There’s a lot of disagreement right now about where the markets are headed.
Much of Wall Street is hoping the rally from the first half of the year will re-ignite, and there’s a fair amount of technical analysis suggesting it very well may.
But more investors are starting to worry about the impact of today’s bond yields. Suddenly, talk is everywhere about how high they are and fear is growing that they may still rise materially higher.
And of course, fundamental analysts have been warning for quarters now that the lag effect from central banks’ historically aggressive rate hikes and balance sheet reduction will be arriving in force soon — sure to drag economic growth AND financial asset prices downwards.
So what’s most likely to happen from here?
We’re fortunate to be joined by analyst Stephanie Pomboy today. She’s CEO of MacroMavens and at the top of the list of most popular experts with the Wealthion’s audience.
Follow Stephanie at https://macromavens.com/ Or on Twitter at @spomboy
Stephanie Pomboy 0:00
When the lagged effect finally lapses and we feel the full brunt of the rate hikes, the impact on the economy and then the corporate and household credit situation will be so severe that they’ll take rates down dramatically, but we’ll have to get a lot of pain before that pivot and the markets don’t seem to be anticipating the pain before the pivot. They’re just anticipating the pivot
Adam Taggart 0:28
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. There’s a lot of disagreement right now about where the markets are headed. Much of Wall Street’s hoping the rally from the first half of this year will reignite and there’s a fair amount of technical analysis suggesting it very well may. But more investors are starting to worry about the impact of today’s bond yields suddenly talk is everywhere about how high they are. And fear is growing that they may rise still materially higher from here. And of course, fundamental analysts have been warning for quarters now that the lag effect from Central Bank’s historically aggressive rate hikes and balance sheet reduction will be arriving in force soon, sure to drag economic growth and financial asset prices downwards. So what’s most likely to happen from here, we’re fortunate to be joined by analyst Stephanie Pomboy today, she is CEO of macro mavens, and at the top of the list of most popular experts with the Wealthion audience. Stephanie, thank you so much for joining us today.
Stephanie Pomboy 1:29
Well, thank you. I don’t know if that’s true, but I’ll take it.
Adam Taggart 1:32
Oh, that’s that’s the most true thing in the intro. Right? That one you can take to the bank. Stephanie. Like thank you for coming back on the program. We were lucky enough to have you interview Jim Rickards two weeks ago about the whole bricks, new currency thing. Very popular video. So thanks for doing that. But in the wake of that, everybody said, Hey, that was great to sort of see Stephanie interview, Jim, but we want to see Stephanie interview. So thank you for coming on to do that. I got a lot of questions for you here. I know, there’s a lot that’s been going on that you’ve had a lot of strong reactions to. And I really want to surface that in this discussion. As we get our way there. Can we start with just the general high level question, I’d like to kick off my, my talks with you with Stephanie, which is what’s your current assessment of the global economy and financial markets?
Stephanie Pomboy 2:24
Well, well, Tom is no great shock to you to learn Adam, that I am still in the recession camp, I haven’t caved and decided that we’re going to have no landing and that the rally that we’ve seen so far this year is gonna sustain itself through the rest of 2023. And on into the future. I think that this is sort of a classic example of certain natural human behavior where the longer time goes without an incident, the more and more people become convinced that you will never have an incident or accident in this case. And so each day that goes by where the recession thesis doesn’t materialize, people become more and more bold. And meanwhile, each day, as you and I have talked about forever, these fire rates are introduced to a whole new swath of people, you know, these fire rates is, you know, I love to state the obvious, but rate increases only impact when you actually have to pay them. So until you have to get a new mortgage, or as a corporation, roll your debt, or as the federal government roll your debt, you don’t experience any pain from the higher interest rates. So these are the long and variable lags that everyone talks about. But just because they haven’t materialized yet, doesn’t mean they’re not going to and in fact, I think they’re going to in a very meaningful way. And we are, you know, you and I can talk about this, we are starting to see plenty of evidence of how vulnerable the weakest links in that credit chain are to these higher interest rates. So I think that story is very much in front of us. And this market feels like it’s you know, rallying on hope, and very little of actual fundamentals.
Adam Taggart 4:17
All right. We’re definitely going to get into the lag effects. I have joked often on this channel, I’m going to change my name to animal IGERT just because I’ve been beating the drum like you just keep people aware that they are going to be inevitable here at some point. You I know Stephanie, love a good analogy. Probably use this one for you in the past. I think I used to use it in regards to the Fed keeping interest rates artificially low. But I think today you can kind of apply it to the recession on switches. You know, the further and further people go out on on thin ice. As long as the ice hasn’t cracked, yet they begin to get more and more confident that it’s not going to right And they start treating it with a confidence of concrete. And of course, that oftentimes tends to make people influenced them to make very speculative decisions or more risk seeking decisions oftentimes right at the wrong time. Right. Right. Right, right before the the ice crack. So we’ll dig into that, as we get into kind of your thoughts for why you think a recession is likely here. If we can, though, I want to, I want to ask you about a recent comment you made. As a jumping off point here into the discussion. You said that the two biggest issues facing the markets right now are the efforts that the Bank of Japan has made around adjusting its yield curve control efforts. And then the second was higher oil prices. And I believe you said Everything else is secondary. Why do those two have primacy right now?
