David Rosenberg says the U.S. recession isn’t coming, it’s already here. In this urgent interview with Trey Reik (Part I of II), Rosenberg explains how trillions in post-COVID stimulus masked economic pain, why that fiscal support is now gone, and how Wall Street is misreading the signals.
He breaks down the Fed’s biggest policy errors, including Jay Powell’s obsession with legacy over leadership. Rosenberg warns that the Fed is ignoring its own Beige Book and that both soft and hard data now point clearly to contraction. From consumer stress and housing unaffordability to labor market weakness and collapsing business investment, the red flags are multiplying.
Key topics discussed:
- Why Rosenberg thinks the recession has already started
- The Fed’s credibility crisis and Powell’s “legacy problem”
- How government stimulus distorted the economy
- Rising uncertainty from trade and tariffs
- Housing and labor market red flags
- The only sector still showing strength: AI and data centers
- Why Treasuries are his top conviction trade
This is Part I of a 2-part interview. Part II will be released next Monday. Subscribe and turn on notifications so you don’t miss it!
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David Rosenberg 0:00
The recession has probably already started. That was the message from the Beige Book today, and corroborated by the last set of FOMC minutes.
Trey Reik 0:16
Greetings and welcome to our wealthion show. My name is Trey Reich of Bristol Gold Group, and we’re visiting today with David Rosenberg, founder of the eponymous firm Rosenberg research in Toronto. Over the course of Dave’s career at Merrill Lynch, Gluskin, Sheff and now Rosenberg, Dave has become, to me, the Dean of contrarian thinkers in his comprehensive daily reports, Dave is a master of sniffing out weaknesses and consensus thinking and identifying hidden risks in financial markets. So Dave, thanks for being with us today.
David Rosenberg 0:56
Pleasure to be on. Thanks for having me back
Trey Reik 1:00
as I was preparing for our conversation, I did think of one question that I thought I would run by you to kick things off, when was the last time you were unabashedly bullish about financial markets? Because I’m not sure I can remember. Well,
David Rosenberg 1:16
I would say that coming out of the pandemic, I wrote many reports talking about how the remote work at home theme was going to generate a whole lot of winners, and that anything that was involved in wiring up your home or deliveries to your Home was going to be in a budding bull market. And actually back then, I was very bullish, in particular, on most parts of the technology sector. So I would say that that was one instant before then, in terms of being unabashedly bullish, you probably have to go back to when I was at Luskin chef, and I think in that period, basically from 2011 through to 2016 I was bullish, and then was increasingly taking risk off the table around the Brexit file and the fiscal policy withdrawal we were seeing back then. And then, of course, we got hit with the aggressive fed tightening in 2018 which was no walk in the park for the stock market. So if you’re looking for the two previous periods, I’d say 20 I caught, you know, I’m notoriously late because I’m conservative in nature. I don’t like to, I don’t like to, to move early and get my head sliced off. So I’ve always basically had a philosophy to participate in as much as of a bull market as possible. Nobody can time the lulls or time the peaks. I’d say, in that period from 2012 to 2016 call it, I caught 50 to 60% of the up move. Didn’t participate in 2018 which was a horrible year for the stock market. And I’d say that, you know, I developed this notoriety of being this permabear, which actually isn’t true, but it’s, you know, Wall Street and the media like to apply labels to people. I guess I would just say, okay, better to be noticed than dismissed or ignored. But in my case, you know, but even when I turned bullish back in that last cycle coming off the great financial crisis, nobody believed me. I can’t tell how many emails I got saying, Rosie, you can’t be serious. You’re not really turning bullish. And that just reminds me of that’s why they never really took John Wayne out of the westerns and move them to romantic comedies. It’s just it doesn’t work. But you know, before I gained fame being chief economist of Maryland, Canada, back in early 2000 and of course, I was turning bearish right around that peak in the technology bubble, and I had a platform. But before then, you know, I was brought into the business the day of the stock market crash in October 1987 at the Bank of Nova Scotia. And if you ran our work back then. Now I wasn’t chief economist, but I was climbing my way up the ladder. We were we were bullish, and actually got out in time ahead of the 1991 recession. But then I worked at the Bank of Montreal, at BMO Nesbit burns, and don’t forget, I was a relative nobody back. Then, and I was working at B monez, but starting from 94 right through to 99 before I went to Merrill. And if you read the work we were producing back then, and that was, of course, much of that was the internet wave, we were bullish through most of that decade, but nobody would ever know that, because, you know, I was just a plain old senior economist hiding in the shadows of the chief economist at the time. So, you know, there you have it. I am not a perma bear, although I think that was the undertone of the question. Because in our business, and actually, just in life in general, there’s no such thing as perma anything, because nothing is permanent. I’ve been doing perma bear. Perma bull is just like, you know, it’s not a very well thought out label, right?
