#988 - Will Rate Cuts Come in 2024? | with Darius Dale

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0:56Will rate cuts come in 2024? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Darius Dale, founder of 42Macro. Hey, Darius, always great to see you. Always a pleasure to see you as well, Maggie. Thanks for having me. Your hair looks amazing, by the way. Oh, thank you. Trying, trying. It's a struggle. Welcome to everyone. Welcome to everyone who's watching and who's joining us in the chat. If you are not a member and you are not in our chat, go to the website, join, so you can join us in the chat. Because before we even get started, hang on a second. We have Paul. Hi, Paul.

1:33who said, Maggie, ask Darius if he wants to announce anything. Oh. His ex-post where he floated the idea of running for president. Well, one, I'm not going to allow you to sit there and call it an ex-post. It was a tweet. Well, I'm just reading what I see, but you're right. Paul's being very, very official. Yeah, yeah. So, I mean, not to get off track on this, but this is something I've thought about for many years now. um back to when i went to school uh you know i initially thought this career path that i would take um but anyway you know i've had this very um you know blessed life experience where half of my life was in the bottom one percent you know the second half of my life is somewhere near the top and i've had a lot of life experiences in between that you know kind of allow me to connect uh with people and understand the plight of the average man and then the low to medium income a person so i definitely think there's some uh some leadership a leadership vacuum that i'd like to a bill in the future.

2:28But between now and then, I'm going to be focused on up in 42 macro clients and they can save money. So check back with me in 20 years. Excellent. Oh, my gosh. So I was totally thinking he was joking, but this is very exciting. Washington, listen, you know, everyone who listens to the show knows that I always reference a very funny thing that Tommy Thornton said to me a couple of years ago, which is that it's a bear market in political leadership being a completely apolitical statement, but just that we have a lot of serious problems. Darius, that's so exciting. And I love that you have that spirit to serve.

3:00And I hope you're serious about it. Let's go, Real Vision. Let's continue to get Darius on this path. I love it. Thank you. But yeah, it's very real. We do need good people to step up. So I hope anyone's listening will consider it as well. And we look forward to following along on this new thread of yours, Darius. But in the meantime, listen, Well, at least we'll have somebody who knows something about the damn economy if you get there, because we know that you know that. And so let's start with that, because we are in an election year and we've had this what seems like really confusing U.S. economy.

3:38And we had some cross currents again today. So we had an ADP report showed that companies are still adding jobs, but the pace was a little bit less than expected. So nothing too hot. It comes on the heels of a little bit of a soft ISM. But it feels like in all of these econ data points, you can sort of find strength and weakness. You and I talk about that all the time. And then Jay Powell was testifying in Congress today. And he said, you know, basically, the headline coming out of it was that the door is open for rate cuts sometime this year, although he once again emphasized that the Fed is in no rush at all.

4:14So we're kind of in wait and see mode. So, you know, we know you probably came with your charts. So walk us through your, have your finger on the pulse of so many different parts of the economy as you try to assess what's going on. So what do you see happening? Do we know where are we with the US economy? Yeah, thank you, Maggie. I appreciate that. So from what we've been analyzing here for our clients at 42 Macro is that we are now seeing a tug of war emerge between the no landing scenario and the soft landing scenario. Recall that the asset markets pivoted to the soft landing scenario as the overwhelming market senses over the past few months.

4:49Really, that process started in late October once we started to get some positive surprises on productivity, some positive surprises with respect to treasury issuance and global liquidity. So that soft landing scenario has essentially peaked in market probability terms and is now declining while the no landing scenario is rising. So this tug of war, in our opinion, holds the key to where markets are headed over the medium term. So as you did allude to, I did bring some charts with me. So, Brian, if you could start with chart seven, where we show the various components of the ISM services report, headline prices, new orders, employment, the breadth, as well as supplier delivery times.

5:27And as we can see, on balance, these metrics supported the soft landing scenario at the expense of the no landing scenario. Headline ticked down, prices ticked down. We saw employment ticked down below 50, which indicates contraction. But we also saw new orders tick up as well as the breadth tick up. If you go to slide eight, Brian, a no landing is currently the highest probability scenario, according to our models, the models that we use to forecast growth and inflation across all the major economies in the world. Well, if you look at our U.S. model where we show our growth projections on the left of this chart on chart eight and we show our inflation projections on the right there, you can see that our model has a growth and inflation bottoming at levels that are historically inconsistent with sort of 2 % inflation, particularly on the inflation side.

