How Hot is the U.S. Labor Market? With Julian Brigden

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1:23How hot is the U.S. labor market? Hi, everyone. Welcome to the Real Vision extended daily briefing. With me today is Julian Brigden, co-founder of MI2 Partners. Hey, Julian. It's great to see you. Hello, Maggie. Thanks for having me back on the show. It's been a while. Yeah, it has been a while since we had you on the daily briefing. You pulled you away for row for the day. I love it. Before we – you probably love it too. Before we jump into the show, just a reminder to everyone. So it's an hour today. The second half of the show is for Real Vision members. So if you want to stay with us, scan the QR code and sign up.

1:58So, Julian, if we take a look, U.S. markets just closed. The action was pretty muted today. I mean, we're in a holiday week, you know, so that's not surprising. We saw stocks sell off a little bit, treasury yields climb a little bit after the release of the FOMC minutes from the last meeting showed, you know, consistent, right? Fed members saying they expect more hikes. How are you thinking about the U.S. economy and outlook for rates right now? Oh, so I'm definitely more in the sort of storm clouds of gathering, Maggit, and certainly would look as though they would have been gathering steadily in the sort of first half of the year.

2:39So if you look at three things in particular, the first one is clearly we have a big inventory cycle going on in manufacturing globally, right? Manufacturing is definitively in a recession. The second one is we have tightening credit. That's being slow to manifest itself, as always is pretty slow to manifest itself. But when you kind of look at the regional bank stuff, when you look at the anecdotes that we're getting, when you look at demand for credit, those are all beginning to tighten. And the third one, and perhaps the most unpredictable, is the housing market. And I've been in the camp that I don't expect anything like sort of 08, 09.

3:19I just think that we built an awful lot of houses since COVID to accommodate this sort of great migration. And we're just not going to build as many going forward. And as that rate of change starts to slowly turn over, that in itself is usually a relatively recessionary effect. Now, fast forward, and I think we have a bit of a dilemma. And let me explain. I believe in this effect called hyperfinancialization. And it's a term that we use at MI2 to describe the feedback loop between the real economy and the financial markets, and particularly the equity market, Maggie. So if I said to you, which one comes first?

4:03Which is the chicken? Which is the egg? Is it the market that's the chicken? or is it the real economy that's the chicken? You'd probably say, well, you know, the real economy should set inflation. That should set bond yields. The real economy should set employment. That should set, you know, company sales, et cetera, et cetera. So you'd think logically that the real economy comes first. That is not the case in the US. If you actually look at everything, stocks lead pretty much most things. and that actually creates a bit of a problem. And that is that we are seeing some weakness. I think we're seeing some weakness now, but there is a risk that this rebound in equities that we've seen, which I think is purely a mechanical function of liquidity.

4:55Nothing wants to do, however, with fundamentals. I know this will rile up a lot of the equity guys will be saying, yeah, but you know, and look, don't get me wrong, certain, you know, within the equity market, Certain sectors will outperform, but the broad level of the US market cap is set purely by liquidity. But the risk is this rebound in equities actually could lead to further strength in the second half of the year. So we end up with this transitory, and I hate to use that phrase, right, the transitory weakness that we're starting to see in manufacturing. Maybe we'll see it in services this week for myosim services.

5:31And I think there's a good chance we might see it from employment, but that is actually transitory. And then the net result, I think, is the Fed will be re-accelerating tightening if we're not careful as we move into 2024 and 2025. Because I just do not believe that we can allow this equity market to continue to rally. I know Raoul in particular thinks it does, but I'm absolutely convinced if this equity market continues to show strength, the bond market is going to crash again. We're going to put another, well, in the belly of the curve, in sort of that two to five-year sector where we've got such aggressive rate cuts price, Maggie.

6:13We could easily add 100 basis points on there and 50 to 75 at the long end. Which is crazy. It would just continue to add to this volatility. We've seen so much volatility in bonds, which is a lot of people aren't used to it. Typically, you don't expect that, and you're not looking for that when you're in bonds. No, absolutely. And also, you'd be expecting some response function from the equity market. And I think, as I said, when you step back and you look under the surface of the indexes, you can see. You can see certain sectors are really winning. Certain sectors are really losing. We really have an equity market if you want of the haves and haves not.

