Did Job Cuts Just Change the Market?

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1:24And now to the top analysis of today's markets.

1:34The job cuts just changed the market. Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Peter Buchvar, CIO of Bleak Leaf Financial Group. Hi, Peter. Hi, Maggie. How are you? Good, good. It's great to see you. And this is the last trading day of what is going to be a shortened trading week. And you could kind of feel it a little bit, but boy, that labor market data grabbed everyone's attention. I'll just run through it quickly for those who may have missed it. Challenger Gray and Christmas reported plan layoffs jumped 15 % month on month, but year on year, over 300%. That's a big change.

2:08Weekly jobs claims were over 200 ,000 again, and we've got that big monthly jobs report out tomorrow. Even though the market's closed, the government is releasing it. What's your sense of what's happening with the labor market? Are we finally seeing the froth come out and that shoe dropping? Well, the most interesting thing was that jobless claim data because it included five years of revisions. And for the past three months of the year, we've been scratching our heads on why are jobless claims so low. Continuing claims had been ticking higher to close to multi-year highs, but it was initial jobless claims, which for many weeks was printing below 200.

2:49But here comes today, the government revises the data over the past five years, as I said, but particularly the last three months, it was a much higher level of initial claims than first reported. So this begins to make a bit more sense. And also continuing claims now back above 1.8 million, which if you don't include COVID, you're talking about the highest level in years. So that is sort of a chink in the armor of, OK, the labor market is just fine. And now and this comes a day after ABP, which showed continued deceleration in the pace of hiring. So interestingly enough, the BLS data is now sort of the outlier.

3:33Now, of course, we'll see what tomorrow's number brings. But the last few months, the BLS is averaging about 100 ,000 more private sector jobs than ADP. But now we have the ISM reports showing modest wage gains in employment. We have claims, as I said, we have ADP, and we'll see BLS. Now, one of these months, BLS is going to mean revert, and we're going to see a real disappointing number. But it makes sense. I mean, you're an employer in this kind of environment. And even if you were one in an industry where you've been desperately trying to find jobs over the last couple of years and have had difficulty finding them, it's just smart and prudent to call a timeout considering the state of things, especially after the bank failures.

4:21and if you're a small business wondering what your relationship with is with your bank. And if you're a big company, you are for sure putting a pause on hiring or at least limiting the hires that you take on. That's a great point because we haven't even seen that start. That's just happening in real time now. So that idea if you're a small business, even if you wanted to add, you're unsure about what's happening in the banking sector, those are all the repercussions of something like that that won't show up in the data, at least for a little bit, that are maybe going to be implemented now. I know you do really rigorous work on the companies that you invest in from a sort of bottoms-up perspective, really listening to what they have to say.

5:01What are you hearing from management teams? What's the sentiment out there? Because at some point, I remember someone saying, listen, this is the most telegraph-free session we've ever had, and actually people are feeling okay about it. And then we hear the flip. We hear that people are nervous, and now we have this banking situation. What are you hearing on the calls and the conversations that you have? So it's still, and the ones that I've listened to this week, particularly to the stock in Conagra, now totally different industries, and MSC Industrial, which is more focused on manufacturing their distributor to the industrial side of the economy.

5:39And Conagra, obviously a consumer products company with food. It seems to be very mixed. And CEOs are quick to say, hey, we acknowledge what you're seeing. We acknowledge the economic data. But it's really a level of cloudy visibility, I would say, and cloudy visibility in either direction. Like MSC Industrial, right now where they stand, granted they have a lot of aerospace business, so that's sort of insulated from what we're seeing in other parts of the economy. But they think that things are somewhat stable, but they acknowledge that we're more cautiously optimistic than optimistic. I'm more cautious and not optimistic, particularly with manufacturing, where we've seen the ISM and S &P global numbers that U.S.

6:32recession is here in manufacturing. With respect to Conagra, interestingly, we continue to see with them and all the other consumer products companies, whether it's food or it's non-durables, consumer non-durables, it's continued revenue growth all because of price and continue to drop. Now, they're somewhat unique and not really giving us a good feel of how the macro is. We'll certainly get that beginning late next week when we start to get the bank earnings and we get to hear not just what's going on in the deposit side, but what's going on on the loan loss side. We did see auto sales this week, you know, talking about the economy, and it was actually a slightly better number.

7:18But it had more to do with higher fleet sales and improved inventory situation where auto manufacturers are just shipping more cars to the dealers just to sort of play catch up. So it's sort of like this hangman of we're sort of like in no man's land in a way in terms of we're like on the cusp of something with the economy. And I think that the economy was fragile going into the bank blow-up mess and is going to be even more hard hit. Now, we have, okay, so you look at the two areas of financing for the economy. We have via the banks, actually three in a way, the banks, the non-banks, shadow sector, and those that rely on the broader capital markets, whether it's selling debt or equity or IPOs or whatever.

