Recession outlook: Is the economy closer to an economic downturn or can it be avoided?

[00:00:00] Speaker 1: Welcome back, everyone. As we wrap up the first half of 2022, there is no question that rising inflation and the concern for global recession has been on the mind of investors over the last few months, causing the markets to experience some of its roughest stretches in years. Joining us in studio now to discuss hopefully a better second half of the year, we've got Julian Emanuel, Evercore ISI Senior Managing Director. Do you think it's going to get better in the second half? [00:00:29] Julian Emanuel: Well, probability dictates that after a down 20-something first half, that the odds are it's going to be better in the second half. And, you know, in a week or two that has been full of downbeat news, we can step back and we can say that in terms of inflation, one thing that we're focusing on, gasoline prices have started to decline. That's a positive. The other positive is that yields have started to decline. And in a year where a lot of this volatility is being caused by the fact that stocks and bonds for the first time in 25 years are consistently moving together, yields declining is a positive. [00:01:13] Speaker 3: So yesterday we heard from Chair Powell, right, speaking in that European roundtable, and he's been hammered as of late. Are you going to cause a recession? Are you going to cause a recession? Are you going to cause a recession? And he's sort of now saying, well, not on purpose, right? It's a higher risk now. And he's sort of acknowledging something that the market has been acknowledging for quite some time. So does that also help sort of mark the bottom that he's acknowledging the difficulty that the Fed's going to have in a more dramatic way? [00:01:41] Julian Emanuel: So in raising my two now college age sons, I've always said that, you know, when you use the phrase not on purpose, which was clearly what the body language was yesterday, it really doesn't matter because the thing happened anyway. And perhaps you need to take ownership of that. Again, the market's narrative has shifted. We're not saying that inflation is defeated by any stretch of the imagination. Whatever the glide path is, is that, you know, Evercore ISI's forecast is 4% on core PCEE next year. That's still too high. But when you look at it, inflation break evens, I don't think there's any way to sugarcoat the word, have collapsed in the last few weeks. Okay. And that tells you that the recession odds are rising. And in our client conversations, whereas a couple of weeks ago, perhaps half of our clients thought that there was going to be a recession likely starting in the next 12 to 18 months, I would say that number is closer to 85%. And of that 85%, I'd say half of them believe we have started one already. [00:02:50] Speaker 4: Yeah, Julian, let's pick on that because we've been highlighting really all week some weakness in retail results. You had RH, another warning last night, Bed Bath & Beyond yesterday, very bad results, targeted a couple of weeks ago. To your point, do you think we're in a recession right now? [00:03:02] Julian Emanuel: So technically, if you look at it, obviously first quarter GDP printed negative. You look at Atlanta Fed GDP, it's literally on the flat line. So, you know, we don't say this very much in the business, but it really is, for the most part, a flip of a coin, whether in fact it is. And I would suggest that if you talk to most people, the feeling is, is that if we're not in one, we are edging very close to one. And if you think about it, what's different this week than prior weeks is the conference board survey fell because the labor market conditions are now being judged as deteriorating, certainly more rapidly than we had thought just a few weeks ago. [00:03:43] Speaker 4: I mean, we're not at the point where we're getting negative headlines on jobs, right? [00:03:46] Julian Emanuel: No, no, no, no, no, no. We're still away from that. And frankly, we have to remember that when you go back to the pre-pandemic era, monthly jobs growth of 100 to 150,000 or so was perfectly acceptable for, you know, a GDP in the neighborhood of 2%. That still applies. But again, the potential for a sudden shift is what really the markets are focused on. [00:04:14] Speaker 1: And so in the event that people are looking to set a position for the long term, given the pullbacks that we have seen in some equity names, pretty much broad based here, where would you start picking at if you would? [00:04:26] Julian Emanuel: So several themes here. The first is, is that the way you're going to make money the next several years is not the way you made money the last 15. We stayed close to the index that drove us into growth, that drove us into FANG. Those stocks are still relative to the rest of the market, have a relatively high valuation. What we want to focus on is this concept, you know, a lot of people say, OK, we've got lots of inflation, so cash is not really valuable. Well, we argue that cash is actually more valuable when there's inflation because the volatility of assets picks up. And we love companies that throw off cash. They come across all industries. There's just a ton of them. And frankly, what it does is that and for the most part, concentrated toward the value sectors, financials, health care, especially. But there are some in consumer names, which, again, is a very beaten down area. If you throw off cash, you've got a margin of safety. You can return to shareholders and you can manage your business better. [00:05:37] Speaker 3: One quick final question. You're also a market plumbing guy. You look at derivatives and all of that stuff as well. There was such huge increase in options trading during the pandemic and shortly thereafter. Has all of that been washed out and what effect is that going to have on the next six months? [00:05:51] Julian Emanuel: So it hasn't been completely washed out because if you look at it and again, this was driven by the public largely because margin balances, margin debt, debt is still very high. OK, and that is mostly the public trading on margin that needs to continue to moderate. But interestingly enough, we have seen option volumes decline simply because when you look at positioning, professional investors are relatively hedged. They've seen this storm coming. They don't know how it's going to unfold, but they aren't using options for protection as much because their positions have already been degrossed, which means you have the potential for a bear market rally literally at any time. [00:06:39] Speaker ?: Interesting. [00:06:39] Speaker 4: Great insight as always. Good to see you in studio. Thanks for coming down. Same here. Great to be with you all again. I know you'll be doing these things via Zoom, but thanks for coming and hanging out. I appreciate it. Julian Emanuel, Evercore ISI Senior Managing Director. [00:06:53] Speaker 1: It's evidence seems to be mounting that inflation may finally start to ease, but will getting it under control trigger a recession? That's the big question here. And joining us with the answer to that question, perhaps, and more, is Fidelity Investments Director of Global Macro, Urien Timmer. Urien, great to have you here with us today. So has inflation peaked from your perspective? [00:07:14] Speaker 5: Well, the hope is that it has. And if you look at, of course, the CPI report, which was a bit of a shocker when it came out a few weeks ago, it kind of, you know, put some cold water on the notion that the rate of change was speaking, as it eventually should, right? I mean, in terms of the base effects and all that. So that, you know, had kind of moved the Fed further into restrictive territory, or at least the market's perception of it. And we got to kind of a 4% terminal rate and talk about, you know, multiple 75 basis point moves in a row. But behind the surface, we see in the tips market that the inflation expectations are actually coming down, at least via the tips market. And we can argue whether the tips market is an accurate, you know, reflection of where inflation is going. But the five-year tips break even peaked at about 3.75% in March. It's about two and three quarters now. So it's come down about 100 basis points. And the five-year, five-year forward, which is a fancy way of saying what investors expect five-year inflation to be five years from now, that really hasn't budged. It's been around 2.25% for quite a while, even during these periods of very, you know, very much soaring inflation. So the bond market seems to be somewhat chill about long-term inflation effects. But again, we have to see who is right. But that's what the market is saying right now. [00:08:43] Speaker 3: Jay Powell doesn't seem to be too chill about it. He's commenting, of course, in that roundtable discussion today over in Portugal. I just want to play you one thing that he had to say, Urien. [00:08:54] Speaker 6: Since the pandemic, we've been living in a world where the economy is being driven by very different forces. And we know that. What we don't know is whether we'll be going back to something that looks more like or a little bit like what we had before. We suspect that it will be kind of a blend. But in the meantime, we've had a series of supply shocks. We've had, you know, very high inflation now across the world, certainly through all the advanced economies. And we're, to Augustine's point, we're learning to deal with it. We have, our job is to find price stability and maximum employment, in the case of the Fed, in this new economy with these new forces. And it is a very different exercise than the one that we've had for the last 25 years. Nonetheless, the goals are the same. [00:09:39] Speaker 3: Of course, he talked about the challenges of doing that and said that the pathways have gotten narrower to a so-called soft landing. So what can we expect from the Fed? Are they going to be forced to back off these interest rate increases? [00:09:55] Speaker 5: It's a great question. And, of course, the Fed has to thread the needle here. You know, up to this point, since really for a long time, for the last several decades, the Fed could always err on the side of maximum employment because inflation was MIA. So it could always sort of overfocus on one mandate while maybe putting the other mandate on the back burner. And that obviously is no longer the case. Inflation has been much more persistent than I think anyone thought, including the Fed. And, of course, if I were at the Fed, I would be concerned about temporary supply shocks or temporary or transitory inflation becoming more entrenched in terms of how people behave, you know, what their expectations are. And that's how you can get chronic inflation. And I think the real test going forward is, you know, if the economy were to weaken significantly and it's weakened some. I mean, growth is slowing, as you might expect during this late cycle phase of the economy. But the employment data are still very, very strong. So I don't think a recession is imminent at all. The yield curve has been flattening, but it isn't inverted yet. And I think the so I think the Fed has license to kind of keep pushing the Fed funds rate higher and more into restrictive territory, which would be above 3 percent or so. I think the real test going forward is, you know, as inflation does come down, at least on a rate of change basis, as the base effects finally kick in, the question is, does it what does it go down to? Does it go from 8 to 2? You know, I think that's probably unlikely. Or does it go from 8 to only 4? And if it gets to 4, which is still twice what the Fed's target is, and the economy is then weakening and maybe employment growth turns negative, that I think is the moment where the Fed has a real dilemma, because then it has to choose whether to accept higher than targeted inflation in order to save the economy. And I don't think we're there yet, but we could get there at some point. Uran, you think the markets are cheap yet? I think the markets are fairly valued. So I look at a very simple metric. I look at the two-year Treasury yield as a proxy for where the Fed cycle goes. And that is a good input into equity valuation per the discounted cash flow model, right? So the DCF model puts in earnings growth in the top, in the numerator, an interest rate or a cost of capital in the denominator. And so far, what we've had is earnings growth has been good, about 10%, and we'll have to see what earnings season will bring in the next few weeks. That's kind of what everyone is waiting for, to see whether those estimates of 10% growth this year will hold. But in the denominator side of that equation, the cost of capital, of course, has been going up, as it has been for everyone, whether you're a mortgage, a home buyer, or a corporate borrower, or what have you. And as the two-year yield goes up, the cost of capital goes up, and that's been a good proxy. So the forward P.E. on the S&P 500 peaked at about 23, 24. Today, it's around 17. Fair value is around 16. So all the market has done so far is to catch up to a lower fair value because interest rates are rising. But it hasn't overshot it. It's not like the market's trading at 12 times expected earnings when it should be at 15. It's just at 16 when it should be at 15 or at 16. So the market is at fair value. It has been. But it's not quite enough, especially where we're all waiting for the other shoe to drop on the earnings front. And maybe it won't drop. Maybe the earnings side will pull through. [00:13:48] Speaker 7: But that is kind of the balancing act here. [00:13:55] Speaker 8: Well, let's get more on that market action for you with our guest, Bob Dole, Crossmark Global Investments Chief Investment Officer. Thank you for joining us. So as we mentioned, they're just days away from the end of the second quarter. What should we read into what we're seeing in the markets right now? [00:14:10] Speaker 9: I think we're experiencing the after effects of an oversold condition. This is the third one we've seen this bear market. The first two led to almost 10% and more than 10% increase. This one's up seven from the low. We're stalling a little today, digesting what we've experienced. But the fundamentals in the last week are, you know, maybe inflation is peaking a bit. But maybe the economy is slowing and we're in this good news is bad news and bad news is good news for the stock market. I think we'll see more of the same. [00:14:44] Speaker 10: Hey, Bob, what are you looking at that suggests to you that inflation may be cooling or maybe we have seen a peak when it comes to prices? [00:14:52] Speaker 9: Well, obviously, the major indices or indicators have not shown us that. But I'm talking about the fall off last week in commodity prices. Copper is a key bellwether there. I think it will show that the second quarter was the peak in inflation. We may be solving some, not all, not even a majority of the supply chain problems. And the boil can come off there. The comparisons get easier from a year-over-year basis. So I think we'll see some decline to still unacceptable levels of inflation, but no longer the 8%, 9% that we've seen of late. [00:15:27] Speaker 8: And I want to ask you about a market sentiment indicator that you mentioned in your notes there, the bull-bear ratio. What is that telling you and how are you using it? [00:15:37] Speaker 9: You know, it tells us that there are a lot of scared people out there, a lot of bears, and not too many people who are excited about things. And that's usually when these sentiment measures get extreme in either direction, it pays to lean in the other direction. So it is among the reasons we think that this bear market rally is not yet over. [00:15:57] Speaker 10: Bob, getting back to what you were just saying a minute ago here, what's necessary to get back to the Fed's 2% inflation target? Do we need to see a recession? Do we need to see the labor market maybe weaken a bit in order to see the inflation drop that significantly? [00:16:11] Speaker 9: Yeah, I think a miracle it's going to take to get back to 2% inflation. Look, I think the things I'm talking about at the edge and some help from the Fed, we can get back to 4% or 5% inflation. But I don't see us getting to 2% without a recession, and that probably comes next year. [00:16:29] Speaker 8: And as we keep an eye, we're seeing the oil prices climbing again, the VIX edging upwards as well. What is that telling us about where the market is headed, and how should people be positioning their portfolios? [00:16:38] Speaker 9: I think what it's telling us is that the market will continue to be volatile, but maybe not exclusively to the downside like we saw in the first half. I think we're going to have a second half that's frustrating the bulls and frustrating the bears bounce around a bunch as we kind of digest the economy slowing. How much of an effect does that have on earnings? Maybe we get a little better inflation news so the P.E. ratio doesn't get threatened as much. But we're moving from a period where it's all been about P.E.'s multiples declining, and we're moving to a period where I think the earnings are going to be watched more carefully than the P.E. [00:17:18] Speaker 10: Bob, you mentioned the high chance of a recession next year. How bad do you see that recession potentially getting? [00:17:26] Speaker 9: You know, great question. I wish I had an honest answer. The honest answer, I do have one, is I don't know. But my guess is there's a chance this won't be a horrible recession. We still have a consumer that's in pretty good shape, a corporate sector, cash, cash flow. And as you all know, the labor market is incredibly strong. We've never entered a recession with the labor market being strong. So I'm hoping those three things can cushion us from what could be a more nasty recession. [00:17:56] Speaker 8: And I want to ask you about the 72 companies that have issued negative guidance for Q3, the highest number since the fourth quarter in 2019. What are you watching in terms of earnings? [00:18:07] Speaker 9: I think that this next 30, maybe 60 days, the reported earnings and the outlook going forward. Don't forget, during this period where the market's gone down, can I say, the limit, and people have been concerned and worried and the recession word keeps coming up, earnings estimates have moved higher during that entire period. Earnings estimates for the S&P 500 today are 6% or 7% higher than they were on January 1st. So to your point about the earnings disappointments, the downgrades, I suspect there's more of that to come. We're going to have to watch where does that show up, how much can corporations defend their profit margins. Corporate America so far has done an amazing job raising prices to take care of cost pressures around labor and manufacturing and transportation. And our guess is that that won't be so easy going forward. [00:19:03] Speaker 10: Bob, what do you make of the housing market? We just got pending home sales out this morning. They posted a surprise increase in May. We've seen kind of a mixed bag when it comes to recent economic data. But specifically looking at the housing sector, I guess, where do you place that now and anything in there that is a worrisome sign to you? [00:19:21] Speaker 9: Yeah, the rise in mortgage rates, while still not at horrendous levels, absolutely, they're up a ton. And I think that has already begun to put some pressure on parts of the housing market. We still have a fair amount of demand. Activity is slowing. So eventually I think we'll have some price declines in real estate that goes with those higher interest rates and a slowing economy. But boy, it's been very strong to date. [00:19:49] Speaker 8: And then as we look at indicators, what's the next piece of economic data that you're keeping an eye on that will really help us track whether or not inflation is peaked and what the markets are pricing in right now? [00:19:58] Speaker 9: Yeah, I think it's the CPI, the PPI, the PCE, the traditional measures. But the lead indicators to that tend often to be those commodity prices that I referenced earlier. If I was only to watch one thing for inflation, price of copper. We call it Dr. Copper, as you know. [00:20:17] Speaker 10: Bob Dahl, always great to have you here on the program, Crossmark Global Investments. Thanks so much for joining us. [00:20:27] Speaker 1: Welcome back to Yahoo Finance Live, everyone. With markets attempting to price in a mild recession, we spoke with Mohamed El-Erian last week who had this to say about the global growth projections. Take a listen. [00:20:39] Speaker 11: Not just should, we will see growth projections coming down more. We got some pretty awful PMI numbers out of Europe. The three biggest areas in