Inflation worsened and expectations for a 100-basis point move from the Fed revived debate over whether recession is here, imminent, or to come. We speak with Barry Ritholtz and Nir Kaissar. Jonathan Bernstein analyzes what we learned from the seventh January 6th hearing. Hosted by Vonnie Quinn.
Welcome to Bloomberg Opinion. I'm Ronny. When this week inflation and the bear market, we'll speak with Barry Riddles and near case are and later. It would be very helpful to know who was on the side of things that really should not be involved in mainstream politics anymore. Jonathan Bernstein on the continuing January six hearings. First to the markets and whether earning season will reflect the confusion in economic and fed forecasting. Let's get straight to Barry Riddles. Okay, So it's been an interesting first half Bury, to say the very least, and yet it seems to be pretty quiet, almost dull at this point. Well, the question is how much of the bad news is already reflected in stock prices. Hey, look at the second quarter, the SMP down, Russell two thousand, NASA down. Those are epic numbers. You have to go back to the COVID pandemic quarter, to the Great financial crisis, and to the dot com andplos to find quarters that bad since the crash. So this is up there with the worst quarters we've seen. It was really quite phenomenal, and yet now it feels like the market is frozen. And I don't mean literally frozen. I just mean people they're waiting to see what's going to happen in terms of the economy, in terms of the Federal Reserve, they're not putting money to work, it feels like, so we're waiting on when the Federal Reserve will recognize that peak inflation is passed. When we look at a lot of data points in copper commodities, oil wages are slowing, down, home sales, there's lots of evidence that that big surge in inflation we saw in into two has peaked. But we've had twenty four consecutive days of gasoline prices falling. Oil is back under a hundred from a hundred and twenty, copper down, industrial medals down, lumber cut in half from really and we've actually seen the Mannheim used car. And remember, inflation first reared its head with cars because you couldn't get new cars because semiconductor production head legged and was so delayed opening. Now we're seeing a pretty substantial decrease in use cars from admittedly very inflated levels. So once we get under that eight handle on cp I, if it's seven or for bids six in the coming months, I think that will let the fed realize they've slowed the economy enough, they've already seen inflation roll over, and maybe a more moderate set of increases five or fifty basis points instead of seventy will continue to pressure inflation, but without causing a full blown economic crash in recession. Well, so this is it. Our recession expectations overdone. Almost nobody I speak to isn't expecting a recession. They're not expecting it immediately. Might be twelve to eighteen months out? Is that because there are supply chain concerns further out? So first eighteen to twenty four months is just so far off in the future, it's you know, it's makeable. It might be twenty years off because when we look at the year head forecast, just what Wall Street does for the economy, for the stock market, nobody gets it right. Twelve months is forever. Eighteen is a whole another lifetime. When we talk about the supply chains, some really interesting data points. We're seeing the transit times for international shipping have fallen pretty substantially. The backlog at ports and the time to ship has fallen. And we also are seeing the shipping containers which pre pandemic cost about two thousand dollars to ship from China to Europe or or the United States spiked up to twenty thousand and has since more than cut in half to about eight thousand. It's still much higher than when it was, but it's less than half of of the peak. So that suggests that the shipping and demand for goods is sort of normalizing. And keep in mind, as we get more and more infectious but less dangerous variations of COVID, people are are moving. Remember we're primarily a services based economy. During the lockdown, hey, we didn't go on vacation. We bought all this junk, We bought televisions, we expanded our houses. All these goods purchases put real stress on the supply system, and so we end up with things starting to get back to normal. It's not a surprise to see that drop. I'm not in the recession camp. We're certainly not in recession today. You don't feels like the economy is mooming. Listen, you just added two point seven four million jobs in the first half of the year. Wages have gone up about five four percent. The bottom half of the wage pool of bottom quartile is up about six percent. Consumer spending year over year is up about five uh. The only place we're really seeing an economic slowdown has been in housing, from admittedly very elevated levels form us in a row of decreased existing home sales during the season where home sales typically go up, home sales bottom around December January, and they go up throughout the beginning of the county year, and they peak in July and August. To see that negative is telling you that increased mortgage rates and the ongoing big price increases have discouraged fired. But other than housing, which is more of an inventory problem than anything else, the rest of the economy looks pretty