8:10and we can definitely say post silicon valley that bank lending is just going to slow and it was it was slowing going into it lending standards were tightening the demand for credit was was slowing the non-bank we can say okay well maybe they'll fill in some of the gaps and maybe they will but if you're a non-bank lender in commercial real estate yeah you'll fill in some of the gaps but you're going to be charging 15 percent so a bar a borrower facing that is only going to take a 15 % loan if they're desperate and they can't raise equity and they don't feel like canning back the keys. And then you look at the capital markets.

8:46And we went a week or two in March around the bank blow up where there was not one high yield bond deal. I don't think there was even an investment grade bond deal. So the capital market sort of froze up for that couple of weeks. And maybe we've had one or two IPOs this year. So there is a credit slash cost of capital squeeze that's going on. and it's just going to continue. I think the last time we spoke, I was worried about sort of a death by a thousand cuts type of economy. And I think what's now going to happen with the bank lending side reinforces my belief that it's going to be a death by a thousand cuts.

9:25That is not going to be one event that we're going to wake up on a Monday morning again and worried about what bank is going to go under. But it's just a nick here, a nick there that's going to continue to lead to slower growth as the year progresses. Yeah, that's a great point. And I remember last time you were very early with us talking about that credit reset, that everyone who had these loans – and let's take housing out of it for a second. Because in the U.S., a lot of people went to 30-year fixed after the debacle of the housing crisis of 08. And so they're on – at least the mortgage is set at a lower rate.

9:58Not great for a new home, but if you've got a mortgage, you're sitting with a good interest rate. But all those other things – and I anecdotally just had a friend. And everybody knows that I'm torturously having to look for a car, which is a nightmare. I'm trying to hold off as long as possible. But I just had a friend whose lease was up and they weren't really paying attention, turned it back in the same exact car, newer model, but same exact car. They've done this. They're happy with it. $200 more a month, like for nothing, for the exact same situation, just because of interest rates. And it was a real shock to them.

10:29And I think that I thought of you and I thought of what you were talking about. And that's just one person. but multiply that out between small businesses and people when they have to go refinance something. And that is a big burden to carry. Absolutely. And I saw that with my wife's car, too. That was about$250 more than the expiring lease. And that's why this is sort of a slow-moving car crash, that each month somebody's payment is going to reset higher, whether it's a car, whether it's somebody's adjustable rate mortgage that they took out that's coming due or bank debt that's coming due or a bond that's maturing.

11:10It's just each month that rates stay high at these levels. And that's why I keep saying that monetary tightening from here doesn't need to take place by a rise in interest rates. All they need to do is stay at these high levels for a while that itself chips away at economic activity. 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.

11:43Yeah, that's a great that just just that pause in and of itself works as a as a dampening or as a break. I want to continue on that, but I just want to ask you, you mentioned about that they're able to, all of their gains are coming from price increases. What is the inflation situation? I mean, it sounds like companies still have pricing power, but are they, do they see that continuing, which means inflation is still high? Are they getting hit on the wholesale side? What's your sense of where we are with inflation directionally? so it's interesting because we had you know the initial inflation shock was in the on the good side as we know and we saw the spike up and now goods prices have fallen dramatically in a year of year basis but services in a delayed fashion because rents keeps accelerating but rents i believe is are now about to start moderating but maybe we're going to start to get a lift in goods and one of the things that i don't think people appreciate when they say oh yeah inflation is just going to go away and we're past or deflation and this and that is that companies got a major margin hit over the last couple of years and they are still going to do what they can to recapture that lost margin.

12:55Like Canagra to bring them up again, I mean, their gross margin got hit by a few billion dollars by a 30 % rise in their costs. So even if their costs start to recede or stop going up, that doesn't mean they stop raising prices to the rest of us, because the price increases that they're putting in place now is a lagged attempt to make up for that initial spike in their costs. So, for example, Canagra said through calendar year, gross inflation they see is going to be up 10%. MSC Industrial talked about still a lot of price friction in the economy, even though it may not be getting worse, there's still going to be price increases that pass through in a lagged fashion playing catch up.

13:44So that's why this whole inflation thing, and I hear people say, yeah, inflation is just going to magically go away. We had the most intense inflation pressures in 40 years, and it's just magically going to go away. Well, it's not going to magically go away if you listen to what actual companies are saying. Yes, rents are moderating from here. And yes, the service society is going to slow. And rate of change in inflation is going to continue to moderate, yes. But there is a stickiness to the inflation shock that we've had over the last couple of years. And the question is, is not, OK, inflation goes up like here and then it goes down here.