6:09You know, you would probably need to decelerate another 100 basis points lower than where our kind of the nadir of our projections are to get a sustained 2 % inflation target. And so that, in our opinion, is likely to cause some market risk. But we don't think that market risk is here yet from a from a trending perspective. Obviously, we may be mired in a correction here, but we don't believe that this current correction, if it extends, is likely to transition us into a sustained risk off regime, at least not yet. And one of the reasons for that is on slide nine. Slide nine, where we show the ISA manufacturing and services, percentage of respondents reporting slower supplier delivery times.

6:48Those numbers are back to kind of really cyclically and structurally depressed levels. And that supports the above-trend productivity growth that has been supporting the soft landing scenario underpinning the Scaldilocks market regime. Another thing on slide 10 that has been supportive of the above-trend productivity growth is on slide 10, where we show, unpack the jolt support that we got today at 10 a.m. The hires rate was flat month over month, sequentially flat at 4%. That is a below trend level relative to the pre-COVID trend. The private sector's quits rate was flat month over month at 2.4%.

7:23And so that's supportive of productivity, obviously, because with less turnover, the on-the-drop training that you're doing with your employees, obviously that sticks and you're able to get more productive employees out of that process. And then lastly, we got on slide 11, the reason this is also that low turnover in the labor market has been so supportive in recent months is because it sort of takes the wind out of the sails of the wage inflation. Now, we had a little bit of a backup in wage inflation. If you look at the ADP median annual pay statistic for job changers, but obviously overall, the trend in wage inflation has been lower across a variety of metrics.

7:58And as long as that trend is lower than Jay Powell's expectation for some rate cuts at some point this year is a reasonable expectation to maintain. Hey, everyone. We're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Join over 5 ,000 attendees for the largest AI event in Asia at Super AI Singapore, June 5th and 6th, 2024. Raoul Pal, Benedict Evans, Balaji Srinivasan, Edward Snowden, and over 150 others will join the industry's most influential to explore and unveil the next wave of transformative AI technologies.

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10:04so you know jerry you're one of the few people that has brought up productivity and it's such an important part of well any economic forecast but why are we seeing high productivity and for those who are not familiar of why that's important can you just kind of give us a a refresher yeah yeah so i think there's there's just two to three things that are kind of really driving productivity right obviously ai we don't know what share what percentage of the productivity growth is contributing to the development and deployment of AI, but we know that is additive at the margins and will obviously lead to more productive employees.

10:38But we also know that turnover, as I mentioned, has declined back to at low trend levels, which means that the employees that are currently employed in the labor market are likely to be more productive because they're either retaining their training and or they're just getting better at their jobs because they're staying at their jobs for longer than they have been in recent years. And then obviously going going back to the ISM survey, the unthawing of supply chains globally, both in between the manufacturing sector and the services sector. If you unthaw those supply chains, you're obviously able to produce more goods and services, same unit of labor.

11:11So those are the three things that are really contributing to above-trend productivity growth. And in our opinion, which is why we believe productivity growth can remain above-trend for the medium term. Now, I don't know that we're in a productivity boom yet, that we don't have any data to support that from a structural standpoint in terms of a three to five year outlook. But I do believe from a one to two to three quarter perspective, you can sustain a uptrend productivity growth, which is very positive because it sustains the, let me take a step back. The reason productivity growth matters so much and why we have been focused on it so much in our research here at 42 Macro since late October, right before we pivoted to being bullish in the early November, is because productivity, more productivity you have, the less pressure you have on corporate margins.

11:54And the less pressure you have on corporate margins, the less corporates need to fire people. So that protects the business cycle. And the less corporates need to pass on PPI increases into CBI and the PC deflator, which obviously it supports financial conditions. Yeah. Yeah. That's where you get the growth without that scary inflationary spiral. And it's why we talk about AI so much and why a lot of people, when they're trying to figure out what's going on, keep looking back to that period when the internet really took off. So will that provide this kind of productivity miracle or a period of really high productivity, which would allow us to grow above trend.

12:29So that's really important. And I don't think enough people have been, we know the number's been high and you've been including it in your reports, but I feel like it doesn't get the headline attention that some of the other numbers do. And it's a super important part of the equation here. So that's really interesting. So were you surprised? So do you think the Fed, that Powell kind of kept that door open on rate cuts because they still think the economy is either going to weaken or they're going to have to force it to weaken. Those higher rates are going to have to force it to weaken to get inflation back to their target.

13:00Is that why they keep it on the table? Because I was sort of surprised to hear them say that given the mayhem that's ensued previously when they've introduced the idea of rate cuts. No, I think the Fed is It's celebrating what is obviously a very positive cyclical forces and what are very positive cyclical forces in the economy. We continue to observe trending immaculate disinflation. That theme is ongoing. We've had two hot inflation reports, particularly for the month of January, the CPI and the PC deflator, but one month does not make a trend. The Federal Reserve and Jay Powell stressed this many times over.

