According to today’s headlines, it’s looking increasingly likely that the economy may dodge a recession. The calls for a “soft landing” are turning into ones of “no landing at all”
The same headlines tell us the markets are in great shape and will be powered higher from here by a new AI-driven profitability boom.
But according to today’s guest, highly-respected economist & award-winning researcher David Rosenberg, founder & president of Rosenberg Research, the headlines are selling a false narrative.
By his measure, the recession is already arriving, deflation not inflation is the bigger threat & the current market AI frenzy is a classic stock mania that will end the way all bubbles do.
Follow David at http://rosenbergresearch.com/ Or on Twitter @econguyrosie
David Rosenberg 0:00
I think that I think that the business cycle is not dead. Got to focus on leading indicators. I understand that for people in my camp, it’s been frustrating and frustrating, you’re waiting. It’s like watching paint dry waiting and waiting. But it’s out there, the business cycle is not dead. And I think that the recession may already have started and we don’t even know it.
Adam Taggart 0:28
Welcome to Wealthion I’m Wealthion founder Adam Taggart. According to today’s headlines, it’s looking increasingly likely that the economy may Dodger recession, the calls for a soft landing are turning into ones of no landing at all. The same headlines tell us the markets are in great shape and will be powered higher from here by a new AI driven profitability boom. But according to today’s guest, highly respected economist and award winning researcher David Rosenberg, founder and president of Rosenberg research, the headlines are selling a false narrative. By his measure, the recession is already arriving in the current market AI Frenzy is a classic stock mania that will end the way all bubbles do today. We’ll hear his reasons why. David, thanks so much for joining us today.
David Rosenberg 1:19
Thanks for the invite. Great to be on.
Adam Taggart 1:21
Thanks. It’s a real pleasure for folks wondering why I’m in this different background. Murphy’s Law. About two minutes before we were to go live with David, the power to my studio went out and had to rush to my backup studio. So David, thank you again, for your flexibility here. Lots of questions for you lots of ground to cover in the time we have here. Let me start with a question I like to ask all my guests at the beginning of these interviews. What’s your current assessment of the global economy and financial markets?
David Rosenberg 1:47
Well, look, the global economy is not a homogeneous entity. So you know, there’s some pockets of strength. You know, you can point to Japan, Japan actually had a technical recession, and second half of last year and is coming out of it. much the better. Mexico is doing well. And when you look maybe one other country, you could focus on India, great demographics, and the arguably the strongest GDP growth on the planet. But you know, what are you going to say about China, their recovery from the reopening is sputtering, the economy is dis inflating, or on the producer side deflating Europe after a miraculous non recession, courtesy of a mild winter and declining energy prices managed to escape a recession. But the numbers there are rolling over. And you look at the United States. And it seems to me as though we’re still making this transition from expansion to recession. So net on that when you add it all up, and you’re taking a look at Europe cooling off dramatically, China sputtering and the US, it seems to me it’s very clear, I know, it sounds extremely controversial to talk about the US going into recession. Just because the lagging and coincident indicators are telling you that we’re in to something brand spanking new about a no landing or soft landing, like you mentioned, we’re heading into a hard landing in the second half of the year, based on all the leading indicators. So I think that we’re heading into a global economic downturn. And in fact, when you look at the OECD leading indicator, it’s telling you the same thing. So I think that we’re heading into a global economic contraction, it’s not going to be shared by everybody, but net on that. When you add it all up, I think that’s what the prognosis is.
Adam Taggart 3:44
Okay, great kickoff, I want to I want to dive into why the market quite hasn’t seem to have gotten the memo, as well as your thoughts for how protracted and how severe this recession might be. Really quickly, before we get there. Let’s just take a path through policy if we can. And let’s start actually, with inflation and deflation. I know that you for a while have been more on the deflationary side of things given in terms of how you think the trajectory of things are going. If you look at the recent data that’s come out on inflation, it does seem that I mean, no doubt it’s come down materially since middle of last year. But services seem to be really kind of sticky right now, especially looking at core PCE, which is the Feds preferred measure. What’s it going to take to tame that sticky services inflation?