Stephanie Pomboy 5:52
Well, let me just preface this by saying that, obviously, you know, the Fed rate hikes are the preeminent issue. But what’s new in the last month is this drag from the Bank of Japan’s adjustment, and its yield curve control, and the higher gasoline prices or, you know, oil prices in general, but I was thinking specifically about higher gasoline prices and the impact they’re having on consumers. So, as relates to the Bank of Japan, you know, it’s no secret that Japan has been the marginal source of financing for global carry trades, not just for the last several months or years, but for more than a decade at this point. So we have built up this kind of institutional culture around being able to always access cheap financing, and yen, and then take that free money essentially, and speculate in anything you want all over the world, whether it’s, you know, Indonesian real estate or junk bonds here in the US, or you know, in video or whatever your your flavor of the month is. And what the Bank of Japan is doing right now, is creating so much at a minimum, creating so much uncertainty around the ability to continue to source that cheap financing, that I think that’s going to have a major impact on global liquidity, that the markets aren’t really acknowledging just yet. And I one of the reasons I felt like that was so important is that I noticed until the last two trading days, that the peak in the s&p was the day after the Bank of Japan effectively doubled the ceiling on the JGB yields, which, you know, in this liquidity context is a real aggressive tightening move. So, you know, I’m not a market technician, but it struck me that those two things were more than just coincidental. And, you know, we’ll see how this fleshes out, because obviously, you know, you need to be a real expert on Japan and monetary policy to be able to hold forth on whether or not this is going to be sustainable, and how they’re going to be able to manage what they’re trying to accomplish with this yield curve control. But as it stands right now, what they’re doing, I think, at a minimum is creating real uncertainty. And uncertainty is the enemy of liquidity. So I think that’s a factor that people need to pay attention to. And then as relates to gasoline prices, again, you know, just as an impact on consumers, here’s another one where you can see a really clear relationship. And the relationship is between gasoline prices and consumer sentiment. And, you know, we saw this increase this sort of surge in consumer sentiment and consumer confidence in the month of July, as those lower gasoline prices started to, you know, register. And then no sooner did the gasoline prices turn back up, then the University of Michigan survey slumps back over. And in fact, I’ve done a lot of charts overlaying the relationship between gasoline prices and sentiment, and it’s a really, I mean, very hard to tell those two lines apart. So I think that’s a very important factor, as we get into this back to school season, and then ultimately into the holiday season, you know, depending on whether the gasoline prices sustain these higher levels, you know, given what we’re seeing in terms of our domestic energy policy, and then recently, you know, as you mentioned, that BRICS conference in in the invitation of Saudi Arabia and Iran and effectively 80% of the oil producing countries into that consortium, it’s hard for me to see an environment where we’re going to get lower oil prices anytime in the near future.
Adam Taggart 10:00
All right. So I’m looking forward and a bit to talking to you about kind of, you know, the state of the US consumer, and what we should expect from them going forward. I’m gonna give a little spoiler alert, I don’t think you’re super optimistic. And obviously high gas prices just make their situation even more compromised. But so if I can sort of summarize what you said, the the big factor, if we imagine the economy is a balloon, and let’s say a balloon that is struggling to maintain its its level in the atmosphere, the big factor, obviously, is we got the Federal Reserve and other central banks. They’re tightening up the force of gravity through their rate hike campaigns and their quantitative tightening, right. So they’re increasing the force of gravity that’s trying to pull that balloon back down to earth. And it sounds like, you know, the, from your perspective, the Bank of Japan’s move, and these higher oil gas prices are like placing two additional anvils inside the balloon. So the Feds pulling it back to Earth, and we’re making it heavier. So we’re making that pole even even more compelling. I just want to mention that. Sorry. You’re nodding as I was saying that. But if you disagree, chime in, right when I finish here, Luke, Roman, I just interviewed him. And he also said, Hey, there’s been, he said, four destabilizing factors that have recently happened. And the two you mentioned were to his four. The other two was the Fitch downgrade of the US credit rating. And then the fourth was Janet Yellen announcing that the Treasury is going to borrow another 1.9 trillion in the second half of this year, basically, dramatically increasing the supply of treasuries which some people fear may push, treasury yields up even higher. So curious, do you think looks to other things are I mean, there’s they’re introducing additional uncertainty, which you said is, is sort of, you know, what, what markets do not like to say what liquidity does not like to say?
Stephanie Pomboy 11:57
Absolutely. Well, first off being and company with Luke is always a wonderful place to be. So I’m happy that I got to have this score. At least I get half credit. But no, and I agree on number three, to a certain degree, I think, actually, let me say, I wouldn’t agree on the on the Yellen, Treasury financing thing as a major one. I think the Fitch downgrade is interesting. I’d love to talk to you in more detail about that. Because I think, ultimately, you know, the reasons why Fitch decided to downgrade right now speak more to situation in the economy, that people really missed it, you know, there’s been a lot of sort of belated focus on the impact of higher interest rates on our deficit financing needs. And that seemed to be the takeaway from the Fitch downgrade was, Oh, holy smokes, look, what’s going to happen to the deficit as we have to roll all this paper at higher interest rates? And how quickly is the deficit going to, you know, geometrically explode, and you see on Twitter, now everyone’s doing the math, and they’ve got these doomsday charts and whatnot. And I’m not dismissing that as an issue. But I think it’s kind of interesting, again, is sort of just a thought experiment, that there’s so much related concern about our ability to finance our deficits, but there is no similar concern about corporations and households, and how they are going to serve as debts. And they don’t have the luxury of a printing press or the power of taxation. So
Adam Taggart 13:35
you know, they don’t have a borrowing capacity either. Exactly. They’re being cut
Stephanie Pomboy 13:39
off from access to the funds. So, you know, I think that is my sort of selfish takeaway from it, because I’ve been really focused, as you mentioned, on the impact of these higher interest rates, on corporations in the household sector. And frankly, I have, maybe people would view it as an intellectually lazy view about the problem of the federal government. And that is, I think the problem is going to be solved by the Federal Reserve going back to quantitative easing. You know, I kind of cop out because I feel like all the reasons that I know Luke has so articulately outlined, as to why this is completely unsustainable, are the reasons why it’s just a matter of time before the Fed has to abandon quantitative tightening and go back to re expanding its balance sheet. I just, you know, again, maybe it’s intellectual laziness, or maybe it’s a sense of looking back at history and policy makers tolerance for pain. That informs my view that you know, they probably aren’t going to abide any material hit. Should that materialize without reversing course and eight, you know, I related to that I feel so strongly about that view, that I have sort of a contrarian A take on what’s going to happen in terms of Fed policy, where the market is anticipating a pivot in interest rates, I think you will see them pivot on the balance sheet before they cut rates. And I think that this gives them kind of a way of effectively lowering interest rates while maintaining their higher for longer nonsense. Because it’s kind of a cloak and dagger type of move. So it, you know, it’s all ultimately going to result in the same thing, which is lower interest rates, but the mechanism by which they do that might disappoint the markets. And as relates to that pivot, and I’m I just wanted to go back and say when, when we talked about the Bank of Japan and gasoline prices, as those two anvils, as you said, added to the balloon of, you know, Fed rate hikes. I think this, the Fed rate hikes are sort of being dismissed by the markets because they’re so confident that we’re gonna get a pivot. And that makes the anvils of gasoline and boj, even more important, because we can’t anticipate a pivot in those two things. And, you know, the markets are very convinced that whatever impact we have from higher rates from the Fed rate hikes are, are going to be quickly dispelled the moment that they started cutting. But those other two factors are a little bit more recalcitrant.
