US Economy Doesn't Need Recession: Shepherdson

[00:00:00] Speaker 1: IAN, YOU TALK ABOUT THE IMPORTANCE OF FED PERSISTENCE. IF WE GET DATA THAT PERSISTS, THIS IS A FED THAT WILL BLINK. WALK US THROUGH HOW YOU PERCEIVE THE DATA TRAIL TO BE [00:00:17] Speaker 2: FORWARD TO WHERE THE FED HAS TO MAKE A DECISION. DECEMBER IS SHAPING UP TO BE POTENTIALLY A VERY INTERESTING BASIS POINTS OF HIKES IN NOVEMBER, DECEMBER TOGETHER. AND IT LOOKS TO ME THAT IF WE GET MORE DATA THAT LOOKED LIKE THE JOLTS REPORT THAT CAME OUT EARLIER THIS WEEK SHOWING A REALLY BIG DROP IN JOB OPENINGS, AND WE ALSO GET A COUPLE OF DECENT CPI INFLATION REPORTS, ACTUALLY WE GET THREE BEFORE THE DECEMBER MEETING, MY GUESS IS THEY'RE GOING TO BE MUCH BETTER THAN WE SAW LAST MONTH. IF THAT'S THE CASE, THEN I THINK THE FED IS REALLY GOING TO STRUGGLE TO CONVINCE MARKETS THAT IT NEEDS TO DO A TOTAL 125 BASIS POINTS IN THOSE LAST TWO MEETINGS OF THE YEAR. BUT LET'S BE CLEAR ABOUT THIS, WE NEED BOTH OF THESE THINGS TO HAPPEN, BECAUSE THE FAIR HAS BEEN VERY CLEAR. A TON OF SPEAKERS THIS WEEK AND, OF COURSE, CHAIR POWELL AT THE LAST MEETING AT THE PRESS CONFERENCE SAYING, LOOK, IT'S NOT JUST ABOUT THE CURRENT INFLATION RATE, AND BY THE WAY, ONE GOOD INFLATION NUMBER ISN'T GOING TO DO IT, WE NEED TO SEE A RUN, FAIR ENOUGH. BUT IT'S ALSO ABOUT THE LABOR MARKET, BECAUSE WHAT THEY'RE CONCERNED ABOUT IS THAT EVEN THOUGH THERE'S SOME PRETTY STRONG DOWNWARD FORCES ON INFLATION, YOU KNOW, THERE'S THIS BULLWIP EFFECT IN INVENTORIES IS GOING TO BE QUITE A BIG DEAL OVER THE NEXT YEAR OR SO, THEY'RE LOOKING AT WAGE GROWTH OF 5% PLUS AND SAYING, LOOK, YOU KNOW, EVEN IF INFLATION COMES DOWN QUITE RAPIDLY BY NEXT SPRING, WE'RE WORRIED ABOUT WHERE IT WILL BE LATER IN 23 AND 24 IF WAGE GROWTH DOESN'T MODERATE. SO I DO THINK THEY WANT TO SEE SOME MODERATION IN THE LABOR MARKET AS WELL AS SOME BETTER INFLATION NUMBERS. BUT HERE WE ARE NOW WITH THE POSSIBILITY OF THAT HAPPENING AS SOON AS THE END OF THIS YEAR. SO THIS DECEMBER MEETING, I THINK, IS GOING TO BE EXTREMELY INTERESTING. I'M JUST WONDERING EVEN WHETHER IN NOVEMBER THE CASE FOR GOING BY ANOTHER 75 HAS ALREADY BEEN WEAKENED AS WELL. YOU KNOW, MAYBE THAT, YOU KNOW, THAT JOELS NUMBER WAS A BOLT FROM THE BLUE. NOBODY WAS EXPECTING ANYTHING LIKE THAT. YOU KNOW, YOU GET A 12% OF DROP IN JOB OPENINGS IN ONE MONTH. SO SOME THINGS ARE STARTING TO