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In this episode of Wealthion, Andrew Brill sits down with Dylan Smith, Vice President and Senior Economist at Rosenberg Research, to delve into the current state of the economy. They discuss the signals of an impending economic downturn, the anticipated rate cuts by the Federal Reserve, and the broader implications of these changes for both investors and the general public. Dylan provides a detailed analysis of inflation trends, labor market shifts, and the potential political impacts on fiscal policy.

Dylan Smith 0:00

Really all Powell uses these, these things for his for, to hint at what's happening in the next couple of meetings and tell us what the data has been doing recently, which we already know. So he's basically said, we're not quite there in July. But things are moving in the right direction for September. So, okay. I mean, if he has to move from that he's going to end up shocking markets before the meeting. But that's, you know, that's kind of the message we've got, it's probably the most likely scenario based on the fact that he's thinking so it will take some big surprises, I think to shut them off that path. But definitely, I think they are preparing away for cuts and September looks, the more likely, we're also gonna have Jackson Hall around that time. And that's often the time that the Fed uses to sort of take a breath and reset on the general trajectory.

Andrew Brill 0:49
I like to welcome back Dylan Smith to wealthion Dylan is the Vice President, Senior Economist at Rosenberg research.

Dylan, welcome back. It's always great to have you with us.

Dylan Smith 1:02
Good to see you Andrew. Thanks for having me on.

Andrew Brill 1:04
So I know we were we were just talking but give it to me again, your overall take? And I'm sure it'll take a couple hours. But your your take on the present state of the economy.

Dylan Smith 1:14
A couple of hours. Yeah. So this is a tool for that. Yeah, I mean, it's okay. So let's go over the macro picture we're in now, just to remind everyone why we, you know, what we think we're experiencing right now, especially in the US economy is a real slow down. We've been calling for for a while, it's taken a little longer way than we expected to come. But everything is pointing in that direction now. And it's actually, you know, quite easy to miss, you know, feel a little bit complacent. But the macro data has have turned remarkably weaker compared to where they started the year. So, you know, we have inflation, came down from 9%, to around 3%, now, stalled for a little bit and has continued on his way down. So we're seeing that deflationary story continuing, we're gonna get into it later. But there's only really a couple of things still holding inflation at that 3% level underlying is looking a lot lower. So very little be concerned about that. And in the meanwhile, we're seeing the labor market starting to crack up and quite a serious way. And we're seeing the growth numbers coming in with some GDP is going to have a one handle again, and the sort of underlying growth numbers that you get from all the other survey data, the so called soft data, very, very weak. But I think the biggest and most important thing that we're seeing in the data flow, and something that can be easier to miss, if you're not paying attention, is just the sheer degree of revisions, we're getting all over the place. So the ones on Non Farm Payroll and employment numbers that we got last week, those obviously got a lot of attention, because they were big, and they were the latest in a long string of of revisions that undermine the message from the headline, employment numbers. But it's not just there, we're seeing it all over the place, whether you look at IP, whether you look at capital goods, you know, basically anyway, you look in terms of the US data flow on series that are revised, they are being revised. So, recent history, picture of it economically is changing pretty quickly. And I don't think we can show it now. But we got to basically put together an index on revisions going back into the into the 90s, which is kind of where you can get this data back to. And if you look at that, across the various sectors of the economy, we're at sort of 99th percentile lows in terms of ongoing downward revisions. And the one thing we do know about the revisions is that they are highly cyclical, highly, highly cyclical. If you think about the incremental information that comes in to surveys, if you're getting a softening economy, that's going to come in incrementally weaker and weakened. So as your sample size increases, and as you collect data week to week and add it to the sample and improve your sampling for the month, you're gonna get a downward revision compared to what you started in the first week of the month. Right. And that's a consistent pattern. That's been that's been happening. And that's why it's so procyclical equally upward revisions tell you the economy is on an upswing, we're definitely up there. So we're taking that as a very meaningful signal. We're not over looking at something that has consistently happened when I was covering Europe back in 20 2014, just after the crisis, we're seeing the same thing happening, or revisions, were ready to leading several other big softening coming. And so, you know, that's that's kind of the economic backdrop that we're seeing. And yet we have interest rates still historically tight or, you know, above above some equilibrium levels. And the Fed saying they need to maintain that tightness until they are quote unquote, confident that the economy is on the right track and tons of inflation. So a real risk of building up that, you know, there's still lagged effective policy in the in the pipeline, and that pipeline is being extended. And so the picture we're seeing is one of current softening and future suffering to come.

