Since 2020, we’ve seen most media outlets on high alert for a looming recession, but unemployment numbers have remained low. Today, Paul brings a WSJ article and asks, “So… when is that recession coming?” Paul and Ira encourage investors not to speculate on the timing of economic changes and talk about what has kept the economy out of recession over the last four years.
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Paul Winkler: Welcome. This is “The Investor Coaching Show.” I am Paul Winkler, along with Ira Work here.
Are we headed for a recession? What do you think, Ira? Recession.
Ira Work: I don’t make predictions, Paul.
PW: Come on. No guts, no glory.
IW: That’s okay. I don’t need glory.
PW: You already —
IW: You know what?
And I’m not going to put my name or the company’s reputation on the line for that.
PW: Yeah. Well, you’re in the minority because now they’re breaking predictions in the Wall Street Journal on why a recession still isn’t here. Because they’ve been trying to predict it for so long.
Now they’re sitting there going, “Oh, we’re going to have a recession. We’re going to have a recession, we’re going to have a recession. Wait, wait, we haven’t had one. Why isn’t it here yet?”
IW: Well, like I said in the last segment …
PW: Come on, man.
IW: It took three years for Alan Greenspan to be right. Eventually, they’ll be right. We teach our clients if they come out and what they say on TV is right, they parade them further like a guru. And if what they said wasn’t right, they just hope you don’t remember what they said.
PW: And some people, they’ll actually call them out right there on the TV set. Sometimes they do that and I crack up.
They squirm out of it. And they do it somehow. And it’s like, how do you face yourself every day in the mirror?
IW: I’ve been thinking about this. I think you were at the same convention that I was at where one of the keynote speakers was a guy who used to work for 48 Hours, and he was talking about how when they’re doing an interview, if they want to make the guy their interviewing seem like he’s lying …
PW: They change the lighting.
IW: Yeah. They would move the lighting closer and closer to make him hot so he would start to sweat. And he’s not necessarily lying, but because he’s sweating because of the heat lamps, it looks like he is lying.
PW: You do up the lighting, so it’ll look like Dracula or something.
IW: But he concluded the speech with, “So you don’t think we manipulate the interviews and that we control what is being said?”
PW: Oh, yeah. And seeing, sure.
IW: I mean even though they’re silently controlling it by just making him look bad.
PW: When you look and you think back to the Nixon-Kennedy debate, people who heard the debate on the radio thought Nixon won. People who saw the debate on TV thought that Kennedy had won. And that was it.
The thing is, and it’s interesting because Gladwell wrote this great book. If you haven’t read this book, it’s “Talking to Strangers.” But transparency is a big topic that he gets into in this book.
And the idea of transparency, which is so interesting, is if we watch TV and he uses an episode of “Friends,” as an example. You watch “Friends” and you see somebody walk in the door and they’re all like this and they’re all excited and blah, blah, blah.
And you go, “What are they feeling?” They’re feeling excitement. And then they open their eyes wide and what are they doing? That’s surprise.
He said that Hollywood has sold the idea that we are transparent. We can look at somebody’s face and tell how they’re feeling.
They gave examples of people going into courtrooms with facial coverings. And the judge is like, “You got to get rid of the facial covering. You got to drop that thing.”
People, they actually do better. The judges do better if they don’t see the person because they’re not influenced by the look of the person.
And I’ve just thought an awful lot about that lately. It’s just so often. This is why I think it’s so important for people to get an understanding of what you’re doing. Why are you doing it?
I need to understand this stuff because people all sound very believable. If you’re really, really confident, if you’re like Harry Dent — Harry Dent is the guy that basically said, “Demographics drives the stock market.”
PW: Fascinating stuff. He said, “If you look at birth rates in America, go back to the 1940s.”
Of course, you have a low birth rate in ’43, ’44, ’45, ’46. The fellas come home from the war and all of a sudden they’re making babies. And all of a sudden you have a baby boom in the late ’40s, and then you have a little bit of a dip in the birth rate, and then you have another jump in the birth rate in the early 1950s.
Why? Because of Korea. The fellas went over to Korea, they fought the war over there, they came back, they started making babies. You have this double bump up, down, and then up again.
Then he said, “Hey, let’s look at how people spend money.” People spend more money.
He said, “But they spend way more money between the ages of 43 and 46. That’s because they’re buying their biggest house between the ages of 43 and 46.”
He said, “People spend a ton of money.” And they’re buying motorcycles too. They’re going through a midlife crisis. But that was another thing he talked about.
Ira’s smiling. “Yeah, that’s me.”
He says that people spend bunches of money between 43 and 46. Let’s take the birthing peaks in 1946-’47 and then the early to mid-’50s, and let’s add 43 to 46 years to that.
