Crypto News: Vibecessions don’t have to end in real recessions

All that vibecession talk in the past year raised concerns that an actual recession was just around the corner. But hard economic data hasn't supported what the 'soft' sentiment indicators have been heralding. Worrying about a recession doesn't mean one is inevitable.

Since the pandemic, consumers have been pretty pessimistic. And that's understandable. It's a pandemic after all. What's there to be happy about? Still, once people started getting the vaccines, which meant an end to lockdowns and huge infection waves, you would have thought consumer sentiment would pick up. And it did for a while. But then the supply chain issues and inflation crushed hopes and consumer sentiment drifted down to lows in June.

Inflation has come off the boil since then and consumer sentiment with it. But the levels are still pretty low. Here's my question: does a vibecession, that sense that all is going wrong, lead to an actual recession? I've been looking at the data and the conclusion I've come to is that vibecessions don't necessarily translate to real recessions. It's basically a difference between soft data and surveys on the one hand and hard data based on sales and spending on the other. In short, there's a wide gulf between what consumers (and businesses) say and do — and that may be the economy's saving grace.

So, despite persistently low consumer sentiment — and business sentiment -- readings, I think the US (and global economy) can escape the post-pandemic period with a softish landing if everything goes right. That will be good for both stocks and bonds and most risk assets — though we'll likely have to wait until next year to see it. I'll show you the data and explain my thinking below, with a little help from my London colleague Kristine Aquino to get a gut check from across the pond.

Here's the data I want to look at: The University of Michigan Consumer Sentiment Index.

We've had four distinct periods in consumer sentiment since the pandemic started. First there was the cliff dive as we went into lockdowns in the Spring of 2020. Then there was a choppy recovery for a year until inflation started to really bite in the Spring of 2021. Sentiment fell off a cliff and reached its nadir last June as inflation was everywhere. But since then, sentiment has recovered but is at levels still below where it was when we went into lockdowns.

None of this matches up with any economic data I looked at — not personal consumption, not GDP growth and not inflation. Even business sentiment in things like purchasing managers indices or the regional Fed indices has been consistently poorer than the hard data. And looking further back into the past, swings in sentiment readings are more pronounced than the change in hard data, with a huge dip in sentiment during the debt ceiling crisis to levels as low as during the Great Recession a few years earlier. When the summer of 2022 began, we were even lower.

So the first thing to take away from soft data, from sentiment, is that it doesn't necessarily translate precisely into spending or economic growth. It can but it doesn't have to. What it can tell us is the direction of travel, whether GDP growth is generally headed up or down. You can see that when you overlay the year-over-year rolling change in GDP.

That change in economic growth isn't as wild as sentiment and the sentiment can't predict a recession, but the two move mostly in the same direction.

The Fed isn't really thinking about stocks when it looks at financial conditions.
And the ECB is thinking about French and Spanish inflation.
As for market darlings, it's bifurcated. For example, Tesla has ripped higher while many SPACs have ended in bankruptcy and fire sales.
Shares are doing ok this year, but still bearish bets are piling up.
When inflation's high, the Fed's not going to move the inflation goal posts.
The balance is tipping ever so slightly from bosses toward workers.
Banks are showing huge profits from higher interest rates.
Quick update on the debt ceiling: options to avoid default aren't great. Fed Chair Jerome Powell is on the case.

Rather than pull up a bunch of economic data charts on things like pending home sales, let me use one chart to sort of encapsulate everything — the Citi Economic Surprise Index. Zero is the dividing line between an economy with more upside surprises and one with more downside surprises. The higher the index is, the more upside economic surprises we see relative to expectations.

What we see there is that for the first time since the fall, data are surprising to the upside. One way to look at the recession predictions, then, is as an extrapolation of the trends that bottomed in the early summer of 2022. With the Fed raising interest rates at a hefty ¾ of a percentage-point pace, extrapolating more downside made sense. But now that things have turned, does it make as much sense to extrapolate more upside?

I don't think it does — simply because the Fed's medicine is still working its way through the system. Let the central banks pause first and then we'll see. Some people are talking about a "no landing" scenario like that's a good thing. But think of the Fed (and, therefore, the economy and asset markets) as being like Goldilocks. They don't like things too hot or too cold, and a no landing outcome — as good as it sounds — would almost certainly be too hot.

A cold economy, or a hard landing, is where we get a deep recession like we had from late 2007 to early 2009. No one wants that — it's bad for employment and its bad for asset markets too. The Fed is actively trying to avoid that outcome. But "no landing" in 2023 is akin to a hard landing sometime later simply because inflation is too high to think we can just drift down. Plus the Fed won't relent in that situation with rate hikes when we are closing in on a 70-year low in unemployment. That's a case of the economy running too hot, overheating in a way that spills over into wild meme-stock speculation and inflation, which hurts those with the lowest incomes the most. The Fed has always said it would work against that scenario.