Andrew Brill 4:58
It's early in the year. Late last year, we were keeping our eye on CPI, which will get Thursday PPI which we'll get Friday. But all of a sudden now we're hearing about unemployment and they're keeping an eye out and on unemployment number, I go back to last Friday, as you alluded to, we got employment numbers that came in on unemployment up to about 4.1%, which gets the Fed looks for about four. So unemployment is rising. Explain to us why unemployment is so important, because I think Jerome Powell who's testifying on Capitol Hill now actually mentioned unemployment, then you want to keep unemployment to goes too high, we're entering recession goes too low. There's inflation. So it's really important to keep unemployment at the perfect level. I don't know what that is. But explain to us why

Dylan Smith 5:45
One of those you could be you could go to the central bank. But look, the Fed has an explicit dual mandate, that comes down to it. And it says you have to focus on price stability and keeping inflation low, which they interpret is 2%. And you have to control unemployment, and make sure that that real side of the economy is functioning smoothly. Right. So Jay Powell is sort of song for the last, say, four or five fed meetings has been mostly we're actually laser laser laser focused on inflation. We're almost there. But we just need to be confident that it's gonna get down to 2%. I don't know what's gonna give them that extra confidence, I guess, increasingly, a 2% print is what will give them confidence that's at 2%. And he's been saying, you know, all if the labor market just breaks down, all of a sudden, unexpectedly, we're obviously gonna have to cut rates as well. Now, neither of those things have exactly happened. But what we're seeing, especially when you scratch below the headline, unemployment, NFP number is that the labor market ready is easing up. And it's happening in two sources, both on the supply side, into the supply of labor and the demand for labor, right, so we're seeing labor force participation, picking up people coming back into the labor force, that's generally a sign that, you know, whatever they were, whatever they were living on, is not taking them as far as quite as far as they thought. And so a single rally of underlying kind of weakens generally. And then you also have sort of immigration pushing up labor supply at the same time as well. So that's opening up, that's always disinflationary. At the same time, on the demand side, you're seeing job openings, reaching levels now back to where they were just before COVID. So we're back in a quote unquote, normal labor market, and continuing to sort of open up more and more, so demand for labor is falling. And so that's, you know, outside of a couple of sectors, notably healthcare and education and similar types of services sectors, we're seeing a real dip, often in labor demand. And so what that means is, is generally softer. I mean, as you said, These things go hand in hand, the use of the labor market is less more educated on inflation. And so all that's pointing towards, you know, there's just no way if you if you ask in the comments, and you said, Hey, unemployment in the US, has risen almost almost five percentage points from the the dip in the last 12 months and three month moving average terms. Inflation is a little bit above target at around 3%. And GDP is printing with a one handle, where do you think interest rates should be? They're not going to tell you Oh, 5%? No ways, right? So we're in a really, really restrictive economy. And so we look at the stable market data. And you take, you take a cold, hard stare at the underlying on the inflation as well. And that tells us that the Fed should start cutting. And I think we're gonna see in the July meeting, today, we found in the in the testimonies that probably they won't be cutting, but you know, it's not unlikely that they'll pave the way for a cut.

Andrew Brill 8:52
Yeah, that's the July meeting as of the end end of this month. And then we have the September meeting where it looks like and from all indications, and you look at all the probabilities and you know, we could probably bet on it, it sounds like September is going to be the first cut. And then they run into a problem where, if they're going to cut in September, we now have an election in November, you don't want to be looking at cutting and possibly, you know, influencing the election at all. I guess that's the that's how they look at it. Right?

