I’ve said several times recently on this program, perhaps the most important and yet least appreciated trend that will drive our economic destiny in 2023 will be the lag effect.
This refers to the delayed shockwaves the economy experiences when central banks make changes to monetary policy.
We experienced one of the sharpest-ever reversals in policy a year ago, but most of the impacts from that have yet to be fully expressed, as they take many months to ripple through the economy before we can see them.
Which is why we’re so fortunate to speak with today’s guest, Michael Kantrowitz, chief investment strategist & managing director at Piper Sandler. He’s created the H.O.P.E. framework – Housing, Orders, Profits & Employment — which provides a way for us to track the progression of those shockwaves, and gives us the ability to project what’s likely to come next.
Michael Kantrowitz 0:00
And I think the message I want to get across is that we have the ingredients the probabilities of markets that are going to struggle with downside asymmetric risk. And we’ve we’re far from out of the woods at this point.
Adam Taggart 0:18
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. I’m off this week attending my mother’s memorial service and spending time with family. But I don’t want to leave you viewers high and dry without content while I’m away. So I’ve selected what I think are several of the most important discussions I’ve had on Wealthion Over the past year, ones that are just as timely today, if not more so than when they were initially recorded. Today we’re running my interview from April with Michael Kantrowitz, chief investment strategist and managing director at Piper Sandler. His hope framework is incredibly important, as it shows the progression for how the economy falls into recession. And it explains why the jobs market is so critical right now, as it’s currently the last remaining Bulwark keeping the economy afloat. Is it likely to remain resilient enough to keep us from a hard landing? If not, how hard of a landing should we expect to find out? Let’s listen to Michael.
Michael Kantrowitz 1:17
Thanks for having me, Adam. Pleasure to be here.
Adam Taggart 1:19
Thanks, Michael. Look, I’m very excited for this interview. I’ve been waiting to have you on here for a good long while, because I am a big follower of your work. But I think the hope framework is so valuable given everything I just laid out there in the introduction. So I want to dig into that framework with you. But real quickly, before I do that, I can just ask you the same high level jumping off question I like to ask all my guests at the start of these discussions. What’s your current assessment of the global economy and financial markets?
Michael Kantrowitz 1:48
Current assessment I’d say is I think people see it as very uncertain with a wide range of outcomes, which is why I think we’ve seen pretty a pretty good deal of market volatility. When we look at estimates, whether they’re macro estimates from economists, for market estimates from strategists are earnings and price targets from analysts, the the width of the distribution has grown and grown over the last several quarters. So I’d say it’s very uncertain. And that makes uncertainty makes investors and policymakers and company executives, very myopic, in my experience, so I think it’s very uncertain, which is why I think it’s so important to have a framework have the ability to understand history, though contextualize it with what’s going on in today’s unique cycle. And ultimately, I see equities hear as a pretty poor risk reward at these levels. And given that we’re just beginning to really now see the impact of the tightening cycle from the Fed and other central banks, which has been going on for a little over a year, commercial banks tightening lending standards have been tightening for over a year. And we’ve had an inflation problem for over a year. And all of those things take time. And they work through the economy in somewhat of a similar sequence, which is what my hope framework is about. And so we’ve recommended to investors to remain patient prudent focus on fundamentals over fear and greed and follow a framework. So you know, I think it’s going to be a year full of debate once again, until we answer that question, ultimately, are we going to a hard or soft landing? And I’m sure we’ll get into that today?
Adam Taggart 3:33
We will, we will. All right. Well, look, one of the one of the reasons why I mentioned the lag effect so prominently in the introduction there is and I know I’m speaking to the preaching to the choir with you here. But it’s, it’s highly important, but it’s it’s one of those things where our human nature works against us, right, where we we say, look, the lever was pulled, I don’t really see a result from it yet. So maybe nothing’s going to happen, right. And what I love about your hope framework is it gives us an ability to kind of deconstruct what the process looks like between lever being pulled and outcome being fully seen. And it tells us sort of where to look. So could you just at a high level of summarize the hope framework for folks that aren’t familiar with it? Sure. And
Michael Kantrowitz 4:21
I like the way you described it, I’m a fairly handy person, I got the gene for my grandfather, I think I like to fix things and you know, I’m very mechanically driven. So you kind of deconstruct and have kind of a logic framework of when something’s broken, or let’s go from one thing to the next to the next and rule out situations to try to fix it. And I think, you know, trying to understand the markets and the macro economy, which is an extremely complex system requires, you know, a lot of that actually got a bit of that, but a lot of deconstructing. So, you know, there’s I’ve been doing this for about 20 years in early in my career when I was working in macro and familiarize myself with the Conference Board, which is an organization that is known for having their three indices, the leading index, the coincident index and the lagging index, and each of those indices have a bunch of different macro and market data in them that have shown the ability to be leading quinson lagging. And so what we’ve discovered and kind of more simplified is that a lot of these things can kind of be over simplified in a way into housing, orders, profits and employment, which spells out hope. And, you know, one of the things in my career, you know, now nowadays, we have social media, we’ve got Twitter, we’ve got 30 news channels, we’ve got 50 trading platforms, you know, it’s just information overload. And I guess you could say, it’s always been the case on a relative basis, but it’s 20 years ago, I used to look at blogs, kind of how we use Twitter today and try to read and follow different bloggers through RSS feeds, to try to distill out all the noise and find people I could kind of trust rely on and learn from to distill that from the, to get the signal. And so I think, you know, with the economy, it’s the same thing in the markets, the same thing. And that’s if you’re a macro focus investor, or a stock specific trader, or fundamental trader, you know, there’s, I don’t know how many line items on the financial statements between the cash flow statement, the income statement, the balance sheet statement, and then how many line items are there in the macro data, I mean, you could lose your mind and come up with stacks of books that will go to the outer space, in terms of all the data and so distilling it out and kind of really understanding what’s repeatable, what matters most, what are lagging and what are leading. It’s really paramount. And I think having a leg up and understanding probabilities of where things are headed from here. So housing is, so far when I look back at data going back many, many, many decades. Housing is always at the beginning of every single economic upturn. And I often say to clients if housings not improving nothing is and you know, with markets, there’s two ways for stocks prices to go up. One is earnings, and one is how much you’re going to pay for those earnings with a multipolar, we often think of peas. And so historically, you don’t see earnings improve unless you’ve seen housing improve. So from a macro perspective, that’s the beginning of every single cycle. And in today’s context, it’s really the landing that is needed, whether it’s soft or hard to occur before we can talk about really anything getting better, and so housings very sensitive to interest rates, it’s the biggest piece of wealth for most consumers, if not all, and so it is really the first thing that turns in a downturn, and in an upturn. And then thereafter, as we see, orders, we typically look at PMIs, for that, but there’s a bunch of data you can look at, again, every single, either hope is simplified, we have checks and balances for housing, there’s 30 housing data points we look at, there’s a bunch of different data for orders we look at from PMIs to industrial production, and so on and so forth. And then profits employment, so orders typically follow next, because of their, the lag is a little longer relative to housing. And then as new orders, which we generally focus on, we want to see the new orders because new orders drive production, they drive inventories and employment and profits, then it’s followed by profits, you can’t make money if you if you’re not selling something, whether it’s a service or a good. And then ultimately, if you think about it, an expansion housing bottoms, people start to buy stuff, companies profit from that consumption, and then they hire more to expand their profits by scaling up and investing more. So employment is always the last thing to go. And when you look back throughout history, the beginning of most bull markets is marked by a sustainable housing bottom, where the H and the beginning of pretty much most bear markets. It begins when employment starts to deteriorate. So the book ends of my hope framework really do consistently across time, underscore what starts a new bull market and what ends a bull market or begins a bear market.
