Time now for our Wall Street daily
segment, the host of Wall Street Week David Westin joining us as he does every
day at this time. And David, you sit down with a lot of
interesting folks. But you actually had a chance to sit
down with really one of the legends in economics and really independent
research on Wall Street at home in a little bit earlier.
And you said it remained and we had those strong numbers out on Friday.
And yet they're still projecting a recession.
So we sat down with that man. He is the vice chair of Evercore and the
chair and founder of Evercore ISI. We asked him why he still thought we're
going to have a recession, at least by Q3, despite those numbers.
So this is the toughest time I've had. I've never forecast a recession this far
in advance. So this could be the end of my career.
But early on, I became a follower of Milton Friedman.
And the money supply and the money supply is now contracting and associated
with the banking crisis. Bank deposits come down and then
somewhere along the line, I picked up the yield curve.
And as you know, it's it's significantly inverted.
And then just as a follower of the policy, you have Kutty as the third.
Item there's no history on that, really discussing it or analyzing it, but they
have also found that if we're tightening and other central banks aren't
tightening, it's not so bad. But if we're tightening and other
central banks are tightening, it makes our tightening much more aggressive on
the economy. So obviously you have all those at work
and they take about a year and a half to impact, if you can believe this.
John Maynard Keynes wrote a paper in 1923 saying it took 16 months.
So the comment right now is very strong. It's amazing.
But I'm patient.
And I think that by the summer, will we'll start to see as a recession
unfold. So is the Fed caught in between?
Because the Fed is looking a lot of the numbers you're looking at for sure.
And they're seeing some slowing in some places at the same time.
You look at those jobs numbers, by the way, look at the wage numbers that were
up five tenths of a percent, I believe, in the last round.
Does the Fed have to keep those rates high?
I don't think so. So, you know, I'm pretty senior.
I've been through a lot of these things and the lags are real.
I mentioned the, you know, 0 6 0 7. And it feels to me that the Fed gets a
number and they say, well, we have to adjust for that number.
And I'm saying nothing. It takes a year and a half to see a year
to see what you've done. But the least convincing part of my
forecast is what you put your finger on. The wage number was up half a percent,
which annualize it's to 6 and year on year is about four and a half.
And if proactivity was, say, 2 or 1, you're not you know, you're still not
getting very close to the Fed's target. So that that part has been the most
troubling, the lack of evidence that wages are slowing there, slowing a
little bit. But it's been pretty grudging.
At the same time, the Fed has obviously raised rates a lot and fairly fast.
A lot of people think and the nominal rate that they have, the federal funds
rate, as you pointed, research is not really the effective rate given the fact
we have quantitative tightening at this time.
So the Federal Reserve in San Francisco has
this measure you're referring to, and it puts the Fed funds rate at about six and
a half. Wages, as I mentioned, the average
hourly earnings were about four and a half.
So by the standard measure, five and a quarter for funds rate or adjusted for
Kutty, it's more than that. So I feel pretty good about our forecast
until I walk over here to see you. And the street traffic is like it's
crazy out there. Restaurants are busy.
And so it's right now the economy is pretty strong.
But I think it's slowly slowing and we'll keep slowing.
And as I mentioned, the you know, when it's impacting when you get a financial
crisis. So we also have the Fed tightening into
not this or a crisis in banks, but certainly a lot of uncertainty about the
banks. We've had the regional bank problems
since March. What is that doing for the Fed?
Is that helping the economy slow down at all?
Are we seeing any evidence of that? No.
I mean, we've definitely seen that the banks in trouble
and you've seen a huge decline in deposits.
They're down about 5 percent, which hasn't happened since the 1930s.
But credit growth is still strong. And on the Friday's numbers, they were
up about 9 percent year on year on the CNI loans.
And and then they have the monthly numbers on consumer borrowing and
they're up like No. 12 or 15.
It's right. So I'm forecasting the economy to slow
down. Now, you do get into a funny situation
when it starts to weaken as you start to get people borrowing for
a problem, you know, they're running out of money.
And so they are running tight. And so they tend to borrow money.
It's a credit expansion tends to be a lagging indicator.
So you are forecasting a recession, even if you're a little nervous about the
forecast, which you're forecasting a recession.
So let's assume you're right that we go into negative numbers in Q3, Q4.
How long does the last? I'd say
at least through the first or second quarter of next year.
So. These are the possibilities.
No recession, soft landing, hard landing or severe recession?
I don't see a severe recession. That would be something like.
Eighty nine. 2008, 2009.
But there aren't any excessive for that. But I mean, a hard landing camp, 5
percent more thinking, you know what?
What am I missing here? And it's possible maybe none of those
are right. Maybe we just have an extended period of
time of very slow growth, maybe for several years.
We don't get a recession. We don't get a hard landing.
But it's a extended period of very slow growth.
That's not my best guess. But
always thinking about alternatives.
