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On this episode of On The Tape Guy, Dan and Danny discuss the market’s reaction to this week’s Fed meeting (3:30), whether we will see a rate cut (8:04), big tech earnings (12:00), what banks are saying about the economy (14:14), Walmart’s warning (17:53), and Meta’s quarter (24:41). Later, Dan sits down with David Rosenberg of Rosenberg Research, to talk about recession indicators (33:19), why David thinks we have seen the last rate hike of the cycle (37:44), cracks in the housing market (54:04), and why the worst is not over (1:01:27).
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Show Transcript:
Guy Adami: [00:00:00] CME Ad [00:00:01][0.4]
Dan Nathan: [00:00:30] iConnections Ad [00:00:31][0.3]
Guy Adami: [00:01:21] We’ve made it to the end of July. Big week of earnings. Big market rally into this week of earnings. Another Fed meeting, another 75 basis point hike, another GDP print that defies logic for you folks that don’t think we’re in a recession. Or if you somehow believe that White House statement from Monday that the definition of recession is now changed. Good for you. But here we are. Market doesn’t seem to care. The Fed seemingly has threading needle. I don’t believe that’s happened. But we’re back and Danny Moses is back after a week away. Danny, welcome back. [00:01:56][35.3]
Danny Moses: [00:01:57] Guys, great to be back. Sorry I missed last week. And I want to point out something that you guys think, god, there’s three people on this show. They don’t all listen to me because guy, your call down at 3650 that we may work our way to 4100. No one could hear my eyeroll at the time on the screen. But frankly, there was one in Dan’s comment that you got to start buying some stuff here that’s quality on dips. Both those things happen. That being said, I would fade this hard. We’re going to go into a why I would. I actually think that while I believe that was a Fed pivot, I don’t think that’s a reason. I think that should scare people more that we’ve seen peak earnings and it’s going to get worse more economically when that reality sets in, which we’ve had some bad August guys in the last decade. I think we’re going to see another one of those things coming up. [00:02:37][40.4]
Dan Nathan: [00:02:37] Yeah, I mean, listen, Guy, you’ve been calling this now for months and months. You just thought that, you know, when we start to see rates come in and Treasury yields, you know, right now the ten year is, what, at 2.7%? That was kind of a support level that we’ve been holding for the last couple of months or so. You didn’t think that was going to be something that investors should kind of extrapolate? That’s good for stocks, right? Because what it’s emblematic of is the fact that the economy is weakening faster than the Fed is willing to acknowledge, I guess, at this point, and therefore is reflective of growth and what I guess the second half growth looks like. The flip side of that is obviously the two year which was steadfast above 3% until what you just called Danny, a pivot by the Federal Reserve. And now that’s below 3%, right? So we just had the inverted yield curve, which was at a 20 year wides at 30 basis points yesterday, headed into the Fed’s meeting. Just got cut in half. [00:03:32][54.1]
Guy Adami: [00:03:32] I’ll take a line from Jackson Browne 1977. Album Running On Empty, which might be the title of this podcast. And by the way, you’re going to sit down with David Rosenberg, who I’m really interested to hear what he has to say about all the data that’s come out, all the numbers, what he thinks is going on. But in my opinion, that’s exactly what’s going on. We’re running on empty right now in terms of this market. And if the market is somehow interpreting the dialog or the comments out of the Federal Reserve as a pivot, good for them. And if you somehow think they can thread this needle, good for you. I don’t think it’s going to happen. [00:04:03][30.7]
Danny Moses: [00:04:03] I think it’s really key to understand what’s happened. The bond market has been telling us for weeks that the Fed is going to overshoot. They’re going to keep going at the risk of a matter of creating a massive slowdown, maybe even more in the fact that the market is trying to price in a soft landing to me is somewhat ridiculous. We have just begun negative earnings revisions, right? We have just begun seeing the data. Unemployment has one direction to go. The Fed made a comment that this period between the July meeting and the September meeting is the longest duration between two. I think it’s eight weeks or something. You made a point to say we’re paying attention to incoming economic data. I think every person out there that’s paying attention knows that we probably have peaked in inflation. So not saying it’s going to come down at the rate some people think and we’ve probably peaked on economic number. So what does that mean? The definition of a recession is two negative quarters of GDP. We got that check. But this cycle is unlike anything we’ve ever seen. It’s a combination of the seventies, the eighties, the nineties, 2000 to 2010, a little piece of it all. But I can say this. Anyone that pretends to know where it’s going doesn’t know. Because when you unwind $9 trillion off of a balance sheet and go from zero rate policy to something different, it just changes. And we are now going to be in a stock pickers and bond picker’s market. I think it’s very clear to understand bond pickers because there’s been no price discovery in equities or fixed income over a decade. So this is going to be a rocky road. And one other comment that I think people didn’t give enough. So the dollar has been the signal, right? The kind of runaway train last week when the ECB unexpectedly went 50 basis point instead of 25 and Europe has their own issues, they’re in a much worse situation with Russia in their gas situation, Germany and rationing. That’s when the dollar, I believe we haven’t seen that high since the dollar came off a little bit that create a little bit into the market. And then this perceived pivot which occurred yesterday, whether it’s a full pivot or not or what it is or the opening parlayed upon that and that’s where we are. And I sell this rally and I think we are headed to one of these August that we saw in 2011, 2015, and I’d be very prepared for what’s coming. [00:05:59][115.2]
Guy Adami: [00:05:59] I agree with you, and I’ll say this. I’ll give you the pivot. Let’s just I’ll go down that road with you. Let’s say they are and they’re data dependent. Whatever. What they’re trying to combat, as we all know, is inflation. And you said it that 9.1% print and I’ve said this as well, that’s probably going to be the high print we see hopefully for decades. So let’s just get that out of the way. And commodities during the period of that print and during the period that CPI number actually came off. So it stands to reason this next CPI print won’t be nearly as hot. But let’s do a little math here. If commodities across the board have come off anywhere from 30 to 35%, take 30 to 35% off 9.1%, and you still have a CPI with a six handle, probably a mid six handle, which is still three times the rate they’re trying to get to. So inflation is clearly still a problem. And if somehow the market thinks they are pivoting and taking their foot off the gas in terms of trying to combat inflation, what’s going to happen? Commodity prices are going to go right back up. Watch how quickly crude oil trades higher. Look at what gold’s been doing over the last couple of weeks. And oh, by the way, I don’t think it’s coincidence at all that Bitcoin magically has now gotten off the mat and is trading north of 23,000. [00:07:16][77.1]
Danny Moses: [00:07:17] So I think it’s official that Bitcoin is not an inflation hedge. I think we’ve kind of gotten that out of the way, right? [00:07:22][4.3]
Guy Adami: [00:07:22] I agree with you and I’m not trying to cut you off. I agree with that 100% for me All bitcoin has been is a play against fiat currencies and a play vis a vis what’s going on with central banks. It’s not a coincidence either, and we’ve pointed this out here, that it was in November, December, that Bitcoin made an all time high right around the time that the Fed pivoted the first time and obviously went from 66,000 down to 17,500 or so. So if the market perceives that this Fed is pivoting again the other way and is going to try to be obviously a bit more accommodative or more data dependent, I’m putting the air quotes up. It stands to reason that Bitcoin is going to run its course and we’ve talked about that for months here Danny. [00:08:03][40.6]
Danny Moses: [00:08:03] Yeah, we’ve had some big bets in the past, right? And one of those was gold back in the day that whatever it hit with 1900 before 1700 and the gold. Yes, it hasn’t worked as an inflation hedge, but it looks like it’s going to be working on the Fed printing money down the road because that’s why it’s rallying finally again here today. But this is much deeper than that, I think, in terms of what the Fed is really trying to signal here. So, Dan, our other bet, which we brought up on the podcast several weeks ago and I kind of went out on a limb and said, I think the Fed starts cutting in December. I know you and Rosie are going to talk about that in a little bit, but I mean, come on, the things are going to slow much quicker than we think. And we know that the Fed has probably overshot. I am in the market now on your five another five grand coming to me because I do believe that a cut in December is presenting itself on the table. [00:08:45][42.2]
