This time last year, almost everyone was calling for a recession to engulf the US economy in 2023. One of those forecasters was was Anna Wong, Chief US Economist for Bloomberg Economics. In October of last year, her model of the US economy showed a 100% chance of a recession happening in 2023. But, here we are more than 12 months later, and US economic data keeps coming in relatively strong. Unemployment remains near multi-decade lows and inflation is pretty close to the Federal Reserve's 2% target. Yet there are still some confusing signals about the economy's overall direction, including surveys showing that many people are extremely pessimistic in their economic outlook. In this episode we speak with Anna about how she's thinking about the conflicting signals in the US economy, why recession didn't materialize in 2023 in the way many people thought it would, and what she's looking out for next year. This transcript has been lightly edited for clarity.
Key Insights from the Pod:
What Bloomberg Economics was expecting for 2023 — 4:07
What goes into a recession model? — 5:40
New ways of thinking about lags in monetary policy — 7:32
Vulnerabilities in the credit markets — 10:07
Why did inflation come down? — 14:01
How much impact did the rate hikes have? — 20:32
Weakness in the labor market — 22:30
The 28 different recession rules — 25:40
Labor market strength during past recessions — 30:31
The differences in hard and soft data — 34:27
What to watch out for in 2024 — 37:40
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Tracy Alloway (00:09):
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal (00:14):
And I'm Joe Weisenthal.
Tracy (00:15):
Joe, it's nearly the end of 2023. It's been a wild ride.
Joe (00:20):
What an incredible year. I mean, the statistic that just jumps out to me is 41.24%. As of right now, we're recording this December 14th, that is the annual gain of the Nasdaq and 23.1% on the S&P, mortgage rates below 7%. Good times. It looks like a good time when I look at the screen.
Tracy (00:44):
Even though you're talking about the rally, it sounds like you haven't escaped the year unscathed. That's because of your voice. It sounds like you've had a rough 2023.
Joe (00:51):
It’s been a good 2023, but my voice is not in great shape at this moment.
Tracy (00:56):
Joe was singing last night at his first show.
Joe (00:59):
Yes, that is my excuse, that I was out late at a bar singing country music. But here I am and I'm very excited to talk about the bizarre, weird, unexpected year that 2023 was.
Tracy (01:11):
So if you recall this time last year, in 2022, it seemed like the consensus going into the year was we were going to have a recession. People were talking about a hard landing, this idea that the Fed was going to have to keep hiking rates and that that was eventually going to have to bring down employment and we were going to see a slowdown in the economy. And yet here we are, and it hasn't materialized.
Joe (01:36):
This time last year, there was just so much pessimism and the market was really in a rough shape in November/December last year, there was this view, it's like, you know what? Things are in rough shape, but it doesn't matter. Inflation is still so high, the Fed has to keep pressing, the Fed has to keep hiking.
It was pretty grim and then somehow, like, this is the big thing that I think people are going to be talking about for years, which is how did we have like the biggest rate hike cycle ever, or one of them, without more slowing in the economic activity? And how did inflation come down from where it was at its peak in the middle of 2022 without more weakening in the labor market?
Tracy (02:18):
Yes, and I should note it wasn't just economists and analysts who were very pessimistic on the economy going into 2023. We had a lot of real world people, for lack of a better term, who also thought that things were going to slow down. Like for instance, you had, I think the Conference Board survey of CEOs, almost a hundred percent were predicting a recession in the US. All the sentiment surveys, as we've been discussing on the show, have been coming in — until recently — very negative. So this wasn't just an economist problem. But I think we should go over the year and we should review what exactly happened that surprised a lot of people.
Joe (03:00):
Well, you said this, I think in our recent episode that we did with Jan Hatzius, and I totally agree. I mean, I feel like the last few years will be one of these periods in economics that people are going to be writing PhD papers on for 50 years. It’s kind of like the great the Great Depression or other periods that are these sort of holy grails or Rosetta stones for understanding how the economy works. There's going to be so much debate and work and academic research and re-litigating debates, etc., about what happened over the last four years.
Tracy (03:31):
I really hope we still have Odd Lots in 2073 and we'll just do episodes on what happened.
