Are We Still Heading for a Recession? w/ David Rosenberg

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0:58Welcome back to Real Vision. I'm Ash Bennington with a guest who needs no introduction, David Rosenberg, founder and president of Rosenberg Research. David, welcome back to Real Vision. Thanks for inviting me back. Great to be on. David, we were talking a little bit before the show. I know you have a very specific view on what's happening right now in the economy. You're less constructive than most on growth. Talk us through your perspective on this economic outlook. Right. Well, I think that most economists and market pundits and even the folks at the Federal Reserve are looking at the U.S. economy through the lens of what happened last year.

1:39And of course, what happened last year was that the recession never showed up and then everybody in their impatience and deptuousness threw in the recession call. They basically threw in the towel on it because, of course, the view was that the recession didn't show up in 2023, why therefore would it show up in 2024. and it reminds me a lot of that narrative in 2007 when I was at Mother Merrill. Same question being asked. The Fed took the funds rate from 1 % to 5.25 % from 2004 to 2006. By 2007, no recession. And then except for me and I think Dick Berner, who was at that point chief economist at Morgan Stanley, we held our ground and the next thing you know, we have a recession that started quite surprisingly to the consensus in December of 07.

2:35And you heard a lot of the same things back then for different reasons, you know, a new era, a new paradigm, global decoupling, commodity super cycle, Chinese economic ascension, gravitating the pull of growth around the world. That didn't exactly happen. And we would have had a recession actually without Lehman Brothers and without AIG without Merrill going down for the count. The recession started actually before even Bear Sturds had to be absorbed by JP Morgan. So I guess that my philosophy is this. My non-belief system is that I don't believe in fairy tales. And I don't believe that the business cycle has magically been repealed.

3:25I don't think that AI, generative AI, has repealed the business cycle any more than the internet repealed the business cycle back in the late 1990s. And once again, recession pressures were building in late 2000. And then into 2001, even with the advent and the extension of maybe the biggest technology inflection point of all time, which was the internet. And I believe that especially in an intensely credit-driven economy like the United States, interest rates matter. but the economy does reset to shifts in interest rates in both directions with lags that are long. And this has been a very long lag indeed, but it was very long back in the mid to late 2000s as well.

4:13So I'm just setting the table for you right now that what happened last year and the surprising 3 % real GDP growth rate that we saw, that still has Jay Powell to this day talking about how the economy is in quotes solid and strong. as I said, still looking at the economy through the lens of what happened last year. What happened last year was that we had rampant fiscal stimulus at a time of a sub 4 % unemployment rate. I mean, the fiscal deficit ballooned 25 % last year. That never happens with the unemployment rate below 4%. But of course, we have big government in Washington and big fiscal had nothing to do with COVID, nothing to do with stimulus checks.

4:58It was just rampant fiscal stimulus laid on top of fiscal stimulus. So a 25 % expansion of the fiscal deficit. Then on top of that, double-digit growth in credit cards, which was a huge boon to the consumer, especially the low-end and mid-end consumer who tapped the credit cards in a very unexpected way last year. But as we had in 2024, there's a big hangover from that, not just from the 20 % plus interest that's on that outstanding liability, which is a new record high. But we now have the delinquency rates in the credit card space. The credit card space now is as big as subprime mortgages were back in 2006, 2007, to the point where the delinquency rate is at its highest level in 11 years.

5:49the delinquency rate is behaving as though the unemployment rate is closer to 8 % than 4%. So what's happening, and you see this in the survey data from the New York Fed, that the banks are now basically forcing you to cut up your credit card. Rejections on new credit card applications going way up, and rejections on credit card limits going way up. And so the credit card story, and of course we saw, I think, one big inflection point, that nobody talks about was that in April, we had this very rare event, which was that outstanding credit card balances contracted in what I call consumerica. The consumer actually reduced their outstanding credit card balances, which is tell me something about frugality and tell me something about a renewed move towards increased savings as opposed to spending.

6:45That, to me, was a very important data point that gets very little attention. And then we had last year the last leg of the excess savings file being put to work in the economy. Now, remember, Joe Biden handed out$2 trillion of stimulus checks in March of 2021. And there's not a snowball's chance in hell you can spend that all at one time. The initial spending, of course, because we were stuck at home, was on Peloton bikes and remodeling the home. and patio furniture in the backyard. And then when the economy reopened, it was on experience spending, right? We had the new acronym, you know, FOMO on Wall Street became YOLO on Main Street.

