David Rosenberg: Don't Believe The Hype! This Economy Is A Dead Man Walking

I think that uh I think that the business cycle is not dead uh gotta focus on leading indicators I understand that for people in my Camp it's been frustrating and frustrating you're waiting it's like watching paint dry waiting and waiting but it's out there the business cycle is not dead and um I think that the recession may already have started and we don't even know it oh welcome to wealthian I'm wealthy I'm founder Adam Taggart according to today's headlines it's looking increasingly likely that the economy May Dodge a recession that calls for a soft Landing are turning into ones of no landing at all the same headlines tell us the markets are in great shape and will be powered higher from here by a new AI driven profitability boom but according to today's guest highly respected Economist and award-winning researcher David Rosenberg founder and president of Rosenberg research the headlines are selling a false narrative by his measure the recession is already arriving in the current market AI frenzy is a classic stock Mania that will end the way all bubbles do today we'll hear his reasons why David thanks so much for joining us today thanks for the invite great to be on thanks it's a real pleasure for folks wondering why I'm in this different background Murphy's law about two minutes before we were to go live with David the power to my studio went out I had to rush to my backup studio so David thank you again for your flexibility here um lots of questions for you lots of ground to cover in the time we have here let me start with a question I like to ask all my guests at the beginning of these interviews what's your current assessment of the global economy in financial markets well look the global economy is not a uh homogeneous entity so you know there's some pockets of strength uh you know you can point to Japan uh Japan actually had a technical recession uh in the second half of last year and is coming out of it uh much the better uh Mexico uh is doing well and when you uh look maybe at one other country you could focus on India uh great demographics and the uh arguably the strongest GDP growth on the planet but you know what are you going to say about China uh their recovery uh from the reopening is sputtering uh their economy is disinflating or on the producer side deflating uh Europe uh after uh a miraculous non-recession uh courtesy of uh a mild winter and declining Energy prices managed to escape a recession but the numbers there are rolling over and you look at the United States and it seems to me as though we're still making this uh transition from expansion to recession uh so net on net uh when you add it all up uh and you're taking a look at Europe cooling off dramatically uh China sputtering and the U.S uh it seems to me it's very clear I know it sounds extremely controversial to talk about the US going into recession uh just because the lagging and coincident indicators are telling you that we're into something brand Spanky knew about a no Landing or soft Landing like you mentioned we're heading into a hard Landing in the second half of the year uh based on all the leading indicators so uh yeah I think that uh we're heading into a global economic downturn and in fact when you look at the oecd leading indicator it's telling you the same thing uh so I think that we're heading into uh a global economic contraction it's not going to be shared by everybody but net on that when you add it all up I think that's what the prognosis is okay um great kickoff um I wanted I want to dive into why the market quite hasn't seemed to have gotten the memo as well as your thoughts for how protracted and how severe this recession might be really quickly before we get there let's just take a path through um policy if we can um and let's start actually with um inflation and deflation um I I know that you for a while have been more on the deflationary side of things given in terms of how you think the trajectory of things are going um if you look at the recent data that's come out on inflation it does seem that I mean no doubt it's come down materially since middle last year but Services seem to be really kind of sticky right now especially looking at at core pce which is the the fed's preferred measure um uh what's it going to take to tame the sticky Services inflation well you know look uh Beauty Judy's in the eye of the beholder so if you're taking a look at the asset sector uh and you're looking at the fact that and we could talk about the stock market separately uh you know last I saw uh the stock market last made a new high uh back in early January of 2022 so to be talking about inflation and Assets in terms of the stock market well I guess you're going to cherry pick your point we haven't made a new peak in you know 16 months uh deflation commercial real estate uh you got deflation and residential real estate it's nothing like it was back in uh 070809 but the home prices the over year percent change is actually hitting negative for the first time in over a decade so you'd have to tell me how do you want to Define inflation or deflation we have deflationary cracks in the asset markets you're going to come to me with this law statistic called the Consumer Price Index and by the way flawed isn't my term for it was Alan Greenspan's back in 1996 when Jenny Ellen and everybody else in the Fed was trying to push them to go towards inflation targeting what is exactly Adam the the Holy Grail of the CPI when over 40 percent of the index is imputed guesswork by the BLS on as you said Services what are we waiting for we're waiting for all the distributive lags on residential rents which accounts for 30 percent of the CPI and 40 of the core we have to wait for that to fall out of the data but we know in real time that residential rents for new tenants uh is going down and we also know based on multi-family building permits Starts Now this isn't true for single family multi-family if you're going to say to me what part of the US economy has been in boom mode it's been multi-family construction right and now those units under construction are going to morph into completions we're going to be faced with a deluge of Supply in the next 12 to 18 months relative to the demand and you're going to continue to see in real time residential rates deflating but it will not make its way into the CPI probably not till later this year it'll be a major event in 2024. but you asked me about the CPI uh well that's your story PC deflator very similar story of course we also had last month um some Health Care Service inflation in there what's that got to do with the economy right when you're taking a look at the cyclical side even of services and the one thing I noticed in the PC deflator is that you are seeing actually deflation now in hotels and motels they're cutting their rates airfares are coming down delivery services what is more what is a more cyclical service I'm not talking about how residential rents are constructed