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Saxo Bank CIO: ‘In real terms, we are in a recession’

Saxo Bank CIO Steen Jakobsen joins Yahoo Finance Live to discuss retail sales, market dynamics, meme stock speculation, and Fed tightening.

Video Transcript

BRAD SMITH: All right, guys, and switching gears back to retail. Retail continuing to run markets this morning. Target's miss tempering early earnings optimism seen from Walmart and Home Depot. Retail sales data adding to that picture.

Let's step back and take a broader look with Steen Jakobsen, who is the Saxo Bank Chief Investment Officer. Steen, great to have you here with us this morning. As we are continuing to evaluate what this all tells us about the mindset of the consumer, what would you extrapolate from both the economic data, as well as the earnings reports, to really kind of paint the picture of exactly where consumers find themselves as a part of the economy right now that is 2/3 driven by them?

STEEN JAKOBSEN: So overall, the consumer is in fine shape. And what you find in terms of the actual reporting, you find a very scattered sort of picture in terms of how the companies are doing. Some people-- some companies clearly has been left with too much inventories in this cycle. And some of them, of course, have been stacking up, too, simply because one year ago, even getting commodities and goods on the shelf was a big issue.

But overall, the private sector balance sheet has been shown to be extremely resilient. You see that through the credit card spending. You see that through even the economic data that comes out of the Federal Reserve and the Bureau of Statistics. So for me, this is just another example of how the market is clearly moving into a stock picker's market more than a momentum market.

BRIAN SOZZI: Steen, let me push back on that because we've seen a lot of momentum over the past week on these meme stocks. It's been a very confusing names. We've been highlighting all morning long Bed Bath & Beyond seeing some big moves and a lot of cash plow into AMC and GameStop. What is driving this?

STEEN JAKOBSEN: It's the euphoria, basically. If you want to really create a narrative, I don't think stocks like that need a narrative in itself because it's like a game. For a allocator like me, I don't even spend more than two minutes a day concerning myself with the meme stocks and the like. But if you want to find a rationality for what goes on, it's basically that the soft landing is going to work for the equity market.

We have a free ride in terms of the maximum interest rate that we'll see. And on top of that, then you clearly get what we in our business call convexity plays. So as interest rate and volatility comes down, these stocks become extremely attractive for short-term speculators. But let me stress, this is entirely speculative. You can just as well go to the casino and put all your money on black.

BRAD SMITH: Oh, yeah. No, I'm not going to do that. Steen, we think about, though, what you just mentioned a moment ago, the soft landing probability and whether or not a real recession would be felt as part of that soft landing. What would you put the expectation at around that?

STEEN JAKOBSEN: So I think from my perspective, we are in a recession if you want to talk about real growth, but we are so far away that is almost imaginable if you're talking normal growth. So right now the US economy is humming along with 9% to 10% nominal growth, while the reporting that we've seen in terms of two quarters of negative growth in real terms is coming down. But remember, the stock market is actually using nominal growth rates. Of course, the sales top line of most companies is costs driven by the actual sales they have, not the real sales.

But if you did actually bother to do the exercise of taking nominal growth out of, for instance, the retail companies and deconstruct that with the actual underlying inflation rate, you will see that the numbers that's been reporting in earnings per share is actually very, very poor relative to the euphoria that exists in the marketplace. So a long answer to your question, basically, in real terms, we are in a recession. In nominal terms, that's not even a 10% chance that we reach that in '22 in terms of for the nominal side of it.

BRIAN SOZZI: So Steen, just staying on some of these retail earnings, look, the weakness was very clear at their core. I mean, do you think these numbers from Walmart, Target, you name it, even TJ Maxx, they suggest we are in a recession?

STEEN JAKOBSEN: No, I don't think they necessarily-- I know we all love to produce. The back of an end of 70% of the US GDP growth is from consumers. But the consumer side that the Targets and the Walmarts you look at is the consumption, and it is the consumption, if I'm diplomatic, at the lower end of the income brackets. And lower-income brackets, of course, is severely hit.

So what I think is the biggest story here is that the low-income brackets in the US is being hurt massively and being impaired from the high energy prices, from the higher inflation that we see. But in terms of the middle income and the high-income brackets in the US, there's absolutely zero impact so far in terms of their ability to both live through this inflation elevation, but also deal with it. So in total terms, if you take the relative size of the different brackets, we are still at a very slow and grinding and bleeding lower in terms of the consumer's pocketbook, basically.

BRIAN SOZZI: Steen Jakobsen, Saxo Bank Chief Investment Officer, good to see you. We'll talk to you soon.