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Economist John Hill Talks Bonds, Stocks and Bernie Sanders


John Hill - MARC NADEL
  • Marc Nadel
  • John Hill

In the 1969 movie The Magic Christian, otherwise sensible people are willing to wade into a vat of excrement to retrieve the money that wealthy Sir Guy Grand (Peter Sellers) dumped there. Nearly 20 years later, in Wall Street, the unscrupulous corporate raider Gordon Gekko (Michael Douglas) declares, "Greed is good." Hundreds, if not thousands, of other films and television shows have illustrated the grotesque lengths to which humans will go to enrich themselves.

Dramatists employ the highly charged qualities of greed and desperation to show us how money makes the world go round. But it's rare that one of these stories pays any mind to what we might call the science of money: economics. According to Merriam-Webster, economics "is concerned with the process or system by which goods and services are produced, sold and bought." Already that does not sound like the stuff of good story making.

But, technical jargon aside, it can be. Just ask John Hill. Actually, that's exactly what we did for this week's Money Issue.

Hill is retired — sort of — and splits his time between Burlington and Las Vegas; that is, he's in Vermont until it starts to get cold and in Nevada until it starts to get too hot. Apparently Hill's internal thermostat is set to ideal bike-riding weather. That's his beloved pastime — along with working out via Skype with his longtime trainer, Norm Granger, at the EDGE Sports & Fitness in South Burlington.

Hill earned this life of relative leisure. Even on paper, his résumé sounds intense: studied economics at Princeton University and Massachusetts Institute of Technology graduate school; first job at the Federal Reserve Bank of New York in open market operations; moved to Washington, D.C., to run the investment division of the World Bank; worked for Merrill Lynch as head of the bond department in Tokyo and head of sales for bonds in London; ran part of government bond trading at J.P. Morgan (now J.P. Morgan Chase).

"Finally," Hill says, "I moved to Burlington and started trading oil futures on my own — and stopped in June 2008 when it was time to get out." His relocation to the Queen City coincided with the enrollment at the University of Vermont of his daughter, Caroline. She's now 29 and getting a master's in teaching at Columbia University. Hill's son, Douglas, is 33 and pursuing a PhD in classical languages at Brown University.

Hill reveals that he's gotten out of the stock market, but he isn't exactly idle on the financial front. "Recently, I've been trying out my own methods for trading options on stocks and other things," he says cryptically.

Looking for his stories, and perhaps nuggets of financial savvy, we spoke to Hill by phone from Las Vegas.

John Hill - MARC NADEL
  • Marc Nadel
  • John Hill

SEVEN DAYS: How'd you get into economics in the first place?

JOHN HILL: I was born in Greenwich, Conn., and when I was 5 we moved to Rye, N.Y. While I was at Rye High School, I had a job on Wall Street over two summers. I had been interested in science, but I switched. I majored in economics at Princeton, and I really liked it.

SD: Working at the Federal Reserve right out of school sounds impressive. I don't think I'm alone in not entirely understanding how it works.

JH: Yes, the one in New York — the one that does open market operations. They have to buy and sell bonds. There's a group of 12 people who meet about every two months or so — seven members from the Board of Governors; the other five come from federal reserve banks around the U.S. They meet in D.C. and review the economic outlook. Their two indicators are the health of employment, and inflation. Once they decided in D.C., then what we did in New York was, we'd look at how much money was in the banks versus what was required for bank reserves. If the committee in D.C. wanted to lower interest rates, we'd buy government bonds.

SD: OK, I'm kind of lost already.

JH: [Laughs.] It's pretty amazing that, with all the weird stuff that goes on, the central banks have remained pretty steady.

SD: I'm told you're the guy who came up with the $2 bill. Explain.

