July 28, 2023 • 38 mins
A rallying stock market and better-than-expected second-quarter economic growth are just the latest developments pointing Wall Street skeptics to the possibility of a US “soft landing.” That’s where the Federal Reserve gets inflation back down to around 2% without triggering a downturn.
For more than a year, Fed Chair Jerome Powell has waged war on inflation while a chorus of adamant recession predictions has fallen flat. But even now, with inflation cooling and the economy looking to be on the glidepath, some big names remain uncertain that he can pull it off. Vanguard Group is one of them.
Joseph Davis, the firm’s global chief economist and head of its Investment Strategy Group, joined the What Goes Up podcast to explain why that is, as well as offer his reaction to the latest interest-rate increase and give his outlook for the bond market.
“To get inflation down that last yard to 2%, you have to see a modest weakening in the labor market, which means the unemployment rate’s going to rise—although hopefully not drastically, let’s say four-and-a-half percent over the next year,” he says. “Well, that’s a hundred basis-point rise. So by definition, that is a recession. Now, anyone who thinks that that’s a soft landing is spitting in the face of 150 years of history.”
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:14):
Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Reagan. I'm a senior editor at Bloomberg, and.
Speaker 2 (00:20):
I'm Katie Greifeld. I'm an anchor with Bloomberg Television and
a cross auser reporter.
Speaker 1 (00:25):
And this week on the show, while the Federal Reserve
raised borrowing costs again this week, taking their benchmark interest
rate to a twenty two year high. At Mane on
Wall Street, believe the Central Bank is either finished or
very close to being finished this very aggressive rate hike cycle.
But what about the recession that so many were convinced
(00:45):
would result from the Central Bank's aggressive fight against inflation?
Was that just misplaced pessimism or is the downturn still
on its way. We'll get into it with our guest,
who is an economist at a major investment firm. But
first I got a question for you. Yeah hit me,
And I know you went to college in the Philadelphia
area at Haverford. I assume you sampled the cheese steaks
(01:12):
in Philadelphia at some point, and you're.
Speaker 2 (01:14):
Preaching right, No, I've never had a cheese steak. I
feel like I'm immediately killing our banter. Our top of
the show banter. But I've never had a cheese steak.
Speaker 1 (01:23):
You've never had a cheese steak?
Speaker 3 (01:25):
No, It just.
Speaker 2 (01:27):
Something about the strips of meat never appealed to me.
I do eat, I'm not a vegetarian, but just did
not fill out my boat.
Speaker 1 (01:35):
Oh man, all right, all right, that's fair. So your
answer is none of the above, Na, not applicable?
Speaker 2 (01:42):
I said, yes, what would have happened?
Speaker 1 (01:44):
My tradition here is to ask Philadelphia area guests what
their favorite cheese steak joint is. And I'm going to
tell you right now, Katie, If our guest this week
actually is a cheese steak eater, I think I can
guess what his favorite place is. And this after never
have met him, never spoken to him. That's how good
I am. All right, you ready?
Speaker 3 (02:05):
All right?
Speaker 2 (02:06):
I'm excited.
Speaker 1 (02:07):
Now let's bring him in. He is Joe Davis. He's
the global chief economist and head of the Investment Strategy
Group at Vanguard. Joe, welcome to the show.
Speaker 3 (02:15):
Oh thanks for having me.
Speaker 1 (02:16):
All right, Joe? Are you ready to be blown away?
Speaker 3 (02:18):
Yeah? Let's go.
Speaker 1 (02:19):
Your favorite cheesesteak joint is Larry's Steaks on fifty for
fifty fourth I believe it is and city line on
Hawk Hill? Am I right?
Speaker 3 (02:32):
Not bad? Not bad?
Speaker 1 (02:34):
Did I get?
Speaker 3 (02:34):
It's not my favorite?
Speaker 4 (02:35):
So I grew up outside of Philly, but I went
to college in Philadelphia proper. So Larry's is a great one,
particularly after midnight because being in college, they're there.
Speaker 3 (02:47):
It's a good cheese.
Speaker 1 (02:49):
Joe Is, I believe you might be our first Hawk,
our first Saint Joseph's University hawk on the show, which
is exciting for me, my whole. I've one of six kids.
Everyone in the family went to Saint jose but me. Yeah, yeah,
it's crazy.
Speaker 4 (03:01):
Well, how is this so if you're from Philadelphia, you
know a rivalry of Saint Jose's.
Speaker 1 (03:04):
Villanova r Oh, absolutely yeah.
Speaker 3 (03:06):
So that's where that's where my daughter's going next year.
So we're gonna have some family tensions.
Speaker 1 (03:10):
Oh yeah, boy, you're at your let you're gonna let
her back in the house.
Speaker 3 (03:13):
I don't know.
Speaker 4 (03:14):
My son's at Penn. So we got the whole. We
have almost the entire Big Five. So yeah, long lived Pilly.
Speaker 1 (03:19):
Three fifths of the Big Five. Well, Joe, let's get
down to business. Then, you know we have the fed
uh statement and press conference today. You know, the vibe
I'm getting is not too many surprises. You know, we
got the quarter point rate increase, so the FED funds
target's now five and a quarter to five and a
half percent. Anything shock you today or surprise you at
(03:40):
all about the statement or what Jerome Palell had to say.
Speaker 3 (03:43):
No, I mean, nothing's really surprised me, Mike.
Speaker 4 (03:45):
I mean again again, I think the big, open ended
question is the same question that we were facing at
the beginning of the year, and that really is how
much work, if at all, there needs to be done
from the Fed, which really brings to the heart really
the essential question, which is how restrictive are they today?
You hear Chairman pal saying they're restrictive.
Speaker 3 (04:04):
By any measure. The question is how much? Because if
you can.
Speaker 4 (04:07):
Get a handle on that, then you know how much
both inflation will fall and how much economic damage may
be done over the next six or twelve months. So
I think that's still the open question that we were
facing the beginning of the year.
Speaker 2 (04:20):
Something else that I wanted to ask about, though, was
the fact that just stepping back from you know, will
they won't they? In terms of rate rises, it's been
striking to me how there's been so relatively few descents
on Chairman Palell's watch. This was another meeting that was
completely unanimous, even though in their words and the FED
(04:41):
speak that follows every big decision, there seems to be
some disagreement. You never see that in the actual votes.
I'm wondering if that's something you've noticed as well.
Speaker 4 (04:51):
That is a good point, Katie, I have noticed it.
I think that if you know, going forward, we may
see greater disagreement. Certainly there's probably more healthy disagreement in
the actual discussions when they're making decisions rather than the statement.
But I think I think they've been I think Chairman
has been able to navigate that with more of the
first appause, you know, the last meeting and now being
(05:14):
a more data dependent phrase because you do have you know,
a healthy spectrum of those wanting to go a little
bit further and those thinking on the FED that they've
done enough. So I think that's also a somewhat of
a testament to his leadership being able to navigate that.
But I think from here on out, I think that
the probability of having you know, some modest descent could rise.
Speaker 2 (05:35):
Do you think at all that it sort of muddles
the message coming from the FED that there has been
unanimous votes up until this point. And the reason I
asked is because I was listening to Andrew Hollenhorst from
City on ATV immediately after the decision, before the press
or after the decision, saying that basically they sacrifice clarity
(06:00):
in having a completely unanimous vote, especially after what we
saw in June where they decided to skip but they
signaled more raises to come. Is that something that that
irks you at all, something that muddels their message? Or
are they pretty loud and clear here?
Speaker 4 (06:16):
No, I mean I think they're closer to loud and clear.
I mean I think reason why we probably haven't seen
as much of a descent or open aired sort of
dialogue is because inflation is still well buff target. Yes,
it has come down, you know, the more recent data
is lower than what it was a year ago. But
I think that that they're still off on their core mandate,
(06:37):
which is why we're seeing still coalestion coalescing around the
final decision. I think again, as we get closer to
two percent, could be a ways off, but as closer
we get a two percent inflation I think you could
see more healthy debate, including on.
Speaker 1 (06:51):
The voting, you know, Joe, I think one of the
remarks that caught some people by surprise was when Jerome
Palce said he doesn't see the economy getting back to
that two percent target until twenty twenty five, so you know,
another year and change, you know, five quarters or so.
Does that make sense? You know, we've seen such an
(07:12):
aggressive drop from you know, what was the peak in
headline CPI like nine to three in the last print.
Does it make sense that it would take that much
longer to get to two?
Speaker 3 (07:24):
You know?
Speaker 1 (07:24):
Is it a is it a story of base effects
that you know, now we're comparing year over year to
inflation that had already cooled off. How are you thinking
about how long it'll take to get to that two percent?
Speaker 3 (07:36):
Well, I think it will take some time.
Speaker 4 (07:37):
I think that's you know, I think that was a
subtle but a very important point is actually it's one
of the most important comments I thought that was made today, Mike,
and that you know, there's there's our own research and projections,
the Federal reserves projections as well as academic analysis, including
from former chairman Ben Bernanke all point to that to
the same outcome, which is inflation and remaining elevated, meaning.
Speaker 3 (07:59):
Above two percent for some time.
