Buck: Welcome back everyone. Today my guest on Wealth Formula Podcast is Catherine Putney. She is from ITR Economics specializing in applied research for business cycle trend analysis, gross cycle trend analysis and implementing cyclical analysis at the practical company level. Now Catherine was on our show right before we saw Covid-19 kind of take hold of the United States in sort of a Black Swan sort of way and before we saw what that ensuing economic fallout would look like and so Catherine was actually kind enough to accept my invitation to come back and sort of create a little bit of a revisionist outlook on what we talked about last time. So thanks and welcome back.
Catherine: Thanks, Buck. Glad to be here, unfortunately under different circumstances but I guess being transparent and getting an update in the economy is always something that’s beneficial to the listeners.
Buck: Yeah absolutely and so you know as we talked to as I mentioned last time we talked frankly you and I both grossly underestimated the impact of you know what this Covid-19 thing would have on the US economy and I think that you know certainly very reasonable most many people did because I think that what we’re trying to do was balance this whole you know the question of what’s going on in public health and putting that in the context of economics. So what happened in your perspective with that.
Catherine: Yeah so so since then we have made several downward revisions to many of our forecasts and the reason for that was the development in the data points of development in the “fear” in the society really drove down economic activity. Beforehand we did not anticipate for the state home orders to be as aggressive as they were in the quarantines to be as aggressive as they were so a lot of the industries and the boots on the ground type of individuals in the manufacturing industry and the automotive industry other aspects of the US economy really took a huge hit, which before the last time we had talked that was something that we had not seen that those trends and that negativity manifest itself yet in our leading indicators or in the trends that we are tracking so given that those updates that we’ve been seeing and even today we’ve seen some new numbers come through on you know retail sales and the industrial economy all pointing to some pretty negative April figures. So we work with the information that we have and even those updates we moved them in and we downward revised some of our forecasts in certain industries are gonna fare better than others some are going to be hit harder than others and that’s what I’m hoping to get across today.
Buck: Yeah absolutely I mean just to highlight again I think that one of the things that I talk about whenever we you know I mention ITR and you know the firm and their record of being able to predict things you know with such high levels of certainty over the last you know 70 years or so but it is almost you know impossible to predict things that are so much farther out on the bell curve so to speak right I mean before we get into the nuts and bolts of what’s going on right now I’m just kind of you know, how can you or is there any point in even thinking about those outliers in the eyes of an economist?
Catherine: Yeah those are what we deem as those Black Swan events those types of elements that are exogenous factors that you can’t control where we look at previous recessions in the US economy where we looked at ‘08/’09 which is very driven by the economy in the housing market. This time around is driven by this last one event with this pandemic and something that we can’t control but we’re always striving to keep the listeners updated to make sure that they’re receiving the most up-to-date information so it was something that that was kind of thrown into the mix and we wanted to make sure that Black Swan event was baked into our outlook which we did but the leading indicators at the time didn’t necessarily pick up the Black Swan event. I mean if we could find a predictor to a Black Swan or pandemic coming up I think we would you know do our diligence to make sure that didn’t happen so this is the case or we had to bake that into the mix that was somewhat exogenous to economics.
Buck: Yeah absolutely and I think that’s one of the biggest problems is that even now you look at this and you know people are trying to make a lot of predictions but again you’ve got two different you know disciplines that are trying to almost coordinate. You’ve got public health on one hand which you know can’t seem to get its own sense of you know what to do what the right thing to do and you know what the true extent of you know further you know disease output is and then trying to have the economists sort of piggyback on that and trying to you know project based on a moving target, that’s a challenging thing. So you know it’s interesting too, you brought up the Black Swan and Nassim Taleb’s book the Black Swan and I actually saw an interview with him in a few days ago and he says you know what this event was not a Black Swan in fact we predicted this happening and he predicted in a book so anything that you can actually see coming is not necessarily a Black Swan but what he did think was a Black Swan is the things that are going to follow which we have no clue what’s gonna happen right, to him that’s the Black Swan event which is really an interesting take so why don’t you know give us a sense for at least you know based on what you’re seeing now and with that moving target you know what the current and near future impact of you know Covid-19 and obviously these incredible unemployment numbers and you know the effects on GDP and you know and just kind of give us sort of a short you know near and maybe you know six months to a year outlook on what you know.
