Recession 'Delayed Not Derailed' As Economy Approaches 'Tipping Point' - David Rosenberg

[00:00:00] Jeremy Saffron: Hey everyone, I'm Jeremy Saffron. This is Kitco News. If you haven't already, don't forget to hit that subscribe button for more. And today, we're digging into some intriguing economic data that just came out. U.S. retail sales have barely nudged this May, climbing just 0.1%. Now, it's a clear signal that consumers are feeling the pinch, pulling back on spending amid ongoing inflation and a job market that seems to be losing steam here. Not even Memorial Day sales could give a significant boost, with major sectors like furniture seeing dips despite the discounts being offered at the tills. Now, we've also seen a worrying dip in consumer confidence lately, suggesting that the Fed's interest rate strategy might be starting to have a real impact. Now, with such a mixed bag of economic signals, it's crucial to understand what this means for future policies and, of course, an overall outlook on the economy. Who better to guide us through this than our friend, David Rosenberg, senior economist at Rosenberg Research, known for his spot-on market prediction, he's been accurate on our show so far. David, welcome back to the program. [00:01:02] David Rosenberg: Great to be on. [00:01:04] Jeremy Saffron: All right, let's talk about today. I mean, consumer spending data indicates that a real contraction for two straight quarters. In a tweet, you described that this is evidence of the Federal Reserve being out of touch with reality. David, expand a little bit on how today's figures align with your previous forecast and what this tells us about the broader economic health here. [00:01:25] David Rosenberg: Well, look, I would say all along consistently that there's two things we have to consider, especially because everybody got so impatient and pestilence that because the recession didn't show up in 2023, therefore, it's not going to show up at all. And it reminds me a lot of what happened in 2007 when the recession everybody expected to start didn't start until December of that year. And then, of course, the NBER didn't date the recession until the end of 2008. People were surprised that it actually started at the end of 2007. But the lags were much longer back then because even after the Fed aggressively raised interest rates from 2004 to 2006, that was a two-year cycle, magnitude about the same as we have right now. But, you know, people kept on tapping into the housing bubble and extracting home equity out of their inflated home price and cash refinancing. So that kept the Energizer bunny going. And I didn't waver at the time, although it took longer for things to play out. And so this time around, last year, we had 3% real GDP growth. Well, let's boil it down. What happened last year? Even though we had sub-4% unemployment for the first time ever in that sort of labor market, the government allowed the deficit to balloon 25%. Never happened before. We had tremendous fiscal stimulus. On top of that, we had double-digit credit card growth. And then later on top of that, the last chapter of the excess savings file from the personal sector being put to work in terms of consumer spending. And if you really adjust for those three, what I call non-recurring events, there was no growth in the economy last year. People will say, well, you know, Rosenberg, you're data mining. And I'm saying, no, I'd actually prefer to call it analysis. Because these things are not recurring. The San Francisco Fed just put out a report saying that more than 100% of the $2 trillion of stimulus checks in 2021 that kept the Energizer bunny still marching, that's over. And the fiscal stimulus, the extent of that, the deficit is not going up 25% this year. Incrementally, fiscal policy is not adding to growth. And now we're seeing with credit card default rates at their highest level in 12 years, you're starting to see the lenders cutting back on limits on credit cards and cutting back on credit card extension. And actually in April, and that's what I said in my report before the data came out, is, you know, what does it mean that credit card outstanding hardly ever goes down in the United States? The narcissistic consumer actually paid down their expensive credit card debt in April. And I was saying, is that sort of a leading indicator? It proved to be looking at the main retail sales numbers today, not just that, but the downward revisions. So that's what we're looking at. We're looking at all the stuff that supported the economy last year. It's gone. But what's gearing us in the face is the lagged impact of the damage the Fed's already done on interest rates, because the economy resets to interest rates in both directions, mind you, with long lags. And then there are things that can get in the way of the recession call. Like I talked about in 2007, the ongoing extraction of home equity kept the expansion going until it ended, because all expansions