Speaker 4 (08:01):
The primary reason for that is the tightness in the
labor market, and so you know, I think that's where
you know, and we have been of the view I've
been have had strong conviction for some time that we
were going to need to see some material cooling in
the labor market to get to two percent in any
near term horizon, because it is in the wage dynamics.
(08:22):
And so I don't I think the market has slowly,
the bond market has slowly come to grips with that
starting to price out cuts. Right if recall at the
beginning of the year there was you know, high conviction
in the bond market there would be significant easy and
almost at this point right now. And so I think
even those comments today, I still think point to the
fact that you know, it's going to take some labor
(08:43):
market weakness to get to that last yard at as
many call it, from three percent trend inflation down to two,
which brings up another I think important debate that words
matter with respect to this narrative around the soft landing.
But perhaps you know, I'll say that for another question.
Speaker 2 (09:00):
Before we get there, and I do want to get there,
I want to talk a little bit more about what
you're saying about wages in the fact that we need
to see some cooling in the labor market to get
back to target. Is that because there's evidence of a
wage price spiral at this point?
Speaker 4 (09:15):
Well, I think, kay, I think there was clearly that
last year you had wage pressures that were significant six
seven percent. You had labor market turnover that was as
high as a generation. Again, we all knew some of
that was somewhat temporary. But I think where I come out,
there's not a wage price spiral. But the fact is
the labor market is imbalanced, and we've grown. You know,
(09:38):
there's measures that many point to the vacancy to unemployment rate.
You know that ratio one is in balanced number of
vacancies equal number of unemployed Americans. We've grown that data
actually back to as far back as World War One,
so one hundred years, which gave us early insight during
the throes of COVID that we're going to have some
(09:59):
wage based inflation pressures. That ratio now has come down,
that's good news, but we're starting to enter the territory
the ratio is right now, one point five vacancies to
a unemployment of one, So one point five is above one.
It's imbalance demand exceed supply. We're starting to enter the
territory where any further drop in vacancies starts to be
(10:21):
associated with a modest increase in unemployment. That's important because
that suggests that and there hasn't been an exception to
that for one hundred years. So if we're right, we
should see some further weakness in the labor market. If
we do not, then that opens up a different door,
which means inflation may be stickier than we think, and
that would be a surprise to the market.
Speaker 2 (10:47):
I did want to wrap in this conversation we're having
on the labor market to current events that we're seeing
in the economy, especially when we're seeing all these labor negotiations.
We saw a big win for labor un unions this
week with the Teamsters versus UPS, and actually the Teamsters
chief was on Bloomberg Television after that saying that now
(11:08):
they're taking the name at Amazon, and I'm wondering how
you're viewing that, whether those are one off scenarios where
you know, maybe that segment that was involved, that union
that was involved gets a price hike. How that is
fitting into your overall view on the labor market right now?
Speaker 4 (11:30):
Well, you know, I think you know, if you talk
to friends and colleagues, as even a Boston as an employer,
you know, you can feel the tightness in the labor
market when you're looking for applicants. It's in the data,
it's in common experience. It's not as tight as a
year ago. Last year seemed like a really a frenzy
where demand just was was was drassicala ecceede supply. Labor
(11:50):
turnovers come down. We know, job you know wage increases
are double the rate when you leave a company for
a new job then when you stay at the existing ones,
So is labor turnovers come down. The wage growth is cooled,
and again this is good news for consumers. But the
fact is we still have an imbalanced labor market. Now
that's why the biggest reason why the Fed took rates
(12:11):
from zero to five percent, right, It's just that there
was that debate a year ago, your member, between Waller
and Summers and others and some calling that immaculate disinflation,
meaning you could have that ratio which at one point
was two vacancies to one unemployed. You could fall most
magically to one. I'm just saying that that's that's historically unprecedented.
(12:32):
You can drop from two to about one point five
maybe one point three, which we're we're tracking along that pace.
At that point, it becomes that that sort of that
line becomes a little kinked, and so any further drop
in vacancies to get a better balance in labor market,
which gets to the wage pressures being a little bit less,
you know, intense, you start to see a rise in unemployment,
(12:54):
and so there's no getting around that trade off at
some point. And that I think the soft that the
soft landing crowd has to come as to grips with
is that is it theoretically possible, Sure, but it would
actually require decent good luck and further labor supply coming
out of the woodwork for us to magically balance the
labor market.
Speaker 3 (13:13):
Over the next six months.
Speaker 1 (13:14):
Well, Joe, let's talk about that soft landing notion. I mean,
it seems like it's getting a bigger and bigger sort
of constituency among economists. One of the interesting things Pal
said today was that the FED staff is no longer
forecasting a recession. The IMF this week raised its its
growth forecast for next year. And at Bloomberg, you know,
(13:38):
obviously we do a lot of surveys of economists. They've
boosted their GDP estimates for the second and third quarters.
According to that survey, consensus is there's about a sixty
percent chance of a recession within the next twelve months.
I'm curious what how you're handicapping it, you know, is
that sixty percent sound high to you? Load to you?
(13:59):
Is it? Is it more of a sure thing than that?
How are you thinking about?
Speaker 4 (14:03):
So I'll give you my answer. I also give you
which it's semantics, but it's actually a very important one
and that is actually many of the forecasts out there,
although they seem dramatically bipolar, either if there's a recession
camp or there's a soft landing camp, right, they're actually
the forecasts, including the FED, including vanguards you know, are
(14:24):
forecast and many from you know, many many economist firms.
They're actually more similar than different. There's just there's this
there's been this bipolar sort of oh we're in the
recession camp or not?
Speaker 3 (14:34):
Why say that?
Speaker 4 (14:35):
Is almost everyone has a rise in the unemployment rate
of at least thirty or forty basis points, so going
above four percent over the next year.
Speaker 3 (14:43):
Right.
Speaker 4 (14:44):
Well, historically that that that has been one hundred percent
associated with a recession, now not necessarily deep in magnitude,
but a recession that, by the way, is the Federal
Reserves forecast. So the Federal Reserve, I mean semantically, they
they're on record saying no, no recession, but by that metric,
it actually it would it is a recession because you
(15:06):
have very modest job losses. Now GDP could be you know,
zero point five percent, one percent next year. That's closer
to our projections one percent. You know, here's the quiz
in two thousand and one, which has been our central
tendency of what's the most closest reference point for a
very mild recession, which is our baseline two thousand and one,
(15:26):
GDP never fell on an annual basis Really, yeah, we
had unemployment rise.
Speaker 1 (15:31):
Yeah.
Speaker 4 (15:31):
No. In fact, many recessions do not have GDP fall
in the calendar year with which they occur. Again, except
GFC and nineteen eighty two and all those deep ones
clearly fall. So again, we haven't changed our view on
that the data has been a little bit stronger than expected.
But ultimately our view has been you can't have your cake,
you need it too, which means to get inflation down
(15:54):
to that last yard of two percent, you have to
see a modest weakening in the labor market, which means,
on pointing rate's going to rise, although hopefully not Drasticgo
let's say let's say four and a half percent over
the next year. Well, that's one hundred basis point rise, right,
So by definition, that is a recession. Now, anyone who
thinks that that's a soft landing is spitting in the
(16:15):
face of one hundred and fifty years of history. I'm
just saying that that's categorically wrong. Now, I think what
the soft landing camp really is is there's actually no
landing at all, meaning there's no rise in unemployment. Now
I would assign the probability of that of roughly fifteen percent.
I mean, that would be both good luck on the
supply side. We still have an increase in labor force
(16:35):
participation rate for example. Right, we got better news there,
and you would have the federal reserve really calibrated just
the right way. The five and a half percent fed
funds with core coming down, it's enough to have non
farm payrolls over the next year come in I don't know,
let's say one hundred thousand, just enough to have a
rise on point rate, but you don't have job losses
(16:57):
where you start to really you know, start to see
set am weaken further. Effectively, that's an environment where businesses
do not really have job cuts, they effectively they just
pause on hiring.
Speaker 3 (17:09):
That is that, in my mind, is what the soft
landing really is.
Speaker 4 (17:13):
And and so that's where I think, you know, from
an economists perspective, that may sound a little bit like
you know, splitting hairs, but it's actually important. So our view,
we say that is a low probability, so the odds
of recession are higher than sixty percent, but we're not calling,
you know, like for a deep recession. It's been it's
fairly mild and closest examples two thousand and one, so
(17:37):
hopefully that's helpful. I just see this disconnect between those
saying we're going to avoid recession, yet they have an
unemployment rate rise in of one hundred basis points. It's
just I just don't think that's possible to have those
two outcomes at the same time.
Speaker 2 (17:49):
Joe, there's a lot to dig into there, But I
want to return to a point you made that to
get to the last yard, to get back to two percent,
sort of The plain question I have is whether or
not that's worth it. Is it worth it to get
to two percent and tip the economy into a recession
versus accepting, you know, maybe a higher inflation rate of
(18:10):
two and a half percent.
Speaker 4 (18:12):
Again, it's a fair question, Katie. I've heard that dialogue.
I've been in research meetings with Federal Reserve officials. That
conversation has been had. I hear that argument. I just
think it's risky. Could it work?
Speaker 3 (18:25):
Yes?