Joe (03:37):
My voice will sound better then.
Tracy (03:40):
I hope so. Why don't we just get to it? We are going to be speaking with Anna Wong. She's the Chief US Economist for Bloomberg Economics. It's the first time we've ever had her on the show, which is kind of surprising. Anna, thank you so much for coming on Odd Lots!
Anna Wong (03:54):
Happy to be here, Tracy.
Tracy (03:57):
So this time last year, why don't you walk us through what exactly Bloomberg Economics was expecting? How did you expect this particular year to turn out?
Anna (04:07):
Yeah so a year ago, or even more like a year and a half ago, we first put out our recession model because at the time the Fed started hiking rates and there was just a lot of curiosity about how this would end. And our goal then was to have a more precise timing of the probability of recession as opposed to just giving a vague ‘What is the 12th month ahead recession?’
And there's a cottage industry of these models out there. And so our model was to put out some kind of number on each month's probability in July, August. And over that period, so this model first came out in spring of 2022, and at that time, the model is actually foreseeing a recession, a high probability of recession, only starting towards the end of 2023 and even in early 2024.
And over the course of last year and this year, that model evolves in terms of the timing of when that trigger is pushed. And all of the calls of that model have been that the recession would begin in the second half of 2023. And so coming into this year, we thought that the recession that is so widely expected would be towards the end of 2023.
Joe (05:31):
Backing up for a second, what goes into a recession model? What does that even mean? Like, how do you build or construct a model and something like that?
Anna (05:40):
Yeah, there are just a variety of models, right? So for example, our model, and we took 13 indicators, typical indicators that had some track record in identifying recessions. And most, many of them overlap with the LEIs from Conference Board. So it’s yield curve spreads, sentiment model and so any models that have those two things — yield curve spreads and sentiment — would tell you there's a high probability of recession.
Even the LEI has over 90% probability of recession. But another type of model that one uses is just thinking about the probability that NBER would date a recession. And NBER told the public that they usually look at six monthly indicators and so one could perceivably be also building a model based on that. But of course, when we make a call for a recession, that is only a very small part of all our inputs.
We tend to look at things in Bloomberg Economics, in my team, we tend to look at things in three ways. We approach a question in three ways. And if those three ways all say the same thing, then we make the call. And so for a recession call last year we also, what really influenced our view is the range of other theoretical models.
So the model that [the] recession probability models I just described are just empirical models, which have no theoretical frameworks, right? But economists, of course, in their tool set, we have general equilibrium models, we have large scale models, we have state-of-the-art models. So we used a model on the terminal, which is called SHOK which mimics...
Tracy (07:26):
Yeah, I was looking at this earlier and it’s pretty cool actually.
Joe (07:28):
Wait, what's it called?
Tracy (7:30):
SHOK. It's SHOK
Anna (07:32):
Right. And that model mimics the Fed's own in-house general equilibrium mode, FRB/US, and that model would suggest that the lags of monetary rate hikes, at least on the labor market, should be about 18 to 24 months, which is about the standard of what has been found in economic literature.
And then another state of the art model we used is a model that central bankers have been discussing a lot last year. This is based on a cutting edge economic paper and that was the paper that tipped a lot of central bankers off into thinking about shorter lags of monetary policy.
Tracy:(8:16):
Which paper is this?
Anna (8:18):
It's a paper by Bauer and Swanson, and that was the paper that found that in fact, the lags of monetary policy are much shorter. So we also looked at that model and what those models found, especially that Bauer and Swanson, the very cutting edge model is that yes, it's true that the lags of monetary policy are shorter
For example, for industrial production, we have already seen IP decline for over a year. And in fact, the decline of industrial production almost exactly matched the contour of that model. And so that model also says that inflation now responds faster to Fed's rate hike than back in the times of Milton Freedman.
But the one area which the model says that, two areas actually, that says that the lags of rate hikes still have yet to really hit the peak is labor market and also credit market. And I think those two are precisely the area where we have not seen much adjustment. And that is why most people don't think we have a recession yet this year.
