ED HARRISON: This is our second conversation on Real Vision Access. We're live here with Michael Liebowitz of RAA Advisors, and we're going to talk to him about money markets. We're going to talk about bonds. We're going to talk about interest rates-- the Fed, in particular. I think it's going to be a wide-ranging conversation. So feel very free to come in, ask some questions.
But I'm going to start out asking all the questions here that I've got. And I think you know where I'm going to start because we talked about this beforehand. Where I'm going to start is the economy, that the economy right now, if you look at the Atlanta Fed and if you look at the New York Fed nowcast, they're really pretty horrendous.
What's going on in the economy? Do you think that we are going to avoid recession? What's your call?
MICHAEL LEBOWITZ: Look. We do know there's a global slowdown. Growth in Europe is coming to a halt. Japan is slowing. China is definitely slowing, although we don't get great data from China.
So we also know there's a manufacturing slowdown. That's been pretty obvious. How much is related to trade and tariffs, we don't know. But there's certainly a slowdown going on there. And in the US, our economy is still growing.
It was 1.9% growth last quarter. Like you said, the forecasts are for 0.4, 0.5, somewhere right around their growth, both Atlanta and New York, the Fed forecasts. So to me, it's the consumer that is keeping the economy afloat. I think it was 1.93% of economic growth last quarter was from the consumer versus 1.9% GDP.
So it's the consumer keeping it afloat, and the consumer doesn't show many signs of slowing down. But we are wondering when they will be affected by potential layoffs in the manufacturing sector, by the news cycle, by the election cycle that's coming up, trade tariffs-- a whole host of things. So what we're watching closely are consumer-related data-- retail sales, for instance. Even like what we just saw-- Lowe's had great earnings but Home Depot's were not good. So it's trying to parse through all the corporate data as well to see if we can see that the consumer's slowing.
A lot of that hinges on employment. And that's also been a very mixed bag. A lot of the survey data on employment has not been that good. But the BLS data-- jobless claims, unemployment, payrolls-- has been good. So I think what's going on there is that companies have stopped hiring or slowed down the hiring. Not stopped, by any stretch. They've slowed down hiring. And we also know that temp hiring has dropped sharply. But I don't think layoffs have really occurred. So what we're going to pay close attention to are today's data, for instance, jobless claims. To see if we can find clues.
ED HARRISON: I'd step in there by saying that, because the jobless claims number-- Danielle, she was talking about this last week, about continuing claims. She said that for like three or four weeks on the trot, we've gotten year over year increases in continuing claims. And that continued into the number that we saw today, plus the fact that initial claims for the first time is now higher than it was a year ago.
So when I see numbers like that, I don't really care about the basing effect, the fact that they're low numbers. What I care about is the trend. The trend is up. And to me, that's a headwind for consumption.
MICHAEL LEBOWITZ: Bingo. It's the rate of change. And that turned positive for the first time in this whole expansion, which is the longest expansion on record now. Now if you go back prior to the last recession, there were false instances where it became positive and then came back down. So it's not the end all be all, but it is one sign that potentially those BLS numbers are starting to turn around. And we do know that payroll growth has been weak. It's been in 150, 180 range, not in the mid-200s.
ED HARRISON: Right. So what about the concept that manufacturing was down but it's not down as much anymore? Right before we got online, I was looking at the ISM number. It wasn't terrible. Usually we get down to 43 on the ISM if we have a recession. It's at 48. So it could be that manufacturing is actually turning around. And as a result, the numbers for GDP will turn around because that's what's holding us back is inventories, manufacturing, stuff like that. I can already tell from your expression-- you're like, no. I don't buy that.
MICHAEL LEBOWITZ: Well, no. It's not that I don't buy it. I think that so much of that is hinging on China and trade talks and tariffs. And there was a lot of inventory stocking, trying to stock up on inventories before the tariffs would take effect. So there's a lot of give and take in those numbers. And again, they're surveys. Trade talks have soured over the last day or two based on the Hong Kong bill that will most likely be signed by the president-- the delay of phase one till whenever, even though it was signed a month ago, apparently.