Catherine: Yeah absolutely we actually do have forecasts for several of these series and the first one I’ll mention is kind of the largest one that we track in the US which is GDP. Now we’re 19 plus trillion-dollar economy we’re on the brink of recession we do expect the next two quarters of 2020 to be decline and a noticeable decline so everyone out there will feel it, consumers, business leaders everyone’s going to feel this decline not only inside the US but outside the US. So 2020 we actually have us closing out the year at 2.1 percent contraction compared to 2019 s levels so we’re going to be back on our feet again in 2021 next year is going to be that recovery and expansionary year in the economy where we do have us closing out at just shy of I wouldn’t say just shy of four percent about 3.6 percent growth in 2021 so next year assuming the assumptions that we are making which is that we aren’t going to see this double pandemic come about again once the quarantine is lifted once the stay-at-home orders are lifted that is a big assumption by the way that we are making we are going to see this better year in 2021 and it’ll be different for many different industries. The one area outside of GDP which is what we’re looking at another sector is unemployment. Now unemployment won’t gain as much traction as GDP will now we know that once this downturn comes to an end and we’re back on our feet again later this year we’re going to see the consumers spend they will spend the money the issue is unemployment whereas a hundred years ago we saw 25% unemployment in the Great Depression. The Great Recession was ten percent employment unemployment and right now we’re at fourteen point seven percent we expect that to continue to rise to around the 18 percent level in the next few months so we’re not at the end yet in terms of those figures we’re going to hit around 18 percent and even then you know before we went into this greatest downturn, we’re at about 128 point eight million workers and in the United States. Now we’re at you know about one hundred and twenty-seven point two million workers existing in the private sector in the US so we don’t expect us to return though to the pre-Covid numbers for employment that 128 million in change until 2022. So that’s going to be the struggle is is the unemployment figures spending patterns will recover, the industrial economy will eventually recover maybe a little slower than the consumer economy but the unemployment figures are going to see some better days but not for quite some time.
Buck: Help me understand something is a non economist you know and I hear these numbers specifically if we’re if we’re thinking you know there’s a projection of eighteen percent unemployment in you know 2020 and maybe you know part of 2021, I don’t understand exactly how that is in line with people spending and only 2.2 percent contraction in GDP, I mean you know as a non-economist I’m looking at this thinking how could we only how could GDP contract only two point two percent after you know what we’re going through and the people not going on vacations people not going to restaurants people not going to you know games and then on top of that if you have eighteen percent unemployment those people aren’t spending anything so I mean so you know it’s just a for me a very confusing can you help understand that and I’m guessing a lot of people probably are thinking the same thing.
Catherine: Yeah so that’s the first thing I do want to mention is that GDP is so large. So it’s consisted of over 19 trillion dollars so 2.2 percent may seem like a very minute figure but it’s actually a very noticeable contraction in terms of let’s say the 18 percent unemployment which is one just looking at those the workers in the workforce or the adult that are working that’s not considering the children at home that you need to be spending on. So the actual decline that the spending that’s happening it will be noticeable but 18 percent unemployment. People are still unemployed are still spending and then you add in the layer that when you look at GDP about 17 percent of GDP is government spending. So that is actually looking at a big figure or a big sliver of the public GDP pie which could eventually mitigate that.
Buck: And you know I think you’ve kind of alluded to this but you know I’m still hearing economists talking about v-shape recoveries in the current environment and all the fallout. To me I’ve been saying again I’m not an economist but I kind of look at this a little bit as an earthquake happening and then there’s the tsunami that falls afterwards which is you know around the corner right now we’ve got a lot of a lot of government you know protections in place and stuff but I mean it’s hard to imagine that you know in something like real estate for example that we have that we’re not going to see you know a ton of defaults as you mentioned obviously really high unemployment and ultimately that sort of continuing to affect almost sort of like a feedback loop as many businesses capitulate through this. Now do you agree with that in terms of you know kind of work that we’re not really kind of through the hardest part here that we’re really kind of looking at something that’s coming that’s probably going to be worse or do you think that we’ve kind of already had hit the hardest part of this economy?
