YouSaid · the spoken record

Nick Reece

lines on the record: 89
first: 2022-07-14
most recent: 2022-07-14
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Yeah, they can go to mercrearch.com, M-E-R-K research.com. You can follow me on Twitter. And yeah, I look forward to engaging with the audience. I'm always reachable by email as well. Nicholas. R-E-C-E at MerckInvestments.com.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“It's hard to say because some of the things that I think might do the worst could also do the best. It's just that sort of bifurcated outcome where you have these kind of tail risks. And so that's a hard question to answer. I don't have a great example of that for you off the, you know, off the top of my head.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“It's far better, it's a far better trade construction than trying to go short stocks for so many reasons, especially from these levels. If you think a recession is going to be bearish for stocks, expressing it through the rates markets, I think is a far superior way of doing it than trying to time the bottom in a bear market, which inevitably is a violent V, whereas the Fed, if they do cut rates in a recession, which they almost always do, and we'll see if that's back to zero in the next one. We don't know. But they typically cut rates and then they leave them relatively low for a period of many months. So that does give you a long runway to potentially exit a profitable trade in rates rather than try to time that violent bottom on the S&P, either through an outright short or through puts.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Sort of go back to what I mentioned a little bit earlier, which is on the euro dollar futures, and this is something to watch the economic data on. But it's really to me kind of an interesting anomaly. And if you look at options on euro dollar futures, oftentimes the pricing is really not suggesting the rate cuts that you would expect to get if indeed the U.S. economy goes into recession. So if you're looking for a hedge against U.S. recession, I would say that long eurodollar futures options on plus two year, plus three-year euro dollar futures is something that people can take a look at. Now, this comes with the obvious caveat that this is not investment advice. This is merely food for thought. But that's something that I'm keeping an eye on and investors that are concerned about recession risk can consider. That's more in the camp of what I think as being pretty good reward to risk. But more generally, and I think...”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“I don't think it's terribly mispriced relative to the fundamentals, but in general, I would say it's more likely that it's undervalued relative to the fundamentals undervalued relative to the probabilities of the outcomes in the months ahead. You know, it's not really a time for dogmatic certainty with respect to what's going to happen. I think we're in shades of gray, we're in shades of probability. But given how weak sentiment is, I mean, sentiment is always going to be a good indication of where you want to potentially be positioned in terms of thinking about taking the opposite side of that. Sentiment's extremely negative. You know, this move has already been plus 20% or more. And if you look at the historical analogs of both recessions and bear markets, there are a lot of good analogs out there that are pretty similar to the current situation where you're talking about 20 to 30 percent decline. So I think the reward to risk over the next year and over the next five years is much better than it was.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Like a pharmaceutical stock that's developing a drug where you don't know what the FDA is going to say about it, it could really go either way. It's either going to totally rip higher and has fantastic value over the next several years, or it's going to be something that perhaps people wish they didn't invest in depending on what happens geopolitically. So that's really, I'd say, one that has these kind of tail outcomes.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Probably be described as a bear market rally for a long time. There will be a lot of disbelief in that new bull market, and that's the wall of worry coming back to the sentiment point that is fuel for that bull market to continue. Now, I'm not really extremely bullish on the market here. As I say, I think there was a needed correction that we were overdue for. I think there's been a multiple reset that's important. We'll see how things develop from here. On China, I guess the one point on that is that I'd say that the sentiment and the pessimism is more likely overdone than underdone if you're looking at what's priced in relative to fundamentals or where the market is relative to sort of the probabilistic paths of outcomes in the real economy. On China, it's like I said, the biggest risk with China is the existential country risk. We saw what happened.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Well, one thing I want to point out is that, and you can probably put this chart off, is that the China market, the CSI 300 index, hasn't made new low since April. And coming back to the point about the US growth stocks, the IPO index, that hasn't made new lows since May. So when the S&P was making new lows in June, those indexes were making higher lows. That's where the decline started. You might think that that's where the recovery and subsequent advance is going to start as well. So that in terms of sort of internals of the equity market, those two segments, Chinese stocks and US IPO stocks, suggests that there might be a move higher here for a while now. Is that going to be a bear market rally? Is that going to be a sustained advance? The jury is obviously still out on that. One thing I would say is that any advance off of the lows is going to look indistinguishable from a bear market rally.