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Macro analyst Mike Shedlock returns to discuss recession risk, the housing market, jobs & a likely new bottom in stocks ahead.


Mish Shedlock 0:00
We’ve had not just two minor negative quarters that we’ve got minus 3% and minus 2.3% on gross domestic income. And you know what, Adam, that number rings true to me

Adam Taggart 0:17
welcome to Wealthion and Wealthion founder Adam Taggart. I’m here today welcoming back macro analyst Mike Shedlock, better known as Misch. To the program. Mike was on the channel here a couple of months ago, a lot has happened since Mike. Mike was on. I think the theme of today’s discussion is going to be despite the real spike in optimism in markets today, the pressure of the underlying stresses within our system still continues to build to pretty concerning levels at this point. Before I jump into the discussion with Mike, I just want to point out yes, I’m in a different background here. I ended up having to fly across the country for a family emergency, I may be ping ponging back and forth between coasts for the next couple of weeks or so. So just asking your forgiveness, and your flexibility in advance of, you know, some changes here on the backgrounds. Hey, Mike, great to see you. You’ve got a little bit of a different background to today.

Mish Shedlock 1:15
Hey, we had some technical issues here. Adam and I both changed things around i So my background is not normal. It’s a microphone issues, camera issues. Anyway, here we are. And yeah, Adam asked me about whether or not I had some news, I do. Gary Brode, at deep knowledge investment invited me to be on his board of analysts. And I’m happy to accept that. And if actually, if you look at the bios of these people, it is a fantastic group. And Adam, I think you need to get Gary on, I think you would be a great guest. And also, I’m migrating off of the Maven off of it’s now called the arena group, I guess. And back to my own website, where I will have more control over comments more control over the layout. That’s happening this week. Fortunately, the URLs do not change. So but there might be some glitches as it takes GoDaddy to move from one server to another. So bear with me on that. I’m going to keep posting but comments are disabled through at least Wednesday on my blog, and we’re looking for a Wednesday rollover from GoDaddy. But it’s still going to be Mitch So wish me the best on that. Technical maneuver, Adam.

Adam Taggart 2:46
Yeah, technical transitions are always they’re always rough. So good luck on that. But I’m sure it’s gonna go smoothly. And yes, everybody continue to go to Mitch talk. Now, it’s just going to be on an even better platform. Alright, Mike, look like I got a whole long list of things here. And by the way, thanks for the recommendation for Gary, I wrote down get Gary Brode on the show. So we’re going to make that happen. So number of questions based upon some of the recent articles that you published on Mitch Real quick, before we get into them, let me just toss the softball. I like to talk to you every time you come on this channel. What’s your current assessment of the global economy and financial markets

Mish Shedlock 3:24
heading into recession? It’s been that way for a long time. And guess what, Adam? Hey, I was early again. I’m always early. This last time I was like, Well, I’m gonna not try and be so early. You know, the US had two consecutive quarters of negative GDP starting 2022. And I said, Hey, we’re not in recession yet. And we weren’t but when consumer spending took a dive, and I think it was April or May of 2022 I said you know, this is it. This feels like it to me, consumer spending went down and it was down for a couple of months and then guess what out of the blue is shoots up against me okay. All right. Well, looks like it’s gonna be third quarter. The same thing happened again. Interestingly four days ago, the the EU announced recession the but they do it differently. They just look at two consecutive consecutive two consecutive quarters of negative GDP they call that a recession. That’s not the way the NBe our does things here. We’ve gotten mixed signals here in the in the US the I didn’t send you this chart but gross domestic income and gross domestic product two measures of the same thing. One of them signaling the economy is fine, gross GDP is gross domestic income is signaling something else. You know, we we’ve had not just two minor negative quarters that we’ve had but minus three 2% and minus 2.3% on gross domestic income. And you know what Adam, that number rings true to me, because when I look at all the part time jobs that are out there, the full time employment has been stagnant. Just a whole number of measures lead me to believe that that’s the real number. The N B E R takes to to an average ism. But even if you average the two, you still get two negative quarters of GDP. But by the time the NBR delays, so like I you know, the recession might even be over by the time they get around to making their assessment. And then we will know whether its GDP is the right one or GDI, or some sort of combination between the two of them. But regardless, the the economy is weakening, and I’ll go back to something that I wrote in August of 2022. And that is the title of my Bose was something along the lines, whether you call it a recession or not, it’s going to be a long period of weak economic growth. I think that’s gonna hit Europe even harder. And China for all this China’s restarting nonsense. Guess what China is struggling to Germany is really struggling and will continue to struggle with deindustrialization of its automotive sector that has been so relying on

Adam Taggart 6:26
All right, great summer their mission and just want to say to what you’re talking about GDP versus GDI. I compliment to you but David Rosenberg feels the same way. We had him on this channel. Two weeks ago, he talked about exactly that. And he said, and I imagined you would say the same thing. If when the NBR comes out and declares, you know, if indeed a recession started this year, he wouldn’t be surprised if we’re already in it. Yesterday,

Mish Shedlock 6:53
I’ve said exactly the same thing. Lacey Hunt has said somewhere comment made similar comments.