7:29YOLO, you only live once, anger spending, revenge spending. So what's interesting is that history shows that what confronted with a stimulus check, historically, the American consumer, the narcissistic American consumer spends half of the lottery ticket and saves half but not today's crew every penny got spent every penny got spent um and that's why biden went two trillion um because his economist said hey you want to get a trillion dollars of stimulus you got to go two trillion um because half is going to get saved but it all got spent and of course that spending coupled with the global supply chain problems produced that 18 month spur of inflation up to 9 % by the summer of 2022 and created all sorts of other distortions.

8:18But you see, what's important is that the San Francisco Fed just a month ago published a report that showed that more than 100 % of the quotes excess savings has already been usurped in the economy. It is in the rear view mirror. And that's why all of a sudden what's very interesting, What's very interesting is that the consumer sector now, now, with inflation with a three-handle, not a nine-handle, now the consumer is telling the business sector, we can't handle today's prices. And so you see this in the Beige Book. Beige Book after Beige Book, and especially the May Beige Book, the Fed's Beige Book showed that there is a consumer revolt against these punishingly high prices.

9:04And that's why business right now, especially in the retail sector, we saw this in the retail sales report, and of course in the most cyclical segments of the CPI report, they're rolling back their price increases to a small extent, but actually we're heading into a deflationary environment in the areas of the economy that are most sensitive to the business cycle. So I find that very interesting that households would choose now, now to say, I'm done, I'm done, I cannot handle the price increases. Whereas when prices were surging, surging exactly two years ago, no problem. Consumers were saying to the business sector, sure, raise the price.

9:45I don't feel it. Well, they didn't feel it because everybody's pockets, all you needed was a pulse. Everybody received a stimulus check. Everybody's pockets were bulging with the lottery ticket from Uncle Sam. So nobody felt the price increases because we were stuffed to the gills with so much, quotes, excess savings. But that's yesterday's story. Now those excess savings are gone. And all of a sudden, oops, now I actually feel the price increases that were put into place over the course of the past couple of years. You don't find that very interesting from even a sociological standpoint that now the consumer sector is balking at these prices.

10:25and it's because they no longer have that savings cushion and so i think as i look towards the economy the numbers are the numbers i don't know i do not know how jay powell with a straight face can go in front of the public as he did at the press conference after the last meeting and say that the u.s economy is strong and solid when the fed's own beige book which has been around for 60 years comes out every six weeks and provides the most widespread informative narrative on the u.s economy by industry and by region that it would characterize the economy last month as being the pace of economic activity as being modest and slight is not strong and solid but you see everybody's bought hook line and sinker into the narrative that you talked about which is yeah the economy is strong and that's looking at what's happening through the rearview mirror which is exactly what was happening even as we were moving into the opening months of 2008 even after bear starts was absorbed the consensus right into the summer of 08 soft landing soft landing no landing soft lighting everything's okay and yet when the NBER announced the recession in December of 2008 and of course because what they do is they wait for all the revisions and now we're seeing all the numbers the housing start numbers uh the retail sales numbers the employment numbers are consistently revised negative the NBER waits for all the revisions we know for a fact from the QCEW you that last year non-farm payrolls were overstated by 800 ,000 but it doesn't matter because if non-farm payrolls come in above expectations on a Friday the markets go bonkers to a completely flawed statistic and primarily this cycle because the response rate from small business has been so low pro post-covid so we're getting a really historical gap between the first release for example of non-farm payrolls and the third release but you see ash by the time the third release comes out everybody's forgotten about it and if you are under the consensus on say uh you know a february non-farm number but a blew up in your face three months later when the revision comes out and you oh what do you know i was right after all i got killed that day but i was right but who cares the revisions are squarely to the downside of all the indicators that's what happened in 2008 so the nbr aren't a bunch of lazy dummies waiting there for the recession call but what's interesting in december of 08 and it's instructive was that they dated the start of the recession to december of 07 december of 07 oh that took a lot of people by surprise but post revisions yes it made a lot of sense so look for all we know and we're looking at these consistent downward revisions to the previous data the recession may already be starting okay uh we've been in a recession pretty well in the housing market in manufacturing and now retail sales and volume terms and by the way the wholesale trade market which is even bigger than retail both contracting two quarters in a row and i'm there wondering where is this narrative of a strong economy coming from except for the fact that everybody's looking at the situation by gazing through the rearview mirror so we're down to one three on first quarter real gdp it was one six down to one three it probably gets revised down again looking at the revisions that we're seeing and it looks like first quarter with all deference the atlanta fed uh at 3-1 that number will come down but thest louis fed now cast is at 0.9 and that's my numbers much closer so we're basically at levels of growth it's right now at one handle for two quarters in a row that in the old days when I started in the business in the mid-80s.

