Peter Berezin
@PeterBerezinBCA
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Chief Global Strategist and Director of Research @bcaresearch Formerly with Goldman Sachs & IMF
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In the history of modern finance, no single indicator has done a better job of predicting when the next global recession will start than when the Bank of Japan starts raising rates. Foolproof!
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Contrarian take: The CPI report was not as bad as initial reactions suggest. All items ex food and shelter were up only 0.1% in September. As the charts below show, food inflation will fall and rents on new listings have already rolled over. Wage growth also looks set to cool.
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Every single US recession has begun when the corporate sector financial balance, an economy-wide measure of free cash flow, was in deficit. Today it is in surplus of 2% of gross value added.
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Bond bears, of which I was one until October, are making a big mistake.
They are seeing that employment remains resilient and concluding that this means that monetary policy is not restrictive.
Wrong! As the chart below shows, when the economy is near full employment, falling…
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Contrarian take: The current inflation scare will fizzle out because unlike in 2021, wage growth is falling. There can’t be a wage-price spiral unless wages are spiralling.
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The euro is 30% undervalued against the dollar. What will happen to the euro if European natural gas prices evolve in line with the futures?
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The hiring rate has tumbled. Remember, firms usually stop hiring before they start firing.
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Outside of shelter, healthcare, and auto insurance, inflation is running well under 2%,
OK, before you say, “gee, that’s great, as long as you’re happy to be homeless, don’t drive, and don’t need any healthcare”.
But that’s not the reason to exclude those three categories.
The…
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One rarely-mentioned reason for why China pivoted so quickly on zero Covid policies was that they had led to a complete collapse in the country’s birth rate.
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The world’s second biggest economy is experiencing outright deflation.
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Why is the Fed backing off from the hawkish rhetoric? The answer is that financial conditions have tightened so fast that by historic standards, the ISM could drop well below 50.
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At its peak in March 2000, Cisco traded at 37-times trailing sales, making it the most valuable listed company in the world.
Since then, Cisco's earnings-per-share have increased nearly tenfold, with sales-per-share rising almost as much.
Yet, the stock remains 39% below its…
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The US consumer is in great shape except that credit card delinquencies are at their highest level since 2012 (when the unemployment rate was 8%), credit card interest rates are at record highs, banks are increasingly unwilling to make consumer loans, pandemic savings have been…
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To drop in job openings in today’s JOLTS release is no blip. Private-sector sources on job openings such as Indeed and LinkUp have been flagging it for a while.
The labor market is cooling and will freeze over by late this year or early 2025.
A recession is coming.
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Bullish sentiment among individual investors, professional traders, and advisors is now well above its historic average. Complacency?
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Bond yields tend to peak around the time of the last Fed rate hike. I don’t expect any more rate hikes, which is why I turned positive on bonds recently.
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Peter Berezin says “relax”, leading indicators for the ECI are pointing down not up.
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Why are bond yields going up?
A: Foreigners are dumping Treasuries.
Why is the US dollar going up?
A: Foreigners want more of those good ol’ safe-haven Treasuries.
Pick a side, folks
If fears of debt monetization were pushing yields higher, the dollar would be falling and…
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Even after Friday’s selloff, Signature Bank was worth $70 per share. 15 out of 19 analysts had a buy ratings on it. But sure, regular depositors with 9-to-5 jobs and no financial training should have done their due diligence before putting money into that bank.
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Wage growth drives services inflation, which is what the Fed cares most about.
Wage growth is going down, not up.
This ain’t 2021.
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Why hasn’t the economy responded more to higher rates? A key reason is that monetary policy works primarily through the housing market, and the preponderance of fixed-rate mortgages has blunted the impact of Fed rate hikes.
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This is the most important macro chart at the moment. Why? Because job openings lead wage growth and wage growth is the primary driver of core services ex shelter inflation, which is what the Fed is focused on.
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I’m always surprised which tweets gain traction and which do not. I wrote this tongue in cheek. Obviously, there’s no causal link between Japan raising rates by 25 bps and the rest of the global economy going down in flames. It’s just that Japan has a habit of hiking rates…
In the history of modern finance, no single indicator has done a better job of predicting when the next global recession will start than when the Bank of Japan starts raising rates. Foolproof!