the world are all slowing simultaneously. China, the U.S., and Europe. And what you're seeing in the oil market, it tells you that demand is now in control. For a long time, supply was in control of the oil market, and that drove prices higher and higher. Now it is demand. And as people worry about a global slowdown, they worry about demand for oil, and oil prices have been coming down. [00:21:15] Speaker 1: That was president of Queens College, Cambridge, Mohamed El-Erian joining us. And for more, let's bring in Keith Lerner, who is the truest chief market strategist. I want to get your reaction to the commentary from Mohamed, and particularly on the kind of face of some of these global economic slowdowns that we've been tracking, but also some of the projection pullbacks that he's expecting. [00:21:37] Speaker 12: Yeah, well, first, Brad, great to be with you and the crew this morning. I think there's no doubt the global economy is slowing down. If you take a step back, we've seen one of the most aggressive global tightening as far as rate hikes from central banks that we've seen over the last decade. And that interest rate increase works with a lag, and we're already starting to see that somewhat in the overall market. The only saving grace, I would say, for the U.S. markets, as an example, at the lows before last week's rebound, we were down about 24%. The median decline around recessions in the U.S. has been 24%. The average is a bit more, and we can certainly overshoot that, but at least some of that bad news is reflected in markets today. [00:22:21] Speaker 4: Keith, is the reality that the markets can't go on a sustained rally until we get a more pronounced decline in gas prices? [00:22:29] Speaker 12: You know, I think it's more about, and it's hand-in-hand, Brian, I think it's more about inflation. The market really has to feel comfortable that inflation is not only peaking, but going to be coming down at a pretty aggressive pace. And that way, you can see stabilization in valuations. On a year-over-year basis, valuations are down for the S&P about 28%. I mean, that's one of the most aggressive re-ratings we've seen, you know, in the last 30 years. The other side, though, is it's also about earnings. I heard you all talking about that earlier as well. I mean, you know, one positive, Brian, potentially on the earnings story, just to kind of inject that, is that, you know, even though economic growth has been moving down, real economic growth, what's less talked about today is nominal GDP growth for the U.S., or which includes inflation, has actually risen from about 8 to about 8.2 since the beginning of the year. [00:23:20] Speaker 3: And I guess that has to do with what we've seen with inflation and companies taking advantage of it, perhaps. But, Keith, I want to ask about tech in particular, because we had tech lead on the way up, tech lead on the way down. And I'm curious what now, you know, if and when we get out of this, is it going to be tech that once again sort of comes to the rescue and leads the gains? [00:23:44] Speaker 12: Yeah, you know, we've been underweight, tech, for most of this year. We're still underweight. I will say you're starting to see some signs of stabilization, at least on a relative basis. So we're watching this. I don't know that it's going to be leadership. It's been leadership for the last decade. Often after you go through one of these downturns, what comes out of the downturn, leadership shifts. And I also think, you know, it also depends on, like, how sticky this inflation. Part of the reason why, you know, tech outperformed for so long is they have slow economic growth and slowing inflation. If inflation stays somewhat stickier and for a bit longer, then that may not be the best, you know, overall backdrop for tech. But again, are there opportunities within there? Sure. And it's something we're watching. But at this point, we're still underweight this sector. [00:24:26] Speaker 4: Keith, is this bear market over? [00:24:29] Speaker 12: Brian, I don't know that it's over yet. I think there's going to be a difference in the way we come out of this relative to the last decade. If you think about the last decade, you had a lot of V-shaped recoveries for the market. And why did we have those V-shaped recoveries? Because the Fed had the markets back. And I think we'll probably go more back to this kind of, you talked about earlier, a bottom in process where you have a move up and then moves back down and retesting, which we didn't really see the last couple of years. But now the Fed is not going to save the market necessarily. So I think we'll see more of that. I think the best you can say right now, Brian, is that we had a very oversold market. We had basically 2% of stocks above their 50-day moving average. That's a very oversold market. You've had a bounce. We think the bounce likely has further to go. But we think that's in the context of a wide, choppy range that's likely to continue. And it's premature to say that the bottom is in. [00:25:18] Speaker 4: That's why we ask you these hard questions, Keith, because we know you can answer them. Truist Co-Chief Investment Officer Keith Lerner, always good to see you. Great work as always. We'll talk to you soon. [00:25:26] Speaker 12: Appreciate it, guys. Thanks so much. [00:25:27] Speaker 7: All right. [00:25:31] Speaker 13: With every day and essentially every downward market move, another dire prediction of a recession. Essentially, it feels more like a question of when, not if, we have a downturn. Yahoo Finance Editor-in-Chief Andy, sir, we're here with the answers to all of our questions regarding a future recession. It just feels like when, right? Not if. [00:25:51] Speaker 14: Yeah, I think that's right. And, you know, I was looking at some of the previous recent recessions, you guys. Of course, we had one just two years ago in 2020 with COVID, a two-month recession, right? And one of the shortest on record. But it was a very, very steep drop, 19.2% drop from the peak to the trough, one of the biggest declines in GDP since the Great Depression. And so, just to take a step back, though, this is the most anticipated, talked-about recession that I can ever remember in my four-plus decades of covering business news. [00:26:29] Speaker 13: So, it wasn't like this last time? We weren't almost cheerleading our way into a recession? [00:26:34] Speaker 14: Well, you know, I think what I took a look at when I looked at the past three recessions, I looked at 2020, 2008, and the tech crash of 2000. And, you know, what I think is really important here, you guys, is how anticipated is the recession and then how complicated are the causes? Those two factors determine how deep the recession is and how long it lasts. [00:26:55] Speaker 8: And it's interesting, because when you look at the last recession, when you think of these as black swan events, you have COVID, you have the war, the Russia-Ukraine invasion. How can you sort of make the economy or sort of make the markets more resilient for something that you cannot possibly anticipate? [00:27:09] Speaker 14: Well, I think, Rochelle, it's impossible. And another one was 9-11. And the 2000 recession was because of the tech crash and 9-11, the one-two punch. The good news about those kinds of events is that they don't tend to really upend the economy for a very long period of time. So, in other words, those things are unexpected and you can get a sharp drop, but it's usually a quick drop. Whereas things that are more systemic, like 2008 in particular, very complicated, you know, trillions of dollars of bad loans and complex securities to unravel, that takes a long time. And that was the longest recession since the Great Depression. [00:27:49] Speaker 13: We don't have those bad loans anymore. How structurally different is the economy from 2008? And therefore, if we have a recession, do you think this is a shorter, less painful one? [00:28:01] Speaker 14: Exactly. You're getting to the end point here, which is, to me, I kind of got here through this reporting and thinking. And so, if this recession, excuse me, that we might have comes about, it will be very widely anticipated, which to my mind means it will not be a sharp drop. It will not be a deep recession. I would say that how complicated is it in terms of tied up to the financial system? I would say medium, because this is about inflation, of course, you guys coming out of COVID and the Ukraine war, as you mentioned, Rochelle, right? But I think that ultimately, first of all, the Fed is fighting it like crazy with the rate hikes, number one. And number two, there's two big factors also fighting inflation, which is our aging population, meaning there's not demand for shopping centers and all kinds of other things, number one. And technology, which is the greatest deflationary force in our lifetime. So, all those factors, I think, are going to mean that we'll have a shallow, if we have one, it'll be a shallow recession. That's a medium length, like, you know, six months or something like that, which is not great. And I think it is probably fairly likely at this point. Remember, we had a contraction last quarter, and this quarter could be as well. And, you know, that's one of the definitions of recession, two quarters in a row of negative GDP growth. [00:29:16] Speaker 13: A Gaga, Lady Gaga recession. Shallow? Oh, wow. [00:29:21] Speaker 14: I was almost lost on that. [00:29:22] Speaker 13: Hey, you're both singers. [00:29:24] Speaker 14: You didn't see that coming? Well, a little bit of Amy Winehouse. [00:29:27] Speaker 13: You can credit me for that later, if you want. [00:29:29] Speaker 14: You can take all the credit for that. Actually, we'd kind of like to hear him sing, don't you think? Not a chance, my friend. [00:29:35] Speaker 13: Andy, sir, we're great to see you. Thank you, guys. We're out of time. [00:29:38] Speaker 8: Well, lucky for you, saved by the bell there. [00:29:44] Speaker 1: Welcome back to Yahoo Finance Live, everyone. Calls of a recession mounting on Wall Street. Deutsche Bank is the latest, saying that there is a 50% chance of a recession in 2023. Yahoo Finance's Alexandra Seminova has the latest. Alex? [00:29:58] Speaker 15: Well, guys, obviously there has been no shortage of recession talk. This week, both on Wall Street and in Washington. But it's been particularly interesting to hear from some of the big banks who are all coming out and putting out their own probabilities for when they think an economic downturn will happen. And it just marks such a quick change in sentiment from just a few weeks ago when it seemed that the consensus was, oh, well, a recession is on the radar, but it's probably unlikely at this point to now. A recession is pretty likely, and it's just a matter of when it will come and how severe it will be. Just think about late April when Deutsche Bank came out and was the first to make that recession call. And everyone kind of raised their eyebrows at that and thought it was premature and a bit exaggerated. And now all of the big banks are coming out and saying that a recession is, you know, on the horizon. You have Citibank saying that there's a 50% chance. Goldman, Morgan Stanley all putting the odds above 30%. So a really dramatic change here among the big banks. Yeah, raising the likelihood. [00:30:56] Speaker 3: What are they saying the reasoning is for the change? And like, how do they figure out these probabilities anyway? I always wondered this kind of stuff. [00:31:02] Speaker 15: Well, obviously, last week's rate hike was the big game changer here. And that's when everyone kind of came out and started putting out these probabilities. But all of them, you know, they're watching the same economic indicators, but they all emphasize different points in the notes that they put out, Citibank specifically pointing to a slowdown in consumer spending, Goldman Sachs pointing to higher gas prices as the reasoning. You know, obviously, that will weigh on people spending money and probably motivate the Fed to act more aggressively. And BlackRock, which is not a bank but an asset manager, put out an interesting note earlier this week saying that a recession is essentially inevitable if the Fed moves forward with its rate hikes, no matter what happens, just because they're so late to addressing the issue of inflation. [00:31:46] Speaker 3: As some people say, recession is inevitable. It's just a matter of when it's going to happen in the next year or further out. So we'll see how these banks continue to change their forecast as time goes on. [00:31:59] Speaker 7: Fed Chair Jerome Powell today testifying in front of the House Financial Services Committee, [00:32:03] Speaker 13: assuring Americans that the Fed's commitment to bringing down inflation is unconditional. And a recession is certainly a possibility. Leave it to senior columnist Rick Newman to say, yeah, recession, bring it on. We want some of that. Is that what you're saying, Rick? Let's just get this thing started and get it over with. [00:32:20] Speaker 16: I mean, you know, when I heard Powell yesterday say, oh, yeah, we could definitely have a recession here. And he's basically saying, I don't even care if we have a recession. All I care about is getting inflation down. It's like, OK, Joe Biden, the poor guy, he's the last optimist standing. He's the last guy saying, we don't have to have a recession. We really don't have to. This is really getting kind of ridiculous. I mean, you know, when you have an unpleasant event coming up, like maybe it's surgery or you have to see relatives you hate and that the dread of the thing ends up being worse than the thing itself. I mean, that's what we're doing right now. We're talking ourselves into some terrible economy that's coming, whereas we're not in a recession right now. We're not. But everybody wants to be. So maybe we should, I don't know, maybe everybody should just quit their job, stop spending money, get the recession started and, you know, maybe we'll be out of it by 2023. [00:33:09] Speaker 10: All right. [00:33:10] Speaker 16: Fed Chair Rick Newman. An interesting point. [00:33:12] Speaker 10: I think people will be a little hesitant with that plan. But Rick, if we do fall into a recession, we already know Biden is in a very tough spot heading into the midterms. How much further does this complicate matters for the Democratic Party? [00:33:25] Speaker 16: Well, if you look at the fundamental economics, this is the position Biden is facing. So consumer confidence, by one measure, University of Michigan, is at its lowest ever. It's lower than after the 9-11 terrorist attacks. It's lower than after the financial crash in 2008 when the S&P fell 57%. So Americans are more bummed out than that. And we're not even in a recession yet. So let's say we do get a recession in 6 to 12 to 18 months. Americans are already as gloomy as they could be. And then we're going to be in a recession. And so they're going to be even more gloomy. So I think Americans just want to feel bad. And if you want to look around, there's plenty to make you feel bad. All you got to do is look at the price of gas and say it's Armageddon. And apparently that's the way a lot of people feel. [00:34:07] Speaker 8: And, you know, when it comes to things like this, it's usually the guy who's in charge who gets all the blame. How much of the blame, though, does fall to President Biden and his policies versus some things that are out of his control? [00:34:17] Speaker 16: It doesn't matter because the reality is what you just said, that most voters are not going to parse how much of whatever is bothering of them about the economy is Biden's fault and how much is not Biden's fault. I'd break down inflation this way. I would say maximum 30 percent of inflation is Biden's fault. The rest is clearly the war in Ukraine, as is the main factor, pushing up oil and gasoline prices right now. Supply chain disruptions, messed up balances of what consumers are buying that date back to COVID and so on. Again, it doesn't matter. I'm going to keep trying to, you know, provide all the details about how much is Biden's fault and how much is not. And people are going to keep emailing me saying, shut up. It's all Biden's fault. [00:35:00] Speaker 13: The interesting thing is about the war in Ukraine is you're seeing pre-pandemic levels of gas exports from Russia, according to some experts, because of India, because of China. So what is the true impact of the price of gas there? I mean, we don't have time to break that down, but it's interesting. [00:35:18] Speaker 16: I'll give you a very short answer, and I'm reporting on this. Sanctions on Russia are not likely to change anything on the ground on the battlefields in Ukraine. Russia is making more energy from oil sales right now, even though it's selling less oil, because the price is so much higher. And I saw one piece of analysis. This is a great detail. Russia is taking in a billion dollars a day in oil revenues, and its military expenditures for the war are $325 million a day. So more than $600 in surplus that they don't even have to spend on the war. [00:35:53] Speaker 13: And unless you get India and China to turn off the spigot, how much you can do about it. [00:35:56] Speaker 10: Rick, we'll have to have you back on to talk a little bit more about that. I'll be here. All right. Rick Newman, we love when you're on set for us. I know. You've got one vote. I'm a little iffy. I don't really know if I'm ready to bring on the recession, but we'll see. She's a no vote. [00:36:08] Speaker 3: So we've been looking at all of the market action, part of it in reaction to what we heard from J-PAL yesterday. Today is day two of Fed Chair Jerome Powell on Capitol Hill. This time he'll be speaking in front of the House Financial Services Committee. And I want to bring in Queens College, Cambridge University President Mohamed El-Aryan to discuss the Fed's latest move. Mohamed, before we dive into this, I want to play a little sound from yesterday's testimony, and actually not from J-PAL, but from Senator Elizabeth Warren. Listen to what she said. [00:36:43] Speaker 17: The Fed has no control over the main drivers of rising prices, but the Fed can slow demand by getting a lot of people fired and making families poorer. And while President Biden is working to increase energy supplies and straighten out supply chain kinks and break up monopolies and bring down prices, you could actually tip this economy into recession. So I just want to say, you know what's worse than high inflation and low unemployment? It's high inflation and a recession with millions of people out of work. And I hope you'll reconsider that as you drive this, before you drive this economy off a cliff. [00:37:24] Speaker 3: So, Mohamed, Elizabeth Warren kind of painting the worst-case scenario there. I mean, Larry Summers has talked about 5% unemployment in the U.S. as a result of this cycle. Do you think that's where we're headed? [00:37:35] Speaker 11: So I do worry that the probability of a soft landing, which means you bring down inflation without unduly hurting growth and employment, that that probability has declined significantly because of a series of Federal Reserve mistakes. Senator Warren is correct in saying that the initial inflationary shock was external, something that the Fed couldn't do much about. But the Fed didn't recognize it had an inflation problem and didn't respond fast enough. And in the process, it has lost its credibility. So it is unfortunately, uncomfortably possible that the Fed is going to slam on the brakes and push us into recession. [00:38:22] Speaker 3: And, Mohamed, I want to linger on the credibility issue for just a moment. This is something you've talked about before. This is something now that is a lot more people are adopting as their view, that not just the Fed, but central banks globally have lost some credibility. Why is this such an important issue? You're really good at explaining these kinds of things. Why does it matter that central banks have lost credibility? [00:38:45] Speaker 11: Because of what's called forward policy guidance, the Fed tells you what it intends to do. It shows you what will result. And then it allows everybody to work together, all consistent with a certain journey and a certain destination. That is a Fed with high credibility. A Fed with low credibility, which is what we have today, people immediately question the Fed's projections, as happened last week. People call them unrealistic, call them other things. Secondly, the market runs ahead of the Fed, tightens ahead of the Fed, now it's loosening ahead of the Fed. Just look what's been happening in terms of volatility in the two-year Treasury, where the Fed has most influence. So instead of the Fed leading the marketplace, the marketplace