13:34They're not changing their policy outlook or their forward guidance based on one data point or even two data points. They want to see multiple months of either positive conditions or adverse conditions for them to make a policy pivot. And so I just think it's too early to stick a fork in the immaculate disinflation narrative. That's been sort of underpinning their expectation for implementing technical rate cuts later this year. That may change. And obviously, according to our forecast, as well as our qualitative research, suggests that that's going to have to change at some point. But we, again, we expect that change to be more of a 2H24 phenomenon rather than a 1H24 phenomenon.

14:11We see, you know, there's so many positive things going on from the perspective of productivity, from the perspective of U.S. liquidity, from the perspective of global liquidity that are all very positive for asset markets and likely to continue to be positive for at least another one or two quarters. Interesting. So Mark asking this question, and it's come up, Darius, any risk that the cuts don't start later in the year? as they would be too political to start too close to the election. He said Jim Bianco may have said this, but it's a very common thought that if the let me put it this way, used to be the thinking used to be that if the Fed wanted to do something in election year, prefer to do it in the beginning of the year because they don't like to do anything right around the election because they don't want to be seen as aiding the incumbent administration or or on either side.

15:00You know, if someone's calling for rate cuts, they don't want to be seen to be feeding into that, even if the decision making has nothing to do with it. That had been the thinking. Is there a risk that even if they want to cut rates, they might be reluctant to do so until we get through the election? Do you think that's going to matter? I don't think it's going to matter to Fed policy. It could matter to investor perceptions of Fed policy. And here's why. So we are expecting the Fed to be able to cut the policy rate likely starting in June or July. But it's very unlikely it's very likely by the time we get to their September meeting or their November meeting that it's very likely that they are forced out of being able to implement incremental rate cuts and maybe forced into hawkish and higher for longer forward guidance again, if our projections on inflation are actually proven correct.

15:45You know, we know that immaculate disinflation is a rare phenomenon in the U.S. economy. In fact, it's never happened before. We've never seen so much disinflation prior to a recession in the history of the U.S. business cycle. And so that's something that's, you know, again, we should expect that at some point, because we continue to grow, because we continue to tax the labor market from the perspective of the supply and demand of labor, we continue to see excess demand for labor relative supply. So we know that at some point, wage growth will stop decelerating, it's not going to go back to 2 % and just be and stick there.

16:15Because again, we still see excess demand for labor. So we know that the immaculate distribution process is probably going to stop exactly what month we it's going to stop. that's a fool's errand to try to guess, but we can monitor the leading indicators of that process every single day between now and that inflection to prepare ourselves for that and our portfolios. Yeah, which Darius has talked about. That's why he has his whole framework that he goes through with us because he doesn't try to, nobody has a crystal ball, right? So you're looking for the signals. You just mentioned the business cycle.

16:48Doug asking, do you feel that 2022 in retrospect will be looked at as a recession or is there something different about how this business cycle has unfolded? We spent a lot of time here on RV. You've been on with Raoul. A lot of us have been looking at whether there's something different going on with the business cycle. Do you think that there is something going on? Is the recession something that already happened in 22? Is it ahead of us? How are you thinking about that, Darius? No, no. In 2022, the summer of 2022 is when we authored our resilient U.S. economy, not our, the resilient U.S. economy theme that you keep hearing all over Global Wall Street, that that was us.

17:21So, no, we don't think a recession happened in 2022. We mean, they may go back and do a technical recession or something like that, but we did not see a broad-based decline in income consumption and employment that would cause the NDR to, you know, stop smoking their backhoe pipes in their tweet jackets. So, no, so no. What we think is happening with this very unique business cycle, which we agree with that characterization, this is among the most unique business cycles in U.S. history. This is why so many people have gotten run over for the past two years, you know, predicting, you know, various economic outcomes and positioning their portfolios according to those predictions.

17:58There's been so many things that have happened in this business cycle that have really, truly never happened before in the U.S. economy. Not the least of which is the decoupling of the manufacturing and services sector. Usually they're correlated throughout the business cycle. They've been actually inversely correlated in this business cycle. we've seen significantly above trend goods consumption, while we still see services consumption is actually still on a nominal basis, still below trend, which is unheard of, very unusual. We have seen an excess of demand for labor relative to labor supply.

