Is the U.S. Economy Starting to Roll Over?

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

1:35Is U.S. economy rolling over? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jesse Feldler, founder of Feldler Investment Research. Hi, Jesse. It's nice to see you again. Hi. Good to be back, Maggie. Thanks. So we had U.S. consumer, we've all been waiting for this inflation data for a while. We had U.S. consumer prices, CPI index come in a little bit lower than expected. Not by a lot, but it seemed to be enough to send those Treasury yields lower. We saw U.S. equities. They were a little mixed, but we did see a late push higher. The Nasdaq up over 1%. They're just settling, actually, those prices.

2:10But what did you make of the number? And do you think this is a sign that we're going to start to see inflation continue to moderate? I think probably it's going to continue to moderate. We have some tough comparables year over year through about June, which will make that disinflationary trend probably continue through that time period. I think what's more important are the bigger picture inflationary forces. I think people are still focused on these monthly readings when really what's going on is their demographic tailwinds to inflation and longer term kind of structural forces to inflation.

2:51that I think are much more important to pay attention to. Because I really think that the big question on everybody's mind is, whether consciously or subconsciously, is the Fed going to be able to go back to the monetary policy that they pursued for the last 15 years? Or are we in a new monetary era where monetary policy is going to be normalized to some extent based on that pre-GFC framework? I think that helps to determine how you look at virtually every different asset class out there. Yeah, and so you're right. I mean, that's it. In fact, it's funny that you bring that up because just earlier today, we had the first of what we're calling the Academy Sessions, a conversation with members and Roger Hurst about trading strategies, how to think about the environment and some of the modules if they work through the real investing course.

3:44And this is one of the things that came up. How are you thinking about this? Is it different or are we going back? And how do we kind of fit that into the frameworks we've been developing? It was really interesting. Where do you fall on that? If that is the big overarching question, how are you thinking about that? Well, my opinion is that we are in a new monetary era, that this 15 years of the post-GFD, zero percentage rates and money printing came to an end. We saw a huge, we really kind of hit its peak right in the response to the onset of the pandemic where we printed trillions of dollars in new money, interest rates went back to zero.

4:28and we've now seen inflation take off as a response to that overdoing it on both fiscal and monetary policy. So I think that that marks a kind of a demarcation point where no longer can the Fed pursue these kinds of policies without there being any consequences whatsoever. It's pretty clear that now the consequence of overdoing it is inflation. And so we have to go back to more normal monetary policy pre-GFC. If that's the case, then it doesn't matter if the Fed does, in fact, pivot and maybe they lower rates to 3 % or something. We're not going back to zero again. And so a lot of the problems that we've seen crop up with regional banks and things based on just the normalization of interest rates, those problems aren't going away.

5:22There's been, you know, as Stan Druckenmiller said this week, when you give out free money, people do stupid things. When you give out free money for 15 years, people do really, really stupid things. And so now that you have to, you know, there's no more free money, we're starting to find out what are those stupid things that happened. And if interest rates don't go back to zero, we're going to just keep finding out there's going to be more bodies, you know, floating to the surface of Stan. Yeah. Yeah. So which is, you know, I think is going to scare people when they when they think about that and hear that.

5:55I'm going to I want to bring a question in because I think it's I think it's exactly in line with what we're talking about right now. But we'll go back to those bodies in a second. You always have to. Right. But this is from Paul. Jesse, you wrote recently there has been no real growth in the economy since 2008. And the economy has actually been in decline for decades and worsened during QE. Can you give a brief explanation? Fits perfectly into the question we asked at the top as well. Yeah, I mean, that was a blog post I put out today. And I basically, you know, when Ben Bernanke started quantitative easing, he said it was in order to create a wealth effect.

6:31We're going to boost asset prices, going to make people feel wealthier. They're going to spend more, and it's going to create a virtuous circle of growth that creates incomes and that creates growth and kind of and so on and so forth. They were effective in boosting asset prices. If you look at household net worth relative to GDP, it's off the charts. I mean, it's gone parabolic in the last few years until last year. Now, whether that's actually most of the economy, I think, is open for debate. But from all the signs I look at, the economy hasn't done nearly as well as asset prices. And when you look at these things in relative to the money supply, let's look at household net worth relative to the growth in M2.

7:16It's actually just flatlined. It's declined since 2008, and it's essentially been flatlined for the last 15 years. So all the growth in wealth is just commensurate with the growth in the money supply. So it's really just a money illusion. I think if you look at it in terms of net worth relative to M2 and if you look at the economy relative to the growth in the money supply, it's been in structural decline for well over since pre-GFC. But during the QE era, we've seen money printing grow a lot faster than the economy, which suggests to me that the money printing has been very successful at creating inflation in the last few years.