David Rosenberg 4:42
Well, you know, look, beauty beauty is in the eye of the beholder. So if you’re taking a look at the asset sector, and you’re looking at the fact that we could talk about the stock market separately, you know, last I saw the stock market last made a new high Back in early January of 2022, so are we talking about inflation and assets in terms of the stock market? Well, I guess you’re gonna cherry pick your point we have made a new peak in, you know, 16 months. Deflation commercial real estate, you got deflation and residential real estate. It’s nothing like it was back in. Oh 70809. But the home prices the year over year percent change is actually hitting negative for the first time in over a decade. So you’d have to tell me how do you want to define inflation or deflation we have deflationary cracks in the asset markets, you’re going to come to me with this last statistic call the consumer price index. And by the way, flawed, isn’t my term for it was Alan Greenspan’s back in 1996 when Janet Yellen and everybody else in the Fed was trying to push them to go towards inflation targeting what is exactly Adam, the holy grail of the CPI? When went over 40% of the index is imputed guesswork by the BLS on as you said, services. What are we waiting for, we’re waiting for all the distributive lags on residential rents, which accounts for 30% of the CPI and 40% of the core. We have to wait for that to fall out of the data. But we know in real time that residential rents for new tenants is going down. And we also know based on multifamily building permits, starts now this isn’t true for single family multifamily, you’re going to say to me what part of the US economy has been in boom mode, it’s been multifamily construction, right. And now those units under construction are going to morph into completions, we’re going to be faced with a daily use of supply in the next 12 to 18 months relative to demand. And you’re going to continue to see in real time residential rates deflating, but it will not make its way into the CPI. Probably not till later this year. It’ll be a major event in 2024. We asked me about the CPI. Well, that’s your story. PCE deflator. Very similar story, of course, we also had last month, some health care service inflation in there. What’s that got to do with the economy? Right? When you take a look at the cyclical side, even of services and the one thing I noticed in the PCE deflator is that you’re seeing actually, deflation now, in hotels and motels. They’re cutting their rates, airfares are coming down. Delivery Services, what is more, what is a more cyclical service? I’m not talking about how residential rents are constructed. I’m not talking about health care. I’m not talking about financial services by the we asked the question, what about what about service sector inflation? Will all of a sudden banks are wasting deposit rates? Oh, well, that shows up as inflation in the in the statistics. But is that is that inflation? The feds creating inflation because they’re raising rates, banks are forced to follow suit now more than they have been. And it shows up in financial service sector inflation. I mean, what what bank right now was raising its fees as we go into a credit contraction, right. So it’s just, it’s just all nonsense. I’ll tell you that. Look, the Producer Price Index was 11%. Year over year, this time last year. So the question would have been a year ago what what is going on? Exactly? We look like some Bob way. Producer Price Index is now 2.3% year over year. Now I get back to show you how people are totally ignorant of the data. They come back and say well, what do you look at ppi for? It doesn’t include services? No, no, that’s the old way from 20 years ago, Producer Price Index 60% of it is services. And one of the biggest factors that is dis inflating. If not deflating the Producer Price Index, which doesn’t show up nearly as heavily concentrated in the CPI is guess what? Freight and transportation and shipping rates are plunging. And that’s in the PPI. So I know like I know, the Fed the Fed, they bowed to the holy grail of the CPI. The statistic that Alan Greenspan, who, despite his own flaws was arguably, I’d say, tied with Volcker as the best economists that the Fed ever had called it a flaw statistic. And because that is what Jay Powell wants to look at, we’ll have to look at it but I’m trying to say is that the year over year trend and the producer price index as collapsed in unprecedented form in the past 12 months from 11% to 2.3%. It’s almost at the Feds target to match and if the CPI which is right now 4.9 color, if that was doing what the PPI was doing, but you see everybody just cherry picks their favorite inflation measure. What I’m trying to say is what makes the PPI special is it doesn’t have all these imputed price measures and services. This guesswork oh this For me, that permeates the CPI and frankly, I know I know what the Feds looking at. I know what CNBC is looking at Fox Business, everybody is just the holy grail bowing down to the consumer price index, there are other price measures actually telling you that the Fed is actually there, they just refuse to believe it, because of hubris, because they, they they committed the cardinal sin of saying inflation is going to be transitory. They believe they are wrong, mostly believe they are wrong. And in his second, you know, second part of his tenure, Jay Powell is not going to go down in history is being compared to Arthur burns. So they’ll crush the economy, we haven’t seen the full effects of the Fed tightening yet. And inflation is going to be a lot lower, it’s already come down a long ways. But talk about you know, the stickiness of the service aside, when naturally, the distributive lags, there’s those lags are like three years, of course, the CPI is the most lack of the CPI is more lagging than the unemployment rate is it’s the most lagging of the lagging indicators. And yet, I’ve never seen the cycle. But it’s been doing this for 40 years, I’ve never seen such anal retentiveness over such a lagging indicator, as the CPI inflation rate, where 30% of it is dominated by residential rents that we know in real time, we’re actually going down. So I don’t waste my time talking about where’s inflation today, I talked about where’s inflation going to be? Three 612 months from now. And it’s going to be a lot lower, and especially 12 months from now, when these rental measures. Go the other way, which every single leading indicator of rents is telling you is going to happen.
Adam Taggart 11:43
Real Time is telling us it’s happening. Yeah, great answer. There’s so much I want to pick apart there. But but I’m, I’m really glad you leaned into the lag effect, because that’s a drum that we’ve been beating on this channel a lot. And I think a lot of people just assume since it hasn’t happened yet, it’s not going to happen. But to your point is, is these policy decisions have a long lag measured oftentimes in years, and those are still traveling in time through to us. So get your your credit, your start criticisms there of the CPI. I’m going to presume you feel pretty similar about the government reported jobs data as well. I don’t want to make that assumption, though, without giving you a chance to corroborate or not.
David Rosenberg 12:23
Well, I mean, the Non Farm Payroll report, again, the Holy Grail, it’s as if there’s no other piece of of job market data, we’ll get another report on Friday, everybody will trade off of one number. Non Farm payrolls were like 30, or 40% of that number has been juiced up this year from the BLS birth death model. Because even though there’s no evidence to suggest that we’re getting any net new business creation, the BLS is still assuming that we are getting additional jobs. And that’s really why the numbers have looked so great. The other numbers haven’t looked so great. The Challenger numbers on layoffs, and hiring announcements not so good. The employment numbers out of the conference sports survey, you saw the Conference Board survey that came out showing jobs hard to get jobs are plentiful, you’re seeing you’re seeing cracks in the labor market. Yeah.
Adam Taggart 13:19
If you look at the withheld taxes, that the US Treasury reports on a daily basis, the employment taxes are withheld, those are in steady decline as well.
