WEBVTT 00:00:00.000 --> 00:00:04.340 align:middle line:90% 00:00:04.340 --> 00:00:06.800 align:middle line:84% Good afternoon, and welcome to the August Eye 00:00:06.800 --> 00:00:10.850 align:middle line:84% On the Market audio/video podcast. 00:00:10.850 --> 00:00:13.130 align:middle line:90% I'm not really in San Francisco. 00:00:13.130 --> 00:00:15.260 align:middle line:90% That's just a Zoom background. 00:00:15.260 --> 00:00:18.710 align:middle line:84% But I have this fancy new microphone, because some of you 00:00:18.710 --> 00:00:21.440 align:middle line:84% have commented that the audio from my iPhone headphones 00:00:21.440 --> 00:00:22.100 align:middle line:90% is terrible. 00:00:22.100 --> 00:00:25.400 align:middle line:84% So I now have a professional Edward R. Murrow-style 00:00:25.400 --> 00:00:27.260 align:middle line:90% microphone. 00:00:27.260 --> 00:00:30.470 align:middle line:84% And you'll be able to see this on video 00:00:30.470 --> 00:00:33.890 align:middle line:84% if you're accessing it through our website rather 00:00:33.890 --> 00:00:37.730 align:middle line:84% than the Spotify or Apple Podcast portal. 00:00:37.730 --> 00:00:41.620 align:middle line:84% Anyway, welcome to the August Eye 00:00:41.620 --> 00:00:46.150 align:middle line:84% on the Market audio-visual extravaganza. 00:00:46.150 --> 00:00:49.840 align:middle line:84% So I-- like everybody else, I'm somewhat 00:00:49.840 --> 00:00:54.220 align:middle line:84% surprised that despite 400 to 500 basis points of tightening 00:00:54.220 --> 00:00:58.360 align:middle line:84% in the US and Europe and a very weak Chinese recovery, 00:00:58.360 --> 00:01:03.160 align:middle line:84% the equity markets are up globally about 18% this year. 00:01:03.160 --> 00:01:08.500 align:middle line:84% And Q3 GDP looks like it's globally going to hang in 00:01:08.500 --> 00:01:11.240 align:middle line:90% and still poised for around 2%. 00:01:11.240 --> 00:01:15.850 align:middle line:84% So the reason I'm calling this the Rasputin recovery is 00:01:15.850 --> 00:01:18.220 align:middle line:84% if you remember the legend around Rasputin, which 00:01:18.220 --> 00:01:21.130 align:middle line:84% is almost certainly false-- but he was I think beaten, 00:01:21.130 --> 00:01:24.430 align:middle line:84% poisoned, shot twice, and then finally drowned before he dies. 00:01:24.430 --> 00:01:28.630 align:middle line:84% And it's a proxy for how I see the global economy right now. 00:01:28.630 --> 00:01:30.910 align:middle line:84% No matter what the central banks are throwing at it, 00:01:30.910 --> 00:01:33.070 align:middle line:84% it continues to exhibit some resilience. 00:01:33.070 --> 00:01:35.920 align:middle line:84% And the same goes for the equity markets as well. 00:01:35.920 --> 00:01:37.030 align:middle line:90% How can we explain this? 00:01:37.030 --> 00:01:40.520 align:middle line:84% Well, the obvious catalyst is the decline 00:01:40.520 --> 00:01:42.470 align:middle line:90% in inflation surprises. 00:01:42.470 --> 00:01:45.080 align:middle line:84% So we've got a chart in here that shows for the US 00:01:45.080 --> 00:01:48.723 align:middle line:84% and globally what those inflation surprises looked 00:01:48.723 --> 00:01:50.390 align:middle line:84% like just in the beginning of this year. 00:01:50.390 --> 00:01:51.830 align:middle line:90% And they have collapsed. 00:01:51.830 --> 00:01:54.770 align:middle line:84% And whether you're looking at core inflation, trimmed 00:01:54.770 --> 00:01:57.980 align:middle line:84% inflation, sticky price inflation, median inflation, 00:01:57.980 --> 00:01:59.840 align:middle line:84% and then a bunch of other measures related 00:01:59.840 --> 00:02:02.630 align:middle line:84% to supply chains and the jobs workers gap, 00:02:02.630 --> 00:02:07.277 align:middle line:84% the inflation outlook has cooled, more or less, the way 00:02:07.277 --> 00:02:08.360 align:middle line:90% the Fed thought it should. 00:02:08.360 --> 00:02:10.610 align:middle line:84% It just took them another year or so before it 00:02:10.610 --> 00:02:13.010 align:middle line:90% started to happen. 00:02:13.010 --> 00:02:15.440 align:middle line:84% And that's the obvious big catalyst, 00:02:15.440 --> 00:02:18.290 align:middle line:84% but I wanted to walk through six other important catalysts 00:02:18.290 --> 00:02:20.210 align:middle line:84% so that everybody understands where we are, 00:02:20.210 --> 00:02:21.710 align:middle line:84% why the markets are doing this well, 00:02:21.710 --> 00:02:23.990 align:middle line:90% and where we go from here. 00:02:23.990 --> 00:02:26.240 align:middle line:84% I think the biggest surprise to some people 00:02:26.240 --> 00:02:30.800 align:middle line:84% has been a chart that we have showing that 00:02:30.800 --> 00:02:34.310 align:middle line:84% on seven prior occasions, every time the yield curve inverted, 00:02:34.310 --> 00:02:35.150 align:middle line:90% you had a recession. 