Warren Pies: A Rate Cut Will Be Inconsequential After Fiscal Policy Already Changed Everything
Summary
Market Outlook: Warren Pies discusses the transition from a deflationary mindset to a debasement mindset, emphasizing a structural bullish stance on equities and hard assets like gold due to fiscal policy changes post-pandemic.
Economic Insights: Pies highlights the impact of fiscal dominance, noting that procyclical deficits are stimulating the economy more than Fed actions, and suggests that future rate cuts will be inconsequential in this context.
Inflation Dynamics: The discussion points to core CPI's stickiness above 3% due to tariffs and structural factors, with the Fed likely to look through tariff-induced inflation when making policy adjustments.
Investment Strategy: Pies advises maintaining a benchmark weight in equities unless recession indicators emerge, and suggests being overweight in fixed income as rates are expected to decline.
Housing Market: The conversation touches on the housing market's stagnation, with Pies predicting no significant price crash but a prolonged period for incomes to catch up with elevated home prices.
Gold and Bitcoin: Pies remains bullish on gold, expecting further gains with potential dollar weakening, and maintains a cautious 3% allocation in Bitcoin, viewing it as a hedge in the debasement era.
Perception Gap: The widening perception gap in macroeconomic analysis is attributed to biases and political influences, with Pies advocating for data-driven approaches to navigate market complexities.
Future Risks and Opportunities: While optimistic about AI's potential economic impact, Pies expresses concern over the systemic risks posed by the growing influence of cryptocurrencies like Bitcoin on financial markets.
Transcript
you're not going to get below 3% core CPI. The math just doesn't work. It's just a matter of are you comfortable with looking through tariff uh inflation and making these policy adjustments. That's what I think the Fed's going to do and especially next year when you get a new Fed chairman, they're going to they're going to even be more doubbish. So, from here to 2026, I think you get a lot of cuts. Warren Pies, founder of 314 Research, it is so wonderful to welcome you to the show. Thank you so much for taking the time to join me today, Warren. really appreciate it. Yeah, absolutely. Thank you for having me. Well, we're thrilled to have you and I have to give a shout out to the viewers who recommended you. We have the best audience. I always like to say the nicest people on the internet watch this show and you came um as a recommendation when I asked who should I have on the show in 2025. So, absolutely thrilled to have you on. And I was spending the last 45 minutes, Warren, reading your latest research note. And I thought it was incredible because I feel like you really captured what I've been kind of seeing or sensing. You really captured the pulse of what I've been hearing from guests in like the best way possible. This widening perception gap that we are seeing in macro. I want to get into that, but I do want to start Warren where we always start with our guest and this will help folks get to know you and how you think about the world and that is with your big picture more of that macro framework how how you're looking at the world, the framework in which you are looking at the world. um that big picture when it comes to the economy, markets. Um so let's start there with that framework. And one of the things about this show, Warren, is you can take all the time you need to set the table when it comes to that big picture view. Oh wow. Okay. The big picture view I I'll try not to just go on and on. I'd say so thematically our view is that the world is transitioning from what we call a deflationary mindset to a debasement mindset. And this has been going on since the pandemic. It's something we've been writing about for a while. And uh just to understand what that transition looks like, a deflation mindset is what ruled markets in our view post GFC. And so GFC uh it was all about debt deflation. Um protecting principle was the most important uh psychic concern coming out of the GFC for investors. And so that re was reflected in the way assets were priced and and a whole other host of other things. And our view is the pandemic was really the ended that era and uh we've we've now entered into this debasement era. And the debasement era is is characterized by a whole host of behavioral changes amongst investors. And I think it's really becoming prevalent out there. People are starting to see this. We've been talking about how hey uh more or less the thing that's going to the big psychic concern now as we go through these years is going to be keeping up with maintaining purchasing power. And anyone who's tried to buy a home or a car over these last few years I'm sure feels it. As long as money is has some scarcity value to you then you're feeling it. You know everything's leveled up post pandemic. Uh we think that really came from fiscal. I know there's a lot of anger at the Fed. The Fed was they've made their mistakes. But I think that the if you're really mad at the Fed, you should should probably redirect your anger at the fiscal authorities and how really the post-pandemic period has they've navigated it. So that's our big picture view in that in that world. Um you know, you're more or less you're structurally bullish on equities and bullish on hard assets in general. I think that the blob of liquidity moves incrementally into different areas of the of the asset menu, you know, but we've been bullish on gold and uh you know, Bitcoin is one of those things where you we're strange because we don't really have a strong opinion like our our main our main uh fund and model. We we have like a 3% max position Bitcoin and we've been riding that max position through the last couple years and so but so it's reflected these are the basement assets and and I think that's what's going on. Now when you think about the macroeconomy there's a secular picture and there's a cyclical picture and I think time frames confuse people a lot when we're talking about things. You know I could be talking about what happens next week. I could be talking about what happens next month or I could be talking about what happens over the next decade. And uh every one of those things is going to be really different, you know, and so the the long-term uh we call secular. That's like a multi-year view. And that's the debasement mindset that's coming in. You know, we're in year five of that. I think that you know, you have another, you know, 10 years potentially in that in that uh change. But on the cyclical basis, our view before the tariff and liberation day was that inflation was actually troughing this year. Even though we think in this debasement world inflation will be structurally higher, we thought that there's this 12 to 18 24-month period where inflation could be subdued just because of the way you measure in the CPI. And so those are the big picture factors uh just to set the table. I love that. Okay, this is so fascinating to me. Um talking about going from this deflationary mindset era to this debasement era that we're in. We're about what 5 years into it. Can't believe it's already 2025. Um, it feels like it was just yesterday. It was 2020. And it makes me wonder, Warren, um, the behavior changes among investors that I wonder if we're still early in the recognition of this new era. Do you think folks have really caught on or do you think some people might still have this kind of older mindset of like how things used to be? I think we're right in the middle of the transition. And I think you know this last sell-off though I I believe really advanced the uh this transition a lot. So you know a lot of this is you have to study the behavior of markets to understand what's um what's what the psychology out there is. And I think that the the sell-off we had and then the fact that retail by all accounts set the bottom in that sell-off and like I could say anecdotally like I would go to my son's football games on Friday nights and uh you meet other parents and they know I do this for a living and so they all kind of huddle up next to you. Hey, what's going off the markets? And uh it wasn't too far into April where the parents would say things like well I wish I would have bought more wish I would have bought more palente. I wish I would have bought more Bitcoin. I wish I would have bought that. You know, so the risk appetite was strong. You know, they've been trained to buy the dips. And so to me, that was a good reflection. I mean, anecdotes, we we're a quantitative, for anyone who doesn't knows, we're very much a quantitative macro shop. And and so uh but obviously these anecdotes inform the data. They show you what you see in the data. And we we did that during the the selloff. We looked at what was where was the buying coming from. We saw retail set the bottom. We saw corporates set the uh set the bottom and then you saw systematic funds like vault target funds and CTAs pile in and advance that rally. And the group that got left out the dry were a lot of these traditional Wall Street uh strategists and banks and and uh players that expected this to be a more protracted downturn. So I think we're in the middle of it. Uh I think there's still more converts. So, you know, by the time everyone gets into this, you know, debasement mindset, we'll be late in the game. And this is a multi-year process. You know, everything's going to have to is going to take time and you have to convert all these these people and pull them out of their uh debt deflation mindset. Yeah, I love the anecdotes and it's so true. I remember like the group texts I was on with like friends during that time around like what folks were buying was kind of it was entertaining. It was interesting. Um, okay. I want to explore this idea that you brought up um because you were pointing out if you're mad at the Fed, you should really direct that toward the fiscal authorities. I thought that was so interesting. Um I would love for you to elaborate a bit more because seems like fiscal really been driving a lot of things. So I'd love to hear more there. Yeah, we've been talking about the fiscal dominance theory. You know, I think sometimes the phrase gets misused. it doesn't really I don't feel like you need to be technically correct to understand the real um the main consequences that we're talking about here and it's just that we started running structurally these proyclical deficits um that were larger than any time post World War II in the history of the United States. So say 7% of GDP deficits when unemployment rates at 4%. You can put together like a scatter plot of those two variables and you just do not see this. So when I say proyclical I mean that we're running a a recession-like sized deficit when we're at uh the peak of expansion. And that's uh what that is is it's basically stimulating in the the highest power type of money to send out into the economy. fiscal stimulus, fiscal deficit spending is like direct payments out into the economy. Uh there is no lending channel you have to work through or anything else. It goes straight out in a number of different ways and it's high power. And I think it was the thing that tripped so many people up. It's why we didn't have a recession in 2022 or 2023 even though uh that was the consensus call and and everyone was really under has underestimated I think even us and we've been saying for a long time like we would pull up the checkable deposits uh charts where it went from uh it just ballooned overnight basically because of the pandemic and the amount of fiscal spending and we would say we don't really know how to factor this into our models but this is crazy and it might it it might it might put us in a totally different world than we've been in before economically. And so to me, that's the dominant factor. You know, there's a lot of anger at the Fed. Oh, you're going to move interest