Moody's Talks - Inside Economics - Energy, Expectations, and Estonia

Episode Date: July 1, 2022

Colleague, Gaurav Ganguly, Senior Director at Moody's Analytics, joins the podcast to examine the economic state of Europe and if they are headed into a recession. The gang also discusses the latest GDP release, recession odds, and beer of choice. Full episode transcriptFollow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandi, the chief economist of Moody's Analytics, and I'm joined by three of my colleagues today. We've got, of course, my co-host, Ryan Sweet, Ryan's Director of Real Time Economics, and Chris, Chris Redis, who is the Deputy Chief Economist. And we've also got Garav. Garav Ganguly. I believe Garab is your second appearance on Inside Economics. Is that, do I have that right? Something like that. Yeah, Garav is hailing from, where are you hailing from today, Garab? London. London, yeah, because we're going to talk about Europe, thinking being that, you know, recession's on the mind. A lot of concern about that here in the U.S., but if the U.S. is headed towards recession, it feels like Europe will get there faster.

So we want to get Garav's take on that, what's going on in Europe and, you know, whether sending out any early warning signals for U.S. recession. But before we get to all of that, well, first I should say, because it's increasingly tradition, I got to say something about each of the guests. Chris, where are you? You are still on vacation, aren't you? I am.

I'm in Italy. You're still in Italy? Okay. Yeah, but I've moved a little bit. I'm in central Italy now. Oh, really? Which do you like better? Northern or Central Italy?

little. Well, it's pretty hot right now. There's a heat wave going on. So the north was a little nicer this time around. But both are, everyone's everywhere in Italy is beautiful. Yeah, it's a great country. I really love Italy. That's why Europe won't go into a recession in the next week because Chris is there spending all his Bitcoin money. You know, all his excess savings. Yeah. Access Bitcoin? I don't know. Actually, I have a great story about Italy. took my brother and we, our daughters, so the five of us. And we went into this, we were looking for, we're driving to, I'm not sure where. And we needed, we wanted a restaurant.

We figured, well, the restaurant, all the good restaurants are at the top of a hill. So we start driving up this road that's going straight up to the top of the hill. And then it turns into like a sidewalk, but we keep going. I was a mistake. I could still see the face of all these Italians looking at it. They're like, what the hell are you doing? Where are you going? So I had to stop and come back down in the mountain.

So we found a restaurant someplace. But yeah, good memory. Anyway, so it's warm in Italy. It's also warm in Pennsylvania, right, Ryan? But you're in your sweatshirt. What's that all about? It's still early in the morning. Later today, when I take the kids to the pool,

I'll put a t-shirt on, but you're still, you haven't had your coffee and everything. I don't drink coffee. I'm like you and Chris. Oh my God. That's the problem. I can't do it. Yeah.

Okay. And of course, Garab, the thing about Garab is, you know, he looks younger every time I see him. I don't know if the hell that's all about. It's just because I have these pins and I keep stretching the skin and

pinning them to the back of my head. Yeah, you're doing really well. Definitely, we're not working you hard enough. That's just not doing a job where, down. Yeah, but I've got to plug me a bit harder.

All right. And okay, well, we've got a great gang here. So this is July 4th weekend. So I don't know that this will be a long podcast, but it'll be a good one. So before we dive into things, maybe we'll have Ryan give us a sense of the GDP numbers. I mean, usually we don't talk. This is a third, so-called third print. So we're still focused on Q1.

in 2022, and this would be the third release of the GDP number. And they've got this gotten revised. And the revisions this time are pretty large with some pretty significant implications. Is that right, Ryan? Do I have that right? Well, I mean, the revision was small overall for total GDP. So it was revised lower from minus 1.5 percent, an analized decline to minus 1.6. But that kind of masks a lot of revisions within the components.

They were just offsetting, but there were some enormous revisions to consumer spending, and it kind of alters the trajectory of spending. We're now basically moving sideways, whereas before we were trending higher, and that kind of bodes ill for the near-term outlook. Also, inventories were revised up a lot, roughly $40 billion at an annualized rate. So the inventory bill in the first quarter is now close to $189 billion at an annualized rate. That's an enormous inventory build. And that makes Q2 even more difficult because the way they account for Inventories in GDP, it's the change in the change in inventories that matter. So we have to get at least 188 billion increase in inventories in the second quarter

for inventories just to be neutral for third or second quarter GDP growth. And that's not going to happen. So inventories are going to be a big weight on GDP again. Yeah, I was surprised by the size of that revision to consumption. So basically what they figure, the BEA, Bureau of Economic Analysis, folks that put the data together, figured out was that we, people actually consumed less and more of that ended up in inventory. That's effectively what happened here. Correct. Although the biggest provisions were, was it revision suspending, consumer spending across all kinds of

all categories? Was that mostly services? Or was it more broadly than that? I think it was more broadly than that. More broadly. That would be overall spending. Yeah, overall spending added 1.2 percentage points to first quarter GDP and that's down from 2.1 percentage point contribution in the government's second estimate. So that's a massive revision to spending. Yeah. So if nothing else changes, given this now much larger inventory gain in Q1, which means in all likelihood inventories are going to be a pretty sizable drag in Q2, the current quarter, or the just ended current quarter, right? This is July 1st. What does that mean for GDP growth in the second quarter?

So our tracking estimates, we have this high frequency GDP model that takes all the source data that's released throughout the quarter. And every day we run it and it tells you what current quarter GDP is tracking based on all the information that we have. Now, we don't have all the data for June yet, but after the GDP number came out, we were at close to 1% at an annualized rate. That got knocked down to half a percentage point. And then the monthly personal income and spending data came out. And that put us negative. So we're now on track to decline minus 0.2% at an annual. Oh, okay, right.

The other folks that do a good job of this, creating these tracking estimates, is the Atlanta Federal Reserve, a similar kind of approach. What is their estimate? Minus one percent. Oh, goodness. So odds are, feel like they're pretty high. We're going to get a negative Q2 on GDP on top of the negative Q1 that we got. Correct.

Atlanta Fed model does a really good job. It just sometimes overstates some of the moves because they use more services or survey-based data that isn't exactly an input into the source data. Ours is really like a bean counting approach, but typically our models go in the same direction. So this is not a good sign. So in Europe, correct me if I'm wrong, Rob, but in Europe, if you had two consecutive quarters of negative GDP growth, that's a good sign. That would be called a recession, would it not?

That would be called a technical recession, yes. That's the sort of statistic that newspapers focus on. And it looks like you guys might get ahead of us because we had about, in the Eurozone, we had about 0.3 percentage points growth in Q1. And Q2 doesn't look too great, to be honest. You know, Eurozone industrial production, retail sales, month on month declined in April, So latest confidence, business confidence is pretty weak. BMI's fallen below 50.