So as these events, especially with China, occur, we're going to see those surveys, which is kind of based on what all these different employers and executives from manufacturing plants are seeing, change. So the question is, how do those surveys translate into hard data?
ED HARRISON: Right. So the reason we're going through all this economic data stuff at the beginning is to make a transition over to market. I know that you're a bond guy more than a equities guy. But I want to start with the equities side because, look, we had great growth in Q2. You talked about 1.9% in Q3. Now cash on below 1% for Q4. Both Atlanta and New York sank.
Yet, the stock market is booming like crazy. So why is the stock market going up when the numbers are actually going down? And I didn't even mention the fact that we have an earnings recession.
MICHAEL LEBOWITZ: I know.
ED HARRISON: So it doesn't make any sense there. What's the answer.
MICHAEL LEBOWITZ: Two words. Quantitative easing. I really think that's what's going on. Now let me just backtrack one second. We'll finish up on the economy. I believe we talked very early July, and I hold true to this. I said that the window for a recession is open.
That means that between global slowing, manufacturing slowing, that we could have a recession. Our natural rate of growth is pretty low. So if the consumer just takes a couple steps back, stops going to a movie now and again, holds off on a dinner, going out to dinner, you can bring this economy from what's expected to be very low growth to negative growth. So that's our backdrop.
We know corporate earnings have also been flat. The general news cycle has been-- the news hasn't been great. But stocks have gone up ever since right around October 14, which is the day that Powell said that they would do QE. The market has just gently risen. Some days it's had nice gains. But it just rises every single day, regardless of the news cycle.
ED HARRISON: Let me interrupt you there because, I mean, I have to ask before you complete your thought. QE. You said QE, and you know that my question's going to be, he never said it was QE. Why are you saying that it's QE? Is it QE?
MICHAEL LEBOWITZ: You can call it whatever you want. The Fed is buying bonds from the market, and that's exactly what they did during QE 1, 2 and 3. And the Fed used to do that. They were called coupon passes. But the size that they're doing it-- I believe the Fed was doing it to the tune of $30 billion a year prior to 2008.
And these where they're doing-- what are we going to do? $60 billion a month now? So you can call it whenever you want. Powell likes to tell us it's not QE. A lot of people on Wall Street and in the media kind of go along with that and say it's not QE. They are basically giving bank reserves and taking bonds out of the market. It's QE, in my opinion. But you can call it whatever you want. But I think what we're seeing is it's having a similar effect on the markets as QE 1, 2, and 3.
Now that does not mean that the Fed is basically printing money and buying stocks. That's not what I'm insinuating. But what I am saying, at least thus far in this QE cycle, is that investors, like Pavlov's dogs, hear the word QE and they buy. There's the whole fear of missing out and momentum and we've got to get on board because it's QE.
ED HARRISON: Now they all have a survey talking about fear of missing out. The switch that we've had has been the most aggressive switch to bullish, in terms of fear of missing out, that we've seen in this cycle.
MICHAEL LEBOWITZ: Right. Right. And what's there not to like? The economy is doing relatively well. Interest rates are very low. And the Fed is now doing QE, which everyone thinks helps the markets. And I think it can literally help the markets at some point. I think right now, the Fed is still trying to fill that funding gap that occurred a couple months ago.
ED HARRISON: Yeah. So actually, that is interesting. Let's talk about that. I mean, ostensibly the reason that is injecting money into the economy that they say is because of markets that are dislocated and they need to add some funding to them. How much of this is a technical thing, and how much of it is actually the Fed is trying to boost the economy on the sly?
MICHAEL LEBOWITZ: I don't know. What we do know is that someone wanted to borrow money at 7%, 8% with treasuries as collateral-- perfectly good collateral. Default doesn't really go into the equation. And no one would lend them money. So there was clearly a lot of banks that did not have reserves and could not lend them money or didn't think they'd have access to reserves once they lent the money. So that's an important thing to say.
