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