robust. The mid terms, how are they going to impact what gets done? The president obviously wants people to stop talking about inflation, or to at least not vote on inflation, because there are so many other issues to vote on. What can he do? So first, I'm not a political analyst, and I try not to make political forecast because of all the terrible objective thing that we can say. No matter who would be in the president's right, will he do anything? You think? Is there anything that you know a sitting president can do? The problem is it's very difficult to do something about inflation, isn't it if you don't have the full cooperation of Congress. And even then when it comes actually inflation, it's hard to do something about it. Well, well, when it's it's more these days of what you don't do than what you actually do. When you look at the impact of the Cares Act, all three segments, the first one under President Trump was two trillion dollars. It was unprecedented, was ten percent of GDP. The second one, also in the Trump was another nine hundred billion, and then Biden came into office and there was another two trillion dollars. So really, the people to blame our Congress who passed these giants spending bills. But both Trump and Biden put a lot of money into the system, and that's part of the reason we've seen prices go up. Consumers are out spending a lot of money. So once that toothpaste is out of the tube, I don't know how you get that back in other than dampening demand by cranking up rates, and the Fed seems to have accomplished that. So all right, let's talk about valuations. How are people value in companies these days? How do they measure what the intrinsic value of a company is when clearly stock market valuations are just all over the place. So there are two key factors that drive valuation. One is just the basic math. What are the earnings right now? You could look at all sorts of other ways of measuring revenue, growth in price the book, and whatever, but really it all comes down to earnings. That's your starting point. And then the market will put some type of a multiple on earnings. And here's where investor psychology becomes so important. The multiple is really a function of everybody's collective consensus as to what investors should pay. Hey, how much are you going to pay for that dollar of earnings? And we see that this rises and falls with the market cycle. My favorite example, you start in the beginning of the eighty two to two thousand bull market. The P ratio for the S and P five hundred was seven x, and it ended at thirty two x. And so while the economy expanded an earnings ru over that eighteen year period, three quarters of the market gain was caused by multiple expansion. One of the reasons we look at that and don't say this is a crazy delusion, This is a bubble is the nature of corporate America has changed. Go back to the seventies, the era that led to that high inflation, low economic growth, and industry was big and costly, a lot of manpower, a lot of material, a lot of capital required. Compare that to you know, the Instagram purchase by Facebook. The joker is a couple of guys on a laptop and it was sold for a billion dollars. The intangibles have not been measured correctly by investors for the past twenty years. And when you saw a technology run up as much as it has over the past decade, a lot of that was those intangibles. That's everything from patents to copyright to business methods and algorithms. I think we've started to see intangibles be reflected in prices. Their value is starting to be recognized. So where do we go from here? We have a quarter coming up where earnings are not going to be all that exciting, They're going to be disappointing people. Well, that's the big question is you know, we're we've seen record high earnings over the past couple of years. We're still forecast for two The consensus is a ten point six percent gain and earnings. Some people think that's a little rich. We've seen a correction in the SMP five hundred, but we haven't seen a correlated downgrade of earnings. I think we'll know really quickly. Is the consensus estimates too high? Ps Historically they're always too high. The analysts community always overestimate earnings, the exception being in the Nadia of recessions, they underestimate the recovery. The odd thing about the past couple of years is the overly optimistic estimates of earnings turned out to be more or less dead on. Well. The other thing is that there's going to be a bifurcation between companies that can pass down inflation problems and still hold onto their margins and the company's account. One of the things that I think the average investor doesn't often recognize is that stocks have long acted as an inflation hedge. And if that sounds counterintuitive, you know, if your input costs go up and there's still plenty of consumer demand for your products, just pass along the price. So your revenues go up on a nominal basis, but they're going up because of inflation. Your earnings go up as inflation. The exception to that is when you can pass along those increases in input costs. So you know when we see five percent increases in consumer demand year over year. Not only is corporate America as well set up in terms of their debt and balance sheet, but we look at the household balance sheets. People are sitting on a couple of trillion dollars