Tracy (09:32):
That's really interesting, especially — putting my former credit market reporter hat on — the credit side of it. I do have a pet theory right now that I think we've talked about, which is that the sheer size of the private credit market might be making a difference here. Like if you have this bundle of money that actually doesn't seem to be that rate sensitive in the current environment, maybe it's propping up parts of the market. But talk to us about why the credit market might not be as efficient at transmitting rate hikes as it once was.
Anna (10:07):
Yeah, I think this might be the surprise. The surprises in the credit market might be a surprise of 2024, which is, well, I think that my pet theory of why credit market hasn't adjusted yet in 2023 is that corporates have locked in low interest rates, right? Everybody knows that. Also, on the household side, households also had wonderful balance sheets during the pandemic, many households paid down the debt, so deleveraged during the pandemic.
But at the same time, I think this is the following areas where I don't think the market understands very well, for households’ balance sheets, really how accurate are the credit scores being reflected? So I think that the credit forbearance, a lot of the debt forbearance during the pandemic had distorted the credit scores, inflated credit scores. And there are some studies that estimate that perhaps by as much as even 50 basis points.
So a lot of, you know, what currently looks like to be near-prime are actually subprime. And some prime could be actually near prime. And then looking at auto delinquencies, which have risen to the level of 2010, right? And you look at who are the ones who are defaulting? They're the ones who bought cars in 2021 and 2022 when car prices were extremely high and they are also the ones who are having subprime and near-prime credit ratings.
So the question I think in 2024 is how many of these borrowers who have leveraged up in the past two years are in fact the credit rating, the good credit quality, that they looked to be like? And when the moment that more defaults happen as prices slow, when inflation slows what also happens is income slows, wage growth slows, and if [the] interest rate doesn't fall as fast… So suppose that the Fed does ultimately do hold higher for longer, whereas income and prices are coming down, that would mean that there would be more delinquencies.
So when that moment happens, whether there will be a credit crunch versus just a normal gradual credit slowdown, depends on how the lender is seeing the information, right? This is the famous adverse selection issue. Like, if there's a portion of people whose credit scores don't appropriately reflect their true behavior, can lenders see who are the bad seeds, who are not? And this is like a famous asymmetry in the used car market.
Joe (13:04):
The market for lemons, right?
Anna (13:05):
Yes, the lemons, right.
Joe (13:23):
What is the takeaway from the realized disinflation that we've seen? You know, I think at one point CPI was around 9%. Now we're basically, you can argue that in recent months, we are by some measures at the Fed's target, and yet unemployment is at 3.7%. And that was a set of conditions that very few people would have anticipated was even possible, in part because the standard story is, well, you need to reduce demand to ease prices. And the way you ease demand is by people unfortunately having to lose their jobs. What have we learned about, at least what we've seen so far in this cycle?
Anna (14:01):
Yeah, Joe, so I would say one would have to acknowledge that it's going better than what everybody thought at first, that it will have to be extremely [painful]. But at the same time, I think as Powell said yesterday it’s too soon to declare victory on flaying inflation and here's why.
So based on various model decompositions of the drivers of inflation over the last two years, our assessment is that half of it is driven by supply, and about half of it is driven by demand. But of course, it's the mixture of those two high demands while supply is hurt, which led to this explosive inflation, right? And in terms of [the] disinflation we saw this year, earlier this year, when SVB collapsed, at that time the CPI, recall it was actually falling, and everybody thought inflation was not a problem. But in fact, the super core, which is Powell's preferred measure, which captures the labor intensive part of inflation was not slowing at all.
But then moving into the second half of this year, we start to see a lot of disinflation. And it actually started in June of this year and this is where I said that, you know, the lags of monetary policy on the labor market is about 18 to 24 months. So that slowdown in wage growth actually hit right about the time that all these models would suggest. And so we started seeing movement in that. But still, core inflation is still around 4% during the summer.
On the second day of the December FOMC meeting, the FOMC received a very critical data point, it is the November PPI. And so Fed staff usually can pull together a PCE inflation number very quickly the moment they have both CPI and PPI numbers in their hand. So on the second day of the December FOMC meeting, that PPI number came in to suggest that actually Core PCE for November is going to be very low. We estimate that it's only 0.04%, possibly. So round to zero in November.
