‘Nowhere Near’ Real Bear Market: This Asset Collapses Next | David Cervantes
Summary
Market Outlook: The guest argues we are not in a bear market; equities should hold up while bonds are most at risk, with the Fed likely on hold.
Energy Supply Chain: War-driven supply shocks create chokepoints across refining, petrochemicals, and fertilizers, favoring firms with pricing power that can pass costs through.
Refiners: Bullish on refiners benefiting from margin resilience, though prolonged crude flow disruptions could force shutdowns and slow restarts over months.
Fertilizers & Food: Fertilizer prices may rise due to sulfuric acid shortages (a refining byproduct), with pass-through into food and food services impacting core consumption.
Gold & Miners: Gold’s deleveraging selloff was rational; the guest is long gold futures and sees miners as highly leveraged beneficiaries on renewed strength.
AI Tailwind: AI capex (~2% of GDP) provides a durable macro buffer supporting employment and dampening the case for Fed cuts; tech sector exposure via ETFs is preferred.
Transportation & Logistics: Favors transportation/logistics amid an emerging industrial renaissance; despite a March drawdown, many names have rebounded toward highs.
Company Examples: Valero Energy is cited as a refiner beneficiary, while Deere is pressured by higher input costs; the guest prefers sectoral over single-name bets.
Transcript
We are nowhere near a bare market. Not not even by a moonshot close. So I would say bonds would are more likely to suffer than any other asset class out there. During a crisis, what do you do with your insurance policy? You cash it in. S&P 500 up or down by the end of the year. I'm pleased to welcome to the show David Cervantes, founder of Pinebrook Capital Management. He has a great Substack that we should follow. Link down below in the description. Prior to Pine Brook, David uh was on Wall Street for many many years working in fixed income sales in Morgan Stanley and also in cross asset sales at UBS and JP Morgan. Welcome to the show, David. Good to see you. >> Thanks for having me. Happy to be here. >> This is starting to look like 2022. What I mean by that is we're having an environment where the equities are selling off at the beginning of the year and it's been the worst since 2022. And we're also looking at possibly no more Fed cuts this year. If you look at the CME Fed watch tool, the markets are not pricing in any significant cuts or any significant probability of any cut until late 2026 December if not 2027. This is starting to look like 2022 all over again when everything fell, including bonds, including stocks. Which do you think will survive this storm this year, David? Will it be stocks or will it be bonds? Do we still have room for the 6040 portfolio is my first question. >> Uh the answer is we do have room for the 6040 portfolio. I know that uh you know correlations are historically out of whack, but I think the broader question is you know how's the how is how is the the cycle? You know ultimately you know equities and and fixed income are derivatives of the business cycle. So I think it's more informative to look at at the cycle and where it's going. Uh obviously this uh we came into the year pretty soft on the GDP front. Uh we had a third revision yesterday on Q4 down to 0.5 down from 7 I believe and the original point8 but you know that's that was just a function of uh the government shutdown in Q4. Um and we're getting a little pop um and actually some midcarter acceleration in the economy and then then the war happened. That kind of put the put the lid on that for a while. Um so my view is that you know we are going to have a uh a growth hole in Q2. Q1 overall will be very soft not recessionary and you know again this is somewhat of a function of uh the disruption in the Middle East and and and this disruption to what really matters the flow of oil. Not not the paper uh futures but the actual physical um oil getting delivered getting out and getting delivered. Um hopefully those things are resolved at some point in the near future and then Q3 we're looking at you know kind of coming back on getting supplies back online that's a transitional phase with some acceleration in Q4. So just to sum it up I think you know equities will be all right. Uh fixed income it's it's kind of a toss up with fixed income because we've got two opposing forces. We got inflation um and then we've got also just the labor market. So, you know, it's it's going to be a toss on the fixed income side, I think. >> With the 10-year yield rising to 4.3% and it's been uh it's been going up ever since the beginning of March. What do you think the bond market is signaling? >> You know, the bond market signaling that u you know, it was yields were a little lower, then they popped up with this inflationary uh spoof, but right now there's not a whole lot of signal in there. And the reason is, you know, for the most part, the the labor market is is balanced. you know, we've got we've had uh little employment growth, but due to the demographic changes resulting from President Trump's immigration policies, um you know, break even levels to maintain a fixed level of employment have collapsed. So, you know, we're kind of that goes back to my thesis that we're kind of at a standstill with uh with with bonds. There's they're neither here neither here nor there. the labor market is stable, so there's no impetus uh uh to cut. Inflation, you know, it's a supply shock and the Fed typically looks through supply shocks. So, you know, there's really not a lot of signal from um from the fixed income market right now. >> I'm looking at my screen here. This is a chart of the 10-year bond uh yield in the uh bar chart, and the blue line is the WTI oil price. Is it normal for oil and the long end of the bond yield curve to be uh perfectly correlated as we can see ever since March they've been doing that? Yeah. >> Yeah. Historically they are because you know typically you know recessionary I'm sorry inflationary impulses start in the energy complex. U I mean there was a difference after COVID where the main source of inflation was the housing market but that's historically you know inflationary impulses start in in the energy complex. So that's why they track so well together. >> So basically yesterday uh