rates up or down? I mean, they raised rates five 550 basis points in 2022 and more or less didn't impact the economy too much. I mean, the uh there's a whole bunch of people who say, well, they should have used the balance sheet. They should have done this. They should have done that. And like those people are generally disconnected from reality in my view because they they they the Fed is not going to proactively crash the economy. And so to me they've they they uh there's a whole school of thinking that has ascribed way too much uh responsibility responsibility to the Fed for how the economic conditions that we're in. And even now like you know we had the whole Jerome Pow Jack Jerome Powell Jackson Hole speech here recently and there's a lot of anger about the dovishness basically him more or less codifying his September cut in that speech. Um and there's I see a lot of frustration and anger in my view is that the frustration and anger you know is really more about what happened in those pandemic years and what happened from the fiscal authorities and this this 25 basis point cut is it's really going to be inconsequential in the grand scheme of things and the the the die has already been cast. We've already changed the entire paradigm of this economy through that fiscal response and so that's what I mean by that. Interesting. So, let's talk about the Jackson Hole speech because I know everyone had been so focused on that last week. I had Jim Biano on the program um on Friday afterward and aired as a Saturday special and he thinks that a cut will actually be a policy mistake. But I just want to kind of get your view of um the Jackson Hole speech and what I'm kind of hearing is if they cut 25 basis points, it'll be inconsequential. But so my question is does the Fed really matter then if it's the fiscal side driving things? Um just want to hear how are you thinking more about the Fed? Yeah, I'm I'm trying to defide two things. So there's this feelings of frustration. I think there's like the anger at the Fed that emotion is about things that have already happened in my estimation that can't be changed really. Um, and that's on the fiscal authority from my the way I read the situation. Now, when we go forward, you can't change what's already happened. Like, house prices have gone up 50% and they're not coming down. They're not crashing. That's money that's came out and went into this area of the econom. Same with the stock market. We're not going back to this like 2019 trend line. We're not going back to the 2019 trend line on any of these assets. Like, we've broken that trend line because of the amount of money it's gone in the system. So, I think you have to get back to that cyclical discussion. you know, we have a secular uh we're in a secular debasement regime, but I think on a cyclical basis outside of tariffs, you have a inflation is mostly troughing and disinflating. It's really about housing inflation is down uh 90 basis points year-over-year so far year to date. And I think there's more of that to come. Oil's down 12% year-to date. I don't see a big oil rally in our future. And that was my background was in the oil and gas space. Um, and you know, so from I know I hear Jim's argument and a lot of those arguments, which is that the labor market is actually tight now because we've had so much supply cut off through immigration policy, but you know, that's not reflected in wages. So if you really had a tightening labor market or a static labor market, you would see wage growth starting to to kind of stall out here. And we're at new cycle lows in wage growth. So when I see what I call that is a a loosening labor market, a disinflation inflating housing market, and weak oil prices, those are the three main vectors that inflation comes through. Uh so I don't see now tariff inflation is going to do what it's going to do regardless of the Fed. And that's why the Fed goes back to 2018 teal book and says, "Hey, we should look through tariffs because it's basically a one-time price increase and all that." Nobody has patience to hear that after what we went through post pandemic. But that's the truth. if you just analyze this situation. So what I look at is the inflation picture to me outside of tariffs is uh is not concerning in the near term. So it means to me that rates are restrictive and when you uh well the other side of rates being restrictive is when you look at the labor market and the economy the labor market is loosening in my view. You know that uh July jobs report was was pretty weak. We saw the unemployment rate tick up. We saw the hiring rate tick down. The firing rate is now above the hiring rate for the first time this cycle post pandemic. So what that means is that there's a freeze in hiring and now you're starting to see a tick up in layoffs. Continuing claims are not at recessionary levels yet, but they keep the they keep bleeding higher. And then you see wage growth, which is reflecting that loosening in the labor market coming down. So wages from the Atlanta Fed wage tracker uh close to 4%. That's a cycle low. You go to Indeed, the private uh job company, job tracking company, and they're at a cycle low of 2.4%. So you look at both of those metrics and map that on to what's happening in those labor reports. I think that the supply thing has really the labor supply thing has really messed up a lot of analysis. It's caused a lot of confusion. Um it did it last year too. Uh last year when we saw the unemployment rate come up because of so much immigration and labor supply. We said this is not a recessionary signal. This is not a growth concern. We called that a benign loosening. Uh I think that was like a pretty you you know we're clever with that. This time around, we're calling this current stalling out of the unemployment rate a malignant stasis, which is probably not going to stick in the same way. But it's just to say uh that supply factor is what's swinging around and causing some confusion in the data here and now. But the bottom line on all that is I see I understand the inflation argument, but I think that the the labor side of the equation is much weaker, much more straightforward here. So the Fed should be cutting. They're restrictive and they should be lowering interest rates that Okay. And then I think from your note, and you may have said it just now too, but if we held the labor force participation rate constant from April, unemployment would be 4.9% instead of 4.2. Correct? Yeah. That's another that points again to this idea that you where really what you're seeing is a tightening of supply and everyone sees that or talks about that. It's just a matter of what does that mean and how do you interpret it. So there's really these two big policy factors. you have tariffs which are um uh pushing up cost in the good side of the basket and then you have immigration which is kind of skewing some of these numbers on the employment side and that's why I think we talked at the beginning you brought up the the perception gap the widening perception gap which is what the title of our report was and uh that's why because there's these these policy clouds that are causing a lot of uh making analysis kind of problematic for many people. Yeah. Okay. So on the labor side, we're going to call it we're calling it the malignant stasis. Yeah, if you want to. It's a little bit, you know, it's we'll see how well that one does. But yeah, I want to um bring up something with inflation with you just to explore a bit more as you're pointing out like we have oil down um shelter cooling, wages decelerating. Uh but I guess my question is core CPI won't budge below 3%. So what's driving the stickiness? Yeah, that's we what we wanted to do because we've been pretty uh we came in here as I would say like again we expected that this cyclical disinflation and we've gone on core CPI from 325 down to 305. So we have had disinflation but admittedly it hasn't been as strong as we would have expected. So what what's going on what's happening in the inflation picture that we that was a little stickier than we expected coming this year? Well number one is tariffs. So the the the real recipe for getting us down to close to 2% CPI target uh and I know it's PC but just stick with me on the CPI thing because that's what we have more data for CPI to talk about. So core CPI over the preandemic years we got to that low twos by having a 2 1/2 to 3% oscillating super core. So that service is non-shelter and then shelter 2 and a half to 3%. Sometimes around 3% for super core and then we had goods outright deflation. So goods were down year-over-year on average like 30 basis points back then. When you put all that together, you get close to the 2% target um that the Fed had. And you probably adjust for the PCE weightings and you get down to 2%. So that's the u that was the recipe for many years to get us there. And now we're in this world where with tariffs, you're not getting that goods deflation. You're going to get goods inflation. So the math doesn't work unless you can pull Super Core or shelter down below where they were pre- pandemic. I just don't think that's going to happen. So it really comes down to we're not probably going to break down below 3% in any meaningful way on core CPI. Uh so that was that is the dilemma is like how is the Fed going to handle the optics of that of cutting into that and there is already a lot of consternation. You have the Trump administration that's putting political pressure on them to cut and then you're going to have a lot of people who are just somewhat rightfully frustrated that the Fed is not abiding by their their mandate. And so you know if they don't believe in the look through tariffs argument then they're going to be very angry with the Fed for cutting uh above 3% core CPI. So, that's what's really sticking. And then, you know, when you zoom in, there's a few things that are one-offs, and this is what gives us like I think this is what the Fed's going to pull out and use when they decide to cut and they'll probably cut with core CPI above 3%. Is uh medical services. That was a big that was a big pressure on the July uh super core number, which was high. You had transportation services in the same boat. Both those had the largest seasonal adjustment that we've ever seen in a July on record. And that's not a small thing. It's like 20 basis points month over month getting added to the the super core number there. So when you I think there's going to be some mean reversion in that in that area. And then there's structural things like electricity which is basically a is going up in the CPI and net electricity generation is making new records in the United States because of this data center buildout. So there are some structural things that are inflationary, but again, electricity is like 2% of CPI ultimately. I get a lot of people who worry about that. Um, and the big p the big passroughs from some of these auctions that have been taking place probably won't hit the consumer basket until middle of next year. So when I put all that together, yeah, I think you're going to have the without goods being at one and a half to 2% year-over-year and potentially even higher depending on how these tariffs shake out. uh you're not going to get below 3% core CPI. The math just doesn't work. It's just a matter of are you comfortable with looking through tariff uh inflation and making these policy adjustments. That's what I think the Fed's going to do. So, it's probably in my, you know, we really usually don't give normative statements like, hey, what should the Fed do? If you put a gun to my head, I'd probably say, yeah, that they should probably look through tariff inflation given what's happening in the labor market. Uh, but I understand if you're don't like that that viewpoint. But the bottom line is that's what they're going to do. That's what they're going to do. And especially next year when you get a new Fed chairman, they're going to they're going to even be more dovish. So from here to 2026, I think