Dan Nathan: [00:08:46] It would have to be absolutely economic Armageddon for that to happen. And you guys just mentioned the Fed tightening, trying to bring down this $9 trillion balance sheet. I mean, what happens? Well, before that and I think Rosie is in this camp is that you have a pause in the fall and then you have basically maybe a halt to QT. And maybe that is a fundamentally that kind of cutting. They’re not going to cut the Fed funds rate this year in 2022. It’s just not happening. I mean, if this whole thing, the way that they’ve hit their pivot from transitory to acknowledging that inflation is a huge issue and they’ve had the fastest Fed funds increase of two and a quarter percent in the history of the Fed here. If they’re worried about credibility, if they’re going to cut in December, you might as well disband the Fed. [00:09:31][45.7]
Danny Moses: [00:09:32] I mean, that’s music to guys ears. But honestly, then I think we will get a point. Whether it happens or not, I’m obviously being a little bit dramatic. There will be sometime in the next month or two where it will start to price its way and probably not more than 20% chance or 30%. But we will have an elevation from 0% probability to ten or 20. [00:09:48][16.2]
Dan Nathan: [00:09:49] All right. Should we double this bed up? You want to go from 5 to 10 on this thing? So you’re betting that the Fed will cut their Fed funds interest rate, that they have just raised two and a quarter percent since March, that they’re going to do that in 2022? Is that what you want to do? [00:10:00][11.8]
Danny Moses: [00:10:01] Hold on. I’ll go double or nothing on the next Fed meeting after that, if you want to do that. [00:10:04][3.9]
Dan Nathan: [00:10:05] No, you can’t push it out. The bet was 2022. [00:10:07][1.9]
Danny Moses: [00:10:08] Listen, I said I went out on a limb. I’m happy with my five grand. And by the way, we’re going to be in the middle of the football season when all this is going on. So a lot of other stuff to talk about. [00:10:15][7.3]
Dan Nathan: [00:10:15] Yeah yeah. [00:10:15][0.0]
Danny Moses: [00:10:16] I guess what I’m saying, guys, is this we know that the economy is slowing, whether in a recession or not. I don’t care. The purchasing power of the consumer has been dropping precipitously now for months. The demand destruction began six weeks ago. Yes, gasoline has come back down. That should probably help it a little bit. Walmart’s telling us exactly what’s going on with Main Street America in terms of what’s happening. They’re spending on the stuff that they have to not that they want to. There’s discounts going on massively. We’re in the early stages of that. So my point is that I believe we’ve seen the peak in inflation, but I also believe in this cycle we’ve seen the peak in the economy here. [00:10:47][31.3]
Guy Adami: [00:10:48] They’re trying to buy themselves some time. So the next Fed meeting of any magnitude obviously will be the end of September. So we have some time and I think they’re going to try to use that time and they’re going to pray that commodity markets don’t go nuts again, that the market can find its footing, which it has, and maybe they can thread this needle. But I would submit that this market is absolutely running on empty here, and we’re sort of whistling past the graveyard. Now, I didn’t think that a month, month and a half ago we actually thought the market would rally. But here we are. And I think now’s the time you’ve got to be taking money off the table. And, oh, by the way, now is a. Time, you have to be really examining will the dollar have a precipitous fall here on the back of whatever the market’s perceiving? And will that lead to another commodities rally here? I think that’s a very distinct possibility. [00:11:31][43.1]
Danny Moses: [00:11:32] Listen, I think I hate to use this phrase, and I know Vinnie hates we’re on the other side of Goldilocks. You just described guy earlier situation on a Fed pivot. What’s happening here to oil, what’s happening to commodities that in turn has a negative effect on getting inflation down. So the more that people pivot or believe the Fed’s done, it’s going to actually potentially give the Fed more fuel to go and still raise rates further. So you’re kind of trapped here in that liquidity profile, and I think that’s what people need to see. Yes, you can trade this market and go in and out of names and try to catch a bottom, sell a top and things like that. But bottom line, people, is that we are in the midst of an unprecedented cycle, in my opinion, of an unwind. And you really have to know what you own out there and take these opportunities in these type of rallies to clean up your portfolio. And then on the flip side, take the opportunity on large sell offs to buy what you know is a long term hold here. [00:12:20][48.2]
Guy Adami: [00:12:21] And people will say, well, wait a second, Danny, earnings have been great. Look at Microsoft, look at Alphabet. And I’d say, okay, let’s look at Microsoft specifically and let’s look at Alphabet specifically. The alphabet quarter was not good. In a word, it was not good. I have seen at least five better quarters over the last three or four years where the stock did not rally nearly as much as we’re seeing now. Why? Well, I think one of the reasons was SNAP was before people sort of perceived Google to have the same problems. They sold it off on the back of it. And we’re seeing a relief rally now. So some of the numbers we saw were not as bad as the market expected, but that was not a good quarter by any stretch. And the Microsoft quarter was not good either. Cloud is slowing without question. Earnings are slowing without question. What got the stock off the mat from 242 in the aftermarket it traded down two after they reported was the fact that Microsoft came out and said they are not seeing a slowdown or a weakening in demand and the market took its cues from that. So maybe that’s true. Maybe they’re not seeing it. It’s coming to a theater. And you look at the ServiceNow quarter, look at what they said, start connecting dots and it stands to reason. It’s just a matter of time before Microsoft sees that as well. [00:13:32][70.5]
Dan Nathan: [00:13:32] Yeah, I think your point is a good one. After the close today, by the time you’re listening to this, we’ll hear what Amazon AWS growth was and I suspect it decelerated like Microsoft Azure and Google Cloud. And I think what’s really important about that is that these are services used by the biggest companies in the world, by the smallest companies in the world that were VC backed, that are all cutting jobs, that are cutting back on a whole host of costs here. And I think that narrative coming out of this earnings season might really be the deceleration in those cloud businesses from three of the biggest tech companies in the world. And then, of course, Apple. Let’s see what they have to say here. But this one may be a bit of a unicorn. It always seems to defy logic. We know that they’re going to be faced with a lot of the same headwinds that most of these multinationals supply chain, strong dollar. But to me, I think Amazon, Google and Microsoft, when we look at what the deceleration looks like for the back half of the year, that might be a good indication of what we see on enterprise spending for months to come here. [00:14:33][60.6]
Guy Adami: [00:14:33] Bond market can’t figure it out. I mean, we talk about this all the time. We had a twos, tens go to I think north of 30 basis points inverted traded back that half of that 15 basis points you get ten year yields flirting with 2.7%. Two year yields going to be either side of two nine or so. The bond market can’t figure out what’s going on. Neither can the banks. Danny Moses. Now, you would have thought, given the rally we’ve seen over the last couple of weeks, that the banks would have participated. But I’m looking at JPMorgan here lower on the day today being Thursday, within a few hours of its recent 52 week low. I’m looking at Bank of America very similar. The banks are not backing this up. And that, I think, has to give you pause if nothing else. [00:15:15][42.4]