Speaker 4 (18:26):
I mean, why die on the hill for two point
seven percent core inflection?
Speaker 3 (18:29):
Right?
Speaker 4 (18:30):
The only risk to that is what happened in nineteen
sixty seven, And that's actually the.
Speaker 3 (18:35):
One year where the yield curve inverted, yet we didn't
have a recession.
Speaker 4 (18:39):
People call it a soft landing, But as I've written
to our own clients and Vanguard, what happened two years
later was actually a deeper recession and inflation came back.
Now that's not our baseline, But why I bring up
nineteen sixty seven is comes back to that indicator I
mentioned before, the vacancy's unemployment ratio. In nineteen six, conditions
(19:01):
were very similar as now. The Federal Reserve cut rakes
because of some a little bit of credit pressures in
the banking sector. Now again, the Federal Reserve is not
cutting rates today. Within a year, though, that vacancy on
appointment ratio it cooled down but always remained well above one.
It started to rise again closer back to two, which
is where we were at the beginning of the year,
(19:21):
And so the Federal Reserve had to switch course dramatically
and actually had to take rates. They were at five
and a half, They took them down to three. By
the end of sixty nine are up to nine percent,
and a deep recession followed. Why so, like you could
let inflation kind of hover at two and a half
two point seven, I would be looking at that point
(19:42):
if that was the decision, where's that vacancy the unappointment.
Speaker 3 (19:45):
Ratio is it? Is it good?
Speaker 4 (19:47):
It is it around one, which is like the true
sooft landing, or is it going back up closer to
the two ratio than we had to beginning of the year.
If that is the case, then I would be screaming
for higher rates because we have seen that play out before.
So I would put a caveat, like, if you're going
to pursue that policy and let inflation hover around three percent,
(20:08):
really keep a close eye on the imbalance or balance
in the labor market, because that was a mistake that
I think many would take back that mistake in nineteen
sixty seven.
Speaker 1 (20:20):
Hey, Joe, if I could ask you to switch hats
for a minute here, As I said at the top,
you are the global chief economist at Vanguard, but you're
also head of the investment strategy group and on the
portfolio management team in fixed income. So I'm curious how
you were thinking about the bond market. You know, it
seems like yields have sort of settled into this range
(20:41):
last few months, call it four point eight four point
nine on the two year and about three point eight
three point nine on the ten year. We did have
the ten year spike above four a few weeks ago,
but it seems like it's settled back into that three
point eight three point nine, you know, at least on
a nominal basis. Obviously, real yields are another story there.
As inflation comes down but are we just kind of
(21:03):
locked into this range phenomenal yields. Do you think if
we if the FED is sort of going into plateau
rates for the rest of this year and next year.
Speaker 3 (21:13):
I think so.
Speaker 4 (21:14):
I mean, I think, you know, first of all, from
an investment perspective, our theme has been for a year
that you know, bonds would come back because you have
some rich real yields that you mentioned Mike, right, You
have real yields positive across most of the term structure.
It's something that you know that I've called the beginning
of the year, that return to sound money, right, And
I think it's been the best positive single development in
(21:34):
the financial markets in the last twenty years bar none.
Speaker 3 (21:37):
Because we have less of a subsidization by.
Speaker 4 (21:40):
Savers to those have had debt, you know, because you
had you had negative interest real interest rates.
Speaker 3 (21:44):
So that is a theme for us.
Speaker 4 (21:47):
I think within the fixed income market. To have a
higher long end of the curve, to have a higher
ten year treasury, you're going to need to make an
argument that either inflation is going to cyclically come back,
which I would say more as a tail risk, although
certainly possible.
Speaker 3 (22:01):
The other one is is that our star that's so
called neutral rate is higher.
Speaker 4 (22:05):
And as you know, our listeners may know, you know,
or we've published research, we've put it on external websites
to say that our star is actually is higher, which
is one of our thesis going into the year that
FED wasn't as restrictive as people think. So I think
from a fixed income perspective, you know, but again, bonds
are back, They're providing income across various investment strategies. On
(22:26):
the corporate sector, I mean, you see the total nominal
yield and on a real, real perspective of pretty compelling
on the municipal space, similar case. So I think it's
been a great development. We viewed this as view really
as a positive outcome for investors. My biggest concern five
years ago, Mike, is that we had negative interest rates
or remember the concerns around secular stagnation and low interest
(22:50):
rates forever. I think this is, you know, the power
of compounding find an investment perspective is pretty powerful.
Speaker 2 (22:57):
So just to draw that point out a little bit,
maybe this is an oversimplification, but if our star is higher,
do treasury yields across the curve need to be structurally
higher as well?
Speaker 4 (23:11):
Yeah, it's an esoteric terms, okaitis you know, but it's
effectively a way saying, what is the neutral cache rate? Right,
which is the bise asset for any security in the world, equities,
fixed income, private equity, So the risk free rate? What's
that neutral risk free rate? No one can see it.
It's like something in the heavenly bodies. You know, it's
(23:31):
out there if you can't actually feel it with your hands.
But our research that we've updated, actually it's fed O
Reserve's own research, we can show that it's one hundred
basis points higher than whatever that neutral rate was before COVID,
and it was starting to rise actually before COVID, and
it doesn't move on a dime. So if we're right,
that means the neutral nominal rate is roughly three and
(23:53):
a half, maybe perhaps this high as four percent, say
a cash rate a treasury T bill, and then you
would price out the yield curve from that, which would
get out of fair value potentially for the tenure treasury
over time. So with the you know, a modestyness in
the yield curve, you can get a fair value five
or ten years from now on a tenure that's a
(24:15):
little bit higher than where we are today, and that's
really debate in the market. The market was very bomb market,
as you know, was very skeptical that we were ever
going to leave that secular stagnation camp. We were anticipating
high odds that we would. We just did not know
the timing of it. But we think this is more
there's more permanence to the recent rise in interest rates. Yeah,
(24:36):
the Federal Reserve may cut rates in the next two years
with some economic weakness, but I think neutral rate is
clearly nominal rate is clearly in the three percent, you know,
three to four percent range. We can debate within that
range and as if it's slightly over that. But again,
that's a dramatic shift from where we were pre.
Speaker 2 (24:54):
COVID and Joe, You'll have to forgive me, but I'm
a journalist. I think in headlines so unforgivable listening to
(25:17):
what you're saying. I mean, ten year yields right now
we're at three point eighty six percent. If the cash
rate is you know, three and a half, I have
to assume that has to rise. Is this the end
of the bond bull market?
Speaker 4 (25:30):
Then I would characterize it differently. So my headline would
be there's more permanence to this, and then this is
really a good news. So I think those that have
been betting that we're going to we're well above normal
ranges and betting on a significant drop in interest rates.
I just think it's off base now this fair value range.
You know, the ten year traders are three point eight.
(25:50):
But there's a probability of recession in the next twelve months,
and so the market is trying to have assign a
certain probability to that over the next several years, which
can drop us below the numbers I just gave you, right,
So it doesn't surprise me that we're a little bit
below the four percent for four and a half percent
range on the tenure because it's also trying to discount
(26:11):
economic weakness in the next two years.
Speaker 3 (26:13):
But I again, I.
Speaker 4 (26:14):
Think we're within a normal range. I think the big
headline I would be putting is bonds will stay back.
You know, the headline beginning the years was bonds are back.
I think that they'll they'll stay high in their perch
for the foreseeable future.
Speaker 1 (26:27):
Chairman Palell duly noted at the press conference the long
and variable lags of monetary policy and how signal they're
still kind of waiting for perhaps some other shoes to drop.
You know, we saw the issues with regional banks in
the spring. These days, there's this sort of slow trickle
of alarming news in the commercial real estate sector. You know,
(26:51):
there's a lot of debt coming up for refinance in
the next few years at much higher rates, with much
lower occupancy rates on top of it. I'm just curious
where how you're thinking about that long and variable lag
and where maybe we should be looking for the effects
to perhaps surprise people. I mean, is it commercial real estate?
(27:15):
Is the regional banking issue not something that's completely solved
at the moment, Where perhaps would you worry about effects
from this aggressive interest rate campaign that we haven't really
seen yet.
Speaker 3 (27:28):
Yeah, well, I think it'd be too Mike. I mean,
clearly commercial real estate.
Speaker 4 (27:31):
Has gotten the most attention, and not to say that's
that that's misplaced. Myself and my team are looking at
two other areas in addition, and one is if we're
going to have a recession at all, or that's called it,
you know, just a significant slowdup. We had it in housing,
but there has to be weakness in the in the
construction in the employment.
Speaker 3 (27:48):
Side we are now.
Speaker 4 (27:49):
Housis would suggest that the pen up demand which was
which is still significant from the COVID type period, that
starts to wean its way through the system by November,
and so after that point, if there's not renewed demand,
then we're going to start to see modest layoffs. That's
the break even. So it puts you into early twenty
twenty four. And then the other one is what you
(28:10):
said in terms of terms out in terms of you know,
refinancing or new debt costs.
Speaker 3 (28:14):
Again, because a lot of a lot of.
