Speaker 1: All right, David Servant is the founder of Pinebrook Capital.
Speaker 1: Thanks so much for joining me today. I've been watching
Speaker 1: your content for six months or so, let's say, and boy,
Speaker 1: I was just amazed how you stood in the face
Speaker 1: of almost everybody with the contrary intake and it turned
Speaker 1: out to be right, and you sort of had this
Speaker 1: unorthodox way that you look at the markets. So anyway,
Speaker 1: I appreciate you taking the time to come on and
Speaker 1: speak to me today.
Speaker 2: Thank you having me happy to be here.
Speaker 1: So, David, the first thing, I guess we'll just dump
Speaker 1: right into I want to talk about, you know, what
Speaker 1: you're looking at, indicators, levels, charts, things like that, your
Speaker 1: unorthodox approach to the markets, why you're sort of this
Speaker 1: contraryan and you seem very confident in your opinions. I
Speaker 1: like that. And then we're going to talk about it
Speaker 1: in light kind of what you think and what you're
Speaker 1: watching for twenty twenty four, and then kind of specifically
Speaker 1: when we look at, you know, huge debt that we're having,
Speaker 1: deficits spending two in an election year, which I think
Speaker 1: is something to be paytitents do. And then in light
Speaker 1: of war. So those are the topics we're in discuss
Speaker 1: and dive into. Before we do that, let's just maybe
Speaker 1: start at the top. And one of the questions that
Speaker 1: I've been asking is Mark Twain said, it's not the
Speaker 1: things that we know for certain, or it's not the
Speaker 1: things that we don't know. They get us in trouble
Speaker 1: to things that we know absolutely for certain. And what
Speaker 1: I saw for the last year and a half or
Speaker 1: two years was everybody saying, as soon as the FED
Speaker 1: raises the risk free rate, stocks have to reprice lower.
Speaker 1: They have to. They have to, they have to. They
Speaker 1: also said, when mortgage rates go from two and a
Speaker 1: half to eight percent, home prices have to have to
Speaker 1: have to. When neither of those things happened, they didn't
Speaker 1: have to obviously, right, So I don't know, do you
Speaker 1: want to start and tell me why they didn't crash?
Speaker 2: Sure? So I think we you know these things. We
Speaker 2: take things that have historically happened and project them into
Speaker 2: the future without really understanding why. So a good example
Speaker 2: that you just mentioned was the housing market. Right, everyone said,
Speaker 2: you know, your mortgage rates went up, home priced home sales,
Speaker 2: especially for the existing home sales pretty much frozen their tracks.
Speaker 2: Nothing happened people stopped buying houses. There was new home
Speaker 2: sales were somewhat okay because of the you know, the
Speaker 2: rape buydowns that some of the bigger builders were able
Speaker 2: to offer. But for the most part, you know, the
Speaker 2: the housing market didn't tank the economy. And what curious
Speaker 2: is that in seven out of the most eleven, seven
Speaker 2: out of eleven post war recessions have originated in the
Speaker 2: housing market. It's the most cyclically sensitive, volatile part of
Speaker 2: the economy, and that's always that's typically been ground zero
Speaker 2: for a recession. But the question, the reason, I'm sorry,
Speaker 2: the no one really bothered to ask why, and the
Speaker 2: why really matters. What matters is housing employment and unit construction.
Speaker 2: And with the pandemic, unit construction kept on going. Housing employment.
Speaker 2: We didn't get an extinction event, an employment extinction event
Speaker 2: that would take down, you know, translate and take down
Speaker 2: the rest of the economy. So while everyone scratching their
Speaker 2: heads about, you know, oh my god, sales have dried up,
Speaker 2: mortgage rates are high, and it's the end of the world,
Speaker 2: the real economy what matters for GDP Accounting kept on
Speaker 2: keeping on, it did find and in November of twenty
Speaker 2: twenty two, recognizing that, I pivoted and said, look, without
Speaker 2: these with this, what really matters. Turning over what doesn't
Speaker 2: matter is not going to have an impact. What doesn't
Speaker 2: matter is sales. Sales does nothing for the real economy.
Speaker 2: Housing employment and unit construction spending that does a lot
Speaker 2: for the real economy, and that never turned over. So
Speaker 2: I think, you know, what's the takeaway is you've got
Speaker 2: to get into the nuts and bolts of causality, empirical causality,
Speaker 2: following the chain of events into what may or may
Speaker 2: not happen. And that's that's a great example right there.
Speaker 1: So we saw that evidence, like in the home builder
Speaker 1: stocks stayed up pretty strong, and the construction industry overall,
Speaker 1: I guess you're saying, remained strong. So even though the
Speaker 1: sales of units went down, the industry itself, is that
Speaker 1: what you're saying, The industry is that right strong.
Speaker 2: That's right, And there's a lot there's a lot of
Speaker 2: and then you peel back the onion and go a
Speaker 2: little deeper. There's a lot of reasons why that's the case.
Speaker 2: You know. One of the reasons is employment, housing construction.
Speaker 2: Employment is that secular lows and in other words, there's
Speaker 2: just not enough bodies out there with hammers, so effectively,
Speaker 2: there's no one left to fire. You know, there's a
Speaker 2: shortage of construction workers. And you can, you know, pull
Speaker 2: your hair out as to why that may be the case,
Speaker 2: but it's just it is the case. Red secular lows
Speaker 2: and housing employment trends, so you know, without anyone to fire,
Speaker 2: you're not going to get that employment extinction event. And
Speaker 2: the other thing that does is it takes it It
Speaker 2: stretches lead times for construction projects. In other words, what
Speaker 2: I can't recall the numbers offhand, but typically it takes
Speaker 2: a certain amount of time to build a house. Well
Speaker 2: over the past two decades, those lead times have increased,
Speaker 2: right because there's not enough people to build them. So
Speaker 2: the things that the things within housing that typically took
Speaker 2: down or spread to the rest of the economy just
Speaker 2: weren't present to have that effect.
Speaker 1: Good good point. Two thousand and eight. My story as
Speaker 1: I got taken down in two thousand and eight here
Speaker 1: in southern California, sort of ground zero in my area
Speaker 1: here in southern California, we saw prices drop sixty percent
Speaker 1: Orange County, California. I was sort of the epicenter of
Speaker 1: the mortgage boom, if you will. Almost everybody, everybody I
Speaker 1: knew was in the mortgage industry and it was hit
Speaker 1: extremely hard. And yeah, today we don't see any of that.
Speaker 1: And my friends that are still in the housing and
Speaker 1: construction industry, I mean, they're still not able to find workers.
Speaker 1: To your point, they can't keep somebody there no matter
Speaker 1: what they do.
Speaker 2: You know, another thing too, there's there's been a huge
Speaker 2: consolidation in the market. You know, I forgot what the
Speaker 2: exact number is, but you know, the big, the big
Speaker 2: home builders control around eighty percent of the new construction.
Speaker 2: So what does that mean. It means they have access
Speaker 2: to capital markets. It means they have a lot more
Speaker 2: buying power. So the industry itself has changed. You know,
Speaker 2: before the old you know the old you know the
Speaker 2: model of a builder and his friends, you know, turning
Speaker 2: over two or three houses a year, That is kind
Speaker 2: of a dying part of the business model. Now it's consolidated.
Speaker 2: These players are bigger, the more agile, they were able
Speaker 2: to do things like the rate bydowns that we saw
Speaker 2: that would have happened ten years ago.