00:02:35.150 --> 00:02:36.740 align:middle line:90% And it was almost automatic. 00:02:36.740 --> 00:02:38.660 align:middle line:84% And there were very few, if any, false 00:02:38.660 --> 00:02:41.180 align:middle line:84% signals where you had an inverted yield curve 00:02:41.180 --> 00:02:42.480 align:middle line:90% and you didn't get a recession. 00:02:42.480 --> 00:02:45.170 align:middle line:84% So we have a chart in here with these little red arrows 00:02:45.170 --> 00:02:47.540 align:middle line:84% showing that if you look at the yield curve inversion 00:02:47.540 --> 00:02:49.400 align:middle line:84% from three months to 10 years, it 00:02:49.400 --> 00:02:51.360 align:middle line:90% was a really consistent signal. 00:02:51.360 --> 00:02:53.240 align:middle line:84% And as you can see, the yield curve 00:02:53.240 --> 00:02:57.305 align:middle line:90% is mega-inverted right now. 00:02:57.305 --> 00:02:59.930 align:middle line:84% But I don't think this is such a great signal this time around. 00:02:59.930 --> 00:03:02.090 align:middle line:84% And I've been explaining to clients this year 00:03:02.090 --> 00:03:05.690 align:middle line:84% when I've been meeting them that the reason why 00:03:05.690 --> 00:03:08.180 align:middle line:84% that inverted yield curve was such a successful signal, 00:03:08.180 --> 00:03:11.360 align:middle line:84% if you look back, was the yield curve was inverted, 00:03:11.360 --> 00:03:13.550 align:middle line:84% but that's because the short end of the curve 00:03:13.550 --> 00:03:16.290 align:middle line:84% was really high relative to inflation. 00:03:16.290 --> 00:03:19.100 align:middle line:84% And if you look at a chart on the real cost of money 00:03:19.100 --> 00:03:21.410 align:middle line:84% associated with those yield curve inversions, 00:03:21.410 --> 00:03:23.060 align:middle line:90% you saw real cost of money-- 00:03:23.060 --> 00:03:26.570 align:middle line:90% 2%, 4%, 8%, maybe even 10%. 00:03:26.570 --> 00:03:29.930 align:middle line:84% This time around, the real cost of money 00:03:29.930 --> 00:03:31.800 align:middle line:90% is still barely positive. 00:03:31.800 --> 00:03:36.140 align:middle line:84% So I think it's premature to even look at this recession 00:03:36.140 --> 00:03:40.070 align:middle line:84% indicator inversion thing because the real cost of money 00:03:40.070 --> 00:03:42.980 align:middle line:84% this time around is barely positive at all. 00:03:42.980 --> 00:03:46.760 align:middle line:84% And it's a sign of just how far behind the Fed got relative 00:03:46.760 --> 00:03:48.150 align:middle line:90% to inflation. 00:03:48.150 --> 00:03:50.690 align:middle line:84% The other thing, too, is if you're really 00:03:50.690 --> 00:03:52.940 align:middle line:84% into that kind of yield curve inversion always 00:03:52.940 --> 00:03:54.980 align:middle line:84% predicts a recession stuff, then you've 00:03:54.980 --> 00:03:58.730 align:middle line:84% got to look at the corporate sector financial balance, which 00:03:58.730 --> 00:04:01.820 align:middle line:84% is a broad measure of the profitability 00:04:01.820 --> 00:04:04.610 align:middle line:84% of the entire corporate sector, not just public companies, 00:04:04.610 --> 00:04:08.790 align:middle line:84% net of capital spending and other kinds of transfers. 00:04:08.790 --> 00:04:12.260 align:middle line:84% And in the past, you got a recession 00:04:12.260 --> 00:04:15.680 align:middle line:84% because that corporate sector financial balance 00:04:15.680 --> 00:04:16.490 align:middle line:90% went negative. 00:04:16.490 --> 00:04:19.800 align:middle line:84% This time around, it's still substantially positive. 00:04:19.800 --> 00:04:23.810 align:middle line:84% So if you're into recession indicator tracking, 00:04:23.810 --> 00:04:27.410 align:middle line:84% the corporate sector financial balance would offset the yield 00:04:27.410 --> 00:04:31.340 align:middle line:84% curve inversion signal even if you believed it, which I don't. 00:04:31.340 --> 00:04:34.400 align:middle line:84% The second thing is, yes, the central banks 00:04:34.400 --> 00:04:36.750 align:middle line:84% are starting to take back some of the stimulus, 00:04:36.750 --> 00:04:40.190 align:middle line:84% but if you look broadly across the Fed and Europe and Japan 00:04:40.190 --> 00:04:42.960 align:middle line:84% and the Swiss National Bank, Canada, Bank of England, 00:04:42.960 --> 00:04:47.950 align:middle line:84% and then the relevant comparable entity within China, 00:04:47.950 --> 00:04:51.370 align:middle line:84% only around 35% of the emergency stimulus 00:04:51.370 --> 00:04:54.290 align:middle line:84% from a monetary perspective has been withdrawn. 