is dragging the Fed along, and the Fed is consistently late. And third, you take away the first policy response, which means that you end up with a worse outcome than you would have been otherwise. That is why central bank credibility is so important. [00:39:56] Speaker 1: Mohamed, one thing that the Fed doesn't have control over is the supply chain doesn't necessarily have control over energy as well. And you've been posting about this even this morning on a more macro level as well. And energy prices roll particularly, not just in a U.S. potential recession, but also in a global pullback. Something that you've been talking about is the long-term oil supply shortages Europe could face, calling it the biggest risk factor to growth. Do you think that global growth projections are accurate as they stand right now, or should we see even more of a drawback on some of those projections? [00:40:29] Speaker 11: That's a great question. Not just should, we will see growth projections coming down more. We got some pretty awful PMI numbers out of Europe. The three biggest areas in the world are all slowing simultaneously, China, the U.S., and Europe. And what you're seeing in the oil market, it tells you that demand is now in control. For a long time, supply was in control of the oil market, and that drove prices higher and higher. Now it is demand, and as people worry about a global slowdown, they worry about demand for oil, and oil prices have been coming down. Europe has another problem, Brad, which is gas supplies from Russia, and the possibility that that may stop overnight. And if that happens, it certainly throws Germany and the rest of Europe into recession. [00:41:24] Speaker 3: So I'm reminded of a conversation I had yesterday with an e-commerce entrepreneur who said economically, at least here in the U.S., things are certainly going to get worse before they get better. And what you're describing over in Europe with that natural gas scenario is sort of a worst-case scenario. So I guess if you can, paint a picture for us globally, economically, what are we in for here? What's the worst-case scenario, and what's the likelihood of that scenario coming to pass? [00:41:59] Speaker 11: So, Julie, you know that I like distributions of potential outcomes. So think of the distributions of potential outcome. The baseline is stagflation, what we are experiencing now. Inflation, high growth, slowing down. That is the baseline. Then think of the two tails of the distribution. The left tail, the bad tail, is recession. The right tail, the good tail, is high growth, low inflation. The balance of risk has shifted significantly in favor of the left tail, recession. So you have a baseline that's not very comfortable, stagflation. And then you have a balance of risk, which is the wrong way, recession. And that's why you get a sense, especially among companies who first had to deal with higher costs, now their ability to pass through those higher costs into higher prices is being questioned by declining demand. And that's why they are nervous. And that's why you heard what you heard yesterday from the CEO, and you'll hear them from most CEOs. [00:43:11] Speaker 3: You know, the fact that you're saying stagflation is the baseline sort of throws into relief something that we've been hearing as a refrain from President Biden, from Powell himself, that we have a very solid economic footing right now. Is that obtuse for them to be making these kinds of comments while we are seeing the indicators that we're seeing? [00:43:36] Speaker 11: So if you go from the global economy to different countries, within the Western economies, the U.S. is best placed. And the reason why the U.S. is best placed is the labor market. We have an incredibly solid labor market. Is it perfect? No. I and many others would like to see higher labor force participation and would like to see wages not being eaten up by inflation as they are right now. But it's a pretty solid labor market. And you saw the latest JOLS number. We still have over 10 million vacancies, twice the amount of unemployed. So that gives you some comfort that there's a backstop. But remember, spending is not just a function of your income. Spending is a function of the expectation of your income. And the more people worry about a slowdown, the more they'll start pulling back on spending. They're already pulling back on certain spending because of high fuel and food prices. And the last thing we want is them to pull back continuously. Because at that point, demand gets decoupled from the labor market. The labor market stays strong, but it doesn't get reflected in actual demand. [00:44:46] Speaker 1: Mahmoud, we'd love to get your take on the cryptocurrency landscape at this point in time to knowing that during the last crypto winter, you also had bought some Bitcoin, buying into that like 3,000 level and saw that run up to 19,000, I believe. Are you buying in this crypto winter? [00:45:04] Speaker 11: Not yet. You know, I must say I was more interested this weekend when we saw 17 and 18. Look, crypto is going through what most innovations go through, which is round one, you get overproduction and overconsumption. And the reason why you do that is because you suddenly lower the barriers to entry to a certain activity and you get too much consumption of it and too much production of it. And we saw that with what's proliferated on the supply side. And we saw lots of people coming in who didn't quite understand what that crypto space really is. They just saw prices going up and thought that would go up forever. So you had a massive speculative demand. We're washing all that out. You're washing right out the supply side and the demand side. And the hope is that you reestablish a stronger foundation, as tend to happen with innovations. That happened during the steam engine. It happened during fiber optics. It happened even during securitization into 2000. The first round isn't particularly good. A lot of people get hurt. The second round, it comes back more solid. So I think that's what crypto is going through. Because I don't fully understand the dynamics of how far are we in this adjustment, I haven't bought yet. But there certainly will. I will be following it very closely. [00:46:31] Speaker 1: Okay. You said you were interested in the weekend, or at least more interested relatively, when we saw, I believe, Bitcoin at around 17,000. We also saw Ethereum dip below 1,000. What would the fair value, from your perception, be for some of these major cryptocurrencies, once we do see kind of that full washout take its course? [00:46:51] Speaker 11: And that's the question that I don't think anybody can answer, Brad. It's a really, really tough question. You know, the reason why I came in at 3,000, the reason why I got out at 19,000, which was way too early, I saw it then go over 60, is basically looking at the technicals, looking at the charts, and trying to figure out, has it overshot? I got the overshot correctly on one side on the way down. I didn't get it correctly on the way up. So, rather than trying to figure out what the fair value is, which is very hard to do, and I certainly cannot do it, it's a feel for when a certain price has overshot, and when you think it's now going to correct over time. It's not very scientific, Brad, I must admit. It's more gut than anything else. [00:47:38] Speaker 1: Mom, just lastly, while we have you, we know you're a huge Jets fan. Are they going to do any better this season? [00:47:45] Speaker 11: Oh, Brad, that's an even harder question. I'll tell you what, let me tell you what I will do, and what many, many, many people will do. We'll go into the season thinking they can do better, and then we're going to be disappointed. We're going to be washed out, if you like, by their performance. That's what I think is the best prediction I can come up with about the Jets. [00:48:05] Speaker 1: We've seen the stands get washed out, similar to some of the crypto holders, if you will. Thanks so much for joining us here this morning. Mohammed, Queen's College, Cambridge University President Mohammed El-Erian, joining us this morning. [00:48:17] Speaker 18: Thanks so much. [00:48:21] Speaker 19: And here's your closing bell on Wall Street. [00:48:23] Speaker 20: And there you have it, your closing bell for June 22nd on a volatile, choppy day, as Jad was just mentioning there. Let's see how the market settles. This market check sponsored by Tastyworks. [00:48:47] Speaker 8: All three ended in negative territory. They were hyper-oscillating right into the close. The Dow, they're settling down almost flat, about 0.16% there, about 48 points. The S&P 500 there, down about five points, more or less. And the NASDAQ down about 16 points there, 0.15%. So relatively flat for the day, but ending in the negative right there. Well, let's get a deeper dive into what happened with the market action with our market panel. Let's welcome in Zach Hill, Horizon Investments Head of Portfolio Management, and Eva Ados, ERS Shares COO. So thank you both for joining us. So, Zach, I'll start with you. We've been talking about recession all day, some not seeing it until 2023. But the fact that Jay Powell mentioned it as a possibility, market's not too happy with that. What is your take on if and when we'll enter recession? [00:49:33] Speaker 19: Yeah, look, the calls about recession coming down the pipe are just really nonstop. And the way that we look at it, there's so much momentum in the economy. Consumers have a really, really healthy balance sheet from all the fiscal stimulus we've done and curtailment of consumption we've done in the last two and a half years. And so, you know, we think the odds of recession in the next six months are quite low. You get beyond that, you know, 12 months, 18 months, and they do tick higher. But really, that's going to depend on what happens with inflation. And that's anybody's guess right now. So forecasting out that far in this really uncertain economic environment is not something that we're really undertaking right now. [00:50:16] Speaker 10: Eva, how about you, the possibility of a recession? How are you factoring that in? And I guess, how likely do you see it? [00:50:23] Speaker 21: We see 60-40 that we're not going to have a recession in 2022 and early 2023. Of course, we don't know if we'll have any unforeseen events, if the war is going to escalate, or, of course, there are those conditions in place. But other than that, all eyes are on inflation. We think that the next reading, mid-July, will be key to watch. And if that is, if then it's announced that inflation is peaking, we think we're at a very good spot and the markets will soar. [00:50:57] Speaker 13: And, Zach, if talk of a recession is overblown in the next six months, where in lies the opportunity in the markets right now? [00:51:04] Speaker 19: So, you know, I think, Zach, go ahead. So, I think you still need to be defensive. You know, look, we've done a lot of work in terms of adjusting valuations lower, especially in, you know, some of the COVID winners and the mega-cap tech space that have been really the darlings of the markets for the last few years. But if you take a look at the earnings picture, that's a place where there's no recession priced in at all. In fact, earnings expectations for the S&P are, they continue to go higher. So, we're still cautious on the overall market, even though, you know, our broad outlook in terms of the economy is looking pretty good for the next six months. [00:51:41] Speaker 8: And, Evan, same to you. In terms of opportunities that you see and how people should be positioning themselves right now. [00:51:46] Speaker 21: I think there's a dichotomy in the market. We have some companies that are struggling with the costs, the majority of them. Out of the 56,000 companies that we're tracking globally, under 250 companies based in the U.S. are profitable and they are seeing their SG&A costs fall. And so, these are the good places to be. And, of course, there are only a handful of companies. But that being said, even if you look at the private market, not only in the public market, you see more and more VCs announcing again and again to their clients that you cannot be spending money like you used to before. So, it's really a company-by-company analysis. And the mega caps are always the safest place to be. But that being said, when money goes off the markets, they're the first to get hit, too. [00:52:39] Speaker 10: So, going back to what you were saying before, the odds of a recession or maybe the talk of recession is overblown. We had a Philadelphia Fed president, Patrick Harker, on Yahoo Finance earlier today. And he was talking about Fed policy going forward, saying maybe at the next meeting a 50 to 75 basis point hike would make sense based on the data that we're going to get over the next couple of weeks. What do you make of the Fed's policy so far? And I guess what do you anticipate we'll see at the next couple of meetings? [00:53:07] Speaker 19: Yeah, look, the Fed is, they've had a tough time in this. They spent too long last year saying inflation was transitory. And so, they're definitely a little bit behind the eight ball here. And that's why we got that 75 basis point hike just last week, although it seems like it was months ago. You know, what we're doing when we think about the Fed is right now actually watching the data much more intently than we're listening to what they're saying. There are a few members, you know, Governor Waller, for example, has been kind of leading in terms of policy most recently. And so, we're paying attention to what he says as well as Jim Bullard. But, you know, broadly speaking, it's going to be the data. You know, your guest on prior was talking about the CPI print, and that's certainly something that's really important, as well as labor market data, what's going on with wages specifically, and then just other measures of inflation expectations, which obviously have spooked the Fed pretty substantially. And so, you know, I think baseline is 50 basis points coming up in the month, and the risk is skewed higher, not lower. [00:54:14] Speaker 13: Ava, Jerome Powell said earlier today they have both the tools and the resolve to get inflation back down to their target at 2%. And Jim Paulson was with us earlier in the show and said he thinks the Fed is succeeding in its goal and thinks that we're looking at a 50-point hike and a potential pause after that. What's your reaction to that? [00:54:32] Speaker 21: Yes, we agree with that statement because the Fed, and many people don't put a lot of attention in that, they have a great wiggle room because on the one hand, the 30-year bond is at half of its historical average. And then if you look at unemployment, it's at historical lows. It's at 3.6 compared to 5.75, which is the historical average. So the economy is really at a good position, and that shows what power the Fed has to do what they're doing. And I agree with their statement because we're already seeing signs and many indicators pointing to a soft landing. We see housing starts falling. We see housing demand falling. We see materials and commodities dropping, even oil. And so there are, and of course, more and more companies now are laying off people, unfortunately, but also that will have an upward effect on unemployment. [00:55:28] Speaker 8: And Zach, I want to ask you, because in your notes, you talked about obviously the mantra of don't fight the Fed, which then spawned the buying the dip mentality. But how should people be viewing it now in light of this current environment? [00:55:40] Speaker 19: Sure. So I think this is a major change and something that we've been trying to talk about for the last couple of months is that don't fight the Fed has meant they can pretty much ignore the inflation side of their mandate and they can focus exclusively on growth. We've been in that mantra for the last 10 plus years since the global financial crisis. And so that's led to persistent dip buying in both the institutional, professional and in the retail community. And, you know, I think that the situation now where they have to worry about inflation as public enemy number one is completely different. They don't want financial conditions to loosen because that's just going to serve the juice up the housing market and make more credit available for auto purchases and things like that. It's exactly in those types of more durable goods and more interest rates sensitive sectors where we have the biggest demand supply imbalances in the economy right now. And so, you know, as we think about it, it's much more of a sell rallies type of market as opposed to a dip buying. That's the 2022 version of not fighting the Fed. [00:56:43] Speaker 13: And Ava, before we go, a lot of talk today about global markets and in particular Europe. Are you seeing softening there? Do you predict a recession there in the next six months? And what's the trickle down to our economy? [00:56:55] Speaker 21: So, we think that, of course, there's a much better chance for Europe to have a recession than us. That being said, we're seeing a slowdown, especially in Europe, but also globally, including the U.S. So, there's no doubt that the economy globally is slowing down. And if you are an international investor and you are trying to decide whether to invest in China or Europe or the U.S., by far the safest haven is the U.S. And we think that in the next announcement regarding inflation, if our prediction is correct and we see inflation peaking, a lot of money will flow back into U.S. equities and especially tech. So, we might see 5% to 10% days in tech or even 10% to 20% weeks in tech. So, I think investors that are in this camp that believe that inflation is peaking, it's good for them to start allocating money back into the markets. [00:57:53] Speaker 7: Okay, Ava Ados and Zach Hill, thanks so much. Appreciate you both being here. [00:58:03] Speaker 3: Recession concerns, we've got them everywhere. They're weighing on the minds of investors as market volatility is persisting. And you see there Jay Powell testifying before the Senate right now, giving his opening remarks. And that's after some fiery opening remarks from Senator Sherrod Brown, who helps the committee there. So, let's talk more about the outlook for the economy. Lauren Goodwin is joining us now, New York Life Investments Economist and Portfolio Strategist. Lauren, thanks for being here. Among other things, in those prepared remarks, the Fed chair said, the U.S. economy is strong enough to withstand tightening of rates. Do you agree? [00:58:42] Speaker 22: I do agree. For all the talk of recession, it's not in our base case for the next 12 months. And that's because consumer and corporate balance sheets coming off of this pandemic crisis are incredibly strong. But I have to tell you whether the real economic data suggests that we're in recession or not here in the next couple of quarters, it might not matter much for the decisions that people are making today for two main reasons. The first is that we know wages are not keeping up with inflation. Real incomes are falling. And that feels like recession for many households, even again, if the official data doesn't say so. And the second reason that it might not matter very much for decisions today is that the sort of recession-resilient asset allocation policy that worked in the previous cycle isn't likely to work in this cycle when inflation is so high. Inflation can create a significant drag on wealth. [00:59:37] Speaker 1: And so it seems like it's got all the makings of kind of a quasi-recession right now, if you're saying it feels like or it seemingly is so, without necessarily, by the technical definition, being it right now. 12 months is what you said. You don't see a recession within. Further along, though, depending upon the Fed's route, is there anything that you would look for in their policy to suggest that maybe we could see one? [01:00:02] Speaker 22: Yeah, well, first of all, I'll say that historically, there's about a 20% risk of recession in any given year ahead anyway. And so there's always a risk of recession. And the longer out we go, that risk increases. And I do see that risk of recession increasing over the 24-month term. Our model suggests a risk of about 70%, which is substantial. Now, when we're looking at Fed policy today to determine whether the risk of, even in the next 12 months, recession risk increasing, the main thing that we're looking for is for economic growth to stabilize or slow. That's what it's going to take to move inflation lower and to take the Fed's foot off the brake. And the reason I say that is because the Fed chair himself has said that they're extremely committed to bringing inflation lower and because it takes a slowing