YouSaid · the spoken record

Eric Basmajian

lines on the record: 96
first: 2023-09-12
most recent: 2023-09-12
sittings or episodes: 1
sources: podcast

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“Thanks for having me on, Jack. Since I think you're the best in the business at these interviews, I fully expected you to hold my feet to the fire. I'm glad you did that. But you can go to epresearch.com. That's where I have all of my offerings. I do private consulting for corporations and some of the companies like I was mentioning. And then I also provide weekly and monthly updates on the business cycle at various tiers. So I'll provide weekly updates on things that happen in the market like what happened with the NFP report. And then each month, my flagship report is a full comprehensive review from leading to coincident to lagging. What's the economy doing across all those stages? What's likely to happen over the next six to eight months given the construct of those indicators and clients get those reports on a monthly basis. So you just go to ep research or shoot me a DM or fill out the contact form. It goes right to my email and we can set up a time to chat.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“One little nuance there is that now the Federal Reserve basically has complete control of interest rates by actually targeting the rate itself from what it pays like on reverse repo instead of changing the level of reserve. So for example, yeah, the interest rates collapsed in 1981 in between that little peak and valley, but I don't think Volker wanted them to decline. They just happened to because he lost control of reserves. But yeah, it's totally interesting. I could see the economy slowing down, as you say, and rate cuts happening next year. 100 basis points cuts is a lot, but it could be more. But I also could see the economy playing out, slowing down, and folks such as yourself who are looking at leading indecally saying recession, we're already in a recession, but I can see Powell up there on the FOMC being asked questions saying, look, the unemployment rate's at 4.1%, we're at 5.5%, higher for longer stamp. It's an open book. But, Eric, thank you so much for coming on. It's been a blast. People can follow.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Into the curve, given that I believe the market's saying that rates at the end of 2024 will be somewhere in the area code of four and a half percent still. It would be historically a first for the economy to have a recession with interest rates only declining 100 basis points on Fed funds. If that view of what's priced into markets materializes, I think that's a soft landing type view where the Fed cuts rates 100 basis points, the economy stabilizes and rates are still at a very high level. So given the fact that I believe that the economy is going to experience a full business cycle recession, I have to say that interest rates based on that prediction look to be priced too high for what's in 2024. Of course, this does take into consideration not only what happens in the economy, but the Fed's reaction function, which has certainly been more durable than I would have anticipated. I think that's fair to say.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“And all through the beginning of 2018. So bond price or interest rates don't tend to be a super reliable leading indicator of the economy. They tend to react pretty strongly to Fed policy. So the view on interest rates, in my view, at this stage with the curve extraordinarily inverted has to be basically a view on where you think the Fed funds rate is going to be in 2024 on an average basis. And broadly, I would say that my view is that what's priced into the interest rate curve in 2024, in my view, I think is higher than what's ultimately going to be realized. So I don't have a super precise view at this moment of when the first rate cut will come. But if my view of the recession in 2024 comes true, then it's hard to see how interest rates aren't lower than what's price.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“So interest rates can be a leading indicator of the economy, but it depends how you're using them. So I would say the yield curve is a reliable leading indicator of the economy that held true in decades of the past. And I believe that it will hold true today. The nominal level of the 10-year bond, for example, isn't always a good leading indicator of the economy. In fact, it's usually quoted as a lagging indicator because it's very sensitive to inflation and Fed policy, which tend to move late. Take an example of the 2018 episode, bond prices or interest rates were rising through October, November of 2018, and they only started to rally quite aggressively, really at the end, like December of 2018, and then all the way into 2019 as the Fed started cutting interest rates. Leading indicators had peaked and started declining at the end of 2007.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“So we talked a lot about the stock market's role as a leading indicator for the economy. What about the bond market, which on a historical basis, 70s, 80s, 90s, 2000s was a pretty good indicator for where the economy was headed. Bonds have been selling off. Are you bullish on bonds right now? If the 10-year rallies 100 basis points, is the two years still where it is? In that case, we have some extreme inversion. So yeah, what do you think about short-term rates, long-term rates, and then the difference between them?”