00:04:54.290 --> 00:04:56.980 align:middle line:84% So there's still a lot of money sloshing around, 00:04:56.980 --> 00:04:59.950 align:middle line:84% and the real cost of money is not prohibitively high. 00:04:59.950 --> 00:05:01.420 align:middle line:84% Those are the first two takeaways 00:05:01.420 --> 00:05:04.180 align:middle line:84% in terms of why things are doing so well 00:05:04.180 --> 00:05:07.000 align:middle line:84% despite 5% higher Fed funds rates 00:05:07.000 --> 00:05:08.800 align:middle line:90% than we started the year with. 00:05:08.800 --> 00:05:10.990 align:middle line:84% The third factor is fiscal stimulus. 00:05:10.990 --> 00:05:14.140 align:middle line:90% 00:05:14.140 --> 00:05:18.730 align:middle line:84% And we have a chart here showing the spike, a really big spike 00:05:18.730 --> 00:05:21.280 align:middle line:84% in construction spending not related 00:05:21.280 --> 00:05:23.980 align:middle line:84% to commercial real estate but related to manufacturing. 00:05:23.980 --> 00:05:27.550 align:middle line:84% And that started to happen shortly after the semiconductor 00:05:27.550 --> 00:05:31.300 align:middle line:84% bill and the energy bill and the infrastructure bills 00:05:31.300 --> 00:05:32.320 align:middle line:90% were passed. 00:05:32.320 --> 00:05:35.930 align:middle line:84% There's a lot of money getting spent here. 00:05:35.930 --> 00:05:39.580 align:middle line:84% And more broadly-- this is the amazing part-- 00:05:39.580 --> 00:05:42.350 align:middle line:84% the fiscal deficit in the United States 00:05:42.350 --> 00:05:47.000 align:middle line:84% is almost as large as it was at its peak level in 2009 00:05:47.000 --> 00:05:49.740 align:middle line:84% when you had the global recession. 00:05:49.740 --> 00:05:54.230 align:middle line:84% So yeah, there's a lot of monetary tightening taking 00:05:54.230 --> 00:05:58.910 align:middle line:84% place, but there's a lot of fiscal easing offsetting that. 00:05:58.910 --> 00:06:00.620 align:middle line:84% Our partners in the investment bank, 00:06:00.620 --> 00:06:02.570 align:middle line:84% they have a great economics team. 00:06:02.570 --> 00:06:05.120 align:middle line:84% And Mike Feroli and his team wrote a piece 00:06:05.120 --> 00:06:08.728 align:middle line:84% on analyzing what's driving the US deficit. 00:06:08.728 --> 00:06:10.520 align:middle line:84% And that's a lot of little bits and pieces, 00:06:10.520 --> 00:06:12.770 align:middle line:84% but lower income and payroll tax receipts, 00:06:12.770 --> 00:06:14.480 align:middle line:84% drop in remittances from the Federal 00:06:14.480 --> 00:06:17.840 align:middle line:84% Reserve to the Treasury, more cost-of-living adjustments, 00:06:17.840 --> 00:06:19.735 align:middle line:84% higher Medicaid and Medicare outlays, 00:06:19.735 --> 00:06:22.110 align:middle line:84% higher interest on the federal debt, and then, of course, 00:06:22.110 --> 00:06:24.140 align:middle line:84% don't forget about the last one, which 00:06:24.140 --> 00:06:27.590 align:middle line:84% is increased FDIC payments to depositors after the bank 00:06:27.590 --> 00:06:29.450 align:middle line:84% failures that occurred earlier this year. 00:06:29.450 --> 00:06:32.120 align:middle line:84% But the bottom line is there's a lot of fiscal stimulus taking 00:06:32.120 --> 00:06:33.410 align:middle line:90% place. 00:06:33.410 --> 00:06:36.620 align:middle line:84% The fourth factor that has helped 00:06:36.620 --> 00:06:40.130 align:middle line:84% contribute to this Rasputin market and Rasputin economy 00:06:40.130 --> 00:06:43.790 align:middle line:84% is it's going to take a while for higher interest rates 00:06:43.790 --> 00:06:47.600 align:middle line:84% to feed into the corporate sector and the household 00:06:47.600 --> 00:06:48.380 align:middle line:90% sector. 00:06:48.380 --> 00:06:50.660 align:middle line:84% And so there was a chart in here. 00:06:50.660 --> 00:06:51.930 align:middle line:90% And I'll be honest with you. 00:06:51.930 --> 00:06:54.680 align:middle line:84% I can't tell you exactly why this is happening 00:06:54.680 --> 00:06:56.180 align:middle line:90% because it's remarkable. 