Danny Moses: [00:15:16] Yeah, people look to the banks, obviously, as a leading indicator of the economy. So they’re giving you that. They’ve all reported they all are kind of under the purview now of these stress tests, these international stress tests that they have to adhere to. So some of them have been frozen on their ability to buy back stock. So that catalyst for owning it, we’ve said all along, these are kind of utility stocks. But here’s what’s interesting. People always want to look at the 210 spread, right? So the difference between the two year yields and the ten, which are now ingrained in an inversion of 20 to 30 basis points in that range, the problem with it why becomes self-fulfilling that we’re going to be in a recession is lending growth. Banks borrow on the short end of the curve and they lend on the long it if they’re not incented or don’t have enough spread to make, they just won’t make those loans or the price those loans so high that it takes people out of the market. So it becomes self-fulfilling sometimes that the 210 stays inverted for a period of time. That’s going to happen. The banks are going to slow down lending. Therefore that’s self fulfills this whole thing here. Right? So the bond market has been telling us now for weeks, for months that the Fed is going to do what they need to do, but that’s going to result in them overshooting and slowing the economy down. And listen, we’re only back to the levels right on Fed funds where we were a few years. In the last rate cycle we attempted and look at the disruption that’s already has occurred in credit spreads, in mortgages, what that’s done to housing, we are financially engineered society. And so we’re coming to grips now with that. And it’s just not going to be pretty and it’s just going to be a burn back through the atmosphere. And I think we forget how good we had it for so long, not necessarily even on Wall Street, just in general, the consumer. Think about it. Last time that you got a line of credit where your rate went up was the last time you had to think about what you were buying in the grocery store. And guess what? The Fed doesn’t have our back this time. So that’s the dynamic that’s changed. That’s not just the psyche of an investor, that’s a psyche of the consumer, which you’re starting to see it flow into names like Walmart. And it’s telling us what’s out there. And if you think this is all clear by the dip, soft landing, you’re out of your mind. Could we go up a little bit more on the S&P? Sure. But I think when we start to see the data come in, we have just begun the earnings degradation cycle just now. Is it cataclysmic? No. Are there companies that sell software that help other companies do better in their internal is there are a way to buying software. Sure, that should be what you should be going out and buying. Those are defensive by nature and probably recession proof to a degree. So I just ranted on and on there. They may have turned into a rot, their Guy. But I think the banks are always clearly and listen, the builders were telling us this six months ago and we did get some builder earnings hits. We won’t go into those. But they were telling us that months ago. So read the tea leaves, everybody. And it’s just not as simple as Fed pivot. Oh, great. They’re here. I knew there would be here for me. [00:17:46][149.4]
Guy Adami: [00:17:46] No, and I agree with that. And we’ve seen historically, I mean, August sometimes can be a pretty dicey month and we’re about to get ourselves into August in a pretty meaningful way, having heard from many of these companies. And I think people are going to start to connect the dots. Now there will be people out there that say, again, for emphasis, the Fed’s figured this out. They’ve knocked down inflation. They’re going to be able to back away. They can pause. That’s going to be great for the market. I will tell you, if the commodity market even gets a whiff of them pausing, the commodity markets can be off to the races again for emphasis. And that’s just going to exacerbate the inflation problem that they’re trying to combat. And again, I encourage you to go back and just read what Wal-Mart said. Look at what Wal-Mart said. It comes squarely on the heels of inflation and what that’s doing to their consumer, and that’s not going away. That did not magically go away with this 75 basis point hike. [00:18:41][54.8]
Danny Moses: [00:18:41] Listen, we’ve had some great guests on the show and it’s great to hear from Rosie later. I can’t wait to hear what he has to say. But Mike Wilson to me and all the people that we’ve had has had the most logic behind. And the comment that he made this week, or I can’t remember was early this week or last week was you don’t buy the first cuts to earnings. This guy has seen a lot. I think he’s somebody to really pay attention to, obviously. Dan, we’re going to get him on again here at some point soon. But to me, it’s those guys that have seen these cycles having occurred in the past and you got to read these tea leaves and just not buy this dip blindly. Know what you own [00:19:11][29.9]
Dan Nathan: [00:19:12] It’s interesting, Guy. You just mentioned Walmart and you know, that stock before that preannouncement earlier in the week was trading at $132. We know that it was well over, what, 160 at its highs earlier this year. It’s gap down to 120. And now here we are Thursday and at the close it has filled in the entire gap. I think it speaks a little bit to what you guys have just been saying about investors expectations, about what we’ve seen and where we are in this cycle. And again, this could be the best opportunity to short this stock because this is not a one quarter thing. Yeah, inventories can get fixed in one quarter, but what’s going on with their consumer is not something that’s likely to get fixed. And the one thing that we haven’t even talked about yet, and it’s the next shoe to drop and we’ve talked about this plenty over the last few weeks and months is that the unemployment numbers are about to start to tick up. That’s just really clear here when you think about it. Where are we seeing it? Dana, you made this point right now is actually a lot of white collar jobs. If you’re a big company and you need to actually chop some costs here, what do you do? You go for some suits and you take out some costs. And then the other thing I just say is that all these wage gains that we’ve been so excited about in the wake of the pandemic, that’s likely to abate a great deal, too. And so I just feel like unemployment is the missing element to this whole conversation. And lastly, you know, we were talking a lot about inflation. I don’t know if you guys saw this just hit the tape, but the Inflation Reduction Act just passed in the Senate and it’s going to Biden’s desk for signature. Well, the Inflation Reduction Act in itself is inflationary. So it feels like you got the Fed doing what they’re doing, which they think is tamping down inflation. You have the fiscal stuff which is not really doing the thing that it says on the bill. And it just feels like, to your point, Danny, about what Mike Wilson has said is like you don’t buy the first hikes that we’re starting to see here. All of this is going to take a long time to work itself into the economy. [00:21:11][119.0]
Danny Moses: [00:21:11] Yeah. To harp on the Walmart just to go back since that’s a name we’ve talked about on this show now for a while, it’s a name that actually I’ve liked. You don’t have to like the stock if you want, but if you don’t pay attention to what they’re saying that is to me what everything that’s going on in the economy, stocks kind of round trip 120 160 back 130. You know it’s doing nothing. Yes, it has a dividend. It’s not sexy. We’ve talked about that. Dan, we don’t have to bring that up again. But pay attention to companies like that. And I think when they preannounced the day before the Fed, there’s a reason they did that the day before the Fed. They didn’t have to do it. They could have waited. They don’t know what their July numbers are to a degree. I mean, they know there was a week left in it and they did it. And I think they were telling the Fed, hey, we see it. People are spending money on what they have to, not what they want to. And it’s having an impact and they are clearing this stuff out of here. So to your point, Dan, and echo your point you just made about white collar people being fired, those are higher paying jobs and it has a direct impact on consumer spending. And that will work its way through these economic numbers over the next several months for sure. [00:22:03][51.4]
Guy Adami: [00:22:03] The economy is clearly slowing, without question. Almost by definition, earnings are slowing. On the back of that, the consumer is strapped. Real wage growth in this country is still negative. These are not positive things. Now, the market’s behaved well, and I would submit I understand why it’s behaved well. The question you have to ask yourself, has this been the rally to pare down positions to sort of de-risk or do you think we’re off to the races here and we’ve weathered the storm? I obviously think this is the rally to de-risk. I don’t think by any stretch we’ve weathered the storm. As a matter of fact, I would submit we probably find ourselves in the eye of the storm and there’s another wave coming. We’ll see how that plays out. But that’s why you listen to us. One of the things we have to talk about, because we’d be a wee bit disingenuous if we didn’t, we thought Tesla would probably rally into their earnings release. I thought it would stall around 775. Obviously it traded north of 800 the first time, did back off a bit north of 800. Again. Danny Moses thoughts? Because I think you’ve got yourself into the TSLA Q and you sort of like set it and forget it. Remember that whole Ron Paul pin or Popeil or whatever that cat’s name was? [00:23:18][75.3]