MOVE. THE FED SPEAKERS AREN'T MOVING YET, BUT, YOU KNOW, A FEW MORE [00:02:12] Speaker 1: WEEKS OF NUMBERS LIKE THIS AND THERE WILL BE MOVEMENT. JOHN, THIS IS FROM NOVEMBER 2ND TO DECEMBER 14TH WHICH IS WHERE NEWCASTLE REALLY DECIDES THE REST OF THEIR SEASON. YOU THINK THAT'S THE CRITICAL PART? THAT'S THE CRITICAL PART OF THE TRACK. THE CHRISTMAS PERIOD IS USUALLY THE CRITICAL PART OF THE [00:02:27] Speaker 3: SEASON. [00:02:28] Speaker 1: I'M BECOMING A SOPHISTICATE. [00:02:29] Speaker 3: IAN, WHAT YOU'RE SAYING ABOUT DECEMBER NOW IS WHAT YOU SAID ABOUT SEPTEMBER THREE MONTHS AGO. WHAT HAVE YOU BEEN SURPRISED BY? [00:02:35] Speaker 2: YEAH. YEAH. WELL, WHAT PUSHED THEM TO THE 75TH SEPTEMBER? YOU KNOW, WE HAD THE HORRIBLE INFLATION NUMBERS AND THAT MADE IT IMPOSSIBLE FOR THEM TO DO ANYTHING LESS THAN PUT THE SLEDGE HAMMER DOWN AGAIN. BUT I THINK THERE'S A VERY GOOD CHANCE THAT THINGS CHANGE NOW. YOU KNOW, WE'RE SEEING NOW SO MANY RESAILERS TALKING ABOUT HOW THEY'VE GOT FAR TOO MUCH INVENTORY. IT'S NOT JUST WALMART ANYMORE. YOU KNOW, NIKE HAVE SAID IT. AND WE'RE HEARING FROM THE CAR BUSINESS THAT INVENTORY IS RISING AGAIN AND THAT'S ALLOWING SALES TO RISE. BUT IT'S ALSO SEEN REAL DOWNWARD PRESSURE ON PRICES. YOU KNOW, USED CAR PRICES ARE DOWN 13% SINCE JANUARY. AND THE RATE OF DECLINE AT AUCTION IS ACCELERATING. SO THERE'S SOME THINGS THAT I HOPE WOULD HAPPEN BY SEPTEMBER THAT DIDN'T ARE NOW HAPPENING. AND THEY'RE IN THE DATA. BUT WE NEED MORE OF THEM. YOU KNOW, JUST A SNAPSHOT OF A FEW GOOD NUMBERS ISN'T GOING TO BE ENOUGH. I THINK POWELL AND HIS COLLEAGUES HAVE BEEN VERY CLEAR ABOUT THAT. BUT THE THING IS, DECEMBER IS STILL A LONG WAY AWAY. THREE MORE ROUNDS OF INFLATION REPORTS. THREE MORE PPIS, THREE MORE CPIS, TWO MORE PCE REPORTS. THAT'S A LOT OF INFLATION DATA. AND I THINK THAT WE'RE KIND OF REACHING THIS TIPPING POINT NOW WHERE THE BULLWHIP EFFECT THAT ALL THESE COMPANIES ARE TALKING ABOUT IS GOING TO BECOME VISIBLE IN THE HARD DATA. AND AT THAT POINT, THAT PUTS THE FED INTO A DIFFERENT PLACE, ESPECIALLY IF AT THE SAME TIME THE NEXT COUPLE OF JOLTS NUMBERS ARE LIKE ANYTHING LIKE WHAT WE JUST SAW THIS WEEK. I MEAN, THAT REALLY WAS VERY STARTLING. [00:03:53] Speaker 4: IAN, HAS DON'T FIGHT THE FED TURNED INTO THE FED IS JUST WRONG AND WE'RE RIGHT? I MEAN, BASICALLY YOU'RE SEEING THE MARKET SAY WE COULD SAY WE COULD HEAR FROM 15 MORE FED