ED HARRISON: This is our inaugural Real Vision Access. I hope that you guys enjoy this. We're going to have Danielle DiMartino Booth talking to us about the economy. She's going to talk to us about the Fed. She's a former FedInsider. And we're just going to start right into the questions here.
So Danielle, we had a recession watch, if you will, in the summer. And we saw yield curves invert. Everyone was really panicked. But now, it seems like it's an all-clear. But when you look at the data-- for instance, you look at the Atlanta and the New York Fed, their nowcast. They're showing for Q4 that we have under 1% growth. Are you concerned at all that the all-clear is premature?
DANIELLE DIMARTINO BOOTH: Well, I have a very hard time with big, huge pendulum swings. And when a consensus builds literally overnight mainly because the yield curve has resteepened, I get a little suspicious. There's no way, right now, that the yield curve could not have uninverted after Jay Powell decided to jump in, feet first, with $60 billion a month in purchases of Treasury bills, on maturity or less. So he physically, with the printing press in hand, uninverted the curve.
But what most people need to understand, I think, is they're forgetting their history lesson. If you look at the way that Morgan Stanley adjust the yield curve, the 3 month, 10-year, that is the one that the Federal Reserve follows. It might not be the 2 year, 10-year that so many in the market follow.
But if you look at the 3-month, 10-year yield curve and Morgan Stanley adjusting it for quantitative tightening, it wasn't May. It wasn't March. It was December 2018 that they feel that the yield curve inverted. Call it May if you want. But according to the Fed's own rules, Ed, all you need, back to data from 1950, is to have 3 months in a row of the yield curve being inverted.
Now, recessions don't start with an inverted yield curve. They only start when the curve has started to steepen out. And it's that second part of the equation that people forget. And the only thing that yield curve, probability of recession, such as the New York Fed-- the only thing it gauges is the level of the inversion of the yield curve. There is no way that it could not have been resteepening. But go back and look at the second half of the charts, Ed. You see that first you must invert, but in order to go into recession, you must then resteepen.
ED HARRISON: Interesting. I think that's a very important point. So then, obviously, the answer to my question is that you are concerned about the data showing that the US economy is slowing. And in fact, you're saying that the inversion came and went because now we're getting into a phase where a steepening makes it seem like, yes, we could be at a critical juncture.
DANIELLE DIMARTINO BOOTH: It's so difficult to say. Look, we have been following the IHS Markit Manufacturing. It seems to be leading the ISM, if you will. And what we saw in October was that for the very first time in 8 months since we saw the industrial sector roll over, the service sector was weaker than the manufacturing sector. The market mainly and only applauded the fact that we finally saw this smidgen of a turn in industrials, and there's no denying that. And we might be pulling out, even globally, of this industrial recession. That's still an unknown.
But the fact is the service sector, which employs 4 out of every 5 Americans right now, is the one where we're seeing weakness. We saw 63% of jobs created, for example, in September be in leisure and hospitality. These are the lowest paying rung of American earners, and they also happen to be last-in/first-out in typical recessions and in typical economic cycles.
So the jury's out for me. I will say that if you step back and look holistically and look in the future at the past 10 years, 2017 was the year that we had the VIX underneath 10. We had the VIX in single digits for over 53 days in 2017 when the global run rate of quantitative easing was $2.2 trillion. That's Merrill Lynch data.
Well, guess what? At the $250, $260 billion that the Fed is pumping in, we're already back up to a $1.6 trillion global QE run rate that does not even take into consideration what they're doing at the ECB.
ED HARRISON: There are a lot of places I can go on that, and we're going to come back to some of that later. I mean, that's a lot to unpack. But in terms of the US economy, tell me, what are the indicators that you're looking at that are most important right now?
DANIELLE DIMARTINO BOOTH: So the two sectors that we're following the most closely right now are continuing claims. And the reason we look at continuing claims a little bit more closely than initial jobless claims, both of them are very bumpy series. But just because people apply for unemployment insurance does not mean that they're able to receive it. You have to see that flow through into continuing claims data.
And what we saw, starting 3 weeks ago, was an increase on a year-over-year basis. And that's what distills the signal from the noise. But starting 3 weeks ago, we saw an increase in year-over-year continuing claims, and that has continued through the latest week. So now we have 3 weeks in a row of increasing continuing claims nationwide. The number of Americans collecting unemployment insurance nationwide has increased for 3 years. We've not seen this since December 2009.
ED HARRISON: Right. So that's definitely a clear recession signal. What else are you looking at? The sort of things that will put services and the manufacturing sector together, are there any sort of metrics there that can help us discern where this is going?
DANIELLE DIMARTINO BOOTH: Sure. Well, so if you want to think of a bridge-- because that's kind of the picture that you're drawing, Ed. If you want to think of a bridge between the industrial sector and the services sector, you literally have to find something that crosses a bridge. You have to find a railroad. You have to find a freight car.
We actually saw port traffic at our three largest California ports collapse, and that was led by imports. Now, imports decreasing, actually mathematically, ends up having a higher GDP figure as a result, but you don't want to see, in a consumption-led economy, port traffic via imports collapsing. And we've seen this run through-- just this week, we got fresh data out on rail traffic. It was down.