Speaker 1: That's a big piece and that's sort of my thesis
Speaker 1: is the way that the central banks interact in the
Speaker 1: markets today has changed. It really changed in two thousand
Speaker 1: and eight. It's escalated and it's a lot different today.
Speaker 1: And you're saying even the sort of similar the way
Speaker 1: that the big home builders interacting the markets has changed,
Speaker 1: which obviously makes them be able to sort of handle
Speaker 1: these situations a little bit differently.
Speaker 2: And there's also that's a segue just you know, segues
Speaker 2: into another thing too, the bank regulations. After two thousand
Speaker 2: and eight, you know, the regulatory bodies had a never again,
Speaker 2: we're never gonna let this happen again. We're never gonna
Speaker 2: let the economy get over at skis over leverage and
Speaker 2: take down to the entire economy, and it was an
Speaker 2: existential moment for the economy. And the banks have been neutered,
Speaker 2: so even if you you know, the wildcatter days are
Speaker 2: kind of over. So that's another element where you know,
Speaker 2: the leverage appetite for risk isn't there, or maybe it's there,
Speaker 2: but it's been neutered by regulatory reforms. So that was
Speaker 2: another element where the industry didn't have that overbuilding that
Speaker 2: it was more familiar with prior cycles.
Speaker 1: And a lot of it is sort of the general's
Speaker 1: fighting the last war, so to speak. And so I
Speaker 1: think you said seven of the last eleven turndowns were
Speaker 1: driven by mortgage. Obviously two thousand and eight still PTSD
Speaker 1: on everybody's mind from that, and so you know, everyone's
Speaker 1: fighting that last war, so to speak, thinking that's going
Speaker 1: to lead the market. But that's not necessarily the case.
Speaker 2: That's right, and with fighting the last war, then you
Speaker 2: end up with perverse outcomes. Now we have the opposite
Speaker 2: problem we had in two thousand and eight. Instead of overbuilding,
Speaker 2: now we have aationwide secular housing shortage. So you know,
Speaker 2: we fought the last war and now we're creating new
Speaker 2: problems for ourselves.
Speaker 1: Yeah, now let's jump into the market. So then I
Speaker 1: don't know, we want to talk markets or economy, but
Speaker 1: you know there's no shortage. I don't want to call
Speaker 1: him out by name. We'll call it Harry Dent Junior.
Speaker 1: Every year he's called him for a ninety percent crash.
Speaker 1: His data is great. I mean, I've read five of
Speaker 1: his books. I think his data is right. His assumptions
Speaker 1: on the data have obviously proven to be wrong. A
Speaker 1: ninety percent crash in June and then in July and
Speaker 1: then November, and you were kind of standing firm and saying, no,
Speaker 1: it's not going to, it's not going to, it's not
Speaker 1: going to. Why is that? What were you looking at
Speaker 1: that was sort of giving you that different picture.
Speaker 2: Well, first of all, the housing market was was central
Speaker 2: to that thesis. And second of all, you know, I
Speaker 2: think at the bond market. You know, if you look
Speaker 2: at bond market, you know, break events and five year
Speaker 2: five or forward expectations, they never really unanchored the bond
Speaker 2: market kind of said was able to see the inflation.
Speaker 2: So as long as the bond market, you know, had
Speaker 2: its retained its confidence in fret and fed credibility to
Speaker 2: bring down the inflation, and as long as the bond
Speaker 2: market more or less agreed that, you know, this was
Speaker 2: a supply chain driven shock, that the bond market was
Speaker 2: not going to fall apart and the inflation would eventually
Speaker 2: turn into disinflation. And that's exactly what happened. We started
Speaker 2: seeing disinflation really kick in June of twenty twenty three,
Speaker 2: and it went to high gear in Q four this year.
Speaker 2: So what was different It was the bond market, the
Speaker 2: bond market never really freaked out. I mean, there was
Speaker 2: some spasms and we know, some term premiums blew out,
Speaker 2: I'm sorry, contracted, and you know.
Speaker 1: There was some dysfunction. We saw a few, you know,
Speaker 1: we saw.
Speaker 2: Some starting with starting with the bank, starting with the banks.
Speaker 2: In March of twenty twenty three, Sure there was a
Speaker 2: mini banking crisis and a pretty favorable, robust policy response,
Speaker 2: but you know, growth, the growth, it didn't really affect
Speaker 2: the growth impulse. In fact, we had some stunning growth.
Speaker 2: You know, people were calling for a recession in twenty three,
Speaker 2: everyone was sure about it, and back in two thousand
Speaker 2: and I'm sorry, back in February of twenty three, this
Speaker 2: is on Twitter. I came out and said, look, as
Speaker 2: long as things get less bad, the economy is going
Speaker 2: to be doing fine. Because despite all the muck that
Speaker 2: was throwing at the economy, we were still at you know,
Speaker 2: very very low but still positive growth. And all these
Speaker 2: headwinds were basically dead weight and the economy proved to
Speaker 2: be resilient. And there's many reasons for that. There is,
Speaker 2: you know, all the stimulus spending, but you know, supply
Speaker 2: chains started coming back online stimulus spending got us through
Speaker 2: you know, the quote unquote of the dark times. And I
Speaker 2: called out a growth impulse back in February of twenty three,
Speaker 2: and lo and behold, Q two came in at a
Speaker 2: high two handle. Q three was on fire, came in
Speaker 2: at I believe five point two percent. So I think
Speaker 2: listening to the bond market, paying attention to what really
Speaker 2: matters and what doesn't matter, is kind of key to
Speaker 2: my process.
Speaker 1: Now, the market responded, the economy we're talking about the
Speaker 1: economy specifically here coming back with strong growth. But what
Speaker 1: about the consumer that is, savings are dwindling, and consumer
Speaker 1: debt is skyrocketing, cost of living is going up, standard
Speaker 1: of living is going down at the same time. I mean,
Speaker 1: how do you look at that.
Speaker 2: These are all valid points, and there's you know, there's
Speaker 2: pockets of you know, strengths, and there's pockets of weakness.
Speaker 2: But for the purposes of the overall macary economy and
Speaker 2: for purpose of markets, it doesn't matter. It really doesn't matter.
Speaker 2: I mean, I remember that last year too. Those I'll
Speaker 2: talk about the this, you know, student loans after I
Speaker 2: guess there was some forbearance and once that forbearance expired,
Speaker 2: then there's gonna be a kind of this huge wall
Speaker 2: of debt. It's going to hit consumers, and it didn't matter.
Speaker 2: And the way the way I approach all these questions
Speaker 2: is take whatever doom story you're thinking about it, divide
Speaker 2: it by the size of the knowledge of nominal GDP.
Speaker 2: It's about twenty eight trillion dollars, and you typically get
Speaker 2: a really really really small number with a lot of
Speaker 2: far you know, far right the tow of zeros to
Speaker 2: the right of the decimal point. So I think when
Speaker 2: you contextualize things like this, it really it doesn't matter.
Speaker 2: This is a massive, massive economy. It's not going to
Speaker 2: be taken down by you know, a relatively small thing.
Speaker 2: I mean, these things obviously affect people's lives, affect people standards,
Speaker 2: individual standards of living, but for purposes of the macro economy,
Speaker 2: which is my area of focus, it doesn't matter.
Speaker 1: That's a really good point. So within the economy, there
Speaker 1: are certainly groups of people that are being affected. So
Speaker 1: if you want to dive into it, you can see
Speaker 1: that certainly some people are dealing with the volatility, and
Speaker 1: a lot of people are affected. But when you look
Speaker 1: at the whole then it's more bullish. So it kind
Speaker 1: of depends on where you're at, but as a whole,
Speaker 1: it's good.
