPEAKER_01: in prices year over year.
SPEAKER_01: It's just a one-time price adjustment.
SPEAKER_01: Small businesses are stressed.
SPEAKER_01: And we are watching the stresses very closely on the small businesses because they account
SPEAKER_01: for 80% of the job openings.
SPEAKER_01: And obviously small businesses will pay the most price because of the trade war that we
SPEAKER_01: have.
Unknown: There's a major change in the last few months, which is a little bit more scary.
SPEAKER_01: UK, US, and France, the 30-year bond yields have been rising.
SPEAKER_01: And they're rising beyond levels that can be explained by just pure market functions
SPEAKER_01: like the buying and selling that goes on in the bond market.
SPEAKER_01: And the only way we can explain this is that there's a rising fear of the rising deficits
SPEAKER_01: and people are moving away from any long-term financing in the bond market, especially when
SPEAKER_01: it gets done by the governments.
SPEAKER_01: So there is this fear going on, not just in our country.
SPEAKER_01: Like I said, it's happening in UK.
SPEAKER_01: It's happening in France.
SPEAKER_01: The planet is aging.
SPEAKER_01: I told you guys about the fertility rates coming down, whether it's the US, Japan, or
SPEAKER_01: China.
SPEAKER_01: And we have an aging planet.
SPEAKER_01: We have an aging population.
SPEAKER_01: And that's a massive challenge everywhere.
SPEAKER_01: Okay.
SPEAKER_01: Let me switch back.
SPEAKER_01: So those are the structural issues I was talking about.
SPEAKER_01: That, hey, by the way, water's so broken that it needs fixing, right?
SPEAKER_01: So I have those charts.
SPEAKER_01: The commercial real estate market has not crashed the way people thought it's going
SPEAKER_01: to crash, right?
SPEAKER_01: So a lot of people said, oh my God, you know, post-COVID, nobody's going back into the office.
SPEAKER_01: And all these buildings, for example, downtown in Sacramento, are going to stand vacant.
SPEAKER_01: And the government and everybody else who's basically occupying those buildings is going
SPEAKER_01: to move away.
Unknown: It hasn't happened.
SPEAKER_01: And it's probably not going to happen.
SPEAKER_01: Okay.
SPEAKER_01: So we are encouraged that I think there's a U-turn that we have seen already happen in
SPEAKER_01: the commercial real estate market, whether it's industrial, whether it's retail, whether
SPEAKER_01: it's office or multifamily.
SPEAKER_01: And so I think things are getting slightly better there now.
SPEAKER_01: Mortgage rates, I just talked about this already.
SPEAKER_01: I think they're going to stay sticky.
SPEAKER_01: But the good news is while the new mortgage rate for new home buyers has gone up, the
SPEAKER_01: effective rate for almost 50% plus of the people who are already in homes is still very
SPEAKER_01: low.
SPEAKER_01: So the effective rate is still, you know, at close to about 4%, because most of the people
SPEAKER_01: who are locked in into homes from before are not paying anything more than 4%.
SPEAKER_01: Median age of a home in the United States has been going up.
SPEAKER_01: So homes are getting older.
SPEAKER_01: This is positive for the construction industry.
SPEAKER_01: I expect more homes to be built going forward, not just because there's higher demand for
SPEAKER_01: homes and we are 5 million units short.
SPEAKER_01: It's also because old homes that are falling apart need to be replaced by new homes.
SPEAKER_01: So that is a positive sign.
SPEAKER_01: The AI trade for energy.
SPEAKER_01: I was just talking to Frankie before the meeting started.
SPEAKER_01: There's a massive demand for energy now, right?
SPEAKER_01: Because of AI and data centers and everything that's going on.
SPEAKER_01: My clients have made tons of money in any stocks that basically companies that do energy.
SPEAKER_01: And so this is going to continue.
SPEAKER_01: This is going to continue for a while.
SPEAKER_01: And I think we were already aware that the U.S. grid was not powerful enough and strong
SPEAKER_01: enough.
SPEAKER_01: Just for existing demand, can you imagine with all the new demand showing up, how much
SPEAKER_01: more has to come on grid for this?
SPEAKER_01: And of course, smart people know better because, hey, I'm the last guy who can talk about energy
SPEAKER_01: here.
SPEAKER_01: All right, all right.
SPEAKER_03: Hang on, hang on.
SPEAKER_03: I've been content to listen.
SPEAKER_03: But the last comment, what evidence do you have the U.S. grid is not able to meet its
SPEAKER_03: demand other than the talking points?
SPEAKER_03: U.S. is what I'm saying?
SPEAKER_03: Minus energy production has been able to meet demand with a handful of very unique
SPEAKER_03: blackouts that's happened mostly a long time ago.
SPEAKER_03: It's like you don't see whites sprayed out.
SPEAKER_03: It's not like Nepal where the power goes out.
SPEAKER_03: Used to go out at 7 p.m. and be out all day long.
SPEAKER_01: Purely anecdotal.
SPEAKER_01: And I can tell you because I live in El Rado Hills, every time, like not this year, last
SPEAKER_01: year, multiple requests to us not to use energy in the afternoon or at the peak demand.