Adam Taggart 9:38
Okay, that was great. And I want to just repeat that back a little bit, just to make sure I fully understand it and that our viewers do too. So, the progression goes H O P E as you said, right. And housing reacts first because it immediately the situation there immediately changes when interest rates change, right? If the Fed raises interest or raises or lowers interest rates, the people who are going out for a mortgage the next day are gonna get a different price. Right? So it’s reflected very quickly in the price of mortgages. Yes. What happens in housing impacts the wealth effect, right? So you just said it’s the biggest asset for, for most families and whatnot, right. So if house prices are going up, people feel a little more flush house prices going down, they probably hold the reins a little bit on their spending, that then impacts purchases or orders, right. So there’s a little bit of a lag with orders from from the O to the h, right. And then if orders are going up, or going down, that’s eventually going to be reflected in earnings at the company. So that’s the the profits part, that’s the P. And then if profits are going through the moon up, companies are going to hire more. If profits are falling through the floor, they’re going to start firing people. And that’s the so that’s sort of the progression that we go through, you’re not exempt saying, Oh, this, so I’m doing okay, so far.
Michael Kantrowitz 11:02
Yeah, let me let me show you an illustration of this. Just to make it even a clearer point here. And I’ll zoom in, this is a chart of one of the pages of my handout we use with our institutional clients. And so this is actually what is looks what’s on the banner of my Twitter profile. This heat map, and this is an actual, it’s not just a pretty picture of colors, it’s actually mathematical heat map. And the color variations are a function of correlations of different data across the top of that heat map. And time. And I’ll zoom in actually see, and I’ll explain what these data points are. And again, this you know, there’s no, you know, with with economics and financial markets, it’s not a science, it’s a social science, there’s a behavioral aspects of there, there’s no nothing’s 100% Any, anytime, nothing always works to the tee, again, 100% of the time, the exact same order with the exact same lag. But this is a general framework for the cycle that does repeat with quite consistency and high probability. So just
Adam Taggart 12:09
as you’re going through it, if you could talk about the timing elements here, because that was going to be my next set of questions. Yeah, but your graph looks like it’s already going to cover that. So great. Well,
Michael Kantrowitz 12:18
I’ll touch on, I’ll touch on that with some other charts. So all the way on the left here. And what this is measuring is the green, the strength of the green color, or the red color, is how quickly things react to a change in rates. So I just want to go across the top here, and this is the nhB. And that’s actually a data point. That is homebuilders, sentiment, and it’s the National Association of Homebuilders. It’s one of the many different leading economic data for housing that I follow, that is quite influential for the market where the market correlates with it quite well. And so that’s the first one. And again, why is it the first one because it’s one of the data points that most quickly responds positively to an easing cycle, or falling interest rates and negatively to a tightening cycle or higher interest rates, that’s followed by building permits. That, you know, when you when you buy a new house, you have to contract us to put in a permit that gets approved by your local town. And then so that’s the age and again, there’s many data we can put in there. But let’s keep it somewhat simple, simplified. And then we move on to orders and is this says ITSM new orders. So that’s ITSM is a company called the organization called the Institute of supply management, it goes back almost 100 years, and surveys, purchasing managers, and asking them questions that if you are fundamental analysts or looking at a company, you would ask them are new our orders improving? And that’s that specific data point I follow? You they also ask companies are you increasing or decreasing your employees are you producing more or less, or your inventory is going up or down. So that’s part of the the Oh orders, we have consumer confidence in here. There’s some other data scattered around consumer new orders, these are all macro data series, and then manufacturing sales. So notice how I ASM new orders, which is a manufacturing survey of new orders, comes before the actual data when we see those manufacturing sales get purchased or the sales activity, and we have capital goods, demand orders, and then followed by industrial production. So that covers I don’t have profits in here explicitly, but profits are tend to correlate with the macro data of industrial production. And then we get more into the employment data, average weekly hours, payrolls, the Friday, non farm payrolls report, personal income, and then the caboose of the economy, the lagging of lagging data core inflation, and so that all kind of goes into this whole process. And the order of these in which they play out particularly from housing to orders to profits, employment, It always works in that order. There’s sometimes a little minutia in between on some of these more subtle data points. But here, let me show you, Adam, a couple of different charts that show some of these lags here. On the left here, this is a chart of the 30 year mortgage rate. Now it’s advanced, that means it’s pushed forward in the chart. It’s kind of like we know the future. But it’s already what’s happened to interest rates. And it’s from a couple of months ago, and the nhp index, that first data point, so again, nothing’s the there’s no such thing as perfection or silver bullets or 100% relationships. So I’m just gonna show you all these general relationships that are related. And so rates are highly correlated. That’s I mean, I mean, yeah, I guess everyone’s got their own different threshold for correlation. But yeah, that’s pretty highly correlated, especially from just one single series, rates, explaining housing sentiment. And so it takes about six months. And again, could it be four months in some periods, eight months and other periods? Yes. A lot of these lags depend on other factors that are can be different in each cycle. But again, it’s about six months or so, for housing for interest rates to feed in to housing sentiment. And on the right side, that’s another housing data point, you see the dark blue lines on both these charts. They’re different time horizons, actually. But you see, in the last year and a half, we’ve seen existing home sales declined sharply. At the same time, we saw the nhp declined sharply in 2022. So now, if we go into orders, send out the Fed. And this is a big topic of debate. This the last 15 months or last 12 months as the Fed has been raising rates, we’ve got the Fed raising rates now for just over 12 months, the Feds first rate hike was March 16, to 2022. And when we were trying to forecast the cycle, we’re trying to forecast when things are getting better, and when they’re slowing down. And that’s what drives you nuts, marginal changes that really drive markets activity. And so when we were trying to figure out when the Feds impact is going to show up in orders, and this is a chart of the change in the Feds interest rate, because again, we want to focus on the change. Are they raising rates? Are they raising rates? Number one? And are they doing it aggressively or slowly and vice versa? They’re easing aggressively or slowly, we won’t understand when that’s going to show up in data like the isn new orders index, which I mentioned earlier. And so what you see on this chart is a couple of things. Number one, the lag the lead the lead there and the data. So how long does it take for a change in the Fed policy rate to show up in PMI data are purchasing activity, on average, about 18 months. And again, if you’ve ever heard any Fed chairman or fed Governor talk about the lag of policy, the word variable is always in the language. It’s a long and variable lag. And so this chart here shows that the best fit is 18 months doesn’t mean it can’t be 16 months in some cycles, or 20 months and other cycles. But what you see from this chart, though, is that so this is as of current data. And this shows the isn, which just came out last couple a couple of weeks ago, fell to a pretty weak reading of about 45 or so. What’s concerning me, though, is that most of this weakness we’ve seen in the economy, I don’t think is a function of higher rates, because unless the lag has shortened all the way to 12 months, which I don’t believe it has, we still have most of the effect of the Feds tightening cycle ahead of us. And so what we’ll talk about that a share a little more of it, that’s that’s the Oh phase the cycle. And that’s an 18 month lag.
Adam Taggart 18:50
In Michael, real quick. Isn manufacturing index readings below 50 signify a contracting economy is that correct?
Michael Kantrowitz 19:02
contraction in manufacturing, not necessarily in the broader economy, and especially in the United States manufacturing since the early 80s has declined massively.
Adam Taggart 19:12
Right. I’m sorry. You’re right. It’s declined in the manufacturing sector. Actually.
