David Rosenberg warns of potential economic turmoil due to surging productivity in most sectors but a ticking time bomb in construction and a growing wealth gap. On this episode of ‘Speak Up with Anthony Scaramucci,’ David Rosenberg, Founder and President of Rosenberg Research, joins to discuss the issues facing the economy. Rosenberg discusses the unusual productivity surge in the U.S. economy, while highlighting significant risks in the construction sector that could lead to widespread layoffs. He also sheds light on the economic disparity between high-income earners and the average worker, raising concerns about the long-term implications for economic stability and political dynamics. Did you like this episode? Like and subscribe, and tell us what you want to see more on our channel!
David Rosenberg 0:00 The whole economy is not contracting, although I would argue that there are sectors that are contracting. And in fact, when you look at the data on a state by state basis, half the US economy regionally, is actually in recession. And it's the half that's not in recession that is creating the conditions for being just above the zero line. But that's where we are. The question is, where do we go next? We've gone from three into a one to 2% range. What's the catalyst? What is the catalyst? That takes us back to 3%? I just don't see it. So I think the economy is soft. And I think what's most important is that the growth in demand, which is what GDP is, is now slowing to a trend that is well below the growth where you were seeing in aggregate supply. Anthony Scaramucci 0:57 welcoming David Rosenberg to speak up, David, thank you for joining us. He is the founder and president of Rosenberg research, he had a long career in banking. And of course, an epic run at Merrill Lynch as Chief Investment chief of investments. Brian Hall. Does that name sound familiar to you remember, Brian by any chance. David Rosenberg 1:17 Of course. He's also a client and longtime friend and mentor. He was probably one of the reasons why I didn't get fired at Merrill for being a skunk at the picnic. All those years Anthony Scaramucci 1:33 See that? See Brian Hall, everyone that listens to wealthion knows who he is, he's everyone's best friend. He's the Oh, positive donor of friendship on Wall Street. I will let's go right to the economy. If you don't mind, sir. I remember yelling at your books, I probably want to take a picture and see of how many of those books I've actually read. Let's go to the economy. Sir. What do you think the Fed going to cut rates in July? David Rosenberg 1:56 Well, nobody else seems to think that July is on the table. But I'll tell you this much. If we get another really great CPI report next month. And if we get some more confirmation and the next employment report that the real deal was the household survey, not the payroll survey, then I would say there's a chance they can go in July. I can tell you that. Unlike most other people. I'm not saying that it's 0%. But I'd say that, you know, what could make sense is that we get Jackson Hole in August, and Powell uses that to set the table for a cut in September. So I'm actually leaning towards September, but I'm not ruling July out. Anthony Scaramucci 2:49 Okay, two cuts, three cuts this year, one cut, zero cuts David Rosenberg 2:52 while the calendar sort of gets in the way, you know, you know what's interesting? I mean, I think it'll be two or three. A lot of people think zero or one or one or two. People think that the election is going to get in the way. I'm not really so convinced about that. Although it is interesting that the FOMC meeting comes a little later in November this year as in two days after the election. On November the seventh, I would say I'm still in the in the two or three camp and I'll tell you why I'm not ruling out three cuts is because of this. You go back to last March, when the media dotplot was still fractionally in the three rate cut camp. Where was the Feds year end forecast for headline PCE inflation was 2.4% or 25 basis points away from that right now. Where was the Feds year end prediction for the core PCE inflation rate was 2.6%. And we are at the grand total of 15 basis points away from that for all the hand wringing over inflation. We're so close to the feds, year end predictions on headline and core inflation. And yet everybody's talking about zero or one cut. And yet back then when they had these predictions in March, it was three, not to mention the fact that the year end projection for the unemployment rate was 4%. And that's where we got to last Friday. This was all consistent back in March, with three cuts and everybody swung to zero or one because everybody swings with all these verbal pivots by the Fed. I get a sense, data permitting that they'll be pivoting again in the opposite direction by the end of the summer. Anthony Scaramucci 2:52 You know, it's interesting, I got friends with Steve Cohen, the Met owner. He's been fairly consistently at the beginning of the year that you'd see three cuts, our economics team here at skybridge. thinks that they're still going to be three cuts. And it was just interesting to see how we went from seven to three to zero. So I'm in your camp, David often will have thought, of course he would happens. And I think he cuts in July. That's just me personally, because I think it helps him. If he's going to start cutting, let's start cutting before the election and get the cuts out of the way. That's just my opinion. But who the hell knows, mortgage applications are down, purchases for homes are lower by 4.4%. We've also seen refinancings down 6.8%. And you and I both know that housing is the heartbeat of small businesses. Many of the small businesses United States are tied to housing. That's where we see a lot of our job creation. Are you worried about that? Do you think the Fed is worried about that? And where do you think housing is going from here? David Rosenberg 6:00 Well, housing has been in the doldrums, not prices, but volumes, for the better part of the past couple of years, we had a hiccup in