Recession? What Recession?

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1:31Recession? What recession? Hi, everyone. Welcome to the Friday extended edition of Real Vision Daily Briefing. With me today is Vincent Dillard, Director of Global Macro Strategy at StoneX Financial. Hi, Vincent. It's great to see you. Anyway, it's good to be here. We're going to be taking questions, of course. So if you have any, go ahead and drop them in the chats and we'll get to as many as we can. So Vincent, we had some inflation data, the PCE index, which we know the Fed watches, came in a little bit above expectations. Consumer confidence was pretty much in line, but steady. Are these readings that are consistent with an economy that's headed toward recession?

2:11Well, not by my, not by my book. I mean, you know, the way I understand it, we still have about, you know, 5 % inflation term, uh, and then, you know, two percent GDP growth. So that's 7 % of our growth. I mean, we have killed for these numbers and years ago. Uh, so yeah, I look at the WRP on the Bloomberg, you know, that funds future pricing and you see all the red cuts, rate cuts being priced, uh, starting getting dried, um, yeah, something better happen soon because, uh, otherwise this will be one of these cases. And there's been a lot of that where the dovish people will always be next quarter.

2:52And they're pushing it back. Yeah. What are you expecting? Well, so we have a Fed meeting next week. What are you expecting from them? What do you think they'll say? Do you think they're going to try to guide the market in a different direction given the fact that we do have all these? People think there's going to probably be one more hike, but we do still have all that easing priced in. Yeah. I mean, if I wanted them, I would walk it back. Um, now they, they had even wrapped them to do so. I mean, I, I feel like my economy case, broadly speaking has been. Incorrect. I mean, inflation is more resilient than people thought the labor market is not cool enough.

3:28I didn't just saw that job risk game numbers yesterday. Uh, consensual is more resilient in cars, actually outpacing inflation. Uh, so you have actual real wage gains. Um, and I'm sure we'll talk about name of what I expect is a big pickup in infrastructure investment coming from the government sector and local government sector. So all that paints the picture of the economy that is much stronger than what's applied by the Fed-femm-tutious market. Yeah. And if I were, I would, I would, yeah, I would try to guide these people. I mean, this is not helpful. Like, you know, the, the, the, the curve is very inverted, it's causing all this here about the economy.

4:07So I would, I mean, the only reason why I hesitate to do that is that is because in recent meetings, he's tried to be very non-communal, which I understand. I mean, we had the SVP crisis, commercial recent issues, and also they look like forward guidance at the end of the day. I mean, forward guidance is, I mean, they've been so long for so long that I think now there's that feeling that maybe they shouldn't make too many forecasts because they can come back to bite them. So maybe he's going to ask, I mean, of course he hides, but keep it light on the full guidance so that he maintains his flexibility, which is probably what the Fed cares most about.

4:51And they don't want to precommet to any path at this point after having so badly menstruating economy or so on. Yeah. So, you know, even if they try to stay noncommittal though, if we keep seeing these strong numbers, are we going to have to have a reset in the bond market? I mean, If the bond market is anticipating there are going to be rate cuts and they don't come, how does that play out? They just lose money. I mean, keep betting. I mean, that's what's been happening, right? Just keep buying, you know, buying the dauvish people that never happens and, you know, a form of inflation that never happens.

5:31So, yeah, it's basically subsidizing the bond investors, subsidizing the economy to get their fantasy visions of a recession, you know, in the curve. But, I mean, it's been going on for three years now. Yeah, a lot of people say it's the most anticipated recession that we still haven't seen, you know, but I guess the longer it goes, people think it, well, it must be around the corner now. We had all of those rate hikes. Why haven't all of those rate hikes seem to have made a dent? Yeah, that's a good question. I think at the end of the day, I like to say we sleepwalk in the right power series.

6:12It was completely accidental. But yeah, we were. And I think a lot of the anxiety rate hikes got us from what happened in 2018, 2019, when Powell tried to hike rates, and then he was forced to backtrack the Christmas was basically 2018 and then the repo market trees in the 4th of 2019. So there was this view, oh, we cannot go above 2.5 % of the platform's rate, things are going to start breaking. And that's why the market is so nervous. Anxious. Yeah. Every time you see high, oh, it's got a rate, it's going to break. Yep. Like, what I would argue is, you know, very minor, like, yes, VB, that people are getting involved.

6:51The reason it's not happening, like I said, in terms of sleepwalked into the right policy mix. So in order to raise rates, we could not raise rate in 2018 because of a highly diverse economy, uh, and, and, and liquidity was a problem. Uh, and we also had a, um, relatively speaking compared to Narciss, uh, some level of fiscal austerity. Uh, so the, the, the impact of rate hike was higher, it stopped the liquidity out. Governments pending could not pick up the slack, but here we're in a completely different situation, right? I mean, COVID basically, if you look at any charts, you just see pre-COVID and, oh, new spike, and then resets higher.