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Good point from
@Claudia_Sahm
. The increase in core services inflation has been very narrow — concentrated in housing and auto insurance. Very different from what we saw in 2022.
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Which housing markets in developed economies are most vulnerable to price declines? Based on valuations, household debt-to-income ratios, and exposure to adjustable-rate mortgages, the answer is Canada, Australia, and the Nordics.
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If the surge in inflation during the pandemic was entirely due to adverse supply shocks, profit margins should have fallen. Instead, they soared.
Was it all "just supply" that caused inflation?
Fed governor Chris Waller is not having it.
"If these are temporary supply shocks, when they unwind, the price level should go back to where it was. It's not. Go to Fred. Pull up CPI. Look at that thing."
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The way you make money in financial markets is not by focusing on what central banks are looking at now but what they’ll be looking at in the future. Skate to where the puck is going not to where it has been 1/
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The Sahm rule has now been triggered in 20 states.
I realize Claudia Sahm has argued against applying her rule to state-level data. I don’t find her arguments particularly persuasive.
As an empirical matter, the state-level Sahm rule does a good job of not just predicting the…
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The three-month average of permanent job losers continued to edge higher in March. It’s a solid leading indicator for the labor market.
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It’s true that excluding the MAG6, the S&P 500 would be trading at “only” 18.1 times forward earnings. It’s also true that earnings have declined by 10% over the past year for those other 494 companies. Pick your poison.
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We were bullish on stocks going into 2023 and our MacroQuant model still sees near-term upside for equities. But the path to a soft landing remains very narrow and did not widen today. While this week’s FOMC meeting reduced the risk of a recession in the next few quarters thanks…
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There’s a lot of talk about how China’ real estate market looks just as bad as Japan’s in the early 1990s. That’s simply not true. China looks a lot worse.
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For those not convinced, look at apartment starts. They lead construction.
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Life is very different when you are on the steep side of the Phillips curve. Rather than causing unemployment to rise, demand destruction will cause inflation to fall. That is why job openings have decoupled from payrolls this year.
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Housing is the most interest-rate sensitive sector of the US economy, but a shortage of homes, and the popularity of 30-year fixed-rate mortgages, is limiting the impact of Fed rate hikes on this sector.
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In contrast to the noisy and erratic JOLTS series, job openings on Indeed are starting to sink fast. The Fed may not need to tighten much more if this keeps up.
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Indices of existing home prices are plunging in China.
The Chinese GDP deflator declined again in Q1.
China is exporting deflation to the rest of the world.
For now, that is making the Fed’s job easier, not harder.
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I focus more on wage growth than price inflation to gauge the temperature of the economy. Indeed’s series on posted wage growth is an excellent leading indicator for realized wage growth. It suggests that the labor market is cooling.
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How strong is the US labor market, really?
As the charts below show, job openings are falling and the hiring rate has plunged. Remember, firms usually stop hiring before they start firing.
Meanwhile, temp employment has dropped, a sure sign of softening labor demand.
The…
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I expect the S&P 500 to bottom out at around 3500 during the next recession, which is likely to begin towards the end of 2024.
Although this target may seem overly pessimistic, it is simply based on the assumption that the forward P/E drops to 16 – slightly above the average of…
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Companies usually reduce hiring and cut back on temporary employees in the lead up to recessions. Will this time be different?
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I just filmed a segment on CNBC’s Power Lunch about my latest report on AI. I argued that we are making the same mistake that we made at the start of the pandemic: We are thinking linearly about AI’s potential when we should be thinking exponentially.
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The corporate default rate would need to drop to below 4% to justify the current level of high-yield spreads. It’s unlikely this would happen even in a soft-landing scenario. Complacency!
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Most investors think the US labor market is in great shape.
But the problem is that they’re focusing on lagging or, at best, coincident indicators.
In this week’s Global Investment Strategy report, we examine more than a dozen LEADING indicators for the labor market.