the first quarter, but you look at all the incoming high frequency data on housing starts and home sales, and they're rolling over again. And of course, in lag response to the bond induced run up in mortgage rates. It's a, this is the most complicated housing market that I've seen in my 40 years in the business. And a lot of it is the, you know, the byproduct of COVID. And the dramatic decline in interest rates to historically low levels. And then everybody in their mother locking in at those lows, and a very fortunate very good move, but they become prisoners in their own units. So existing homeowners, there's no turnover. They're locked in, they can't move. So there's no inventory. There's a dearth of inventory in the market for resale homes, which is 85% of the total market. And what's really interesting is because it's a completely dormant market, you've got sales are negative sales are negative year over year in the existing housing market. And yet prices are up for like roughly five 6%. So we flipped economics on its head where demand goes down, and prices go up. Very unusual, except for the fact that we have a very sclerotic and elastic supply curve for housing and the resale market. So even with weak demand, the supply curve is so anemic, that prices go up. But of course, that even along with higher mortgage rates, forces, fence sitters who want to come into the market, they just get crowded out. That's why the homebuilding stocks for the better part. And I have done well, because that's been the only valve if you want to buy a home, that's where the inventory is. And it's interesting that in that segment of the market, sales are up, and prices are down. So it is a very bizarre and bifurcated residential real estate market. I would just say that, you know, the most unusual thing that I'm seeing in the data is this, that although the economy is really I mean, if there's one source of positive in the US economy, it's this resurgence in productivity. It's running two and a half percent year over year, which is very good out of nowhere. We just don't know the extent to which is that a secular trend that seems a little early for AI to be generating that or is it cyclical, but the one sector where productivity is sinking? Isn't construction, you've got this bizarre situation where the employers in the construction industry are hanging on to their staff, even with depress levels of construction spending. And I'm waiting at some point for something's got to give here. I mean, either construction spending has got a balloon, but that's not happening in the data, or the construction industry has started laying off people. And rather significantly, you know, that could be upwards of about a million people who lose their jobs and construction and things don't pick up because that sound bloated, the payroll is in that sector. Anthony Scaramucci 9:29 So I want to sit back for a second because you and I have been doing this a long time. And I'm looking at the economic dashboard of the United States. And it feels okay to me, but now I'm wondering if I have the Confirm biases of the group of people that I hang out with, which is mostly wash Wall Streeters, and frankly, elitist snobs if you don't mind me saying so. So I also here From my buddies that are in the blue collar world, that they're not as happy that the inflation is eating up their disposable income. There's economic anxiety about job stability. And I feel like we're in a tale of two economies. Am I wrong about that? Or what am I missing? Because in an economy like this looking at the dashboard, you would say, okay, the incumbent president of the United States is going to get reelected. But the incumbent president of the United States has a 37% approval rating. And at this stage in the election cycle, that's the lowest that any incumbent President has had since they've been recording this stuff. So isn't it the economy stupid, or am I wrong? David, tell me, tell me what you think? David Rosenberg 10:45 Well, I think the reason why so many people think the economy is so strong is because they take their cue from the stock market. But the stock market is not the economy. But that's what they think everything is so great to remember that the s&p 500 hit its all time high. On October 9 of 2007. When I was working at Mother, Merrill, we peaked at 1565. I went into the Fed in Washington and gave them a presentation on the day of the peak. And at the end of my presentation, because I was calling for recession, and I was laughed out of the room. And one of the research people there said to me at the meeting, Mr. Rosenberg, do you not realize that the stock market actually hit a record high today? And what do you know, the recession that nobody saw coming began, less than two months later, in December of oh seven. But you see people conflate the equity market, and the animal spirits in the equity market to what's happening in the economy. They're not the same thing. And it also comes down to why there's this bifurcation, not just between the high end and the low end, but also bringing the high end in the middle class. Because when you look at the data, and you look at the socio demographic data, and you look at where the concentration of wealth is, and we're talking principally equities, and housing, it's mostly in the upper class, so they are rolling in, not gonna say rolling in the dough. But there's certainly rolling in the net worth, from what's happening in terms of asset inflation. If you're renting, you're not getting a benefit from the housing wealth effect. And most people in the lower income echelons in particular, just don't have the money to put in the equity market. So you know, that's the, I mean, that's the real story in terms of high end versus low end. However, however, you know, when you listen to the retailer reports, and the latest quarter, you're hearing a lot of high rollers are now shopping at Walmart or Target like they're starting to, to tray down as well. But there is a huge growth gap between the high end and the low end. That much is true. And in terms of the