What Fed Chair Powell is trying to do is find a middle ground between the policies of the 1970s and the crushing interest-rate hikes of Paul Volcker. His hope has been what he calls a "softish" landing. That likely includes a mild recession during which unemployment rises. And that's because, by definition, a "softish" landing has to be different than no landing. The unfortunate aspect of that so-called softish landing is that unemployment never just ticks up a tad, it always shoots up in a recession. So we'd go from 3.4% to 5% in no time if that's the outcome they're striving for.

2.8%

- run-rate GDP growth for the current quarter as estimated by the Atlanta Fed via GDPNow

Let me bring my colleague Kristine Aquino in here because when I asked her about the vibecession, she said there was definitely one in the UK, where inflation is still running at a double-digit pace. Here's how she put it:

In the UK and Europe, the vibecession is maybe, just maybe, starting to ease up.
We started the year with a warning from the Bank of England that we're already in a recession, followed by a grim statistic from the International Monetary Fund that Britain's economic outlook is even worse than Russia's.
Then came the central bank's updated view that it sees a shorter and shallower contraction than it previously thought. There was also the slew of post-Christmas retail earnings that suggested consumers were not as hampered by the cost-of-living crisis as initially feared, which was affirmed by the January retail-sales data. That showed that both the volume and value of sales rose. That's partly due to discounting, but it's also a sign that Brits have been more resilient than expected in the face of higher costs.
There's been further optimism in the latest figures for GfK's consumer confidence measure, which rebounded by the most in two years. Yes, it's still negative, but the upswing is compelling and signals that we're headed in a less dour direction.
It's a similar picture in Europe, where a milder winter has led to lower energy prices and stronger-than-forecast output from businesses is emboldening European Central Bank policy makers to guide markets toward expecting more rate hikes. Traders are heeding the message.
Of course, the question remains: would things break if rates rise further? After all, in the UK, we've yet to see the full impact of a decreased energy subsidies beginning in April, as well as the wave of households that will see their mortgage rates double this year. The economy is only as strong as its weakest point, and we're not there just yet.

I think the UK is a good test case of how this works out simply because they have the highest inflation rates amongst the G-7 economies, that means nominal GDP growth is high and people are spending more but growth is low or the economy is contracting simply because inflation eats up so much of that growth. If they can avoid a deep recession, there's hope for us all.

One area that the vibecession has not touched is the stock market.

2022 was a tough year for stocks. But you can blame that on central banks and interest rates, not sentiment. Since the pandemic began, there's been very little correlation between stocks and sentiment indicators. That makes sense too because stocks follow discounted cash flows. If the cash flows increase or the discount rates decrease, making a future earnings stream more valuable, then we can expect stocks to increase.

So, ignore the vibecession for your investments and concentrate instead on discount rates and the potential for a (deep) recession. Of the three outcomes we're faced with — a too hot no-landing, a too cold hard landing, and a middle of the road soft(ish) landing, that third one is the closest to Goldilocks. It involves higher interest rates and unemployment. But after 2023, it means a sustainable base for a longer recovery with manageable inflation levels. And that's good for stocks and bonds as well as other risk assets.

As far as the recent data go, Bloomberg Economics think they've been better because of some payback for a bad December. And there may be some excess seasonality built into the data as Januarys are hard to smooth out with the rest of the year. So as the year continues, I expect to see the data soften and will be playing closest attention to jobless claims again. They may tick higher due to recent layoff announcements.

So while the Vibecession is just easing up right now, my money is still on the economic data starting to surprise to the downside. In the end, we might just get the softish landing Powell and Co. are looking for. It's not a gangbusters outcome for sure, but any overheating would be bad for inflation and lead to a stronger policy response and harder landing down the line anyway. The focus now should be on how well the economy handles this new higher-for-longer rate regime.

One last thing — This week, the MLIV Pulse survey is looking into active versus passive investing. Low-fee index funds have taken in a lot of money in recent years as their performance has matched or beaten actively-managed ones. But is the growth of passive index funds a 'bubble'? And how likely is it that an actively managed fund that outperformed in one year will outperform the next year? Share your views here.

"I know some are still trying to figure out how many hikes the Fed has left, but it's not many and AGAIN, higher rates for a longer time frame should be the focus."

Peter Boockvar

Chief Investment Officer of Bleakley Financial Group and author of the Boock Report

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