Speaker 2: Correct me. As a whole, we've created over two point
Speaker 2: five million jobs in the past few years. I mean,
Speaker 2: that's bonkers. That is crazy. I mean, and you can
Speaker 2: say it's because the stimulus is fine, it's fake. Fine,
Speaker 2: you say whatever you want. But the number is the number,
Speaker 2: and that's what you got to pay attention to.
Speaker 1: Even though a lot of those are two jobs, the
Speaker 1: second jobs.
Speaker 2: Look, that's that that that those individual hardships are are
Speaker 2: kind of a policy question. But for people in the
Speaker 2: markets that want to make money, that's what they need
Speaker 2: to focus on.
Speaker 1: Good. Okay, now do you.
Speaker 2: Think I'm sorry, I'm sorry if that sounds harsh. I mean,
Speaker 2: I'm you know, I didn't grow up rich. I I
Speaker 2: went to public schools all my life. I know, I know,
Speaker 2: I know, you know, I've I've experienced different I've had
Speaker 2: many different experiences in my life. I'm not trying to
Speaker 2: be callous to the human element of it. I'm just
Speaker 2: saying for purposes of markets, yeah, that should be the focus.
Speaker 1: Yeah, and I'll to speak into that human element of
Speaker 1: it just for a second, I mean, if you're one
Speaker 1: of these people that might have not liked what David
Speaker 1: just said, and hey, that doesn't help me, you know,
Speaker 1: I'm affected by that. The hope is that well, lots
Speaker 1: of the market and economy still doing very well. And
Speaker 1: you're not a tree. You can move and so you
Speaker 1: could learn a new skill, you can move into a
Speaker 1: part of the market that is in demand, that is growing.
Speaker 1: And so while whatever corner of the market or economy
Speaker 1: you may be in that that's affected, there's lots of
Speaker 1: other corners and areas in the economy and market that
Speaker 1: are doing well well.
Speaker 2: And we see it in you know, one really one
Speaker 2: of the best things about this labor market recovery is
Speaker 2: that we've seen labor market dynamics that we haven't seen
Speaker 2: in generations. African American employment is at levels that we
Speaker 2: haven't seen in fifty years. People that were at the
Speaker 2: margins of the labor force, people with you know, mild
Speaker 2: disabilities that maybe were not deemed to be socially appropriate
Speaker 2: for a job environment. Now suddenly they have access to jobs.
Speaker 2: People with petty criminal records that were you know, because
Speaker 2: maybe they smoked a joint and high school or in
Speaker 2: college and got nailed for it or got a DUI
Speaker 2: when they're eighteen, But now they're thirty five and they're
Speaker 2: trying to support a family. You know, they were hard
Speaker 2: to employ because they had a felony record. Now that
Speaker 2: stuff is being looked over, So you know, the human element.
Speaker 2: I think, you know, a rising tide does lift all
Speaker 2: boats eventually, maybe you know, again, not at the same rate.
Speaker 2: Now everybody benefits at the same time. But this economy,
Speaker 2: this recovery, has helped a lot of people that were
Speaker 2: previously on the margins of the labor force.
Speaker 1: Now in your work at Pinebrook Cap it's a substack.
Speaker 1: We'll link to it down below. I follow it. Like
Speaker 1: I said, you kind of stood in the face of
Speaker 1: the general consensus, if you will, sort of as this
Speaker 1: contry and the market's not going to crash. You started
Speaker 1: to I think it seems like maybe you're starting to
Speaker 1: change your view a little bit. You've kind of been
Speaker 1: reporting that maybe the Fed's job of cooling inflation has
Speaker 1: maybe gotten in front of them, and so maybe they
Speaker 1: wanted to cool it. Maybe it's cooling too asked, which
Speaker 1: is part of why I think you were calling for
Speaker 1: the pivot. You know, coming a little bit sooner. And
Speaker 1: now it looks like some of the data that you're
Speaker 1: looking at might be saying that maybe they've gone too far,
Speaker 1: too fast, and this disinflation might be catching them off guard.
Speaker 1: I don't know if I'm summarizing.
Speaker 2: That right, No, I think that's right. I think, you know,
Speaker 2: if we go back to the premise that a lot
Speaker 2: of the you know, look there was the inflation is
Speaker 2: a very complex subject. You know, to this day, we
Speaker 2: still don't have a true working theory of inflation. And
Speaker 2: that's you know, that's everyone knows this. Everyone at the
Speaker 2: FED knows this. You know. It's it's not like, you know,
Speaker 2: it's not like a machine that we can totally understand.
Speaker 2: We have ideas, we have approximations, but no one really
Speaker 2: has a real working theory of inflation.
Speaker 1: So we're kind of making I buy into the Austrian
Speaker 1: school economics theory of in place and being a monetary phenomenon.
Speaker 2: But anyway, so, yeah, so so now that we've kind
Speaker 2: of realized that, look, you know, roughly around eighty percent
Speaker 2: of the inflation that we saw was supply chain driven.
Speaker 2: Maybe we over maybe they were over hiked, you know,
Speaker 2: and and the FED kind of put themselves in this position,
Speaker 2: right because they were related to the trade, and you know,
Speaker 2: when they call it transitory even and it wasn't transitory,
Speaker 2: they had egg on their face. So now they had
Speaker 2: like this oh crap moment of oh my god, we're
Speaker 2: behind the curve and we better get after it. And
Speaker 2: we see that with you know, they started with twenty
Speaker 2: five basis point hikes, twenty five, then they went to fifty,
Speaker 2: and then they're like, we need to do seventy five,
Speaker 2: and they went guns and blazing. So I think by
Speaker 2: the time they were at at a point where they
Speaker 2: were hitting, they were, you know, baking seventy five basis
Speaker 2: point increases. By then, you know, if you subscribe to
Speaker 2: the idea of you know, long and variable lags, I
Speaker 2: kind of do kind of I have do have, don't.
Speaker 2: But by by the time they were doing seventy five,
Speaker 2: you know, they were there. They were just getting getting
Speaker 2: too aggressive. At that point. I mentioned earlier in the
Speaker 2: show that disinflation really started in June of twenty three.
Speaker 2: Well guess what, we got a signified basis point hike
Speaker 2: in July. So right there you have this wedge is
Speaker 2: asymmetry of the disinflation has already started, but we're still hiking.
Speaker 2: And that's only you know, seven months ago. So the
Speaker 2: idea that we went may have gone too far. Obviously
Speaker 2: we will only know that in hindsight, but we're getting
Speaker 2: clues that that has been the case right where now
Speaker 2: we're undershooting the fed's target for twenty twenty three. The
Speaker 2: FED had a target of three core PC of three
Speaker 2: point seven. We're undershooting. We undershot that. So by definition,
Speaker 2: if you've undershot it, that means you applied the brakes
Speaker 2: too hard. Think of a moving car. You got your
Speaker 2: approaching a stoplight. You want to nail the stop more
Speaker 2: or less appropriately. But if you had to shoot the
Speaker 2: stoplight by by one hundred meters, you've either put the
Speaker 2: brakes on too long, too hard, or both. And that's
Speaker 2: effectively what happened in twenty three. In twenty three, we
Speaker 2: see it already, and we're seeing it more as as
Speaker 2: the data comes in. So the way it's looking now,
Speaker 2: the piece the Summary of Economic Productions, the FES looking
Speaker 2: at a PC of two point four for twenty four.