New orders don't look too great so the pipeline doesn't look too good. Consumer confidence has been absolutely shocking. So Q2, we'd be lucky to post a positive number in the Eurozone at least. UK might even post a negative number, by the way. So clearly on the edge there in the UK, UK posted a positive number in Q1. But Eurozone might just scrape by, despite everything that's going on, which feels a bit odd. Chris, spending all this money in Italy means that Q, you know, that's going to keep us above

water in Q2. But actually, all the other tourists who go on holiday in Europe in Q3 should keep Europe well above water in Q3. And then we get into some fairly uncertain. And I, you know, from where I'm sitting, it looks fairly dark times in Q4 and Q5. Q4 of this year and Q1 of next year. Q5, that would be kind of cool. Q5, that'd be good.

That might, that might, I don't know. Bring that on. None. We need a bonus. We need a bonus quarter. Not working to adjust as a basis. GDP would be a big time. You know, I've heard this term many times, technical recession, particularly in Europe.

What does that mean exactly technical? Oh, that's interesting. I thought you guys had that over in the U.S. as well, because I was quite surprised by this. This came out, I don't know, maybe a decade ago or so, I started noticing that newspapers, like, you know, financial times, whatever, the big broadsheets that were carrying this term. So two quarters of Q-1-Q negative prints of GDP growth would be something that call a technical recession. I don't know. Maybe that just makes it easier for the readership to grasp rather than the classical economics, you know, the Burns and Mitchell style, business cycle definition of a recession, which is so broad-based and something you can only really fix on quite long after the event.

From the U.S., there's the dating committee, right? the NBER, National Bureau back in the Mark Research, dating, right? That's what goes back to Burns and Mitchell, right? That's what goes back to Bill and Mitchell in 1947 and all that. And yeah, the UK has to say. There is no. No, there's formal, formal dating committees

and they will expose data recession. And those are, of course, very similar in style and contents to the NBER dating system. It's just that in the popular press, you get to see this concept. But you hear a lot about this concept of a technical recession. Yeah, I mean, it feels like we're going to be debating here now whether we're in recession and been in recession since the beginning of the year. Yeah.

We'll be debating it, but the press is just going to be all over this. They're already writing about a technical recession. So this is how we're going to talk ourselves. Do they use that word technical recession? People are saying that. Yeah, this morning. I heard a textbook. I heard a textbook recession.

Yeah, textbook. Oh, is that what they're saying? Textbook recession? This morning they used technical. Who's they? Like Wall Street Journal? They? Blumberd.

Oh, okay. Interesting. Yeah, but I mean... Technical recessions typically what they see in Europe to capture this concept. They call it a technical recession, right? Yeah. But as we've been discussing, that we don't think that, that's the the National Bureau of Economic Research, the Business Cycle Dating Committee of the recent NBR,

which is, I think we've all kind of sort of agreed as the official arbiter of our business cycle here in the U.S. We don't think they're going to date this period as the U.S. being in recession. How could they when you're creating 400,000 jobs a month? Right. I mean, the only weakness is really in GDP, and that's subject to enormous revisions. Right. Yeah. And it feels like this could be really revised a lot when you get the annual benchmark revisions, right?

I guess the other thing to consider here, this is the third print on Q1, but there's also these annual more comprehensive benchmark revisions. And then they've got like a even bigger set of revisions, the BEA to these studies, I think every three years, don't they? I believe that's the case. And so given what's going on with this data and given a lot of it around inventory, feels and trade, which is hard to. to measure it real, certainly in real time. It feels like there could be massive revisions here to this data. It feels like it. Yeah.

Yeah, I agree. Right. The other implication, actually, that of all this is, if GDP is declining and recreating a lot of jobs, by definition, productivity growth is getting hammered here, right? Yeah. So, okay. All right. Well, before we go on, let's play the game.

Let's play the statistics game. And I will admit, I'm ill prepared for this week, but I know you guys are on top of it. But the game. Are you on vacation? No, no, I'm not, you know, I've been working. Oh, I think we just lost Chris. I've been working, but this got away from me somehow to prepare for the statistics game. But I do have one.

I just thought a good one. actually. All right. And I'm sure Chris will come back. But just to remind everyone, and this is for folks that don't follow regularly, I apologize. I know this sounds, it's increasingly redundant, but the game is we each provide a statistic. The rest of us try to figure that out through questions and clues and deductive reasoning. The best statistic is one where it's not so easy that we get it so that we all get it quickly, not too hard so we never get it. And is a statistic that is related to what's going on recently would be, or a topic at hand would be a bonus. So with that, let me turn to you. Chris, are you on the line? Do we get you back?

I am. Can you hear me? Yeah, you sound great. Why don't you go first, just in case we lose you again. Okay. Three numbers, all related. 8.6%, 22%, and 6.5%. and is it based on is it coming from an economic release that came out this week this past week? Yes. Is it inflation related? It is.

So one of them is the S&P, or the K Schiller, House Price Index. Nope. No. No. No. Some sounds suspiciously like June Eurozone

annual inflation rate. You got it. You know the other one two are? That's Just 8.6. That's me done. 8.6. Yeah, that's Eurozone.

That was also easy because Chris is in Italy. Oh, right. He's adding to the inflationary pressures. But what is 8.6? What is that? That's the June print on Eurozone inflation year and year. Oh, year on year. Comparable with a consumer price inflation.

That's right. So it was 8.1% in May and it's just gone up to 8.6%. Which, by the way, is exactly equal to the U.S. CPI inflation for the month of the bank, which is interesting. Okay. Yeah. What's the second number, Chris? 22%. 22%.

It's related. They're all related. Is that what energy prices are right? No, that would be even more. So is it a component of the CPI that's up 22% in Europe? No. Not really. See how he delayed that?

I mean, yeah, is that 22% getting close? It's not a direct component. It's not another country? It is very good. Oh. What are the Botics? Yes, which one? Lithuania.

I've got one third chance of getting this rate. I like Lithuania. I'm going with Lithuania. Estonia. Estonia. Okay. Yeah. 22% over a year.

Inflation's up that much in Estonia? So across all three Baltics, actually, inflation is really high right now. Why? Energy. That's right. Yeah, so they're very exposed to Russia. They import a lot of energy from Russia. They export a lot of goods to Russia. They've had a massive supply site shock as a result of all the sanctions.

Wow. That makes sense. And conversely, there's another country that's at 6.5%. That's France. Just to show you the range. That's France. Very good. Wow.

That is very good. has gone up from 5.4% to 6.5%. And by the way, I'm not showing off anything, but that's because they've got all these tariff. They've got all these exemptions. They've got like an 18 cent subsidy on fuel, on petrol, and they've got caps on electricity prices. And they produce a lot of their own nuclear power.

Yeah, well, that helps them because there's, of course, an internal electricity market in Europe. So everybody gets the same marginal cost at the wholesale level at the retail level because France produces so much nuclear, the French government can get away with putting a cap on electricity prices. Oh, interesting. Okay. Okay, so that was a really good one, Chris. Yeah, very good. And it does highlight a point, a broader point, that inflation is high everywhere across the planet. It's not just the US. It's everywhere. We're seeing that. And that goes to the debate around what's causing the inflation, whether it is the high inflation, whether it's demand side or supply side. You know, is it something

broad? If it's demand side, then you see much bigger differences in inflation across the world. But since we're saying similar inflation rates across the world, that suggests it's supply side. And there's two obvious supply side shocks, the pandemic and obviously the Russian war in your crane. Exactly. You came to the same conclusion, right? Rob, do you do, is that consistent with your thinking, too? That's largely supply side.