00:06:56.180 --> 00:07:01.010 align:middle line:84% But it shows-- we have a chart that shows that every time 00:07:01.010 --> 00:07:03.860 align:middle line:84% since the early '70s when the Fed funds rate went up-- 00:07:03.860 --> 00:07:05.750 align:middle line:84% in other words, when policy rates went up-- 00:07:05.750 --> 00:07:08.810 align:middle line:84% corporate interest payments as a percentage of their profits 00:07:08.810 --> 00:07:10.370 align:middle line:90% went up too. 00:07:10.370 --> 00:07:16.220 align:middle line:84% This time, not only is that net interest payment ratio 00:07:16.220 --> 00:07:18.470 align:middle line:90% not rising, it's still falling. 00:07:18.470 --> 00:07:20.690 align:middle line:84% And now, there's a number of things 00:07:20.690 --> 00:07:22.820 align:middle line:84% that could be contributing to this, 00:07:22.820 --> 00:07:29.210 align:middle line:84% notably companies that have a lot of short-term excess cash 00:07:29.210 --> 00:07:31.100 align:middle line:84% are reinvesting and earning higher rates. 00:07:31.100 --> 00:07:34.130 align:middle line:84% And those same companies, one can infer, 00:07:34.130 --> 00:07:37.250 align:middle line:84% extended duration massively at the low rates. 00:07:37.250 --> 00:07:41.300 align:middle line:84% How ironic is it that the corporate sector understood 00:07:41.300 --> 00:07:44.180 align:middle line:84% the assignment when rates were-- when 10-year rates were 00:07:44.180 --> 00:07:46.220 align:middle line:84% at 1.5%, the corporate sector extended 00:07:46.220 --> 00:07:49.130 align:middle line:84% duration, whereas some of the banks who you would assume 00:07:49.130 --> 00:07:52.220 align:middle line:84% were experts in asset liability management-- some of the banks, 00:07:52.220 --> 00:07:55.370 align:middle line:84% as you now know, extended their asset duration 00:07:55.370 --> 00:07:58.317 align:middle line:84% at the lows in rates while the corporate sector got it right 00:07:58.317 --> 00:07:59.900 align:middle line:84% and extended their liability duration. 00:07:59.900 --> 00:08:01.280 align:middle line:90% I think it's kind of ironic. 00:08:01.280 --> 00:08:05.780 align:middle line:84% But you can see in this chart that the corporate sector 00:08:05.780 --> 00:08:10.700 align:middle line:84% is not really getting hit right now from higher interest rates. 00:08:10.700 --> 00:08:13.610 align:middle line:84% Most certainly, that has something to do with having-- 00:08:13.610 --> 00:08:17.240 align:middle line:84% their having extended duration when rates were much lower. 00:08:17.240 --> 00:08:19.520 align:middle line:84% And same for the household sector. 00:08:19.520 --> 00:08:24.350 align:middle line:84% Look at the rate on outstanding mortgages. 00:08:24.350 --> 00:08:28.700 align:middle line:84% That rate has come down steadily and is now around-- let's say 00:08:28.700 --> 00:08:30.540 align:middle line:90% around 3.5%. 00:08:30.540 --> 00:08:36.020 align:middle line:84% So in contrast to Europe, most homeowners in the United States 00:08:36.020 --> 00:08:39.230 align:middle line:84% have long-duration fixed-rate mortgages. 00:08:39.230 --> 00:08:42.440 align:middle line:84% And while mortgages look prohibitively expensive 00:08:42.440 --> 00:08:46.460 align:middle line:84% for new home buyers, existing home owners 00:08:46.460 --> 00:08:48.290 align:middle line:84% have locked in really low rates, which 00:08:48.290 --> 00:08:51.560 align:middle line:84% is one of the reasons why the debt service to income 00:08:51.560 --> 00:08:54.470 align:middle line:84% ratio of the US household sector has gone up 00:08:54.470 --> 00:08:56.510 align:middle line:84% a little bit with higher rates but is still 00:08:56.510 --> 00:08:59.600 align:middle line:84% close to the lowest levels that it's been at since 1980. 00:08:59.600 --> 00:09:02.330 align:middle line:84% So not just the corporate sector has 00:09:02.330 --> 00:09:04.730 align:middle line:84% been resilient to higher rates, but also households. 00:09:04.730 --> 00:09:07.370 align:middle line:84% And housing has gotten hit pretty 00:09:07.370 --> 00:09:10.250 align:middle line:84% hard in terms of starts and permits 00:09:10.250 --> 00:09:12.900 align:middle line:84% and mortgage applications and the normal stuff 00:09:12.900 --> 00:09:14.430 align:middle line:90% that you'd look at. 00:09:14.430 --> 00:09:18.210 align:middle line:84% But housing would have looked much worse if not for the fact 00:09:18.210 --> 00:09:22.080 align:middle line:84% that we have very tight inventory levels in terms 00:09:22.080 --> 00:09:24.780 align:middle line:90% of single-family homes. 