Bad…
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Stocks typically perform best when unemployment is high rather than low. This is partly because valuations tend to be more stretched when unemployment is low, but it is also because the unemployment rate is a very mean-reverting series. Once it gets down to very low levels, it…
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These charts seem pretty meaningless unless you know the value of the offsetting interest rate swaps banks have against these long duration positions. Obviously for Silicon Valley Bank the answer is “not many”. But I doubt that’s true in general.
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A major problem with understanding what’s happening to the economy at the moment is that the response rates to most of the government’s surveys have plunged. For JOLTS, it has dropped to 30% from 70% five years ago. What’s going on?
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There is no mystery as to why the US dollar has weakened since last October. The dollar is simply responding to shifts in relative interest rates and growth prospects.
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Save your shades for the eclipse. Labor market doesn’t look so bright.
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Stagflationary narrative inconvenienced by latest S&P Global survey showing strongest global growth in 11 months and abating inflationary pressures.
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There’s a lot of misleading stuff from Mike Wilson here.
First of all, one shouldn’t look at the evolution of earnings estimates in any given calendar year because analysts are notoriously overoptimistic.
This means that even in good times, earning estimates usually fall.…
"Morgan Stanley’s Wilson Says Stock Rally Will End If Profits Dip
S&P 500 earnings estimates have been falling since November"
He eventually will be right but he missed one of the most aggressive rallies of the last few years
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Labor demand still exceeds supply but the differential is narrowing. If the current trend continues, unemployment will start rising rapidly towards the end of this year. Careful!
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Almost everyone expects the Chinese housing market to continue weakening this year. That very well may turn out to be true, but before you jump to this conclusion, consider the chart below, and ask yourself: What do Chinese households usually do with their savings?
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The number of multifamily units under construction rose by 10% in the second half of 2022, even as the Fed was hiking rates. There are now more than twice as many multifamily units under construction as at the height of the housing bubble.
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Confused about why job openings and wage growth have been falling, and yet employment has managed to hold up? Don’t be. This is exactly what you would expect if the labor supply curve were vertical.
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Rising auto insurance premiums have pushed up inflation recently.
Why is that?
Cars are more expensive to repair these days, even after minor accidents (a problem that is especially acute for EVs).
The weather has gotten worse with the number of hurricanes increasing.
People…
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Investors have been looking at the US labor market the wrong way. Unlike in the past, the binding constraint to employment growth is supply not demand. But the differential is shrinking and labor supply will exceed demand by early next year. Unemployment will surge then.
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I am bullish about the near-term direction of the economy and the stock market. However, I’m also cognizant of the fact that stocks typically don’t do well when the unemployment rate is low. My guess is that we’ll see a good selling opportunity later this year.
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Cooling water also looks stable until it freezes over.
The gap between labor demand and supply is steadily shrinking. At the current pace, labor supply will exceed demand by early next year, at which point the unemployment rate will rise rapidly.
A phase transition is coming.
Much has been made of the strength of the job market, but have you noticed how remarkably stable it has been. UI claims are low and have barely budged in months. Some 250k jobs are being consistently added to payrolls each month. And unemployment has been steadfast at below 4%.
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As a percent of consumption, personal interest payments have jumped by more than one percentage point from their recent lows. Credit card interest rates are at record highs, pandemic savings have been largely exhausted, and banks have become less willing to lend. Danger!
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Back in 2019, the UN estimated that the Chinese working-age population would contract by 40% over the remainder of the century. Its latest estimate, published in 2022, foresees a 60% drop. And even that may be optimistic given that the birth rate fell further in 2023.
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Powell kept saying that services ex shelter inflation has not fallen at all, at one point even citing the 6-month rate.
Okay… but the 3-month rate has cratered so we kind of know where the 6-month rate is going, no?
See bottom two panels.
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Based on the historic relationship with bank lending standards, commercial and industrial loans to businesses will be down 10% by the second half of 2024, which normally only happens during recessions.
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Back in 2021, small businesses wanted to hire more more workers but there weren’t many around. Today, willing workers are available but small businesses don’t want to hire them.
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The Magnificent Seven are expensive but nothing in these charts says they are in a bubble.