Dylan Smith 9:25
Yeah, that is how I look at it. Look, we're coming from a very tight position. We've done some work on what policymakers do in the lead up to elections. And actually, there's no consistent pattern they if they if they need a cut in a couple of meetings before election, my answer is well, it's not like you see policy kind of holding, Holding, holding for the whole year and then suddenly changing afterwards. Right. They've actually been quite good. And I think have improved their credibility by telling a consistent story and making the moves on mobile. So I think that's my September that's also far enough from the election. I think they buy something so question. The election itself probably does put more question marks than there would be on the subsequent meeting. But the other conversation you usually hear in markets is Oh, December liquidity ever goes on holiday liquidity is low. That's not a good time to cut cut into segment before. So it's quite possible, we just get a shift in a cut that will come in October comes in December instead. But the more important question is, when did I press go on the on the evening, and then how far to be is, a lot of people only have a sort of three, four cup heating and total, which was still live in restricted, it will still be saying, we think the economy is too hot. Or we'll be saying we think the mutual interest rate is like 4% knowledge, which I don't think anyone believes. So we think it'll be a lot more to come. And the pace will depend, I think, in all honesty, from the friends perspective on on how fast all the indicators are moving. If inflation stays below 2%, it goes down through 2%, and sticks there and even gets, you know, starts flooding with outright deflation, you're gonna see them come very aggressively, but either way, they have to, they have to go down to sort of two and a half 2%, just to set themselves to neutral and say this is where we want the economy to be ticking along. I don't think that's why we recognize this as it should be.

Andrew Brill 11:14
Done by all indications, you know, depending on how the election goes, the inflation, you know, under Trump inflation, the talk is that it could rise rapidly. And if they if Biden wins the election, or whoever I guess, Democratic nominee is going to be wins the election, inflation should continue just the way it is. The question is, how careful does the Fed have to be going into the election? Whereas if they cut too much, and inflation all of a sudden ticks up, now they have to raise rates? Or are they thinking you know what, we'll do this real slowly into the election, and then figure out from there where the numbers are flowing?

Dylan Smith 11:55
I think we're actually past the point where right action now has a meaningful effect on inflation portfolio actually, right? These things happen with pretty slow lags. And the forces that are pulling inflation down right now have been building up from, you know, two plus years of tight monetary policy now. So even if they use, they'll be restricted. So unless they cut enormously, sorry, unprecedented cuts, they're not really gonna move the needle much of inflation to the to the election. So I don't think that's that's the major risk in terms of cutting. Now, I think where it starts becoming very challenging is what happens after the election? And where does it leave the Feds framework in terms of how he thinks about the economy in relation to fiscal policies. So, you know, I think you're right to diagnose that a democratic win, which would in all likelihood, come with some some power sharing, most likely with a Republican Senate, that would curtail the ability to do ready a whole lot on the fiscal front. Biden's already said, and perhaps Biden's democratic successor would follow this. But Biden has already said that, you know, that he'll keep most of the tax cuts that we got from Trump. But you know, that you've allowed some of the taxes on very high income people to reset. So nothing major happening on the tax front, really, and I think democratic spending plans are all done. Right. It was an enormous, enormous opening up of the fiscal taps in the first term. And that's just basically going to play out, you know, when people back. Now, similar, actually, if there's a split on the other side, if if, if Republicans win the White House, but don't manage to win both houses of Congress, again, the blocking power will probably be sufficient. You just end up basically status quo on a lot of the fiscal stuff. The other Republicans who've gone up since the debate, and that's the scenario where you rarely see, you know, in addition to the fiscal situation already being somewhat untenable, it gets worse quickly, because there's all sorts of tax cuts coming down the pipe. And what we know also about Trump is that he likes to be Poppy doesn't like to take things away from people. And so you don't get the spending offset, either. And so you're going to pick opening of the fiscal taps, that is suddenly negative on the debt side, it's negative for the long bond. In fact, we probably have to rethink our bond quite seriously if we got that kind of result, because we're pretty bullish on the tenure and the study. Yeah. But not conditional on a Republican sweep on the election. So we'd have to have a hot thing and see what happens afterwards. But that would be inflationary. And the Fed would want to lean on that a little bit. So you know, to the extent it seems like cutting cycle, it probably slows the pace of cuts a little bit, it probably means that they terminate a little higher than they would have otherwise. All on the margin. Troubles like low interest rates, right, so we've started getting some pressure on them. Bad. Powell gets told he's never getting another term. We don't know what comes next. And markets just kind of start having a little bit less credibility and fed policy. And that's the bad outcome in terms of kind of the Fed and they coming from the election and what it then leads to, as a case of fiscal dominance, we're ready to go policy was driving the economy. And you know, I've spent a long time covering emerging markets in the past life, that's not a situation you want to be. And so that's, I think my thought about now, of course, the profession always has winners. So investors can think through, you know, who benefits most from this kind of outcome, but in terms of, you know, my stable economy from the Fed, it makes the job a lot harder.

