Transcripts
Erik: Joining me now is Tressis chief economist and fund manager, Daniel Lacalle. Daniel, it is great to get you back on the show. It's been way too long and of course, what's on everybody's mind and particularly when your name is mentioned is the macro outlook for Europe. We had pretty good perspective on the European story from some of our guests through last fall. Everybody knows about the energy crisis in Europe and boy, it seems like we made it through the winter, are we out of the woods? Are we headed for more trouble? What do you see in on the horizon and what's the situation look like in Europe?
Daniel: Thank you so much, Erik. Thanks for inviting me and I think you've summed it very well. On the one hand, we have survived the winter thanks to a very mild temperatures, very mild temperatures. And also, because rate hikes have had a very significant impact on commodity prices. So the combination of lower consumption of natural gas and at the same time, lower prices has certainly helped the European Union economy. The eurozone economy though remains very weak. We have had as latest PMI figures show that the manufacturing sector is in its 35th month of contraction. And overall GDP is slightly better because of lower imports certainly, because of higher government consumption, which is certainly not a positive in my book, because it comes fundamentally from higher debt. And because of the services sector remains relatively strong thanks to the tourist season and the amount of spending from savings that were accumulated during the COVID crisis. But those savings are almost consumed. Citizens all over the European Union are feeling the pinch of elevated and persistent core inflation and overall inflation. And the impact of rate hikes is certainly going to have a significant dent on the economy for a very simple reason. In the United States, the real economy is mostly financed through the private sector, and not through the banking system. About 15% of the US real economy is financed through the banking channel according to the IMF. In the European Union, it's 80% of the economy that is financed through the banking channel through direct banking, lending. And we are seeing, for example, in the latest figures from the ECB that lending is more challenging, that credit conditions are tightening very, very fast. So the combination of our situation that has been aided by weaker commodity prices and lower consumption may come back to bite in winter of this year because the European Union hasn't done anything significant to reduce its energy or to improve the energy crisis.
Erik: Joining me now is Tian Yang, CEO of Variant Perception. Tian prepared a terrific slide deck to accompany this week's interview. Variant Perception is very well known for excellent graphs and charts so you're definitely going to want to download this one, folks. You'll find the download link in your research roundup email. If you're not yet registered and don't have a research roundup email, just go to our website macrovoices.com and click the red button above Tian's picture that says looking for the downloads. Tian, it's great to get you back. It's been way too long. Why don't we dive into the slide deck and start with this US recession that so many people have been anticipating for so long that hasn't happened quite when everybody expected it? Is it finally time?
Tian: Yeah well firstly, great to be back. And yeah, I think this is a very good time to review a lot of the leading indicators for the US economy. I think when we talk about recessions, you know, definitions are important. And a lot of times, there's a lot of focus on what we will consider coincident or lagging data. So people look at the employment and nonfarm payrolls, retail sales, GDP. Generally speaking, these are coincident indicators that by the time you see it, is usually kind of too late. And a lot of the underlying recessionary dynamics have already kicked in. So I think the way we think about recessions is to really focus on the leading data. And broadly speaking if you consider, you know kind of classic lead indicators of the business cycle, you know, building permits, ISM manufacturing, and so forth. A lot of them have obviously been signaling stressful while and the kind of final missing piece has been the initial claims, and the continuing claims data. Normally it takes kind of a 20% rally off the lows for these indicators to align with recession. And, you know, given the Big Data revisions that occurred last month, it it's now pretty unequivocal that the labor market data in terms of the leading parts are all signaling kind of stress picking up. And that usually is where you expect to see as the kind of final piece that confirms the recession. So it does from the data kind of modeling side, it does look a lot more recessionary now.
Erik: Joining me now is Mike Green, Chief strategist and portfolio manager for Simplify Asset Management. Mike, it's been way too long, it's great to get you back on the show. I want to talk about everything that's going on. But let's start with this banking crisis. You know, this is one of those things where it seems like everything's okay. But wait a minute, this whole system is designed with an incentive for them to tell us everything is okay, when it's not okay. Because this is a confidence game. So how do we make sense of this? How do you even know when the banking crisis is over?
Mike: Well, the quick answer is that the banking crisis will be over when we actually start to treat the underlying condition. And the underlying condition, unfortunately, is that banks themselves are or depositors or more accurately long a call option on their deposits at banks. They can withdraw them at any time. The value of that call option is a function of the spread between interest rates that are available elsewhere, for example, in money market funds, versus the interest rate that they can earn on their deposits. And the value of any call option is positively associated with the increase in volatility. So by hiking interest rates incredibly rapidly, and driving an extraordinary spread between what banks could afford to spend, and to pay on their deposits and what it can be earned on returns from US Treasuries. They created a huge hole in bank balance sheets, the only way to reverse this was one to have moved much more slowly to this process of this level of rates. And two, no unfortunately, they're going to have to reverse it.
Erik: Joining me now is Ole Hanson, head of commodities research for Saxo Bank. Ole has prepared a slide deck to accompany this interview that you're not going to want to miss. So I highly recommend that you download it and refer to it as we will be discussing the charts and graphs that contains throughout the interview. Ole, it's been way too long since we've had you on MacroVoices, welcome back and why don't we dive right into the slide deck and talk about US interest rates because so much else hinges on that. What's the outlook?
Ole: Oh gosh. I wish I knew Erik. Thank you very much for inviting me back. It's most certainly still a market that's throwing up a lot of surprises and talking points. But yes, the direction of interest rates, short term interest rates in the US has clearly been a major focus in the market over the past six weeks going from expecting a year of no change in terms of rate cuts and further hikes to suddenly a dramatic round of cuts in response to the banking crisis. And since then the market, that's once again, you have just basically looking for heights in the short term, and then cuts later in the year, and then that's really I think, creating a lot of confusion in the market and also uncertainty and it's still it's amazing how resilient some of these markets have been. I would say especially stock is not, it's not my area of competence. But I think we've seen quite a stable market despite all the uncertainty that's out there.
Erik: Joining me now is Rosenberg Research founder David Rosenberg. Rosie, it's great to have you back on the show. It's been way too long. Let's start with the big picture. We're climbing away here with what some people think, is a recovery to maybe new all time highs in the stock market. I'm skeptical myself, how do you see this market? What lies ahead?
David: Well, we have a long way to go to get back to those early 2022 highs. So that is a bit of a stretch. I think that the markets, whether it's the equity market, or whether it's the credit market, has gone into pricing a soft landing. So I think that they more or less bought into the Jim Bullard view from the Fed, that all is good, the business cycle has been repealed, there is no recession. And the green light is there to bid up the forward multiple back almost to 19 earnings. So this is a very expensive stock market right now and it's priced for Goldilocks. So all of a sudden, recession apparently is off the table and investors are embracing the soft landing once again.
Erik: I have a feeling David, that you are not quite as sold on this idea as some others are that it's all uphill from here. What's your outlook and what do you see on the horizon?
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