JH: At the Fed I was assigned to one of the governors [on the board]. I went to D.C. for six months. This governor said it costs as much to print $2 bills as $1 bills; he thought we could cut down costs of printing. My opinion was that putting the $2 bill in circulation wouldn't fly because people like their ones. All I did was to walk over to the Treasury and [say], "The chair of the Fed board wants to reintroduce the $2 bill." Within a month or so, the Treasury had printed a huge amount of $2 bills!

SD: Are they still in circulation?

JH: They're still available, but I think commercial banks don't usually have them. You have to ask for them.

SD: You can special-order bills at the bank? Who knew? So, how long were you at the Fed?

JH: Seven years, from '71 to '78, mostly in New York. But I did a few other things then, too. In 1976 I went to Kuwait, during the energy crisis. The country was getting a lot of money coming in. My boss asked me and another guy to go to Kuwait and talk with them about preventing inflation. When a central bank wants to stop inflation, they sell bonds to their citizens. Bonds carry an interest rate. The Fed doesn't directly sell to individuals but to dealers, who in turn sell into pension funds, to rich people, etc. And inflation goes down.

SD: Why does the economy always have to grow?

JH: Sometimes you have to slow the economy dramatically for a while to slow inflation. You need sufficient growth — about 2 percent — for population increases. It's a matter of opinion whether the economy should grow fast or not.

SD: Let's move on to your next job, at the World Bank.

JH: The World Bank lends to projects in developing countries; it issues bonds in order to fund them. There were 10 to 15 currencies — European, Japanese, as well as U.S. — they could borrow from. We generally had about $10 billion on reserve in the bank to be lent. My group was investing the money on an aggressive basis — constantly buying and selling to increase the return on the World Bank's cash.

My group was visible. We were held in high regard. [Cites articles in the New York Times and Smithsonian magazine.]

SD: You were there three years...

JH: Yes. Then I took a job at Merrill Lynch, outside the U.S. I first worked in Tokyo, in about 1981. The Japanese were interested in buying U.S. bonds (a lot of the pension funds in other countries frequently invested outside their country). Even then, Japan was an aging population. Had they invested only in Japanese companies, they'd be investing in old people. They needed to diversify.

Merrill Lynch had a basic office in Tokyo — just two or three people. There was almost no competition. Within six months my little operation became the No. 1 seller of bonds (about 70 percent of the U.S. bonds sold in Japan). We also dealt with central banks in Asia — the Philippines, Korea, etc. Then Merrill Lynch asked me to move to London, where I was head of sales for bonds.

My final job was at J.P. Morgan in government bond trading, back in New York.

[Our conversation got into the weeds about types of bonds. What's important to know is that during this time Hill came up with a way for the Mexican government to pay, rather than default on, a $20 billion U.S. bond. He laments that the Wall Street Journal attributed the plan to the U.S. Department of the Treasury. "A friend of mine says that Mexico owes me a lifetime supply of tequila," Hill says with a chuckle.]

After that, I started a hedge fund with a friend — about 1998 to 2002. We had an office in Stamford, [Conn.]. I married a psychiatrist, and she said, "Why do you keep that hedge fund going?" By the 2000s, a trader could do institutional-style trading online. Once I dropped the hedge fund, I got interested in trading oil.

George W. Bush was president. My daughter had graduated high school. I said, "I don't have to live in Westchester anymore." I drove my daughter to Vermont in June 2005 for orientation at UVM. I saw houses on the waterfront and liked one. In July I drove up with all my belongings and won the bid for a condo.

SD: How did you get involved in biking?

JH: Someone told me I should get to know Chapin Spencer [then director of Local Motion]. I went on a "VerMontréal" bike trip and became a member of Silver Spokes [Cycling Club], a group of people roughly my age — I'm almost 74. We'd go on bike rides every Tuesday unless it rains.

SD: When did you start wintering in Nevada?

JH: In the fall of 2010. I come here when the average temperature in Vermont drops below 70. I return to Vermont when the temperature in Nevada gets over 90. By the way, my monthly electric bill in Nevada — with an electric car [Tesla] — is $50.