Michael Kantrowitz 19:16
Yeah, there’s no there’s no magic number. That tells us we’re in a recession on on the isn new orders index. And part of getting does not get too into the weeds. But if this is a kind of a real, it’s a diffusion index, it’s a survey. So it really tells you are things getting better or worse. And how broad based is that? It doesn’t tell you if GDP is down 2% or 4%, or 8%. Could because it’s a survey. It’s a diffusion index. You can’t simply regress it over time and say, Well, if we hit 42, then we’re in a recession. It doesn’t work like that. Because of a lot of reasons and especially today, we’re We have an economy that’s got a good amount of inflation. The isn doesn’t capture doesn’t capture that. So it doesn’t, it really captures real activity, which is basically people buying and selling stuff, disregarding the price of what they’re buying and selling it for. But it’s a great measure of momentum. Great. And
Adam Taggart 20:19
so if we can say here on momentum, the momentum is to the downside. It looks like it should continue to the downside, given historical correlations with the fed funds. Right? Correct. And this is just one series, it just one series. Yeah, I’m just helping people understand this. And also, again, you said it’s not a magic recessionary indicator. But the levels at which we are now, and if we’re still heading downwards, are somewhat correlated with previous recessions. We’ve had you see we get down low during the 2020. Recession, the 22,008. One, the 2021. One. So my point is, is these are generally at levels at which people will begin to worry is that is that a fair statement? Yeah, and
Michael Kantrowitz 21:05
especially I would say, given the last 20 years, that when we haven’t, it’s been 16 years, since we had a real cyclical recession, since we had a real cyclical downturn that began which began in late oh, set in late oh seven. And throughout the post, global financial crisis, or GFC. World from oh nine through 2020. Until COVID, we had a world with really low inflation. And so in a way back, then the isn was a real, really good gauge of real GDP real and nominal GDP growth, because there was no inflation. So when you got down to those levels back in, like 20, late 2011, we were on the we were on the cusp, or close to a recession. I probably felt like a recession for many sectors. But we weren’t actually in one. So yeah, it gets people worried because of historical patterns. But again, there’s no magic number where it means we’re in a recession or not.
Adam Taggart 22:07
Okay, and look, I’m gonna let you get on to profits. But real quickly, just to kind of mark where we are here. We talked about the age and housing, the housing market, seems to be clearly entering a correction at this point in time, right, we’ve seen kijken prices in most markets, the Case Shiller Index is beginning to head downwards. I’m just trying to track where we are. So it looks like the H isn’t
Michael Kantrowitz 22:30
going to show you. I’m going to show you four charts that give you the whole thing in one simple one. Okay, great. Well, we’ll hold off for that. Yeah, so. So that’s the order of component of it. Here’s the profits component. Again, this is now looking at forward earnings growth, following long term interest changes in long term interest rates. And so again, I look at these charts all day. So they, they seem very familiar to me. And I know for many people looking at this chart, what’s going on a lot of noise a lot, a lot of axes and a lot of labels. Just think of the gray line going up as interest rates coming down, and the gray line going down as interest rates rising again. So when we get an easing cycle, that gray line moves up, tightening cycle, the green line goes down. So I’ve shaded where I think earnings expectations are going because in the last 15 months, we’ve seen interest rates go up tremendously quickly from the Feds policy rate to mortgage rates and everything in between. And again, that lag This is a chart that shows the lag of profits on forward expectations of earnings growth. And then on the right side, that little chart there shows you what analysts estimates are for the calendar year for the s&p 500 or 2023, and 2024, which continue to slide lower. The chart on the left is just a growth rate of that data, essentially. And so here, I’m gonna jump to employment, and then we’ll kind of recap it all in four simple charts. So then, the last thing to go, you know, what, what creates employment, what drives employment, profits, what drives profits, orders, what drives orders, easing, selling housing and easing cycles, and again, not directly. So this chart here shows actually the interaction of the hope cycle, starting with the H and leading something of an employment data point. So this chart here on the left is the that nhp index I showed you earlier. And this time, we took the housing data, we flipped it over, and we advanced it. So I’m going to annotate this to make it a little clearer. Actually, I know it’s starting to get a little up, down, right, left, you know, everything’s advanced and backwards and forwards. So in the last year or so, we’ve seen the housing data, and it’s inverted here on the right scale, the HP was at 80 and change and fell all the way to 30 and change. So this is a this is a decline in the housing data. recently. It’s bounced a bit here, but again These things have long lead times. And we’ve seen this in the past where housing data declines, housing data declines, housing data declines and housing needed declines. And so it’s ultimately what follows that. And what follows that typically, is a rise in unemployment claims. These are people that have gotten laid off from their jobs, and are going to the local state office on unemployment claims to get unemployment insurance. And that’s about a 16 month lead again, is it exactly 16 months every cycle? Absolutely not. Can you can you come up with with an estimate of how high claims are going to go because of the deterioration in housing, not necessarily magnitudes really difficult, because recessions tend to be nonlinear, meaning that I five point decline the nhB doesn’t mean that unemployment claims go up X amount. It’s not that static, it’s very dynamic. So what this chart shows you is again, that, you know, housing started deteriorating A while ago, and we’re now beginning to we’re at the point of the digestion phase of the of the lag, where we should start to see employment weaken. And that’s why we think we’re gonna have a hard landing later, later this year. And so to pull this all together, these are the four charts, as we sit here roughly today, showing the full height hope cycle on its own and to show you know, so again, the housing data, the most leading of housing data actually peaked in November of 2020. And now, people often ask me, Well, what about home prices? Well, home prices, house prices, are probably the more lagging aspect of data. Because I mean, right now, if anyone you go out to go buy a house, you think people are going to give you a price based on a recession happening that hasn’t even happened. Or, you know, are they going to say, Well, this guy sold his house two months ago. And that’s my, that’s my mark, that I’m going to sell you the house tomorrow. So housing prices are very lagging. And we’ve seen that throughout cycles. And so that peeked into the nhp index or builder sentiment, most leading part of housing peaked in November 2020. The ASM peaked in about six months later, March of 2021. profit expectations, or analysts estimates for where profits are going in the next 12 months, peaked in June of 2022. And as we sit here today, we’re still in this kind of sideways maybe the beginning of an upturn in unemployment claims and other unemployment data like the unemployment rate. And that is what is, that’s what a hard landing is. And that’s when historically, markets for lack of a better word, take it on the chin. Here’s a chart showing that and I mentioned earlier, it’s usually the employment deterioration that starts a new a bear market, or ends a bull market if you’re at all time highs. And if you look at this, this data up top here of the s&p 500. Bottom, I have unemployment claims. And so just imagine Adam, you and I were doing this in October of oh seven, the s&p is at an all time high. Claims are sitting at their lows. Even back then credit spreads were near 2020 year lows. And back then people were saying, Oh, we’re gonna have a soft landing, because the Fed stopped raising rates, so on and so forth. And then Halloween happens and boom, that’s the day the market peaks. And then over the next subsequent several weeks and months, unemployment claims went up and up and up. And the stock market started going down as that took out took place. And then things like Bear Stearns and Lehman started to break, which is what makes recessions nonlinear. And that’s really makes things ugly, in when you’re in these past historical cycles that you can’t forecast. And even if you can forecast like, oh, I you know, if someone were to say, I think I knew Lehman was gonna go into business, trying to understand the ripple effects of that, and magnitude and duration becomes a you know, ultimately a guessing game. And that’s why our hope framework focuses on which direction are we going in? And how long are we going to be in that direction? And again, it all starts off with changes in policy and inflation. All right.
Adam Taggart 29:22
Well, Michael, this has been just fantastic. And these visuals are super valuable. You know, it’s, it’s, it’s, I know, you’re dealing with averages of many different times in history. So it’s not an exact predictor. You can’t set your watch by necessarily. But these are very important milestones that as you see more and more of them, I assume it gives you more and more confidence, that if all these things are happening, that these things are likely to happen next, you mentioned that when earnings starts deteriorating, that is usually the mark of the start of a new bear market. And my question for you is if I got that correctly, is it employment? Adam? Employment? Oh, sorry, employment. I meant I meant employment. I was thinking e in my head. But yes, employment. That’s the difference. The difficulty with tea and epi its profits, but I think earnings, but yeah, okay. So earnings when earnings starts correcting, that’s the signal that a new bear market may be underway. Is it when earnings? Sorry, is it when employment or unemployment? bottoms? Like is it? Is it the change of trajectory? is what sets things off for you? Or do do does unemployment need to rise to a certain level or by a certain amount before you say, oh, okay, this is the the indicator? Or is it just the change in trajectory?
