Market Panic Attack In Store Once It Realizes 'Hard Landing' Is Unavoidable | Lakshman Achuthan

I mean I've as I said I've done a few of these Cycles now I've lived through a few of them there kind of has to be this whole moment of like oh my gosh we're in a recession oh that means the sky is falling oh my gosh woe is me like all of that we haven't done that really I don't think I don't think that's really happened quite yet so um uh that there may be some version of that narrative that still has to unwind [Music] welcome to wealthyon I'm Wealthy on Founder Adam Taggart the real money in investing is made by those who perceive what the markets are likely to do tomorrow and then position themselves today to profit from that future action today's guest lakshman achuthan co-founded the economic cycle Research Institute specifically to identify these key turning points for investors which key turning points are in play right now and how can we best take advantage of them well let's find out lakshman thank you so much for joining us today thank you for having me it's my pleasure thanks well look I've been excited to get you on the program for a while lakshman so glad you were able to join us today lots of questions for you I really want to dig into the Cycles understanding part about the the work that you guys do at ecri um very quickly though before we get into the details I can just start with a question I'd like to ask all my guests at the beginning of these discussions just a level set what's your current assessment of the global economy in financial markets okay um it's a big question uh so I'm gonna say um we've been in a cyclical downturn so we're all about looking at the direction of growth we believe it it Cycles up and down and we've been in a cyclical downturn globally uh for well over a year quite a long time actually and that in and of itself uh may be notable um our guests uh our educated guess I'd say let me correct that is that it's going to resolve uh in a what we would call a hard Landing or recession for the United States uh and for some other major economies around the world um it doesn't all happen in lockstep it's it's pretty messy there's lots of cross-currents but that's our our Outlook our cyclical Outlook continues to be to the downside uh and probably resolves with what in retrospect we will deem a recession and so for the market it's um particularly interesting as you know that's like the Chinese curse may you live in interesting times and we do um there's there could be a lot of so-called bear Market rallies uh bear markets are typically associated with hard Landings but there could be a lot of bear Market rallies uh and we've seen some of that volatility um and there's also this this very you know we're in this Backdraft of QE and low flation and is it going to go back to the way it was or is it going to be something different going forward and so the markets are really having fun kind of going to different Slots of the equity markets to try and find the right horse to bet on all right and definitely AI seems to be like a favorite horse right now um well I want to dig into this in a bit as we get later in the discussion laxman which is um from your perch you know you see the the global downturn that we've been in the momentum continuing to go down uh until we hit a recession likely a hard Landing Market definitely does not seem to have gotten that memo yet love to hear your thoughts for for why but we'll get to that and as you said that's sort of the role of a bear market right it's to to cause as many people as possible to lose as much money as possible so some of the biggest rallies in history have happened within bear markets to try to get everybody back into the pool before the claws come back out um but let's let's actually if we can start this discussion with the work that you do at the economic cycle Research Institute um and I think it's really fascinating what you guys do is study Cycles as you've said but as I understand it what you're really trying to look for are key turning points yeah right and to say that okay look you know here's here's where we think the road veers in a different direction than it's currently traveling in and if we can see that in advance you know we can position now so that when it does make that turn we're positioned to benefit from that so um if I did describe that right and correct me if I didn't what key Cycles are in play right now um you know you talked about the the general uh cyclical downturn cycle of the economy but I'm guessing there are other cycles that happen within that right with inflation and growth and all sorts of other things absolutely um so um thank you that's a that's a really good overview uh of kind of how we're approaching this and um just for a little bit of background uh I uh was a protege I am a protege of Jeffrey Moore who's my mentor and he was he's known as the father of leading indicators and so at Equity all the researchers there many of them uh including my uh my co-founder honor Von Banerjee we all studied with um Jeffrey Moore and the leading indicator approach um and and you hear the words leading indicator all the time now everybody as their own leading indicator there's different leading indexes countries have whatever and so on and so forth now the origin of this is um probably you know the origin is probably 100 years old okay it used to be just gargantuan jungle variety swings in the economy depression and expansion it was crazy I mean as crazy as today sounds it was CR it was it was more volatile and and with things like unemployment would be swinging huge now there was a an obvious question what's going on and what the researchers were finding and this is my mentor's mentors Leslie Mitchell who helped found the National Bureau of economic research they what they saw was that in a free market economy there's a very natural inherent feature that there is an acceleration and a deceleration okay so in free market oriented economies if we are capitalists and we're not in a managed economy we've got this free market dominated economy we have Ebbs and flows now what becomes interesting is the turning points the Peaks and the troughs and the ebb and the flow and that's where leading indicators come in they're designed to kind of help us track where we are in the cycle and what's the risk of it turning and so that technology the original leading indicators have made over half a century ago some of them they still work today which is amazing um but we've done a lot of work we've been researching and researching and trying to figure this out because everybody's asking us the question what's going to happen all the time right so now I've been doing this real time since 1990 and um Dr Moore beforehand had worked on the idea that their cycles and growth but it's more complicated than that there's also separate Cycles in inflation they're related to growth right they have a relationship but it's not perfect it's pretty messy there's long leads and lags for when inflation Peaks and when growth Peaks and vice versa and then there's a third cycle which is very important which is Cycles in in jobs in the job market uh again it's closely related to growth um but it can have different turning points it could Peak or trough a little off of the overall business cycle all of those elements those characteristics that I just described that inflation's a little out of sync with growth or the jobs are a little out of sync with growth they are all evident in full force today right uh and so in in our monitoring