I'm not talking about health care I'm not talking about financial services by the way ask the question what about what about server sector inflation well all of a sudden banks are raising deposit rates oh well that shows up as inflation in the uh in the statistics but is that is that inflation um well the fed's creating inflation because they're raising rates banks are forced to follow suit now more than they have been and it shows up in financial service sector inflation I mean what what bank right now is Raising its fees as we go into a credit contraction right so it's just so it's just all nonsense I'll tell you that look the the producer Price Index uh was 11 year over year this time last year so the question would have been a year ago what what is going on exactly we look like Zimbabwe reducer price index is now 2.3 percent year over year now I get back to show you how people are totally ignorant of the data they come back and say well why do you look at PPI for it doesn't include Services no no that's the old way from 20 years ago producer price index 60 of it is services and one of the biggest factors that is disinflating if not deflating the producer price index which doesn't show up nearly as heavily concentrated in the CPI is guess what Freight and transportation and shipping rates are plunging and that's in the PPI so I know like I know the fed the fed the battle of the Holy Grail of the CPI the statistic that Alan Greenspan who despite his own flaws was arguably I'd say tied with volcker as the best Economist that the FED ever had called it a flaw statistic and because that is what J Pell wants to look at we all have to look at it what I'm trying to say is that the year-over-year trend and the producer price index has collapsed in unprecedented form in the past 12 months from 11 to 2.3 percent it's almost at the fed's Target can you imagine if the CPI which is right now 4.9 column if the if that was doing what the PPI was doing uh but you see everybody just Cherry picks their favorite inflation measure what I'm trying to say is what makes the PPI special is it doesn't have all these imputed price measures and services this guesswork oh this function that permeates the CPI and frankly I know I know what the fed's looking at I know what CNBC is looking at box business everybody is just the Holy Grail bowing down to the Consumer Price Index there are other price measures actually telling you that the FED is actually there they just refuse to believe it because of hubris because they they committed the cardinal sin of saying inflation was going to be transitory uh they believe they are wrong mostly believe they are wrong and in his second uh you know second part of his tenure Jay Powell is not going to go down in history as being compared to Arthur Birds uh so they'll crush the economy we haven't seen the full effects of the FED tightening yet and inflation is going to be a lot lower it's already come down a long ways uh but talk about you know the stickiness of the services side when naturally the distributive lags there's those lags are like three years of course the CPI is the most likely the CPI is more lagging than the unemployment rate is it's the most lagging of the lagging indicators and yet I've never seen a cycle I've been in those for been doing this for 40 years I've never seen such anal retentiveness over such a lagging indicator as the CPI inflation rate where 30 percent of it is dominated by residential rents that we know in real time are actually going down so I don't waste my time talking about where's inflation today I talk about where is inflation going to be 3 6 12 months from now and it's going to be a lot lower and especially 12 months from now when these rental measures go the other way which every single leading indicator of rents is telling you is going to happen real-time is telling us it's happening yeah um great answer there's so much I want to pick apart there but but um I'm really glad you leaned into the lag effect because that's a drum that we've been beating on this channel a lot and I think a lot of people just assume since it hasn't happened yet it's not going to happen but to your point is is these policy you know decisions have a long lag measured oftentimes in years and those are still traveling and I'm through to us so get your your credit your your start criticisms there of the CPI I'm going to presume you feel pretty similar about the government reported jobs data as well I don't want to make that assumption though without giving you a chance to corroborate or not well um I mean the non-farm pure report again the the Holy Grail it's as if there's no other piece of uh of job market data we'll get another report on Friday everybody will trade off of one number non-farm payrolls where like 30 or 40 percent of that number has been Juiced up this year from the BLS birth death model because even though there's no evidence to suggest that we're getting any net new business creation uh the BLS is still assuming that we are getting um additional jobs and that's really why the numbers have looked so great the other numbers haven't looked so great uh the Challenger uh numbers on layoffs and uh hiring announcements not so good uh the employment numbers out of the conference board survey you saw the conference board survey that came out uh showing uh jobs hard to get jobs are plentiful you're seeing you're seeing cracks in the labor market yeah it's not that unusual if you look at the um withheld taxes uh that the U.S treasury reports on a daily basis the employment taxes are withheld those are in steady decline as well we see from the joltz data that um you know the openings uh the hirings um are are starting to uh decline from albeit a very high level but they are declining rather precipitously in the past several months so uh I would say look there's there's uh you know the the notion that companies are being very slow to fire people after the horrible experience of the lockdowns and then the government paying people not to work paying them or not to work than the paycheck they were getting created all these distortions and what happened was that companies uh lost contact with their employees couldn't find them again and you had this massive Distortion that's one of the reasons why the job openings data you know look like a.com stopped from 1999 job openings because companies are trying to find uh the employees that they used to have uh and so we did have this Distortion and I could see as a as a business owner and you're going to be loath you're going to be low to let people go uh in fear of what happens in the next cycle you're not going to find them again but what's happening is that hours worked are going down and what's interesting is that it's the work week the work week is the work week is one of the only leading indicators from something that's otherwise a lagging indicator called employment and the work week is down 0.6 percent year over year uh which sounds like a small number but it isn't really and what's happening is