Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: The following podcast was recorded on the 16th of November 2023 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: Don't forget that you can follow this podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macro Brief.
Speaker: Hello and welcome to the Macrobrief.
Speaker: I'm your host, Piers Butler in London.
Speaker: It's been an uncertain year for investors with low growth, high inflation and soaring bond yields, providing a challenging backdrop.
Speaker: From turbulence in the banking sector in March to the rise of geopolitical risk in the Middle East, there have been plenty of events for the markets to digest.
Speaker: As we edge towards the end of the year, attention is turning to the outlook for 2024.
Speaker: Today, we're going to be speaking with Max Kettner, our chief multi-asset strategist, and also look at some of the pushbacks he's been getting from investors on his positive outlook.
Speaker: Max, welcome to the podcast.
Speaker: Thank you very much for having me.
Speaker: So broadly speaking, it's fair to say that you are reasonably positive about the outlook for 2024.
Speaker: Yes, that's correct.
Speaker: So we haven't really changed our view over the last couple of months.
Speaker: We've been pretty constructive on risk assets more broadly since the start of the year.
Speaker: There's obviously been some concerns around the banking sector in the U.S. In March and April, there's been some concerns around overheating growth, particularly in the U.S.,
Speaker: in September and October.
Speaker: But suffice to say, look, as long as growth expectations, both on the bottom upsides on earnings and also growth expectations top down GDP, for example, for the US, as long as they continue to be really, really low, which is exactly what we're seeing right now,
Speaker: that's really good for risk assets broadly, right?
Speaker: So on the back of having published your multi-asset direction, you went on the road and spoke to investors and you've had some pushback on your view.
Speaker: And the first one, which we hear a lot in the press as well, is that a lot of indicators are supposedly flashing
Speaker: recession signals for the US.
Speaker: Why are you not sort of taking that into account?
Speaker: Well, the reality is that it's a bit of a discussion which a lot of people hate, but we have to do it sometimes.
Speaker: It's a discussion around levels versus changes.
Speaker: When we look, for example, at the unemployment rate in the US, fair enough.
Speaker: The change in the unemployment rate is definitely going up.
Speaker: We are seeing a higher unemployment rate compared to where we were at the end of last year, for example.
Speaker: But what we've got to realize is when we look at, for example, the level of the unemployment rate in the U.S. still really, really, really low.
Speaker: When we look at initial jobless claims in the U.S., what we're seeing is it's still close to a 50-year low, right?
Speaker: It's still really, really close to a 50-year low.
Speaker: So yes, fair enough.
Speaker: The change in the unemployment rate is positive, and that typically looks like it's a precursor of a recession.
Speaker: The change in initial jobless claims is also positive.
Speaker: But when we look, for example, at the level of jobless claims, it's still only around 30,000 above the, I think, 50 or 60-year low, right, in jobless claims.
Speaker: And, you know, typically what we've seen over the last 40, 50 years is that the absolute low in jobless claims was around about 300,000, right?
Speaker: Now we're still talking about 220,000.
Speaker: So we're still way below the typical lows that we've seen before, you know, really people are starting to talk about an overheating economy in the last sort of three, four decades.
Speaker: So levels matter.
Speaker: Give us another example.
Speaker: I thought the one in your report about credit card delinquencies was also quite telling.
Speaker: Yes, there is a lot of talk around delinquencies.
Speaker: I think credit cards is one thing, right?
Speaker: Credit cards and credit card debt as well.
Speaker: Delinquencies, if you look at the change of delinquencies, that looks extremely scary.
Speaker: But again, when we look at credit card delinquencies, in fact, when we look at all delinquencies, right, all of the total consumer balance delinquencies, or we look at things like private household bankruptcies, for example, or...
Speaker: or we look at private household debt service ratios, those kind of charts, they all look like the same.
Speaker: They all look like they basically have seen a massive fall with the onset of QE after the financial crisis.
Speaker: And then what we've seen with COVID was even more QE and on top of that fiscal stimulus.
Speaker: So we went to really absurdly low levels of consumer stress.
Speaker: And now...
Speaker: We're sort of normalizing back to the levels where we were before COVID, but we're a long, long way off even the average levels that we had before the financial crisis, let alone the peak levels.
Speaker: We're miles away from that, so we really cannot really talk about significant strains on the consumer yet.
Speaker: We're really normalizing off from absurdly low levels.
Speaker: That's what we're seeing right now, but we're not really seeing genuine signs of stress just yet.
Speaker: So Max, can I challenge you on that?
Speaker: Because obviously during COVID, this enormous amount of excess savings built up in the system.
Speaker: Surely that's been exhausted, no?
Speaker: So it's a funny discussion because I think we've checked the first time where there are some articles out on the depletion of excess savings.
Speaker: has literally been in the summer of 2020.
Speaker: So we've been talking about those excess savings running out for the best part of the last three and a half years.
Speaker: And it turns out when we look, for example, at the San Francisco Fed, they've just put out the new estimate of excess savings, which still puts it around five and a billion.
Speaker: But the bigger issue here, I think, is that the estimation of excess savings is really prone to an estimation error because you need to make really, really strong assumptions in order to arrive at these levels of excess savings.
Speaker: It depends on whether you use fixed assumptions or variable assumptions.
Speaker: It depends on whether you say, oh, I think the trend rate of the savings rate should be at least five to ten years long.