7:55It hasn't been successful in creating economic growth, as Ben Bernanke suggested that it would way back in 2010. So interesting. So what where how do we juice the growth then? How do we solve the growth problem? Well, it's funny because my friend Jim Bruce put out a movie after the great financial crisis called Money for Nothing. And there was a quote from that movie that didn't actually make it into the movie, but Janet Yellen told Jim in an interview, in the outtakes, that we somehow have to find a way to grow the economy without the assistance, without relying on asset levels. something that we've kind of relied on since the 1990s dot com and then the housing bubble and now what we've called everything bubble for the past decade or so.

8:51You know, you have to find a way to not be reliant on monetary policy to try and stoke asset prices. You have to do it in a more fundamental way, and that is through real growth in the economy. And I think the other side of this is the fact that the labor share of income has been in structural decline relative to corporate profits for a long period of time. And so people have been making less money. Their share of the pie, as Warren Buffett has called it, has declined. The average person's, their share of the pie of the overall economy has declined. And so we're probably at an inflection point, I think, anyways now where that's reversing and labor shares going to start to take more of that slice of the pie.

9:38And I think that will help in a lot of these areas. But it's not disinflationary. Yeah. And it's interesting because when that happens, the first thing you do if you see wages go up is everyone freaking out and the Fed hiking rates to stop that from happening. I mean, it's seen, the knee-jerk reflex of that is seen as a negative because in the era we've been in, that has been the case. And people wonder why confidence in the Fed is, you know, a Gallup poll this week shows confidence in the Fed is its lowest ever recorded. And it's because people start, you know, the Fed creates inflation. And then when wages start picking up, it's OK.

10:18No, now we've got to crush wages. And so, you know, I think we're going to, if we continue down the path that we're on, you know, and this is something Warren Buffett wrote about 20 plus years ago in 99, 2000, that if the labor share continues to decline, we're going to get political problems. And I think that's what we've started to see in the last five, six years is growth of populism and people voting for people they think are going to put their interests ahead of corporations, ahead of things like that. And I think we're going to – those kinds of populist sentiments are only going to grow unless we find a way to kind of balance out the economy in a more equitable way.

11:04Hey, 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.

11:17Yeah, I'm glad you say think that they are going to address the problem because no matter where you look, there is not a lot of substantive, you know, really deep economic policy discussion and thinking going on in political circles. There's a lot of reelection talk and election politics and very little else, which I think is frustrated an enormous amount of people. And that is a completely apolitical conversation or comment, by the way. That is just how I see it. Edward says something very interesting. I love this expression, too. If the economy goes into the soup, what choice does Powell have other than aggressively cut and reinflate the bubble?

11:56I would add to that, based on what you just said, Jesse, is monetary policy is one area, but there's fiscal too, right? I mean, it was always really supposed to be fiscal that was driving this. It wasn't supposed to be just up to the monetary authorities to address these issues, right? Right. I mean, and that's, you know, you could argue that that's what the Federal Reserve felt like it had to do through, you know, in the post-GFC period was because fiscal couldn't get its act together that, you know, it was all put on the central bank to try and stimulate the economy. I do think that there's a good chance we are headed for a hard landing in the economy, and that will probably force a pivot.

12:42But I think Jay Powell knows, I think, you know, a lot of people, a lot of, you know, smart people in this business understand that if he does pivot, there's a risk that inflation becomes an even bigger problem down the road. And so I think it's a very difficult point, dilemma that's facing the Fed. And for now, with unemployment extremely low, the Fed is executed on one side of the dual mandate, full employment side. I think by anybody's definition, we have full employment. Stable prices side, they're not. And so I think they have to maintain interest rates, a tightening posture, until you see very compelling evidence that we are already in the midst of a hard landing.

13:33That's potentially what could get Powell to pivot. Yeah, that's interesting. And that lag of when we're going to get it to show up in the data. And it's funny that you mentioned hard landing. We had Jeremy Schwartz on from Wisdom Tree on the daily briefing yesterday, and he made the point that we haven't really begun to see the impact of this regional banking crisis. Let's have a listen to that clip, and then we'll talk on the other side. You can tell the message is going that the bank lending, we've been saying, could be as much as three or four hikes. You've got people like Torsten Slott, who says six hikes.