And this would mean that the six month annualized core PCE, this is the measure that Chris Waller and a lot of Fed officials are looking at and gauging the momentum of inflation, would come in at 2.0, likely, in November, right at the Fed's target. So if the FOMC has that data point on the second day, on the morning of the December FOMC meeting, [then] that explains why the summary of economic projection downward revision of core PCE to only 3.2% for end of 2023.
Now, [what] do you make of this significant drop in core PCE? So I would say that when this number ultimately is publicly released late in December, I think it would spark a big debate. On one side, a lot of people would say the Fed is already at target, they should be cutting rates in January, even. But the second group of people, and I would be in that second group of people, would be saying but a lot of the disinflation in November is actually in categories that’s exogenous to the Fed's rate hike. In fact, it's due to China.
If you look at the downside surprises, it's actually all in categories with high China import content. So they're in apparels, clothing, furnishings and those actually drove almost all of the downward surprises. So what I think is happening, and this gives me some memory of what happened in 2014 and 2015 was you have a global growth slowdown started by China, and then that led to a commodity prices decline.
And also sometimes when global growth slows down occasionally, that could also lead to OPEC having trouble keeping a discipline within OPEC, and that leads to a race to the bottom. On top of that, you have US shale who's pumping suddenly. A lot more of that actually was the dynamics in 2015 and 2014 that led to that collapse in oil prices.
So when you have this China slowdown and what's going on with oil prices, you actually could lead to this disinflation that we are seeing right now. But the implication is also that for the part that the Fed has been focusing on, super core services, that actually doesn't look as great. So services inflation actually picked up a little bit in November in the Core PCE.
So I think for the Fed to declare victory too soon would be a mistake and just looking at our outlook out to 2024, we do see the six month annualized Core PCE dipping in the first half of 2024, and dropping to even 2.2% in March, and then stabilizing at about 2.7% in the second half of the year. And that would be that last mile of inflation because the Feds should not be happy about 2.7 or 2.8% inflation.
Tracy (19:51):
I definitely want to discuss the outlook a little bit more, but before we do, I'm glad you mentioned these exogenous factors. These exogenous price declines because there is, you know, 2023 has turned out to be better than a lot of people expected, but there is now this vibrant debate about how much of that can be attributed to the rate hikes and by extension, the Fed. So I guess my question is, how do you think Fed tightening has actually worked through this economy and how much of what we've seen so far is due to monetary policy versus perhaps normalization of things like supply chains?
Anna (20:32):
Yeah. Good question, Tracy. You know, I think the way that monetary policy has worked this year is largely as the models expected. As I was saying, if you use these state-of-the-art models, you would see industrial production has declined exactly according to that contour that the model would describe. Inflation as well.
And the places which have not been behaving as models would describe would be the credit market and labor market. But even so, the labor market, in fact, is moving in the direction that the model would describe. So with an 18- to 24-month lag of monetary policy on the labor market, we should be seeing a more clear slow down in job growth in the second half of this year and I think we did see that.
And I will also have to add that the strong Non-Farm Payroll data over the year is likely to be overestimating the strength of the labor market. That in fact, about 40% of the non-farm [payroll, 3 million non-farm payroll gains, is due to the BLS birth and death model.
So if you think about whether this makes sense, you know, this is a year where bankruptcies have risen to the level of 2010. At the same time, small businesses are complaining that it's been very hard for them to hire. So if that's the case, how could it be that new firms could contribute to 40% of the 3 million job gains this year? So I think that in fact, after all the revisions are done, which will take a year or two more, then it will be clear that in fact, in 2023, the job market did slow down significantly in the second half of this year.
Joe (22:30):
What do you see in the data that makes you think that the strength of the labor market is overstated? Because I mean, if small businesses are still to this day and like I said, we're recording this December 14th, earlier in the week we got the NFIB survey, which said that finding labor is still a challenge for many companies. It was like in the first one or two paragraphs of the report, that sounds like a robust tight labor market. So what are you seeing in the data that makes you think that there is this deceleration going on?