Michael Kantrowitz 30:48
So, historically, and I’ll bring up the chart again, I like showing charts. And I think charts speak better than I do at the end of the day. So you know, again, it’s not, it’s not like the first week claims go up, the market goes down, and it’s a perfect reaction function. But it’s data that, you know, as we’ve seen, the month of April, as claims have turned up, it started to get started to get the word recession all over the place. In fact, the Fed is now forecasting recession, I don’t know if they’ve ever forecasted a recession. And so there’s no, there’s really no magic levels for anything. And that’s been, that’s because, you know, I remember back in the last decade, when oil was after Oh, seven, and oh, eight oil got to $147. And then the next time we had a big spike in oil was in 2009 10, into 11. And a lot of real common question was, well, at what price of oil? Do we get demand destruction? Or what price of oil? Do we get fall into recession? And it’s just not that simple. Because, again, everything’s relative. So it’s, you know, well, how much is what’s the price of oil in real terms, you know, relative to my income, which changes over time. So today, you know, gasoline prices in the US in the US are like 370, for regular gas, or 380. You know, that that’s may seem high, because we were at three, close to $3.06 months ago. But if you global go back over the last several decades, the real price of energy hasn’t really gone up, it’s gone down, because incomes have gone up in the economy has has has gone up and gasoline prices have kind of averaged about three bucks over the last decade or so. So for employment, and claims with the unemployment rate, yeah, typically, recessions do start around the first negative non farm payrolls print, but the data are also so heavily revised. And so the end of the day, I think, you know, what investors should do is not ever rely on one data point or any one signal, but build a breadth of evidence around ideas and concepts. Like I’ve tried to explain through the hype cycle, and have as many as you can, to some extent, data to corroborate the message. And so for us, right now, just look at unemployment claims. And I look at this chart, and you could say, Well, look, it’s starting to go up. And so I want to sell everything. It’s not that simple. Because again, the markets are multivariable equation, very complex backdrop. And we don’t know if for the next, let’s say, the next several months, what if claims go sideways here. And then in October start going up vertically. That, again, is really so what we do is we look at our Well, what earnings doing how bad earnings, and we’re about to approach earnings season right now. So we’ll get some new information. So it’s all about always building a mosaic and not single simply relying on the on the simple charts. I think it’s important to have simple charts and keep it simple, as you know, you know, you know, the last SS. But like so, for example, if you look at these four charts, these are data and we’ve got a lot of them that help corroborate what’s going on in the claims data. So for example, there’s the NFIB data, which I think is a treasure chest of macro data. And if IB stands for the National Federation of Independent Businesses, these are real small mom and pop companies. And the data goes back to the 80s. I mean, that is a it’s 40 years of data. It’s that’s a great set sample. And as you can see, I mean, talking about correlation, Adam, I mean, good luck finding another series that correlates as well. And obviously, we were looking at unemployment claims. And we’re looking at small business hiring plans. Again, the hiring plans are inverted. So you see that gray line going up. It’s not a good that’s not good news. It’s bad news. Right. But you see, there’s a fairly strong, extremely strong negative correlation. So that helps us kind of corroborate and understand well, you know, is this claims data we’re seeing which is what most people focus on in addition to the payrolls data, the unemployment rate data, the jolts data all All of it has deteriorated from its points, different various points of strength. But a downturn and a recession is not an event. It’s a process. And it happens in different points of the business cycle in different points in the market, at different points as you head into it. So that’s one of the ways we try to understand it. But sorry for the long winded answer. But the there’s no magic level that will say, boom, claims hit 300,000, time to sell everything. So it’s, again, these things are nonlinear. And the way we approach it with our investors, institutional investors, which are moving large sums of money that can’t day trade, or switch their portfolios overnight, if they change their minds. It’s a progression. On one side of the spectrum, you’re really risk on really offense, really on the offensive on the offense really positioned bullish Lee, on the other side of the spectrum, you’re extremely defensive, you know, as much cash as you can hold, and owning really lower beta, strong, fundamentally companies, strong fundamental companies. And so as we see the progression of moving from one to a hard landing or into a recovery, we advise clients to make that move in kind of terms of a spectrum. Kind of admitting to ourselves that we’re not going to know, consistently, what day is it going to all fall apart. But as we build more and more evidence, we feel more and more convicted to continue to position in the direction where we think that the ultimate end game is. And so for the market, we still think that we’ve got a handful of months before claims really rise sharply.
Adam Taggart 36:39
Okay. Okay. Yeah. And I want to talk to you in a moment about, you know, look, it actually doesn’t matter with any given day in the markets, it doesn’t necessarily matter what the, all this data says it matters, how much of this data the market is taking into account, right. And there seems to be potentially a pretty big disconnect right now between the markets outlook, versus what all this data is saying, but But real quick, and I’m going somewhere with this. If we have your progression, H O P E, I presume and correct me if I’m wrong, but taking everything into account all the data points you look at, if I imagine this as a dashboard with either a red or green light for each one, the hope has probably the H is probably turned red in terms of sort of net bearish and where things are going. Maybe the same for the oh, maybe the same for the P, you can correct me if that’s wrong. I’m not sure if the E yet has switched from green to red yet. And my question is just sort of like, how much more deterioration do you think you’d need to see before that last light? switches from green to red?
Michael Kantrowitz 37:48
Yeah, so here, I want to I want to show this. And I want to make a really important point here, because I think you brought up something or you triggered something in me that I think is really important to explain is that the markets, quote unquote, not yet reflecting this. And so you I’m sure you’ve seen the movie Wall Street listeners have. And there’s a great long way
Adam Taggart 38:08
blue horseshoe loves the whole framework.
