Lightspeed Podcast Hosts Wanted

In this section, the Blockworks Podcast Network announces that they are hiring two podcast hosts to build a show called Lightspeed. The show is for builders, tinkerers, and lovers of technology who are interested in crypto from the perspective of a builder and an engineer designing for scale.

• Lightspeed is an exploration of crypto from the perspective of a builder and an engineer who's designing for scale.

• Blockworks is hiring two podcast hosts to build the show called Lightspeed.

• Interested candidates can apply through the careers page on blockworks.co or contact Mike Ippolito on Twitter.

David Rosenberg on Economic Outlook

In this section, David Rosenberg discusses his macro view of the economy and how it's transitioning from expansion to recession.

Transition Phase

• The economy has been in a transition phase from expansion fueled by reopening trade and policy stimulus in 2021.

• Market signals and economic indicators suggest that we're in the final stage of this transition phase before entering into recession.

Business Cycle

• Recession is part of the natural course of events as far as the economy is concerned.

• Interest rates matter in a credit-driven economy like the United States.

• Every recession was connected to an expansion, and every expansion was connected to a recession.

Fed Policy

• Fed policy has the most powerful influence on economic growth compared to other policies.

• The lags between monetary policy and the real economy could be two to four cycles.

The Business Cycle and Interest Rates

In this section, the speaker discusses the business cycle and how interest rates impact it.

Defining the Business Cycle

• The business cycle consists of economic, rate, and market cycles that intersect over time.

• The early cycle is characterized by positive growth and accelerating positive growth.

• The Fed raises interest rates in the mid-cycle to moderate growth and prevent inflationary pressures.

• In phase three, the Fed inverts the yield curve as growth becomes too strong and inflationary pressures burgeon.

Impact of Interest Rates on the Economy

• Interest rates matter because they affect servicing capacity and credit markets with lags.

• Lagged impacts of fiscal stimulus from two years ago are starting to hit home this year.

• Leading indicators suggest that a recession is starting this quarter or next quarter at the latest.

The Fed and Recessions

In this section, the speaker discusses how the Federal Reserve's actions can lead to a recession. He notes that historically, 11 out of 14 Fed rate hiking cycles since 1950 have resulted in a recession.

The Start of a Recession

• When the Fed starts raising interest rates, it can be an indicator that a recession is on the horizon.

• A year or two down the road after the Fed raises rates, there may be negative effects on the economy.

• The speaker compares predicting a recession to betting on horses - you look at various factors to determine your odds.

• Historically, 80% of recessions have followed a tightening cycle by the Fed.

Soft Landings and Recessions

• There are times when the Fed extends a cycle without causing a recession - this is called a "soft landing."

• A recession is different from slow economic growth because it involves a significant decrease in national income.

• Soft economic growth is not as concerning as an actual recession.

Historical Examples

• In the mid-1980s, Paul Volcker raised rates aggressively but we still had a soft landing due to falling oil prices.

• In 1994-95, we experienced another soft landing due to external factors like Netscape going public and creating an internet boom.

• It's unclear what external factor could offset any negative effects caused by current Fed policies.

Yield Curve Inversion

• One key difference between previous cycles that resulted in a recession and those that didn't is whether or not the yield curve was inverted. The Fed did not invert the yield curve during previous soft landings.

The Yield Curve as a Leading Indicator

In this section, the speaker discusses the yield curve and its effectiveness as a leading indicator for predicting recessions.

The Yield Curve Reversion

• When the yield curve reverts, many Wall Street economists dismiss it as a relic of the past.

• However, these same people tout the yield curve when it is steep and bullish on growth and markets.

• Despite this, the yield curve still dominates as a price signal and leading indicator for recessions.

• The only time the yield curve inverted without resulting in a recession was in 1998 due to a massive flight to safety.

Different Yield Curves

• There are different types of yield curves that can be used to predict recessions.

• The speaker's preferred indicators are twos tens and three month tenure.

• They also have an in-house model called Roswell research that looks at 21 different yield curves.