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“The cresting and beginning of a decline that we're seeing makes a lot of sense and should continue given the fact that we don't see huge accelerations in the indicators that foreshadow the fact that these would start to roll.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“No, I don't use any anecdotes to guide where we're going. I would say that all the data you quoted is correct with one nuance is that construction employment encompasses both residential and non-residential. Non-residential is lagging. Residential is leading. So if you break out the residential, it's actually starting to contract where the non-resi is actually still quite strong, which is what you would somewhat expect. So it's a little bit of a nuance there. And my view on where those categories are heading is solely based on what I see in both the leading indicators of the broad economy, but also the leading indicators of employment, some of which we talked about, the weekly hours work, the temporary health services, the decline in corporate margins and things like that. So the fact that we're seeing leading indicators of the broad economy end of the employment market specifically hold in contraction, I think that”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Sure, you're right about the fact that it's much better at predicting troughs than it is at peaks. But okay, so yeah, so I've got a chart just looking at right now at construction, manufacturing, and transportation and warehousing. And construction actually employment looks pretty good. Again, this is a seasonally adjusted basis, still growing for sure. Manufacturing has flatlined and transportation warehousing has started to exhibit some modest declines. Would you say that's accurate? Yeah. What motivates your view that they'll continue to just be very bad just based on what you're hearing from on the ground?”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“At the peaks. I think in the 1990 recession, I want to say the stock market made a new all time high inside the recession, but you'll have to fact check me on that.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Make a good point, and I'll put some nuance around that, Jack. So stock prices are contained within the leading indicator group. And you're certainly correct about that. But there's a nuance to if you go and you do the breakdown of stock prices and recessions, what you'll find is that stock prices are not a great leading indicator at business cycle peaks, but they are an extremely reliable and consistent leading indicator at business cycle troughs. And when you average the two of them together on balance, they tend to be a two to three month lead time over the business cycle. But that is generally constituted of an average of basically no lead time at business cycle peaks and a pretty reliable two to three month lead time at business cycle troughs. So stock prices are generally much more reliable at picking up the troughs than they are.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Some of those processes beginning in some of the more cyclical areas of the economy. And I'm sure if you speak to people in those sectors, they'll attest to that. So I just wanted to mention that it's not just asset markets that this economic process is designed for and used for. There are a lot of applications for”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Employment data and to the extent that the broad employment data doesn't deteriorate, you're not going to get a huge reactions from the Fed and asset markets. So I just wanted to put that out there that while asset markets are certainly one part of the world, there are a large group of people that run businesses with fixed assets that move quite slowly just by nature of the businesses that they have. And these types of businesses are uniquely positioned to use these types of leading indicators because whether the asset market trends oscillate from recession to no recession to recession, the corporations are generally much more sensitive and true to what's actually happening in the economic data where the markets can gyerate wildly in both directions, moving from one side of the boat to the other. And we certainly, without question, have”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Is going to slow from here. It has already started to play out in a big way in their sectors, which is why this process is beneficial outside of asset markets. In fact, it can be used quite effectively for corporations that move a big ship that takes a while to turn. If your industry is experiencing job losses now, the time to prepare for that was certainly six or eight months ago, which is when the leading indicators first began moving into contraction. There are a lot of people in those sectors that are fully experiencing recessionary type conditions that had to act in a timeframe that was actually roughly consistent with when some of this leading data started to move into contraction. In asset markets were predominantly dealing with more lagging type indicators because they are generally more keyed off of what happens to”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Of improvement across the broad basket. It keeps me grounded in the fact that I still think that's going to happen. And I would point out that while I do serve asset manager clients, I serve a large part of my business is corporate clients that are in this cyclical types of economy. manufacturing companies, trucking companies, steel companies, things like this. While we all have to, when we're dealing with asset markets, we wait for the quote unquote big crash to signal that we're in recession. As