00:09:24.780 --> 00:09:27.030 align:middle line:84% We have a chart in here showing that we're still close 00:09:27.030 --> 00:09:29.730 align:middle line:84% to the levels of the last 40 years 00:09:29.730 --> 00:09:34.960 align:middle line:84% or so in terms of the supply of existing single-family homes. 00:09:34.960 --> 00:09:36.540 align:middle line:84% So that tight supply-- now, there's 00:09:36.540 --> 00:09:38.460 align:middle line:84% all sorts of problems related to that 00:09:38.460 --> 00:09:42.600 align:middle line:84% in terms of productivity and employment and labor mobility. 00:09:42.600 --> 00:09:45.075 align:middle line:84% But this time around, it's made the housing markets 00:09:45.075 --> 00:09:47.450 align:middle line:84% more resilient than it might have been to rising interest 00:09:47.450 --> 00:09:48.150 align:middle line:90% rates. 00:09:48.150 --> 00:09:52.750 align:middle line:84% So if we step back and look at the US consumer, 00:09:52.750 --> 00:09:57.100 align:middle line:84% in January of this year, the consensus forecasts 00:09:57.100 --> 00:10:02.140 align:middle line:84% were a consumer-led recession by the summer. 00:10:02.140 --> 00:10:04.750 align:middle line:84% All of the factors I've just walked through 00:10:04.750 --> 00:10:07.630 align:middle line:84% have helped prevent that from happening so far. 00:10:07.630 --> 00:10:10.090 align:middle line:84% And now when you look at those same forecasts, 00:10:10.090 --> 00:10:11.950 align:middle line:84% the decline has pushed out a little bit 00:10:11.950 --> 00:10:14.530 align:middle line:84% but notably doesn't go negative on any kind 00:10:14.530 --> 00:10:17.270 align:middle line:84% of year-on-year or quarter-on-quarter basis. 00:10:17.270 --> 00:10:21.010 align:middle line:84% So the forecast of the consumer slowdown 00:10:21.010 --> 00:10:24.370 align:middle line:84% has changed in terms of both timing and magnitude. 00:10:24.370 --> 00:10:28.090 align:middle line:84% And the other thing-- and this gets discussed a lot, 00:10:28.090 --> 00:10:30.550 align:middle line:90% and I think it should-- 00:10:30.550 --> 00:10:33.730 align:middle line:84% households are still burning off massive amounts 00:10:33.730 --> 00:10:37.870 align:middle line:84% of excess savings that they got during COVID 00:10:37.870 --> 00:10:43.090 align:middle line:84% via both fiscal stimulus means and monetary stimulus means. 00:10:43.090 --> 00:10:44.680 align:middle line:84% Here are three different forecasts 00:10:44.680 --> 00:10:47.980 align:middle line:84% from three different parts of JP Morgan we have in this chart, 00:10:47.980 --> 00:10:51.350 align:middle line:84% and they're all pointing to the same thing, which is sometime 00:10:51.350 --> 00:10:53.090 align:middle line:90% in 2024, that runs out. 00:10:53.090 --> 00:10:56.990 align:middle line:84% But that still gives you at least a few months of cushion 00:10:56.990 --> 00:10:58.820 align:middle line:84% where households will have the ability 00:10:58.820 --> 00:11:02.330 align:middle line:84% to spend in excess of their earned income. 00:11:02.330 --> 00:11:06.920 align:middle line:84% Now, even with all of that, just wait. 00:11:06.920 --> 00:11:11.090 align:middle line:84% The leading indicators are still projecting weakness 00:11:11.090 --> 00:11:14.480 align:middle line:90% this fall, Q4, Q1. 00:11:14.480 --> 00:11:17.930 align:middle line:84% We have a chart in here showing you can split leading 00:11:17.930 --> 00:11:19.910 align:middle line:84% indicators into coincident indicators, 00:11:19.910 --> 00:11:21.590 align:middle line:84% meaning the stuff that's happening now, 00:11:21.590 --> 00:11:24.260 align:middle line:84% and leading indicators, which is the stuff that's expected 00:11:24.260 --> 00:11:25.610 align:middle line:90% to happen in a few months. 00:11:25.610 --> 00:11:27.620 align:middle line:84% And the coincident indicators all 00:11:27.620 --> 00:11:30.650 align:middle line:84% look fine, whereas the leading indicators still 00:11:30.650 --> 00:11:31.640 align:middle line:90% look pretty weak. 00:11:31.640 --> 00:11:35.570 align:middle line:84% And so we take a closer look than just 00:11:35.570 --> 00:11:38.150 align:middle line:84% at these aggregate baskets, and we 00:11:38.150 --> 00:11:42.980 align:middle line:84% track 20 or so long-dated leading indicators 00:11:42.980 --> 00:11:46.640 align:middle line:84% that give us a sense for what might be happening anywhere 00:11:46.640 --> 00:11:50.330 align:middle line:84% from three months to six months, nine months, 12 months. 00:11:50.330 --> 00:11:51.860 align:middle line:90% They don't look terrible. 