Speaker 2: The end of twenty four, we're probably gonna hit that
Speaker 2: mid June and that's why, you know, the fixed income market,
Speaker 2: the short end of the curve is being so aggressively
Speaker 2: bid because the market is seeing that, holy crap, we're
Speaker 2: gonna unershoot the red light. We're not We're gonna we're
Speaker 2: not gonna h stop you know, three feet before the
Speaker 2: red light. We're gonna stop a thousand feet before the
Speaker 2: red light.
Speaker 1: Yeah. So one of the big, maybe the big drivers
Speaker 1: of this to me, seems to just be looking at
Speaker 1: sort of the natural constraints that are there, the amount
Speaker 1: of government debt that we have, and not just really
Speaker 1: the debt, but really the deficit and the continuing adding
Speaker 1: of the debt that's that's going there. I mean, we're
Speaker 1: having you know, the largest deficits spinning that we've seen
Speaker 1: in any war, but you know, even even higher than COVID.
Speaker 1: This spinding never sort of came down that deficit spending
Speaker 1: seems to be in an area what we'll call fiscal dominance,
Speaker 1: I mean, pushing the markets, if you will, and sort
Speaker 1: of there's this provlaile rock and a hard place where
Speaker 1: they're fighting inflation, but at the same time they don't
Speaker 1: want this disinflation or deflation that we're seeing there. How
Speaker 1: do you see them navigating this in light of being
Speaker 1: an electioneer? I think maybe one president income and president
Speaker 1: during an electioneer and a recession has ever won reelection,
Speaker 1: and so you would think if there's anything the Democratic
Speaker 1: Party could do to stay in power and keep the
Speaker 1: economy going, they would do that. So how do you
Speaker 1: think they manage this election and this debt deficit spending
Speaker 1: and sort of what is this tug of war that
Speaker 1: we see in the economy in the markets this year.
Speaker 2: Honestly, for now, they don't care. I think this morning
Speaker 2: I just heard that they don't care.
Speaker 1: What about inflation or about.
Speaker 2: About the death set. The depth isn't in an election year,
Speaker 2: it's not. It's a non for us. It might be
Speaker 2: an issue, but I think for policymakers, for people, you know,
Speaker 2: making the rules, not really consideration why they want to
Speaker 2: get elected. Both parties want to get elected, right, so
Speaker 2: they're gonna they're gonna spend, and they're spending. This morning,
Speaker 2: I just I think I read a blurb of that
Speaker 2: some R and D and some business property expenses are
Speaker 2: going to be be allowed for you know, instant depreciation,
Speaker 2: expanding the child tax credit. Again, we can argue to it.
Speaker 2: We're blue in the face where that's good or bad,
Speaker 2: But the fact is they're doing it, and that's what
Speaker 2: matters for markets. So I think with that kind of spending,
Speaker 2: you know, it's going to be hard to get a
Speaker 2: recession this year when the government can you know, the
Speaker 2: twenty twenty four is going to the budget's looking bigger
Speaker 2: than twenty twenty three.
Speaker 1: Yeah, I love, I love your viewpoint on this and
Speaker 1: something I say quite often, which is we have to
Speaker 1: take the market as it is, not as we want
Speaker 1: to be or we think it should be, but as
Speaker 1: it is. And so you're like, wait, we could argue
Speaker 1: these whether these are good or bad policies, and that's fine,
Speaker 1: but like the data is the data, right, right?
Speaker 2: I mean, these are these are you know, ultimately they're
Speaker 2: philosophical questions, but they're they're electoral questions. There are questions
Speaker 2: of national priorities, what's important, what's not. We should have
Speaker 2: this debate. But as an effect as it matters to markets,
Speaker 2: I think I think that's the If you start projecting
Speaker 2: politics in the market, you're just gonna get wrecked.
Speaker 1: I think, uh, except for I mean, you do sort
Speaker 1: of want to think about the politics and what they
Speaker 1: may do. I mean, if you're trying to sort of
Speaker 1: guess into the future, right, so it's like, hey, the
Speaker 1: politics is they want to get elected, so they're going
Speaker 1: to continue to do deficit spending, and so we kind
Speaker 1: of have to anticipate that versus going, well, no, they're
Speaker 1: going to run on a ballot of austerity and they're
Speaker 1: going to cut the spending. Right, So you do kind
Speaker 1: of have to run the politics a No.
Speaker 2: I think that's right because we saw with you know,
Speaker 2: a lot of the IRA spending the ironically they call
Speaker 2: it that Inflation Reduction Act, but that targeted a lot
Speaker 2: of you know, a lot of spending. So you know,
Speaker 2: if you're if you're a market participant, you want to
Speaker 2: get in front of that, find out where's that? Where's
Speaker 2: that money? Follow the money, as they say, right, where's that?
Speaker 2: You know this is this is trillions and trillions of
Speaker 2: dollars going into different sections of the economy. And if
Speaker 2: you can get in front of that, sure there's a
Speaker 2: buck to be vein.
Speaker 1: Yeah. So in an electioneer both parties want to get
Speaker 1: elected and they don't really care about the defast it anymore.
Speaker 1: I almost seems like I mean, at this point, the
Speaker 1: deficit and the debt are just so big that like
Speaker 1: everybody just doesn't even care about it. I mean, it
Speaker 1: just seems like we're at that pace at that point anymore.
Speaker 1: It's such a big number, like thirty four trillion now
Speaker 1: we've surpassed, Like we're never going to pay that back. Yeah, well,
Speaker 1: I guess we'll just kind of forget about it. And
Speaker 1: what does it even mean at this point?
Speaker 2: Well, I mean, let's look at history. We know, we
Speaker 2: had look at World War Two as as a president,
Speaker 2: where we had massive debt I think nationwide, you know,
Speaker 2: economy wide, meaning private debt as well as public debt.
Speaker 2: You know, we're right over two hundred percent GDP, and
Speaker 2: we managed to work our way through that to much
Speaker 2: lower levels by the sixties and seventies, and debt really
Speaker 2: didn't start picking up again until the eighties. But my
Speaker 2: point is governments have a unique ability, especially a government
Speaker 2: that is the issuer of the global reserve currency. They've
Speaker 2: got a lot more runaway than we think. They're not
Speaker 2: like a household. The rules that apply to me and
Speaker 2: you do not apply to governments. Why you and I
Speaker 2: have a natural life spent we will die. We need
Speaker 2: to satisfy our obligations before we die. Governments until unless
Speaker 2: they're defeated in a warrant taken over, they live in perpetuity,
Speaker 2: so they can ride out. They can basically deflate and
Speaker 2: ride out you know, debt. Right in other words, when
Speaker 2: the country was newly formed and needs any you know,
Speaker 2: a ten million dollars bond issue and so it's massive
Speaker 2: back then. Now I mean it's it's a drop in
Speaker 2: the buckets. And these numbers kind of deflate over time.
Speaker 2: So governments have a unique ability, especially again we print
Speaker 2: our own our own currency. We we can ride out
Speaker 2: these bumps. And not only that, you know, because we're
Speaker 2: the world's largest reserve where the reserve the reserve currency
Speaker 2: of the world. You know, money pours in here. Why
Speaker 2: because we have the biggest, deepest liquid, most liquid capital
Speaker 2: markets in the world every country. You know, we we
Speaker 2: rent current account deficits, we we we we buy more
Speaker 2: then we sell. But you know, we seem to be
Speaker 2: able to give in foreign investors a good return on
Speaker 2: their capital. And you know that that party can go
Speaker 2: on as long as we give foreign investors to get
Speaker 2: return on their capital. And you see it with stock
Speaker 2: markets where you know, em valuations European valuations are at
Speaker 2: a discount compared to the US. Why because we just
Speaker 2: have better companies, better institutions, and better returns.
