Markets, US Economy, And The Supply Chain (Podcast)

to a professional here. Let's switch gears. This is it's just ugly afterre Matt Stucky, senior portfolio manager for Northwestern Mutual, joins us. Matt. The concern this morning to talk this morning. The Wall Street chatter this morning is recession. What say you? Is that in your model? Well, it certainly in the distribution and at that section the distribution has been rising over the last few months. Um, growth is rapidly slowing, and the potential for a mild recession I think is

pretty elevated here. Um, you know a couple of data points that you know, we would point to that are really starting to kind of shine out to us as you saw it the last quarter with orange reports from you know, the likes of Target and Walmart. We kind of wonder what else is going to be spilling over. And you know, first and foremost we think it's probably housing here just as a reflection of how quickly interest

rates are rising and what that does to affordability. Um. But you what you've seen so far this quarter, which I think is really interesting, is just the percentage of increase of inventory that's out there in the existing home market, and that's being met with with a buyer that's starting to uh, really refine out what their what their budgets are with the higher interest rate environment, and um, you know,

somewhat of a bias right going smar right now? So housing about a house without even thinking about my budget and about how terrified every day but hopefully locked in that interest rate exactly. I was like three, I'll pay whatever you want. Um. So we've had these um inventory build ups at Walmart, at Target, and I hear you now saying that we're seeing that in housing as well. Does that mean you think inflation is going to roll over? I do think that's going to roll over pretty quickly.

And you know a couple of things, you know, certainly the durable goods, the story has been well discussed, and inventories they are potting up quickly, which you know inevitably leads to discounting that eventually find its way into uh inflation obviously. But um, you know, the housing story I think hasn't been really discussed much in terms of what it means in terms of overall inflation. UM. You know, this is it's a stickier part of the inflation story, and it moves with a lag and in terms of

the way excuse me, it finds its way into inflation. UM. So you know for the third War, certainly, you know, I think it's got upward pressure for for PC as well cp I. But you know, as you move into the fourth quarter beyond, UM, you know, we don't really expect as much up pressure from the happening part of

the equation as it relates to inflation. UM. So you know, between the backup of inventories as well as consumer spending shifting away from durable goods and you know pressure coming off for um, for housing as we moved throughout this year, you do think that there is the potential for inflation to to move lower throughout the rest of this year and into and it's it's a it's starting to show up in terms of what the bond markets expecting the

Federal Reserve to do you did you didn't notice that, um, first quarter traders are certain to price in Fed Reserve cuts, which is just you know, obviously a pivot by the feder Reserve from a ratching up of interest rates and so, UM, it's starting to fall on a line where you know, the peak of inflationary pressures in the rear view mirror. Here. All right, man, we got the earnings coming up starting in about a week or so, the big banks will kick it off in earnest here. What are you looking

for this earning season? You know, UM, it's it's great that we get to have banks start things up because they touched so many fastest of the economy, from the consumer and credit conditions there to what business spending is looking like. UM, as well as you know M and A activity. A couple of things that really we watch out for obviously is is consumer press sure and in the form of delinquencies. You would expect those to normalise

as inflationary pressures have started to strain consumer pujects. UM. You know, credit credit performance throughout the last couple of years such as been absolutely fantastic. UM. You would expect that to normalize would still be pretty healthy here because consumers and aggregates still have two trillion worth of access liquidity that they didn't have before the pandemic. UM that

really helps credit performance for for banks UM. You know, on the on the expense side, UM, we are wondering whether or not you know, banks you could be able to start to defend margins UM you know as as UM and transition from UH back to more of an operating leverage scenario that you know we saw pre pandemic.