Recession Signal

• When over 80% of those curves invert, it is considered a bona fide recession signal.

• Based on the duration and extent of inversion, along with dispersion, all indicators point towards an upcoming recession either in this quarter or next quarter.

Stress in Banking System Compared to Additional Rate Hike

In this section, Tara Pal compares stress in banking systems to additional rate hikes.

Banking System Stress

• Tara Pal compares stress in banking systems to additional rate hikes.

• The speaker mentions high profile bank failures, including one large one in Europe with Credit Suisse.

The Fed's Monetary Policy Mistake

In this section, the speaker discusses the Federal Reserve's monetary policy mistake and how it made a recession that was probably inevitable deeper than it needed to be.

The Fed's Mistakes

• The Fed made several mistakes in their monetary policy.

• The first mistake was accommodating insane fiscal stimulus with low-interest rates.

• The second mistake was not tightening policy earlier by shrinking the balance sheet and raising rates.

• Faulty research led to the misreading of the situation, assuming that not much of the stimulus would get spent. However, pretty much all of it got spent.

Correcting Mistakes

• To correct their mistakes, the Fed will have to create conditions for demand destruction.

• Jay Powell compares himself to Paul Volcker, who created two recessions back-to-back in 1980 and 1981-82 to kill inflation.

The Supply Side of the Economy is Coming Back

In this section, the speaker discusses how the supply side of the economy is recovering and how labor market participation rates are increasing.

Recovery of Supply Chain Pressures

• The supply chain pressures have dissipated.

• The participation rate in labor markets, especially in parts that lagged behind, has increased.

• Prime working age women who were slow to come back are now flirting with an all-time high.

• Male 50+ participation rate is going up.

Mistakes Made by Central Banks

In this section, the speaker talks about how central banks make mistakes and overstay their accommodation or over-tighten policies.

Forecasting Inflation and Prices

• It's a mistake to forecast inflation and prices with one curve.

• Tightening should have started earlier.

Overkill by Central Banks

• Everything done since fall has been overkill.

• Refusing to sit back and assess damage done will impact demand negatively.

• By the time they realize all the damage they've done, it will be too late; economy will be in recession.

Falling Inflation During Recessions

• Not concerned about inflation as it usually falls like a stone during recessions.

• Even sclerotic unionized 1970s inflation fell substantially during recessions.

Over Easing and Over Tightening Cycle Post-COVID

In this section, the speaker discusses how post-COVID we are experiencing an over-easing and over-tightening cycle on steroids.

Central Bank Run by Humans

• We don't have a central bank run by robots; humans make mistakes.

• Over-easing and over-tightening cycle is on steroids.

Historical Examples of Central Bank Mistakes

• Greenspan took rates to negative and real terms in 1993.

• Rates were taken down all the way to one percent back in 2003 after the housing and dot-com bust.

• Central banks always overstay their accommodation and then over-tighten.

Business Cycle Built on Mistakes

In this section, the speaker talks about how the business cycle is built on mistakes made by central banks.

Mistakes Made by Central Banks

• The business cycle is built off of mistakes made by central banks.

• There's nothing new here; it's been happening since post World War II period or before.

Special Offer from Blockworks Research

• Blockworks Research offers research data governance models and more about leading D5 protocols in space.

Weekly Reports and the Federal Reserve

In this section, the speakers discuss weekly reports and live data. They also talk about the Federal Reserve and its impact on the market.

The Federal Reserve's Impact on the Market

• There is a lot of speculation in the market regarding what the Fed will do.

• As of April 25th, there is moderate speculation that there will be one more 25 basis point hike in May.

• The economy is more interest-sensitive than it has been in the past due to high levels of debt.

• The Fed may make policy errors due to this sensitivity.

Hiking Cycle and Debt Servicing Costs

• Household balance sheets are stretched, with household debt income at 130%.

• Corporate balance sheets are also stretched, as are government balances.

• Interest rates are not going back to historically high levels because we are already at levels seen during previous cycles.