SPEAKERS TODAY AND 25 TOMORROW AND THEY COULD ALL TELL US WE'RE NOT GOING TO CUT RATES NEXT YEAR. YOU'RE STILL GOING TO CUT RATES BECAUSE THE DATA IS MOVING FASTER THAN YOU'RE ACKNOWLEDGING. DO YOU THINK THAT THE MARKET IS RIGHT AND THE FED IS WRONG? [00:04:15] Speaker 2: WELL, THEY'VE BOTH GOT A POINT. SO HERE'S THE THING, YOU KNOW, RATES HAVE GONE UP SO MUCH OVER THE LAST YEAR THAT UNDER NORMAL CIRCUMSTANCES I WOULD BE SCREAMING ABOUT A RECESSION. I WOULD BE SCREAMING AT THE FED, PLEASE, FOR GOODNESS SAKE, STOP ALL THIS HAWKISH TALK, STOP THE TIGHTENING. YOU KNOW, VERY SOON YOU'RE GOING TO HAVE TO SIGNAL AN EASING. THE REASON I'M NOT SAYING THAT SO, YOU KNOW, AS I WOULD BE NORMALLY, IS THAT THE FACT IS THAT THE HOUSEHOLD SECTOR IN THE U.S. IS STILL SITTING ON ONE AND A HALF, ONE AND THREE QUARTER TRILLION DOLLARS OF PANDEMIC SAVINGS, WHICH THEY ARE CLEARLY BEING WILLING, THIS YEAR ANYWAY, TO RUN DOWN IN ORDER TO MAINTAIN THEIR SPENDING. AND THAT'S OFFSETTING SOME OF THE HIT FROM INTEREST RATES. AND SIMILARLY, IN THE CORPORATE SECTOR, THERE'S A LOT OF CASH AS WELL. SO, YOU KNOW, AGAIN, IN A NORMAL ECONOMY WITH RATES UP THIS MUCH, I'D SAY, YEAH, YOU'VE DEFINITELY DONE ENOUGH AND YOU'RE IN REAL DANGER OF OVERDOING IT, REAL DANGER OF TRIGGERING A RECESSION THAT WE REALLY DON'T NEED, I THINK. BUT THE CONSUMER IS HOLDING UP EXTREMELY WELL, HOUSING NOT WITHSTANDING, AND THE CORPORATE SECTOR LOOKS OKAY AS WELL. BUT THERE'S ENOUGH STRAWS IN THE WIND HERE NOW. NOW, YOU CAN SEE IT IN, FOR EXAMPLE, SOME OF THE REGIONAL FED SURVEYS. CAPITAL SPENDING INTENTIONS HAVE REALLY WEAKENED A LOT. YOU CAN SEE IT, OBVIOUSLY, IN THE HOUSING MARKET, AND YOU CAN SEE IT IN THE JOLTS NUMBERS, AND YOU CAN SEE IT IN SOME OF THE OTHER BUSINESS SURVEYS AND THE CONSUMER SURVEYS AS WELL, JUST SAYING THAT, YOU KNOW, MAYBE THINGS ARE BEGINNING TO WOBBLE A BIT IN SOME SECTORS, IT'S NOT A COLLAPSE, IT'S NOT A ROUTE OF THE ECONOMY, DEFINITELY NOT. BUT IS IT THE SORT OF ECONOMY WHERE YOU STILL NEED TO BE HIKING BY 125 BASIS POINTS AT THE NEXT TWO MEETINGS? THAT IS FAR FROM CLEAR TO ME AT THIS POINT. WHAT I'M REALLY HOPING IS THAT BY THE TIME THEY SIT DOWN IN DECEMBER, IT WILL BE CLEAR, AND IT WILL BE CLEAR TO THEM THAT THEY DON'T NEED TO KEEP GOING SO AGGRESSIVELY, BECAUSE EVERY INCREMENTAL HIKE HERE NOW, I THINK, IS RAISING THE RISK OF TRIGGERING SOMETHING THAT WE DON'T NEED, BECAUSE