Is the Recession Forecast wrong?

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0:54Is the recession forecast wrong? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jim Bianco, president of Bianco Research. Hey, Jim. How are you? I'm doing great, Maggie. Thanks for having me. Great, great. Well, it's going to be a very interesting week. Sort of small, kind of muted moves, I'd say, across most of the major markets today as investors mark time ahead of big inflation data and, of course, the Fed meeting this week. Stock's up, bond yields up slightly, but you can tell everyone's just really waiting. What are you expecting from Jay Powell Wednesday? I think he'll do what he does best.

1:31He'll have an emotional reaction to tomorrow's CPI report is basically where he'll be. He's got to, though, in all seriousness, he's got to have a fine line. He's got to walk. Yeah, things are getting better. I'm going to take victory, a victory lap. We finally licked inflation. I don't think he has, or something like that. But he doesn't want to unleash the animal spirits and have the stock market soar and have the everything rally that we've seen continue. And why not? Because if a lot of people here follow crypto, he doesn't want everything to do. feeling frisky and going out and buying Lambos because that's going to wind up pushing up prices and creating an overheated economy.

2:14So he's kind of want to say that things are going well, but we might not be done raising rates, but maybe possibly, you know, and kind of thread that needle. The problem he's been facing lately is he's been trying to do that and the market's not been listening to him. You know, he's been mumbling that maybe we're done, maybe we're not done in the Mark's like, no, you're done, Jay. Rally on, guys. He's done. Don't pay attention to anything he says. He's done. And that's the problem that he faces right now. Yeah. And part of that, of course, is driven by the fact that we have seen inflation coming down.

2:49It's kind of been a regular drumbeat. We've seen some indications of the economy weakening. Listen, we've had indications in some parts of the economy for a while. But now that those two are coming together, that narrative really caught fire, right? But there's still a divide out there, it seems like, certainly, I think more so on our platform, because we encourage people to come with divergent views. But if you listen, but certainly I think with analysts and economists broadly, that you have camps, right? One is that this is the recession we're waiting for. It's finally coming. We're finally seeing prices roll over, and it's going to continue.

3:28And then some of them think all the way to a recession. And then we can debate about whether it's a severe one or not, or a shallow one. But then there are others that say, hang on a second, I do not think this inflation dragon's tamed in any way, shape, or form. I think the market's wrong about that. They got way, way ahead of themselves. Julian Brigden and Rao, I think, typify that divide. They're in opposite camps on this. They just sort of battled it out on our recent macro insiders last week. Let's play a clip from Julian, and then we'll talk on the other side. Okay. So the models are telling me that, if anything, the most we've had is a mid-cycle slowdown.

4:07Okay? Now, the only problem I've got with that is that I think there is an enormous disconnect between what policymakers are saying and what markets are hearing and what markets are focused on. So markets are hearing inflation, inflation, inflation, inflation, inflation, inflation. They're looking at the numbers and the numbers are coming down, right? What they aren't hearing is what the policymakers are actually saying. And the policymakers are saying, fine, inflation is one thing, but broad aggregate demand needs to continue to slow. And my concern is that we're not yet out of the woods. That's why I said I still think this is the trading market, Raoul, because if we're right, and the models, well, let's just say if the models are right, and we are seeing a six-full upturn, then the risk is that the rate cuts that are priced into all of these curves, and they're enormous, enormous, don't fucking happen at all.

5:14The The models are telling me that, if anything. So you can watch that full debate on our website. Just head over and find out how to become a member or upgrade to get that. The three of them get together once a month and sort of discuss or duke it out, you could say. But it's always a really interesting and informative conversation. So, Jim, where do you come down on this debate? I'm probably closer to where Julian is. You know, I've been of the opinion that there's going to be no recession, that the slowdown you're seeing in the economy is the natural reaction to a 5 % third quarter growth rate.

5:55We're going to slow below trend. But I think when you average to two quarters out in the previous quarters before it, what I think is coming next is you're going to have probably trend to slightly above trend growth. That means two, two and a half percent or so, maybe high twos on GDP. That's what we've done in the last year, and I think we will continue to do it. Where I probably diverge most with people like Raul and a lot of other people is that I think inflation is bottoming here and now at 3%. I think this is about as good as it's going to get, and that all the calls that that's it, we're going to take the victory lap, you're taking the victory lap at the bottom is what I'm afraid of.

6:36Now, can we get 2 % inflation? Sure, if we get a severe slowdown in the economy. But if my first half is right that we don't see a slowdown in the economy, and you wind up with, say, three-ish or so on inflation, by the way, the three-month moving averages have all bottomed out on inflation and all the metrics that we use seem to have bottomed out here, with the exception of gasoline. But then, you know, if you could predict gasoline, you're going to be Elon Musk wealthy anyway because you'll be able to make so much money on it. And so if gasoline rebounds, especially we'll see in the first half of next year, we'll see the inflation rate probably trend closer to four.