the 9th of April, the the S&P closed uh extending a 7-day winning streak. It's longest since last October, David. So the index is still down about 4% year-to- date. Is this a bare market rally or is the bottom in you think? >> Well, we're not even in a bare market, right? I mean, currently um the year-to- date return is 31%. >> Yeah. Um so you know and at the at the bottom of uh the index last week I think 6,300 handle uh we were around 10% give or take. So this is just you know volatility and correction we are nowhere near a bare market not not even by a moonshot close. You could make that argument if we were, you know, pushing eight minus 18% 20%, but at minus 10% that's that's historically, you know, you know, a run-of-the-mill kind of correction that you have once a year, once every 18 months. That that is nothing there's nothing remarkable to that. Now, what is interesting though is the kind of a sideways pattern that we've seen since basically October 28th. October 28th is when um trains last year is when uh tech peaked and then after that it was kind of sideways um going into into uh into February into the war. Um so the question is are we you know if we can get this uh uh or move past the geopolitical situation with a favorable outcome or at least not a bad outcome. The question is, do we keep grinding sideways or do we eventually move up? I'm in the camp that will move up and the reason is estimates are still being marked up. Now, typically estimates lag the market, right? The market front runs. But look, you know, we're we are a hair away from all-time highs. You know, right now the market is telling us that these uh um estimate increases are still are still to be considered valid, right? All right, if the market were down 15% and analysts are still raising uh estimates, then you know someone's wrong. It's typically the analysts. But here we have we have you know kind of a you know a a cohesive um alignment between what the market is doing and what the estimates are doing. So I I don't see the I I think the resolution will be at some point um a breakout to the upside. >> This is an interesting piece that you wrote. This is called the great unrotation and you pointed out that the real opportunity lies not just oil itself but the entire supply chain mechanism. So to understand how the current disruption propagates through the economy, we must map the industrial chain. The wardriven supply shock begins with energy and transportation disruption but quickly spreads through the uh petrochemical and fertilizer systems. Geopolitical conflict causing energy supply disruptions causes refining and petrochemical stress. sulfur and chemical feed stock shortages, fertilizer and industrial input shortages. And you said that this sequence describes the industrial aftershock mechanism. Importantly, each stage produces a different set of sector winners. Tell us more about this and which are ultimately the sector winners here. >> Yeah. So the the basic idea is the disruption is going to create um choke points in the supply chains, right? And the choke points you want to be you want to be long the some of the choke points not all of them. You want to be long the choke points that have pricing power and can absorb the increased cost and pass them off to consumers. You don't want a uh you know someone that has to absorb the costs and not have the opportunity to pass them off to consumers because that kills their margin. So the the the the idea is to focus on uh choke point um positions that are are are placed to you know actually expand their margin as as a a result of this right so you know inputs um increase but can your output price increase at the same rate or more so that's where you want to belong right you don't you don't you know a company like deer you know they they during this whole um disruption they got hit hard, right? Because they are they they their input costs went up asymmetrically relative to their ability to pass those prices off. So that that didn't you know that didn't pan out well for them. Now Valero Energy refiner they as long as they can maintain their margins they will benefit from uh these kind of choke points. So there there's it's there is a distinction in between who you want to be long and who you want to avoid. Before we continue with the video, let's talk about a company that's building serious gold leverage for the long term. Our sponsor today, Stellar Gold, is sitting on three major Canadian projects. Tower and Colac are among the largest undeveloped gold sites in the country. The Tower project alone could be worth $2.5 billion after tax at a $3,200 gold price assumption. And if prices go higher, so does its value. Colum expands over 1,000 square kilmters of greenstone deposits and could be Canada's next big gold camp. They also have Holler Tailings, a cleanup project that could deliver near nearterm cash flow. Across all projects, they've drilled over 16 million ounces of gold, which would cost over $2 billion to replicate today. With a seasoned team, Stellar Gold is one company to watch. Scan the QR code here on screen or visit stellargold.com/davidlin to learn more. How long do you think that these sectors can maintain their winning position? In other words, how transitory do you think these disruptions are? Really, >> you know, first of all, it comes down to we got to do some damages. Well, there's two things. The first is the oil has to flow. And the reason the oil has to flow is that the longer the oil doesn't flow, then the higher risk of mass shutdowns in along the supply chain. Because in other words, for example, a refiner, you can't keep a refiner online if there's nothing to refine. So at some point, if there's no crew coming in, at some point the refiner has to say, I got I got to I got to shut down. I got to furlow people. I got to, you know, turn off the lights, right? So that's that's that problem kind of just grows and and it just kind of metastasizes down down the supply chain. So So it really comes down to how how long can we go without having to have further downstream interruptions. So I kind of pinned that around June. By by June, if this is not resolved, you're going to start seeing, you know, I mean, the shutdowns will be starting soon anyway, but they're they're going to get worse past June where that the the