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Inflation Will Ease, Fed Hikes Will Not: Richard Excell (Szn 4, Ep 24)

Last updated on September 21, 2022

Richard Excell, former prop trader and portfolio manager and currently a professor of finance at Gies College of Business, joined the podcast to discuss his outlook on the economy, inflation, Federal Reserve interest rate policy, and more.

Content Highlights

  • The outlook on inflation: 5% by December, but don’t expect the Fed to ease off of rate hikes (7:14);
  • Can the Fed engineer a soft landing? It has succeeded just three of the last 14 times it hiked rates… (9:34);
  • We may not see a housing price decline on a national basis anytime soon (14:05);
  • Expect a 75 basis point rate hike at the next FOMC meeting on Sept. 20 — and again at the subsequent meeting in November, even though the economy should not start to brake until next year (16:11);
  • Background on the guest (22:02);
  • Views on asset allocation: more constructive for bonds than equities at present (27:03);
  • A recession will happen. The good news: it may be mild… (32:30);
  • How much of a concern are global issues in Europe and China? (35:40).

More Information on the Guest

Quick Highlights From Our YouTube Channel

Transcript

Nathaniel E. Baker 0:30
I’m here with Richard Excel. He is currently a professor of finance at Gies College of Business at the University of Illinois at Urbana Champaign. Richard thank you for so much for joining the contrarian investor podcast today.

Richard Excell 0:50
I’m happy to be here. Thanks for having me.

Nathaniel E. Baker 0:53
Yeah, great to have you. And you have some views here on the economy, and specifically on inflation. And your view. And this is quoting from a recent piece that you guys that you did a couple of weeks ago, I believe. And you said that despite everything that’s happened here, inflation is still the only game in town. Why do you see this still is vital right now?

Richard Excell 1:14
Sure. So I guess I will look at this from a couple different angles. The first is that we look at what is driving the markets this year, I say the market is a super risky markets, it’s so let’s just look at the equity market. So what is driving it this year, and you can, you can look and see that the basically the entire movement of the market this year has come down to changes in multiples, whether you like PE or even EBIT, da, that’s been the driver, right? Because earnings are relatively flat, give or take now this that I’m talking at the market level, of course, just incredibly, that might be a little bit different. But I’m at the market level. And so and we look at its multiples that are driving that that’s investor sentiment, essentially. So what’s driving those multiples? Well, if you look at what’s driving multiples, and not so I look at, for instance, the earnings yield of the SPX, which is the inverse of the forward P E. So I look at that I always look at multiples on a forward basis, because we value equities on what’s going to happen in the future. And that’s what not what has happened in the past. And, you know, the forward earnings yield, and the expectation of rate hikes from the Fed in the next year, are highly correlated. And so which isn’t surprising, right? Because ultimately, we we build up the our valuation models for anything, including discount rates for equities, for initially from short term, you know, depending on which one you use treasury yields or, you know, not not fed funds, per se. But of course, even a five year or 10 year Treasury yield is just the sum of the Fed Funds, there’s going to be over that period of time. And so when we look at that it’s the expectations of rate hikes are driving earnings yield. So they’re driving the P E, which is driving the market. And so from that standpoint, I’d say that’s really all that matters right now. Now, the other thing I would add to that is that I, I normally when I look at the world, my lens, my investment process, we look at growth and inflation. And so growth right now, I don’t think there’s that much difference of opinion on growth, I think most people understand that growth will be slowing, you can look at enough forward the forward indicators on housing markets, new orders, etc, to suggest that we think growth is going to slow. And so I don’t think there’s a difference of opinion on that. I think disinflation is the game in town, for the market right. Now. The other reason I say that, is because if you look at the way many investor portfolios and investment portfolios are built, it’s, you know, relying on the fact that stocks and bonds are negatively correlated. That could be the traditional 6040 portfolio and a retail portfolio, or risk parity, which has been the all the rage for institutions, pension funds, etc. And the key factor there is that stocks and bonds are negatively correlated, so they can pick up provide buffers for each other. Those that works very well has worked very well this century when, you know, when inflation has been low, and all we have to worry about is growth, because if growth starts to fall, the expectation is central banks will cut rates. So bonds rally, equities fall with the growth outlook. And so their balance, if growth is moving higher, equities are rallying, but bonds are selling off. And so there’s that negative correlation. However, if we move into the world, as we have in the last 18 months, a world of inflation, and that transitory inflation, but stickier inflation, Deck, the correlation becomes positive. And that’s what we’ve seen really, all of this year is that stocks and bonds are positively correlated. In fact, both assets had their worst start to the year their worst first six months of the year, and in about 50 years, right. And so those portfolios that are built in relying on that negative correlation have been particularly hurt badly. And so I think that there’s there’s a lot of focus on inflation and how sticky inflation is because there might be some that are questioning how sustainable In this, this kind of in risk parity, or 6040, is on a forward looking basis. Right.