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The pass-through of monetary policy to the real economy is faster in Canada than the US. Canada is the canary in the coal mine.
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A key reason why oil has been less sensitive to geopolitical risk than one might have expected is that OPEC spare capacity is a lot higher than it was two years ago.
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Commercial real estate is most at risk for a slowdown in regional bank lending.
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Everyone knows about the business cycle, but few people know that within the broader business cycle, there are mini-cycles, the most important of which is the 3-year manufacturing cycle. My cycle framework suggests that manufacturing activity may now be bottoming.
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Gold bulls beware: China has generally been price-sensitive in its strategic accumulation of natural resources. The fact that the PBOC’s holdings of gold rose by just 0.2% in March – the smallest increase since November 2022 – is evidence of that.
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Corporate credit growth is set to turn negative in 2024 based on recent trends in bank lending standards.
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Housing is the most interest-rate sensitive sector of the economy, so why are homebuilder stocks outperforming?
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The deceleration in core services ex shelter inflation should not come as a complete surprise. The chart below shows our estimate of the composition -adjusted change in average hourly earnings for production and non-supervisory workers. It has slowed from over 8% to 4.4%.
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Goldman: Higher immigration explains much of the recent increase in the unemployment rate.
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Peter Berezin’s US Consumer Reality Tour, Exhibit
#1
Pandemic savings are nearly exhausted, and real bank deposits among the bottom 80% of households are below 2019 levels (and yes, that includes money market funds).
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Many recession timing models, mine included, point to high odds of a recession in 2023 because they rely very heavily on things such as the ISM manufacturing index, which is being weighed down by the normalization in goods spending following following the pandemic.
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The US dollar is extremely overvalued. Interest rate differentials have moved against the dollar since August, suggesting that much the dollar’s recent appreciation has been fuelled by technical forces and rising geopolitical risk outside the US.
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And private-sector data on openings from Indeed and LinkUp show an even bigger drop in job openings in 2024 than JOLTS.
Outside of the health care sector, job openings keep drifting lower. In retail, vacancies are nearly back to where they were at the height of the Covid lockdowns!
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A Trump victory would be bad for bonds in three ways:
1) Higher odds of another unfunded tax cut (remember Liz Truss)
2) More trade protectionism, leading to higher import prices and increased reshoring
3) Decreased immigration, resulting in a tighter labor market.
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If the aggregate supply curve is very steep at full employment, as all the evidence suggests is the case, then benign disinflation can very easily turn into malign inflation once demand starts rising again. The following charts are concerning in that regard.
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As my colleague Arthur Budaghyan has pointed out, a post-Covid consumption boom in China would probably have only a modest impact on growth outside of China since most consumer goods are already produced in China. What happens to housing and infrastructure is more important.
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MacroQuant’s equity score plunged in the first week of April, just days before the S&P 500 began its swoon below 5000. The model sees stocks as being 43% overpriced relative to their net present value. Careful!
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US manufacturing production has been weak lately but manufacturing construction is booming, especially in the IT sector where reshoring has become a big deal.
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Don’t let the low unemployment rate fool you. When the economy is near full employment, falling labor demand will mainly show up in the form of lower job openings. And according to
@linkup
, job openings took another plunge down in December.
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The rebound in global growth has been entirely driven by the United States. What’s wrong with everyone else?
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Excess demand for labor reached its highest level since the late 1960s last year. At full employment, any decline in labor demand will primarily lead to lower job openings and/or slower wage growth, rather than rising unemployment. That’s what we are seeing now…
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I don’t find this Goldman take especially reassuring. OK, perhaps tech stocks are not in a bubble. But they weren’t in a bubble in 2007 either. They are still expensive and hence will still go down a lot if there’s a recession.
The forward P/E of the 10 largest TMT stocks peaked at 52x in 2000 and 43x in 2021. Today, they trade at “just” 28x forward earnings.
Goldman Sachs
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Before the 2008 global financial crisis, small and medium-sized US banks had lower loan-to-deposit ratios than large banks. Now, the reverse is true (although in absolute terms, smaller banks still do not appear overly leveraged).
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