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, my checklist, I have a number of contrarian signals. And yeah, I'm looking for if sentiment's really weak, that's of course a positive in my framework. And so you want to look at what are the dominant narratives to the extent that you can quantify those things and you can do that with the uncertainty index or the AAII Bulls Bear survey. A lot of those things look very, very depressed. There is a lot of pessimism out there. And that's why I say it might not take that much for the glass to go from half empty to half full. And it's not a question about what the narratives are today, which is pretty clearly Fed tightening, inflation, the war in Ukraine, the China lockdowns. You know, we're already potentially starting to see some easing of those China lockdowns, some reacceleration of their growth cycle. As I've said, I think we might actually be through peak-fed hawkishness, even if they don't realize it yet. And so in three to six months, you know, the dominant narratives could be very different than what they've been over the past six months.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“In December of 2008. That's more kind of trading in line. But yes, I would say liquidity is a big factor in why the market has declined as much as it has. But markets don't bottom on good news. They bottom on terrible liquidity and on dire sentiment. And you have to ask yourself, have we gotten enough of that to be potentially through a bottom or very close to a bottom where the market can start to climb the wall of worry on the other side with what you would presume would be on the margin improving liquidity?”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Being the BOJ balance sheet does continue to expand. It's not at a set pace. It depends on how many JGBs they need to buy to maintain that yield curve control cap. So, it's not obvious that that G3 aggregate balance sheet really is going to contract all that much. And even if it does, if you look back historically, the quantitative tightening was a big part of that Q4 2018 correction in the S&P. But the S&P bottomed and started climbing a wall of worry well before quantitative tightening ended from the Fed. So it is not a guarantee or it's not a requirement that you have that ongoing aggregate balance sheet expansion in order to have an advance in the broad markets or in the S&P. In terms of liquidity, the Chicago Feds national financial conditions index, I think is a good one. That's been trading pretty closely in line with the S&P. It hasn't really been the leading indicator that it was during the GFC period. You know, it was a leading indicator on the downside in the summer of 2007. It was a leading indicator on the upside.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“They have an unlimited balance sheet in euros. So when they talk about inflation versus fragmentation in the eurozone, it is an interesting potential contradiction where they're trying to raise interest rates, but they're trying to contain these spreads. And I think that the way to think about this is that within the ECB's framework, they're going to raise rates to fight inflation. They don't want spreads to blow out. So they're going to use the interest rate tool on inflation, the balance sheet tool on spreads. And that's sort of wearing the monetary policy hat on the one hand and the fiscal policy hat on the other hand. So how that nets out in terms of balance sheet with the ECB, I think, remains to be seen. The Bank of Japan has not moved away from yield curve control. And it's interesting. They may stick to that until everybody else goes through a dovish pivot. And who knows, the Bank of Japan might not actually break that 25 basis point cap on the 10-year yields before the Fed pivots and the ECB pivots. So that remains to be seen. But for the time being,”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I do like that aggregate G3 central bank balance sheet versus the SP 500 chart. So just to review G3 would be the US, the Eurozone, and Japan. So that's the Fed, the ECB, and the BOJ. The Fed, as we know, is in this period of quantitative tightening that is going to ramp up in terms of these monthly caps of what they allow to roll off. The ECB, I think it's a question mark as to what's going to happen with the ECB balance sheet. The ECB, which is the Eurozone in general, is a unique framework because you have the ECB, which is the monetary authority. There really is no fiscal authority in the Eurozone. And so the ECB has become the de facto fiscal authority. That goes back to the Draghi 2012 do whatever it takes speech. And they have actually affected that in practice. And that's basically the way it is in the Eurozone is that the ECB is the fiscal authority. They have the willingness and the ability to”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“What about liquidity in the checklist you have? You have a lot of factors that are related to liquidity, like central bank accommodation, but I don't think you list liquidity itself. How do you think about liquidity? And then also you have a great chart of, I think the S&P 500 against the central bank balance sheets that's somewhere close to 20 trillion. And that is set to go down by multiple trillions of dollars like it has not done since the great financial crisis. So do you think that a synchronized quantitative tightening, shrinking of balance sheets, that the likes of which we've never really seen is something that is a threat to the market or not so much?”