7:31Bank deposit, money market from assets, reverse report, facility. I mean, we're basically like forced that 5 trillion of liquidity into the economy. And that earning is still there. My friend John Martha has a good metaphor for that. He talks about the COVID by the COVID pig has not been the Pfizer. So it's slowly making its way through the Pfizer economic Pfizer. But again, keep in mind that you inject it, then people spend it. Right. So that these, these deposit news of other people's deposit that keeps spending it. So it keeps stepping around the economy. It's basically this kind of multiplier theory.

8:06So that by five June injection is still there. I do see in the PC, for example, PC is about 600 billion higher than it was pre-cold even just in point patients. So that is still there. And that has allowed agents to leverage. That means you see cash everywhere. You get private equities, you want to see on cash, you know, JP Morgan insuring cash. So it's still in there. So that's one. And then the second last, the second reason is, is that the pickup in government spending, we moved from the world where we had about four trillion in annual government spending to 6.5 trillion. So that is, and I'm, I'm a fiscal, fiscal type of guy.

8:45I believe fiscal policy is way more effective than monetary policy, and you're going to increase, you know, deficit spending by governments or 2.5 trillion. That's, yeah, that's money that flows on the private sector to the private sector. That means that people are more able to spend and the economy as well can withstand high rates. And I would argue that is a great theme. 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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10:17Yeah, we're going to get into that. We're going to get into that in a little bit because you put a very interesting research point out. But I want to ask, you brought up SVB, so I want to just touch on the banking situation because this is also, there's some varying opinions about this. So we saw again this week that SVB, I mean, people are now speculating openly that or forecasting openly that the bank is most likely headed for FDIC receivership. Hasn't happened yet, but the losses in the stock price just keep adding up and it's very hard to come back from where they are right now. And some people say, OK, this is sort of there are circumstances for some of these regional banks.

10:59And then other people are a little bit more worried. My colleague, Andreas, has been keeping a close watch on the banking system, and he is worried that there's more trouble ahead. Let's have a listen to a clip from his latest report, and then we'll talk on the other side. So let's have a look at the three stages of the bank crisis. I essentially think that we have now passed stage number one. and the initial outset of the crisis was this deposit flight from the svb and other banks while now that the dust has settled on the liquidity or deposit crisis the next thing that we need to watch is the response from a credit perspective so how will banks respond to the instability in deposits from a credit perspective need to remember that deposits typically make up a large portion of the funding base of commercial banks meaning that if there is a source of uncertainty surrounding that funding source it also leads to ramifications on the lending side and those are the exact ramifications that we are slowly but surely gathering evidence of the last part of the banking crisis, which is probably still say a couple of months or three to four months out, is the actual economic contraction as the consequence of a lack of credit being made available to the real economy.

12:33So first, a deposit crisis, then a credit crisis, and then the ultimate contraction of the actual activity in the real economy. And you can watch that full Steno Signals episode on our website. Just hit the QR code and sign up. You'll also need that, by the way, if you want to stay for the second half of the show. So come on and join us. Vincent, are you concerned? First of all, do you share those concerns? And are you concerned that we will see more regional bank failures? Yeah, it's an interesting clip you played. You know, I love Andreyos. It's a great word. He's always a bit more pessimistic than I am in the economy.

13:17I blame that on Indian Danish, you know, the country of Kierkegaard, Schopenhauer, no, no, whatever. You know, some philosophers about this angst of living. There's some of that there.

13:33But actually, I didn't see... I would agree with everything that he said. And my understanding from the point is, uh, this is a process, not an event. Uh, and when the early ending, my read from the market mission marsh was that it was reading the SVD as, as a Lehman moment or like everything. And no, I mean, there is a process, which I think Andrea has highlighted quite well. Uh, you know, so, uh, the deposits are moving out, but now we stabilize that. So now it's going to be credit and credit's going to be a slow grip uh and i would stress that i mean i'm i'm my timing would be even longer than andreas actually uh so if we if we stabilize the deposit base which we should already you know btfp yeah btfp and the uh fdic insurance uh then it just just comes down to credit how how quickly these and how big are these commercial restates uh nazis going to feed through mutual banks balance And it's going to be a race between these losses and banks' ability to burn their way out and provision against them.

14:44And if you look at the average term on an office lease in the U.S., it's five years. So for now, the bill that comes due, which you will, are five years old. So that's 2018. And I would like to point that we had a tremendous amount of inflation. I'm going back to my COVID big idea here, that we had a tremendous amount of inflation, including on rents in 2018. So yeah, okay. You got to, your vacancy rate is going to go up. No question. I mean, not even San Francisco. I mean, downtown is a ghost town. So your vacancy rate is going to shoot up, but you're going to reprice a lot of these rents much higher.