economic growth to do that. And so we've seen many of the indicators of a peak hawkishness environment already. It's the slowing economic growth that we need to see ahead. [01:01:04] Speaker 3: Lauren, everybody's dusting off their playbooks for, if not recession, at least sharply slowing growth, right? And you guys are looking at value stocks in particular as one way to get into that playbook, right? So how have they behaved in the past in these types of periods? [01:01:24] Speaker 22: Well, I'll first say that one of the reasons why we're looking at value equity as a high conviction bet in our portfolios is that when inflation is this high, it's really challenging to rely on previous recession resilient strategies, things like cash, core bonds, and treasuries, because inflation takes a bite at those returns. And so staying fully invested, including in equities, we believe is important to help build resilience against inflation. Now, why value equities? Well, even though growth equities have taken a major hit as interest rates have risen, they're still relatively expensive compared to value equities. We also see major risks ahead for growth equities as interest rates, we believe, have not yet peaked. And because so much of the earnings potential of these companies has been pulled forward because of the purchasing patterns during the pandemic that you were describing earlier. And so we see value equity as, again, a way to stay invested and to build some resilience both against inflation and against volatility, which we expect in broader equity markets. [01:02:30] Speaker 1: Lauren Goodwin, who is the New York Life Investments economist and portfolio strategist. [01:02:34] Speaker 18: Thanks so much for the time this morning. I appreciate it. [01:02:40] Speaker 23: Let's get to the start of the day now. [01:02:42] Speaker 3: Stocks have fallen a median of 24% in recessions going back to World War II. You can see that on this chart. It's according to Deutsche Bank. The silver lining for investors. When the Fed does ease monetary policy, stocks can then turn positive relatively quickly. On the other hand, though, as we talked about with Miles Udland yesterday, the median or mean, either way, of a bear market drop is around 35%. [01:03:08] Speaker 23: So that's on the other side. Here's a closing bell on Tuesday. [01:03:28] Speaker 10: That was the closing bell sponsored by Tasty Works. Let's take a look at where things shaked out here with the Dow, S&P, and NASDAQ all in the green. The Dow closing well off its highs of the day, but still up 643 points. Seen some buying action here after last week's pretty steep sell-off. S&P closing up about 2.5% as well as the NASDAQ. On a sector basis, all 11 of the S&P sectors in the green. Energy by far the outperformer. Consumer Discretionary Technology. Healthcare not far behind. For more on the markets, let's bring in Melissa Brown, Contigo, Managing Director of Applied Research, and Ryan Payne, Payne Capital Management President. Ryan, first to you, when you look at today's action, seeing some appetite from investors here to buy, where do you see the opportunity at this point? Because I think a lot of people are still trying to figure out where we're headed next. [01:04:20] Speaker 24: Yeah, and I wish my crystal ball was working. No, actually, I think, look, we've had a lot of volatility in here in all seriousness. And I think what you want to think about here is, you know, the one dynamic that's changed a lot since after the pandemic is we're in a tightening cycle with the Fed. We know we're in a higher inflationary environment, and we know historically cyclicals, energy, financials do a lot better than technology. So I realize we're getting this big bounce in tech today, but if you want to win the war, not the battle, I think you want to diversify further. I think a lot of investors are happy to get a bounce back in their tech stocks. But if you look at the longer-term picture, tech's probably not going to do as well the next couple years because we're in a much different economic environment than we were the last 10 years. And that's critical when you're looking at your portfolio. [01:05:05] Speaker 13: Melissa, Knight's bounce back with the S&P still in bear market territory, the Nasdaq down 29% year-to-date. Do you agree with Ryan on the future of tech and strategy? [01:05:13] Speaker 25: Well, I think maybe, you know, you don't want to dismiss tech as a sector completely. You may want some selectivity in certain parts of technology that may actually do well. But I think in general, when we're looking at this high level of volatility, investors are more likely to flock. If you're going to stay in equities, you're going to stay towards lower volatility, lower risk types of stocks that maybe are not going to be quite as volatile as the market overall. [01:05:47] Speaker 10: And Melissa, investors are still digesting the comments that we heard from Fed Chair Jay Powell last week. Anything that you heard from the Fed that changed your outlook over the next, I don't know, six, eight to 12 weeks? [01:05:59] Speaker 25: Well, you know, the Fed move last week was a little bigger than had been expected, at least if you go back the week before, expectations were that the increase was not going to be that big. So maybe that, it wasn't really a surprise on the day, but maybe that was the one surprise that the Fed is being more aggressive than I think many, many investors had been expecting going into this meeting. [01:06:29] Speaker 13: Ryan, is this the aggressive posture that the Fed is going to need moving forward? [01:06:35] Speaker 24: I think so in the short term, yes, right? I mean, the Fed, everything the Fed has done is working, right? And they're putting the brakes on the economy. It's been a red-hot economy. You're already starting to see with the housing market, right, mortgage applications are going down. Commodity prices have started to come down a little bit. And of course, last month, we did not see a lower print. We saw a higher print on inflation. So the Fed's doing everything in its power, which is limited, right, to slow this economy down and bring inflation down. So my hope here is, and I suspect, because the Fed is being more hawkish now and as the economy slows, because with interest rates going up or the Fed raising interest rates, there's a delay there, right? It's a lag of something like 9, 18 months before it really has an effect. The economy does slow down. They can pivot, and they can be a lot more dovish later. And I would argue that's a very, very bullish sign for the markets if the Fed can actually change course at some point this year, if things do cool off. And, you know, I think they are going to cool off. [01:07:33] Speaker 10: Melissa, do you agree? Do you think things are going to cool off when it comes to inflation? [01:07:37] Speaker 25: In terms of inflation, I think we're still in a period where if you look at the month-over-month numbers, they continue to be very high. So that means that the year-over-year numbers are also going to continue to be high for a while. So I think maybe the numbers that come out won't be higher than what we've seen over the past few months, but it doesn't look like they're going to be lower either. I think maybe they won't seem quite so eye-popping, but I think they'll still be fairly high. [01:08:09] Speaker 13: Ryan, you say what the Fed is doing is working. Are you in the camp that believes we will hit a recession in the next 12 months? 30% of, Goldman says now, a 30% chance. That's up from 15% chance. [01:08:22] Speaker 24: Still a 70% chance we're not, right? So we should focus on that. Thank you for that. I think that's... You're welcome. Hey, you know, I studied my math. I'm in finance. No, but in all seriousness, I think it's not a foregone conclusion. And the headlines will make you believe that. But, you know, I think the fact is, you know, maybe we go in recession. If we do, it's probably a very light recession. I mean, we have full employment right now, right? We know that for every two jobs out there, there's only one person looking. You know, people have money in their pocket. You know, they saved a lot of their stimulus. And I realize they're starting to reach into it now because inflation's higher. But also, you know, there's been a big change from buying goods to going out and buying services, right? People are out and about in the economy again. Just go to the airport and you can just see that people are spending money. They're traveling. They're going on trips, you know, going to restaurants. So, you know, where the money's being spent in the economy has changed drastically since we're really kind of truly out of lockdown right now. So I think the consumer is going to stay strong. I think you could see maybe a mild recession. Maybe, I don't know, is it like four or five quarters out? But the reality of it is it's not a foregone conclusion. I think this isn't 2008, 2009 when the economy was broken, right? We're just trying to slow down a really, really hot economy. And we're trying to reel back a lot of that free-flowing money. And that's good because we're getting a lot of the excess out of the system, like places like Bitcoin and all these disruptive technologies. So I think it's all good. And I think when you start thinking further down the line, you know, I think we're still going to be on really, really solid footing here in the U.S. [01:09:51] Speaker 10: Melissa, when we talk about the economy cooling here, just look at housing. We got the existing home numbers out this morning falling for the fourth month in a row. We still have a ways to go because prices are at a record. But how are you, from the market's perspective, how is the market looking at some of the cooling that we've seen in housing? And I guess, how do you see that impact in the market here in the short term? [01:10:11] Speaker 25: Well, housing is such an interesting case because on the one hand, it is an inflation hedge. And, you know, all of our research has suggested that that old saw is true. But on the other hand, it's also hurt by higher interest rates, you know, which drive mortgage rates, obviously. So I think it really kind of depends on where we come out in this whole interest rates versus inflation and do we start to cool down inflation. If rates stay high and inflation comes down a little bit, real estate may not be a great place to be. But for right now, you know, it certainly has held its own as a sector, even with, you know, home buying going down. [01:11:00] Speaker 13: Melissa Brown, thank you. Ryan Payne, thank you for reminding us there is 70% chance we avoid it. You taught us something today. [01:11:08] Speaker 10: The optimistic view. [01:11:09] Speaker 13: Is the media too pessimistic? [01:11:10] Speaker 10: I think, yeah, thank you for that. Maybe we are today. [01:11:13] Speaker 7: Appreciate that, Ryan. [01:11:17] Speaker 26: But of course, the big focus is on still the market action [01:11:21] Speaker 27: following last week's abrupt pivot from the Fed towards a more aggressive rate hike path. And Goldman Sachs last night raising its recession probability from 15% to 30%. And then we heard from former U.S. Treasury Secretary Larry Summers saying the U.S. will need to have unemployment rates above 5% for five years to take inflation down. The guy who finances, Myles Udlin, at the desk here to talk about this. And Myles, you know, first of all, great to have you on this side. [01:11:49] Speaker 28: I was going to say, I'm not allowed to read Promptor, though. Tough. No, you're not. Tough scene for me. [01:11:52] Speaker 27: You're going to have to just actually talk off the dome right now here. Try to try to get through it. Hey, any recession call is just a recession call, right? I mean, I guess on one hand, why should we put any more water into Larry Summers' thoughts than anyone else's? But look, this is becoming a prevailing talking point, which is that the Fed might not be able to keep unemployment rate down if it wants to try to get ahead of inflation. [01:12:11] Speaker 28: Yeah, well, there's like two parts to this conversation. So we'll start with the Larry Summers part, which is like a classic Larry Summers. Unemployment could be this or that or the other. That's his argument. Could be one of three things is how we need to proceed here to sort of get inflation under control. But really what it sounds like to me is Wall Street economists in their own way all accepting what higher interest rates are likely to do. Yeah, I mean, in general, higher interest rates are going to be, in general, rising interest rates will be negative for growth and they will be negative for corporate earnings, negative for profit margins and negative for the economy. But it takes some time for these things to both be seen in the data, see the Fed do it for these recession calls to start ratcheting up. But what's a 30% recession call anyway? Kathy Woodmath actually says that's a 100% increase in the recession probability from Goldman Sachs. [01:13:06] Speaker 27: Which, yeah, okay, that's a very mathematical approach to that. That is one view of it. But okay, so here's the thing. A lot of dunking that was, you know, attempted by some sides of Fintwit over the weekend, over Larry Summers' kind of take here. And this may be because of the fact that he had already had some attention for that third, third, third call. You remember it was a third chance of a recession, third chance of no recession, third chance of something else in the middle. I mean, how important do you think the economist view is right now? Because you brought up earlier in the morning that the markets have already come around to the view that a recession was going to happen months ago. And it's only now that you're starting to see these Wall Street notes start to say that. Why the difference? [01:13:43] Speaker 28: Well, again, we'll do the two parts. Larry Summers matters because he had a call with President Biden about the economy. So the president calls Larry Summers and says, hey, Larry, what do you think about the economy? So it matters for that reason, regardless of what we think of his construction of maybe, maybe, maybe on the Wall Street economist side, I think what you are starting to see is an acceptance. And ultimately, we talked about this last week, the SEP, the SEP, if you kind of finally tune that, finally read that, is saying the economy is going to slow down, if not tip into recession. And Wall Street economists are now saying, okay, we believe the Fed to an extent. [01:14:18] Speaker 27: So I guess here's the question is, a recession is a recession, but the severity of the recession is not something that you can necessarily see when Goldman Sachs says, well, we're raising our odds from 15% to 30%, right? You can have a recession that looks something more like 2000, which is going to be a very different story than 08 versus 2020. Yeah. So is that the conversation? Is that the next evolution of this conversation? [01:14:39] Speaker 28: I think it is, but that's the evolution that I do not care for. I talked about this with Julie last week because Julie Hyman was sort of being like, well, you know, it could be a shallow recession, right? That's not so bad. The reason, in my view, that all recessions are bad is because you don't know what happens when the economy starts to slow, when people begin to lose their jobs, negative externalities, to use a Brian Chung framework on that one. So I think that we can now start having the conversation, Deutsche Bank, more severe, but sooner, shallower, but longer from other banks. If the economy is going to slow down, we don't know exactly what shape it will take, but it does seem that there is now more acceptance, let's say, of the, you know, with the idea that there will be people losing their jobs, there will be fewer people employed, and as a result of that, you know, we're going to get a recession. [01:15:27] Speaker 27: No, recession is good. That's a miles on the quote. Kind of like what Jay- That's my controversial take. That's what Jay Powell basically told me when I asked him, you know, why the difference between the Main Street view and the Fed view, and he was like, no one likes inflation. [01:15:39] Speaker 28: No one likes inflation? Everyone knows that. No one likes recessions? Yeah. No one likes multiple dinners. Morning brief, perhaps. God, we have moved so far away from can't eat twice per night. [01:15:46] Speaker 27: Which, I think we should do a whole other column on that, actually. That's kind of like the- You can't eat dinner. You can eat multiple. I can eat three to four dinners in one night. [01:15:53] Speaker 28: God, there's so much there. Like, what a different world. Jay Powell will talk about two dinners a night. All right. [01:15:58] Speaker 27: How far we've come. Junior, senior market editor, Miles Udlin, [01:16:01] Speaker 26: thanks so much for stopping by. Appreciate it. [01:16:07] Speaker 23: Let's talk more about the economic outlook now. [01:16:08] Speaker 3: As we've talked about this morning, as Alexander just mentioned, are we going into a recession? If so, when is it happening? What's the probability? We've got lots of opinions on this. Let's get another one. Bruce Kasman is with us. He's JPMorgan Chase, chief economist. Bruce, it's good to see you. We've been talking all about, you know, Goldman Sachs, your peers over there, raising their probability for a recession the next year to 30%. We've got some comments on this from Elon Musk. We talked to an investor earlier in the show who said signs point to us already being in a recession. I believe you are not in that camp. Talk us through why we're not there quite yet and maybe it's not as imminent as some are saying. [01:16:48] Speaker 29: Well, let's just make sure we know what we're talking about. Recessions are basically breaks in economic activity which depressed household income sharply, really have a major impact on labor markets. And we haven't had a recession in the U.S. in post-World War II history without the unemployment rate rising more than two percentage points. If you ask me, are we there now? I think the answer is definitely not. We're still seeing strong job growth. We're still seeing consumer spending increase despite the fact that there's a fairly big drag here from purchasing power from inflation. And basically all the indicators are suggesting we're still growing. What it is suggesting is we're slowing and I don't have any difficulty with the idea that recession risks are rising. There's a combination of higher inflation with commodity price pressures intense, tightening financial conditions. And more recently, of course, and importantly, what the Fed told us last week, which is that they're definitely moving policy into a restrictive stance and that they ultimately do want the unemployment rate to rise. You put those things together, you can't ignore the idea that we could be in a recession sometime in the next six to 12 months. [01:17:55] Speaker 1: Previously on the employment front, we were talking about the great resignation, but are recessionary fears, at least right now, pushing more people back to looking for jobs or being in the workforce right now? [01:18:08] Speaker 29: I think people are moving back and we're seeing the participation rate rise. I don't think it's primarily about recession fears. I think it's partly about activity picking up in the world of service sector industries, which were hurt and dislocated. I think it's partly about the pandemic concerns fading. And I do think it's partly also about the fact that income has been squeezed by higher inflation, which is also pushing people back into the workforce. So that negative, I think, is a factor, but I don't think it's recession fears specifically that's driving a labor supply to pick up here. [01:18:41] Speaker 3: So, Bruce, as we look at recession risks, how should we frame this potential recession? In other words, you think about the financial crisis and its feeders and what triggered a recession there. The pandemic, one, was quite obvious. How should we think about this one? Is it going to be a slowdown or a recession, however you slice it? Is it consumer spending-led because of inflation? We've got some slowing in housing. Where are you looking for those sort of pain points the most? [01:19:09] Speaker 29: So I'd like to emphasize two very different dynamics around recession. They're not unrelated, but they are different. The first is that we're just putting too many straws on the camel's back here. In the back is the consumer, and that is the high inflation. It is the tightening in financial conditions. It is combining with what the Fed is doing here to put a lot of pressure. And if you kind of hit that hard enough, even in what we