Adam Taggart 16:30
Sure. So I’m so glad you went here, because this was the literally the next question that I had on my sheet. Was your comment here about saying, look, the Fed is looking like it is going to make good and attire for longer. But you could see it switching to quantitative easing, you know, re expanding its balance sheet while still raising interest rates, or at least keeping interest rates really high. Which I think is a scenario that not too many people have been entertaining, right, as you said, everyone’s been super focused on the Fed, pivoting by lowering interest rates. Right. And it’s not
Stephanie Pomboy 16:59
to say that I don’t think they’re going to rates. I mean, my scenario is that this hit that when that lag effect, finally lapses, and we feel the full brunt of the rate hikes, the impact on the economy, and then the corporate and household credit situation will be so severe that they’ll take rates down dramatically, but we’ll have to get a lot of pain before that pivot. And the markets don’t seem to be anticipating the pain before the pivot. They’re just anticipating the pivot.
Adam Taggart 17:29
So roll up your sleeves, Steph, because we got a lot to dig into here. Okay, so first, good. So first, you and I have talked about kind of the broken thinking where the markets, I mean, for almost a year now, maybe even a year now, right, have been looking salivating for the interest rate pivot, right, we just want the Fed to start cutting and there was talk that they’ll never get to 3%. Right. And, of course, the Fed is has hiked much more than the market expected. And the market has had to readjust its expectations every time. Now, what’s been interesting is that’s been happening all this year, too. And even as the market has had to change his expectations, it’s still been able to power financial asset prices higher in the wake of that which obviously, you know, doesn’t necessarily make total sense. But if you look back at history, we see very clearly that when the Fed is hiking into what very well may be a recession, when it is forced to pivot, right by the economy starting to struggle, financial asset prices continue to go down for a couple of quarters. Right? So the market still has this expectation that like, oh, well the Feds gonna pivot rates, and then it’s gonna be happy days all over again immediately, right? So we have that in Congress line of thinking here, right? So now you’re saying, hey, beyond that market, like the Fed might pivot by cutting interest rates, but it’s not going to necessarily have the outcome that you want, but the Fed might not actually initially pivot. By cutting interest rates, it may go back to stimulate the economy through QE. So let’s talk about that for a second. So what I and a number of people that I’ve interviewed recently on this channel, think and I want to get your opinion on this to see if you think similarly or different is the reason why so many people have been surprised this year, why we haven’t gotten the recession that seemed so imminent at the end of last year, is largely because while the Fed and the banking system are stamping on the monetary and credit, availability breaks, the fiscal side has been still spending really heavily with these, you know, sort of wartime deficits that we have right now. Right. And that that some people posit is what’s been pushing the recession now preventing it from from arriving here. Now, if if the economy if the economy still continues to wobble from here, and I think we’re potentially seeing more signs that those lag effects are arriving and I just had Danielle on last week and to talk with her about this, and she said, Yep, I get it. I just think that the lag effect is going to overpower the fiscal spending side of things eventually. If and when it does, and the Fed then resorts back to quantitative easing. Well, then do we have the issue of potentially still the fiscal side trying to stimulate and now the monetary side stimulating and then reigniting inflation here? Because I know you’re very much in the in the DIS in the deflation camp? Could could we? Could this make inflation a lot stickier than it otherwise would be?
Stephanie Pomboy 20:33
Wow. So we’re jumping across the crisis to the other side? And looking at that, and I, you know, I
Adam Taggart 20:41
guess it was a fine answer. I’m just trying to, you know, besides trying to stimulate, yeah,
Stephanie Pomboy 20:45
I’m inclined to be more in Danielle’s camp on that. Because, you know, I’m, I’m history makes an impact on me. And I’m very, you know, impressionable in that regard. And I think back to the period of 2007, eight and nine. And first off to your point about how financial assets underperform once the Fed pivots, it’s funny, you bring that up, because I was looking, you know, I’ve been deep in spreadsheets on the corporate bankruptcy thing. And I went back and I was looking at that, when did they really start to pick up in that 2000 789 thing, and they started to pick up big time in September of 2007, which is exactly when the Fed first cut interest rates, so that you started to see the pain, right when they started to ease and it stands to reason it’s the pain that causes the pivot. It’s not as some kind of Immaculate delivery.
Adam Taggart 21:45
Sorry to interrupt, but but just as there’s a lag effect, where the Fed policy is starting to just cool the economy, and then things start rolling over, there’s a lag effect from when it starts trying to stimulate the economy, you don’t see that benefit for a good while, right?