I was mentioning, it's empirical that trucking companies have lost jobs, manufacturing companies are shedding jobs. The only reason that they would do that is obviously if their business has slowed significantly. So if I was to have a consultation with them now, it wouldn't do them much benefit for me to tell them that the economy”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Would have to see a broad based acceleration in all of the leading encyclical indicators that foreshadow what's supposed to happen in the rest of the economy, which is why I've preserved the stance that I've had. It's that, as you pointed out in some of the charts that we were looking at, not only have we not seen a broad-based improvement in these leading indicators, the growth rate has actually continued to get worse and has stayed at extraordinarily deep levels of contraction. It confirms to me that the slowdown in the more broader coincident indicators is still to come. If we saw accelerations and broad baskets of these leading indicators came out of negative territory and started rising, that would give me a lot of pause and say, hey, look, the broader economy is probably going to start to accelerate if the recession hadn't already occurred by then. But given the fact that we're not seeing those huge levels,”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Is there going to be any time next year in 2024? What would have to happen for you to change your mind and say, actually, wow, like the economy is strong and what happened from 2022 to 2023, that was just a mid-cycle slowdown and the boom is here.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“By the end of 2025. Yes, I have a high degree of confidence in that. And if it doesn't happen, then there will be a really long list of things that never have happened before that would have happened, right? Things that historically have signaled recession with 100% certainty or 90% certainty, all of which will have collectively missed this one, which I guess is a possibility considering we're coming off of specifically unusual period, but I would be incredibly surprised if with that generous length of time, which is certainly fair to put my feet to the fire on that, I do think that we'll have experienced a full business cycle recession in the US.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“The two of them together. And on that basis, it does indicate that the economy is much closer to recession than prevailing wisdom says at the moment. Conventional wisdom has shifted from definitely recession in Q4, definitely in Q1 when Silicon Valley to now definitely not, when a lot of the indicators that are used to define this recessionary process are not a whole lot different from Q4 than they are now.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“That up, that data gets revised. And that data gets revised on a benchmark basis against what's called the quarterly census of employment and wages. That quarterly census, which I'm sure you've seen, put out preliminary estimates for whether the non-farm payrolls numbers will be revised up or down. And there are preliminary estimate was that the numbers will be revised down. So there could be an overstating on the GDP side. There's a lot of different factors that play into it, which is why best practice is to average the two of them together. The average of real GDP and GDI. And if you go to your Fred database, they actually provide that for you. There's a line item that says average of real GDP and real GDI. And that is the most accurate measure. It's what the NBER uses to define recessions. They don't use GDP or GDI.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“So it's hard to say, but I read one paper that attempted to sort out the difference and it is a plausible explanation. I don't dig into it with this level of granularity, but it seems to be somewhat impacted by capital gains because you had big stock market increase with lots of capital gains in 21, big decline in stock market, no capital gains at all in 2022. So there is huge fluctuations in capital gains. And that is something that happened even in the 2001 scenario, that capital gains line item was shifting quite rapidly because of the tech bubble. And that does impact the income calculation. So that does look like a possibility for some of the discrepancy. There's also issues with the way that the aggregate income that comes from the jobs report you could take income and wages and you can add”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Looking back, sometimes if there is a discrepancy, real gross domestic income is higher than real gross domestic product. The fact that there's such a discrepancy now in the other way, how can you explain that within this cycle? Is it because GDP is calculated with inventories and GDI doesn't use inventories?”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Side of the equation. So every expenditure is an income for somebody, which is why in principle there's supposed to be exactly the same. They do have differences because there's a lot of complexities with income. It's not so easy as just consumption, right? You have dividend income, you have capital gains income, you have all these different types of income that can be hard to capture. And then same thing on the production and consumer side. We're dealing with things like depreciation and inventories. And all these things that are non-cash items. So it does get quite complicated. But in principle, there's supposed to be exactly the same, which means that there should be no preference for an analyst to prefer GDP over GDI other than one is released a month earlier than the other one.