And what we’re going to do is we’re going to take that chart and we’re going to shift it to the right, 43 to 46 years. Then he lays the chart on top of the S&P 500.
You got these two bumps, these two hills, they move over 43 to 46 years. Then he lays it on top of a chart of the S&P 500, and voila, there’s a high correlation.
Then he said, “Look, this is what drives the stock market. Demographics.”
PW: He wrote a book, “The Roaring 2000s,” about how the stock market was going to reach 40,000 by 2008, 2009.
Well, there was only one problem. It crashed in 2008, and in early 2009, it went below 10,000. He was as wrong as he could possibly be.
IW: But he covered himself with that because he said, “And if it doesn’t work out that way, we’ll go back and we’ll relook at the data and we’ll massage the data.”
PW: “What did we miss?”
IW: “We’ll figure out what we missed.”
PW: Yeah, exactly. Exactly.
IW: “And then we’ll readjust our …”
PW: And we’ll write another book called “The Great Depression.”
IW: And we’ll miss it that time too.
PW: Yeah, we’ll miss it that time too. Really great stuff.
He went and did that, and he came out with a mutual fund in the late ’90s, the AIM Demographic Fund, which was based on his theories. People were buying this workshop — financial advisors were buying this workshop like crazy.
And then of course, what happened was the stock market did the total opposite. The mutual fund lost 80% of people’s money. You have to be really good to lose 80% of people’s money.
And then you have Howard Ruff. He basically said the same thing back in the 1980s. “Everybody got to invest in gold, got to invest in gold.” Does this sound familiar?
“You got to invest in gold. That’s what you need to be putting your money in because the stock market’s dead.”
IW: But he sold a lot of them.
PW: He sold a lot of books.
IW: A lot of them.
PW: Yeah, a lot of books.
PW: Well, the Journal, they’re saying, “Why is the recession still not here?” And number one, they’re trying to predict this stuff.
Now you can sort of, kind of get an idea of if the economy’s going to slow down. There are some things that you can look at sometimes, but this is a testament to how sometimes it just doesn’t work.
Steady hiring continues to fuel consumer spending in turn and economic expansion unlike anything the U.S. has seen. There’s your key. There is your key.
It happened differently this time than it happened in the past. And that’s what you don’t know.
And how can they be different? Technological progress can be different. The political parties that are in power can be different. The things that they do can be different.
You look at sometimes these political leaders right now are doing things that are very, very different than what their predecessors did. And maybe sometimes it’s not that great, but it’s very different.
Then you can have situations where if a politician comes in and does something that seems like it’s really good for a short period of time, then it’s not so great for other countries. And there are a lot of things that happen that are very, very different.
And that’s the problem. There’s always something a little bit different. That is why it’s so hard to predict the future.
If you could just say the patterns in the past are indicative of the patterns in the future, we’d have something; we could do something with that. The unemployment rate has been at or below 4% for 30 months, something that last occurred during the Vietnam War and in the late 1960s.
Or in the Korean War in the early 1950s. That’s going to be different too, because we’re not used to not having huge birthing rates in the United States.
That happened during the Vietnam War. That happened during periods of time like the Korean War because there was a little bit of a lull in the birth rate at that particular point in time as well. It was pretty short, but that happens.
What they said here is of course, just because everyone who predicted a recession has been wrong doesn’t mean they won’t eventually be right. I love that line.
I have to say that again. Just because everyone who predicted a recession has been wrong doesn’t mean they won’t eventually be right.
Ira, that just reminds me of that line. “Economists have predicted nine of the last five recessions.”
It’s just like, “Yeah, it’s going to be a recession. Oh, it didn’t happen. It’s going to be a recession. Oh, it didn’t happen.”
Wolf, wolf. Eventually, a wolf shows up and then nobody comes because the wolf has been talked about every single time.
Though the unemployment rate remains low, it has risen from post-pandemic extremes. The unemployment rate has ticked up to 4% last month from 3.9% in April. It was as low as 3.4% in April of 2023.
At some point, is this going to happen? I suppose, but you can’t predict it; that’s the problem.
PW: The reality of it is there may be a recession here in the United States, but one of the things that happened this week is they already lowered interest rates overseas. They didn’t do it here in the United States because it can be politically a little bit challenging.
If you lower interest rates, you might help one candidate, the incumbent, and the Fed doesn’t want to be seen as taking sides. They are playing a game of cat and mouse as far as asking, “Do we lower interest rates to stop a recession or do we take our chances and leave interest rates a little bit higher for a little bit longer?” They’re not quite sure exactly what to do.
And they are a little bit of a game of chicken, cat and mouse, whatever you want to call it. “Do we do this?”
