The Breakdown - The White-Collar Recession

Episode Date: December 8, 2022

This episode is sponsored by Nexo.io, Circle and Kraken.   On today’s episode, NLW provides an overview of the broader economy, including: Wall Street’s predictions for a bad 2023 PepsiCo layoffs OPEC+ oil decision China backing off Zero-Covid policies    - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company ensures the safety of your funds and keeps innovating with products like the Nexo Wallet - a non-custodial smart wallet that allows you to create your Web3 identity. Get early access at nexo.io/wallet. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - Kraken, the secure, trusted digital asset exchange, is our sponsor for today's show. Kraken makes it easy to instantly buy 185+ cryptocurrencies with fast, flexible funding options. Your account is covered by regular Proof of Reserves audits, industry-leading security and award-winning Client Engagement, available 24/7. Sign up and trade today at kraken.com/breakdown. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is "Back To The End" by Strength To Last. Image credit: Malte Mueller/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and Cracken, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, December 7th, and today we are talking about the white-collar recession. One quick note before we dive in, there are two ways to listen to the breakdown podcast. You can hear us on the Coin Desk Podcast Network, which comes out every afternoon, and also features other great Coin Desk shows, or you can listen on the breakdown-only feed, which comes out a little later in the evening. Wherever you listen, if you're enjoying the show, I would so appreciate it if you would take the time to leave a rating or a review.

Today, friends, we are going to be taking just a little break from the Sam show to catch up on the wider economy. Right now, some of Wall Street's loudest voices are sounding the alarm about next year's outlook for the U.S. economy and equity markets. Goldman Sachs, David Solomon, said that the economy faces, quote, a bumpy road ahead. J.P. Morgan's CEO, Jamie Diamond, held the view that the U.S. would see a, quote, mild to hard recession. Morgan Stanley Wealth Management's Lisa Shalett said corporations are facing a rude awakening on earnings. And the CEO of UBS Global Wealth Management recently wrote, We do not think the economic conditions for a sustained upturn are yet in place. Growth is slowing and central banks are still raising rates.

Now, equity investors appear to be taking note. After a two-month rally, the S&P 500 has fallen in eight of the last seven sessions, including a brutal 1.4% drawdown on Tuesday. Equity strategists who are typically perma bullish are now on average predicting a down year in 2023. Black Rock strategist wrote, a recession is foretold. Central banks are on course to over-tighten policy as they seek to tame inflation. Equity valuations don't yet reflect the damage ahead in our view.

Chart readers are also finding few reasons for hope. Each year, the S&P 500 suffers a 15% drawdown through November, December is typically much weaker, according to BTIG's Jonathan Krinsky. This year's drawdown to date has exceeded 19%, with multiple rejections off the 200-day moving average, including the end of the rally last week. Morgan Stanley strategist Michael Wilson, notable for being bearish equities, encouraged his readers to take profits in this week's note. The risk reward for playing for more upside quite poor at this time, and now we are sellers again. Charles Schwab's chief investment strategist Liz Ann Saunders said,

quote, we have to take our medicine still, meaning a weaker economy. in a weaker labor market. The question is, is it better to take our medicine sooner or later? And I think sooner. Now, diving a little bit deeper into what's been happening in the markets, as the S&P 500 was going down over the last couple days, Treasury yields pumped right across the curve, with 10-year government debt reaching a 3.6% yield. Rate swaps markets began to forecast a higher terminal rate from the Fed, with the market pricing in a peak above 5% in the middle of 2023. The U.S. dollar reversed a four-day sell-off with the Dixie up more than 1.1% so far this week. What's behind this reversal? Ed Moya, senior market analyst at Awanda, pointed to recent economic

news coming in less dire than expected, saying, quote, good economic news is bad news for stocks, as it will keep the risk elevated that rates might have to end up higher later next year. And this is really one of the we're weirder features of the economy right now, is that stocks are rooting for bad signals so that the Fed has to reverse course. But that's not what we're seeing. In fact, November saw a surge in business activity in U.S. services, according to the Institute for Supply management's data that was released on Monday. The gauge showed the strongest monthly gain since March of last year, suggesting that section of the U.S. economy remains robust. The equivalent gauge for manufacturing data released last week showed its first contraction since May 2020,

telling the story of a two-speed economy with weakening demand for additional goods. Bloomberg economist Eliza Winger said, quote, the service sector expanded at a faster pace in November with the holiday season bolstering business activity. The price subindex confirmed the inflationary impulse and services is still strong despite more widespread disinflation in good sectors. Now, as the final few pieces of of data fall into place ahead of next week's Fed meeting, the central bank is running out of room to paint a doveish picture. As inflation continues running at multi-decade highs, and data shows a strong and resilient U.S. economy despite the Fed's best effort to curtail demand. In a note that reflected on this