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“We're at 16 on the forward multiple, and you've got that PE ratio, and we're just going to sort of fix that. And then we're going to lower the denominator, and then we're going to calculate some kind of further decline from here. Because clearly in a recession, the 10-year yield is going to go down. The discount rate's going to go down. Typically what you see in recessions is that forward PE ratios actually spike because yes, the denominator moves lower, but the market is not priced based on the next 12 months. It's definitely a long duration asset class. It's definitely looking out over a five to 10 year period, let's say. So the market then does start to price in earnings recovery further out and probably some catch-up growth further out. So there are more cross currents that I think a lot of people imply when they talk about, oh, the 10 years moved up to 3% or over 3%. Obviously, it's coming back down now. And we're at.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Think there will be a stagnation period in terms of earnings, what it'll kind of, if you look at the SP EPS, it'll probably move sideways and catch up with its 12 month moving average. Earnings recession is possible. Earnings recessions are more common than full-blown economic recessions. But if you look at the correlation between the S&P 500 and its trailing 12-month earnings, the correlation is pretty much zero. I mean, the market moves ahead of what happens with earnings. I do agree that so far it does look like this decline has been mostly multiple contraction, mostly driven by the increase in the discount rate using the 10-year yield as the benchmark for that. But you have to think, and I'm not saying that a recession might not, you know, an imminent recession wouldn't take stocks further down. I think chances are it would, but I don't think the math is as linear as people sometimes suggest where they say,”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Nick, what about earnings so far the drawdowns in stocks, if you look at a price-to-earnings ratio, it's just been that multiple because bond yields have gone up, discount rates have gone up, so future cash flows are discounted back at a higher rate, the price goes down. But the earnings estimates are actually still pretty rosy. I think earnings estimates somewhere around 6% or 7% growth for the S&P 500. Does that make sense to you? Do you think that earnings will continue to grow or will they stagnate or even perhaps decline?”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“When you come into those crashes, the dot-com bust and the 87 crash actually as well as in the 1929 crash, the Dow was trading well above 100% of its, in other words, well above double its 10-year moving average. And I think in this bull market, the highest it got was like 70 or 80 percent. If you look at the S&P, it was about 90% above its tenure moving average. So it was well below that sort of what I would say historical minimum threshold for those major market tops that were followed by major bear markets and that's true also of the 1989 market in Japan. It was about 120% or more above its 10-year moving average on the NICA. And so now that's not a guarantee, but it's just to say that this market, this bull market that we've been in has actually not performed as well as a lot of people seem to think it has or suggest it has. It's not at that kind of runaway level.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Further for the DAO than the SP. So I'll just use the DAO because we get a good example in the 1920s. If you just look at the performance of the DAO, and maybe you can put this up, if you look at it relative to its tenure moving average and just say, what percent is the DAO trading above its 10-year moving average?”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“That's been a really key distinction in terms of performance here. I'm not in the camp that's coming from the perspective that this market in 2021 overall, if we're talking about the DAO or the S&P, was in some kind of major bubble of historic proportions like Jeremy Grantham talks about. I'm really not in that camp. I wouldn't be surprised if this secular bull market ends in a situation like that. Now, again, I have to be agnostic and non-dogmatic and realize that this outlook could be wrong. And I respect those viewpoints. And I think they're important to take into consideration. But one of the things that I look at with respect to stock market bubbles historically, if we're talking about, you know, real bubbles is that, and the data goes back really far for both the down.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“I ran an analysis in Bloomberg looking at doing an equity screen for free cash flow positive companies versus free cash flow negative companies. That's been a huge, that's really been the key distinction in this market decline. If your free cash flow negative, which basically means that you rely on capital markets either venture capital or raising new equity financing in the public markets to survive, that's been the key distinguishing factor. Whereas if your free cash flow positive, it generally means that you can survive on your own. You don't need, you're not reliant on the capital markets.