David Zervos, Jefferies Chief Market Strategist, joins Yahoo Finance to discuss the outlook on the economy, consumer sentiment, the labor market, and Fed expectations.
JULIA LA ROCHE: David Zervos, the chief market strategist for Jefferies. David, you had a great note out on Sunday evening that garnered a lot of attention, certainly caught our attention. And it was following some economic data, the University of Michigan's Survey of Consumers. And in that note, you pointed out that our consumer is far more fragile than many are thinking, which is why the Fed is playing a very dangerous game with its turn toward more hawkish rhetoric.
Would love to explore this thesis that you laid out here in the note and some of the reaction that you've gotten.
DAVID ZEROS: Yeah. It's nice to be here, Julia, first of all. Thanks for having me. And yeah, I think that note, it did get a lot of attention, probably because I wrote it on the weekend. I don't usually write on weekends. But I wanted to kind of start everybody's week off by having them read the opening paragraph from the chief economist that puts together that University of Michigan survey, which probably nobody's ever heard of. His name's Richard Curtin.
But he wrote a very sobering paragraph. And when you read it-- and I tend not to get caught up in any one individual data piece. But when someone tells me there's a 50-year time series of data-- the University of Michigan Survey of Consumers, and it's been around for 50 years. And we just had the sixth worst print in history. And it's worse than it was at any time during the pandemic.
I kind of go, well, that's pretty serious. Let me dig a little deeper. And reading Richard's note, I was just very struck by the tone that he had. And I think he made a very important point, which is that the emotional scarring. And he used the word emotional, and I like that a lot. The emotional scarring that our consumer has had through this entire pandemic process has been a lot more extreme than many people are thinking.
And I think it's nice to put these numbers up about how GDP has recovered and how we've gotten a lot of the jobs back. But people's confidence on their employment outlook and their income outlook fell. It fell last month in the survey. It fell by not as much as the sentiment toward inflation caused the drop. But the fact that it fell with 10 million job openings and JOLTs tells you that people's confidence is not as strong as many would hope and certainly, I think the Fed would hope.
JULIA LA ROCHE: Right. And as you point out, it runs counter to a bunch of the narratives out there. I would like to dig in on this a bit more and what do you think is weighing on that consumer sentiment. I know you brought up a few ideas here. But is it inflation, or is it the delta variant? As you kind of dig into it, what do you think it is? What's at the root of it here?
DAVID ZEROS: I mean, I think the inflation story has definitely got people focused. And you hear it in everyday discussions. You hear it in the markets. You hear it with your family around the dinner table. And you see it in the survey data. We're up at pretty high numbers for the short-term inflation expectations, although, Julia, they did drop back last month. So the one-year ahead inflation expectations actually fell, even though long-term went up toward 3%.
But here's the funny thing, inflation expectations, the long-term numbers, were actually higher back in 2011 than they were today. They were, I think, 3.2% or 3.3% was the peak. And now we're at 3%. And 3% isn't that crazy for long-term inflation expectations. They usually have been well above the 2 number on a regular basis.
So I don't think you can really say that it's inflation expectations. What you could say, it's the speed with which the inflation numbers have moved, the velocity. So that's probably more of a culprit. We had 0.9%, a 0.7%, and another 0.9% on the core CPI. And now we just got a 0.3%, which is a great relief, especially to the transitory folks, like myself.
But to see used car prices going up 10% in a month and then 7% in a month and another 6% or 7%, I mean, these are huge increases in things that people on the ground are seeing. It's not like cruises on yachts have gone up or prices of high-end goods, although they have gone up. It's real everyday things and even things that affect, say, the bottom the bottom 80% of the income distribution, not the top 20% of the income distribution.
So I think there's something to that. I also think that people are just not as confident that this job market is as robust as the data might say.
And let's also go back to one other thing. We are still missing 5.8 million jobs from where we were in February 2020. Yes, GDP is back to its now-highest level in history. We surpassed the Q4 2019 numbers in the last Q2 report, barely. So we're basically flat in GDP for six quarters. But we're doing the same GDP, making the same amount of stuff, producing the same amount of stuff with 5.8 million less people.
Now, if I were a worker and I saw that this economy could produce the same amount of stuff that it produced in Q4 of 2019 with 5.8 million less jobs, like 5.8 million less people employed, I'd actually be a little bit worried about my job because that tells me that productivity has surged but that my job may not be around as long as I really want it to be around.
So I think there's a lot of anxiety on the job front. Even though it's an amazing time to get a job, the duration of that amazing time may be causing a few sleepless nights for some.
BRIAN CHEUNG: Hey, David, it's Brian Cheung here. Fascinating conversation here. Now obviously, as we head into next week's Jackson Hole symposium where the Fed will be offering a little bit more commentary, what do you think is going to be the big story? I mean, your fixation on the labor market is their fixation as well, especially under the new framework.
And we know that the Jackson Hole speeches and commentary tend to be fairly academic in nature. Do you expect that something like inflation expectations would be a big focal point of Jay Powell's speech? What do you expect to see next Thursday and Friday?
DAVID ZEROS: I don't expect a lot of fireworks. I think this is not the time nor the place to bring up, hey, we're about to start tapering. I think they do want to see another employment report before the next meeting, for sure. So I think that's not the story line.
Inflation expectations? Look, inflation's kind of going in the right direction for them after the last CPI report. So I don't think there's a lot to get souped-up about in that one.
What I do think is that the title of Jackson Hole is about income inequality and what central banks can do to sort of deal with that and what that means for the overall performance of the economy. So I would expect Jay to be addressing more of this income inequality issue and maybe have even some touches on some of the environmental concerns that have come up in a few of his speeches on the ESG stuff, which is much further ahead in Europe and Japan than it is with us.
But nevertheless, I think it's going to be more about those things. But in particular, I think it's going to be about the inequality issues and probably doing a lot of repair work to say that the Fed did not cause inequality. That's one because they don't want to be seen as having done that. And there's a lot of folks out there that do believe that many of these policies did contribute to inequality. So there's some repair work.
And then some ideas on how the Fed is thinking about tweaking its toolkit in the future to help deal with some of the inequality issues, whether that's the next set of programs that come in a downturn that target more of the inequality issue rather than trying to be blanket programs for the entire corporate bond market or the entire muni market or the entire commercial paper market. I think that's going to be an interesting part of the discussion.
Whether anything significant comes out, I'm skeptical. Actually, I'm more likely thinking this is a dud than anything else. But we'll see.
JULIA LA ROCHE: Well, we'll certainly be watching. David Zervos, chief market strategist at Jefferies, always great to have you on the program. Thank you so much for your time.