Andrew Brill 15:40
Yeah. Trump has already said that he wants to be the Fed chairman. So if he wins, Powell is certainly out. And we're gonna have zero interest rates, it would seem but I joke, but the as I said earlier, the CPI comes out Thursday, PPI comes out Friday, in your research any expectations as to what we might be looking at?

Dylan Smith 16:02
Yeah, so I think markets are currently or economists are predicting point 1% month on month on CPI, that's important to recall. So you know, that would be similar to what we did last month, and pretty, pretty soft, ready. So the rest of that has probably asked to the downside, because one very positive development that we saw last month was we got a little bit of a ticking down. And auto insurance and insurance generally, that is one of the three things that has been holding inflation above target. It has been, you know, basically lagged effects of that industry catching up on the prior run up and automotive prices, highest death rates, I accident rates, higher cost of replacement rates. So all of that has has already happened. I'm just saying the price impact. Now, we've done some modeling on some of the typical lags around that it should be swelling right now, which is what we're seeing. And so I'm not sure if forecast was all auto aware of that. So the risk, I think, to the point one is that again, a little lower than flat on the month, all of which again, builds into the case for for the fences stop cutting. If on July 7 and September, I think that will start to lock in on the loss of almost a done thing if we get that officially.

Andrew Brill 17:14
Yeah, on Tuesday, I think Chairman Powell, as we record this, I think he has intimated that things are softening and things are trending in the right direction, what they're doing seems to be working, as he puts it. Head Do you think he's given hints to an upcoming rate cut?

Dylan Smith 17:33
Look, these estimators have gone from being really interesting, rarely sometimes challenging to pass. Treated treatises by past Fed chairman who have been really great thinkers, you know, postcrisis ramped up manky drawing on all his research about the Great Depression and what kind of moment we were around him. I was thinking through the state of the world, and the economy. And we'd be on the data, same with Greenspan. And really all Powell uses these these things for his forum, to hint at what's happening in the next couple of meetings and tell us what the data has been doing recently, which we already know. So he's basically said, we're not quite there in July. But things are moving in the right direction for September, so okay, I mean, if he has to move from that he's going to end up chopping markets before the meeting. But that's, you know, that's kind of the message we've got, it's probably the most likely scenario based on the fact that he's wondering the thinking, so it will take some big surprises, I think to shut them off that path. But definitely, I think they are preparing away for cuts, September looks, the more likely we're gonna be we're also going to have Jackson Hall around that time. And that's often a time that the Fed uses to sort of take a breath and reset on the general trajectory. So comes out of that.

Andrew Brill 18:50
It seems like the cut will be about a quarter point, is that going to move the needle at all?

Dylan Smith 18:55
Yes, the interesting thing about about cutting, you know, the individual cut does almost nothing. For first cuts, very important because it tells you you're starting. And so you tend to get a this is why the Fed is an economist like to measure financial conditions broadly. What is the state have access to finance and the economy? How prohibitive or how easy? Is it to get it? Whether through different instruments, direct borrowing equity, blah, blah, blah. So once you find is, is that the first time we'll do a little more in terms of easing financial conditions, because everyone all that uncertainty around is there a cycle coming? It's priced out, and you get financial conditions, kind of easing? So it's more about the signaling about the Fed saying, you know, we are moving into a phase of from restrictiveness to gradually easing. And then the debate comes becomes about how fast and, you know, it's not just the actual cuts, it's how quickly and how deeply into markets think that the Fed will cut because that tells you what happens on longer bonds. It does What happens on the yield curve? And that's ultimately the the main way that policy gets transmitted through the economy as you get more or less foreign, depending on how steep the yield curve is. And that's where I think we need a little bit more debate. And there's a lot of focus on on the September meeting, I think more important is, how much does it benefit you to do on starts doing it, we've been should have been doing it. And I think that's, that's why we're a little out of consensus and saying, This is gonna be pretty deep, we're gonna get sort of 20 plus basis points of cutting. And I'll do quicker than people think it will go meeting by meeting. We're not expecting anything sort of consensus in terms of doing 5075 basis point cuts. That's, that's crisis era stuff. So unless some something big has happened, we're not in that world. But I think it will be a steady rate steady flow down. that not everyone is peaceful. They do after all, sorry, I just want to say they do absolutely, they need to uninvent the yield curve, right. So they have to get through the tenure rate at sort of 4.3 pretty quickly in order to do that, and then they need to keep inverting and inverting it by by cutting them on. So I think people are sort of thinking about three rate cuts, four rate cuts, appear to want to down flat yield curve, which again, is not going to be neutral.