Anna (23:05):
Several things, so I think the difference between our views, our assessment of the labor market and other soft landing, really staunch, softlander’s view of the labor market really differs only in how much weight we place in different labor market indicators.
For example, job openings — so that has been very high throughout this year and in fact, for most of this year there were still over 1.8 vacancies for every unemployed. But we put very little weight in that data because first of all, a lot of HR recruiters have been fired over the turn of last year. And so logically you would ask yourself if most of the layoffs late in 2022 and early 2022 is in the recruitment industry, then who are the people recruiting people?
And second, we do rely on anecdotes and in turning points of an economy, anecdotes are extremely useful because they don't get revised. And the Fed also relies a lot on Beige Book and anecdotes during turning points as well. So we thought that the Jolts were just overstating.
But what gives us more confidence are the price measures, so wage growth. And throughout the year we have seen wage growth measures coming down softer and softer, even as you see these headline numbers being very strong in terms of payroll gains and job openings. And I do believe that that price measures are better collected and less susceptible to revisions because you just collect a price data, whereas with counting the number of jobs you need to consider are you appropriately taking account of all the failed firms? Because firms who are going bankrupt would not be answering surveys of how many people they hired. So, you know, that's why we put a lot more focus on price measures, which suggest to us that in fact, the labor market is softening more and also we look at a range of recession rules that are based on unemployment.
Tracy (25:36):
Oh yeah. Bloomberg Economics has its own recession rule. I didn't realize that.
Anna (25:40):
Yes, so a couple weeks ago I had a piece with Bill Dudley, and we considered 28 recession rules that are based on unemployment. And the idea is that unemployment is a very good indicator because, number one, it doesn't really get revised. And number two, it also, unemployment, a job, is the most important variable in the economy that determines income, consumption, saving patterns.
So that's why I would focus on unemployment. And so the unemployment rate is just the inflows of people into the unemployed state minus the people escaping the unemployed state, divided by the labor force. That is the unemployment rate but even within an unemployed state, there are a lot of different categories, right?
The most commonly used unemployment rate is the U3 rate, the rate that we know about. But there is also U1, which measures the number of people who have been unemployed for 15 months or longer. There's also a U2 rate, which measures the people who are laid off and who are temporary workers who finished their temporary stint.
And so our 28 rules basically look at these three unemployment rates as well as just flows — inflows and outflows. And in fact back in January, 2008, Janet Yellen was discussing the state of the labor market in the FOMC meeting then, and she was the San Francisco Fed president then, and she talked about unemployment flows. And so when you see a lot more people flowing into the unemployed state but having a hard time getting out of it, that is how you get a swelling of the unemployment rate. And you don't necessarily need layoffs to get a higher flow of unemployed, right? It could be reentrants into the labor market or new entrants into the labor market.
And in fact, in the 1990, 2001, 2007 recession, the initial increase in unemployment rate is actually due to entrants, new entrants and reentrants, not layoffs. So the most accurate rule that we have found is the unemployment inflows and outflows indicator, that whenever the six-month moving average of unemployed inflows exceeds outflows is when you are about two months after a recession begins.
And I think the intuition there is just that usually the beginning of a recession begins with people just finding it harder to find a job, not because there's layoffs, but because there are less people quitting, less turnover. So it's harder to find a job and only after this stagnant state goes on for a while in the labor market, when firms decide because of the low attrition they have to lay off people, and that's where you get all the layoffs, that's the increase in U2 rate.
So based on this rule, it suggests that we are likely already in this state of downturn, and that is why we think that a year from now, or even a year and a half from now, if NBER were to time the beginning of a recession, I think October could be a candidate. And usually after this rule is triggered, the unemployment rate would persistently increase because it's just harder and harder for people to find a job.
Tracy (29:34):
Yeah it’s exponential. So you mentioned the Sahm rule, and we had Claudia Sahm on the show a few weeks ago, and she has made the point, in many venues now, but the idea that yes, the Sahm rule exists and it is one of 28 recession rules, as you just mentioned, Anna. But it is just a rule, it is just a guide.