Trey Reik 5:53
I’ve been doing gold for 25 years, so I’m pretty close to your thinking on a lot of these issues. And there’s a lot of things that I’ve been expecting for decades which haven’t happened surprisingly, in terms of the dollar standard system, etc, and it does appear that finally, some of these things that we’ve focused on for decades are starting to actually transpire in markets. So I’m with you all the way. Specifically, your current stance on the market, I know is sort of bent in the recession category. And you have been talking about a recession since the Fed’s breakneck rate hikes in 22 and 23 and obviously, and I was in your camp, 100% we’ve no recession has yet materialized. Can you talk a little bit about why you think that’s been the case and where we stand now on recession probabilities, right?
David Rosenberg 6:57
Well, I guess you could look at 2022 and 2023 we’re recession call as being a blown call, and that’s what it was. And I was writing that what is more important in a credit driven economy than the rate of interest. And it was a volt caress tightening by Jay Powell, we’ve never had a tightening of that magnitude. And then you consider, you know, the balance sheet shrinkage, we haven’t had a fat tightening cycle like that since the early 80s, where Paul Volcker gave us back to back recessions. We see back then, there were no antidotes, and we had some powerful offsets this time around that, frankly, I didn’t really see coming in the sense that, I mean, we all knew that in the beginning of 2021 we had two rounds of very powerful tax stimulus checks being sent out to the population, whether you had a pulse or not, and that was over $2 trillion that was like a lottery ticket that was placed in people’s accounts, $2 trillion and the historical record and the academic research showed that households typically, when confronted with a stimulus Check from Uncle Sam, they spend half and they save half. So when I did the arithmetic, there wasn’t going to be enough of these excess pandemic savings to save the day from the Fed. But in fact, what happened was that all of the $2 trillion plus of stimulus checks ended up going into the economy, which is unprecedented, and I suppose, speaks to the narcissistic characteristic of society today. You know, we went into the pandemic where at least a third of the household sector went into the crisis with insufficient savings to get through three months of idle employment activity did not have enough savings to get through three months of being out of work. And so my inclination was to believe that, if anything, far less than half the traditional average of those stimulus checks would be spent. But that’s where I went wrong, because, you know, in my business of forecasting, your assumptions drive your conclusions, my assumption was not that you know the savings rate was going to plunge from call it 8% pre COVID down to running close to 3% so there was this really big shift towards consumerism, not just the stimulus checks, but on top of that, the degree to which American households were spending more and more of their after tax income and the memories of COVID just faded away. Or maybe people believe that, hey, if we ever get another crisis, the guy. Government will be there to bail me out. There might be that mentality on top of all that. What happened was all the Biden stimulus, the chips Act and the oxymoron, oxymoronic inflation Reduction Act, and also you had tax subsidies up the wazoo, you had debt moratorium for students, and you had all sorts of spending on green energy and manufacturing construction, you know, so that we’re going to be the world’s next chip making giant I mean, I look today and I still can’t believe, did you know this that government spending, federal government spending, today, is 53% higher than it was Pre COVID in late 2019 so we had the mother of all fiscal responses that totally mitigated what the Fed did on interest rates. And it’s astounding that we have what like five years in a row of the deficit to GDP ratio being in excess of 5% and that was closer to seven. We didn’t have five years of 5% deficit GDP ratios under FDR to fight the Great Depression. We’ve never seen this outside of of a world war. It’s so we’ve had just the fiscal spigots have given this illusion of prosperity. And of course, government, in all its forms, is part of GDP, but that explains how the recession call didn’t exactly work out, but we’re in a different situation right now. And I think what’s very dangerous is that most people in my business who made the call along with me for the recession are now in a classic case of once burned, twice shy. And you know, to them, it’s a big deal if they take their recession odds from 25 to 40% you know that’s going to make it on the front page of the daily newspapers. But nobody is willing to really make a recession a base case scenario because the fear of being wrong again. But I don’t let the past. I don’t extrapolate the past. I try and learn from my bad calls. You know, you learn from your mistakes. What else are mistakes good for? Then to