14:32Let me tell you something. If we had back-to-back quarters of 1%, what we called stall speed back then, I would be getting asked questions. When's the recession starting? Nobody's asking that question anymore because of last year's experience. But the pace of economic activity is weakening, and it's gone from a three-handle to a one-handle. And then the question we'd have to ask is, so what exactly is the catalyst? What is the catalyst that's going to cause you reacceleration and growth? What is it going to be? Are we going to get a revival and credit card extension as we had last year? I don't think so.

15:11Is fiscal policy going to be a stimulative this year as last year? No, I don't think so. And is there going to be like some new stimulus package to give people cash in their pockets? Because last year, one of the big stories was the last leg of the excess savings file being put to work in the retail sector. That clearly is not happening. so that's my sense is that whether you want to call it a classic nber defined recession well time will tell but the economy is growing below trend and that's what's really important from an inflation standpoint that's what's important from and you don't need a recession to cause a further disinflation environment from taking hold and i'll tell you why because when you're forecasting as an economist any price you need two curves you need a supply curve and you need a demand curve and that's why you want to talk to the economist more than just because we're a bunch of fun loving people we can predict prices of everything from copper to gold to real estate to the economy and the price level of the economy is dictated by the movement and the shape of two curves very powerful curves one's called aggregate demand one's called aggregate supply and it behooves the economist to be on the right side of the call here so aggregate demand is GDP spending it's all about spending we're down to a one handle we're down to a one handle now the fed's got its forecast that we're into a three-year period of two percent real GDP growth a perfect world but we'll see about that right now we're down to around one percent But the supply side of the economy, which, by the way, Powell had been talking about, but all of a sudden, because they don't want to cut rates, he's not talking about the supply side.

17:02The supply side being basically labor force, participation, and multi-factor productivity. That's running well north of 3 % right now. The supply side of the economy, which was a principal source when it was basically decrepit back in 2021-2022, was a source of inflation the time that demand was booming. But the supply side is running over 3 % growth at a time when the demand side is already barely above 1%. let's even assume they'll be charitable and assume that the Fed's got it right, that we're just going to have perfect Goldilocks 2 % GDP growth. You see, they forecast GDP, but GDP is just demand.

17:47They don't forecast what their estimates are of the supply side of the economy. But even if they're right on 2 % spending growth or GDP growth for the next several years, if the supply side holds in, as I expect it will, you're going to have this gap between these two curves aggregate supply aggregate demand that's going to force inflation down over time won't be a straight line any more than a straight line in the opening months of this year but everything tells me looking at the supply and demand of the u.s economy and if you don't have a supply demand framework then don't bother having an inflation forecast.

18:28It's telling me that the pressures on inflation are going to be subsiding, that the decline in inflation headline of core is going to surprise a lot of people by the end of this year and in the next year. So my highest conviction call basically is that the Fed will be cutting rates much harder and faster in the next year than what's priced in. And the treasury market is going to end up delivering equity-like returns between now and this time in 2025. Hey everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back. Have you ever wanted to trade Bitcoin but haven't dared try?

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20:07David, very sobering remarks as you frame out your view of this economy. I have a number of questions for you. Let's just dive in here. Where do you think trend growth is right now in the economy? Well, trend growth right now, if we're talking about the supply side, is north of 3%.

20:27And I know the Fed is way below that number, but that's what the numbers are right now. That's what we are going through. This is actually not even AI-related yet. We know AI is going to have productivity benefits. We just don't know to what extent. uh this is a lot of this is really coming from covet and the fact that uh in a perverse way that's what the lockdowns did was they forced everybody to digitize and automate automate their business um so it was actually totally unnecessary and provided tremendous distortions that we see to this day especially in office real estate however it forced a lot of old economy businesses especially in retail and in fact that's where the biggest productivity gains are coming from believe it or not is not from technology or manufacturing it's coming from the retail sector because either you became you took on amazon's model or you went bankrupt that was the choice so right now we're seeing tremendous productivity growth and and then we're seeing people coming back in you see people are coming back into the labor force why pray tell because they don't have the savings cushion anymore and they don't have the extended unemployment insurance benefit anymore so they have to come back to work.