think is a pretty healthy underpinning for the economy, you can throw us over. That's the short-term recession risk. And I would put the risk of that in the next six to nine months at somewhere in the 35%, 40% probably, which means I don't think it's the likely scenario, but it's uncomfortably high in terms of risk. I think the second scenario, and it does interact with this, is the fact that inflation is not likely to come back down to where the Fed wants. It's likely to need to put policy in place to raise unemployment rates. And over time, that's not an easy path to follow without doing enough damage to throw the economy into recession. I think those risks are quite high, but I think they're elongated over a two- or three-year period because I don't think the Fed is right now moving completely insensitive to what they see in the data. And I don't think the Fed's going to get policy rates up high enough in the next six to nine months to do the job by itself. [01:20:24] Speaker 1: We've gone from talking about a soft landing to a hard landing. I think we're just trying to make sure that everybody who's on the flight makes it safely here at this point. But if there are those major kind of risk factors that we have to think about within certain parts of the population, you know, who is going to feel this the deepest right now? [01:20:43] Speaker 29: Well, I think it's unfortunately the case that anytime you have a mix of high inflation and labor markets that are easing, which isn't the case now, but would be the case in a recession, it does hit low-income households by far the most. And I think that is the concern and that is the problem that we're going to face here. Of course, a recession is broad-based. It hits sectors across the economy quite, you know, widely. But I do think right now the biggest concern are consumer interest-sensitives, autos, housing. I do think if it is, as we would think, a recession that reflects drags that are hitting the world broadly, global manufacturing gets hit. I think the interesting thing is that if we're right and the pandemic dynamic is shifting to an endemic, service sector activity should, in a relative sense, do better here, even if economic conditions worsen. [01:21:39] Speaker 3: Bruce, finally, your purview is global. So I do want to ask you about the global economy. It doesn't feel like we're necessarily going to get a coordinated global recession. You know, you have China coming out of it shut down and seeing some growth there. So what does that do, if anything, to mitigate the effects of a slowdown and recession where it is happening? [01:22:02] Speaker 29: So first, and I think most importantly, that's one of the reasons we think we might be able to avoid things. I think in the rest of the world, what we think we're seeing as we're moving into the middle of the year is China begin to lift from its recent lockdowns. We think Europe has some benefits from the dynamics of COVID as well, Asia more broadly. Those are things which we think can help cushion the blow in the U.S. Unfortunately, though, the other parts of the global environment with the Russian war, with the pressure on energy prices, those are things which will hit the U.S. and hit everybody else as well. But in our baseline forecast, we do have the rest of the world doing somewhat better, mitigating some of the effects, not by any means creating a complete buffer. And it's one of the things that helps keep the economy from avoiding recession if we're broadly right here. I would not want to argue if oil went to $200 a barrel or we had another intense geopolitical shock that I'd want to ignore the sense that that could push us over the edge. But I still think the risk of recession right now, while elevated, is still below 50% for the next six to nine months. [01:23:13] Speaker 18: Let's talk all about it with our senior markets editor, Myles Udland. [01:23:17] Speaker 1: Myles, I mean, we've been having the conversation of whether this is kind of a dead cat bounce within this broader bear market that we're certainly in the throes of right now. [01:23:26] Speaker 28: Yeah, you know, it's interesting. Jared Bookery brought up something in one of our Slack channels earlier today about how as bear markets progress, the bounces actually get larger in magnitude, more violent, I guess you could say. So I think we've had, what, a 12%, 15% bounce off the lows before this latest fall into bear market territory. And if history is any sort of guide, we should be looking for even larger bounces as we progress through whatever period we're in right now. But of course, Julie, people will disagree on whatever that period might be. [01:23:56] Speaker 3: Right. They'll disagree on the period it might be. And there's also the idea that we, have we seen the bottom yet? That's what people like to look for, right? There was some talk that maybe last week we saw this sort of exhaustive selling. But if you also look at history and you look at the size of bear markets, forget about the duration for a minute, they do tend to be a little deeper than the sort of, what is it, 22% or so that we've seen thus far. [01:24:22] Speaker 28: Yeah, what's it, 34%? 35%? Is it the median or the average? Because that matters. But I think, look, the conversation that's really come up on Wall Street in the last couple of weeks is like, have we priced in a full recession? And the quote unquote full pricing in is about that 35% level. So, okay, we have 12 or more percentage points to go-ish from here. But I think ultimately you look at like the last 72 hours of notes, and I know we'll talk about this with Brian Chung a little bit later on today. Everyone now is on this, well, recession chances are up, recession chances are up. And it has this feel a little bit of, it's like economist capitulation. They're not investors, but there is like this Wall Street economist view that they have all now accepted that we are going into recession. The market has been saying we're going into recession, I think for the last six months, really. And so if you really wanna, you know, torture the contrarian view here, you can say, well, it's all adding up. You know, it's finally coming back. Everyone is so bearish. B of A sentiment is at zero. Everyone is so bearish that maybe it's now bullish. But as we just noted, those, you know, bear market rallies tend to be larger in magnitude as we progress through. So certainly something to be on the lookout for. [01:25:37] Speaker 1: Well, we've already surpassed the Cardi B barometer threshold for what a recession might look like. She was early, though. She was early. [01:25:43] Speaker 28: That was what, two, three weeks ago at this point? [01:25:45] Speaker 1: Yeah, exactly. And so I think at this point in time now for consumers who are looking across higher prices, who are navigating supply chain issues, because they're seeing it in stores that they go into, where would we, should we be looking into the data right now to really get a sense of how deep this recession might be? [01:26:02] Speaker 28: Well, what's interesting on that supply chain issue is if you look at the number of ships waiting to be offloaded at the port of LA, for example, that's down over 50% in the last couple of weeks. You look at what Lenar told us this morning, they are starting to see some supply issues finally ease a little bit. And so back to that economist capitulation, sort of half-baked take, we are, by the time everyone, quote-unquote, everyone is talking about how you can't buy anything, everything's so expensive, that might be the moment that finally some of those pressures start to alleviate. And if the tech sector is any kind of a leader, which it was on the way up, and it's a leader on the way down, the pressures in the labor market are also really starting to build. [01:26:44] Speaker 23: All of this positive action, though, [01:26:46] Speaker 3: coming amidst thing number two, more recession calls. That follows last week's Fed rate hike and market sell-off. This morning, Goldman Sachs is coming out, and in a note to clients, the bank raising its recession probability from 15% to 30%, and this is in the next year. Goldman Sachs chief economist Jan Hatzius saying part of the reason for the revision was that recession risk is, quote, now higher and more front-loaded. So you have people like him on the one side, and then on the other hand, you have people like President Joe Biden, who doubled down on his stance that a recession is not inevitable. Over the weekend, he made those comments. [01:27:23] Speaker 1: No, I don't think it is. I was talking to Larry Summers this morning, [01:27:27] Speaker 18: and there's nothing inevitable about a recession. [01:27:32] Speaker 3: To be clear here, Goldman Sachs isn't saying it's inevitable. I mean, 30% is still pretty darn low for a recession to happen in the next year. [01:27:41] Speaker 1: Absolutely. And when you look at some of the warning signs as well that we're keeping in close mind, and really kind of just looking across what the consumer is experiencing at this point in time and the pullback that we've seen in stocks. So you put the economic data together with what is already kind of being pre-forecasted into or priced into the stock market right now is the probability of a recession. And then even further, we're going to be watching a continued tightening from the Fed. They're going to be looking to dampen down inflation. Consumers along that route, we might see less of the opting into some of the mortgage rates. We're already seeing that showing up in some of the housing data as well. And we're going to be breaking down one of those particular housing companies to really read through some of the tea leaves there and understand better where it's actually showing up in some of their order demand as well. Because along this broader route, there are a few things that the Fed can't have any control over. It's the supply chain crisis. That's something that's still going to have an outsized impact on the consumer. And then additionally, the Fed does not have control over where consumers are going to continue to react to the pricing that companies, quite frankly, have to continue to enact because they're seeing wage pressures at this point in time. They're still navigating the same supply chain issues. And so all of those things considered, it's the stock market trying to price in the probability of the recession before it actually happening and showing up in the data. [01:29:07] Speaker 10: Recession fears surging among top business leaders. A new survey from the conference board found that more than 60% of CEOs expect a recession in the next 12 to 18 months. That's compared to just 22% at the start of the year. Rick Newman is here with us. And Rick, we talk about the fact that the Biden administration obviously facing a huge challenge when it comes to inflation. Now more business leaders are sounding the alarm on possible recession. It can't be what they want to hear. [01:29:35] Speaker 16: That's right. And it brings to mind Jamie Dimon, the CEO of JPMorgan Chase, saying recently he sees a hurricane that might be coming. I do want to make one point about that survey, however, which was from the conference board. Those were global CEOs. That was not just people running U.S. companies. That was people running some U.S. companies, but also companies in Europe and Asia and other parts of the world. And other countries are in worse shape than we are. Biden keeps saying that. And he's right, especially Europe, which is dealing with a lot more difficulty from the Russia-Ukraine war than we are here in the United States. They are much more dependent on Russian energy, and they're having a much harder time dealing with some of that Russian energy that's getting cut off. So Europe may already be in a recession. That does not mean we're going to go into a recession here. I just don't want us to become a little too promiscuous going around saying, oh, a recession is coming, a recession is coming. The unemployment rate is still 3.6%, I think. That's extremely low. So we're not there yet, and let's not talk ourselves into it. [01:30:40] Speaker 8: And I think you raise a fair point. I know we spoke about this before, sort of speaking a recession into an existence and then that affecting sort of mood among CEOs and other things. But when you keep in mind that this many CEOs are thinking like this and we're already seeing some layoffs in the tech sector, could you think that end up having more of a tightening in the labor market if CEOs are becoming more pessimistic? [01:31:01] Speaker 16: Yes, but there's another side to this, which is these sort of warning signs that we're talking about. This is exactly what the Federal Reserve is trying to do. They are trying to cool off the economy. That means cool off the labor force. If you make people a little more conscientious about spending money, that is exactly what the Fed is trying to do. They are trying to reduce demand for all these things that have been going up in price so much. So yes, these are, on one respect, these are typical warning signs of a slowing economy, but it's also exactly what the Federal Reserve is trying to do. When you hear it's bad news for Target's earnings that they have too much inventory and they're going to have to start having clearance sales, but that means inflation is going to come down, at least in those products. So this is what the Fed is trying to do. And this gets back to the central question for the Fed is, will they go too far or will they get it just about right? [01:31:55] Speaker 13: And I hate to keep talking about the R word, recession, but President Biden was asked about it by the AP and said a recession is not inevitable. But a couple of key caveats, and one being that he said most of what happened is a consequence of COVID, and two, that the United States is better positioned than anyone in the world to get through this without a recession, are those true statements? [01:32:16] Speaker 16: I think they are. And I mean, I'm sure that, you know, possibly some tiny place like Luxembourg might be in a better position, or Switzerland, you know, where they depend on, you know, banking for the world's elite. But among large developed economies, I mean, we have the best labor situation. We, you know, we are dealing with the Russian invasion of Ukraine and the resulting increases in energy products. That is a global market, and you can't escape that. But here in the United States, we also have more domestic energy production, which Europe does not have, and that's a good thing. Now, Biden, of course, wants oil and natural gas drillers to produce even more than they are drilling, but we probably are going to get to record levels of oil and natural gas production here in the United States. So it's not a comfort to people to say, yeah, the economy kind of sucks here right now, but it sucks worse someplace else. That doesn't make anybody feel good. But it's, you know, look at the data, and it's more or less true. [01:33:17] Speaker 10: And Rick, it's also causing some tension within the Democratic Party, right? Because some Democrats are a little bit frustrated that Biden hasn't been changing his strategy or changing the messaging when it comes to the pressure that the country is under with inflation. [01:33:31] Speaker 16: Right. There's now some grumbling coming out of Capitol Hill among Democrats who are saying, look, this situation has completely changed from six months ago when Biden was still trying to get his Build Back Better legislation through. And basically, what the White House has done is just a rebranding exercise. Now they're saying, oh, we need to pass, help families with child care because that will help beat inflation. That will lower the cost of child care for families. So it's the same program with a different branding attached to it. And, you know, some people on, some Democrats on Capitol Hill's side starting to say, we need a new plan, man. The problem is, there's just not much the president or Congress can do about inflation. This is up to the Federal Reserve to fix it. Biden has said that. And he's just in a crappy political position right now, which is why his approval rating is, last I saw it was at 39%, the lowest of his presidency so far. And I suppose it could probably go lower than that. [01:34:27] Speaker 13: Yeah, I said, Rokana needs to be more imagination, more energy, more boldness, not a terrific review of their economic plan. [01:34:34] Speaker 7: Rick, good to see you. Happy Father's Day. Thanks. Thanks, man. See you guys. [01:34:42] Speaker 26: All right, let's talk a little bit more [01:34:44] Speaker 27: about the state of the U.S. economy after that big move yesterday. Sarah House, Wells Fargo senior economist, joins us now live along with Emily Rowland, John Hancock Investment Management, co-chief investment strategist. Great to have both of you on the program this morning. Why don't we start off with you, Emily? You had a note after the meeting yesterday noting that we could be in a late cycle environment here, which translation might be, we're about to reach the end here and that recession we were just talking about might be happening. What do you think of the Fed's messaging that they can avoid that, that J-PAL hopes we don't have to get into the R word? [01:35:15] Speaker 30: Yeah, he certainly indicated that they hope that we're not heading for a recession, but hope is not exactly the best investment strategy out there. So we do think it's important that we position portfolios for these late cycle dynamics, which essentially means growth is slowing, inflationary pressures are persisting. The Fed is clearly hiking aggressively into that until they stop and start cutting, which we think will happen in 2023. So we need to prepare portfolios. There are parts of the market that are starting to reprice for a recession, and that might sound obvious, but clearly the bear market that we're seeing play out in equities, which is continuing today. We've seen a massive reset in certain sectors of the market, but the bond market is the one place that has not really repriced for a recession. You know, yields remaining well over 3% here. They continue to climb higher based on this increasingly hawkish message from the Federal Reserve, but normally in a recession, and you know, listening to your show today, it sounds like most people are moving in that direction, bond yields actually fall. And so we expect there to be a bid for treasuries once we see the yields peaking out here, once we see inflationary pressures start to subside, and we think we'll see a bid for higher quality, low default type assets as investors start to prepare for recessions. So we look opportunistically at bonds today. [01:36:38] Speaker 31: - Sarah, you could certainly argue that yesterday's hike by 75 basis points, certainly an admission by the Fed, that they are in fact behind the ball here. You said that it will take a more material slowdown to bring core inflation back to the Fed's 2% target. What does that slowdown look like? What will it take to rein in inflation back to that 2%? [01:36:59] Speaker 32: - So we're expecting the U.S. economy to slip into a recession in the middle of next year. And so we do think that it's gonna take that actual contraction in growth. Unfortunately, some job losses to where the unemployment rate starts to rise, relieving some pressures on wages, to help bring inflation down. In addition to just some good luck in terms of things like supply chain easing, and perhaps some relief on energy prices, if you get at least some stabilization in the situation with Ukraine. So I think it's gonna take both a reduction in demand, and then some good luck on the supply side as well. [01:37:34] Speaker 27: Sarah, as a follow-up to that, I mean, you know, the bigger picture question here, I guess, is what does 75 basis points do that's dramatically different than a 50 basis point hike yesterday on addressing those factors that you just described? [01:37:47] Speaker 32: - So I think it sends an important signal that the Fed is trying to be nimble, that they are reacting to the data. So yes, a lot of the upside surprise in the CPI report we got last Friday for May was an energy, but it was also an upside surprise in the core, showing that those inflation pressures are more entrenched. And so I do think that the Feds shift to that 75 basis point, while, you know, 25 basis points, and it doesn't mean much between, you know, one single meeting, but I think it's more the signal that that's important. And it does show that the Fed remains on this aggressive path. And I think it does have, obviously we've seen a reaction in markets of rethinking about how far the Fed will go and what that means over the, for the economic outlook as a