Stephanie Pomboy 21:57
Absolutely. And, you know, people are licking their wounds, it takes a long time for people to get over the scars, that they build up during that decline. And you know, nothing is more brutal than leverage in reverse. So, you know, when you’re, it’s one thing to lose money, but to lose money on leverage is a really, really painful experience. And we saw that, you know, the household sector after the housing bubble bust, I mean, they refuse to even borrower in their credit cards for a long, long, long time after they were so chastened by that experience. So I think you will have a period and this is what you know, will ultimately bring back the phrase pushing on a string, remember that fate phrase? Yeah, that’s what you’re referring to about when the Fed cuts rates, it seems to have no response. Because they’re trying to pump money into a system that just doesn’t want it. They don’t want to borrow, they don’t want to expand and, you know, undertake catbacks and hire people, they want to hunker down and kind of work through the emotional and financial distress of what they just live through. So we will definitely go through a period like that. And that will serve as a counterbalance to the inflation pressures that fiscal and monetary policy are trying to exert on the system. Now, obviously, in terms of the inflation impulse, the fiscal policy is more meaningful, because unlike monetary policy, where they just kind of scattershot money out there and hope that it lands, fiscal policy can be targeted. And you know, they can as they did with the Cares Act, send me you know, check in the mail to people and your impulse to spend money that’s in your hands, versus access to credit in the banking system is obviously substantially higher. So I didn’t, you know, depends on whether you know, what the situation is in Washington, after this recession takes hold? Do we have divided government where the ability to pass that kind of fiscal stimulus again is hamstrung? That’s really political discussion, and I’m definitely not equipped to hold forth on that other than sort of a man on the street viewpoint. But I do think as you said, there, I you know, my heart is more in the deflation camp, because in that experience of 2008, nine, you know, people forget, we had five and a half percent CPI in July of a weight. A year later, it was minus 2.1%. So, you know, a real hit to the financial markets can have a massively disinflationary impact on goods and services in the economy.
Adam Taggart 24:57
Okay, and let’s let’s talk about the deficit first. I can’t because it is very large, right? It is about the largest in terms of percent of GDP, than we’ve ever had at a time where unemployment spend this low, which is sort of why I use the term we have a wartime deficit in a peacetime economy here. Now there are elements of that deficit that will compromise economic growth going forward. Right. So one of it is give you alluded to this a little bit earlier, but is the interest service on the national debt is really ballooning under these higher rates right now, right. Also parts of that deficit are potentially getting turned off. One of the things Danielle talked about when I was talking with her was the wind down of the employee retention credit, where the IRS is really beginning to, you know, wake up to the fact that there was a ton of fraud in the earlier pandemic relief, and they’re really trying to get on top of it this time around. And it looks like there’s some real efforts now to materially curtail the the amount of spending that’s been done today, which has been substantial. I mean, it’s been in the 10s of billions per month. And one of the things Daniel talked about is a lot of that is going to the top 20% of households to which is a contributing to the wealth on affordability. But also as it gets turned off those top 20% of households, they do about 40% of consumer spending. So it’s going to be a disproportionate hit likely to consumer spending, that’s going to come at the same time that you know, 40 plus million student loan borrowers are going to have their loans finally go back into repayment here, and I think the average is something like 300 bucks a month, that all of a sudden is not going to be going into the economy and instead is going to be going to repay student debt. So you know, there are some pretty big shoes that are going to be dropping here in the very near term. That again, if they’re not adding anvils to that balloon, they’re putting, you know, cinder blocks and bowling balls and stuff in there. So you said you think you’re sort of you’re you say you’re still in camp procession, talk about, you know, what you see going ahead from these factors. When do you see the economy following from here? Is there going to be a slow down grind for the rest of the year? And the worst is going to happen in 2024? Could it happen sooner or later? What do you say?
Stephanie Pomboy 27:16
Well, I, you know, I guess I am not as convinced that the fiscal stimulus isn’t major. I mean, it absolutely had to been a major driver of growth, not so sure that it’s as impactful now, and what leads me to say that is, when you look through the consumer spending numbers, you know, consumer spending is by no means strong. So this idea that the economy is doing great, and it’s being driven by a greater fiscal stimulus, that’s offsetting monetary restraint, is one I’m a little tentative about, you know, real retail sales have gone nowhere for over a year. That means unit sales have not increased at all, people, the headline nominal retail sales looks good, because inflation is not, it’s all higher prices. And the point I’m trying to make on that is that people aren’t buying more stuff, because they want to, or because they feel great, and they’ve got all this money to spend. They’re buying the same amount of stuff. And they’re just paying more to do it. And in fact, not only are they paying more to buy the same amount of stuff, but they’re drawing down savings and ramping up credit card borrowing at the same time. So when I look at the consumer, I you know, the two questions I asked when I see a 1% headline, nominal retail sales number are, well, three questions. Number one, what kind of seasonal adjustment, Sumption did they use? And it turns out, they use some pretty simple and nice flattering assumptions there that they didn’t use last July. But anyway, I’ll put a pin in that one. But I look at what are consumer spending on? Is it discretionary stuff? Or is it non discretionary items? How are they financing that consumption? And whether you’re talking about retail sales, or overall consumer spending, what you see is that it’s non discretionary stuff, it’s healthcare, it’s in, you know, housing, gasoline. And these are things people are forced spend on and again, they’re financing this consumption, increasingly with savings, and with credit card borrowing. So that doesn’t strike me as a strong consumer that’s being lavished with fiscal stimulus that they just don’t know, you know, where to spend it fast enough. So that’s sort of my my takeaway on it. And I guess my feeling is that you therefore are building this kind of a steady erosion of consumer spending and you know, you saw I’m sure, Macy’s and Dick’s Sporting Goods and you know, a lot there were a lot of warnings of about the strength of the consumer in those retail earnings numbers. So I think that’s an important factor there. And, you know, where I come out in terms of how growth has managed to sort of defy all of us, who were anticipating a really severe recession, taking hold immediately, is that I think this pivot, hope or hype, has not just afflicted Wall Street, but mainstream. And I think I’m not talking about households, because they may not have any idea about where the Fed funds rate is much less how much the Fed might cut it, and when, but in corporate America, you had this post pandemic, labor hoarding tendency, you know, when you look at the decline, we’ve seen in corporate profits, you would normally see, like decline in employment. You know, it used to be traditionally that if you overlaid profit growth and employment growth, you couldn’t tell the two lines apart. And that’s not been the case, the cycle. And I think the reason and it’s fairly, you know, widely accepted that the reason is that companies had such a hard time getting people back to work after the pandemic, that once they got them, even as profits slowed, they said, you know, we’re not going to rush to let go of these people, it took so long to get them, let’s hang on and see how bad this is and how long it lasts. And they’re being told by everyone on Wall Street, that it’s not going to last very long, if we have a landing at all, and the Fed is going to pivot. And if you have a recession, it’s going to be short and shallow. So only a fool would let go of these workers that they worked so hard to get. So my sense is that we could go from a period of aggressive labor according to aggressive labor shedding, when it becomes clear that you know, in fact, we are going to have a hard landing, then the Fed is holding to higher for longer, and there is going to be a lot more pain than the markets are currently anticipating.