that companies are not firing people dot dot dot yet but they're cutting their hours and that's classic classic transition going back 70 years when you're making the transition from expansion to contraction and look there's no reason to get overly passionate about this the business cycle is the business cycle thank the good Lord that 85 percent of the time we're in an economic expansion 15 of the time we're in recession but recessions aren't uh unicorns they're not fairy tales they're not fantasies they're real but thankfully they happen 15 of the time the same thing with bull Mark and some bear markets we're in a bull market 85 percent of the time historically we're only in a bear Market 15 of the time but it behooves the economists and strategist and analyst to identify for their investors so where exactly are we in the cycle well focus on the leading indicators and focus on those relative to The Coincidence to lagging because ratios are more important than levels because ratios give you something about momentum that's why people who follow the equity Market they look at Dow transports to utilities they look at consumer discretionary to Consumer Staples they look at Value versus growth small caps to large caps so you're always looking at ratios because they tell you something about relative momentum so when you're taking a look at the labor market holistically and you're taking a look at what's happening not with bodies but what leads bodies what leads bodies are ours in both directions when you come out of a recession you see companies aren't sure are are we really out of the recession so you see they don't start hiring right away what do they do they start to lengthen the work week of their existing staff and now but that's working the direction so look it's I know the recession is like waiting waiting for God oh it's like we're waiting and we're waiting but you know recessions they're sort of like they're this odorless gas and the next thing you know I mean look what happened in the last cycle when I was at mother Merrill come on you know in in in in in the summer in in in in June of 08 the FED shifted to a tightening bias Richard Fisher from the Dallas fed actually voted that meeting in June a couple of months away from Lehman and AIG and Meryl collapsing everybody thought everybody thought you know bear Stearns is a one-off the housing is behind us the consensus and the summer of 08 was soft Landing next thing you know nobody knew nobody had a clue nobody had a clue to the recession the nber defined recession actually started in December of 2007. uh so that's what I'm trying to say look uh we had a housing collapse house price collapse it uh infected household balance sheets then of course we had the financial collapse and I'm not saying that's going to happen this time around at all but the cycle is a cycle and the leading indicators are the leading indicators but nothing I'm seeing including your questions even about the stock market which we can get into what is the stock market telling you nothing to surprise me right now recessions do take time to unfold but the thing is that nobody believes it until you get several months of employment declining then they say ah okay now I see now by the time the employment's declining employment's always Last Man Standing because the hours worked lead that the key is to stay ahead of the herd SO waiting for employment to go down is one of the craziest and dangerous Notions I've ever heard by the time employment goes down we're going to already be three to six months knee deep in the recession and that's the last man standing but the hours worked are telling you that that is going to be the next chapter of the story now with all due respect do I know for a fact is it going to be a June Story a July story August story take your pick probably sometime in that time frame and then when employment starts to go down you see the first time employment goes down people say it's a one-off it's a one-off because you see nobody wants to call you see you know I I say to people we're going to have a recession and I I've been through probably four cycles and every time it's the same thing I looked them in the eye and I say I think we're gonna have a recession and the response I get it's as if I call their it's as if I said your kid is ugly you know it's like no just you know it's part of the business cycle you think that you think that there's a get in a jail free card after the most pernicious fat tightening cycle since 1981 you really think interest rates don't matter it's as you said Adam it's that it's that there's lags lags and the lags could be one or two years right I mean the fat stop tightening in the spring summer of 2006. ah you know by the spring of 07 okay so we lost new sensory Financial we got these problems with the abdx indices in the mortgage Market don't worry don't worry no yeah by recession started at the end of 07. it's like the feds stopped tightening in um when fed stop tightening in the winter spring of 2000. ah yeah the nasdaq's rolling over but big deal big deal the s p hit its high in September of 2000 don't worry about it don't worry about don't worry about it and then we're going to earlier one don't worry about it and then all of a sudden you know when does the recession start in March of 01 and I'll tell you the consensus didn't get it but Alan Greenspan will tip my hat starter cutting rates 50 basis points on the first trading day of the year in 2001. this is where maybe a little too much information but it's very valuable okay go for it that nobody nobody you don't want the consensus started calling for the recession in o1 do you know when the you know the consensus after after 9 11. it always started remarkable one that and of course it ended two months after 9 11 because we had all those gobs of fiscal stimulus coming in after the terrorist attacks so I know I look I know you're saying the market this Market's saying that and this data's saying that but you know the the key in this business is to stay you know stay ahead of the curve and do not follow the herd well that's we're so excited to talk to you because what I I I agree with what you're saying and if you look at uh just to stay in policy for one more second the FED is looking at what you're saying is is sort of um you know faulty data and very lagging data and if you look at both inflation and you look at jobs both those numbers right now seem to be telling pal keep tightening right like you still have more work to do looking at these flawed metrics and so you know he very well may continue going higher for longer here I mean he's being squirrely about whether he's going to commit to another right hike or not but Bullard was out last week saying he thinks there's still two more so you know RR monetary leaders potentially making the coming recession even worse than it needs to be right now by leaning into their tightening policy at the same time that all the indicators you look at are are deflating well you see here's what what the FED is