whole. [01:38:32] Speaker 31: - Emily, you know, we certainly got some other decisions from other central banks today. We were talking about the BOE as well as the Swiss National Bank. I mean, when you look at the broader picture, obviously all that liquidity that we saw on the market during the pandemic getting sucked out. And I wonder if you're talking to investors, where do they invest in that environment right now? [01:38:53] Speaker 30: - Yeah, the big challenge, Akiko, is that the cycle is moving so rapidly. And we're not used to that. We've had low inflation, low rates, low growth for a long time here until the pandemic ensued. And we got this massive response from fiscal stimulus, policy makers in Washington, from the Federal Reserve, bringing rates all the way down to zero and using forward guidance to tell us that they were gonna keep them there for a long time. And that fueled this massive rally that we saw in risk assets coming off the height of the pandemic. Clearly inflationary pressures ensued. We had the biggest mismatch between supply and demand that we will probably ever see again in our lifetimes. And now the Fed has no choice but to tackle that. So we're moving rapidly from early cycle to mid cycle, and now into late cycle and we have upped our projections for recession from here, like Sarah has as well. So, you know, that's the challenge. And I think there is an opportunity now for investors to make those shifts in portfolios, to look at those higher quality assets with great balance sheets, good return on equity, good earning stability, and barbell that with more defensive parts of the market. As we move away from an environment in which consumers have binged on everything they've wanted. I don't know, maybe you guys can relate to me on that. More towards things that they need. So looking for your more traditional sort of defensive assets. We like areas like healthcare, infrastructure equities, which benefit from more consistent demand and income. That's really where we would focus. And then just notching up on quality within the fixed income portfolio to prepare for an environment in which volatility is the new normal. [01:40:39] Speaker 27: Sarah, when we talk about the next Fed policy meeting, which is in the last week of July, a lot can happen between now and then. We'll get a new jobs report. We'll get another CPI print, another PCE print, every inflation reading you can imagine. What's the most important for the Fed heading into that next one, which could decide the difference between 50 and then 75? [01:40:56] Speaker 32: No doubt it's the June CPI report that we'll get on July 13th. So we're expecting year over year inflation to hit 9%. Now, a lot of that will be driven once again by energy, but still expecting a lot of strength coming out of the core. And I think with inflation continuing to head the wrong way, it really ties the Fed's hands where they have to go 75 again. So we think we'll see another huge increase at the July meeting. [01:41:22] Speaker 27: Yeah, I believe Jay Powell described it yesterday as inflation needs to flatten before it can come down. So got to see signs of it flattening. For Sarah House, Wells Fargo Senior Economist, and Emily Rowland, John Hancock Investment Management Co-Chief Investment Strategist, thanks to both of you for joining us this morning. Appreciate it. [01:41:41] Speaker 1: Welcome back to Yahoo Finance Live, everyone. The risk of recession coming to the forefront of conversations as the Fed raises rates by 75 basis points in its bid to fight soaring inflation. And for more on this, let's bring on in Yahoo Finance's Alexandra Seminova. Alexandra? [01:41:55] Speaker 15: Well, guys, as you know, economic downturn has been the talk of the town on Wall Street. And we have some of the biggest names in finance chiming in about whether we'll see a recession or not. And the takes have varied a lot across the board. One of the sharper warnings came from billionaire investor Leon Cooperman, who the other day in an interview said that we will see a recession next year and that stocks could fall as much as 40 percent before we get any kind of meaningful rebound in the markets. He was concerned about, quote, "toxic fiscal and monetary policy" that is now catching up to us. Morgan Stanley's CEO, James Gorman, had a little bit of a less pessimistic outlook. He said that the chances are 50/50 on whether we'll see a recession or not. He pointed to still strong consumer spending and, of course, a still tight labor market. And, of course, Citibank CEO Jane Frazier also talking about a recession, though a warning that the risk is higher in Europe, not in the U.S. And so very different takes here across the board. [01:42:56] Speaker 1: And typically the markets will price in a recession well before it actually showing up in the data. And even the word recession coming up eight times yesterday as we were discussing the commentary that took place from Fed Chair Jerome Powell yesterday. And so with that in mind, to what extent are some of the analysts, strategists, economists even predicting that a recession will hit? Because Wells Fargo told us earlier, Veronica from Wells Fargo said we're expecting a mild and short recession. [01:43:22] Speaker 15: Well, again, you know, the picture is changing every day, it appears. Just from last Friday's CPI print and that more aggressive than expected rate hike coming in yesterday, now everyone is getting more and more worried that it's likely. Although I want to point to James Gorman's James Gorman's comments. He did say that even if we do see a recession, he doesn't expect that it will be a deep or prolonged one. So it varies a lot across the board. [01:43:50] Speaker 23: Here, let's bring in our guests for the hour. [01:43:52] Speaker 31: We've got Stiefel chief economist, Lindsey Piegsa, joining us this morning. Lindsey, you know, the market expectation has really shifted over the last several days to a 75 point basis, 75 basis point hike. It sounds like you're still holding steady on that 50 basis points. What do you expect? [01:44:11] Speaker 33: I think it's I think it's going to be difficult for the Fed to justify a larger increase later this afternoon, given the rhetoric that they've previously shared with the market, suggesting that a 75 basis point increase is not something that they're considering at this point. And 50 basis point increases is what the market should expect for ongoing meetings. So I do think it's going to be very difficult. The Fed has essentially predetermined policy at this point. Now, that's not to say that the Fed chairman can't open up or broaden the potential pathway for policy going forward during the press conference. He can certainly say that given the unexpected rise in headline inflation, a 75 basis point or larger increase may be appropriate or may be something that the committee will be willing to consider. At the same time, we have to remember that the core level of inflation, really the primary metric that the Fed looks at, is beginning to show improvement. So I also think the chairman is going to remind market participants that inflation is showing some signs of abating, at least in some areas or leveling off in other areas. And of course, this morning's number, this morning's disappointment of retail sales, reminds us that the economy and the consumer are still very much under pressure. And given that the vast majority of price pressures are stemming from the supply side, further, more aggressive rate increases may not be the policy answer. So there's a lot that the Fed chairman is going to try to disseminate in terms of the message to the market. [01:45:42] Speaker 27: Hey, Lindsey, Brian Chung here. So, I mean, I guess on that point, what do you expect to see on the messaging from the Fed with regards to the rate path for the remainder of this year? Because either way you cut or slice it, regardless of whether or not you expect 50 or 75 today, all signs seem to be pointing to something more aggressive than was plotted forward in their last economic projections in March. [01:46:01] Speaker 33: Oh, I think they're going to remain ambiguous. I think they're going to keep their options open. They're going to say that inflation remains too high and further Fed policy action is warranted. But I think they're going to be a little more careful in terms of quantifying the appropriate pathway or as they expect the appropriate pathway to evolve. So I don't think that the messaging is going to give us much indication or much clarity as to what to expect going forward, adding not necessarily undue, but certainly additional volatility and uncertainty to the equity and fixed income markets going forward. [01:46:36] Speaker 31: Lindsey, let me push back on your earlier point, because, you know, certainly makes you've made the case for a 50 basis point hike. And yet there is the argument on the other side that says it's better to move more aggressively so that ultimately when we start to see the slowdown, you can pull back just a bit. I mean, what's the counterargument to that? [01:46:54] Speaker 33: Well, the counterargument is if we move too aggressively or too fast, raising rates to a too high level, you undermine growth and force us into recession. Whereas if the Fed took a more balanced approach to raising rates, they may be able to still navigate some sort of softish landing. Again, raising rates only addresses the demand side of the equation, which is already beginning to falter. Excuse me. With the impact of the earlier 75 basis points, income still trending negative, a loss of fiscal stimulus, savings being depleted, we're already seeing the consumer pull back from the marketplace. So the Fed is doing its job in terms of tapping down investment, tapping down consumption. But raising rates does nothing to address the supply side issues, supply side constraints that we're seeing as a result of the aftermath of COVID-19 or international conflict. So by being more aggressive, sure, you have more ammunition in your tool belt to cut rates later when needed. But you're also ensuring a recessionary or worse, stagflationary scenario. [01:48:03] Speaker 27: So, Lindsay, do you think that 75 basis points today raises the risk of a hard landing for the Fed? [01:48:09] Speaker 33: Absolutely. Absolutely. The economy is still very fragile. And so any time we're talking about an increasingly more aggressive Fed, that raises the risks of recession or at least raises the risk of negative growth. It doesn't have to necessarily be a technical recession. But absolutely, if the Fed goes 75 basis points and signals further 75 basis point increases going forward, I think we have to move up our recession call from early 2023 to late 2022. [01:48:39] Speaker 31: And finally, Lindsay, how do you think J-PAL today addresses the issue of inflation coming in from things that aren't necessarily in the Fed's control right now? Russia, Ukraine, obviously, still big question mark. And then there's what's playing out in China and whether, in fact, we could see more shutdowns. How much of that is coming through in the inflation print that we're seeing here? That's not necessarily in the Fed's control. [01:49:04] Speaker 33: Well, that's exactly what I mean when I say that's stemming from the supply side, which renders traditional policy metrics less effective in reining in inflation. Again, raising the cost of capital via rate increases can tap down investment, tap down consumption. But it doesn't address any issues in terms of restoring balance to the global marketplace or resolution, which is needed overseas. And so when these issues are raised, I would expect the chairman to acknowledge that these are factors that are certainly contributing to elevated inflation. But I do think he will stop short of specifically articulating that the Fed does not have control over these issues. [01:49:40] Speaker 31: Okay. We will all be watching this afternoon. Lindsay, appreciate the time today. Stifel chief economist Lindsay Piegsa along with our very own Brian Chung. Kind of weatherman, too, right? [01:49:52] Speaker 23: He gave us a weather forecast. [01:49:57] Speaker 13: Let's talk more about the CPI number and the impact on the markets with Nancy Tangler. Laffer Tangler Investment CEO and chief investment officer. Nancy, nice to see you on this difficult day. I'd love to ask for some good news in this data, but that may not be possible. What's your big picture? If you're writing the story of today, what's your headline? [01:50:18] Speaker 34: That the inflation numbers, Dave, were catastrophic. I think this was a month when some folks thought we would see a decline because we dropped off a very big month in April of last year, a high inflationary month, but we didn't. And if you look closely at the Atlanta Fed sticky CPI, it's now at 7.5% month over month and 5.2% year over year. That's the stuff that people have to pay. They can't not pay rent. They can't not pay for health care services and things that have a long lead time. And so I think this shows us that the Fed has to become more aggressive. And it's just unfortunate that Fed Chairman Powell took 75 basis points off the table because that's exactly what they should be doing next week. [01:51:07] Speaker 8: I mean, and speaking of what people should be doing, a lot of people scratching their heads. We had some analysts saying, look, inflation has peaked. Now we have this new data coming out. What should people make of this investing environment? What are the defensive plays here? [01:51:20] Speaker 34: Well, that's a great question. And I think what I would say to you is that you don't want to take risk entirely off the table. So we've been adding, we added risk back into our portfolios or added to it in May. And I think three to five years from now, which should be anyone's investing time horizon, we'll be very happy we did. But we also went defensive last year. When we expected growth to slow and we thought that the Fed had gotten behind the curve in inflation, and we've written a lot about this, we added names in the portfolio that took on more defensive characteristics, reliable growers. So things like public storage, Chubb insurance, Philip Morris, names that will kind of turn in earnings regularly. They're important parts of people's budgets, and they're not going to change very much. And so we're always on the lookout for those. On the riskier end of that reliable growers environment, we added Spotify to our portfolios yesterday. And we think that that will be a place that we'll be happy we're in, a stock we'll be happy we're in a couple years from now. [01:52:25] Speaker 10: Nancy, I want to go back to what you said about the Fed, the fact that the Fed should be hiking rates by 75 basis points next week. We likely won't see that since Fed Chair Jay Powell said that it was off the table. But turning that focus then to the fall, does that mean that 50 basis point hike in September, is that almost a sure thing at this point? And then looking out to the rest of the fall, what do you think the Fed policy will potentially look like? [01:52:48] Speaker 34: Well, I think, so, Shauna, I think that what we're seeing is behind the scenes, the Fed is tightening up the balance sheet. We saw a precipitous drop, and I mean that in a good way, in M2, because we really need the liquidity to come out of the market to kind of get ahead of inflation. Jeremy Siegel had said almost a year ago that he thought we'd see about 20% inflation at some point because M2 had expanded so dramatically. And when I repeated that, people laughed, but I think he's going to end up being right. So the decline in liquidity will do part of the work. The futures market clearly thinks that we're going to see 50 basis points in September. Just a week ago, we had Fed governors coming out and saying, well, we might pause in September. So I just caution people not to put too much on this. It is a midterm election year. I imagine we're going to get a rally in the fourth quarter and that the Fed may be sort of pushed to the sidelines as we get into September. We'll see. I mean, they're in a very precarious position, having to hike rates in a slowing growth environment. I'm not in the recession camp this year. If we get one, I think it'll be next year, and I don't think it's going to be, I think it'll be shallow and short. But we are experiencing decelerating growth, sorry, globally. So we have to be aware of that. [01:54:07] Speaker 13: And there were a few signs, Nancy, of a strong consumer. Then comes the University of Michigan Consumer Sentiment Index at an all-time low. How does that change your perception of the consumer at this moment? [01:54:18] Speaker 34: Yeah, and that's a really great point, Dave, because that was the historic low since the survey started, 50.2. And their inflation expectations also edged up. So a couple things. You know, you'll hear people say, well, there's a lot of excess savings. And there still are, and I think that's important to note. In the first quarter GDP number, we saw that consumers saved about a trillion dollars. So, yes, it's slowing down, but they still had a pretty decent cushion. But now we're starting to see credit going up. And revolving credit went up 19.6% in April, total credit up 10.1. At some point, that can't continue into infinity. So I think you'll see consumers willing to still spend, and they kind of have to because prices are going up. So they're going to be spending more than they expected to. But I don't think – I grew up in the 70s. I managed money in the early 80s. This is not that. And so I think we have to keep that in mind. Corporations have tons of cash on the balance sheet. I think that we're in an environment that's uncomfortable and unprecedented in many ways. But it definitely is not the 1970s. [01:55:27] Speaker 8: And speaking of discomfort, we're obviously still seeing some layoffs, especially in the tech sector. And you're saying that that's actually going to offset some of the labor market tightness. Why is that so important, especially in this environment? [01:55:38] Speaker 34: Well, Rochelle, I think one of the really important things that investors need to pay attention to is that corporations are utilizing technology to improve productivity. Now, we haven't seen it in the last two monthly numbers, but I believe we will as we move forward. And CapEx budgets for tech are now – well, the total CapEx spend is now greater for technology than old economy CapEx spend. So I think that's going to provide some cushion in margins as, you know, I think these companies are going to be very determined to protect their margins as best they can. So we are seeing some layoffs, but it's in the thousands and maybe even, let's call it hundreds of thousands. But we still have 11.5 million open jobs. And I think really that's what the Fed's going to try to target, is reduce the number of open jobs while preserving the number of people working. Because that is the important factor. Yes, your disposable income may decline, but if you're working, it's a whole different picture in a high inflationary environment than if you're not. [01:56:42] Speaker 10: Nancy, how are you looking at the travel sector? Because even ahead of this inflation report, we certainly have seen many of these travel names under pressure today, taking a look at names like Delta, American Air, some of the cruise lines all moving to the downside yet again. Are you seeing an opportunity to enter this space or is there still too much uncertainty and investors should stay on the sideline? [01:57:02] Speaker 34: Yeah, they've been so volatile and there's no fundamental reason for the short-term moves. I think you've got a lot of the algos in there, a lot of the hedge fund traders. And in the short term, that creates just a lot of white noise. We don't usually buy those names because they are not committed to their dividends. And so we're interested in dividend growers and growth at a reasonable price names that ideally also pay a dividend. So we've been long energy and we continue to be. We've been long the commodities that drive planetary decarbonization. And we've been long technology and health care. And I think, you know, those are areas that kind of balance each other out in a portfolio when you have this much uncertainty. You know, at some point, we will be through this and people, you know, will return to normal again, we hope. And you'll start to see stocks trade on fundamentals. And those are the spaces we want to be exposed to in that period. So materials, we do have an overweight to industrials, but also technology selectively. Not the high flyers, not the stay-at-home tech names, but the ones that have real balance sheets and real earnings and are growing earnings. You know, you look at the cloud names and