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Fallen like 95%. I do think that that was a genuine, you could say bubble or speculative mania in that segment of the market. And in my report, I include a quote from a book that was written all the way back in 2009 about hard to access beta. And what tends to happen with these asset classes is that in this case venture capital and young growth companies, pre-IPO growth companies, that people invest in them, they show these great returns over a five to ten year period. The market sort of adjusts by feeding the market what it wants in terms of providing supply. And so you just get this tidal wave of supply that overwhelms demand. And I think that we finally got to that point in 2021.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Historical reference because of this kind of unprecedented peace dividend that we've been in. And if we're reverting to some kind of period that's more like the earlier part of the 20th century, which is a concerning thought generally, then there really is no place like home if home is the United States. If you look at capital markets history over the really long term and the book Triumph of the Optimists 101 Years of Global Capital Markets is an excellent book on this The US is just particularly well situated in terms of its geography to not have these existential threats that other Country risk is a real thing that was demonstrated. That's been demonstrated with Russia. As Warren Buffett has often commented, it's very, very hard to beat investing in the U.S. capital markets.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“So, you would think that, and that's not a good timing indicator again, valuations aren't, but over the next five to ten years, there's probably quite a bit of room for the dollar to depreciate versus foreign currencies. And that tends to be a tailwind for emerging markets, tends to be a tailwind for For international stocks, with the one caveat that the past 30 years or 40 years of data that we have to look at these things may not be a good”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Being invested in credit is To be somewhat risky and probably as further downside, but in a mid cycle slowdown scenario. You're probably not far from the highs in terms of the high yield spread. We haven't seen it blow out to the degree to which we saw it in terms of mid-cycle slowdowns in the 2010. So I think there's more room there potentially on high yield spreads. And then internationally, it's sort of a tough call internationally because, of course, there's a lot of data to suggest that there's better bargains abroad in terms of some of the classic, price to earnings, price to book, price to sales of either developed international or emerging markets. And the dollar, which is now at 107 on the DXY, it's at valuation levels not seen since really the highs in terms of dollar valuation of 2001.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“But they're not priced to go to zero, and yet, you know, if you look at what's happened with these easing cycles over the past 30 years, the Fed cuts rates aggressively in a recession. So that's, you know, in terms of from a reward to risk perspective, that sort of two to three year either euro-dollar futures, Fed fund futures, obviously less liquid, or just in treasuries, kind of that two, three, five-year treasuries potentially relatively attractive here if we are going to get a recession.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Well, as I said earlier, definitely the TINA effect that was such a big tailwind to stocks through the 2010s is less of an impact now. We have seen a pretty decent rise in yields. So investment grade yields, for example, are kind of starting to compete with S&P earnings yields. They're the closest they've been since going back to the period before the financial crisis. In terms of bonds, I think based on what I'm saying about the Fed tightening cycle, whether it's a mid-cycle slowdown or a recession, I think the Eurodollar futures, you know, first of all, one thing to say is that if you do think we're going into a recession, you have a high conviction on that. I think one of the best ways to potentially express that as an investment thesis, as an idea, is through the eurodollar futures curve. Yes, they're priced to cut a little bit after the peak. That's what's currently in the pricing. And that's, like I said, always kind of the case at the end of these tightening cycles.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“And now it's not a high bar, but I think the Fed funds rate is probably going to average higher this decade than last decade. And if we are in a somewhat inflationary period or given some of these trends that I've talked about and also given the tendency of the sort of style trends to last in sort of five to 10 year cycles, I would look at US small and mid-cap value, particularly relative to U.S. large cap growth as an area where you might want to allocate away from US large cap and towards US small and mid-capp as potentially benefiting from that slightly higher inflation, slightly higher interest rate environment, and some of this kind of onshoring theme that does actually seem to be genuine and would be a multi-year process.