learn from them? But the problem is that we still have a very tight Fed policy on that point. Donald Trump is not wrong. You have a Fed funds rate that is being pinned about 125 basis points above the Fed’s own estimate of where neutral is, where the economy is when it’s in balance. Rates are still 125, basis points above that level, but without the fiscal stimulus. So we still have a tight fed there is no fiscal stimulus. There is no fiscal stimulus from this big, beautiful bill. It just basically avoids a falling off the fiscal cliff at the beginning of next year, because it extends the the 2017, tax cuts, mostly on the personal side, which is basically, you know, $4 trillion of those future deficits just comes from the extension. So there’s no fiscal stimulus. More likely when you look at all the tax relief measures, no tax on tips and Social Security and overtime. But you look at the other revenue raising measures, and you look at the spending restraint, which is much needed. We actually estimate that heading into next year, there’s fiscal drag coming in the economy. The era of the past five years of fiscal stimulus is over. We’re left with a tight fed, and then Big Mama is all this trade uncertainty and tariff uncertainty. And so in answer to your question, you know, I’ll take my lead from others. We are seeing things we didn’t see in 2022 and 2023 for example, we just got the Fed’s Beige Book. The Fed’s Beige Book told us that 75% of the US economy is now either contracting or stagnating, and that’s up from just about 50% six weeks ago. So the Beige book itself is telling you that the economy, that the recession, has probably already started. That was the message from the Beige Book today, and corroborated by the last set of FOMC minutes. Because when you read you know when you get the FOMC minutes. The first part is about the Fed staff, the Fed. Economic staff, what their view is on the economy and their forecast. And I was struck by the fact that the Fed staffers said that the odds of a recession are now as high as their base case economic scenario, a base case scenario, by the way, which they cut. And they’re saying that that cut to their growth forecast is equal, at odds to an actual, outright NBR defined recession. So I found that to be very interesting, because we weren’t really seeing that in 2022 2023 we were not seeing this degree of negativity in the base book back in 2022, 2023, and you know, we’ve got the OECD forecast, not that it’s gospel, but they’re down to 1.5% real GDP growth for this year and 1.6% for next year. Now these are averages. But when you go back all the way to 1948 what you find, because that is otherwise known as stall speed. When you get to stall speed two years in a row of call it one and a half percent real GDP growth, embedded in that two year time frame, embedded in that is a recession, back to 1948 100% of the time, 100% of the time. So,
David Rosenberg 16:28
you know the no such thing as a sure thing, but I think that the base case scenario is a recession. I think it could be starting now. I know people are aghast, because how could you say that when the Atlanta Fed downcast model is 4.6% for the second quarter, but that’s primarily because imports fell out of bed. We had a record plunge in imports because of all the volatility around the trade data. And so you can create, once again, the solution of prosperity through GDP, because imports are subtraction. But when I’m looking at, you know, the monthly data flow, and I’m seeing negative single family housing starts, negative building permits, negative non residential construction, negative prints on core capex, shipments, negative retail sales, volumes, back to back, declines in auto sales. So everybody is saying, well, it’s just the soft data. It’s not the hard data, and we’re going to wait for the soft data to morph into the hard data. And what I’m saying is that the soft data that we’ve been seeing as in the survey data, which tell us about behavior, they’re not hard dollars, but it’s starting to morph into the hard data. I’m waiting for the day when Jay Powell would no longer say, Well, we’re waiting for the soft data to move into the hard data. It’s happening. And on top of that, I would say, like, basically, you know, the Fed’s been doing this Beige Book since 1970 and they sent out their agents into the field to speak to industry contacts across the entire economy, across industry and across regions. It is just a sensational amount of information. We get it every six weeks. Well, I asked, I want to ask. I mean, my hope is that someday somebody in the press, at the post meeting press conferences, somebody asked Jay Powell, why do you still do the Beige Book? Why do you bother doing the Beige Book when you don’t even listen to it? Or like, why are you employing these fed staffers who are telling you that the odds of recession are 50% and you don’t listen to them. Maybe it’s I’m being too harsh. Maybe it’s just that they’re so consumed with their credibility and reputation. Having missed transitory Powell is on his way out May of next year. Doesn’t want to be remembered as Arthur burns. Arthur burns gets tarred and feathered, I think, rather unfairly. But you know, that’s the moniker on Wall Street. Once again, you don’t want to be Arthur burns. If you’re a central bank chairman, that’s for sure. You want to be Paul Volcker. But the inflation concerns, the uncertainty around inflation that’s dominating the Fed right now, but I would say that that the economy is losing momentum at a rapid clip. And what amazes me the most is how much in denial risk on investors are right now. Whether you’re in the credit market or the equity market, you’ve done some work. There’s no recession raced in at all. Right? You’ve done