interpretation of the economy. I just tend to find everybody is looking in the rearview mirror yet, you know, we had a strong economy last year, last year 3% Real GDP growth. And 100% of that growth came from the fact that the Biden team widened the fiscal deficit by 25%. Imagine that in a sub 4% unemployment rate, that deficit expanded, that's virtually unprecedented, but that added to growth because government is part of that GDP. So huge impetus from government. And then we had the final chapter of the excess savings file in the consumer sector. You know, the history books showed that when confronted with a stimulus check, the household sector, which has always been narcissistic to a certain degree, but never like this, between YOLO spending and anger spending and revenge spending. All of the $2 trillion Biden fiscal stimulus checks doled out in 2021, it all got spent. And it was a gift that kept on giving right up until the end of last year. Of course, the San Francisco fed who I believe actually produces the best research among the the Federal District banks, wrote a report recently showing that all of the excess savings have already been spent in the economy that had a big impact last year, the fiscal deficit spending had a big impact last year and of course, we had a double digit growth boom in credit cards, which are now being cut up because the delinquency rates have hooked up to the highest level in 12 years. Those three things together credit card boom, the last leg of the excess savings file and the rampant expansion of the fiscal deficit Believe it or not, without those three impacts GDP growth last year was zero. Now some people will say, well, Rosenberger data mining, to which I say no, that's just analysis. That is if I was an equity analyst, writing up a report on this as a company, I would put an asterix at the bottom saying non recurring items. And then we fast forward to this year. I remember, months before first quarter GDP was released, the Atlanta Fed was like somewhere close to 4%. What do we get? We got 1.3. And the second quarter, it looks like it's coming in somewhere between one and 2%. So you would argue, well, maybe that's not a recession. But when I started on Wall Street, back in the mid 80s, we would call one to 2%, growth stall speed. And that's where we're heading into. So the economy is no longer strong, its weak, is it contracting? The whole economy is not contracting, although I would argue that there are sectors that are contracting, in fact, when you look at the data on a state by state basis, half the US economy regionally, is actually in recession. And it's the half that's not in recession that is creating the conditions for being just above the zero line. But that's where we are. The question is, where do we go next? We've gone from three into a one to 2% range. What's the catalyst? What is the catalyst? That takes us back to 3%? I just don't see it. So I think the economy is soft. And I think what's most important is that the growth in demand, which is what GDP is, is now slowing to a trend that is well below the growth where you were seeing an aggregate supply. I know I'm talking like a very nerdy economist. But the reality is that if you don't have a demand and supply curve, you can't forecast inflation. And so I don't even need I don't need or the Fed doesn't, hey, we're actually going to trigger lower interest rates over the course of the next six to 12 months. And that's, that's my highest conviction call. Anthony Scaramucci 17:12 If I had asked you for an actionable thing, you always ask people this. Something actionable is trade that you see there's a market that you like, there's something in the marketplace right now actionable. What would you do? Anything you see right here? Is it this is a layup? David Rosenberg 17:33 Well, I think that, you know, you and I seem to have a very similar view on where the Feds gonna be by the end of the year. So I think being long, those Fed Funds, futures contracts that aren't price, fair enough fed easing. That to me, I'm not going to call it a layup. But that's a strong conviction call. I think that inflation and we're starting to see a break significant break in the culprit that caused the deviation and the inflation numbers this year, which is auto insurance. And actually, that deflated modestly, in May, very thankfully. And I think the rental numbers are starting to start to slow down at the margin. I think that when I take a look, once again, at what's happening, the broad contours in the US economy and the excess capacity in the product and labor market that I see unfolding, I think that these pressures will bring inflation down to 2% by the end of the year, and down closer to one and a half percent by the end of next year. So I'm very bullish on the Treasury market. I think that you will not get as much of an impetus given how inverted the curve is, in terms of yield decline at the long end of the Treasury curve. However, I think that that'll be your best total returns, we'll be seeing 10s and 30s. And if you're a trader that trades around the curve, I think the curve will naturally really steep into a more normal slope. Once the Fed starts to play catch up to Canada and to the ECB, I think you'll find that the dollar is going to start to go down. That might be a call for later this year in the next year. That's going to be very good news for the gold price. On top of that, I think in the FX market to me, you know the Japanese yen seems like a coiled spring here and the BOJ will be snugging policy as everybody else in the world is cutting interest rates and there is nothing more undervalued on the planet than the Japanese yen. So if you're in the FX world, you might just want to buy the Japanese stock market unhedged and take on the current See to and within sectors. Look, I have a I think that recession risks have not totally subsided like everybody else does, I have a very more call it defensive and cautious approach towards the equity market at these valuation levels however, given my interest rate view, I want to own what I call