"We NEED A Recession!" Says Wolf Richter, Though He Doesn't See One Happening Soon
Dec 5, 2023
auto_awesome
Economist and financial analyst Wolf Richter discusses the contrasting narratives about the economy, expressing concerns about overvaluation and warning of a recession next year. He assesses the global economy, highlighting the divergence between the strong US economy and weaker economies in other regions. They discuss positive trends in construction spending and per capita income, delinquency rates in the subprime sector, expectations for bond yields, gold and commodities as long-term investments, and the importance of staying fit and healthy.
The US economy is in a relatively good state with consumers earning record amounts of money and businesses spending and investing, indicating no evidence of a weakening economy or signs of an upcoming recession.
Inflation in goods prices has been coming down, but services inflation remains high, implying that the overall inflation fight is not over and there could be surprises in the future.
Interest payments on government debt may provide a discipline for Congress to address the deficit, forcing them to rethink fiscal policies.
Bond yields have been volatile, but the upward trend in long-term yields remains intact, with expectations of long-term yields rising above short-term yields in the future.
Deep dives
Economy in Pretty Good Shape
Based on the data, the US economy is in a relatively good state. Consumers are earning record amounts of money, with the biggest pay increases in 40 years. They have significant amounts of cash flow from interest income and Social Security colas. Consumer spending remains solid, with car sales and other durable goods performing well. The savings rate, though lower than historical norms, is still positive. Businesses are also spending and investing. Overall, there is no evidence of a weakening economy or signs of an upcoming recession.
No Immediate Concerns about Inflation
Inflation, particularly in goods prices, has been coming down. Automotive prices, gasoline prices, and other durable goods prices have seen declines. However, services inflation remains stubbornly high, and there may be some surprises in the future. It is expected that services inflation will stay higher than 2%, while goods prices may stabilize and start rising again. The overall inflation fight is not over, and there could be head fakes in both directions.
Interest Payments as a Discipline
As interest payments on government debt increase, they provide a potential discipline for Congress to address the deficit. The Federal Reserve understands that excessively accommodating monetary policy could lead to unmanageable levels of inflation. The discipline of interest payments may force Congress to rethink fiscal policies and address the deficit.
Expectations for Bond Yields
Bond yields have been volatile, with recent declines not breaking any downward records. The upward trend in long-term yields remains intact, and it is expected that long-term yields will rise above short-term yields in the future. This could result in a 10-year yield above 5.5% and mortgage rates in the 7-8% range.
Uninversion of the Yield Curve
The yield curve is expected to uninvert primarily through a bear steepening, with long-term yields rising above today's short-term yields. This is expected to be driven by the strength of the economy, as it sustains relatively higher interest rates. The US economy has shown surprising resilience in the face of rising rates and is not expected to be significantly impacted by higher interest costs.
Housing Market Outlook
The housing market is experiencing a correction after a period of inflated prices due to low interest rates and monetary policies. Median incomes have not kept up with the rising housing prices, resulting in affordability issues. Homebuilders have responded by lowering prices and offering mortgage relief. The market is starting to see new listings and a shift towards more realistic pricing. While the overall economy may remain steady, housing prices are expected to continue lowering, potentially experiencing a mild correction of 5-10%.
Market Outlook and Investment Recommendations
The podcast guest believes that the stock market is overvalued, heavily reliant on a few large stocks, and can be volatile. They do not favor investing in stocks at this time. However, they see potential in long-term treasury securities if yields increase, making them more attractive. They caution that credit issues may arise next year impacting corporate bonds, making treasuries a safer option. They also touch on commodities, emphasizing the short-term volatility and specific risks associated with certain industries. Finally, they highlight the importance of investing in personal health and well-being for a rich and fulfilling life, promoting habits such as exercise, healthy eating, and adequate sleep.
There are a lot of narratives flying around right now regarding the economy, the stock market, recession risk, jobs, inflation and what's going to happen next year.
Given the recent 5%+ Q3 GDP print and one of the best Novembers on record for both stocks and bonds, bulls are back to saying "everything is awesome" again & 2024 will be a great year for making money
Bears on the other hand point to near-record levels of overvaluation, recessionary leading indicators and warn the inevitable arrival of the lag effect will see the economy in recession next year and the return of a bear market.
When sentiment is full of such crosscurrents, it's prudent to seek the counsel of those who take. cold and calculated look at the data, to see what "is" vs what our biases may want us to see.
Which is why we're fortunate to speak with macro analyst Wolf Richter of WolfStreet.com, who will share with us what the charts he regularly compiles are telling him about the true state of today's economy & markets.
To learn what's in store for this new Thoughtful Money channel, SUBSCRIBE FOR FREE to Adam's new Substack at https://adamtaggart.substack.com/
#recession #inflation #economy
Remember Everything You Learn from Podcasts
Save insights instantly, chat with episodes, and build lasting knowledge - all powered by AI.