6:49But the problem is, if that broad market equity market doesn't go, I think financial conditions remain too loose and bonds will have to go again. Again, and that's just going to do, I hate to say, ultimately more underlying damage to the real economy, because I know certain people don't think it matters anymore. But it does matter where you finance your mortgage. It is going to matter if you're going to try and buy a new car and the finance rate is 10%. Oh, it's terrible. I mean, there are a lot of people, just anecdotally, I think we all know that a lot of people are feeling that in many different places.

7:26Forget about individuals and cars. There's also small businesses, right? Small businesses with those loans. It's brutal. Yeah. I mean, a buddy of mine who runs a quite interesting credit business just did some sort of phantom shopping. And I think he's got a FICO score in the upper 700s and his boss has got one in the low 800s. And they went to one of these wholesale lenders, like LendingTree or one of these guys. And they asked for between three and five year borrowing. and the rates they got quoted were 22 to 24 percent. Wow. Because he said it just means that these guys have no access to credit anymore.

8:07Right. Yeah. And that's, you know, all right, they've got good credit. I don't know how much they were asking for, but, you know, you've got to imagine it's even worse if you're asking for a subprime car loan now, right? Yeah. No, it puts it out of reach for a lot of people. Let me ask you – so there's a lot in there. Let me ask you about this financialization of the economy, of the American economy, because that's super interesting, and it's a particularly American thing. Do you think that is because so many people's pensions are tied up in 401s? Why do you or is it because you'll know that there are some people who are paycheck to paycheck.

8:54They're not probably in the investing class. Right. So why does it have that much of an impact? So I think, look, the wealth effect, really, which is what you're talking about. You know, if you're wealthy enough, you've got some stocks, you look at your 401k, particularly if you've locked your mortgage in. What's the Fed doing to me? I mean, literally, this goes back to this, like we talked about the haves and haves, not in the corporate sector. You've got this in the board economy. As you said, if you're living paycheck to paycheck, you're having to finance yourself on credit cards. Your credit isn't that great.

9:27You need to buy a car. Then, you know, this is really hurting. If you're wealthy, you've got a bunch of stocks, and you locked in your mortgage at under 3%, what's the Fed done to me? Nothing. and touch me. I'm up, right? I'm up. Now, so that wealth effect is definitively one, but I think actually the bigger element of hyper-financialization is the response function of CEOs. And I think this is a damning indictment, frankly, of the whole system. We have a system now that rewards CEOs for doing one thing and one thing only, and that is to be shepherds of their equity price. And they are literally only paid to keep pushing up their stock price.

10:17I mean, up until very recently, you know, and this is why Cathie Wood did well, you weren't even rewarded for making a profit. You were penalized for making a profit, right? You just want to keep that momentum going in your equity price. So the only thing that truly elicits a behavioral response from these guys is when their stock price goes down. and unless you get their stock price down they don't drop their capex spending they don't drop employment and the correlations between certain metrics in the labour market and the equity market with the equity market leading by three months are in the 90s so the bottom line is and you can see it there's a couple of great websites one called like layoff.ie or something.

11:11And they do one where they look at the tech sector and they look at tech layoffs. Now, we know that that was in the news at the beginning of this year. We were seeing a ton of layoffs in the tech sector. But why was that? Well, we hammered the equity market into December of last year. When did those tech layoffs peak? January. And what have they done subsequently? As the equity market is rallied, They've fallen. And I just do not believe that we've done enough damage, unfortunately, to this labor market to get the Fed where they need to be. I don't care what headline inflation does. You could drop headline inflation to zero tomorrow.

11:55And I know that the equity boys would go, hurrah, that's it, we're all done, right? The problem is, in a hyper-financialized environment, if that is the case, your equity market will remain strong. Your labor market will remain strong, which means your nominal GDP will remain strong. Because pretty much take-home pay, how many people are employed, how many hours they're working, is kind of nominal GDP. So even if your – and nominal GDP at the moment is seven, Maggie. So even if your inflation goes down to zero, if your nominal GDP remains at seven, that means your real growth has to go to seven.

12:34And we're not an emerging market. We can't support 7 % real GDP growth, which is four times trend. And all that will happen is your labor markets will try and tighten again. And at 3.7 % unemployment, we can't do that. And so what will happen is the Fed will see you'll see all your headline rates drop. And your call will remain exactly where it is.

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14:00People aren't looking at this, but if you take Powell's service inflation, which he's talked a lot about, right? He looks at service inflation at X shelter, and it's dropped. Why is it dropped? Energy. It's just base effects from energy. And if you look at service inflation X energy, it's still 6.5%. They haven't addressed this at all. So this whole inflation is going away. It's all going to be great, right? A, inflation is going to base in the next month or so and bounce a little bit. Not a huge amount, but it is definitely going to bounce. That deflation impulse is kind of done because it is just energy.