SPEAKER_01: Or I'm sure there was a thing given by the governor's office, right, that, hey, don't
SPEAKER_01: charge your cars because we want to make sure that grid doesn't fail.
SPEAKER_01: Right.
SPEAKER_03: I mean, I would love to see evidence to support that claim because I've read that claim and
SPEAKER_03: I've read the claim in the journal.
SPEAKER_03: But I've not seen any evidence to support that is actually true.
SPEAKER_03: I just made the disclaimer.
SPEAKER_03: And I'll point out today, two years ago, exactly two years ago, it was a hundred and like 13
SPEAKER_03: degrees and today at 78.
Unknown: Right.
SPEAKER_03: So like we have the infrastructure ready for this 120 degree day that we didn't get this
SPEAKER_03: year.
SPEAKER_03: So anyway, I just want to point that out.
SPEAKER_03: My neighbors always say positive things about smart when PG&E puts us on some kind of alert.
SPEAKER_01: That's a hundred years of PG&E's mismanagement, which is why they have power safety shutoffs,
SPEAKER_03: or that's a hundred years of energy mismanagement by the PUC and PG&E.
SPEAKER_03: My expertise does not lend itself to talking about the energy issues in this room.
SPEAKER_01: You guys are way smarter than I am.
SPEAKER_01: Yeah.
SPEAKER_01: Okay.
Unknown: All right.
SPEAKER_01: Let's keep moving on.
SPEAKER_01: If you have noticed, goldhead at all time high, it's not because of the US or what's
SPEAKER_01: happening in the fear in the US.
SPEAKER_01: It's primarily because Chinese are loading up and the Indians are loading up.
SPEAKER_01: Right.
SPEAKER_01: So this just shows you the chart as to how much the Chinese have bought in the last few
SPEAKER_01: months.
SPEAKER_01: Why do I believe there will be a soft landing still?
SPEAKER_01: Right.
SPEAKER_01: So why am I still confident that I think we may not see a recession next year?
SPEAKER_01: First, there's a lot of cash still in the household accounts, especially in the higher
SPEAKER_01: income household accounts.
SPEAKER_01: So you'll see as you go up the distribution on the income as far as the households are
SPEAKER_01: concerned, you'll see how much cash is basically still sitting on the sidelines.
SPEAKER_01: Household net worth hit an all time high at $173 trillion this past month.
SPEAKER_01: So aggregated United States of America is still growing wealthier.
SPEAKER_01: Right.
SPEAKER_01: You can talk about income disparity and all that stuff.
SPEAKER_01: The household debt to asset ratio is sitting at a 50 year low in spite of the fact that
SPEAKER_01: we have stretched quite a bit as a consumer.
SPEAKER_01: This ratio is still sitting at a 40 year 50 year low.
SPEAKER_01: So again, I'm just showing you the data as to how some of these things are shaping up.
SPEAKER_01: Money market funds still have close to five to $7 trillion depending on how you do the
SPEAKER_01: math still sitting on the sidelines and still waiting to go back into the market in many
SPEAKER_01: ways.
Unknown: Right.
SPEAKER_01: The this is the U.S. income and expenditure chart by households in terms of income.
SPEAKER_01: And you will find that the higher households in terms of income not only account for a
SPEAKER_01: higher proportion of the income, but they also account for a higher proportion of the
SPEAKER_01: spending.
SPEAKER_01: So almost 60 to 70 percent spending is not coming in from the poor people.
SPEAKER_01: It's coming in from the higher income households, which is the reason why there's a dichotomy
SPEAKER_01: in the thinking that while people are struggling to pay for gas and they're struggling at the
SPEAKER_01: grocery store, our economy hasn't tanked because we still have a lot of people who are spending
SPEAKER_01: money at the higher portions of the distribution.
SPEAKER_01: Right.
Unknown: Debit card transactions are still going up.
SPEAKER_01: This is not credit card transaction.
SPEAKER_01: So we have seen credit card, for example, transactions going up and people getting stretched
SPEAKER_01: on credit cards.
SPEAKER_01: But even debit card transactions are going up, which means that people are willing to
SPEAKER_01: pay using the cash in their checking and savings accounts, right, for the expenditures.
SPEAKER_01: Restaurant bookings are still at an all time highs.
SPEAKER_01: I mean, you can see the restaurants are not basically weak.
SPEAKER_01: I don't know about you guys, but where I live, midweek, if I have to go out and eat, it's
SPEAKER_01: hard to get in without a reservation.
SPEAKER_01: You still need a reservation today.
SPEAKER_01: And you would think that, oh, my God, I mean, it would be easy to just go find a table,
SPEAKER_01: right?
Unknown: You cannot.
SPEAKER_01: US air travel, extremely strong, extremely strong.
SPEAKER_01: As much as we complain about the airlines and maybe the quality of travel, but travel
SPEAKER_01: is still very, very active.
SPEAKER_01: Bankruptcy filings have leveled off.
SPEAKER_01: So again, we are not seeing a spike in the business bankruptcy filings.
SPEAKER_01: And then staffing firms are basically pointing to a rebound in job openings, especially in
SPEAKER_01: the financial industry and in the technology industry because of the M&A deals that are
SPEAKER_01: coming through now.
SPEAKER_01: So you can see deal flow has picked up.