recovery time to come back is magnified. Now, you're looking at, you know, 3 to four, 6 months for uh operations to come back online after they've shut down. You can't just go, you know, turn on a refiner like a switch. It's not a light switch. It's there's things got to be calibrated, pressure has to be optimized, blah blah blah blah. So that's one thing. And then the second thing is how much damage assessment. We got to do a damage assessment, right? There's this is kinetic war action. Uh targets have been hit. Um there's been degradation of um you know manpower, institutional knowhow. Um facilities destroyed, facilities interrupted. And that's across the the Gulf States, right? It's not just Iran, it's also UAE and Saudi Arabia. They've been hit. So, we got to find out, you know, how long does it take to, you know, get these places back online? Do we have spare parts? Do we not? What's it going to take? So, you have to, you know, once you've determined that that kind of a timeline, then that sets the stage for, okay, I can be long these choke points for, you know, 18 months or a year or whatever it is. So, it's kind of a, you know, chicken and egg problem in that regard. >> Well, what do you not like right now? which assets do you think are overbought or you think overhyped because of this conflict and what ha what has happened with the o oil and energy sectors? >> So I think the the the asset that's most at risk is actually fixed income and the reason is um as long as the labor market holds up which it's looking like it will. I mean, as of now, it's it's it's, you know, we're 4.3% U3. Um, you know, as long as as long as the labor market's fine, I think late in the year, uh, there will be kind of I'm not calling for a hike. I'm actually calling for nothing to be done, but the Fed will start communicating and start leaning uh, hawkish towards the end of the year, provided the labor market doesn't um, fall apart. And look, you know, there's a there's a a tailwind to the economy. That's the AI spend, right? The AI spend is around 2% GDP. That is a huge buffer to uh and provides resiliency to the business cycle. So, as long as you've got that the AI trade going on, I find it really hard to make an argument that the labor market's going to fall apart and therefore that the Fed will be incentivized or motivated to cut this year. I just don't see it happening. uh going into the war, inflation was already picking up. I actually called for uh no cut uh back in February because of this um you know inflation that was percolating down the pipeline. So I I think there are things outside of oil um that the Fed doesn't have to consider in their mandate, right? They can they can look past this the the oil shock. what they can't uh look past is um you know goods um goods are are increasing um you know uh travel's going to increase that's related to the oil shock but that also takes on a life of its own. So if if things outside of the energy complex that feed into core keep increasing they're going to have to get you know get on board with a with a hawkish bias. So I would say bonds would are more likely to suffer than any other asset class out there. bonds meaning I guess uh in the long end of the curve or the short end. >> What's your duration here? >> Uh well 10 year tenor so it's about a you know 7% duration but a 10 year tenant so the tenure is the answer. >> Okay. Do you think precious metals have signaled? People have talked about how gold has signaled this conflict and has signaled higher inflation. And it's interesting how gold didn't really move up beyond what it did prior to the invasion or the attack on Iran, meaning gold actually fell alongside stocks. So, how do you think the metals complex is behaving right now? Is it normal for the metals, especially gold, to be going down during geopolitical stress? I mean this is entirely normal right so gold is seen as a a hedge on you know geopolitics or central banking competency right so it's it's your hedge it's your insurance policy so during a crisis what do you do with your insurance policy you cash it in so in in March we had a huge uh deleveraging and you sold what you could you sold what you made money on you sold you you wanted to protect profits so the the sell off in gold um was entirely rational given the the the deleveraging unwind and it it bottomed um right near the 200 moving. I'm talking about the metal, not not the future contract or the ETFs, but the actual metal. So, the XAU is the ticker on Bloomberg. Um the the actual metal bottomed um in late March as this unwind kind of um um you know, took its toll. And once we got some signaling that, you know, a an agreement could be in the works or ceasefire, you know, gold started front running that and started move uh moving up. So, you know, people started accumulating again. The the deleveraging cycle was for the most part uh at least paused. But gold did gold behaved entirely rational. People cashed in their chips and now now that the crisis looks like it may abate on the geopolitical front, then it's it's getting a bit bid again. So, and I think the miners the miners are very well positioned to um to to you know profit off that move, right? So, the miners are very heavily levered heavily levered to the uh to the spot price and um yeah, I I think I think the miners are are looking good right here. >> And the fact that the Federal Reserve has become more cautious in regards to inflation, how has that changed your assessment on bonds overall or or has your evaluation on bonds been independent of monetary policy? No, I mean my my eval my my views are informed, you know, 100% or not 100% but very much by monetary policy and you know we did have a shift in in the outlook in in January as you know there were some members that were previously you know dovish or neutral start going to the hawkish camp Neil Kashkari in particular. Um so so I think the you know the the Fed is you know slowly um you know will be moving over to the hawk side. Now there is a slight problem right now and that is the handover in leadership from Jerome Pal to uh Kevin Worsh. Um, right now, you know, there there's some, you know, political stuff going on and looks like, you know, the the can is kicked for a while on Wars, but, you know, that may be resolved at some point and I that