the cybersecurity names this last quarter, not only did they beat, beat, and raise, but their guidance was really optimistic. And I think when this all settles down, those are going to be places where you hope you should have or might have increased your exposure and you'll be quite pleased. [01:58:32] Speaker 8: There you have it. A heads up there from Nancy Tengler there, Laffer Tengler Investment CEO and Chief Investment Officer. [01:58:38] Speaker 23: Thank you so much. Thank you. [01:58:42] Speaker 3: Lachman Achathan is with us now to talk more about all of this, Economic Cycle Research Institute co-founder. Hi. So what you do is in the name of the organization, Economic Cycles, is where your expertise lies. Yep. So are we going into a recession? When is it happening? You know, how should we be thinking about this, especially with the numbers this morning? [01:59:04] Speaker 35: Sure. Well, I think these numbers reinforce our earlier outlook that odds are we are going to go into a recession. The question as to when is just not yet. But, I mean, it's super tantalizing, but it's there because of the kind of information that we're seeing today. The Fed is going to be super hawkish, I think we just concluded, right, as a result of these continuing highs in inflation. So that makes for a really odd mix. You don't have to be an economist to figure this out, right? The economy is slowing. Consumer confidence at a record low. You don't want to hear that. At the same time that the Fed is stomping on the brakes, what's going to happen, right? The odds are you could slow too much. And they really just have a choice of policy mistakes or errors. There's no right way out of this. We wrote back in January that because they were so late in going after inflation and kind of slowing things down, they now are trying to make up for it or catch the train. But the inflation train left the station a long time ago, and we're seeing that kind of build here. So as a result, the U.S. Fed, other central banks around the world, everybody's tapping on the brakes. We're all going to slow. And I think we all know the odds are really high here of a recession. [02:00:35] Speaker 4: Mild recession or something bruising? [02:00:38] Speaker 35: First off, I just want to say it's super hard to predict a recession. I know a lot of people are predicting them. I just got to tell you, it's super hard to do this. We have a pretty good record of doing it. And so I think it's meaningful that we're saying that there's a recession in front of us. Now, as to mild or severe, a lot depends on the nearby shocks, right? By definition, you don't know what they are. We think we know what they are, right? Some pretty shocking things have happened. And they may persist to make a recession more severe. On the other hand, you might say, well, some consumers have money saved up. Some businesses have decent kind of balance sheets. [02:01:16] Speaker 36: And most people have jobs. [02:01:17] Speaker 35: And most people have, well, the job market's pretty tight, let's say. So, therefore, this could mean a mild recession. I don't think that's knowable just yet. One of the things that we're seeing from our research, because we do look at 22 economies around the world, is that there is a setup for a more severe recession, a more international recession. And the last time we had that would have been, like, the early 80s, which is after the inflation of the 70s. So, there you go. [02:01:52] Speaker 1: And so, within that context, as we're thinking about where this leaves employees, but also consumers, because at the end of the day, those employees are daily basis consumers on everything from gas to food items. And they're looking across the board at where those price increases are being felt. So, in the wake of, or at least leading up to a recession, how they're feeling is going to be even more so priced into the markets, well ahead of the actual recession showing up in the GDP. [02:02:21] Speaker 35: Yeah, yeah, yeah. So, 100% right. And I'm glad you brought up, like, what do consumers do, right? First off, as you were saying, job market's hot. If you don't have your dream job, get your dream job. If you're in it, hang on to it. Just solidify yourself. It's a really good time to be doing that, number one. Number two, save for a rainy day. If you can, start to sock away or beef up your savings a little bit, because things are likely to get more volatile. A growth rate cycle slowdown, just a simple garden variety slowdown, you can get 10%, 20% corrections in equities. A recession, you're more in bear market territory. And when you go back to the consumers, let's oversimplify and say there's lower income is a half or more, and then upper income to various stages is the other side. Lower income, very strapped already, right? Because it's rent, it's food, it's energy, it's everything that you need takes up the whole budget. Wealthier consumers may have some exposure to equities or home prices that have been rising. If those start to wobble, they get a little edgy and start to pull back. And you'll see it, even though nominal numbers can look good, a company's going to come out and say, oh, look, nominally we did these blowout numbers. Look at the actual amount of stuff, right? There's less chips in the bag, even though the bag still costs two bucks. And people will start to move on discretionary things. Like, you won't use a fresh can of tennis balls every game. You'll use them for a few games. That's the kind of stuff that starts to seep in. [02:04:00] Speaker 3: You said a moment ago that the ingredients are sort of in place to potentially have a worse global recession. What are those ingredients? What would need, walk us through what would need to happen to get there? [02:04:10] Speaker 35: OK, so we enter this recessionary window of vulnerability. I think we're edging toward that pretty clearly. Then you have shocks that are occurring inside the window of vulnerability. We already have the energy shock. If it persists, that verifies. That could be part of what makes a recession sharper. You could have a market event. That's a type of shock. You could have a geopolitical event. Look at what's going on in Europe. I mean, I know it's kind of slipped a little off of the major headlines, but that's still percolating. Those kinds of impacts you see coming full circle. And in today's report, food is up. Energy is up. So these are the kinds of things. And there's some interesting things happening with currencies and these central banks around the world. There's things that can move very fast. In the summer of 2008, August of 2008, before Lehman blew up, our international indexes, leading indexes, now I'm talking forward-looking, where is the puck headed? Those indicators went to recessionary readings, and then Lehman blew up. So that combo, in retrospect, was the recipe for the Great Recession. We have to wait and see. [02:05:25] Speaker 4: If we get that recession, who bears the most blame for it? Is it Jerome Powell, the Fed, or the Biden administration? [02:05:30] Speaker 35: No, yeah. So, look, they both have their fingers near this, right? So you want to support the economy coming out of the pandemic and the deep COVID recession. There was a—we called an inflation cycle upturn in September of 2020. That's 21 months ago. The Fed hung out with the transitory stuff, keeping that going all the way until November of last year. So that's very late. And the same thing with the kind of fiscal response. There's things early on that were super helpful. I think people see that. But then more recent stimulus, you're kind of pushing on the gas when the inflation cycle's already running up. I think the fundamental issue, fundamental from where I said I study cycles, is that I don't think economic policymakers understand that inflation is cyclical and that that's different than the business cycle. It's a fundamental kind of concept. I think a lot of non-economists can understand that. But actually, after you've become an expert in modeling, it's a little tougher. [02:06:45] Speaker 4: Well, on that happy note, let's go get some shots. Let's go get some shots. No, no, no, no, no, no. [02:06:49] Speaker 35: OK, we've survived all of this stuff in the past and we're going to survive it again. I have no doubt. And this will set us up for stronger growth, you know, but unfortunately, some of the more vulnerable get hurt during a recession. [02:07:01] Speaker 4: All right. I like leaving on that. Let's leave it on that note. Lakshman Achyothan, Economic Cycle Research Institute co-founder. Good to see you. [02:07:07] Speaker 37: Appreciate you coming down. [02:07:08] Speaker 18: Thank you. [02:07:12] Speaker 1: Here to dive more into that market reaction with us, we've got RBC Capital Markets head of U.S. Equity Strategy, Lori Calvacina. And Lori, I mean, this kind of jives directly with what some of your anticipations were, especially for the S&P 500. But even going forward from here, you know, where does the inflation start to ease in order for the markets to finally have something to perhaps see a turning or a turning of the corner around? [02:07:40] Speaker 38: Well, thanks for having me on, as always. And it's obviously an interesting day in the market with today's CPI print. Look, I will tell you that as we talked to investors this week, there was a lot of concern about this print that was coming up. And, you know, I've heard, you know, institutional investors, some at our energy conference, some I met with privately, have been saying things to me like, how can we possibly avoid a recession with the Fed being as aggressive as it is, with gas prices being as high as they are, with inflation being as high as it is? So I think that, you know, if we've all been sort of looking for capitulation in the market, you know, I do feel like just the exasperation and the frustration with this inflation backdrop has really seeped into the investor community this week. And look, we still do think that equities are going to be higher by year end. Our economics team has been optimistic that by year end, we will get some moderation, particularly in core CPI. We obviously didn't get that today. But I do think that just the fears that I have seen, I don't think that this was a total shocker for the investment community or the equity community today. [02:08:38] Speaker 3: Perhaps not a total shocker. Hi, Lori. Perhaps, but an unpleasant surprise, let's call it then, if not a total shocker, right? The fact that it was a little bit higher than estimated. And so walk me through this path here, from here to the end of the year, and still seeing some kind of gains from here in equities, especially if, okay, so even if it's not 8.6%, what if it's still 7%? What if it's still 5%? I mean, these are not happy numbers any way you slice it. [02:09:08] Speaker 38: Well, look, I think if we did get some sort of moderation, right, from an 8-plus percent number down to a 5-percent-ish type number, you know, I think you do have, that would be, you know, more on the headline side. You do have to look at core, and that is what the Fed has said they're going to be more focused on. But, look, I think the path is pretty simple, Julie. It really does come down to whether or not the Fed is going to pull off this landing. And I don't like the term soft landing. I think it could be a bumpy landing, and the market could still be okay. But I do think it has to avoid sort of the crash-and-burn scenario. And we've told people that, you know, our economist is not making the call for a recession, rather a return to sort of, you know, subtrend conditions in GDP later this year into next year. If that continues to be the case, I think the markets will breathe a big sigh of relief. But I do tell people, you know, my conviction level that we'll avoid the recession, I think it's about 60%. Like, it's definitely the way I tilt. It's better than 50-50. I do understand why people are concerned. I think the market needs clear and convincing evidence that a recession is coming before it's willing to price one in, simply because if you look back the past few years, whether it was the trade war, whether it was the pandemic, there have been so many instances where the consumer was doubted, where corporate America's resilience was doubted, investors panicked over it, and frankly, things ended up being more resilient than previously expected. So I do think that the market really does need to see signs that the Fed is going to tighten us into a recession and be pretty convinced of that before you'll take another leg lower below that May 19th low of 3,900 that we already had. [02:10:34] Speaker 4: Laura, do you see this inflation print as being the worst-case scenario for investors this summer? You have inflation that just accelerated, and you have a Fed that is about to put its foot on the gas. [02:10:45] Speaker 38: Look, I think it's all about the Fed messaging, and I think after, you know, sort of the last round of commentary that we got, I think investors took some comfort on the equity side at least in the idea that the Fed was pulling forward some of the hikes and being aggressive with hikes, you know, in sort of a front-loaded fashion so that they could be flexible later on. That, in my mind, contrasts very much with what we heard back in 2018 when the Fed essentially said that it was on autopilot. And investors, I think, got a very different message, so we do need to see what the messaging is going to be going forward. [02:11:16] Speaker 3: Laurie, I'm also curious, as, you know, market psychology is obviously important here, even though most of the trading in markets is institutional, so an institution, I guess, is less vulnerable to psychology, but everybody's paying higher prices, right? Everyone is watching the markets, and so you get the so-called wealth effect of people feeling like they have less as stocks go down. Are we in danger at all of seeing sort of a circularity, if you will, to that psychology where people are less willing to put money to work? [02:11:46] Speaker 38: I think that's a great term, circularity. You know, I've sort of thought about the phrase a lot, the biggest thing to fear is fear itself right now. I don't think that necessarily we have to have a recession, but if I do sort of think about what keeps me up at night, and a client asked me this yesterday, actually, it is just that idea that the fear starts to feed on itself. I've heard institutional investors fretting about the high, you know, sort of airfares that they're looking at for their family's summer vacation. So this is not just, you know, sort of a low-income consumer problem where the inflation is starting to take a bite and cause some consternation. But I will tell you, you know, if you go back and you look at the numbers over time, when sentiment is as washed out as it has been on the AAII net bull bear survey, and if you look at the CFTC data on institutional equity, future positioning, they're both basically, you know, sort of circling the drain. They're about as low as they tend to get. And prior to this week, at least, we had started to see some signs of a positive inflection. And so that is something that continues to tell me that even sort of this pain that a lot of investors are starting to feel personally in their own lives, a lot of that has already been reflected in markets. Perhaps not all of it, but I do think a lot of it is there. [02:12:53] Speaker 1: Of course, reading into the inflation print this morning, also looking into some of the companies that have announced that they are going to be either hiring or freezing some of their hiring, excuse me, or cutting some of their workforce as well. You know, on the path that the Fed is on right now, do some of their own goals with regard to employment, full employment, and then even price stability, do you see that breaking down even as they are on the way towards that continued tightening? [02:13:21] Speaker 38: Look, I think that, you know, I've heard a lot about sort of the labor market from investors. The housing market is something that comes up. If you talk to my home building analyst, he'll tell you, you know, it seems like the Fed is on a mission to really cool the housing sector, and that can't be good for his stocks. I do think that these are things that have to happen, right? The Fed is trying to cool things off. The question is simply going to be whether they cool them off too much. And, again, I don't think that history book has been written yet, but I do think what we know is that the Fed has demonstrated in some of the recent commentary a sensitivity, you know, to sort of the broad part of their mandate. I'm not a Fed watcher, I'm not a Fed prognosticator, but I will tell you, as an equity market generalist, that is what I heard in some of the recent commentary. And we do need to see if they continue to sort of toe that line or if they take the messaging in a different direction. [02:14:07] Speaker 4: RBC Capital Markets head of U.S. equity strategy, Lori Calvacino. [02:14:11] Speaker 37: Always good to see you. Have a great weekend. [02:14:16] Speaker 4: The warning signs for a possible recession continue to mount. The Atlanta Fed's GDP tracker is now signaling an annual gain of just 0.9% in the second quarter. Keep in mind that first quarter GDP fell 1.5%. This coming the same day as the OECD cut its GDP forecast for this year in 2023. Let's bring in Yahoo Finance's Brian Chung to discuss this further. And Brian, another day, another hour reading the global economy. [02:14:42] Speaker 27: Yeah, certainly. It seems like the hits just keep coming when we kind of pair this with the World Bank warning yesterday. They lowered their forecast for global growth this year to 2.9%. And the OECD, again, the Organization for Economic Cooperation and Development, also downgrading substantially their forecast for growth this year to 3%. That's down from 4.5% from their last forecast. Now, what's really interesting is that that's a global kind of measure that we're seeing there. Now, again, the OECD is careful to say they're not projecting necessarily a global recession at this time. The World Bank is not doing that either. But they're saying that the risks of recession, particularly a stagflationary environment where you have low growth but high inflation, is still high. Now, here in the United States, a bit of a different picture, but interesting to see the Atlanta Fed GDP now tracker, which kind of measures where the kind of next read on inflation for the second quarter could be. They downgraded their estimate for the next quarter of GDP to 0.9%. Keep in mind that we already have one quarter of negative GDP from the advance estimate for the first quarter. So if there is a negative print on the second quarter of GDP, that would be that kind of informal definition of a recession, which people often associate with two back-to-back quarters of negative GDP. Again, Atlanta GDP now saying, at least for right now, that's still a positive figure that they're forecasting. But keep in mind, the margin of error for that measure tends to be about eight-tenths of a percentage point. Oh, that's big. So it's pretty big. Again, forecasts are forecast. We know that. [02:16:11] Speaker 1: So the OECD, they had three key takeaways within the report, right? The war slowing the recovery, inflationary pressures intensifying, and then additionally, the cost of living crisis will cause hardship and risks famine, they say. And so with what some of the different regulatory bodies and policymakers are able to do, do they have the necessary tools in order to combat some of these very present risks to the economy? [02:16:35] Speaker 27: Well, absent some sort of diplomatic solution in Russia and Ukraine, probably not, right? I mean, that's the biggest difference between the last round of forecasts that we got at the beginning of this year from the likes of the OECD and the World Bank and their updates now is the fact that in January, there was no war happening in Ukraine, no war happening in Eastern Europe. So that's the big reason for the downgrade here. So it's a little bit quick to just look at the revision and say, well, here's the largest world international body saying all of a sudden, oh, wow, the global picture is changing because of central bank policy or government spending. It's really mostly just because of the Russia-Ukraine war. As far as what governments and central banks can do about it, well, if you want to avoid a stagflationary scenario, try to get ahead of inflation by lowering aggregate demand. You could do that by raising interest rates. We've seen the Bank of Japan, not the Bank of Japan, actually everyone but the Bank of Japan, Bank of England, Bank of Canada, the Federal Reserve doing exactly that. Of course, you can