Yeah, that's exactly what we see. A partially supply side. And then it's going to be interesting how this plays out, I think, how much disinflationary pressure we see going forward because of these high prices that are really eating into consumer disposable income. So in the UK, for instance, there's an unprecedented squeeze in consumer. and consumer disposable income. And that's coming through now.

We can see retail spending going down. And with the Bank of England raising rates, that's another squeeze on households. So it's going to be interesting to see how that plays out. Well, yeah, and this goes back to the recession, potential for recession. The proximate reason for recession is the inflation. And that works in two. There are many different ways that hurts the economy and raises recession. recession risk. First is what you just mentioned, this kind of negative income shock, right? So

people's real incomes have declined. They have less purchasing power. They pull back on their spending, and that raises the odds of recession. Second is central banks, Fed, B-O-E, Bank of England, ECB, European Central Bank, are trying to slow the economy's growth rate to keep inflation expectations down. So they're raising interest rates. And that's the other way, the key way that this results in higher recession odds. But going back to the real income shock, the thing that confuses me a little bit there is that households here in the U.S. and in the U.K. and in continental Europe have a fair amount of excess saving, right? That they built up during the pandemic because of sheltering in place in government support, and that should help cushion the

blow. But it feels like, or maybe I'm just reading too much into the recent data, feels like it's It's not as big a cushion as one would have thought. Is that your sense of things, Grav? I get the sense that there is some cushion. I get the sense that things could be worse than they are right now because actually consumers are holding up pretty well. I also think that we might see some of that cushion being released in the third quarter of the year when Europeans go on holiday.

So they're paying quite a lot for the holiday tickets right now if they get to go anywhere at all, by the way. So watch out whether, you know, I'm not sure when Chris plans to come back. get back from Europe to the US, but lights up next week. You better get better internet connectivity if he's going to stay over there for I want.

Yeah, I got to fix this. Europeans are looking to go out and spend in summer. So I think some of that cash cushion is going to be used for the summer holiday plan. So yeah, I think there is some and I think it is helping. I think things could be worse. So what I'm worried about is when we get into

the end of this year, an early part of next year, will that cushion still be there? Yeah. I mean, if prices stay high, inflation doesn't recede, then at some point, certainly low-income households blow through the excess saving. Right. Then they have no choice but to pull back, and that feels like the odds of recession rise. In some countries like the UK, actually low-income households didn't get much of a chance

to amass extra savings in any case. Right. Right. Interesting. Oh, you said one thing that I found, maybe I heard it, I just want to make sure I heard it right. You're saying that people bought their tickets in Q2, but the real spending is, and that's kind of taken away from their ability to spend in Q2, and then they're going to travel in Q3, and that's going to show up in the spending. Is that kind of what you were saying? So, a bit of both.

I think people have been spending, the spending on holidays. So what they bought in Q2, the tickets that they bought in Q2, that's in Q2 spending, obviously. They're going to go out and spend more in Q3, of course. They're going to go to places and wine and diet and all that sort of stuff. I see. So you're saying the travel shut up in Q2 spending, kept it going a bit, and there's still more common in Q3 because now they're going to go on the trip. Right. Yeah, got it.

All right. Yeah, it makes sense. All right. Let's go on to the next person in the statistics game. Garab, you want to go next? Yeah, I've got a weird number. I'm handing out a price to anyone who gets it, which is totally against the spirit of, oh, I don't know, we'll see.

That's the cowbell. Yeah, exactly. A Swiss cowbell. We want to sweet. A Swiss cowbell. Yeah, Chris is telling me that there's differences in cowbells. So we go for the Swiss cowbell. But it's a number I'm following quite closely right now.

So it's 57. A number you're following very closely and it's 57. And it's 57 and it's a European number. Okay, is it like a confidence measure? I thought it was Heinz ketchup related. Yeah, Heinz ketchup. I don't like ketchup. I'm not following it.

You don't like ketchup? Who doesn't like ketchup? What do you have? So this is a European thing. I like mayonnaise. Oh, yeah. Don't tell me you put mayonnaise on your French fries. I put mayonnaise on my French fries, yes.

Oh, God. That's really. I don't know. We're talking fourth of July, though. That's weird. Little contract. Seven. Is that, is that a confidence measure?

57, a consumer confidence measure? No, it's, it's not a confidence measure. It's a commodity measure. Oh, a commodity. Oh, is that natural gas prices? And it's close. It's related to natural gas. Oh, it's related to,

natural gas. What's related to natural gas? Inventories and natural gas? It's something to do with natural gas. Yeah, so inventories? Inventories, exactly. So, cowbell, 57%?

Oh, 57%. I should have said that. I should have said 57%. Sorry, okay. Two cowbells to Ryan's speed, one each for each of you. So that's 57%. That's very diplomatic.

That's, that's, that's the amount of gas in storage. amount of capacity that's been filled to date in Europe. And Europe has the ability to store about a quarter of its annual gas consumption. And it does that to even out seasonal peaks. And it's roughly at 57% of capacity right now. That's more than usual, right? That's ahead of schedule. It's unfortunately not, actually.

If you look back to, so sort of what happens over the course. Of course of the year. Last year was a bad year. Last year was a bad year. That's right. It's ahead of last year. But if you look back last 10 years, this isn't particularly special. So the European Union actually wants to achieve a target of 90% of gas and storage. Fill up storage to about 90% by the 1st of November, which is the seasonal peak in storage after that. The net withdrawals from the gas system, from the storage system. 90% of capacity is something Europe has achieved in the past. I don't know if it'll actually managed to achieve that this year. It's an ambitious target. Last year, it certainly didn't, as Chris was saying. What's been happening recently is that Russian gas flows have slowed down considerably coming into Europe. It slowed down anyway in 2021, but actually one of the big pipelines that comes into Germany,

Nord Stream 1, capacity in that pipeline flow in that pipeline is about 40% of capacity right now. So Europe, if it wants to get through next winter, really wants to get about 90% of gas. in storage as a buffer, that should help a lot. But it doesn't look like it will achieve that right now. And of course, the gas is being impaired by, intentionally by Russia, correct? I mean, they're sending a signal. They're sending a signal. They're doing what we've been worried about for a long time, which is essentially weaponizing gas.

It knows that Europe is vulnerable in this front. Right. And what is the price of, do you have a sense of the price of natural gas, where it was pre-Russian invasion and where it is today? So right now, right now in Europe, it's about 145 euros per megawatt hour. And about a year ago, it was closer to 25. So it's been a massive, massive increase in gas prices. Right. And of course, natural gas is very key to home heating throughout Europe.

been a lot of industrial activity, particularly in Germany, which is very dependent on Russian gas. Exactly. So Europe consumes about 400 billion cubic meters of gase. 40% of that is for households for heating purposes and heating, cooking, et cetera. And then another 25% goes to industry. But a lot of that is actually for heating. And about 15% goes to actual industrial processes, in chemicals or cement, steel, etc. The problem is that even where gas is used for process heating in industry, you can't really shut down the gas or ask people to consume less. So things like precision engineering.