Speaker 1: Although we have seen the last couple of treasury auctions
Speaker 1: have some pretty big tails and some dysfunction there. And
Speaker 1: it looks like when I've looked at the data, like
Speaker 1: the foreign demand is still there. It's just the treasure
Speaker 1: is just issuing more supply than there is demand for that.
Speaker 1: So at some point there is some sort of a
Speaker 1: limit there. Obviously until you can start, you know, forced
Speaker 1: to by by yourself, I suppose, I mean, don't you
Speaker 1: take that into some consideration.
Speaker 2: Absolutely, but it's not. It probably won't happen in our lifetime.
Speaker 2: It's just the number the capacity for debt is staggering.
Speaker 2: Think about it. We are at I think you mentioned
Speaker 2: you're right, I think you're thirty two trillion dollars in
Speaker 2: federal debt. So that's a little more over one hundred percent,
Speaker 2: you know, if we can get you know, during World
Speaker 2: War Two we managed over orders of magnitude above that.
Speaker 1: So that's just as a percentage as a percentage, correct.
Speaker 2: That is a staggering amount of money for the government
Speaker 2: to spend that. Maybe they can spend that in our lifetime,
Speaker 2: but it's a huge runaway that I think most people
Speaker 2: find hard to fathom. I mean I find it hard
Speaker 2: to fathom. And this is kind of what I look
Speaker 2: at a lot. Yeah, will there be a dec day
Speaker 2: of reckoning. There always is, but it's just a question
Speaker 2: as well i'd be around to see it. Yeah, highly
Speaker 2: enlightening my life.
Speaker 1: Well, it's a law of the way that I see.
Speaker 1: It is sort of the law of diminishing returns. And
Speaker 1: you know, you have this Kinsian multiplier, if you will.
Speaker 1: So they're using debt to get growth, but eventually you
Speaker 1: don't get enough growth for the debt that you're consuming,
Speaker 1: and then eventually you're getting more debt. The hole is
Speaker 1: getting digger deeper, right, So you're getting more debt than
Speaker 1: you're getting growth, and then sort of that collapses. I mean,
Speaker 1: it happens to all nations.
Speaker 2: We've seen it.
Speaker 1: I see it having all around the world.
Speaker 2: I agree one hundred percent. I think that the trump
Speaker 2: card at this car that this country holds though, and
Speaker 2: that we're not leveraging is immigration. People still want to
Speaker 2: come to this country. And if you look at every
Speaker 2: developed nation and even under development or developing nation, they
Speaker 2: have really bad demographics. You know. If you look at
Speaker 2: you know, Japan, you know they're just they're they're you know, China,
Speaker 2: There're gonna below replacement rates at some point. People still
Speaker 2: want to come here, people will still die to get here.
Speaker 2: And I think if we can you know, GDP is
Speaker 2: basically two things. It's population growth and productivity growth. So
Speaker 2: you know, all we need to do is you know,
Speaker 2: I had out some green cards. And this may not
Speaker 2: be politically uh, you know, appealing to a lot of people,
Speaker 2: but from an economic standpoint, the GDP calculation is very simple.
Speaker 2: It's people and productivity. So if you grow your people,
Speaker 2: you're going to grow your you grow your economy, and
Speaker 2: you grow your way out of debt. If you have
Speaker 2: pred activity to that, things like AI or whatever. I'm
Speaker 2: not sure how much of an impact is gonna have.
Speaker 2: There's a lot of hype, I'm sure, but there's a
Speaker 2: lot of you know, productivity that if you exploit that
Speaker 2: then it's like a superpower. And I think I'm very
Speaker 2: boolish long term in this for this country.
Speaker 1: Okay, so the massive amounts of debt. They're not worried
Speaker 1: about that right now in an election year, the goal
Speaker 1: is to continue to keep a recession at bay, and
Speaker 1: your sort of outlook is they'll probably be pretty successful
Speaker 1: with doing that, I think.
Speaker 2: So. I mean, I'm a I'm a small time investor,
Speaker 2: so you know, I'm I'm the I'm the pimple on
Speaker 2: the elephants, but the elephant being the Fed and policymakers,
Speaker 2: and they will make the rules. My best bet is
Speaker 2: not to fight them. It's to find out where it's
Speaker 2: going and just you know, enjoy the party.
Speaker 1: Yeah, now, what about there's any number of black Swans
Speaker 1: or gray Swans, because we know about them, that we
Speaker 1: could we could discuss. But what about the war and
Speaker 1: the risks of the wars and escalating wars things like that.
Speaker 1: So right now we're seeing you know, the attacks happening
Speaker 1: in the Suez Canal. We see car transit cargo going
Speaker 1: through is down almost forty percent in just the last
Speaker 1: couple of weeks. Ships are having to be rerouted. You know,
Speaker 1: YadA YadA, yah. We can go on at less trips,
Speaker 1: more costs, higher inflation, et cetera. And this is just
Speaker 1: a small piece I mean, if it continues to escalate,
Speaker 1: what does that do to oil, to you know, supply
Speaker 1: chains just in general. And we don't need to get
Speaker 1: into the details of each one of those, but I mean,
Speaker 1: is that a potential wrench that could be thrown into
Speaker 1: the spokes of sort of the economy and this inflation
Speaker 1: dynamic this year.
Speaker 2: Yeah, if we have a serious supply chain interruption, we
Speaker 2: could you know, go back to twenty twenty twenty one.
Speaker 2: It depends on the severity of it and the escalation.
Speaker 2: So I think it's an everyone's interest to de escalate.
Speaker 2: But there's no doubt. You know. Look, you know, you
Speaker 2: know what happened with Russia and Ukraine. You know, it
Speaker 2: was kind of you know back then, it was like
Speaker 2: it'll get resolved and really quick, and all of a
Speaker 2: sudden it turned into this massive supply chain shock. You know,
Speaker 2: everything from energy Europe, fertilizer, food, you know, so these
Speaker 2: things can have huge ramifications, and I think need to
Speaker 2: pay attention to these things now. I think it's an
Speaker 2: everyone's interest to de escalate. Hopefully there's successful at it.
Speaker 2: War's never in anyone's interest, but unfortunately it happens now.
Speaker 1: I mean, that's a pretty good sort of proxy to
Speaker 1: look at, sort of the rush of Ukraine situation. So
Speaker 1: when that happened, it didn't crash the markets. We did
Speaker 1: see supply chain shocks. We did see the price of
Speaker 1: gold and oil go through the roof. So it sort
Speaker 1: of drove asset prices higher, commodity price is higher, and
Speaker 1: even the cost of goods higher because of the supply chain.
Speaker 1: So that was sort of an inflationary impulse that happened.
Speaker 1: It was not a deflationary impulse. So is that sort
Speaker 1: of what you think may happen If if this were
Speaker 1: to escalate and get worse, it'd probably be more of
Speaker 1: an inflationary impulse to the economy than a deflationary one.
Speaker 2: I think so, because you know, you have you have
Speaker 2: oil in there. I mean oil is oil is really
Speaker 2: you know, there's some people, some people have a theory
Speaker 2: and I'm sympathetic to it that inflation really is an
Speaker 2: oil phenomena and energy or energy rather and energy really
Speaker 2: is at the heart of inflation. So people think of that.