of those three Cycles we're tracking them all very closely and we don't require that they all match up sometimes they don't and that's really confusing but still just having a bead on where are we in the employment cycle where are we in the inflation cycle where are we in growth gives us some anchoring in the midst of all the stuff that is going on and so we're tracking all of those and and in every one of those big Cycles you can kind of drill in a little bit and look at manufacturing or services on growth you could you could look at Commodities or home price inflation and and things like that so um please let me know where you'd like to go and I'll and I'll delve to the next layer of that onion well you you just opened uh the right door there which as you said we've got these three main sort of cycles that you guys look at that are interrelated uh but but but in a messy way right um and uh you know I I I don't think I I can't but ask the question just say can you walk through each cycle and tell us where we are in each one right now yeah absolutely and it's a fascinating and and so uh you know we're you know I'm a dad so I I'm full of bad dad jokes and and so it was were all of the other researchers that I've worked with so we are monitorists with an i I mean it's not that we don't we watch money as an indicator but we're monetarists with an eye we're really just tracking where are we in these cycles and so on growth we're cycling down you look at employment uh growth is going down you look at output is going down uh you look at sales is going down uh an even income uh is coming down and those are the four indicators that Define cycles and overall growth and they're all cycling down uh I think there's a there's there's this this um kind of rule of thumb that people are used to we have to see two quarters of negative GDP in order to say there's a recession and that's pretty much the case but it's a rule of thumb uh and you know a statistic is not a recession it's really a process where output employment income and sales all feed on each other to the downside that's your recession or slow down and then the recovery on the other side is when that's flips it kind of just flips almost in a binary way and it becomes virtuous a surprise demand begets more jobs and income and sales then it goes to the upside so on growth we're cycling down um I think people are familiar uh probably that that you've been speaking with and listening to you that uh Demand on the growth side of our economy in the United States has been weaker the services have been holding up for the most part uh and so um the story there is that post covid people kind of leave their home and they go out and they want more experiences and so on and so forth so there's pent-up Demand on the services side and and therefore that's adding up to an economy that's growing right sorry Revenge travel was the way that one of my guests just described it yes absolutely and and and we're still in it I think in this summer we're still going to get some more of that um or or maybe you won't travel quite as far maybe you'll keep it a little closer to home as as the discretionaries spending starts to get constrained but the uh the issue here is that most recessions not all of them but almost all of them the Lion's Share of them uh are created by swings in the good sector of the economy uh so that's just a concept when you think about cycles and growth I'm oversimplifying here but let's say that the US's services manufactured goods and construction okay so the construction and the manufactured goods those those parts that's the good sector of the economy the size of the cycle in that part of the economy is about six times larger than the amplitude or the size of the cycle and services kind of makes sense right you you don't have a choice on school you got to go to school or to the doctor yeah and sorry to interrupt you here real quick but as you as you continue to elaborate here um so you said the size of the cycle is so much bigger in the goods part now Goods in manufacturing is is now a a minority of the percentage of of the US economy right I mean Services is a share of the economy is substantially larger than than manufacturing now but what you're saying is you're you're not referring to the size of the economy you're referring to the size of the cycle is that correct this the amplitude of the moves in that um part of the economy is six times larger than the amplitudes of the moves and the services side of the economy now having said that um the output uh of the good sector is still pretty darn large it's not small the employment there has gone down um and and and I think that's the thing that we all kind of viscerally feel right not that many of us are working in manufacturing or construction and the people we know by and large are probably more in these people-oriented people-facing Services jobs of some sort um but at the same time because the size of the swings in the good sector are so much bigger the job losses during recessions and we're going to get them they're coming right they they're focused in that good sector they're focused in the manufacturing and construction side on the services side you might have growth come down and kind of flatten out inside of a recession but it doesn't necessarily go negative so that's how you can see the restaurants fall the interesting the concert is full or something but the growth is negative how does that happen right it doesn't something's wrong with the numbers they're not counting it right there's some other story it's really just the nature of the size of the swings in the different sectors and and this goes through further to consumer spending right so since a lot of our spending is on Services um what you will see is that very often we enter recession with consumer spending growth around where it is now and if anybody wants to get into the Weeds on the data the the kind of mother of all indicators there would be the personal consumption expenditures growth right the the and that's the big uh uh uh statistic on all the things that we're buying as consumers the more narrow um measure would be retail sales growth right that's a little more Goods oriented yeah uh and there I think we're going on a half a year of negative real retail sales growth and you know never say never but we in the past have not seen that reading away from a recession so there are lots of these like warning signs flipping off in different parts of the economy they're consistent with us going into recession or maybe we're already in being in one yeah yeah um we talk about a lot of those on this channel that it just kind of going back to my point of the markets not having gotten the memo um there's a there's a I mean the conference board leading economic indicators chart and I know you have your own leading economic indicators we'll talk about in a bit but like that's a readings that we've never seen outside of a recession right absolutely absolutely on the um on your your point there about consumer strength um and saying that you know we tend we go into recessions where the consumers still spending pretty well heading in um I I I wonder if so what I've sort of been intuiting from the recent data is you're right consumer spending the growth is slowing in fact we fed the negative real retail sales as you mentioned um and and obviously 2020 2021 uh consumer spending was really bolstered by the stimulus that was being pumped into the system uh and all the Forgiveness programs and whatnot just made people feel you know