SPEAKER_01: More mergers and acquisitions are happening now.
SPEAKER_01: You can see the IPO activity has picked up.
SPEAKER_01: There are many more companies that went public right in the recent months.
Unknown: Okay.
SPEAKER_01: Let me switch gears and just basically show you the impact.
SPEAKER_01: So what impact all of this is happening on United States households, right?
SPEAKER_01: In spite of household wealth hitting all-time highs at $173 trillion, we have roughly 60%
SPEAKER_01: of Americans who are broke.
SPEAKER_01: And the broke definition means they don't have $1,000 in the checking of savings accounts.
SPEAKER_01: They're living paycheck to paycheck.
SPEAKER_01: And by the way, these 60% of Americans, it's not that they didn't go to college or they're
SPEAKER_01: not educated.
Unknown: They are engineers, they're doctors, they're lawyers, but they're financially illiterate.
SPEAKER_01: So that's the reason why they struggle.
SPEAKER_01: The earnings season is wrapping up for the last quarter.
SPEAKER_01: And it's hard to argue that earnings surprises have not shocked people in terms of how positive
SPEAKER_01: they were.
SPEAKER_01: The earnings have come in way better than most people expected.
SPEAKER_01: And the earnings trend is still very positive.
SPEAKER_01: We expect earnings to go up next year for the S&P 500.
SPEAKER_01: We were expecting S&P 500 earnings to grow 7% or 6%.
SPEAKER_01: They actually grew almost 11.8% this past quarter.
SPEAKER_01: So it's a very strong picture for earnings.
SPEAKER_01: If you look at the margins, once again, in spite of tariffs, the margins are still looking
SPEAKER_01: very good.
SPEAKER_01: They're at all-time highs.
SPEAKER_01: So yes, tariffs are having an impact, but nearly not the impact I think most people
SPEAKER_01: thought they might have.
SPEAKER_01: Like I said, next two years, we're still very positive on earnings.
SPEAKER_01: This concentration in the market.
SPEAKER_01: So this is a tough one because there used to be 10,000-plus publicly-created companies
SPEAKER_01: ten years ago.
SPEAKER_01: We're down to about 3,600 today.
SPEAKER_01: The top ten companies account for almost 54% of the returns on the S&P 500.
SPEAKER_01: So when you talk about the magnificent seven plus adding another two or three, they're
SPEAKER_01: driving the market clearly.
SPEAKER_01: And they're also about roughly 40% of the market cap.
SPEAKER_01: So 54% of the earnings returns and then almost 40% of the market cap.
SPEAKER_01: So if you're not in those companies, obviously, maybe things are not that bright.
SPEAKER_01: This is a chart for people, again, who – this is like Warren Buffett's quote from years
SPEAKER_01: ago again and again, don't bet against the U.S. economy, don't bet against the U.S. dollar.
SPEAKER_01: The rest of the world is still investing in the U.S. markets.
SPEAKER_01: And the world's – and our stock market here is about half the world's stock market.
SPEAKER_01: And I told you how one company in video is larger than the entire German stock market,
SPEAKER_01: the entire British stock market, and the entire German economy for that matter, right?
SPEAKER_01: These charts are showing you how the foreigners are still investing in the markets, 18.5%
SPEAKER_01: in the equity markets, you know, 30% of all treasuries, 30% of the corporate credit.
SPEAKER_01: Let's see.
SPEAKER_01: I want to skip this one.
SPEAKER_01: This is something that, again, in my world I have to be very unemotional about.
SPEAKER_01: In April, our stock market sold off 10% over two days.
Unknown: That was a massive drawdown in the market.
SPEAKER_01: The last time we saw a massive drawdown was COVID.
SPEAKER_01: So in March of the year 2020, if you remember, the market just went down like 35% over three
SPEAKER_01: weeks.
SPEAKER_01: If you see what happened in April this year, this chart is a reminder that even if there's
SPEAKER_01: a drawdown during the year, does not mean you're going to end the year lower.
SPEAKER_01: You could end the year much higher than where you are, right?
SPEAKER_01: And we have seen a massive recovery.
SPEAKER_01: This is one of the fastest recoveries we have ever seen in history that we have seen from
SPEAKER_01: April, for example, until what we have today.
SPEAKER_01: Today, NASDAQ closed at a new high, right?
SPEAKER_01: So again, it just shows you how resilient the markets are.
SPEAKER_01: This shows you, again, this is just purely educational.
SPEAKER_01: Bull markets last a lot longer than bear markets.
SPEAKER_01: Bear markets typically don't last more than a year.
SPEAKER_01: Bull markets can last seven years, eight years, nine years.
SPEAKER_01: And so that's why even if people are pessimistic that this may trigger a bear market because
SPEAKER_01: of the tariffs and everything else that's going on with policy issues and policy errors
SPEAKER_01: maybe, we're confident that the bear market is not going to last very long.
SPEAKER_01: This is purely for people who get into political debates saying that, hey, maybe it's because
SPEAKER_01: of what the government is doing.
SPEAKER_01: I'm saying, no, it doesn't matter.
SPEAKER_01: It doesn't matter who's in office.
SPEAKER_01: The market still keeps going up higher and higher every year, or at least over long horizons.
SPEAKER_01: So this is just a quick sort of educational slide on that one.