Andrew Brill 21:19
Yeah, perhaps we should just skip the July meeting and head right to September where everyone will be happy, because the Fed will just signal that Yep, we're gonna take a quarter point off, and that might open the floodgates to more incremental cuts, like you said, not nothing, nothing drastic done. Last time we spoke it was the tail end of earnings season for the first quarter. Now we're here and the beginning of earnings season for the second quarter. Last year, last time, banks had a really good quarter. Are we expecting that because there's been some news about banks recently, that really rubbed me the wrong way?

Dylan Smith 21:58
Yeah, it looks like banks will be a little softer. This time around. Of course, they open up earnings season. So that's where the focus is going to be. early on. But I mean, we've been thinking quite hard about what we're gonna see this next season, I'm digging a little bit on what's going interesting is, you know, there's a lot of tension, a lot of attention paid to, to the level of concentration, and the stock market right now in terms of what's driving the major indices, right. So you got these seven stocks, already 5, 45 stocks, that are accounted for almost all of the growth and the rest of the 490 Odd stocks in the s&p 500. Basically, flat, last shout them down. So something very mixed signals about the state of the economy, the set of markets, and through an earnings earnings are actually you know, a lot less consistent and breathless and a lot weaker than then you would think just based on the headline numbers. So with that in mind, what we're basically sort of telling our clients is that, you know, you got to pick the industries that you really like around the selling season, it's not going to be a broad story. Now, there are some tail risks, if we see a mess from one of the major AI related stocks, that's the signal everyone's waiting for in terms of the bear market probably being over something into correction and bear market. But more broadly, I think we're going to be finding signals that are consistent with the with the macro data, we're seeing the economy kind of slow down. sectors where you got an arm touched by these forces outside of telecoms outside of outside of energy outside of tech, you know, probably pretty soft earnings, right. And the banks, again, one of those places that we expect some softening, they can't find, you know, they're finding an inverted yield curve, which is always difficult for banks. And by the way, when the Fed cuts, that's great for banks, because that's going to convert, and then an interest income really improves quickly. And so there's a solvency for the regional banks. So that's one place. We're sort of looking in terms of positioning that.

Andrew Brill 23:58
I had been reading and an article about JP Morgan Chase. And this affects all of us because they JP Morgan Chase said that, it seems like all the banks are going to do it, which is starting to charge for checking accounts, it seems that there's regulation out that's trying to lower the or cap, the charge they can put on overdrafts, and stuff like that. And in order to make up that money, they're going to start charging for checking accounts, which affects all of us. Is this what you're hearing? And do you think this is actually going to take effect because last time, they talked about this and it didn't happen? And I really don't want this to happen again, either.

Dylan Smith 24:39
Well, you got to look at what that tells you right about the economy and in an ideal world and in a very well functioning economy. Banks sort of play their main role in terms of essentially shifting money and shifting value between the present and the future, right. And the amount they charge for that is based on the yield curve and base Now on the future value of money and time value of money that's expressed in that what we're seeing banks sort of doing now is they're facing an inverted yield curve. Right. So, from that perspective, it's very difficult to be profitable on lemon business, because fundraising in short markets, you know, plus 5%, and they can't lend a margin that sort of funds their business. Right. So for other revenue, okay, a lot of banks are going into, you know, the investment banks are very big on private credit and funding private credit markets, which they withdraw from directly, but they're seeing ways to kind of be a service provider to that industry, instead of instead of do the lending themselves. We're seeing an increased focus on asset management and wealth management. And yes, for the consumer banks, they're looking for fee revenue, because fee revenue is immune to interest rates, essentially. And so, you know, I think this tells us fed policy is too tight, right, the banks aren't able to properly like fulfill that role on the economy, they're looking for ways to kind of suck up funding from from other sources. So hopefully doesn't happen, I don't have any special insight on that. Phone can actually stop it if they wanted to.