Adam Taggart 6:58
Yeah. So alright, so two things one, to your point about kind of like, doesn’t really matter, whatever we call the recession, however we define it. What really matters, particularly for the folks that are watching this channel, is just what’s the lived experience going to be? Right? You know, because analysts and policy wonks can argue all day long about the technical definition of a recession. But when people start seeing their wages, crimped their hours, cut back, maybe losing their jobs, etc, a lot of the type of Fallout you get from a recession, that’s what really matters. So from that perspective, what do you see coming ahead? How do you think this recession may compare to some of the ones that are still in living memory, like a weight or a one or, you know, earlier,

Mish Shedlock 7:43
the direct opposite, and we’ve talked about this before, I expect the the opposite of what happened in 2008. We had people walking away from homes, now they’re walking away from corporate real estate, hotels, and the light. So this is gonna be a different kind of bust here. People weren’t as leveraged in mortgages, as they were in 2008. We didn’t have the liar loans, the ninja loans, all that kind of stuff. The but starting August, people are going to have to start paying back their student debt loans. I think that’s going to take a cramp out of spinning. already. We’re seeing hours caught. I mean, you can look at the headline jobs numbers. Adam, they just they just do not ring true to me. Yeah. I have and if I’m online with, with what Rosenberg is saying, I’m happy because he’s a pretty damn good analyst. Right. The so I wasn’t aware of that. So you know, that’s, that’s good to know. But we have seen falling hours and we will say, Oh, it’s just tack and, you know, look at earnings. Look at this. Look at that. Well, you know, guess what, in 2008, there was this meme out there. But China’s going to decouple from the global economy. Now, everyone believes the US is going to decouple from the global economy. Now, you know, Europe’s currently in recession. Now, so far, it’s weak. But, you know, what are they going to do about you know, they don’t have the policies and the procedures and the tools and Germany’s workforce is aging brutally fast here. So their infrastructure is terrible, their internet connections, I you know, they got buy off the auto sector SAP and a few other, you know, companies now, there’s not been a lot of innovation out of the EU period. I mean, look at artificial intelligence. The EU is nowhere to be found at anything. They’re trying to suppress it. Right. So what’s the driver for growth in the EU? I don’t see One, at least in the US, we can point to some things and say, okay, you know, artificial intelligence technology, the like, you know, Biden’s trying to catch up on with with China on electric cars. The problem there is, you know, where do we get the materials? That was what I wrote about today. And so a very completely different kind of recession. But my my synopsis to the COVID recession, which was it was very short, didn’t even last a full

Adam Taggart 10:33
quarter blink, and you miss that recession? To a certain extent.

Mish Shedlock 10:36
Yeah, it was, it was, you know, two months of negative growth, the but a, an enormous, unprecedented decline in employment and jobs, which I believe was under counted by the way. The so now I think we’re going to see the opposite of that, it’s going to be much longer, much more prolonged, out of fear of stoking inflation. And look at Biden’s policies, I, you know, you can like him or not, but the policies are very, very inflationary. You know, where do we get the metals from, you know, we’re, you know, we have to build out infrastructure, where do we get this stuff? Meanwhile, we’re still supporting, you know, war in Ukraine, you can like that or not, but you you can’t deny that this is going on. So, you know, I don’t know, you know, there’s, there’s some pretty strong elements here of stagflation, if you look at it,

Adam Taggart 11:42
okay. Just to give you another kudos for thinking of like with another smart person had Peter boockvar On this channel last week, and he thinks it similar to you where he said, he doesn’t think there’s a you can’t predict with 100% certainty, there’s going to be a recession, but he pegged it at about 99.99%. Okay, but he doesn’t think it’s going to be an event. Like we just, you know, oh, yeah, economy just crashes, he doesn’t actually think there’s gonna be a coincidence stock market crash, but he just sees it as sort of this slow, prolonged grinding downwards, which I kind of get that same impression. But But clarify if that’s wrong. So when you say it’s gonna be very different, though, from some of these previous ones, from from people’s lived experience to does that? I mean, obviously, it didn’t seem like you think we’re gonna have the housing market, you know, collapse that we had last time around, because there’s a ton of people in houses with very little mortgages. But how about jobs? You know, will we do you think we’ll see continued layoffs building will the employment rate? Well, you and I even have a bet going on this. So maybe I’m asking a loaded question. But what do you think’s going to happen with

Mish Shedlock 12:53
you, Adam? We’ve got this marginal bat, what is it pizza and beer? I think? Maybe he’ll I don’t know, whatever it is, it is. But you thought the unemployment rate will be what five?

Adam Taggart 13:09
I think when we made the bet, which was in March, that I was more pessimistic than you in fact that the employment rate will cross 5%. Somewhere between March we made the bet and next March.

Mish Shedlock 13:23
So I’m, it’s still looking good for me. But you know, these things can change on a dime, you can easily be right. And by the way, everyone, Adam hopes that I’m right.