Michael Kantrowitz 38:11
Yeah, and had a con steel and had a cast steel. So there’s a great, there’s a great scene, when Gordon Gekko is in his in his office, and he’s talking about Fox, I believe. And he says, you know, what are you Alaska and the deal team to get the memo, or I’m paraphrasing. And so if you look at this chart, I’m bringing back this to try to showed you earlier, the s&p 500. And claims, the market doesn’t discount this by three months, by six months by 12 months. And I’ve I’ve tweeted this a lot. And I say this a lot. The market is not very forward looking. And so the s&p today is sitting at 4150, or thereabout. And you could you just said it at I’m not doing this to call you out and do this to make it to make the point that if you’re looking at the s&p 500, and say, well, the markets are discounting this, where the market discounts things is always underneath the surface, the surface. It’s never at the s&p level. In fact, that’s why if you look at the chart, I mean, almost literally, peaks in markets take place with troughs and claims. And so the market doesn’t get ahead of that. But if we were sitting here in October of oh seven, remember the s&p was at an all time high was at like 1500 and something something something maybe I’ll find that it’s been a while. 16 years, but point being is that the s&p was an all time high in October of oh seven. Was the market not discounting what was coming? It absolutely was underneath the surface. Just remember what was going on and housing stocks, what was going on and consumer stocks, what was going on in high beta stocks? What was going on in a lot of value stocks? They were so just like the economy and just like the hope framework are pieces of the puzzle start to unravel? Before the whole puzzle falls apart? And I think you know, the last few weeks is a great example of this. Yeah, the s&p 500 has shot back up, while whereas the small and mid cap index are still about 10%. Below. Where are they were the last time the s&p was at these levels in early February. Credit spreads today, again, the last time the s&p was at 4150. In early February, credit spreads high yield were at 430 basis points. Now they’re at about 530 basis points, they’re 100 basis points wider. So you have to dig underneath the surface to see really what’s going on. And literally the last place you’ll see it is in the index. And what we’ve what have we seen in the last month since this banking crisis ensued, and you know, has moved, we’ve moved beyond it to some extent. You know, I mean, the right now as we sit here, the Kre small banks index is sitting at its low. Whereas JP Morgan, a bunch of big banks have gone up a lot has been this big rotation into quality and, and larger cap stocks, to simplify it. And that rotation is the market, starting to discount this downturn. It’s not like one day, everything just goes down all together. So I think that’s super important. And let me show you a chart here. Alright, so Adam, so let me give you an example. Let me show you on some data here. So as I mentioned earlier, we’ve seen earnings growth slow this chart here on the top left is a chart of earnings growth expectations, which is now below zero. If you want to see the level data, it’s right to the right, it’s to the right of that chart. So we’ve seen earnings come down. And I want to show you the evidence of the market is discounting this and again, the s&p is going to be the last thing to fall because people are going to crowd into the most high quality stuff, which nowadays is generally the larger stuff. It’s usually the larger stuff before they really kind of get super negative on equities as an asset class. And so just if we look at the relative performance of some cyclical sectors, like industrials, that peaked back in January, had a great rally from July. Same thing with materials, you know, real estate’s relative performance, we’re keeping this real simple here, just on secondary relative performance is sitting pretty much at a at a new cycle low one year low. A lot of people are concerned about the potential in recessions, things break people worry at this time, that’s commercial real estate, real estate investment trusts trusts that are somewhat exposed that could break. So that’s I would say evidence of that as well. The financial sector we know and again, this is kind of skewed towards the s&p 500 names. So you know, the JP Morgan’s of the world that have benefited from this debacle within their smaller counterparts. But again, financials relative performance also peaked back in January, a healthy market, quote unquote, is a market where especially in an economy that’s improving as a market where the cyclical sectors are really outperforming not the more growth at com services up here in the top left are even consumer staples. And yeah, the data can be noisy. So you know, we don’t want to marry any kind of long term view to what’s going on in the markets today or over the last three months. But it’s definitely evidence of that. And one other example, I can show you that the business cycle generally does a really good job of explaining the market. And I won’t get too much into the details of the weeds here. But this is a chart of a model we have it’s called our risk on risk off model. It is a sector neutral. So there’s no specific sectors that drive it. Long, short portfolio that looks for stocks that are let’s say, in the numerator, or the long side that are quote unquote, risk on. So they generally have higher beta, they have more economic operating leverage in their fundamentals with the economy, they’re more value oriented, and were cyclically oriented, etc. Versus companies on the short side that kind of have attributes at the opposite side of the spectrum, that have better balance sheets that are lower beta that are more defensive, etc, etc. And you can see here are the relative performance of that of this portfolio or that light blue line. Again, not perfectly, but certainly tracks the trend of this isn new orders data that we talked about earlier. And so you know, when we think about the markets, kind of what’s going on underneath the surface, you know, where investors rotating what’s leading what’s lagging, you don’t see that at the index level, you don’t necessarily know what’s leading if you’re looking at the s&p 500. And again, the s&p 500 usually drops when unemployment employment, unemployment starts to rise because that’s a hard landing. But until that happens, the markets are going to oscillate the economies are going to economy is going to oscillate with other indicators that are more leading and so this shows that so We’ve we’ve had, we’ve had the market go up from October to February, and then kind of sell off throughout February March into the banking crisis. And now again, the s&p is rebound back. But you see, we’re nowhere near on this chart, the peak of what we go back to that the peak of risk on leadership, where we were back in early February. So if the s&p is back to I’m gonna say these levels risk on or what’s going on underneath the surface is still sitting here. This is a tremendous gap. Last time, the s&p was at these current levels today, 4150. This is where we were in terms of leadership. So it’s the markets kind of like the seasons, and we don’t just go from summer to fall. In terms of weather in one day, the weather progressively gets cooler and cooler. And obviously in the opposite heading into spring and summer. And that’s the same way the economy works the same way the market works. And really the the the lights out moment for, for the markets broadly, is really when we have a clear deterioration in employment, and we’re just not there yet.
Adam Taggart 46:14
Okay. So, again, super helpful. I think it does a great job of sort of explaining to those people, and I’ll include myself in the folks who’ve been doing this saying, hey, the markets just seem to be not taking the stuff into account. And you’re basically saying, hey, they are, they’re just not at the headline level yet. And we’re beginning to see the sort of erosion in a lot of these subcategories that you just just talked about. So you made a key statement, which I just want to make sure everyone’s really aware of here where you said, we haven’t seen enough erosion yet in the employment side in the E of hope, for it to be a lights out moment yet for the markets for the economy. Let’s assume for a moment for the sake of argument that we get there in the next couple of months, then it does seem to me that we’re sort of for red lights on that dashboard that I was referring to, if that indeed becomes the case, what typically follows.
Michael Kantrowitz 47:13
I’m laughing because she said the word typically will what typically follows a stock’s go down, how much and for how long? You know, I don’t, I don’t like you know, using averages. I like using sequences and repeatable patterns, which is what our hope framework is. But you know, what, how much will the market fall? And what’s the average bear market? I think that data is informative, but not always helpful in the moment and without context. So when when when unemployment starts to deteriorate, and this is something we’re already beginning to see, corroborating that we’re at the the the beginning of this E stage.
Adam Taggart 47:49
Right, and sorry to interrupt, but you should initial claims in your charts by continuing claims are also rising as well at this point in time.
Michael Kantrowitz 47:54
Yeah, absolutely. And that’s, again, that’s further evidence, because continuing claims as people are people that can’t find a job after they’ve been laid off. And it tells you that the problems broadening, the employment backdrop is weakening, more broadly. So there’s a couple of things that happen when was a lot of things that happen when people unfortunately lose jobs, the most for the financial markets, it’s credit spreads. And this is really kind of the explanatory factor of why markets go down. In so think about it, again, what leads the earnings of the employment component, its earnings, when companies start seeing their earnings decline, their margins decline, they start, they start to need to cut costs. And part of that and some for most companies, the largest cost is employment employment. So as as earnings are already going down. And again, remember, stock prices are two things earnings and how much we’re paying for those earnings are the P E. If the ease, the earnings are already going down. And then you see credit spreads widen. That’s that’s what a bear market is. That’s what at least a familiar bear market. From from all those periods I showed you when claims go up, the market goes down. It’s when earnings are expectations are falling or actual earnings are falling, profitability is falling. And simultaneously we’re seeing default risk or credit spreads start to increase as people realize that hey, I may not get paid back or, or company XYZ just went bankrupt, which means they can’t pay their counterparties which means it creates a domino effect. And again, it doesn’t have to be a doom and gloom oh eight like scenario, but these things literally always take place to different magnitudes in every recession. So credit spreads is something when I’m watching closely right now to corroborate the claims data. And ultimately, that’s why when claims turn up, we will get really bearish because it creates a credit problem and the worst thing for equity is a credit problem?
Adam Taggart 50:01
Yeah. Got it. All right. So, so if in that, if indeed that were to happen. And I know there’s a lot of data still to come in, right. But if indeed that were to happen, sounds like you’re saying, okay, you know, likelihood of a recession goes up. You’ve talked about the type of landing soft landing hard landing love for you to let me know whether you think one is more likely than the other. Sounds like we’ll have a market downturn. I guess where I’m going here is looking at all the data that you can currently see right now and having to know that you don’t have perfect information. If if we do have a recession have you know, do you think it’ll be a hard landing versus a soft one? And then secondly, if the markets do go down, do you anticipate that they would go down to set a lower bottom than what we saw in in 2021? Sorry, in 2022, or too early to tell?