Andrew Brill 26:17
Right. So the inverted yield curve means that the two years, the two year bonds, the interest rates are higher right now, because that's what the Fed is, is really pushing because of the debt that we have. And the longer term bonds, the 10s, the 30s, those yields are lower, and how do we so when the Fed cuts interest rates? Do you think that'll just automatically invert the curve?

Dylan Smith 26:47
Yes, so typically, you see an upward sloping yield curve. And the reason is, because compared to investing your money for a short amount of time, so it's sometimes you look at the 10 year, three month or the 10 year two year, you can get kind of guaranteed returns on that very short bending, and that's essentially pinned to the to the Fed funds rate and control what we call the front end of the yield curve. Now, of course, you could reinvest your money every three months, every one year, every two years, whatever. And on a consistent rate of return, depending on what your expectations are of where short rates are gonna go. Right. So if you think that short rates are going to stay the same, absolutely anything else, you'd expect them to have flat yield curve, but you also might think that, okay, but the economy is going to grow in the future, plus inflation I need to be compensated for for those future cash flows. And that's what pushes the longer rates off. Right. And that's a normal situation. That's the kind of situation which says there is a growing economy in the future. And as for backspace, and this is all around us, lending now on the future investment returns. But what we're seeing at the moment, actually, is that basically, bond markets are telling the Fed, we think short rates are going to be lower in the future. Which means a we don't think growth is going to be so high, that it requires you to have very tight policy, and neither did we see major inflation was coming down the tube, that would lead us to put a premium on that, which would make the yield curve upward sloping. And so the way that that an inverse in that kind of situation is to bring down the front end, in other words, to mean revert the yield curve, the Fed needs to cut rates, right, and you do usually get the whole curve flattening a little bit. So we would almost definitely see the 10 year rate with a three handle on it get to like 3.5% of the Fed cut down to say, between two and 2.5%. And that actually generates a very high rate of return because of nonlinearities and hop on returns work, which I won't get into now. But point being it is the fan who was uninvited the curve that uncontrolled along and especially when they're not doing QE and as the Fed who will invert the curve again.

Andrew Brill 29:12
Does it behoove the Fed to sell longer term bonds than the short the two year bonds?

Dylan Smith 29:18
Yeah, well, so it's the Treasury who sells bonds. But, one of the most massive and difficult to explain policy decisions that we've seen by Treasury Secretary Yellen is you know, during the period of very, very low rates, she did not issue at the long end, right. So she could have locked in a huge amount of government funding at 10 years at 30 years. For you know, 2%. And instead, the fantasy shifted to shoulder shoulder debit issuance during that period, which is now rolling over. And so there's a lot of issuance coming into markets that needs to be that needs to be issued somewhere With rates being, you know, very elevated, it's not easy to win in that scenario. And so what that means is that the interest burden of the US government is going up and will continue to go up, because that gets locked in as stuff rolls up, right. And so that's one of the things that's making Magnus a little more worried, especially on the longer end of the curve around the tenure raises some questions about okay, how sustainable is government funding? If a you're going to be quite loose debts are already high, and you're increasing the cost to carry that debt. And so, yeah, that is definitely a problem and a very big missed opportunity, not doing it previously.

Andrew Brill 30:42
So let's talk about the markets a little bit the NASDAQ and s&p record highs, Dow is not terribly far behind it, you would assume that quarter point or that rate cut, we'll call it is already worked in there?