Nathaniel E. Baker 5:06
Okay, so let’s talk about more in a little bit. But let’s get turning back to inflation again, what are your views on inflation here for the rest of the year and into next year?

Richard Excell 5:16
So, you know, we build a number of different models with the students. And when we look at those models, right now, we we see inflation slowing for sure we see inflation coming coming coming back lower. The problem is, it’s not going to come back to the 2% Fed target. And anytime soon, I think even when we look at it, throughout the to the end of this year, it’s still something on the order of the forecasts are in the five to five and a half range by December. But by December of 2023, they started to have to handle again at that point, right. So when we look further and further out, you know, really starts to kind of come down. So we do see this coming down. And so we but the question is, as the Fed told us at the Jackson Hole meeting, you know, if we look back to last year, why the reason the Fed was so slow to react initially, was because their models, were telling them inflation was going to fall, and then it didn’t fall. And so now they find that they have to catch up. So Jay Powell, base and subsequent speakers basically told us, like, I think, even if their model, even if their models are telling me in place is gonna fall, they’re still going to be aggressive. So I don’t necessarily think that changes Fed policy, certainly not for the September meeting, I think somewhat This to me that’s baked in the cake at 75 basis points, because they want to send the message. And the one of the reasons they want to send the message is, I think it’s important. That’s central bankers, you know, are looking for inflation expectations, right. And inflation expectations are a mindset, their mindset for consumer, their mindset for businesses. And so just as much as the Fed, or other central bankers want to fight against deflation, when we’re close to zero and use that kind of communication strategy to say, hey, we’re not we’re going to make sure that, you know, what was the Jay Powell saying, when we were at near deflation, he was saying, we’re not even thinking about thinking about thinking about raising rates, lower here raise rates, again, really telling consumers don’t worry the capitals there. Well, what’s the what are they telling us now? We’re going to keep raising rates and keep them high. And so inflation will come lower. So I think it’s a communication strategy right now, but I think they have to back that up to have credibility. And so that’s where I look at even with all my models are telling me is gonna come down, the Fed still seems like it’s going to be largely in play right now.

Nathaniel E. Baker 7:33
Can the Fed continue this tightening policy? And can we continue to see this small slowdown and growth, slowdown, inflation? Let’s go there. Without cutting into growth? And without starting a recession? Can we have a soft landing?

Richard Excell 7:49
Well, in theory, we can have soft landing practice, we’ve had some soft landings, right of the last 14, rate hike cycles, not counting this one, we’ve had three soft landings of those 14. So it can happen. It’s not it’s not the base case, by any stretch. And when the central banks are telling you that they’re essentially going to go until they break something. I don’t think that should necessarily be the expectation this time, either.

Nathaniel E. Baker 8:12
Okay, so we think there’s a chance that the Fed does reverse course, before they get to 2%.