14:42And secondly, even if inflation drops, if you do not weaken this labour market and get growth down, and as it is at the moment, equities are too strong for you to do that, the risk is real growth will accelerate, as we just saw in the last quarter, for example. And you can't do that with 3.7 % unemployment without stoking core inflation. And the Fed will just be simply raising rates or draining even more liquidity out of the system in the second half of the year. Just a quick moment to remind you, today's Real Vision Daily Briefing is sponsored by CraneShares. Learn about their KRBN ETF at craneshares.com forward slash KRBN.

15:27Now back to today's analysis.

15:33That's so interesting, Julian. I think you made a really, really important point about the CEO behavior, and it's something that we don't hear a lot about. You hear it in leadership conversations. I've had a lot of CEOs tell me that that dynamic, even if they're benefiting from it, that focus on share price, on equity price, means that they only play the short game, right? It's very hard to invest and play the long game when you're doing that. So from a sort of organizational or leadership position, that has an issue. But in terms of that being part of the financialization, because you look, I just, while we were talking and we were talking about whether it's 401, you Google this and it comes up all the time.

16:13Okay. It says 60 % on a quick Google of Americans hold some sort of stock, but there's another stat that I pulled up just now. 1%, the 1%, top tier 1 % hold 53 % of stocks. The bottom 50 hold six-tenths of stocks. So when you think about that, you're like, what wealth effect? And that's the pushback you get on that argument. Well, I mean - But if you look at it from the CEO lens, that's a totally, that's a different, even though they're probably - I agree. Totally different situation. The big one, obviously, which is pretty heavily correlated to equities though, is house prices, right? And that's the one that most people hold, right?

16:53So I totally concur. Most stocks are owned by a tiny minority of people. They all live in much bigger places than mine in Vail here behind me, you know, in their$40 million homes. You know, so that's absolutely true. But house prices, yes, we've seen some slight reduction, but we haven't really seen that much, right? You know, in actual house prices remain absolute level, still really, you know, really, really high. We haven't seen defaults there. We haven't seen anything yet. So this kind of, the thing that I'm really struggling with, Maggie, and I do think we are probably facing a period of weakness, but this concept that we can have this immaculate recession, that we can somehow have no landing.

17:46And I'm hearing it again. Yes, it's back. It's back. We did it in January, right? January and February. What happened in March? The bond market puked. And I am telling people now, if the data does not drop and if the equity market, now I'm quite skeptical on the equity market right here, right now, right? Because I do think it's very high, you know, versus relative underlying liquidity in the system. But if those do not back off, this bond market is going again. You think that's out there in the universe at all? I don't think so. Does it feel contrary in that? Yeah, it does a little bit. I mean, I think it's something that the bond guys have been – it's very much consensus.

18:33We did a trip, and I was part, I guess, of the consensus. It just looked to me that people had got far too aggressive in their bets. As soon as SVB came along, the bond boys went, right, all on black, right? This thing is done. It's broken. We're going. We're going into recession. I'm betting everything. And of course, it didn't happen, in part because the Fed introduced more liquidity in the system and the equity market went straight up, right? And, you know, we're in this tug of war between bond and equities. And we're at one of those points again where it is unsustainable right here, right now.

19:11I see your questions coming in, everyone, and we are going to get to them. I just want to sort of fill in a little bit because we're an hour today, so we have time. I just want to make sure we get sort of Julian's view on everything. So I think one of the things that's hard. So you mentioned before that stocks, this is a mechanical function based on liquidity that's driving stocks up. And I think that people hear that, they understand that, and they're super interested in that because we get a lot of questions. We just had questions on it in the academy sessions that we did earlier, which is on the platform, everyone.

19:45But then they grapple with this larger technology narrative, right, that we're all sort of slammed into us with AI. But it's not only AI. It's sort of all the exponential. I know you and Raoul talk about this all the time in your monthly Macro Insider shows. Raoul recently sat down with Jordi Visser, the CIO of Weiss Multistrategy Advisors. And they had a very interesting take on that sort of that issue. Let's have a listen to that clip and we'll talk on the other side. So we increase money in a way that is just unprecedented, which we all know. And so we end up getting a move. No one thinks there's going to be inflation, but we print so much money that people start spending it from their couch and this goes on.