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“So the discrepancy they chalk up to calculation differences and the way that they're sampling the data and that discrepancy gets pretty small once the data has a chance to be revised, but it's just the opposite side of consumer spending is the best way to think about it or the easiest way to think about it. If you go to the store and you buy a chocolate bar, you're consuming one chocolate bar and that chocolate bar is counted in GDP. We measure up the level of consumption that's going on in the economy. But the store owner who sold you that chocolate bar, he's receiving income from your purchase. So gross domestic income goes down the economy and adds up all of the income received in the economy and gross domestic product. And this is obviously a super simplistic explanation. Gross domestic product is lining up all of the expenditure.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Payrolls have to decline before the recession in order for there to be a technical recession, payrolls do have to decline, but they don't have to decline in the beginning or middle or even before the recession. There are instances like 1974 is the biggest one where payrolls didn't have their first negative reading for up to eight months into the recession. That's my general view of kind of the rough guidelines of when this thing will be dated. I think it's possible it's in 2023. I would be surprised if by February of 2024 we don't have a continued directional deterioration in more of these big indicators like payrolls, unemployment rate production, consumer income, and things like that.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Adjusting for inflation. If you pull your chart back, if my memory's correct, there has never been a instance where GDI has been negative on a year-over-year basis without the economy being in recession. And I believe GDI has contracted on a year-over-year basis for three consecutive quarters. So this isn't just a one-off contraction. There's a stained contraction in gross domestic income. Gross domestic product is saying something entirely different. Certainly the Atlanta Fed number. But all I'm saying is that GDI is one of the indicators that's listed on the NBER website as something that they use to help them define this process. So there are several indicators that have been historically incredibly reliable that do spell a possibility that the economy could be in a recession at some point in 2023. It's not a condition that”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“GDI is gross domestic income, and GDP is gross domestic product. So if you go out there and you spend money, GDP is capturing your spending. GDI is capturing the income from the person that you gave your money to. So in theory, they're supposed to capture the exact same thing. There's supposed to be one for one. They're not. There's a small difference, which is called statistical discrepancy just based on the methodologies and the way they collect the data. That discrepancy obviously closes as the data is revised over the years. But GDP and GDI are supposed to be identical. There's no reason why you would preference GDP over GDI other than GDP is released a month earlier, which is why everyone uses GDP versus GDI. The NBER says that you're supposed to average the two of them together to get the most accurate reading.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Exactly, and it still didn't really shake people's confidence that much because the SP rallied to within 8% of its all-time high in.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“I do have a high degree of confidence that the economy will go into recession. The timing of it is hard to say because we tend to think of the timing of a recession as an event. If this in September of 2007 and then you interviewed me in February of 2008, you'd still probably grill me and say, hey, nothing has happened yet. Even though we were inside the recession.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“So it seems like you're very confident that the US will enter a recession by cute definitely 2024. But in terms of the timing, how soon do you think the dominoes are going to start falling? Because what do you think the odds are? We talk again in February of 2024 and the economy has slugged along and real retail spending is maybe flat. Maybe it's a little bit positive if the price of oil doesn't skyrocket or something like that. And that we're still it will still be arguable about how much the slowdown has been and it will be an arguable point between thinking people or how confident are you when we do an interview let's say in February that it's like, oh, wow, yeah, Eric, it happened. And it's continuing to happen.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“And again, I'm speaking definitely way outside my area of expertise. So someone will, I'm sure, correct me on that, but it's an interesting question. I believe that the reason that Lacey focuses on that other deposits line item is because it is the core funding mechanism for the banks and that time deposit CD area is generally not. But we'll leave it to an expert more suited than myself.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“And they're pretty confident he wasn't going to pull his money if they offered him that rate in exchange for X amount of deposits.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Ventures. Because a lot of those they try are relationship deposits, right? There you put the deposits here. And in exchange for that, we'll give you X. And that tends to feel like it's a very sticky type of deposit.