telling us is that they they either they don't have a view or they don't have confidence in their view uh either they have a model or they don't but we know the FED has a model they don't have confidence in the model uh this whole notion of data dependency is the stupidest thing I've ever heard monetary policy hits the hits the economy with lags that are 12 to 24 months and so they should have a forward-looking view but they're data dependent they're not view dependent we just had you know the reality is that what are they waiting for like inflation peaked in June at 9.1 percent uh we've come down what 420 basis points in a 10-month span which in the past has only happened uh three other times it happened in 1975 it happened in 1982 and it happened in 2009 that's how fast called the first derivative of the rate of change of the CPI or you want to call the second derivative of the CPI um he Compares himself to volcker well again with all deference with all deference to J Powell took Paul volcker almost seven years in his tenure to get inflation to two percent it took Alan Greenspan 10 years so yeah we have a two percent goal but what you're going to want to get there when the three months and four months you see they are so caught up in hubris and their embarrassment of missing like you know we all missed who even the most Ardent Hawk Muhammad alerian Larry Summers Bill Dudley I don't remember anybody talking about a nine handle now we were just there for for one month admittedly uh but yeah they've already overdone it history will show that they corrected one mistake with another mistake but I don't know maybe I'm being too hard maybe it's not a mistake what did he keep on from the get-go in the Titan cycle the March 2022 who did Powell compare himself to not Greenspan not Bernanke not yellow not Machesney Martin no to volcker at every opportunity and volcker created the conditions for disinflation with not one recession but two back in the early 1980s so he gave that to us on a silver platter which way they were going next thing you know they're going in like 75 basis point increments and then he tells us at um at Jackson Hole last August he says I'm so sorry I'm so sorry but I have to inflict pain his word that four-letter word pain on the household and business sector well pain that's that that ain't no soft Landing pain ain't no soft Landing pain is not like no Landing which I actually I laughed continuously at the notion of a note do you understand when people say no Landing soft Landing they're telling you they're telling you my forecast is the business cycle has been repealed right what so he told you that they actually want to create the conditions like a volcker to constrict contract aggregate demand which is GDP uh because they're in a big hurry they're in a big hurry to get inflation down to two percent now as I said before volcker didn't have any credibility problems took them almost seven years Greenspan we could argue uh about his credibility problems around subprime but it took them 10 years so we're automatically going to have to get down to inflation that quickly to me is uh is a little irresponsible but you know there's like I said there's they feel like their credibility is under attack and I don't know where that comes from because let me just ask you the question do you see it in the 10-year break-evens the tips break evens because I don't see credibility issues 2.2 2.3 percent five year five year forage do see uh is the commodity markets telling you that the fed's got some massive inflation problem we're talking you know you're talking to me about the certain services so much of it is imputed I just finished saying nobody talked about this I didn't see this anywhere except my writings over the weekend that in that PC deflator hotels motels negative delivery service is negative airfare is negative car rental leasing negative so to come to me and say well look at the stickiness yeah when you have rents and I would say health care as well which is not anything the FED can fight and I think it was a one-off most cyclical Services those prices are actually going down and so I just get a sense here that the fed's not fighting its credibility the US dollar is breaking out right now to the upside if I was concerned a central Banker our credibility is under attack the US dollar will be in free fall it's not commodity prices would be surging they're going the other way what's more important than the oil price what actually LED you know what led the first thing that led the inflation first thing that led the inflation off of zero in the spring of 2020. was the oil price now all prices are diving nobody talks about it I feel questions every day about the inflation it's not even called inflation the inflation it's about the inflation the inflation people think I'm crazy for saying disinflation I'm saying do you not see that like oil prices are down almost 50 percent and that feeds in everything and it feeds into Services it feeds into delivery services if he's in the airlines it feeds in so we got this collapse in oil and and everybody's still talking about inflation I actually think back thinking I I sort of like this because where's the surprise going to be uh and so I'm looking at Commodities I'm looking the shape of the yield curve tell me is the inverted yield curve the inverted yield curve telling you anything when if there's the fed's under inflation attack the yield curve is steepening and bond yields are surging the dollar is tanking commodity prices are surging we have none of that but all I hear about this uh is inflation and we're focused we're focused like in a ridiculous way on the CPI which I argue is not the only statistic out there I think this is where the FED has gone wrong is not teaching us they should teach us about the eclectic holistic measures of inflation okay not everything is following the CPI the same thing with the labor market he chooses like seriously like um job openings to unemployment but you see unemployment the u3 unemployment is a very narrow measure of Labor Market slack there is actually a statistic that the BLS produces that's called the total pool of available labor which is like 50 percent bigger than the youth but but we're going to look at the u3 definition of unemployment and we're going to look at by the way the jolts data and and that's the thing is that nobody knew what the Joel's data were before Powell elevated the Joel state of the number one status never mind the fact that post covert the response rate has collapsed so I'm trying to say is that there is no veracity behind the numbers that the FED is looking at which really surprises me I would love to be one of those meetings and maybe give them my own presentation because I've been doing this a long time myself they're looking at job openings to unemployment if you really Trace that out we should have had 10 wage growth this cycle but it never happened wages did go up but wages got bottled up by prices every step of the way real wages have only gone down so