end and all recessions end. It's all just part of the cycle. So where I'm different, I suppose, from almost every other economist on the planet is I do not believe in fairy tales. Okay. I don't believe the business cycle has been repealed. And I firmly believe that in a hugely credit driven economy like the United States, interest rates matter, but they hit the economy with lags. So this is going to be the story going forward, especially because there are no other real antidotes to put a floor under this thing. I actually think that the consumer recession that a lot of us, including me, were thinking we're going to start last year. Well, I've got news for you. Delayed is not derailed. Okay. So you can be early and wrong or just play wrong. And I guess I was early and wrong, but I was viewed as being early and wrong back in 2007 before being proven to be spectacularly right in 2008. And I'm not trying to compare the two cycles. We're not going to have a 30% meltdown in home prices and Armageddon in the financial sector. However, the business cycle, the business cycle is the business cycle, life moves in cycles, seasonal patterns, movement cycles, and the markets and the economy move in cycles. And so we're actually right now, I think we're at a tipping point. And I think it's a wide array of data are really suggesting that the economy is starting to tip over into a classic NBER recession. And when I talk about this to people, it's incredible. It's like they've never seen a recession in their life. It's like I look them in their eyes and I'm saying, your kid is ugly. No, it's actually just a matter of being prepared for the really inevitable recession, which will then be followed by the inevitable expansion. It's just the business cycle. [00:06:43] Jeremy Saffron: Yeah. Yeah. And you mentioned it. I mean, consumer spending and retail sales, looking at it, it's the weakest pace since the Great Recession of 2009. And you mentioned it might not be the same, but, you know, given the Fed's stance last week describing the macro backdrop as strong, in their words, might there be some other figures here that we're not looking at that might not be immediately apparent from today's data? [00:07:07] David Rosenberg: Well, the housing data have turned lower. You're seeing the, you know, the industry in building materials that's rolled over. You're starting to actually start to see some cracks emerge, even in the fun and game industry of cyclical consumer services. Look at what happened to airfares and the CPI number last week. It looks as though that demand for air travel is starting to recede, admittedly from very high levels. But we're talking about growth here. We're not talking about levels. It was actually rather surprising today to see the weakness in restaurants in the retail sales data. So we're starting to see, even in the areas, part of the reopening trade, part of what people were spending their cash from the stimulus checks on, because, of course, we choked ourselves on Peloton bikes and patio furniture and redecorating the living room, you know, when we couldn't get out of the house and COVID was raging. And now it's been all about fun and game services, the YOLO spending, you only live once, the experience spending. That's starting to show signs of fatigue. So, yeah, you mentioned, I was struck, honest to God, last week, to listen to Jay Powell, like, I guess he is really the chief economic cheerleader for the United States, and everybody just laughs it up. Now, one reporter, now one reporter said, as Powell is up at the podium, saying those two words, that the economy is solid and is strong, was so diametrically opposed to the tone of the base book, the Fed's base book, which actually called the pace of economic activity, slight and modest, which is not necessarily recession, but that's usually what you get in the transition towards a recession, those two words. The base book is what? The base book is not data. Every six weeks, the Fed sends its staff into the field to interview business contacts across every industry. In every region. And they've done it for 60 years. And the tone of the base book, the reason why I was below consensus on retail sales is because I looked at the commentary on retail sales. And I said, there's, there's no way that we're getting a 0.5 on core control, or we're getting a 0.3 or 0.4 on headline. That's not going to happen. Well, it didn't happen. And people say to me, how'd you get the number right? It's because I read the base book, which is actually revised. It's actually facts on the ground. They've done the base book for 60 years. And I felt I would put up my hand if I was there. If I was there, I would put up my hand, you know, to, at the press scrum. And I'd say, Mr. Powell, why does the Fed expend all the time on the resources on the base book every six weeks when you don't even listen to it? They're so hyped up about inflation because they're living in a world in the rear view