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“More inflationary than we've seen over the past 30 years, I would agree with the idea that over the past 30 years, this globalization that we've been in since the fall of the Soviet Union and the liberalization of China has been very disinflationary. It's been outright deflationary with respect to durable goods. If you look at the price, the level, not the year-year rate of change, but the level of durable goods, that's been a pretty straight line down over the past 30 years until we got to the COVID shock. And so if we are going to get these supply chains reoriented, that is going to be a multi-year process, and it's probably going to be more inflationary than we've seen in the 2010s. And so all LC being equal, you know, you might have higher rates. I think it's, rates are going to have a hard time, in my opinion, being as high as maybe Bill Dudley's been talking about, kind of in the fours. But I do think that it's.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Know, I do think that. From the demand perspective, I think we are already seeing this inflation. And the rest of it probably does need to come from the supply side. And on the supply side, so I would say from the demand perspective, we're there or getting there on the disinflation. The supply side, we could see some persistent inflationary pressure. And primarily what I'm thinking about there is that there does seem to be a somewhat medium-term shift in attitudes towards supply chains. You've heard this term of going from just-in-time inventory to just-in-case inventory and having more robust global supply lines, probably having less reliance on Russia and China, more localized. There's the sort of deglobalization trend. If that is genuine, Then that's probably all else equal to be.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“So, Nick, the way that you see the business cycle shaping out over the next six or 12 months, does that orient you towards particular sectors? Like, you know, if you think the economy is going to be super hot, let's go into copper miners. Let's go into shipping. But if you think it's more of a sort of a secular stagnation period, let's own some apple. Let's buy some meta maybe. Let's go in the metaverse. So where are you on that spectrum in terms of asset allocation?”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Definitely, yeah, you raise a good point because I am saying that year over year it's been coming down on PCE, but certainly they want to see month over month and look at, well, how is that annualizing? So yes, they want to see that coming down. The soft landing scenario, the more constructive scenario is going to be to see that reading kind of coming back to the three ways of looking at economic data, to see those PC month over month readings coming out lower the expectations, lower than prior, and getting ever closer to annualizing at 2%. So, you know, that's like a 0.17 reading month over month is roughly what annualizes to 2%. And so you want to see sort of a glide path down towards that kind of level in the month over month over month readings.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“In the coming months, there's still time for that soft landing. And I think fiscal policy is going to naturally ease as well in the coming months. I have the chart that I showed in recent report that looks at the two-year yield, very good real-time proxy for Fed pivots. When we saw that spike in mid-June up to 345, that I think is a very good indicator that that might have been sort of What's priced in from sort of Fed hikes and Fed hawkishness, and that's something that and the gasoline price I'm looking at every single day in terms of trying to get a sense of where we're headed from here.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“So you have to take these, some of these negative sounding headlines with a grain of salt always. But now we do see yields coming down. And I would say that what we would have to be looking for in terms of not going into recession is one of those so-called soft landing or tightening cycles that don't end up in a recession. And I think if the Fed pivots...”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“And so far, we've seen a lot of inversion with yields rising or flattening and then into inversion with yields rising. That's actually consistent with ongoing economic expansion. I remember there were these headlines, and this was just kind of classic clickbait headlines from, I think it was 2017, the yield curve, you know, the headline was the yield curve hasn't been this flat since 2007. But back then, it hadn't inverted yet. You know, the correct analog was 2005, not 2007, right? It had to invert and then...”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Pricing that tightening cycle to go until November of 2019. So it's inevitably the case that these cycles end sooner than the futures market is pricing. On the yield curve inversion, you certainly can get these sort of head fake inversions that are not followed by a recession. We have this somewhat unusual situation where we're not getting a consistent picture from the yield curve because obviously the 10 year versus the three month has not inverted. That is the one that the Feds most focused on. That is the one that a lot of people think has the most sort of so-called predictive power in terms of recessions. And I also think it's important to disaggregate the yield curve into its constituent components and look at what's going on under the hood there. So in terms of recession risk over a sort of imminent time period next six months, you'd really be looking for an uninversion coming from a state of being inverted, an uninverted with yields decline.