7:18So what I'm arguing is if we get to two and a half percent growth, we get three, three and a half percent inflation. That's five to six percent nominal growth. And I've been arguing now throughout this entire decline from well before, but also since late October, when we hit 5 % in the 10-year note, I still think we're going back to 5.5 by somewhere in 2024, and that the uptrend in yields is not over. And the last thing I'll mention about the uptrend in yields are two quick things. One, I don't think that these rates are punishing. I don't think that this argument that real rates are 2 % or so and that that's punishing and that as the inflation rate comes down, that means real rates get wider.

8:04Real rates are the interest rate after inflation. So if interest rates hold steady and inflation falls, real rates get increased, that that somehow will hurt the economy. We're at real rate levels that are still below average of what we saw before QE in 2009. 2000s, the 1990s, it was a fine economy with 2%, 3 % growth. The other argument that you hear from people is upside down. Well, we can't see rates go up because the government's borrowed so much debt. No, that's why we're going to see rates go up. Because if your argument is we've borrowed too much money, so therefore interest rates can't go up, so then the consequence of that is so we can borrow even more money and borrow even more money.

8:46And the only thing that stops the borrowing is high interest rates. So if the argument is we've borrowed too much money, full stop, then the consequence of that is higher interest rates to stop the borrowing, not to support more borrowing, because borrowing is stimulative and that is inflationary. So everything I add up is I still think the uptrend in interest rates is still going higher. And that I don't think that they're at punishing levels. There's an old line in the markets, that usually something breaks an economy to go into recession, whether it's COVID, a spike in oil prices, a financial crisis like 2008.

9:27Everybody's thinking now that the thing that's going to break the economy is higher interest rates. If the S &P is at 3 ,500, you've got an argument. With the S &P at 4 ,600, it's telling you that these interest rates are not punishing. And that's why I think that the trend in rates will continue higher. 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.

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10:58There's a lot to unpack there. I just want to really draw a line under where you see Treasuries going, because we're looking at a 10-year right now that's at 4.24%. It was under 4.2. To get back to 5.5, that's another huge move that seems like no one is positioned for right now. Well, there's two things about that. One, I joke about this internally all the time, that we see these 10, 15 basis point moves in the bond market, sometimes closer to 20, in a day, a couple of times a week. and I always joke internally, like I said, I'm old enough to remember when that used to be a good month and now we do that every other day, Friday.

11:45Friday, we had a giant move. So the way this bond market works right now is just like we saw in late October. When it gets ready to go, oh, it's 4.24, it's 4.26, it's 4.8. What just happened? That's the way it moves. Or if it wants to go in the other way, it's 4.21, it's 4.2. You think it's going to go down, it's 3.75. And that's the way that it seems to work over and over again. So when it gets ready to move, it will move. And as far as five and a half goes, let's remember the high in the 10-year yield was 503 on October 27th. So that's only 47 basis points above the old high that we set in October.

12:25I know there's a narrative going around, we'll never see 5 % again, brought to you by the same people that said we'll never see 4 % again back in the spring. So like I said, I'm bearish. I've been wrong on this market now for six or seven weeks. Everything I look at says to me there's nothing wrong with the economy. Inflation is going to be sticky and that the path to interest rates is going to be higher. And the stock market is telling me it's OK with that because it never really seemed to have a problem. Yeah, we did have a 10 % correction for one day in late October when we hit 5 % rates. But then all it took was 80 basis points to get the stock market back to new yearly highs.

13:09So the way I interpret that is it doesn't have a problem with it. So if no one's got a problem with interest rates going up, I think they are going to continue to head higher. So what drives inflation higher from here, Jim? What's the impetus that's pushing that inflation up that the Fed needs to worry about? like it reignites inflation? Well, I think the big one is services and wages. Those are the two big things that are driving the inflation level. The wage numbers are still around 4%. Think about it this way. If wages are growing at 4 % a year, you're getting a 4 % raise. The average person's getting a 4 % raise.

13:49That means you could pay 4 % inflation. So what happens in 4 % inflationary environment is you get the same amount, you go to the grocery store, you buy the same things you bought a year ago, except everything's 4 % more expensive, and you got a 4 % raise. So the impetus of higher wages is pushing. And now why are wages going higher? To me, if you look at the market with the very low initial claims numbers, the very low number of people on unemployment insurance. Oh, they're 52-week highs. Yes, but as a percentage of the workforce, they're some of the lowest numbers we've seen in 60 years in terms of 1 % of the workforce is on unemployment insurance right now.