mirror. They're fighting yesterday's battle. We had the inflation, had it gone from nine to around 3% inflation, had a couple of bumps in the road this year because of auto insurance premiums. It has nothing to do with Fed policy or the economy. It was just a lagged response to the horrible claims experience that the property and casualty insurance industry faced. They fattened their margins. And now that story is over. We saw that in the CPI number. And yet you read the base book and all you read about is a rapid diminishment of corporate pricing power. And it's very, it's forward looking. The Fed, what does the Fed talk about? The Fed not just talks about that strong and solid economy, which was last year's story. They're still harping about the lack of confidence they have on the disinflation, even though we've gone from nine there for one month down to three plus. And all the pressures are heading lower in the future. But they don't talk about the pressures in the future on inflation. They don't talk about that. They talk about the year for year percent change in the CPI and the core CPI, which are inherently lagging indicators. And they focus way too much on contemporaneous and lagging indicators. And that's a big problem. That's a big problem. And when people say to me, are you nervous about the recession? Yeah, well, I guess I'm not nervous about it. I think it really could have been avoided. It could have been avoided. But the Fed has stayed too tight for too long. And I know people will say, well, but it's what about the stock market? Really? Really? The stock market? Three stocks? Three stocks? You're serious, right? They talk about financial conditions. Oh, all the economists you must interview. Financial conditions are so easy. Well, the easy financial conditions are not producing an accelerating economy. These loose financial conditions are actually a decelerating economy below trend, which is creating all the conditions for disinflation, which was in the Fed. And so that's what I'm talking about here, that the Fed, and maybe they were just so shamed by transitory and missing the 18-month inflation bulge, they still feel somehow their credibility has been jeopardized. Once burned twice, but the sacrificial lamb is going to be the economy. And we're starting to see it in real time. And it wasn't just beginning today because the retail sales number in April was even worse. Post-revision was even worse. And you have back-to-back numbers now of negative real retail sales. That's 40% of the consumer and really a heavily cyclical part of consumer spending because it doesn't have health care, it doesn't have education, it doesn't have telecom. There's some segments, wide swaths of consumer spending that just never go down, no matter how bad things are. But the importance of the retail sales is that it's very, very cyclical in nature and it's giving you a very important signal right now. [00:13:14] Jeremy Saffron: Now, David, you've pointed out that the lag from past fiscal policies is now affecting the consumer sector. Much like we just discussed, now there's been different approaches. Canada, obviously, you know, cutting a little bit of an interest rate. Europe starting to. We're looking at other places in the G7. How do you compare the situation to EU or maybe Canada? What lessons might the Fed take from these international counterparts here? [00:13:38] David Rosenberg: Well, they're really in different orbits because up until now, the U.S. had two things going for it. So, dramatic fiscal stimulus. Now, remember, I don't think Canada or the Eurozone had a 25% expansion of the fiscal deficit last year. I don't see other countries with something called the CHIPS Act, which is a real protectionist policy by Joe Biden. And in the U.S., they also have 30-year fixed rate mortgages. They don't have that in Canada. Interest rates reset quickly. The transmission mechanism from monetary policy to the economy is much more quicker and is much quicker and much more vicious here. And you haven't even seen all the mortgages here reset. And there's going to be more pain for the Canadian consumer. Not to mention the fact that in Canada, you have a much more heavily indebted. I don't know how society or the regulators or the Bank of Canada allowed the debt-to-income ratio in Canada, in the household sector, to go even higher than it was in the most epic credit bubble of all time in the U.S. in the mid-2000s, how did we let this happen? And then you layer on a John Crow type of Bank Canada tidying cycle onto this layer of debt. And now we have a near-record proportion of income in Canada in the personal sector being siphoned off into debt service. So Canada is in much weaker shape. I mean, even as we talk about it right now, the year-over-year trend in real GDP here is 0.5. And in the U.S., it's over 2.5%, slowing but 2.5%. Canada, it's 0.5%. The unemployment rate in Canada has already gone up 100 basis points, more than 100 basis points