Trey Reik 19:45
some work on the soft data, which suggests GDP is actually negative at this point. Can you talk a little bit about that?
David Rosenberg 19:52
Yeah, so we modeled out the soft data, all the survey data, there’s a plethora across the consumer. Yeah, and across the business sector, and we model it out, and it’s telling us actually that what’s, what’s what’s consistent with, it’s consistent with minus 1.3% real GDP growth. We actually run a machine learning model on the base book, and it is telling us that second quarter is flat to negative. Now you’re going to come back and say, but what’s with the Atlanta Fed? Well, like I said before, it’s it’s really rather artificial. It’s basically the 4.6 on the Atlanta Fed. And we’ll see what happens to that number. Is not a reflection of strength, it’s a reflection of sagging imports at an unprecedented rate after surging at an unprecedented rate. So that’s all the Atlanta Fed is telling us right now, but the monthly pattern of the data is decaying, and the soft data always leads the hard data. The soft data is all behavioral. It’s telling you a behavioral shifts. It’s not much different than looking at company reports. I mean, people push back on this view, to which I say, did you notice what Dollar Tree and Dollar General had to say this week that the reason why their numbers are up and their visits are up, is because the wealthy, the wealthy, are now shopping at discount stores in droves because they’re starting to feel the stress as well. And so, you know, so, so, so, there you have it. That is the sort of things as an economist, you want to look for you don’t want to forecast a recession once it started. Of course, when you forecast a recession, you want to get it right. No guarantees that that’s always going to happen, but you do your best, and you read the tea leaves, there is a visible shift underway in the consumer and business sector. And I could tell you that, you know, the canary in the coal mine was out there for all to see late last year when Jay Powell, after one of his meetings, compared the current situation of the Fed moving to the sidelines, to say, basically, in when you’re in a dark room with furniture, what do you do? You stand still and and that’s this elevated level of uncertainty and confusion we have in our hands right now. You know, in that, in that Beige Book, it’s not that, it’s not that big a report. We had something like 112 citations of tariffs, 80 mentions of the word uncertain, or uncertainty. That’s absolutely incredible, that in the past six weeks, these last two beige books, we have never seen, ever seen the word uncertainty show up that much, let alone the word tariffs, but the word uncertainty and of course, they’re joined at the hip, although there’s other uncertainty right now, there’s also fiscal policy uncertainty, but the trade uncertainty, the tariff uncertainty, make policy up on the fly. That is really unnerving the private sector. Now, the private sector in the real economy, not the individual investor in the stock market who’s whistling past the graveyard, in my opinion, when you have a situation where uncertainty is elevated, and we’re talking about most measures of uncertainty, and there are historical measures. We’re talking about at least a three standard deviation event taking place. And what happens is, you go into the J Powell dark room, and you’re seeing that now, you’re seeing the savings rate in the household sector starting to go up. Consumer spending is not just slowing, but as we’re seeing in the retail sales data and in the auto sales data the past couple of months, they’re starting to actually contract and business spending as far as CapEx, companies are just sitting on their hands. Who’s going to be spending money in this environment, the answer is, nobody. And then in the housing market, you’ve got affordability completely out of control. Affordability is almost a two standard deviation event. You got sky high prices now they’re starting to correct, probably more to go but you still have these punishingly high 7% mortgage rates. I mean the qualifying income for a first time buyer to purchase a home today, a median priced home, the income the qualifying income is $100,000 but the median income of the first time buyer is only $70,000 that’s a bit of a problem, don’t you think that is out of balance. So. You know, you’re not going to be getting any lift out of the housing