Adam Taggart 13:33
I absolutely do. I do not want to win this. We’re

Mish Shedlock 13:35
not We’re not rooting for, you know, our positions here. You know, I don’t want there to be a massive rise in unemployment, because I think it’d be painful. And the Fed I don’t think and the reason why one of the reasons why I’m predicting this long, you know, blown out thing it out of fear of stoking more inflation. I don’t think, you know, the Fed is going to resort back to, you know, more QE, you know, slashing interest rates to zero again, I think that’s off the cards. I think we’ve we might have seen the secular low in interest rates, barring some severe economic crash. But one of the reasons why I think there’s there’s rain employment or unemployment, if you look at the last jobs report, this has been going on for a year, you know, on an employment is barely risen and jobs are up like what 4 million or something in the last year. You look at full time employment, it’s only gained maybe a million. I think this ties back into the idea that Rosenberg and I had about a you know, this matches GDI folks, whether you like it or not, it does so The but people, there’s there’s three classes of zombies here. And I wrote about this in a guest post on on deep knowledge investment, my first post over there, we’ve got, you know, corporate zombies that you know, are barely alive, you know, only because they can keep rolling over debt. Well guess what the cost of rolling over that debt is now monstrous. And we’re seeing it in the commercial real estate sector, we’re seeing people walk away, or real estate investment funds walking away from hotels walking away from, you know, apartment buildings, you know, they they got these interest only loans, and it doesn’t make any sense to carry them. Now it’s 7%. But it made sense to carry them at three. So completely different kind of recession. But I don’t think we recovered all jobs, you know, the, you know, in the fast food industries, and, and, you know, the hotels and that stuff. So, okay, I think some of these openings are going to vanish, and ours are going to be caught more so before they lay off any people. But back to commercial real estate, and I knew I’m bringing Daniel DiMartino booth flag here on that. But I think commercial real estate is going to be nasty. And if you look at and I had a, I had a charter or some numbers on this off, the top of my head says might not be exactly correct. But the regional bank exposure to commercial real estate is 28.6% of their loans and investments. The big banks, if the number I recall correctly, is 6.8%. So when we have another decline in commercial real estate, it’s these regional banks, they’re gonna get hit. And we’ve already seen what’s happened to three of these regional banks, right. So what’s the Fed gonna do come in, they’re gonna come in and they’ll do something, they’re gonna bolster this, but they’re not going to be slashing interest rates, like they do move four out of fear of recession. And given Biden’s policies and the push towards, you know, clean energy and the push towards unionization of Biden, you can agree with it or disagree with it. But Biden’s tactics, student loan forgiveness, all of that stuff that’s gonna go by the wayside. I believe that Supreme Court, by mid July, well, we’ll find out and but he’s got a big inflationary push. So which is like, it’s unusual for me to be preaching a little bit of a stagflation message. But that’s kind of what I see here right now.

Adam Taggart 17:59
But it’s so interesting, because I think a lot of people first got exposed to your work back leading up to 2008, where you were really kind of known as one of the bigger deflationists at the time. And now you are a stagflation mist, it sounds like

Mish Shedlock 18:14
I waver. And I know both sides, and I did a post out there and I said, Well, okay, here’s all the stuff on this side, you know, demographic is actually on both sides. Now, you know, we got people retiring, these are skilled workers, they’re going to be replaced with non skilled workers, so productivity rates to go down. So that’s one side of it. You can say, Okay, that’s a little bit inflationary. You can also say, okay, boomers retiring, they’re no longer working, they don’t have that paycheck coming in, you know, guess what, you know, they’re going to, especially the stock market has lower, they’re going to try and reduce expenses. So, you know, everywhere you look at, you know, the, the write off of debt is inherently deflationary. So, you know, I look at that, and, you know, my God, you know, look at this, this is another wave that’s coming. Its way we just have counterbalancing forces here now, we had globalization and and offshoring. You know, that was that allowed the Fed central banks in general to slash interest rates. We don’t have that now. We’ve got we’ve got reshoring, we’ve got Germany is in a much worse than than the United States is. So there’s a lot of forces on both sides. And I look at both of them. And I sometimes I say, Well, I don’t know. And then who’s gonna win the next election? Nobody knows that. And it Are those policies? So do we continue them? Do we backtrack on them? What’s going to happen? So there’s a lot of stuff out there that just has me saying, You know what, I the housing bubble, I was very confident that it was gonna crash. It was gonna be a deflationary event it was. And the resolution of that was the the, the Fed stepped down. And John husband has talked about this too, and is ended mark to market accounting, you know, okay, let’s let the banks, you know, hold the stuff on their balance sheet, you know, at whatever price they want. And off we went. And, you know, the takeoff the liftoff didn’t surprise me because I called it in housing, I called the bottom, I called the top and the bottom of the housing mark. I just never thought that these bubbles would get as big as the, because they did. And that’s up typically the position. I’m in Adam, you know, and most people to these bubbles just always have a way of going on much longer, and they go much further than almost anyone thinks

Adam Taggart 21:09
he can. Thank you. And by the way, the lance Roberts has been reiterating that a lot recently with the current potential new bubble that we’re seeing in AI stock markets right now, where you get companies like Nvidia that are priced at 40 times sales. And he’s like, It’s bananas is that is that’s not a train, you necessarily want to step in front of and start you know,

Mish Shedlock 21:30
exactly. You don’t know when it’s going to add, and and B will retire as well. You know, look at this a crash is coming. Well, I’m sorry, crashes don’t come from overbought conditions, crashes happen in oversold conditions. And, you know, so you know, we need to see a significant decline, and then decline it fails before we can even start talking about crashes. We’re not even close. You know, it’s it’s pretty amazing here, Adam, you know, how this has things lifted off? All right, well, look,

Adam Taggart 22:06
I want to get to some of your more recent pieces. But just to stay on this for a second, you said there’s kind of a lot of cross currents going on which make this future trajectory from your harder to call it and say back in 2008 for you. Do you see it more as sort of a like a patchwork quilt, where in some parts of the economy, we’re gonna see inflation, some parts, we’re gonna see deflation because of, you know, these different crosscurrents? Or is it more you think like, like Felix zulauf described the road ahead for the next decade is you said, it’s going to be the decade of the rollercoaster, where we’re just going to have these great big swings from one side to the other. As you know, things start to deflate and then policy responses push things back up, and, you know, inflation researches and so he just says it’s going to be we’re going to kind of be lurched around back and forth, by the sort of tidal forces over the next decade. Do you have Julie more?