more flush than normal um we a lot of debate going on how much of that stimulus pig is still left in the python but we know it's on its way out what we have seen happen is when folks were getting stimulus they were paying down to a certain extent uh debt which was great they were spending it on cars and boats too maybe not so great uh but but some were taking responsible steps well that's ancient history now and we've seen Consumer Debt rock it back to all-time highs that debt as well is now trading uh or is now you know charging in many cases record interest on credit cards auto loans Etc so guess where I'm going with this is is usually what we see is the consumers keep their you know the momentum of their spending going for as long as they can by shifting its financing from savings to debt and it's only when they start hitting debt limits right where the creditors won't let them have any more or they just have so much they can't actually take on anymore is when things really start to fall off a cliff well that's that's when you Okay so we're talking about two things here and this is I mean we could do it's so easy to do where they're related but they can get conflated right we don't want it so so we have like the economy and then we'll have the markets and I'd love to talk about the markets in in a moment yeah we're getting two separate things they're related but they're separate so here um about the consumer and how are they purchasing what are they doing and what is their behavior right so um what happens is sure they're flush let's say with the stemi checks or with other uh sources of income or whatever and they're flush and they're saving and they're paying down debt and they're doing all these things and then they're trying to maintain some say some consumption and they start to eat away at that and develop some bad habits and then they still try to maintain some consumption and they go to the credit to finance things and then they still are trying to find a way to do it and until someone says no right so the early part of that is your growth Slowdown that's your cyclical slowdown in growth yeah so that they're buying as much but they're not buying more obviously so you have your acceleration and growth this is a so now let's let's just pretend business Cycles don't matter recessions recovery forget about them just put them on the side for a second you have your acceleration and growth and your deceleration in growth that moment that switch very big deal that's a very big deal because um that will that makes its way to the margins to profits growth yeah uh and so the deceleration in growth um is a difficulty that's a headwind now for firms that are producing discretionary products that's when they start to feel a shift in their customer and they have to start to figure out how to navigate that and all the managers have different ways of doing that now um one thing they might do is say I'll go if you're financing because you don't want to do it you don't have the cash to do it I'm going to finance you and they're like uh I can't give you zero percent but I'll give you a low rate and then the rate goes up and up and up and then they say oh your credit's no good anymore you know I can't I don't I'm not sure I should loan you the money uh and we're somewhere on that Journey okay okay uh and you see so so in every time there's a growth rate cycle downturn about half of them turn into hard Landings okay half of them don't and so we're just we know we're gonna go through cycle downtown it's just is it a hard Landing or not it's kind of like how far are we going in that process and we are seeing and this is a long way of getting back to your point that the credit conditions are tightening up people are bumping up on the top of their credit limits loan officers for small businesses medium businesses or or thinking twice all of those things uh are happening and that's contributing to lower capital investment lower hiring plans all of those things so we're in the vicious part of that cycle where things are starting to feed on each other to the downside all right great couple of questions here first off this um this turning point in growth right you talked about how you know it accelerates we hit the top of the parabola and then we start heading down the other side I assume that's like just classic one of the turning points that you and the team at Equity are looking at that's the primary one so so we're all about risk management and and this is the segue in a way to to markets because the same kind of concept you just said works for inflation it's just a different cycle it's a different Target but the same cyclical concept and to to at a certain level it's just are we in an upswing or a downswing and what's the risk of the direction changing as far as we can see which is a couple quarters at best and so job number one is uh where are we are we on the upswing of the downswing and the immediate follow-up question is is there a risk of this whichever side we're on flipping and going the other way and at the flip moment at that at that inflection point moment um that's a moment where the deck review will have its largest Divergence from the consensus expectation the consensus expectation um is derived very much from you know very sophisticated models including now ai and regenerative models and all these things which are extrapolating trends so if you're in an upswing and you're really good at extrapolating the trend and and these tools are they're good they're useful tools away from turning points so what they're going to do is they're going to be forecasting past that inflection point right so you you need to know the time when the error is going to be big and that's really what we do God because that's where the Market's pricing something in where you think nope something else is going to happen so let me let me position there before the market realizes its mistake right so let's say the Market's looking at a half a dozen things um on the cyclical component I think we have a good read they might be sitting there going oh gosh you know yellen's gonna do this or Powell's gonna do that or whatever and and there's some other thing that's in their mind yeah uh but but on this on this actual is growth going to turn and go the other way including the trough you know those are moments where uh it gets very interesting to see the forward risk of a term got it and in terms of when it really matters to your model right in terms of taking positions and whatnot um is it the is it the turning point that matter or or what's the relative importance of the turning point from from growing to um from increasing growth to decreasing growth and just to make it in terms people can understand from inflation to disinflation versus declining growth to negative growth we'll say like disinflation to deflation right what tends to matter more I think um well well first and maybe it's just uh the solution looking for the problem but I think I think it's true that it's the inflection right because so if you're looking one way and I'm looking the other way and one of us is going to be right or wrong right uh I think getting that direction is more important um and and that's the place so declining growth whether it's a positive number or a negative number as long as growth is declining that's the trend that matters more yeah like look if we go from six percent growth to half a percent growth I think and and and the expectation was go to go from six percent to seven or eight I think that's a really big deal yeah now if