you get a lot of cuts. Gold prices have been breaking all-time highs this year. But price appreciation isn't the only way to profit from owning gold. You can earn a yield on gold paid in gold without selling your gold or silver. Unlike dollar yields that can be slashed or even go negative, a yield on gold paid in gold means more ounces in your account every month, not paper, monetary medals is revolutionizing the way people invest in gold and silver. Instead of paying to own the metal, now you can get paid to own it. Right now, there are opportunities for you to earn 4% on gold paid in gold in their marketplace. The interest you earn is paid in ounces of physical gold or silver which you get in addition to any price appreciation that comes from gold and silver during the year. The question is this. Why earn in dollars when you can earn in gold? Join thousands of investors who are earning a yield in physical gold and silver every month with monetary medals. Visit monetary-medals.com/julia to learn more. Okay, I want to talk about this widening perception gap because even like with the Fed too, there are differing views within the Fed on what we should do as well. So, but when I think about the markets and the economy, the participants, especially like in the macro world, it does often feel like we're looking at just two different economies depending on like who's looking at the data. Maybe there's a political bent that comes into it as well. I don't I'll let you um flesh out what you mean by the perception gap, but sometimes folks ask me, Warren, they'll say, "Oh, do you only invite bears on the show?" No, that's so not true. Um we we actually don't always know like what our guest views are going to be. So, I didn't know like other than reading your note, I didn't know what your views were going to be um exactly, but I maybe maybe macro folks tend to be more of a bearish bit. I don't I don't really know, but you would know better than I would. Um, but let's explore this widening perception gap because I really think you have a pulse on what's happening out there. Yeah. Well, number one, I I do think everyone brings a bias to the table when they think about making these kinds of calls and then like they you have all this data to choose from. Like we say macro is the synthesis of chaos. A lot of times you're just trying all this chaos and like make sense out of it. And so a big part of that is knowing what to pull out and what to what to look at and having a source of truth and having a structure and a model to to filter this data through. And I think that helps you uh avoid being uh I mean everyone including myself is going to have some bias that you have to work against. Just acknowledge it, admit it, try and argue against your position. Try and uh really see where you could be wrong because a big part of this is being wrong. And it's that's a hard set of skills to to uh really foster. And then you throw in the political aspect. I think the political aspect has kind of broken people's brains a little bit here. Like it's very hard to maintain a disinterested uh uh disposition when it comes to Trump is what I find. You know, some people love him and some people hate him. Um I I genuinely don't care too much and I know like that probably pisses both sides off. Like some people think he's the best president ever and some people think he's like America's Hitler. And to me, I just look at it and try my best to like take what's happening. There'll be some good, there'll be some bad, analyze it um and without some emotional attachment to it. But there's this um there's definitely a political element. And I mean, what I see on the Fed is a lot of former Hawks who've become 180°ree doves with uh no real data to back them up for their pivot from like last year. Uh and then you see a lot of the doves and they're usually more uh you know the liberal academic types and they can hide their bias a little bit better but it's there as well if you look closely and they've they've become very circumspect. They were cutting a lot last year and now well I don't know cutting might you know we might lose credibility or we might inflation expectations might become unanchored but when you dig closer dig under the surface I think both sides are being controlled by their bias mostly so for us we really try to go back to the data you know what does the data say we lay out a bunch of things of beforehand to our clients and say this is what we're going to watch we're going to watch we think if there's going to be loosening the labor market it's going to start in housing construction construction segment of the market for instance. So we model all that out what's happening in housing also if rates are restrictive which is what a lot of this conversation comes down to you see it first in the housing market. So to us everything flows down from that and then we can construct uh our views for for macro around that. And that's just an example of how you I think you need to have a structure to filter the data from. Um otherwise you just you become stuck in your bias. You can't change your mind and uh you become part of just this like mob mentality. So that's what I that's what I see going on in the perception gap. I want to get your take on housing. I am one of those millennials that would love to buy a house right now, but I'm also waiting. Um, and I don't even know if that's the right move. I am waiting because they are quite high. The prices I am personally seeing things that aren't moving on the market and I am noticing some prices coming down. We do have uh Melody Wright coming on the show this week and she's going to talk all about housing, but I just want to get your views on like what's going on in housing from where you sit. Yeah. Well, first off, we look at it more from like a GDP perspective first. And that is to say, we think that residential construction employment leads overall job losses. So, before each recession, you get about an 8 to 10% draw down in residential construction employment. Uh, we've now had, based on revised data, four straight reports where residential construction employment has fallen. It's it's just it's it's a tiny amount each month, but it's bleeding lower at this point. And then what we do is we take starts uh completions time to complete a home. We take labor intensity of single family and multif family put that in a big model and we say okay how many jobs do we need in the United States for housing construction? And we're about 90,000 out of about a million workers. Then you have trades and stuff on top of that. But just the core group that we look at, there's about a million people just under working in that cohort. And we think there's about 90,000 too many. So if you were to to get to that place then uh you would be in a firmly in recessionary territory for the economy. Uh now there's a whole bunch of reasons we don't expect that to just stair step lower because I think there is a labor shortage. There is labor hoarding. Builders have fat margins. They're able to pay down. They're able to to to extend this cycle because of all that. So, we're we have all this stuff and we look at it through a GDP lens on should you buy a house, should you wait, is there going to be a correction in house prices. I'm a millennial, too, an older millennial, but I I had the same decision back in 2022, 2023, moving into a larger house, wanted to move into a larger house. And I think it was part of that debasement mindset like going through that process to me it real it made me realize like those old home prices are never coming back. They're never coming back. We're not I don't think there's going to be a big crash. I think I think Melody I'm vaguely familiar with her work. I just know she seems to be pretty bearish. I wouldn't share that view. I think that you are going to stagnate here for many years and you're going to have to have incomes catch up with housing. But I think we underbuilt housing in this country for a long time and there's now a supply shortage and there's this demographic bulge of millennials who are just about, you know, call it 37 to 44. That's right. I'm 37. Right. Okay. So, everybody wants to buy a home. That's family formation like and everyone in this group has delayed family formation as long as they can or they've worked with what they could and now they've got to buy a home. So, I think there's a lot of um I don't think the demographics support it. I think that the amount of money we've printed ultimately through fiscal policy that we talked about has leveled up these homes and uh direct your frustration at the fiscal side then. Yeah, exactly. I think that's what I'm talking because it is frustrating like how do you make these payments work and then you get mad at the rich boomers who are giving their kids money and just letting them you know using that as a down payment. Like there's a lot of uh this inflation creates a lot of uh angst out there. Yeah. Um this is why I love this show so much because you do get differing viewpoints and you can have different conversations and I love that. Um okay, I want to explore markets with you because at the top of the show you were talking about being bullish on equities, favoring hard assets like gold. So let's kind of start with the markets. I just want to get your take on where we are in the markets. the valuations they make sense for you because I'm sensing you're still very much bullish on equities just kind of and maybe weigh in on the sentiment as well. Let's just kind of start big picture markets and let's focus on equities to start in this world with this debasement world. One of the things we've said is that unless the Fed is tightening or we see a recession in our models, you cannot be underweight equities. So that's our big that's a rule of thumb for our our institutional clients. Um, we had a 6,800 price target on the S&P 500 coming into this year. We never changed that or backed away. Part of our call coming in this year is we did expect to see a 10% or greater correction in late Q1, early Q2. So, that played out. We down we were overweight, equities downgraded in February to benchmark weight, then got back in in May and then to overweight and now we're back benchmark weight. And so I'd say we're structurally bullish on the equity market, but in the near term, and we've been wrong, we downgraded too early just to be straight honest about it is just is what it is. Um, but I I think you have to weigh the odds. And again, we're not outright bearish. Just saying reduce your risk if you're a client of ours. And the reason you say reduce risk here is we do see excessive optimism in the near term. I think that there's been, like I I referenced some systematic bids that have really been under this market since the April lows. We had corporate buybacks hit 8% of daily volume back in April. That's something we watch. And if you go play that out on a seasonal basis, there's we're in a real dry zone for corporations. They're not going to be buying back stocks. So that supports out of the market. Vault targeted funds which buy the stock market when volatility goes down. Those stocks were huge buyers, huge buyers from like late April going forward. That was the next phase of buying along with retail and corporates. And they're full of stock at this point. And then the next group that came on to the the rally were CTAs. CTAs or trend followers and they were buying more in like late May into June and they're basically full now. So when I look at it, I think that's that's a support that's gone for the market. Um the Jackson whole thing makes me slightly less concerned. concern. I was more concerned before that and more concerned that uh we would probably need to have a little bit of wobble here in this seasonally weak period for the markets uh before uh before PAL and the Fed blessed another set of rate cuts, but they were pretty dovish. And so maybe I'm wrong on that and we just hang out at benchmark weight for a while. But when I zoom out, that's the uh that's the way