Actually, rooms needed to be heated to a specific temperature for instruments to work, cutting instruments to be at the optimal. So you can't really have one or two degrees less. Right, right. I mean, it is what it is. Yeah, exactly. Yeah, interesting. So we're at 57% of storage capacity.

The Europeans want to be at 90. And so you're watching that very carefully as a gauge to how vulnerable Europe is when we go into the winter months. To Russian. Yeah. Okay. Okay. Are you hearing talk of rationing? Yeah, there's a lot of talking about.

Yeah. There's a lot of talk about. rationing. Some of this is just, I guess, ready. Well, a lot of this is actually readiness, I think. So various countries, all countries have national gas emergency plans given sensitivity to natural gas. And Germany's just got a three-point emergency plan. It triggered the first part of it in March just after the invasion. It's now triggered the second phase of its national gas emergency plan. All of this doesn't mean that much yet. I mean, there are things that German industry can do under the phase two of its emergency plan, but nobody's doing any of that yet. Phase two basically is a state of heightened

alertness when gas prices are incredibly high and there's potential for disruption, but actually markets still manage to clear and supply manages to meet demand. If you get into phase three, that's when gas rationing could occur. And thinking about it, it's not clear to me that gas rationing has to be something that immediately follows curtailment of gas supply, because in a way we've been facing disruption for a year, and markets have been coping, Europe's been coping, then that's where storage comes in. So if there's a fair bit of storage and Russian supply ceases completely,

Europe can draw down on its storage rather than seek to ration gas to industry. And that's probably the way it goes. If it happens at the start of winter, 90% gas in storage, there's a bit of a buffer there. Europe doesn't use up all 90% of its gas just for heating homes in winter. You can easily emerge with 30, 40% of gas still in storage at the end of a winter. So there's some buffer there to provide to industry. If it happens now, Europe faces a choice. Is it going to ration gas to industry or is it going to slip on its storage targets?

So again, it doesn't have to happen immediately. Well, it's also driving up natural gas prices here, right, because of LNG, liquefied natural gas. So because of the high price in Europe, there's an arbitrage. opportunity. So U.S. producers of natural gas want to ship it to Europe, get to higher price. And I think the U.S. has now become the largest exporter of LNG of liquefied natural gas in the world as a result. But it has pushed up prices here. So nothing compared to Europe, but we're paying, last I looked, $6.50 for, what is it, Ryan? Is it a million BTU? I think it's

million BTU. Yeah. And that's more than double what it was a year ago. So that hasn't really had a big impact here, but if we stay at these prices going into the winter months, that could be more of a deal, just because it costs hassles a lot more. And Europe needs that LNG, it really needs that LNG from the US right now. So if I look at what's happening, last year, Europe imported about 150 billion cubic meters of gas from Russia. It wants to get down to about a third of that by the end of this year. So it doesn't want to import more than, I don't know, 45 billion cubic meters. It might just do that even with these reduced flows from Russia. So I just estimated that even with these reduced flows from Russia now, Russia could end up sending about 50 billion cubic meters of gas to the rest of Europe over the course of the rest of this year. So that would balance it out. Europe would have what it needs. But the rest, it's all really coming from LNG. Europe needs about 170 billion cubic meters of LNGU over 2022 to balance it all out and meet its annual consumption. I guess some also increasing amount will come from the Middle East, right?

Or U.S. and Middle East? Some from the Middle East, yes. But I mean, the big potential for the Middle East, well, that's a medium-term play. I see. Getting Katari gas on stream and sending that over to Europe. That'll take some time. Right. Okay.

All right. Let's move on. Ryan, you're up. What's your statistic of the week? 2.04%. 2.04%. 2.04. Is it an inflation number? Yes. It's related to inflation.

Related to inflation. Is it a commodity price? It is not. Okay. Related to inflation. Is it a survey-based measure? It is not. It is not. Is a market-based measure? It is. And I'll give you context. 2.04.

Okay. It peaked recently in April close to 2.6%. It, okay, 2.6% now 2.04. Is it inflation expectations measure? Mm-hmm. Oh, is it like a, it's not one year, five, is it five year, five-year forwards? Yeah, correct. Good job. Ah, right. There you go.

Rob, you see how that's done? You see that? Yeah, I just slowly will, wittled him down. Yeah. There's another cowbell there for you, Mark. I want a Swiss cowbell, though. Yeah, absolutely. You got it. Switzerland, I like it from, please. Chris is going to bring them all back.

We're on a work on it. Okay. You want to explain? Is this the ice measure, the five-year, five-year-forward, or do you know where you're getting this from? Or what is this? We calculate it. We calculate it.

Yeah, the Fed paper, but it's also consistent to what you see, you know, on the blowing or terminal or any other way of calculating five-year, five-year-fourths. And do you want to just explain what that is? Yes, so five-year- or five-year-forwards are what the bond market expects inflation five years from now, five years after that to be. So it's a good measure of long-term inflation expectations. And it's based on the consumer price index. So in fact, it's probably running a little bit below where the Fed would want it to be right

now if you adjust it for the personal consumption expenditure. So Fed's put a lot of emphasis on inflation expectations, and that's one reason why the Fed went 75 basis points in June instead of 50 is a survey-based measure of inflation expectations to jump. But I think you and I, Mark and I put a lot more emphasis on the bond market because those are people putting their money where their mouth is. And basically the market saying we're not worried about inflation. If you look at inflation swaps, same story. You know, they expect inflation to come down, you know, in the medium term. So yeah, I think this reduces the odds. We get another supersized rate hike in July if inflation expectations remain, you know,

at the low end of where the federal want them to be. Yeah, there's so much to unpack there. The measure I find most useful, I'm curious what you think, is the one year, five-year forward from ICE, ICE constructs these inflation expectation measures. measures based on break-evens and swaps. So, bar market measures, and they combine those two into this one measure, and I think one year, five-year-for. So that's inflation a year from now in the subsequent five-year period. And that feels like what the central banks or the Fed has most control over what they should be most focused on.

I think I looked this morning, I did look this morning. it was 2.2%, which is low, right? I mean, yes, to your point. Feels like inflation expectations are exactly where the Fed wants them. By the way, in conducting monetary policy, I'm just going to lay out a little framework. I'm curious how what you guys think of it, is the Federal Reserve and other central banks

are trying to raise rates high enough, fast enough, to slow growth so that economies don't flow past full employment and exacerbate the inflation pressures and more importantly keep inflation expectations anchored to their target, which is 2% or 2.5% depending on the measure. And the fact that the one year, five year forward or the five year forward or the five year forwards are right where they want to be, they feel like they're accomplishing that. And then the other thing they want to do is not raise rates so high, so fast, it pushes the economy into recession. And the indicator that I think is best at measuring, that also bond market related or measured,

is the yield. So the 10-year treasury yield vis-a-vis the two-year treasury yield. And that's that difference, that spread typically is, you know, could be 100 basis points, a percentage point. Now, yesterday, I think it was three basis points, 0.003%, you know, percent. It's razor thin. But that feels like that's almost perfect, right? Because it hasn't inverted, meaning short-range rising above long-race because that historically signaled recession.