it goes to half a percent or minus half a percent yeah okay now we're saying the r word or not but the the real big deal was looking the right way got it got it yep all right that's great I'm glad we clarified that because again I think it's really what makes your work so valuable to folks thank you um so I do want to get to markets but um there were two other Cycles you mentioned if we can talk about it briefly because you know we just spent all this time talking about the consumer and you know their ability to try to hang in there as much as they can well two things that are really going to impact their ability to do that is what's going to be happening with cost of living um and cost of capital which which are kind of related to what's happening in inflation um because those impact cost of living and what the FED decides to do with rights um and then obviously jobs right I mean you can have all the best of intentions in the world as a consumer but if you lose your job that changes your prospects right and so for both 100 right and and I'll just restate what I said earlier which is cycles and growth are linked to cycles and inflation and jobs but their turning points can be quite different and so therefore we have a process for looking at the risk of a turn in each cycle so but all the three Cycles are cycling down inflation jobs and growth they're all cycling down so let's get that out of the way we know what general direction we're looking okay that's right water under the bridge I'm going to let you run here but two things what one is inflation clearly right we were at nine percent last year we're now at 4.9 we can argue how sticky it's going to be but the it's it's disinflating for sure yeah jobs when you get to talk about that I'd love for you to dig into that a little bit because that's one where it's a little less visible where a lot of people are scratching their heads and saying my God this jobs Market is so much stronger than we would think given all these macro indicators and what's going on and I don't know if you're familiar with Michael cantrowitz's work but the Hope framework and and you know basically the employment e being the last Domino to fall and that's you know yeah that's very much I would I I'm not I I'm not sure what he said in in the most recent time but I think that's very much a play what you just intimated uh right now uh I would agree with that wholeheartedly um when uh when I say Cycles in in jobs and the job market is cycling down uh what I mean is from where it was right we were adding uh quite quite a lot of jobs uh several hundred thousand jobs so over half a million jobs in some in some cases per month and uh now I think it's I don't have the exact data in front of me we're going to get something this this on Friday and I think it'll continue to be the case that we're probably at two something year lows in the growth rate year over year great so your rate of change has peaked and is coming down all right yeah that's very important yeah yeah it's just like Voom it's just like and so I don't know the the the guesstimate today is 195 for Friday um maybe it's if that's true that's a Slowdown continue and if it's weaker than that then it's more of a Slowdown okay so um we've got uh employment is roughly coincident with the business cycle um now I'm speaking over a century okay I'm jumping around here so I'm speaking over half a century a century if you look at all these Cycles uh accelerations decelerations recessions recoveries all these things employment is roughly coincidence sometimes it Peaks a little soon sometimes speaks a little later we've had jobless recoveries all these kind of things have happened okay and the uh so that's that's very much the case today in in in the mirror image way um inflation uh more often than not will follow growth but enough times it doesn't there's probably a quarter of the time that it leads growth a little bit so it's interesting uh to to to have some some defense against that in the current cycle no in in in in in in the current kind of narrative hey we've got a a weakening economy maybe even a recession that's going to kill inflation I agree okay but it doesn't happen the way most people think most people uh think that uh oh it's obvious uh that there's a hard Landing so therefore recession's coming down uh inflation's coming down so don't worry about it actually inflation won't get near its weaker readings until well after the recession which hasn't yet to be acknowledged or defined is over so that's not now right that's a long time from now okay so now let's flip over to in uh inflation for a second and then I'm going to start bouncing back and forth between inflation and jobs um on inflation uh it's cyclical um it it had been very very low in the previous decade uh following the uh great financial crisis and the Great Recession um part of the reason a big part of the reason a really big part of the reason that it was low was because we were importing disinflation around the whole good sector of our economy mostly from China okay but by offshoring or manufacturing to cheap labor regions and and they had just a gargantuan amount of stimulus that they were kind of footing the bill on the production a lot of stuff and selling it cheap here to keep their economy revving or for whatever reason that happened uh and that allowed um all kinds of uh pretty um experimental dare I say or aggressive or uh non-traditional uh monetary policy to be put into the markets and the economy without inflation really getting out of control last decade post GFC up until kind of coveted stuff so then covid is a massive shock right it's a quick recession uh recovery which we nailed um and then uh quite a lot of stimulus right that we all talked about but then there's a meta stimulus historically relevant standpoint but yes there's like a huge amount of stimulus and we have this uh and we and we have that whatever debate about uh inflation the our future inflation age leading indicator of inflation went to a 40-year high like like a rocket ship right when did it hit that I'm curious it was doing that in 2020 when it was like Hey is the recession over and then and so then you run into that transitory stuff and uh you know it's all right through all of that um now when the FED starts to hike rates it's doing it very gingerly right to begin with it it's it's heart wasn't in it uh until uh Last Summer almost a year ago it starts to go 75 right a meeting and that's really when people started to talk recession um before that yield curve inverts all these things happen and before that you know we were much more alone in our recession forecast we forecasted about uh publicly about a year ago uh which is a long that's a long time ago I will admit you know uh well uh and and so lots of people are saying hey you said there was going to be a recession it's not here yet right it started interrupt but presumably that wasn't just like because you had an opinion that's because your Cycles indicators were telling you right they all changed right so I mean we probably have a hundred leading indicators for around the world we do it for probably 14 or 15 for the United States Services construction overall economy manufacturing and then very importantly for the world for 22 economies around the world they all Tanked right so post covet post covet China went into a recession for the first time since 1989 not a lot of people understand that right uh and of course Europe uh and and other major economies uh into recession as well and so we have a setup because