we'll have a little more clarity once the leadership changes. Um, but, you know, look, he Kevin Worsh doesn't set policy. Neither does Jerome Powell. It's a committee and he his job is to corral the committee into some unamity or some consensus to to make a decision. And we're just a little far off from that right now. He's not even in office. Do you actually think there's a possibility of rate hikes this year, David? >> No. My my view is the Fed's not going to do anything. It's too early. Um cut or hike, it's too early to be just for the reasons I mentioned. The the the labor market's holding up and right now they're looking through the the the inflation implications of the the energy shock. It's too early. >> What will move the needle either way? either hikes or nothing or rate cuts, which is what was originally anticipated before the Iran war broke out. >> Well, let's look at let's look at the Fed reaction reaction function, right? Um policy reaction function. They're looking they have a dual mandate, right? Um for the most part, they've been guided guided by, you know, the idea of we'll keep an eye on inflation. We'll attack inflation provided the labor market's not falling apart. They they since the uh Fed pivot in uh November of 2023, the Fed has prioritized the labor market over the uh inflation um mandate simply because you know we were start we were you know on on the soft landing glide path, right? Inflation was prior to President Trump launching the tariff war and then again launching the um this kinetic war in Iran. Prior to that, we were on a soft landing track. So, you know, why bother with inflation? Let's support the labor market. And, you know, they initiated a cutting cycle in that. And that's kind of the proof, right? If the Fed was still very focused on inflation last year or, you know, why would they have started a um a cutting cycle? So, for now, they're still prioritizing the labor market. Um >> but if inflation again if inflation bruises its head as a result of things outside of of the inflation um energy complex then that's a different conversation. >> Right. So this morning the BLS reported the the latest CPI numbers uh headline inflation soar to 3.3% its highest level since May 2024. Uh less food and energy core CPI remains at 2.6% 6% slight uptick as well but not to the same extent as headline to what extent do you think uh oil is in the is still isolated in other words how concerned are you that higher oil prices will feed into core CPI and core PCE items that are not related to oil and energy. >> Yeah. So there's things like you know um you know core strip strips out um energy uh but there are still knock-on effects right in other words for example um you know dining dining services dining out right you know food has got to get trucked in that's going to be impacted by um um the energy prices. So even though you know energy kind of finds its way into most things. So whether it's you know eating dining out um whether it's uh travel whether it's um you know goods and services energy always finds its way through the system. The question is you know how impactful is it at what rate over what time frame. So um my concern really though is on not so much on on gas. It's really on food. I think I think we're going to see you know just due to the issues with uh fertilizers. fertilizers, you know, they depend on, you know, sulfuric sulfuric acid which is a derivative of the um um uh you know refining process. So there's going to be shortages of sulfuric acid which are going to feed, you know, affect fertilizer prices and that's going to get passed on to consumers in the form of food. Um and that's kind of one thing I'm watching. So food is a big one. Um obviously food's not a part of of core, but food services is right. restaurants, people eat out, Door Dash, what all that stuff. So, you know, again, many ways to find its way through the system. And I think uh food is um going to be um kind of a node, a transfer point, if you will, into other sectors that feed into into PCE. Um so, yeah, >> I want to ask you about this uh piece here. you have here um a Substack called economic growth update, US economic growth update. And in particular, you wrote about how growth in the US could look more European if the supply shock lasts 4 to 8 quarters. Uh first of all, 4 to 8 quarters is a long time. So that's that's one assumption in itself. But what do you mean? Uh if the US were to turn more European, what does that look like? So what it comes down to is right, you know, currently, you know, pretty much before u the tariffs, our economy was geared towards optimization, right? So you know, we wanted to optimize things to be more efficient and have wider profit margins, be more productive, and that ultimately is long-term raises productivity is I'm sorry, raises living standards. It's it's productivity. So you know, you you you become more productive by being more efficient. you do things like just in time inventories, you you hold minimal, you know, you warehouse things less. Um, and in a situation where supply chains become permanently disrupted or disrupted for a long time, you as a business have to shift your your business model from optimization to resiliency. Now you have to have redundancy in your suppliers. You have to have uh warehouse stocks. You have to prepare for bad outcomes. And that shifts um resources from optimization to now resiliency. Now you're spending money on insurance. Now you're you know again it's just this it's kind of a snowball effect. Ultimately that impacts your profit margins that impacts your productivity. Lower productivity you become more European like more static if you will less dynamic. And that so that's what I meant about uh the the productivity transmission channel. So what we want to avoid is kind of becoming, you know, a more closed economy. You know, onshore, I get the the strategic concern behind onshoring, but if you want to onshore everything and make everything, you're making, you know, goofy things like toys. You know, what are you even doing? Then you're you're kind of just, you know, you're going against all, you know, basic economic models regarding trade and and and efficiency. So you know we don't want to end up in a situation in 12 18 months uh 2 years where we are now um uh less focused on