we're positioned right now is benchmark equities. We actually are overweight fixed income right here. overweight bonds in duration. Uh, and where on where where do you want to be on the curve then for bonds? We make our allocation really simple for our clients like on this the way we our official allocations get tracked and our performance is tracked. We just use the 10-year as a benchmark so that clients can know because they can buy spread spread product if we don't think we're in recession and things like that. We have a master fund that goes into spread product and we're overweight spread product in that we're overweight equities in that um slightly overweight so it's close to benchmark and then we have Bitcoin and gold. So anyways um yeah we I do think that rates are coming down like I know Jim's view I've talked with him online. I've had discussions with him. Jim's view is that rates went up last year on the long end at the 10-year for instance when the Fed cut and that signaled a policy mistake. That's not my interpretation of what happened. My interpretation is that there had never been a cut cycle that started with the yield curve as inverted as it was last year. The yield curve in the bond market was seized up expecting a recession. So once the Fed came in and supported and then the data came in and was supportive as well, what happened is that recession pricing came out of the longer end of the yield curve. We're not situated like that now. The like last year the 10ear was at 3.67 six seven six or 7% and the Fed funds rate was at 5.5%. Today you're at 4.5% Fed funds rate and you're at 43% tenure. You're at you have a 3.7% 2-year and a 3 4.3% 10ear. You have a normalized yield curve here. So what happens in a normalized yield curve historically when the Fed cuts is that you get like a 17 basis point decline for every 25 basis point decline in the Fed funds rate in the two-year and you get a 10% decline in the 10ear and then you get a bull steepening of that twos 10 yield curve by like seven basis points. That's your historic mapping. I would expect I would actually expect to see the tenure be less reactive because of all these fiscal dynamics and supply and things like that that are out there. But nonetheless, I think yields are coming down. Like the big picture is the Fed's going to cut and yields are going to come down. And that's uh that's how we're playing it right now. And the other side of that is our worry as our we have a benchmark weight equity position. Our worry if you're looking at portfolio construction is on the growth side because of those the labor market the labor the labor market deterioration. Yes. Okay. You get another bad labor report bonds are going to get a a strong bid. Okay. Got it. And so you're still long equities but on the bench benchmark long equities not overweight. Yeah. Yeah. That's the for now. Like we've been through on and off this year we've been overweight and benchmark but never underweight and we wouldn't be underweight till we saw a recession. Awesome. This is so great and it's so helpful. Okay. Um, another area I want to bring up with you and we're we are not a gold channel but there is a lot of interest in our audience um in gold. So you mentioned that at the top. What's your take on gold? Um how are you thinking about that as an allocation and where do you see things headed for the precious metal? Yeah, we um we've been very bullish on gold for a couple years now. We thought that the when we saw the breakout, we saw a breakout first like two years ago in an equal weighted basket of gold. And then what we saw last year was gold breaking out despite real real rates rising, despite the dollar rising. You've never seen a calendar year where that happened. And so we thought we hit the $3,500 an ounce this year and we did it. We hit the the target. We touched it. I think that it's now kind of consolidating. That consolidation is going to probably last a bit. um you need to see the dollar start to reweaken I think to push that next leg of gold higher and uh so I think that really is going to require more cuts to come into like the sofur curve for instance than that are already in there right now. So you're going to you're probably going to need another cutting impulse to get into the market to then kind of get this dollar dollar uh index to break down below it's it's kind of uh where it's kind of found support here and that would push gold up. So, I still like gold. I think you need to have it in your portfolio and be long gold when you're in this debasement world. I think for the rest of the year, you're going to chop probably. Um, and then with a breakout. So, watch the charts for that breakout. Watch the dollar as well to to signal that. And so, that's how uh but we like gold. We've been big wouldn't call gold bugs, but for the last two years, we've had some pretty insane gold predictions that have worked out. Nice. And then on Bitcoin, you mentioned like a 3% allocation in Bitcoin. Yeah. So that's in our model in our fund, you know, just because we we our philosophy in that is we have like 20 assets, we have gold miners, we have gold, we have Bitcoin, we have energy stocks broken out as an alternative. We have uh commodities, crude oil all separated because our view is that this blob of liquidity is going to move into these different assets at different times. So, you want to have availability in your structure and our model has like Bitcoin. Uh 3%'s our max position because we're not crazy about this crypto stuff. Um and and that some of the momentum has stalled out. But again, I I think that there is this our our theory on it is that you're in this debasement world. It's a lot like gold ultimately when you strip everything away and what Bitcoin serves with the place it serves in a portfolio. And uh I do think you're undergoing some level of just mass adoption where you're seeing advisors and other kind of mainstream people take through these ETFs and stuff like that and put Bitcoin into their their clients long-term allocations. And so you just want to stay generally long of Bitcoin. Okay. One final question for you and it's going to be a two-part question I've been asking a lot of my guests lately. Um, what is that risk for you right now that's maybe keeping you up at night that or not doesn't have to actually be keeping you up at night, but that you're thinking about and what is something that is making you optimistic? Oh, the the optimism is I really my my partner I'm not a I'm not a computer scientist by trade or anything. We use we code a lot for our company and but my partner is and he's his background is is in AI and machine learning and he really has um converted me. I I'm a believer that AI is going to be a big deal for the economy. It's going to be a a major productivity boost. I think that the next phase of the AI story is it's going to move into these really high quality large cap companies and you're going to see like you heard even Walmart there's whispers that they're going to hold their their headcount constant for like the next 5 years like add 150 billion in revenue and then hold their headcount constant. I think that all comes down to this some of this AI and automation story that's that's starting to bubble under the surface. So it you know and you ask me about about valuations. We've done a lot of work on valuations and the bottom line on that is we're not concerned about valuations in this market right here. And I know that that that makes people really mad when you say that. You sound so cavalier, but there's a lot of research behind that. Um that's another show another time. But uh No, I love that though, Warren, because like we need to have that conversation, too. You know, we have to have different views. Yeah. No, I I mean we I'm a look, it held me back for a little while. Like last year we we really we undertook a big project to understand valuations. Is there a way we could see how this what's what this market's pricing that makes sense that's not a bubble? And we wrote a report la we did all that research. We published it wrote a report last year and basically said we think that the market can hit 7,000 by 2026 and not be overvalued. Like that was the the big takeaway is that we didn't think we thought if you gave us that earnings growth that was baked in and you give us the margin growth because margins are a huge factor in all of our research. If you give us those two things then we think that the S&P 500 will easily hit 7,000 by 2026. And so we wrote a report S&P 7000 and it some people love the report some people hated it. we had there had never been more of a lightning rod of a report that we wrote at our company. But um I really feel that that research has stood up well in this in this cycle. And so that's our I know it's maybe non-conensus, but we believe that. So yeah, that's my optimistic side. What what keeps me up at night? Nothing really is keeping me up at night in the markets, but when I try and think of how this cycle is going to end, we know we just talked about Bitcoin. I really don't like I really worry about this micro strategy um sort of game that's being played that someday somehow like that that keeps becoming a larger and larger piece of the financial infrastructure and there's more people tied to it. One of the things that was great about Bitcoin for many years when you test it as a quant is it could decline by 80%. And it wouldn't hurt the rest of your asset. So it was really uncorrelated in a lot of ways. So is non-sist systemic and now you're seeing crypto bitcoin all itself is a $2 trillion market cap I believe or crypto maybe in general. Um it's enough people are using it as a a way for wealth for the wealth effect and using it in their economic lives that if you got a collapse in Bitcoin again I think it would be uh a major negative for it would be systemic at this point. it would bleed into other asset classes. It would bleed into the equity market. All that retail bid that we saw by the markets could dry up. So that if you made me think about how the cycle ends or a potential doomsday scenario, that's one of them. Yeah. I have to say, Warren, I've really enjoyed this conversation. I've loved having you on this show and I am really grateful for my viewers who recommended you because it's always a treat to like find someone new and get to learn from them and listen to them. And before I let you go, um would you mind taking the final few minutes here? Let folks know more about the work that you're doing at 314 Research. Um how they can, you know, support that work, if there's a way to subscribe or access the work, um anything that you would like to plug, where they can find you or follow you on social, things like that. And any parting thoughts, anything that you would like to share with this audience, the floor is all yours. Wow. I appreciate that. And I really That has been a fun conversation flew by. I would say um you can find us at 314ressearch.com. That's our site. We're an institutional research provider. So, we really work with um institutions including adviserss um but family offices, hedge funds, advisers, institutional asset allocators. The uh if you're if you're interested in investing with us, I'd say our the ETF the main our main ETF is the real asset allocation model or real asset allocation fund, ticker symbol RAA. And that's that 20 asset model that I was referencing that goes around in in all these different corners of the the universe in this debasement world and tries to shift around and and give you an efficient allocation to the widest uh set of assets, the most favorable trends. So RA is uh another way you can find us and then you can find me on Twitter at Warren Pies. I love it. Warren Pies, founder of 314 Research. Thank you so much for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and get better. I really, really enjoyed the conversation today. Appreciate you taking the time and would love to welcome you back on the show at a later date. Thanks again, Warren. Anytime. Thank you.