SPEAKER_01: This is an interesting one for me because in my world, if you take the last 20 years
Unknown: and there are 250 trading days in every year, so if you multiply 250 trading days by 20
SPEAKER_01: years, that's 5,000 days.
SPEAKER_01: If you are not in the five best days during those 5,000 days, you can see you lose almost
SPEAKER_01: half your portfolio.
SPEAKER_01: If you're not in the market during those 10 best days in the market during those 5,000
SPEAKER_01: days, your portfolio actually loses almost 60%.
SPEAKER_01: So this is just a reminder, it's hard to tie in the market, very hard to tie in the market,
SPEAKER_01: and you're better off just sticking it out even during bad times when you see markets
SPEAKER_01: sell off, for example, 10% over two days.
Unknown: 87% of the companies today in the United States that have more than 100 million are not public.
SPEAKER_01: They're actually private.
SPEAKER_01: So they're not the Amazons of the world.
SPEAKER_01: They're not the Netflixes of the world.
SPEAKER_01: These are all private companies, and in my world, public markets are shrinking in terms
SPEAKER_01: of the number of companies.
SPEAKER_01: The private capital is growing.
SPEAKER_01: So there's a lot more.
SPEAKER_01: I'm sure you're reading in the papers under the new administration, they're trying to
SPEAKER_01: actually include private capital in 401k plans.
SPEAKER_01: Some people think it's a bad idea, some people think it's a good idea, but in general, it's
SPEAKER_01: here to stay because private capital now is exploding.
SPEAKER_01: You can see there's a lot of private capital being made available to the businesses that
SPEAKER_01: are private.
SPEAKER_01: Over long horizons, private markets outperform public markets.
SPEAKER_01: So in my world, private equity does better than public equity, private credit does better
SPEAKER_01: than public credit, private debt does better than public debt, and then private real estate
SPEAKER_01: does better than public real estate.
SPEAKER_01: The good news, which I think the reason why I was so confident that we will see three
SPEAKER_01: rate cuts this year, is because the rest of the world was already cutting their rates.
SPEAKER_01: The ECB, which is the European Central Bank, the Bank of England, the Bank of Australia,
SPEAKER_01: even Bank of Canada, they were all cutting their rates well ahead of what our Federal
SPEAKER_01: Reserve was doing.
SPEAKER_01: Our economy cannot be sustained without our Federal Reserve at least coming in sync with
SPEAKER_01: global rates.
SPEAKER_01: And right now, we are not in sync with the global rates.
SPEAKER_01: Our rates are slightly higher than what they need to be to be in sync with the global rates.
SPEAKER_01: So that's why I'm very confident that at some point in time, you will see things change
SPEAKER_01: a little bit.
SPEAKER_01: So just very quickly, I know I've taken a little bit more time than I should have.
SPEAKER_01: Terrorists are going to weaken growth.
SPEAKER_01: We understand that.
SPEAKER_01: I mean, terrorists are going to have a negative impact on GDP growth.
SPEAKER_01: We understand that.
SPEAKER_01: But I don't think it's going to be strong enough to cause a recession.
SPEAKER_01: Tax cuts have already been, you know, we just had the tax package be approved.
SPEAKER_01: We'll start seeing the implementation of that and the effects of that pretty soon.
SPEAKER_01: They'll be serving as tailwinds.
SPEAKER_01: We'll be seeing the rate cuts coming in as tailwinds.
SPEAKER_01: Corporate profits are still strong.
SPEAKER_01: Margins are still good.
SPEAKER_01: Household balance sheets are stretched, but certainly still in good shape.
SPEAKER_01: So I would say overall message is still positive in spite of the challenges that we have going
SPEAKER_01: forward.
SPEAKER_01: Unless we see major policy errors in the next few months, if we get the free rate cuts
SPEAKER_01: and we get two more rate cuts early next year, I'm very confident that I think we'll have
SPEAKER_01: tailwinds that will help the economy a lot going forward.
Unknown: Thank you.
Unknown: I thought that was – I was already talking about energy.
SPEAKER_03: It's a really excellent presentation, and I appreciate all the slides and all the knowledge
SPEAKER_03: base.
Unknown: Look at what you were talking about sort of early on, trying to estimate impacts of tariffs.
SPEAKER_03: You were saying something like 1%.
SPEAKER_03: I tried to write it down, but I couldn't quite capture it all.
SPEAKER_03: I find that really interesting, like the tradeoff between having inflation, say, be it 3% versus
SPEAKER_03: 2%, which is 50% higher, but really you were thinking your data was saying that it probably
SPEAKER_03: isn't a huge repercussion necessarily.
SPEAKER_01: Because purely putting it to historical perspective, the 3.3% is a historical average for inflation.
SPEAKER_01: We were deflationary the last 20 years.
SPEAKER_01: I don't know if you recall, we have gone through periods during which the producers
SPEAKER_01: did not have pricing power.
SPEAKER_01: And we were worried that the economic growth was very anemic because there was no pricing
SPEAKER_01: power there, right?
SPEAKER_01: So now at least we have the point where this is getting normalized.
SPEAKER_01: So just like, for example, interest rates are getting normalized, inflation is also
SPEAKER_01: getting normalized.