Adam Taggart 32:05
Let me just add a thought to that, which is, back to my balloon analogy, I’m going to beat that thing to a bloody pulp before the end of this discussion. So when when the balloon really starts falling fast, right, and the balloon conductor is fearful of oh my god, we’re gonna have a really hard landing. What does he do? He just starts jettisoning anything he can from the balloon, right, that has mass, right. And I think that’s a good analogy for corporations, right, which is, once once the things really hit the fan, and the corporations are fighting for survival. You know, that’s when they say, okay, look, I don’t have the luxury of hoarding employees anymore. If someone’s not immediately essential to tomorrow, they’re out. Right. And I also think, one psychological trigger that could happen there, too, is we’ll look, why was it so hard to hire people back during the pandemic? You know, two reasons. One, people legitimately had some fear for their safety still, at some point, right? We didn’t know if getting back into the office was going to expose you if you felt you were at risk. But more importantly, we were sending people tons of checks. I mean, we were just sending them a ton of stimulus. So we had the great resignation, right, you know, quits went through the roof. And everybody either retired early, if they’re when when their stock portfolios recovered, if they were older, or they just gave the boss the, you know, one finger salute and said, Hey, I’m not I don’t have to, I don’t have to work right now. Right? A different environment now. Right? And certainly likely to be even more different, the more we fall begins to really fall into recession here. Right. So I think at some point, you would think that hires might say, You know what, like, it may actually not be as hard to hire people back in the future once I let them go, because when I think about it, it was a totally unique situation during the pandemic. We don’t have those conditions again. In fact, there’s probably gonna be a lot of qualified people banging on my door to get rehired right, if layoffs really continue to go through the roof here. So I don’t know. What do you think about that?
Stephanie Pomboy 34:02
Yeah. Well, I think you’re seeing signs of that already. I mean, I think you look at Goldman Sachs and Amazon, for example, saying that’s it, you know, no more work from home. If you want a job at our company, you’re going to be coming to the office. So I think there are signs where employers are saying, you know, we don’t need, we’re there plenty of good candidates out there. We don’t need to bend over backwards to cater to these people who just, you know, want to continue to dwell in their pandemic, you know, cozy cocoons. So that’s one shift. You know, the other thing that happened, you’re so correct, that we were basically paying people to stay at home during the pandemic, and that was evident in the labor force and the great resignation. The other thing that happened was obviously, you had a concomitant bubble blown in the markets, right. So you had this whole swath of people became daytraders and whatnot. And you know, I think even I talked about this this is probably two years ago now, I was doing these charts overlaying the Wilshire 5000 with the jolts quit rate, right. And, you know, the minute the stock market started to turn down, people stop quitting their jobs and vice versa. So the more the stock market went up, and more people just said, I’m out, you know, so there’s a wealth effect side to this as well. So my point there is that if we do have the markets finally exceeds the reality that we are going to have a hard landing and that profit growth isn’t going to be double digits next year, but might in fact, be double digits. On the downside. You could see, you know, financial deflation, that gets a lot of people coming back into the workforce, just in time for companies to say, You know what, we don’t need anyone anymore. We’re gonna start shedding workers. So I think we could go from labor, tightness to labor slack in in a pretty good hurry.
Adam Taggart 36:03
Yeah, you’ve talked about how I think I think it’s CPI, not GDP growth. But it was one of the two how quickly in going into the Oh, eight recession, that went from very robustly positive to just, you know, stomach churning ly sickening negative in a very short period of time. And that’s just, I mean, history shows us it can happen, but but people kind of forget about that. Right. And so they don’t think it can happen that quickly. I’ve said many times, I think even conversation with you, that, you know, as as the trillions of stimulus got pushed out during the pandemic, and it, you know, just shoved the prices of all financial assets to gargantuan new highs, we had a lot of people eject to retire early, right? When they looked at their their retirement. Well, I got here years before I expected to write, you know, see a boss take this job and shove it right, I’m retiring. And I don’t have the data in front of me. But I did see more the earlier part of this year, you know, coming out of the gruesomeness of 2022, that of the people that had retired early, I think I almost said like 40% or something like that were already finding their way back into the workforce, because their their portfolios had been injured, and the cost of living was higher than they had initially forecasted, right with a huge surge in the cost of living. And they were finding themselves having to come back into the workforce. And so anyways, I’ve made this prediction now, two plus years ago that the great resignation was was probably going to metastasize into the great, please may have my job back, sir hates movement. And I think we’re beginning to see that but I believe and don’t let me put words in your mouth. But I believe if we have the type of recession that I think you think is coming, that’s probably going to be true on steroids, correct?
Stephanie Pomboy 37:54
Yeah, absolutely. First, let me say she’s not allowed on the furniture at home. So that’s why she’s helped.
Adam Taggart 38:02
Like it’s wheeling me as well. We’re just living in it.