on the cycle low, about double what has gone up in the U.S. So it's interesting that the Bank Canada invoked for two meetings in a row this term excess supply, which is code for output gap, code for disinflation, disinflation at a time when inflation in Canada, broadly measured, has already moved to target. So, yeah, the Bank Canada is very well-backed by what's happening here to cut rates ahead of the Fed. I think the Fed has had reasons to lag behind, and a lot of that is because of the fiscal and the fact that most people locked in their mortgages, so there's less inter-sensitivity than there is in other countries in the world. But you see, that's not going to last indefinitely. So the Fed will be the last man standing. But when it comes time to cut later this year to 2025, I think they'll be cutting pretty hard. And the same goes through, you know, in Europe, where, frankly, not the same degree of fiscal stimulus, really a different structure to their mortgage market. I think Canada is weaker. I think Canada, you can argue, is the weakest G7 country. The eurozone, I would say, is muddling along. And the U.S. is probably the cleanest shirt of the laundry basket. But as I said before, a lot of those factors that have kept the Fed tight and supported the economy, they're starting to subside. And there's one other thing to keep in mind is that, you know, the Fed is hung up over the inflation in the United States. Now, I said that a good chunk of the deviation in the opening months of this year from the disinflation momentum in 2023 was auto insurance premiums followed by home premiums. We still have this stubbornly high rates of growth of, call it 0.4 per month in owner's equivalent rent. I'm not even talking about the regular rent, which is 7% of the index. 27% of the CPI in the United States is one question to a sample of homeowners, which is, what do you think you can rent your home out for? It's not even at a price anybody really pays. That's 27% of the CPI. Now, in Canada, we have our own ridiculous way of calculating housing costs and mortgage rates. Mortgage rates go right into the CPI in Canada. I always make the joke about mortgage costs, like, you know, as inflation. You know, like when you're at Loblaws with your wife, do you say, hey, honey, can you get me the mortgage interest beside the cornflakes? I don't hear anybody ever say that. So, but Canada does not have OER. And Europe doesn't have OER, only the United States. But when you strip out shelter, the way that they measure it from the BLS, inflation is a target. It's pretty well at roughly 2% in the United States. So, a lot of this, when we're talking about deviation and monitoring costs, a lot of it also comes down to the methodology and construction of how these statisticians do their relative consumer price indices. [00:18:49] Jeremy Saffron: Right. Hey, David, talk to me a little bit about how political this is. Because as you mentioned, you know, within the G7 nations, Canada's not doing very well. Yet, of course, we've seen that small decrease in the interest rate. And then we saw the prime minister doing some laps, Chrystia Freeland going on the press, talking about how the G7, Canada's the best at a G7 nation. We're seeing similar a little bit with Biden, you know, over in Europe right now, really touting his economy and how resilient. What's happening with the data here? I mean, is this just political? Is this just to get past this next election cycle? Or is this, you know, really hitting us, these, you know, disconnects? [00:19:30] David Rosenberg: Well, let me just start first with Europe, which is in a state of political disarray. And if things were really that great, for example, in the UK, I don't think the Labour Party with a few weeks to go would be 20 percentage points leading in the polls against the Conservatives. We've just had an overhaul in France in the EU parliamentary elections. If things are going that great, then the citizenry would be voting for the status quo. That's not happening. So there's nothing to brag about in Europe. That's for sure. Although there's parts of it. It's funny that the areas that were the basic cases back in 2012, 2013, Greece, Portugal, even Ireland, you could even argue Italy. They're doing far better than core Europe is. I could throw Spain in there as well. However, the US, you know, Biden can brag right now, 4% unemployment rate. That sounds pretty good. Of course, he can't say it's 3.4 anymore, which is where it was at the lows. And he could talk about GDP growth north of 2.5%, but he better start talking about that now because in the lead up to the election, things are going to be a lot weaker. So if you're Joe Biden, you're going to talk about the economy, you better strike while the iron's hot, okay? Because the iron is going to be pretty warm by the time the election rolls around. So get it out of the way because the economy in the United States is weakening. In Canada, I mean, that's just a case