But it's so flat, it suggests the economy is just going to really slow down here, not going recession, but it's really slow down. And that's exactly what they want, right? It achieves their first goal is to slow growth in the economy to the point that we don't blow past full employment. So it feels like these bond market measures, they, in a problem. If I were sitting there trying to calibrate policy, those are the two measures I'd be looking at. And right now, they're saying success. I mean, obviously, a lot of script to be written here, but so far, so good. What do you think of that frame?

Did that make sense to you what I just said? No, I think, yeah, I agree with you. I mean, the bottom market's saying that they're going to pull it off. They said they're going to pull this off. Right? So, exactly. Maybe the Fed is looking at those two measures, trying to calibrate around those two measures. They were putting a lot of emphasis on inflation expectations.

And I think they've come down. I mean, they came down a lot this week and commodity prices have sold off. So wheat prices are down. Oil prices are down. Your favorite copper has dropped noticeably. So there's a lot of moving parts in the commodity market. All right. Chris, what do you think of that frame for thinking about things?

I mean, in terms of the conduct of policy appropriately in the current context. Yeah, reasonable framework. But, you know, it's like you said, we're at three basis points on the yield curve. We're right at a razor's edge here. It could easily tip it to, it could go negative today, right? So I think they're useful metrics, but a lot more script to be written as you suggested. Yeah, right. But if you were writing a script, you'd say, please, Mr. Bond Market, give me three basis points on the 10-year, two-year-year spread.

That's what I'd say, give it to me. And give me 2.2% on the one-year-five. year forward. I mean, that's what I would write on a, if someone came to me and said, what would I want, you know, today, given what we need to achieve here, I'd write those two numbers down. And they've got it. Oh, yeah. If we could hold here, right, then sure. That simplifies the policy dramatically, right? This is, yeah, right. This is the sweet spot. Yeah. You're skeptical we can hold it here. I hear you. Yeah. And it's reasonable. But, you know, right now as of today, it feels like it's exactly where you'd want to be.

Yeah. And even other, even other financial market measures that, you know, I would be looking at the gauges policy appropriate. Am I, am I balancing these two, these things to, you know, appropriately? Like the stock market, stock market's down 20, 25 percent from the all time high. I'd say that, okay, that seems about right where I'd want it to be down. Because again, I want the economy to slow. I need to take some steam out of this economy.

We're creating 400,000 jobs a month. That's too many. We're going to blow past full employment. So how do I do that? I raise rates and it comes out of the housing market, it comes out of the equity market, which affects consumer spending by high income consumers.

Down 20, 25, that feels, you know, that was, by the way, the stock market was up 20% last year. So we're back to where we were two years ago. So that feels about right to me, right? Anyone? Based on the valuation ratios, right, PE or? Yeah. It's like the sickly adjust to, right. It was overvalued certainly. So yeah. Hey,

Grav, this frame I just laid out in all the numbers, does this resonate in the European context, the UK or, you know, the continent, how people are thinking about it in Europe? Probably less so. I don't think you get that meaningful signal out of two stands. You do get a, I mean, you do, you do get meaningful signals out of, I think, I guess the five-year five-year forward. And central banks will be looking at those. So in the euro area, I think that's the five-year-five-year-year forward is now just about 2.1%. So again, it doesn't look as though inflation is a big concern for European bond markets.

But there are other factors that play in European bond markets, including what's happening with the ECB and its asset purchase program and the fact that it's brought up so much of peripheral bonds and what it might do to buy even more peripheral bonds going forward. By peripheral bonds, I mean the bonds of countries like Italy, Spain, Portugal, Greece, which have seen the spreads widen in recent days. Bond market finance isn't that important compared to bank finance. It's a big difference in capital markets between Europe and the US. So I guess bond markets don't play such a big rule. So what happens in bond markets, what happens to the bond curve isn't as big a deal as it is in the US.

So, yeah, sure, they look at these factors, but I think there are other factors that play. here. And I think, I guess given Europe's vulnerability to the energy situation, what we talked about earlier, the possibility of gas rationing, which could be really negative, that would be one thing. And then there's the history of the ECB. It's just been so cautious about lifting off. It lifted off last in 2011, promptly went back down again. And since then, it's adopted this three-word mantra, and the three words are gradualism, gradualism, gradualism. And it's only recently that the hawks have taken over. And now they're all gung-ho about lifting off.

And we look like we're going to lift off in July, but it's just running to catch up now. So that's where this aggression could play against the ECB, starting to lift very aggressively, just as the economy really cools rather dramatically. And that could really tip the balance in favor of a recession. So the other number I was going to use was 550 basis points. That's the high-yield corporate bond spread.

And we're getting really close to that peak in 2018 when the Fed pivoted. So I'm wondering if we go past that if you're going to see the Fed start to, you know, take a more cautious approach. Going back to measures of what's financial conditions, what's going on to gauge whether the Fed's calibrating correctly. Or you're saying look at the credit spreads in the corporate bond market, the high yield meaning lower quality, higher risk bonds of companies, that that difference between the difference between the yields on that and the 10-year treasury yield is 550 basis points, 5.5 percentage points. And that is kind of where things got back in 2018 when the fit started taking its foot off the brakes. Yeah. Yeah, started easing up a little bit. Right. Okay. All right. But DeGrov, you're saying bond market,

not quite the barometer that is here, just because the bomb market is smaller, not as liquid, more affected by ECB, B-O-E buying, you know, their quantitative easing. So it's just not sending quite the signals that it might hear in the U.S. Quite strong signals as you get in the U.S. I think historically that's also been the case, even before the ECB started buying bonds back in 2008. Yeah, and I guess the yield curve isn't quite as prescient historically there, the shape of the- Exactly. Yeah. Exactly. Yeah. Okay. Okay, very good. And I guess the indicator, the bond market measure there that people are really focused on is the, as you pointed out,

the yield on Italian debt or Spanish debt, the periphery countries where fiscal issues are more of a problem where debt loads, sovereign debt loads are high. Their yields are high relative to the German 10-year bond, for example. And that spread is a pretty good measure of people's angst about what's going on in the economy, the European economy. Right, right. I mean, if you cast your mind back to 2011 and the Euro-Sovran crisis, then of course bond deals amongst these peripheral countries, they were as high as 7, 8% at some point. It was really, really stressful. And then fast forward a few years and a couple of years ago, Greece issued a 30-year bond. This is a country that defaulted on its sovereign debt.