Michael Kantrowitz 51:00
The I do and so I have a year end target, which probably sounds scary of about 30 to 2532 and change. And, again, the that’s it’s not how we’re telling investors, again, everyone’s got different time horizons, you know, a lot of people that follow me on Twitter are very short term focused. And so they’re like, You’re wrong, you’re wrong, you’re wrong. It’s a year end target. And I’ve been explicit about markets gonna go sideways, until we see claims drop, just like that chart I showed you earlier, you don’t see the market probably go down. So what we’re focusing on right now with our clients is all about positioning, trying to beat the market trying to understand where our investor funds flowing to, as we see more and more evidence convincing people that hard landing may be coming. So as a strategist, I don’t care about GDP. I don’t care when the NBA er, that that’s the the organization that determines recessions,
Adam Taggart 51:57
when we’re in a recession, and then your calls are generally so many months or quarters beyond the start of it. It’s not really helpful. But yeah, most of
Michael Kantrowitz 52:06
the fun fact most recessions are caused by the NVR after they’re over. Okay, great. Yep. So it’s definitely not something you want to wait till Sunday. And then again, I you know, I’m trying to help our clients position for where leadership is going to be and then ultimately, yeah, sure, where the markets going to go, which will influence leadership. So it my definition of a hard landing is when claims rise, credit spreads widen, and earnings deteriorate, real simple. And we haven’t had that in a sharp way yet. But as I already showed you a couple of charts that show that things are going to get a lot worse, for longer. Yes, I do think the markets will go below 3491, I think was the low in intraday on September 28, or whatever that was when the UK crisis kind of really hit the fan in 2022. But for all this discussion, you and I have talked about back and forth, and the s&p still sitting here 41. And change is why people always think in every recession, at least going back to the period when there were phrase soft landing was coined back in 1973. Look at that, every time and because all goes back to human excuse me human behavior. Because markets, given a chart I showed you of claims and the stock market, probably the market doesn’t go down until it gets smacked in the face by claims going up. And that’s why, you know, I’m not making a crazy bearish call right now, for two reasons. That’s the first reason that it doesn’t happen until it happens. And two, I guess, is interpretation that the markets don’t get headed that by six months. So if claims don’t rise over the next five, six months, and they kind of go sideways or even go lower, markets, probably just gonna keep trading in this range that it’s been in for nine months. But when we see that actually start to happen, necessarily, that creates credit problems. And that’s what ultimately brings the market down. Obviously, we want to be trying to close as that inflection point as possible. But it’s, it’s, it’s, it’s not, it’s not going to happen until it happens. So that’s why people always think it’s a soft landing. And so I’m going to show you real quick why we think it’s a hard landing. Real simple. So this is, again, a couple of charts in my handout. What is a soft landing and what is a hard landing? Let’s just quickly define these. So again, a landing is when housing bottoms that has marked and specifically those leading indicators we talked about earlier, the nhB. Building Permits housing starts. It’s when that bottoms and sustainably rise rises. That’s where the landing is. And when that happens, whether you’ve had a big deterioration in employment or not determines whether you’ve had a saw Finding our hard landing. The tricky part again, going back to the idea that it’s always a soft landing, which charted just shows you is that even before recessions there’s always a head fake bounce and housing data when you’re at the end of a tightening cycle, just like we’re seeing now in housing stocks and housing data, because once mortgage rates peak, but until employment deteriorates, which is that window, I believe we’re in now, housing data bounces. So just think about this. From February of Oh, six to October Oh, seven. Sorry, sorry, June of Oh, six to February of oh seven. Let me do say that again. So from the end of the Feds tightening cycle in June of Oh, six. For the next six, seven or eight months, the housing data bounced in the second half of those six into early oh seven. And that and people look at it and said, Well, look, we’re not gonna have a downturn and housing prices aren’t gonna go down, we’re not going to have this recession. And, and sure enough, we have one of the worst housing downturns in history. The same thing happened in the summer of 2000, right before the recession. And after the Fed stopped. Same thing happened in 1990. So again, the housing data always bounces. Understanding whether it’s a head fake, or real, sustainable bottom comes from three things. And it’s ultimately what determines the difference between a soft and hard landing. And again, what’s the difference? What is a soft landing is when you have a downturn and don’t see employment deteriorate. And so there’s these three things, again, let’s keep things really simple. Instead of focusing on 100, data points, let’s fit that are derivatives of really three data points. So when you have a downturn in the economy, a slowdown that usually is preceded by higher rates, higher oil prices, things like that. And so recessions, all of them are preceded by a Fed tightening cycle. And so, in the past 12, tightening cycles, which takes you back over to 1960, not including today, this would be the 13th tightening cycle. Since 1960, there has been four soft landings. So begs the question, well, what preceded those four soft landings that was different from those other eight periods, that led to a hard landing, or, again, a rise in the unemployment rate, a rise in unemployment claims and a big downturn in the market. So they are both preceded by the Fed raising rates. But it’s the second and third components that ultimately determine if it’s a hard landing, or a soft landing, once the Fed started tightening, and that’s number one, whether we had an inflation problem while the Fed was hiking. We do today, we had one. And number two is whether or not banks were tightening lending standards during or immediately after that fed tightening cycle. And I like to simplify it, it’s basically you know, I mean, just think about it when you all you know, inflation is is 10 tends to be a drag on the economy. Yeah, there’s positives and negatives. But ultimately, especially if it’s like energy prices tend to be a drag on the economy. Banks tightening lending standards will be a drag on the economy, because people with poor credit won’t be able to get a loan. And of course, the Fed raising rates, again, has its pros and cons, but can be a drag on investment as the interest rate for new capital investment goes up. So this has been a very aggressive tightening cycle. Again, I’ll just show you, if we look at the last those four times we’ve had soft landings and the tightening cycles that preceded that we just had a soft landing, actually in 2019. Here’s the tightening cycle that started in 2016. And lastly, through late 2018, and then we had a soft landing. We also had a soft landing in 95. That was preceded by tightening cycle in 94. That was only about one year. And then the other two types, the other two soft landings took place after the 1966 and 84 tightening cycle. Here’s today, notice how it’s much greater in magnitude, and much steeper of a slope than most of these. If we now look to the right side of the chart, these are all tightening cycles that lead to recessions. And so notice that today’s tightening cycle is kind of in the context of those. Yeah, what is the Fed raising rates aggressively? Because we’ve had an inflation problem. I like to look at food and energy inflation. And this is a chart of that. The four soft landings that took place historically. Here’s 5%, food and energy inflation. So if gasoline prices are up 5% You think anyone really cares? Not so much. Gasoline prices are up 1015 20 23% Last year, what’s that going to do? Well, that’s going to flow in to other goods and make them more expensive. That’s going to flow into the Feds thinking and make them raise rates more aggressively. So now we’re compounding these tightening cycles, you know, we’re hitting lower income folks that are really sensitive to food and energy. And the Feds reacting to that raising interest rates, which is now hitting middle income and hire folks that, that live on credit or use credit for investment or loans. So now you’ve stacked the probabilities or increase the breadth of the tightening cycle. And what that usually leads to is banks that are tightening lending standards. And I know everyone probably has now become very familiar with the idea of lending standards because of what just happened in mid March with small regional banks. This is a chart that hasn’t been updated since February, because we don’t have a new data point. The Fed publishes quarterly series, it’s called the senior loan officers serving. And the higher it goes, the tighter lending standards become what does that mean? That means it really tight lending standards, if you don’t have perfect credit, we’re not lending to you or if we are lending to you, we’re charging you such an exorbitant rate that you’re unlikely to even take the loan. And so again, in those soft landings, those appeared for periods I mentioned earlier, as most recently as 2018. Banks were easing. So above the above this black above this black line is tightening below its easing. So when the Fed was hiking in 2016 1718, banks got easier. When the Fed was hiking and 94, banks were getting easier. So offset it. Same thing in 84. Same thing in 1966 into 67. Previous times where the Fed was hiking, and lending standards were tightening like they are today. And again, this is not even reflecting the what happened in the first quarter.
This is only really data through the end of the year, maybe the beginning of January. We’ll find out in the next few weeks, what lending standards, how much they’ve tightened to. But again, when you get these three things, the Fed to raise rates aggressively. High in food, energy inflation, and tighter lending standards, that has always led to a recession, or a rise in unemployment, or a bear market. That is a function of weaker earnings. And wider credit spreads, which is what I think is ultimately coming later this year. And it’s employment data in a watch. But we have all the preconditions, all the all the ingredients, all the things we can talk about, you know, well, what about this, and this time is different because of this, and that, you know, we had a pandemic, we’ve got a war going on. There’s different regulatory backdrops today than history is different tax policy, there’s the SPR release, I mean, we can sit here for an hour, just talk about all things that are different today. The end of the day, none of those have a bigger influence on the cycle than these three things I’ve just shown you. And ultimately, each when you try to contextualize them, you try to understand, well, could they speed up the legs? You know, could it make an 18 month lag, a 16 month lag or a 20 month lag? Or could it be a backdrop like in a wait, where can we had these three? Same three things in a way? That’s why we went into recession? Why was it a horrible recession, or some people call it a balance sheet recession or the great financial crisis, we call it because there was all this bad paper floating around that all broke. And Lehman broke and etc, etc. So that made the magnitude of it and the duration of it really bad and really long. I’m just talking right now that we’re going to get into a recession, if commercial real estate ends up, quote, unquote, breaking, where other things show up. As the tide goes out that breaks and ultimately hits confidence and credit markets, then the magnitude and duration of this downturn will possibly be worse. But again, I think the message I want to get across is that we have the ingredients, the probabilities of markets that are going to struggle with downside asymmetric risk. And we’ve we’re far from out of the woods at this point.
Adam Taggart 1:04:09
Okay, yeah. So Michael, this is phenomenal. And I’ve just got to imagine by looking at the charts that you’ve just walked us through here, that your probability of recession has got to be your confidence, and the probability of recession is gonna be pretty high here based upon the indicators that you look at. Yeah,
Michael Kantrowitz 1:04:29
and that’s, and so we have these things that we have the preconditions that have preceded and so people often ask me, What’s the analog? Well, it’s all recessions is the analog because these are, these are three things that have happened before every single one of these recessions. You know, everything that’s unique, and each one shapes the magnitude and duration, and then we have our hope framework, which helps us navigate Okay, well, we’ve had these three conditions. And is the economy slowing down in the fashion that it does in reaction to those conditions? And the answer I think you know, showing hopefully enough charts and I’ve got plenty more is yes, that doesn’t mean tomorrow you want to go out and sell everything, again depends on your time horizon horizon, your risk. Everyone’s got to make their own investment decisions. But you know, I do believe history will repeat as it’s done the last 12 times separating soft and hard landings. And I think the ultimate catalyst for broader markets to go down, investors kind of capitulate will be employment.
Adam Taggart 1:05:30
So, so So Michael, we have a lot of regular investors that watch this channel, right? They’re not day traders, they’re not people that are trying to, you know, get a big game tomorrow, and then sell the next day. They’re just trying to be good stewards of their wealth over the arcs of their lives. I look at a lot of what you’ve said here and say, okay, these seem to be pretty clear storm warning, you know, indicators, like, you know, in general, this seems to be a time to be getting defensive, to be preparing for rougher times ahead in the markets. Is, would you agree with that sort of broad brushstroke in this market? Yeah, I
Michael Kantrowitz 1:06:13
think, again, I always think of things in probabilities. And I’d say, you know, again, because nothing’s 100% Certain. It could be different this time, right. And no one has a crystal ball, and no one gets a right all the time, every time. But when we think about probabilities and risk reward, and we go throughout history, and we look for, you know, all the way points along the way from a good economy till recession, what I’ve hopefully shown you and your audience today is just a sample of data that suggests we’re, we’re moving in that direction, and for this economy to turn around sharply, or for the inflation problem to magically go away, I think is a low probability bet. And so, yeah, I, you know, we’ve been cautious on equities for over a for over a year now. And again, we’ve had, again, my time horizon for our clients is not two months and two weeks, it’s, it’s it’s longer than that, it’s, I’d say, anywhere from six to 1218 months. And everything in between. So yeah, I think again, the risk reward of equities here is extremely poor. We haven’t had these conditions item since 22,007. At no point from after the oh, 708 recession. And up until recently, have we had those three ingredients simultaneously, that have produced recessions every time so we’ve had scares in 2011 2015, COVID was was more of a public policy health event than a cyclical downturn due to those three conditions. So you know, and it’s having its, you know, it’s having its obviously ripple effects on creating a lot of uncertainty. And there is a tremendous amount of uncertainty from day traders, to retail investors all the way up to institutional investors, and people like me again, that’s why we have to try to corroborate as much as we can, with as much data, useful data as possible.
Adam Taggart 1:08:22
Right. And that’s what’s so great. And I’m gonna say compelling, from my standpoint about your position here, Michael, is that you’ve got so much data here, right? And when you know, what you always hope for, as you look for different datasets that if they start telling you the same thing, you can start having more confidence in that because you’re hearing it from multiple sources. You seem to have a, you know, a real panoply of, of different data sources that are now increasingly beginning to align from at least my read of your stuff. What To your point about, we haven’t seen the same indicators that we see now. The last time we saw them was back in 2007. One thing that is different versus that time is the extent of debt that’s in the system. Like I think just the federal debt, if I’m remembering correctly, it was about 9 trillion back in 2008. And it’s what over 31 trillion right now. When you talk about things breaking, is there a concern that breakages could be bigger this time? Because when you compare those, those spikes in the in the federal funds rate, right, when you were comparing the soft landing areas versus the hard landing areas were at the same, you know, absolute increase in rate hikes as some of those previous ones, but the debt pile those rate hikes are applied to this time round are so much larger. So does that a concern of yours?
Michael Kantrowitz 1:09:43
It’s it’s I’d say it’s going to be a it’s going to be a concern that kind of comes and go you know, when the economy’s reaccelerating no one talks about the debt. You know, how much debt in the economy has market certainly don’t focus on it. You know, they always view the world as glass half All, we’re now in a cyclical slowdown again heading into a hard landing later this year. And so I think people will increasingly see things glass half empty, you know, we have the debt ceiling issues coming up, we’ve got student loan issues, perhaps going to likely be having to be repaid. So I think you know, those those fears kind of come and go. And if we want to kind of look at a poster child of a country with too much debt, looking at when we had two countries that had two big problems during the fourth quarter of early fourth quarter of 2022. And it was the UK, which was able to, they were able to kind of resolve that put a bandaid on it or take it away pretty quickly because that was a policy decision that they removed. But look at Japan, the yen fell nearly 50% versus the dollar, five, zero. And so that’s what happens when you print too much money and have too much debt. And you know, Japan can afford rates to go to 3%, we did a study almost a decade ago now on my team, looking at well, what at what interest rate of JGBs, or Japanese government bonds would basically eat away at their entire offset their entire revenue. And 10 years ago, it was like 3%. And so as the debt the stock of debts gone up, that number is necessarily like a video game with like the ceiling of Indiana Jones with the ceilings coming down and spikes are coming at you. So the more debt you pile on, the lower the interest rate you need to, quote unquote, survive or not have a debt crisis. So yeah, I mean, I think, you know, in looking ahead, there’s gonna be a lot of tough political decisions that every a lot of developed countries are going to have to make. And depending on which party is in power, you know, they’re going to be cutting from different areas of the budget, because you can’t cut interest expense. You know, that’s a default. Right. And so at the end of the day, I think that that’s matter. And here’s why we’re increasing, we still are extremely rate sensitive as an economy. And so yeah, I think that’s certainly playing a role. And it’ll be an issue that boils to the surface as we get closer to this debt ceiling debate. And, you know, hopefully, we’ll get a real quick and fast resolution, and everyone in DC will behave and act like adults. But that’s it hasn’t been the track record, necessarily, every time and in the downturn, it’s going to be perceived, especially if employment is deteriorating more than it is today, in a few months, that’s going to be only perceived as a bigger, negative.