Richard Excell 8:18
i Well, I will tell you that I think that if it was domestic policy alone, the Fed would continue to move things higher, I think you have to we have to offer, we also have to appreciate that the you know, the Fed is aware of what is going on in Europe, the Fed is aware of what’s going on in Asia. They don’t make policy because of those things, of course, because the fed only has a mandate on full employment and price stability in the United States. But they’re also aware of the fact that these global slowdowns will have an effect on the US economy. So I think there are clearly a part of the Fed that has, you know, is looking at these forward looking models. However, I think near term, what we’re going to see in the next couple of meetings are that the Fed is still going to be to continue to be hawkish, then there’ll be, then, you know, we might get to the point where we hold and then we’ll we’ll kind of wait and see, like what the Fed was really pushing back against was the idea that they’re going to hike through the end of this year, and then have to, you know, quickly cut next year. Many of many of the Fed speakers have kind of told us that they’re going to move rates higher quickly, and then wait and see. And so I think there’ll be equally as slow to remove the rate hikes next year, even in the sign of trouble, but I think we that’s something that, you know, when we look at yellow flags around the world, because quite a quite a few of them.

Nathaniel E. Baker 9:46
You know, question? Is there. Is there a chance that the Fed over does it because you’ve had these pretty dramatic rate hikes here? I mean, we haven’t seen this in in, I don’t know, 40 years. I don’t think the 75 basis points in Now we’re seeing two of them, and then more interest rate hikes for later in the year. And they appear very much focused on bringing down inflation, which, as you said, is part of their mandate. But is there a chance that they overdo it that they, because these these rate hikes have maybe not work their way through the economy yet, fully and housing, you’re starting to see it, I guess. But elsewhere, you know, hiring is strong and the consumer is strong. So do you think there’s a chance that they, they kind of get a little impatient and Jack things up too much, and then have a whole nother mess of things to deal with?

Richard Excell 10:36
I think there’s a quite a good possibility of that. And then to your point, you know, monetary policy acts with a lag, lag is about 12 months or so give or take. And so that is the difficulty that they face is that they’re making policy changes right now, where they know there’s a lag, and they won’t see the effects of that, you know, until summer of next year. And at that point, you might have gone too far. I would say that you’re upset, right, you’ve seen, you know, you’ve seen some impact on housing, on a cyclical basis, it’s certainly coming off the boil, and you’re certainly seeing in some parts of the country, that’s going to be even more pronounced, whether or not we see a national house price decline, I’m not personally thinking that that’s going to happen, because when I look at housing, you know, what a mortgage rates are, what their some give or take around five and a half percent. You know, if we look at, if we look at where mortgage rates were back in 2004, or five, six, they were at six and a half percent. So while this has been a very, very stark change, you know, up over 100%, on a year over year basis, the absolute level of that is not something that is completely worrisome, because the other component that goes into the housing market, not just mortgage rates, but it may be even a bigger driver is the employment conditions. And you know, what do people have jobs and are their wages going higher, because even as we saw post the financial crisis, even if rates are, are near zero, people aren’t going to buy a house if they don’t have a job. And if if people’s wages aren’t keeping up with inflation, or keeping up with these changes in rates, even at higher rates, you can still afford a house. And so there’s, there’s you know, that’s where I’m probably not as bearish on housing as as others might be. So you are seeing some of that effect come through into that market. You know, but I think when we think of the stock market, we have to understand that the Fed doesn’t care about multiples the Fed cares about earnings. I told you before that, you know, this year, it’s been the multiples it’s been the only game in town, if you will. And that’s what’s been driving performance earnings haven’t earnings have been pretty flat this year. And so the Fed is going to keep going until earnings slow down materially, they don’t care that the s&p forward multiple came down from 21 times to 16 times and backup to 18 times then that’s not going to stop them. So if that’s what’s driving the market, that won’t stop the Fed, if earnings go from being flat year over year to down 10 or 20%. That would get the Fed to take notice. Yes.

Nathaniel E. Baker 13:09
What’s your base case? What do you what do you see what’s your forecast for the end of this year and into into next for I guess the fed fund the Fed rate, and employment and inflation?

Richard Excell 13:20
Well, I think certainly in the next two meetings, we’re going to get 75 basis points.

Nathaniel E. Baker 13:25
September, I immediately start in November, or November. Yeah.