You know, UH, operating leverages been going in the wrong direction for the last couple of years and and you know, maybe this quarter with rising UH that interesting income as well as you know, continued healthy credit performance, operating leverage can continue, can continue to be a good out of the story. In said of Nago that we've seen the last couple of you. By the way, I'm wondering, do you have products at Northwestern that you sell the people

who are just worried about inflation. All they want to do is be inflation like a tips thing or or an insurance product. Well not, I don't really think we have one on the insurance side, but certainly side portfolios that we manage UM of you know, public securities. You know, we do from time, from time to time build up UM inflation protection in their portfolios in the form of tips. We took a pretty big step into a TIPS position

UH in April. We actually exited out earlier out earlier in two is we thought we were past the point of peak inflation. UM. You know, we we tipped at maybe a couple of a few weeks to early because in the Russia, Russia Ukraine flare up did occur, unfortunately. But you know, even since even since um, you know, Russian dated Ukraine, you've seen one year UH inflation break evens moved from UM over six percent back down to four and app all right, man, we're gonna to have

to leave it there because of time. But but we'll get you back and we'll check in on that. Matt Stucky, senior portfolio manager in Northwestern Neutral. Now let me bring in my friend Gary Schilling, who's had a long and storied career, starting in Fremont, Ohio, then going on to Amherst, which is almost as good as Williams and Wesleyan before landing at Stanford UM, the Federal Reserve and Mary Lynch etcetera,

and so forth. Gary, great to have you on the program. Um. I was hoping, first of all, we could talk about a comparison between the kind of inflation that we're having now and the kind of inflation that we had in the seventies. A buddy of mine, Neil Grossman and and Bill Dudley also have said that the way they're measured is different. But if we measured inflation now like we did, then it could seem just as bad. What do you think, Well, it is a different type of inflation. It's more it's

more supply. It's more weakness and supply and over abundance of demand. But it's a little of both. And the way they come together as pushed as push up prices. But it makes it a lot coverer for the Fed to deal with because the Fed. You know, look what what can the Fed do? They can raise the lower interest rates, they can buy and sell securities and that's it, and that's very good for controlling demand. Um. You know,

they pull on the string constrict demand. They push on the string, not much happens, but they can't do very much on the supply side. So the FED is dealing with instruments. They're not really appropriate to the current situation, but they were so far behind the inflation curve that I think they felt just just to preserve their credibility, they had to do something. So they are hot and

heavy at raising rates. And when they go on these rate raising campaigns, more times than not, you end up with a recession their virgin soft landings in the entire post or a period that brings up something that that you and I were talking about this weekend, and I was really taken to task this morning, um by claiming that we're in a recession already. The Atlanta Fed GDP now tracker says the second quarter contraction was two point one percent, and of course we had a one point

six percent contraction in Q one. John Riding said, Miller, you don't know you're talking about And you basically told me the same thing, Um, how will how will we know when we're in a recession? We'll know when they Nastural Bureau of Economic Research, a private research organization that really first uh first mapped out business cycles and started them back in the ninet thirties. When they say so, no administration, Republican or Democrat, would ever want to declare

a recession. Oh no, no, they leave that to somebody else and v R. And the thing is that they wait until they get all the visions and all the late data in and and there are times when they don't declare that they passed the peak of business and intercession until the whole thing is over. And so it's it's it's very difficult. I mean, you can't to say you're in recession. Yeah, I think we're probably either in or close to it. That's what I started talking about

earlier this year. But again, it's all over, including the shop for the time it becomes official. So, Gary, if we are already in a recession or close to one, do you have any sense, based upon your experience, how deep it maybe, how long it may be. Do you have any feelings at that point? I think it could be deep now, not like the oh seven oh nine when you have the collaps and sub prime mortgages, and and not like the two thousand, which was the COVID

in terms of depth. But you've got a lot of speculation out there, and that's that's what happens, you know, what really happens. What's the guts of recessions? It's the correction of accesses, accesses and inventories, accesses and speculation heavy financial positions. And we've had so much very reserved for largest really since two thousand eight reaction to the financial crisis, that there's there's, there's no doubt, an awful lot of speculation.

That's we see it coming out of the woodwork every day. You see the sp A c is collapsing, you see crypto collapsing. These things that people fall were perfectly safe, but you find out there's a lot of speculation. And one of the things that we always see is that everybody ends up on the same side of the same trade at the same time. So when one goes bad, traders have to cut back their positions and other things

they are totally unrelated, oftentimes in order to survive. So I think it could be, it could be deep blank, it'll it'll run into next year. I wouldn't I wouldn't try to put an exact pinpoint the timing, but it could very well last three or four quarters, which isn't

all let unusual. Could the sell off in stocks and indeed bonds gary which have you know, collapsed relative to history in the first half, could it be a paradigm shift, because you famously called the shift back in the day when you know, before people owned tangible assets and eventually started investing in things like stocks and bonds. Could we see that turnaround? Uh? Yeah, we probably probably could. I think you've had a lot of speculation in commodities. Um,

I don't. I don't. There isn't anything that's really going to drive global global growth. There's no big forces on the horizon. And I think we're going to be in a low inflationary environment. And the key driver of that is we're in the next I supply world. You've got Asia, huge producers, very weak consumers, and unless we had all out protection as you've got a surplus of of supply or demand that the savings but they talk about, and I think that's going to keep downward pressure on on inflation.