Stephanie Pomboy 38:05
I tell you, she just discreetly jumped up on the sofa there as if no one was going to notice. Yeah, absolutely. I think that we would have a you know, go to real labor slack, as you say, on steroids. And I think another factor that kind of dovetails back to another bee in my bonnet, is the role that the corporate bankruptcies are going to play in this. You know, we’ve seen a lot of headlines about how we have the largest number of corporate bankruptcy filings so far this year since the global financial crisis. And yet no one seems to think that that’s an issue of any kind, but lapse in from any discussion about the corporate bankruptcies is so many people are being read losing their jobs. I went through just this morning, just picked out the top 10 companies that have filed for bankruptcy this year that the names that are familiar to you and me like Bed Bath and Beyond, and Tuesday morning, yellow that just went bankrupt a couple of weeks ago, this morning, they’re talking about Rite Aid filing for bankruptcy. When I add up those 10, the top 10 companies there, they employ 200,000 people. So and this is just 10 companies out of nearly 200 companies that have filed for bankruptcy so far this year. So imagine what the total hit to employment is for that. We get a window into it, I saw an estimate of how many people are employed and zombie corporations, which are all the companies that, you know, basically couldn’t service their debt out of existing operation before the Fed started raising rates. So forget about their ability to survive today. Those companies employ 2.2 million people. So this corporate bankruptcy cycle is going to have a huge impact on the employment picture. And that, in turn, obviously will impact consumer spending. And so we’ll have, you know, several circles of hell, if I may use that analogy to get through here. And obviously, as the consumer spends less than companies that are viable enterprises will see their profits were there. And then, you know, they’ll hire fewer people. And you get into this kind of
Adam Taggart 40:26
vicious cycle. Yeah, exactly. Alright, so I was going to dredge up an old analogy of yours about where are we on the bodies floating to the surface count? Sounds like you’re beginning to, to starting to identify some right, yellow over here, right over here. Right. So I assume we’re still probably though in early innings from your expectations here.
Stephanie Pomboy 40:53
Yeah, absolutely. And I think, you know, as it is early innings, we’re seeing the worst again, since the global financial crisis, that they’re accelerating. So here in August, we’ve seen many more bankruptcies, 50%, more than we saw last month. And then, you know, my window into sort of the leading indicator of the defaults in the in the bankruptcy cycle, our ratings downgrades and the pace of ratings downgrades has also accelerated, you know, a year ago, before the Fed started raising rates. We had upgrades in the corporate credit market, outpacing downgrades, two to one, this quarter downgrades are outpacing upgrades, two to one. So we completely flipped the script. And again, you know, you have a lot of debt that has yet to roll. You know, there are a lot of stories on Bloomberg about shall this risk on moment that we’ve had here has allowed a lot of companies to get in there, a lot of junk rated borrowers have come in and sees this as an opportunity to roll their paper. It’s interesting that you’ve got this kind of dichotomy where it’s junk borrowers who are taking advantage of this opening in the market right now. And investment grade borrowers are standing back, you know, they’re like, Ooh, I don’t know if I want to jump in here. And what’s interesting about that is that the chunk borrowers are locking in rates that are double what they were paying prior, you know, before the Fed started raising rates, chunk yields were 4%. They’re 865. Today, you know, investment grade borrowers have seen also a doubling of their borrowing costs, but they’re standing aside in the
Adam Taggart 42:49
interview for one second that so high yield yields much higher now than they were are the spreads blowing out yet or not?
Stephanie Pomboy 42:56
No, no. And so that’s in the in the junk space. The spreads have not really blown out, they did initially when the Fed started raising rates. And then, you know, that whole risk on moment, I mean, basically, junk spreads, and the s&p, you know, kind of moved together. So you had a little repricing of risk. And then, you know, now we’re back in this risk on mode. And so the spreads really haven’t picked up very much. I mean, they’re up, but not dramatically. So they’re nowhere near where you would expect them to be. Were we anywhere near the navy or of this threat pain? So that, you know, again, is another indication that we’re nowhere, we’re just at the fairly early innings of this. And you know, when you think about really simplistic things, like if you overlay the junk bond yields with the speculative grade default rate, did basically the junk bond yield leads by 12 months. And that pre stages a really substantial increase, and junk or speculative grade defaults over the next several months, and we’re already seeing that increase. I think it was Moody’s or s&p, you know, they keep revising up their forecasts for the speculative grade default rate. And I think it was Moody’s actually recently raised it from three and a half to four and a half percent, as their base case and they are a pessimistic scenario is a 13 and a half percent default rate for speculative grade paper, which is higher even than during the global financial crisis. And when I saw that I was like, Yay, finally, someone who can do basic math because corporate the corporate sector has twice as much debt as they did going into the global financial crisis rates have doubled and the quality of the debt is so much lower than it was going into the G See, I mean, the issue in the GFC was the household sector and mortgages, primarily, the corporate sector really wasn’t excessively levered, and it wasn’t low quality borrowers. Today, it’s the opposite, you know, corporate sector, as you now add up more than half of what’s categorized as investment grade paper now, it’s just one downgrade above being being junk. So we’ve got very low quality paper out there that’s exceptionally vulnerable to these higher rates. And we still have a trillion dollars in debt that rolls next year and a trillion dollars a year after that. So I think there’s a lot of runway for pain here. So as much as we’re seeing a lot of, you know, bankruptcy filings now and the default rate picking up I don’t think we’re anywhere near at the end of the cycle by a longshot.
Adam Taggart 45:53
All right, and I just want to show this chart, are you able to see this chart stuff? I am? Yes. All right. So this is a chart that gives a sense of the debt that is coming up to mature. So you’ll see this year, we’re going to do a little over half a billion next year, it’s getting close to 800 billion, over a trillion in 2025. Right? So pretty serious numbers here. And if you could just talk for a second about why the quality of this debt is worse than it was going into the great financial crisis, like what what happened in the lending world where, you know, obviously, you would have thought they would have learned to be cautious of the loans they’re making from getting burned from the GFC, but clearly not.