Catherine: I don’t think we’re quite there yet I think we’d still have a few more about one to two more quarters to go before we’re at that trough point of that V as you mentioned and the Devils in the details with that there are garden certain aspects of the economy that are going to be doing better or worse than others but in totality, the aggregate is calling for this generalized v-shape. Now a great example that I typically like to use on this is it depends again depending on which industry you’re in. Let’s say you you own a restaurant and for me, my perspective is I am all this demand that’s being lost right now for me not going out and spending at a restaurant, I’m not going to go out and triple my expenditures or spending at restaurants when this comes to an end. So that demand is lost and that recovery will likely be more difficult coming out of it so it may not be as v-shape as let’s say the housing market where if I’m in the market to buy a new house that demand isn’t lost it’s not going to say that you know what I’m not going to go buy a house anymore I’m still going to go and buy a house it just maybe you know a few months into the future so it’s not technically disappearing demand it’s just shifted demand which a lot of industries on the durable side of the economy are going to see, they’re going to see a good rebound which is why we’re seeing that v-shape is not because of the fact that the demand is lost, it’s just waiting to be used at a later point in time.
Buck: Why do you think Catherine and I know you know economics really is is sort of not designed to predict the you know what’s happening in the stock market per se, but one of the really shocking things to me at this point has been that there’s really only been I don’t know market’s only down about 13/14 percent from highs and you know the problem seems bigger than that to me you know a lot of these businesses that are in the Dow for example I mean they’re not even functioning right now and on top of that the valuations in the market are still incredibly high, you know record highs. Why do you think that the market is not reacting maybe congruently with the realities on the ground and with the business sector?
Catherine: Yeah so a big reason we do not compare directly the market to the strength or the performance of the economies because of emotion and because a big reason of you know emotion and speculation is tied to that performance you could see a tweet or a expectation of guidance of where the earnings are going to be for a company and make a move and move the needle on the market there but a big a big thing that the quote that we like to use at ITR is dare we think it we’ve seen recently that somewhat very short so far recovery trend coming from the stock market but the numbers that we are seeing are telling us that there could likely be a precipitous drop in the stock market coming because a big reason for that is comparing the stock performance and the S&P to both retail sales and corporate profitability both retail sales and corporate profitability is stagnant right now we’re even during last year where we saw asset prices in the stock market climb so there’s that Delta that deviation coming from a kind of stagnated profitability standpoint and a retail standpoint but the asset prices are high. So there needs to be some sort of reconvergence between those trends which is telling me that we’re likely going to see some potential decline still to come from that stock market before that correction but at the end of the day, I think a lot of that positivity is driven by the fact that there is this idea of from you know consumers and investors that say you know what the US government or the Fed will do whatever it can do to we’ll do whatever we can do to prevent a crash from coming. Well there’s only so much ammo that the government has to to keep this out of this decline so as that idea starts to resonate in investors I think we may see some more risk-averse behavior coming from those investors.
Buck: I’m curious and again you know let tell me if this is just not really part of what you do but I mean I you mentioned something that I’ve been very concerned about which is you know the feds expanding rule as you know the idea of buying essentially buying junk bonds right you know and propping up some of these businesses you know to me I look at that and I’m and I know I feel like I understand why they’re doing it right you’re trying to prevent this huge crash and you know trying to create some consumer confidence so that there’s not all this you know wealth lost but isn’t there an overall hazard to that you know sort of a moral hazard going forward you know that negatively impacts how markets behave?
Catherine: Yeah I mean I think that there’s going to be soon a realization that there’s only you know we can expand if the Fed can expand its presence as much as it would like but there is a ending point there is a point where you know can’t it can’t keep on convention to you know to cure the economy and that so that’s it that’s a big thing that we look at is well there’s there’s only so much time before these investors realize that because you know if we saw in the Bank of Japan BOJ did this type of process where they purchased those type of ETFs and a lot of the results of that at least that what I’ve been reading was that there’s a lot of skepticism in the market there because it says why are you doing this? This doesn’t seem like the best tactic approach to take is this the end of the line for the decisions you can make to to prevent us from coming out of the economy or coming out of this downturn and so I don’t there’s other metrics we can trigger or other approaches we can take that you know the ETF purchasing especially on junk bonds as well not only the safer type of investment is going to definitely bring a lot of skepticism into the market which will only drive down the stock market further.
Buck: I’m curious about that because I actually read somewhere that I think was Mohamed el-Erian talking about well what happens you know what happens if the Fed comes in and starts buying S&P ETFs right? And if they do that as an investor you’d almost be kind of crazy not to jump onto that though right because you’re like okay well they’re gonna prop this market up but what you’re saying is eventually you have to pay the piper.