So the Fed came in, and they provided reserves via repo. And what they were finding was they needed a more permanent solution versus going into the overnight markets every day. And that's when they introduced QE. So what's really happening? I think it's potentially there are a couple of things that the market's not really considering.
One is that there is a bank failing of sorts, and that that money that no one would lend to that person-- because we do know that some banks have excess reserves. The Fed told us that. So why weren't some of these banks with excess reserves lending the money? Maybe it--
ED HARRISON: Let me give you a story that is being peddled. I'm not saying peddle in a negative way, by the way, because I was actually looking at this earlier today from a guy by the name of David Benoit. He's at The Wall Street Journal. He wrote this article, How the Discount Window Became a Pain in the Repo Market. And basically what he's saying is that borrowing from the discount window, the Fed's only channel for lending directly to banks, has plummeted, that through October, banks were on pace to borrow only $750 million, which is less than half of last year's total. And it's also less than the record low, which was 1961.
And JP Morgan, in particular, they said that they keep $120 billion in reserves at the Fed and won't let it dip below $60 billion on any day. And the reason is is because no one wants to be stigmatized with borrowing from the discount window. After the Great Financial Crisis, they all want to look like they have a fortress balance sheet, right? So maybe that's what the problem is.
MICHAEL LEBOWITZ: It could be.
ED HARRISON: Do you think that makes any sense?
MICHAEL LEBOWITZ: That does make some sense. Could also be that there was a bank in trouble. And it's not necessarily a domestic bank. Could be a foreign bank. And they didn't want to go to the Fed and borrow a lot of money at a discount window. Because again, there's a stigmatism, and that would be reported. So the whole market would know. So how else could the Fed get that bank money, especially if other banks aren't lending them the money? They could do it via repo pretty easily.
ED HARRISON: So what--
MICHAEL LEBOWITZ: And in effect, we'd do repo directly with the bank or with another bank that would then lend it on.
ED HARRISON: So when you say a bank that could be in trouble, I mean, the first name that comes to mind, obviously, is Deutsche Bank.
MICHAEL LEBOWITZ: Sure.
ED HARRISON: I mean, it could be a company like that.
MICHAEL LEBOWITZ: Of course, it could be. I mean, it could be any financial firm. If I had to put money on it, I probably be with you and go with Deutsche Bank.
ED HARRISON: Right. Yeah.
MICHAEL LEBOWITZ: Now here's the other thing that was easily predictable but no one seemed to see it coming. The Treasury issuance over the last three or four months has been massive. Once they passed the debt cap extension, the Treasury has issued almost a trillion dollars. Their debt outstanding has grown by about a trillion dollars, and none of that is being funded by foreign entities.
So that whole trillion dollars or so is falling on domestic investors, and there are not the reserves to fund that trillion dollars. And that trillion dollars is a massive amount of money over a quarter. It's a massive deficit over the course of a year. But over the quarter, it's unbelievable. So why the Fed didn't see this coming, why the banks didn't warn the Fed about this coming is beyond me.
But I think what's interesting, Ed, and you talk to a lot of people. I do, too. No one has an answer. Everyone has some variation on some set of themes, 5 or 10 different themes. Some say it's benign. Some say it's the end of the world. And most of us are somewhere in-between. None of us know. And I even wonder if Powell and the Fed really know what's going on. And that, to me, is what's most concerning.
ED HARRISON: Right. Yeah, it is concerning because everyone has their own pet theory about what the ultimate source of the problem is. I mean, one of my pet theories is that the ultimate source is the fact that the Fed, relative to other central banks, has been easier-- or sorry, tighter than those other central banks. And so the dollar had been relatively high. And as a result, we're seeing the stress of people wanting to own dollars come through into the repo market. That's just a theory. I don't know any more than anyone else. But I mean, what's your view on how this whole thing affects the US dollar?