And the economic cycle of the post-pandemic period has been so unusual that there is a good chance that maybe the rule doesn't apply to this particular cycle. I'm curious how you factor in, I guess, the extraordinary unusualness of the Covid period into your outlook. Is that something that you take into account when you're looking at things like the relationship between unemployment and the economy? Would you adjust those models for, I guess, the weirdness of the post-pandemic economy?
Anna (30:31):
Definitely, and that's one of the reasons why we were never calling for a recession in 2022 or even the first half of this year, because the most important thing to adjust for in terms of the unusualness of the pandemic is the excellent balance sheet of households and corporates. You could only really time the downturn once you have a good understanding of when those cushion financial buffers that people have built up exhaust themselves.
And also another very special factor about the pandemic is this labor shortage. And that could be a reason for why firms would be hoarding more laborers and therefore [are] less likely to let people go. However, I would say that we always supplement our model, or rule of thumb-based analysis with historical analysis.
And we went back to look at the Beige Books, the FOMC transcripts, real time FOMC minutes of previous recessions and we found that labor shortage is always a problem in previous recessions. In fact, in 1973, that was at that time the deepest recession since World War II. Employment was climbing even 11 months after the recession began and that was also a recession where everybody at the FOMC at that time was talking about how tight the labor market was. There was an enormous labor shortage and that was why even 11 months, only 11 months into that recession did employment turn negative.
And then also if you go back to the Beige Book in 2001, that is the recession that I think if we were to have one today, would be most likely to resemble. That one was where everybody actually lived through that recession before realizing that there even one and by the time NBER announced it, it's already over.
And at that time, what people were talking about when that recession started was that the labor market is very tight. There’s a lot of shortages, there were pockets of weaknesses, manufacturing isn’t hiring, and it’s hard to get manual labor. There [is] decreased demand for temporary workers, but there's also shortages of white collars.
So it actually, this narrative of labor shortage and tight labor market always existed in the first month of recessions. So this is why, to us, it was not powerful enough of an argument to push back against an empirical regularity that actually, to be honest, I don't think economists have a very good understanding about. And so if we don't understand why [the] unemployment rate would always jump by another 1.5 percentage point after jumping 0.5 percentage point, then it's very hard to deconstruct this argument if you don't even know why it is that way.
Tracy (33:48):
So speaking of things that economists might not have a great understanding of, you kind of touched on this earlier, but the other big debate of the moment is this idea of hard versus soft data. So the hard data is still coming in relatively strong, although as you point out, maybe it gets revised down later. These surveys, the soft data are pretty bad, at least up until recently. There's been some improvement. But if you were looking at something like the consumer sentiment survey earlier this year, you probably would've thought that recession was already here. How are you squaring those two variables, the soft and the hard?
Anna (34:27):
Yeah so soft indicators, sentiment indicators, have not really played a key role in our recession call for the reason that you mentioned. And I do agree that if you look at the decomposition of the sentiment, it's driven by political party lines. However, I would say that it is important to take into account people's lived experience because ultimately people, ultimately, and I stress the word ‘ultimately,’ people's behavior is a function of how they feel the world is going to be like.
And I could understand why sentiment is very poor, because the key reason, the key explanation is that price levels are still high and not only in US, but all around the world, when you look at countries that has suffered from high inflation, what happened is that the relative levels of prices in the economy is completely distorted.
And it takes a while for these relative levels to return to normal, even if the growth rate of inflation falls to 2%, in fact, everything is very different. For example, the price of a burger relative to my income is permanently higher. And also, you know, if your heater is broken this winter, you'll be shocked to find out that in fact it now costs $20,000 to get a heat pump versus before the pandemic it was, you know, about $10,000.
So, many prices actually increased more than 30%, 40%. And I think it's just harder for people to plan for the future whenever financial shocks happen. And also, if you look at the distribution of the gains from financial asset appreciation during the past three years, it is actually very concentrated in Baby Boomers and, you know, 70% of stocks are owned by people who are older than 59 years old.