Dylan Smith 30:57
Yeah, I think that expectation is in there. And I do the sort of full path of expected fed cutting would be would be priced in, that is quite shallow at the moment. So you know, there's an interesting dynamic between the fact that a market dip would cause the Fed to cut, probably five, so we think this will give them cover to lower interest rates, but also better for equities. Right? So this is why we're seeing sort of every time that soft data, which makes it more likely the Fed cuts markets kind of do well. Every time that strong data, oh, the economy's great markets do well, right? That's the hallmark of a bull market, everything's good. And but one thing, actually, that we should probably point out in this market is that, you know, as we've discussed already, very high concentration, the stocks that are in the Magnificent Seven, their correlation to GDP growth is zero. Okay, these are stocks that are in a secular story and have been, you know, in the case of, say, Microsoft or Facebook for a very, very long time of industry growth, right, the industry is is sort of at the forefront of the economy, and it is kind of growing no matter what happens to the quote unquote, real economy, in terms of other services, or in terms of like manufactured goods. And so, you know, those stocks will, will be determined by their own kind of dynamics, right, when when a video misses an earnings report, that's when it's gonna go down. Right, not because as a recession on the rest of the economy, and we're seeing that in the price as well, as well, because on some of these stocks, you know, there's widely acknowledged kind of fragility, they have not been performing super well. But, you know, a lot of people are index indexes. And so they've been benefiting from from the rise in tech stocks. But yeah, I think to answer your question, you know, I think the right expectations are in there. And I think even more than that, for cyclical stocks, ones representing companies exposed to high interest rates. Those have an underperform because of how tight policy is, and rates would need to be a fair amount lower to get those correctly priced.

Andrew Brill 33:04
I have a question about the volatility of the market right now, the VIX, the volatility, meter, or gauge, if you will, is right around 12, which is extraordinarily low. So not a lot of people worry too much about the market, but unemployment is creeping up. Last time, we saw something like this was right around 2007. And there was a very significant drop. Do you see that as a possibility? We there is a correction coming? We know that whether it's 5% 10%, whatever it is, it could it be drastic?

Dylan Smith 33:42
It could be, I think how drastic it is depends again, on on news on the magnificent seven themselves whether or not it's just people so tailing back or whether there's something that causes a rethink of basically on its projections for those companies and BA fi medical, but as it would have happened late 90s. Right. So the tech plays, and 2000. But, yeah, I mean, in terms of what the VIX is telling us complacency. volatility is low, because everyone has decided on the narrative. And Australian the narrative every day, and there's very little that is changing that narrative right now. And so you just get a steady creep up and very little in the way of measured vol. It's not a coincidence that that happens just before times when we tend to get corrections in the market, because that always happens when not surprisingly, complacent investors get surprised. So it's not it's not the most reliable indicator. In fact, it was doing the doing the opposite of its job if every time it went down. By but the longer it stays, the more it tells you that this kind of a bit of fragility building up into the markets.

Andrew Brill 34:55
So how do we protect ourselves from from it Something like that, you know, do we do we take some cash out, put on the sides, okay, it went way down, let's pump it in there.

Dylan Smith 35:06
Yeah, people start taking profits, it's, it doesn't happen, the way it used to pumping is because there's fewer active managers, in terms of the overall share of funding is now in index funds. And people just the whole point of index fund is to let it sit. And so we're not seeing a lot of profit take. And we would say, Now, for those who can now is a good opportunity to do it was at the same thing three months ago, and six months ago. So timing is always extremely difficult to call. But you know, that might be wise, where would you park, if you do think there's a correction coming in, you're worried about it, if your equity is only, you know, as we said that that tech thing is a little bit economically insulated. But you know, that's probably where the correction is centered when when there is a bit of a rethink. So but there are adjacent industries, which are very strong, so things like utilities, which always outperform in a weak market, and now also exposed to some great secular kind of growth themes around energy demand, around datacenter, build out all that kind of stuff, it's good, there are certain REITs that are going to do very well, we think we quite like commodities. So we're pretty bullish on commodities. So commodity adjacent stocks are a good place to be more broadly, in terms of a diversified portfolio without gold within gold's went to 3000. It's taking a breather off to the big performance earlier this year. But, you know, we see plenty of reason to believe that the sources of demand and and push it to where it is I still strong. And there are more that need to come online still, basically, when when so the ETF demand picks up, once we get some dollar weakness, when the Fed starts cutting, that's all very gold positive. And so that could be higher, we think, alongside the gold miners alongside silver. And then we're sort of more deeply bullish or structurally bullish on other base metals, especially the ones that are linked to kind of green transition technologies broadly. So that's how we think through Oh, and by the way, we had a pretty bullish call on Europe earlier in the year, that's closed out. Politics has kind of made them fairly difficult to maintain. We think there's a lot of investment coming into the UK with the change in government, the first period of stability that the country will see, after the 2016 Brexit vote, there is a lot of investment that has not happened in the UK economy because of that, and because of COVID. And investors are now seeing a period of stability of effectively sound management of the economy, and much more sensible margin management, the economy coming. And so we think there will be actually a Russian investment in the UK, as well performed.