So uh yeah, I think you've probably got slow growth of low inflation, if not even deflation as we look ahead. Garry, give us your sense of the consumer here. I was down at the Jersey Shore this weekend. People were out and about spending money, having a good time. Are you confident that the consumer can kind of power through here? Uh? Well, if you look at if you look at what's going on, people are pining back or article to wellstry journal the day you probably saw to that effect that people are

taking fewer trips, even the libraries. So consumers, consumers are you know they're there are two thirds of of GDP consumers spending and people have been affected. I mean it's you know, they call it demand destruction if it cast you cast of I bucks of down and to fill the tank unless you've got a big shirt plus of of saving and a lot of people have been saving more, they're really scared. So I just don't think that there's

gonna be a lot of spending. You know, it's it's a it's if it's it's cut back in one area that they've got up accommodate others. So do you still have that Volvo? Gary? You had? You had like a a brown two forty station wagon from the eighties. Now, wait a minute, two thousand one board explorer. I drive him till they dropped? Man? Okay, has some one Ford explore?

All right? Gary? Great stuff as always. Gary Shilling, President of a. Gary Shilling and Company, UH PhD in economics from Stanford BS in physics from Amherst College back in the day. He's seen a thing or two. He's seen a cycle or two on Wall Street over his career. We appreciate getting a few minutes. The discussion today is all about recession, so we need to check on the read.

Pickard U s economy reporter for Bloomberg News, plus Ryan Guest, CEO at Arrow Clean, discusses how her company is trying to disrupt the cleaning and disinfectant market in a sustainable way. That should be interesting, but coming up, let's check in with Greg Jared first get a Bloomberg Business Flash. Greg stocks have tumbled as recession fears gripped the market's outweighing optimism over the possibility that US China talks will have

tariff reductions. As a result, the S and P five is now down two percent, down seventy five dollars down two point two percent, down seventy five, and the nasdacs down just over one down a hundred eleven thirty four. The tenure is up twenty one thirty seconds, with the yield at two point eight percent. West Texas intermediate crude is down below a hundred dollars for the first time in a long time. Uh, down eight point three at

forty one a barrel. Comics gold is down at one point nine at seventeen sixty six dollar the euro a dollar to forty three in the British founded dollar nineteen twelve. How many people hold up your hands, honky your horns, flash your lights or whatever. How many think that gasoline is going to go back down to where it was when oil was last at? No way? Why not? Because they've already raised prices. They don't cut them now. You know how hard it is to get that long pole

out there and move those numbers around. Paul, Okay, that explains it. Actually, I just I saw a great meme over the weekend with people President Biden blames for gas prices, right, and it's putin crossed out oil producers, crossed out, gas station owners, crossed out the guy who puts the numbers on the side that's next. I think it's just a commodity. That's kind of how I play it, all right, Greig Jared, thanks so much for that. We appreciate it. All right.

Let's check in with read a pick or u s economy reporter and editor for Bloomberg News, and read It's a great time to touch base with you, because, boy, the narrative in the market today after the July four long weekend is recession. That seems to be spooking the market. What do you what is your reporting showing? Absolutely so thank you for having me. So we had a story out today based on Bloomberg Economics model and they now see a chance of recession within the next twelve months

at thirty eight percent. So that's a big increase from what they were expecting just a couple of months ago, where this same model was showing zero percent UM. And then of course if we look further on that time horizon UM by the start of they, like a lot of other economists on Wall Street UM, expect a recession. UM. There's about a three and four chance of a recession by the start of so you know, in terms of the markets, yeah, they're looking at the picture where recession

odds are growing. It's looking increasingly likely that we could have a second straight quarter where GDP declines UM and the Fed, you know, is messaging that they are determined to crush inflation. So you know how much they would come to the rescue if things go down to downhill? Is is not super clear. No, well, they can't do it right now. Um. The worst thing that could happen for the Fed's credibility is that they don't raise as