Speaker 4 (28:16):
The locking in of low interest rates during COVID, I
think there is some truth to the fact that the
lives could be somewhat longer this cycle because of the
lock up. Exactly, the interest rates sensitivity for the economy
right now is lower than what it would be on average,
right And so both of them put you into not
that interest rates don't have an impact on the economy,
it just puts you in the downturn. The flowdown being
(28:40):
later into twenty twenty four. That would corroborate with another
piece Avage was had nothing to do with the lags,
and that's just what the fact is only now that
have we had the real, the real Fed funds rate,
so that you know where the Fed is five and
a half percent today minus the rate of trend inflation,
which you know is own recently gone. That those lines
(29:01):
have only recently crossed, and so you know, we've really
never had a recession without the Fed funds rateing at
least two percentage points above the rate of core inflation.
Speaker 3 (29:12):
So if you put cord four and a.
Speaker 4 (29:13):
Half roughly, let's say in three months we're down to
three and a half only, then you start really ticking
the clock between those long and variable lags impacting the
economy from a from a growth perspective. So housing is
still I think you know something I would I would
focus on. It's tough for me to square having a
slowdown in the labor market and not having some modest
(29:36):
job losses on the construction side.
Speaker 2 (29:38):
Yeah, and it's been really interesting to watch the home
builder stocks in particular really crush it this year because
people just don't want to sell out of that three
percent mortgage. The supply of existing homes has been very tight.
So definitely an area that we've been watching at Bloomberg.
But I do want to ask about you know, we're
talking about all these scary things, and I want to
(29:59):
talk about what is the haven asset in this environment,
because you would think it's treasuries, But then you take
a look at treasury volatility. It's come in a little bit,
but it's still pretty elevated relative to history. And then
you take a look at some of the big tech
stocks that are just absolutely crushing it this year, and
(30:20):
it feels like the there's no volatility to speak of.
And I haven't even mentioned the vics here, and Joe,
I guess this is a long way of asking, why
is it that text stocks have pretty much supplanted treasuries
as the safety trade this year? And do you think that,
you know, maybe that holds water, that maybe that's not
(30:43):
the worst dynamic in the world.
Speaker 3 (30:45):
Well, you know, we looked at that.
Speaker 4 (30:46):
You know, ca'se a good question even over a year ago,
and we're back to where we were a year ago,
right where we had gross stocks. It's just you know,
fantastic valuation levels at least relative to say the other
half of the un verse, more value based companies. And
I think there's two things going on. One is legitimate
and one more of a narrative which you start to
(31:06):
get concerned with with overvaluations, and the narrative is today
it's AI, but before it was platform effects, network effects,
winner take all dynamics. Again, there's some truth to it,
but it's one of the reasons why you can get overvaluations.
It's the extent of the of the multiple that's priced in,
and the other one is just a discount rate. I mean,
I still think, you know, you can justify some of
(31:29):
the growth stock the tech stocks valuations only if you
think that we live in the old world and that
rates are going to are well above where they should be,
and that we're going to ultimately go back to the
very low interest rate environment. So I don't think, you know,
tech stocks are certainly not immune to gravity. So if
you ask your question, where is there a haven, I'd
(31:49):
be more I would want to stay fully investigate. I mean,
I think the natural response would be cash, but over
a long period of time, I'm not going to get
really a strong risk premium for that. So you know,
for me, person, oh yeah, I'm looking at areas that
haven't been his love for the past year, and that's
like the value part of the market. You're still participating
in the equity market, but you know, he doesn't have
that major run up like you have on the tech side.
(32:11):
And I don't need value stocks to grow at the
same path as gross stocks to win, because that has
not been the case historically, So I would put the
value of risk premium. It's been a headwind the past
six months, but I think over long periods of history
it's been a tailwind. So that's where I'd be kind
of rebalancing into because the market is pretty unbalanced within
the equity market.
Speaker 1 (32:32):
Well, you're listening to Joe Davis. He's the global chief
Economists and head of Investment Strategy Group at Vanguard. Katie
at Larry Steaks in West Philly. The name of the sandwich,
the famous sandwich is the belly filler. That's you're just disgusted.
(32:54):
I was gonna say, I think Joe filled our belly
there with a lot of good information there is that
Is that too weird? The belly filler? Joe, the belly filler.
Thanks man, the belly filler. I always love that one. Anyway, Joe,
we can't let you go just yet. We do have
attrition on the podcast where we have to reveal the
craziest things we've seen in markets, or in your case,
(33:16):
I'll take in economic data. Whatever you got for the week, Katie,
how about you go first.
Speaker 2 (33:20):
I think this is pretty good. Take a look at
the Dow Jones Industrial Average. On Wednesday, it closed it's
thirteenth straight up day in a row, a wind streak
of thirteen days. That is the longest wind streak for
the Dow since January nineteen eighty seven.
Speaker 1 (33:39):
Since eighty seven. Oh boy, well, that's anomenous here to
bring out. I don't know about that, that connection to
nineteen eighty seven. I guess we got ten months till
everything hits the fan. That is pretty amazing. Thirteen days. Yeah, wow,
that's a good one. That is crazy. Yeah, you did well.
Speaker 2 (33:57):
All right?
Speaker 1 (33:58):
How about you, Joe, you got anything crazy for Yeah?
Speaker 4 (34:00):
I would say, well, and it probably matches Katie's chart.
That would be you know, the number of web searches
for the phrase soft landing. It used to be high,
than it dropped to zero. Now it's back at record highs.
And so I think those two charts would be very
highly correlated. May maybe they stick for the rest of
the year. I'm skeptical, but hey, here's the wishing.
Speaker 1 (34:22):
All right, good stuff to both you. I'll give you
mine now, all right. This is courtesy of cbsnews dot Com. Joe,
I prefer the alternative asset classes for my crazy things,
and this is about as alternative as it gets. It's
a gold, ruby and diamond ring worn by rapped legend
Tupac Shakur during his last public appearance. Wow, he were, yeah,
(34:47):
how about that? And it's pretty cool look and it's
got a crown on it, and with the crown is
made of rubies and diamonds and gold. He apparently was
a big reader of Machavelli and like the medieval kings
and medieval lure of Europe. Anyway, Yeah, yeah, who knew
about Tupac? What up production at Sotheby's. So it's time
(35:10):
to play that game. The price is precise. I regret
to inform both of you. You are contestants. Katie, what's
your price or the winning bid for rap legend Tupac
Shakur's gold, ruby and diamond ring.
Speaker 2 (35:26):
Can I tell you something horrible? I actually just googled
it because it sounded so it sounded very pretty, and
I wanted.
Speaker 1 (35:34):
To see no, no, googling.
Speaker 2 (35:36):
I'm sorry, I'm sorry. I removed myself.
Speaker 1 (35:40):
You forfeit, You forfeit. Well, Joe, I gotta tell you
you're automatically the winner. But I still want to hear
what your bid is.
Speaker 3 (35:46):
Oh, I know I heard. I was just going to
throw it a million. I have no idea.
Speaker 1 (35:50):
Are you googling too? Joe? You hit it exactly on
the nose. That's impressive.
Speaker 3 (35:55):
How big was the diamonds and rubies?
Speaker 1 (35:58):
Katie does it?
Speaker 5 (35:59):
Say?
Speaker 1 (35:59):
I don't know, but it's not it.
Speaker 2 (36:01):
Yeah, I mean the diamonds are accents. I'm on people
dot com right now. It's more about the crown. Is
really the centerpiece of in the crowd.
Speaker 1 (36:11):
Yeah, yeah, Well.
Speaker 4 (36:12):
That makes more sense to me though than you know,
you know, things like sneakers and stuff.
Speaker 3 (36:17):
At least there's intrinsic.
Speaker 4 (36:18):
Guys who knows, well, at least you're gonna do if
you're gonna diversify and alternative assets. You got that, You
got gold, diamonds and ruby, so you got multiple You
got it.
Speaker 1 (36:26):
All covered right South of Beys had only estimated two
hundred to three hundred thousand, so way off base. They said, wow,
this makes it the most valuable hip hop artifact ever sold,
I don't know.
Speaker 4 (36:37):
Artifact sounds well, you could tell, you could tell that
the Federal Reserve that perhaps financial conditions are not that restrictive.
Speaker 3 (36:44):
When you have things going on.
Speaker 1 (36:46):
We're gonna add Tupac's jewelry to the financial conditions index.
But and rest in peace to uh to mister Shaker.
My old college buddy Jeff Peerlman is actually right in
a biography of them, so little shout out to them. Yeah, Joe,
pleasure to hear your thoughts. We really appreciate it. Oh
and you never didn't give us your favorite cheeseteak. Join
(37:08):
it's not Larry's.
Speaker 4 (37:09):
Oh I go Pats Downtown. Yeah all right, yeah, but
they're all good, you know, classic. And you know, Katie,
you should try the chicken cheese steak. You know, It's
just it's a nice diversifier too.
Speaker 1 (37:19):
I'm gonna I'm gonna buy you one next time I'm
in the Okay together, Katie.
Speaker 2 (37:24):
I appreciate that, but I'll just have a burger.
Speaker 1 (37:27):
Yeah, man man oh man. Anyway, Joe, David Niche so
much for your time. We really appreciate it.
Speaker 3 (37:36):
Thank you both for having me.
Speaker 2 (37:46):
What Goes Up.