• It is unnecessary for the Fed to raise rates again; it will likely be their last hike of this cycle.

Pausing Rates

• At some point, the Fed will pause rates.

• Normally after a rate hiking cycle, they press pause.

• To find out what causes them to pause, you have to go back to minutes and transcripts.

• Normally when they pause it's not a financial calamity or even a recession.

Bank of Canada's Pause in Rates

In this section, the speaker discusses the possibility of a pause in rates by the Bank of Canada and how it is a rational decision. The speaker also talks about how there has always been a pause with a de facto tightening bias and that they will signal rate cuts before actually cutting interest rates.

Possibility of a Pause

• The Bank of Canada has already paused for two meetings.

• It would be rational for them to pause again.

• The pause will come with a hawkish directive until they move to an easing directive.

Signaling Rate Cuts

• Every pause comes with a de facto tightening bias.

• They don't want the markets to price them when it's priced in.

• The pause is going to be with a hawkish directive until they move to an easing directive.

• They'll be signaling rate cuts, and then they'll be cutting interest rates.

Yield Curve and Market Game of Chicken

In this section, the speaker talks about how the market is playing chicken with the Fed regarding yield curves. He also mentions that before the Fed started raising rates, the market was already pricing in rate hikes.

Market Playing Chicken

• The market is playing chicken with the Fed regarding yield curves.

• The FED unveils its 2023 dot plots for the funds rate in June of 2021.

• The dot plots for the end of this year were .625 percent, but they are now at five eights.

Market Pricing In Rate Hikes

• Before the Fed started raising rates, the market was already pricing in rate hikes.

• Banks and Silicon Valley Bank are saying that they're going to raise rates.

The Possibility of a Recession

In this section, David Rosenberg discusses the possibility of a recession and how it is a natural part of the economic cycle.

Recession as Part of the Economic Cycle

• The economy experiences periods of expansion and recession.

• A recession is like the economy getting a flu bug; it's not permanent.

• The yield curve is just part of the cycle, and fighting against it is like fighting against Mother Nature.

Understanding Recessions

In this section, David Rosenberg explains what he means by a hard landing scenario and provides some historical context for different types of recessions.

Types of Recessions

• There have been many different types of recessions in US history.

• Tightening cycles often lead to financial crises.

• Excesses in certain areas can lead to unexpected financial crunches.

Banks' Lending Behavior

In this section, David Rosenberg talks about banks' lending behavior and how it affects credit contraction during a recession.

Banks' Lending Behavior

• Banks are becoming more cautious with their lending behavior.

• The government and regulators will move aggressively to backstop any financial crisis.

• Regional banks took up a larger share of credit, which could lead to a credit contraction during a recession.

The Impact of Credit Worthy Borrowers on Recessions

In this section, the speaker discusses how credit-worthy borrowers impact recessions and how changes in the economy occur at the margin.

Credit-Worthy Borrowers and Recessions

• Positive flows and lending to credit-worthy borrowers do not cause a recession.

• A recession occurs at the margin, where non-credit worthy borrowers have trouble accessing credit.

• A recession could be a one percent decline in the economy or a six percent unemployment rate.

Changes in Behavior During Recessions

• Changes in behavior during recessions are psychological and can lead to a cascading effect on the economy.

• The availability of credit compounds economic problems during a recession.

• Focusing exclusively on lagging indicators is a mistake because it does not account for changes in behavior that occur at the margin.

The Fed's Approach to Rates During Financial Crises

In this section, the speaker discusses how the Fed approaches rates during financial crises.

Historical Approaches to Rates During Financial Crises

• The Fed typically cuts rates during financial crises.

• It is possible to have a recession with low prime rates.

Current Fed Approach to Rates During Financial Crises

• The current Fed has raised rates into an inverted yield curve despite having a strong belief that the economy is strong.

• The Fed's focus on lagging indicators is a mistake because it does not account for changes in behavior that occur at the margin.

