By some measures, the U.S. is enjoying robust economic growth. Even so, the U.S. Federal Reserve is widely expected to cut interest rates at its next meeting. Kim Parlee speaks with David Prince, founder of Harbinger Capital Markets Research about why traditional economic tools may not work in today’s economy.
- Welcome to the show. It is great to have you with us. My name is Kim Parlee. And we are about a week away from the next Fed meeting, where a rate cut is widely expected. Even as indicators highlight robust economic growth in the US, there are growing concerns the world's largest economy is very close to slipping into a recession, as well as perhaps some other economies around the world.
My next guest says low rates are, in fact, part of the problem and are fueling long-term economic problems, and it could be getting worse. David Prince is the founder of Harbinger Capital Markets Research. And he joins us now. David, it has been much too long. It is nice to have you here.
- [LAUGHS] And thank you for inviting me again.
KIM PARLEE: It's always a pleasure. I want to start with, I know you've brought us some charts we're going to take a look at. But I think the thing where I want to start is that markets are still near all-time highs. People are still very uneasy. And I think most people who invest in the markets are just quite confused-- because the markets are so high, where do you put your money? So I'm just going to start with, can you just kind of lay the groundwork as to how you see the world right now?
DAVID PRINCE: Yeah, I think that's important, because traditional methods of looking at valuations and a lot of stocks, and certainly the markets at large, have been distorted because the low rate picture is not where we should be if the economy in the United States is as great as what everybody thinks or tells you it is.
So there are big issues. And the big issue is simply the fact that if you keep suppressing rates artificially, you eventually push money into assets which are high risk.
And then you start to realize that that's the only place that you're going to get a return. And then suddenly you've got all your money, or a big chunk of your money in very high risk type of instruments. That is a great concern for me, because the unwind at some point has to be that you get to see a dislocation as rates eventually move to more normalized rates.
So here we are. The ECB has basically, for 10 years, been telling you all about how we're going to get this going at any cost. Well, if it's going to be any cost, he's certainly proving that it's a lot of cost. Because what's happened is, look at the amount of banks in Europe that have failed or are about to fail or need huge injections of money.
All of this is something that should have been washed out, much like the US took the hits-- as bad as they were, it meant that their overall banking system would return to health. So that's fine.
But we are now going on a path whereby who's calling the shots-- and this is why this upcoming Fed meeting is so questionable. You've got a lot of factors that have said, economy's great, earnings are coming in OK-- well, until today. But the big point I'm making is, it's not a tradition, or it's not in the way that you would look for a new round of rate cutting. That's a big change to me.
KIM PARLEE: Let me just-- you said rates were great until today. And just for people who aren't watching as closely as you are, what did you see today that made you go--
- Well, a lot of the earnings came out.
- And then what you saw was this incredible reaction in terms of the volatility for Facebook. You had a number of reports that came out very disappointing. But it wasn't so much the disappointment on this past quarter. It was the disappointment about the outlook.
And that really was lowered a great deal for a number of companies. That's going to really test people in terms of their belief there's going to be this big second half resurgence in the overall economy. It's now becoming a little more doubtful. But that said, what has now become the obvious is a rate cut, the bigger issue is, how big is the rate cut going to be?
And more and more people are advocating, well, let's get on with it and really hit the 50 basis points right away. Certainly, if you looked at two-year yields in the United States, it would say you've got at least 50 basis points. Potentially, you've got 75.
KIM PARLEE: It seems crazy, though. I mean, just to back up and say you're having people talk about 50 rate basis point cuts when you've got the markets at all time highs. I mean, that just--
DAVID PRINCE: Boy, are you ever right.
- So I mean, do you think that's probable there could actually be-- I know and the market's pricing some of this in, but could it happen?
- It's becoming more likely, because there's no doubt that the reaction to the market is such that there is this ongoing up move in the equity market because it's got all this money looking for a home. So that one's somewhat insulated from any big hit if they put a 50 basis. If it comes, it'll be short-lived is a better way to put it.
That being said, what you do see, though, are companies borrowing ridiculously amount to go and buy back their shares. That's going to be problematic with the floats. It's going to make it very difficult for a lot of companies to get new financing down the road.
So I think it's going to be a very tumultuous type of time. And I think that one of the big things to keep in mind is, this low-rate phenomena is not as good as what a lot of people are currently telling you.
KIM PARLEE: Let's pull up your first chart here. You've got a look here at Japanese and German 10-years and yields under pressure.
DAVID PRINCE: Yeah. No, I wanted to show people, because you can talk about negative rates. But I thought the picture would give you a better sense. So the blue line that you're seeing on that picture are 10-year German Bund yields.
And yes, you are seeing that zero line. This is not the first time that we've gone below. Back in 2016, we went well below to try to stimulate the economy. We saw that come through in terms of the German economy, but only briefly, because the last year and a half, the German economy, especially manufacturing, has been in a negative situation. And fears of recession are a lot more prevalent in Germany now than they are in the United States.
And so the Japanese thing, of course, is the 20-year bear market that everybody talks about. But they have repeatedly used this tool to think they're going to stimulate an economy which is driven by much different fundamentals than what-- a rate structure has lot to do with their demographics. And it has a lot more to do with the competition coming out of China. So they're in a different point.
So you lower the rates all you want, but you're not going to get your economy going through the roof. And that's something that has really been a problem, is that we're dealing with old-style type of economics. If I really lower rates, I'll stimulate inflation. Whoops. That's not happening.
KIM PARLEE: Yeah.
- And it's called productivity. And people are way underestimating what's happened.
KIM PARLEE: Yeah. Is there anything where do you think the penny is going to drop in terms of where central banks realize that's not-- it is productivity. It Is technology. We know these tools don't work.