14:20It's where it sort of settles out after that that right side, sort of that inflation chart. And maybe we won't know until 2024 where that really settles out at. But I continue to say it's not going to be 1 % to 2 % that we're so used to in all the years leading into COVID. It's going to be 3 % to 4 % that is going to be what inflation rate we're going to have to get used to on a sustainable basis for a variety of structural reasons. So in this same theme, my colleague Andreas released his latest Steno Signals, and it's out on the platform. He discusses the dilemma that the Fed's in. Let's have a listen to that clip, and we'll talk on the other side.

15:10The curve couldn't send us a clearer message. The Fed is close to caving in to the demands of the market. The Fed will need to confirm current market pricing if they want to avoid further banking stress. And my impression from talking to these top investors is that they've also told the Fed to cave in. And ultimately, that increases the likelihood, in my opinion, that we will see a pivot from the Federal Reserve into the second half of the year. On this chart, I show the federal funds rate in light blue versus the spread between the 12th and the 4th contract on the so-called euro-dollar curve.

15:52So expectations for the Federal Reserve policy going forward, 12 months from now relative to four months from now. That spread is very good at predicting trend changes in the Federal Reserve policy. And as you can see, currently the curve basically screams that the Fed needs to bring rates lower. And therefore, I think this is the safest sign you can get from the system that cuts are needed. And cuts will obviously be delivered probably with the time, like just due to the fact that the system is screaming for them. That entire presentation is available on our website. If you are not a member, just scan the QR code and jump on the trial offer that's there for you.

16:35Peter, so many of the macro analysts we've had on Real Vision just in the last few weeks are really presenting it seem to think that the Fed will have to choose between inflation and financial stability. Do you see it that way? How are you thinking about the Fed's actions? I mean, I think we're going to reach that point. But I think it's important to understand that the days of the Fed just slashing interest rates back to zero is over. So yeah, can the Fed, after maybe hiking one more time, even though I think they should not. And I don't actually think they will, but let's just say they hike another 25 and we go to five and five and a quarter.

17:20Yeah, let's just say they cut 75 basis points by year end and we're at four to four and a quarter. Well, four and four a quarter is still a pretty high Fed funds rate. And they can actually view that as, you know what, we're going to relieve some pressure on the banking sector. will relieve some pressure on banks having to raise deposit rates to maintain a certain level of profitability. But we're not going to go whole hog on this cutting because the economic slowdown because we still are worried about inflation. So this is a much different because we have to look at the next step. Is it just going to be as easy as a recession?

18:04The Fed's going to cut to zero QE and they're going to just dust off the same used playbook that we've been seeing every single time for the last 20 plus years we go into recession. No, this is going to be a much more difficult situation for the Fed to respond to. So are we going to cheer, OK, the Fed funds rate goes from five back to four? Well, I don't know if that's really something to cheer about when even a 4 % Fed funds rate is a risk to economic activity, considering the debt levels. And it still creates a situation for loans that are maturing that are going to have to reset at a much higher level.

18:42So now, can we get sort of a burst of excitement initially when the Fed stops hiking and they start cutting? Yes, but it's happening because we have a recession. And I have to remind everyone that But the Fed was cutting well before the bear markets ended in 2002 and 2009. So it's not necessarily a good thing when the Fed starts cutting. And usually bear markets end when the Fed is almost done cutting interest rates, not when they just begin cutting interest rates. But I agree, Andreas, that, yeah, they probably will cut, but it's going to be a real difficult balancing act for them in trying to address a recession that are we really going to benefit from rate cuts at the same time that it could reignite inflation, particularly if those rate cuts spur further weakness in the dollar.

19:39and all of a sudden oil goes back above$100, which I think will happen. And then they're in a real conundrum. We'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.

20:00Yeah, and Achilles, I think that answers your question. At some point, bad news is bad news for equities. and talk of rate cut is because we are in a bad situation. One more thing I want to mention, and we've got so many good questions I need to get to them, but you and I spoke about this briefly. Jim Bianco, good friend of this show, tweeted something really interesting today about the move index. And you told me you also look at it every day. And the move index is to bonds, for those of you who may not be familiar, is to bonds what the VIX is to equities, right? It's a way to look at sort of volatility in the bond market.

20:39And this is, as Jim was pointing out, hitting levels that it does not usually get to, levels that would indicate that something is really, I don't want to say wrong or dangerous. I don't think those are either the words I'm looking at. But there's something coming. There's something that people are worried about. But we don't see that reflected in the equity market. How are you thinking about this? Well, just some perspective on the move index. The five years leading into COVID, it averaged about 65, give or take. And now we're just below 150. So we're seeing bond volatility that's more than double the five-year average leading into COVID.