So that's how much things changed in Europe, thanks to the ECB, and thanks to that famous statement from Mario Draghi saying that they'll do what it takes, the best most costless way of saving economies. So now we started completely discounting any issues that might arise from debt sustainability, the fact that euro area countries, some euro area countries had debt to GDP ratios of close to 150% or above, like Greece was close to 200% Italy. at about 115% debt to GDP. Even after the pandemic, when debt loads went up roughly by 10 percentage points of GDP,

we didn't really worry about it because the ECB bought all the surplus issuance and interest rates at zero. Now all of a sudden, the issue of debt sustainability starts to rear its ugly head again, I guess, because actually spreads arising amongst peripheral countries, and they do face fiscal concerns. I guess a big difference between now and the European debt crisis, coming out of the Great Recession a little over a decade ago was the mechanisms for the ECB to buy the debt of these periphery countries to make sure that these spreads don't gap out and we don't get into the kind of situation we did back 10 years ago. Yeah, it's a tremendous firepower now.

Yeah, tremendous firepower now. I'd talk about European sovereign stress at this point, but I wouldn't talk about European sovereign crisis. Yeah. It's pretty much the way I look at it. I really can't see that happening with the amount of firepower at the ECB's disposal. And also EU institutions. I mean, ESM is still there. The European Union does have this great capacity to issue its own debt.

So I just think there's enough firepower there to avert a crisis. Yeah, I guess the way I would think about what you're saying is it's a good indicator of this mounting stress, but it's very unlikely that that's going to boil over and we get a crisis because of the, ability and the will, frankly, of Europeans to keep it together and make sure that we don't get into a crisis situation like we did 10 years ago. Exactly. And I think if you look at this trickle-down of that of suffering stress onto financial conditions, onto the banking sector, for instance, it's no way similar to what we saw back in 2011 and 2008-9. So banks have plenty of access to wholesale funding. They're really well capitalized. Their credit impairments are pretty reasonable

thanks to accounting standards. And even in the UK where there were some issues around how banks could resolve themselves, the whole concept of living wills that banks could actually put in effect resolution plans in distress without having to cease operations. Well, that was a sticking point for the UK regulator for a long time, but I just read a couple of weeks ago that the UK regulator issued a statement saying it's actually quite satisfied with the status of those plans for the UK banking systems. I don't see banking systems being exposed. Oh, and I should mention that while we were concerned back in February around the exposure that European banks might have to Russia, Ukraine, actually all of that has worked out, worked itself through the system.

Banking systems actually have very little exposure to Russia and whatever exposure there is has all been dealt with by now. Right, right. Okay. Okay, I'm up. I've got a statistic. $3.57. Is that gasoline prices? Or the futures? Future gasoline prices. They're that low? $3 and 57 cents? I thought so. Really? No. Let me double check. Yeah, that can't be. Because we're just under $5 for retail prices, right? It can't be. Hold on. That's embarrassing. $3.65.

$9. What? Hold on. They've come down a ton. They've come down that much? I can share my screen. It's $3.65. Does that mean retail prices are going to come in here pretty quickly?

They've been falling the last several days ahead of July 4th. I did not know that. If you look at wholesale prices, they lead retail to the prices that we pay at the pump by two weeks. So we should see a pretty decent drop in gas prices soon. Oh, that's encouraging. So we were peaking at $5 a gallon nationwide for regular unblooded. Where are we headed now, do you think, given these wholesale prices? I got to double check, but it's probably like $4?

Not not in two weeks, no. No, no, no. I mean, if we kind of stayed here at these wholesale prices. Yeah, you'll probably get down to $4. Oh, boy, that would be nice. That would help. That would help a lot. Without waiving the gas tax.

right without waving the gas tax right now wow i didn't realize i knew i knew crude oil was down quite a bit uh you know we were at 120 125 i think last i look we're at 105 right 110 on a barrel oil so i but i didn't realize gasoline prices had come in that fast wow that's interesting okay well that's good news no well that's not the answer uh it's not three thousand although the pretty good guess I thought that was embarrassing guess, but that's a pretty good guess. I'm embarrassed that I was. Dr. Copper. You see the way Chris said that?

It was like, I'm so disappointed in you for bringing that too easy. Do you hear that in his voice? I did. Do you know Chris well enough? Did you heard that in his voice? Yeah, I don't know Chris well enough perhaps, but I heard it in his voice. Yeah, exactly. Oh, geez.

Really? I roll. He just he came up with. Yeah, that's why he's hiding his video. He's rolling his eyes. He's just, he's disappointed. He looks like a baby in that photo, by the way. That's probably the first photo that he took when he joined Moody's.

How you get your photo taken and everything. That's good. All right. You're right. Dr. Copper. That's the price of copper. $3.57.

Wait a second. Is it three? I'm confusing myself. Yeah, it is $3.57. Exactly. And it had been well. over $4 for a long while. And this is one of those statistics. Remember back when the podcast started about a year ago, we each called out a statistic that we would follow to gauge where we were in the

business cycle. And I think Chris was unemployment insurance claims, UI claims. And Chris, I'm going to ask you to talk about that in a minute. Ryan, you were the tenure treasury yield, right? Correct. And we're watching that. And by the way, just as a sidebar, I was exactly right about where the tenure was headed, you know, relative to you guys. You guys, nowhere. I don't know if you want to use it. We don't have to go down the path. I don't need to embarrass you on this one, but I'm just saying. And three dollars and fifty cents on, I was copper. And for anything over four bucks is consistent with a very strong global economy. Anything down near two is recessionary, at least historically has been the case. And now we're

at $3.57, which would suggest we're coming off the boil. You know, growth is obviously slowing recession risk right but it's still elevated now that may be overstating the case given uh you know the supply shortages and supply chain uh disruptions that kind of thing but but feels like that's also moving in the right direction here it's falling consistent with the slowing economy but it's not falling out of bed which would be consistent with recession does that sound right anyone would disagree with that characterization no i would agree with your assessment Yeah, okay. Me too.

Yeah. Okay. All right. I mean, I'm kind of rooting for it to come down a little further. Yeah, now we can hear you, Chris. Can you hear me? I can hear you now. So let me ask, well, let's get down to brass tax here in recession risk.

We've kind of been talking about this, talking around it. But here in the U.S., you know, I think everyone I talk to things were going into recession, you know, CEO, CFOs. investors, just friends. They're going, oh, we're going into recession. It's almost like a feta-com plate. We're going under recession. And economists are a little bit more cautious circumspect,

but even most, all economists think that recession risks are high here. And pretty close to, you know, even odds. Is that similar in your garab? Is that also kind of the sentiment there that, yeah, it's almost like, yes, we're going into recession? So a lot of people I've spoken to pretty much of the same opinion as you just described. They think recessions around the corner, if not even just upon us. And over the next 12 months, it's highly likely that we'll get into recession.

I think where the conversation breaks down is when we start to dig into the details and try and figure out what that recession looks like. Because clearly, we're doing... Oh, so you've already concluded we're going into recession then? Well, a lot of people, a lot of people I talked to have included that. I haven't concluded that we're going into recession. You haven't gone all the way in to that. I'm attaching 50% probability to Europe going into recession in the next 12 months.