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Pretty weak spread that risk free spread. And with the other deposits, they are making more long-term type investments. So I personally think of it, and I could be entirely wrong here. I really, I'll be listening to one of your future episodes to see if you cover this, but I think that when there's a huge flood of demand for CDs, they are buying a lot of the short-term paper that's needed to fund those securities. I don't know how much of it is a huge rush of clients demanding CDs and then they're taking that inflow of deposits and lending it out for mortgages or autos. I don't know the answer to that, but I feel like in my understanding of it is that they would match that asset since they're going to be rolling every three months or something like that. And that other deposit line item, the one that they're still able to pay zero or one or two percent is the core funding of the bank that they use to fund more of their profitable.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“You would be better served talking to a banking expert on this. I know you have contacts to a lot of them. Risk speaking out of turn here, but with that caveat, I would think that when a bank offers a CD to a client, the CD rate is usually slightly below the prevailing interest rate on those securities that the bank is usually going to offset them with. So I think that those products, they're harboring that.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“That's really interesting. Why is it you think that banks funding of nonintrospect bearing deposits are super low? Bank of America checking account deposits that being replaced by CDs precedes a recession because if anything, I would say, look, if people are giving money for 0%, I can just cash on it. I'm not going to take a lot of risk and that's not going to be economically simulative. But if I have to pay 5% for deposits, I'm going to be making as many car loans and credit card loans as I can.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yeah, you usually almost always see a contraction in the deposit line item of the banks or a slowdown in that line item before it comes through the asset and loan side. So almost in all historical cases. And to get even more clear, one of my mentors, Lacey Hunt, has popularized the other deposit line item in the bank balance sheet. Other deposits is basically total deposits and strips out CDs or time deposits. So what we're seeing now is that if you look at the H8 report, it looks like deposits are stabilizing at these banks. But what it really is is just a vertical line of CDs because they're offering 5% and other deposits, which are the most profitable engine of the bank, are actually continuing to go down. So that other deposit line item almost always precedes a decline.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Said that typically bank lending grows into a recession, but that it's the bank liabilities are shrinking. So that makes sense in this cycle because money is leaving the banks to go to higher yielding money market funds, cash market, stuff like that. 2020 as well really 2008, 2007, was that also the case? I guess you're looking at a historical basis, which goes back to the 60s.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“And I think a lot of that Jack also is because we have to remember it's a nominal data series and we know that inflation is lagging. So you can improve the lag time by looking at real bank credit or real bank lending, but even still, it does lean towards a lagging indicator. Some of that is just inflation, right? Because if inflation is 4% and a bank grows its loan book 3%, they're supporting less economic activity. It's just at higher prices.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Totally right. Yeah, bank lending peaks into a recession and credit card data is even worse. Credit card data is at its peak in terms of the growth rate at the end of a recession. So like everyone was borrowing the credit cards in 2009.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“That's right. So I think what we're seeing is the liability side, the deposit side is moving down. They're having to replace that with higher cost borrowings. And the next step is they usually try and wind down securities and replace them with loans. And then once credit problems start to emerge, they obviously have to shut off the loan book altogether. I think that it's correct to say that we haven't seen loan books contract in aggregate. The growth rate has come down. Like you said, it's maybe flat over the last six months or so. But if that category did turn down, that's evidence that the economy is already in a recession. It's something that occurs quite late”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“You're exactly right, Jack. You're exactly right. And what I would say again, Chris, going back to the framework, and when we do these historical back tests, bank lending specifically in nominal terms, is an extraordinarily lagging indicator. In fact, it's listed in the conference board lagging economic indicator. So the process or the sequence that generally plays out is usually you get a decline in the liability side of the bank balance sheet, the deposits, then they shrink their asset books usually starting with securities because they're less accretive to the profitability of the bank.