of the missed inflation cycle upturn where policy by and large around the world is tightening Chinese were one exception they they didn't tighten because they they're concerned uh but but uh by and large around the world everybody's tightening while the leading indicators before the FED started to go hard were already recessionary that's unusual so there's a lot of unusual things happening right uh and that's super unusual again it's it's kind of a you know there's the whole discussion about the fed and how they go about policy we've got to put that on the side it's too big uh there's the post covet environment and then um there's the this ketchup or whatever you want to call it where the central banks in order to maintain their credibility have to fight inflation really hard into a recession and the way inflation works is it often Rises into and into a recession it can do that um it's ancient history but in 2008 you know oil hit 140 something bucks uh two six months inside of a recession so you know and and and the bank was promising the the Fed was was uh telling the markets and the markets believed them in May June of 08 six months inside a recession that they were raising rates by a hundred basis points by December I mean so that's how it looks like inside a recession when people don't believe there's a recession right like markets can get that out of whack and so which which smells a little similar to the out of whackness we have today yeah yeah so out of whack is kind of normal and and and the reason is look I've done my first recession real time was 1990 working with Jeffrey Moore and I can tell you that inside of a recession or when one's starting nobody knows nobody is like yeah oh yeah it started right which is why the official government agencies don't tell you about the recession until like a year after it started right yeah you have to wait for the revisions to the data uh and so on and so on and so forth and and uh the I think it was I was looking at this the other day in July of 08 now you're three quarters inside a recession there was no negative GDP print right now there is and then there wasn't then there wasn't right and so the markets were like what there's no negative GDP what are you talking about yeah they were still partying at that time yeah yeah so so now there's two things on jobs that are really important and and you may have talked about this but I want to relate it to Cycles one is the so-called money illusion uh and this is when you're in an inflationary environment right how do people act and uh the the the best example we have to think through about the psychology of consumers of policy makers of business managers it's the 70s and so you walk into the 70s and inflation's kicking starting to kick up there's several recessions in there there's several inflation Cycles in that decade through the early 80s and um initially uh it's Burns Arthur Burns and he's like oh there's inflation and he starts to fight inflation and he gets his head handed to him I am telling you it was on a pike practically yeah what you see today is nothing at all he was persona non grata I mean nothing nothing like what we see now and so um that's uh the reality people didn't care so much about the higher uh prices because they were getting paid a little more and the job market was hanging in there and so it wasn't terribly annoying it started to get annoying uh uh after 73.75 and going into the 79 recession it started to get super annoying okay uh and um Burns was out and volkers coming in and it's a different world now oh yeah inflation is a problem I want you to fight that perhaps at the expense of jobs yeah and there was a much more of an opening for volcker to do it and he still had pressure not to do it and he still kind of goofed up in 1980 and let his foot off the gas and then had to really stomp hard in 8182 and make a big recession so that this this Dynamic that happens in an inflationary site we just talked about the policy makers business managers are like whoa if everybody else is raising rates I can raise rates and we all everybody listening here I feel it you feel it everybody feels it you know that the package got smaller you know that the price got higher and you know whatever you're getting you're getting a little less of it you feel it in your bones right and you and that that in in uh is all of the managers are saying well wait a minute if you're paying up for everybody else's stuff I gotta push it a little here and see what I can get uh and so even though internally you're paying more for your worker you're paying more for your inputs to your product there is for a period of time not forever but it could go for a few quarters you can pass some of that along yeah the illusion that things are going to work out if I can get through this yeah then the economyal firm in the second half and I'll be okay and I and I won't have to have fired these people okay so now let's switch over to jobs post covid you lose millions of people right anybody um you know within 10 years of retirement you know might have taken a look at retirement and said why am I doing this it's a lot of grief uh let me retire a little early so we lost a lot of people there we lost some people to to health situations and and and and complications uh we lost uh some legal immigration which is critical for our Workforce growth um so so we we lost some of our senior workers who were highly more product actually quite productive yeah uh and and highly skilled you just can't replace them on a dime yeah yeah and I think that's that's actually showing up there's evidence of that showing up in construction where um you know if you if you've got a an experienced construction worker who's took early retirement and you might have to replace them with two people who were younger and even then it's not that good right you know and and because it takes a while to figure this stuff out and um which again hurts profitability so you've got but you've got this constrained labor Supply uh you have the massive kind of spurt in post-covered Revenge spending um and you have uh as a result what you what's called Labor hoarding uh and and this actually happened uh in a couple of the recessions uh in the 70s I'm gonna go back to the inflationary ears that inflationary mindset the money Illusions floating around uh the recession starts and we don't get Negative jobs growth until the ninth month inside of the 7375 recession for eight months jobs growth is positive inside of an official recession and and that happened again in 1980 for two months so you have this thing this thing and you can understand it right if you're managing some firm some Enterprise you've had a really tough time hiring hiring back up postcovid uh you're able to push your price pretty darn hard because of the inflationary environment I don't want to fire anybody right away yeah you don't want to fire if you have to right yeah until it's gone to the Head time until it's gone to head time and I think I think we're starting to get there okay um so first off it sounds like what you're from what you're telling me um and if this is true it echoes from what David Rosenberg was saying when I interviewed him yesterday um that you're not super surprised by this disconnect right now between the markets and you know the decaying indicators that you're looking at simply because you've just given us many of examples we see a lot of this relative strength maybe false strength in a lot of these you know Top Line metrics going into recessions so you said we had job growth