Time now for our Wall Street daily segment, the host of Wall Street Week
David Westin joining us as he does every day at this time.
And David, you sit down with a lot of interesting folks.
But you actually had a chance to sit down with really one of the legends in
economics and really independent research on Wall Street at home in a
little bit earlier. And you said it remained and we had
those strong numbers out on Friday. And yet they're still projecting a
recession. So we sat down with that man.
He is the vice chair of Evercore and the chair and founder of Evercore ISI.
We asked him why he still thought we're going to have a recession, at least by
Q3, despite those numbers. So this is the toughest time I've had.
I've never forecast a recession this far in advance.
So this could be the end of my career. But early on, I became a follower of
Milton Friedman. And the money supply and the money
supply is now contracting and associated with the banking crisis.
Bank deposits come down and then somewhere along the line, I picked up
the yield curve. And as you know, it's it's significantly
inverted. And then just as a follower of the
policy, you have Kutty as the third. Item there's no history on that, really
discussing it or analyzing it, but they have also found that if we're tightening
and other central banks aren't tightening, it's not so bad.
But if we're tightening and other central banks are tightening, it makes
our tightening much more aggressive on the economy.
So obviously you have all those at work and they take about a year and a half to
impact, if you can believe this. John Maynard Keynes wrote a paper in
1923 saying it took 16 months. So the comment right now is very strong.
It's amazing. But
I'm patient. And I think that by the summer, will
we'll start to see as a recession unfold.
So is the Fed caught in between? Because the Fed is looking a lot of the
numbers you're looking at for sure. And they're seeing some slowing in some
places at the same time. You look at those jobs numbers, by the
way, look at the wage numbers that were up five tenths of a percent, I believe,
in the last round. Does the Fed have to keep those rates
high? I don't think so.
So, you know, I'm pretty senior. I've been through a lot of these things
and the lags are real. I mentioned the, you know, 0 6 0 7.
And it feels to me that the Fed gets a number and they say, well, we have to
adjust for that number. And I'm saying nothing.
It takes a year and a half to see a year to see what you've done.
But the least convincing part of my forecast is what you put your finger on.
The wage number was up half a percent, which annualize it's to 6 and year on
year is about four and a half. And if proactivity was, say, 2 or 1,
you're not you know, you're still not getting very close to the Fed's target.
So that that part has been the most troubling, the lack of evidence that
wages are slowing there, slowing a little bit.
But it's been pretty grudging. At the same time, the Fed has obviously
raised rates a lot and fairly fast. A lot of people think and the nominal
rate that they have, the federal funds rate, as you pointed, research is not
really the effective rate given the fact we have quantitative tightening at this
time. So
the Federal Reserve in San Francisco has this measure you're referring to, and it
puts the Fed funds rate at about six and a half.
Wages, as I mentioned, the average hourly earnings were about four and a
half. So by the standard measure, five and a
quarter for funds rate or adjusted for Kutty, it's more than that.
So I feel pretty good about our forecast until I walk over here to see you.
And the street traffic is like it's crazy out there.
Restaurants are busy. And so it's right now the economy is
pretty strong. But I think it's slowly slowing and
we'll keep slowing. And as I mentioned, the you know, when
it's impacting when you get a financial crisis.
So we also have the Fed tightening into not this or a crisis in banks, but
certainly a lot of uncertainty about the banks.
We've had the regional bank problems since March.
What is that doing for the Fed? Is that helping the economy slow down at
all? Are we seeing any evidence of that?
No. I mean, we've definitely seen that the
banks in trouble and you've seen a huge decline in
deposits. They're down about 5 percent, which
hasn't happened since the 1930s. But credit growth is still strong.
And on the Friday's numbers, they were up about 9 percent year on year on the
CNI loans. And and then they have the monthly
numbers on consumer borrowing and they're up like No.
12 or 15. It's right.
So I'm forecasting the economy to slow down.
Now, you do get into a funny situation when it starts to weaken
as you start to get people borrowing for a problem, you know, they're running out
of money. And so they are running tight.
And so they tend to borrow money. It's a credit expansion tends to be a
lagging indicator. So you are forecasting a recession, even
if you're a little nervous about the forecast, which you're forecasting a
recession. So let's assume you're right that we go
into negative numbers in Q3, Q4. How long does the last?
I'd say at least through the first or second
quarter of next year. So.
These are the possibilities. No recession, soft landing, hard landing
or severe recession? I don't see a severe recession.
That would be something like. Eighty nine.
2008, 2009. But there aren't any excessive for that.
But I mean, a hard landing camp, 5 percent
more thinking, you know what? What am I missing here?
And it's possible maybe none of those are right.
Maybe we just have an extended period of time of very slow growth, maybe for
several years. We don't get a recession.
We don't get a hard landing. But it's a extended period of very slow
growth. That's not my best guess.
But always thinking about alternatives.