Is Today’s Economy Hotter Than Expected?

Ben Laidler 0:00
What one is obviously inflation. If it rears its head again, markets see that as a tail risk today, but they absolutely don’t see it as the base case. And if it became so I think markets, you know, that’s the second pillar of this bull market. So I think that will be very negative.

James Connor 0:20
Hi, and welcome to Wealthion. I’m James Connor. Well, here we are in the middle of q2, and we’ve had numerous companies report quarterly numbers, some good some bad. We’ve also had some very disappointing economic data, and we’ve had some backpedaling out of the Fed. So there’s a lot of economic crosscurrents. And to make sense of it all. I’m joined with Ben Laidler, Global Market Strategist at trading and investment platform eToro.

Ben, thank you very much for joining us today. How are things in London?

Ben Laidler 0:54
Hi, James. Thanks for having me back. Oh, things aren’t good. The sun shining summers around the corner. We’re trying to ignore markets. But yeah, things are good.

James Connor 1:03
Well, that’s good to hear. And people in London, they love to complain about the weather. So how has this spring been so far?

Ben Laidler 1:10
So you’re going to ask me about the wildlife gave me the excuse to complain. It’s pretty good. Yeah, the sun shining has stopped raining. I’m just gonna leave it at that.

James Connor 1:18
And so you have a long weekend coming up meet a weekend?

Ben Laidler 1:22
Yeah, absolutely. Can’t be a three day weekend. Yeah, just around the corner.

James Connor 1:27
So I am based in Toronto, and we also have a long weekend coming up in May. It’s called Victoria Day, believe it or not, we’re, we’re still hanging on to the British crown.

Ben Laidler 1:40
Yeah, so we call it the most original name, we can come up with his early May Day bank holiday, I think we should have just stuck with the old sort of colonial name.

James Connor 1:48
Yeah, very good. So let’s talk about the economy. The last time we spoke, you were very bullish on the US economy. But we recently saw a weaker than expected q1 GDP number. It came in at 1.6% versus expectations of 2.4%. And some people might look at this and say this pullback is good because it’s going to result in lower inflation. But what’s your take on this GDP number? And what’s your view on the US economy overall.

Ben Laidler 2:15
So I call it U.S. exceptionalism. You know, the rest of the world is sort of slowed down, and we’re looking for recovery and everything else. And the US economy just continues to chug along at very strong rates. And what looked like a weak first quarter GDP report, actually really scratched the surface, I think, was very strong. So I think the narrative here is the US economy absolutely slowing. But at a very modest pace. The two bits of the economy really, really care about us investors, consumption and investments, consumer spending in that first quarter report was two and a half percent. And services spending, which is the biggest driver of the economy was 4%. And investment 3%. So you know, these are the drivers of the economy, they remain very, you know, very strong, you know, the takeaways which gave you that sort of low headline, number of basically the volatile smaller bits that we don’t really worry too much about trade inventories. And just to put all this in perspective, your long term, potential US GDP growth rate is something like 1.8%. So we are still running at very strong levels by historical standards.

James Connor 3:28
Okay, so let’s look at interest rates. And also inflation. When we started, when we came into 2024, everybody was looking for six rate cuts, then got reduced down to three. And then after this last fed announcement, I guess people are saying it’s only going to be two cuts. And some people are saying now, it’s not going to be any. And this is all based on inflation expectations. And as you just alluded to, we had a very strong CPI number recently, car insurance, for example, was up 22%, year over year, the largest increase since 1976. So maybe you could just take us through the your views on inflation in a little more detail.