of, what can I say, blindness to be talking to the Canadian economy. Are you kidding me? Are you kidding me with this? You know, in the United States, they can talk about, and all they talk about, the strength of household balance sheets, the strength of household balance sheets. The Canadian household debt to income ratio, which is peaking and rolling over, is in the stratosphere. That's a crazy-looking chart. Canadian household debt to income looks like NVIDIA stock. I mean, that is actually not encouraging. And then you've got the situation where only 60% of the people in Canada in the past year coming into the labor force, 60% are managing to find a job. So we're seeing a flood of people coming into the labor market. Only 60%, 40% are not finding a job. Ergo, the unemployment rate is on an upward path. And the unemployment rate is higher today than it was before COVID. So how can you claim to people the Canadian economy is in good shape? With 0.5% real GDP at a time when the population growth because of the immigration is north of 3%, how can you ever boast about the Canadian economy? I would just say to anybody who would want to take that up, I'd say, well, what's the Canadian dollar telling you? What's the Canadian dollar telling you? And not just against the U.S. dollar, against most other currencies. It's going down. And the currency is a relative pair trade. So, no, I would take the under on the bullish call in the economy and the fact that Bank Canada is cutting rates. It's telling you that they're pretty concerned. [00:22:56] Jeremy Saffron: Yeah, they're definitely concerned. And you could certainly tell that it was the Prime Minister Trudeau going to CBC. He wasn't coming to Kickco News for those hard questions. Okay, before I let you go, David, I was reading an article yesterday about outgoing Cleveland Fair, Chad Loretta Messger, talking about rebranding communication from the Fed, basically saying, we need to highlight other data so that we're more, you know, critical with our assessment and more vulnerable about what we show. Talk to me a little bit about this. You know, the current data that they're showing, we just talked about how J-Pow last week was saying, okay, I'm really optimistic about the U.S. economy. What's the communication problem that the Fed has here? [00:23:38] David Rosenberg: Firstly, they talk too much. I look on my Bloomberg screen, I'll see, oh my God, there are six Fed officials talking today. You know, I started in the business in the mid-1980s. And I was in Toronto at the Bank of Nova Scotia. And I remember in my first month, I got to hear two Fed officials speak. Gerald Corrigan, who's a legend, and he was the vice chairman of the Fed. And then about a month later, this is in the fall of 1987, I got to hear Lee Hoskins, who was the Cleveland Fed president. And Corrigan talked about the implications of global financial sector deregulation. Okay. He didn't go there to say, this is where we feel interest rates are going to be. This is where we feel we're going to be at the next meeting. He talked about something you can sink your teeth into. What did Lee Hoskins talk about? Because he was Cleveland Fed president. What did he talk about? He talked about free trade with Canada and how it's going to affect the Great Lakes economy. These were mental giants. What do we get today? We get people that can't wait to get in front of a camera and a microphone. I've never seen this before. And they all say the same thing. We're not confident enough. They come up with these buzzwords, patient, transitory. They meet around, they say, okay, now it's called we don't have enough confidence. We don't have enough confidence. And then they all say the same thing. We're not cutting rates till December, as if they know. We're not cutting rates till December. And then they talk about their lack of confidence. We need more months. They don't talk about anything. They are focused. They want to improve the communication. Talk about your forecast. Talk about the pressures on inflation, the pressures on the economy going forward. Everything they say is in the rearview mirror. I've never seen this before. I actually printed this in my daily a couple of weeks ago. We're at some quotes from Ben Bernanke. Okay. And he was giving testimony and he talked about the productivity outlook and how that was going to affect the inflation outlook. And you could sink your teeth into that. Then I had one from Greenspan. Not that these two central bankers were God's gift to central banking, but they just were really smart. And they provided intellectual health. Greenspan, I remember when people were getting hyped up over inflation, this is going back over 20 years ago, he gave a dissertation on profit margins. And how the movement of profit margins was going to mitigate any inflation pressure. And that's like providing a view beyond the stupid dot plots. Imagine the dot plots. Look at their forecast on GDP growth year after