Mish Shedlock 23:05
I like the second one. I don’t think we’ve seen the bottom in the stock market. I really don’t. And, and it’s funny, you know, the Wall Street Journal came out the other day, I don’t know if you saw the post a new bull market, it started well, lovely. Okay, really, you know, it’s possible that it has, okay, you know, you have to be open to the possibility that we’re in a new bull market. But a bull market is not confirmed until we take out the brief previous high. Now, I went back, and recently I posted a chart and one of my blogs, we had two 50% rallies and one 40% rally, while the Nasdaq fell from you know, 4000 all the way down to 700. So, you know, I’m sorry, you know, those, none of those 50% rally started, and 50% rally is a huge rally right here. We’re only talking about a 20% rally and a call of a new bull market. Well, it’s possible. I just kind of doubt it. But certainly, it’s not confirmed. And and, you know, if the Wall Street Journal would, you know, bother to look at that NASDAQ chart from from 2000. They might want to change their mind as what a definition of a bull market is here. So yeah, I think we’re liable to see some swings. We’re we’re in one right now at 20% rally in the s&p. So if we go on to make a new high Well, I stand corrected sorry, the but as for long sustainable growth in the stock market, given my analysis of a long prologue in and out recession for a potentially year ers. It just doesn’t. I’m gonna stick with that forecast. So especially what’s happening globally. So it just doesn’t jive that the stock market is going to take off here and not look back.

Adam Taggart 25:15
Okay. All right. Well, look, I do want to get to maybe a little bit more of your specific market outlook and what assets you think might be wise given that that but let’s save that for a little bit. So, you, you mentioned that you’re here in the States and other countries as well. But a big part of what we’re doing here in the States is to try to, you know, bring some of our supply chains back deck, definitely electrify the transportation grid, right, lots of spending already earmarked for that, and the inflation Reduction Act, that is part of the liquidity that’s going into the system now. But that will be a big wave of spending over the coming years, especially if the Biden administration stays in office next year. And so that’s inflationary in and of itself. But what’s interesting is, there may be some limits on our ability to do that, that aren’t policy related, no matter what policy is, just just finding and getting some of these materials is becoming more and more challenging, and you address this in a recent piece. So if you can just sort of elaborate for folks, you know, these are some of the pressures and stresses I was talking about earlier, what is going on with with materials, right now, some of these critical materials,

Mish Shedlock 26:29
I can’t even pronounce the names of some of these things, I added a cheat sheet up, but it was I we had to switch the layout here. So I don’t have that in front of me. So I’m not even gonna mention some of the names. But I sent you a couple of charts. And if you have time, you can you can work them in. But the the US did an analysis that just came out, I think, a week or two ago, on, you know, what is our risk here of a, you know, what, what minerals do we need, and you go, you know, up and down the line, the US is, I mean, China is overwhelmingly, you know, the the huge source, but it’s not always China, Indonesia, on one and South Africa, you know, on another one Zimbali is, you know, as as a huge piece of, of, of one of these minerals. But, you know, there’s a lot of geopolitical risk here, especially with a you know, Russia, you know, is a producer of some of these, with Russia and China, you know, producing these minerals and, and President Biden, you know, and before him, you know, Donald Trump, you know, antagonizing, you know, not Russia, so much, but but but but China with trade wars, and we’re, you know, continuing these, these trade wars, Taiwan is very much in, you know, in the picture, you know, does this China and shut off the supply of some of these rare earth minerals? Now, I took one of the charts that, you know, of, from that energy assessment, and I put my own spin on it and said, Okay, there’s two things, you know, how critical is this, you know, to the US, or, you know, to energy, global energy. And then what are the supply risks, and I multiplied those two things together and came up with a number, I don’t know if this is a valid approach or not, but, you know, the critical list that I came up with, might be a little bit different than, but pretty much they were in line with, with what the Department of Energy, you know, came up with, but you look at some of these things. And, you know, there’s a risk of running out of supply by 2025. You know, if we don’t step up production, well, the US, we’re not going to open a mind here, Adam, in the next two years, I you know, I think it takes what, eight or 10 years to open your mind. And then plus the, you know, the permanent, you know, the imagine the greens going, you know, not soy, if we start opening, because a lot of the toxic sludge that comes from producing these minerals, you got to get rid of it. China is one of the few places on this bulb that’s, you know, willing to process these things. And, and, and, and get rid of all that. So then, you know, what does that say to our supply, especially if we start really ramping up, like Biden wants to do what we’re going to do. So I don’t see and I never did, where these minerals are coming from. And now, you know, it’s not just me saying this. We’ve got actually official government documents saying, you know, hey, what, you know, look at this, you know, there’s, there’s at least a handful of things here that are, you know, in critical supply, and China controls all of them. So, you know, what do you do?

Adam Taggart 29:59
Just To again, underscore your point there, we’ve had both Rick Rule and Tommy caster on this channel who are both natural resource investors. And you know, they’ve been banging the drum for years that even just a current growth rates, current demand, we’re going to be hitting some pretty serious supply shortages going forward over the next decade or two, because we have under invested so much in capex in the mining spaces for so many of these metals, also seems relatively true for just you know, main energy, main fossil energy sources to oil, etc. So, they’ve really been warning about this. And now we’re beginning to see those chickens come home to roost. And like you’re saying, like, you know, we’re actually finally seeing the government publicly begin to admit how critical that the supply forecasts for some of these things are. So anyways, yeah, just to me, that just seems like we talked about some of the inflationary things from the existing plans to invest in infrastructure, but that may be sending some of the cost of these materials skyrocketing, because it’s