bonds and drag in the stock market. And the poster child for that would be the utilities which have actually been a good place to be. And they seem to be rerated for longer term defensive growth characteristics, and of course, benefiting from Ai. But I also like utilities, because when rates go down, their dividend yield becomes more attractive. So that's what I would throw into the pot as far as what sector I'd be focused on. Anthony Scaramucci 20:47 Okay, so we got a few minutes left here. Let's go to some great stuff. Thank you. Should I be in USD for the crash? Or look at ETFs like TLT, EDF and ZROZ. So I don't think we're crashing Elizabeth from Miami. But I'll I'll turn that over to David. David Rosenberg 21:07 Well, I don't think the US dollar is is going to crash. You know, I mean, I Anthony Scaramucci 21:13 I think she's implying a stock market crash or a David Rosenberg 21:16 well, you know Anthony Scaramucci 21:17 some type of a market based apocalypse. David Rosenberg 21:20 I mean, I guess there's always tail risk. You know, can the stock market collapse? I mean, normally, when you had a collapse in the stock market, it's around a financial crisis, like what happened in Kuwait or a health crisis, like what happened in 2020. So I don't think I would formulate a base case around Armageddon. But, you know, I'm looking at, you know, an equity risk premium in the s&p 500. That's now flirting near zero. I mean, you're just not getting paid to take on the capital risk of the stock market, you're paying to take on that risk, and that that unnerves me. I don't like the valuations. I think the sentiment is wild. And, you know, I hear all the time that this is an earnings driven stock market. And no, no, it's not earnings are up 6% Over the past year. So if the stock market was up 6%, I'd say granted, it's a it's an earnings lead stock market, but the stock market's up more like 25%. So like Forex what earnings are doing, and that just basically, because most of this last leg of the rally to the highs has been purely multiple expansion. So I'm just nervous that too much, too much is priced in. And valuations aren't a timing tool. 100% true. But at any given moment in time, the valuations in the stock market, the multiple tells you something about expected future returns. And I would rather invest with a tailwind than a headwind and the multiples right now are a are a headwind. And then we talk about market concentration. I mean, a third of the stock market now is back to being technology. We're back heading back to where we were in the late 90s, early 2000s. So there's there's the concentration risk. There's the valuation, there's the fact that everybody seems to be all in and I may I'm a contrarian at heart. So I am not bullish on the stock market. I'm you can classify me as bearish. I'm not in Armageddon camp, because it would take some sort of real tail risk or financial shock or something like that. But behind that the US stock market the All I'll say is I just don't like the math. I don't like the math right now behind it. Anthony Scaramucci 23:46 Fair enough. Okay. Just two more quick questions. And we'll have you out of here. David, thank you so much. GameStop, they raised over $2 billion from the roaring kitty trading frenzy. Do you see social media influencers continue to manipulate the market? Or crypto mean corns? This is Jordan from San Diego. So I think that that's going to be with us for a very long time. What do you say, David? David Rosenberg 24:11 I mean, I don't disagree, you know, unless you know, the regulator regulator step in always a risk, that's also a risk for AI. But I would say that, I mean, to me, I sort of put that aside, and it could just be, once again, you know, Bitcoin over 70,000 GameStop, the meme stocks. It's part and parcel of the mania. It's part and parcel of really the mania that we're seeing in certain parts of the market, the parts of the market that really you're commanding everybody's attention. So it's all part of the same trade and it's really all part of really the generative AI trade. Lots of hopes. I mean, to me these, the chip stock craze reminds me of the Yeah, fiber optics craze back in the late 1990s. And we saw what happened. And what naturally is going to fall was overcapacity, and deflation, so on and so forth. But these are everything that you're describing. To me. It's just what I was talking about before. It's all about animal spirits. It could people could say, well to the Fed, this is a sign that there's excess liquidity in the system. I'm not so sure about that. I mean, take a look at what the we know what the mag seven are doing. Or maybe now it's down with the mag five for the mag one. But the rest of the market has lagged well behind and actually earnings in the mag in the in the in the s&p 493 is actually negative 3%, year over year. So everything is skewed towards froth, concept, what's sexy, and it all speaks, it all speaks, including your opening question and Gamestop to just so swathes of the market that have a very high speculative bet. So I'm not participating. Anthony Scaramucci 25:59 Where do we find you, sir, before I let you go, what do we find you are you're on Twitter, you're on Instagram. David Rosenberg 26:06 Well, not Instagram, but on Twitter, we I have my own YouTube channel. And, you know, for anybody that wants to subscribe, we'll offer anybody on this show a one month free trial, we just have to google Rosenberg research teacher right there. Or you can just google this is probably the best way to reach me information and Rosenberg research.com. And one of my client service, people will get back to you ASAP and get you signed up for a trial. Anthony Scaramucci 26:39 Awesome. All right, so Well, thank you very much. You've been generous with your time legendary David Rosenberg. I agree with you on the Fed. Let's see what happens. So hopefully you and I can revisit this before the end of the year to see if we're right about where things are going. I wish you great success. If you like this video. You'll like this video as well. Check it out.