MICHAEL LEBOWITZ: I think you may be right as well. I've thought about that. The dollar is getting strong, and a strong dollar is tough on the US economy and on US corporations. So that would not surprise me. And I do think the more aggressive the Fed gets-- especially aggressive relative to Europe, Japan, China-- the weaker the dollar can get. But there is a dollar shortage. I mean, that's clear. There's a dollar shortage. So any weakness I think is somewhat limited, unless the Fed really gets aggressive and/or the Treasury really starts just pushing the dollar down via words or potentially actions.
ED HARRISON: So on a fundamental basis, you're basically saying that you are not dollar bearish at this point.
MICHAEL LEBOWITZ: I am probably dollar neutral. My guess is it'll drift higher. A rise, a decent acceleration from here would not surprise me. But also, the dollar falling off versus those other currencies would not surprise me either. I guess I just don't have a strong opinion on it at the moment.
ED HARRISON: So now interesting that you mentioned the Treasury. And obviously, that means Trump, executive taking a active stance because they don't feel like the Fed is doing enough easing into an election year. So that definitely brings up the topic of Trump versus Powell. What is your view on where this Trump versus Powell thing is heading? How does it get resolved, and what are the sticky points?
MICHAEL LEBOWITZ: Well, I think what Trump has made very clear is that one of his most important things is to get the stock market to go higher. I would almost say he cares more about the stock market than the economy. And the easiest way to do that is a weaker dollar would help, but Powell doing what he's doing now-- quantitative easing, lowering interest rates, very easy monetary policy-- especially given the relative strength of the economy, is one thing that will work.
So Trump is going to lean on the Fed. He's been doing it. He's going to continue to do it. The question is, will Powell continue-- recently, he's been acquiescing. And I know he's not doing it because Trump wanted him to do it, but he is doing the things that Trump wants done. So what's going to happen?
And I think a few interesting things have come out over the last few weeks, and Powell himself said this in his congressional testimony, that he thinks that the level of debt of the federal government is too high. And it's outpacing economic growth, and that's a real problem. And we've heard that from some other Fed members as well, both on the corporate side as well as the federal side.
And Powell and his colleagues are not dumb. They know that lower interest rates make it easier to borrow, make it more likely that people borrow-- corporations, governments borrow. And if you look at the statement from the last Fed meeting and Powell's comments, they kind of made it sound like they're done. They're not lowering. They're certainly not raising because they want to see persistent, strong inflation. That seems like a ways off here. So they sent out this message that they're not doing anything.
And if we see a very weak economy, like Atlanta and New York are forecasting-- even a negative number-- Trump's going to be back on his Twitter and yelling at the Fed. But he will potentially do what he can do. And one of the things he can do is try to get Mnuchin to take the dollar lower.
ED HARRISON: So let's say that we're in this neutral holding pattern that you're talking about. The Fed's saying, we're on hold indefinitely until we see the economy transition in some way, shape, or form.
MICHAEL LEBOWITZ: Well, wait. Let me just stop you one second. I think they're neutral until the stock market falls 5%, 10%. I don't know what the number is, but I don't think it takes much from the stock market to push the Fed back into action. Regardless of the economy.
ED HARRISON: Oh yeah. OK. Right. That's definitely true because they're obviously thinking about financial stability there, and they're concerned about this pyramid of debt that's riding on the base that they're creating. The question is is that what's the number from the economic perspective that gets them away from that stance on either side of the spectrum? What's the range that you think that they're looking at that is definitely safe, and what's out of bounds? Obviously, a negative number is out of bounds, but what else?
MICHAEL LEBOWITZ: Yeah, and I think employment, changes in employment. If they see a rapid deterioration in jobless claims or in the payrolls number or the unemployment rate, I think that could get them to take more action. But I think Powell was very clear about raising rates, and that's not going to happen. In his last statement, he talked about that inflation has to be higher than the target. And he made it-- I forgot the word he used, but it was much higher than a target, for a persistent period of time.
So the Fed is telling us they're not raising