Whereas the [younger] people, the Millennials and Generation X, what they had in the last three years is actually they saw their debt load climb. In fact, consumer credit for Millennials rose over 30% over the last three years. So you know, there's a distributional aspect to it and I think if you ask the baby boomers, yes, times are great. For the younger generation they cannot, they have a hard time buying a house. So I think that one way that we could get a sustained soft landing would be if the Baby Boomers could transfer their wealth to the Millennials to help the debt burden.
Tracy (37:26):
If all the old people die.?
Anna (37:29):
No, just be altruistic.
Tracy (37:32):
Yes, yes. Please give us our inheritance now.
Joe (37:37):
In 2024 what should we watch for, what's going to happen?
Anna (37:40):
Yeah, I think there are definitely both positive and negative risks. So as I mentioned, I think that there might be a chance that a recession in fact has already started late in 2023. But I don't think any recessions are inevitable because there's this short period of time where if policy makers act on it, you could turn it around.
And when I wrote my 2024 outlook, our base case is that we think a downturn has started in October, but the Fed can still achieve its soft landing if they cut faster and earlier. And in my mind, I was thinking the Fed should be cutting in December and January, and amazingly we did see a great pivot from Powell in the December FOMC meeting and that is actually the sort of stuff that could staunch the downturn dynamics and turn it all around. Of course, it helps that you have positive exogenous supply shocks. China slowed down, as bad as it is to global growth, [it] actually helps Powell's case in that it drives down commodity prices.
On the negative risk side, I remain concerned about the credit crunch. I mentioned that our models would suggest that the credit sector has not adjusted to Fed rate hikes, and it takes time for the rate hikes to hit that sector because first you need the balance sheet cushion of consumers and corporates to be depleted. And then second, you don't actually need negative growth, you just need a slow down in revenues for corporations to feel the heat, then you'll see more defaults. As you see more defaults, then you can see lenders pull back or the defaults could also reveal that there is actually some underlying vulnerability, either in the consumer credit segment or corporate.
Tracy (39:46):
Well, Anna Wong, thank you so much for coming on Odd Lots and walking us through your 2023 call and giving us a preview of 2024 as well. Really appreciate it!
Anna (39:55):
Happy to be here, thanks.
Tracy (40:09):
Joe, that was really interesting. There are so many things to pull out of that conversation. I thought the credit market point was an extremely interesting one. People have been talking about the idea of the credit market maybe having a reckoning for many years now, but the idea that maybe the lags between the interest rate hikes and the credit market have somehow changed due to the big maturity takeout that we saw. But also the idea that if revenues start to come down, that's when you could see the crunch point that was interesting.
The idea of the distribution of sentiment, I think that's something that we're starting to hear over and over again, not just in the political sense. So obviously Republicans and Democrats are reporting very different things at the moment, but also maybe differences in ages. If you're a Baby Boomer with a huge stock portfolio and a house, you're probably feeling pretty good right now. If you're a Millennial without that much in stock-based savings or any hard assets like houses, then you're probably not feeling so good.
Joe (41:10):
I thought there were so many interesting observations there, but I can't talk. So Tracy, just say more.
Tracy (41:15):
You can just say ‘That’s a great point Tracy.’
Joe (41:17):
That's a great point, Tracy.
Tracy (41:18):
Thank you. I appreciate that. Also the idea that if we do get a recession soon, it could resemble something like 2001.
Joe (41:28):
We should talk about that recession. We should do an episode on the 2001 recession.
Tracy (41:31):
I would totally be up for it. The idea that people, it was one of those recessions where people didn't realize it was happening that much until afterwards.
Joe (41:39):
September 11th woke people up, that was the moment, but yes, I think at that point people were like ‘Oh, we're clearly going to have this contraction.’ But I do think that's a really interesting historical recession that we don't talk about much. And I do think there's sort of this interesting question about the lags between when the NBER dates the start of recession to when the consensus sets in that ‘Oh we’re in recession.’ So it's sort of an interesting thing to look back at, like how long it typically takes historically.
Tracy (42:11):
Joe, I think we should leave it there because it sounds painful just listening to you.
Joe (42:15):
I apologize.
Tracy (42:16):
No, I thank you for coming on the show and working it out. But let's leave it there.
Joe (42:23):
Let's leave it there.
You can follow Anna Wong at
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