sector. And then, as far as you know, the the foreign the foreign sector, as far as exports are concerned, the world, the world is flat. You know for sure, Europe is going to be going through this fiscal boom on defense and infrastructure, but that’s got a long gestation period. So for the life of me, I cannot see. Maybe you can help me. I cannot see outside of data centers, okay, outside of AI, and there’s lots of spending on that, but outside of that, I do not see. I do not see where the vitality of the US economy in the aggregate is right now. And that was ratified in the base book, was there, loud and clear. That was that Beige Book. That was the, my opinion, that was the recessionary stamp that we got on the base book. That, by the way, was not as emphatic in 2022 and 2023 this was emphatic, and I would suggest ignore it at your peril.
Trey Reik 26:05
So one of our colleagues, who I’m sure you’ve followed, Danielle DiMartino booth, has spent a lot of time on labor figures. And one of her contentions, I guess, is that the labor markets are much weaker than what the data demonstrate. And I think the quarterly census on employment and wages was due today, it should be out today, tomorrow, that type of thing. But what do you make of of the labor market? Is it as strong as the Fed says, or has there been really big misses there with, you know, the birth death model and all that type of stuff.
David Rosenberg 26:50
Yeah, well, the birth death model has been, you know, accounting for about half that payroll growth, and it moves, it tends to exaggerate the increases as you move through the business cycle. That exaggerates the declines in the recession. But you know that you’re under percent, right? There’s really, there’s there’s two numbers, there’s the actual survey, and then there’s the skew from the birth death model, which has continued to add jobs. That’s why the qcw data actually did come out, and it shows that year over year. Now it goes to December, it shows that year over year, and payroll growth was really point 8% year over year, point 8.8 that’s a boom, okay, non farm payrolls. What we trade off of on those non farm Fridays, that’s up 1.3 and so we’ll get into probably another big downward revision to payrolls. But you know, you have a point 5% difference, you know, 1.3 versus point 8.5% difference on 130 million workforce, you know, so you’re talking about payrolls, and Danielle is right, 100% right, that employment is being overstated. The numbers that traders trade off of, they’re fictitious. And that’s why, like, the revisions are so wild. And I think in the past year, you know, three quarters of the time the revisions were to the downside. So even though you’re trading off of a certain number a non farm Friday, and you get whipsawed, and you think you’re wrong, and you’re painfully in the red on your books, only to find out the next month, when it’s too late, that actually, with the revision, you were right the error term, and it’s because the sampling is a lot lower than it used to be before COVID. The error term is extremely wide, but let’s just say that a point 5% difference in the growth rate between QC, QC, W and non farm payrolls, that’s equivalent to 800,000 jobs being overstated. That is not insignificant. I think the labor market is cooling. It’s not collapsing, but it’s cooling off substantially. We saw that with the ADP number and the ADP number. The key feature there was that you had a decline in small business employment for the first time in a few years, and small businesses are have a front row seat to the economic game. The small business sector is in the weeds. They have a front window on the economy and now, and that’s leading indicator. So the key was in May, and the ADP was that negative print on small business that’s very important, because they lead the big guys. What else? Well, we got the jolts data. And what I want to say about the jolts data is. Is that when you look at the numbers that really matter, and it’s not the job openings, it’s actual hires and actual fires, because you could post a job on Indeed one month, take it off the next month, but hires and fires are actual decisions. A lot of the time, companies will post a job, and just to test the waters, it’s not really a true measure of labor demand, although it’s the number that J pal pays most close attention to, which baffles me, but it’s the actual hires and fires in the jolt state of the matter. And in three of the past four months, the number of fires, the number of layoffs, has outstripped the number of new hires. So you’re seeing once again, in the labor market, there is a it’s not collapsing, but there is a decay. There is a decay. And just keep in mind that, depending on what the labor force does, and you are seeing under the initial jobless claims numbers, this massive and rising backlog of continuing claims, it’s taking longer and longer for people who are out of work to find a job. And you see that in some of the soft surveys, like in the conference boards consumer confidence survey, they asked the question about jobs being hard to get or