21:20And you can see that in how treasuries have traded here, particularly since SVB went down, where the two-year went from five to four in a matter of days, it seemed like, where bonds were really trading like meme stocks. and now some of that certainly gets exaggerated by less liquidity in that market but tying it into the VIX yeah it's maybe not necessarily correlating and it could be sending a message that we get we have a wave of volatility to come in equities but even a VIX around 20 that is the long-term average of 20, but in the QE days, it averaged something like 10 to 12. So even the VIX is well above the QE salad days of low volatility.

22:14So I don't know how to directly connect the dots. I just know we're in a more volatile world. We're in a much more uncertain. Now, we're always in an the uncertain world. So I usually hate using that word. But I understand the volatility. And whether it's in bonds or stocks, it's just the new world we're in. We are in a higher structural rate environment for a longer period of time, and accidents occur. And that's being reflected in higher volatility and what I think will be continued degradation in multiples of a lot of different things. Yeah. Is it a sign that there's some sort of event coming, though, that there's some sort of financial instability, some sort of market breakdown, something of that nature.

23:01I mean, that is way above the range or the average that it trades at. Is it some sort of warning sign that we should be really conscious of? I think when you go from zero to five percent in interest rates in 12 months, things are going to happen. And there are more to take place. I just don't know yet if it's going to be like I said one big event or it's just going to be a lot of things that sort of accumulate and that sort of snowball is going down the hill and ends up picking up speed but initially it may not be going that fast but yes every month there's somebody going to be negatively affected by this higher rate environment and it means that things broadly are going to get impacted.

23:56Now, where this goes, we're just going to have to see, but it's going to be a hard landing. And even if it's not, it's going to be a malaise and a challenge for the economy for a while. We're not just going to have this sort of the economic bottom. Yeah, which is important to point out because a lot of people keep saying, When do I get in like that? You know, we're trained to sort of look for the bottom. Have we bottomed? And I think when you look at something like that and I wanted to put it on everyone's radar, if you hadn't seen that tweet, if you look at something like that, you understand why a lot of the people have been coming on our show say, be patient, be conservative, have cash ready, because it feels like there's a lot more pain to get through.

24:41Peter, let's jump into a couple of great questions here. G Blackburn asking, Peter, credit stress is not really priced in. How do we trade it? Well, with respect to the credit stress, not yet. But it doesn't happen just all at once. It happens slowly. And yeah, credit has hung in this year. But a lot of it has to do with people thinking the Fed has done raising interest rates. To me, that's been the relief valve for the credit markets. But SVB has created a gut check. And while that is sort of centric to the banking sector, a higher cost of capital in the banking sector is going to reverberate to a higher cost of capital throughout.

25:27And I'm watching certainly high yield, particularly triple C spreads. And I am particularly focused on the leveraged loan market, which doesn't have the benefit of higher rates anymore or the lower end of the credit quality spectrum. And I think they're going to be refinancing issues there as well. So just because there hasn't been credit issues yet doesn't mean it's not to come. And I think it's still to come. No one knows thyself asking, does Peter have a view as to which emerging market or just international market will outperform the US in the next year? So I am very bullish on Asia. I think the China reopening is a big deal for not just China, but the Asian region.

26:17And now I'm talking specifically about the positive impact of the Chinese consumer. Chinese manufacturing is still going to be challenged by slowing in demand in the U.S. and Europe. Chinese real estate, residential real estate market is still going to be challenged. But there's a lot of catch-up consumer spending and leisure and hospitality and travel that's going to take place via the Chinese consumer. So we're along some travel-related things surrounding China, but also Japan, which is obviously not an emerging market. But I think Japan is going to be a great beneficiary, Singapore along Vietnam, just to name a few.

27:01Interesting. And you're looking mostly equities if you are in that? Is it ETF? Is it companies with exposure? How are you expressing that? So equities, yes. some individual stocks in addition to some country ETFs. But also, I really like emerging market local currency bonds. I think the dollar rally has been tightly correlated to Fed tightening. That dollar rally started in mid-June when the Fed had a mid-June 2021, when Jay Powell said, we're finally thinking about tapering. That started the dollar rally. And when the Fed basically ended their pace of 75 basis point increases and started to decelerate the cadence of their hikes, that ended the dollar out.

27:47So to me, I can get some pretty good mid-single-digit yields in emerging market bonds. And then I can also benefit from the weakness of the dollar by owning local currency bonds. So we're long that as a way to play emerging markets on the sovereign side. Interesting. And Stephen, I think that answers your question. He was asking what happens to the U.S. dollar if interest rates stop rising. On that, we have a couple of questions related. A lot of people, probably because there's a lot of conversation happening on Twitter, a lot of people asking about currency alternatives. So this is just one.