Thoughtful Money with Adam Taggart
David Rosenberg: Is A Jobs Shock About To Hit?
Description
The episode covers various aspects of the global economy, including economic performance, fiscal stimulus and consumer spending, Fed policy and data analysis, market outlook and investment recommendations, as well as lessons and perspectives. Key insights include concerns about overstatement of jobs data, the impact of fiscal stimulus on consumer spending, challenges in predicting recessions, potential policy mistakes by the Federal Reserve, and investment recommendations for areas correlated with lower interest rates. The episode also emphasizes the importance of seeking different perspectives and avoiding groupthink.
Insights
The official jobs data reported by the government are 'overstated by historical proportions' according to economist David Rosenberg.
The global economy is described as flat with some areas doing better than others. India is experiencing tremendous growth fueled by productivity, similar to what the US experienced in the 1980s. Europe has outperformed the S&P 100 this year and offers better valuation plays than the United States. The US stock market is seen as speculative and trading at a high forward multiple, leading to concerns about future returns.
Companies beating their top and bottom lines are not being rewarded with the same degree of exuberance by the investment community as before, signaling a fully priced market.
Investors are encouraged to look beyond the US stock market to other areas globally with better valuations and secular tailwinds, such as Japan and Europe. Hong Kong's market is experiencing a resurgence due to regulatory changes, offering better valuations compared to the US market. Europe has been an upside surprise in terms of economic performance, with lower inflation rates and upcoming rate cuts by the ECB. The US avoided a recession in 2023 partly due to unanticipated fiscal stimulus like Biden subsidies that led to a boom in industrial construction.
Fiscal stimulus last year led to a decrease in government revenues despite a 6% nominal GDP growth.
US consumers spent all of the $2 trillion stimulus checks received, leading to elevated spending and credit card borrowing. Historically low savings rates at around 3% compared to pre-COVID levels of close to 8% have contributed to sustaining economic growth. Drawdown of savings rates and increased credit card borrowing have fueled the economy, similar to patterns seen during previous asset price booms like the housing boom in '07 and dot com boom in '99, 2000.
The wealth on household balance sheets has increased by almost $12 trillion in the past four quarters, leading to a feeling of wealth among asset owners.
When both the unemployment rate and savings rate have a 'three handle', it indicates a late cycle with limited growth potential. There are concerns about a potential recession due to factors like corporate debt rollover and high debt refinancing rates. The corporate sector is facing a $7 trillion debt refinancing with rates expected to be 300 basis points higher than origination by 2027. There is uncertainty regarding the impact of Fed's measures on the economy, with questions about whether the lag effect has been deferred or derailed. The small business sector is facing challenges with an average interest rate of 9%, impacting capital spending and economic growth. Despite government support and consumer spending, there is little growth in capital spending, leading to concerns about the overall economy.
Companies are retaining earnings for future debt servicing, impacting new hiring and capex.
Predicting recessions can be challenging due to lags in economic impacts. The Federal Reserve's focus on lagging indicators may lead to policy mistakes. The Fed's cautious approach may result in waiting too long to adjust rates, risking economic outcomes. The Fed is managing risks and may cut rates to avoid inflation, prioritizing recession over inflation. Concerns raised about the Fed relying on lagging and flawed data like non-farm payrolls, with potential overstatement of jobs and income. Business insolvencies are up 35% over the past year, indicating a recessionary statistic despite not reflecting in other consumer spending data. The wide error term around the data used by both traders and the Fed could lead to significant policy missteps in the future.
The Fed's reliance on traditional data sources like CPI for rate decisions may be problematic given the wide error term in the data.
Business contacts and survey data have been suggested as important indicators by Patrick Harker of Philly Fed, but Powell's focus on baseball anecdotes has led to market misinterpretation. The Beige Book provides valuable anecdotal information from business contacts that is not reflected in traditional economic data, indicating a flat economy with limited inflation. Inflation concerns may be exaggerated as evidence suggests that the recent inflation bump is mainly driven by increases in insurance costs rather than broad-based price hikes. Comparing US inflation rates to European standards reveals a lower core inflation rate in the US, raising questions about the Fed's approach to monetary policy.
The speaker discusses the possibility of rate cuts by the ECB and the Fed, with a focus on historical trends.
There is an analysis of past recessions in relation to Fed tightening and yield curve inversion, suggesting a potential recession ahead. The market outlook includes a shift from US stocks to treasuries due to excessive valuations, anticipation of lower inflation, and expectations of bond deals coming down. Recommendations are made for investing in areas correlated with lower interest rates such as banks, utilities, telecom services, select REITs, and growth stocks in the future. Defense spending has visibility and certain commodity markets are no longer cyclical, impacting areas like EV and infrastructure. Gold is in a bull market due to declining real interest rates globally, which also affects silver, platinum, and palladium. Emerging Asia shows promise while Japan is a buy-and-hold opportunity; India's economy resembles China's growth trajectory from 30 years ago with the added benefit of democracy and English proficiency. Discussion on a potential stimulus injection into the US economy through home equity loans, highlighting concerns about increased leverage and its impact on deferring a recession. The proposed stimulus could lead to increased aggregate demand but may prompt the Fed to raise rates instead of cutting them, potentially causing economic repercussions.
The host promotes Rosenberg research and encourages viewers to check out David's newsletter.
David shares a valuable lesson he learned from mentor Jack Rifkin about seeking out non-corroborating evidence to avoid groupthink. The importance of considering blind spots and seeking different perspectives is highlighted during the conversation.