SPEAKER_01: So in my book, at least this is a personal opinion, I'm not hung up on that 2% inflation
SPEAKER_01: target that the Fed is hung up on.
SPEAKER_01: Because to me, that's not official.
SPEAKER_01: They just borrowed it from the last 20 years.
SPEAKER_01: If I go back the last 50 or 100 years, which is a lot more historical in my opinion, hey,
SPEAKER_01: we were happy with 3%.
SPEAKER_01: 3% was fine.
SPEAKER_01: It was not problematic at all.
SPEAKER_01: And then again, high inflation is not a bad thing in my opinion.
SPEAKER_01: Again, for another reason, it was slow down demand.
SPEAKER_01: If you truly believe that demand is causing the higher inflation, then demand is going
SPEAKER_01: to cool off.
SPEAKER_01: It happens in the gas market all the time, in the oil market, that every time we see
SPEAKER_01: the prices spike a lot, you can see demand falls off.
SPEAKER_01: And then again, oil prices drop.
SPEAKER_01: And then gas prices come down.
SPEAKER_01: And then the last part, which is, again, I want to say this in a positive way, I have
SPEAKER_01: lived in all pockets of the country.
SPEAKER_01: In California, we're playing probably more than two times for energy.
SPEAKER_01: We have electricity.
SPEAKER_01: We're paying more than two times for gas.
SPEAKER_01: I just came back from Florida.
SPEAKER_01: The highest gas at the pump was like $260.
SPEAKER_01: I don't think I can find $260 anywhere in California.
SPEAKER_01: We are paying more for homes.
SPEAKER_01: The housing is more expensive.
SPEAKER_01: Insurance is more expensive.
SPEAKER_01: In my opinion, that's a tariff.
SPEAKER_01: We are paying a California tariff.
SPEAKER_01: Does that mean that everybody in California is devastated and we don't live here and we
SPEAKER_01: are all abandoning California and moving out from here?
Unknown: Nah, we are still here.
SPEAKER_01: So yes, there will be some negative impacts.
SPEAKER_01: We understand that.
SPEAKER_01: But not to the extent that I think has been made up in the whole room of things.
Unknown: Well, Dr. Farsny, this is much better than I thought it was going to be.
SPEAKER_06: I'm wondering, you mentioned at the last part of your presentation that if it's possible
SPEAKER_06: that things could turn this around where it wouldn't be so positive if the interest rates
SPEAKER_06: didn't continue to come down.
SPEAKER_06: I'm wondering what else we should be looking for.
SPEAKER_06: You know, like it is true that people said, you know, tariffs, tariffs, they're terrible,
SPEAKER_06: but I really haven't seen that much impact from it.
SPEAKER_06: What would I see if I knew that, oh my gosh, we're headed to a recession?
SPEAKER_06: What would I see?
SPEAKER_01: I think in my opinion, the primary driver for the recession will be the destruction
SPEAKER_01: in the job market, which has already been happening.
SPEAKER_01: The job market is getting destroyed.
SPEAKER_01: I mean, I feel terrible about the new generation that's going to be graduating soon because
SPEAKER_01: this is not a good job market.
SPEAKER_01: It looks great on the surface, but it's terrible underneath it.
SPEAKER_01: The destruction in the job market can be stabilized, in my opinion, by making the consumer
SPEAKER_01: a little stronger.
SPEAKER_01: And the consumer has been weakening, too, over the last several months.
SPEAKER_01: What we are paying for auto loan rates today, what we're paying for rates on the credit
SPEAKER_01: cards or whatever, generally, the cost of borrowing is at levels right now that's not
SPEAKER_01: sustainable.
Unknown: And we need to find relief for that.
SPEAKER_01: And the only way we can find relief for that is to bring the short-term rates down.
SPEAKER_01: The long-term rates, if anything, might actually go up higher from here.
SPEAKER_01: But that's normalizing the yield curve, too.
SPEAKER_01: But the short-term rates have to come down.
SPEAKER_01: If they don't, my point is I can be wrong.
SPEAKER_01: If you don't get the three rate cuts and the Fed says, no, we're watching inflation now,
Unknown: I think it surely is going to cause a recession, in my opinion, because that's going to weaken
SPEAKER_01: the consumer further from where we are.
Unknown: It's going to cause more destruction in the job market.
SPEAKER_01: And regardless of what corporate America does, those two alone are sufficient, because the
SPEAKER_01: consumer is 70 percent of the GDP in our country.
SPEAKER_01: So if the consumer is not strong, we know that the economy is not going to be strong.
SPEAKER_00: Dr. Varshney, thank you.
SPEAKER_00: Out of all of the headwinds that you mentioned, the potential threats to the economy, the
SPEAKER_00: one that seems to me the biggest, the most consequential, is the federal deficit.
SPEAKER_00: And at what point does that become not just a threat, but to have real impact?
SPEAKER_00: And what does that look like?
SPEAKER_00: And is there anything we can do at the local level to address that?
SPEAKER_01: It's already an impact.
SPEAKER_01: Today, the cost of refinancing a public debt has already exceeded our defense budget.
SPEAKER_01: So our line item right now in the federal budget, just for the cost of refinancing,
SPEAKER_01: is higher than what we spend entirely on defense.