We got fresh data out on freight traffic. There's actually a gauge that precedes the cash survey. And whether it was dry load, refrigerated truck, we've seen these transportation metrics continue to slow and deepen on a year-over-year basis.
At Quill Intelligence, we actually look at individual states on an ongoing basis. Right now for the month of October, we only have 23 weeks of permanent continuing claims data on hand. But what we can tell you about those 23 weeks is that 78% of high-transportation states had continuing claims in the month of October.
And this was not purely a GM story. Obviously, there was a lot of stress in the Midwest, but I'll give you one example, the state of Delaware, where Amazon has a massive, massive presence, warehouses and what have you. We've seen rising continuing claims in the state of Delaware. This is not purely a GM strike or an industrial recession story that we're seeing. And again, that's why we follow transportations so very closely.
ED HARRISON: Interesting. Very interesting. Now, actually, I'm getting a question here from some of the viewers here, and it goes back to your bear steepener that you were talking about. So since this is a bear steepener happening because of the Fed, does the steepening of the yield curve still apply? That's the question from Rick.
DANIELLE DIMARTINO BOOTH: Well, I don't think-- and I'm the one who stepped into the hole, right? I mentioned Morgan Stanley backing into the effects of quantitative tightening to backdate the inversion of the yield curve to December.
But let's look at this cleanly and say May of this year. Prior Fed rate-hiking and easing cycles have been preceded by the Fed taking their foot off the brake. So what the Fed has done here is somewhat artificial, if you will, but I'm not going to fade the steepening signal coming out. Because again, first you have to have the prerequisite of inversion, and then you have to have resteepening.
But again, Ed, I'm not trying to speak out of both sides of my mouth, but I think it's critical to explain that the liquidity that the Fed is pumping into the system will have a beneficial effect. It will buy us some time.
ED HARRISON: Right, OK. Let me think about Q4 in that context because I opened up talking about the Atlanta and the New York Feds. And when you look at the Q4 data, the GDP data, what stands out for you about the data and what it says about what kind of numbers we're going to get?
DANIELLE DIMARTINO BOOTH: Well, I think some of the reason that we've seen those Fed nowcast models come down-- and actually, the Atlanta Fed one is-- I think it's 0.98. New York Fed is 0.7 at this point-- is that going into the trade war, there was a lot of stockpiling. There was a lot of inventory build under the assumption that the input costs for a lot of these companies was going to go through the roof once further tariffs were implemented, which we know is no longer going to be the case.
But now, if you're Joe Q. Company and you're sitting on this inventory, if you don't start to move that, if you don't see the final demand pick up, then you're not going to rebuild those inventories. And that, I think, is what a lot of people are missing in the GDP math, is that we've had a few disappointing inventory reads that have been more negative than what we were anticipating, suggesting that the rebuilding of stocks is not occurring.
And this actually backs right into the discussion that we were just having about transportations. In a million years, in a seasonal month, such as October when you've got merchandise getting to stores in order to satisfy holiday shopping demand, this is the last time of the year that you're expecting weakness when it's normally a seasonally extremely robust time for all transportations. But again, follow that inventory data. It's been a drag on the GDP forecasts.
ED HARRISON: Right, interesting. Now, actually, I'm looking here, and I see that there's a follow-up question. It's about repo. I'm not actually going to ask you about that now because we're going to talk about repo a little later.
What I did want to talk to you about for a second, though, is that I used to be a credit guy. I was in the credit markets in high-yield and so forth. And whenever I think about deceleration like you're talking about, I think, first and foremost, where is the credit at? How-- in a negative way into companies and where the default's going to come. What are you seeing in the credit markets right now?
DANIELLE DIMARTINO BOOTH: Well, it's interesting. We quietly have Fitch, for example, raising its default estimate for the year going forward. I'm not so sure that, even though we've known-- for example, Dean Foods was a company in distress. I'm not so sure that the credit community was ready for that bankruptcy filing. It's a very large bankruptcy filing.
Last week, we had Newell Brands taken down from investment-grade to junk-grade debt. And, as another example, very big junk issuer, Ford Motor, came out with very weak earnings report. There's a good chance that they have a second downgrade across that BBB line into junk territory. So if you're looking at S&P, if you're looking at Moody's, you are seeing the number of companies trading at very, very wide spreads, increasing at levels that we have not seen in years.
So what the credit markets are communicating is that there is stress building into 2020. And I think that that is something of a reflection of the fact that even though we've not had deeply negative earnings per share, according to FactSet data, Q1 was negative. Q2 was negative. Q3 was negative to a deeper extent. And now, after last week, we've seen analysts take down their expectations for Q4 as well.
So we are looking at 2019, four quarters in a row, of negative earnings per share. And something that's coming up on our radar screen increasingly is the fact that it's the top-line growth that we're starting to see come under pressure. And you roll this back into the very idea of credit, and the number of companies that simply do not have the cash flow on hand to withstand a protracted earnings recession-- file in energy if you will, and the fact that we can't hit that 60 on WTI. And I think that you're going to continue to see also defaults/delinquencies rising in the energy patch as well.