Richard Excell 13:29
November, it’s like just after the election. So I think I think you’ll see that in both of them. You know, I think it’s baked in the cake for sure, in September and November. I think that’s probably I’m probably a little bit more hawkish than others. My sense is that that’s going the goal of that is to try to get a little bit ahead of the curve, knowing that they can kind of reduce them later if they need to. And but most most importantly, to kind of restore some credibility for them. And I don’t think that while I, while my miles, and my gut tells me that we are going to see the economy starting to slow and earnings starting to slow, I don’t think things will have broken by November of this year. I think things maybe if they are going to break won’t be until q1 of next year, because the employment picture is still pretty solid. And people have money. And maybe they’re pulling back on some spending, but it’s not falling off a cliff. And so I think there’s enough things that can, you know, can carry through the economy to the end of the year. That’s the Feds going to stay in play, I think next year becomes a more difficult environment for taking risks.

Nathaniel E. Baker 14:34
Interesting. Yeah. And to your point, you know, the the interest rates were zero as recently as March. So if we’re talking about a 12 month lag, that puts us right at the end of q1 2023.

Richard Excell 14:45
I would say to you that that when there was all the talk of the Fed pivot, my thought was that if there was going to be a pivot and I that it would come by by changes in the quantitative tightening and that changes in the rate hikes because The Fed has more flexibility on how they how much in and how they execute the quantitative tightening. And it’s easier for the Fed to back off quantitative tightening and say that the, the market conditions are such that they can’t do as much as they thought, while they can kind of continue on and hike rates and normalize rates, and use this quantitative tightening, or lack thereof as a way to kind of soften the approach. And so that’s where I think if you look at those that look at like a shadow Fed funds rate that includes the impact of Quantitative Easing or quantitative tightening, you could see a pivot there. But I frankly, didn’t think that there’d be any slowdown in, you know, in the rate hiking. And not only that, not only are we not seeing a slowdown, we’re actually seeing an acceleration. Right. So to your point,

Nathaniel E. Baker 15:47
yeah. Interesting. So by that by your estimation, then that will put us at 4% a year. Right. And we’re doing the math. Right.

Richard Excell 15:53
Yeah. And then that’s kind of what, you know, a few speakers, certainly fed Governor Mester kind of talked about as well.

Nathaniel E. Baker 16:01
Yeah, correct, correct. I mean, do you think that they’re going to keep it there for most of 23?

Richard Excell 16:05
I think they would love to keep it there for most of 23. The question is, will they allow the will the data allow them to and so that’s, that’s what we have to kind of watch

Nathaniel E. Baker 16:15
for is very interesting. Wow. Okay, cool. That’s awesome. Very, thank you so much for that. Richard, I want to take a quick break here and come back, ask you some more about yourself. Talk a little bit more about markets. But first, we’re going to take a break. If you’re a premium subscriber, you do not get the break. Don’t go anywhere. Don’t touch the dial. We’ll be right back. In fact, we already are. Welcome back, everybody here with Richard Excel. Great last name, by the way, I’ll let you spell it with two L’s, but that’s okay.

Richard Excell 16:44
Well, I came up with the software though.

Nathaniel E. Baker 16:47
But um, yeah, great to have you here. And this is the segment of the show where we ask our guests about themselves, and their personal and professional background, I know you have a long history as a trader, on the buy side, and including at hedge funds. So I’m curious about that, and how you came to investing in the first place, and then how this all took you to where you are today?

