- In early 2023, the mood on Wall Street was quite pessimistic. But the U.S. economy has proved to be incredibly resilient this year.
- Economist Ed Yardeni says that instead of sharp downturns, we’ve been experiencing a “rolling recession,” otherwise known as a mid-cycle, slow-down growth recession, particularly in the housing market. Meanwhile, consumer behavior has driven down goods inflation. Is the “rolling recession” about to become a “rolling recovery”?
- Ed, who coined the term “bond vigilantes” in the early 1980s, argues that this bond market activism is back. Why now, and who or what is to blame?
“The bond vigilantes are back.”
It’s familiar terrain for Ed, a Wall Street veteran who coined the term “bond vigilantes” in 1983 to describe fixed-income traders who sell bonds, or simply threaten to do so, to push back against policies undertaken by the issuers of those bonds. Back then, he was characterizing the actions of large bond traders in the Treasurys market. Selling bonds depresses their prices, pushing interest rates up and making borrowing more costly for the issuer.
Bond vigilantes think fiscal and monetary policy is reckless — “too stimulative and too inflationary — obviously not in their best interest,” Ed says. “They basically send their friends, the bond vigilantes, to take over the credit markets.”
He says bond vigilantism is a problem because the practice spikes interest rates, often up to levels that cause a credit crunch and a recession.
“I’m hoping that the economy will slow some without an outright recession and that inflation will continue to moderate, and that will stabilize the situation,” says Ed. “But we are seeing aspects of a debt crisis that are very unsettling.”
As founder and president of Yardeni Research, Ed (“Dr. Ed” to his followers) shares his financial outlooks with more than 4000 institutional and private investors — for a price. But here, his insights are free. On a Global Macro episode of Top Traders Unplugged, Ed talks with Alan Dunne about why bond investors push up long-term bond yields, a looming debt crisis and the possibility of “rolling recessions” versus hard landings.
Read on for highlights of their discussion about the state of the economy now, how the pandemic shaped our current economic cycle — and how he would invest if he could start all over again.
Yale and Yellen
Over his nearly 50-year career, Ed has been the chief economist or chief investment strategist in multiple investment houses, including Prudential and Deutsche Bank. His resume also includes positions at the Federal Reserve Board of Governors and the U.S. Treasury Department.
I’d argue that the “reckless” fiscal policies that bond vigilantes discredit have been shaped by Ed and other economists of his generation. He definitely has plenty of stories about his journey from academic policy wonk to frequent CNBC commentator, dubbed a “Wall Street Seer” by Barron’s.
As a newly minted Yale Ph.D., Ed served as an economist with the Federal Reserve Bank of New York for a year, in 1976-77.
That wasn’t as glamorous as it might sound. He remembers wearing a polyester dress shirt and keeping ties in his windowless office.
“I wrote some memos on the savings and loan industry, which was in crisis back then,” Ed recalls. “Well, actually, it was pre-crisis, but [I] just kind of monitored their deposit flows. Those memos are still somewhere in the basement of the Federal Reserve Bank of New York, I suspect.”
At Yale, Ed studied economics under Nobel laureate James Tobin, whose innovative theories, techniques and models are staples of economics textbooks today. Current Treasury Secretary and former Federal Reserve Board Chair Janet Yellen was also one of Tobin’s Ph.D. students, graduating six years before Ed.
Ed says he owes Yellen a “debt of thanks” because she had taken copious notes in Tobin’s economics class, which were “subsequently xeroxed” and disseminated to students who came after her, becoming the “unofficial textbook” for the course.
“She got me through Yale,” Ed jokes. “Of course, she’s a liberal, whereas I tend to be more conservative, at least on economic policy matters.”
Pessimism and resiliency
Arguably, Ed’s take on the current economy is conservative, too.
“Unfortunately, I think I got it mostly right, but not completely right,” he says.
While pessimism reigned in early 2023 (Chase CEO Jamie Dimon saw a “hurricane” approaching), the markets have been quite resilient. We’ve weathered a few storms, for sure — like the collapse of Silicon Valley Bank. Alan calls that incident a “bit of a wobble” and remarks on “how wrong — again — the economics profession seems to have been about the economy this year.”
Ed points out that he started arguing that the economy was already in a recession back in early 2022. “But I thought it was a rolling recession, otherwise known as a mid-cycle, slow-down growth recession,” he says.
He thinks that the Fed’s decision to raise interest rates late last year led many economists to forecast a sharp downturn.
“They figured if the Fed was going to be aggressive in raising interest rates, and if inflation [would] be persistent rather than transitory, the result would be a credit crunch and a recession. I didn’t see it that way,” Ed adds.
He thinks that this year, we experienced a “housing recession” — “but we have to be exact about that,” he says. “It was a single-family housing recession. Housing starts for single families took a dive.”
However, multifamily housing remained strong until recently, because developers and landlords saw the demand for rental properties and for apartments. However, in August, prices began to drop in this sector. Ed predicts the rolling recession is headed into multifamily housing, because developers “might have overbuilt.”
Shopping sprees and Swifties
The economic climate today is a direct result of pandemic shortages and spending patterns, says Ed.
“Here in the U.S., we were locked down during the pandemic … and we all got cabin fever … and when the lockdowns were lifted, we all needed to do something to make ourselves feel better.”
The wonderful thing about Americans is that “we spend money when we’re happy, and when we’re depressed, we spend more money,” he observes.
In the early days of the pandemic, those consumers on shopping sprees mostly bought goods because services, events and travel were still subject to social distancing. But by late 2020, inventories were depleted and retailers ordered more merchandise from China and other trade partners, but much of it got jammed up in the Port of Los Angeles, which was caused by the trucking crisis (among other events). When the influx of merchandise finally arrived, consumers had moved on from goods and went on an experiential buying binge, flocking back to restaurants, air travel and hotels.
“More recently, they went to Taylor Swift concerts or went to see ‘Barbie’ and ‘Oppenheimer’ at the movies,” Ed adds. “So the retailers got stuck with a lot of merchandise and had to discount it, which brought inflation down quite sharply, at least in the goods area.”
Now, he thinks the rolling recession is headed toward commercial real estate.
“Look, I’m not saying that we couldn’t still have an economy-wide recession,” Ed notes. “But there’s been a lot of economic correcting in some important cyclical sectors.”
Blue chips and bond markets
Alan asks Ed to share his advice for newbie investors.
“If I were starting all over again, I would have saved more — even if that meant reducing my standard of living,” Ed says. “And I would have put it in high-quality dividend-yielding stocks. Companies that have been around for a long time, that have been growing their dividends, paying more year after year.”
He thinks he would put the stocks on the proverbial back burner and avoid the day-to-day battles in the financial markets.
“You can really get whipsawed around quite a bit in the stock market and even in the bond market,” he says. “I think you have to buy quality; buy securities that are giving you a good return, and then just put them away. And try to get some peace of mind because if you’re trying to trade these markets, it can be quite tough on you as an individual investor.”
Peace of mind … that sounds like just the thing right now.
This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.