21:51So the working age prime adult participation rate has gone back to a two decade high. So you're seeing all the stuff the Fed was all concerned about two years ago. Don't you remember the great retirement theme? Oh everybody's going to retire with all this money in our pockets you know our 401ks and look Look what's happened. Nobody talks. How come nobody talks about that new era? The great retirement team. Nobody talks about that anymore because it doesn't exist. And so you've got the labor force expansion coupled with productivity. It's telling me that the trend growth in the economy trend means aggregate supply running over 3%.

22:34That's actually very bullish. However, it would only be inflationary if demand. was running over 3%, which it no longer is. So let's talk a little bit about the disconnect between the productivity gains we've seen on the supply side and what we're seeing on the side of aggregate demand. Frame that out for us. Well, it's like I said, aggregate demand is spending in the economy. And no doubt, we still have government spending going on. But interestingly enough, business capex has been fairly anemic And everybody talks about, well, but look at this earnings boom Well, there's no earnings boom Earnings are going up roughly 6 % And outside of the MAG-3, I mean, we were MAG-7, then we were MAG-5 Maybe we're MAG-1 now But the S &P 500, 497, earnings are actually negative year on year and business cap backs follows earnings um there's not been a cap back cycle of course we see here hear about these order books for generative ai chips going through the roof but that's not the only thing that goes into the economy uh housing housing might only be a three and a half percent chunk of gdp but it has all these powerful multiplier impacts look what home sales are doing look what housing starts are doing this is the most credit intersensitive part of the economy And housing has powerful spinoff effects.

24:03And it's heading right back down again after some really what was an upward blip or noise in the first quarter. It's heading right back down again. And the consumer. Consumer is 70 % of GDP. And there's some things that just never go down in a downturn. I mean, education spending, utilities, food at home, health. There are things they don't cut back on. But the cyclical parts, the cyclical parts, the stuff you don't need, they're starting to crumble. And, of course, the retailers are telling you that the same thing. So you're seeing cracks emerge in the consumer sector, broadly speaking. Housing is back in a downturn.

24:50There's precious little growth in capital spending. Commercial construction is under disarray. And that's really a good chunk of your GDP. You know, net exports, what's going to happen there? Strong dollar, crimps exports. You still have a squishy soft global demand picture. I mean, India is very strong. Some parts of the world are okay, but Japan is bouncing along at the bottom. I suppose that's probably relatively good news for them. But Japan is bouncing along at the bottom. China is in a whole lot of pain from their property and financial sector morass, and they're in a structural slowdown.

25:26Obviously, it has an impact throughout the rest of Asia. So it's hard to say where the global growth is going to be to make the export sector. The export sector, again, in the United States, very strong multiplier impacts not happening. And then we've got the strong dollar, which is another tourniquet on exports. Hits back on manufacturing. so i'm trying look i'm trying to find the needles in the haystack where's the re-acceleration story coming from last year the re-acceleration story really came from the massive unexpected fiscal expansion the fact that nobody saved anything from the joe biden lottery ticket uh all that money got spent last year that was a big surprise and this credit card boom came out of nowhere None of that's happening this year.

26:13So, you know, that's really the outlook on the demand side. But in a word, in a word, I won't even go and say recession. I do not even need a recession to get my inflation call right. I don't need a recession to get my industry call right. A recession for those calls would just be cherry on the cake. I just need to have one word on the demand side, which is anemic. and that's really where we are. And I don't see the catalyst for reacceleration. The risk to my forecast is that this productivity uptrend proved to be something temporary. Well, we'll see. I'm not convinced that that's the case or that the labor force growth is going to roll over.

26:59But I think that as times get tough, people come back into the labor market to look for a job. and we see that in the jobless claims numbers. Take a look at the backlog of continuing claims is telling you that it's getting tougher and tougher for the ranks of the unemployed to land a new job. So what's going to happen is that the unemployment rate, which is not derived from non-farm payrolls, it's derived from the household survey, got as low as 3.4, now it's at 4%, And it's not the level of the unemployment rate that determines the contours of the business cycle. It is the change. It's change.

27:41We're up six-tenths of a percentage point off the lows. And as the unemployment rate goes up, what happens is that with a lag, wage rates start to decelerate. So that's going to cut into consumer spending growth at a time when the consumer sector is going to be focused more on rebuilding their depleted savings rate. So all roads lead to a slaughter recession, anemic growth that will come in below the trend of aggregate supply. That's all I need. That's all I need. Now, if for whatever reason aggregate supply growth implodes, then my disinflation thesis is going to be at risk. But right now, things have flipped from a couple of years ago.