Richard Excell 17:10
Sure. So I mean, I got into the market when, early after my freshman year of college, I had a chance to intern, the CBOE on the Chicago Board Options Exchange. And I just fell in love with the idea of the trading derivatives. To me, the, you know, the floors, which of course, have closed now, we’re the one place where you could, you know, it was a physical and a mental challenge all at the same time, right. But you’re having to calculate derivatives in your head, while somebody’s elbowing you and spitting on you, etc. Like it was, to me that was that was just to me an appealing environment, because it’s for smart people that you know, and there’s but there’s like competition and athleticism. And it’s just, it was fun. And I just enjoyed it. And so I did that for a couple couple years of internships during during college. And then that’s what I wanted to do right after right after college, I was fortunate enough to be able to do that. And I started the business at a firm, that’s where I was interning was from cole O’Connor and Associates, which was one of the top derivatives firms in the world. And I think a lot of people who are in the derivatives and options world know that brand. O’Connor was bought by a Swiss bank, and Swiss bank was moving the O’Connor people to his offices all over the world. And so I was initially moved to Tokyo upon graduation, partly because I had a minor in Japanese Studies. And so it was 1990 in Japan was the top of the world, right? So I spent the better part of the 90s in Asia, in investment banking, on the sales and trading side. So started in foreign exchange, branched into precious metals, as well, and then ultimately got into Asian emerging market FX and debt, and ended the end of that decade, really focused on global prop trading. That was back, you know, before the financial crisis, when the investment banks were taking a lot of progress, I had managed to navigate, you know, in that world that I was in the European exchange rate meltdown, the tequila crisis, the Asian financial crisis, and then the Russian Brazil crisis, which of course, led into the LTCM crisis. And so I was getting to like 1999. And I’m like, what more could possibly happen in the world of FX, right, so it’s time to maybe pivot. And I always wanted to kind of get into the world of equities, equities, even though it’s interesting. Equities do not have that same sort of, I mean, they’re not the biggest of all the markets. In fact, FX is the biggest market by far. But they get all the headlines and they kind of everyone talks to them. So and with some of the people that I had actually met in that very first summer that I interned there, were starting a hedge fund. You know, underneath the UBS Asset Management brand called UBS O’Connor because they were all O’Connor, original partners, etc. And so I moved into the world of hedge funds in 2001 to do equity long, short, and then for the better part of next 12 years. I was at UBS, O’Connor doing a number of different things for equity Long, short for a while, and then I moved into back into kind of global macro, then I got to spend some time in Europe doing running the entire office. So I got to look at all of our different strategies. Move back to finally the last couple of years I was there running our global equity, long, short business, globally, and so responsible for all of the capital allocation, etc. in risk management. Wow, I left that in 2013 to start my own hedge fund that was quickly then kind of rolled into and merged with Wolverine asset management. And that’s what I did until 2020. When I finally retired.

Nathaniel E. Baker 20:40
Wow. Okay, so now you have this teaching position over and out there in Illinois.

Richard Excell 20:47
Yeah. So in 2016, I reengaged, with my university where I went, did my undergraduate work, because my daughter had started school there. And it started with kind of speaking to a class. And then we’re doing some client projects where I was giving the students some research projects to work on for my firm. And next thing I know, I was teaching the class and then I was teaching two classes. And by 2019 2020, I was teaching for classes while I was still working. And so that was quite a bit. And so I decided that I could only do one or the other. And since I had gotten to the point of 30 years in the markets, and really had enjoyed my run, I thought it was a good time to stop managing money, professionally, and focus all my time on teaching. And so now I’m starting my third full year of teaching.

Nathaniel E. Baker 21:36
Wow, graduations. That’s really interesting. Wow. So the question is on when it comes to asset allocation now, because we mentioned at the top, we have a massive sell off in equities, the first half of the year, and also a massive load and bond yields, which, to your point rarely happens together at the same time. Where does that leave us? Other than, you know, maybe trading around a little bit and putting into risk as, as the Fed fed on fed off or anything like that. But is there anything like for the long term that people could do for asset allocation.