SPEAKER_01: And that's my point.
SPEAKER_01: If the rates don't come down, the bond market is signaling massive problems down the road,
SPEAKER_01: not just here, but in Europe, too, because every government has done the same thing.
Unknown: They have spent more money by borrowing.
SPEAKER_01: The federal debt levels have gone up, and they are not basically free money.
SPEAKER_01: It has to be refinanced somewhere.
SPEAKER_01: And the refinancing cost is still very high.
SPEAKER_01: So we need to figure out how either we're going to bring the deficit down or find a
SPEAKER_01: cheaper way to refinance it.
SPEAKER_01: But one or two will both have to happen in the next few years.
SPEAKER_01: Otherwise, that's a recipe for disaster.
SPEAKER_01: So yep.
Unknown: You don't have to bring it down in as much.
SPEAKER_03: Inflation, if you stop adding to it, inflation will make it go down naturally.
SPEAKER_01: But that's clearly not the case.
SPEAKER_01: We have an exponential function going on.
SPEAKER_03: They were talking about it when I was in middle school in the 90s now, right?
SPEAKER_03: Like how giant the debt was, and it seems trivial compared to what it is today.
SPEAKER_03: As a low-hole policymaker, I absolutely cannot control what is happening in Washington, D.C.,
SPEAKER_03: and Poland.
SPEAKER_03: But we do have some ability to control Sacramento.
SPEAKER_03: What are your thoughts on, when you said one of the issues Sacramento has, is that you
SPEAKER_03: know, the state of California is not building enough new employment to offset parting.
SPEAKER_03: Do you have any thoughts about things that SMUD and the local policy makers can do to
SPEAKER_03: try to improve the local situation?
SPEAKER_01: That's a loaded question.
SPEAKER_01: That's tough.
SPEAKER_01: Like I said, I've been here 21 years, and I'm not saying the effort has not been made.
SPEAKER_01: Time and again, whether it's the Metro Chamber of Commerce, whether it's what used to be
SPEAKER_01: the old SACTO, I've sat on all these boards before, and now we have GSAC, all these organizations
SPEAKER_01: are working hard, trying hard, all the regional chambers of commerce, Rancho Cordova, they're
SPEAKER_01: all trying hard to try and figure out how to basically offset it.
SPEAKER_01: I think at the end of the day, I think we have a marketing problem.
SPEAKER_01: We simply don't have the marketing presence, in my opinion, to compete with some of the
SPEAKER_01: other job centers or economic centers that are much more attractive and are able to attract
SPEAKER_01: a vibrant young population, attract higher level jobs, much more diverse in terms of
SPEAKER_01: the job base.
SPEAKER_01: We are still primarily a government town, because 25 to 30 percent are still government
SPEAKER_01: jobs, and the vast majority of other jobs are all basically self-sector.
SPEAKER_01: So when it comes to diversity of the job base, it's not there.
SPEAKER_01: I'm not saying we can't celebrate Sacramento.
SPEAKER_01: We celebrate Sacramento a lot, maybe more than we should, but the reality is we don't
SPEAKER_01: have the high-paid jobs here, and they're not coming here.
SPEAKER_01: In my previous role, not Goldenstone, which is my own firm, but I was going to Reno and
SPEAKER_01: some of these other places very often, because that was my region.
SPEAKER_01: I was CIO for all of California and Nevada.
SPEAKER_01: Reno is a massive success story, massive, right from, I mean, in the middle of the dirt,
SPEAKER_01: you see Google, Apple, Amazon, Tesla, Switch, I can go on and on and on, and all these companies
SPEAKER_01: bypass Sacramento, and everybody thought, oh my God, we are heaven, they have to stop
SPEAKER_01: here when they're coming from the Bay Area, right?
SPEAKER_01: No, they didn't stop here.
SPEAKER_01: They went straight to Reno, and based on handshakes and based on whatever, very little paperwork
SPEAKER_01: and little, what do you call it, permitting process or whatever you want to call it, they
SPEAKER_01: were able to get business done quickly here.
SPEAKER_01: So clearly, we are our own worst enemy in that sense, because this is not new.
SPEAKER_01: I'm not the first one to preach this to the people that a permitting process or a regulation
SPEAKER_01: here or however we operate is very business unfriendly, right?
SPEAKER_01: But your question was designed to get me into trouble.
Unknown: We are just fishing for good ideas that we can implement.
SPEAKER_02: That's for sure.
Unknown: Thank you.
SPEAKER_02: Well, thank you, Dr. Arjuna.
SPEAKER_04: This is very interesting.
SPEAKER_04: I did want to point out, you talked about energy prices.
SPEAKER_04: We are 50 plus percent lower than our neighboring utility, which is an economic driver for this
SPEAKER_04: area.
SPEAKER_07: But I think, you talked about marketing.
SPEAKER_04: I don't think marketing is going to overcome the land prices, the home prices, the air
SPEAKER_04: quality issues.
SPEAKER_04: There's reasons young, smart people that make a lot of money want to live in a place.
SPEAKER_04: My nephews and nieces, I was just in New Hampshire last week.
SPEAKER_04: Their price of gas was also $2.60ish, which was shocking to me.
SPEAKER_04: I hadn't seen that number in a very long time.