of cash. The average household is working, Most Bello have gotten pay raises. This isn't the standard situation that you see heading into a recession. This is a pretty robust expansion where unique circumstances caused by COVID nineteen, the pandemic, the lockdown, and then the reopening have caused the spike in inflation. As things start to normalize, we could have a pretty typical two to and g d P with two pc inflation in twenty three. Everybody is so focused on the change in the cost of capital and the increase in rates they may be missing the optimistic picture, which is the economy is still fairly robuts how much is Russia's war in Ukraine lingering when it comes to the US economy and particular U s docs, so it's less of a factor in the US than it is overseas, but it's a global market. So if Russia restricts their output, all those little bumper stickers on gas stations, with Biden saying I did that, it's a fair argument to say Putin did that. Before the war, oil prices were fairly elevated. They were, then the war came in and tacked on another. So at the moment, you're painting a fairly rosy pitcher which seems to die. But with what we're saying, rosy picture from down exactly I was. You know, it's easier to be rosy when the market has gone on sale a little bit. Yeah, exactly, Well, what could derail the market further? Of all of the scenarios you painted, there doesn't seem to be any kind of an event in there. So the biggest threat is a policy mistake by the FED, and that means overtightening. It's not a fragile economy, but it's not a bulletproof economy either, So that's one issue. We would hate to see the Russian invasion of Ukraine's spill into the rest of Europe. That could be really problematic. You never know what's going on in China. China's economy seems to be slowing much more than I think people were expecting. That's still impacting supply chains and goods. We also help this stronger dollar, which doesn't seem to be going anywhere and anything. It's going to strengthen more. I love the expression the cleanest shirt and a hamper full of dirty laundry. Where else are you going to put your currency? The Euro? Certainly not the end come on or when? When we look at China's currency, the US is clearly the best choice amongst those. And by the way, we've been hearing about the death of the dollar, I don't know my whole adult lifetime. If you think the dollar is dead, you should go to Europe and spend some time in Italy or Paris or wherever you like, and you'll see the purchasing power of the dollar remains very, very really strong. Well, it's a party now basically with the euro amazing. So honestly, everything you've just said makes me think the markets by so the market is a bye if you have a time horizon of more than you know, six to twelve months, because anything can happen in a giving year. I think the concern is when will the FED realize that we are past peek inflation, that their original take that inflation wasn't going to be sticky and it was going to be transitory turned out to be right, just trans story took a lot longer than anyone expected, and that they've already done most of what they need to do. I hope the FED is aware of the fact that copper metals, lumber, gas, oil, even housing and wages are either slowing their rate of increase or tacking downwards, in which case they should be a little more gentle Barry riddles there. Let's get to the January six hearings now here in seven, with another to come next Thursday. We're joined by Jonathan Bernstein. We seem to be getting a lot more details, and I mean, the gossipmonger parts of us are very satisfied with what we're hearing out of the committee. But what struck you as the most intense part of this week's hearing, Well, you know, they're just continuing to fill in the details of the basic story of of You know that Donald Trump was attempt thing to overturn the election and essentially overthrow the government the United States. So you know, each detail sort of adds to that without anything in particular really changing what we've actually known since January six itself. But you know, it's increasingly clear that it was a deliberate plan, that he was deliberately trying to do this, and that he was calling on anybody who was willing to work with him, including these extremist organizations. Now, did it give the committee half to the Patsy Bylonian people like that, did actually give testimony in the end, And do we need to hear from people like Steve Bannon? Part of this goes beyond my expertise, which is to the legal side of things and exactly what is criminal and what kind of evidence would they need to you know, make certain charges stick. And you know, I'm not a lawyer, so I can't really speak to that. But the more evidence that they can get, and and not just about Trump himself, but about you know, other people who are active leaders of the Republican Party, whether they're members of the House or people who were in the administration who are still active leaders of the Republican Party. Whatever happens to Donald Trump, it would be very helpful for us to know who was involved into what level because you know, as the Committee has said, there's nothing wrong with pushing legitimate lawsuits to make sure that the presidents that any candidates case gets made in court if they think that there's something going on that they have rights to what Trump