20:31We get inflation. I think we're still in the after effects of that, which make it feel because of inflation last year and because of everything that we're still in this traditional economic cycle. And so everyone's calling for recessions and everyone's going through it at a time when what I believe is happening is we're going through all that excess money where we raised rates incredibly fast and that'll slow the economy down and get it back. It'll get us not to have the problems that we had with inflation. It might take another two, three years to get all of that burping out of the system from the hangover of all the money.

21:05But at the same time that that's going on, the most important innovation that's happened during my life, for sure, because of the ubiquity of it overnight, is artificial intelligence. And so I have this belief, as I did in 2014, that the future is where we used to make investments on a 20-year viewpoint. That was in a linear world, and we are now in an exponential world to where we don't know what solutions AI will come up with. We don't know what it'll do to energy demand, energy supply, and new solutions. But I've kind of come to the decision that anyone thinking about, well, one year from now, there'll be a recession.

21:44I just don't think that matters anymore. And so my overall viewpoint is that productivity is the number one story because of AI. And with productivity is going to mean we're going to need less people and less hour work to generate the same GDP. And that, to me, is a very powerful story for equities. And it's a very powerful story for inflation to come down faster than what people probably think. And that's where I kind of am on things. Not an optimist. I just think we're in a point where those are the number one things. Productivity boom from AI. Super interesting. That full interview, by the way, is on the platform, as are all of Julian and Raoul's macro insider shows.

22:24I like to call them sparring sessions, which air on, because that's kind of what they are, but that's why they're so good. They air on our pro tier. So if you're not a Real Vision member or you want to upgrade, scan the QR code and you can hit the link for information on how to do that. So Julian, I thought that was so interesting. Recession doesn't matter. It's all about productivity. What's your thought on that?

22:47Look, productivity is definitively a huge structural driving force, right? We've been – I've got absolutely no contest with that at all. You know, I like to go back and spend time looking at history. And there's a couple of great papers that the Bank of England wrote about deflation and bond yields or disinflation, not deflation, disinflation. So falling prices in a growth environment as opposed to deflation, which is falling prices in a stagnant environment. And they basically highlighted how we've been in a disinflationary world for 400 years. Right. Now. And, you know, if you look at it, because we've had technological advances, Maggie, and we've pushed them right across things.

23:36And, you know, the advent of airplanes, the advent of cars, the advent of internal, you know, steam engines and clipper ships and all of this, the telegraph and all this sort of stuff, right? Now, don't get me wrong. I think AI has that potential, right? I think AI definitively, and I think it could be quite unpleasant in many respects, at least the initial phase. Because unlike some of these inventions that were very narrowly focused, this can be applied to quite a cross-section of the economy, quite a broad cross-section of the economy. So I think in that sense, it's highly disinflationary at some point, and I think it will boost productivity at some point.

24:23The question is, is when? The question is, is when? And, you know, if I put my 400 years lens on, absolutely. If I put my next three years on, I'm not sure. because we saw this with the internet we're here courtesy of the internet, everything that we do these days is actually transformed because of the internet, the iPhone is a function of the internet it was all a function of that money that was pumped in heading into the dot-com bubble from 1995 into 2000 did you make money buying the stocks then? did productivity hugely advance during that period? Absolutely but they're not necessarily the same thing So I absolutely concur.

25:11AI is going to be transformative. It is disinflationary. But is that disinflationary wave going to hit in the next three months, the next six months or the next three years? And if it's the next three years, then I personally am not even thinking about it really from an investment perspective, from a trading investment perspective right here, right now. And this is one of the things that comes up a lot, I know, with you and Raoul, is timeframes. So I think the important thing that you just teased out there is that it's not that people necessarily disagree. It's just that if you're looking at a long-term narrative, which I'll remind everyone, that's what Raoul does.

25:48And he'll say that when he's talking to you. He tends to look at these big long-term pictures. You're focused on a shorter timeframe. So it's not that recession does matter to you because you are having to think about investments in the next year, as are your clients. So you mentioned you were sitting in Vail before. I know you're going to hold a summit there in September. And I imagine this exact issue, you're going to get a million questions about this because it's what we get asked about all the time. What's going on? What are you going to do in September? So, you know, we've always had since we launched MI2, you know, back in 2011, at the behest of some of my big clients at the time, really tried to set the business up with the focus of talking about the economics and, you know, building the models and predicting where GDP is going to be or unemployment is going to be.