Mish Shedlock 31:06
even worse, it’s even worse. Adam in Germany, you know, they don’t have they don’t have big deserts in Germany, you know, where are they going to put the solar panels, you know, they’ve they’ve actually started mining, you know, their, their percentage of coal is like, up to, I’m going to guess a number here is something like 33%, almost a third of the they, they kicked out nuclear, and Germany is one of the if you look at the Fall structures, anything gang is one of the safest places in the world to build nuclear. Well, they killed that. And you know, to supplement their energy needs, what are they going to do? Solar is not going to work, they’re

Adam Taggart 31:49
starting to wrap up right now, what they’ve been doing is burning more coal than they burn. Yeah,

Mish Shedlock 31:53
exactly. That’s why, you know, they, in the last three years, their reliance on coal went from going to, you know, throw out some numbers here that are approximate, learn from 28%, back up to 33%. Now, so what are they going to do? And, and, you know, Germany’s a big export nation, but they’ve got a huge, you know, trade deficit with Germany. And their car situation, one of the things, the few things that they did export to China was their cars, but China is now taking the world leading in car export, I’m gonna be buying German cars anymore.

Adam Taggart 32:38
Wow. All right, crazy. All right. So to continuing this, this stagflation theme here. You know, the cost of living continues to rise pretty dramatically, you’ve written two pieces recently I want to touch on. One is the fact that it seems that the consumer you know, they’re still hanging in there spending wise, although retail spending, you know, hasn’t been super robust. But it seems what they’re doing to be able to enable continuing that spending as they’re shifting how they’re financing it, right. So they got, you know, stimulus during COVID, they had forbearance programs, you know, there was there was, you know, child credits, or all sorts of sort of special, extraordinary measures that were being taken to support folks during the pandemic, most of those are gone. Now, there’s a few important ones that are still around that are gonna end soon, like the student debt, it’s gonna go back into repayment, as you’ve been mentioning, and so what we’re seeing is, is that as people are draining those excess savings that they had, they’re now turning to revolving credit. And I think credit cards are now back at all time high in terms of just outstanding credit card debt. But they’re now also I believe, charging all time high interest rates to

Mish Shedlock 33:57
is the, the chart is misleading and accurate, both the we’re at an all time high in nominal terms in credit card debt. But that’s not adjusted for either population or inflation. And so, you know, I posted a chart on on my blog on this. So we’re still inflation adjusted. We’re below pre pandemic level we’re even below I think, are right at the level, you know, all the way back in like 2007 I think, but the trajectory is unbelievable. You know, the the the steepening the rate of increase and expansion of, of consumer credit and especially credit card debt. What’s that say? I think it says that, hey, you know, whatever savings anyone had, you know, as as far as Out of all the forbearance programs, you mentioned, of all the free pandemic aid, we had his run off that the money has been spent, somebody will say it’s still out there. But, you know, a lot of this was fraud and gotten in the hands of people who really didn’t even need aid. And guess what they’re not going to spend that they’ve already invested in the stock market or whatever, it’s not going to be consumer spending. If that money is indeed ever going to, you know, come back into the economy at all. So that is wearing off right at the same time, that people are going to have to start paying back their student loans, and people and the rent forbearance is now gone. So it’s, it’s a telling chart, perhaps it’s not as bad as it looks, because we compare it to previous recessions were inflation adjusted, we’re still not at an all time high. But the steepness of the how fast this is rising is very scary. I think that’s probably the more important takeaway out of this. So, you know, that’s kind of telling, something’s got to give, you know, either people need to start making more money. And I think wage growth is starting to level off or come down. And certainly you look at people job hopping, you know, for a long time, people were, you know, just willing to go get another job. And we’re almost back to normal levels here.

Adam Taggart 36:40
Pretty quick.

Mish Shedlock 36:42
So that’s what I’m talking about, you know, it’s

Adam Taggart 36:43
a great resignation.

Mish Shedlock 36:44
So, you know, an outright quit, you know, they were, you know, taking another job getting a higher rate, well, people have stopped quitting or actually not stopped, you know, people we are down almost to what we were pre pandemic, it’s still elevated, because it was elevated that, but, you know, maybe this is sort of a new normal, I hate that phrase, with, you know, all the, you know, Boomer retirements we have, so it’s one thing, it’s like, still supporting wage growth, but nowhere near like, it was all these things, you know, all these are just tiny little pieces of the puzzle that just, you know, fit together that paint a picture that say, you know, what, these GDP numbers just really don’t look, right.