THE U.S. [00:06:00] Speaker 4: ECONOMY TO ME DOESN'T NEED A RECESSION. TRIGGERING SOMETHING THAT WE DON'T NEED, THE U.S. DOESN'T NEED A RECESSION. OTHER PEOPLE WOULD DISAGREE WITH THAT, INCLUDING SOME PEOPLE PERHAPS IN THE FEDERAL RESERVE, BASED ON SOME OF THE FORECASTS THAT THEY HAVE CURRENTLY IN PLAY. WHAT IS YOUR VIEW IF WE DO GET A RECESSION OF THE DEPTH OF IT BASED ON THE TRAJECTORY OF RATE HIKES THAT WE SEE, BASED ON HOW QUICKLY THE DATA IS CHANGING TO ACCEPT SOME OF THE WEAKNESS THAT PEOPLE WERE EXPECTING TO SEE EARLIER IN THE YEAR? [00:06:24] Speaker 2: YEAH. SO, MY GENERAL RULE IS THAT RECESSIONS ARE PROPORTIONAL TO THE IMBALANCES IN THE PRIVATE SECTOR THAT PRECEDED THEM. I MEAN, THE WHOLE POINT OF RECESSION IS TO FORCE THE PRIVATE SECTOR TO CHANGE ITS BEHAVIOR FROM DOING YOU KNOW, THINGS THAT ARE OVERSTRETCHING IT TO COMING BACK TO NORMAL. SO, IF IT'S NOT VERY OVERSTRETCHED, THEN IT DOESN'T NEED A DEEP RECESSION. SO, YOU KNOW, I DON'T EXPECT ANYTHING LIKE 08. IT WOULD BE MUCH MORE LIKE 1990 OR 2001, SO MILD AND BRIEF. BUT I DON'T THINK WE NEED ONE AT ALL, BECAUSE I THINK THIS BULL WHIP EFFECT IN INVENTORIES AND THE CRUSHING OF MARGINS THAT IT'S GOING TO IMPOSE ON THE RETAIL SECTOR IS GOING TO BRING INFLATION DOWN FASTER THAN THE FED THINKS, EVEN WITHOUT ANY MEANINGFUL RISE IN THE UNEMPLOYMENT RATE. SO, NOW, I REALIZE WE'VE NEVER SEEN ANYTHING LIKE THIS BEFORE. WE'VE NEVER SEEN IT ON THE UPSIDE WITH THE SPEED OF THAT MARGIN EXPANSION, AND WE'VE NEVER SEEN ANYTHING ON THE POTENTIAL DOWNSIDE THAT WE'VE GOT COMING EITHER. THIS IS VERY MUCH UNCHARTERED TERRITORY. BUT, YOU KNOW, WHEN YOU'RE IN UNCHARTERED TERRITORY AND YOU'VE ALREADY HIKED A LOT, YOU KNOW, MAYBE THE PRUDENT THING TO DO IS TO EASE OFF A LITTLE BIT AND JUST HAVE A LOOK AROUND. YOU KNOW, THAT'S THE THING WHEN IT'S UNCHARTERED. YOU DON'T KNOW REALLY WHERE YOU ARE. SO MAYBE PAUSE, HAVE A LOOK AROUND, GIVE THE DATA A COUPLE OF MONTHS TO BREAK ONE WAY OR THE OTHER. IF THEY DON'T, THEN, OKAY, CARRY ON HIKING. BUT IF THEY DO BREAK TO THE DOWNSIDE, BEARING IN MY MONETARY POLICY WORKS WITH REALLY QUITE LONG LAGS, IF YOU'RE STILL HIKING AGGRESSIVELY IN NOVEMBER AND DECEMBER, AND YET THE INFLATION PRETCHER IS ALREADY BREAKING TO THE DOWNSIDE, THEN WHAT YOU'VE DONE IS IMPOSE DISINFLATIONARY FORCES ON THE ECONOMY FOR THE WHOLE OF NEXT YEAR, WHICH IT PROBABLY DOESN'T NEED. need.