15:22So you started seeing ratio maybe naturally improved. But, uh, so now of course that's going back to the big moving, the Python and as time passes, you're going to start hitting these leases that were signed down in 2021 at least observed by ratio. I've started your rates, uh, very high. So there you gonna get it, but that's gonna hit more in maybe two, three years. Uh, and a lot of things can happen in two, three years. Um, so yes, we'll see bank theaters for sure. But I would say, yeah, we see banks fail all the time. We have a banking failure resolution mechanism that works quite well in the US.

16:03We have massive amount, massive banks that are probably just, you know, already salivating at this. I mean, this is fantastic, right? Where the banks get taken over, basically, you can buy the assets for free from the FDIC. I mean, there's always, there's some good parts in these mutual banks. Uh, you know, JP Morgan earns almost 25 million net interest income every quarter. Uh, private equity too. Uh, I think I'm on the last Blackstone call, you hear these guys already like, you know, salivating, thinking about all the good stuff. Like, oh, the more, the more regional techs go out, the more we get to buy stuff on the cheap.

16:44Uh, so again, my same idea that when we have so much equity in the system, we can handle it. I mean, it'll be bad. It'll be bad in certain markets. So San Francisco is an issue. I would say, I think Dallas also has maybe a lot of overbuild. Phoenix is pretty bad. Atlanta maybe as well. I saw a really interesting chart you had. I don't know if our folks can pull it up on the fly like this, but it was in your report where you were talking about real estate. And I think we always think that San Francisco, New York, the cities that were really hit by the work from home, But you, on one of them, you showed Houston looked like it was in really bad shape.

17:25And given energy and what's happening, I was sort of surprised at that. But I guess it has to do with the supply before we went to. Yeah, there's a lot of field there. Big population, migration. It's hard to know how long that would be. And yet, they'll rebuild. Now, I kind of think, especially if you use them, that they'll be able to grow into it. But, you know, in the short term, it's too much to buy for what the market is. Yeah, it struck me because sometimes you can't anecdotally look across. This is why you really have to look at the data, because it was a little surprising when you look at that rundown.

18:05So we've got some of that, but you see this all as trouble spots, points of pain, a slow roll, but nothing systemic. Yeah, that's a great summary. It's funny. Do you think that we keep thinking that's going to happen just because of what happened in the great financial crisis? Does that sort of ghost follow us around? I mean, I even myself, like, you know, I, I started my career six or seven and so on. This is the, you know, when you get a very, and I think a lot of people are like that in their early forties, like you get a very traumatic experience when you're in your formative years, that's not a frame or, you know, the same way that, uh, the 1987 crash, I got people who went through that, or they did this internet bubble.

18:54They always think that. Uh, and then I think there's some, uh, um, you know, some, uh, it's just the mechanics of, uh, of our industry. Uh, you want to be the hero who called the big, uh, liquid recession, right? So I, you know, if my call is correct, you know, my course has been, you know, Yeah, the economy is kind of slowing, but from a high base and there are some upsetting factors. Yeah, the construction sector, the commercial mistake is real, but it's going to be paid all the time. It just means that growth is not a slow, but we're not going to be in a fundamentally different place six months from now that we are today.

19:41Now, this is not a very exciting call. Like I'm not going to get invited to 7BC for saying that. Now, on the other hand, if I were to pull for an all-back event with a sharp recession, this would start to be like, well, so… Yeah. And there's a lot of that on Twitter. And people refer to it as doom porn, but it's not very helpful when you're trying to make accurate decisions about your money. You mentioned something in there about construction. what's happening because people, you know, the natural thought is higher rates again, back to 08 housing, terrible for housing, for residential housing.

20:20But you point out, we have a lot of money and stimulus coming from the infrastructure side of things. Yeah. So I started thinking that precisely because of the absorption drop. So one thing that really surprised me is if you look at the, the, the, the, the data on construction, you'll see that we added to our production jobs. Bastion. It's kind of like, whoa, you know, and it really matters because usually construct like if you want for the whole fed, dovish people, theory, right. You mean the labor market to cool there. Right. And then usually that happens on the construction sector because it's low qualified, it's very sickly call.

21:02Uh, so it's a carrying the format, but not only no CX, even before things starting to roll over, we had already destroyed, uh, 200 ,000 jobs in 2000 stakes construction jobs. So that isn't like, if you want that whole, uh, bearish narrative, uh, not on the market, I'm bearish on the market, bearish on the economy, like recession, recession narrative, you really need construction to start rolling over and they're not, and at this point, recycle we should have. So that's, that, that's kind of what led me to, why, why is that? Some of the first thought I had was, oh, of course, you know, we had the Inpatient Reduction Act.