you know nine months in to away recession right so you're not shocked here no because of that combination of inflation high and by the way info the the calm down inflation we're in a cycle downturn on inflation but it's sticky it's uh our forward-looking indicators there have gone sideways for a couple of quarters so that's the sticky core Services wages stuff that really freaks out Central bankers uh and and if you look there's various ways of looking at that the heart of inflation not food and energy which are bouncy yeah but that heart of it and and and not even shelter but that wage growth stuff that starts to get a little sticky that's what happened in the 70s Powell does not want to go there and and I'm pretty sure when I when I am listening to him that he's saying gun to my head I take a recession over sticky inflation yeah and so he's actually said that I mean he's he said look people don't listen to him I know people don't listen to him but he said like look if we Titan too far we know how to undo that right yeah yeah um but yeah you're right yeah the markets aren't listening to him um much right now so sorry I interrupted you yeah so but I think if you're so so we deal with a lot of asset managers a lot of companies Big C Suites and multinationals and asset managers and and the really really big thing is asset allocation and so now you've got um bonds that I mean you know treasuries or other government debt that has returned yeah on it so that's an alternative that's different okay you've got higher for longer so that's got to be in your playbook uh even on shorter term uh uh uh uh rates and then you've got probably the biggest question is do we go back like we have a recession and so let me try to hide in the market where I can and right now ai or or the tech stuff is the place to go uh uh for all the reasons that have been discussed but many other parts of the economy um you know they're they're just not being valued as high I think because of the recessionary backdrop the um and and the commodity Commodities which is the one the other asset class uh you still have this Global industrial downturn it's quite long in the tooth so we're looking for it to to kind of wind up uh but it's still cycling down so even when China reopens and everybody gets bullish on oil yeah there's not a lot of there there yeah right because they haven't they're not gearing yet because the global industrial cycle hasn't bottomed quite yet it's it's it's it's still you're still looking for that to happen and and um all of this adds up to uh probably a you know a you know generally it's more of a defensive posture um until you can get some real green shoots in the forward data uh and it'll happen it's just you know is it today uh it's hard to say I mean you might have the AI story to play with or some other speculative stuff to play with because quite frankly a lot of big institutions have gotten defensive all right they've switched to a defensive posture that's kind of where they're sitting now uh and and wondering is the Fed gonna pause or not pause or pivot or this and that I I think it's kind of higher for longer uh uh uh for the time being and when you know the pro the way it I mean as I said I've done a few of these Cycles now I've lived through a few of them there kind of has to be this whole moment of like oh my gosh we're in a recession oh that means the sky is falling oh my gosh woe is me like all of that we haven't done that really I don't think I don't think that's really happened quite yet so um uh that there may be some version of that narrative that still has to unwind and and I think other commentators have made this point and we certainly have backed this up with our cycle research is that uh when the Fed it all it all it here's where magnitude comes into it if it's a hard landing and the fed's cutting yeah the market is quite risky the equity Market remains quite risky to be in uh if it's a soft landing and the FED pivots and start cutting great I would go fully risk locked but it just doesn't seem like that right so soft Landing fed cutting I just want to give you an idea when that was that would have been 95. yeah okay great time to go along yeah I it it doesn't like the indicators aren't showing that right if it if it's if it's if it's uh 2008 and the FED starts cutting yeah it's too early there's still more kind of like a little bit more of a crack up that has to happen first okay so um so your indicator suggested a hard Landing uh is more likely you've said the market hasn't had this uh oh my God you know we were we were too optimistic uh and then maybe you get that kind of you know change in sentiment and all of a sudden it's the sky is falling for a period of time how like I'm not trying to get you to yeah pick a number but like I mean how how what magnitude of a repricing would you expect given the difference in in where the market is right now given what your indicators are saying about the hard Landing mild repricing moderate repricing major repricing yeah so now we get into magnitude yeah of the cycle um and and uh again it's exactly the question massive asset allocators are asking for the same exact reasons right it's it's like okay I've got my basic defense on but what am I where am I where are my guard rails right is it back to 3600 and that's it okay I can handle that yeah right I think that was whatever last fall right so or and then we run up to 42 36 42 we're back and forth okay and say that come down off the top was like a 20 25 come down at some point right that was roughly what that was that's a pretty Garden variety correction uh or associated with recession it's not a big one um so it could it be a is it a mild recession or is it a medium recession or is it a severe recession now um I I don't know the our indicators don't provide that answer so now I have to shift to institutional knowledge and shifting to institutional knowledge um one thing that that gives me pause and makes me think it's worse than mild is the global nature of the recession uh and that was your tone in the lead and you were asking what's going on with the global economy what's going on with the global markets and that Global nature what happens is there's no locomotive around the world to pull us right you know I I like started interrupt but China was quite unlevered going out coming into the 2008 crisis so they were able to hugely level up and pull a lot of the world out with them they can't do that this time around no they to the contrary uh they can't they they have a massive debt problem they can't really do it they have low inflation so they they'll poke at it here and there and do some targeted stimulus and that's something um and then there's the geopolitical kind of whatever which is not let's hold hands it's more like let's go back to our corners and put up walls right so that yeah that's actually inflationary that's and that's not growth supportive unless it's like defense spending or something that could maybe grow a bit here right right um so that that's one thing that that makes me say yeah maybe don't Bank on it being mild the other thing that uh makes me say maybe it's not guaranteed to be mild is the long and variable lags you know monetary policy works with long and variable legs I know some researchers have done some stuff to say maybe it's not that long and you know I don't know but the the weight of the evidence is long and variable legs and and um when you see again that happening globally that just doesn't happen yeah like we haven't this is new ground for you and