year. Look at the latest dot plots. Two, two, two, two. Well, four years or three years of 2% growth with no deviation. Guess what? That's never happened before. Then their forecast on unemployment, four, four, four. So four years of 4% unemployment in a row. That's never happened before. So, like, why are you bothering even producing these forecasts? I would say, and then they produce their, then they get everybody distracted by their new estimate of R star. It's such a waste of resources. It's a waste of my time to have clients email me to ask me the implications of the R star, which is inherently easy. So what's interesting is that Powell will go up there and say, well, don't look at R star, but the fact that they actually produce a projection all coming from Bernanke in 2012. Big mistake. They don't even know. I mean, R star when, when they had R star at 3% back in 2018 and you had Powell first appointed as chairman, guns a blazing. He says, we're going to blow a hole through neutral. They didn't come close. What does it even matter? So basically I would say, uh, if there's a new communication from the fed, please less, a lot less, get rid of the dot plots. And those ridiculous forecasts that have an incredibly high error term. Stop talking about what you're going to do or not do with the next meeting. Okay. Be a real central banker. Talk about the economic outlook. Talk about the pressures. Talk about the risks. Okay. They just all say the same thing. What they're going to do at the next meeting, uh, or the meeting after that, or what they're not going to do. And, uh, they talk about their favorite indicators, which is the year of a year, uh, inflation rate, the headline unemployment rate, the ratio of job openings to unemployment, which is. Powell's favorite indicator tells you nothing about the future. And they have thousands of economists with all their models, and all they talk about is what's already happened. So I am really disappointed in this Fed. I'll say for the record, in my 40 years in the business, I don't think that I have confronted a Federal Reserve with such a lack of intellectual heft as this one. I'm astounded, actually. I wish they would speak less, and when they have something to say, attach some meat to the bone, okay? Because that's not what we're getting. But here's what's disappointing, is everybody, every economist on Wall Street, I mean, you see them there, they're like lemmings. The media and the press, at the press crumbs, you know, the questions are feeble, and there's the general acceptance, general acceptance. And I'll give you just one example. One example of inconsistency is Patrick Harker, and you mentioned Loretta Mester, sure. Patrick Harker, and this is what I was encouraged, Patrick Harker, back it was either December or January, and this is when the market started pricing in six rate cuts. The market wasn't being stupid, they were looking at what the Fed was saying. Patrick Harker, who's now gone 180 degrees the other way, said in a speech that he says, we don't want to make the same mistake twice, because we missed the inflation run-up, because we weren't listening to business contacts, we're focused on the data. He says, now we're going to focus less on the data and more on business contacts, because we don't want to miss the turn of the economy to the downside. That's what he said six months ago. The meeting in January, right after that, very rare to ever have the Fed chairman actually bring up the base book. Powell brought up the base book, and I'm there rubbing my hands thinking, okay, okay, this is good. This is good. They're going to listen to the base book. But then what happened? They didn't. They didn't. There was a huge deviation between the incoming economic data and the tone of the base book that is now, by the way, being rectified by the fact that all the previous data are being down when they revised. What do you know? So maybe what they should do is start to talk less about the data, which have very low response rates post-COVID, are getting constantly revised, now revised to the downside, talk about what your business contacts are telling you. And that's a communication that I can certainly support. [00:31:11] Jeremy Saffron: Yeah, well said. A different communication strategy, of course. David Rosenberg joining us today to break it all down. We appreciate it. Don't forget the audience can also go to RosenbergResearch.com and you can sign up for David's analysis. You've been split on, my friend, so I appreciate making the time for us. As we watch this reality show get closer to July, hopefully we'll have you again on soon. [00:31:33] David Rosenberg: Great. All the best. [00:31:35] Jeremy Saffron: Thanks, David. Appreciate it. And thank you for watching. I'm Jerry Saffron for all of us here at Kidco News. We appreciate tuning in. Tell your buddies to make sure that they subscribe to the channel. We'll have more great content coming your way soon. Music by Ben Thede.