Warren Pies: A Rate Cut Will Be Inconsequential After Fiscal Policy Already Changed Everything
Summary
Transcript
you're not going to get below 3% core CPI. The math just doesn't work. It's just a matter of are you comfortable with looking through tariff uh inflation and making these policy adjustments. That's what I think the Fed's going to do and especially next year when you get a new Fed chairman, they're going to they're going to even be more doubbish. So, from here to 2026, I think you get a lot of cuts. Warren Pies, founder of 314 Research, it is so wonderful to welcome you to the show. Thank you so much for taking the time to join me today, Warren. really appreciate it. Yeah, absolutely. Thank you for having me. Well, we're thrilled to have you and I have to give a shout out to the viewers who recommended you. We have the best audience. I always like to say the nicest people on the internet watch this show and you came um as a recommendation when I asked who should I have on the show in 2025. So, absolutely thrilled to have you on. And I was spending the last 45 minutes, Warren, reading your latest research note. And I thought it was incredible because I feel like you really captured what I've been kind of seeing or sensing. You really captured the pulse of what I've been hearing from guests in like the best way possible. This widening perception gap that we are seeing in macro. I want to get into that, but I do want to start Warren where we always start with our guest and this will help folks get to know you and how you think about the world and that is with your big picture more of that macro framework how how you're looking at the world, the framework in which you are looking at the world. um that big picture when it comes to the economy, markets. Um so let's start there with that framework. And one of the things about this show, Warren, is you can take all the time you need to set the table when it comes to that big picture view. Oh wow. Okay. The big picture view I I'll try not to just go on and on. I'd say so thematically our view is that the world is transitioning from what we call a deflationary mindset to a debasement mindset. And this has been going on since the pandemic. It's something we've been writing about for a while. And uh just to understand what that transition looks like, a deflation mindset is what ruled markets in our view post GFC. And so GFC uh it was all about debt deflation. Um protecting principle was the most important uh psychic concern coming out of the GFC for investors. And so that re was reflected in the way assets were priced and and a whole other host of other things. And our view is the pandemic was really the ended that era and uh we've we've now entered into this debasement era. And the debasement era is is characterized by a whole host of behavioral changes amongst investors. And I think it's really becoming prevalent out there. People are starting to see this. We've been talking about how hey uh more or less the thing that's going to the big psychic concern now as we go through these years is going to be keeping up with maintaining purchasing power. And anyone who's tried to buy a home or a car over these last few years I'm sure feels it. As long as money is has some scarcity value to you then you're feeling it. You know everything's leveled up post pandemic. Uh we think that really came from fiscal. I know there's a lot of anger at the Fed. The Fed was they've made their mistakes. But I think that the if you're really mad at the Fed, you should should probably redirect your anger at the fiscal authorities and how really the post-pandemic period has they've navigated it. So that's our big picture view in that in that world. Um you know, you're more or less you're structurally bullish on equities and bullish on hard assets in general. I think that the blob of liquidity moves incrementally into different areas of the of the asset menu, you know, but we've been bullish on gold and uh you know, Bitcoin is one of those things where you we're strange because we don't really have a strong opinion like our our main our main uh fund and model. We we have like a 3% max position Bitcoin and we've been riding that max position through the last couple years and so but so it's reflected these are the basement assets and and I think that's what's going on. Now when you think about the macroeconomy there's a secular picture and there's a cyclical picture and I think time frames confuse people a lot when we're talking about things. You know I could be talking about what happens next week. I could be talking about what happens next month or I could be talking about what happens over the next decade. And uh every one of those things is going to be really different, you know, and so the the long-term uh we call secular. That's like a multi-year view. And that's the debasement mindset that's coming in. You know, we're in year five of that. I think that you know, you have another, you know, 10 years potentially in that in that uh change. But on the cyclical basis, our view before the tariff and liberation day was that inflation was actually troughing this year. Even though we think in this debasement world inflation will be structurally higher, we thought that there's this 12 to 18 24-month period where inflation could be subdued just because of the way you measure in the CPI. And so those are the big picture factors uh just to set the table. I love that. Okay, this is so fascinating to me. Um talking about going from this deflationary mindset era to this debasement era that we're in. We're about what 5 years into it. Can't believe it's already 2025. Um, it feels like it was just yesterday. It was 2020. And it makes me wonder, Warren, um, the behavior changes among investors that I wonder if we're still early in the recognition of this new era. Do you think folks have really caught on or do you think some people might still have this kind of older mindset of like how things used to be? I think we're right in the middle of the transition. And I think you know this last sell-off though I I believe really advanced the uh this transition a lot. So you know a lot of this is you have to study the behavior of markets to understand what's um what's what the psychology out there is. And I think that the the sell-off we had and then the fact that retail by all accounts set the bottom in that sell-off and like I could say anecdotally like I would go to my son's football games on Friday nights and uh you meet other parents and they know I do this for a living and so they all kind of huddle up next to you. Hey, what's going off the markets? And uh it wasn't too far into April where the parents would say things like well I wish I would have bought more wish I would have bought more palente. I wish I would have bought more Bitcoin. I wish I would have bought that. You know, so the risk appetite was strong. You know, they've been trained to buy the dips. And so to me, that was a good reflection. I mean, anecdotes, we we're a quantitative, for anyone who doesn't knows, we're very much a quantitative macro shop. And and so uh but obviously these anecdotes inform the data. They show you what you see in the data. And we we did that during the the selloff. We looked at what was where was the buying coming from. We saw retail set the bottom. We saw corporates set the uh set the bottom and then you saw systematic funds like vault target funds and CTAs pile in and advance that rally. And the group that got left out the dry were a lot of these traditional Wall Street uh strategists and banks and and uh players that expected this to be a more protracted downturn. So I think we're in the middle of it. Uh I think there's still more converts. So, you know, by the time everyone gets into this, you know, debasement mindset, we'll be late in the game. And this is a multi-year process. You know, everything's going to have to is going to take time and you have to convert all these these people and pull them out of their uh debt deflation mindset. Yeah, I love the anecdotes and it's so true. I remember like the group texts I was on with like friends during that time around like what folks were buying was kind of it was entertaining. It was interesting. Um, okay. I want to explore this idea that you brought up um because you were pointing out if you're mad at the Fed, you should really direct that toward the fiscal authorities. I thought that was so interesting. Um I would love for you to elaborate a bit more because seems like fiscal really been driving a lot of things. So I'd love to hear more there. Yeah, we've been talking about the fiscal dominance theory. You know, I think sometimes the phrase gets misused. it doesn't really I don't feel like you need to be technically correct to understand the real um the main consequences that we're talking about here and it's just that we started running structurally these proyclical deficits um that were larger than any time post World War II in the history of the United States. So say 7% of GDP deficits when unemployment rates at 4%. You can put together like a scatter plot of those two variables and you just do not see this. So when I say proyclical I mean that we're running a a recession-like sized deficit when we're at uh the peak of expansion. And that's uh what that is is it's basically stimulating in the the highest power type of money to send out into the economy. fiscal stimulus, fiscal deficit spending is like direct payments out into the economy. Uh there is no lending channel you have to work through or anything else. It goes straight out in a number of different ways and it's high power. And I think it was the thing that tripped so many people up. It's why we didn't have a recession in 2022 or 2023 even though uh that was the consensus call and and everyone was really under has underestimated I think even us and we've been saying for a long time like we would pull up the checkable deposits uh charts where it went from uh it just ballooned overnight basically because of the pandemic and the amount of fiscal spending and we would say we don't really know how to factor this into our models but this is crazy and it might it it might it might put us in a totally different world than we've been in before economically. And so to me, that's the dominant factor. You know, there's a lot of anger at the Fed. Oh, you're going to move interest rates up or down? I mean, they raised rates five 550 basis points in 2022 and more or less didn't impact the economy too much. I mean, the uh there's a whole bunch of people who say, well, they should have used the balance sheet. They should have done this. They should have done that. And like those people are generally disconnected from reality in my view because they they they the Fed is not going to proactively crash the economy. And so to me they've they they uh there's a whole school of thinking that has ascribed way too much uh responsibility responsibility to the Fed for how the economic conditions that we're in. And even now like you know we had the whole Jerome Pow Jack Jerome Powell Jackson Hole speech here recently and there's a lot of anger about the dovishness basically him more or less codifying his September cut in that speech. Um and there's I see a lot of frustration and anger in my view is that the frustration and anger you know is really more about what happened in those pandemic years and what happened from the fiscal authorities and this this 25 basis point cut is it's really going to be inconsequential in the grand scheme of things and the the the die has already been cast. We've already changed the entire paradigm of this economy through that fiscal response and so that's what I mean by that. Interesting. So, let's talk about the Jackson Hole speech because I know everyone had been so focused on that last week. I had Jim Biano on the program um on Friday afterward and aired as a Saturday special and he thinks that a cut will actually be a policy mistake. But I just want to kind of get your view of um the Jackson Hole speech and what I'm kind of hearing is if they cut 25 basis points, it'll be inconsequential. But so my question is does the Fed really matter then if it's the fiscal side driving things? Um just want to hear how are you thinking more about the Fed? Yeah, I'm I'm trying to defide two things. So there's this feelings of frustration. I think there's like the anger at the Fed that emotion is about things that have already happened in my estimation that can't be changed really. Um, and that's on the fiscal authority from my the way I read the situation. Now, when we go forward, you can't change what's already happened. Like, house prices have gone up 50% and they're not coming down. They're not crashing. That's money that's came out and went into this area of the econom. Same with the stock market. We're not going back to this like 2019 trend line. We're not going back to the 2019 trend line on any of these assets. Like, we've broken that trend line because of the amount of money it's gone in the system. So, I think you have to get back to that cyclical discussion. you know, we have a secular uh we're in a secular debasement regime, but I think on a cyclical basis outside of tariffs, you have a inflation is mostly troughing and disinflating. It's really about housing inflation is down uh 90 basis points year-over-year so far year to date. And I think there's more of that to come. Oil's down 12% year-to date. I don't see a big oil rally in our future. And that was my background was in the oil and gas space. Um, and you know, so from I know I hear Jim's argument and a lot of those arguments, which is that the labor market is actually tight now because we've had so much supply cut off through immigration policy, but you know, that's not reflected in wages. So if you really had a tightening labor market or a static labor market, you would see wage growth starting to to kind of stall out here. And we're at new cycle lows in wage growth. So when I see what I call that is a a loosening labor market, a disinflation inflating housing market, and weak oil prices, those are the three main vectors that inflation comes through. Uh so I don't see now tariff inflation is going to do what it's going to do regardless of the Fed. And that's why the Fed goes back to 2018 teal book and says, "Hey, we should look through tariffs because it's basically a one-time price increase and all that." Nobody has patience to hear that after what we went through post pandemic. But that's the truth. if you just analyze this situation. So what I look at is the inflation picture to me outside of tariffs is uh is not concerning in the near term. So it means to me that rates are restrictive and when you uh well the other side of rates being restrictive is when you look at the labor market and the economy the labor market is loosening in my view. You know that uh July jobs report was was pretty weak. We saw the unemployment rate tick up. We saw the hiring rate tick down. The firing rate is now above the hiring rate for the first time this cycle post pandemic. So what that means is that there's a freeze in hiring and now you're starting to see a tick up in layoffs. Continuing claims are not at recessionary levels yet, but they keep the they keep bleeding higher. And then you see wage growth, which is reflecting that loosening in the labor market coming down. So wages from the Atlanta Fed wage tracker uh close to 4%. That's a cycle low. You go to Indeed, the private uh job company, job tracking company, and they're at a cycle low of 2.4%. So you look at both of those metrics and map that on to what's happening in those labor reports. I think that the supply thing has really the labor supply thing has really messed up a lot of analysis. It's caused a lot of confusion. Um it did it last year too. Uh last year when we saw the unemployment rate come up because of so much immigration and labor supply. We said this is not a recessionary signal. This is not a growth concern. We called that a benign loosening. Uh I think that was like a pretty you you know we're clever with that. This time around, we're calling this current stalling out of the unemployment rate a malignant stasis, which is probably not going to stick in the same way. But it's just to say uh that supply factor is what's swinging around and causing some confusion in the data here and now. But the bottom line on all that is I see I understand the inflation argument, but I think that the the labor side of the equation is much weaker, much more straightforward here. So the Fed should be cutting. They're restrictive and they should be lowering interest rates that Okay. And then I think from your note, and you may have said it just now too, but if we held the labor force participation rate constant from April, unemployment would be 4.9% instead of 4.2. Correct? Yeah. That's another that points again to this idea that you where really what you're seeing is a tightening of supply and everyone sees that or talks about that. It's just a matter of what does that mean and how do you interpret it. So there's really these two big policy factors. you have tariffs which are um uh pushing up cost in the good side of the basket and then you have immigration which is kind of skewing some of these numbers on the employment side and that's why I think we talked at the beginning you brought up the the perception gap the widening perception gap which is what the title of our report was and uh that's why because there's these these policy clouds that are causing a lot of uh making analysis kind of problematic for many people. Yeah. Okay. So on the labor side, we're going to call it we're calling it the malignant stasis. Yeah, if you want to. It's a little bit, you know, it's we'll see how well that one does. But yeah, I want to um bring up something with inflation with you just to explore a bit more as you're pointing out like we have oil down um shelter cooling, wages decelerating. Uh but I guess my question is core CPI won't budge below 3%. So what's driving the stickiness? Yeah, that's we what we wanted to do because we've been pretty uh we came in here as I would say like again we expected that this cyclical disinflation and we've gone on core CPI from 325 down to 305. So we have had disinflation but admittedly it hasn't been as strong as we would have expected. So what what's going on what's happening in the inflation picture that we that was a little stickier than we expected coming this year? Well number one is tariffs. So the the the real recipe for getting us down to close to 2% CPI target uh and I know it's PC but just stick with me on the CPI thing because that's what we have more data for CPI to talk about. So core CPI over the preandemic years we got to that low twos by having a 2 1/2 to 3% oscillating super core. So that service is non-shelter and then shelter 2 and a half to 3%. Sometimes around 3% for super core and then we had goods outright deflation. So goods were down year-over-year on average like 30 basis points back then. When you put all that together, you get close to the 2% target um that the Fed had. And you probably adjust for the PCE weightings and you get down to 2%. So that's the u that was the recipe for many years to get us there. And now we're in this world where with tariffs, you're not getting that goods deflation. You're going to get goods inflation. So the math doesn't work unless you can pull Super Core or shelter down below where they were pre- pandemic. I just don't think that's going to happen. So it really comes down to we're not probably going to break down below 3% in any meaningful way on core CPI. Uh so that was that is the dilemma is like how is the Fed going to handle the optics of that of cutting into that and there is already a lot of consternation. You have the Trump administration that's putting political pressure on them to cut and then you're going to have a lot of people who are just somewhat rightfully frustrated that the Fed is not abiding by their their mandate. And so you know if they don't believe in the look through tariffs argument then they're going to be very angry with the Fed for cutting uh above 3% core CPI. So, that's what's really sticking. And then, you know, when you zoom in, there's a few things that are one-offs, and this is what gives us like I think this is what the Fed's going to pull out and use when they decide to cut and they'll probably cut with core CPI above 3%. Is uh medical services. That was a big that was a big pressure on the July uh super core number, which was high. You had transportation services in the same boat. Both those had the largest seasonal adjustment that we've ever seen in a July on record. And that's not a small thing. It's like 20 basis points month over month getting added to the the super core number there. So when you I think there's going to be some mean reversion in that in that area. And then there's structural things like electricity which is basically a is going up in the CPI and net electricity generation is making new records in the United States because of this data center buildout. So there are some structural things that are inflationary, but again, electricity is like 2% of CPI ultimately. I get a lot of people who worry about that. Um, and the big p the big passroughs from some of these auctions that have been taking place probably won't hit the consumer basket until middle of next year. So when I put all that together, yeah, I think you're going to have the without goods being at one and a half to 2% year-over-year and potentially even higher depending on how these tariffs shake out. uh you're not going to get below 3% core CPI. The math just doesn't work. It's just a matter of are you comfortable with looking through tariff uh inflation and making these policy adjustments. That's what I think the Fed's going to do. So, it's probably in my, you know, we really usually don't give normative statements like, hey, what should the Fed do? If you put a gun to my head, I'd probably say, yeah, that they should probably look through tariff inflation given what's happening in the labor market. Uh, but I understand if you're don't like that that viewpoint. But the bottom line is that's what they're going to do. That's what they're going to do. And especially next year when you get a new Fed chairman, they're going to they're going to even be more dovish. So from here to 2026, I think you get a lot of cuts. Gold prices have been breaking all-time highs this year. But price appreciation isn't the only way to profit from owning gold. You can earn a yield on gold paid in gold without selling your gold or silver. Unlike dollar yields that can be slashed or even go negative, a yield on gold paid in gold means more ounces in your account every month, not paper, monetary medals is revolutionizing the way people invest in gold and silver. Instead of paying to own the metal, now you can get paid to own it. Right now, there are opportunities for you to earn 4% on gold paid in gold in their marketplace. The interest you earn is paid in ounces of physical gold or silver which you get in addition to any price appreciation that comes from gold and silver during the year. The question is this. Why earn in dollars when you can earn in gold? Join thousands of investors who are earning a yield in physical gold and silver every month with monetary medals. Visit monetary-medals.com/julia to learn more. Okay, I want to talk about this widening perception gap because even like with the Fed too, there are differing views within the Fed on what we should do as well. So, but when I think about the markets and the economy, the participants, especially like in the macro world, it does often feel like we're looking at just two different economies depending on like who's looking at the data. Maybe there's a political bent that comes into it as well. I don't I'll let you um flesh out what you mean by the perception gap, but sometimes folks ask me, Warren, they'll say, "Oh, do you only invite bears on the show?" No, that's so not true. Um we we actually don't always know like what our guest views are going to be. So, I didn't know like other than reading your note, I didn't know what your views were going to be um exactly, but I maybe maybe macro folks tend to be more of a bearish bit. I don't I don't really know, but you would know better than I would. Um, but let's explore this widening perception gap because I really think you have a pulse on what's happening out there. Yeah. Well, number one, I I do think everyone brings a bias to the table when they think about making these kinds of calls and then like they you have all this data to choose from. Like we say macro is the synthesis of chaos. A lot of times you're just trying all this chaos and like make sense out of it. And so a big part of that is knowing what to pull out and what to what to look at and having a source of truth and having a structure and a model to to filter this data through. And I think that helps you uh avoid being uh I mean everyone including myself is going to have some bias that you have to work against. Just acknowledge it, admit it, try and argue against your position. Try and uh really see where you could be wrong because a big part of this is being wrong. And it's that's a hard set of skills to to uh really foster. And then you throw in the political aspect. I think the political aspect has kind of broken people's brains a little bit here. Like it's very hard to maintain a disinterested uh uh disposition when it comes to Trump is what I find. You know, some people love him and some people hate him. Um I I genuinely don't care too much and I know like that probably pisses both sides off. Like some people think he's the best president ever and some people think he's like America's Hitler. And to me, I just look at it and try my best to like take what's happening. There'll be some good, there'll be some bad, analyze it um and without some emotional attachment to it. But there's this um there's definitely a political element. And I mean, what I see on the Fed is a lot of former Hawks who've become 180°ree doves with uh no real data to back them up for their pivot from like last year. Uh and then you see a lot of the doves and they're usually more uh you know the liberal academic types and they can hide their bias a little bit better but it's there as well if you look closely and they've they've become very circumspect. They were cutting a lot last year and now well I don't know cutting might you know we might lose credibility or we might inflation expectations might become unanchored but when you dig closer dig under the surface I think both sides are being controlled by their bias mostly so for us we really try to go back to the data you know what does the data say we lay out a bunch of things of beforehand to our clients and say this is what we're going to watch we're going to watch we think if there's going to be loosening the labor market it's going to start in housing construction construction segment of the market for instance. So we model all that out what's happening in housing also if rates are restrictive which is what a lot of this conversation comes down to you see it first in the housing market. So to us everything flows down from that and then we can construct uh our views for for macro around that. And that's just an example of how you I think you need to have a structure to filter the data from. Um otherwise you just you become stuck in your bias. You can't change your mind and uh you become part of just this like mob mentality. So that's what I that's what I see going on in the perception gap. I want to get your take on housing. I am one of those millennials that would love to buy a house right now, but I'm also waiting. Um, and I don't even know if that's the right move. I am waiting because they are quite high. The prices I am personally seeing things that aren't moving on the market and I am noticing some prices coming down. We do have uh Melody Wright coming on the show this week and she's going to talk all about housing, but I just want to get your views on like what's going on in housing from where you sit. Yeah. Well, first off, we look at it more from like a GDP perspective first. And that is to say, we think that residential construction employment leads overall job losses. So, before each recession, you get about an 8 to 10% draw down in residential construction employment. Uh, we've now had, based on revised data, four straight reports where residential construction employment has fallen. It's it's just it's it's a tiny amount each month, but it's bleeding lower at this point. And then what we do is we take starts uh completions time to complete a home. We take labor intensity of single family and multif family put that in a big model and we say okay how many jobs do we need in the United States for housing construction? And we're about 90,000 out of about a million workers. Then you have trades and stuff on top of that. But just the core group that we look at, there's about a million people just under working in that cohort. And we think there's about 90,000 too many. So if you were to to get to that place then uh you would be in a firmly in recessionary territory for the economy. Uh now there's a whole bunch of reasons we don't expect that to just stair step lower because I think there is a labor shortage. There is labor hoarding. Builders have fat margins. They're able to pay down. They're able to to to extend this cycle because of all that. So, we're we have all this stuff and we look at it through a GDP lens on should you buy a house, should you wait, is there going to be a correction in house prices. I'm a millennial, too, an older millennial, but I I had the same decision back in 2022, 2023, moving into a larger house, wanted to move into a larger house. And I think it was part of that debasement mindset like going through that process to me it real it made me realize like those old home prices are never coming back. They're never coming back. We're not I don't think there's going to be a big crash. I think I think Melody I'm vaguely familiar with her work. I just know she seems to be pretty bearish. I wouldn't share that view. I think that you are going to stagnate here for many years and you're going to have to have incomes catch up with housing. But I think we underbuilt housing in this country for a long time and there's now a supply shortage and there's this demographic bulge of millennials who are just about, you know, call it 37 to 44. That's right. I'm 37. Right. Okay. So, everybody wants to buy a home. That's family formation like and everyone in this group has delayed family formation as long as they can or they've worked with what they could and now they've got to buy a home. So, I think there's a lot of um I don't think the demographics support it. I think that the amount of money we've printed ultimately through fiscal policy that we talked about has leveled up these homes and uh direct your frustration at the fiscal side then. Yeah, exactly. I think that's what I'm talking because it is frustrating like how do you make these payments work and then you get mad at the rich boomers who are giving their kids money and just letting them you know using that as a down payment. Like there's a lot of uh this inflation creates a lot of uh angst out there. Yeah. Um this is why I love this show so much because you do get differing viewpoints and you can have different conversations and I love that. Um okay, I want to explore markets with you because at the top of the show you were talking about being bullish on equities, favoring hard assets like gold. So let's kind of start with the markets. I just want to get your take on where we are in the markets. the valuations they make sense for you because I'm sensing you're still very much bullish on equities just kind of and maybe weigh in on the sentiment as well. Let's just kind of start big picture markets and let's focus on equities to start in this world with this debasement world. One of the things we've said is that unless the Fed is tightening or we see a recession in our models, you cannot be underweight equities. So that's our big that's a rule of thumb for our our institutional clients. Um, we had a 6,800 price target on the S&P 500 coming into this year. We never changed that or backed away. Part of our call coming in this year is we did expect to see a 10% or greater correction in late Q1, early Q2. So, that played out. We down we were overweight, equities downgraded in February to benchmark weight, then got back in in May and then to overweight and now we're back benchmark weight. And so I'd say we're structurally bullish on the equity market, but in the near term, and we've been wrong, we downgraded too early just to be straight honest about it is just is what it is. Um, but I I think you have to weigh the odds. And again, we're not outright bearish. Just saying reduce your risk if you're a client of ours. And the reason you say reduce risk here is we do see excessive optimism in the near term. I think that there's been, like I I referenced some systematic bids that have really been under this market since the April lows. We had corporate buybacks hit 8% of daily volume back in April. That's something we watch. And if you go play that out on a seasonal basis, there's we're in a real dry zone for corporations. They're not going to be buying back stocks. So that supports out of the market. Vault targeted funds which buy the stock market when volatility goes down. Those stocks were huge buyers, huge buyers from like late April going forward. That was the next phase of buying along with retail and corporates. And they're full of stock at this point. And then the next group that came on to the the rally were CTAs. CTAs or trend followers and they were buying more in like late May into June and they're basically full now. So when I look at it, I think that's that's a support that's gone for the market. Um the Jackson whole thing makes me slightly less concerned. concern. I was more concerned before that and more concerned that uh we would probably need to have a little bit of wobble here in this seasonally weak period for the markets uh before uh before PAL and the Fed blessed another set of rate cuts, but they were pretty dovish. And so maybe I'm wrong on that and we just hang out at benchmark weight for a while. But when I zoom out, that's the uh that's the way we're positioned right now is benchmark equities. We actually are overweight fixed income right here. overweight bonds in duration. Uh, and where on where where do you want to be on the curve then for bonds? We make our allocation really simple for our clients like on this the way we our official allocations get tracked and our performance is tracked. We just use the 10-year as a benchmark so that clients can know because they can buy spread spread product if we don't think we're in recession and things like that. We have a master fund that goes into spread product and we're overweight spread product in that we're overweight equities in that um slightly overweight so it's close to benchmark and then we have Bitcoin and gold. So anyways um yeah we I do think that rates are coming down like I know Jim's view I've talked with him online. I've had discussions with him. Jim's view is that rates went up last year on the long end at the 10-year for instance when the Fed cut and that signaled a policy mistake. That's not my interpretation of what happened. My interpretation is that there had never been a cut cycle that started with the yield curve as inverted as it was last year. The yield curve in the bond market was seized up expecting a recession. So once the Fed came in and supported and then the data came in and was supportive as well, what happened is that recession pricing came out of the longer end of the yield curve. We're not situated like that now. The like last year the 10ear was at 3.67 six seven six or 7% and the Fed funds rate was at 5.5%. Today you're at 4.5% Fed funds rate and you're at 43% tenure. You're at you have a 3.7% 2-year and a 3 4.3% 10ear. You have a normalized yield curve here. So what happens in a normalized yield curve historically when the Fed cuts is that you get like a 17 basis point decline for every 25 basis point decline in the Fed funds rate in the two-year and you get a 10% decline in the 10ear and then you get a bull steepening of that twos 10 yield curve by like seven basis points. That's your historic mapping. I would expect I would actually expect to see the tenure be less reactive because of all these fiscal dynamics and supply and things like that that are out there. But nonetheless, I think yields are coming down. Like the big picture is the Fed's going to cut and yields are going to come down. And that's uh that's how we're playing it right now. And the other side of that is our worry as our we have a benchmark weight equity position. Our worry if you're looking at portfolio construction is on the growth side because of those the labor market the labor the labor market deterioration. Yes. Okay. You get another bad labor report bonds are going to get a a strong bid. Okay. Got it. And so you're still long equities but on the bench benchmark long equities not overweight. Yeah. Yeah. That's the for now. Like we've been through on and off this year we've been overweight and benchmark but never underweight and we wouldn't be underweight till we saw a recession. Awesome. This is so great and it's so helpful. Okay. Um, another area I want to bring up with you and we're we are not a gold channel but there is a lot of interest in our audience um in gold. So you mentioned that at the top. What's your take on gold? Um how are you thinking about that as an allocation and where do you see things headed for the precious metal? Yeah, we um we've been very bullish on gold for a couple years now. We thought that the when we saw the breakout, we saw a breakout first like two years ago in an equal weighted basket of gold. And then what we saw last year was gold breaking out despite real real rates rising, despite the dollar rising. You've never seen a calendar year where that happened. And so we thought we hit the $3,500 an ounce this year and we did it. We hit the the target. We touched it. I think that it's now kind of consolidating. That consolidation is going to probably last a bit. um you need to see the dollar start to reweaken I think to push that next leg of gold higher and uh so I think that really is going to require more cuts to come into like the sofur curve for instance than that are already in there right now. So you're going to you're probably going to need another cutting impulse to get into the market to then kind of get this dollar dollar uh index to break down below it's it's kind of uh where it's kind of found support here and that would push gold up. So, I still like gold. I think you need to have it in your portfolio and be long gold when you're in this debasement world. I think for the rest of the year, you're going to chop probably. Um, and then with a breakout. So, watch the charts for that breakout. Watch the dollar as well to to signal that. And so, that's how uh but we like gold. We've been big wouldn't call gold bugs, but for the last two years, we've had some pretty insane gold predictions that have worked out. Nice. And then on Bitcoin, you mentioned like a 3% allocation in Bitcoin. Yeah. So that's in our model in our fund, you know, just because we we our philosophy in that is we have like 20 assets, we have gold miners, we have gold, we have Bitcoin, we have energy stocks broken out as an alternative. We have uh commodities, crude oil all separated because our view is that this blob of liquidity is going to move into these different assets at different times. So, you want to have availability in your structure and our model has like Bitcoin. Uh 3%'s our max position because we're not crazy about this crypto stuff. Um and and that some of the momentum has stalled out. But again, I I think that there is this our our theory on it is that you're in this debasement world. It's a lot like gold ultimately when you strip everything away and what Bitcoin serves with the place it serves in a portfolio. And uh I do think you're undergoing some level of just mass adoption where you're seeing advisors and other kind of mainstream people take through these ETFs and stuff like that and put Bitcoin into their their clients long-term allocations. And so you just want to stay generally long of Bitcoin. Okay. One final question for you and it's going to be a two-part question I've been asking a lot of my guests lately. Um, what is that risk for you right now that's maybe keeping you up at night that or not doesn't have to actually be keeping you up at night, but that you're thinking about and what is something that is making you optimistic? Oh, the the optimism is I really my my partner I'm not a I'm not a computer scientist by trade or anything. We use we code a lot for our company and but my partner is and he's his background is is in AI and machine learning and he really has um converted me. I I'm a believer that AI is going to be a big deal for the economy. It's going to be a a major productivity boost. I think that the next phase of the AI story is it's going to move into these really high quality large cap companies and you're going to see like you heard even Walmart there's whispers that they're going to hold their their headcount constant for like the next 5 years like add 150 billion in revenue and then hold their headcount constant. I think that all comes down to this some of this AI and automation story that's that's starting to bubble under the surface. So it you know and you ask me about about valuations. We've done a lot of work on valuations and the bottom line on that is we're not concerned about valuations in this market right here. And I know that that that makes people really mad when you say that. You sound so cavalier, but there's a lot of research behind that. Um that's another show another time. But uh No, I love that though, Warren, because like we need to have that conversation, too. You know, we have to have different views. Yeah. No, I I mean we I'm a look, it held me back for a little while. Like last year we we really we undertook a big project to understand valuations. Is there a way we could see how this what's what this market's pricing that makes sense that's not a bubble? And we wrote a report la we did all that research. We published it wrote a report last year and basically said we think that the market can hit 7,000 by 2026 and not be overvalued. Like that was the the big takeaway is that we didn't think we thought if you gave us that earnings growth that was baked in and you give us the margin growth because margins are a huge factor in all of our research. If you give us those two things then we think that the S&P 500 will easily hit 7,000 by 2026. And so we wrote a report S&P 7000 and it some people love the report some people hated it. we had there had never been more of a lightning rod of a report that we wrote at our company. But um I really feel that that research has stood up well in this in this cycle. And so that's our I know it's maybe non-conensus, but we believe that. So yeah, that's my optimistic side. What what keeps me up at night? Nothing really is keeping me up at night in the markets, but when I try and think of how this cycle is going to end, we know we just talked about Bitcoin. I really don't like I really worry about this micro strategy um sort of game that's being played that someday somehow like that that keeps becoming a larger and larger piece of the financial infrastructure and there's more people tied to it. One of the things that was great about Bitcoin for many years when you test it as a quant is it could decline by 80%. And it wouldn't hurt the rest of your asset. So it was really uncorrelated in a lot of ways. So is non-sist systemic and now you're seeing crypto bitcoin all itself is a $2 trillion market cap I believe or crypto maybe in general. Um it's enough people are using it as a a way for wealth for the wealth effect and using it in their economic lives that if you got a collapse in Bitcoin again I think it would be uh a major negative for it would be systemic at this point. it would bleed into other asset classes. It would bleed into the equity market. All that retail bid that we saw by the markets could dry up. So that if you made me think about how the cycle ends or a potential doomsday scenario, that's one of them. Yeah. I have to say, Warren, I've really enjoyed this conversation. I've loved having you on this show and I am really grateful for my viewers who recommended you because it's always a treat to like find someone new and get to learn from them and listen to them. And before I let you go, um would you mind taking the final few minutes here? Let folks know more about the work that you're doing at 314 Research. Um how they can, you know, support that work, if there's a way to subscribe or access the work, um anything that you would like to plug, where they can find you or follow you on social, things like that. And any parting thoughts, anything that you would like to share with this audience, the floor is all yours. Wow. I appreciate that. And I really That has been a fun conversation flew by. I would say um you can find us at 314ressearch.com. That's our site. We're an institutional research provider. So, we really work with um institutions including adviserss um but family offices, hedge funds, advisers, institutional asset allocators. The uh if you're if you're interested in investing with us, I'd say our the ETF the main our main ETF is the real asset allocation model or real asset allocation fund, ticker symbol RAA. And that's that 20 asset model that I was referencing that goes around in in all these different corners of the the universe in this debasement world and tries to shift around and and give you an efficient allocation to the widest uh set of assets, the most favorable trends. So RA is uh another way you can find us and then you can find me on Twitter at Warren Pies. I love it. Warren Pies, founder of 314 Research. Thank you so much for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and get better. I really, really enjoyed the conversation today. Appreciate you taking the time and would love to welcome you back on the show at a later date. Thanks again, Warren. Anytime. Thank you.