14:10Like Torsten's been saying, he's a chief of cons from Apollo saying that the tightness in lending standards and Apollo knows something about lending. I mean, they do lending. And, you know, he says it's it's 150 basis points. So six hikes, we say maybe three, maybe four. And some of the Fed were saying one. So we definitely see what's going to happen in bank lending acting as another mitigating factor. Plus, we see the data, you know, we've been talking a lot about the lag data in housing, that that's going to feed into much lower inflation. If they used updated data, they'd actually see they're right at their 2 % target.

14:46I mean, I can't wait to update. We have an alt inflation series compared to the Fed and the BLS official inflation series. And, you know, my projects were showing that the core rate would be below 2%. I thought that was so interesting. And by the way, I don't believe Wisdom Tree, I don't know if they're calling for a hard landing. I don't believe that. Just so we're clear on that. I'm not sure exactly what their call is. But they are worried. Jeremy, for one, is worried about this sort of when it starts to show up in the data. And it's not maybe capturing what's happening in real time in the economy.

15:22Jesse, how are you thinking about are we facing a credit squeeze that's going to hit the U.S. economy? And if so, how bad will it be? When do you expect it to show up? These are the bodies, I think, that you're talking about, right? Well, yeah. I mean, the bodies would be more problems in regional banks. I think even maybe private credit. Who knows where the next bodies are going to show up. Yeah, but I do think the economy is headed for hard landing. All of the leading indicators you'd want to look at, whether it's the yield curve or composite of oil price, interest rates, and the dollar, they all kind of point to a significant potential for a recession in the second half of this year.

16:13So I think we're headed that direction. Now, in terms of the Fed's mandate and what we saw in the clip there, the Fed's mandate, just to be clear, is for stable prices. The Fed interprets that as 2 % inflation. I think technically it means 0 % inflation, but they're in charge and they say 2%. So to say that they're potentially hitting on their mandate when core inflation is still running 5 % plus year over year, I think is tough. I think the Fed has to see core inflation, and this is what JL said, they have to see it declining significantly for several months in a row before they can have any confidence that it's headed back towards two.

17:00So I think when we're still running double mandate and you have things like sticky CPI, median CPI, trimmed mean CPI, all of these things are still very elevated and suggesting that we're not going to get close to two anytime soon, that it has to maintain a tightening posture. That's what they're, and I think that's what they'll do until we start seeing that there's problems on the other side of the mandate, right? Start seeing unemployment rising and things due to the fact that we're in the midst of a hard landing. Then you can start talking about, okay, the Fed needs to cut. But it's usually, right?

17:34I mean, too late. Too late. Something's broken. Broken, the famous phrase we use all the time we're trying to figure out. So John read my mind and is asking exactly what I wanted to know, where to hide if the hard landing is coming or what performs well in this environment. It's a great question because normally you would say, OK, I want to buy iteration. I want to go into longer term bonds, right, that the economy is going into a hard landing. And things like even the copper to gold ratio suggests that interest rates are potentially too high at the long end of the curve. that we should fall below three.

18:15It's interesting to me, though, that they haven't, right? That we're still well over three and a quarter on the 10-year. And until it breaks below that, I think you have to look at what's going on with supply and demand, right? The Treasury needs to refill its coffers once the debt limit is increased. They have tons of new debt to sell. There's interest, right? This is the first time we've had interest rates above inflation for a long time, but that's mainly at the short end of the curve. When you look at, do I want to go three and a quarter for 10 years when inflation is, I don't have a lot of confidence that Powell is going to hold the line on inflation.

19:01And 10 years from now, inflation could be even more of a problem than it is today. It's hard to get excited about bonds. you know obviously stocks don't you know if stocks if we're going into our landing earnings are going to decline significantly than we've seen that's not good for the stock market so I think generally I think we talked about this the last time I was on Maggie was we're in the early stages of a longer term commodities super cycle in the short run a hard landing is going to be bearish for potentially things like oil and copper but longer term, the supply demand for these things is inordinately bullish.

19:38And so I think you have to look at opportunities to buy the dip in commodity-focused areas. And Paris Metals, I think, are maybe the most interesting area in the market right now, and getting zero interest from the mainstream media and investors, which to me is even more bullish. Yeah. So we have, I think you sent over a chart on that. And I love the story count because I have to tell you, I mean, I don't know. This goes, I think the story count might go back to last year as well. But anecdotally, this year, every single person that we talked to at the beginning of the year in January wanted to talk about gold.