00:11:51.860 --> 00:11:53.600 align:middle line:84% We have a color-coded table in the Eye 00:11:53.600 --> 00:11:55.490 align:middle line:84% on the Market that shows roughly what we're 00:11:55.490 --> 00:11:57.800 align:middle line:90% expecting based on each one. 00:11:57.800 --> 00:12:03.110 align:middle line:84% And there's a modest slowdown expected later this year 00:12:03.110 --> 00:12:05.360 align:middle line:84% or early first quarter that I would 00:12:05.360 --> 00:12:08.810 align:middle line:84% put at something like 1% growth rather than recession. 00:12:08.810 --> 00:12:11.600 align:middle line:84% But that does have implications for how large an equity 00:12:11.600 --> 00:12:15.860 align:middle line:84% market drawdown you might expect, even if there is one. 00:12:15.860 --> 00:12:20.660 align:middle line:84% And a lot of these signals look a lot less malevolent 00:12:20.660 --> 00:12:23.790 align:middle line:90% than they did a few months ago. 00:12:23.790 --> 00:12:28.190 align:middle line:84% Now, of course, the last and the sixth factor 00:12:28.190 --> 00:12:33.830 align:middle line:84% is what's been driving the market this year is the return 00:12:33.830 --> 00:12:35.870 align:middle line:90% of risk appetite in a big way. 00:12:35.870 --> 00:12:37.410 align:middle line:90% So just be aware of that. 00:12:37.410 --> 00:12:39.950 align:middle line:84% This is not an earnings-led recovery. 00:12:39.950 --> 00:12:43.010 align:middle line:84% First of all, the market cap of the largest seven companies 00:12:43.010 --> 00:12:45.680 align:middle line:84% is at its highest level since the 1970s. 00:12:45.680 --> 00:12:47.930 align:middle line:84% It's even narrower market leadership 00:12:47.930 --> 00:12:50.540 align:middle line:84% than during the TMT bubble during 2000. 00:12:50.540 --> 00:12:51.980 align:middle line:90% And you've all read about this. 00:12:51.980 --> 00:12:53.870 align:middle line:90% We've written about it before. 00:12:53.870 --> 00:12:56.450 align:middle line:84% The crowding and growth factor investing 00:12:56.450 --> 00:13:01.430 align:middle line:84% has reached the 97th percentile eclipsed only in the year 2000. 00:13:01.430 --> 00:13:04.550 align:middle line:84% There was a very good piece that the investment bank-- 00:13:04.550 --> 00:13:07.490 align:middle line:84% JP Morgan's investment bank put out last week 00:13:07.490 --> 00:13:11.870 align:middle line:84% by the US equity strategy team that gets detail on this. 00:13:11.870 --> 00:13:14.870 align:middle line:84% I cited in the Eye on the Market the name of that piece in case 00:13:14.870 --> 00:13:16.700 align:middle line:90% you want to look at it. 00:13:16.700 --> 00:13:20.300 align:middle line:84% And for those of you that are fans of the Eye on the Market, 00:13:20.300 --> 00:13:22.760 align:middle line:90% just be aware the YUCs are back. 00:13:22.760 --> 00:13:28.250 align:middle line:84% So we track the percentage of overall market cap made up 00:13:28.250 --> 00:13:31.430 align:middle line:84% of the YUCs, which are the Young, Unprofitable Companies. 00:13:31.430 --> 00:13:34.880 align:middle line:84% One of the signals that I wrote about a lot 00:13:34.880 --> 00:13:36.980 align:middle line:84% that I was very worried about where 00:13:36.980 --> 00:13:39.650 align:middle line:84% markets were valued in 2021 and early 2022 00:13:39.650 --> 00:13:41.090 align:middle line:90% is how high this was. 00:13:41.090 --> 00:13:45.660 align:middle line:84% It corrected in 2022 in the fall but now is going up again. 00:13:45.660 --> 00:13:51.200 align:middle line:84% And so just be aware rising YUC shares of the overall market 00:13:51.200 --> 00:13:52.310 align:middle line:90% is-- 00:13:52.310 --> 00:13:53.810 align:middle line:90% there's a reason we call it YUC. 00:13:53.810 --> 00:13:56.480 align:middle line:84% I'd rather not be seeing this in terms 00:13:56.480 --> 00:13:58.700 align:middle line:90% of how stable this rally is. 00:13:58.700 --> 00:14:02.300 align:middle line:84% And then I think the most important chart, in some ways, 00:14:02.300 --> 00:14:05.960 align:middle line:84% in the piece we have is one that looks 00:14:05.960 --> 00:14:10.790 align:middle line:84% at the rise in the valuation multiple on the P/E 00:14:10.790 --> 00:14:15.680 align:middle line:84% ratio for the S&P compared to long-term earnings growth 00:14:15.680 --> 00:14:16.520 align:middle line:90% forecasts. 00:14:16.520 --> 00:14:19.220 align:middle line:84% Now, sometimes long-term earnings growth forecasts 00:14:19.220 --> 00:14:21.500 align:middle line:90% take a while to change. 00:14:21.500 --> 00:14:23.870 align:middle line:84% Corporate guidance and the analyst community 00:14:23.870 --> 00:14:27.380 align:middle line:84% have to get on board and reflect what they're seeing. 