14:31That is microscopically low is what we've seen. The payroll report, 17 of the last 20 months is the expectations, which tells you that Wall Street is struggling to understand this market. We've had a 20-year high in labor strikes. And everybody's getting the wage increases they're asking for. For health care workers in California, the minimum wage now is$25 an hour, which means eventually the minimum wage for everything in California is going to be$25 an hour. And eventually the minimum wage everywhere is going to be$25 an hour in short order. This labor market is a market where employees have the upper hand.

15:13That's why we talk about labor hoarding and other things about like remote work. Even the federal government, the federal government is trying to get everybody in D.C. back to the office four days a week and they're quitting. So they're backing off of it right now because so many people are quitting. Because when people quit, that means they're comfortable that they can find another job. When they're comfortable that they can find another job, they spend. And when they spend, we get growth in the economy. And that's been the surprising resilience. So wages is a big one. Services is a big one as well, too.

15:51And on the goods side, goods is only about 20 % or 30 % of what we spend our money on, although we think it's more. Most of what we spend our money on is services. I still see indications that goods are bottoming. Yes, goods have been deflationary. They've been deflationary for six months. And yet we still have 3 % inflation with goods deflationary. And I think there's an argument to be made that they're closer to bottoming and maybe turning around. And there might be some early indications that the supply chain, which everybody says now, is gone completely the other way and is a glut of too much and container prices are very low.

16:29And all of that is true, that those might be bottoming and they might be starting back up. So that's where you get the inflation. Now, let me be clear. I'm not talking about 8, 10 or Zimbabwe inflation here. I'm talking about three. I'm talking about three and a half. And we're already at year over year inflation right now is 3.2. And it's probably going to be 3.1-ish after tomorrow's number, unless there's a big surprise. So we're already in the low threes to begin with. And I'm saying it's going to stay here, maybe go higher. And that's your impetus for a 5.5 % bond yield when you do all of the math, even though that sounds like a mesmerizing number.

17:08Yeah. You know, it's I think what makes this confusing and this is it's important what you say, right, because that wage component is the thing the Fed worries about the most, because unlike supply driven inflation, where supply chains clear up and shortages clear up and you see those prices go down, wage inflation sticks, right? People don't give up their wages. So that's always been the thing that the central banks fear the most. But when you hear when you when you see that, I don't know if anyone who's sitting in the U.S. caught the news, but CBS News and YouGov came out with a poll and it was it was very depressing.

17:46It was very kind of negative about the economy. Bad news for Biden, I guess. But is your income keeping up with inflation? 76 percent said, no, it's not. Compared to your parents, is your standard of living the same, better or worse? 46 % said worse. 30 to 64-year-olds, 51 % of them say things basically suck. I mean, there's not a lot of, this doesn't sound like a consumer that feels like they're doing well and want to go out and spend. I think that's where a lot of us are getting hung up. So do you think that they're just saying that, but actually they have the means to keep propelling the economy, Jim?

18:24No, I think what they're saying is what they feel, that they have to spend to keep up. And they are spending to keep up. And that spending that they're doing is what is propelling the economy forward and has been all year. If you look at the retail sales numbers, if you go back to the end of COVID in April of 2020, right now, retail sales are 45 % more than what they were back in April 2020. Now, we were partially locked down then as well, too. But on a real basis, they're only about 20 % more. Now, what am I trying to say here? People are buying the same amount of stuff every day, every month.

19:11But they have to pay more for it constantly. So they're spending more money and they don't like it. Now, the mistake that economists, the mistake Wall Street makes is that we look at year over year numbers and the public thinks about the cumulative change in prices over the last couple of years. And they see everything is way more expensive than it was in 2019 or 2021 or whatever anchor you want to use in the past. And that's what they're unhappy and that's what they're upset about. In fact, we're so mesmerized by year-over-year numbers that somebody in the Biden administration tweeted out, because we know it wasn't Joe, that inflation is coming down, so why aren't companies cutting prices?

19:57And they got a community note on them that, no, when inflation comes down, their prices are still going up. They're just going up by a lesser amount. They're not going down. That's deflation when prices go down. So we've kind of lost the narrative here as far as what's been happening. And what the public sees is what cost me$100.21 is costing me nearly$120 today. And I'm spending$120 for today. And that is what's showing up in the spending numbers. But I don't like that I have to spend$120 today. So they're miserable about the situation, but it doesn't mean they're not spending, which makes sense.

20:37So TrillianX asking a lot of great questions here. Keep them coming. We'll get through as many as we can. So do you think that SEP and DOTS will be revised up as there is no recession for the next 12 months? Do you think the Fed also believes this and will reflect that in its economic forecast at this meeting? Well, there's two things about the SEP and the DOTS. The SEP is the summary of economic projections, and the DOTS are their interest rate forecast. So, yeah, I think the SEP will show, those are another set of dots for anybody who's not familiar with it. It'll just show what the Fed has been showing.