Adam Taggart 1:12:50
Okay, Michael, this has been great. There’s so many questions I didn’t get a chance to talk with but gotta be respectful of your time, because you’ve given us so much already, you have an open invitation to come back in this program, anytime you want, especially as more data either continues to validate what you’re seeing, or if a monkey wrench gets thrown in and something all of a sudden looks like, you know, the probabilities that we talked about are getting shifted anytime you like, please come back on here. We should. Right before I ask you where people can go to learn more about you and your work really quickly. And I know that you have private clients that you’re writing research for and whatnot, but at a general level, as you look towards this future, right recession coming heartland and coming, you know, maybe s&p down to 3200 ish or so. Are there is there’s I’m curious sort of how you’re thinking about allocating for this? Is it? Is it more for, you know, in preparation of that, and I know, you’re not saying sell everything tomorrow, but obviously stocks in general, you’re probably bearish on for the next year. Right. bonds may be kind of interesting, because you can hide out in safety, you know, and get paid this time around. Yeah, that might be interesting. So I’m just curious how you’re looking at trying to help people not become collateral damage to what you see coming ahead.
Michael Kantrowitz 1:14:10
Yeah. So again, you have to you have to realize, you know, my audience, they’re all thinking in a relative world, you know, even absolute, even hedge funds that look for absolute returns, because they’re trying to, they’re trying to have their Long’s beat their shorts to create absolute returns are long only clients, mutual funds, pensions, etc. Endowments are long, only generally. And they’re just, you know, they’re obviously trying to produce the positive returns and also beat their benchmark. So everything is really in a relative world. These investors have to remain somewhat fully invested to some extent. And so we’re always looking for what’s going to what’s going to lead over a period of time that we can have more consistency. Individual investors right now I again, I don’t cater to REITs to institutional investors. Maybe one day that’ll change and we’ll open it up to the retail community and individual investors is. And so yeah, again, I think I think patience and prudence is paramount here. Obviously, everyone in their different stage of life and their risk tolerance has to make their own decisions. But I think, broadly speaking, I’ve preferred treasuries over equities this year, again, thinking from a full year perspective, with the view that a hard landing will play on the back half. Or at least, you know, if I’m wrong on that, and we get, you know, quote, unquote, a soft landing, well, then inflation is going to come down and bond yields will probably, at least, to some extent, still be attractive, right? If we can’t get rid of the inflation from, then it’s hard to say a landing or recovering economy is going to be really bullish, because that’s going to push inflation back up. So yeah, I think, you know, for investors, watch employment data, watch, weekly unemployment claims that comes out every Thursday. And this is not a time to look, look to swing homeruns. Again, at least that’s not my risk tolerance. And so yeah, I think, you know, kind of rolling short term treasuries here. For me, myself, that’s what I’ve been doing. And I’m happy to collect that income. While I’m waiting for, I think, a more sustainable opportunity, we’re gonna see a broad based improvement in the economy, and the probabilities are on your side. So for blackjack players is not the time to double down. This is time to go like this. And the dealer shown a six right now. And, and you’ve got you’ve got 15. So I’ll take on pass.
Adam Taggart 1:16:37
All right. Well, I can’t wait to have you back on this channel. At some point, it may be a while but where right now, it seems like we are potentially at one extreme of the hype cycle, which is telling a cautionary tale right now. But when the indicators start to flip the other way, maybe when we get into this recession start begin to come out of it, having you come on to say, Hey, I’m beginning to see what we see at the start of a new bull market will be extremely value for those folks who’ve been paying attention and might be able to get in early on that trend. So anyways, I give you the invitation for that whenever it happens.
Michael Kantrowitz 1:17:12
But the funny thing is I joined Twitter, I think in maybe 20. I really started actively tweeting in like 2021, or maybe 2020, but really actively in 21. And mostly people start and start following me until 2022 and 2023. And so I often get the perma bowl, perma bear, sorry, perma bear label. And I think I’m the furthest thing because again, we’re cycle focused, we actually had the highest target on Wall Street in 2021. We’re were was extremely bullish, you could see that in my in my feed. And yeah, there will be a time to be extremely bullish once again, where the markets will trend higher. Without these, you know, 1015 20% corrections, without this volatility and more stability in the markets in the macro environment. And trust me, I look forward to it. Because being bearish is not fun. It’s exhausting. You know, when you’re bearish as strategist, you better be confident in your view, because you know, kind of people feel like you’re kind of betting against them.
Adam Taggart 1:18:14
Yeah, you’re telling investors where they don’t want to hear? Yeah.
Michael Kantrowitz 1:18:17
And you know, that’s, you know, don’t shoot the messenger, we follow a framework, which is why I have so much data, because if you didn’t have the data, and you’re just going like this, you’re gonna get beaten up pretty quickly. So I do look forward to that. And if we do see the recession, or mild or deep recession, there will be an easing cycle, we will see commodity and inflation prices come down. And then there will be another great opportunity for an expansion in a multi year bull market. But I don’t think that’s a story for 2023.
Adam Taggart 1:18:46
Okay, yeah, but we got to get through 2023 First, but All right. Well, Michael, for folks that have really enjoyed this discussion, and I’m sure there are going to be a bunch. And probably maybe a number of them hadn’t been familiar with you beforehand. Where can they go to follow you in your work? I know you mentioned Twitter.
Michael Kantrowitz 1:19:03
Yeah. So for if you’re an institutional investor, you can become a client of Piper Sandler, which is where I’ve been for just over a year, and our whole macro franchise and our economists or policymakers, energy, etc. Work out of, and right now that’s only for institutional investors. Maybe one day that changes. We opened it up to retail and individual investors. Otherwise, I’m on Twitter at Michael kentro mi, ch, AE l k, n tr, O, we’ve got a blue checkmark because I get personated way too much. So hopefully that’s helping. It’s $10 or $11 a month. Whatever you lost charging is worth the less aggravation, I think. So you follow me there. And frequently on CNBC and Fox and Bloomberg as well on TV.
Adam Taggart 1:19:58
All right. Well, Michael, this has been just out Absolutely fantastic. Look, I know that you deal primarily with institutional clients, as you said. But most of the viewers of this channel here are regular retail investors, folks, Michael has given perhaps the best empirical presentation that I’ve seen to date on why the odds for recession, and a market correction later this year are high enough that we should be factoring them into our plans here at a bare minimum. And so hopefully, you are working with the guidance of a professional financial advisor, who is aware of all the issues that Michael talked about, is creating a personalized investing plan for you based upon that information, and then executing that plan for you. As we get deeper into this year, and some of these additional shoes that Michael is looking to drop, start dropping. If you have a good one who’s able to do that for you, fantastic, stick with them. But if you don’t, or you’d like a second opinion from one who does consider talking to one of the financial advisors endorsed by Wealthion, cost, nothing to do so you just go fill out the short form email@example.com, they will sit down with you, they’ll hear your personal financial situation, they’ll tell you what they think you should do, you can take that information, you can bring it to your existing financial advisor, you can do it yourself, or you continue talking to these guys if you’d like to. But these consultations are totally free. They don’t cost you anything, no commitment to work with them. It’s just a public service that these financial advisors offer. Well, folks, if you’ve enjoyed this conversation with Michael, even just a tiny bit as much as I have, please do me 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. And Michael, as I said, you are welcome to come back on this program any time in the future to update us on what you’re seeing with your data. But this has just been absolutely fantastic. Thank you so much for your time.
Michael Kantrowitz 1:21:46
All right, awesome. Thanks again, Adam.