Andrew Brill 37:51
So the UK is on the rise, at least economically, they've been a little bit of a disaster. As as of late What about Canada, Dylan, I know that Canada has had their had their problems as well. And that doesn't, it's going to take a long time for them to crawl out of where they are.

Dylan Smith 38:11
That's true. Before I before the bad news, like it was some good news though, if you're investing outside of Canada, the loonie is very weak. There are parts of the TSX that are very well exposed to rate cuts. And Canada's a commodities producer. So there are definitely ways that Canada can give you exposure to some of the things that we've just been talking about which are quite positive. But broadly, the Canadian macro economy is in a pretty poor position. There has been a very large immigration surge, which has been kind of masking, underlying deterioration and the Canadian economy. So increasing measure total GDP, at the same time that per capita GDP has been shrinking. Productivity has not grown since in the last decade, basically. And, you know, the ability of the economy to generate growth has been become weaker and weaker. There's also you know, an ongoing house house price. You know, surprise, affordability, if you think it's bad in the US, it's really bad. And so that is weighing quite a lot as well. People are holding COVID savings and suspending them. And the Bank of Canada is sort of acknowledging this. And as it sees inflation settled within the target band, which is one two 3% in Canada, and the labor market is cracked up sort of on a six month six months ahead, the US basically in terms of the labor market breaking up and so that's all allowed the bank account to start cutting we think that will continue to count. They will cut faster than the Fed. That means a very weak Canadian dollar. So that's one investment position you can take. And there are obviously industries tourism, few others that benefit quite well from.

Andrew Brill 39:58
So last last thing I want to talk about it is the debt almost nearly 36 trillion at this point. And with interest rates not coming down, we need to service that debt at a very expensive rate. Obviously, a rate cut will help in a miniscule way and more, more would definitely help. Where do we go from here because neither one of these presidents is going to stop spending money.

Dylan Smith 40:22
The more rate cuts help, as long as it's not seen as license to borrow more. So it all comes down to to the fiscal policy that happened. And as we discussed earlier, that comes down to the balance of power after the election. And the the sort of bold factors that nothing in this election campaign has been about consolidating the national debt, no party is running on the honest idea that the US needs to renegotiate its social contract, in order to manage down its debt. There are sacred cows that need to be locked down, which neither party has any interest in looking at, and which will, to the credit, be very unpopular in election season to stop raising things like we have to adjust Social Security etc. But that's the only way, it's the only way and the the sort of buildup of of higher incremental cost of borrowing is already happening and will continue to happen. Unless the Fed flows rates to zero because the outcome is not possible. So it's a big reason for concern. Equally, you know, these, these things don't happen all at once it takes years and years for fiscal crisis to build up and develop. And so, you know, the line we're running is that between the 2008 election will be run on the debt. And it's going to take a whole whole build up now, as we've said, of, if Republicans are in control across the board, that is going to make that deterioration more rapid, more inflationary. And so you know, that's one outcome that we should be on guard for, but equally, you know, we don't see a way for cross party consensus to deliver a sensible and growth positive consolidation in the event of a Democrat in the White House, either, so it's gonna get worse before it gets better.

Andrew Brill 42:19
2028, we could be looking at 40, 45 or even 50 trillion at that point. And, boy, it's, you know, my grandkids are gonna be paying for that. that's for darn sure. They'll, uh, where can we find your research? And where can we find you on social media?

Dylan Smith 42:35
You can find out research at And you can see a lot of it before you you have to commit to anything because we do a one month free trial of full suite of products on social media, you can find me on LinkedIn, you can listen to me weekly, at my podcast, which is Rosenberg research on the Rosenberg roundup rather than so we do weekly roundup so the other week in economic data and macro land. We're talking about about some special reports. And we've been working on for Matic things. And we also do occasional interviews with sort of movers and shakers in finance. So that's where you can find me. And if you want to hear more from me.

Andrew Brill 43:18
I have listened to the podcasts. And if you if you know our viewers want to listen, it's 15 to 25 minutes. It's great stuff and it's very, very informative. So Dylan, thanks so much for joining me. I really appreciate it as always.

Dylan Smith 43:30
Thank you, Andrew.

Andrew Brill 43:32
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