Ben Laidler 4:09
So the economy is running hotter than expected, and therefore inflation is running a bit harder than expected that I think is probably the big takeaway. And this has driven a bit of a reset and expectations for not necessarily bad reasons. I think many of us would embrace a stronger economy and therefore stronger corporate earnings, but it has resulted in this reset of interest rate cut expectations, coming into the year, maybe a little bit off our heads, but we thought we were going to see six or seven cuts starting in March. Now you know, here we are, and we’re looking at maybe one cut in starting in in September. So we’ve seen a sort of big big change, but markets have taken it in their stride. Why? Because it’s been compensated by stronger growth and stronger earnings A and B but Because I think the rate cuts are still coming, inflation is still falling, it’s just been a bit stickier than expected. Headline rates are over 3%. The PCE numbers, which the Fed looks at are, you know, under 3%. But it’s those last hard yards. Why am I not panicking too much about it? Market, long term inflation expectations have really not budge, they’re still in those sort of low 2% levels. And I think when you delve into the inflation numbers, the stickiness comes from a lot of these sort of backward looking components like shelter, like healthcare, like insurance, that I do think will ultimately ease interest rates at five and a half percent, I still think are restrictive. I think the backup in bond yields, which just happened is doing some of that slowdown work for for the market. And I guess, big picture, we’re seeing a productivity boom in the US productivity rates, how much work that we get out of that one hour of work, are running about two times higher than normal levels. Why? Because the labor market is tight, companies have to do more with what they have. And we’re seeing this sort of tech boom, which has given us all the tools to work more efficiently. But long story short, this is the secret sauce that allows us to see strong growth, but also lower inflation that keeps the door open for interest rate cuts later this year.

James Connor 6:25
And just to clarify, you’re expecting only one interest rate cut this year.

Ben Laidler 6:30
That’s what that’s what markets are pricing. I think we may see one or two. I’m not too worried about the timing or the magnitude, I think all we need to know is that, you know, the next move is down and it’s coming within our sort of investment horizon over the next six months or so.

James Connor 6:48
And we have a big election coming up in the US. And so therefore, if you want to do this before the US election, let’s just say he’s concerned about the impact, or the optics associated with an interest rate cut ahead of the election. Do you think that’s going to come into play at all? Are you?

Ben Laidler 7:04
Yeah, a little bit at the margin, it’s definitely going to mess with the timing a little bit. I think that’s why everyone’s focused on September because the meeting after that you’re right in the teeth in the middle of the election. But whether it’s September, whether it’s December, I’m not actually too bothered, again, because this is we still think inflation is falling, we still think the next move is down, not up for interest rates. And the fact that it’s been a bit delayed, and it’s going to be less than expected is for good reasons. From an equity investor standpoint, which is that growth is strong and earnings are strong.

James Connor 7:36
So another large component of CPI is energy. And we’ve had further hostilities in the Middle East, which could lead to higher oil prices at some point right now. WTI is hanging in the in the mid 80s. But are you concerned about the oil price and the impact that this might have on inflation going forward?

Ben Laidler 7:56
Well, I have to be a little bit humble here. Because, you know, when you look back at history of gasoline prices and oil prices that feeds straight into those inflation expectations that you were alluding to. So it’s absolutely a risk. If we see a spike in oil prices, it feeds straight through to consumer expectations for inflation, and the Fed has to respond to that. But I think that any significant move up in oil is sort of self adjusting. If we do see $100 oil for whatever reason, I think we will just drive less companies will work very hard to use less oil, A and B, I think oil ever gets that high. The temptation is going to be for OPEC just to pump more oil. And it’s OPEC holding back about 5% of total global production from the market, which is making this market sort of so tight. So I think you have a couple of sort of self adjustment mechanisms, which you know, they may not protect us from oil going to 100 but they absolutely protect us I think from that sort of energy price shock and prices going higher than that.

James Connor 9:02
So I’m based in Toronto and we are paying about $1.70 A leader I’m curious what you are paying for petrol in London.

Ben Laidler 9:12
So I’m not sure I can do the maths as quick as you but we’re paying about one pound 50 A gallon in the UK, which I’m sure is higher than in Canada. I guess the big difference in the UK is I think tax I think the government takes about over 50% of our of our petrol price.

James Connor 9:31
Oh yeah, it’s at least 50% Here I’m telling you don’t even get me started about Canadian politics and the economy.

Ben Laidler 9:40
Let’s not go down the tax rabbit hole.