28:28A couple of years ago, we had very anemic agrid supply curve, booming demand. But the roles have switched. Now we have anemic demand. And actually, the supply side of the economy is actually pretty robust. We just got the industrial production numbers. And if you're taking a look at capacity growth, the capacity in the industrial sector in the United States, capacity is running 1.5 % year over year. Let me just tell you, that is a 20-year high. So we are actually building more productive capacity. Is that bullish? Yes. And it'd be even more bullish if we could actually get the demand side to match the supply side, or if you're an inflationist, demand to go above supply.

29:19But right now, we've got role reversal here, where the supply curve is actually rather dynamic. The demand curve is the one that's faltering. That is what leads to the disinflation slash deflation call that just brings on derisions of laughter. Whenever I bring this up, then I have to wheel out the whiteboard to actually show people what it is I'm talking about. But that's what I'm talking about. I mean, it's literally, David, sounds like we boiled out of those two lines, AS, AD, and the gap between them. What does that gap suggest to you in terms of where you see inflation headed? How low can it go?

29:59I think that headline and core will be heading down to around 2 % by the end of the year. So it'll be a target. And that's what's funny is that all the Fed, the Fed's all telling us we're not cutting rates till the end of the year. Whereas at the end of last year, Powell was very vociferous when he said, we don't have to wait to get to the 2 % target before cutting. Of course, understanding that inflation is a lagging indicator. He said, we wait till 2%, it's going to be too late, especially when you consider how far above the funds rate is, even higher than this newly guessworked 2.75 % neutral funds rate.

30:43Nobody knows where neutral is, but policy is still tight. He even says policy is tight. Policy is restrictive inflation will be down towards two percent it's currently above the neutral policy rates so yeah by by 250 basis points so uh there's a long road to hoe just to get to neutral and they're not going to be stopping a neutral especially if we get a recession however i think that in answer your question i think inflation will be down towards two percent nobody believes that that's what our our analysis shows it's just based on analysis it's not a not an opinion not a humble opinion not any sort of opinion it's just the math that falls out of the work that we've done and then we receive further to around one and a half percent by the end of next year so when you're asking me well you're still bullish on treasuries uh yeah i work in a business where your assumptions drive your conclusions if my inflation assumption came to a different conclusion, I wouldn't be bullish on treasuries.

31:43But this is what falls out of the analysis. Hey, everyone, we're gonna take another quick break and hear a word from our partners, and then we'll be right back.

31:56Well, David, that brings me exactly to where I wanted to go next, which is the implication for asset prices on this. As we're having this conversation, S &P 500 broke above 5 ,500 for the first time, led by NVIDIA, that rally continuing. Let's talk a little bit about your perception of risk asset prices and what the hypothesis implies for where that's going to be going over the next three, six, 12 months. Well, I have the benefit of producing economic and financial market research so i don't have to run money for a living and i feel sorry for investors out there that uh don't own nvidia it's it's it's like how you felt as a a fund manager you know not owning cisco back in the late 90s or if you were in canada god forbid not owning nortel um so it's tough it's tough it is really a tough market it's a tough environment to run money because to meet or beat the index today much like the late 90s and the late 90s was not just about dot-com people say well but the dot-coms made no money they had no business plan these companies today have money they have business less no a financial asset bubble is a financial asset bubble and uh the reality is that everything is getting tarred and feathered by ai today even utility sector is being re-rated because of generative ai and having to uh you know revamp the power grid in light of all the data centers that have to be built and then powered up and back in the late 1990s it was dell and it was cisco and it was microsoft um the you know the the tech sector broadly speaking dot coms or not still went down 80 % from peak to trough from 2000 to 2003.

33:58And then it took a long time for these stocks to recover. You couldn't have sold that story back in 1999 or 2000. My sense about the stock market today is very interesting. We have tremendous concentration risk. You have three stocks that command 20 % of the index. And if you don't own those three stocks, your clients are yelling at you or they're pulling out their money. So it's creating extra concentration risk because most fund managers are too scared to let go of these high flyer mega cap names. And on top of that, we have unprecedented flows into passive investing ETFs. And when the flows go into ETFs and the index buying, because it's easy to do on a slow cost, the funds themselves, the indexes, they have to buy these names.

34:51so it's making the bubble get even bigger um i mean how could it not be a bubble nvidia is a great company all these cisco was a great company microsoft was all these companies and then we're dot coms late nights were great companies they survived the test of time they were lousy stocks for about three years but well i'll just say that the point that we have tremendous concentration risk in the market okay valuations are excessive um i mean there's no more the equity risk premium has been banished. And that's a bit of a problem. I like to tell people, I like to invest in the stock market with a tailwind, not a headwind.