Speaker: Or other people would say, well, but we've seen the Trump tax cuts in 2018 and 2019, so we should only use those years for the trend rate.
Speaker: And depending on what kind of trend you use, you get vastly different estimates of excess savings.
Speaker: So from that angle, it's really, really uncertain, right, where really excess savings are.
Speaker: I think one of the things that we've got to bear in mind is that particularly low-income household wage growth,
Speaker: has been really, really high and really been picking up in the last couple of years.
Speaker: And that's good.
Speaker: That's good for consumption, right?
Speaker: It's particularly those households, those consumers that are really spending the most money and they have seen the highest wage growth, right?
Speaker: So away from excess savings, we're also seeing the flow.
Speaker: So wages being actually much more supportive, particularly for those households that are spending more money.
Speaker: So let's move away from the data and maybe talk about sentiment.
Speaker: And I know you track sort of sentiment data and what real money is doing.
Speaker: What are the latest indicators there?
Speaker: So we have one indicator, for example, that tracks real money sentiment, sentiment among sort of the largest asset managers, real money asset managers worldwide.
Speaker: And the interesting thing over the last 12 months was that
Speaker: that the sentiment on equities and high yield credit hasn't really changed.
Speaker: So on aggregate, real money investors still continue to be underweight equities and high yield, so still hold this risk off stance.
Speaker: The only change is that I think over the last two, three months, we've seen incrementally a bit more sort of neutrality in equities, more and more investors moving towards a bit of more of a neutral stance, but still
Speaker: no way really near a risk-on stance or even an overweight in high-yield or in equities.
Speaker: The final pushback, which is one that has concerned me, is that when you look at the US equity indices, the S&P 500 or the NASDAQ, the performance has been really skewed towards a small number of very large market capitalized tech names.
Speaker: Isn't there a risk associated there?
Speaker: Yes, so we've done a bit of an analysis on that and on what we call market breadth.
Speaker: So how broad is a rally or how broad is the performance in a specific index?
Speaker: And when we look, for example, here at the S&P 500, actually measures of market breadth
Speaker: as a tactical asset allocation tool do really, really poorly.
Speaker: In fact, what we've seen is that on average, if market breadth is really poor, that tends to be followed by actually good performance of equities, not like what people expect that if market breadth is poor, that is a precursor of really, really bad performance.
Speaker: But the more important point to bear in mind in that analysis is that that's really on average.
Speaker: If we look at the pattern, there is no discernible pattern.
Speaker: So we go from sort of minus 15 percent, sometimes it's plus 15.
Speaker: It's really all over the place.
Speaker: So what it means in plain English is market breadth as an indicator, as a tactical asset allocation indicator, just does really, really poorly.
Speaker: Conceptually, theoretically, it might be concerning, but empirically, there is no real evidence for that.
Speaker: So if you're not worrying about market breadth and you've dealt with quite a few of these pushbacks, what are you worried about?
Speaker: I am most worried about overheating.
Speaker: So because expectations both on the earnings side and the top-down growth side, because those expectations continue to be so low, it doesn't take an awful lot to have really very, very strong positive activity surprises.
Speaker: And that's been the big, big, significant difference in the third quarter compared to the first half of this year.
Speaker: And the first half of this year, we had, you know, U.S. GDP growth roundabout potential, a bit stronger, but, you know, nothing where really we were, we had to worry about, oh, is this too strong in order for us to really bring inflation down?
Speaker: And that really changed in Q3, right?
Speaker: We had a blowout quarter.
Speaker: We had almost 5% GDP growth.
Speaker: Suddenly, we had to worry about, well, with 5% GDP growth,
Speaker: There is no way we're going to get inflation down.
Speaker: And I think that's the biggest risk.
Speaker: It's not the recession.
Speaker: The recession, it can't really be a risk because like we said, right, like we said earlier, on aggregate, investors are still underweight equities and are still underweight in high yield credit and overweight in sovereigns and in IG credit, right?
Speaker: So on aggregate, they are positioned for that.
Speaker: So if they're positioned for that, by definition, it can't be a risk.
Speaker: So it has to be the overheating scenario where, like we've seen in September and October, no asset class works, nothing works, and there is virtually no place to hide.
Speaker: That, to me, is really one of the biggest risks next year.
Speaker: All right.
Speaker: Well, we'll see how it plays out in 2024.
Speaker: But for today, thank you very much for joining us.
Speaker: Thank you very much for having me.
Speaker: Before we go, here are a couple of things to highlight from the team at Global Research.
Speaker: James Pomeroy, global economist, has been considering the future of food.
Speaker: With a population set to rise to around 9 billion over the next 20 years, will there be enough to go round?
Speaker: On the one hand, climate change presents a risk to supply.
Speaker: However, James says technological solutions such as AI, robotics, and consumer apps give us some cause for optimism.
Speaker: The report also looks at how trade will play a vital role and the implications for policymakers.
Speaker: Elsewhere, our FX team has been looking at what's in store for currencies next year.
Speaker: They expect the US dollar to stay strong in 2024, aided by soft global growth and comparatively high US yields.
Speaker: It's a more challenging outlook here in Europe, though, where they expect the euro and sterling to remain under pressure.
Speaker: For more information on anything we've talked about today, or for any questions, comments or feedback, please email askresearch at hsbc.com.
Speaker: So that wraps things up for another week.
Speaker: Thanks very much for listening.
Speaker: We'll be back next week.