only lower inflation so much with supply chain issues still a big driver of that upward pressure. Lockdowns in China, second largest economy, certainly a big part of that. Until you can figure that out, it's really hard to see how you can avoid that scenario. [02:17:45] Speaker 3: I mean, on the other hand, even though you can't necessarily point the finger at central banks as a reason for the slowdown, the knock-on effects of them raising rates are substantial, right? And we had the latest example of that today in the Mortgage Bankers Association Weekly Index of refinancings and applications for mortgages. And it looked really bad. We saw a 6.5% drop in mortgage applications. And if you look at the aggregate, the lowest in 22 years. And that has a lot to do with rising rates because the Fed's been raising rates. And then you see benchmark mortgage rates go up. [02:18:17] Speaker 27: Yeah. And the Mortgage Bankers Association kind of read on overall activity in the housing space also includes refinancing. I think that's going to be a big part of that, right? It makes sense that as rates go up, you're going to have a lot less refinancing, especially when you're comparing that to the period of late 2020, early 2021, when everyone was refinancing. Why not? Rates were at near zero, right? So when you take a look at that overall economic activity in the housing sector, that's certainly a big part of it. The question naturally is, well, what's that going to do in terms of the overall aggregate economic activity here in the United States? That raises the question, well, how substantial is refinancing mortgage activity to overall GDP? Estimate is that it feeds into residential investment. That's about 3% to 5% of U.S. GDP. But consumption spending on housing services is much more substantial. About 12% to 13% is the estimate there. So whatever's happening in the housing space does have ripple effects into the overall aggregate. [02:19:13] Speaker 3: We've been seeing that. We saw that yesterday with Target, which was seeing a pullback in housing goods. [02:19:18] Speaker 4: And also, I would say all this ties back to inflation. And look, we continue to hear from some heavy hitters on the inflation topic. Here's what they've been saying this week. [02:19:26] Speaker 39: As the war continues, it is pushing up inflation and slowing growth. Russia's aggression comes with a price we're all paying. Disruptions have driven up food and energy prices, which are putting a high burden on all of us and especially the most vulnerable. [02:19:44] Speaker 40: We currently face macroeconomic challenges, including unacceptable levels of inflation, as well as the headwinds associated with the disruptions caused by the pandemic's effect on supply chains and the effects of supply side disturbances to oil and food markets resulting from Russia's war in Ukraine. [02:20:07] Speaker 41: Stagflation is a really knotty policy problem because the remedy to high inflation is a policy that will have as a side effect stagnation or something worse. So both central banks and ministries of finance have to navigate this very narrow path between enough tightening to reduce inflation, but not so much tightening that you get a deep downturn, let alone a recession. So it's a really difficult balancing act. [02:20:35] Speaker 4: So, Brian, whether it's knotty inflation or knotty inflation, both really aren't too good. [02:20:40] Speaker 27: Yeah, we'll try to figure out the interpretation. I mean, look, either way you cut or slice it, stagflation is certainly the risk that everyone's worried about, right? If central banks can't lower aggregate demand enough, that's going to come alongside a slowing of economic activity, low GDP growth, high inflation. That's the worst possible outcome. Now, what's interesting about the global picture, though, is I want to emphasize that it's a global phenomenon, right? It's not just the Federal Reserve that's dealing with this. But we also have to keep in mind all of those lower income, kind of more impoverished nations that we don't tend to talk about on these programs. They don't have the fiscal space to pass any sort of targeted relief, for example. This type of recovery, if there is a recession that kind of ends it abruptly, could actually further exacerbate the divide between the advanced nations and its lower income. [02:21:24] Speaker 3: Yeah, that really stood out to me yesterday in the World Bank report, right, is that those developing nations, that they could see post-pandemic growth at 5% below the pre-pandemic levels, right? [02:21:33] Speaker 27: Yeah, and also keep in mind, I mean, the central bank picture is very important there, because as the advanced nations that have the ability to raise interest rates like the Federal Reserve, what is that going to do to those, you know, other types of advanced or rather developing nations that can't afford to also raise their interest rates? I mean, it's not to say there would be a 1997-like Asian financial crisis again, but you do wonder whether or not the strength of the U.S. dollar is really going to suck a lot of momentum out of those other nations, which are still trying to recover. [02:22:15] Speaker 18: Everyone, another major story that we're tracking here. [02:22:18] Speaker 1: The World Bank is warning that the global economy faces risks of both high inflation and low growth, which could throw some countries into a recession. In the updated report, we know that the World Bank slashed forecasts for global growth this year to 2.9%. That's down from 4.1% in January. One of the quotes coming out from World Bank President David Malpass saying that the war in Ukraine, lockdowns in China, supply chain disruptions, and then the risk of stagflation are hammering growth. And for many countries, recession will be hard to avoid. [02:22:49] Speaker 36: Yeah, and in particular, they're talking about developing economies in this note as well. The level of per capita income in developing economies this year will be nearly 5% below pre-pandemic trend, which is really fascinating there. [02:23:03] Speaker 3: And also draws a sharp contrast with what we have seen here in the United States, because even though we are debating recession, etc., if you look at income level, if you look at earnings growth, if you look at many other metrics, as Amanda Agati of PNC was pointing out earlier, we're in decent shape. And that is even more stark in comparison with some of these developing economies and what they're facing. And the bite that inflation takes, as painful as it is here, if you have lower income, it's even more painful. [02:23:35] Speaker 4: Right. And the World Bank noting global inflation is expected to moderate next year, but it will likely remain above inflation targets in many economies. Of course, that has direct implications on what the Fed and central banks oversee, what they do and what they don't do. And then secondarily, I mean, the headline from this is stagflation. And I would argue, I'll push back on what Amanda said. You know, when you see an earnings report from the likes of a target and some of the other ones we saw late in May, those are companies, these are companies that are, of course, consumer-driven, but preparing for a stagflationary environment for the balance of this year. [02:24:08] Speaker 36: But it's not a wholesale consumer pullback. It's a pullback in very specific areas where we saw enormous pull forward during the pandemic. [02:24:16] Speaker 4: But I think you brought up a good point in the prior segment, Julie. At what point do you start to see that pullback in services? Does it happen? Prices for services, too, are starting to go through the roof. Is it Dave and Buster's quarter? Is this the best it gets here right now? [02:24:30] Speaker 36: I think you've got to look out a little bit further, but maybe. [02:24:32] Speaker 18: It gets passed through in experiences as well, though. [02:24:35] Speaker 36: Yeah. [02:24:39] Speaker 42: Paul, what do you think the markets were reacting to the most today? [02:24:44] Speaker 43: Good afternoon. Good to be with you again. Look, I think today was more of a sigh of relief, more than anything else. You know, Friday didn't end so great. Markets have been volatile. The negativity looks like and feels like and acts like you've been through a 30% decline with a moderate recession. So I think each and every day, the markets are trying to wring out the volatility, calm things down. And frankly, that's the only way you repair from a 20% decline in the S&P and a 30% decline in the NASDAQ. You slowly but surely, volatility goes from the alligator's mouth being wide open and slowly it closes and you get back to some normal trading patterns. And that's what we're seeing right now. [02:25:28] Speaker 10: Paul Kim, lots of focus is going to be on the end of the week when we get that latest CPI print. Questions about what's been priced into the market in terms of inflation. How do you see that? [02:25:39] Speaker 44: I think the pendulum's come swung back a little bit in the past couple of weeks, right? May ended up essentially flat. And so if anything's priced in, I think much more moderate Fed is currently priced in. And not so much dependent on the single CPI print on Friday. I think there's going to be a continuous sort of realization that inflation is not transitory. It's here to stay. There's a lot of pressures, both from a tight job market, a continuous high and elevated housing market, as well as all the supply chain and commodity related issues that we faced all year. And I think really the culmination is going to be next week where we expect to see some more market volatility. We're kind of trading sideways until the continuation of that narrative begins again. [02:26:28] Speaker 13: Paul Schatz, there's a first time for everything and likely the last time I ever asked about Cardi B talking about the economy. But here it is. And here's your opportunity to speak to her. She tweeted this. When y'all think they're going to announce that we're going into a recession? And Paul Schatz, what's your answer? Are we headed toward a recession? [02:26:49] Speaker 43: My kids would love this because they would bet I wouldn't even know who Cardi B was. But here's what's so fascinating and so eye-opening about this. When someone in pop culture starts tweeting, commenting about markets, about the economy, it's like having it on the cover of Time or Newsweek or U.S. News and World Report. It's so beyond what we're in the industry focused on. When that happens, you know the negativity needle is about as pressed it can get. I would never expect Cardi B or anybody else like that to focus on the economy. I think recession fears are way overblown. I said this coming in with you guys, January 1. No recession in 2022. It's not going to happen. Could we have one in 2023 if the Fed makes policy mistakes? Yes. However, with all the data that's available and looking forward, I'm still going to be in the camp that if it comes in 2023, it's mild. And the stock market has largely discounted a mild recession going down 20%. Mild recession, stocks go down 20 to 25. Unless you get a moderate recession, not mild, moderate, and oil goes to 175 or 200, we've largely survived what could be coming next year. But I don't think recession is coming this year. Nope. [02:28:14] Speaker 8: And we've seen a lot of people on Twitter saying, look, a lot of you are going to end up just sort of speaking a recession into existence because it keeps becoming this narrative, even though a lot of analysts are saying, if we do get one, perhaps next year or perhaps not at all. Paul Kim, I want to ask you about some of the narratives that we're seeing in terms of what the Fed can really do to break some of this inflation inertia. What are you keeping an eye on? [02:28:34] Speaker 44: Really looking at, obviously, interest rates. The bond market is relatively smart compared to many markets and has been fluctuating, right, back and forth. But really, I think the single most important metric is oil. I think oil is going to tell you a lot about which side is winning. Because traditionally, oil has created recessionary impulses when it's roughly doubled in a year, and we're pretty close to that. And if oil continues to rip, it's going to by itself create a lot of the energy, no pun intended, to create a recession. But also, if you see it really start to sell off, that's a classic pattern of a recession in progress. So either way, a very sharp sell-off in oil or continuous ramp-up in oil, I think either of those are pretty bad for our future outlook. [02:29:23] Speaker 10: Paul Schatz, what do you like in this environment right now when there's uncertainty? We have record high gas prices. Inflation isn't too far from the 40-year high. What are you buying? [02:29:35] Speaker 43: Look, Shawna, you go down 20% in the S&P, you go down 30% in the NASDAQ, and you get a whole bunch of stocks down 60%, 70%, 80%, 90%. There's a whole lot I love. You just got to give me the time frame. So short-term, I think, I love the semis. If you want to get granular, you can look at AMD and Broadcom. I did like Tesla. It's just so hard with this constant circus of a game with Twitter. So I'm not going to add to my small position in Tesla. But certainly, semis. I love utilities. If you want to get some income, we've been paring back our energy exposure as crude's gone higher. I don't think that right now, I don't think that trend is sustainable. Even if I'm wrong and crude does spiral to 175, there should be a pullback first. If you want to add, you can, but up here, it's too difficult, at least for me, to buy crude. Listen, if you're aggressive, so many of these stay-at-home stocks or new-age tech stocks or ARC stocks have been so hit over the head. I do think stock market rallies in the process of rallying 7% to 15%. Those stocks should go 15% to 30% in the short intermediate term. There's plenty to love here. I just, if I were to, and I love bonds to the end of the year. I think bonds offer phenomenal risk-reward. I think the worst case is bonds go sideways. Best case, you get back half of what people lost early in the year. We get into the middle of summer, I may want to be a seller. But right now, I think the path of least resistance is higher, and I don't see a moderate recession, which would make me wrong. [02:31:13] Speaker 27: Well, shifting now to a quick look at social media, with Cardi B asking the hard questions that we're all asking ourselves, which is, are we in a recession yet? [02:31:24] Speaker 30: That was such a long transition. [02:31:26] Speaker 27: That was really a problem at times. But no, it is a serious thing that people are asking about. [02:31:34] Speaker 32: Oh, man. I think this is an opening. [02:31:36] Speaker 27: That could be a recession indicator in and of itself when the rappers start to talk about recession, and then we talk about it on this show. I think this is an opening for you. I really don't have much more. [02:31:49] Speaker 31: I think this is an opening for you to reach out to Cardi B. [02:31:52] Speaker 27: I really don't have much more to ask. Just tease it. [02:31:55] Speaker 26: Go ahead and tease it to kick out. [02:32:00] Speaker 37: All right. Let's get over to Matthew Lizetti over at Deutsche Bank. [02:32:03] Speaker 4: Matthew, always good to see you here. So we've just been talking about the JOLTS report. Now, you were one of the first people on Wall Street to call recession amongst the biggest banks. Where are you at right now with that call? [02:32:15] Speaker 45: Sure. First, thanks so much for having me. We've maintained that call. I think it's important to note that it was not for a near-term or imminent recession. The basis of our call was that we expected a recession towards the end of next year and the second half of next year. And it was driven by a view that the labor market would remain remarkably tight. Something that we're seeing with this morning's job openings data, quits rate data. And then inflationary pressures would be more persistent and ultimately force the Fed to be more aggressive in terms of the rate hike. So we still maintain that call. I think a lot of the data that we're seeing is suggestive of an economy that remains resilient, a labor market that remains tight, and a Fed that will need to tighten more aggressively than what the market currently anticipates. [02:32:55] Speaker 1: But if we stay in this kind of recessionary period, because that's what it feels like. If you ask consumers, if you listen to businesses on their earnings calls, even if they are bullish about their business prospects, they are still very much monitoring the reality of a recession. And so with that in mind, if some of these elements remain intact through your target, which is second half of next year, that places us in a much different conversation by that point. [02:33:21] Speaker 45: Yeah, certainly from a market perspective, there's been a lot of focus recently on recessionary risk. And that has been driven by the sharp tightening of financial conditions that we've seen, the sell-off in risk assets, most notably in equities. We've seen some alleviation of those pressures recently. What I would focus on from a real economy perspective is what is the labor market telling us? And I think from that perspective, the best real-time indicator is jobless claims. And there we've seen continuing claims remaining near record low levels, initial jobless claims remaining very low. It's suggestive of the labor market that we're not shedding labor because there is still substantial tightness there. And I think as long as that story holds in, you have consumer spending that will remain resilient, as we saw with last week's consumer spending data. [02:34:02] Speaker 4: How long do you think it will stay intact, Matthew? Because you had President Biden come out in an op-ed this week in the Wall Street Journal, I think really reset expectations on job growth. Are we talking about later this year, we're getting, what, 50,000 jobs added each month? [02:34:17] Speaker 45: Yeah, I think the context is really important. So over the past three months, we've added more than 500,000 jobs on average. And that's with an economy where the unemployment rate is already 3.6%, where you have 5.5 million more job openings than unemployed. So you have a really tight labor market at a time where we're seeing really, really strong job gains. Inevitably, that will slow. We think that you see 325,000 jobs later this week. And that will likely slow further as we go forward. But that is kind of the natural case of things as you get to a very tight labor market. The question will be, does labor demand hang in? Do job openings remain elevated? And does wage growth continue to pick up? And at least from that perspective, the data we saw this morning, I think, is still saying that it is a tight labor market. The quits rate remains elevated. And that wage growth should remain elevated at least over the next several quarters. [02:35:05] Speaker 1: In the event that things reverse course and perhaps because businesses are seeing more tightness in their balance sheet or their ability to actually maintain a profit over an extended period of time, whether that's because they're having more difficulty on the supply chain front or whether they're paying employees more and thus need to cut back on the number or the head count that they have, those discharges, that comes even more into the conversation at that point. And so ultimately, where do you see those businesses netting out in and at the end of the day also some of the workers and how they're going to be able to find those job opportunities if there aren't as many postings that are out there? [02:35:44] Speaker 45: Yeah, that's currently the big macro debate at the moment. And we saw Governor Waller from the Fed devote a speech to this on Monday. What will happen as job openings come down and given the huge buffer that we have of 5.5 million more job openings than unemployed, will unemployment ultimately begin to rise? Our view is that it will, that there's a lot of variation in these job openings relative to unemployed across different geographies and across different sectors. And so as the Fed tightens monetary policy, as financial conditions tighten, I think ultimately it will mean that the unemployment rate rises. And then historically we know simply that once the unemployment rate rises by five-tenths or more, that has always coincided with the recession. And so that is essentially the basis of our call, that in order for inflation pressure to come down, the labor market has to loosen materially and that the labor market loosening will likely mean the unemployment rate moving higher and that has always been associated with the recession historically.