The Fed's Focus on Lagging Indicators

In this section, the speaker discusses how the Fed's focus on lagging indicators is a source of frustration and may be a mistake.

Frustration with the Fed's Focus on Lagging Indicators

• The Fed's focus on lagging indicators is frustrating because it does not account for changes in behavior that occur at the margin.

• It may take years to realize that focusing exclusively on lagging indicators was a mistake.

English The Frustrating and Confusing Federal Reserve

In this section, the speaker talks about his experience with the current version of the Federal Reserve and attributes its frustrating and confusing nature to various factors.

Appointment of Jay Powell as Fed Chairman

• The speaker believes that the appointment of Jay Powell as Fed Chairman in early 2018 was not necessarily a good thing.

• Many people were happy that an economist was not heading up the Fed, but the speaker questions whether having a lawyer in charge is any better.

Transparency Issues

• The speaker believes that there is too much transparency when it comes to the Fed's decision-making process.

• He thinks that this started with Bernanke and has only gotten worse over time.

• There are now too many speeches given by Fed officials on a daily basis, which he finds unhealthy for the markets.

Too Much Media Attention

• The speaker believes that some Fed officials have become like rock stars who will run in front of any TV camera they can find.

• He thinks that this is unhealthy for both the officials themselves and for the markets.

• He would prefer to hear less from the Fed overall.

Overall, the speaker finds this version of the Federal Reserve to be frustrating, confusing, and overly transparent. He believes that there is too much media attention given to Fed officials and their speeches, which can be unhealthy for both parties involved.

English Reading FOMC Transcripts

In this section, the speaker talks about his habit of reading FOMC transcripts and speeches given by past Fed chairmen. He praises Alan Greenspan's brilliance despite his flaws and compares him to Volcker.

Reading FOMC Transcripts

• The speaker reads FOMC transcripts and speeches given by past Fed chairmen.

• These transcripts read like a Greek tragedy or Shakespearean play, but are very interesting.

• Alan Greenspan was brilliant despite being tainted by the bubble bursting. His knowledge of the economy and financial markets was unparalleled.

• The level of brilliance displayed in Greenspan's speeches and testimonies was unmatched.

• There might not have been a more brilliant Fed chairman than Greenspan.

• When you read what he says in the transcripts, these are masterpieces.

English Permissionless Conference

In this section, the speaker promotes a conference called Permissionless that is coming up in Austin, Texas. He mentions some of the speakers from last year's conference and offers a discount code for listeners.

Permissionless Conference

• The speaker promotes a conference called Permissionless that is coming up in Austin, Texas.

• Last year's conference had over 5500 people attending with great speakers such as Montana and Baiju Bot co-founders of Robin Hood, Chris Dixon, Jim Bianco, Dan Tapiero among others.

• Listeners can get 10% off on tickets if they use margin 10 discount code.

• The speaker invites listeners to attend the conference and hopes to see them there in person.

English Thoughts on Fed's Decision Making

In this section, the speaker asks for the interviewee's thoughts on how assets will respond to economic gyrations. He also asks about people's perception of the Fed and whether they understand what they are doing.

Fed's Decision Making

• The speaker asks for the interviewee's thoughts on how assets will respond to economic gyrations.

• The speaker talks about people's perception of the Fed and whether they understand what they are doing.

• The interviewee says that the Fed is not made up of idiots and generally does a good job.

Powell's Favorite Statistic

In this section, the speakers discuss Powell's favorite statistic and why they believe it is a spurious statistic. They also talk about how the Fed continues to shift its focus and change the things that they are looking at.

Powell's Favorite Statistic

• The speakers discuss Powell's favorite statistic, which is job openings.

• They mention that there is double counting and a low response rate associated with this statistic.

• The Fed is focusing on this statistic because it relates to areas where there is a labor demand mismatch, such as recreation services, leisure hospitality, restaurants, bars, hotels, airlines, health education.

• The Fed believes that if there are burgeoning wage pressures in these areas of the economy, it will filter into inflation and broaden out to the rest of the economy.