James Connor 9:42
But and just for the just for our American viewers $1.70 litre would equate to about $5. US gal and so it’s rather Hi, Ben, I want to ask you about the 10 year bond. It’s currently it was at 4% nearly margin, then it went to 460 to 470. Here, what’s what’s this telling us is? Is this telling us we’re going to see a hard landing or what’s your take on it?

Ben Laidler 10:10
So I think it’s telling us two things. It’s telling us that the outlook has changed a little bit for inflation and interest rates, stickier inflation high for longer term interest rates, I think that’s absolutely pushed bond yields up, I think the other thing we just talked about less is the return of the term premium. This is the bit of bond yields, which is driven not by inflation, not by growth. But by everything else. We’ve all forgotten about this for decades, because it was negative, but it’s on the verge of turning positive. And it’s this sort of catch all, which I think reflects all the other worries that are beginning to come to fore in the market of the fiscal situation in the US the debt situation in the US the fact that we have this election in November, what’s happening with quantitative tightening, so it’s a little bit of a sort of annoying catch all. But I think it’s an important part of this move up in bond yields. It’s not just about this reset of inflation expectations. And when the Fed is going to cut interest rates, it’s also the sort of other bubbling uncertainties. So what I think this means is that we’re just going to have to get used to bond yields being a little bit higher than we might have expected six months ago.

James Connor 11:25
And because we have seen higher than expected inflation numbers, and then a lower GDP number, there’s been a lot of chatter in the recent days about stagflation. Do you think this is a concern at all going forward?

Ben Laidler 11:37
I think what we’ve seen in the last few months is a reconsideration of the sort of tail risks. So whether it’s a, whether it’s inflation, researching whether it’s the Fed being forced to put interest rates up, not cut them, whether it’s the return of sort of stagflation, I think these are things we’re now talking about again, but I think they’re still in the realm of sort of tail risks. But it does mean that some of the assets that most benefit from that and commodities are sort of the obvious one, have been doing better in the last few months. And I think this is a reflection of, even though it’s not my base case, people are now put a 1015 20% Possibility on these issues happening versus zero a few months ago. And that means that you know, you’re nibbling at some of these asset classes, which have traditionally been, I’ve done quite well in stagflation airy environments, or when inflation has returned. And it’s absolutely been a big driver of oil prices that you talked about, or the sort of broader pickup in commodities in recent months.

James Connor 12:38
So you mentioned earlier that you’re looking for an interest rate cut in the US possibly by September, maybe one to two cuts this year. The Swiss recently cut rates, who do you think is the next country to cut interest rates?

Ben Laidler 12:55
Well, short answer is gonna be the ECB, on June the sixth, in terms of big central banks, and maybe here in the UK, we follow that at some point later in the summer, but I think that’s gonna be the big change. You know, we’ve seen a complete rollover in the global interest rate cycle in the last sort of six months or so we started seeing interest rate cuts out of Latin America, and Eastern Europe, they were the first to raise they’re the first to cut. The Swiss National Bank, as you mentioned, was the first of the sort of big developed market central banks to cut and I think Europe’s going to be next. Why? Because Europe is almost in recession. And inflation is running at sort of two and a half percent. So the macro stars are there for them to cut. And I think it’d be very bullish, because I think Europe is particularly sensitive to lower interest rates, they have higher debt, and they have a weaker economy, inflation has already come down. So I think it’s a key catalyst as a sort of more bullish story for Europe. But more globally, we’ve had three times as many rate cuts this year as rate hikes. And that’s a complete turnaround from where we were even a year ago.

James Connor 14:05
So let’s move on now. And I want to get your thoughts on the US stock market in q1 was very strong. We’ve seen some weakness here in the last couple of weeks. But many of the big tech names have reported mixed numbers. Google came up with a massive beat. It also initiated its first ever dividend. I was surprised to hear that but they also said they’re going to implement a $70 billion stock buyback. But we’ve had weak numbers out of meta and also Tesla, and what are your views on the stock market? And are you concerned at all with this pullback that we’ve seen in both the s&p and the Nasdaq here in the last couple of weeks?

Ben Laidler 14:42
The short answer is no. We were absolutely overdue for the pullback that we’ve just seen in the last few weeks. I mean, just to throw a whole barrage of numbers at you coming into this pullback. US stocks were analyzing their best year in 70 years, and we were just coming off a remorseless as low volatility 25% rally, so overdue for a pullback your average year in the s&p 500, you see three pull backs. And we have now maybe just seen one, your average intra year drawdown in the s&p 500 is 14%. Average. And we’re not even close to that. So we were overdue some volatility. We’ve seen it now. And it’s an actually it’s an opportunity, stocks are now cheaper, or the money or the people that were sitting on the sidelines and missed that rally, I think that we should now be and probably are by the looks of what’s going on in the market beginning to sort of nibble at this pullback, and on and on earnings. If we’re getting less bullish about the magnitude of rate cuts, then that’s the sort of less good news, the better news is, earnings are being stronger than expected 80%. The s&p 500 is beating expectations. So far this quarter, every sector has beaten expectations. And big tech is doing the heavy lifting. Magnificent Seven earnings are expected up something like 40%, this quarter, and the rest of the s&p 493 will basically be flat. Now we expect that to rebalance over time. But right now it’s all about big tech, and no matter sold off 10% Recently, despite reporting 27% sales growth. So it’s quite a tough crowd, when you have that sort of reaction. But you know, big tech is really showing its strength here. I mean, we’ve seen very strong AI driven numbers from Microsoft from Google. So we’re seeing the growth. But we’re also seeing them just flex those financial muscles with you know, they have net cash balance sheets, they have huge profit margins, and you’re just beginning to see them. You know, when times get tough, and they need the social and the shareholders, they can do these dividends, they can do these big buybacks because they have have this sort of embarrassment of riches.

James Connor 16:56
So just to summarize a few of the points that you made, you’re you’re still bullish on the US economy, in spite of this pullback that we’ve seen in the GDP numbers, and you’re still bullish on the US stock market, once again, in spite of the pullback that we’ve seen here in recent weeks.

Ben Laidler 17:14
Absolutely, you’re making me sound like a probable, but yes, absolutely positive.

James Connor 17:20
And once again, you’re seeing this as an opportunity to get long.

Ben Laidler 17:25
I think so I think we’re in the early innings of a bull market, your typical bull market is four to five years, and 150%. And this one kicked off six months and 20% ago. So I think we’re in the early innings. I think the pillars of this are a recovery of earnings, and a soft landing in the US. And I think that remains on track. And the outlook for interest rate cuts. And I still think that’s on the table, maybe push back maybe a little bit more delayed. But absolutely coming. Those are the twin pillars. And technically, I still think there’s an awful lot of money on the sidelines, a six and a half trillion in US money market funds, which if we get a big pullback, we’ll step up and I think play in this market. So yes, structurally bullish. That doesn’t mean along the way that we’re not going to see some volatility, which maybe we’re seeing now. It’s always sort of two steps forward one step back. But I think I think we’re in the early innings of a bull market, and the pillars of that remain firmly in place.

James Connor 18:28
So let’s talk a little bit about what’s happening in Britain, you are based in London. So I’d love to hear your thoughts on this. And I love that city, by the way, but it’s so damn expensive. And because of my poor performing Canadian currency, every time I go there, it’s costing me a small fortune just to buy a cup of coffee, I’m paying eight bucks. But what’s your take on what’s happening in Britain and the economy?