optimization and more focused on resiliency survival. So we we don't want that. We don't want to become you know the functional equivalent of of preers you know these people that you know they they got their basement full of food and um you know whatever preparing for the the world to end. You know we we don't want to be in that mode. We don't want to be we don't want to be economic peppers. We want to be dynamic. We want to explore. We want to take risks. And a a a resiliency type framework moves us away from that. And that's where it is. >> Well, you're right about the abundance regime. Tell us more about that and why that's at risk of coming to an end. >> Well, you know, the the it's not so much the abundance regime. Uh that's an input. The broad the broader theme is, you know, we we've had counteryclical um product counteryclical productivity boom, the first one since the late 90s, right? In the late 90s, you know, we we had, you know, awesome growth. Um stock markets are booming, everyone's employed. And what was different about that is typically productivity is counteryclical. So productivity typically jumps when you know there's an employment extinction event going into a recession. People you know firms fire people they're doing more with less. So you kind of just have this mechanical uh productivity boom and that's kind of been the basic thing since World War II until the '9s happened. 90s we have this crazy boom but people aren't getting fired. Um and then you know do happens and all that just gets shot in the head. Now, you know, we after COVID, we kind of start seeing the same kind of thing where, you know, in the in the 2010s, productivity was around 1.7, 1.6, maybe lower. Um, and now we're running like 2 and a half% productivity per year, and that's manifested in real time in S&P profit margins, which are continue to be at all-time highs. So we have this situation where productivity is booming, employment's low, we're at 4.3%. How do we have this magic? So there's three stools to that. One of them is abundance. Abundance feeds is is one of the three legs in the bar stool that gives us this framework for boom for productivity boom. Abundance means we can be optimal and not resilient. All right. The the other one is full employment which we currently have. Um, and the third bar stool is actually falling off the top of my head right now, but it's in my writing. And um, you know, so that's that's kind of, you know, oh, here it is. It's the it's the capex boom. So in the late 90s, we had the um.com capex boom >> and now we've got the AI capex boom. You know, it's providing a tailwind of 2% of GDP spending, right? You have almost almost threequarters of a trillion dollars in in in AI spend. So those three things, the AI spend, full employment, and the abundance regime are what support this whole framework of a productivity boom. And that's being jeopardized the more, you know, the more kind of self-inflicted, you know, foot shooting that we engage in that becomes jeopardized. >> For the last section, David, I'd like to do a quick lightning round. So I think you know the rules, you've seen this on the on game shows. I'll ask you for just your uh outlook or long or short something. Answer in two sentences or less. Starting with GDP. First quarter is already almost done. Uh second quarter are we looking at positive or negative? >> Uh zero to negative is my bias is the answer. >> S&P 500 up or down by the end of the year? >> Up. >> Favorite sectors within the S&P. >> Uh actually like uh transportation and logistics. Obviously that trade got murdered in March, but um I I do think we are seeing some kind of um industrial um renaissance. Um so I think that's going to that's going to come back. In fact, some of those stocks that I sold in in March that were linked to that are actually back at all-time highs. So we're seeing it in the price action already. >> Oil up or down by the end of the year from current levels, which is about $100 WTI. I'm inclined to up and the reason is uh these physical shortages they're not going to be resolved. You know, first we need a political settlement. So, who knows how long that can um take and then the process of actually restarting refineries takes a while. So, there's going to be physical shortages that will persist. So, the answer is up. >> So, headline CPI, we're currently uh at the highest level since May 2024. Up or down by the end of the year? >> Down. >> Down. What about core CPI excluding food and energy? >> My focus is PCE, but they're generally, you know, they're close enough as proxies. Uh the answer is by the end of the year down. I think CPI or PC, whichever one you want to measure, they will peak around uh August. >> Okay. And so ultimately the Fed then will they be hiking rates or lowering rates this year? >> They're doing nothing. >> Okay. No change. Uh gold futures, are you long or short? I'm currently in long gold futures and I want to be getting long miners as well. >> Okay. And silver. >> Uh I shorted that thing pretty successfully early in the year. It's too small of a market. It's not um it's not some it's not a jungle to play in. >> How do you play the AI stocks? >> Honestly, I I keep it simple and just buy buy the ETF. Uh XL XLK, I believe it is. I keep it simple. I'm not I'm not a uh I'm not a stock picker. U more of a sectoral gen generalist. So I just keep it simple. >> Okay. Uh what do we do with uh industrials like um sulfur producers, fertilizers, uh nitrogen fertilizers, potach so on? >> Yeah, those those those are along uh industrials like deer, you know, those that have to pay more for higher inputs, those types are short. >> Mhm. Okay. And bonds, we talked about bonds extensively. So at this particular point, long or short bonds? >> Short. >> Okay. Excellent. Thank you, David. Where can we find you? Where can we find your work and read your work? >> Uh, pinebrookcap.com on Substack or you can just go on the internet, type in pinecap.com. I'm also on uh pretty active on Twitter, econp uh and you can find me hanging around there. >> All right, we'll put the links down below. David, it was nice to meet you. Welcome to the show and I look forward to speaking with you again. Take care for now. >> Thanks for having me. Take care. Bye. >> Thank you for watching. Don't forget to like and subscribe.