SPEAKER_04: But my nephews are all in IT experts.
SPEAKER_04: One of them has been offered a very high paid job in San Jose.
SPEAKER_04: And he won't take it.
SPEAKER_04: He said, there's even a $200,000 a year.
SPEAKER_04: I will never buy a house in California.
SPEAKER_04: I will never be able to afford a home and have a family.
SPEAKER_04: And that's what this whole affordability crisis is about.
SPEAKER_04: But at least I feel like we at SMUD do our part to keep the rates low and to attract
SPEAKER_04: businesses through our low energy rates and our reliability.
SPEAKER_04: And we do turn people's power on a lot faster.
SPEAKER_04: But there's a lot to overcome in order to get businesses to site here.
SPEAKER_01: I will fully endorse SMUD's annexation of El Rado County.
Unknown: What's your doctorate's?
SPEAKER_04: You're not the first to say that.
SPEAKER_04: In fact, I will do the economic impact study for free.
Unknown: Oh, OK.
SPEAKER_06: It's on the tape.
SPEAKER_04: I do have a question about our national debt, because that does really worry me.
SPEAKER_04: It seems like politicians talk about that and they are worried about it, but then they
SPEAKER_04: just vote for things that are going to skyrocket the debt.
SPEAKER_04: So who are we borrowing all that money from?
SPEAKER_01: So more than 50% of the Treasury market is actually our own investors in the US.
SPEAKER_01: But if you look at the foreign governments that have placed the money in the US through
SPEAKER_01: Treasury holdings, that includes countries like Japan, countries like China, countries
SPEAKER_01: in Europe, even India has some.
SPEAKER_01: So we have a lot of foreign countries that have actually parked their money short term
SPEAKER_01: or long term in the US Treasury market.
SPEAKER_01: So we have borrowed from them, literally.
SPEAKER_01: First again, make sure that we understand most of the borrowing happened internally
SPEAKER_01: from our own investors.
SPEAKER_01: But then in terms of foreign governments, yes, those are the larger ones.
SPEAKER_01: And it's like a plus and a minus.
SPEAKER_01: The minus is that we have been borrowing from all these people.
SPEAKER_01: The plus is that it shows strength of the US Treasury market in a way, that the US Treasury
SPEAKER_01: market still remains the safest market in the world for parking money by either investors
SPEAKER_01: or foreign governments or sovereign funds or whatever you want to call it.
SPEAKER_01: So that just shows that as much as people may not have confidence in the US dollar
SPEAKER_01: or may not have confidence in the US markets, the fact that they're still holding those
SPEAKER_01: Treasuries is still fairly good signs of confidence that's happening.
SPEAKER_01: But it's not sustainable.
SPEAKER_01: We can't have this go on forever.
SPEAKER_01: We can't basically keep having the debt climb.
SPEAKER_01: Well, and I guess my question is, if it's less than 50%, but it's close to 50% foreign
SPEAKER_04: and we're terrafing here, there and everywhere and upsetting them, could they just call in
SPEAKER_04: and say it's time to pay up?
SPEAKER_01: They couldn't.
SPEAKER_01: I'll give you an example why.
SPEAKER_01: So this has been debated for years and years, and I can tell you my two cents.
SPEAKER_01: I have done enough trading in the markets, including in the bond market to tell you that
SPEAKER_01: it cannot unload billions of dollars worth of bonds on one day.
SPEAKER_01: So if the Chinese government or the Japanese government wanted to walk away from the US
SPEAKER_01: bonds, the most they might be able to unload is be able to unload a little bit, but that's
SPEAKER_01: going to basically cause a crash in the bond market.
SPEAKER_01: And the ones who are going to get hurt the most will be them because they're still holding
SPEAKER_01: massive amounts of those bonds.
SPEAKER_01: So they will not ever attempt to do something like that because that would be a no-no.
SPEAKER_01: They will hurt themselves.
SPEAKER_01: Yeah.
SPEAKER_04: Well, that's somewhat comforting.
SPEAKER_04: Thank you.
Unknown: Appreciate that.
Unknown: Yeah.
Unknown: Sorry.
Unknown: It came in late.
SPEAKER_05: So I guess I would want to ask you a little, I hate to say challenge, but from what I've
SPEAKER_05: read, so I work in tech, I'm also a CIO.
SPEAKER_05: What I've seen, the Nevada payoff hasn't been quite the payoff that they had hoped for because
SPEAKER_05: they basically handed over bags of cash to test them.
SPEAKER_05: It wasn't just permitting.
SPEAKER_05: It was straight like, just we're giving you all this.
SPEAKER_05: And when the nine, I just read a report in Harvard Business Review, the nine-year look
SPEAKER_05: bag, it actually has not when you look at the ROI.
SPEAKER_05: And so that's where I guess I always kind of push on people.
SPEAKER_05: It's like, yes, California's market, but we also aren't willing to just hand over the
SPEAKER_05: money because really companies are still coming here.
SPEAKER_05: Even though some people don't want to work here, the workforce is unparalleled here.
SPEAKER_05: And that's what I've seen in the Nevada market space is at the end of the day, there aren't
SPEAKER_05: this huge rush of people now that telecommuting is being taken away.