Catherine: Yeah it’s about those individuals that are saying why are they buying these ETFs in these junk bonds? You know it could be safe hey the US is deemed as somewhat of a safe haven globally because it’s the largest economy in the world but then you kind of if you peel back the layers of the onion there and see okay well this is why are they doing this what why are you going out and buying you know these junk bonds aren’t there other mechanisms you can do and that kind of stirs up some of the emotion of saying okay well should I be nervous right now about the strength of the Fed and the US economy?
Buck: Well you know we’ve talked about this on the last episode you had you know ITR has had this relatively long-standing thesis of a roaring 20s and then a depression in the 30s and this was based in part on the levels of debt and demographics as we approach 30s. Now debt levels have materially changed and changed very quickly does that change the thesis overall on the timing of that depression and the complexion of what the 20s actually look like?
Catherine: Short answer is now, in fact, the increasing amount of the government debt actually adds more fuel to that economic fire of depression we’re going to go through in 2030 that was simply you know one piece of the pie for the drivers to the 2030 depression it was the government debt the difference between the tax receipts were taken in the difference between you know the transfer payments we were making so if anything that kind of adds that fuel to another layer to add on to that 2030 depression also you look back to a big comparison we made for 1922 the 2020s and 2030s is looking back a century ago where we did have you know the Spanish flu a century ago and following that the roaring 20s and then the crash the great of the Great Depression. Now I don’t want to make an exact comparison to a century ago the economies what they’re different a hundred years ago but what we’re going to go through is similar to that where there were actually three recessions in the 1920s. People see the deemed the word roaring 20s as just consistent rise when that was actually not the case. There was an early 20s recession and that’s kind of similar to where we’re in right now not comparing apples to apples but overall directionally themed is the 2020s will be still overall ascent and then the drivers I just mentioned that we talked about is still going to push us into this depression where I use the D-word there for 2030 whereas I’m not using the word depression, in this case, this is more of the R recessionary trend it’s not going to be a depression.
Buck: Basically you’re saying that because of the 30s depression is so multifactorial this is just one more piece to it and you know ultimately you adding I don’t know what it’s going to end up maybe or five trillion dollars more to the debt that at the end of the day that is just one variable and that really doesn’t change the timing is that fair?
Catherine: Very fair to say absolutely.
Buck: I was reading an article that Brian Beaulieu Brian I maybe it was a brother but either one it was Allan or Brian. So one of them was essentially saying that one of the key drivers in that 30s depression was a loss of confidence. Can you explain that a little bit because the demographics and the debt I think we all understand but there is a little bit of I think you know why then in terms of the loss of confidence piece?
Catherine: Yeah so I mean kind of similar to what we’re in right now where there is that lack of confidence that’s driving the economy down where people are skeptical about the future so they are kind of spending better they’re kind of being more reserved in their spending. It’s going to be a little different in the 2030 time frame and a large reason for that is because we’re not going to know what the resolution of this depression is going to be quite yet and we’re going to see all of these the last of the baby boomers enter into the social security timeframe they’re entering into this age where they’re going to be a huge economic burden if we don’t make any changes to Social Security or our taxes. We need to either increase our taxes or somehow diminish what we’re paying out in the economy so our reliance on what the government is going to do about this similar to what we’re in today is what is the government going to do and their decisions are going to make us either more skeptical or less skeptical. It is going to be a kind of a similar approach in a decade from now just different reasoning for that skepticism, it’s going to be more tied to okay well how are you going to you know stimulate economic growth where you have a huge demographic cohort such as the baby boomers entering into an age where they’re not working they’re retired and their propensity to consume their multiplier effect from an economic standpoint isn’t as great as younger generations and younger generations aren’t producing children as heavily as some of the older generations used to, that’s going to be the reason for the skepticism and the lack of confidence.
Buck: I didn’t ask you this last time but you know in terms of that depression, can you project out at least the way you project that it is that you know 2030 if you have a depression, how do some of those elements naturally dissipate? Is it about boomers dying off is it about I mean it’s obviously you know yeah I don’t think you can necessarily predict that somehow we’d have the political fortitude to make the debt go away but how does that play out? Is it something that you guys see lasting 5 years 10 years and and you know what what Tim you’ll I would take you out of that depression?