18:27That's never happened before in this time series statistics. So this is something that we're doing and we're dealing with here. And then I think the number one thing that we've been talking about with our clients, again, going back since the summer of 2022, is the resiliency of the household and corporate balance sheet. Again, I think I've thrown these statistics out on this program several times, but for those who have not heard me say this, we have$7.9 trillion of cash on household balance sheets. That number's up from$3.5 trillion just prior to the pandemic. Obviously, that was fiscal monetary largesse dumped into the household sector balance sheet.

19:00That$7.9 trillion of cash is 5 % of total household assets, which is the highest ratio of total household assets since early 1950s. So there's a tremendous amount of liquidity on the household sector balance sheet. There's obviously a tremendous amount of demand for labor. And so households have been supported by income, both from the perspective of the labor market, but also from the perspective of, you know, the cash on their balance sheet. So they're able to spend a higher share of their income relative to previous business cycles. That's why the savings rate, the flow statistic is so high because the stock of savings is actually, sorry, the flow statistic is very low because the stock statistic is actually quite high.

19:37We have termed this in our research, the West Book, sorry, the West Village Montauk Effect. Check out my tweets for that. So, yeah. And if you're sort of, if you're listening to that and thinking, God, it doesn't feel like that, those are largely people with assets, right, Darius? That's why it's sometimes, if people are at the bottom stratosphere or young people, they may not be feeling like that they're flush with cash and that there's all this money swishing around. It hasn't filtered to everyone, right? No, no, no. Sure. And I've long maintained that, and I've seen this with my own eyes, that the employer class made out like a bandit during COVID with PPP loans that were forgiven, COVID tax breaks that were unnecessary and useless.

20:22I've seen all that kind of stuff. And so you think about the$600 a month the government was handing out to people on the lower end of the income spectrum. That paled in comparison to the billions and billions and billions of fiscal monetary largesse that we were dumping into the coffers of the elites. And now, but let's not forget here, we're talking about aggregate statistics when we say things like GDP, income, employment. So we have to include the elites in those aggregate statistics. We don't want to just myopically focus on the people on the lower end of the distribution like the people that I grew up in and the communities that I grew up in.

20:53We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:04Yeah. Yeah. Same. But that's what I think it's important to tease that out because when you hear something like that, you're like, wait a minute, that doesn't jive with what I'm seeing. That's why. That's why. And it's a, by the way, as we roll into, we're going to do a two week series. We're going to start telling you about next week. That's why it doesn't, some people are feeling very pessimistic about the future and we've got to figure out how to get through that. So really understanding what's going on and how those figures match up to the reality on the ground and where the pockets are that could become real problems are going to be really important as we go forward.

21:40So we're going to work on doing that with everyone over the course of the next two weeks. So Andreas just dropped his latest Deno signals, and he is looking at the outperformance of the U.S. As you mentioned, this is an economy that everyone's gotten wrong. It's been more resilient. You've been talking about it, and we're very early on talking about the fact that, listen, this thing is stronger than anybody thinks, and it's not slowing down. So Andreas was looking at that issue, but against the lens of what's happening around the world and what the market's priced in. Let's have a listen, and then we'll talk on the other side.

22:14So the GDP outlook for 2024 in the US is outpacing that of peers by miles now, at least according to the economic consensus. And right now, I kind of get the same vibes myself. But the interesting thing here is that if everyone already agrees that the US economy is reaccelerating, that is probably slowly but surely already baked into prices of US assets. But what if this starts to spill over to the rest of the world? What if the real economy in Europe, in Japan, in China, in the UK starts to show signs of life? I mean, just green shoots here will be relevant for market prices given this divergence in views on GDP growth for this year.

23:04We didn't get to see Andreas there, but trust us, it was him. You can see that full presentation. They're always great on the website. If you are not a full RV member, head over to our website. You can create a profile. And some folks are chatting. We have some regional chats now. There's an RV New York channel, depending on a whole bunch of other ones, depending on where you are. so you can connect to people who are in your area, which is super cool. I'm going to have to jump in those. I haven't had a chance to yet. Darius, so what are your thoughts about that? I mean, it's interesting idea that I thought for a while the common perception was that Europe and everyone were feeling the pain and the U.S.

23:46was going to follow suit. Now we're kind of flipping that and maybe the U.S. has been growing. And what if we start to, as Andreas says, see green shoots around? And then, you know, I guess who's best positioned to have that not priced in? How are you thinking about that global picture? Yeah, so I appreciate you tossing that to me because this is exactly a theme that we authored back in January, which is green shoots globally. If you go up slide 12 in today's chart pack, where we show our global liquidity monitor, we use this to now cast trends and key market indicators and try to identify geographic dispersion before it happens.