- Boy, that's a great question. I'll tell you the one thing that keeps me up at night. And that's a really good one. I'm fearful because the governments, especially left-wing governments, are really prone to go and spend like mad and don't worry about budget deficits. No, they do not take care of themselves.
But what is really important about that is if you continue to borrow at these accelerated rates, you end up with a situation much like what happened in Venezuela, where there are developed shortages. And suddenly, then you've got real price inflation, but you have chaos.
And that's what really is bothering me about this allowance that, OK, let's just let them spend. One of the things that gets tossed around now is this modern monetary theory. And that's only because to me, it's an excuse to keep on spending like mad because eventually, we have never seen an economic cycle like this.
KIM PARLEE: What's happening with commodity prices?
- So that leads in to the next part of this whole deflationary type of environment. And one is obviously the fact that the US dollar being strong has pushed down commodity prices in US dollar terms. Also what people are forgetting about is the dramatic increase in the overall supply of these commodities. So we've had that. And the demand picture has started to wane and wane severely in non-US economies.
So one of the things that I like to look at is the CRB Raw Industrial Price Index. And it's the spot prices. But it's a really good indicator of just overall levels that are input prices for PPI. And as you can see in that chart, you'll see that this thing started to peak out here. And we've been coming down.
But to me, if we just take a look at here versus here, we're about the same. So that's an incredible period of time where we've had price stability. And that really has been the remarkable side of this overall economic expansion.
The one underneath, though, is the one that people get pointed to all the time. And, of course, it is the oil price. And that's just WTI.
But I do think that there's a couple of things here that need to be talked about. One is the fact that we have had a dramatic and much more dramatic increase in the supply of oil than what people anticipated not that many years ago. And where it has really come has been over the last five years because of shale and other production methods that have brought us more oil. OK.
That's an incredible difference to where the Americans have to get their oil. And yes, their economy is expanding. Their increase has gone up, but not as much as the supply. So we've got to stabilize that there.
And in fact, as I pointed out a couple of times on different shows, you go from the 10 million a day, which it was only four years ago, to the 13 now. That's an amazing pickup because OPEC's talking about restrictions, which they came again to confirm this week, of 1 million and 1 and 1/2 million.
So you can understand why the Trump administration says that they've got control of the oil price. And they do in a lot of the aspects, except, of course, for the latest spout where we get the geopolitical disruption called Iran.
KIM PARLEE: Yeah.
- So if you're looking for what possibly could make this price go zooming higher, it would be something that would happen where there's a big supply shortage out of the Middle East. Possible? Yes. Is it immediate? I'm not going to bet more than 50% on it.
But looking at overall pricing of the oil-- and this is why it's so frustrating for us and Canada-- we are dealing with a situation whereby we'd love to get those prices. We'd love to ship more oil. But we've capped out. And it's one of the big problems that if you have an environment where there's so much uncertainty, no one is going to invest.
KIM PARLEE: Yeah.
DAVID PRINCE: So the Americans have built a couple of new pipelines. Isn't that amazing?
KIM PARLEE: Yeah.
DAVID PRINCE: Everything is going quite well for them. They're going to bring in a lot of production over the next couple of years while we sit. That's pretty pathetic.
KIM PARLEE: Yeah. I've heard a lot about Canadian discounts.
- It's ridiculous.
KIM PARLEE: Yeah, people seem to... Yeah.
- I don't think it makes the people here in the East upset. But they will if their transfer payments ever get cut. But that said, what we do see in the overall commodity price is a fairly stable environment, at least when you look at what's going on historically.
KIM PARLEE: I've only got about a minute left.
- Yeah, sure.
- And I want to make sure we get to this last chart here. You've got to look here, title-- "Cash Flocks to Large Caps." Why is this one on your radar right now?
DAVID PRINCE: Well, the most important, until today, observation that people were making in the market was this was solely on a few names, primarily in the NASDAQ, primarily technology. So, yes, the NASDAQ and the technology type of stocks have been the great leaders of this whole recovery. Small caps, which are true American, have not been participating. But they are dominated by a bunch of regional financial banks.
What's happening is that there's people looking at the overall profitability and the change in business, and realizing there's some good value in those financials. And that's what's picked up here today.
KIM PARLEE: I'm just going to say, we're going to bring up the chart so people can see it. I'm just going to get you to clear the telestrator too so they can
DAVID PRINCE: Oh, sorry.
- --so they can bring up a nice, clean chart. But here it is. So there's a look at it.
DAVID PRINCE: Yeah. And you can see, obviously, we've a record high today. But this ticked up just a bit today. And you'll see it tomorrow when you look.
The main thing, though, has nothing to do with what's going on in terms of that picture. The bigger picture today, of course, is the ongoing earnings. And this is where people are starting to look at what's happening in that second half. As I said, more and more of them are speaking about a much weaker forward-looking expectation for business than we anticipated even a month ago.
The number that really caught my eye was the conference board, which turned negative. And that really is a big surprise at the time of a record. We've never seen that.
KIM PARLEE: And why is that, do you think?
- Because a lot of people are very concerned. There's not the wealth distribution that people think in the United States.
KIM PARLEE: Yeah. You have to make sure that people that are going to be spending have the money to spend, to all buy all those goods.
- It's funny how that works, yeah.
- Yeah. There's a bit more concentration. Yeah.
- Right. But that said, here's what we've got now. We've got a market that's really overheated, very susceptible to pullbacks. Earnings disappoint. We saw it with the Tesla today. That really knocked it back down. It's also going to mean it's going to be difficult for them to get more funding to keep this ship afloat.
KIM PARLEE: David, always a pleasure. Thank you so much.
- You're welcome.