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Speaker 1: Right now joining us on Bloomberg Business Week, ED your Denny,

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Speaker 1: founder of your Denny Research, and with us on zoom

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Speaker 1: in New York City. ED, thank you so much for

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Speaker 1: joining us. Talk to us about you know, your thinking

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Speaker 1: about this inverted yield curve that you know is like

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Speaker 1: gloom and doom, We're going to have a recession, and

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Speaker 1: yet you see it differently. Talk to us about it

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Speaker 1: and how you came to that.

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Speaker 2: I do. Actually I wrote a short little book back

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Speaker 2: in twenty eighteen titled what is the ill Curve really forecasting?

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Speaker 2: And came to the conclusion that it's had a great

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Speaker 2: record of forecasting recessions, but what it really does is

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Speaker 2: forecasts the process that in the past led to recession.

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Speaker 2: So when the yeld curve inverts, basically bond investors are saying,

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Speaker 2: we are willing to buy a ten year bond at

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Speaker 2: a yel below the two year because we think if

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Speaker 2: a fend keeps raising rates, or even if they leave

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Speaker 2: them here, something's going to break in the financial system.

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Speaker 2: It will be a financial crisis and that will morph

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Speaker 2: into a economy white credit crunch, and that's what caused

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Speaker 2: recessions in the past. It wasn't the inverted yell curves,

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Speaker 2: the inverted yulcre just anticipated that something bad would happen

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Speaker 2: if the FED continued to raise interest rates. And so

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Speaker 2: it's got a pretty good track record, a very good

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Speaker 2: track record of anticipating exactly that kind of process. Now,

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Speaker 2: how about the current situation. All, in the current situation,

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Speaker 2: it's done a great job again of anticipating a financial crisis.

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Speaker 2: We had a banking crisis back in March, but this

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Speaker 2: time the FED came in so quickly with a liquidity

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Speaker 2: facility to stabilize the situation. I mean, the FEDS used

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Speaker 2: to play whack them all with these problems since two

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Speaker 2: thousand and eight, two thousand and nine, So they whacked

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Speaker 2: them all this time, and as a result, we did

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Speaker 2: not so far get an economy, white credit crunch, or

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Speaker 2: a recession.

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Speaker 3: What do you think about this Fed ed? I mean

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Speaker 3: you've worked for various FED I guess boards from the

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Speaker 3: White House, from Wall Street? What do you think about

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Speaker 3: Jerome Powllin how he's done here?

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Speaker 2: Well, I think it's going to work out this time.

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Speaker 2: There's a Tennessee on Wall Street to what sort of

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Speaker 2: bemoan everything that the FED is doing. They clearly don't

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Speaker 2: know what they're doing. Seems to be sort of a

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Speaker 2: knee jerk reaction of Fed watchers on Wall Street and

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Speaker 2: other places. But I think they may actually have got

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Speaker 2: that right this time. I mean, clearly they were late

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Speaker 2: in tightening, but once they realized that, they moved very

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Speaker 2: aggressively from zero to five hundred basis points above zero

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Speaker 2: with the FED funds rate. And I think that's worked

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Speaker 2: pretty well in moderating inflation without causing a recession so far.

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Speaker 2: And I think again, they came in just in the

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Speaker 2: nick of time here. Actually, they came in very quickly

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Speaker 2: in dealing with the financial crisis that occurred in March,

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Speaker 2: and as a result, we haven't had the typical process

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Speaker 2: of financial crisis credit crunching.

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Speaker 1: Hey, and one thing Matt and I were talking about

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Speaker 1: is the difference between the different yield curves. Right, we

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Speaker 1: talk about the two in the ten, we talk about

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Speaker 1: the three month in the ten. What is the yield

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Speaker 1: curve that you think individuals need to focus on to

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Speaker 1: really get an idea of Okay, wait, yeah, we're headed

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Speaker 1: for a recession.

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Speaker 2: Well, the Index of Leading Economic Indicators is an important

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Speaker 2: series and it tends to have a good track record

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Speaker 2: of anticipating recessions, and one of its components is in

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Speaker 2: fact the shape of the yell curve, but it's the

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Speaker 2: spread between the Federal funds rate and the tenure yield.

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Speaker 2: And so in this situation, I prefer the two year

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Speaker 2: versus the ten ure because I think the two year

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Speaker 2: gives us a more day by day view of what

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Speaker 2: the credit markets are thinking, whereas the Fed funds rate

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Speaker 2: is totally driven by the Fed. The two year tends

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Speaker 2: to anticipate what the Fed's going to do very well.

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Speaker 3: But I think Powell in the past has talked about

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Speaker 3: the three month ten year spread. I feel like Cam Harvey.

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Speaker 3: I'm not sure which one he uses, but he kind

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Speaker 3: of gave us this idea, right, he's a professor. I

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Speaker 3: think at Duke who gave us this idea that the

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Speaker 3: yield curve inversion could forecast a recession. Have we seen

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Speaker 3: the three month tenure spread invert and not had a recession?

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Speaker 2: Well, again, the inverted yell curve was one of the

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Speaker 2: components of the Index of Leading Economic Indicators. In both

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Speaker 2: those series have had a spectacular track record of anticipating recessions.