Richard Excell 22:10
So when when I think about asset allocation, and through the process that I use, I look at growth and inflation, and I kind of define the world as four different regimes, right, when when growth growth is either either rising or falling, and when inflation is either rising or falling. And so the best time to be an investor in equity markets is when growth is rising, and inflation is falling. That’s kind of like early stage recovery, etc. And that’s the when you get the best returns in the equity market, the second best or when growth and inflation are both moving higher, that’s that’s the, you know, that’s the second best, but that’s actually commodities are the best asset class to be in at that point, then you kind of move through the cycle, and you’re at the point where inflation has moved higher enough higher, that growth starts to slow down, but inflation is still rising. And that’s what we’ve been in in the last, you know, at least maybe not now, but certainly been in for the for the better part of 2021 and early 2022. And that’s one where equities start to struggle between because growth is falling. And growth drives earnings. And so that starts to get people worried about equities, but commodities still do well. And that’s, frankly, exactly what we’ve seen. And then the final phase is when both growth and inflation are falling, which it looks like we could be going into here, at least that’s what my forecasts would be. And that’s traditionally when very defensive sectors do well, that’s when very defensive country indexes like the US or UK or Switzerland, to also do well. And that’s when we’re commodities really start to struggle. So I think the when I look at it from and that’s when we’re bonds have historically been the best place to be. Now, I think in some ways the market is pricing in the expectation of that the only place we don’t see, you know, when we want to look at the traditional empirical results, the only place we don’t see them pricing in that phase would be in the bond market. Now, there’s, you know, there’s a lot of different reasons, one might think that one might suggest that they will, we kind of seen as that with the central bank activity in the markets, especially around COVID. PITINO prices in the bond market had gotten pretty far dislocated, from what models would suggest that they were so maybe we have to work off some of that. But again, what we talked about earlier, you’re also seeing some quantitative tightening come in or expectations of more quantitative tightening. So that might be not allowing the bonds to do what they have traditionally done at this phase. But we’re certainly seeing in terms of the country positioning, the sector positioning, the other asset class positioning, that the market is pricing in this falling growth, falling inflation type of outcome, the you know, over the next three to six months. And so, you know, to me, if I look at the opportunity, you know, I might suggest that then maybe the bond market in that phase looks like it’s the best place to look, but I also can appreciate where her you know you like you said you’ve got some Yeah, macro investor positioning long bonds, but you’re also getting central banks trying to unwind that. So that’s, that’s, that’s something that we have to kind of keep our eye on. Because one thing we have to appreciate, I think, is that the micro structures of the market have kind of broken down a little bit in the sense that as we’ve moved away from active money and into passive money, and now we also have central bank players in there, the traditional relationships are can be difficult. And then, and it can be frustrating for active managers, because you’re you’re not seeing that’s the same sort of mindset and models kind of dictating prices.

Nathaniel E. Baker 25:34
Yeah, right. That’s, that’s true. What do you think we bottom out here on a 10? year yields? Um,

Richard Excell 25:41
you know, I think that, to me, three and a half is about as high as I would think it would go. Because even if we get fed funds to 4%, that will be, you know, essentially 50 basis points of inversion that would suggest that at 4%, we’ve probably gone a little bit too far, and things might start to break. And that’s why I don’t think you’ll see tenure get, you know, much above three and a half. But again, I you know, I have to be I’m, you know, I spent time as a risk manager as well. So I have to be open to the idea that one investor positioning might cause an overshoot, and to what if, if the central banks are gonna keep on on quantitative tightening, we have to be open to the idea that, that that can open up some some further move as well. So I think for me, I’m confident and comfortable in the options market. So I like to express my views more with options to kind of embed that risk management. Sure. Okay.

Nathaniel E. Baker 26:33
But it does sound like you think like it’s, you’re maybe a little more bullish on fixed income than then equities at

Richard Excell 26:38
this at this. Yeah, that’s completely fair to say for sure.

Nathaniel E. Baker 26:41
Interesting. How bad do you think things get in terms of the recession? Because one thing I’ve noticed, and I’ve lived through maybe three of them is that they’re all They’re never mild when you’re going through them? Right, right. In fact, most of the time you don’t you get this narrative that develops, that is the worst down worst downturn since the Great Depression. Yeah, I swear, we heard that in the early 90s. Maybe not. Maybe I imagined it, but we certainly did in 2008. And I thought we didn’t early 2000s. Well, but anyway. So how bad of a recession do you think, Well, are we going to get a recession? You said there’s a chance we could have a soft landing. But yeah, what are your views on that?