00:14:27.380 --> 00:14:30.770 align:middle line:84% But undoubtedly, the chart we've got here 00:14:30.770 --> 00:14:36.560 align:middle line:84% shows the valuation multiple has gone up almost 4 points, maybe 00:14:36.560 --> 00:14:40.850 align:middle line:84% 3.5 points, without any movement higher in long-term earnings 00:14:40.850 --> 00:14:41.810 align:middle line:90% growth forecasts. 00:14:41.810 --> 00:14:42.980 align:middle line:90% That's unusual. 00:14:42.980 --> 00:14:45.440 align:middle line:90% That doesn't happen a lot. 00:14:45.440 --> 00:14:48.650 align:middle line:84% And there's no escaping the fact that there's a lot of good news 00:14:48.650 --> 00:14:50.510 align:middle line:84% priced into the markets right now 00:14:50.510 --> 00:14:52.860 align:middle line:84% and not a lot of room for negative developments 00:14:52.860 --> 00:14:55.320 align:middle line:84% should they come from Russia-Ukraine war, 00:14:55.320 --> 00:14:58.330 align:middle line:84% global energy and food prices, or anything else. 00:14:58.330 --> 00:15:02.430 align:middle line:84% So I think there's a reasonable foundation for the rally that's 00:15:02.430 --> 00:15:06.570 align:middle line:84% taking place this year because inflation has outperformed 00:15:06.570 --> 00:15:09.030 align:middle line:84% almost everybody's forecasts in terms 00:15:09.030 --> 00:15:10.560 align:middle line:90% of how quickly it would fall. 00:15:10.560 --> 00:15:13.980 align:middle line:84% Wage inflation is declining a little bit more slowly. 00:15:13.980 --> 00:15:15.840 align:middle line:84% And a lot of people were under-invested 00:15:15.840 --> 00:15:17.100 align:middle line:90% at the end of 2022. 00:15:17.100 --> 00:15:17.790 align:middle line:90% They added risk. 00:15:17.790 --> 00:15:19.000 align:middle line:90% I get it. 00:15:19.000 --> 00:15:22.020 align:middle line:84% But I think it's important to understand exactly where we are 00:15:22.020 --> 00:15:27.120 align:middle line:84% at this point in a earning-less appreciation cycle that's 00:15:27.120 --> 00:15:29.680 align:middle line:84% taking place in a handful of stocks. 00:15:29.680 --> 00:15:32.720 align:middle line:90% So just a couple more things. 00:15:32.720 --> 00:15:38.220 align:middle line:84% First, I think this is the best time for risk-averse investors 00:15:38.220 --> 00:15:39.850 align:middle line:90% in 20 years. 00:15:39.850 --> 00:15:41.050 align:middle line:90% So why do I say that? 00:15:41.050 --> 00:15:43.980 align:middle line:84% We have a chart at the end of the piece that 00:15:43.980 --> 00:15:47.790 align:middle line:84% looks at the earnings yield on the S&P, which is basically 00:15:47.790 --> 00:15:50.280 align:middle line:84% earnings divided by price, and we compare that 00:15:50.280 --> 00:15:55.350 align:middle line:84% to the short-term returns on corporate bonds and treasuries. 00:15:55.350 --> 00:15:59.400 align:middle line:84% And they've all converged to somewhere around 5% to 5.5%. 00:15:59.400 --> 00:16:03.990 align:middle line:84% The last time you earned more money on treasuries 00:16:03.990 --> 00:16:06.210 align:middle line:84% than you did on equities was in early 2000. 00:16:06.210 --> 00:16:13.500 align:middle line:84% So it's been over 20 years since a risk-averse investor could 00:16:13.500 --> 00:16:17.040 align:middle line:84% look at the fixed-income markets and consider 00:16:17.040 --> 00:16:20.310 align:middle line:84% them roughly comparable in earnable yield terms compared 00:16:20.310 --> 00:16:20.890 align:middle line:90% to equities. 00:16:20.890 --> 00:16:22.420 align:middle line:84% And that's where we are right now. 00:16:22.420 --> 00:16:26.610 align:middle line:84% So one last thing I wanted to mention, 00:16:26.610 --> 00:16:29.320 align:middle line:84% and I hope I'm not running out of time. 00:16:29.320 --> 00:16:32.580 align:middle line:84% But I normally-- I don't do any press. 00:16:32.580 --> 00:16:38.050 align:middle line:84% I don't have a lot of time for that, 00:16:38.050 --> 00:16:40.450 align:middle line:84% and our compliance people generally get very nervous 00:16:40.450 --> 00:16:45.610 align:middle line:84% when I'm put in front of press people, which I can understand. 00:16:45.610 --> 00:16:51.640 align:middle line:84% But I agreed to do this video podcast of a money 00:16:51.640 --> 00:16:54.370 align:middle line:84% manager called Josh Brown, and he 00:16:54.370 --> 00:16:59.200 align:middle line:84% does an in-depth 90-minute video podcast a couple times a month. 00:16:59.200 --> 00:17:00.520 align:middle line:90% And I joined over the summer. 