Chapters
- Economic Performance
- Fiscal Stimulus and Consumer Spending
- Fed Policy and Data Analysis
- Market Outlook and Investment Recommendations
- Lessons and Perspectives
Economic Performance
00:00 - 16:00
- The official jobs data reported by the government are 'overstated by historical proportions' according to economist David Rosenberg.
- The global economy is described as flat with some areas doing better than others.
- India is experiencing tremendous growth fueled by productivity, similar to what the US experienced in the 1980s.
- Europe has outperformed the S&P 100 this year and offers better valuation plays than the United States.
- The US stock market is seen as speculative and trading at a high forward multiple, leading to concerns about future returns.
- Companies beating their top and bottom lines are not being rewarded with the same degree of exuberance by the investment community as before, signaling a fully priced market.
- Investors are encouraged to look beyond the US stock market to other areas globally with better valuations and secular tailwinds, such as Japan and Europe.
- Hong Kong's market is experiencing a resurgence due to regulatory changes, offering better valuations compared to the US market.
- Europe has been an upside surprise in terms of economic performance, with lower inflation rates and upcoming rate cuts by the ECB.
- The US avoided a recession in 2023 partly due to unanticipated fiscal stimulus like Biden subsidies that led to a boom in industrial construction.
Fiscal Stimulus and Consumer Spending
15:34 - 30:55
- Fiscal stimulus last year led to a decrease in government revenues despite a 6% nominal GDP growth.
- US consumers spent all of the $2 trillion stimulus checks received, leading to elevated spending and credit card borrowing.
- Historically low savings rates at around 3% compared to pre-COVID levels of close to 8% have contributed to sustaining economic growth.
- Drawdown of savings rates and increased credit card borrowing have fueled the economy, similar to patterns seen during previous asset price booms like the housing boom in '07 and dot com boom in '99, 2000.
- The wealth on household balance sheets has increased by almost $12 trillion in the past four quarters, leading to a feeling of wealth among asset owners.
- When both the unemployment rate and savings rate have a 'three handle', it indicates a late cycle with limited growth potential.
- There are concerns about a potential recession due to factors like corporate debt rollover and high debt refinancing rates.
- The corporate sector is facing a $7 trillion debt refinancing with rates expected to be 300 basis points higher than origination by 2027.
- There is uncertainty regarding the impact of Fed's measures on the economy, with questions about whether the lag effect has been deferred or derailed.
- The small business sector is facing challenges with an average interest rate of 9%, impacting capital spending and economic growth.
- Despite government support and consumer spending, there is little growth in capital spending, leading to concerns about the overall economy.
Fed Policy and Data Analysis
23:24 - 53:45
- Companies are retaining earnings for future debt servicing, impacting new hiring and capex.
- Predicting recessions can be challenging due to lags in economic impacts.
- The Federal Reserve's focus on lagging indicators may lead to policy mistakes.
- The Fed's cautious approach may result in waiting too long to adjust rates, risking economic outcomes.
- The Fed is managing risks and may cut rates to avoid inflation, prioritizing recession over inflation.
- Concerns raised about the Fed relying on lagging and flawed data like non-farm payrolls, with potential overstatement of jobs and income.
- Business insolvencies are up 35% over the past year, indicating a recessionary statistic despite not reflecting in other consumer spending data.
- The wide error term around the data used by both traders and the Fed could lead to significant policy missteps in the future.
- The Fed's reliance on traditional data sources like CPI for rate decisions may be problematic given the wide error term in the data.
- Business contacts and survey data have been suggested as important indicators by Patrick Harker of Philly Fed, but Powell's focus on baseball anecdotes has led to market misinterpretation.
- The Beige Book provides valuable anecdotal information from business contacts that is not reflected in traditional economic data, indicating a flat economy with limited inflation.
- Inflation concerns may be exaggerated as evidence suggests that the recent inflation bump is mainly driven by increases in insurance costs rather than broad-based price hikes.
- Comparing US inflation rates to European standards reveals a lower core inflation rate in the US, raising questions about the Fed's approach to monetary policy.
Market Outlook and Investment Recommendations
53:27 - 1:14:06
- The speaker discusses the possibility of rate cuts by the ECB and the Fed, with a focus on historical trends.
- There is an analysis of past recessions in relation to Fed tightening and yield curve inversion, suggesting a potential recession ahead.
- The market outlook includes a shift from US stocks to treasuries due to excessive valuations, anticipation of lower inflation, and expectations of bond deals coming down.
- Recommendations are made for investing in areas correlated with lower interest rates such as banks, utilities, telecom services, select REITs, and growth stocks in the future.
- Defense spending has visibility and certain commodity markets are no longer cyclical, impacting areas like EV and infrastructure.
- Gold is in a bull market due to declining real interest rates globally, which also affects silver, platinum, and palladium.
- Emerging Asia shows promise while Japan is a buy-and-hold opportunity; India's economy resembles China's growth trajectory from 30 years ago with the added benefit of democracy and English proficiency.
- Discussion on a potential stimulus injection into the US economy through home equity loans, highlighting concerns about increased leverage and its impact on deferring a recession.
- The proposed stimulus could lead to increased aggregate demand but may prompt the Fed to raise rates instead of cutting them, potentially causing economic repercussions.
Lessons and Perspectives
1:08:01 - 1:14:06
- The host promotes Rosenberg research and encourages viewers to check out David's newsletter.
- David shares a valuable lesson he learned from mentor Jack Rifkin about seeking out non-corroborating evidence to avoid groupthink.
- The importance of considering blind spots and seeking different perspectives is highlighted during the conversation.