David Rosenberg 13:30
Now that we see from the jolts data that you know, the openings, the hirings are, are starting to decline from albeit a very high level, but they are declining rather precipitously in the past several months. So I would say look, there’s there’s, you know, the, the notion that companies are being very slow to fire people, after the horrible experience of the lockdowns, and then the government paying people not to work, being the more not to work, then the paycheck, they were getting created all these distortions. And what happened was that companies lost contact with their employees couldn’t find them again, and you had this massive distortion. That’s one of the reasons why the job openings data, you know, look like a.com stock from 1999 job openings, because companies are trying to find the employees that they used to have. And so we did have this distortion. And I could see as as the business owner, you’re going to be low, if you’re going to be low to let people go in fear of what happens in the next cycle. You’re not going to find them again. But what’s happening is that hoursWorked are going down. And what’s interesting is that it’s the workweek the workweek, is the workweek is one of the only leading indicators from something that’s otherwise a lagging indicator called employment. And the workweek is down 2.6% year over year, which sounds like a small number, but it isn’t really And what’s happening is that companies are not firing people dot dot dot yet, but they’re cutting their hours. And that’s classic, classic transition, going back 70 years when you’re making the transition from expansion to contraction, and look, there’s no reason to get overly passionate about this, the business cycles, the business cycle. thank the good Lord, that 85% of the time, we’re in an economic expansion 15% of the time, we’re in recession. But recessions aren’t unicorns. And they’re not fairy tales. They’re not fantasies, they’re real. But thankfully, they happen 15% of the time, the same thing with bull markets and bear markets, we’re in a bull market 85% of the time historically, we’re only in a bear market 15% of the time, but it behooves the economist and strategist and analysts to identify for their investors. So where exactly are we, in the cycle? Well focus on a leading indicators and focus on those relative to the coincident to lagging because ratios are more important than levels because ratios give you something about momentum. That’s why people follow the equity market. They look at Dow transports to utilities, it looked at consumer discretionary to consumer staples, they look at value versus growth, small caps to large caps. So you’re always looking at ratios because they tell you something about relative momentum. So when you’re taking a look at the labor market holistically, and you’re taking a look at what’s happening now with bodies, but what leads bodies what leads bodies are hours in both directions when you come out of a recession. You see, companies aren’t sure are we really out of the recession? So you see they don’t start hiring right away. What are they do? They start to lengthen the workweek of their existing staff? And now, but that’s working in the direction? So look, it’s I know, the recession is like waiting, waiting for God, oh, it’s like we’re waiting. And we’re waiting. But you know, recessions, they’re sort of like they’re this odorless gas. And the next thing, you know, I mean, look what happened in the last cycle when I was at Mother, Merrill, come on, you know, in the summer in in June of Oh, eight, the Fed shifted towards tightening bias. Richard Fisher in the Dallas Fed actually voted that meeting in June, a couple of months away from Lehman and AIG and Merrill collapsing, everybody thought everybody thought, you know, Bear Stearns is a one off, the housing is behind us, the consensus in the summer of Oh, eight was soft landing. Next thing, you know, nobody knew nobody had a clue. Nobody had a clue that the recession, the NBR defined recession actually started in December of 2007. So that’s what I’m trying to say, look, we had housing collapse, house price collapse, it infected household balance sheets, and of course, we had the financial collapse. And I’m not saying that’s gonna happen this time around at all, but the cycle is a cycle. And the leading indicators are the leading indicators, but nothing I’m saying including your questions even about the stock market, which we can get into what is the stock market telling you, nothing has surprised me right? Now, recessions do take time to unfold. But the thing is that nobody believes it, until you get several months of employment declining, then they say, Ah, okay, now I see now, by the time that the employments declining employments always last man standing, because the hours worked, lead that the key is to stay ahead of the herd. So waiting for employment to go down, is one of the craziest and dangerous notions I’ve ever heard. But time employment goes down, we’re going to already be three to six months knee deep in the recession. And that’s the last man standing, but the hours worked are telling you that that is going to be the next chapter of the story. Now, with all due respect, do I know for a fact is going to be a June story, July story, August story. Take your pick, probably sometime in that timeframe. And then when employment starts to go down, you see the first time employment goes down, people say it’s a one off, it’s a one off? Because you see nobody wants to call you see, do you know I say to people, we’re going to have a recession. And I’ve been through probably four cycles. And every time it’s the same thing, I look them in the eye and I say I think we’re gonna have recession. And the response I get it’s as if I call their stuff I said your kid is ugly. You know, it’s just, you know, this part of the business cycle. You think that you think that there’s a Get Out of Jail Free card after the most pernicious fed tightening cycle since 1981. You really think interest rates don’t matter. It’s as you said, it says is that there’s lags lags and the lags could be one or two years. Right? I mean, the Fed stopped tightening in the spring summer of 2006 Oh, you know by the spring of oh seven Okay, so we lost New Century financial we got these problems with the ABX indices in the mortgage market. Don’t worry, don’t worry no. Yeah, by the recession started at the end of oh seven. It’s like the Fed stopped tightening in when fed stop tightening in the Winter spring of 2000. Hey, yeah had the NASDAQ’s rolling over but big deal. Big deal. The s&p hit its high in September of 2000. Don’t worry about it. Don’t worry about don’t worry about it. And then we’re going to early Oh, one, don’t worry about it. And then all of a sudden, you know, when is the recession start in March of oh, one. And I’ll tell you the consensus didn’t get it. But Alan Greenspan, I’ll tip, my hat started cutting rates 50 basis points. On the first trading day of the year in 2001. This is where maybe a little too much information, but it’s very valuable. Okay. Go for it that nobody, nobody, you don’t want that consensus started calling for the recession, or no one Do you know, when the, you know, the consensus? After murder, right after 911? It already started working for one, that and of course, it ended two months after 911 Because we had all those globs of fiscal stimulus coming in after the terrorist attacks. So I know, look, I know you’re saying the market, this market, seeing that and this data saying that, but you know that the key in this business is to stay, you know, stay ahead of the curve, and do not follow the herd.