Some people I talk to think we're nearly there. Let me press you. You can't say 50%. It's got to be more than even or less than even. 50% is, you know, you're saying I don't really know, and I get that. But what is your instinct? Are we going into recession or not going into recession? I think we could escape it.

We've got a strong job market, just like in the US. I mean, we don't add quite as many jobs as you guys do, but the huge number of vacancies out there, to take the UK, there are actually more vacancies posted out there than people unemployed. Some of that may be optical because of the way in which vacancies are posted, but it's still very tight. And if you look across France, Germany, other European job markets, vacancies at historic highs. So really, really tight labor markets. So where's the recession? Lentier scope for that to moderate. Growth is weak, activity is weak, but there still is some spending power.

We could get through this. If energy prices fall, that would be great. And in fact, there are base effects coming up. Energy prices, inflation, energy price inflation has to start moderating unless there's some really bad shock again. So then that leads us with something like food, where food prices have been going up quite a lot. And we can't benefit from those base effects. So that's something that could hit us. And then we've got the wild card of what else could happen to energy, what could happen

to geopolitics, how that might affect consumption. So some positive, some negatives, I guess. We could escape it. We've got a strong job market. We've got reasonable housing markets. We don't have big financial imbalances to unwind. On the other hand, we've got really negative sentiment. We've got the possibility of further supply side shocks, particularly to energy prices.

And we've got monetary policy. So if I balance them all up, I'd say it's pretty even odds. Maybe just over. If you want me to come off the fence, I'd say 51 to 55. percent of going into recession. Just over even odds of going into recession. Just over. Yeah.

But there are people I talk to who are much more negative than that would say there's 80, 90 percent chance of going into recession. And that shimes with the CRO, CFO community that you're talking about. Yeah. Yeah. I mean, here, and I assume there, a lot does depend on oil, natural gas, commodity prices, what happens with those prices going forward here. I mean, if we've seen the peak in price and they keep, they don't even need to come down,

I don't think, from current levels, but we've just seen this peak and we stay here, you know, for, it feels like the Russian war is going to continue for a while. Just say we stay here for a while, it feels like we can squeak our way through. But if prices go up for whatever reason, that feels like it can be pretty hard to digest and recession will occur. If energy prices stay where there are, then those base effects will just be a boost. you've got to have inflation starting energy inflation starting to come down

I'm not so sure about food inflation now energy is about 10% of the Eurozone inflation basket foods about 20% so you know there's an amplification greater amplification from food and food prices have been going up in recent months been going up

roughly 1% a month and then in June the winter 2% month and I'm not so convinced that food prices come down very quickly there's the we've not only have we got the Russian invasion of Ukraine and what that's doing to commodities like wheat. We've got very high fertilizer prices. And actually, we're not through the growing season yet, so we've got to wait for the harvest, the summer harvest to come through and what that does to food prices in autumn and winter.

Right. Okay. And let me ask you if you say the probability of Europe going into recession is a little over even odds, that means some countries are going into recession, doesn't it? Yes, some countries will, at least in that. And again, we get back to what is recession at this point. I see. So I'd say that European recession, if it happens, is going to be a fairly shallow growth recession. So we'll have contraction in GDP for a few, well, cumulative loss in GDP, which could be fairly mild. It doesn't even have to be successive quarterly contractions in GDP. We could just bump around zero mark for a while. We could see a small increase in unemployed. and some cooling in-house prices. And that could be it. So we're certainly not talking about a devastating hit to growth and a massive increase in unemployment in the way we've seen in the past.

And yes, some countries will. You've got Italy, which is fairly weak. Germany is looking pretty weak right now, surprisingly. So plenty of scope for countries, individual countries, to go into recession. Not really surprising, though, right? because they're very dependent on the vehicle industry, and that is under a lot of pressure. Exactly.

That's definitely one thing. What about the UK? Do you think that has more or less of a chance of going into recession than Europe? I'd put it a slightly more than in Europe. That's surprising. You would have thought that the UK might be slightly better off because it imports less energy. but that's not really the case actually UK inflation is running

just above European inflation now. There's this tremendous cost of living squeeze that's going on. The consumer is really taking a hammering. I'm very negative about the UK consumer even into Q3 and Q4.

I'm not sure the holiday season will help the UK consumer that much or the UK consumer will support the economy that much in holiday season. So I'd say it's a bit above, a bit above whatever odds they put for Europe. Okay. All right.

Hey, Chris, do we have you back? Are you back? Can you hear me? Yeah, I wanted this, just to close the loop on something I mentioned earlier, going back to the U.S., is UI claims, unemployment insurance claims. That was one of the indicators we had called out about a year ago to follow the gauge where we were in the business cycle. And, you know, can you give us a sense of what they're saying now?

the UI claims? Because I think we need to start watching that pretty carefully here as things slow. You know, that that would be a pretty good barometer. So what's it saying now? Did it come out this week? I didn't see the numbers this week. It did. If my memory is correct, it was 231,000. Okay. Last week around there, at least, I think it was slightly down from the week before. But it's certainly in that range. And that's up substantially from where it was a few months ago, right? You remember we were, I think down to 185 or somewhere very low. Yeah. So you do have claims coming up, but I think kind of hoking out to your theme, again,

I would say this is in the sweet spot where the economy is slowing. We are getting a few more layoffs, but it's not falling apart. And if we can manage to keep this type of level of activity, right, that's what the Fed needs in order to justify its monetary policy, keep it from hiking the rates very aggressively, and just slowing down the economy to a more appropriate level. So if you had to write on a piece of paper, what would be the ideal number of initial claims for unemployment insurance? What would that be? So my rules of thumb are 250,000 is the equilibrium.

If they get much above 275,000, I start to get worried above 300,000, and I really start to get working. So we're still below what I would consider an equilibrium level. Equilibrium, meaning enough layoffs consistent with enough job growth to maintain stable unemployment. Stable unemployment, wage growth is not accelerating, right? Again, shooting for that Goldilocks economy. right okay all right good i i think we're coming to the end of the podcast there's two things i want to do one this open-ended question to grog grov grov what should we know about europe that we don't know in the context you know in the in given the conversation here around recession and the other is we

always end well at least we've recently been ending with our our we give our reception odds here for the u.s we'll do that last but just an open-ended question what is it that you know you wanted to say or would like to say that this haven't had an opportunity in the conversation so far, if anything. I think I've already mentioned that number, 57%. Okay. And that feels like sensitivity right now. Watch out for European gas and storage.

Watch out for Europe being able to actually continue to get reasonable supplies of gas, keep its economy running. Everything else we know. If we follow the path of energy prices and we feel we're at the worst of it now and it'll soon be behind us. And actually, things have to start moderating. Prices have to start coming down. Inflation starts getting better. Monetary policy, if it finds that right momentum, then gets the economy in a glide path. Maybe we have a quarter of contraction in GDP. That's not a big disaster. You guys look like you'll have two of those. We could be in a good place come early next year.

But if there is, if Russian supply ceases completely and Europe can't sort out alternatives, and I think we're in for a very rough time. Okay. All right. Okay. Let's send to the conversation we've been doing over the past few weeks, and that is our recession odds. Ryan, what are your recession odds next 12 months, next 24? And has that changed since the last time we chatted?