20:20Every single person. And then that was it. Like it vanished, you know. So why do you track that? That's so interesting to me. Well, actually, I have to be honest. I stole this chart from Nick Reese. I retweeted his chart with full credit to him. It was fascinating to me. It really mirrors when you look at things like ETF flows. We've seen gold prices really take off since the end of last fall, from about$1 ,600 to over$2 ,000. And we've seen no flows into gold ETFs whatsoever. It's essentially, you look back at those two previous times, gold attempted to break out above$2 ,000, which was a little over a year ago, and then back in the middle of 2020.

21:07And the amount of interest that it garnered was just off the charts. You had 100 ,000 news stories a month, and ETF flows were off the charts. The fact that we're testing 2 ,000 again, trying to break out, and there's zero interest is a sign to me that a very bullish contrarian sentiment signal. My friend Peter Atwater likes to say, media reflects mood. And if that's the case here, then the media is reflecting total nonchalance, no interest at all in precious metals, which would be very bullish for a potential breakout here. We're going to take another quick break to hear a word from our partners.

21:48We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:57Are people not interested in it because they think it's had its run? Or is that too backward looking? I think, you know, what I keep hearing is a triple top in the gold price. But if you look at that chart, you can understand why people might be thinking that. Yeah. You know, that's not a common technical pattern that I ever come across. Making it up. I mean, a double top, yes. A triple top, I mean, the more times you test a support or resistance area, the weaker it gets. And so I think we're getting close to breaking out above that 2000 level. And you look back at the previous cycle, right? Gold prices bottomed in August of 2018, about six months ahead of the original Powell pivot, right?

22:42Gold prices anticipated that the Fed was going to be done with its rate-hacking cycle. When it was done, you know, when it was clear that Powell was done, gold prices started to really take off. And I think we're at a very similar point in the cycle here where gold prices bottomed about six months, maybe a little bit longer this time, ahead of the Fed being done with its rate hiking cycle. Once it becomes clearer that Powell's not going to raise anymore, it becomes obvious. It's no longer a question. We can see gold prices really take off like they did in 2019 and 2020. It's so interesting. Roger in the chat just said, no one wants to buy at these highs.

23:26everyone's waiting for a pullback in gold. Very interesting, because I'm wondering what everyone's timeframe is. And maybe you can tell us your timeframe, Jesse, because I would think if you're really short-term, maybe you're doing that, but you're talking about a longer-term trend you're seeing. Does timeframe matter when you're thinking about prices like that? I think, you know, waiting for, yeah, I've been buying - How do you respond to that from a trading strategy point of view? Well, from a standpoint, I do think we could see a little consolidation period for gold before it does officially break out.

24:02When you look at that price analog chart that I shared, that's what we saw in early 2019, right? Prices peaked in February of 2019 and kind of pulled back for a little while before they finally broke out above that$1 ,350 level in 2019. I think we could see potentially something similar here. But with the problems in the banking system and with the debt limit issue kind of looming, if anything kind of goes wrong in either of those areas, gold prices could break out at any time. Gold is really kind of the only safe haven, I think, right now. Normally, people in a risk period would look to buy dollars.

24:51But if we're in the midst of a debt limit issue or something like that, the dollar might not be the safe haven that it once was. And people will be looking for an alternative. And the only clear alternative, I think, is gold. Oh, very interesting. Yeah, we're going to have to be – what's your feeling about the debt ceiling? Because as we march up to it, people usually say, oh, it's nothing. It's a bunch of drama in D.C. It's ugly. it's unfortunate, but it will get resolved at the 11th hour. Is that how you think about it? Or is that is there a little bit too much complacency in that? I think that's the most likely outcome.

25:29And that's why the markets are so comfortable discounting it is because it's the most probable thing. But when you look at when you actually listen to what they're saying in Washington, you have the White House saying they're waiting potentially for some market volatility to spur Republicans into a more favorable kind of negotiating position for the White House. Conversely, the Republicans are kind of waiting for some sort of market, potentially market volatility, market event to communicate to the White House, you need to budge. And so it seems like they're both waiting for markets to say, okay, we're really starting to worry about this before they come closer together in terms of some type of negotiation.

26:11So what that type of market signal needs to be is anybody's guess. I mean, it could be another breakout higher in interest rates across the curve. It could be just volatility in stocks, you know, stocks rolling over hard, kind of like they did in 2011. Either way, I think, you know, people aren't necessarily appreciating the fact that I think both sides are waiting for markets to start getting nervous. Yeah. So, yeah, it's a game. It's a dangerous game of chicken. And politicians always think they can play it skillfully. But, you know, these are complicated markets. By the way, just passing along something we were just talking about internally, Libby Cantrell from PIMCO, I heard her talking earlier today, and she was talking about May 26 as the line in the sand, not June 1st, because Congress breaks for Memorial Day.