21:36That's like, you know, fork as far as the eye can see, we're going to do the grid, the solar panel. I mean, 150 billion here, 200 billion there. I mean, this is, whoa. And then you know how these government projects work, right? It's over time. Get a big check to get the press conference. Oh, we never spent 500 billion building a 21st century economy. I mean, that stuff is going to be spent over five years, if at all. And remember, the rubana and the Orion had the shovel ready, stealing the spot. Nothing was shovel ready. I mean, nothing ever would, right? You need to appropriate the money. You need to get the approval, you need to pay the consultant.

22:11So fiscal policy, I mean, it's long and not variable lag. So that IRA money is already spent over the next five to 10 years. You add in the chips, that's another 250 billion, I think, in basically bringing facts back from from Taiwan and Southeast Asia to the U S with huge subsidies. And you see all the announcements already from TSMC to the Texas instrument, Micron, and, you know, and these are, I mean, the fad is massive building. And they started working on that. So there's some at the federal level, but the biggest story and the one that really surprised me, uh, Intervall it's managed to, I mean, it was real, but I didn't realize how big it was is how much money's stake in local government have, how much of a bonanza they got from, uh, Corey payments from the federal level.

23:01And then the capital gains soaring sales tax soaring because the economy was high on crack in 2021, 2022, we'll get 15%. So fiscal receipts way, way higher than people think. And they didn't have time to spend the money. And you restart like the federal government could manifest money in air, right? Local governments still more complicated. So when they have such a huge influx of money, it doesn't get spent right away. So it's going to be spent in the next two to three years and keep in mind that white culture infrastructure spending about 70 % on it at the local level. Uh, so my impression is that was one of the construction sectors of transfer.

23:38Yes. There is the real estate market is slowing, I'll buy not drastically. I think it's the way, but it is slowing. No question. Uh, private credit is going to slow and SVP and all that is not going to help. Regional banks are in dignity, you know, and it will under us there, but you'll see some pick-up go from fiscal governors, central governors, and most importantly, state and local governments. 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.

24:15Yeah, that's a really important point, and it's not one that has been brought up that frequently. And that is a really big, important support when you're looking at the U.S. because so much is done by a state-by-state level. So I think that's a really interesting and critical point. I want to get to a couple of questions because we have some coming in. And you just mentioned semiconductors. So I'm just going to pop to that one from Dan. How much longer can this stock market keep up? It says this five stock market, but I think that's just a typo. The stock market keep up. Algos are chasing fang.

24:47Do you think the NASDAQ will roll soon? Yeah, I mean, I agree on the assessment. So, near to date, the Russell 1000 is up 70 % now, right? 100 % of that comes from six stocks. So, that's it. The other not for 94 stocks, you make no money. The Russell 2000 index is down. So, yeah. May die, I think it's double. And Tesla is not for BI, VDI is probably up 70%. Microsoft and Apple, the two largest stocks in the world, they up like 35 % each. And given the weights, the index, that this carries everything. So I agree with that.

25:34Now, when does it roll? Well, I think you would need to see what we were talking about, about these dovish people insanity being at least pushed out, if not canceled rate. Like, well, when we start to reprice and to understand that, yeah, we'll be more four or five percent inflation that comes rate well for a while, which, which I think is correct. Uh, yeah, you do not buy the S &P 520 ,000 earnings. You buy it, you know, 15 ,000. Uh, so it's, it all goes back to the how long can this recession they hold on and keep burning the curve before they give up. And I guess they have a lot of money to lose.

26:17So they cost me want to bet against the economy and then they keep betting against it. And that creates this feedback loop, the, the mega tech, uh, which that, uh, the other thing that two things are points on, um, on the, um, the, the big tech phenomenon, uh, Ron is that the problem that my friend Mike Green always mates about the rise of index fund effectively benefiting from Rogers Captain Index. And clearly that process is up late here. I don't know when that ends. Give that hands at all. I mean, you should probably have him on the show. We did him not long ago, but we'll catch up with him again.

26:55He has a lot to say about that. And then the second thing is, I think it was a post that Josh Brown, the reformed broker I had a couple of years back, which I thought was, I'm going to reuse this term in school, just whom the damn robots. And I think this is probably happening with big facts. I think we, you know, in recent months, we've all had anxious he made with chat GPT or two GPT or whatever new thing is. And we've all had this, this mix of, wow, this is awesome. And I said, terror. Yeah. When is that going to steal my job? We all, we all think about it, especially in journalism. Right. And I think partly when I see Microsoft and Google, like, we probably straight up, I'm like, this is panic.