Speaker 5 (37:47):
We'll be back next week. Until then, you can find
us on the Bloomberg Terminal website and app, or wherever
you get your podcasts. We'd love it if you took
the time to rate and review the show so more
listeners can find us. You can find us on Twitter,
follow me at Wildona Hirich. Mike Reagan is at Reaganonymous.
(38:07):
You can also follow Boomer Podcasts at podcasts. What Goes
Up is produced by Stacy Wong, and our head of
podcasts is Sage Paulman. Thanks for listening and we'll see
you next week.
Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Reagan. I'm a senior editor at Bloomberg, and.
Speaker 2 (00:20):
I'm Katie Greifeld. I'm an anchor with Bloomberg Television and
a cross auser reporter.
Speaker 1 (00:25):
And this week on the show, while the Federal Reserve
raised borrowing costs again this week, taking their benchmark interest
rate to a twenty two year high. At Mane on
Wall Street, believe the Central Bank is either finished or
very close to being finished this very aggressive rate hike cycle.
But what about the recession that so many were convinced
(00:45):
would result from the Central Bank's aggressive fight against inflation?
Was that just misplaced pessimism or is the downturn still
on its way. We'll get into it with our guest,
who is an economist at a major investment firm. But
first I got a question for you. Yeah hit me,
And I know you went to college in the Philadelphia
area at Haverford. I assume you sampled the cheese steaks
(01:12):
in Philadelphia at some point, and you're.
Speaker 2 (01:14):
Preaching right, No, I've never had a cheese steak. I
feel like I'm immediately killing our banter. Our top of
the show banter. But I've never had a cheese steak.
Speaker 1 (01:23):
You've never had a cheese steak?
Speaker 3 (01:25):
No, It just.
Speaker 2 (01:27):
Something about the strips of meat never appealed to me.
I do eat, I'm not a vegetarian, but just did
not fill out my boat.
Speaker 1 (01:35):
Oh man, all right, all right, that's fair. So your
answer is none of the above, Na, not applicable?
Speaker 2 (01:42):
I said, yes, what would have happened?
Speaker 1 (01:44):
My tradition here is to ask Philadelphia area guests what
their favorite cheese steak joint is. And I'm going to
tell you right now, Katie, If our guest this week
actually is a cheese steak eater, I think I can
guess what his favorite place is. And this after never
have met him, never spoken to him. That's how good
I am. All right, you ready?
Speaker 3 (02:05):
All right?
Speaker 2 (02:06):
I'm excited.
Speaker 1 (02:07):
Now let's bring him in. He is Joe Davis. He's
the global chief economist and head of the Investment Strategy
Group at Vanguard. Joe, welcome to the show.
Speaker 3 (02:15):
Oh thanks for having me.
Speaker 1 (02:16):
All right, Joe? Are you ready to be blown away?
Speaker 3 (02:18):
Yeah? Let's go.
Speaker 1 (02:19):
Your favorite cheesesteak joint is Larry's Steaks on fifty for
fifty fourth I believe it is and city line on
Hawk Hill? Am I right?
Speaker 3 (02:32):
Not bad? Not bad?
Speaker 1 (02:34):
Did I get?
Speaker 3 (02:34):
It's not my favorite?
Speaker 4 (02:35):
So I grew up outside of Philly, but I went
to college in Philadelphia proper. So Larry's is a great one,
particularly after midnight because being in college, they're there.
Speaker 3 (02:47):
It's a good cheese.
Speaker 1 (02:49):
Joe Is, I believe you might be our first Hawk,
our first Saint Joseph's University hawk on the show, which
is exciting for me, my whole. I've one of six kids.
Everyone in the family went to Saint jose but me. Yeah, yeah,
it's crazy.
Speaker 4 (03:01):
Well, how is this so if you're from Philadelphia, you
know a rivalry of Saint Jose's.
Speaker 1 (03:04):
Villanova r Oh, absolutely yeah.
Speaker 3 (03:06):
So that's where that's where my daughter's going next year.
So we're gonna have some family tensions.
Speaker 1 (03:10):
Oh yeah, boy, you're at your let you're gonna let
her back in the house.
Speaker 3 (03:13):
I don't know.
Speaker 4 (03:14):
My son's at Penn. So we got the whole. We
have almost the entire Big Five. So yeah, long lived Pilly.
Speaker 1 (03:19):
Three fifths of the Big Five. Well, Joe, let's get
down to business. Then, you know we have the fed
uh statement and press conference today. You know, the vibe
I'm getting is not too many surprises. You know, we
got the quarter point rate increase, so the FED funds
target's now five and a quarter to five and a
half percent. Anything shock you today or surprise you at
(03:40):
all about the statement or what Jerome Palell had to say.
Speaker 3 (03:43):
No, I mean, nothing's really surprised me, Mike.
Speaker 4 (03:45):
I mean again again, I think the big, open ended
question is the same question that we were facing at
the beginning of the year, and that really is how
much work, if at all, there needs to be done
from the Fed, which really brings to the heart really
the essential question, which is how restrictive are they today?
You hear Chairman pal saying they're restrictive.
Speaker 3 (04:04):
By any measure. The question is how much? Because if
you can.
Speaker 4 (04:07):
Get a handle on that, then you know how much
both inflation will fall and how much economic damage may
be done over the next six or twelve months. So
I think that's still the open question that we were
facing the beginning of the year.
Speaker 2 (04:20):
Something else that I wanted to ask about, though, was
the fact that just stepping back from you know, will
they won't they? In terms of rate rises, it's been
striking to me how there's been so relatively few descents
on Chairman Palell's watch. This was another meeting that was
completely unanimous, even though in their words and the FED
(04:41):
speak that follows every big decision, there seems to be
some disagreement. You never see that in the actual votes.
I'm wondering if that's something you've noticed as well.
Speaker 4 (04:51):
That is a good point, Katie, I have noticed it.
I think that if you know, going forward, we may
see greater disagreement. Certainly there's probably more healthy disagreement in
the actual discussions when they're making decisions rather than the statement.
But I think I think they've been I think Chairman
has been able to navigate that with more of the
first appause, you know, the last meeting and now being
(05:14):
a more data dependent phrase because you do have you know,
a healthy spectrum of those wanting to go a little
bit further and those thinking on the FED that they've
done enough. So I think that's also a somewhat of
a testament to his leadership being able to navigate that.
But I think from here on out, I think that
the probability of having you know, some modest descent could rise.
Speaker 2 (05:35):
Do you think at all that it sort of muddles
the message coming from the FED that there has been
unanimous votes up until this point. And the reason I
asked is because I was listening to Andrew Hollenhorst from
City on ATV immediately after the decision, before the press
or after the decision, saying that basically they sacrifice clarity
(06:00):
in having a completely unanimous vote, especially after what we
saw in June where they decided to skip but they
signaled more raises to come. Is that something that that
irks you at all, something that muddels their message? Or
are they pretty loud and clear here?
Speaker 4 (06:16):
No, I mean I think they're closer to loud and clear.
I mean I think reason why we probably haven't seen
as much of a descent or open aired sort of
dialogue is because inflation is still well buff target. Yes,
it has come down, you know, the more recent data
is lower than what it was a year ago. But
I think that that they're still off on their core mandate,
(06:37):
which is why we're seeing still coalestion coalescing around the
final decision. I think again, as we get closer to
two percent, could be a ways off, but as closer
we get a two percent inflation I think you could
see more healthy debate, including on.
Speaker 1 (06:51):
The voting, you know, Joe, I think one of the
remarks that caught some people by surprise was when Jerome
Palce said he doesn't see the economy getting back to
that two percent target until twenty twenty five, so you know,
another year and change, you know, five quarters or so.
Does that make sense? You know, we've seen such an
(07:12):
aggressive drop from you know, what was the peak in
headline CPI like nine to three in the last print.
Does it make sense that it would take that much
longer to get to two?
Speaker 3 (07:24):
You know?
Speaker 1 (07:24):
Is it a is it a story of base effects
that you know, now we're comparing year over year to
inflation that had already cooled off. How are you thinking
about how long it'll take to get to that two percent?
Speaker 3 (07:36):
Well, I think it will take some time.
Speaker 4 (07:37):
I think that's you know, I think that was a
subtle but a very important point is actually it's one
of the most important comments I thought that was made today, Mike,
and that you know, there's there's our own research and projections,
the Federal reserves projections as well as academic analysis, including
from former chairman Ben Bernanke all point to that to
the same outcome, which is inflation and remaining elevated, meaning.
Speaker 3 (07:59):
Above two percent for some time.
Speaker 4 (08:01):
The primary reason for that is the tightness in the
labor market, and so you know, I think that's where
you know, and we have been of the view I've
been have had strong conviction for some time that we
were going to need to see some material cooling in
the labor market to get to two percent in any
near term horizon, because it is in the wage dynamics.
(08:22):
And so I don't I think the market has slowly,
the bond market has slowly come to grips with that
starting to price out cuts. Right if recall at the
beginning of the year there was you know, high conviction
in the bond market there would be significant easy and
almost at this point right now. And so I think
even those comments today, I still think point to the
fact that you know, it's going to take some labor
(08:43):
market weakness to get to that last yard at as
many call it, from three percent trend inflation down to two,
which brings up another I think important debate that words
matter with respect to this narrative around the soft landing.