did with something else, and it would be very helpful to know who was on the side of things that really should not be involved in mainstream politics anymore. Well, the only thing that we heard this week is that we heard from some members of some of these groups, like the Old Keepers for example. Does it take away some of their perceived power or their self perceived power that lives being shared on how they operate. Yeah, I think that it's very helpful. You know, this is stuff that you know, people who follow all these things have known about for years really, um, but it's very helpful for the committee to shine some light on it. As you say, these are dangerous groups. They are extremist groups, and one of the things that Donald Trump did that was so unusual was to treat them as legitimate parts of the party coalition. And once the president, once the leader of the party does that, it's very hard for the rest of the party to disengage, especially since there are some overlapsing in policy positions or ideas. The Democrats have done a very good job on their side of keeping their distance from extremist groups. They have. Democrats didn't always do that. In the seventies, there was there was that kind of problem, but that problem is mostly on the Republican side now that they just find it very difficult to exclude people who you know, are not supportive of democracy and who are giving the party attention. Biden was asked on his middle strip about rematch with the former president. Say there is no prosecution and that the former sitting president doesn't see any sort of consequences from the hearings or the Justice Department doesn't do anything. What do you want again, Well, you know, there's a political scientist who says, we can talk about who is running four and then we can talk about who's running in As of right now, Donald Trump is running for president. As of right now, Joe Biden is running for a second term. In both cases, we just can't really predict whether that will still in the case, we can say with some certainty that if Biden eventually makes it too, he would almost certainly win the nomination. If there's such strong opposition to seeking a second term. He'll probably drop out sometime in the next I don't know, ten months or so. As far as Trump is concerned, he's much less predictable because he doesn't listen to people. UM. So it's it's certainly possible that he could run and win the nomination. That's possibly could run and lose the domination. It's possible that he could drop out of running entirely. There's just no way of really predicting what goes on in his head. And you have to wonder about Rhonda Santis. What are you hearing behind the scenes, Jonathan, about whether Rhonda Santez could overtake Trump as a party favorite. Oh, I don't hear anything. Of What I could say is that it's very very early, and the Sandals has has had a lot of support in Republican aligned media. You know, he gets mentioned a lot, which has successfully meant for him that he now shows up in polls doing double digits or better in Republican early polls ofation. But you know, we've seen a lot of candidates, whether it's Rudy Giuliani or whoever, UM, have early leads that dissipated once we find out who the actual candidates that are entering the primaries are and once the candidates get tested by going through the process. Jonathan Bernstein There, don't forget do get in touch via Twitter, I'm at Vanni Quinn or email v Quinn at Bloomberg dot net. Opinions and comments always welcome. By the way. We're also available as a podcast on Apple, Spotify or wherever you get your podcasts. Happy to be joined now by near Caesar to continue our look at this bear market, what it signifies, how long it may last, and what you should know if it's your first So earlier I spoke with Barrio Riddholes and we were talking about how robust the economy is. In subsequent hours, suddenly one hundred basis points is on the table from the Federal Reserve. Is one hundred basis points necessary? Well, I was curious how the economy is doing. I was looking at the numbers today and from what I can tell, the latest estimate from the Bureau Economic Analysis is that is that the economy contracted by about one point six percent in the first quarter, and the latest estimate from Atlanta said is that it contracted an additional one This is all after inflation in the second quarter. If that's the case, then we have two consecutive quarters of negative real growth. We're technically in intercession now, but I don't know that that's the end of the now this because to the extent that there's a silver lining in this. Even though the inflation number today was bad, there's no question about that. If you look at what the market is expecting. The five year break even rate has declined from rough three and a half percent in the spring too close to two and a half percent now, and the ten year break even has declined over the same period from roughly three percent to two point three percent. So I mean the market at least believes that the worst of inflation is over, at least for now, and that might mean that whatever the FED has done so far plans to do, which is probably another two d basis points between now next year and all the tough talk in the meantime, might have been enough to uh to bring this inflation under control, even though it's not apparent in this moment. And