Adam Taggart 21:03
We’re so excited to talk to you, because what are you I agree with what you’re saying. And if you look at just to stay in policy for one more second, the Fed is looking at what you’re saying is sort of, you know, faulty data and very lagging data. And if you look at both inflation, and you look at jobs, both those numbers right now seem to be telling Powell keep tightening, right? Like you still have more work to do looking at these flawed metrics. And so, you know, he very well may continue going higher for longer here. I mean, he’s being squirrely about whether he’s going to commit to another rate hike or not. But Bullard was out last week saying he thinks there’s still two more. So, you know, our our monetary leaders, potentially making the coming recession, even worse than it needs to be right now, by leaning into their tightening policy, at the same time that all the indicators you look at are deflating,
David Rosenberg 22:00
well see, here’s what the Fed is telling us is that they either they don’t have a view, or they don’t have confidence in their view. Either they have a model or they don’t. But we know the Fed has a model. They don’t have confidence in the model. This whole notion of data dependency is the stupidest thing I’ve ever heard. Monetary policy hits the hits the economy with lag set or 12 to 24 months. And so they should have a forward looking view. But they’re data dependent. They’re not view dependent. We just had, you know, the reality is that what are they waiting for, like inflation peaked in June at 9.1%. We’ve come down what four and 20 basis points in a 10 month span, which in the past has only happened three other times it happened in 1975. It happened in 1982. And it happened in 2009. That’s how fast called the first derivative of the rate of change of the CPI or the want to call it the second derivative the CPI. Now he compares himself to Volcker Well, again with all deference with all deference to Jay Powell took Paul Volcker almost seven years in his tenure, to get inflation to 2% It’s an Alan Greenspan 10 years so yeah, we have a 2% goal but we’re you’re gonna want to one get there when the three months and four months. You see they are so caught up in hubris and the or embarrassment of missing like, you know, the we all missed who I mean even the most ardent Hawk, Mohamed El Erian. Larry Summers, Bill Dudley. I don’t remember anybody talking about a nine handle now we were just there for one month admittedly. But yeah, they’ve already overdone it. history will show that they corrected one mistake with another mistake. But I don’t know. Maybe I’m being too hard. We missed on a mistake. What did he keep on from the get go and the tightening cycle of March 2022? Who did Powell compare himself to knock Queens Greenspan? Not Bernanke. Not Yellen. Not my Chesney. Martin no to Volcker and every opportunity, and Volcker created the conditions for disinflation, with not one recession but two back in the early 1980s. So he gave that to us on a silver platter which way they were going next thing you know, they’re going to like 75 basis point increments. And then he tells us at at Jackson Hole, last August, he says, I’m so sorry. I’m so sorry. But I have to inflict pain, his word that four letter word, pain on the household and business sector. Well, pain, that’s any no soft landing painting. No soft landing paint is not like no landing, which I Lashley I left in initially at the notion of a note, you understand when people say no landing, soft landing, they’re telling you, they’re telling you my forecast is the business cycle has been repealed. Right? What? So he told you that they actually want to create the conditions like a Volker to constrict, contract aggregate demand, which is GDP. Because they are in a big hurry, they are in a big hurry to get inflation down to 2%. Now, as I said before, Volcker didn’t have any credibility problems, took them almost seven years. Greenspan, we could argue about his credibility problems around subprime, but took them 10 years. So we’re automatically going to have to get down to inflation that quickly, to me is, is a little irresponsible, but you know, there’s like I said, there’s, they feel like their credibility is under attack. And I don’t know where that comes from. Because let me just ask you the question, do you see it in the 10? Year breakevens, the tips breakevens because I don’t see credibility issues. 2.2 2.3% Five year five year forwards Do you see is the commodity markets telling you that the feds got some massive inflation problem? You were talking? No, you’re talking to me about the certain services so much of it is imputed. I just finished saying nobody talks about this. I didn’t see this anywhere except my writings over the weekend, that in that PCE deflator, hotels, motels, negative delivery services, negative airfares, negative car rental leasing, negative sort of come to me and say, well look at the stickiness, yeah, when you have rents. And I would say healthcare as well, which is not ending the Fed can fight and I think it was a one off most cyclical services, those prices are actually going down. And so I just get a sense here that the Fed start fighting its credibility, the US dollar is breaking out right now to the upside. If I was concerned, the central bank or credibility is under attack, the US dollar would be in freefall. It’s not commodity prices would be surging. They’re going the other way. They’re good. What’s more important in the oil price? What actually led you know, what led the first thing that led the inflation? Firstly, that led the inflation off of zero in the spring of 2020 was the oil price. Now oil prices are diving, nobody talks about it. I feel questions every day about the inflation. It’s not even called inflation, the inflation, it’s about the inflation, the inflation, people think I’m crazy for saying disinflation, I’m saying, Do you not see that like oil prices are down almost 50%. And that feeds in everything, and it feeds into services. It feeds into delivery services, the fees in airlines it feeds in? So we got this collapse in oil. And everybody’s still talking about inflation, I actually think back thinking I sort of liked this, because where’s the surprise going to be? And so I’m looking at commodities, I’m looking at the shape of the yield curve, tell me is the inverted yield curve, the inverted yield curve telling you anything? When if there’s the Feds under inflation attack, the yield curve is steepening and bond yields are surging, the dollar is tanking, commodity prices are surging, we have none of that. But all I hear about this is inflation. And we’re focused, we’re focused like in a ridiculous way on the CPI, which I argue is not the only statistic out there. I think this is where the Fed has gone wrong is not teaching us, they should teach us about the eclectic, holistic measures of inflation. Okay, not everything is following the CPI. The same thing with the labor market, he chooses, like seriously, like job openings to unemployment. But you see unemployment, the U three, unemployment is a very narrow measure of labor market slack, there is actually a statistic that the BLS produces. That’s called the total pool of available labor, which is like 50%, bigger than the youth but but we’re going to look at the Youth three definition of unemployment. And we’re going to look at, by the way, the jolts data, and that’s the thing is that nobody knew what the jolts data were before Powell elevated the job status number one status, nevermind the fact that post COVID, the response rate has collapsed. So I’m trying to say is that there is no veracity behind the numbers that the Fed is looking at, which really surprises me. I would love to be at one of those meetings and maybe give them my own presentation. Because I’ve been doing this a long time myself. They’re looking at job openings to unemployment. If you really trace that out, we should have had 10% wage growth is cycle but it never happened. Wages did go up, but we just got bottled up by prices every step of the way. Real wages have only gone down. So people talking about wage inflation wage inflation, we never had real wage inflation in the 1970s. And that’s Oh, the 1970s that’s the template or the 1970s. wages went up more than prices half the time and prices went up more than wages half the time and that’s called the wage price spiral, because back then inflation was institutionalized into the economy. He through Cost of Living Allowance contracts, cola clauses, they don’t exist today, right? God forbid, oh, you get a Starbucks, a Starbucks union or you get an airline. And it’s a front page news about we’re getting a big wage breakout. I think that I think I think people and including the Fed have been hyperventilating about the inflation far too much. But for the Fed, I think that they believe they’ve had a perceived lot of loss of credibility. And when you compare yourself to Paul Volcker, who inherited a much different inflation situation, and a much more pernicious, longer lasting one than the one we had, like, without, without, again, I keep on saying with all due respect, and normally when you say it, you know, you don’t mean it, but I do mean at this time, like, you know, almost two thirds of the time in the 1970s, the inflation rate was over 9%. We had one month of nine, one month, June of last year. And we’re like, we got the big institution institutionalized inflation in here. So I’ll take the other side of that bad inflation has already come down a lot. And I think it’s going to come down even more in the next 12 months. And the Fed will be cutting interest rates rather dramatically in that environment, because one thing we know about Jay Powell is that he pivots in both directions.