But perhaps you know, I'll say that for another question.
Speaker 2 (09:00):
Before we get there, and I do want to get there,
I want to talk a little bit more about what
you're saying about wages in the fact that we need
to see some cooling in the labor market to get
back to target. Is that because there's evidence of a
wage price spiral at this point?
Speaker 4 (09:15):
Well, I think, kay, I think there was clearly that
last year you had wage pressures that were significant six
seven percent. You had labor market turnover that was as
high as a generation. Again, we all knew some of
that was somewhat temporary. But I think where I come out,
there's not a wage price spiral. But the fact is
the labor market is imbalanced, and we've grown. You know,
(09:38):
there's measures that many point to the vacancy to unemployment rate.
You know that ratio one is in balanced number of
vacancies equal number of unemployed Americans. We've grown that data
actually back to as far back as World War One,
so one hundred years, which gave us early insight during
the throes of COVID that we're going to have some
(09:59):
wage based inflation pressures. That ratio now has come down,
that's good news, but we're starting to enter the territory
the ratio is right now, one point five vacancies to
a unemployment of one, So one point five is above one.
It's imbalance demand exceed supply. We're starting to enter the
territory where any further drop in vacancies starts to be
(10:21):
associated with a modest increase in unemployment. That's important because
that suggests that and there hasn't been an exception to
that for one hundred years. So if we're right, we
should see some further weakness in the labor market. If
we do not, then that opens up a different door,
which means inflation may be stickier than we think, and
that would be a surprise to the market.
Speaker 2 (10:47):
I did want to wrap in this conversation we're having
on the labor market to current events that we're seeing
in the economy, especially when we're seeing all these labor negotiations.
We saw a big win for labor un unions this
week with the Teamsters versus UPS, and actually the Teamsters
chief was on Bloomberg Television after that saying that now
(11:08):
they're taking the name at Amazon, and I'm wondering how
you're viewing that, whether those are one off scenarios where
you know, maybe that segment that was involved, that union
that was involved gets a price hike. How that is
fitting into your overall view on the labor market right now?
Speaker 4 (11:30):
Well, you know, I think you know, if you talk
to friends and colleagues, as even a Boston as an employer,
you know, you can feel the tightness in the labor
market when you're looking for applicants. It's in the data,
it's in common experience. It's not as tight as a
year ago. Last year seemed like a really a frenzy
where demand just was was was drassicala ecceede supply. Labor
(11:50):
turnovers come down. We know, job you know wage increases
are double the rate when you leave a company for
a new job then when you stay at the existing ones,
So is labor turnovers come down. The wage growth is cooled,
and again this is good news for consumers. But the
fact is we still have an imbalanced labor market. Now
that's why the biggest reason why the Fed took rates
(12:11):
from zero to five percent, right, It's just that there
was that debate a year ago, your member, between Waller
and Summers and others and some calling that immaculate disinflation,
meaning you could have that ratio which at one point
was two vacancies to one unemployed. You could fall most
magically to one. I'm just saying that that's that's historically unprecedented.
(12:32):
You can drop from two to about one point five
maybe one point three, which we're we're tracking along that pace.
At that point, it becomes that that sort of that
line becomes a little kinked, and so any further drop
in vacancies to get a better balance in labor market,
which gets to the wage pressures being a little bit less,
you know, intense, you start to see a rise in unemployment,
(12:54):
and so there's no getting around that trade off at
some point. And that I think the soft that the
soft landing crowd has to come as to grips with
is that is it theoretically possible, Sure, but it would
actually require decent good luck and further labor supply coming
out of the woodwork for us to magically balance the
labor market.
Speaker 3 (13:13):
Over the next six months.
Speaker 1 (13:14):
Well, Joe, let's talk about that soft landing notion. I mean,
it seems like it's getting a bigger and bigger sort
of constituency among economists. One of the interesting things Pal
said today was that the FED staff is no longer
forecasting a recession. The IMF this week raised its its
growth forecast for next year. And at Bloomberg, you know,
(13:38):
obviously we do a lot of surveys of economists. They've
boosted their GDP estimates for the second and third quarters.
According to that survey, consensus is there's about a sixty
percent chance of a recession within the next twelve months.
I'm curious what how you're handicapping it, you know, is
that sixty percent sound high to you? Load to you?
(13:59):
Is it? Is it more of a sure thing than that?
How are you thinking about?
Speaker 4 (14:03):
So I'll give you my answer. I also give you
which it's semantics, but it's actually a very important one
and that is actually many of the forecasts out there,
although they seem dramatically bipolar, either if there's a recession
camp or there's a soft landing camp, right, they're actually
the forecasts, including the FED, including vanguards you know, are
(14:24):
forecast and many from you know, many many economist firms.
They're actually more similar than different. There's just there's this
there's been this bipolar sort of oh we're in the
recession camp or not?
Speaker 3 (14:34):
Why say that?
Speaker 4 (14:35):
Is almost everyone has a rise in the unemployment rate
of at least thirty or forty basis points, so going
above four percent over the next year.
Speaker 3 (14:43):
Right.
Speaker 4 (14:44):
Well, historically that that that has been one hundred percent
associated with a recession, now not necessarily deep in magnitude,
but a recession that, by the way, is the Federal
Reserves forecast. So the Federal Reserve, I mean semantically, they
they're on record saying no, no recession, but by that metric,
it actually it would it is a recession because you
(15:06):
have very modest job losses. Now GDP could be you know,
zero point five percent, one percent next year. That's closer
to our projections one percent. You know, here's the quiz
in two thousand and one, which has been our central
tendency of what's the most closest reference point for a
very mild recession, which is our baseline two thousand and one,
(15:26):
GDP never fell on an annual basis Really, yeah, we
had unemployment rise.
Speaker 1 (15:31):
Yeah.
Speaker 4 (15:31):
No. In fact, many recessions do not have GDP fall
in the calendar year with which they occur. Again, except
GFC and nineteen eighty two and all those deep ones
clearly fall. So again, we haven't changed our view on
that the data has been a little bit stronger than expected.
But ultimately our view has been you can't have your cake,
you need it too, which means to get inflation down
(15:54):
to that last yard of two percent, you have to
see a modest weakening in the labor market, which means,
on pointing rate's going to rise, although hopefully not Drasticgo
let's say let's say four and a half percent over
the next year. Well, that's one hundred basis point rise, right,
So by definition, that is a recession. Now, anyone who
thinks that that's a soft landing is spitting in the
(16:15):
face of one hundred and fifty years of history. I'm
just saying that that's categorically wrong. Now, I think what
the soft landing camp really is is there's actually no
landing at all, meaning there's no rise in unemployment. Now
I would assign the probability of that of roughly fifteen percent.
I mean, that would be both good luck on the
supply side. We still have an increase in labor force
(16:35):
participation rate for example. Right, we got better news there,
and you would have the federal reserve really calibrated just
the right way. The five and a half percent fed
funds with core coming down, it's enough to have non
farm payrolls over the next year come in I don't know,
let's say one hundred thousand, just enough to have a
rise on point rate, but you don't have job losses
(16:57):
where you start to really you know, start to see
set am weaken further. Effectively, that's an environment where businesses
do not really have job cuts, they effectively they just
pause on hiring.
Speaker 3 (17:09):
That is that, in my mind, is what the soft
landing really is.
Speaker 4 (17:13):
And and so that's where I think, you know, from
an economists perspective, that may sound a little bit like
you know, splitting hairs, but it's actually important. So our view,
we say that is a low probability, so the odds
of recession are higher than sixty percent, but we're not calling,
you know, like for a deep recession. It's been it's
fairly mild and closest examples two thousand and one, so
(17:37):
hopefully that's helpful. I just see this disconnect between those
saying we're going to avoid recession, yet they have an
unemployment rate rise in of one hundred basis points. It's
just I just don't think that's possible to have those
two outcomes at the same time.
Speaker 2 (17:49):
Joe, there's a lot to dig into there, But I
want to return to a point you made that to
get to the last yard, to get back to two percent,
sort of The plain question I have is whether or
not that's worth it. Is it worth it to get
to two percent and tip the economy into a recession
versus accepting, you know, maybe a higher inflation rate of
(18:10):
two and a half percent.
Speaker 4 (18:12):
Again, it's a fair question, Katie. I've heard that dialogue.
I've been in research meetings with Federal Reserve officials. That
conversation has been had. I hear that argument. I just
think it's risky. Could it work?
Speaker 3 (18:25):
Yes?
Speaker 4 (18:26):
I mean, why die on the hill for two point
seven percent core inflection?
Speaker 3 (18:29):
Right?
Speaker 4 (18:30):
The only risk to that is what happened in nineteen
sixty seven, And that's actually the.
Speaker 3 (18:35):
One year where the yield curve inverted, yet we didn't
have a recession.
Speaker 4 (18:39):
People call it a soft landing, But as I've written
to our own clients and Vanguard, what happened two years
later was actually a deeper recession and inflation came back.