Adam Taggart 37:38
Yeah. Well, I hate to ask the question this way. But like, you know, if you look at this, and you see, you know, cost of living going up, right? You see, you know, wage inflation, which which has increased, it’s still negative on a real basis. And we’re beginning to begin to see weakening in the labor market, I had a chart in a previous video last week, showing that the labor leverage ratio is has been declining for a while. And that’s because we had great resignation. It’s funny, you know, we had this pandemic, which we shut down the global economy, but we put so much juice in there, that a lot of people were like, Hey, I’m, the job I have sucks, I’m gonna go sit on the beach for a while I’ve got some money, or my portfolio did really well, because of all the stimulus. And I’m going to retire a few years earlier than I thought it was going to right now that that that excess is coming out, people are having to, you know, the now have kind of near record low savings rates, people are turning to the credit card to make ends meet, they’re no longer able to kind of demand as much as many purchasers is, you know, they can’t be as aggressive with employers as they were in the past. I said several years ago, and I’ll just say it here to keep it on the record, that I believe that the great resignation was going to eventually devolve into the great, please, may I have my job back movement? And that that may be the case here. But but just Yeah, so there’s all these all these forces that just show it’s getting harder for the average consumer, right, things are getting more expensive. They’re now losing leverage in the workforce. They’re falling behind in a real basis, their personal debts are going up. It’s not a great trajectory. And I kind of think especially on the cost of living side of things. Yeah, it wouldn’t wouldn’t surprise me if CPI gets back down to you know, below the Feds 2% or less target level at some point because some of the other deflationary forces that are going on in the challenges to growth like you’re talking about with GDP, but I make an analogy with like, What Happens all the time in commerce like with the airlines, right where oil prices go up? So airlines, you know, they remove things they used to give you you know, we all remember used to get the blankets and pillows for free and that was all fine. But then they put on these excess costs because they Say, Hey, oil prices are so high, we need to have this short short time short term temporary, you know, fee increase, because we need to be able to still, you know, afford to fly with afford to fly you right? Then oil prices come down, those fees never go away, those removed parts never come back. Right. And so it’s always sort of just evolving customer experience. And I believe people are out there saying, Gosh, inflation has been horrible, you know, I just can’t wait for the day when prices come back down to make sense. I think in a lot of cases, prices aren’t ever going to come back down to pre pandemic levels. And a lot of this inflation, even if the growth slows, or even goes to zero, we’re not going to roll the car the date back and food’s not going to cost what it was. Cars are going to cost what they were housings not going to cost what it was. So I see this concerning, you know, continued squeezed for the consumer going ahead. I’d hate to paint such a dire picture. But but do you feel the same? Or do you look at it differently?

Mish Shedlock 40:58
No, I think you’ve you’ve hit it there pretty hard. Food is possible. But But rent? I don’t, I’m really doubting it. And rent is 33% of

Adam Taggart 41:15
the CPI CPI calculation. Yeah, yeah.

Mish Shedlock 41:18
So in one way or another shelters, 33% of is we got owners equivalent ran and ran. And but I mentioned the word zombie, but I never finished that point earlier. The the normal meaning of zombie is someone who is a corporation that needs low interest rates to keep rolling over the debt because they don’t have enough profits or any profits to survive, other than by continually rolling over debt, the zombie Corporation is going to go under, but I came up with two more classifications of zombies. And and it’s, it’s, I define them as someone who is running out and wants a house, but is just finally realized, Hey, I’m never going to be able to afford this house. And then we got another class of zombie, someone who even owns a house, but is got a 3% mortgage rate. And that person can’t, you know, you know, wants to move, good, maybe even afford to move, except they don’t want to give up their three percenters below 3% mortgage for a 7% mortgage, we have a lot of people trapped. And meanwhile, corporations are starting to demand more people come back into the office. So I think this impacts the quick ratio here, you know, the, the this combination of, of factors. So, you know, people can no longer work at home, you know, okay, if they’ve got a house close to where they can afford to move, all of these things, if you look at it, it’s it’s housing tends to drive the economy into recession and out of recession. If by some miracle it didn’t this time, then it’s just we’re not going to have this recovery, as long as mortgage rates are at 7%. Right? I even doubt 6%. So it’s slowing down household formation. I didn’t write about this, but I’ve seen other people write about it. The US birth rate is what the lowest ever I did I see that report recently. So you know, that says something to household formation, the ability and desire of people to have kids because they can’t afford them. You know, they can’t afford a house. You know, they’re worried about school, you know, especially if they live in a large city. I mean, the education system, and just to pick to Chicago and San Francisco is horrendous. The but you know, so they’re stuck. And I think people are going to be stuck for a long time. They’re not going to walk away like before, they might even have a little bit of paper equity in their house that it’s hard to cash out, but they just can’t afford to move because they can’t afford to hire the mortgage rate. And if my analysis is correct, out of fear of stoking inflation, the Feds not going to be able to put the pedal on the gas on QE and mortgages. This is a huge problem over the Feds making, you know, they’ve never admitted this. They’re not going to but the Fed really really blew it and put us into this zombie like economy. And yeah, we might have a roller coaster as they try and extradite themselves from this mess. I’m just failing We’re gonna see how they extradite themselves from this mess, Adam.

Adam Taggart 45:02
All right, yeah. Well, you know, that’s what occupies a lot of our time and attention here on this channel is trying to figure out what’s going to happen because in many ways we are kind of fed, it really has kind of backed itself into a corner. So real quick, just to finish up the housing topic here. You had written an article recently about the proclamation that there basically are no more starter homes left in America, because the pricing is just too high for new homebuyers, first time homebuyers to get to get into the market. I totally understand that. I’d love to have you make any commentary on that you want? But my question is is. So I’ve asked this a couple of times recently, some of our experts you know, the transactions have really slowed down, right? It’s hard to buy and people don’t want to sell like you’ve just said they’re they’re sitting on those little mortgages. I mean, housing in general, is stickier than than financial assets, right? The price of the housing market moves more slowly than the price of stocks, just because, you know, it’s a much less fluid liquid asset, right. But transactions still happen, right? Even in even in a slow market like now. There’s an organic amount of transactions as people die, get divorced, have to move for jobs, semester jobs, etc. Right. And over time, those should, you would think that would be the price discovery mechanism. And, you know, given that mortgage rates are a lot higher now. And some other factors we could easily talk about, we would expect prices to be coming down with those organic transactions, even if they’re a relatively small percentage of the market, what they eventually bring the stock market down if interest rates status high, or there are other factors at play, that might keep things elevated.