people talk about wage inflation wage inflation we never had real wage inflation in the 1970s and that's oh the 1970s that's the template oh the 1970s wages went up more than prices half the time and prices went up more than wages half the time and that's called the wage price spiral because back then inflation was institutionalized into the economy through cost of living allowance contracts Cola Clauses they don't exist today right God forbid them all oh you get a Starbucks a Starbucks Union or you get an airline and and it's a front page news about we're getting a big wage breakout uh I think that um I think I think people and including the FED have been hyperventilating about the inflation far too much but for the fact I think that they believe they've had a perceived lot of slaws of credibility uh and when you compare yourself to Paul volcker who inherited a much different inflation situation and a much more pernicious longer lasting one than the one we had like well again I keep on saying with all due respect and normally when you say it you know you don't mean it but I do mean it this time like you know almost two-thirds of the time in the 1970s the inflation rate was over nine percent we had one month of nine one month June of last year well and we're like we got the big uh uh institutionalized inflation in here so I'll take the other side of that bet and places already come down a lot and I think it's going to come down even more the next 12 months uh and the FED will be cutting interest rates rather dramatically in that environment because one thing we know about Jay Powell is that he pivots in both directions so let's go there if we can and by the way I have so many notes here we're not getting a chance to get through but this is great David thank you um so uh a lot of people I'd say the vast majority of people you know are salivating the market is salivating for power to Pivot still believes he's going to Pivot sooner than he says he's going to um in the type of future that you see coming in terms of the type of recession the severity of the recession that you see coming how big do uml imagine the policy response is likely to be you know it seems that every time that we have a central bank engineered rescue now it's bigger in most cases substantially bigger than what it was before you know so what kind of magnitude are you expecting when pal pivots next well it's it's well it's situational right and we got to keep in mind that people seem to think the FED could only cut rates if we get in some Financial Calamity uh not true uh do we have a financial Calamity in uh 2019 when he cut rates three times no uh did we have a financial Calamity you know in the year that uh we labeled uh Alan Greenspan the Maestro 1995. I mean we had the tequila crisis in Mexico well we saved that with Tesla Bono's uh problems in Orange County was there a financial crisis in 1995 not really the FED cut rates three times not like a.com Bust or a 2008 well so something but so what I'm saying is that you know the the FED in the markets had the symbiotic relationship the markets lead the fed the FED leads the markets but when push comes to shove um interest rates are cyclical and the FED May lag what the markets are pricing in but interest rates are so cool why would anybody have a problem with we go into even an economic slowdown let's not call it a recession and inflation comes down uh you know why would interest rates be static in that environment right so if we get the soft Landing which to me is a classic case of uh hope triumphing over experience that we get a soft Landing then uh when you look at soft Landings and soft Landings are when the economy slows but doesn't contract a big difference between the two the FED Cuts rate 75 basis points which up until recently the markets had price down uh if we get a soft Landing we get a hard Landing which is a recession whether it's mild or whether it's severe the FED historically Cuts rates 500 basis points to a t to a T and I understand that nobody can ever believe that will ever happen at the peak and rakes I could tell you that when the funds rate was what six and a half percent uh back in um in 2000 did anybody say oh we're going down to one percent in 2003 no yeah absolutely uh when when we when we got to five and a quarter in 2006. anybody say oh wow we're going to zero in the next cycle so um and look I'm not talking about uh pandemic-led recession um things are cooling off anyways and the FED goes from well what were they back then about two and a half down to zero right the last three Cycles we've got down about one percent or zero in a recession so is someone going to tell me oh but this recession because of yesterday's story called inflation they're not going to go back down to zero I think they probably will be forced to I think we're gonna have a recession I don't know about the severity I don't know about the severity but I don't really care because we had the mildest recession of all time in 2001. real GDP went down the grand total of negative 0.2 percent did that stop the market from going down like you know 60 percent right now so you know so you know the um I think that uh I think that the business cycle is not dead uh gotta focus on leading indicators I understand that for people in my Camp it's been frustrating and frustrating you're waiting it's like watching paint dry waiting and waiting but it's out there the business cycle is not dead and um I think that the recession may already have started and we don't even know it and I say that because of something called GD Plus GD plus is not just real GDP but it's real GDP and Real gross domestic income and we've actually had back-to-back quarters of negative prints and q1 and Q4 of last year negative 1.4 and q1 negative 1.2 so people look they'll look at the latest consumer spending number okay that's good after a prolonged period of weakness uh Capital spending is in a recession uh you have lots of things that are extremely weak but the income side the income side of the economy very interesting everybody was going Gaga over the real consumption number what was it 0.5 that we got uh for April but nobody says oh oh but what did real disposable income do oh it was flat so the story was that the savings rate was drawn down from 4.5 to 4.1 percent so I call that a very low quality consumer spending report but hey people knock themselves out because they just spend their time looking at the headlines without really digging through uh the data which is you know what I do for a living that's called it's not called Data Mining it's called analysis but what I'm trying to say is that the recession could already be starting and I know you're going to tell me but nobody sees it the markets don't see it I'm trying to say they were saying the same thing saying the same thing in 1990 they're saying the same thing in uh in in uh in in uh in 2000 saying the same thing and two because we're also borderline narcissistic and impatient yeah uh but I think that the it could well be the it could