‘Nowhere Near’ Real Bear Market: This Asset Collapses Next | David Cervantes
Summary
Transcript
We are nowhere near a bare market. Not not even by a moonshot close. So I would say bonds would are more likely to suffer than any other asset class out there. During a crisis, what do you do with your insurance policy? You cash it in. S&P 500 up or down by the end of the year. I'm pleased to welcome to the show David Cervantes, founder of Pinebrook Capital Management. He has a great Substack that we should follow. Link down below in the description. Prior to Pine Brook, David uh was on Wall Street for many many years working in fixed income sales in Morgan Stanley and also in cross asset sales at UBS and JP Morgan. Welcome to the show, David. Good to see you. >> Thanks for having me. Happy to be here. >> This is starting to look like 2022. What I mean by that is we're having an environment where the equities are selling off at the beginning of the year and it's been the worst since 2022. And we're also looking at possibly no more Fed cuts this year. If you look at the CME Fed watch tool, the markets are not pricing in any significant cuts or any significant probability of any cut until late 2026 December if not 2027. This is starting to look like 2022 all over again when everything fell, including bonds, including stocks. Which do you think will survive this storm this year, David? Will it be stocks or will it be bonds? Do we still have room for the 6040 portfolio is my first question. >> Uh the answer is we do have room for the 6040 portfolio. I know that uh you know correlations are historically out of whack, but I think the broader question is you know how's the how is how is the the cycle? You know ultimately you know equities and and fixed income are derivatives of the business cycle. So I think it's more informative to look at at the cycle and where it's going. Uh obviously this uh we came into the year pretty soft on the GDP front. Uh we had a third revision yesterday on Q4 down to 0.5 down from 7 I believe and the original point8 but you know that's that was just a function of uh the government shutdown in Q4. Um and we're getting a little pop um and actually some midcarter acceleration in the economy and then then the war happened. That kind of put the put the lid on that for a while. Um so my view is that you know we are going to have a uh a growth hole in Q2. Q1 overall will be very soft not recessionary and you know again this is somewhat of a function of uh the disruption in the Middle East and and and this disruption to what really matters the flow of oil. Not not the paper uh futures but the actual physical um oil getting delivered getting out and getting delivered. Um hopefully those things are resolved at some point in the near future and then Q3 we're looking at you know kind of coming back on getting supplies back online that's a transitional phase with some acceleration in Q4. So just to sum it up I think you know equities will be all right. Uh fixed income it's it's kind of a toss up with fixed income because we've got two opposing forces. We got inflation um and then we've got also just the labor market. So, you know, it's it's going to be a toss on the fixed income side, I think. >> With the 10-year yield rising to 4.3% and it's been uh it's been going up ever since the beginning of March. What do you think the bond market is signaling? >> You know, the bond market signaling that u you know, it was yields were a little lower, then they popped up with this inflationary uh spoof, but right now there's not a whole lot of signal in there. And the reason is, you know, for the most part, the the labor market is is balanced. you know, we've got we've had uh little employment growth, but due to the demographic changes resulting from President Trump's immigration policies, um you know, break even levels to maintain a fixed level of employment have collapsed. So, you know, we're kind of that goes back to my thesis that we're kind of at a standstill with uh with with bonds. There's they're neither here neither here nor there. the labor market is stable, so there's no impetus uh uh to cut. Inflation, you know, it's a supply shock and the Fed typically looks through supply shocks. So, you know, there's really not a lot of signal from um from the fixed income market right now. >> I'm looking at my screen here. This is a chart of the 10-year bond uh yield in the uh bar chart, and the blue line is the WTI oil price. Is it normal for oil and the long end of the bond yield curve to be uh perfectly correlated as we can see ever since March they've been doing that? Yeah. >> Yeah. Historically they are because you know typically you know recessionary I'm sorry inflationary impulses start in the energy complex. U I mean there was a difference after COVID where the main source of inflation was the housing market but that's historically you know inflationary impulses start in in the energy complex. So that's why they track so well together. >> So basically yesterday uh the 9th of April, the the S&P closed uh extending a 7-day winning streak. It's longest since last October, David. So the index is still down about 4% year-to- date. Is this a bare market rally or is the bottom in you think? >> Well, we're not even in a bare market, right? I mean, currently um the year-to- date return is 31%. >> Yeah. Um so you know and at the at the bottom of uh the index last week I think 6,300 handle uh we were around 10% give or take. So this is just you know volatility and correction we are nowhere near a bare market not not even by a moonshot close. You could make that argument if we were, you know, pushing eight minus 18% 20%, but at minus 10% that's that's historically, you know, you know, a run-of-the-mill kind of correction that you have once a year, once every 18 months. That that is nothing there's nothing remarkable to that. Now, what is interesting though is the kind of a sideways pattern that we've seen since basically October 28th. October 28th is when um trains last year is when uh tech peaked and then after that it was kind of sideways um going into into uh into February into the war. Um so the question is are we you know if we can get this uh uh or move past the geopolitical situation with a favorable outcome or at least not a bad outcome. The question is, do we keep grinding sideways or do we eventually move up? I'm in the camp that will move up and the reason is estimates are still being marked up. Now, typically estimates lag the market, right? The market front runs. But