if that's the case, we might have escaped with a relatively mild recession, which was the point I think to begin with. You know, if I had told you that that was going to be the worst of it, I think we all would have been happy with that result. It's too early to say, obviously, but as far as I can tell, that's the base case. Well, and that's the thing. If the fan does go one hundred basis points, is that enough to derail and economy? That's pretty robust, But as barivit All said earlier, not bulletproof. I don't think any more than where it is now, because I think ultimately the question is what are we digesting in terms of our expectations. I think people are pretty morose about inslation. I'm not sure that the print changed really any of that. And if you look at expectations in the futures markets, I mean you see that, you know, markets are expecting a fat funds rate of roughly three hundred forty basis points this time next year, roughly let's say June of next year. And so I think, you know, market participants, the economy in general, businesses, I think they've all calibrated for that number, and the question is will there be a surprise from there. All of that is to say, I don't know that the path matters so much of the destination, whether they give us two hundred more basis points, you know, with to one hundred basis point hikes, or with four fifty basis point hikes, I'm not sure that at her so much. I think the question is will they move off the destination, And in that regard, I think there's a higher probability of a surprise to the upside than to the downside. So then we get into your column which says that bear Marcus at the moment is a first for so many. Just give us the synthesized version of your thesis near Well, you know, I've been reflecting on the fact that, you know, we have all these trading apps that didn't several years ago, and then millions of new investors has come to markets in the pandemic, some of them before the pandemic, but a lot of them in the pandemic. There's been a lot of stories about that, and it seems to me that a lot of them are navigating a bear market for the first time. And I was sort of reflecting on my first bare market, which was the dot compas from two thousand to two thousand and two, and there are things that I just didn't, you know, even though I was a business student as an undergrad and I was told these things in the classroom, there are a lot of things that I just didn't I don't think I really realized until I experienced it for the first time. So give us a little bit of a rundown of a couple of these mistakes that they don't have to make that you might have made. Yeah, right, Okay, you know one is listening to prognosticators one of those things that which is what we're hoping they're doing right now. Well, yes, yes, and I think we should all acknowledge that, you know, none of us have any ability to know where the market's going. I mean, we're in the seven months of this bare market. You know, it's getting long in the tute, but when it ends, how low stocks will go. We just have no model economic model to be able to say that. The problem is during a bare market, people want those answers, and so they're inviting that kind of prognostication. And what I would say to them is it's fine to listen to this stuff as entertainment, but just don't make any financial decisions based on it, because ultimately no one knows where it's going. The second lesson I would highlight is that I think when you're a new investor, you don't realize how vulnerable companies are in general. I was refrecting on the fact that Enron, roll Com disappeared to me the dot com bust, that ge never really reget its luster after that. And so for for folks who are coming to the market for the first time and buying their favorite stocks and thinking that it's going to you know, it's going to be a sure bed for them, it's it's nothing. It's nothing even close, right, And there's something different about every air market. Obviously, the reasons for the bearer market different depending on you know, which bearer market we're talking about, But there's really very little that's the same about one bear market as another. Well, that's one of the difficulties, right, is that how the bear market behaves to some extent is going to depend on the input. What are we fighting. You know, the last bear market was very short. We were fighting a pandemic. Um this time we're fighting inflations and selling economy and lots of economic challenges, etcetera. And so there are going to have different tenors. However, I would say that there is a common denominator running through them, which is that in general, during a bear market, you have a repricing of assets, and the more expensive the asset you own, the more vulnerable you are to repricing. So you know, during the dot com bust, famously, that was probably the most expensive U stock market US history. When that recession came, and some will say it was even caused by that, by asset prices being too high, there was a lot of room for repricing, and in fact, they did reprice in that regard. This one looks looks it's not exactly the same, but this market is still very expensive, and there's a lot of room for a lot of stocks to reprice. And in that regard, I think you sort of have to watch that as a common denominator of all bear markets. Well, and that is one interesting thing. You