00:17:00.520 --> 00:17:05.109 align:middle line:84% And the reason I'm mentioning it is at the end of the podcast, 00:17:05.109 --> 00:17:08.410 align:middle line:84% he asks the people that joined for that session 00:17:08.410 --> 00:17:11.109 align:middle line:84% to name a book and a movie that they liked. 00:17:11.109 --> 00:17:14.740 align:middle line:84% And I started thinking about Bidenomics, 00:17:14.740 --> 00:17:17.140 align:middle line:84% which is essentially the United States having 00:17:17.140 --> 00:17:20.089 align:middle line:84% an industrial policy for the first time, really, 00:17:20.089 --> 00:17:21.470 align:middle line:90% in 50, 60 years. 00:17:21.470 --> 00:17:24.280 align:middle line:84% And there's a lot of money that's 00:17:24.280 --> 00:17:26.829 align:middle line:84% going to be spent in terms of direct government spending 00:17:26.829 --> 00:17:31.040 align:middle line:84% or tax expenditures on infrastructure, 00:17:31.040 --> 00:17:32.680 align:middle line:90% energy, semiconductors. 00:17:32.680 --> 00:17:35.650 align:middle line:84% I have questions about the long-term inflationary 00:17:35.650 --> 00:17:37.720 align:middle line:90% consequences here. 00:17:37.720 --> 00:17:40.510 align:middle line:84% How much will it eventually cost to produce semiconductors 00:17:40.510 --> 00:17:42.610 align:middle line:90% in Arizona versus Taiwan? 00:17:42.610 --> 00:17:44.620 align:middle line:84% What's going to be the cost of energy 00:17:44.620 --> 00:17:47.680 align:middle line:84% once you have both the cost of storage 00:17:47.680 --> 00:17:52.480 align:middle line:84% and backup thermal power added on to the cost 00:17:52.480 --> 00:17:54.640 align:middle line:84% of a high renewable system, things 00:17:54.640 --> 00:17:56.260 align:middle line:90% we explore in the energy paper? 00:17:56.260 --> 00:17:59.110 align:middle line:84% So I've got some questions about the inflationary consequences 00:17:59.110 --> 00:18:00.200 align:middle line:90% of this. 00:18:00.200 --> 00:18:04.480 align:middle line:84% But one thing I am optimistic on is the ability for Bidenomics 00:18:04.480 --> 00:18:10.840 align:middle line:84% to reverse some of the damage that was done to manufacturing 00:18:10.840 --> 00:18:14.500 align:middle line:84% communities in the United States after China joined the World 00:18:14.500 --> 00:18:15.340 align:middle line:90% Trade Organization. 00:18:15.340 --> 00:18:17.260 align:middle line:84% I showed some research a couple of years 00:18:17.260 --> 00:18:21.040 align:middle line:84% ago that after China joined the WTO 00:18:21.040 --> 00:18:24.160 align:middle line:84% and then started engaging in currency intervention, 00:18:24.160 --> 00:18:27.130 align:middle line:84% US manufacturing employment and wages plummeted, 00:18:27.130 --> 00:18:30.520 align:middle line:84% and opioid use started rising specifically 00:18:30.520 --> 00:18:32.890 align:middle line:84% in the counties that had the most 00:18:32.890 --> 00:18:37.180 align:middle line:84% intense competitive economic pressures with China. 00:18:37.180 --> 00:18:44.290 align:middle line:84% And so I'm hopeful that the Battery Belt that 00:18:44.290 --> 00:18:47.140 align:middle line:84% will stretch from Georgia up to Michigan and some 00:18:47.140 --> 00:18:49.240 align:middle line:84% of the other monies that get spent here 00:18:49.240 --> 00:18:52.120 align:middle line:84% alleviate some of the pain and suffering in those communities. 00:18:52.120 --> 00:18:58.510 align:middle line:84% And on the podcast, I mentioned the book Empire of Pain 00:18:58.510 --> 00:19:01.060 align:middle line:84% about the history of the opioid crisis and the family 00:19:01.060 --> 00:19:01.910 align:middle line:90% behind it. 00:19:01.910 --> 00:19:04.323 align:middle line:84% And I mentioned the movie The Third Man with Orson Welles 00:19:04.323 --> 00:19:05.740 align:middle line:84% because there's a scene where he's 00:19:05.740 --> 00:19:10.150 align:middle line:84% explaining his justification for his tainted penicillin scheme. 00:19:10.150 --> 00:19:12.010 align:middle line:84% And I thought that that was a nice way 00:19:12.010 --> 00:19:14.770 align:middle line:84% to wrap the whole message up together. 00:19:14.770 --> 00:19:17.960 align:middle line:84% Anyway, thank you for listening/watching. 00:19:17.960 --> 00:19:21.490 align:middle line:84% I hope this all worked, and we'll see you sometime 00:19:21.490 --> 00:19:22.520 align:middle line:90% in September. 00:19:22.520 --> 00:19:24.210 align:middle line:90% Thank you. 00:19:24.210 --> 00:19:28.000 align:middle line:90%