Adam Taggart 31:13
So let’s go there if we can. And by the way, I have so many notes here. We’re not going to kids to get through. But this is great, David, thank you. So a lot of people, I’d say the vast majority of people, you know, are salivating the market is salivating for Powell to pivot still believes he’s going to pivot sooner than he says he’s going to in the type of future that you see coming in terms of the type of recession, the severity of the recession that you see coming, how big you amount, imagine the policy response is likely to be, you know, it seems every time that we have a central bank engineered rescue, now, it’s bigger, in most cases substantially bigger than what it was before, you know. So what kind of magnitude you expecting when Powell pivots next?
David Rosenberg 31:58
Well, it’s it’s, well, it’s situational. Right? And we got to keep in mind that people seem to think the Fed can only cut rates if we get into some financial calamity. Not true. Did we have a financial calamity in 2019, when he cut rates three times? No, no. Did we have a financial calamity? You know, in the year that we labeled Alan Greenspan, the maestro in 1995? I mean, we had the tequila crisis and Mexico while we save that with Tehsil Bono’s problems in Orange County, was there a financial crisis and 1995 got really the Fed cut rates three times not like a.com bust, or do you guys know? Well, something that so what I’m saying is that, you know, the Fed and the markets had this symbiotic relationship, the markets lead the Fed, the Fed leads the markets. When push comes to shove, interest rates are cyclical. And the Fed may lag, what the markets are pricing in. But interest rates are so cold, why why would anybody have a problem with we go into even an economic slowdown, let’s not call it a recession, and inflation comes down? You know, why would interest rates be static in that environment? Right. So if we get the soft landing, which to me is a classic case of Hope triumphing over experience. So we get a soft landing. Then, when you look at soft landings and soft landings are when the economy slows, but does a contract, big difference between the two, the Fed cuts rates 75 basis points, which up until recently, the markets had priced in. If we get a soft landing, we get a hard landing, which is a recession, whether it’s mild or whether it’s severe. The Fed historically cuts rates 500 basis points to a tee, to a tee. And I understand that nobody can ever believe that will ever happen at the peak and rates. I could tell you that when the funds rate was what six and a half percent. Back in. In 2000. Did anybody say, Oh, we’re going down to 1%? In 2003? No, yeah, absolutely. When we when we got to five and a quarter in 2006. Anybody say oh, wow, we’re going to zero in the next cycle. So and look, I’m not talking about pandemic led recession. Things are cooling off anyways. And the Fed goes from well, what were the back then about two and a half down to zero, right? The last three cycles, we got down to about 1% or zero in a recession. So some are going to tell me Oh, but this recession, because of yesterday’s story called inflation, they’re not going to go back down to zero. I think they probably will be forced to I think we’re gonna have a recession. I don’t know about the severity. I don’t know what the severity, but I don’t really care. Because we had the mildest recession of all time. In 2001 Real GDP went down a grand total of negative point 2% That that stopped the market from going down. Like you Oh 60% Right now, so. So you know the I think that I think that the business cycle is not dead. Gotta focus on leading indicators. I understand that for people in my camp, it’s been frustrating and frustrating, you’re waiting. It’s like watching paint dry waiting and waiting. But it’s out there, the business cycle is not dead. And I think that the recession may already have started, and we don’t even know it. And I say that because of something called GD plus. GD plus, is not just real GDP, but it’s real GDP, and real gross domestic income. And we’ve actually had back to back quarters of negative prints and q1 and q4 of last year, negative 1.4. And q1, negative 1.2. So people, look, they’ll look at the latest consumer spending number, okay, that’s good after a prolonged period of weakness. capital spending is in a recession, you have lots of things that are extremely weak, but the income side the income side of the economy, very interesting. Everybody was going gag gag over the real consumption number. What was it point five that we got for April? But nobody says oh, oh, but what did real disposable income do? Oh, it was flat. So the story was that the savings rate was drawn down from 4.5, to 4.1%. So I call that a very low quality consumer spending report. But hey, people knock themselves out because they just spend their time looking at the headlines. Without really digging through the data, which is, you know, what I do for a living, it’s called, it’s not called data mining. It’s called analysis. But what I’m trying to say is that the recession could already be starting, and I know you’re gonna tell me, but nobody sees it. The markets don’t see it. I’m trying to say, they were saying the same thing saying the same thing in 1990. They’re saying the same thing. And in in, in, in 2000, saying the same thing, because we’re also borderline narcissistic and impatient here. But I think that the it could well be the it could well be that the recession has already started. And indeed, indeed, nobody’s noticed it. And that’ll be the big question mark is what will be the trigger point, I guess it will have to be when we start to see the employment contraction. And I would say that that’s taking a little longer to take hold because of this need for the business sector. I gotta hang on on my staff, but you got to hang on to your staff until you can’t, and I’ll tell you why businesses won’t be able to and it was in the first quarter productivity number. You saw the first quarter productivity number, negative 2.7% at an annual rate, negative 2.7. That’s a one in 15 event. So real nonfarm business output in the first quarter was almost flat. And the business sector added 2.7% of labor input. Two points. So we, as you said, and let’s take the let’s take the Non Farm Payroll numbers as gospel with the birth death model. We’re hiring all these people to produce nothing. Yeah. Is that is that a business model for capitalist economy? We see companies are hanging on as long as they can, but they won’t be able to because the productivity decline is crushing their margins, they won’t be able to and they’re already starting to cut the hours. Our see the body. So I think that once we start getting employment, the clients, people will, will What do you know, great cycle isn’t dead, after all, can ask