Danny Moses: [00:23:19] I don’t tweet a ton, but I did put out a thread, I guess, as you guys call it, Guy and I are about as technological savvy as the next boomer. I just felt just common sense wise. The stock trades on non fundamental stuff all the time. What’s non fundamental selling credits in their business to other auto manufacturers who need them? What happened in this bill that Dan just mentioned? There’s a credit for the purchase of electric vehicles, so people took that and ran with it. It doesn’t change anything that’s going on fundamentally in the company. I wanted to make a point on that thread about reading the ten cues. It’s one thing to listen to P.T. Barnum on the conference call, explain things away, and people just harp on his every word. But it’s amazing to me when you start to dive in. Why did you sell? Basically, why did you have to raise $1,000,000,000 in liquidity by turning Bitcoin into Fiat? It wasn’t because you didn’t believe in Bitcoin. As you said, we needed the money. Why do you need money if you’re $18.9 billion of, quote, cash and cash equivalents on your balance sheet because you don’t there’s always been an argument all along that when you see during the quarter in the SEC, as we know, has asked this question as far back as 2019 is why is interest income so low if that cash is sitting on your balance sheet for 90 days straight? Those are the type things that people need to look at. The accounts payable they extended, it’s over $11 billion. So the truth is that the company’s great. They make a great car. Okay, you’re not getting anything for me. I think they endanger people. That’s a whole nother thing. But it doesn’t trade on fundamentals. And that’s always scary both on the long side and the short side. And I just felt I needed to get it out there. So I think we’re in for a rocky fall with that stock. I think we’ve seen their peak numbers, at least for this little piece of cycle. They got the trial starting. It’s just frustrating to me because it’s the king of the memes. And as I said in the thread, AMC and GameStop are memes, but people only get hurt in video games and movies with those stocks. People are getting ahead of their life by having a product on the road that really shouldn’t be offering what it’s offering. [00:25:00][100.8]
Guy Adami: [00:25:00] We heard from Facebook this week as well, Dan, and you’ve been talking about this for a while. You’re layer position. And it’s interesting. The quarter was a disaster. The guidance was a disaster. I think everybody anticipated that. I didn’t think we’d get back to the recent 52 week low of 154 and change. That’s exactly what we did on Thursday. Stock has bounced, but this is probably levels where you can start to make a pretty compelling case that although the broader market might be a bit tenuous here, you’re at levels in Facebook that actually start making sense, especially if certain things may happen with Tik-Tok. [00:25:35][34.9]
Dan Nathan: [00:25:36] So let’s just take a step back here. So that guide for revenue for the existing quarter was down about 10%. So right now the stock’s down about 6%. Here it’s trading at 159. Guy, to your point, the prior 52 week low was 152. CEO Mark Zuckerberg sounded less than bullish about anything and he basically sound like it’s worse than the expected. Just some of the headwinds, the digital ad market, they know that they’re spending a whole heck of a lot to pivot this company into what they call the metaverse. And that was something that investors started to get apprehensive about late last year. And then you start layering in just a whole host of competitive challenges you just mentioned tiktok. I don’t know if you guys saw this earlier in the week. Kylie Jenner, who’s probably one of the biggest personalities on Instagram, I think she put a. No doubt suggesting that, hey, stop trying to be tick tock. Just do the thing that you guys used to do before and that sort of sentiment. We’ve seen that about Instagram’s products in the past, their fast followers. They like to copy Snap and Tik Tok and whatever else is coming out. So their core product is under pressure in a whole host of different ways. So I guess the question you have to think about is, is that the good news in that quarter was that their daily active users ticked up 3% year over year. The monthly active users is near 3 billion. BAU near 2 billion. And if they are able to actually make any inroads into what they deem to be the metaverse or whatever their plays are to monetize those users in a different manner rather than the blue page or their mobile social apps, then this company is set up, I think, for a good next five years. Where does it bottom out? Well Guy you and I looked at this at the chart. The 2019 low was about 120. The 2020 pandemic low was about 140. I just said the stock’s at 159. From a technical standpoint, somewhere in in that area, it makes some sense. So you probably have about 25% downside of a stock that’s down close to 55% from its all time high. They have a shit ton of cash. They have all those users. If they don’t go away, it just seems like this is one where you want to start averaging into. And again, I think you have 25% downside and maybe 100, 200% upside. I feel the same way of SNAP. I worked an average into that thing about ten and a half bucks. Here it is at 970. The stock is down 80% from its all time highs. I get it. People, stocks, it go down 80%, can get cut in half. Again, to me, I just think if TikTok is going to be banned in this country and I think there’s a strong chance that it does if China moves on Taiwan, we are going to have to start thinking about some economic and financial solutions in which to kind of harm this country. We know or at least fight back against this country. Many of our digital companies are not allowed in China. This just seems like such an easy one to me. So again, I like those two names. They are not high quality names at this moment. They’re getting kind of cheap. Well, Meta is getting very cheap guy. You would probably admit that you’re not a fan of their products, but if you think about all the things I just mentioned, this one looks kind of interesting. And snap, this one is a bit of a flier. And this really is predicated on the fact that Tik Tok may not be here in the U.S. in the near future. [00:28:37][180.6]
Guy Adami: [00:28:37] Danny Moses is a man of many, many talents. His betting record speaks for itself. I tell you, I can’t wait for the NFL season because even if you’re 70% of last year, that’s going to be heroic. But your ability to change your voice captivates me, captivates our audience. So the stage is yours Danny Moses. [00:28:57][19.7]
Danny Moses: [00:28:57] Before I get into we are in the right in the throes of baseball season, the Mets took two, I think, from the Yankees there Guy. [00:29:04][7.3]
Guy Adami: [00:29:06] Yeah let me stop you there for a second. I know Vinny and Porter are listening. The Mets did take you from the Yankees at Citi Field. I’m being respectful. I’m not saying Shea the better team emerged victorious in July. We’ll talk again in October. But after that second defeat, the Yankees actually went out and made a move proactively, got themselves a new outfielder. In the name is Andrew Benintendi, who should really enjoy the short porch of Right Field, not a field of dreams, Danny, but at Yankee Stadium. [00:29:38][32.0]
Danny Moses: [00:29:38] And there it is, the field of dreams. So I was thinking about baseball season in this market and people want to believe that they can own. And I think of the great James Earl Jones that’s sitting on the field in Iowa looking out. And all of a sudden the ghosts appear to him and he turns around to Ray Kinsella and he says, Ray, the people will come will come to Iowa for reasons they can’t even fathom. The long for what was good and right. Well, they’re coming back to the market because they think the ghost of Toro is running around the field and they’re going to get hit hard here. I think if they don’t pay attention to what actually is going to happen to them. And to me, the Field of Dreams is going to turn into a nightmare in the month of August. I think it’s something to pay attention to. So James Earl Jones on my favorite orders, they better not take him from us because they’ve taken some great actors and people. One of them was in that movie, obviously, Ray Liotta. We just lost Paul Sorvino, by the way, another guy Guy and then Goodfellas thing. So anyway, I wanted to end with that. So good luck to everyone. We’re going to turn the calendar, obviously, and we’re going to be in August when we come to you guys again. But I just wanted to get that out of the way. [00:30:37][58.3]
Guy Adami: [00:30:37] Stay tuned. Sports fans, I think the commodity market is set for another leg higher. Just my opinion, I think it’s going to happen on this perception that the Fed might pause, will see the commodity market just wants an excuse to go higher. And if that happens, the inflation that they’re trying to combat is going to stick around a lot longer. You should stick around a lot longer because when we come back, Dan Nathan sits down with David Rosenberg. Stick around, folks. [00:31:03][26.5]
Dan Nathan: [00:31:30] CME Ad. iConnections Ad. Masterworks Ad. Welcome back to On the tape. I am with David Rosenberg of Rosenberg Research. You guys know him as Rosie. He has been on our pod a few occasions over the last year. David, thanks for joining us again. [00:33:27][116.8]