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think this gets back to the question of can the Fed go through a hiking cycle without causing recession? And historically, yes, it can. There have been these hiking cycles that have ended in soft landings is what they're called. In other words, there is not a recession. The mid-90s was one. And I would say that the 2018 tightening cycle followed by the 2019 easing cycle really would have been one had it not been for COVID. So it's certainly possible. On the eurodollar futures curve, yes, you correctly point out that the peak in rates has been moving closer and closer to present. And that's typically what happens. And what is inevitably the case is on the day of the last hike, the futures curve is pricing the tightening cycle to peak some date in the future. So it's not the expectation that the last hike is the last hike at the present moment. So I went back and looked at the futures curve from December 2018, which turned out to be the end of that tightening cycle. And the futures curve was”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Growth, which is really that high multiplier, that high marginal propensity to consume. This was checks in the mail to low income households in the context of a sort of capped supply side of the economy. Not surprising that that's going to be inflationary, but as the supply side heals and as we have those programs run off, which they have done and the automatic stabilizers have run off as the unemployment rate has dropped very rapidly, fiscal policy in terms of the dollar value of these deficits has decreased dramatically. It's actually fiscal policy is tighter than where it was pre-COVID. So that is going to definitely have an impact on inflation in addition to what we've seen in terms of the move in mortgage rates from the Fed.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“In May and in June, I think that's going to come through in the data. Again, I come back to the point about the daily average national gasoline price, which we get every day on a real-time basis. That continues to come down and that has a direct impact on inflation expectations, which is one of the things the Fed's really concerned about and focused on. So I think the Fed and the staff at the Fed is going to look at a lot of different indicators and say, hey, we're potentially going to overstay our welcome here. We got to realize that this acts with a lag. We've probably done a sufficient amount of tightening. I mean, mortgage rates, again, it's not so much about where the Fed funds rate overnight is relative to neutral. I think it's about where mortgage rates are. So I think the Fed has done a lot of tightening. And then the Fed gets too much blame for the inflation or too much credit, however you want to describe it. A lot of this is driven by fiscal policy. There's not enough emphasis on fiscal policy. And if you look at year-year M2 money,”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Comes out with a particularly long lag for economic data. So it's a two month lag on that case show numbers. The last reading we have is from April. Month over month was still annualizing to over 20% home price appreciation, which is, I would say, potentially concerning from the Fed's perspective. But if you look at anecdotal indicators as well as the earnings call from, for example, Lennar, who's a home builder, they're pretty clearly indicating that they're seeing real softening in prices.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“The question is how does the Fed, I mean, if the Fed is only looking at that, yeah, you could say they're going to overstay their welcome in the tightening cycle, but the Fed's prime really, and there's this framework which is highly theoretical, highly academic about a neutral rate at 250 and they're not quite there. And if they go 75, then they would be upper end of the target range at neutral. To me, what is the real transmission mechanism to the real economy from fad policy? It's through mortgage rates. And mortgage rates have moved from under 3% to over 6% on a 30-year fixed rate mortgage in under a year. I mean, that is a dramatic amount of tightening. If you remember what people said about the soft landing in the mid-90s, Greenspan Fed, it was Greenspan punched the bond market in the nose. Well, I think you could say the Fed has sufficiently punched the mortgage market in the nose here. And that housing data, which is definitely a key feed through into inflation in terms of owner's equivalent.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Clearly, this outlook is also data dependent, and as I said, we're going to get a jobs report tomorrow that'll be very important, and we're going to get a CPI report that's going to be, I would say, important, but I do think it's key to keep in mind that you have to know that those mid-June readings are going to look bad on headline CPI. So that, I think you can just already price in that that's going to be bad.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Soft landing, and again, a lot of this is going to be out of the Fed's control. But we do see U.S. oil production continuing to recover. We do see the labor force participation rate continuing to recover. Just anecdotally, I think we all feel like these COVID restrictions are almost completely gone in the U.S. And so if we get a decent return of the supply side and supply bottlenecks, if you look at indicators there, definitely look like they're easing. China looks like it's re-accelerating. So that would all speak to really strongly considering the possibility of a soft landing. And you can criticize the Fed all you want. I think the Fed definitely has made mistakes, and I wouldn't credit the Fed if we do get a soft landing necessarily. But I think that soft landing mid-cycle slowdown scenario is not quite as being sort of probabilistically considered as highly as perhaps it should be by many market participants.