look, you know, we're we are a hair away from all-time highs. You know, right now the market is telling us that these uh um estimate increases are still are still to be considered valid, right? All right, if the market were down 15% and analysts are still raising uh estimates, then you know someone's wrong. It's typically the analysts. But here we have we have you know kind of a you know a a cohesive um alignment between what the market is doing and what the estimates are doing. So I I don't see the I I think the resolution will be at some point um a breakout to the upside. >> This is an interesting piece that you wrote. This is called the great unrotation and you pointed out that the real opportunity lies not just oil itself but the entire supply chain mechanism. So to understand how the current disruption propagates through the economy, we must map the industrial chain. The wardriven supply shock begins with energy and transportation disruption but quickly spreads through the uh petrochemical and fertilizer systems. Geopolitical conflict causing energy supply disruptions causes refining and petrochemical stress. sulfur and chemical feed stock shortages, fertilizer and industrial input shortages. And you said that this sequence describes the industrial aftershock mechanism. Importantly, each stage produces a different set of sector winners. Tell us more about this and which are ultimately the sector winners here. >> Yeah. So the the basic idea is the disruption is going to create um choke points in the supply chains, right? And the choke points you want to be you want to be long the some of the choke points not all of them. You want to be long the choke points that have pricing power and can absorb the increased cost and pass them off to consumers. You don't want a uh you know someone that has to absorb the costs and not have the opportunity to pass them off to consumers because that kills their margin. So the the the the idea is to focus on uh choke point um positions that are are are placed to you know actually expand their margin as as a a result of this right so you know inputs um increase but can your output price increase at the same rate or more so that's where you want to belong right you don't you don't you know a company like deer you know they they during this whole um disruption they got hit hard, right? Because they are they they their input costs went up asymmetrically relative to their ability to pass those prices off. So that that didn't you know that didn't pan out well for them. Now Valero Energy refiner they as long as they can maintain their margins they will benefit from uh these kind of choke points. So there there's it's there is a distinction in between who you want to be long and who you want to avoid. 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In other words, how transitory do you think these disruptions are? Really, >> you know, first of all, it comes down to we got to do some damages. Well, there's two things. The first is the oil has to flow. And the reason the oil has to flow is that the longer the oil doesn't flow, then the higher risk of mass shutdowns in along the supply chain. Because in other words, for example, a refiner, you can't keep a refiner online if there's nothing to refine. So at some point, if there's no crew coming in, at some point the refiner has to say, I got I got to I got to shut down. I got to furlow people. I got to, you know, turn off the lights, right? So that's that's that problem kind of just grows and and it just kind of metastasizes down down the supply chain. So So it really comes down to how how long can we go without having to have further downstream interruptions. So I kind of pinned that around June. By by June, if this is not resolved, you're going to start seeing, you know, I mean, the shutdowns will be starting soon anyway, but they're they're going to get worse past June where that the the recovery time to come back is magnified. Now, you're looking at, you know, 3 to four, 6 months for uh operations to come back online after they've shut down. You can't just go, you know, turn on a refiner like a switch. It's not a light switch. It's there's things got to be calibrated, pressure has to be optimized, blah blah blah blah. So that's one thing. And then the second thing is how much damage assessment. We got to do a damage assessment, right? There's this is kinetic war action. Uh targets have been hit. Um there's been degradation of um you know manpower, institutional knowhow. Um facilities destroyed, facilities interrupted. And that's across the the Gulf States, right? It's not just Iran, it's also UAE and Saudi Arabia. They've been hit. So, we got to find out, you know, how long does it take to, you know, get these places back online? Do we have spare parts? Do we not? What's it going to take? So, you have to, you know, once you've determined that that kind of a timeline, then that sets the stage for, okay, I can be long these choke points for, you know, 18 months or a year or whatever it is. So, it's kind of a, you know, chicken and egg problem in that regard. >> Well, what do you not like right now? which assets do you think are overbought or you think overhyped because of this conflict and what ha what has happened with the o oil and energy sectors? >> So I think the the the asset that's most at risk is actually fixed income and the reason is um as long as the labor market holds up which it's looking like it will. I mean, as of now, it's it's it's, you know, we're 4.3% U3. Um, you know, as long as as long as the labor market's fine, I think late in the year, uh, there will be kind of I'm not calling for a hike. I'm actually calling for nothing to be done, but the Fed will start communicating and start leaning uh, hawkish towards the end of the year, provided the labor market doesn't um, fall apart. And look, you know, there's a there's a a tailwind to the economy. That's the AI spend, right? The AI spend is around 2% GDP. That is a huge buffer to uh and provides resiliency to the business cycle. So, as long as you've got that the AI trade going on, I find it really hard to make an argument that the labor market's going to fall apart and therefore that the Fed will be incentivized or motivated to cut this year. I just don't see it happening. uh going into the war, inflation was already picking up. I actually called for uh no cut uh back in February because of this um you know inflation that was percolating down the pipeline. So I I think there are things outside of oil um that the Fed doesn't