Ben Laidler 18:51
You should try living here not just visiting. So, so the UK is a sort of transAtlantic economy. What I mean by that is that it has, you know, a lot of the European continental European problems have this sort of growth, stagnation, verging on recession, then it also has some of the problems the US is having, maybe the quality problem the US is having of this very strong labor market, which is helping push up or helping keep inflation, you know, high. Growth in the UK is becoming less bad. Inflation has started to finally ease and interest rate cuts are beginning to sort of come on the horizon, maybe not as early as ECB, but probably running ahead of the Fed. And I think this will be a particular relief. In the UK where debt levels are quite high. A lot of people have mortgages, a lot of those mortgages are fairly, a fairly short term. And I think this is going to be pretty positive for the UK market, which everyone has just basically forgotten about, over the last sort of decade or so and that means that this market has just got cheaper and cheaper and cheaper. It’s trading at about 20% discount to the sort of long term average. And I think this mix of sort of old economy stocks, sort of banks and commodities is particularly sensitive to the recovery, I think we’re going to see in the sort of broader UK and European economy, and maybe also particularly sensitive to these lower UK interest rates, taking some of the strength out of the pound.

James Connor 20:31
You made mention of the fact that in the UK, they have short term mortgages. And we also have that here in Canada, you either get a three year or five year mortgage. And I recently had a discussion with David Rosenberg, and he was expressing concern that he thinks we might see a reset in the Canadian housing market because of the short term mortgages coming due. And people are, of course, going to be resetting at a much higher interest rate. Do you share any of those concerns with what’s what might happen in the UK?

Ben Laidler 21:01
Absolutely, you know, debt levels are high, people are very exposed to, to interest rates in the mortgage market. And this is sort of a slow moving train wreck, given the you know, there’s this three to five year, you know, reset. Basically, we’re in a race between those resets and lower interest rates. Absolutely. This is a significant drag on the economy. It’s why interest rate cuts are so important. The UK is a particularly consumer driven market as well. So anything that you’re paying away extra to the bank and your mortgage payments is something that you’re not out spending in the shops. So yes, absolutely big deal. But what I would say, though, is that everybody has known this, this is why the markets depressed. This is why the economy has been reasonably depressed. This is why I think interest rate cuts in the UK are a particular capitalists given how interest rate sensitive the economy and the stock market are in

James Connor 21:55
your office is Canary Wharf. And I’m always curious, when I talk to people in other cities, what’s happening in terms of the workforce? Is everybody back to the office five days a week? Or is there are people working remotely? Or is it hybrid?

Ben Laidler 22:09
Absolutely hybrid, and places like Canary Wharf, which is, you know, a office district with a not a lot else going on and have been particularly hard hit by that.

James Connor 22:20
And do you think this could be an issue going forward with the commercial real estate market?

Ben Laidler 22:27
I think it is an issue today. I mean, there’s an awful lot of these buildings in Canary Wharf, which are half empty, or completely empty, and will need to be repurposed. Well, some of them may or may be handed back to bank. So yeah, absolutely. I think it’s an issue. But I guess similar to my comments on the mortgage market, your average commercial real estate loan is even longer than your average mortgage. So the least bad thing I can say about this is it’s a, it’s a it’s a 10 year workout, which everybody can see coming and therefore, whilst negative, it won’t be a surprise to anybody,

James Connor 23:02
and I want to move on now and get your thoughts on. Bitcoin. Your firm has written extensively about Bitcoin as an investment class. And given its huge outperformance in the last couple of years, I want to get your thoughts on this. It’s still up 50% on the year it has pulled back from its high. But and we recently went through this having process but what’s your take on it now?

Ben Laidler 23:24
So I would say we’re still very long term bullish. And I would say two things. One, right now you’re seeing a classic supply demand squeeze. We’ve seen the spot Bitcoin ETFs launched in the US back in January, which have collected over 12 billion of funds. So far, it’s probably been the most successful ETF launch in history. So we’ve seen a big pickup in demand, and then she’ll point the Bitcoin having is just further depressing supply growth, having it but we only have 6% of all bitcoins still left to be issued from here. So this is your classic supply demand squeezing the short term, which is helping prices and longer term. This is a big institutional adoption story. professional investors dominates other asset classes three to one versus retail investors. Crypto is completely the opposite. Retail Investors dominated and it’s still a very small and very young asset class. This year, we have we’re gonna have new accounting regulations in the US which make it easier for companies to on crypto, we’re gonna have new banking regulations, which make it easier for banks to own crypto. At some point, I think we’re gonna see a central bank, step up and own crypto or Bitcoin as part of its reserves. So I think this whole institutionalization story, is still to play out and is going to be very, very significant.