• The speakers express confusion over why the Fed continues to shift its focus and change what they are looking at.

Comparing Powell to Arthur Burns

In this section, the speakers compare Powell to Arthur Burns and Volcker. They discuss how Powell may be trying to retire as Volcker because he is so revered.

Comparing Powell to Arthur Burns

• The speakers compare Powell to Arthur Burns and Volcker.

• They mention that there is a high degree of hubris going on with regards to how the Fed operates.

• There have been no descents so far under Powell's leadership.

• The Fed has been deliberately looking at things that justify their policy stance.

• The speakers express confusion over why the Fed is doing what they are doing.

Economic Recession and Asset Prices

In this section, the speakers discuss how the economic recession may map onto stocks and bonds. They mention that almost all of the gains in the stock market have come from 10 mega-cap stocks.

Economic Recession and Asset Prices

• The S&P is up about 8% on the year, but almost all of those gains have come from 10 mega-cap stocks.

• The best days and weeks for the stock market historically happen in bear markets.

• The market has priced in a soft landing and priced out a recession.

• A recession right now in the marketplace broadly speaking is a flip of a coin.

Bearish on Equities

In this section, the speaker expresses his bearish outlook on equities and explains why he thinks they are overvalued.

Expensive PE Multiples

• The market is much more concentrated now.

• The speaker is bearish on equities as an asset class due to high valuations.

• The S&P 500 is pressing against a 19 Ford multiple, which translates to a 5.3% earnings yield.

Better Alternatives

• The speaker prefers single A triple B corporate credit for better returns.

• He believes that the equity market is not fully pricing in a recession.

• He has the lowest weighting of equities in his portfolio since 2007.

Recession Assumptions

• The speaker assumes that there will be a recession soon.

• In a recession, there is typically a 20% hit to earnings and multiples bottom out at around 15 or 16.

• This takes the S&P down to around 3200, which means there could be another 20% drop from current levels.

Market Bottom and Recovery

In this section, the speaker discusses when he thinks the market will bottom out and what factors need to change for it to recover.

Fundamental Bear Market

• We are still in month 16 of the bear market that started in January of 2022.

• A fundamental recession bear market ends when the recession is about 70% through.

• If we assume that we are just starting a recession, then we have some way to go before things start improving.

Fed Rate Cuts

• Two things need to happen for recovery: Fed rate cuts and steepening of yield curve.

• There's no evidence anywhere anytime that you don't bottom with an inverted yield curve and the Fed still tightening.

• The Fed needs to cut rates aggressively for a more normal slope in the yield curve.

Market Recovery

• When the Fed cuts rates sufficiently, it will steepen the two's tens to plus 140 basis points, which is a very bullish sign.

• The equity risk premium is now less than 200 basis points at fundamental bear market lows.

• Typically, you buy the market when the recession is almost over.

Bond Yields and Equity Markets

In this section, David Rosenberg discusses the relationship between bond yields and equity markets.

Bond Deals Go Down First

• Bond deals go down first before equity bottoms.

• This happened in December 2008 during the last cycle and also in the summer of 1982.

• Chicken or egg situation: what comes first, bond yields going down or equity markets bottoming out?

Turn Bullish on Bonds First

• To turn bullish on stocks, you need to turn bullish on bonds first.

• When bond deals reach stupid low levels (e.g. when Erp is 400 basis points and the two's tense curve is 140 basis points), it's time to turn bullish on stocks.

How to Access Rosenberg Research Products

In this section, David Rosenberg talks about how to access his research products.

Visit Rosenberg Research Website

• Visit the Rosenberg Research website by Googling "Rosenberg Research" or emailing information@rosenbergresearch.com.

• The website offers 12 different products that cover small picture, big picture, and everything in between.

• You can buy single products or a premium package that includes webcasts, dailies, weeklies, and monthlies.

Free One-Month Trial Offer

• Get a free one-month trial offer for their research products by signing up through their website.

• Take advantage of this offer to make an educated decision about whether or not you want to subscribe.