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Yes, and as deposit rates are going up, on the one hand, they have to make all these higher, they have to make a lot of loans to maintain their NIMS or to stop their NIMS from going down a ton, but also they are shrinking their volumes of loans a lot. I guess as some deposits are leaving the banking system, so they would have to fund that with new borrowing, which they would get from at 5% or maybe even 6%, which is unattractive. I would say I haven't done a backtest to know this, but I would say that a bank's not making mortgages or car loans, and that is obviously recessionary or contractionary, but banks selling securities like treasuries or agency mortgage-backed securities, I don't, on the margin it is, but I would say it's much less economically sensitive that that matters for the world of securities.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Reducing their securities portfolios in just an effort to shrink their gross balance sheet altogether. I'm sure you've talked to a lot of people in the banking industry. There's not a huge willingness of banks to go out there and grow their balance sheet. So in my view, what they're trying to do is they're trying to keep their balance sheet flat by reducing securities and replacing them with higher yielding loans. That is potentially a good idea because it'll help them reprice their asset books higher, but we have to consider are they increasing their credit risk by swapping securities for loans at a time when the economy may be about to experience some more credit losses? That's an open question. So I think that there's a game that's being played between banks trying their hardest to reprice their asset books as high as they can while also trying to maintain some”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“It's not stimulative, but it, I would say that if they sell someone else has to absorb that and to the extent that we know that the Federal Reserve is not absorbing that, it does push tighter conditions throughout the economy. I think that's actually what we're seeing now is the dollars going up and you're seeing interest rate pressure throughout the economy. And that does, I think, in my view, amplify some of the tightness of credit that's going on. So if banks were buying a ton of securities and that was keeping interest rate pressure or interest rate volatility low, then it is in a way somewhat stimulative or more so than it is that they're not shedding securities. So those securities have to be absorbed by somebody. I know that in some worldviews, it's always going to be the Fed and that may be true. But at the moment, it's not. So I think that there is a tightening of financial conditions that comes from banks.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Which, and that's not real bank credit. It's called bank credit, but it's not economically sensitive thing. If a bank, if JP Morgan buys $10 trillion worth of US treasuries, that's not stimulative, you know what I mean? And if they sell a trillion, or if they sell 10 million, it's not.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“That's right. So I would say that we've seen bank credit contract in aggregate since basically Q4 of last year. A lot of that contraction has come from the securities side of bank credit rather than the loan portion of it”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“What's your view on banks now and the volume of credit? Like bank loans and leases has somewhat flat lined since January, still up year over year. But I wonder some of that just so many people who wanted to people who wanted to get a mortgage, they got one already. And so they don't need it. So it's the demand of credit, not necessarily the supply of credit. And yet no one wants a 7% mortgage rate. The banks are tightening standards, but it's not as if Banks are unwilling to make a 7% mortgage rate to someone who can pay it off. They would love to. It's just that no one's really coming out at their door.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“Unit of activity that doesn't get done that drives the recessionary process. And what we're seeing now, what I was articulating in the beginning is that despite the interest rates being very high, that marginal unit of activity hasn't really fully rolled over yet. Once that does, I think that you'll start to see the credit stresses appear in the banks, in some of the people that are holding private assets, but that is going to be an artifact of the labor being shed from these more cyclical areas that suffer from that marginal unit of activity no longer being economically viable.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT
“In my process, in my way of looking at the world, it's the diminishment of the marginal unit of activity that creates the recession. It's not because of what happens to the existing borrowers. It's what happens to that next project that doesn't get initiated because it's no longer feasible under new interest rates, which then causes that company to have excess labor and they have to get rid of it. And then once that excess labor is purged, those people become credit stresses on the existing borrowers. And that's my feeling of how it plays out. So I think it's more about the marginal unit of activity getting shut off because when we think about real growth, that's basically the number of units that we're consuming or producing. And a recession is producing or consuming less units, number of units going down. So it's really much, it's really the marginal.”
2023-09-12 · Forward Guidance · Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon) · IDENTIFIED FROM THE TRANSCRIPT