Richard Excell 27:14
I definitely think we’ll get a recession. I think it will be more of what we call I’d called garden variety recession, which was kind of like what we saw them in the 90s. But I’m not saying we didn’t get their commentary in the 90s. But I think if we you know that right now would be a pretty tame recession relative to what we’ve seen in this century. I think the problem is a lot of people that, you know, who’ve been in the market more than I think I saw something on the order of like, you know, two thirds of professional fund managers right now came into the markets after the financial crisis. But let’s just say that that’s maybe extreme, like, most people’s investment career have been colored by this century, right. And so the only downturns we know, are a tech bubble bursting and the financial crisis, and then a really sharp COVID bubble, that got your COVID depression, sorry, that pic got hit. And then those were pretty extreme events by, you know, kind of global standards. And so I think, I don’t think we’ll see anything like that. I don’t think there’s been some comparisons to 2008, because housings coming down so much. But we don’t have nearly the leverage in the system, as as we did in 2018, that it’s not even close. And then that’s, that’s the financial institutions. That sounds consumer balance sheets said even on the corporate balance sheets, we just don’t have that same leverage. The leverage is in the system, but it’s all on sovereign balance sheets, for the most part. No, we haven’t been through a recession where where the with the sovereigns are that, you know, are that levered? So? We don’t necessarily know. But my base case would be yes, we’ll see a recession. No, it won’t be that deep, because I do think the jobs market will probably hold up better than we think. And I think that a lot of that has to do with labor force participation, and the fact that we have had some levers, I also don’t think the housing will be as stark not only because of the the lack of leverage, but I think we’re seeing well, while what we’re seeing is a cyclical slowdown, the secular drivers to housing, which is that we have historically, if I look at a long term, long term basis, we are under supplied and housing, and we are starting to see more and more household formations, and that is trending higher. And so the combination of demand from household formations, and a lack of long run supply tells me that secularly we should be a reasonably strong housing market for the next five years, though I acknowledge over the next year, you know, we’re coming off some cyclical accesses. And so I don’t think we’ll see too sharp of a downturn in the housing market. And so I think that will that the housing always leads into recession and leads out of a recession. So I think that’s what’s taking us in on that slowdown. But I think if if we seasonally bottom sometime in the spring by any buying season, you that’s where you can start to say well, we’ve had it we know we had a recession, but it won’t be that bad.

Nathaniel E. Baker 29:58
Last question is going Back to the global, you’re maybe putting on your global macro hat a little more here. How much of a concern are the you know, you have a slowdown in China, obviously Europe, in a lot of trouble. The US consumer has kind of been able to support all that so far. But how much concern are those slowdowns? I mean, China is still very nebulous. and Europe has nothing in terms of like their consumer strength. So where do you view that?

Richard Excell 30:26
Well, I’m kind of worried because I mean, you’re Europe is it’s a very real problem, right? And I mean, orders of magnitude more so than what we have here. And I’m, you know, if if, on average, if we look at the energy prices for American consumers have gone up maybe 50% year over year, which is big, and that that leaves a mark, it’s something closer to five or 600%, for Europeans, right. And so it is orders of magnitude more difficult. And you’re seeing that you’re seeing the effects of that. And so Europe is definitely in trouble. I think it the reason it’s held up better than maybe some expected through the summer has been probably because those American consumers not we’re not just buying here, but they were traveling to Europe. And it was it was three years worth of travel on one sovereign, that’s probably, you know, kept Europe holding up there for a while. But I think you’re going to start in the fall here, q4, and q1, I think that’s where the pain is going to really be felt, though, you know, you’re seeing some some tough choices being made now on on, on how Europe wants to kind of continue, you know, consider its energy policy going forward. So, you know, we’ll see what will come out on the other side of it, but I think Europe is definitely going to be a drag for sure. China is China is difficult, right? I mean, China is in a crisis of its own making. And so, you know, China will decide when it wants to it’s this crisis to stop, I think, and now the question is, do they lose control, etc. You know, the net number one mandate for the Chinese government is social stability. And so when you start to see social instability, that that’s where I think you’ll have, you’ll start to see some problems. And in some ways, you’ve already seen that, right? You’ve seen more protests in front of wealth management offices, and you’ve seen before you’ve seen runs on banks, etc. So and in the last three weeks, we’ve started to see a number of small and incremental, but voluminous stimulus measures, right, we see probably 20 different stimulus measures of some kind, it’s not the shock and all that you saw in 2008, because they don’t want to re inflate the housing more housing bubble that they had. But you know, it’s there’s the recognize that housing is an incredibly important sector in our economy, I mentioned how housing leads the US into another recession, housing is a much bigger deal, even in China, because there’s no social safety net. And so consumers in China that they have high savings rate, and then they tend to put those savings into second or third homes as a way to save for retirement and help take care of, of their other family members, etc. So the fact that you’ve had a housing crisis is a pretty big deal in China, even bigger than it would have been here. But you know, we’ll start to see what happens. And I would expect, even as we kind of go into this, the autumn National Party Congress when President Xi Jinping is trying to get a relatively unprecedented third term, you know, I think you’ll see China trying to step in and support things a little bit there.