well be that the recessions are already started and indeed indeed nobody's noticed it uh and that'll be the big question mark is what will be the trigger point I guess it will have to be when we start to see the employment contraction and I would say that that's taking a little longer uh to take hold because of the this need for the business sector I gotta hang on to my staff but you got to hang on to your staff until you can't and I'll tell you why businesses won't be able to and it was in the first quarter productivity number you saw the first quarter productivity number negative 2.7 percent at an annual rate negative 2.7 that's a 1 in 15 event so real non-farm business output in the first quarter was almost flat and the business sector added 2.7 percent of Labor input two points that so we as you said and let's take the let's take the non-farm payroll numbers that's as gospel with the brick death model we're hiring all these people to produce nothing yeah uh is that a is that a business model for capitalist economy but you see companies are hanging on as long as they can but they won't be able to because the productivity decline is crushing their margins they won't be able to and they're already starting to cut the hours hours lead the bodies so I think that once we start getting employment declines people go uh well what do you know great this cycle isn't dead after all can ask you then real quick so it seems that the s p analysts are now bringing their earnings expectations up what's going on with that they've been excessively Rosy given the macro data they were load to bring them down they did start bringing them down but it looks like they've kept them relatively robust for next year but most recently I'd have seen is they've been bringing their EPS their earnings estimates up for next year are they bringing their estimates up their growth estimates up or the levels up uh I mean I believe they're bringing the the actual number of of earnings that they're projecting up they're revising I have no idea I have no idea I had a client ask me today that my old friends at Merrill Lynch have taken their numbers up for next year what does anybody know about next year now I think what's happening and this was happening on the growth side that the growth rates for next year were going up uh even as the level estimates for next year were going down because of the weaker base for 2023 it's called bear Market math so taking down 2023 May 2024 looked a lot better from a year-over-year growth perspective if you know what I'm talking about yeah um if anybody's raising their numbers for next year uh then I would say ipso facto they have a soft Landing in their forecast and everybody is falling into that sense of complacency that we're look I'm just getting questions all the time Rosenberg where's the recession Rosenberg wears show me the recession doesn't matter that I have this metric real GDI real GDP the other people's eyes this rule where's the recession we're not seeing it in the consumer um we're not seeing it in employment now uh it's hard to say that you're not seeing it in the consumer because you're seeing it certainly out of the retail reports that we got right uh like when you start getting high-end people going to Walmart you know something funky is going on you see all these retailers are showing how there's people are trading down uh that when you're taking a look at what people are shopping is way down relative to the traffic the traffic hasn't come down nearly as much um items dollar value of items bought uh per unit purchase coming down record credit card debt and all that the decline in the savings rate there's a lot of stuff yeah the credit card and that's that's so interesting too right because what happened to the excess what happened to the excess savings and if everything's so hunky-dory why are people people are actually people are actually using their credit card to buy food I mean so you know you start to wonder that the complexion of the consumer and look there was a great article in the Wall Street Journal uh and I think it was uh on um on Monday uh talking about how uh Walmart and others uh Big Ticket retailers are going to their suppliers and push them to cut their costs substantially uh so that's what lies ahead of us but the you're seeing a I I am seeing a definitive shift towards consumer frugality but I guess people are gonna have to wait and see I Gotta See multi-month declines in consumer spending then I will gravitate towards this recession for you I've got to see several months in a row of employment declining and then I will basically change my view by that time the recession is going to be six months old yeah right and that's what I'm talking about the look the leading you know actually enough I think that before chatgpt this will put every Economist out of business but it's been around since 1959 so maybe you should have done that already which is the conference board is leading economic indicator which is down 13 consecutive months and that's only happened in the context of predicting a recession right exactly and that's only been in recessions and and actually the the average and median lag is around 15 months from the peak of the Lei when did it Peak peaked in December 2021. yeah it's telling you the recession the recession you see like I said before this recession it's like it's this odorless gas you see what I'm saying it speaks up on you and I think I think this recession is already starting now you'll say I want to just want to address what you said about the markets because once again you know we battle the Holy Grail of non-farm payrolls oh the Consumer Price Index these Flawless statistics the S P 500 seriously what about the s p 600 the s p 600 of the small caps have a much higher beta or Torque to the economy then these Mega cap growth stocks do right then the s p six or whatever well the s p 600 is uh is is 23 off the peak the Russell 2000 which has more zombie companies down 27 from the peak but you see once again I what do I care do I do I wanna so large cap growth technology they're in their own universe and of course their valuations are being amortized discounted over a much longer time frame you can't look what are you going to look people are saying oh that the that the AI craze is going to save the economy like what are you talking about like we had the internet crazed in the late 1990s did that stop the business cycle did we not have a recession 2000 2001 and we and and the internet was real but it was a it was a financial bubble so we were saying oh the AI the AI is going to say the generator is going to save the economy and they're thinking well it's going to be a game changer long-term Game Changer but no no no this stuff does not alter the Contours of the business cycle they're not by the way bigger than interest rates as Albert Einstein famously said the power of competent interest is the eighth wonder of the world uh so you know the uh the major Point here is that when I look at the stock market I wanna and