21:14There won't be any recession. Inflation will return to 2 % sometime in 2025 or 2026. And the Fed will be ready to do a victory lap. Now, that's what they've been saying, that set of dots. The other set of dots that we all focus on is what do they say about the funds rate? Right now, the last dots that we got were in September. They update them quarterly, showed that the funds rate would end 2024 at between five and five and a quarter, or there would be one rate cut in 2024. Now, most likely that will be revised to three rate cuts. And the market is somewhere in around four or five rate cuts for 2024 right now.

22:00So but I'll caution everybody. The dots are useful. The market pricing is useful because it tells you what the Fed thinks. It tells you what the market thinks. But that doesn't mean that it is what will happen. You know, George Box, a statistician, once said all models are useless. All models are wrong, but some are useful. And I like to say, you know, all forecasts are wrong, but some are useful. and what some of these forecasts of where what does the Fed think what is the market think is kind of useful to know but just because the Fed says three cuts and the market says five cuts so don't think well I'll split the difference to go with four that may be the case but that's often not the case that what winds up happening during the year could be wind up very different than what they think you know and they'll revise it they pretty much say that they're always following economic conditions.

22:55So Chris asking, hey, Jim, what's up with gold, silver? But answer that. But also, what about commodities? Because if you look at commodities, a lot of them I heard someone talking about today are down significantly as if they see a recession coming. They do see a recession coming in China is what they see a recession coming. Because remember that the biggest consumer of raw materials, copper, iron, ore, steel, and the like, is China. And China's economy is not in a good place right now. They've got some real problems. And it's showing up, by the way, it's showing up in their stock market being down, I think, 11 % on the year or so.

23:37And the Chinese are so out of ideas right now as to what to do about it that they're throwing short sellers in jail. They do that over there. And they're And they're banning bearish brokerage house reports. And they're telling people that work in the financial industry to not display signs of wealth. So leave that expensive watch at home. This is what they're doing in China. Like I said, this is what you do when you're completely out of ideas to try and make your market try and go back up again. It's just throw people in jail and say you can't publish negative reports anymore. So they are the big consumer of commodities.

24:13And it is really struggling, especially on the industrial side as well. Precious metals, gold and silver. Let's put silver in the precious metal camp, although it has many industrial applications as well, too. They are, as I've argued, what's happened with them is we've created them, we've turned them into another fiat. What is the purpose of gold or what role did gold historically serve? Now, for my purposes, I'd say if you were ever worried about the financial system or the monetary authority. What do you do with your money? Well, you can't really get it away from them, but you can sort of get it away from them in gold.

24:51And that's why in periods of stress, like high inflation or deflation or war or anything else, gold performs well. Well, that's because it was supposed to be outside the financial system. But we've taken gold and brought it in. We've got ETFs, we've got options, we've got futures, we've got other derivatives on it. And so it has become part of the financial system. So you'll hear people say, I'm buying gold because I think the world's going to hell. OK, how you own it? Well, I own GLD. So you own a piece of paper in the New York Stock Exchange that says you've got some gold because you think the world's going to go to hell?

25:26And it ain't going to be worth anything if your forecast is right. So what happens is gold looks like another fiat currency. It rallies when the yen rallies. It rallies when the euro rallies. It rallies when the British pound rallies. And that's what's been happening with it. It's been going up because the dollar has been weakening. What's the major driver of the dollar weakening? Two things. Europe is still not on board with cutting rates. Japan is still talking about raising rates. And we're talking about big cuts in rates. So our interest rates are going down. Their interest rates will either not go down as fast or in the case of Japan might go up.

26:04So their currencies are going up. Ours is going down on the interest rate argument, and gold being like another fiat is rallying with those other ones. That's not what gold is supposed to be. Like I said, it's supposed to be on Bitcoin. It's probably a better measure for this. How do you get your money out of the markets? Bitcoin. What is its correlation, hopefully, to the dollar? Zero. That's what gold used to be. But then when we brought gold into the fold, we turned it into another fiat currency. And by the way, that's my fear about with cryptos. I'm very bullish on cryptos, but I'm very hesitant about this whole ETF thing.

26:41You're going to bring Bitcoin into the financial system, and you're going to turn it into another version of the euro. And at the end of the day, you've accomplished nothing. It needs to stay independent of the financial system, outside the financial system. But if we're all going to beg that Larry Fink's ETF is going to create adoption and number go up, yes, for a while. And then what happens after that? They own you. They own you. They'll put the rules on the ETF. They'll put the rules on the Coinbase brokerage accounts. And they'll be able to tell everybody in the crypto space that you're going to act just like everything else in financials.