Catherine: So I mean there are multiple avenues we can take there to potentially get us out and it’s going to be difficult to project that now but and the reason for that is the US economy is very reactionary, we’re not preventive we wait for things to happen and then we try to fix them instead of trying to prevent things from happening but a big aspect that we like to look at is okay well in ten years from now who’s going to be on Capitol Hill? Who are going to be the politicians or the president at the president’s at the time and it’s a Millennials and a huge burden that Millennials have right now is student loans and student debt, similar to even the generation below Millennials just Gen Z-ers. So what’s going to happen is the decisions being made to help at that time are going to benefit the Millennials, they’re going to potentially get rid of you know student loan debt that could be a potential option and there is that unfortunate as it is that the dying off of these baby boomers handing down their wealth to the previous generation to stimulate economic activity and on top of that too often times when the economy crumbles, goes through this depression we like to call it an economic forest fire, it’s burning out all the Deadwood and what that does is it leaves room for the sprouting of a new forest or you know the new trees that are going to come up which we saw a hundred years ago with the Industrial Revolution where we saw that the Depression happened in the late 20s and early 30s that drove the Industrial Revolution to come from that. In this case, it’s going to be not the industrial revolution but it’s going to be something that needs a Depression to spur a whole new economy and that’s what we’re going to likely head toward more to the AI more to the automation and technology it’s going to thrive for a whole new type of economy but it’s going to be more like the first half of the 30s as in the really low point the down point and then starting to creep back up toward the late 30s it’s going to be that kind of silver lining or light at the end of the tunnel as we head toward the late 30s.
Buck: I would be remiss not to ask about apartment building since we have so many people invested in large apartment buildings right now so and I don’t know if this is an area that you’ve looked at specifically but you know we’re generally working-class apartment buildings seem to be doing okay right now. We anticipate you know they’ll probably be some defaults and that sort of thing but if you looked at the larger commercial real estate market and have any near sort of year to you know six months to a year your thoughts on that or is that something you have not really specifically looked at?
Catherine: So from a part of an apartment building standpoint not that the commercial standpoint multifamily I mean it depends if we’re looking at the near-term as a long-term near-term right now permit trends and multifamily are doing really well. You saw a lot of great permits which means that there’s likely going to be some good behavior into the future for construction on top of the fact that people migrate to renting rather than buying in recessions they can’t afford their mortgage they default or you know they can’t qualify so they typically migrate to renting we saw it 10 years ago where there was a much quicker recovery in multifamily. So from a multifamily standpoint or apartment standpoint we likely will see less of a burden on both the multi actually single-family side as well from a commercial standpoint. We do have a forecast for that I don’t have it with me right now on the top of my head but I do know that one commercial construction is measured in dollars so the impact of inflation would have a big driver on that and as of right now the money being pumped into the economy which typically is known as an inflationary aspect is not enough to offset the decline in demand. So we’re not expecting aggressive inflation over the course of the next year which could drive down the cost. You know you could renegotiate that the cost of this type of construction or these projects because people want the work and you can get away with lowering the cost because of the deflationary environment or the lack of inflation that we’re seeing.
Buck: So that’s interesting is that inflation projection for just the next year I mean do you see inflation naturally rising more as the economy starts you know picking up again and then you’ve got all this additional money in the system?
Catherine: So our expectations for inflation are for a general and slow recovery in ’21 so but it’s so not going to be you know deemed very healthy. 2022 s we’re going to kind of get back to the normalcy and longer-term basis all the way up to the Great Depression or the depression that we’re expecting in 2030, it’s going to be more general inflation on a long term aspect but near-term, we’re not expecting us definitely a slower bounce back in inflation.
Buck: Interesting. That’s fantastic. Well listen Catherine I don’t want to take up too much your time. This has been a really interesting conversation as usual and do you want to just let us know how we can you know continue to learn more from you and from ITR?
Catherine: Absolutely I mean we have so many economic tools and items that you can utilize to figure out where you’re positioned in the economy what does this mean to you so if you visit our website at www.itreconomics.com there are plenty of notes and informative practices you can approach to kind of figure out you know what best suits you. You’re able to find some really great blog activity that’s at no cost to kind of see what the economic update and what’s been going on in the economy that’s there I really encourage it I know it may not be the best of news given the circumstances we’re in but as long as you know where the economy is going even if it’s in decline you’re prepared for it and you can utilize that to your advantage.
Buck: Thank you again and I can vouch for the newsletters etc. I am a subscriber myself. Thanks again Catherine and we will be right back.