Stephanie Pomboy 46:40
So, you know, as a result of the decade plus of effectively 0%, interest rates, people had to go to the farthest corners of risk to get any kind of return. So you had everyone from, you know, venture capital, the private equity, to the pension funds that were giving them the money, trying to find anything that would offer a return better than, you know, 2%, risk free 10 year Treasury paper. And in the process of trying to find candidates that could provide that yield, they obviously scraped deeper and deeper into the bottom of the barrel. And the result of that is that you have a tremendous number of borrowers who never otherwise, you know, in a normal environment, would have been able to get credit, suddenly, or not only access to credit, but were lavished with it at very low interest rates,
Adam Taggart 47:39
anything from the dancer, a,
Stephanie Pomboy 47:42
you know, the perfect example of this, in my view is SPB. SPV was basically the bank for all these zombie companies that were funded by all the private equity VC firms in that area. And these are companies as we learned that really didn’t have viable business models. They weren’t earning money. But their modus operandi or the way they were able to survive, was just by borrowing. And they, you know, they just larded on debt upon debt upon debt. And it didn’t matter because the Tet was so cheap. That, you know, if they ever needed more money, they could just turn around and, you know, debt, more money from a pension fund or whoever. And this was the problem for Silicon Valley Bank, at the end of the day, you know, everyone talks about the run on deposits. But what happened was, their customer base were the zombie companies, and they were burning through cash. And that’s what was draining the deposits. And it forced SPV to actually liquidate the assets, they were holding against it the Treasury and agency securities that were being, you know, pushed underwater by the Federal Reserve right height. So there’s a perfect combination of awful since. But at the end of the day, I maintain that SVB was a corporate credit story, the banking crisis story. At its heart, it was an issue related to the solvency of its corporate clientele. And it was the first sort of shot across the bow of this major corporate credit bust. And I think we’re now in the early innings up.
Adam Taggart 49:28
That’s great, great point. And I’m going to combine two of my now analogies here, let’s see if I can do it. The Fed you This is why we talk about policy so much on this channel, folks. While it sounds like such a dry topic, it just influences so much of the world that we live in, right so the Fed forced people to go further and further out on a thinner and thinner ice as Stephanie was saying because they needed to to be able to get yield. Right when interest rates were so low, people had to go further and further out on The risk curve, right, so that’s like going out and thinner and thinner ice. Now then all of a sudden the feds, you know, realize that created a big problem. And so it started jacking up interest rates, that’s like increasing the force of gravity right out while you’re there on the thinnest part of the face, right. And so corporations in sadly, soon people are going to be, you know, falling through the ice like this. But it’s all because of events that the Fed put in motion. And, you know, SBB, and many other banks know, most regional banks have been victim of this, which is they had to go out on the risk curve as well, even in safe risk assets, like treasuries, right, but now they’re finding that their portfolios are underwater. And so they needed the rescue of the bank term funding program and all that stuff, right. And, of course, what will happen is, at some point, as you said, Stephanie, the Fed will pivot and will then try to paint itself as the hero to come rescue you, buddy from the problem that it created that was created by the previous problem.
Stephanie Pomboy 50:54
Right, right. And they’ll try to find a new constituent to shovel cheap credit to who will take it and run and help, you know, sow the seeds of the next economic upturn. But you know, what we’ve learned, I think, over the last 30 years, basically, since Alan Greenspan started this whole cycle is that the solution to excess borrowing is not deeper credit and more debt. This is just, we’re just going around and around and around. And the Fed has this ping pong going from one asset bubble to another, hoping that, you know, the last group that blew up, you know, we’ll take the bait again. But we’ll see what happens.
Adam Taggart 51:35
And you begin to run out of people who can take on that role, right. And for the world, the party that arrived at the table and took on all the debts that everybody could recover was China, right? And then all of a sudden, now China, which fast forward, you know, whatever, 13 years or so, is now, you know, highly leveraged, where it wasn’t really much at all beforehand. Now, all of a sudden seems to be stumbling under a lot of its internal economic problems were a lot of the the economic programs it was pursuing that some folks were saying, I’m not sure how sustainable these are, are all of a sudden appearing to maybe not be nearly as sustainable as at least China itself was trying to sell to the world. So point being is China doesn’t seem to be in any position to ride to the rescue this time. How worried? Do you think we should be both about kind of their lack of being able to come in and act as the Savior, but also just to like, as they begin to stumble? You know, the Chinese real estate market is the largest asset in the world, right? I mean, if that begins to cascade that is highly likely to set off some contagion, at least in global markets and the global economy, correct?
Stephanie Pomboy 52:51
Yeah. And we actually saw this back when the Evergrande things started to become an issue. I mean, what does that now two years ago, really? 2021? Yeah, yeah, keeping the lid on this thing for quite a while, which speaks to the power of centrally controlled economy, I guess. But yeah, I mean, we started to see some ripple effects here from that, when that happened in our credit market, not surprisingly, I’m sorry, I think it’s a good point. You know, I think China will be an issue, most independently in terms of its role for global growth, and its ability to drive marginal consumption, or not, as the case may be. But also, there seems to be a real bipartisan movement afoot to try to reduce our dependence on China, and sort of create a little more distance between our economy and theirs, which if it actually materializes, will make us even, you know, less likely to benefit from any growth that they’re able to orchestrate there. And as to whether it can mitigate any harm, you know, it’d be hard because the harm will be financial, and the growth would be economic. So, you know, it’s it’s, that’s a tricky one, it’s hard to see where China’s going to be our Savior, for sure. And it’s certainly not going to do that in terms of our deficit financing, probably not in terms of economic growth. Although I, you know, I would not underestimate the Chinese government’s determination to prevent their economy from having a real significant downturn because that’s, you know, it’s life or death for their policymakers. So, they’ve got a vested interest in making sure that the people don’t get uppity and that that may require an enormous amount of money, but it’s money that won’t be coming into our markets will instead be doing you know, stay Hang at home to support their local population and make sure that they aren’t rioting in the streets.
Adam Taggart 55:05
Right. So we had this kind of White Night show up last night in the global scale aside, global chessboard economically at the end of the GFC. With China, I look around now and I just look at Europe. Okay, no, I look at Japan. No, okay, no, China, I just don’t see anyone I kind of, I kind of lean towards Brent Johnson, where it’s like, like it or not, like we’re, we’re, we’re shaped. And we have all these problems that you and I have been talking about here. So it does very much sound like an environment in which you shouldn’t be pinning your hopes on the cavalry arriving, right, that you should be planning for a tougher slog ahead. And then we’ve had, you know, for the past 510 years, right?