I want to say what's the stock market telling me about the economy I don't go to the s p 500. I look at the banks I look at consumer discretionary and I look at transports because they have the highest sensitivity they give you the most information about GDP and they're down 33 from the peak so when people say well as you said well you know what's the answer to be 100 telling you well I'm telling you what it's telling you do I care is when you're looking at health care you're looking at Healthcare in the s p that's something about the economy or large cap Tech no banks transports consumer discretionary that's all you need to know all right and those are and they're telling you the same story by the way that the inverted yield Chris been telling you since last June okay so so those those are important indicators in your dashboard that are still blinking warning recession signs um all right so um I want to be sensitive because I know you have a hard deadline coming up here um so uh okay so we've done a good job of ripping whatever wool might have been over the eyes of the viewers of this um this video although David just so you know I believe most of the viewers on this program have been thinking very similarly to you so I think you've been in more validation mode for the way in which they've been skeptical of today's markets um what is looking appropriate to you to consider in terms of asset classes given where you think markets are going to head from here over the as this recession arrives in force well look uh I obviously like what works well in a recession and uh long-term treasuries work well in recession so uh I like the treasury market I like the long end of the treasury market because I think that's why you'll get your greatest Total return uh I think that uh as the fed the FED will be cutting rates um but you see the bank of England and uh the ECB uh have lagged behind they'll have more to do so relative interest rate differentials are going to work against the US dollar so I want to have a hedge against the US dollars so I'm very glad to have gold so I would be recommending what I refer to as because I love alliterations is the bond bullion barbell um I think that uh if you're going to be fully invested in the stock market then be prepared to have a lot of bumps in the road because the recession is no longer priced in we're getting a lot closer at 3 600 on the S P last fall but all of a sudden as you said before uh the the analysts are buying into the soft Landing view soft Landing has taken over and soft Landing has got repriced in uh I think that I've got problems with what's being priced into the stock market writ large but there's long-term thematics out there um and uh there's Farmland I think come out of the covid with uh and not just that but with the Ukraine war understanding about the importance of uh um a global security supply when it comes to food so uh that's a theme I'm still long-term bullish on on energy uh and in terms of uh cyber security uh there's all sorts of different non-economic correlated thematics a lot of them you can get in the public security markets and ETFs some you you know there's uh in uh in more in the private markets um but I would say that you want to be focused really on things in a recession things that you need not things that you want so in the consumer space I like Consumer Staples over consumer uh discretionary uh I think that Healthcare is a place that I that I like if you're talking about sectors again it has a very low correlation with the economy I want to be out of the cyclicals in terms of regions I think that the Japanese story which is starting to gain some notoriety has a lot further to go I think that we've written a couple of reports on this already another Special Report is coming um this this this um if there's a a secular bull market brewing in the world uh it is in Japan uh I call it uh Hot Topics okay and what is driving that and well there's a it's it's it's the it's the finally the the the the uh the lagged impacts of uh abdynomics and so you're seeing corporate governance uh take over corporations are being compelled by The Regulators this is something the U.S did 40 years ago uh to return cash to shareholders to break the uh um the intertwining of uh of companies so you're seeing um uh uh you know breaks up breakups of monopolies oligopolies you're seeing companies now CEOs are discovering shareholder value they are moving cash off the balance sheet and returning it to shareholders and who was the first one to notice that happening is the the king of value investing uh Warren Buffett right and of course his investment is more in the financials and and that's a natural thing to do because financials will in any Market is going to be a beta off your overall stock market so uh that's what's happening is there's a an equity culture that's starting to finally come to the fore in Japan people don't remember when I I started the business back in the 80s Japan was in a huge bull market and of course peaked in 1989 we just got back to the 1989 levels um people tend to forget that how great how great a a market Japan was until they went through the multi-decade period of very poor policy making uh and of a Relentless uh deflation uh and that's something else they've broken out of the deflation they're they're they're not they're in a Sweet Spot look you're talking to somebody I'm known as this radical Perma bear no no no no I'm an ideas guy and I want my clients to stay out of trouble um Japan has three percent plus inflation I mean people are saying Oh but you know that's crazy high for Japan now don't you see the bank of Japan is doing like a dance they are out of their multi-decade deflation and inflation's not crazy like it is in other parts of the world like if they're not deflating like China is they're not inflating say like the US and Europe is and so you've got and the three percent inflation is perfect it's greasing the wheels for nominal GDP growth growth and profits growth and wages this is a great story uh Plus on top of that you've got a bank of Japan like we just talked about Powell and the fed the fed the fed the fed the fed and of course the bank bank of England all the other central banks except for the pboc uh and the bank of Japan did not follow the Fed uh so when you're taking a look at relative evaluation look at the valuation in the Japanese Market you always have I said before ratios matter you can't just look at a price earnings multiple let's say I like this Market don't like this Market I actually look at the U.S market with a 20 multiple or five percent treasury bill yields I got a five percent earnings yield and I got a five percent equity yield well why would I take the Capital Market but you have zero rates the bank of Japan says thank you very much Mr fed Mr Mr ECB Mrs ECB Bank of England we've got a real monetary policy we are not freaking out over inflation we actually don't think we have an inflation problem they're keeping rates at the floor and so you've got this tremendous