jobs being plentiful. And those numbers are not moving in a very pro growth fashion. So the labor market is cooling. The question is, at what point will we actually go from strong to weak to that negative? That’ll be the key in terms of bringing forward those rate cut expectations out of the Fed and provide some life to the maligned Treasury market. It’s a waiting game right now. So we got to wait for employment to start to show up, as much as if it’s a lagging indicator, nobody will believe that we’re in a recession until payrolls start to decline. Of course, even though we might have had a quarter decline in real GDP in 2022 there wasn’t two. It got revised away. There was one negative quarter. We never really got the employment contraction that will that will catch people by surprise, and the unemployment rate going to four and a half percent or higher. We’re 4.2 right now, but we’ve crossed above 4.4 that’s the peak forecast this year by the Fed and the latest stock plots. Those are the sorts of things we have to see because the Fed is so consumed with inflation concerns from the tariffs that we’re going to have to have a real break in the jobs data to get them to rekindle the rate cutting program that they abandoned late last year.
Trey Reik 33:01
So you bring up the Fed, I’m going to hit you with a bench clearing statement or question on a scale of one to 10. What’s your confidence in the PAL fed?
David Rosenberg 33:19
Not much. I mean, there’s, there’s only two people in the Fed that speak my language, and it’s Goolsby, and it’s Waller, and that’s pretty well about it. I never really liked the fact that you know, G Powell will come up with a statistic to justify his stance, like the super core. The Super core, remember the super core, the services X energy X housing. So to justify his overtightening stance, it was the core services, CPI, the fact that it printed negative in April that hasn’t caused him to sound any less hawkish than he has. Oh, so I guess maybe he’s not looking at anymore. Now he’s got a new GDP number, right? He’s got a new GDP number. And what it is, it’s consumer spending and business spending added together as if that’s the entire economy. It’s a reasonably big chunk of the economy, obviously, but there’s another call it, 20% out there. So he just says, well, the economy is great because add up consumers, out of business. But Mr. Powell, are you telling us we should ignore housing? We should ignore housing. We should ignore net exports, really. We should exclude government. We should include, exclude inventory swings. I just. Yes, but you know, it’s just basically come up with something that will justify our current stance, and I’m just shaking my head. So I’m also concerned that the Fed is fighting the last war in the sense that they are consumed with the damage to their credibility. There’s no evidence right now that there’s any damage to their credibility. But, you know, they talk transitory. I mean, the question is, 18 months wasn’t 18 years. It wasn’t the 1970s like everybody thought. But nor was it, you know, three months. It was 18 months, you know, of inflation going from basically zero all the way up to call it roughly 9% only to come back right back down again. So the Fed corrected that policy error. But they’re so gripped with fear about their credibility and the timing of Jay Powell’s departure in May, and I think that he would rather go out being compared to Volcker than being compared to, say, Arthur burns. So they’re being deliberately tight. And so I just think that there’s just too much of that, too much of weight being put on the fact that they blew the call on inflation. You know, I guess I just have a philosophical difference. I am not factoring in the fact that we didn’t have recession in 2022 2023 because I understand the reasons why we didn’t get the recession. It’s not stopping me from calling for recession right now under different circumstances. So you mean to extrapolate, you know, what happened a few years ago into the future? I think is a pretty dangerous game, and I think that’s that’s what the Fed is doing by the time, you know, by the time all these coincident indicators and lagging indicators, the Fed focuses on Play catch, down to what the leading indicators have been saying for some time, it’s too late, and then they’ll be scrambling. So that’s one thing that has me unnerved, is that this has not been this, this Powell fed, certainly unlike the Greenspan fed, is not forward looking. They focus strictly on contemporaneous or lagging indicators. They have for years. They seem to get away with it, because Jay Powell, if you speak to most people on Wall Street, they love Powell a lot more than Donald Trump does, and everybody is fine. You know, when you when you go on CNBC, or you look at Fox News or Bloomberg TV, everybody is just rolling out the red carpet for the Fed I am, I have to say I am more critical, more critical. I will always be critical of a fed that does not listen to its own Beige Book and does not listen to its own economic staff, that that’s a situation that troubles me.