Stephanie Pomboy 55:46
Yeah, I mean, our cavalry is the Federal Reserve. And the question is really how effective the cavalry is that? Number one, you know, are they going to maintain this higher for longer promise, in which case, you know, the economic downturn will be more material before they finally are forced to relent. But also, what’s the cost to us, in terms of the debasement of the dollar at a time when the rest of the world seems to be rapidly losing their appetite for transacting in dollars? And of course, you know, that conversation that you were kind enough to let me have on your channel with Jim Rickards was really eye opening, I think, and it’s, you know, on the one hand, I was disappointed that they didn’t announce a joint currency agreement at this meeting. As he said, You know, it’s just a question of when, not if, and if you ignore the steps that these countries are taking to diversify away from the dollar, you do so at your own peril. We’re talking about, you know, more than 50% of world GDP and 80% Now, of energy production. So this is a material shift. And, sadly, as he outlined in that conversation, you know, our policymakers seem either blinded by hubris or just, you know, willfully ignorant. Yeah, yeah. And that’s not good for the average American, because while we’d like to, onshore a lot of production and not rely so much on the rest of the world for cheap imports. Right now, we still do, and, you know, they’re gonna get hit in terms of declining purchasing power parity, and, you know, more silent inflation, which is, of course, the Feds favorite kind. Right,
Adam Taggart 57:34
right. Well, as I, as I, you know, think about this, I think a lot about Zoltan Posner’s work, where he basically just said, you know, look, these are the these are the resource producers, right, these countries and, and as their economies continue to mature and begin to compete more and more as they are with the developed world, we in the developed world, very well may have a really rude awakening, where we in the West, and certainly us in the US, we’ve always kind of operated on the assumption that we’ll be able to get access to as many commodities as we want, right? We’re the big guy out there buying them all, like we’re, we’re first in line. And he’s saying we’re gonna find likely that more and more of the supply of a commodities global commodities are going to be encumbered. Meaning, we’re going to say, okay, look, we want you know, whatever, 2000 units of those, and I’m gonna say I sorry, we’ve already promised half of those to China, and another 20% to India. So I can, I can give you 40% of what you want. And by the way, because they’re, you know, buying me out the price is higher than it was last time around, right. So we very well may be finding ourselves in a different world order from a trade perspective, and then in living memory we’ve been used to.
Stephanie Pomboy 58:48
Absolutely, and I mean, I think Delta obviously spent a tremendous amount of work on that, and so right, about controlling resources. I mean, the fact is, we all need those basic resources to survive. And again, you have a very cavalier attitude here, as you outlined about our ability to access that not only our ability to access global resources, but our willingness to just restrict our access to our own resources, which is just, you know, that is probably when the push will come to shove and will ultimately go back to actually encouraging domestic production, whether it be of energy or, you know, farmlands, etc. When we realize that we can’t rely on the rest of the world to be our resource producers. But right now, we’re really cutting off our nose to spite our face. And, you know, again, this all feeds back into my macro view in the form of the dynamics of inflation. You know, not to get too wonky about it, but this morning, the data point today was the Dallas Fed manufacturing index, and when you went through the details, their their prices paid, jumped, and their prices received declined. And I think this is a dynamic, we’re going to start to see a lot more where input costs continue to go up, even as the CPI, consumer inflation pressures recede. And it will be a function of the scarcity of resources, and the degree to which we have basically outsourced our supply to the rest of the world. And we’re now dependent on these producers elsewhere, many of whom are not so inclined to rush to satisfy our various demands. So I think you’ll see that you know, in that will create more pressure on corporate profit margins, as you know, we saw with the Dallas Fed on their manufacturing companies where their input costs start to go up faster than their ability to pass them on. And then that, again, feeds into the employment picture. So basically, it all comes back full circle into this same dynamic, where you’re really looking at a corporate sector, that’s going to be under duress, both in terms of servicing higher cost debt, and managing higher input costs at a time when the consumer appears pent up and lent out and is less inclined to absorb those price increases, as we saw with Macy’s, and Dixon, you know, so on and so forth. And, you know, then we get into that vicious loop that we talked about.
Adam Taggart 1:01:29
All right. Well, look, it’s definitely we’re, we’re at the hour, I have two other topics that I would just love to talk with you do you have the ability to go a little bit long here. I want to be respectful. So lately,
Stephanie Pomboy 1:01:39
I’m playing, I’m enjoying it, your your audience has probably committed suicide.
Adam Taggart 1:01:45
Now, I’m pretty sure.
Stephanie Pomboy 1:01:47
Exactly to go. I’m sorry.
Adam Taggart 1:01:50
I said, I’m sure folks have been loving your sides of this conversation. All right. Well, thank you for doing that. And before I get to those two, I just can’t not ask you this question and let you clarify and whoever you want. We’ve been talking a bit about inflation. We’ve mentioned deflation very slightly. I know that you were I’ll say team deflation. That doesn’t mean you’re wishing it upon us. But I think you’ve long said that you think that that is going to be the dominant outcome here. Do we see it in 2024 in your your eyes. Our interview with Stephanie will continue over in part two, which will be released on this channel tomorrow, as soon as we’re finished editing it. To be notified when it comes out. Subscribe to this channel, if you haven’t already by clicking on the subscribe button below, as well as that little bell icon right next to it. And be sure to hit the like button too while you’re down there. Also, if you haven’t yet heard tickets for the Wealthion fall conference, have gone on sale at the early bird price discount of nearly 30% off our standard price. And if you’re alumni of our previous conferences, you get an additional 15% discount on top of that. So to lock in those low prices while they last go to wealthion.com/conference. And if the challenges that Stephanie is detailed in this interview, have you feeling a little vulnerable about the prospects for your wealth, then consider scheduling a free no strings attached portfolio review by a financial advisor who can help manage your wealth, keeping in mind the trends, risks and opportunities that Stephanie’s mentioned here. Just go to wealthion.com and we’ll help set one up for you. Okay, I’ll see you next over in part two of our interview with Stephanie Pomboy.