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Speaker 2: I think the last eight recessions were anticipated by an

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Speaker 2: inverted Yell curve and by declining leading indicators. There have

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Speaker 2: been some instances where they started to flash orange and

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Speaker 2: nothing terrible happened. Those were basically consistent with mid cycle

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Speaker 2: slowdowns of the economy, otherwise known as rolling recessions. And

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Speaker 2: I think that's what's been going on in the current situation.

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Speaker 2: I think we've actually had a recession since the beginning

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Speaker 2: of last year. It's just been a rolling recession. It's

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Speaker 2: been hitting different sectors at different times. It's certainly if

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Speaker 2: you ask anybody in the housing market, that's definitely been

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Speaker 2: in a recession since the beginning of last year. And

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Speaker 2: the same thing goes for goods for the past year,

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Speaker 2: there's been a recession in a good sector.

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Speaker 1: Yeah, our Rich Miller is highlighting you know, you're thinking

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Speaker 1: about rolling recessions. You know, Cam, I mean Cambell Harvey also, No,

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Speaker 1: I wasn't calling him camp, but I was just saying

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Speaker 1: Cavill Harvey, who also came up with this he for

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Speaker 1: our story, said it's too early to say that the

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Speaker 1: curve in version is a false signal. He said, the

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Speaker 1: big question is not whether the downturn is coming. It's

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Speaker 1: how severe it will be. I do worry that the FED,

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Speaker 1: with two more raid hikes, will put enough gasoline on

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Speaker 1: the fire that is going to push us in a

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Speaker 1: very negative direction. Is that still a risk in your view?

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Speaker 2: Well, that's what makes markets right. I have my view,

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Speaker 2: his view, and I guess my view is that the

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Speaker 2: Hill curve isn't going to work this time as a

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Speaker 2: predictor of a recession. It's worked very well as a

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Speaker 2: predictor of a financial crisis caused by the FED raising

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Speaker 2: interest rates. But I don't think we're going to get

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Speaker 2: a recession out of it. But it is an open debate.

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Speaker 2: I'll conceive that. I mean, you know, nobody's concluding that

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Speaker 2: I'm right or the other side is right. It's just

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Speaker 2: the other side has more history, you know, favoring a

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Speaker 2: recession outlook. But look, it's been since last summer that

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Speaker 2: the Yill curve has been inverted. It's been since December

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Speaker 2: twenty twenty one that the index of leading indicators has

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Speaker 2: been declining, and yet we don't have an economy ride recession.

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Speaker 2: But I think we've had a rolling recession. It's been

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Speaker 2: just hunky dory.

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Speaker 3: I think Harvey actually is closer to your camp than

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Speaker 3: the quote in our story illustrates, because I've talked to

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Speaker 3: him in the last few months and he says this

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Speaker 3: time is different, and that not that the yield curve

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Speaker 3: in version is not signaling a recession. I want to

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Speaker 3: ask you you wrote fed watching for fun and profits,

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Speaker 3: but you also like movie watching for fun, which I

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Speaker 3: know because I spoke to you earlier about Oppenheimer. Carol

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Speaker 3: and I are both excited about Barbie, but Oppenheimer's another

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Speaker 3: one that just crushed it at the box office this weekend.

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Speaker 3: What did you think?

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Speaker 2: Well, you know, I had a choice of going with

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Speaker 2: my daughter and her friends to see Barbie or going

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Speaker 2: to see Oppenheimer. I decided to go see Oppenheimer, but

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Speaker 2: she said she want I heard some bad reviews of Barbie,

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Speaker 2: but she said that she really enjoyed it and wants

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Speaker 2: to see it again, so I may join her because

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Speaker 2: it's a cultural happening clearly. But with regards to Oppenheimer,

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Speaker 2: it was an outstanding movie. The directing was awesome. Christopher

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Speaker 2: Nolan did an amazing job of kind of going behind

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Speaker 2: the story, not just behind the story, but behind Oppenheimer

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Speaker 2: and looking at kind of Oppenheimer and it's times, I

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Speaker 2: certainly had a standing of the domestic and geopolitical consequences

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Speaker 2: of developing and using the Adam bomb. And then you know,

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Speaker 2: there's certainly some philosophical discussion of what does it mean

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Speaker 2: that humanity has created this horrible instrument of mass destruction

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Speaker 2: that can just basically wipe out creation. So it's it's

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Speaker 2: a three hour movie, but it goes by pretty quick,

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Speaker 2: and I thought it was extremely well done.

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Speaker 1: I love that.

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Speaker 3: I really want to see it.

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Speaker 1: I want to see both of the movies.

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Speaker 3: Actually, me too.

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Speaker 1: Can I ask you real quickly, I'm going to go

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Speaker 1: back to markets twenty five seconds. You made some great

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Speaker 1: forecasts on Dow five thousand, ten thousand. Where do you

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Speaker 1: see markets going from here?

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Speaker 2: Just quickly, well, quickly say, I think we're going to

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Speaker 2: go to forty eight hundred to fifty four hundred by

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Speaker 2: the end of the next year, and I think more

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Speaker 2: at the top of that range in the bottom.

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Speaker 1: All right, that sounds like optimism to me. Good to

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Speaker 1: leave it there, ed, thank you so much. The movies,

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Speaker 1: the markets. I talked a little Nirvana. That was really great.

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Speaker 1: We really appreciate it, if you will ed your Denny

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Speaker 1: founder of your Denny Research awaaz on Zoom in New

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Speaker 1: York City,