much as we expect and then inflation rises even higher. Right. So, but you mentioned something interesting the the fact that we have two quarters of you know, back to back contraction. I know a recession does not uh make but for simplistic people like me, that's a general rule of thumb, right, And the Atlanta Fed UM GDP now forecast shows a contraction in Q two of two point one percent, right,

and it is a general rule of them. So here in the US is different than other countries, and that we all look to a group of academics at the National Bureau of Economic Research who makes the official call on these types of things. Um. But what's tricky about right now when we're looking at these two quarters is you know, in the first quarter, a big part of that decline UM. What weighed on that number in the

GDP accounting was that you had imports surge. So you actually saw an underlying measure of demand that economist tend to look at. UM. You actually saw that quite strong consumer spending UM wasn't as strong as we were all thought it would be UM after some recent revisions, but it's still held up UM. But the second quarter is looking UM kind of increasingly scary from the fact that we finally just saw real spending or inflation ingested spending

fall for the first time this year in May. So it's not quite clear what's going to happen in June and whether that was more of a blip in the month or whether this is the start of a sustained downward trend and inflation adjusted spending. So read does that Bloomberg Economics Research note that they have an opinion at as to maybe how deep this recession, maybe if in fact we do vol into recession, is it's something that

could be multi quarters? What are they saying? So I haven't talked to Bloomberg Economics specifically about this, but in terms of other economists that I've spoken with, the general kind of description word that I hear is mild or modest,

But in terms of the length people differ. So I've had some economists say that they see this being a kind of two quarter thing, very short UM, and then others who kind of note the fact that the FED is in a situation where they really need to hit inflation and hit inflation hard, so they might not offer the kind of support monetary policy support that we're used to seeing in downturns. And as a result, while it might be a old recession, it could very well be

a long recession. Um. But I think it is important to keep in mind, whether you know, even if this is a quote unquote mild recession, recessions are painful, and even a mild recession would still likely mean you know, possibly hundreds of thousands of people losing their jobs. All right, interesting, Matt, Do you know what the Cavalier Cavalier Daily is? Is that a Cleveland, Ohio newspaper? Student newspaper? No, it is the student newspaper at the University of Virginia. Read Pickard

was a reporter there. It is a very high quality student publication. How long were you a reporter at the Cavalier Daily. I was years ago now, but I was a reporter for four years. It's a it's a heck of a student paper. Are they the Cavaliers? I thought they were like the who's who it's read? You can explain it. Yeah, It's it's kind of like Auburn is the same way where people people yell wah who waf But um, the actual mascot is A is a cavalier.

So at football games and satch there um is A is a mascot of a guy with a sword and a hat with a feather in it. And I can't not know that because we have like half of the people at Bloomberg came from uv A. Right, Well, it's even worse than that thing from the University of Carolina Danny Berger. Um Kaylee lines and the list goes on and on and on. I know there's more, you know, uv A people, a ton of North Carolina people, and

painfully few dude people here, so we're vastly outnumbered. Well, I'm the only one from Antioch College and anti colleges in Ohio. Right it is Antioch College, Yellow Springs, Ohio when they're the fighting. Uh, we have had no football team since. The only intercollegiate sport we've had that I know of is women's rugby. Nice. I'm sure you exceled there a right. Read Thanks so much for joining us. Read Pickard us economy reporter and editor for Bloomberg News,

former reporter at the Daily Cavalier The Cavalier Daily. I guess during the pandemic we all became I guess experts at cleaning stuff and disinfecting stuff. Our next guest has an angle on that. Rain guest CEO of a company called arrow Clean. Rain, thanks so much for joining us here. I love for you just to give us, you know, kind of a thirty overview of what you guys do at Aero Clean. Well, nice to chat with you guys

this morning. Things for having me, uh So at Aero Clean, we actually have a patented device that gives people the power to produce their own cleaning and disinfecting products on site. So it actually just circumvents the whole supply chain completely. So I mean I would think that during the pandemic, as people were searching for again, cleaning solutions, disinfecting solutions, your business got impact. A little bit of talk to us about how that played out over the less several years. Yeah,

so it was really interesting. Historically at we've been regulated as a device um by the e p A. So when the pandemic hit, even though we had all the testing that showed we were, you know, thirty times more effective at killing uh COVID. We were actually exempt from the list end, which is the holy grail of products that you know, everybody recommended during the pandemic. So you know, at a time when everybody was looking for ways to you know, they nobody had access to disinfectants and cleaners.

