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Speaker 1: Welcome to the Bloomberg pim L Podcast. I'm Pim Fox.

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Speaker 1: Along with my co host Lisa Abramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether at the grocery store or

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Speaker 1: the trading floor. Find the Bloomberg pm L podcast on iTunes,

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Speaker 1: SoundCloud and at Bloomberg dot com. I'm Lisa Bramo. WIT's

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Speaker 1: my co host, Pim Fox is on vacation. We let

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Speaker 1: him out of the building, but he will be back

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Speaker 1: in about a week and a half. I want to

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Speaker 1: learn more about whether the FED even matters if you're

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Speaker 1: an equity trader anymore, given that inflation expectations have gone

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Speaker 1: up so much that it almost makes the benchmark great

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Speaker 1: less relevant, possibly irrelevant. I want to bring in Matt Malley,

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Speaker 1: equity strategist at Miller t Back, to give an answer

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Speaker 1: to that. Matt, what do you think we always so

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Speaker 1: the one thing that we do have to worry about?

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Speaker 1: What that is? And I certainly understand why, uh why

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Speaker 1: people are starting to feel that way, and and and

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Speaker 1: I think we would all agree that would be a

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Speaker 1: good thing because they've been so dependent on the set

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Speaker 1: for so long. But the one thing I do worry

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Speaker 1: about is we move into next year. Uh. Anything can

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Speaker 1: happen in the next six weeks or so, but UH

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Speaker 1: is that as rates move up, we still have huge

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Speaker 1: amounts of leverage in the marketplace. Now the banking system

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Speaker 1: is certainly the U S banking system anyway, is much

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Speaker 1: less leverage than it was during the during the crisis.

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Speaker 1: But the New York Stock Exchange margin dead is above

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Speaker 1: it's two sounds of seven seven levels. So there's still

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Speaker 1: a lot of leverage out there. And as interest rates

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Speaker 1: move higher, the cost of carrying that leverage, UH will

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Speaker 1: go up, and which means some people will have to

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Speaker 1: unwind some of that leverage. So for one second, I

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Speaker 1: really want to dig into where the leverage could be

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Speaker 1: because a lot of people have talked, as you mentioned, Matt,

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Speaker 1: the banks themselves have de levered. But this is an

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Speaker 1: important point. I mean, where is the leverage? Where are

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Speaker 1: we going to see the pain? Well, you see, like

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Speaker 1: I said that the New York stock has changed, and

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Speaker 1: just in the stock market than the amount of margin

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Speaker 1: debt UH with people are just levering up on the

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Speaker 1: markets is is at all time higher. It's actually I

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Speaker 1: think it's just slightly below that, but it's uh well

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Speaker 1: above where it wasn't two thousand and seven. We've also

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Speaker 1: seen um, you know, with the you know, so much debt,

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Speaker 1: with some of these companies putting on things, so much

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Speaker 1: debt has been put into non uh things that didn't

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Speaker 1: really help service that debt. In other words, they've gone

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Speaker 1: back to buying back stock and such and rather than

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Speaker 1: investing in their in their own businesses. So uh, in

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Speaker 1: a in a weird way, uh, the companies that are

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Speaker 1: more leverage than they used to be. And of course

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Speaker 1: we have a private private debt as a percentage of

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Speaker 1: GDP up at historic Hive. So there's a lot of

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Speaker 1: leverage out there in the marketplace, even though it's not

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Speaker 1: necessarily in the banking system. And therefore I'm not worried

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Speaker 1: about the system collapsing, but they still could have a

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Speaker 1: cause the headwinds for for for the for the stock markets,

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Speaker 1: because leverage help the addition of leverage help the stock

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Speaker 1: market move higher in the last six seven years. I'm

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Speaker 1: not certainly not saying that's the only reason one up,

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Speaker 1: but it's certainly helped it. So we'll cause the headwind

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Speaker 1: if if that leverage needs to be unwound. So what

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Speaker 1: would have to happen for the leverage to be unwound?

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Speaker 1: I mean, is this people borrowing short term in order

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Speaker 1: to finance longer term purchases are riskier purchases, So if

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Speaker 1: the short term rate to borrow goes up substantially, people

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Speaker 1: will need to de lever. Is that the idea here,

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Speaker 1: so that that as benchmark rates climb higher, you will

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Speaker 1: see sort of some of this leverage squeezed out, Yes, exactly.

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Speaker 1: And then I mean, although I will say this, it's funny,

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Speaker 1: you know the people are talking about among one of

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Speaker 1: the things I've been saying for a while is that

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Speaker 1: the FED realizes this, and that's one of the reasons

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Speaker 1: why they said, even before they did their first rate

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Speaker 1: hike that they would go very slow. And part of

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Speaker 1: that has to do with the what with the speed

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Speaker 1: of the economy, but it also has to do with

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Speaker 1: this issue. They don't want to suddenly cause more problems

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Speaker 1: than they're solving. So I don't you know, everybody's starting

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Speaker 1: to say, now with Trump coming in the office, suddenly

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Speaker 1: they're gonna have to raise rates a lot faster than

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Speaker 1: they than they would otherwise have UH, that's probably true,

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Speaker 1: but I don't think it will be quite as fast

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Speaker 1: as people as some of the most various people are

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Speaker 1: calling for. UH. And so again it's causing a headwind,

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Speaker 1: not a major a major problem, but it's definitely something

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Speaker 1: that will have an impact on stock prices away from

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Speaker 1: the fundamentals, and with with the settle reserve having been

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Speaker 1: so important to the markets in the last few years, UH,

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Speaker 1: some of these non fundamental factors have been important and

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Speaker 1: they will be for I'm sorry for to say for

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Speaker 1: some time to come. Which areas of the stock market

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Speaker 1: do you think are most vulnerable to a dramatic pullback

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Speaker 1: as leverage gets squeezed out? Well, and it's really gonna

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Speaker 1: be across the board on a very near term basis,

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Speaker 1: though is oddly enough, is that I worry about the

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Speaker 1: financial stocks only, and this is between. This is really

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Speaker 1: on a short term basis, been between maybe now on

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Speaker 1: the end of the year. They are certainly poised to

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Speaker 1: go higher because UH, interest rates are poisoned to go

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Speaker 1: higher and which should you know, invert the sorry, UH,

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Speaker 1: keep the EO courage steeper, continue to steep, and then

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Speaker 1: that should be helpful However, they've gone so far, so fast,

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Speaker 1: and the problem is we have everybody's on one side

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Speaker 1: of the boat. You look at the sentiment indicators for

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Speaker 1: the mom market, there's over extend as I've ever seen them.

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Speaker 1: I've been doing this for over thirty years. Uh And,

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Speaker 1: and the positioning isn't quite as bad as it has been,

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Speaker 1: but it's still quite extreme, or getting more extreme, I

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Speaker 1: should say. And the same with the bank stocks. You

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Speaker 1: look at some of these charts, they're wildly overbought. Again.

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Speaker 1: I guess my point is these things will may look

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Speaker 1: like they're collapsing for a very short period of time.

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Speaker 1: But if you like these groups and uh and in

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Speaker 1: these sectors you want, you want to think hold off

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Speaker 1: and buy them. I think you get a better chance

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Speaker 1: to buy them at lower levels down the road as

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Speaker 1: we moved towards the end of the year, rather than

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Speaker 1: chasing them up at these levels. Matt malle thank you

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Speaker 1: so much for joining us. Matt Malley, equity strategist at

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Speaker 1: Miller T Back. Thanks for listening to the Bloomberg P

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Speaker 1: and L podcast. You can subscribe and listen to interviews

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Speaker 1: at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm

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Speaker 1: pim Fox. I'm out there on Twitter at pim Fox.

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Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one

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Speaker 1: before the podcast. You can always catch us worldwide on

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Speaker 1: Bloomberg Radio