Now that's not our baseline, But why I bring up
nineteen sixty seven is comes back to that indicator I
mentioned before, the vacancy's unemployment ratio. In nineteen six, conditions
(19:01):
were very similar as now. The Federal Reserve cut rakes
because of some a little bit of credit pressures in
the banking sector. Now again, the Federal Reserve is not
cutting rates today. Within a year, though, that vacancy on
appointment ratio it cooled down but always remained well above one.
It started to rise again closer back to two, which
is where we were at the beginning of the year,
(19:21):
And so the Federal Reserve had to switch course dramatically
and actually had to take rates. They were at five
and a half, They took them down to three. By
the end of sixty nine are up to nine percent,
and a deep recession followed. Why so, like you could
let inflation kind of hover at two and a half
two point seven, I would be looking at that point
(19:42):
if that was the decision, where's that vacancy the unappointment.
Speaker 3 (19:45):
Ratio is it? Is it good?
Speaker 4 (19:47):
It is it around one, which is like the true
sooft landing, or is it going back up closer to
the two ratio than we had to beginning of the year.
If that is the case, then I would be screaming
for higher rates because we have seen that play out before.
So I would put a caveat, like, if you're going
to pursue that policy and let inflation hover around three percent,
(20:08):
really keep a close eye on the imbalance or balance
in the labor market, because that was a mistake that
I think many would take back that mistake in nineteen
sixty seven.
Speaker 1 (20:20):
Hey, Joe, if I could ask you to switch hats
for a minute here, As I said at the top,
you are the global chief economist at Vanguard, but you're
also head of the investment strategy group and on the
portfolio management team in fixed income. So I'm curious how
you were thinking about the bond market. You know, it
seems like yields have sort of settled into this range
(20:41):
last few months, call it four point eight four point
nine on the two year and about three point eight
three point nine on the ten year. We did have
the ten year spike above four a few weeks ago,
but it seems like it's settled back into that three
point eight three point nine, you know, at least on
a nominal basis. Obviously, real yields are another story there.
As inflation comes down but are we just kind of
(21:03):
locked into this range phenomenal yields. Do you think if
we if the FED is sort of going into plateau
rates for the rest of this year and next year.
Speaker 3 (21:13):
I think so.
Speaker 4 (21:14):
I mean, I think, you know, first of all, from
an investment perspective, our theme has been for a year
that you know, bonds would come back because you have
some rich real yields that you mentioned Mike, right, You
have real yields positive across most of the term structure.
It's something that you know that I've called the beginning
of the year, that return to sound money, right, And
I think it's been the best positive single development in
(21:34):
the financial markets in the last twenty years bar none.
Speaker 3 (21:37):
Because we have less of a subsidization by.
Speaker 4 (21:40):
Savers to those have had debt, you know, because you
had you had negative interest real interest rates.
Speaker 3 (21:44):
So that is a theme for us.
Speaker 4 (21:47):
I think within the fixed income market. To have a
higher long end of the curve, to have a higher
ten year treasury, you're going to need to make an
argument that either inflation is going to cyclically come back,
which I would say more as a tail risk, although
certainly possible.
Speaker 3 (22:01):
The other one is is that our star that's so
called neutral rate is higher.
Speaker 4 (22:05):
And as you know, our listeners may know, you know,
or we've published research, we've put it on external websites
to say that our star is actually is higher, which
is one of our thesis going into the year that
FED wasn't as restrictive as people think. So I think
from a fixed income perspective, you know, but again, bonds
are back, They're providing income across various investment strategies. On
(22:26):
the corporate sector, I mean, you see the total nominal
yield and on a real, real perspective of pretty compelling
on the municipal space, similar case. So I think it's
been a great development. We viewed this as view really
as a positive outcome for investors. My biggest concern five
years ago, Mike, is that we had negative interest rates
or remember the concerns around secular stagnation and low interest
(22:50):
rates forever. I think this is, you know, the power
of compounding find an investment perspective is pretty powerful.
Speaker 2 (22:57):
So just to draw that point out a little bit,
maybe this is an oversimplification, but if our star is higher,
do treasury yields across the curve need to be structurally
higher as well?
Speaker 4 (23:11):
Yeah, it's an esoteric terms, okaitis you know, but it's
effectively a way saying, what is the neutral cache rate? Right,
which is the bise asset for any security in the world, equities,
fixed income, private equity, So the risk free rate? What's
that neutral risk free rate? No one can see it.
It's like something in the heavenly bodies. You know, it's
(23:31):
out there if you can't actually feel it with your hands.
But our research that we've updated, actually it's fed O
Reserve's own research, we can show that it's one hundred
basis points higher than whatever that neutral rate was before COVID,
and it was starting to rise actually before COVID, and
it doesn't move on a dime. So if we're right,
that means the neutral nominal rate is roughly three and
(23:53):
a half, maybe perhaps this high as four percent, say
a cash rate a treasury T bill, and then you
would price out the yield curve from that, which would
get out of fair value potentially for the tenure treasury
over time. So with the you know, a modestyness in
the yield curve, you can get a fair value five
or ten years from now on a tenure that's a
(24:15):
little bit higher than where we are today, and that's
really debate in the market. The market was very bomb market,
as you know, was very skeptical that we were ever
going to leave that secular stagnation camp. We were anticipating
high odds that we would. We just did not know
the timing of it. But we think this is more
there's more permanence to the recent rise in interest rates. Yeah,
(24:36):
the Federal Reserve may cut rates in the next two years
with some economic weakness, but I think neutral rate is
clearly nominal rate is clearly in the three percent, you know,
three to four percent range. We can debate within that
range and as if it's slightly over that. But again,
that's a dramatic shift from where we were pre.
Speaker 2 (24:54):
COVID and Joe, You'll have to forgive me, but I'm
a journalist. I think in headlines so unforgivable listening to
(25:17):
what you're saying. I mean, ten year yields right now
we're at three point eighty six percent. If the cash
rate is you know, three and a half, I have
to assume that has to rise. Is this the end
of the bond bull market?
Speaker 4 (25:30):
Then I would characterize it differently. So my headline would
be there's more permanence to this, and then this is
really a good news. So I think those that have
been betting that we're going to we're well above normal
ranges and betting on a significant drop in interest rates.
I just think it's off base now this fair value range.
You know, the ten year traders are three point eight.
(25:50):
But there's a probability of recession in the next twelve months,
and so the market is trying to have assign a
certain probability to that over the next several years, which
can drop us below the numbers I just gave you, right,
So it doesn't surprise me that we're a little bit
below the four percent for four and a half percent
range on the tenure because it's also trying to discount
(26:11):
economic weakness in the next two years.
Speaker 3 (26:13):
But I again, I.
Speaker 4 (26:14):
Think we're within a normal range. I think the big
headline I would be putting is bonds will stay back.
You know, the headline beginning the years was bonds are back.
I think that they'll they'll stay high in their perch
for the foreseeable future.
Speaker 1 (26:27):
Chairman Palell duly noted at the press conference the long
and variable lags of monetary policy and how signal they're
still kind of waiting for perhaps some other shoes to drop.
You know, we saw the issues with regional banks in
the spring. These days, there's this sort of slow trickle
of alarming news in the commercial real estate sector. You know,
(26:51):
there's a lot of debt coming up for refinance in
the next few years at much higher rates, with much
lower occupancy rates on top of it. I'm just curious
where how you're thinking about that long and variable lag
and where maybe we should be looking for the effects
to perhaps surprise people. I mean, is it commercial real estate?
(27:15):
Is the regional banking issue not something that's completely solved
at the moment, Where perhaps would you worry about effects
from this aggressive interest rate campaign that we haven't really
seen yet.
Speaker 3 (27:28):
Yeah, well, I think it'd be too Mike. I mean,
clearly commercial real estate.
Speaker 4 (27:31):
Has gotten the most attention, and not to say that's
that that's misplaced. Myself and my team are looking at
two other areas in addition, and one is if we're
going to have a recession at all, or that's called it,
you know, just a significant slowdup. We had it in housing,
but there has to be weakness in the in the
construction in the employment.
Speaker 3 (27:48):
Side we are now.
Speaker 4 (27:49):
Housis would suggest that the pen up demand which was
which is still significant from the COVID type period, that
starts to wean its way through the system by November,
and so after that point, if there's not renewed demand,
then we're going to start to see modest layoffs. That's
the break even. So it puts you into early twenty
twenty four. And then the other one is what you
(28:10):
said in terms of terms out in terms of you know,
refinancing or new debt costs.
Speaker 3 (28:14):
Again, because a lot of a lot of.
Speaker 4 (28:16):
The locking in of low interest rates during COVID, I
think there is some truth to the fact that the
lives could be somewhat longer this cycle because of the
lock up. Exactly, the interest rates sensitivity for the economy
right now is lower than what it would be on average,
right And so both of them put you into not
that interest rates don't have an impact on the economy,
it just puts you in the downturn. The flowdown being
(28:40):
later into twenty twenty four. That would corroborate with another
piece Avage was had nothing to do with the lags,
and that's just what the fact is only now that
have we had the real, the real Fed funds rate,
so that you know where the Fed is five and
a half percent today minus the rate of trend inflation,
which you know is own recently gone. That those lines
(29:01):
have only recently crossed, and so you know, we've really
never had a recession without the Fed funds rateing at
least two percentage points above the rate of core inflation.
Speaker 3 (29:12):
So if you put cord four and a.
Speaker 4 (29:13):
Half roughly, let's say in three months we're down to
three and a half only, then you start really ticking
the clock between those long and variable lags impacting the
economy from a from a growth perspective. So housing is
still I think you know something I would I would
focus on. It's tough for me to square having a
slowdown in the labor market and not having some modest
(29:36):
job losses on the construction side.
Speaker 2 (29:38):
Yeah, and it's been really interesting to watch the home
builder stocks in particular really crush it this year because
people just don't want to sell out of that three
percent mortgage. The supply of existing homes has been very tight.
So definitely an area that we've been watching at Bloomberg.
But I do want to ask about you know, we're
talking about all these scary things, and I want to
(29:59):
talk about what is the haven asset in this environment,
because you would think it's treasuries, But then you take
a look at treasury volatility. It's come in a little bit,
but it's still pretty elevated relative to history. And then
you take a look at some of the big tech
stocks that are just absolutely crushing it this year, and
(30:20):
it feels like the there's no volatility to speak of.
And I haven't even mentioned the vics here, and Joe,
I guess this is a long way of asking, why
is it that text stocks have pretty much supplanted treasuries
as the safety trade this year? And do you think that,
you know, maybe that holds water, that maybe that's not
(30:43):
the worst dynamic in the world.
Speaker 3 (30:45):
Well, you know, we looked at that.
Speaker 4 (30:46):
You know, ca'se a good question even over a year ago,
and we're back to where we were a year ago,
right where we had gross stocks. It's just you know,
fantastic valuation levels at least relative to say the other
half of the un verse, more value based companies. And
I think there's two things going on. One is legitimate
and one more of a narrative which you start to
(31:06):
get concerned with with overvaluations, and the narrative is today
it's AI, but before it was platform effects, network effects,
winner take all dynamics. Again, there's some truth to it,
but it's one of the reasons why you can get overvaluations.
It's the extent of the of the multiple that's priced in,
and the other one is just a discount rate. I mean,
I still think, you know, you can justify some of
(31:29):
the growth stock the tech stocks valuations only if you
think that we live in the old world and that
rates are going to are well above where they should be,
and that we're going to ultimately go back to the
very low interest rate environment. So I don't think, you know,
tech stocks are certainly not immune to gravity. So if
you ask your question, where is there a haven, I'd
(31:49):
be more I would want to stay fully investigate. I mean,
I think the natural response would be cash, but over
a long period of time, I'm not going to get
really a strong risk premium for that. So you know,
for me, person, oh yeah, I'm looking at areas that
haven't been his love for the past year, and that's
like the value part of the market. You're still participating
in the equity market, but you know, he doesn't have
that major run up like you have on the tech side.
(32:11):
And I don't need value stocks to grow at the
same path as gross stocks to win, because that has
not been the case historically, So I would put the
value of risk premium. It's been a headwind the past
six months, but I think over long periods of history
it's been a tailwind. So that's where I'd be kind
of rebalancing into because the market is pretty unbalanced within
the equity market.
Speaker 1 (32:32):
Well, you're listening to Joe Davis. He's the global chief
Economists and head of Investment Strategy Group at Vanguard. Katie
at Larry Steaks in West Philly. The name of the sandwich,
the famous sandwich is the belly filler. That's you're just disgusted.
(32:54):
I was gonna say, I think Joe filled our belly
there with a lot of good information there is that
Is that too weird? The belly filler? Joe, the belly filler.
Thanks man, the belly filler. I always love that one. Anyway, Joe,
we can't let you go just yet. We do have
attrition on the podcast where we have to reveal the
craziest things we've seen in markets, or in your case,
(33:16):
I'll take in economic data. Whatever you got for the week, Katie,
how about you go first.
Speaker 2 (33:20):
I think this is pretty good. Take a look at
the Dow Jones Industrial Average. On Wednesday, it closed it's
thirteenth straight up day in a row, a wind streak
of thirteen days. That is the longest wind streak for
the Dow since January nineteen eighty seven.
Speaker 1 (33:39):
Since eighty seven. Oh boy, well, that's anomenous here to
bring out. I don't know about that, that connection to
nineteen eighty seven. I guess we got ten months till
everything hits the fan. That is pretty amazing. Thirteen days. Yeah, wow,
that's a good one. That is crazy. Yeah, you did well.
Speaker 2 (33:57):
All right?
Speaker 1 (33:58):
How about you, Joe, you got anything crazy for Yeah?
Speaker 4 (34:00):
I would say, well, and it probably matches Katie's chart.
That would be you know, the number of web searches
for the phrase soft landing. It used to be high,
than it dropped to zero. Now it's back at record highs.
And so I think those two charts would be very
highly correlated. May maybe they stick for the rest of
the year. I'm skeptical, but hey, here's the wishing.
Speaker 1 (34:22):
All right, good stuff to both you. I'll give you
mine now, all right. This is courtesy of cbsnews dot Com. Joe,
I prefer the alternative asset classes for my crazy things,
and this is about as alternative as it gets. It's
a gold, ruby and diamond ring worn by rapped legend
Tupac Shakur during his last public appearance. Wow, he were, yeah,
(34:47):
how about that? And it's pretty cool look and it's
got a crown on it, and with the crown is
made of rubies and diamonds and gold. He apparently was
a big reader of Machavelli and like the medieval kings
and medieval lure of Europe. Anyway, Yeah, yeah, who knew
about Tupac? What up production at Sotheby's. So it's time
(35:10):
to play that game. The price is precise. I regret
to inform both of you. You are contestants. Katie, what's
your price or the winning bid for rap legend Tupac
Shakur's gold, ruby and diamond ring.
Speaker 2 (35:26):
Can I tell you something horrible? I actually just googled
it because it sounded so it sounded very pretty, and
I wanted.
Speaker 1 (35:34):
To see no, no, googling.
Speaker 2 (35:36):
I'm sorry, I'm sorry. I removed myself.
Speaker 1 (35:40):
You forfeit, You forfeit. Well, Joe, I gotta tell you
you're automatically the winner. But I still want to hear
what your bid is.
Speaker 3 (35:46):
Oh, I know I heard. I was just going to
throw it a million. I have no idea.
Speaker 1 (35:50):
Are you googling too? Joe? You hit it exactly on
the nose. That's impressive.
Speaker 3 (35:55):
How big was the diamonds and rubies?
Speaker 1 (35:58):
Katie does it?
Speaker 5 (35:59):
Say?
Speaker 1 (35:59):
I don't know, but it's not it.
Speaker 2 (36:01):
Yeah, I mean the diamonds are accents. I'm on people
dot com right now. It's more about the crown. Is
really the centerpiece of in the crowd.
Speaker 1 (36:11):
Yeah, yeah, Well.
Speaker 4 (36:12):
That makes more sense to me though than you know,
you know, things like sneakers and stuff.
Speaker 3 (36:17):
At least there's intrinsic.
Speaker 4 (36:18):
Guys who knows, well, at least you're gonna do if
you're gonna diversify and alternative assets. You got that, You
got gold, diamonds and ruby, so you got multiple You
got it.
Speaker 1 (36:26):
All covered right South of Beys had only estimated two
hundred to three hundred thousand, so way off base. They said, wow,
this makes it the most valuable hip hop artifact ever sold,
I don't know.
Speaker 4 (36:37):
Artifact sounds well, you could tell, you could tell that
the Federal Reserve that perhaps financial conditions are not that restrictive.
Speaker 3 (36:44):
When you have things going on.
Speaker 1 (36:46):
We're gonna add Tupac's jewelry to the financial conditions index.
But and rest in peace to uh to mister Shaker.
My old college buddy Jeff Peerlman is actually right in
a biography of them, so little shout out to them. Yeah, Joe,
pleasure to hear your thoughts. We really appreciate it. Oh
and you never didn't give us your favorite cheeseteak. Join
(37:08):
it's not Larry's.
Speaker 4 (37:09):
Oh I go Pats Downtown. Yeah all right, yeah, but
they're all good, you know, classic. And you know, Katie,
you should try the chicken cheese steak. You know, It's
just it's a nice diversifier too.
Speaker 1 (37:19):
I'm gonna I'm gonna buy you one next time I'm
in the Okay together, Katie.
Speaker 2 (37:24):
I appreciate that, but I'll just have a burger.
Speaker 1 (37:27):
Yeah, man man oh man. Anyway, Joe, David Niche so
much for your time. We really appreciate it.
Speaker 3 (37:36):
Thank you both for having me.
Speaker 2 (37:46):
What Goes Up.
Speaker 5 (37:47):
We'll be back next week. Until then, you can find
us on the Bloomberg Terminal website and app, or wherever
you get your podcasts. We'd love it if you took
the time to rate and review the show so more
listeners can find us. You can find us on Twitter,
follow me at Wildona Hirich. Mike Reagan is at Reaganonymous.
(38:07):
You can also follow Boomer Podcasts at podcasts. What Goes
Up is produced by Stacy Wong, and our head of
podcasts is Sage Paulman. Thanks for listening and we'll see
you next week.
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Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy, Jess Hilarious, And Charlamagne Tha God!