me and everybody where hey this is the most predicted recession all over the world and we're all going to be raising rates at the same time all right that's a unusual one and and makes me think huh you know this may not end quickly got it yeah we're not just raising rates at the same time we've been raising rates at the same time meaning to the extent there is a lag we've got numerous rate hikes traveling through time you know that like so those 75s those 75s from July are starting to to bite now yeah because it propagates through to that uh credit limit or that that loan officer right around here um so yeah so so so so this this is going to take uh a little while longer I I want to take the other side go for it okay and be like gosh you know the sun is shining the clouds clear We're Off to the Races what happened right I'm just trying to be like what could it be and and um the I'm not going to go to AI because I think that takes a while um but you know maybe there's something about just losing millions and millions of people out of the workforce that that that that that keeps jobs chugging along uh uh uh a little longer I mean we didn't necessarily have that case in the 70s right they chugged along for eight months and then stopped uh inside of a recession uh and and here you know maybe the super tight labor market because you lose that many people we're not having huge immigration legal immigration uh you know so the demand for workers it has a bid even in a recession it's got a bid and we're we're seeing that I I just don't know if it's going to be enough yeah and I'm curious do you have productivity indicators that you look at and if so what are they telling you oh gosh sorry it's like the doctor giving you bad yeah I'm sorry I'm sorry it's horrible I'm taking a stool out of your bullish uh yeah no no no look I am everything we're looking at is hard landing and and it's not that uh bullish in the near term having said that look we know literally that Cycles turn even when you think they can't right so so um if and when that's going to happen and hopefully it happens sooner rather than later I'll be the first one to raise my hand and say whoa whoa we're turning and I'll probably do that when everybody else is cutting this living you know really yeah bring your hands in the oven yeah and please please come back on here when you start doing that I will I will but on productivity growth it's quite bad it's it's in and it's inflationary right before the financial crisis before 07. where productivity is really jumpy and it's really hard to know why we're productive by the way uh why it grows and why it doesn't we can guess so that's the lay of the land but if you if you average out that productivity growth pre-gfc it's it's healthily it's well above two percent for the overall economy post GFC boom it jerks down about one percent so sitting at around one percent from two to one for the entire U.S economy that's very material that's a really really big deal especially if you're thinking about policy and economic policy um that in and of itself in a vacuum is inflationary but for China sending us disinflation for the decade that bailed us out of that one yep now China's gone postcovid our productivity growth has gone down even further like noticeably so the worst is in construction uh manufacturing is also quite negative and even Services productivity is negative a little bit which is unusual harder to measure but it's a little bit negative so all that boils down to um profit squeeze unless you are a company that can automate yeah and so you know it maybe makes sense to go to the AI and Tech stuff because that's where the margins are juicy oh God there's so many topics you keep bringing up that I'm like I don't want to dig into that with him too well please do and I'd love to hear your thoughts in the automation part because my my quick little preview on this is it's something I've been tracking long before AI got real big but like we have just been making it more and more expensive to employ humans in this country and for a long time we had a tremendous perverse incentive for companies to really accelerate their their Automation and their offshoring and whatnot because it was so cheap to borrow to do so right that's a little bit different now but but now we have potentially the the threat of AI right so super interesting on that we also didn't talk about housing um you talked about the the money illusion have a lot of uh companies where they're hiring just just trying to hold on and hopefully they'll get through the other side we have that happening exactly in the housing market right now too would love your thoughts on that but rather than shortchange you in the last couple of seconds here we'll bring it back on and add that to the discussion um real quick um I'm about to get to my last question which is where folks should go to follow you and your work but but really quick because it sounds like you're saying that um you know from an asset allocation standpoint looking at safety right now at least seems prudent um yeah you talked about kind of safe you know debt that's yielding five percent or more um you talked about hiding in in some of these bigger companies you said AI I don't know if anyone wants to hide in Nvidia right now at its current prices but but you can hide an apple or Microsoft right now that's a stock that's not going to likely get cut in half you know tomorrow um where are some other places that that your clients or some of the companies that you talk to you know when they're thinking about safety where where are they looking and actually love to hear about your clients but of course we just have regular people watching the show who are just trying to say look I don't want to become collateral damage here what are some of the things I should be looking at yeah so the the same issues are there for asset allocators if it's billions or if it's a hundred grand okay um or 10 grand uh you you know what can I risk and what do I need to have safe and and so these this kind of balanced portfolios are a reasonable idea uh and then you could tilt them towards being a little more defensive or a little more aggressive okay so maybe now's a good time to dial up your cash Holdings right just yeah I mean if you if you have yeah you don't need to be a hero here it'll be there'll be another time to be a hero it'll be better to have cash so that you can buy uh in a little bit um or and maybe you're not going to bottom ticket but you'll you know hopefully get three quarters of the ride or something and that would be great or two-thirds of the ride and that would be great um so we've definitely had a more safe I mean it's kind of run its course there's an allocation to Gold that people had earlier uh that's kind of run its course uh bonds obviously um those really really solid companies like you mentioned um and it may um in the place I'm looking for the next opportunity uh maybe actually in the commodity space okay um you said you're going to wait until the global cycle bottoms out right well yeah I think it's it's I think we're closer to that than farther away um but right now it's pretty uh you know it's risky stuff it's falling knife stuff here right right now um but uh there may be an opportunity there if you're somewhat speculative uh in the coming months um where you've got your defensive posture on and you're willing to you know hey I'm Nancy I want to take a little bit of risk right let's make these little dollar cost average nimbling in maybe over sure yeah sure and um one of