strong economic data this week, Jeffrey said, quote, the Fed are going to have to hold rates at a high level sufficiently restrictive for quite a while to get inflation back down to the 2% target. Now, right now, traders are awaiting the release of U.S. producer prices on Friday, which is one of the last major economic data releases before the Fed convenes next Tuesday and Wednesday to decide on policy rates for December. One thing that's been notable this year is that obviously we've seen lots of job losses in the tech sector, but not necessarily in other sectors. In fact, the strength and resilience of the labor market is one of the things that both makes the Fed feel like they have more room to tighten, and also makes them feel like they need to do so so as not to support a wage price spiral in the months and years to come. However, this week, according to the Wall Street Journal, PepsiCo is set to lay off hundreds of headquarters staff from its North American operations. And the question that everyone has is whether the food and beverage giant is a bellwether

to indicate that corporate reductions are beginning to spread beyond the tech and media sectors. The reporting cited an internal memo in which PepsiCo described the layoffs as intending to, quote, simplify the organization, allowing it to, quote, operate more efficiently. Previous quarters reporting had shown PepsiCo as one of the beneficiaries of inflation. It paid more for supplies of food commodities, but was easily able to pass on these costs increases to the consumer. However, with an uncertain economic environment and persistent inflation forecast, you're starting to see a broad base of companies look to reduce costs through layoffs. Market analysts at the

Bitcoin layer Joe Consorti tweeted, first it came for interest rate sensitive jobs, then it came for the services sector, then it came for the manufacturing sector, and folks are getting canned from their jobs at PepsiCo. Headline prints may not be reflecting it yet, but the labor market is rolling over. Danielle DeMartino Booth called it a white-collar recession, saying the white-collar recession marches on. Top 20% of income earners equals 50% of U.S. spending. Trickle-down hurts. In an ecosystem where innovation is the norm, it's the basics that are in the spotlight. Nexo is a company that has never put the safety of clients' funds in question. With over 50 global licenses, $775 million in insurance, and a real-time audit of custodial assets, Nexo sets an example

for security standards in the industry. Apart from keeping their 5 million clients safe, Nexo has kept building, they've just announced their non-custodial smart wallet. Visit nexo.io, that's nexo.io, and sign up today. This episode is brought to you by Circle, the sole issuer of USDC, and a leader in crypto that's held to a higher standard. USDC is a fast, safe, and efficient way to send money around the globe. USDC is always redeemable one-to-one for U.S. dollars and has over $45 billion in circulation as of October 13, 2022.

Plus, Circle posts weekly reserve reports and monthly attestations of reserve capital, letting users know that USDA is safe, transparent, and compliant with regulations. Just go to circle.com backslash transparency to see why USDC is a trusted staple coin. As one of the largest, longest-lasting, and most secure exchanges, Krakken continues to set the industry example for transparency and trust. Regular proof of reserves audits verify your balances are backed by real assets. Industry-leading security keeps your funds and information safe. And award-winning client engagement teams are available for support 24-7.

Buy crypto instantly with fast, flexible funding options on Cracken. Download the Cracken app on Google Play or the Apple App Store. Or visit crackin.com slash breakdown to join. Now, let's zoom out our focus a bit and see what's going on more globally. One of the big stories this week is from OPEC Plus, who have responded to volatility in the oil markets and uncertainty. about forward demand by leaving oil production quotas unchanged. After taking the controversial decision to reduce production by 2 million barrels at its October meeting, a decision which has only

recently been implemented, the cartel of oil-producing nations has kept production steady, as the global economic picture presents more questions than answers. As of this week, the European Union's sanctions on Russian crude oil exports have come into effect. At the same time, China appears to be taking the first tentative steps towards easing COVID measures, which is a move that could bring significant oil demand back to the market. Mali, the president of Rapidan Energy Advisors, said, quote, with massive and offsetting fundamental and geopolitical risks bearing down on the oil market, ministers understandably opted to hold steady and hunker down.

OPEC Plus, led by Saudi Arabia and Russia, will next meet in February when the global economic outlook may be clearer. More on the EU's restrictions, Russian seaborne imports into the EU will be banned, and vessels will be unable to access EU shipping or insurance services unless cargoes comply with a $60 per barrel price cap. Right now, it's not clear whether this policy will have significant effect. effects. The $60 price cap is comfortably above the current $50 per barrel price for the flagship Russian oil export. However, Moscow has signaled that it would rather cut production than sell oil to any

nation that insists on the price cap. Amrita Sen, chief oil analysts and co-founder at consultant energy aspects, said, quote, OPEC plus rolled over the existing quotas as expected, amid uncertainty around Russian flows following the price cap and a weaker China. The group will continue to monitor markets and should fundamentals deteriorate they will meet prior to June. Now, as I mentioned, the other side of this is China. So let's talk a little bit about what's been happening there. A Communist Party mouthpiece has confirmed that China's scaling back of lockdown, quarantine and mandatory testing policy was in response to nationwide protests. In a rare show of deference to public outcry against Beijing policy,

measures have already begun to be partially lifted in many large cities, despite a still active outbreak. Cases are dropping rapidly, however, mandatory testing has been one of the first measures to be reduced in scale, which could go some way to explaining the fallen cases. The Chinese Communist Youth League wrote in their official WeChat account on Sunday, quote, In the past few days, there have been quite a lot of opinions about local epidemic controls. The incident has initially subsided through prompt communication and improvements. Of course, they also added that the swift response and changes in policy showed a level of responsiveness by party leaders that would be impossible anywhere else in the world.