No, it hasn't changed. So 65% probability in the next year. and then I think it was 75% over the next two years. 65% probability recession over the next year, 12 months, and then 70. No, no, no, no, it can't be. You were at 65% over the next 24, right? Yeah, it was 65% over the next two years. And what was like 45 next year?

Oh, you should know this. You should have this memorized. No, I haven't run the models yesterday. Okay. All right. Probability recession models. Is there an aster signal? We're not really sure.

But you're saying 45% next 12 months, 65% of the two years. Yeah, that's it. That's it. Okay. And that's where you were last week. That's where you were a month ago. Nothing has changed. Nothing has changed except for the ISM survey just came out.

Oh, what was that? It dropped from 56.1 to 53. So the ISM index is a diffusion index. So anything north of 50 is usually signaling growth, anything below 50s contraction. But getting to the idea of talking ourselves into recession, new orders is below 50 now. And employment is below 50. So. Okay.

But you were saying, and this is the survey, purchasing manager survey for manufacturers, you're saying for recession, to be consistent with recession historically, that has to be like 45. Yeah. Yeah. Yeah. We have a cushion. Yeah. We're at 53.

We have to be at 45. But you're saying some of the components of the survey, like around orders or Reakening more. Orders and employment, probably the two areas where businesses are worried about a recession or think we're in a recession, where they're going to cut back on first? Orders and then employment in hours. Okay, 45 and 65. Chris? I'm holding at 40% and 60%. But I'm getting nervous because of real per capita disposable income that fell this week. We didn't talk about that, but that's what we kind of did in that real income shock. That's the real income. income shock, right? Yeah, I guess we didn't get into the specifics, but yeah, that's coming down. That's not good for future spending. Right. Right. Okay. So what is it again? Forty five and no, 40 and 60. 40 and 60. Okay. And that has not changed. No. Okay. I'm at 40% next 12 months and

about even odds, give or take for the next two years. I've actually become more. optimistic, not less. I mean, you know, on the margin, obviously. But again, going back to the theme, it feels like everything is kind of lining up to where you'd want it to be given the circumstances that we're in. I mean, it's a fragile place, obviously. A lot can go wrong. And I'm sure something will. I guess that's Chris's point, though. That's why he's odds are higher. He's just counting on something going wrong. It doesn't take a lot. Yeah. Yeah. Not counting on it, but yeah, yeah, that's a good point. You're saying there's some probability, something doesn't stick to script is what you're saying.

And we're very well. Yeah, that makes a lot of sense. Yeah, very good. Okay, I think we covered it. I think we covered it. Oh, what's that? Chris. Did Garv give his probabilities for U.S. recession?

Oh, I thought that. Grav, do you have recession probabilities from the U.S.? I think the US is in a slightly better place than Europe. So if I'm going to say, if I give my recession probabilities for Europe, then I'd say 50%. I've told you this already, 50% over the next 12 months, and it's probably 60, 65% over the next 24. So it feels to me like the US isn't a slightly better place,

not as vulnerable as Europe. It should be about 10 percentage points, at least below Europe. So you're 40. Like 40, 55 or so. 40. That's more, that's kind of sort of like you and I, Chris, somewhere around where we are. No, but his long term is higher, right? 65 for.

But he's saying that's Europe. That's for Europe. That's Europe. That's Europe. Oh, so he's saying 55 for the U.S. For two years. Okay. Yep.

Yeah. So what he did, this is appropriately. He said, okay, these are my recession odds for Europe and now subtract 10 percentage points for the U.S. And I'm at, you know, 40% probability over the next 12 months and 55% over the next 24. That's what you'd be, that's right, Grav? That's what I said.

Yeah, exactly, which is, you know, pretty consistent with us. Okay. Well, sorry about that, Rob. I didn't mean to leave you out. Oh, no. No, that's all right. Yeah, yeah. Will you have a recession odds for Alabama?

No, just joking. I know, Ryan, Estonia. By the way, that does bring up something we didn't talk about, and that's Roe v. Wade, which is a big deal. Maybe we'll talk a little bit about that next week. or in subsequent weeks because getting a lot of questions about, you know, the, you know, that the overturned the Supreme Court's ruling that overturns Roe v. Wade in the response by states in terms of limiting abortion access. Lots of questions about, well, what does this mean for the economy? And that's an interesting question. So we might want to tackle that at some point. But not today. We've covered a lot of ground today. And with that, let me thank everyone for their participation. I hope the folks here in the U.S. Me and you, Ryan, we enjoy July 4th.

Grav and, Chris, you can celebrate as well. I will also enjoy, yeah, I will also enjoy July 4th. There you go, very good. As will I. As will I. I'll have mayonnaise on my chips. Oh, no, geez. Well, have a hot dog on us and please put mustard on it.

I'll do that. Mustard and hot dogs, that's dear good. That's fine. That, you know, have you had a hot dog with mustard recently? if you have not done that, I highly recommend. Highland, highly. With the beer. With a beer, that sounds like a great idea.

It is funny. Get a groaning. If you're in Italy, you know, I don't know what, Guinness if you're in the UK. Ryan, what are you drink? Guinness in the UK. Oh, wow. Oh, sorry. Oh, boy.

We are just wandering in the UK. Some Pilzner, whatever is. Some Filzner. Some Filzna. Oh, Stella. Oh, Stella. I'm all for Stella. Stella.

Yeah. Ryan, you know, what beer people drink is very telling, I find. So, Chris, is Peroni your drink? Is your beer? What is my beer? I've been drinking some Peronis recently, yes. Okay, very good. And Garav, what do you drink?

I'm a German beer drinker. So I like German dark beers and German wheat beers. That's interesting. And Ryan, I think Ryan, I'm going to guess Ryan before he tells us what he drinks. Bud Light. That's what Dr. Ryan drinks. That's what I drank in college.

I would never drink that again. Okay. Well, okay. What do you drink? Come on, man. Victory. I support the local group. Oh, okay.

Ah, nice. IPA? Yes. Yeah. I have the IPAs. All right. Well, go enjoy a beer. Get a hot dog.

You know, whatever. What do you drink, Mark? You know, like most of the gronies. The gronies. Exactly. Actually, I imagine. I've been experimenting with rye whiskey or gin. I'm just saying, you know, so.

Oh, wow. Aren't you always a big gin and tonic person? Very much so. But I got, you know, I'm one of these people that I consume the same thing for like a decade. And then one morning or day or afternoon, I wake up, I just can't drink or eat it anymore. And I go on to the next thing and I do that for a decade. So gin and tonic, it's my, you know, the 2000s. But ngronies, I'll have to tell you, there's a lot of alcohol in those ngronies.

I mean, I don't know what the Italians are doing once they have one of those ngronies. So forget about it. You know, so anyway. They're adjusting the recession odds. There you go. Well, this is a wonderful conversation. I hope everyone has a wonderful weekend. And we're going to call this a podcast.

Take care, everyone.