David Rosenberg: [00:33:28] 100% pleasure. [00:33:28][0.7]
Dan Nathan: [00:33:29] We got a lot to talk about. This is Thursday in the afternoon into the close this morning we had that Q2 GDP print. We had that Fed meeting and presser yesterday afternoon. A lot has gone on here. You’ve had a lot to say. It’s funny, I was watching your Twitter real time as the Fed presser was going on and you had some kind of interesting commentary as it relates to unemployment and the views at which I guess the Fed, you know, how they feel about the economy, whether they think we’re in a recession, whether they think that’s important, whether they think they’re going to deliver a soft landing. And we’ll get to that. But let’s let’s talk a little bit I mean, I want to separate the markets reaction to this Fed meeting yesterday and the GDP print this morning and then obviously what’s going on with the economy. So let’s start with the GDP print this morning. So we have two consecutive negative prints. You know, maybe it’s just semantics, whether that means that we are in a recession or not. Give me your thoughts on where you think we are and what that print really means. [00:34:24][55.3]
David Rosenberg: [00:34:25] Well, look, I think that it’s very obvious to me, although not to a lot of other people, that a recession has already begun. So this was just added ratification. I mean, these aren’t big negatives in GDP, but back to back negative quarters isn’t technical nBER defined recession except for the fact that when you look at the history of the post-World War Two period, whenever you had back to back quarterly declines in GDP, well, guess what? We’ve been in recession and 100% of the time when you’ve had back to back declines or two out of three. So it’s staring us in the face. I just tend to find that shouldn’t surprise me anymore that so much of the economic consensus, including the Fed, I think are in denial mode. So they continue to believe this is a soft landing, which is why the stock market’s rallying as it has been. It believes that this is a, quote, mild recession that will be over very quickly. I actually think it’s just starting and it’s going to last quite a bit longer. [00:35:23][57.9]
Dan Nathan: [00:35:23] Yeah, I think that’s kind of an interesting point because most strategists that you follow or economists that I follow, they were not predicting a recession really for the most part in 2020 to maybe the potential for a 2023 recession. But they even then thought it would be fairly shallow here. And I’m in your camp here. Is that the fact that whether the NBER defines it as such, to your point, two consecutive negative prints in GDP have always preceded recessions. Right? So here we are. We have that the data gets worse before it gets better. What are you most focused on? Because yesterday during the Fed presser, I saw you tweeting and I’m just going to read it really quickly. It’s very clear that the Fed will be surprised if payrolls now show a decline in any of the two jobs reports have had the September meeting hours work rolling over claims, jumping and negative productivity suggests this is a good bet. Talk to me with what you think is going on in the jobs market here and what other than what you just said in that tweet yesterday, the Fed is just refusing to acknowledge. [00:36:25][61.3]
David Rosenberg: [00:36:25] I’ll tip my hat that at least Jay Powell mentioned the household survey, which is pretty well stagnated, if not decline moderately in the past three months. We know that ADP, small business, they’re modifying their methodology. But in the latest four months, we had almost a 280,000 decline in small business employment. And that’s always a leading indicator because small businesses I happen to be a small business owner. We are in the weeds with a front window to what’s happening in the economy. So obviously, numbers, you take a look, we’re up more than 50% from the lows. It’s not the level, it’s the change in claims. And actually that’s another recession signal. The one thing I want to point out here, Dan, is this. This is what I said yesterday. The Fed is focused on contemporaneous or lagging indicators. The fact that the unemployment rate is at 3.6% is immaterial to me because it’s always crazy low at the end of the cycle. What matters is the leading indicators. Unemployment is in the index of lagging indicators from the Conference Board. Non-farm payrolls is in the index of coincident indicators. And if you’re an investor, and I’m imagining most of the viewers here are investors, you have to always drive by looking through the front window. So there’s only two components in the leading economic indicator from the Conference Board that are labor market indicators. One of them is the manufacturing workweek, which peaked back in March and has rolled over significantly. And the other one is initial jobless claims, which have ratcheted up, I think at this point after today’s number, roughly 90,000 off the lows. Those are the leading indicators of employment. Nonfarm payrolls, not once in its history has given you the recession signal In time. You have to basically not talk about today’s non-farm number. This is what frustrates me about Powell. Mr. Powell, what do you think payrolls will be? 3/6/12 months from now. I don’t care about last month’s number, but you see, that’s what they’re doing. They are they’re so humbled and embarrassed that they don’t have any confidence in their forecasts. So they’re not forecast dependent? Well, now they’re data dependent. And that’s what I mean in terms of what you just mentioned before was very interesting was it wasn’t really a pivot, but it was certainly a change in their strategy. They’re no longer pre committing to rate hikes. A mention we have two CPI numbers. We know the CPI number for July is going to collapse because we could see what’s happened with energy prices. And food, of course, has come down quite substantially as well. But what employment’s going to do is very important because, again, that’s the big surprise when Powell was asked repeatedly about his views on the economy. Why why no recession, Mr. Powell? And his answer was, we’ll just look at the super strong labor market. I think that’s the narrative that’s going to change by or after Labor Day. I think that the people could see what’s happening with the economy. I think that you’re going to be finding you know, we just had big declines in the GDP number, in consumer spending on durables, commercial construction, housing. And this is all going to filter through towards a notwithstanding the fact that there’s still shortages in some service sector areas that much is true? Yeah, small share of the economy. Mind you, we’re going to have declining employment and we’re going to have the unemployment rate ratcheting higher. And I think that there’s a strong chance I’m not saying the Fed is going to cut rates because they’ll really have to see inflation falling and falling fast. But I’m of the view I’m of the view that we may well have seen the last rate hike of the cycle yesterday. [00:39:52][206.6]
Dan Nathan: [00:39:53] Wow. All right. Well, that is actually way, way, way out of consensus here. So your point is that they are not pre committing to hikes any longer. Okay. And so right now, CME Fed funds, you know, the Fed tracker is pricing a very strong likelihood of a 50 basis point hike, right? It was like 50 or 75 was was really what was being bandied about over the last month or so for September here. So if we are not going to have a rate hike at the September meeting, will they signal that in Jackson Hole in a month from now? And will it be reliant on what you’re saying is we’re going to have some of this economic data that is just rolled over. And then I know that also from just kind of reading your work on Rosenberg Research, which I get every day in my inbox, people check it out at Rosenberg Research.com. There’s your plug there, David. But if that were to happen, this would be, you know, like I think monumental for I guess, the consensus thinking about the Fed and their credibility train or credibility campaign, if you will, that they’re on here. Because, I mean, I just can’t imagine a scenario where they are going to be able to deliver a soft landing if they go from doing to consecutive 75 basis point hikes. And then they go to actually not hiking at a meeting where, you know, just a couple of months ago, it was a foregone conclusion they do 50 basis points. [00:41:18][85.4]