Speaker 2: I know, you're an Austriten. That's fine. I respect that,
Speaker 2: But you know, in any case, I think there's no
Speaker 2: question that the you know, energy shock would be you know,
Speaker 2: it could be it could be a disaster for the economy.
Speaker 2: It could be really bad. And that's what's kind of
Speaker 2: like the one thing we really want to avoid. That's
Speaker 2: that's the that's we don't want to go there.
Speaker 1: Yeah, do you do you? I don't know. I haven't
Speaker 1: seen you talk a lot about oil and energy and
Speaker 1: your research, so I'm not sure how first you are.
Speaker 1: But it is seemingly sort of a little bit interesting
Speaker 1: right now seeing this traffic whatever's happened in the Middle
Speaker 1: East wherever you want to call it. I don't know
Speaker 1: if it's officially declared as a war or whatever, but
Speaker 1: whatever's going on there, Plus with the shipping delays through
Speaker 1: the sous Canal, et cetera, and we're seeing the price
Speaker 1: of oil still continuing in to fall, which is pretty interesting.
Speaker 1: You would think just from that alone, it would be
Speaker 1: pushing the price up. I don't know if you have
Speaker 1: an opinion on that, And do you think it's potentially
Speaker 1: you know, the economy, the global economy is slowing enough
Speaker 1: to sort of offset that supply demand imbalance that's being
Speaker 1: pushed there.
Speaker 2: I think that's one thing that's really interesting is that
Speaker 2: the United States is now the largest largest oil supplier
Speaker 2: producer in the world. That is crazy. I mean, we
Speaker 2: don't think about that that you know, all we think
Speaker 2: about in Saudi Arabia and the Middle East. But now
Speaker 2: we are the world's biggest oil producer. That is bonkers.
Speaker 2: And I think that's I think that's the offset to
Speaker 2: what's happening in the Middle East.
Speaker 1: So that is sort of sort of kind of keeping
Speaker 1: the price down. Even though there are some supply chain
Speaker 1: shortages happening over the Middle East, the US is sort
Speaker 1: of picking up the slack in that.
Speaker 2: Sure, yeah, we're able to do that.
Speaker 1: We know.
Speaker 2: One other area of concern, the possible black swan that
Speaker 2: not a lot of people are talking about, is Panama Canal.
Speaker 2: So there's a drought in Panama. The for to operate
Speaker 2: the canal locks, they have to pump into water from
Speaker 2: the nearby lake. That lake is you know, getting pretty
Speaker 2: bone dry, and now they're starting to put limits on
Speaker 2: traffic going through the Panama Canal. So, you know, I
Speaker 2: don't know to the extent or the impact, but I
Speaker 2: think that's going to keep an eye on if if
Speaker 2: someone is really concerned, if one is really concerned about
Speaker 2: possible future supply change shocks. Have a look at the
Speaker 2: Panama Canal.
Speaker 1: Yeah, yeah, I mean it's the same thing. I mean
Speaker 1: then you would have to basically reroute ships around Cape
Speaker 1: Horn as opposed to Cape Good Hope and to add delays,
Speaker 1: add costs, add things like that.
Speaker 2: So that's right.
Speaker 1: What about all the what about all the people pointing
Speaker 1: to the yield curve inversion and one hundred percent accuracy
Speaker 1: and pointing to a recession and it's going to be
Speaker 1: uninverting and it's guaranteed doom and gloom because one hundred
Speaker 1: percent as that uninverts, that there's a massive recession coming.
Speaker 2: Yeah, So the yield curves I think is important. But
Speaker 2: I think what people can inflate is the ConFlat for
Speaker 2: being a coincident indicator and having predictive power. What they'll
Speaker 2: curve tells us, the ill curve inversion tells us is
Speaker 2: inflation is higher today than it will be tomorrow, and
Speaker 2: therefore short rates are higher today than they will be tomorrow.
Speaker 2: That's all. That's all. That's what it's telling us today.
Speaker 2: It can't it doesn't tell us that a recession is coming.
Speaker 2: It's been coincident. It's kind of it happens as a
Speaker 2: part of that, but it's not. It doesn't cause the
Speaker 2: recession itself. How do we know this, Well, this is
Speaker 2: the exception this cycle, right, The you'll care first inverted
Speaker 2: in October of twenty twenty two three. And to be clear,
Speaker 2: I'm talking about not two tens. I'm talking about three
Speaker 2: month tenure that spreads the gold standard for an inversion,
Speaker 2: and that inverted in October twenty two. Classic theory tells
Speaker 2: us it's twelve to eighteen months. We're on month fifteen. Now,
Speaker 2: chances of us getting recession the next two to three
Speaker 2: months is pretty low. I mean, it's recession was always there,
Speaker 2: but you know it's not happening. Why is that? There
Speaker 2: are many answers. I don't know them all, but I
Speaker 2: think what's happening flies in the face of what we
Speaker 2: were told is supposed to happen. So the yield curve
Speaker 2: is I don't think is predictive. I think it's coincident.
Speaker 2: It just tells us what's happening today.
Speaker 1: I think some of it too, kind of going back
Speaker 1: to a point I made earlier about the way the
Speaker 1: central banks interact in the Market's changed in two thousand
Speaker 1: and eight with the launch of QE, and it seems
Speaker 1: it's only escalated since then. And now instead of the
Speaker 1: FED being sort of this reactionary machine, now they're sort
Speaker 1: of preemptively moving. So if you look at like two
Speaker 1: thousand and eight, it took seven months from bear Stearn's
Speaker 1: collapse till the the FED got about one hundred and
Speaker 1: fifteen billion into the market in twenty twenty three. Who
Speaker 1: saw it in six days, right, Yeah, And so that
Speaker 1: just showed short to shoo the size and the speed
Speaker 1: of these moves. In twenty twenty, I think they set
Speaker 1: up like thirteen SPV you know, funding facilities in a
Speaker 1: matter of months, including buying equities, you know, basically in
Speaker 1: the market. We've never seen that before, and so you
Speaker 1: sort of look at that. And so then going back
Speaker 1: to this yield curve, typically showing that rates will be
Speaker 1: lower in the future means that, well, there must be
Speaker 1: some big recession coming that would cause them to lower rates.
Speaker 1: I don't know, this is kind of my thinking about it. Yea, yeah,
Speaker 1: but what we're seeing now is well, they are cutting
Speaker 1: rates and there is no big recession, and so in
Speaker 1: the past they've sort of started cutting rates and then
Speaker 1: people would say, well, it's when it uninverts then it
Speaker 1: causes the crash, or when they when they pivot, it
Speaker 1: caused the crash. But I think to your point, that's
Speaker 1: not the cause. It was what was it was in
Speaker 1: common and so the FED was late to reacting. The
Speaker 1: markets were already crashing when they made the pivot. But
Speaker 1: in this case, they're making the pivot early.
Speaker 2: Well that you're I think you're right, and I think
Speaker 2: they they're they're preemptive. In other words, typically what would
Speaker 2: have happened in twenty three with those banks going down,
Speaker 2: they would have shut the banks down, you know, the
Speaker 2: problem banks twenty three, and but the fallout the model
Speaker 2: that the transmission would have kept on going and the
Speaker 2: negative transmission, and we saw in twenty three was that
Speaker 2: negative feedback loop was short circuited by by by policy.
Speaker 2: Whatever they did, they stopped the you know, they stopped
Speaker 2: the contagion from spreading. They front run that and got
Speaker 2: ahead of it. And so credit continued to flow. The
Speaker 2: economy was never starved with credit. People still had access
Speaker 2: to credit, corporations still had acces to corporate to credit.