Adam Taggart 38:28
you then real quick. So it seems that the s&p analysts are now bringing their earnings expectations up? What’s going on with that? They’ve been excessively rosy given the macro data, they were loath to bring them down. They did start bringing them down. But it looks like they’ve kept them relatively robust for next year. But most recently, I’ve seen as they’ve been bringing their EPS, their earnings estimates up for next year.
David Rosenberg 38:52
I think they’re bringing their estimates up or their growth estimates up for the levels up.
Adam Taggart 38:58
I mean, I believe they’re bringing the the actual number of earnings that they’re projecting up, they’re revising, I
David Rosenberg 39:03
have no idea. I have no idea I had a client asked me today that my old friends at Merrill Lynch have taken their numbers up for next year. What does anybody know about next year now I think what’s happening, and this was happening on the growth side that the growth rates for next year were going up. Even as the level estimates for next year were going down because of the weaker base for 2023. It’s called bear market math. So taking down 2023, may 2024 look a lot better from a year over year growth perspective, if you know what I’m talking about. Yeah. If anybody’s raising their numbers for next year, then I would say ipso facto, they have a soft landing in their forecast. And everybody is falling into that sense of complacency that we’re look I’m just getting questions all the time. Rosenberg where’s the recession? Rosenberg Where’s show me the recession? Doesn’t matter that I have this metric real GDI real GDP, the people’s eyes this role. Where’s the recession? We’re not seeing Then the consumer, we’re not seeing it in employment. Now, it’s hard to say that you’re not seeing it in the consumer, because you’re seeing it certainly out of the retail reports that we got, right? Like when you start getting high end people going to Walmart, you know, something funky is going on you. So all these retailers are showing how there’s people that are trading down, that when you’re taking a look at what people are shopping, is way down relative to the traffic, the traffic hasn’t come down nearly as much. Items, dollar value of items bought per unit purchase coming down. So sharing
Adam Taggart 40:42
the credit card back to read a credit card record credit card debt and all that the decline in the savings rate, there’s a lot of
David Rosenberg 40:48
the credit card. And that’s interesting, too, right? Because what happened to the excess? What happened to the excess savings? And if everything so hunky dory, why are people people are actually people are actually using their credit card to buy food? I mean, so you know, you start to wonder that the complexion of the consumer. And look, there was a great article in the Wall Street Journal, and I think it was on on Monday, talking about how Walmart and others, big ticket retailers are going to their suppliers, and push them to cut their costs substantially. So that’s what lies ahead of us. But the you’re seeing a I am seeing a definitive shift towards consumer frugality. But I guess, people are gonna have to wait and see I see multi month declines in consumer spending, then I will gravitate towards this recession for you, I’ve got to see several months in a row of employment declining, and then I will basically change my view. By that time the recession is going to be six months old. Yeah. Right. And that’s I’m talking about like the leaning, you know, actually, and I think that before check GPT. This will put every economist out of business, but it’s been around since 1959. So maybe it should have done that already, which is the Conference Board is leading economic indicator, which is down 13 consecutive months. And that’s only happened in the context of predicting a recession.
Adam Taggart 42:15
It’s only been in in recessions. And actually
David Rosenberg 42:17
the the average and median lag is around 15 months from the peak of the LSI. When did a peak peaked in December 2021. Telling you the recession, the recession? They see, like I said before this recession. It’s like it’s this odorless gas. You see what I’m saying? It’s not on you. And I think I think this recession is already starting now you say? I want to I just want to address what you said about the markets because once again, you know we bow to the holy grail of non farm payrolls, oh, the Consumer Price Index these fall statistics, the s&p 500. Seriously, what about the s&p 600? The s&p 600 Small caps have a much higher beta or torque to the economy, then these mega cap growth stocks
Adam Taggart 42:59
do right than the s&p Six or whatever
David Rosenberg 43:02
it will the s&p 600 is, is 23% off the peak, the Russell 2000, which has more zombie companies down 27% from the peak. But you see, once again, I What do I care to why do I want to so large cap growth technology, they’re in their own universe? And of course, their valuations are being amortized discounted over a much longer timeframe. You can What are you going to look at when people are saying oh, that the that the AI craze is gonna save the economy? Like what are you talking about? Like we had the internet craze in the late 1990s? Did that stop that business cycle? Do we not have recession 2000 2001. And we and the Internet was real, but it was a it was a financial bubble. So we will say all the AI the AI is going to say the generator of AI, it’s gonna save the economy. I’m gonna thinking well, it’s going to be a game changer launch game changer. But none No, no, this stuff does not alter the contours of the business cycle. They’re not by the way bigger than interest rates. As Albert Einstein famously said, the power of compound interest is the eighth wonder of the world. So, you know, the, the major point here is that when I look at the stock market, I want to and I want to see what’s the stock market telling me about the economy. I don’t go to the s&p 500. I look at the banks. I look at consumer discretionary. And I look at transports, because they have the highest sensitivity, they give you the most information about GDP. And they’re down 33% from the peak. So when people say, Well, as you said, Well, you know, what’s the s&p 500 telling you? Well, I’m telling you what it’s telling you do I care is when you’re looking at health care. You’re looking at healthcare and the s&p that’s selling what the economy or large cap tech, no banks transports, consumer discretionary. That’s all you need to know. All right, and those are You’re telling you the same story, by the way, that the inverted yield curve has been telling you since last June.