David Rosenberg: [00:41:18] Well, the soft landing view is pure hope. I mean, I started saying at the beginning that we have to always focus and respect the probabilities and the historical record. And I said historically, when the Fed embarks on a tightening cycle, we land in recession, whether deliberately or inadvertently 85% of the time. The soft landing was always a bet that had a one in seven chance, not zero. But why people make that their base case scenario is for career longevity reasons because most economists either work on Wall Street or they work on Bay Street. They work for some big financial institution. And if they’re all run together on a bearish call, who’s going to remember that two, three, four or five years from now? Nobody. So it’s just called playing it safe. There is no soft landing. Here’s the reality of the situation okay. You had the most famous economists in the United States. I was in Merrill, and after Bear Stearns already went down for the count, we were going into the spring and summer of 2008, and the view was that we were in a soft landing. And then you had people like people today who like to say, well, I’m going to wait for the NBER to tell us about the recession. Well, yeah, the NBER told us we were in a recession in December of 2008. It started 12 months earlier. But the soft landing is always a consensus view until you see the whites of the eyes of the economy. And that always comes when employment starts to decline alongside everything else. And so the Fed right now is playing that same game with actually when they say that, I mean, look, the stuff that he’s looking at, I mean, I was following the JOLTS survey when it first came out. It’s got, what, two cycles, no track record. He’s focused on job openings and he’s focused on the unemployment rate lagging indicator, and he’s focused on nonfarm payrolls, which is basically a contemporaneous indicator. All the leading indicators on employment, the challenger hiring intentions. The Challenger layoff intentions. The jobless claim numbers. ADP small business. And now the household survey, which does a much better job at turning points, by the way, in both directions, is telling you a different story. But you see, Jay Powell was just basically focused on nonfarm payrolls because it fits his narrative. Then what else was he going to say? How could he yesterday go and crap all over the economy in front of the podium when he just wants 75 basis points? So, of course, he has to spin because when push comes to shove, the Fed is the construct of the Federal Reserve Act. The Fed chairperson is appointed by the President, he’s then confirmed by the Senate for people that think the Fed is not a political institution, please. And so the bottom line is that the recession is already starting. It isn’t deep just yet, but it’s just starting. And I think people will be surprised, not so much by the magnitude, but by the duration, because what is going to be the spark? Dan what will be the spark for the recovery? The stock market right now is bouncing. It always bounces when it gets this feeling that the Fed tightening cycle is over. Look, you might have one more rate hike under his belt. Who knows? But I think that we’re either at the end or pretty well near the end, and the market’s feeling good about that. But the Fed’s rate hiking cycle only started in March. It only started in March. And the lags between what the Fed does in time A and the peak impact on the economy in time Z is usually around 12 months, and they’ve done a lot already 225 basis points. We haven’t come anywhere close to seeing the full impact this is going to have on the economy and on the economy. Therefore, for an equity investor on earnings, we haven’t come close to be seeing the peak impact. And then the other part of the equation is quantitative tightening. So people look at me like you almost looked at me in disbelief, like, holy smoke, you’re you’re actually going out on the limb saying they might not raise rates in September, but they’re still tightening policy for the balance sheet. In fact, this year, the tightening to the balance sheet will be roughly close to 100 basis points. So there’s still going to be a tightening policy at the same time that we’re in fiscal contraction. You just saw this deal that Joe Manchin, the signing with Schumer, that is a contractionary fiscal package. When you net out the tax increases with the spending increases, the fiscal contraction at a time of balance sheet contraction, quantitative tightening will have an impact. They’ve already done a lot. They’ve gone in neutral or what they think. Who knows where a neutral is based on their definition. They’re already there and the economy is contracting. So I actually think, you know, if I was at the Fed, would I continue to vote for more interest rate increases? They’ve already frontloaded a lot. But the point here is that people say to me, Oh, so you think they’re going to ease policy, they’re going to go to the sidelines? No, they’re not going to the sidelines. They’re still going to be shrinking their balance sheet. So saying so and so, that’s that’s that’s why I’m saying now, of course, the rate side is going to matter for your view on the curve and so on and so forth, whether growth versus value in the stock market. But yeah, I’m, I am turning even more bullish on rates and I do think that the Fed has overdone it and you can see it already. They have tightened only Paul Volcker tightened into a recession and the Fed tightened here into a recession for the greater good of killing inflation. Inflation will be killed because we’re starting to see some relief on the supply side. You see that in the vendor delivery delay data, the the order backlog data, you’re seeing it in a freight cost data. It’s certainly not what it was three, six or 12 months ago. The Fed has told us so that they’re not relying on the supply side anymore after being so embarrassed and ashamed over transitory, they’re not taking any chances. But you see, any economist can draw what the demand curve is looking like right now, and demand is shifting to the left. And that is going to actually ultimately be very disinflationary. It’s going to take a while because inflation is like the unemployment rate, a lagging indicator, although we’re also so consumed with it. But GDP is aggregate demand. And that’s the big story, Dan, for this year is aggregate demand. Aggregate demand. So we can tell you inventories are part of GDP. But if you take housing, commercial construction, consumer spending on durable goods was negative. Yet key components of the cyclical, sensitive parts of the economy that were in negative territory. It was a very significant report on what we saw in the first quarter. There’s actually negative momentum being built into the third quarter. So so here’s the deal. If we get negative three, if we get three quarters in a row of negative GDP, are people still going to be talking about a soft landing? I mean, is that really possible at this point? Because Dan it looks like you three look, it’s early days. I mean, it’s just starting. But the moment from Q2 to Q3 is negative three quarters in a row. And I’m wondering if these people are still going to have their head in the sand. And that, I think, will be the big surprise. The other big surprise will be that employment starts to contract. There’s nobody talking about that. But I think that’s going to be the next shoe to drop. And it actually has to be the next shoe to. Because the implications of today’s number was another quarter of negative productivity. [00:48:18][419.8]
Dan Nathan: [00:48:19] Last time you were on the podcast, I think it was in April, you had mentioned just exactly what you just said, that you think that unemployment may stick around here for the coming months, but it’s very likely to start to tick up here. And you gave us some data, and I think it was over the last 50 years when you’ve seen just really like 3/10 of a percent increase. So give us that data again. And what followed that, because I’ve quoted that on fast money on a couple of occasions, I’ve forgotten exactly what it is. But we are still here at 3.6%, which is very near the pre-pandemic lows. And you said the Fed focused on the wrong stuff. They’re looking at job openings. Right. But you also believe that U.S. businesses have massively over hired. And that’s the thing that kind of mean reverts a little bit here. So what happens if in two or three months we do see an unemployment rate that ticks up to 3.9% or 4%? [00:49:12][53.3]
David Rosenberg: [00:49:13] Yeah, well, when you look at the historical record and both on an average and median basis, when the unemployment is up 3/10, it confirms that we’re in a recession. For example, I think we’re in a recession already. The unemployment rate hasn’t really budged. It’s three six. It invalidates. It’s a confirming indicator. You could be in a recession already, but usually that is just another validation. Or remember, it is a lagging indicator. It just validates the recession view. What I said before, look, so what was the one of the big deals and GDP, of course, was the the inventory liquidation, And it’s ongoing. So what happened was that the business sector over stockpiles they went into this year with a faulty set of assumptions on what domestic demand would look like. And maybe this is where the Fed doesn’t face any criticism. All people do is they criticize the Fed for transitory missing the bus on inflation, but nobody criticizes them for the fact that they’ve missed the real economy by almost as much. Because the Fed went into this year, their forecast for real GDP Dan for this year was 4%. So if you’re a business person and you’re saying, well, I’m going to rely on the Fed, they have 300 Ph.D. economists. They’re calling 4% growth. I’m going to preorder a heck of a lot of stuff and I’m going to hire a lot of people. And of course, in the past 12 months, nonfarm payrolls, if that’s your guide, has averaged more than 500,000 per month. Can you imagine in the past year, companies have been adding