Mish Shedlock 46:54
I I’m not sure that housing is is tied that much to the stock market, other than perhaps in the reverse sense. If, if the stock market does take a dive, you know, de negative, you know, I, you know, i Hey, you know, I can afford to do this, that and the other dishpan, buy more, and as I upgrade my house, buy new furniture, whatever. So, in that sense, I think they’re related. But I do expect home prices to decline. But what’s interesting is, I think the last at least two months or is it three? Case Shiller said home prices have risen month to month now wasn’t every market. So you know, and that’s really not a good market for the Fed, by the way, because if things stabilize here, we’re there we’re stabilizing at a point of unaffordability you know, is like point 2.2 homes that this article they surveyed the what the average renter was making and and what a lower tier, third tier, starter home starter home, but they defined as as bottom third of price in the area. Okay, so point two homes did this analysis of who can afford a starter home? And they looked at 100 markets, and in precisely zero, could the average person running now actually afford to go out and buy a home priced in the lower third? So, you know, that’s pretty telling, and that’s again, telling on on household formation and just think of all the things that goes into buying a house, you know, home builder builds a new house, new appliance, carpeting, you know, paint you, you buy an existing house, you refurnish you put in new cabinets, almost certainly new carpet, you know, in landscaping, you know, you upgrade the lawn, you know, curtains, all that kind of stuff. That’s activity, that’s just not going to happen,

Adam Taggart 49:20
right? It’s a multiplier effect of construction. You take that construction away, you get this multiplier effect going in reverse, right?

Mish Shedlock 49:31
Yeah, actually, if you total it up, housing is not that huge of a portion of GDP. However, it’s a cyclical portion. You know, you know, government spending doesn’t change much except go up every year, right and go, government spending adds to GDP. Now we can debate whether or not it should and this is another reason why this may be an important point here. We’re GDPs you No inflated, you know, we build bombs, we drop them wherever doesn’t matter, we were always seem to be dropping bombs somewhere. Okay, so you know, this added to GDP, you know, so we got product, we’ll use the product, it totally God is wasted, we got nothing out of it we made enemies in the process. And yet they’re telling me that this added to GDP. So you know, I think you know a better term for GDP is grossly distorted procedures rather than gross domestic product. And I don’t know if Rosenberg has ever done this kind of analysis or not. But you know, maybe this is what GDI is saying versus what GDP is saying. But anyway, you know, nowhere do we account for the amount of money we spend that we’ve just totally wasted. It just adds to gross domestic product. So you know, there’s something wrong there.

Adam Taggart 50:58
All right. Well, I got I got two questions to ask you in our last couple of minutes here as we wrap things up. The first one, why don’t we make the first one your market outlook, which is just sort of what do you expect ahead for the the second half of the year? And are there any assets or strategies that you think would serve the average investor to consider right now, given where you think the markets are headed,

Mish Shedlock 51:22
I’m still, you know, if you want to be invested in stocks, I still like foreign stocks over us, I think the US market is grossly inflated. One of the things that happened recently, and I wrote about it on my blog, was we filled gaps and you know, the gap is where the stock opens above the high of the previous day and stays there or below the low of the previous day and stays there, like 14 gaps that have all been filled. Now, the only two gaps that remain are below where the stock and it’s kind of interesting here with you know, this Nvidia rally the the s&p gapped down eight months ago, you know, and it’s now taking eight months to fill that gap. And I was wondering, you know, is this gap gonna fill but I swear to God, Adam gaps, just act like magnets. And sure enough, we went back there. So anyone who shorted that breakdown and didn’t take their profit somewhere along the line, and huge chances to do so. is now back to even and we see this on gap ups too. Now we have two stacked open gaps. One at like, 39. And one recently, I’ll say 41. The, the on the on the SMP. So I think these I’m positive, these gaps are going to fill so and I would guess sooner rather than later, then we can talk about, you know, what happens then. But I don’t think the low is in, you know, not by a longshot. And if for some reason it is then it’s this muddle through kind of thing, you know, that’s not going to do pension funds, any good if, you know, they’re expecting 6% returns, and all we’re getting is this, you know, this sideways range movement, I still think lower lows are coming.

Adam Taggart 53:25
Okay. lower lows are coming in, I’m going to assume sort of like boockvar thinks the economy is going to be sort of in a slow grind downward from here. Are you expecting that the markets will hit those new lows kind of in a slow grind as well? Or do you think it’s going to be a bit more?

Mish Shedlock 53:42
No, that’s gonna be more depending on euphoria over nonsensical announcements from the Fed and stuff like that, you know, Nvidia coming out, you know, with earnings, exuberance over over artificial you know, a intelligence AI, the like, but you know, one observation is bull markets don’t end on bad news bull markets end on good news. We’ve had a heck of a lot of good news lately.

Adam Taggart 54:10
They’re just so funny, you know, a couple of months ago it was not the case but but all of a sudden it’s everywhere.

Mish Shedlock 54:15
Right? Exactly. So that was always skeptical is Oh, we got all this bad news. But we had bad news and that stock market didn’t drift lower and I’m sitting here Yeah, okay, look at this gap up here. This sucker is gonna fill the now I feel it in reverse. The gaps are below and and their gap ups. Anyone who bought that exuberance and hold on is probably going to regret it. I would suggest that about Nvidia, Apple, any of these, any of these companies, I think the stock market is grossly overvalued. But you know, guess what I mean, if you fight this stuff, you lose money, though. It’s kind of hard for the You know, money managers who don’t participate in bubbles will lose clients. So it’s just what happens.

Adam Taggart 55:08
Yeah, you’re you’re forced as a money manager to follow the the John husband paradigm where he says, you know, manias force you to make a decision or whether whether it looks like an idiot now or look like an idiot later. Right. All right, last main question for you, which is, you know, we’ve talked a lot about a lot of pretty pessimistic stuff in terms of the direction of the economy in the future for the consumer. Just as an exercise, I want you to try to put on a bear hat, sorry, a bull hat for a moment and just say, you know, if the future is different from what, what we’ve been talking about here, and it’s much better than what we’re talking about here. Do you have any sort of sense of, of, you know, what could be those catalysts? You know, if I, if I had to say, Miche, make the best bull case you can make right now? What would you be doing?