not just dividend yield and earnings yield together Gap against where interest rates are is a really compelling story uh and so all those things above and there's one last one which is this which is fun flows you see what's happening Japan is a huge beneficiary from this economic cold war with China and the US was intensifying so right now you want to invest in China say and people have wanted to invest in China not just China directly but because of uh to get a toes into the Asian market but you see now investing in China as an American is a little risky right but now if you want to but now if you say I want to get you go to your financial advisor I want to get exposure in a liquid Market to Asia so what they're saying is go to Japan and that's what's interesting is that you're saying the foreign fund flows International fund flows into the Japanese Market have been accelerating but but but the locals have yet to catch on the domestic investor in Japan is yet to catch on so you're going to get this additional fund flow just rational I mean don't forget a lot of this is psychology but beyond the psychology and the momentum and the fact that the retail sector and in Japan unlike the retail sector in the United States the real sector the retail sector in Japan is grotesly underway Japanese equities but I think that the Tailwinds if you're going to say to me just tell me the one story The One Japanese story it is the corporate governance it is basically Japan basically going through these reforms and this deregulation that the U.S did back in the early 1980s and I'm pretty sure in the early 1980s when people were telling you okay the early 1980s if you're a broker and you co-called a prospect they call the cops on you okay and and it was and that was the best time the the P multiple was eight nobody wanted to touch the equity Market in the early 1980s best time to buy and so I have the same very similar sense that that's what's happening in Japan right now uh so that to me we're asking before about what sectors you know and and there's long-term thematics you can invest around you got to be patient um I'm not saying I I don't like all areas of the stock market as an asset class I'll tell you right now less than 20 percent of my asset mix both the rosemark research in our portfolio and personally I'm below 20 Equity allocation and that's a lower suspense Since By the way since 2007 so I'm putting my money where my mouth is but I would say that whatever Equity exposure you have I would be taking profits in the United States and so far as you've got them from uh what's happened in the tech sector and I would be putting them well where Warren Buffett's putting them and they're safer assets and well but but also if I'm going to be have long only Equity exposure Japan and you know of course I would want to um be very careful about having the currency exposure because the longer the the bangage plan keeps rates where they are you know the currency could weaken but even if the Yen I mean how much for its dollar Yen's 140. you know it's not going to 180. it's not going to 160. um that's actually I think the the best risk reward profile for any Market in the world right now is Japan that is actually I would say as strong a conviction call I have as my bond bullion barbell wow wow all right well that's really saying something um David thank you this has been fascinating very valuable I would love to continue diving with you just in Japan alone but we're past the time that that we agreed uh to to make available for you here uh because I know you have to get onto another meeting um I just want to say a huge thank you let you know the doors open to come back here and talk about Japan or AI which we didn't get into all that much or any of the other issues that we talked about thank you so much this has been wonderful the last question for people that have really enjoyed this discussion would like to learn more about you and your work follow you and your work where should they go they can just uh just you know type in uh Rosenberg research and uh on you know on the internet and it'll take you right to our website or you can just go to our information box and go to uh information at rosenbergresearch.com and it'll take you right there to everybody on the call one month free trial for everything we do very generous thank you and so when I edit this I'll put those URLs right up on the screen so folks know where to go David you're also on Twitter too right that's right uh Twitter uh and uh we also have a uh uh I have my own YouTube channel as well so you can watch me on video okay great we'll put the URLs to those up as well okay folks well in closing uh David has done just a phenomenal job in this interview uh delivering great seasoned advice and counsel that only somebody who's like him been through so many different Market Cycles before and can see all these patterns that are highly likely to hold through uh to today um but he also made the case that we make all the time is that this is a really tough time for investors to navigate especially right now with all the you know calming words of don't worry about a recession and uh oh we're in a new bull market with AI so uh we highly recommend as we do every week on this program that you get help navigating all this from a professional financial advisor who understands all the macro issues that David talked about in this interview and takes them into account in putting together their personalized portfolio plan for you and not only building a plan for you but actually executing it for you while you're busy living your life focusing on your family your jobs Etc if you've got a good one who's doing that for you excellent obviously stick with them but if you don't or if you'd like a second opinion from one who does feel free to schedule a free consultation with one of the financial advisors uh that wealthan endorses these are the firms that you see on this channel every week with me to go do that just go to wealthyon.com fill out the short form there it doesn't cost you anything um there's no commitment to work with these guys it's just a public service they offer to help as many people as possible position prudently before many of the the potential shoes to drop that David has mentioned here happen in the future with that David I just want to thank you so much again folks if you'd like to see David come back on this program uh please do us a favor support this channel by hitting the like button then clicking on the red subscribe button below as well as that little bell icon right next to it David again I can't thank you enough this is just been such a phenomenally valuable and generous sharing of your expertise with us um thank you and look forward to having you back on the program again as soon as you're willing to return great got to help take care Adam foreign thank you

Channel: Wealthion

Views: 116,855

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Id: nyP0pLZ2sUU

Length: 58min 46sec (3526 seconds)

Published: Wed May 31 2023