We actually had a facility hole of here in the Dallas area of devices that made hundreds of gallons of it a day, but because we were exempt from that list, people didn't trust it. So since then, thankfully, the e p A has put us on that list. And you know now that supply change shortages are happening again and people are looking for ways to save money, um, and

they're understanding the importance of killing germs effectively. You know, people are understanding that these germs infect us and that's why everybody's getting sick, you know now, uh, you know, whether it's here domestically or for an uh overseas, people are are wanting to find more effective, safer disinfectants. So

only there were such a device for baby formula, right. Well, you know what's interesting about the baby formula situation is you know, the CDC actually determined that the bacteria that they found at the Abbot facility didn't match the genetic strains that infected the babies. So if you look at the CDC's website, it actually says that the most likely cause of infections is then someplace like someone's kitchen counter.

You know, you put a formula scoop on a kitchen counter and then it contaminates the baby formula and that's where infections come from. Um. Because you know, I'm really hoping that the CDC will put out a public warning soon to parents, you know, reiterating how important it is for us to disinfect surfaces in our homes, so that week with your website on it, right, Okay, Well, you know you want to use the products that works the fastest, and you want to you know, use the product that

is safe. So yeah, what do you expect in terms of I mean, clearly, right now, we're all still freaked out. Even if the pandemic were to end tomorrow. Um. I know a lot of people in this office are going to be disinfecting things until the rest of their lives. But do you see demand falling off at all? No, not at all, but I am hoping happened. So, UM, demands not going to fall up because there's numerous pathogens, right, there's covid, different strings of covid. Hospitals historically have had

crazy death rates. You know, hundreds of thousands of people diet you're in hospitals from infections. Millions of people get infected in hospitals from infections. So COPE is not the only bug in the game. You've got Merca's death. You know, we've got monkey pops now and always. Well, yeah, but you know it's spread on surfaces, so might so MC for surfaces, and so you know, we really need to take take a step back and say, Okay, everybody needs to disinfect. But the question we need to be asking

ourselves is have we been doing it properly? Well? I also wonder if we've been doing it too much though. I mean, when I was a kid, uh growing up here in New York City, my mom had no problem with us like licking the handrails in the subway because the idea back then was, um, it builds immunity, right, Was that wrong? No? You know what I used to see my younger brother, mud Pies. I was raised up in Ida Hook. It was like, there doesn't get out their play right, go climb a tree near stuff on

your face. Um, but you know there's good germs, when there's sad germs, and when you know, imagine you know, we're all a bunch of animals in a small, confined space in essence, right, So I don't think that you can ever disinfect too much. We're almost going to touch surfaces and then touch our eyes, notes or my health, and we're always going to get infections. But we do

want to mitigate some of the risk. Now. The one thing that I don't think most people realize is, yes, we were using a lot of disinfectants, but those disinfectants that we were using, most of them have warnings on them like they cause respiratory issues, their respiratory irritants. And when you use products like that incorrectly without proper protective gear, you actually leave yourself more susceptible to infectious diseases like COVID.

And then compound that problem, if you don't let that product sit on the surface for the contact time the proper contact times, you don't actually kill the bugs. So most disinfectants cause respiratory irritants, and most disinfectants have to sit wet on the surface for ten minutes to kill germs. Now, gentlemen, have you ever let a product sit on the surface for ten minutes? No? I mean, I mean, I was just thinking. You know, we used to disinfect the grocery

who brought them home from the grocery store. Don't do that anymore. I've also, I mean when I I can't even conditioner when it says leave it in for two minutes, I don't think I can last that long. No, No, once you have no hair, So that's well. Now now I used to have gorgeous locks. But it's a good point, Rain, I know nobody does that. Yeah, exactly, all right, all right, Rain, thank you so much for joining us. I really appreciate getting your thoughts there. Rain Guests, CEO of Arrow Clean,

thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on false swheey. I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio.