Yahoo Finance

Welcome to a new episode of the opening bid podcast. I'm Yahoo Finance executive editor Brian Sazi. Like I always say, this is the podcast that will make you a better investor, period. And we're really leaning into that better investor, uh, trademark here. Going to bring in here for our featured interview BCA Research chief global strategist and director of research Peter Berez and Peter, good to see you. I've been following your work for a very, very long.

Good to be on the show, Brian.

Before we, uh, get into tariffs, you name it, and stocks and markets, tell us a little about your firm. Uh, how long has it been in business, a little bit about your career here.

BCA has been around since 1949. We're the world's largest provider of macroeconomic research to the, uh, investment community over 80% of the world's top.Financial institutions subscribe to our research, so we're well known in the in the in the business and uh we are independent 100% we don't have any investment banking operations. What we say is what we believe.

Well now it's a good time to be independent, right, because you come out here with some big calls. I was reading your work about a month ago and I know you, you never pull any punches in anything you do in your work.You called out and you were head of I should say Goldman and a lot of the all of these companies. Hey, uh, my recession risk is 75%. Take us through that call.

Yeah, and in fact I increased my, uh, recession probabilities following the election. Now I haven't been.Bearish for many, many years. I'm not a perma bear. Back in 2022 I was probably one of the few people who was making the case that the US was not in imminent danger of recession and in 2023 we kind of doubled down on that optimism and predicted an immaculate disinflation, arguing that.Inflation would fall with very little cost to the economy, but last year, as others were becoming more optimistic, I turned more negative. And the reason I turned more negative was because a lot of the insulation that had supported the economy earlier had begun to fray back in back in 2022 when I was optimistic on growth, we had millions of job openings.In the United States, anyone who lost their job back then could have walked across the street and found new work. That wasn't true anymore. uh, last year. Openings had fallen to more normal levels. Two years ago we had $2 trillion in excess savings. That was gone by the end of last year. So with the economy becoming more vulnerable with the prospect of a Trump administration raising.Tariffs, I decided that it was the right time to get negative

and I should note for those not familiar with a perma bear, essentially I've always viewed perma bear or perma bulls as strategists or economists that are very set in their positions. One, they're going to be bears forever, no matter if the mark goes up or they're gonna be bullish no matter if the market goes down. So I just want to decode that a little bit, uh, for the listeners out there. So you see a recession thisyear.

I see recession starting within the next few months. I wouldn't even rule out the possibility the recession has started already. It's not my base. It's entirely possible if you look at the Atlanta Fed's, uh, tracking estimate for growth, uh, in the first quarter. It's deeply negative even if you take out the anomalous impact on the GDP calculations from the surge in gold imports, growth is still negative. Consumers.Spending is based on that model, uh, likely to shrink in Q1. In fact, if you look at real personal consumption expenditures, they were lower in February, the last month of data than they were in November. So the consumer is slowing down before tariffs, even before tariffs, if any, because a lot of the things that help support consumption just aren't with us anymore, those excess savings.That I mentioned they're gone. The ability of households to borrow is becoming more difficult as delinquency rates go up, you know, the delinquency rate on credit card debt is back to where it was in 2011, a year in which the unemployment rate was 8%. So the consumer is not in great shape, and we're starting to see that in the data now they

can't borrow against their Nvidia stock, right? I mean, Nvidia's not going up anymore, Peter. I mean, there's only so much you can do, um, so how bad could this recession get?

I don't expect a very deep recession because the imbalances in the economy are not as severe as they were in say 2008. Nevertheless, I think we'll probably get a fairly nasty recession, especially as financial markets are concerned. You think about the 2001 recession.That was a very mild recession. We didn't even have two consecutive quarters of negative growth, and yet stocks still fell 49% peak the trough because they were so expensive going into that recession. So I do envision a fairly large decline in stock prices. What's going to make this recession more tricky is that the policy response probably will be fairly anemic. The Fed can't really cut rates aggressively now because they're worried about inflation.and fiscal policy is also kind of spent. We've got a budget deficit already that 7% of GDP can't really increase it a lot more and so with a fairly weak policy response to any downturn that most likely will uh lengthen and make the recession somewhat more severe than it otherwise wouldbe.

So what you're saying is that the, the effect of tariffs is not priced intomarkets.

No, I don't think the effect of tariffs is full.Priced into markets because if you look at what's happened to stocks this this year they have gone down but they've gone down primarily because of the magnificent 7 stocks. If you look at the other 493 companies, they're basically flat for the year. Uh, that's not what you would expect from a market that's priced in a recession. If you look at say the German DAX, very cyclical stock market, I just recently hit an all-time high, so.What we've seen this year is some fizzling of the AI story, but we haven't yet priced in a recession. If we do price when it went in, I think the S&P goes below 5000 below

5000. I mean, yeah, the Magnificent Seven has been a real dog of a trade this year. It's been, it's been awful. So that's where I, I wanted to, you know, follow up here on is how much is down? How down is down for stocks because the S&P 500 is already down, your date, Nasdaq is down, your date, Max 7 is down. Like how severe could this get?

Well, I'm by far the most bearish, uh, strategist, uh, in the Bloomberg survey by far. My S&P target for the end of the year is 4450, 4450, which is about 1000

points down with a sad face on my4450actually it's actually, it's actually what I did, guys, 4450 with a smiley face down. Go go or

frowning face. Take that one upside down, yeah.Now the thing is to get to 4450, you don't have to make any wild assumptions. All I'm assuming is that the forward P multiple on the S&P 500 drops to 18 and that earnings estimates are cut by around 10% points from current levels. Neither of those two assumptions is outlandish. If you think about where the stock market traded between 2015 and 2019.A period which didn't feature recession, a period which incorporated most of Trump's first term. The average forward P multiple was 16.8, so I'm talking about 18 in a recessionary scenario. That's actually not bearish at all. Likewise, a decline in earnings estimates of 10% points. In a typical recession, the drop in earnings estimates is closer to 20 points and of course this time around analysts are very, very.Optimistic they expect earnings to grow by over 12% over the next 12 months, so a 10% point drop in estimates still leaves you with flat earnings. So if anything, that 4450, which is 1000 points lower than the next, uh, strategist on the Bloomberg list, could be too optimistic rather than too pessimistic.

Peter, I've talked to folks that have ties to the Trump administration, and they.And they have all have told me tariffs are not inflationary. What are these folks missing?

I think they're missing just kind of the underlying logic behind tariffs. You can't on the one hand argue that tariffs aren't going to raise prices and then turn around and argue that Americans are gonna shift their spending away from foreign made goods towards domestic made goods. I mean what's gonna cause that.Shift in spending, it's got to be the case that the price of those foreign made goods go up. Uh, that's what's going to cause the the shift so you can't have it both ways. Tariffs are going to be inflationary. We see that in the surveys and we see that in things like CPI swaps and break evens which are pricing in.CPI inflation rate of over 3% in 12 months' time. The Fed has to be concerned about that, and I think we have to be concerned about that because if prices go up, that means lower real incomes, that means less spending across the economy.

Soreally consumer spending key to your call, it sounds like it's about to fall off the map.

It's already slowed sharply and most likely will continue to slow as unemployment begins to rise.

What,what gets us out of a recession?Well,

usually what gets us out of recession is monetary easing or fiscal stimulus, as I mentioned earlier.Hard to see either of those two happening in force because the budget deficit is already large and the Fed is concerned about inflation. So what might have to happen is we just have to wait. If we wait long enough, people will just have to trade in their cars for something new, uh, a lot of the machinery that companies.Invest in will depreciate away they'll have to buy new machinery, but you have to wait a long time for that unfortunately. So while I'm not expecting a very deep recession, I'm not expecting a quick rebound either. This could be more of a U shaped or even L shaped recession.

All right, hang with us, Peter. We're gonna go off for a quick break. We'll be right back on opening bid.All right, welcome back to Opening bid talking with uh BCA Research chief global strategist and director of research, Peter Berezin. Uh, that's just one hell of a call on the S&P 500 potentially hitting 444,400, 4450, 4450.You mentioned that how many quarters do you think we are in a recession? I mean, recession, what do you still define it as two quarters back toback?

Well, I mean that's kind of the colloquial definition of recession. The NBR National Bureau of Economic Research has a more, uh, holistic, uh, definition. They look at things such as industrial production, unemployment, uh, consumer spending, and so on, not by their metric.We're not in a recession yet, most likely, although, as I mentioned, consumer spending, which is 70% of the economy does seem to be slowing, so it's certainly possible that they'll be calling a recession later this year. It usually takes a while before it's clear that we're in a recession. If you think that you think about the 2008 recession, it took 12 months.

I stillremember seeing packed retail stores in like late 2007, 2008.Like this is not normal guys. You guys see stock prices. It's just, it was a weird it was a weird time, but you know what you're actually based one in in Canada, right? What is, what's the vibe on the ground in Canada with the the local shop owner that's selling liquor, um, your clients, you know, how are they viewing what this administration is doing?

Um, I, well, I mean, in Canada, of course, the mood is one of trepidation.Uh, the business surveys have, uh, weakened sharply.Uh, and now for the first time in my lifetime we're seeing a real backlash against, uh, the US, uh, if you look at some of the data on travel to the US, you know, bookings to Las Vegas, some of these vacation spots are down 70%, uh, so we're gonna see an impact on the US, not just from the retaliatory tariffs, uh.Which are coming but also from people electing just to travel less to the US and do less business with the US because they find that they have no confidence in the current administration. That's certainly the view in Canada I think in the US, the view is a little bit more optimistic. I think there's a hope that President Trump is just using these tariffs as a negotiating lever.Proven wrong, which is proven wrong so far that certainly my view going into this year. I think the issue here is that a tariffs actually aren't that high, at least amongst developed economies and so there's not much that uh other countries such as Canada can do in reducing their tariffs and also the reality is that Trump wants the revenue from these tariffs and so we.And have that revenue if you're just gonna use tariffs as a negotiating tool

we're talking about tariffs as if they're just going to be a US thing, but you mentioned retaliatory tariffs. Well, what happens if Canada comes back after these fresh set of tariffs and announces tariffs of their own? The European Union, China, does that worsen your GDP outlook? Does it worsen what happens to you as consumers? Does it worsen.Does it take that S&P 54,450 call and make it 4000?

Well, those retaliatory tariffs are part of my baseline. I would be shocked if other countries didn't retaliate for no other reason than retaliation is politically popular. I mean, President Trump has single-handedly resurrected the Liberal Party.In Canada, Trudeau and the Liberal Party were heading towards a huge defeat in the coming elections, and now most likely Prime Minister Mark Carney will win. Why? Because he's sounding tough. He's threatening retaliation. Canada is doing retaliation and so unfortunately the risk here is that these.Tariffs are gonna go up as countries retaliate, and that leads uh President Trump to further ratchet up thetariffs.

You think the relationship between the two is permanently destroyed?

I wouldn'tsay it's permanently destroyed. I mean, who knows what will happen in 4 years, but right now it's definitely damaged.

Talk of becoming a state is ridiculous, right?

The US could become the 11th province, so you know that option is still on the table, I suppose, but yeah, I mean this is not something that most Canadians, uh, uh, welcome. They see that as a bullying posture.

Let's go. You mentioned, uh, how overseas markets have done have those moves in Europe. We've seen a rotation out of US stocks to overseas and you know I've told people, I mean it makes sense it made sense initially, but it doesn't make sense now. I'm trying to figure out where do you hide because I could see that European train unwinding if we're in a full on trade war. Where do you go?

There's not a lot where you can go. I think kind of the mood around Europe is too optimistic. Europe, like other countries, are probably benefiting right now from the trade war in the sense that the prospect of higher tariffs has led to a lot of tariff front running orders that would have taken place later this year took place earlier, and that's helped to buoy economic activity that's going to go away over the next few months. It's certainly true that.Germany's stimulating its economy. That's good, but it's really only Germany that can do this stimulus if you look at France, Italy, Spain, Belgium, even the UK, their government debt to GDP ratios are over 100%. There's not a lot of stimulus that they could do even if they wanted to, so I suspect that Europe is going to head down in terms of.Growth later this year just like the US and so hiding in Europe is not gonna be a sensible strategy I think what you wanna do is you want to move more of your assets into cash if you're gonna be in stocks, shift that money towards defensive sectors such as consumer staples, healthcare.

We're gonna needsoup. I mean, that S&P 50 goes to 4450 or maybe it's a couple nights a week you're having soup, maybe a can of tuna fish.

Perhaps,

perhaps, but where do you, where do you rotate to, you know, even in a recession there are certain sectors that out outperform certain stocks that do well. I imagine you can't own the mag mag 7 even in a recession, even though they're down double digits across the board.

No, I mean, usually what happens in recessions is that the really high price stuff gets, uh, bid down even if it eventually rebounds during a recession during a period of risk off sentiment.You don't want to be in high flying tech stocks. What you want to be is in the defensive sectors. You want to be in things like gold. You want to be in cash. I think at some point this year you want to be aggressively buying bonds when the Fed is forced to start cutting rates. I don't think we're quite there yet, but that's, uh, coming, so there are places to hide, but I'll be the first to admit that there aren't a lot of them. If stocks go down, they're gonna go down and they're probably going to go down.Uh, almost across the board, some sectors will do relatively better than others, but in absolute terms, most stocks willstill fall.

I guess I should buy some gold bars from Costco and just bury them in my backyard, right? I mean, that's right, that's where we're going here. I mean it sounds like, um, in the last couple of minutes we always love to get a hot take from our guests. You mentioned, um, we might even be in a recession. Let me put this to you. What is, what is the economic or what is the US GDP growth rate this year?Uh, if we are in recession.

I think on a kind of quarter 4th quarter of a 4th quarter basis will be slightly negative, uh, but that's, you know, that sounds well it's not too bad, slightly negative, but the economy needs to grow by around 2% just to keep the unemployment rate from rising. So if we're looking at zero or negative growth.We're still talking about we're still talking about an unemployment rate that goes up towards 5.56%. That's not gonna be a very pleasant situation for the, uh, labor markets and

the biggest problem is the Fed can't do anything because theoretically inflation is up, growth is slowing, can't cut rates.

I think right now they can't cut rates. Now the Fed has a dual mandate. It's not just inflation that they care about. They also care about the labor market. Once it becomes obvious that we're in a recession, the Fed then will cut rates and they're going to have to accept higher inflation, and they'll probably accept temporarily higher inflation. Now rising slack will eventually bring down inflation, but for a while they'll have to accept.Higher inflation, but the problem is that monetary policy operates with lags. So by the time the Fed starts cutting rates aggressively, it's gonna be too late. We're already gonna be in a recession.

Thisis one big stagflationary environment

for now it's looking stagflationary, yes,

I should know, of course, stagflation, what's slowing growth for periods of high inflation is that how you would you would.

Funded yeah, kind of below trend growth and above target inflation.

Well, look, it's gonna be uh a hell of an end to the year. Uh, I always follow your work, Peter. Uh, it's ahead of the curve, and a lot of times, uh, it's very often, right? Uh, BCA research, uh, chief global strategist, director of research, Peter Berezin, good to see you. Uh, safe travels back to what, uh, Montreal back to Montreal. All right, we, uh, we'll talk to you soon.Alright, and that is it for the latest episode of Opening Bid. Continue to hit us with all those 5 stars on all the podcast platforms, thumbs up on YouTube. Love all your comments and feedback. I try to answer every single one of them. We'll talk to you soon.