24/7 Wall St. is conducting a series of interviews with prominent economist and market strategist. Jason DeSena Trennert is the Managing Partner, Chief Investment Strategist at Strategas Research Partners LLP.
The conversation:
24/7 Wall St.: The bias right now in the press when they report what’s going on with the economy is to try to figure out how much the GDP is going to go up or down, and not a huge amount of time on what the elements are that profession economists would look at as bellwethers for whether things are actually getting better or getting worse. Are there two or three things, particularly to start of with, between now and the end of the year that you would be paying special attention to?
Jason: The hard part is that the signals you would normally look at, in particular one that would be one of the best would be 10-year treasuries, is that they’re so broadly manipulated that on purpose, so there’s nothing directional about it, its monetizing the debt, that some of the signals I would normally look at, in particular ten-year treasuries yields are not behaving the way that they normally would. I think the stock market generally, I think financial markets generally speaking are better economists than economists themselves. I would say for the most part the markets now, with the exception of treasuries, are discounting some sort of deflationary risk. Economy that’s driven by broad-based disinflation. The only problems with that is the currency markets are telling you that, the commodity markets are telling you that, and stock are telling you that. So I don’t know, there’s not really a good thing I can tell you. The problem as I see it now is that we’ve become so dependent upon public spending to get growth that the typical things you would look at… in a typical recovery you would normally be looking at housing and autos, you would be looking at durables. Because the U.S. economy is practically, but not right now at 71% consumer spending. 71% of GDP is consumer spending, and normally 60 at average or 65, normally the way it works in the U.S. is that you take the tip of the yield curve in the direcdtion of some sort of pent up demand for housing and housing starts to get… the problem now is there’s very little pent up demand for housing and autos. Whatever demand you’re getting is being driven by public spending or subsidies. So right now only about 20% of the stimulus that was passed last year had been spent. So you have about 80% of the stimulus that has yet to be spent. Probably only about a third of it will be spent by the end of this year. Sorry I’m dancing around your question and I’m nor answering it specifically. Because frankly I truly believe its different this time and that’s part of the reason why the cycle will… and the reason its demonstrably different is, again, its being driven by public spending as opposed to endogenous factors like consumer spending.
24/7 Wall St.: So how important does that make retail spending between Thanksgiving and New Years as a marker since the consumer doesn’t appear to have been the direct beneficiary, as of yet, of the stimulus?
Jason: I think it’ll be important to the extent to which it will give people some sort of signal as to whatever the growth that we’re getting is real of Federal. That is to say that I think so far whatever the pick up in demand for housing and autos was really driven by government subsidy and there is, to my knowledge, no subsidy for lets say credit card debt or anything of the like. But I think that holiday spending will be a pretty good indicator of whether the typical cycle of long lasting consumer-led cycle, or something that’s driven more by public spending. So I think that you’re right. Holiday spending will probably be a very important indicator. Back-to-school would have been a good indicator but there were a lot of, cash-for clunkers and a lot of other things, and varying comps. So it was pretty obscure as to what was really happening from the retail perspective.
24/7 Wall St.: The holidays look like they may be sort of pure in terms of how they would work as a proxy for consumer spending.
Jason: I think that’s right. I think that Christmas season, keep in mind there’s a very strong correlation between back-to-school and Christmas. The good news is that you have some net worth gains. Generally speaking that has some decent proxy on Christmas sales, stock price. More important tends to be, believe it or not, gasoline prices. In the past, generally speaking, they’ve had very good negative correlation with retail sales. That’s another countervailing factor that you might have to take a look at. Anyway, I’m rambling on here.
24/7 Wall St.: Well you brought up gas. Its interesting to watch the past couple of days the amount to which crude has moved up really just sort of on the whisper the global economy is getting better. If it appears the GDP here and the EU are going to move back to the levels where they were two and half years ago fairly quickly and that in China they’re moving back towards ten percent, does it look like oil has the tendency to be pressured upward given how little a nudge has been needed to get to $75.
Jason: I don’t want to say the commodity trade is all about China, but I really think its all about China. China has an advantage the U.S. doesn’t have in that it has money. It has two trillion dollars in currency reserves with which it can choose its growth rate to a certain extent. If you look at the marginal increase in demand that China has represented for a variety of commodities from oil to copper it is clearly the marginal player. The whole world has essentially adopted the public spending approach to juicing the economy. China is is kind of taking the lead on that. As I said China is controlling prices and that deflate the prices of everything that it exports. So inflation is going to be very heterogeneous. Its very likely that there will continue to be pressure on wages due to low employment in manufacturing and compare that with more demand for workers in sectors like healthcare and consumer staples.
24/7 Wall St.: You hear the term jobless recovery a lot, and I guess there’s some precedent for that with unemployment sort of coming a couple of quarters behind GDP rebound. I’m just wondering if this last recession was so much more brutal than some of the ones before it that its safe to assume that your’e going to get a similar pattern of employment recovery.
Jason: I think its very likely that any jobs gains you get will be temporary and that’s mainly because the engine for job growth generally speaking is small business job creation. Small business formation and small business job creation. And most small businesses business formation is driven by home equity lines of credit. So its difficult to really see the typically engine of capital formation , which is really geared towards housing, really providing much of a tail wind for either again capital formation of for that matter job gains. So the large companies generally either fire people, or stay the same, or outsource other things to smaller companies. Its hard if you’re relying on very large companies to power you’re economy. If you’re relying on the government that’s generally speaking not a particularly good, at least in the States, way of creating jobs. I love to believe that the access to the cost of credit has been generationally impaired. Its not something that’s going to be easy to put back together again. So as a result its very unlikely that you’re going to have a V-shaped recovery in employment. We’re kind of using the squared root shaped for the overall economy, but in terms of employment I think companies are going to be very hesitant to take worker back on given the uncertainty they just went through and the uncertainty that still persists.
24/7 Wall St.: There’s a theory that you hear every once in a while that is that as need and aptitude for businesses, large or small, to return to the credit market begins to pick up that the deficit the country is running requires so much money to be raised in the global capital markets
Jason: You’re going to look just on the cash basis the deficit this year could be something like two trillion dollars. At present value play it, the government is shaving between a trillion and a half to two trillion dollars a year. So that’s what you’ve got to give. You’re either going to have less investment, or the other parts of the economy are going to have to save a lot more. So this accounting identity is kind of getting away from that. I think that’s one of the ironies for the stock market in a weird way, and the bond markets for that matter, is that the real problems are going to come when the real economy starts to pick up, Its hard to see the deficit being cyclical. Some of the things I’m hearing from some of my clients, I hope I’m wrong, its very hard for the deficit to be cyclical because the magnitude is so enormous that they seem awfully sure of it to me. So the we’ve been using conversations with our clients, so far as the equity market is concerned, to determine that we’re bullish until the bill comes through. And the bill is going to come through in the form of higher long term interest rates or higher taxes, or both.
24/7: Thank you.
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