Adam Taggart 45:04
Okay, so those, those are important indicators in your dashboard that are still blinking warning recession signs. Alright, so I want to be sensitive because I know you have a hard deadline coming up here. So, okay, so we’ve done a good job of ripping whatever will might have been over the eyes of the viewers of this. This video though, David, just so you know, I believe most of the viewers on this program have been thinking very similarly to you. So I think you’ve been in more validation mode for the way in which they’ve been skeptic skeptical of today’s markets. What is looking appropriate to you to consider in terms of asset classes, given where you think markets are going to head from here over the as this recession arrives in force?
David Rosenberg 45:50
Well, look, I obviously like what works well, in a recession, and long term treasuries work well in recession. So I liked the Treasury market, I liked the long end of the Treasury market, because I think that’s where you’ll get your greatest total return. I think that, as the Fed, the Fed will be cutting rates. But you see, the Bank of England and the ECB have lagged behind, they’ll have more to do. So relative interest rate differentials are going to work against the US dollar. So I want to have a hedge against the US dollar. So I’m very glad to have gold. So I would be recommending what I refer to as because I love alliterations is the bond billion barbell. I think that if you’re going to be fully invested in the stock market, then be prepared to have a lot of bumps in the road because the recession is no longer priced in we’re getting a lot closer at 3600 on the s&p last fall. But all of a sudden, as you said before, the analysts are bleeding into the soft landing view soft landing is taken over and soft landing has got repriced in, I think that I’ve got problems with what’s been priced into the stock market writ large. But there’s long term thematics out there. And there’s farmland, I think we’ve come out of the COVID with and not just that, but with the Ukraine war understanding about the importance of global security supply when it comes to food. So that’s a theme I’m still long term bullish on on energy. And in terms of cybersecurity, there’s all sorts of different non economic correlated, the Maddix a lot of them you can get in the Public Security markets and ETFs some, you know, there’s in in more in the private markets. But I would say that you want to be focused really on things in a recession, things that you need, not things that you want. So in the consumer space, I like consumer staples over consumer discretionary. I think that healthcare is a place that I that I like if you’re talking about sectors, again, it has a very low correlation with the economy. I want to be out of the cyclicals in terms of regions. I think that the Japanese story which is starting to gain some notoriety has a lot further to go. I think that we’ve written a couple of reports on this already and other special report is coming. This this this if there’s a secular bull market brewing in the world, it is in Japan. I call it hot topics.
Adam Taggart 48:31
Okay. And what is driving that it? Well
David Rosenberg 48:33
there’s a it’s it’s the it’s the finally the the lagged impacts of obey nomics. And so you’re seeing corporate governance, take over corporations are being compelled by the regulators. This is something that us did 40 years ago, to return cash to shareholders to break the the intertwining of companies so you’re seeing you know, breaks up breakups of monopolies oligopolies. You’re seeing companies now CEOs are discovering shareholder value, they’re moving cash off the balance sheet and returning it to shareholders. And who was the first one to notice that happening is the the king of value investing of Warren Buffett right. And of course his investment is more in the financials and that’s a natural thing to do, because financials will in any market is going to be a beta off your overall stock market. So that’s what’s happening is there’s a an equity culture that’s starting to finally come to the fore in Japan, people don’t remember but I started the business back in the 80s. Japan was in a huge bull market and of course peaked in 1989. We just got back to the 1989 levels. People tend to forget that how great how great a market Japan was until they went through the multi decade period of very poor policymaking and And of relentless deflation, and that’s something else the broken out of the deflation. They’re in. They’re in a they’re in a sweet spot. Look, you’re talking to somebody, I’m I’m known as this radical perma bear. No, no, I’m an ideas guy, and I want my clients to stay out of trouble. Japan has 3% plus inflation. I mean, people are saying, Oh, but you know, that’s crazy high for Japan not only see that the Bank of Japan is doing like a dance, they are out of their multi decade deflation. And inflation is not crazy like it is in other parts of the world. Like they’re not deflating, like China is not inflating say, like the US and Europe is. And so you’ve got and the 3% Inflation is perfect. It’s greasing the wheels for nominal GDP growth, growth and profits growth in wages. This is a great story. Plus, on top of that, you’ve got a Bank of Japan, like we just talked about Powell and the fed the fed the fed the fed the Fed, and of course, the Bank, Bank of England, all the other central banks, except for the PBOC. And the Bank of Japan did not follow the Fed. So when you’re taking a look at relative valuation, look at the valuation in the Japanese market, you always have I said before, ratios matter, you can’t just look at a price earnings multiple and say I like this market don’t like this market. I actually look at the US market with a 20 Multiple or 5%. Treasury bill yields. I got a 5% earnings yield. And I got a 5% Equity Yield. Well, why would I take the capital but you have zero rates that the Bank of Japan says thank you very much Mr. Fed Mister, mister ECB, Mrs. ECB, Bank of England, we’re gonna roll monetary policy, we are not freaking out over inflation, we actually don’t think we have an inflation problem. They’re keeping rates at the floor. And so you’ve got this tremendous, not just dividend yield and earnings yield together GAAP against where interest rates are is a really compelling story. And so all those things above and there’s one last one, which is this, which is fun flows, you see what’s happening. Japan is a huge beneficiary from the second normal cold war with China and the US was intensifying. So right now you want to invest in China sales, and people that want to invest in China, not