do see a lot of growth stocks, a lot of tech companies that have repriced more than just into a bear market. I mean, some of them are lower or more. Is there any conviction out there that they might reprice back at least a little bit to where they were, you know, I fly this is one of the things I touch on in this column for tomorrow is that famously, the market has no memory of price. It doesn't really care what you paid for a stock. So for example, if you paid seven hundred dollars, let's just say for Netflix, which was the high I believe, and now it's down, that doesn't mean it's going to come back to seven. So I don't think we can look at these stocks and say, just because it's down thirty fifty seven or whatever, it's coming back. I think the best that we can say is that in general, the broad market is going to recover, it's going to regain its previous level, it's going to reach new highs. What happens the individu dual companies is anyone's guess, which is why I think betting on these individual companies and worth hanging on to whatever price you bought is a big mistake. So it's very interesting that you point out that some of these companies didn't exist, or were defaulting customers, or just looks different after the last bearer markets. Do you anticipate that that happens after every parer market, including this one. I think investors do tend to pay more close attention during downturns, which is understandable. You know, when you're making money, you tend to get lazy and you tend to not care as much. When you start losing money, you want to know why, and you start looking under under the hood, so to speak. And you know, when investors do that, I mean, they find that some companies are not exactly above board. And that's invariably another common denominator in these downturn is that shenanigans come to light. The only question is what is the extent of them and who is committing them. I mean, the bigger the company that is committing them, the more likely it is to end in a catastrophic way for that company and the investors. Just nearly on the scale of it. But yeah, I'm sure that if this goes on any longer, we're gonna we're gonna find out some things we didn't know. Well, it's funny, but you've just put crypto into my mind. I'm not quite sure why I associate the two, but I guess we have seen some shenanigans in the crypto space of the market already, and I think we'll more. I mean, you know, one of the things that's interesting about crypto is it comes in the long line of new assets, and there's real there's history there, right. I mean, when junk bonds came to the four in the late nineteen seventies and nineteen eighties and they had their first wipe out, there were a lot of shenanigans that came to light. Any time that a new asset comes to the scene, you know, a lot of money is being made. I think people are not as careful as they ought to be, and that invites all kinds of bad behavior. Of course, there's always some correction all that comes to light. But I think crypto is just the latest and the long tradition of new assets that are gonna have that are gonna have to deal with with with behavior that is not necessarily above board across you know, all around. Yeah, near there's some hope here as well for people too, though, right. I mean, if you're going to start investing, investing in a bear market is better than nos in some ways. Is that always true? I think it's pretty much always true. One of the things that I say his column is that you know, in general, when prices are going down is the time you want to be buying. A lot of people their instinct, I think is to hold off it's the way or worse to sell what they own on the theory that they'll wait until things get better and then they'll buy back in or resume investing. In my opinion, that is a big mistake because you won't know when the bear market is over until the new bull market commences, and in general, the bull market comes in with a bank meeting, the market really turns sharply higher to announce the new bull market, which means that you end up buying at higher prices than you otherwise would have if you just have to continue buying through the bear market. So I view all bear markets as buying opportunities, assuming that you you invest regularly through it, very similar to the way you would do in a in a bull market. So you're having already given the caveat that you shouldn't listen to prognostigators. Is there anything else that you would tell people out there, Well, I would tell them to just focus on the long term and to just keep in mind that don't matter how bad the news gets, no matter how long the bear market bear market lasts, and you know it could last several years, I mean, it's happened before the end. They always end and Ultimately, you know, most people are not investing for two or three years. They're investing from five, ten, twenty years. Time is on their side. There's really no reason for them to be concerned. Assuming that they're investing intelligently, they're buying regularly, investing the broad market. There's really no reason to worry much in my view. Near case are is there. We are now choosing to end all conversations, not with you, though, as always we love to hear from you. I'm at Vanni quent on Twitter, or send your thoughts to v Quinn at Bloomberg dot net. We're produced by Eric mollow Till next time on Themberg Opinion