Speaker 2: High yield bond spreads continued to come down, and so
Speaker 2: you know, the FED was able to front run that,
Speaker 2: and the yield curb version had nothing to do with that.
Speaker 2: It was just policy being preemptive and of what are
Speaker 2: the problems of the past.
Speaker 1: Yeah. Now I love how, you know we talked earlier,
Speaker 1: sort of your ear your take on the market, the
Speaker 1: way you look at them, watch them, read them, et cetera.
Speaker 1: A little bit different. It seems to be a lot
Speaker 1: more data driven. And as we kind of said earlier,
Speaker 1: it's not as you think it should be, your philosophically
Speaker 1: want it to be, but as it is, so all
Speaker 1: of this could change at any moment, and you're sort
Speaker 1: of watching the data, right and I'm guessing, or I
Speaker 1: guess I'm curious, Like what are you watching? You know,
Speaker 1: your charts to indicators you think are probably the most
Speaker 1: important to kind of sniff out when you should start
Speaker 1: to change your mind.
Speaker 2: Yeah. So, in terms of conventional charts, I look at
Speaker 2: the labor market. I'm kind of obsessed with the labor market,
Speaker 2: So I look at weekly job, the weekly job claims,
Speaker 2: the continuing claims, the four week moving average of continuing claims.
Speaker 2: Those are a big tell on on the cycle. Once
Speaker 2: you start you know, once you start losing the labor markets,
Speaker 2: it's kind of like an emergency and it's pretty soon
Speaker 2: game over. So throughout this whole cycle, what we've seen
Speaker 2: is those numbers improve even in the face of other shocks,
Speaker 2: the labor market kept on improving. So you don't get
Speaker 2: a recession when people are still working. As long as
Speaker 2: people wake up in the morning, go to work, earn
Speaker 2: a paycheck, spend it, the economies and to keep on going.
Speaker 2: And so that is really really important to me, the
Speaker 2: labor market.
Speaker 1: But isn't that somewhat of a lagging indicator unemployment. I mean,
Speaker 1: typically businesses are going to go through a whole lot
Speaker 1: of hardship before they start to lay off employees.
Speaker 2: The answer is yes and no. It's lagging in the
Speaker 2: sense of it's the last thing to go. But if
Speaker 2: you as long as it as long as it you know,
Speaker 2: is resilient, you're not going to knock the economy over.
Speaker 2: So I guess if you want to say, oh my god,
Speaker 2: you know it's labor market softening up, We're to have
Speaker 2: a recession tomorrow, I guess in that way, it could
Speaker 2: be leading right it It gives you a talent what's
Speaker 2: going to be happening in the market. So maybe it's
Speaker 2: the last thing to go. But since it's the last
Speaker 2: thing to go, that's when you really have to start worrying.
Speaker 2: I know, it's I know, it's kind of counterintuitive in
Speaker 2: that way. It's kind of like, I don't know, I'm
Speaker 2: trying to draw an analogy. I don't I'm getting I'm
Speaker 2: getting old. So once once I start, once I start
Speaker 2: losing my hair, and then should I really really worry
Speaker 2: about getting old till then looking great? Right? So it's
Speaker 2: it's it's kind of a it's a counterintuve approach that
Speaker 2: I take at least.
Speaker 1: Yeah, what about the Fed's numbers, the probably not CPI
Speaker 1: maybe PCE. I mean, what about those into type of indicators.
Speaker 2: Yeah, so I look at I really look at the
Speaker 2: the s c P, the Statement of Summary of Economic Projections. Now,
Speaker 2: a lot of people think that the s c P
Speaker 2: are forecasts, and they say, oh, you know, inflation did this,
Speaker 2: and the FED they can't forecast for beings and they
Speaker 2: don't know what's going on. I think that's the wrong framework,
Speaker 2: the wrong approach. FED projections in the se PR statements
Speaker 2: of intent, What does that mean? It means that they
Speaker 2: are trying to use their policy powers, the levers of policy,
Speaker 2: to guide the economy to you know, whatever target they have. Right,
Speaker 2: it's a it's an intent in other words, like when
Speaker 2: you wake up in the morning and say, God, I
Speaker 2: went on a diet and my goal is through this
Speaker 2: fifty pounds by year end. So you know, it's in
Speaker 2: a way, it's kind of a forecast. But really it's
Speaker 2: an intent that's going to guide your actions and hopefully
Speaker 2: you get there, maybe you miss. But it's really a
Speaker 2: framework for guiding other parts of the policy apparatus, whether
Speaker 2: it's the r RP you know there, you know, all
Speaker 2: these different you know, plumbing acronyms, those things are driven
Speaker 2: by the S, by the SEP, by the statements of intent. Right,
Speaker 2: So the statement of intent creates the framework for how
Speaker 2: different policy levers are going to be pulled and manipulated
Speaker 2: to guide the economity their target. It's not a forecast, no,
Speaker 2: no one's got a crystal ball. So I start with
Speaker 2: the with the SEP and try to understand, Okay, if
Speaker 2: this is the target, then they're going to try to
Speaker 2: do X, Y and Z to get us to that target,
Speaker 2: and that has an impact on rates, it has an
Speaker 2: impact on risk assets. So you know, a good example
Speaker 2: was we undershot PCE. So having undershot PCE, now they're
Speaker 2: going to have to take actions to kind of recalibrate
Speaker 2: their policies. And that's what that's what I use to
Speaker 2: kind of front run where they're going to go. So
Speaker 2: the SEP for me, is a tool of getting into
Speaker 2: their thinking, not to not to make a forecast, but
Speaker 2: to get into how they're going to react to the data.
Speaker 1: Okay, now you put on Twitter a few weeks ago
Speaker 1: or maybe a week ago, I forget, but something about
Speaker 1: I remain risk on. I think you said that, right, yep,
Speaker 1: that's your viewpoint for this year. Your remain risk on
Speaker 1: until proven otherwise, until some of these indicators you mentioned,
Speaker 1: the unemployment data or the SEP data starts to change
Speaker 1: your mind. But until then it's risk on.
Speaker 2: Yeah. I mean, look, there's volatility, there's risk. You know,
Speaker 2: we you know, just get if we get a five
Speaker 2: percent pullback, that doesn't really change the broad thesis. It
Speaker 2: just means, you know, the market that a little ahead
Speaker 2: of itself. You know, there's always variants in markets. But
Speaker 2: I'm constructive of the economy. A recession is not my
Speaker 2: base case. I don't think we're gonna go into recession.
Speaker 2: I don't think we're gonna get an employment extinction event.
Speaker 2: You know, obviously there's there's always those risks that we
Speaker 2: discussed earlier, right, supply chain, risk, war, these things can
Speaker 2: can always you know, we just don't know. But apps
Speaker 2: all else being equal, Uh, you know, inflation should continue
Speaker 2: to moderate or disinflate, the labor markets should remain strong,
Speaker 2: and we should not go into recession. And you know,
Speaker 2: risk it's a favorable, favorable environment for risk assets.
Speaker 1: So so how do you play it? What? What sectors
Speaker 1: do you like the best? I mean, I think I'm
Speaker 1: an inflation bowl. I think the rest of this decade
Speaker 1: is an inflationary story. And maybe the story isn't so
Speaker 1: much how do we keep up with inflation? But how
Speaker 1: do we beat it in this type of environment? What
Speaker 1: type of sectors and assets are are you liking for
Speaker 1: this type of environment?