just China directly, but because of to get a toes into the Asian market. But you see now investing in China as an American is a little risky, right? It’s but now if you want it but now if you say I want to get you go to your financial advisor, I want to get exposure in a liquid market to Asia. So what they’re saying is go to Japan. And that’s what’s interesting is that you’re saying the foreign fund flows international fund flows into the Japanese market have been accelerating. But but but but the locals have yet to catch on the domestic investor in Japan has yet to catch on. So you’re gonna get this additional fund flow, just rational. I mean, don’t forget, a lot of this is psychology. But beyond the psychology and the momentum and the fact that the retail sector and in Japan, unlike the retail sector in the United States, the real sector, the retail sector in Japan has grotesquely underweight Japanese equities. But I think that the tailwinds if you’re going to say to me, just tell me the one story, the one Japanese story, it is the corporate governance. It is basically Japan, basically going through these reforms and dis deregulation that the US did back in the early 1980s. And I’m pretty sure in the early 1980s, when people were telling you, okay, the early 1980s If you’re a broker, and you cold call to a prospect, they call the cops on you. And it was, and that was the best time the P multiple was a nobody wanted to touch the equity market in the early 1980s. Best time to buy. And so I have the same very similar sense that that’s what’s happening in Japan right now. So that’s me were asking before about what sectors you know, and there’s long term thematics you can invest around, you got to be patient. I’m not saying I don’t like all areas of the stock market as an asset class, I’ll tell you right now, less than 20% of my asset mix both Rosenberg research in our portfolio, and personally, I’m below 20% equity allocation. And that’s the lowest it’s been since by the way since 2007. So I’m putting my money where my mouth is. But I would say that whatever equity exposure you have, I would be taking profits in the United States and so far as you’ve got them from what’s happening in the tech sector, and I would be putting them well, where Warren Buffett’s putting them in
Adam Taggart 54:33
safer assets. And in that,
David Rosenberg 54:34
well it but also if I’m going to be long on the equity exposure, Japan, you know, of course, I would want to be very careful about having the currency exposure because the longer the Bank of Japan keeps rates where they are, you know, the currency could weaken. But even if the yen I mean of Oxford’s dollar yen is 140. You know, that’s not going to 180 it’s not going to 160. That’s actually I think the The best risk reward profile for any market in the world right now is Japan that has actually I would say, as strong a conviction call I have as my bond bullion barbell. Wow.
Adam Taggart 55:12
Wow. All right. Well, that’s really saying something. David, thank you. This has been fascinating, very valuable. I would love to continue diving with you just in Japan alone. But we’re past the time that that we agreed to make available for you here. Because I know you have to get on to another meeting. I just want to say a huge thank you let you know the door is open to come back here and talk about Japan, or AI, which we didn’t get into all that much, or any of the other issues that we talked about. Thank you so much. This has been wonderful. Last question. For people that have really enjoyed this discussion would like to learn more about you and your work follow you and your work, where should they go?
David Rosenberg 55:47
They can just just, you know, type in Rosenberg research and on on the internet. And it’ll take you right to our website, or you can just go to our information box and go to information at Rosenberg research.com. And it’ll take you right there. And right, we provide an ID to everybody on the call, one month free trial for everything we do.
Adam Taggart 56:11
Very generous things. So wouldn’t this I’ll put those URLs right up on the screen so folks know where to go. David, you’re also on Twitter, too, right?
David Rosenberg 56:18
That’s right. Twitter. And we also have a, I have my own YouTube channel as well. So you can watch me on video.
Adam Taggart 56:26
Okay, great. We’ll put the URLs to those up as well. Okay, folks, we’ll enclosing David has done just a phenomenal job in this interview, delivering great seasoned advice and counsel that only somebody who’s like him been through so many different market cycles before and can see all these patterns that are highly likely to hold through today. But he also made the case that we make all the time, this is a really tough time for investors to navigate, especially right now, with all the calming words of Don’t worry about a recession. And oh, we’re in a new bull market with AI. So we highly recommend, as we do every week on this program, that you get help navigating all of this from a professional financial advisor, who understands all the macro issues that David talked about in this interview and takes them into account and putting together their personalized portfolio plan for you. And not only building a plan for you, but actually executing it for you while you’re busy living your life focusing on your family, your jobs, etc. If you’ve got a good one who’s doing that for you, excellent, obviously, stick with them. But if you don’t, or if you’d like a second opinion from one who does feel free to schedule a free consultation with one of the financial advisors that Wealthion endorses, these are the firms that you see on this channel every week with me to go do that just go to wealthion.com Fill out the short form there doesn’t cost you anything. There’s no commitment to work with these guys. It’s just a public service. They offer to help as many people as possible position prudently before many of the potential shoes to drop that David has mentioned here happen in the future. With that, David, I just want to thank you so much again, folks, if you’d like to see David, come back on this program, please do us a favor support this channel by hitting the like button, then clicking on the red subscribe button below, as well as that little bell icon right next to it. David, again, I can’t thank you enough. This has just been such a phenomenally valuable and generous sharing of your expertise with us. Thank you and look forward to having you back on the program again as soon as you’re willing to return.
David Rosenberg 58:28
Great, that to help take care out of
Transcribed by https://otter.ai