the things that we've uh learned over the last couple of decades is that semiconductors actually they're right in there they're a commodity uh and that's and and and so I'm only talking on the cyclical component of it I know there are other stories around that but I'm just talking about the cyclical component which has been weighing on some of these um uh may may begin to to bottom out um then you may look at as I mentioned there's a lot of different countries that were were looking at so um I think as China has become tougher and tougher to invest in uh people have turned to India India's India's actually slowing right now but it may not matter it's not a recession uh and it may not matter uh because uh I think a lot of people are having to reallocate away from China it's just too difficult because they're on a relative play basis yeah yeah and and so that's going on the other one is with the onshoring and kind of where we are in the cycle um you know Mexico may be a pretty good beneficiary um it's an interesting I mean all of these economies I'm mentioning have very clean Cycles they're cycling up and down uh we're not all in lock lock sync yep um I mean Mexico certainly suffers uh as the U.S stumbles right it's not immune to that uh but maybe there'll be some opportunities as a result of that cyclically right the cycle stuff let me give you time frames right I'm looking at a few quarters not farther than that yeah so this is the cycle stuff is very useful in your process to to just get on the right side of some of these tactical moves and if you can kind of regularly be on the right side of some of the Tactical moves then you open up kind of strategic opportunities and that's the way people use this really great awesome I'm going to ask just one last question on countries because it came up yesterday pretty strongly from Rosenberg um you said that India and Mexico there the Cycles are pretty clear are they the same for Japan too Japan's all of a sudden you know being talked about is you know one of the more attractive people at the dance right now all of a sudden after being you know shunned for decades yeah yeah well structurally I don't think anything's changed so all the structural issues they had earlier they continue to have um the one cyclical opportunity I'll share I wasn't planning on sharing it but I will uh is that uh there were so so the same way that we have growth indicators around the world we have inflation indicators around the world inflation cycle indicators including for Japan um now what's interesting there's been a switch at the boj uh corota's out and the new gentleman new gentleman's and there's they have inflation for the first time right they haven't had inflation in a long time yeah and they have it a couple percent uh uh on on on some of the measures which is a big deal for them uh and there's been a little bit of a feeling of oh maybe they don't have to do that crazy crazy intervention that they've been doing for decades um which makes it on the margin uh a little more attractive perhaps all right so that kind of fits with the with the the vibe or the story you're saying their future inflation gauge Japan's plunging um so that um I don't think the bank knows that okay so you think that's maybe a little bit of a false hope people are getting like oh we're back to inflation you're like that's not going to last yeah and so if you can think through um how that manifests how that plays um there may be some opportunities there um you got the FED hire for longer here and uh the boj kind of a false start so so so you can think through those kinds of things um maybe the the market looks okay but on an exchange traded basis maybe not as okay yeah you have to you got to work through a little bit of that yeah you do get to keep the currency risk in mind all right well look this has been wonderful um lakshman uh just this was everything I hoped it would be and more your perseverance on this channel really look forward to having you back on in the future especially as you see key indicators make a turn please reach out to me and say Adam I got something to tell your audience we'll have you back on anytime you want to come um last question for folks that have really enjoyed getting to meet you through this interview would like to learn more about you follow you and your work where should they go well I think first and foremost uh businesscycle.com uh our website uh talks about our process uh and there's also we do something there called the column where we write our own editorial piece uh every few weeks and post it up there and so some of the themes I touched on today would be in there for example and you can read those there um then I would also go to Twitter it's uh at business cycle so we we pop out little you know tasty appetizers there for people and there's also something on Fridays we put there a weekly leading index a picture of that which is um the uh offspring of the uh Lei it's it was what Dr Dr Moore made the Lei back in the day and then he made the weekly leading index afterwards and so we continue to put that out on Fridays and you can you could watch that on Twitter and then on LinkedIn I think we're called economic cycle Research Institute so you can just follow us there too awesome and lakshman when we edit this I will put up the URLs to all those resources so folks know exactly where to go all right well Justin wrapping up here locksman did a phenomenal job of laying out you know a lot of the non-intuitive uh trends that are going on right now across these different Cycles all the cross currents that he talked about makes this a really hard time for the average investor to navigate especially because most people have a life have a family they've got to pay attention to they've got a job they just don't have the time experience uh bandwidth or even desire to try to tease out and untangle all the things that are going on which is why we highly recommend that most people should be working with a professional financial advisor in general but but specifically one that understands all the macro points that that laxman has shared here today if you have a good one who's doing that for you and creating a personalized investment plan for you and then executing that plan for you great you should stick with them if you don't or if you'd like a second opinion from winner does consider scheduling a free consultation with the financial advisors endorsed by wealthyon to do that just go to wealthion.com only takes you a couple seconds to fill out the form these consultations totally free they don't cost you anything there's no commitment to work with these advisors they just offer their counsel as a public service to help as many people as possible prudent position prudently for what may Eli ahead and and hopefully to you know lochman's Mission position themselves to profit from some of these turning points and again if you enjoyed the locksmen coming on this channel folks would like to see him come on again especially if there are some of these key turning points he observes that we all want to hear about please do me 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 locksmith again thank you so much this was just wonderful buddy look forward to having you back on the program again soon great thank you so much

Channel: Wealthion

Views: 97,642

Keywords: recessionhardlanding, recession, hardlanding, inflationsticky, jobsunemployment, Lakshman Achuthan, investingadvice, marketcrash

Id: _F7VZAca2k8

Length: 72min 9sec (4329 seconds)

Published: Thu Jun 01 2023