to their payrolls over 500,000 per month. I mean, in a normal cycle, 250,000 is a good number into the first two quarters of the year. GDP, which is the overall economy, printed negative two quarters in a row. So what happened in today’s number that is so important because companies didn’t just over stockpile, they over hired the two are joined at the hip. So we knew going into the second quarter number that the labor input or accurate hours worked, which is workers and hours were up 2.7% at an annual rate. And here, what do we print today when it was -0.9 than the headline, but private sector GDP was -0.7. So what falls out of those down is -3.4%, -3.4% and annual rate on productivity. So productivity now will have been negative three of the past four quarters. Hello for the most dynamic economy on the planet, negative productivity that hardly ever happens. And it will mean that on a year over year basis, productivity will be -2%. That’s a number nobody talks about. Nobody talks about the fact that with today’s number and with what the labor markets done, with all the over hiring productivity, -2% year over year is practically unheard of. But the question comes down to what does it mean because it’s not sustainable. So if we’re talking about the need to bring productivity just back to zero, just to prevent the ongoing decay, and it doesn’t happen on the back of accelerating output. And that’s not going to happen to the Conference Board’s leading indicators down four months in a row. So I think that actually these negative quarterly GDP prints are going to be sustained in the third quarter. We’ll see what the fourth quarter looks like. But if we don’t get a rebound in output, the only way to get productivity back up even to zero is by laying off workers. That’s going to be happening because companies over hired relative to their expectations of where their order books and their production schedules is going to be. Remember, the Fed came into the year with a 4% real GDP growth forecast in the last set of forecasts, which was in June. It was down to one seven. And now I’m going to tell you that it’s going to be zero for the year. It’s going to be a big fat zero. It might even be fractionally negative. So we’ve over hired. And when I look at the data, I could easily see in the next 12 months employment going down 2 million. It’s not the end of the world. We create a six months jobs in the past year we go. We’re going to basically reverse one third of that. It’s not the end of the world. However, it would take the unemployment rate to 5%, which is not the end of the world. But you see, what’s important for markets and investors is change at the margin. That’s not the level people will say, well, 5%. What’s wrong with that? Well, the problem was three six to five is going to be painful in this respect. It means the unemployment rate going up is going to cause wage pressures to dissipate. And even if the Fed’s successful in getting headline inflation down, we’re probably going to see wage growth cut in half from 5% to two and a half percent. What does that mean? That means that real incomes, which are already under downward pressure, are going to remain under downward pressure. And that’s all you need to know what real incomes are going to do, because real consumer spending follows real incomes and real consumer spending is 70% of GDP. What else do you need to know? So it’s telling you that we are going to be into a consumer led recession, which is already starting for the next several quarters. And I think people will be surprised, not so much by the magnitude, but by the duration of this recession. [00:54:16][302.5]
Dan Nathan: [00:54:16] You said that before, and I wanted to kind of key into that. So the duration of the recession. And I think that if you want to bring it back to markets a little bit, also, I think one of the things that a lot of investors who did not experience the post .com recession and bear market and then the financial crisis and like you said, I mean, the recession started in 07. The market topped out the stock market in late November of 2007, didn’t bottom until early 2009. And I think duration is one of the things that I think a lot of investors, again, are not prepared for. I wanted to add one thing that is, I think near and dear to your heart. If all of that happens with consumption and wage growth and unemployment, housing is in for it. Man. And some of the data that we’ve seen lately kind of suggests that obviously how how quickly is the housing market going to come unraveled? I think you have you think that we could see maybe declines to in some of these kind of really hot markets, 30% or so. And what does that mean for the negative wealth effect, especially if we are to see the stock market make lower lows? [00:55:22][66.2]
David Rosenberg: [00:55:23] Right. Well, look, the stock market and the real estate market are joined at the hip. They don’t necessarily have to move in complete synchronicity, but they are the two longest duration assets in the economy and they are both very interest rate sensitive. You know, in the last cycle, the housing market went down first, equity market went down next. This time around, it was the equity market first. And you’re starting to see cracks emerge in the housing market. The Shiller home price data moves very glacially, but you’re starting to see some shifts occur in terms of the momentum. And of course, you saw the new home price numbers really fall quite hard in the past few months, and the inventories in both the resale and in the new housing market are starting to pile up. This was a bigger home price bubble than it was when I was banging my fists on the table back in 06 and 07 when I was at Mother Merrill, this is a bigger price bubble. I’m not saying it was a bigger leveraged bubble, and I’m not going to say that this is going to cause a bank run. You know, it doesn’t have to be a catastrophe. It’s not always a catastrophe. You know, we’re not fighting the last war, but price ratios mean revert price to earnings ratios if you look at the historical chart, is a mean reverting series. Well, when you look at housing price to rents price to income prices relative to the CPI. So what I’m trying to say is that when you take a look at the ratios, which I was looking at when I made the bubble call back in the mid 2000s, people thought I was crazy. There was a new era in housing, right? And then we went to an interest rate cycle and look what happened next. And you know what they say, you know, the higher they go, the harder they fall. This bubble bigger I’m not saying the debt bubble. There’s no like mezzanine CDOs loaded with stuff that nobody knows what’s in it. But the price bubble the price bubble is more acute this cycle than it was in that cycle. And there’s lags between interest rates and housing demand and then home prices. We’ve seen the rates. Now we’re seeing those in demand. The look of the pending home sales numbers, depending on the sell numbers, are leaning indicators. They’re down to where they were in April 2020, which was month number two of the pandemic lockdown recession. That’s only well. So what’s going to happen here? Unless you don’t believe the loss of supply and demand, home prices are going to come down. And I think it’s starting it is starting actually the question of how much. And so Bob Farrell’s rule number one, mean reversion, simple, elegant and factual. And so when you actually look at all these different ratios in residential real estate and look, some some areas will get hit harder than others. But nationwide housing market actually was more overvalued at its peak than the stock market was in December of last year. So I think that we could be in for if you believe in the concept of. Mean reversion. We could be in for a 30% collapse in real estate. [00:58:17][174.2]
Dan Nathan: [00:58:18] Yeah and I guess the biggest difference now versus, let’s call it 07 08 is that rates just went up like I mean, like this just happened, right? Like literally in the last few months or so. And the housing market was still white hot at the start of this year. So it really feels like the data we’re starting to see is really kind of the tip of the iceberg here a little bit. You know, back to your point about mean reversion in Bob Farrell’s rule number one, talk to me a little bit about you’ve been so right about so many things. What do you think I was I don’t listen, I’m not an economist. But in my career, in 25 years, staring at FactSet machines and trading and investing, almost everything that I’ve seen has always mean reverted. Right. And so I was in that kind of transitory camp, not because I had some central bank dogma about it, the way the Fed was kind of. And I know you were in that camp also late last year. Right. The some of the plight and clearly the situation, Ukraine really, you know, made that much worse. Zero-Covid in China, what do you think you got wrong about that? And is it correcting itself? Because, again, it’s semantics. I mean, transitory. If you look at some of these inflationary readings over the last two years, they clearly speak to the fact they were transitory. It just depends what your time horizon was. [00:59:31][73.3]