Mish Shedlock 55:59
That’s pretty easy. Um, the the US is certainly leading in artificial intelligence. Europe is lagging. The the US is ahead of, especially with Tesla, ahead of Europe, on electric cars, like Elon Musk or not, I mean, the man’s a genius, actually, the and the US economy is still one of the most freest open economies in the world. So the Compare and contrast that with the nanny Kratts in the EU, and you have a different kind of thing.

Adam Taggart 56:44
But that is that sort of the Brent Johnson argument that capital flows will continue to come into us, because even though it has its problems on a relative basis, it’s way better than a lot of other places.

Mish Shedlock 56:54
Yeah. And look at China, the demographics in China are sinking, you know, pretty fast here. So just, you know, everyone thought that not me, I was not in that camp. But most people thought, you know, China was going to rule the world. And maybe they do still, but it’s always seems to be right around the corner. And now, it doesn’t seem to be the time, they still got massive property bubbles in China that they’ve not extradited themselves from. And they’re still relying, you know, on exports, you know, maybe they can do that with EVs. But if Biden and you’re put high enough tariffs, they won’t. So the, you know, those are the factors. That’s the bull case, and it’s considerable actual, the the US is still the best of the lot, I think pretty much that sums it up, but and is leading, you know, in artificial intelligence, China, probably number two, and, and Europe is trying to suppress it. I you know, so if you want to, you know, a basket case, you know, look at compare the US to Germany.

Adam Taggart 58:21
All right. Thanks, Mike. And just for viewers, I am still working on getting an AI specialist on the program here to really dive in deep into that topic. Alright, Mike, look, we talked a little bit about your site at the beginning of the of the interview here. But again, for folks that have really enjoyed this discussion, want to follow you and your work, where should they go?

Mish Shedlock 58:38
It’s still and this is the good part about the move. And just to recap, if you’re joining this video at the end, or Miss Miss Miss the beginning, or I’m moving Mitch, back to WordPress from the Maven, but the URLs are staying the same. So hopefully no links get broken. Anything like that. That’s happening this week. Comments are shut off on my blog. And I’m going to be doing more guest posts and I offer you to add them to provide some for me. If you’ve got anything from from your fantastic, you know, Collection of Interviews you want me to post I’m open to that. Gary Brode at deep knowledge investing invited me onto his board of analysts, I’m there, he’s going to be doing some actual investment ideas. You know, one of the criticisms one blog over the years is I just talked about the macro picture. I never said you know, do this don’t do that people want investable ideas. So Gary’s gonna provide some of those for me. I’m going to cross posts on my macro economic stuff on his site. And Adam, you’re welcome to join this party, if you would like.

Adam Taggart 59:51
Thanks, Mike. And that’s a great compliment, actually, between your content there and Gary’s, I appreciate the offer and I will hopefully be able to take you up on it. miss you and I have known each other for a long time, back in the days where I used to write a lot, and I just don’t have much time to write anymore with all the interviews that we’re doing here. But I would love to get the opportunity occasionally when I can to pull back at the keyboard and do something that’d be really fun to post it on your site. And again, maybe when we have a particularly good interview here, I can do a write up around that send it to you and ensure that we exactly

Mish Shedlock 1:00:24
that kind of thing. I’m I’m looking forward to I always lean on. And I don’t see things exactly the same way in crypto, but we see some things like there. I mean, I don’t know what’s going to happen. But I think glenolden is brilliant. And I look forward to seeing more of her work. And, of course, I follow Danielle DiMartino booth real close on on Twitter. So you had a lot of amazing guests, and people need to subscribe to your channel to see them.

Adam Taggart 1:00:55
You’re too kind. Alright, well look, in wrapping up here. Two things, folks, one, Mike just you know, did a phenomenal job of walking through all the challenges that the economy and the markets have long ahead of them. If you are feeling a bit overwhelmed about how to position for all of that, you’re not alone. In fact, most people are in your camp. As always, we recommend that you work under the guidance of a professional financial advisor, but particularly one that understands and takes into account all the issues that Mike and I talked about here. If you have a good one who’s doing that for you and building a personalized portfolio for you around that and then executing it for you. Great, definitely stick with somebody like that because they’re rare. If you don’t have one, or if you’d like a second opinion from one who does, then consider scheduling a free consultation with a financial advisors that Wealthion endorses to do that only takes a couple of seconds, just go to Fill out the short form there. Again, those consultations don’t cost you anything. There’s no commitment to work with these guys. It’s just a public service they offer to help as many people as possible. And if you’ve enjoyed having mike on this program, we’d like to have him come on here again in the near future. Please do me a favor support this channel by hitting the like button. Then clicking on the red subscribe button below as Mike encouraged you to as well as that little bell icon right next to it, Mike, it’s always great having you on the channel, buddy. Thanks so much for coming on. I look forward to having you on again soon.

Mish Shedlock 1:02:14
Adam. It’s a pleasure. And we go back to what 2006 or something we’ve been

Adam Taggart 1:02:20
I six or seven and it’s been that long. It’s been that

Mish Shedlock 1:02:23
long and there’s gonna be more coming up exciting announcements from Adam and I you can count on it. All right,

Adam Taggart 1:02:29
buddy. Thanks so much everyone else thanks so much for watching.

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