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“That's China. That's the world's second largest economy. The Eurozone, if you look at that in aggregate, is basically, I think probably bigger than China, roughly the same size as China. And Germany, which is the biggest Eurozone economy, they just had an unemployment rate jump. And this comes back to the point that I was making earlier. I looked at the chart for German unemployment and I thought, well, this movement looks consistent with a German recession historically. Well, when I looked into it, why is that happening? Why is that unemployment rate going up? It's going up because they have an influx of refugees. So they have an influx of new workers. That's the return of the support. Well, you can say the return of the supply side, that would be analogous to if in the US we have the increase in the labor force participation rate. So that's a return of the supply side, which is both pro-growth and disinflationary.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“With going into recession over the next six months. Now, obviously, as data comes in, the forecast always needs to get updated and you always need to look at things relative to what's happening in the market. You can't look at fundamentals in a vacuum. It always has to be relative to price. But that's the way I would frame that question about looking at the PMIs in those two different ways. The other thing that I want to mention is that, as I said, China is actually going in the right direction, so it's moving higher and it's above 50. So pretty much everything, any way you want to look at that China data with respect to their PMIs, it looks pretty good.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“And still have that picture for what that's worth if we're just looking at that consistent with soft landing, consistent with mid-cycle slowdown. All of these mid-cycle slowdowns, if you go back to the 10-year expansion that we had coming out of the GFC, I think we had three different dips below 50 on the manufacturing PMI. Those were the mid-cycle slowdowns. Then growth received. Keep in mind, the natural state of the economy is expansion. And I get the adage that expansions don't die of old age. They're killed by the Fed. There is quite a bit of truth to that. But as I said, the Fed, I think, is going to make a dovish pivot here sooner than a lot of people expect. There's going to be time over the next several months for those PMIs probably to continue to decelerate and many of them go below 50. But as I said, looking at the labor market, leading indicators for the labor market, that still looks pretty strong. That doesn't look consistent.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“That yes, that can continue to happen, but that can continue to happen for three, four, five more months. We can see these readings go below 50 in the US and in the majority of those 12 largest economies.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Well, a couple of things. One is that I think that you can look at economic data releases in three different ways, and you can probably write the headline positively or negatively depending on how you want to look at it and almost always in the media that's going to be shaded with in a negative context. So to use the PMI example, if you have an expectation of a reading of 55, but it comes out at 54, that's lower than expectations, but if the prior reading was 53, right, that's moving in the right direction, right, in terms of the second derivative that you're referring to. But the headline might be manufacturing PMI misses expectations, which sounds like a negative headline. And then, of course, the third way of looking at it. So one way is relative to expectations. The other one is relative to the prior reading. And the third way is just in absolute terms with the framework that anything above 50 is positive and expansionary. Anything below 50 is contractionary. So to your question on this deceleration, clearly that's been happening. And what I'm saying is...”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“Right. Now, Nick, there are folks who don't look at the first derivative. So, for example, a PMI above 50 indicates growth below 50 it indicates contraction. So a PMI of 50.1 indicates growth. So that sort of level rate of change one. But then people who look at the rate of change of the rate of change. So a PMI from 65 down to 64 is still growing 64. That's still pretty good. That's very good. But it's the rate of change is itself going down. Now, I'm not definitely not an adherent to this sort of second derivative school of thought necessarily. But what do you think about the PMI that last month was 56? This month is 55. Next month is 54. Generally, it's not the type of environment when you want to own a copper mine, for example. Generally, it's one that you want to own more bonds. Would you agree with that or do you?”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT
“But they're a buffer that potentially bridges the gap over the next year through what might otherwise be a recession to what's going to be looked back on as a soft landing. Now, clearly that could be wrong, but I think that that possibility is something that needs to be seriously considered.”
2022-07-14 · Forward Guidance · No Clear Sign Of Recession Yet, Says Nick Reece · IDENTIFIED FROM THE TRANSCRIPT