David Rosenberg: [00:59:32] And that’s a great point, because there is no time stamp on transitory. It’s really open ended. I guess you could say life is transitory. It was a poor choice of words. And I thought that the the folks at the Fed would have a really big picture view about that. We really face these multiple shocks and that they will subside and that no, sorry, there are no new eras and that excesses are never permanent. Really, the biggest mistake was continuing on with quantitative easing. We passed the worst point of the pandemic and the recession. I mean, to continue to add securities and especially mortgages which contributed to the housing bubble in 2021, was was ridiculous. That was really the critical policy mistake. I know so much about interest rates. I mean, has the Bank of Japan raised rates now? Has the PBOC raised rates now? You could argue, well, they were economies are quite a bit different. Okay, I’ll buy that. The ECB has gone ballistic. The Fed is really panicked here and that they felt that their credibility was under attack. That was certainly under attack from Larry Summers. And you could argue that it was even under attack from Bill Dudley and from the media and from academia. The Fed was under attack. And yet when you take a look, if the Fed was behind some proverbial curve, why would the dollar be in such a raging bull market over the past year? Why your tenure tips break even at 230? Why are five year five before four? It’s barely above 2%, which is their target. If you take a look at household inflation expectations beyond this year, which is mostly gasoline prices would start to come down. If you look at the University of Michigan survey, the 2 to 5 year eliminating just what’s staring us in the face, the 2 to 5 year median inflation expectation is 2.2%. It’s exactly where it was before COVID and they got an inverted yield curve. I mean, we would have had the mother of all bear steep earners and a faltering dollar if the Fed, if the US economy all of a sudden was becoming Zimbabwe and some of the horror stories that we were hearing. But the Fed thought its credibility was coming under attack. And look at how aggressive they’ve been. I mean, March wasn’t that long ago we’ve gone up to 225 basis points. He still basically, despite what I’m saying about September, I know that it’s a wild view because he basically did retain a de facto tightening bias. But you know what? I picked my points when I bet against the Fed. Let me tell you something, that in the summer of 2008, this is back at the June meeting. And remember, the ECB, Trish, they already raised rates and we would have the worst was over. Bear Stearns was mopped up by JPMorgan. The worst was over for housing and Bernanke at the June meeting in 08. So this is basically a couple of months before Lehman and AIG and Merrill, the Fed, switched to a tightening bias. [01:02:15][163.8]
Dan Nathan: [01:02:17] Yeah Let’s talk about this really quickly here, because I think that’s important, because everything that I’ve just heard from you over the last 30 minutes would suggest that the worst is not over for the US economy, for the US consumer, we have corporates who are just starting to move their feet on cost rationalization, that sort of thing. So this goes back to your point about the surprise that you believe will be the duration of the recession, which then leads me to the stock market. I just had somebody tweet tweeted me. It was watching something that Guy and I were doing earlier today. He said that out of the way, clear sailing upward for a while. This is the buy the dip mentality that is so pervasive among a lot of investors, both retail and institutional. And if you are correct about most of what you just outlined that we are in for here, then there’s no way that the stock market bottomed right here in June of 2022. [01:03:10][52.8]
David Rosenberg: [01:03:11] Stock market hasn’t bottomed. And this is probably. The normal investor behavior. They see a shift in tone at the Fed and you get the traders coming in to bid the market higher. The Fed went on the sidelines in 1989 and next thing you know, you have a about a 20% pop in the market over a few months. The same thing happened, look, in 2000. Greenspan goes on hold and the market rips like ten, 15%. Well, when did we bottom when did we bottoming? Bottomed in October 2000 to more than two years later. We saw the same thing back when Bernanke went on hold in 2006. The market popped like 10%, nice tradable rally. Then you get some of the best tradable rallies of all time. Happened in fundamental bear markets and they’re fun to trade. You know, if you’re if you have the Paul Tudor Jones gift, then go for it. But this is a bear market rally. We’ve had bear market rallies. We had a few bear market rallies back in the great financial crisis that were 18% or more and the same in the in the tech wreck we had multiple huge what’s bigger than we’ve seen this year bear market rallies and that’s exactly what it is because if you’re going to tell me that this is just more than pricing in a shift in tone from the Fed, but that we’re actually I mean, if your belief is that we have a soft landing, then by the market, if you believe in a a soft landing, then the market did bottom in June. But I think the recession is just starting. You see, that’s the thing is people did not count in what is the impact of the fiscal contraction. I was saying that all along. This is a historic this year is a record year for fiscal contraction. The fiscal deficit is down 70% this year. Now, people, libertarians and Tea Party advocates, they’re dancing around. But that has an impact on aggregate demand, which, by the way, is GDP. You see, the Fed only started raising rates in March and they have gone in a very short period, up 225 basis points. We’ve already had back to back quarters of negative GDP, and the lag from what the Fed’s already done haven’t even kicked in yet. Then we tack on the balance sheet. I think this is going to be a two year recession and it’s going to need a catalyst. It it will need ultimately there will be a catalyst because interest rates are cyclical. Inflation will come down. Even Paul Volcker cut interest rates with double digit inflation because it was coming down. Rates will come down. And when is the fundamental low for the stock market? Is that the tail end of the Fed easing cycle, which is probably not going to be till late next year. So this is going to be just like the past two bear markets. Now I don’t know if we’re going to go down 50%. But the true bottom only happens two thirds of the way through the recession and after the Fed has cut rates to the bone. This stoical evidence in a recessionary bear market where the bottom is at the beginning of the Fed easing cycle. We’re not even in the easing cycle yet. So to talk about a true fundamental bottom in the stock market is preposterous, no basis in historical fact. But then again, there are no historians in the market. Right. They they don’t understand the history of these things. And the bear market rally is just that. We have multiples of these in the tech wreck. And it was a three year bear market the great financial crisis three or bear market multiple bear market rallies have fun trading them. Just have an exit strategy and don’t abandon your hedges. That’s really what you have to do if you want to trade them. [01:06:43][211.6]
Dan Nathan: [01:06:43] All right. Well, that’s that’s where I am, you know, Guy Danny and myself, or at least Guy and I, we believe that, you know, we can’t even start talking about a bottom in the stock market until the s&p 500 roundtrips its entire move back to its February 2020 pre-pandemic highs. That would be 30%. And then the Nasdaq, the Nasdaq 100, it would be about 40%. So we are in your camp. Hey, listen, Rosie, you know, I think regular listeners of our podcast know that one of the first things that I read every morning is early morning with Dave. You can find it at Rosenberg Research.com. That is his offering and he recaps the day that was in headlines in the markets and the economy and then previews what’s ever coming next. So please people check that out. I am a very happy subscriber and David really appreciate all the time and breaking this GDP Print down in your thoughts in the market what Fed Chair Powell said or didn’t say here. So we really hope that you will come back to On The Tape. [01:07:38][54.3]
David Rosenberg: [01:07:38] And use dummy up and I’ll be there. [01:07:40][1.8]
Dan Nathan: [01:07:41] Haha you’re the man. [01:07:41][0.2]
David Rosenberg: [01:07:42] Thanks. Once again, the CME Group and I connections for sponsoring this episode of On the Tape. If you’d like what you heard, make sure you hit, follow and leave us a review. It helps people find our show and we love hearing from you can also email us at on the tape at risk reversal. Dot com any time follow and connect with us on Twitter at on the tape pod and we’ll see you next time. [01:08:06][23.5]
Dan Nathan: [01:08:07] On the tape is a risk reversal media production. This podcast is for informational purposes only. All opinions expressed. By me and Nathan Guy, Danny, Danny Moses and any other participants are solely our opinions and should not be relied upon for specific investment decisions. [01:08:07][0.0]
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