Speaker 2: Yeah? So I link it to my to my policy
Speaker 2: call on what's happening with the YELD curve. So what's
Speaker 2: what's going to happen, What's going to happen? What we
Speaker 2: know is going to happen. Is the yield curve is
Speaker 2: going to disinvert. We know that's going to happen. Why
Speaker 2: do we know it's gonna happen.
Speaker 1: You think it happens this year?
Speaker 2: I start, it's that I think I don't know if
Speaker 2: it fully happens this year, but that's I think more likely. Yes, Okay,
Speaker 2: So the yield curves, you know, disinvert. Now what does that?
Speaker 2: That can take different forms? Could mean that could mean
Speaker 2: that two years days where it is, ten years goes higher.
Speaker 2: It could mean it could mean, you know, ten years
Speaker 2: stays where it is to your fall eels fall. Could
Speaker 2: be some combination thereof, but it will disinvert. So I
Speaker 2: think the trade is to play off that disinversion. Who
Speaker 2: who benefits from a disinversion? Well, the easiest one is
Speaker 2: if you're borrowing short lending long right now, you're kind
Speaker 2: of screwed, right In other words, if you're if you're
Speaker 2: financing costs today are higher than what you're making on
Speaker 2: the long end, you're kind of screwed. You're not, you're
Speaker 2: upside down. However, if the yield curve disinverts, and depending
Speaker 2: on the speed, if you're in if you're in any
Speaker 2: business that borrows short lends long, you're gonna start making
Speaker 2: more money. So classic one is and I discuss we
Speaker 2: put this trade on back in November, and I discussed
Speaker 2: it on a different podcast. Was you know the mortgage rates.
Speaker 2: You know things like anally mortgage, they basically borrow money
Speaker 2: from banks buy mortgages. So they're they're they're they're borrowing
Speaker 2: short lending long, and they've been in the toilet for
Speaker 2: a while, so lately they're up around being close to
Speaker 2: twenty percent it's November. Why because their funding costs are
Speaker 2: going their overnight funding costs are going down, and you
Speaker 2: know they're they're buying you know, long dated paper that's
Speaker 2: going to be yielding more than what they're art costs are.
Speaker 1: So banks, financial institutions that that sort of have these
Speaker 1: types of strategies you think will outperform.
Speaker 2: You like that, uh correct? And also homebuilders right, and
Speaker 2: they're they're capital intensive, so they need to borrow. I
Speaker 2: mean they're borrowing the way they turn off their debts
Speaker 2: a little different. But I think between the secular wind
Speaker 2: of the housing shortage combined with the change in in
Speaker 2: in the yeld curve, they should do really well.
Speaker 1: So companies that are cash intensive could do good because
Speaker 1: they're borrowing costs would go down, which would drive their expenses.
Speaker 2: Down borrowing costs relative to what they're making on the
Speaker 2: other on the other side, Yes, right, Okay, doesn't really
Speaker 2: matter the level. What matters is the relative relationship between
Speaker 2: those two.
Speaker 1: Okay, so homebuilders some financial institutions that have that and play.
Speaker 1: What do you think about commodities? Do you follow commodities much?
Speaker 2: You know? I don't. I just and I I don't
Speaker 2: only out of ignorance. They are they are so above
Speaker 2: my above my pay grade. I do not understand them.
Speaker 2: I mean they're there. I know it's supplying demand. I
Speaker 2: can tangle and vapradation. I get these consps academically, but
Speaker 2: just as as as a as a way to approach
Speaker 2: them to make money, I would most likely lose money
Speaker 2: to make it, so I don't touch them.
Speaker 1: Yeah, I mean, certainly the commodity itself has those attributes
Speaker 1: supply demand, if you will, which is there's a million
Speaker 1: reasons that would drive that. I was thinking about the
Speaker 1: companies themselves, the gold mining companies, the oil companies. They're
Speaker 1: very capital intensive, right, so they may be caught up
Speaker 1: in that sort of borrow along lend short sort of scenario.
Speaker 1: But okay, I just.
Speaker 2: Don't under I don't understand. I don't get it. Unfortunately,
Speaker 2: I wish they did.
Speaker 1: Yeah, yeah, okay, So financial stitutions, what about what about
Speaker 1: like the tech stocks and like AI you mentioned AI earlier.
Speaker 1: Do do you think of in that area that's that's
Speaker 1: certainly a risk on type of asset.
Speaker 2: Absolutely, I think I think tech is you know, tech is.
Speaker 2: I believe it's now forty of the S and P
Speaker 2: five hundred. I mean, it's right tenth overall, and I
Speaker 2: think that that's going to keep growing and that I
Speaker 2: think those huge leverage returns, those scalable returns that you
Speaker 2: can get from technology is one of the reasons why
Speaker 2: US markets, especially at the SMP level, trade at a
Speaker 2: premium round to other world markets. We just have best
Speaker 2: in world, best in class world, you know, world class companies,
Speaker 2: and that will I think that's gonna that's going to
Speaker 2: continue to do well.
Speaker 1: Yeah, And what's your take with bitcoin? The ETF popped
Speaker 1: a lot of trading volume happening over there. Larry Fink
Speaker 1: seems to have really sort of turned the corner at
Speaker 1: least vocally what he's talking about on bitcoin. What's your
Speaker 1: viewpoint on that?
Speaker 2: I I have no no view on bitcoin. I don't
Speaker 2: trade it. I mean I understand one of it's like commodities.
Speaker 2: I understand it intuitively maybe and academically, but it's I
Speaker 2: really devote my time to understanding the economy and interest
Speaker 2: rates and from their building out trades based off the
Speaker 2: interest rate movements, and that that takes up a lot
Speaker 2: of my most of my time.
Speaker 1: Sure, sure, yeah, Warren Buffett strategy, right your deal box,
Speaker 1: stay in your area of your circle of competence, if
Speaker 1: you will.
Speaker 2: Sure, exactly, Yeah.
Speaker 1: All right, David well Man, that was really good. A
Speaker 1: lot of information there. I really really appreciate that. Anything
Speaker 1: else that we need to lay out there that we
Speaker 1: haven't discussed, no.
Speaker 2: I think we covered it all, you know. I think
Speaker 2: we're looking at it at a March cut in by
Speaker 2: the Fed, and you know, we'll see how that evolves.
Speaker 2: But I think the cuts start in March.
Speaker 1: Whether it happens in March or April, does it really matter,
Speaker 1: you know.
Speaker 2: I think what matters more is less the timing at
Speaker 2: this point, more the degree, you know. I think if
Speaker 2: they just I think the more they forestall or kick
Speaker 2: the can on actually making the cut, the bigger the
Speaker 2: impetus grows for a large cut. In other words, instead
Speaker 2: of starting at twenty five, if you start kicking the
Speaker 2: can un till June, now, now you're going to start
Speaker 2: cutting at fifty, right because of the disinflationary pressure is
Speaker 2: building up, So you know, to me, it's you know,
Speaker 2: you know, tomato, tomato, right, That's.
Speaker 1: Kind of what I was thinking. That was sort of
Speaker 1: like last year, like, oh, we're gonna get one more
Speaker 1: twenty five basis point raise, and it's like does it
Speaker 1: really matter at this point? All right, and sort of
Speaker 1: kind of like that. Okay, great, well, David Savante's Pinebrook Capital.
Speaker 1: We'll link to your stuff down on the show notes
Speaker 1: down below. Anyway, thanks for joining, Thanks for.
Speaker 2: Having me, appreciate it. Take care,