Still, the acknowledgement of the public anger at these policies is one of the first public admissions of flaws in the policy endorsed by leader Xi Jinping. Despite reports that President Xi told visiting EU officials that the unrest reflected citizens' outrage at pandemic policies, Chinese officials also criticized Washington for fomenting protests. Secretary of State Anthony Blinken, for example, expressed their support for the protests. Now, these easing of restrictions marks the first major backtrack from the zero-COVID policy, which has been maintained for almost three years. While the policy has kept death tolls lower than international comparisons, it has come at the cost of widespread public resentment and curtailed

economic growth. The news coincided with a 4.5 percent increase in the Hong Kong-Hang an index, but some analysts were quick to warn that COVID-easing does not necessarily mean the end of zero-COVIDE policy, and China likely has a long and convoluted path back to a full opening. Pandemic reopenings in 2021 were difficult globally, but because China has been largely sheltered from outbreaks, their population has much lower rates of vaccination in the elderly and very little acquired resistance in the population from infection. Using Taiwan and Hong Kong as analogues due to their similar rates of vaccination in the elderly population, Goldman Sachs forecast that China's outbreak will peak in January 23, with anywhere from 3 to 13 million cases per day.

They stated that the ability to minimize additional deaths will largely depend on Beijing's ability to increase vaccination rates in people over 80, which currently sits at around 66%. Michael Pettus, a senior fellow at the Carnegie Endowment, said this is more complicated than many realize. My closest friend tells me his 83-year-old grandmother, a former doctor, won't get vaccinated. She rarely goes out, she says, and worries that the risk of getting a jab exceeds the risk of not getting one. There's also a lot of skepticism from her and many others about the value of the Sinovac vaccine, even among the most educated. The lack of trust isn't really helping the vaccination program. Finally, one more story as we wrap up this little macro tour. It is not just the crypto industry

that is facing significant outflows. The embattled Swiss Investment Bank Credit Suisse is offering wealthy clients higher yielding debt and bonus deposit rates in hopes of recouping some of the almost $90 billion in assets under management that it is lost in recent months. On Monday, Chairman Axel Lemon told Swiss broadcaster SRF, quote, Thankfully, the outflows have stabilized. When you have a capital raising, which has a big dilution effect, that creates a lot of uncertainty and that leads to high volatility. But I believe the situation has calmed.

The business is definitely stable. Credit Suisse's head of wealth management, Francesco DiFerrari, has mobilized his 1800 relationship managers to get busy on the phones with current and former clients. The bank is offering exchange interest rates of 5 to 6% on much lower deposit balances than usual and fixed term debt at rates of 7% to compensate for investors locking up their cash for a number of months. Credit Suisse hit trouble in October when their solvency came under question. Their main business line, wealth management, saw more than 10% of its business walk out the door in a matter of weeks.

A spokesman for Credit Suisse said we are in close contact with our wealth management clients as we implement our new strategy. Market headwinds result in a volatile environment for our clients and we are now fully focused on providing them with differentiated advice and solutions that are in line with market rates. The bank has been undergoing a restructuring and shuffling executive team over the last few years, but has struggled to find its footing. The current wealth management head has only been in his position since the start of the year and has had little time to rebuild the business instead facing constant crisis management. In the past two years, Credit Suisse has recorded $8 billion in losses and is currently seeking $4 billion in capital to fund its restructuring.

The downturn in global asset markets has caused additional problems as low liquidity has required lending desks to restrict credit provided to clients. Some client retention calls are being paired with margin calls on existing loans as collateral plummets in value. So, I think what's clear here is that we remain in a strange moment. You have the stock market that's looking for signals that will force the Fed to stop their tightening program, and you have a weird combination of mixed signals on that front. There are some suggestions that the U.S. economy is strong and resilient, but there's also a lot of pain out there in specific sectors. The fact that we're starting to see job losses trickle into other areas beyond just tech, I think is pretty telling.

But to the extent that this is a white-collar recession, the question is going to be, is that enough to get Powell and the Fed to pivot? And right now, it certainly doesn't seem so. However, as you heard, next week is the FOMC meeting, and that will tell us a whole lot more. For now, I want to say thanks again to my sponsors, nexo.com.com, and crackin. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.