Is recession in 2023 inevitable?
In this episode of On The Margin, Mike Ippolito is joined by David Rosenberg, Founder and President of Rosenberg Research and Associates Inc., to talk about macroeconomics, bear market, possible happenings next year and more.
Read our notes below to learn more.
Bear Market
A bear market rally is when the heavy is short of stocks no matter how junky they are, they are the ones that lead the charge.
He always tries to preach patience, discipline, always maintain a certain degree of resolve and not be chasing intermittent rallies unless they are a gifted trader.
When the stock market bottoms in a fundamental bear market, it gets stupid cheap that you want to jump in with both feet because the expect of returns going forward are so lucrative.
He thinks that the odds are overwhelmingly in favor of a recession in 2023.
In a recession bear market, just as the market peaks ahead of the recession, the market bottoms ahead of the recovery.
No matter how bad the economy is, don’t fight the Fed.
There’s no evidence ever of the stock market bottoming especially in a recession with the Fed tightening policy into inverted yield curve.
Will the Fed break the market?
Most parts of the economy reset into higher interest rates with a lag tends to take time before things start to break and things start to break when cash flows start to contract which hasn’t happened yet.
The most pernicious of the tech rack and the impact it had on capital markets in the economy happened in 2001-2002.
There’s a lot of stuff that’s going to happen that hasn’t happened yet.
There’s extreme leverage in key corners of the capital markets globally.
The middle class and low-end consumers are resorting now to borrowing money on their credit cards to buy food and that is not a very good situation at 22% interest rates.
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Defaults are a lagging indicator like the unemployment rate.
He thinks we haven’t seen the economic and financial repercussions yet because of the leftover of all that fiscal stimulus kept the consumer hanging on by a thread.
For the past couple of quarters, the savings rate is down to a 17 year low, barely more than 2%.
The Fed only started raising interest rates in March and the lags usually start about 9 to 12 months so 2022 was the year of aggressive rate rate hikes and 2023 will be the year when those lags from the hikes bite hard on the economy and cash flows.
What a default cycle looks like
Looking at the household debt to income ratio, it only looks good next to where it was at the peak of the last cycle which was the biggest credit and housing bubble of all time.
Regional bank stocks are down 35% from the peak and consumer finance stocks are down more than 30% of the peak.
The residential real estate market is the bedrock for the entire system, it is the biggest asset class on the household balance sheet and commercial bank balance sheets.
Heading into this year, it took more than 8 years of family income to buy a single family home and that’s about 30%-40% above the historical norm.
When household balance sheets shrink, the asset values go down but you see the liabilities stay the same and as that erosion in credit quality, that precipitates a different payment cycle, more restructuring and higher defaults.
Most people are still employed and paying their debts on time in a recession but it’s the rise in the late payment rate that is a necessity for financial institutions to provide loan loss provisions against any further deterioration that causes something else to happen.
When will reality set in for consumers?
The retail sector employment was down more than 30,000 and down in each of the past 3 months by more than 60,000.
Powell told people in March that they’re not focused on supply anymore and David thinks that’s a very important comment.
70% of demand is consumer spending.
Consumer spending doesn’t go down a lot in recessions.
There are two surveys on employment, we have the non-farm payroll survey which gets all the attention and the household survey which is a smaller sample size that does a much better job at turning points of the cycle.
The leading indicators for employment are actually showing that employment is going to be contracting and when employment contracts, incomes go down and debt service goes up at a time when we’re in a much higher interest rate environment.
Has J. Powell over-tightened?
A few central bankers did more damage to the economy than Paul Volcker did in the early 80s.
In his opinion, J Powell absolutely over-tightened and overkilled but it is not evident yet, it might be evident next year or the year after that.
Volcker had almost 15 years of structural inflation to deal with.
He thinks this time next year, inflation is going to be well below the Fed’s target.
Supply-driven Inflation
When looking at the U.S. economy and taking a look at where GDP growth has been for the past 3 years, real GDP growth has averaged about 2%.
Demand hasn’t changed, what’s changed is the supply.
Looking at vendor supply delivery delays, supply bottlenecks, order backlogs and freight rates, they’re all telling a consistent story which is we are seeing a thaw on the supply side globally.
The Fed wants to generate a recession next year to get inflation down and they want to get it down quickly.
We’re going to get the demand contraction at the same time that we’re seeing a global supply thaw.
Which assets get bid first in a recovery?
The first recovery bid will be the bond market and it is already starting.
The bond and treasury yields have to go down to provide the stock market with that relative support that it always gets at the lows.
He thinks if you’re bullish on equities, you have to be first bullish on bonds.
There will not be a bottom in stocks without treasuries rallying significantly next year and it’s already starting.
The first asset class to enter its bear market cycle is the first one to exit.
He thinks capital spending is going to be cut next year along with employment.
He thinks commodities are still going to have a rough year but it's going to bottom at a higher level than it had in the past.
The lower the correlation of what you own and your equity portfolio in GDP, the better off you’re going to be.
He doesn’t know how to give value to crypto or how to fit it in the portfolio.
Gold is relatively stable while crypto is when you got to have ice in your veins.
U.S. outlook
Emerging markets traditionally are high beta trades coming out of a recession.
He doesn’t think anybody’s ever made much money betting against the U.S.
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Ledger’s latest innovation, the Ledger Stax, is a credit card-sized hardware wallet complete with touchscreen and Bluetooth capabilities. Did we mention it’s designed by Tony Fadell, the creator of Apple’s original iPod?
Act now, click the link below and preorder the Ledger Stax to use crypto on the go.