SPEAKER_05: These companies that once attracted all these people.
SPEAKER_05: That's where I guess what, I mean, besides handing over bags of cash was what Nevada
SPEAKER_05: did.
SPEAKER_05: Really, we bid on it and that's what it came down to.
SPEAKER_05: We weren't willing to give Amazon and Tesla and Google literally millions of dollars in
SPEAKER_05: straight cash.
SPEAKER_05: So what else as a region would you say, because we need to have an ROI, SMUD needs to have
SPEAKER_05: a proper ROI.
SPEAKER_05: So when we give the economic rates that we do, it just can't be the hope of bringing
SPEAKER_05: jobs because we've done that.
SPEAKER_05: We've seen those models, right?
SPEAKER_05: We're really at the end of the day, you're not bringing that influence.
SPEAKER_05: So what else besides offering, would you say, economic development rates, investing in workforce
SPEAKER_05: that you could see as being able to move the needle because I don't think California
SPEAKER_05: will ever be in a place like Texas and Nevada and just we're just going to give you a bunch
SPEAKER_05: of money to come.
SPEAKER_01: Yeah.
SPEAKER_01: I think besides incentives and besides the fact that, like you were talking about the
SPEAKER_01: bags of cash that might have been used to incentivize some businesses to move there,
SPEAKER_01: in general, there is something to be said about the economic climate and the quality
SPEAKER_01: of life that every family basically wants to see happen in a positive way for their
SPEAKER_01: families, right?
SPEAKER_01: So it's no surprise that for the last 10 years we have been losing population in California.
SPEAKER_01: So our net negative migration is because of the fact that more people leave California
SPEAKER_01: than the number of people that come in, right?
SPEAKER_01: Businesses have been leaving California too.
SPEAKER_01: I think it's less about just incentivizing people to leave or to move.
SPEAKER_01: It's more about quality of life.
SPEAKER_01: So for example, even if you make $200,000 in San Jose, your quality of life may not
SPEAKER_01: be as good sometimes.
SPEAKER_01: So when you look at all the new frontiers that have come up, whether it's Phoenix, Arizona,
SPEAKER_01: who wants to live in Phoenix, Arizona when the low is like a 90 or 95 for 45 consecutive
SPEAKER_01: days and your AC never stops working.
SPEAKER_01: But if you're a family of four and you have to put food on the table and you can't do
SPEAKER_01: that here in California, you'll probably leave.
SPEAKER_01: You'll say, hey, I've got to pack my bags and leave.
SPEAKER_01: So there are two types of people who are leaving California that my math shows, right?
SPEAKER_01: My research shows.
SPEAKER_01: The top 1% of the wealthy are leaving.
SPEAKER_01: And then of course you'll have a lot of middle class families who simply cannot find a good
SPEAKER_01: quality of life here.
SPEAKER_01: The masses of poor people are still here, right?
SPEAKER_01: And then the people who are basically not in that top 1% are still here too.
SPEAKER_01: So the 1%, if you look at Reno, Nevada, if you look at Incline Village, you look at Las
SPEAKER_01: Vegas, they have attracted all the billionaires and the multimillionaires from Los Angeles
SPEAKER_01: and from the Bay Area.
SPEAKER_01: And I won't take any names here, but I have worked on teams where we helped many of these
SPEAKER_01: people move.
SPEAKER_01: They're not moving physically.
SPEAKER_01: They still have the home in Atherton.
SPEAKER_01: They still have the home in Palo Alto.
SPEAKER_01: But they are now making Nevada their primary home just so that they can escape some of
SPEAKER_01: the very high costs of regulation, high costs of taxes, high costs of whatever else that
SPEAKER_01: they have to face, right?
SPEAKER_01: So again, it's a very hard topic, right?
SPEAKER_01: Not to solve the world's problems in a few minutes, but yeah.
Unknown: We're good?
Unknown: Awesome.
Unknown: Thanks for having me here, and have a wonderful evening.
Unknown: Thank you.
Unknown: I took it out.
Unknown: I already took it out.
Unknown: I didn't use it.
Unknown: I came in late.
SPEAKER_01: Did we have any cards?
SPEAKER_01: No.
Unknown: No.
SPEAKER_05: No.
Unknown: No.
SPEAKER_05: Okay.
SPEAKER_05: So next item on the agenda is public comment front items not on the agenda.
SPEAKER_05: Have we received anything?
SPEAKER_08: We have not.
Unknown: Okay.
SPEAKER_05: Written comments received on items not on the agenda will be included in the record.
SPEAKER_05: You've received for two hours the meeting.
SPEAKER_05: Any summary of committee direction?
SPEAKER_08: Nope.
SPEAKER_05: Great.
SPEAKER_05: Thank you.
SPEAKER_05: And then now we will move on to policy.
Unknown: Okay.
SPEAKER_04: Thank you.
SPEAKER_04: Director Brue Thompson.
SPEAKER_04: I'm sorry.
SPEAKER_04: I'm going to look at our legal.
SPEAKER_04: Do I have to?
SPEAKER_04: I'm sorry.
SPEAKER_04: You need a minute.
Unknown: Joe, do I have to read this whole thing over again?
Unknown: The pattern in practice.
SPEAKER_08: Is a practical matter everybody who's here.