We've seen quite a few headlines coming from that direction. If we don't see 60 on WTI, we're going to continue to see, for example, rising jobless claims in the state of Texas, the second most populous state in the nation. These are things that are outside of the bounds of the trade war.
ED HARRISON: Right, interesting. Actually, I heard about Chesapeake Energy, I think, in that context that you're talking about.
DANIELLE DIMARTINO BOOTH: Exactly.
ED HARRISON: We have another question talking about the chip sector. I don't know if you know anything about this. But the question was, how do you square the increasing chip sales and, thus, stocks hitting new highs in the context of this slowdown that we're talking?
DANIELLE DIMARTINO BOOTH: Well, you know what, Ed? This is way above my pay grade because I cannot put together the absolute collapse in South Korean chip exports and put that together with what we're seeing in terms of the stock index. Call it me, Danielle, in a corner, crying, scratching her head, because I can't make heads or tails of it because we're getting such disparate signs, disparate data points when it comes to that particular sector.
ED HARRISON: You ment-- and so this is a good transition, then, since you're mentioning South Korea, to go and think about the impact that outside of the US is having on the US. And I was telling you, before we got on this call, that I was looking at some Twitter things from Lakshman Achuthan, from the guys at Hedgeye. And they're saying that they're seeing a bottoming. You mentioned this before, that maybe the manufacturing sector is bottoming, but you're more concerned about the services sector. What, globally, are you see in places like South Korea, like Japan, China, and Germany? Those are the big four that I'm interested in.
DANIELLE DIMARTINO BOOTH: Well, clearly, we got a surprise out of Germany, and they did not go into a technical recession, though I would add that if you look at the absolute level of German growth in the first quarter, we are still lower than where we were at the beginning of the year. I think, to go off on a bit of a side note, if you will, there's going to be a danger in Germany not falling into technical recession. You've already had politicians out on the wire saying, this is fantastic news. We absolutely have confirmation that there's no need for stimulus.
ED HARRISON: Right.
DANIELLE DIMARTINO BOOTH: That's not a good sign in the context of, for example, German construction coming under pressure. So I don't know if the green shoots narrative is going to hold or not. Clearly, we've got QE, in Europe, revving up. I doubt Christine Lagarde's going to take her foot off the accelerator. She's going to continue with that stimulus.
So we will see what happens with Germany and Europe and the green shoots. I've seen the ECRI data. I don't deny it at all. And we've seen some of the forward-looking indicators, such as factory orders, such as automobile orders, increase. So there could be something to that narrative. I would push back only to the extent that we haven't seen improvement out of Germany's single largest importing nation, and that would be China.
ED HARRISON: Right.
DANIELLE DIMARTINO BOOTH: To step back, I saw an interesting chart a few days ago that shows that it looks like while China's PMI manufacturing seems to be bottoming, none of its closest trading partners seem to be on the receiving end of whatever is happening in China. We continue to get bad car sales data out of the country. Obviously, industrial production disappointed. And fixed investment in China fell to the lowest level since 1999. And we also had retail sales disappoint.
Again, if China is what got this started-- and by the way, it started well before the first Trump tweet. It's slowing in China because they'd reached a saturation point in terms of the urbanization of major Chinese cities. If they can't find a way to push growth out more than they are via stimulus packages-- and I think there's reticence on the part of Chinese officials to just blow out the system with stimulus-- then I think that there will eventually be a reverberation back to Germany and a continuation of the trend.
Again, Germany is focused on the internal combustion engine. I know this Tesla news is very well timed, and there's going to be an electric vehicle revolution in Germany. But these things don't tend to happen overnight. So I'm in a wait-and-see mode, though I don't deny the green shoots.
ED HARRISON: Right. You mentioned China, and it makes me think immediately of trade. So how much of the impact is trade having on China, and what do you think about this phase when trade deal? Does it matter in terms of the US economy?
DANIELLE DIMARTINO BOOTH: Well, we'll have to see if we can go back to ceteris paribus. I mean, that's actually-- the funny thing is that we're talking about China going back to buying what it used to buy from our farm sector. If you dig through all of the hype and the pump, I have yet to see any definitive signs from China that they're willing to bend on intellectual property. That is what got this entire trade war started.
So while I'm pleased for our farmers and our farmers are buried in debt-- there've been some very good stories out on the wires these last few weeks about the debt load increasing in the farm belt. While I would certainly be pleased to see relief for that sector, all we're doing is undoing the negative effects of the trade war. We're not actually taking a step forward. We're simply trying to say, let's take the damage away.
And by the way, the Chinese have shown absolutely no inclination to go anything beyond-- they're not going to give us anything in the trade war unless we continue to tear these tariffs back. But I suspect that Trump will continue to do so because I think he wants to get re-elected, but what do I know?
ED HARRISON: Right. Yeah, that makes a lot of sense. Well, here's a question here from the audience that's watching. They were saying Friedman talks about lags. He says that-- then the question is is,