One of the things that's different in Vermont is, when people have a party or event, they say, "weather permitting." No one says that here. Also, no one cares about the Canadian dollar. And we don't have potholes.

SD: I'm going to rattle off some more questions. Here's one: Are banks overregulated?

JH: No. Not now, but they were badly underregulated about 15 years ago. Maybe some regulations technically need to be refined. And banks shouldn't speculate with their money. The U.S. had no choice but to bail out the banks [in the financial collapse of 2008], because, when banks go under, the effects are felt for a long time.

SD: Are "big banks" too big?

JH: I'm not so worried about size as I am about them being properly regulated. Banks have to be big enough to compete.

SD: Has our national economy recovered from the Great Recession?

JH: Yes. Some say it's been a slower than usual recovery. But up to this point, I think it's in pretty good shape.

SD: You were a Sen. Bernie Sanders supporter and a precinct captain during the primaries...

JH: I'm a supporter of Bernie because I didn't like anyone else. Let's take health insurance — he's in favor of single payer. If he structures that bill so it has negotiation room, that will be good.

I think sometimes Bernie gets too wrapped up in ideology. I agree with his bottom-line objectives. But I don't think he always has the means of getting the results.

SD: Why did you get out of the stock market?

JH: I decided to sell all the stocks — I just had to go to cash. When you get to be my age, you want to make sure your money is going to last.

SD: Seriously, should we just be putting money in our mattresses?

JH: [Laughs.] The stock market [decision] applies just to me. For a long time I had two kids in college. I just wanted to make sure I had enough to live on. I didn't have any pension.

SD: What's your favorite movie about money?

JH: I just saw The Bonfire of the Vanities. It was terrible. The Big Short [about the financial crisis triggered by the housing bubble] is really good.

SD: Here's a big question: How should average people relate to economics, the Fed, the stock market?

JH: While it's easier said than done, try to view as big a picture as possible. When I do this, I think that economic growth will pick up a little — say, to 2-and-a-quarter percent. During the economic recovery since 2008, growth has been modest, not overstimulated or overregulated. Other recoveries may have been faster, but the initial problems were less deep. So, we might expect to return to slightly better growth.

But not as fast as growth could be. This is because Trump's policies, should any of them be implemented, will help and hurt various sectors and have little net value, broadly speaking. If anything, my guess is business managers won't expect some of these policies to last, particularly environmental and social, and are not likely to dramatically change their plans.

As for stock market investing, find three ETFs [exchange-traded funds] — like mutual funds but more cost-effective. Put a third of your cash into each one. Choose one ETF based on the U.S. economy (tied to the S&P 500 or the Russell 2000), one based on other developed economies (Europe, Japan), and the third one based on the developing world economies. Use a low- or no-cost broker and ETFs with low expense ratios.

Check off boxes on the broker's website that request automatic dividend reinvesting. Every few years, rebalance so that percentage weightings of the holdings are back to one-third each. Do not try to outguess the stock market.

SD: How does the Fed's behavior affect us?

JH: You don't have to love the Fed. Maybe you thought they made interest rates too low or built up their balance sheets too much. But be glad they were and are there, because the rest of government did little to help the economy recover. And I feel that if the banks and some manufacturing companies had gone bankrupt, we would still be in very bad shape today.

SD: Globalization of markets has ballooned over the course of your career. Is globalization good for us?

JH: Globalization is good, except that it tends to make some people too rich. Some rich people really need to figure out how to be less rich — like, pay more taxes. It's up to some of the progressives to get some really good stuff in place. I think they might get there eventually.

SD: But they might have to get a few Rs out of Congress first.

JH: Yes, that would really help.

Regarding globalization, the slow-money movement and local buying movements, I would prefer having diverse trade practices, but this makes the rich even richer. Unless the rich get together and call for a rational response — regulation and fair taxes and expenditures — we will live in a suboptimal economy. Maybe there will come along a progressive politician who can bridge the gap.

The original print version of this article was headlined "Market Force"