James Connor 24:50
And you also cover the gold sector. What’s your view on gold?

Ben Laidler 24:53
Been more qualified on gold? I mean, it’s been doing well, we’ve had seen new all time highs. The drivers of that Central Bank buying geopolitics people looking for safer havens. But outside of that, I’m just a little bit nervous. The traditional drivers of gold are not in place today. bond yields are rising, not falling. The dollar is strengthening, not weakening, flows into the gold ETFs. We’re seeing outflows not inflows. So I guess I think this is a sort of a low quality gold rally. And I just be a little bit cautious that it really has the legs here.

James Connor 25:34
And so when it comes to speaking with investors who speak to both institutional and retail investors, how do you reconcile the two investments? What are you suggesting investors do between allocating resources toward Bitcoin and or gold will always

Ben Laidler 25:50
say, you know, diversification is the is the quickest route to happiness in your investment portfolio. They both do sort of slightly different things. I think gold is a great diversifier. It’s obviously much more time tested than Bitcoin and has much lower volatility. Bitcoin, I think, has much higher returns and will continue to generate much higher returns, but it does it at the cost of much higher volatility. So I’m very, I would own both, and I will own both in moderation as part of our diversified portfolio.

James Connor 26:17
Then as we wrap up, you are very bullish on the US economy, and also the US equity markets. If there was one risk to your thesis, what would it be?

Ben Laidler 26:25
I’ll give you two. What one is obviously inflation. If it rears its head again, markets see that as a tail risk today, but they absolutely don’t see it as the base case. And if it became so I think markets, you know, that’s the second pillar of this bull market. So I think that will be very negative. I think the second one, which is maybe somewhat less appreciate is just how supersize US assets are US stocks are 65% of global market cap, its bond markets are almost as big, its dominance of the currency market is almost as big, meaning that if I’m wrong on the US economy, if something terrible happens at the election, if debt keeps rising, if the US sort of really stumbles here, it has a completely will have a completely disproportionate impact on global capital markets.

James Connor 27:18
Yeah, and you just touched on debt. We didn’t even discuss that. But is that a concern with you at all the US debt levels around $35 trillion, and growing by $1 trillion every? What is it every 100 days,

Ben Laidler 27:32
so the levels look manageable? The problem is the rate of change and the direction of travel, and the seeming complete lack of political willingness to do anything about it. At some point, there will be a tipping point. And the bond market vigilantes will come back, and they will force politicians to do something about it. I don’t know when that’s going to happen. But yes, it’s absolutely one of those sort of tail risks, which are looks over the shoulder. It’s beginning to feed into things like that term premium discussion in the bond market. I talked about not a huge issue today, but could easily become one in the not too distant future.

James Connor 28:14
Well, listen, that was a great discussion, Ben, and I want to thank you for spending time with us today. And if someone would like to follow you online and read about your thoughts, where can they go?

Ben Laidler 28:23
You can find us on etoro.com or you can find me on Twitter where we publish every day.

James Connor 28:28
Great, once again, thank you very much.

Ben Laidler 28:31
Thank you.

James Connor 28:31
Well, I hope you enjoyed that discussion with Ben Laidler and provide you with some guidance on what to expect in the coming months. As we just discussed, navigating the financial markets and planning for your financial future can be a daunting task. And if you would like help with that process, consider having a discussion with a wealthy and endorsed financial advisor Wealthion.com we’ve aligned ourselves with some amazing Wealth Advisors that can help you plan for your financial future, and you can learn more at wealthy on.com. If you have any suggestions on who else you would like to see interviewed on our channel, please let us know in the comment section below. Once again, I want to thank you for spending time with us today and I look forward to seeing you again soon.