Trey Reik 38:24
Yeah, I think looking back, you probably agree that the decision to pump 120 billion of QE per month throughout, you know, 2021 with GDP at 6% and CPI already on the way from five to seven and unemployment down from 14 to six will go down as one of the most damaging Fed policy errors of all time. You agree? Yeah,
David Rosenberg 38:51
I would agree. And look, you know, I mean, Bernanke got the ball rolling on QE say, back in, you know, you know nine, but, you know, we came off a mega crisis of 1930s proportions, and then we had a very abnormal recovery, and still with an output gap inflation below target. That was a frustrating period, different, different concern that the Fed has on its hands today, but we weren’t fighting a tariff and trade war. So we also had, remember, after Barack Obama’s first two years, where he only accomplished Obamacare, well, then the Tea Party took over, and we had tremendous fiscal restraint. People tend to forget that we went in a matter of, like, a half a decade, from what was about a 10% deficit, GDP ratio, like 2010 all the way down to 3% it can be done. But you need a you need a Congress that that’s tough on fiscal policy. So so. So the point, the point, the you know, as I was, I digress, is just want to get the point across that QE and then most market participants won’t like this, but QE could be justified back then based on just how weak the economy was, below target inflation and fiscal drag. Well, we don’t have any of that just yet, right, so, but I would tend to agree with you the the whole thing, the whole thing taking rates to negative in real terms and leaving them there. I mean, remember that Pfizer Monday was October, was was November of 2020, right? We had Pfizer Monday, the economy reopened, and then we had these gobs of fiscal stimulus. Like in retrospect, it was foolhardy not to think there was not going to be an inflation response. The beauty of 2020 hindsight, you had impaired supply chains globally. You had mountains of money from the Fed, and the Fed basically accommodating fiscal largesse to at a pace and a level that we just basically had not seen before. I mean, think about it, the fiscal policy made a mockery out of the New Deal. Last I saw though we weren’t fighting a Great Depression. So anyway, yeah, that was a the the QE, the rate cuts, the excess of stimulus got us into a lot of hot water, and now we’re paying for it again, because that’s the Fed is nervous. They’re going to make a mistake again if they cut rates. Keep in mind Another key difference is we came off of zero in that tightening cycle, we were, you know, colored at that point 250, basis points below neutral. Now we’re 125 basis points above neutral. So just looking at the state of affairs today, policy is tight. And guess what? You’re seeing it in the most credit sensitive sectors. Because you could look at the stock market and say, look what’s happening in the stock market. We’re closing in on the highs. The Home Builders are still stuck in a fundamental bear market, and the housing market is still extremely weak, and that traditionally has been a leading indicator for the overall economy, because of all the powerful multiplier impacts that residential real estate exerts right across both the goods sector, the services sector, something else that people aren’t talking about. We’re, of course, we’re focused on data centers, focused on the AI craze, I mean, from a bullish standpoint, but the housing market is massive. I mean, it might only be call it 3% of GDP, but it it packs a powerful punch for the rest of the economy, and it already is in a recession of its own.
Trey Reik 42:48
So switching gears a bit to financial markets. I’ve heard what you’ve said recently about treasuries, and you know the proposition they currently present. But can you give us a an outline of your view of the comparative valuation of equities and bonds and your thoughts on treasuries from this point forward?