Nathaniel E. Baker 33:25
All right. And they can do that without generating all kinds of crazy inflation there. I mean, I’m not I mean,

Richard Excell 33:31
if they would definitely try to create some inflation, but I’ve not tried to, but they would get some inflation out of all that. But the thing about it is that, you know, what, where we would normally see that release valve would be in the FX market, right. And that’s what you’re seeing in in Europe is that there’s trying to step in to help and, and then you’re seeing the Sterling Pound sterling, you’re seeing the Euro weakening, you’re actually seeing to Chinese revenue revenue be weakened, they’re allowing you to weaken, but it’s a managed flow, so they can control how much it weakens. I think the one of the things in Asia we should watch is that it’s a bit of an FX war going on, right? Because Japan kind of said, Hey, you guys have all this inflation, we’d love to have inflation, we’ve been trying to get inflation for 30 years. So we’re going to keep our we’re going to keep pegging the 10 year to 25 basis points and let our currency weaken, because that will import inflation. And we’ll be really happy to do that. And now you’re China’s allowing its currency to weaken because it wants to maintain some sort of competitiveness in this as well. So I think Asia will be importing the inflation that the US and Europe don’t want. And it’ll be coming there. And now it’d be a different problem for them. I think there are there’s China has probably a number of different issues to worry about. But also, one thing to recognize is that they probably don’t mind bringing in some inflation because the latest data we’ve gotten from the UN un and even from the Shanghai Academy of Sciences is that China’s demographic picture is much more bleak than we thought it was. We knew the workforce is slowing but it’s it looks like it’s going to be slowing much more rapidly than we thought before, which means that potential GDP is going to be falling, which means that we’re going to be in a period of secular disinflation, if not deflation. So starting from a higher point probably isn’t seen as, as a massive longer term risk only a near term risk.

Nathaniel E. Baker 35:16
Fair enough. All right, Richard Excel. Thank you so much for joining me contrarian investor podcast today. Maybe in closing, you could tell our listeners where they can find out more about you. I know you’re active on Twitter. And I’ll put that information in the show notes as well.

Richard Excell 35:32
Yeah, I’m pretty active on Twitter and LinkedIn, I’m trying to put content out there every day. But for those who’d like a little bit more of my kind of long form thinking, I write a blog on substack called stay vigilant. So stay vigilant that subject that calm, feel free to kind of come on there, like and subscribe if you enjoy what you see. And but most importantly, I love having dialogue and comments with the subscribers. Because to me, that’s how we all get smarter is by having discussions about different things in the market, because we don’t all have all the answers. And so I always love having that kind of Socratic debate, even if it’s in the comments or if in direct messaging. So stop by see what you think. And and either there, subscribe if you like it, or DM me if you don’t. Very

Nathaniel E. Baker 36:16
good, very cool. Yeah, I’ll put those links in there. And with that, I thank you all for listening. Thanks again to rich, and we look forward to speaking to you again next time.

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