Now they’re looking at holding the interest rates this week. They’re supposedly going to hold steady. And the Fed’s trying to balance the risk of cutting too soon and allowing inflation to persist because it’s been stubborn and they’ve been saying it was going to be transitory. They said that forever.
“It was going to be transitory. This is going to be short-lived. You’re going to get this period of time where we just need to get the supply chains working again, and all of a sudden inflation will go away.”
Well, it didn’t go away. And they’re worried about triggering a slowdown that may not be needed to finish the inflation fight.
And you don’t want prices going down because if prices go down, you have a situation where people will put off purchasing things because the price is going to be lower next year. That’s why I always tell people, “That’s why we don’t want deflation.”
People are always talking about, “What is it? Inflation? All gone now.” I’m like, “Well, at least you don’t have deflation.”
PW: This time economic activity they say has been supported by more wealth and incomes than by credit. What’s been happening is the economic growth has been as a result of people having money.
Now, where did the money come from? That’s another question. And incomes. But incomes have been able to do that.
This is where you’re cooped up for a long time and you’re going, “I got to get out of the house.” And that’s what people started doing.
IW: Or, “I have to start timing the market.”
PW: Well, they started, yeah, that too. Or they started timing the market, but they got out and spent, they went out to dinner, they went out to concerts like crazy, and they didn’t mind spending huge sums of money on that kind of thing. And then all of a sudden now you have a lot of demand for a limited number of products, and all of a sudden prices go up.
And the article said, “Together with higher asset prices, solid job prospects, and government stimulus, this left more households feeling flush.” They felt okay. This was just Keynesian economics.
Keynes basically said, “If you can get governments to borrow money and spend,” and he was really talking about doing it during economic downturns. That’s what Keynes was all about. Do this during downturns.
When the economy stinks, that’s when the government does stimulus spending. That’s what his idea was.
Now, Hayek would say, “Now forget it. Don’t do that. In the long run, the economy will come back.”
And Keynes would quip, “In the long run, we’re all dead.” They would have this fight back and forth.
PW:
Higher rates have not only hit demand but they have also blunted supply because what people are doing is sitting there going, “I got a 2% mortgage, a 3% mortgage. You’re not getting me to move out of this house and giving up this mortgage.”
IW: That’s me.
PW: That’s you. It’s like, “No, I’m good, I’m good. I’m not going out and borrowing and buying another house at 7%. I am not going to do that.”
Literally what’s going on is builders are trying to build places, and then what they’re doing is they’re playing around with some of the math because people don’t want a 7% mortgage. I think some of them are giving lower interest rates, but they’re doing it by increasing the price of the property.
IW: Well, but it’s for everything. I had to drop my wife’s car off at Volkswagen the other day. Some lights started coming on and wouldn’t go off.
I’ve dropped it off. I’m waiting for the Uber to come pick me up to take me home. And the salesman comes out and he’s like, “Are you interested in buying your car?”
PW: There you go.
IW: I’m like, “Not really.” I’m like, “What are the rates?” He’s like, “7 to 10%.” I’m like, “You’re nuts.”
PW: Oh, really? They weren’t lowering it?
IW: Seven to 10%.
PW: Wow.
IW: They are offering some special finance deals.
PW: They’re not hopping up the price of the vehicle?
IW: No. Well, he said, “Well, there are some of the cars where …”
PW: What if you pay cash? I want to know, if you said, “I’m going to pay cash,” what would they tell you? Would the price drop?
IW: I don’t know. I didn’t say that. I didn’t pursue it.
PW: Because I’ve heard some people say that they’re not going to drop the price.
IW: I don’t owe anything on my car.
PW: Oh, come on.
IW: So I’m like, “Why should I bother?”
PW: But then, you could find out for the radio show.
IW: Oh, I’ll go back. I’ll go back and pretend.
PW: Come on, man. It’s called research.
IW: All right. I’ll do it at Ferrari. They just opened a Ferrari dealership down the road.
PW: Do the Ferrari dealership.
IW: I’ll see what they’re willing to do.
PW: Yeah, oh, wow. Nice.
IW: But he did say that there are some cars that have a 1.9% special for people who are highly qualified.
PW: Highly qualified. Highly qualified in what?
IW: Well, I guess they probably have a 700 plus …
PW: You’re a very qualified financial planner. Does that count?
IW: I guess like a 700 plus credit score and you have no debt.
PW: Yeah. Yeah. You got cash to cover it.
IW: Right.
PW: Those who need money can’t get it. Those who don’t need it can get it all day long.
IW: They can get it all day long.
PW: Right? Yeah. That’s the way it goes, doesn’t it?
IW: Yep.
PW: That’s life.
IW: That’s it.
PW: I mean that’s the way the bench works. Yeah. It’s the way life works sometimes.
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