have to consider in their mandate, right? They can they can look past this the the oil shock. what they can't uh look past is um you know goods um goods are are increasing um you know uh travel's going to increase that's related to the oil shock but that also takes on a life of its own. So if if things outside of the energy complex that feed into core keep increasing they're going to have to get you know get on board with a with a hawkish bias. So I would say bonds would are more likely to suffer than any other asset class out there. bonds meaning I guess uh in the long end of the curve or the short end. >> What's your duration here? >> Uh well 10 year tenor so it's about a you know 7% duration but a 10 year tenant so the tenure is the answer. >> Okay. Do you think precious metals have signaled? People have talked about how gold has signaled this conflict and has signaled higher inflation. And it's interesting how gold didn't really move up beyond what it did prior to the invasion or the attack on Iran, meaning gold actually fell alongside stocks. So, how do you think the metals complex is behaving right now? Is it normal for the metals, especially gold, to be going down during geopolitical stress? I mean this is entirely normal right so gold is seen as a a hedge on you know geopolitics or central banking competency right so it's it's your hedge it's your insurance policy so during a crisis what do you do with your insurance policy you cash it in so in in March we had a huge uh deleveraging and you sold what you could you sold what you made money on you sold you you wanted to protect profits so the the sell off in gold um was entirely rational given the the the deleveraging unwind and it it bottomed um right near the 200 moving. I'm talking about the metal, not not the future contract or the ETFs, but the actual metal. So, the XAU is the ticker on Bloomberg. Um the the actual metal bottomed um in late March as this unwind kind of um um you know, took its toll. And once we got some signaling that, you know, a an agreement could be in the works or ceasefire, you know, gold started front running that and started move uh moving up. So, you know, people started accumulating again. The the deleveraging cycle was for the most part uh at least paused. But gold did gold behaved entirely rational. People cashed in their chips and now now that the crisis looks like it may abate on the geopolitical front, then it's it's getting a bit bid again. So, and I think the miners the miners are very well positioned to um to to you know profit off that move, right? So, the miners are very heavily levered heavily levered to the uh to the spot price and um yeah, I I think I think the miners are are looking good right here. >> And the fact that the Federal Reserve has become more cautious in regards to inflation, how has that changed your assessment on bonds overall or or has your evaluation on bonds been independent of monetary policy? No, I mean my my eval my my views are informed, you know, 100% or not 100% but very much by monetary policy and you know we did have a shift in in the outlook in in January as you know there were some members that were previously you know dovish or neutral start going to the hawkish camp Neil Kashkari in particular. Um so so I think the you know the the Fed is you know slowly um you know will be moving over to the hawk side. Now there is a slight problem right now and that is the handover in leadership from Jerome Pal to uh Kevin Worsh. Um, right now, you know, there there's some, you know, political stuff going on and looks like, you know, the the can is kicked for a while on Wars, but, you know, that may be resolved at some point and I that we'll have a little more clarity once the leadership changes. Um, but, you know, look, he Kevin Worsh doesn't set policy. Neither does Jerome Powell. It's a committee and he his job is to corral the committee into some unamity or some consensus to to make a decision. And we're just a little far off from that right now. He's not even in office. Do you actually think there's a possibility of rate hikes this year, David? >> No. My my view is the Fed's not going to do anything. It's too early. Um cut or hike, it's too early to be just for the reasons I mentioned. The the the labor market's holding up and right now they're looking through the the the inflation implications of the the energy shock. It's too early. >> What will move the needle either way? either hikes or nothing or rate cuts, which is what was originally anticipated before the Iran war broke out. >> Well, let's look at let's look at the Fed reaction reaction function, right? Um policy reaction function. They're looking they have a dual mandate, right? Um for the most part, they've been guided guided by, you know, the idea of we'll keep an eye on inflation. We'll attack inflation provided the labor market's not falling apart. They they since the uh Fed pivot in uh November of 2023, the Fed has prioritized the labor market over the uh inflation um mandate simply because you know we were start we were you know on on the soft landing glide path, right? Inflation was prior to President Trump launching the tariff war and then again launching the um this kinetic war in Iran. Prior to that, we were on a soft landing track. So, you know, why bother with inflation? Let's support the labor market. And, you know, they initiated a cutting cycle in that. And that's kind of the proof, right? If the Fed was still very focused on inflation last year or, you know, why would they have started a um a cutting cycle? So, for now, they're still prioritizing the labor market. Um >> but if inflation again if inflation bruises its head as a result of things outside of of the inflation um energy complex then that's a different conversation. >> Right. So this morning the BLS reported the the latest CPI numbers uh headline inflation soar to 3.3% its highest level since May 2024. Uh less food and energy core CPI remains at 2.6% 6% slight uptick as well but not to the same extent as headline to what extent do you think uh oil is in the is still isolated in other words how concerned are you that higher oil prices will feed into core CPI and core PCE items that are not related to oil and energy. >> Yeah. So there's things like you know um you know core strip strips out um energy uh but there are still knock-on effects right in other words for example um you know dining dining services dining out right you know food has got to get trucked in that's going to be impacted by um um the energy prices. So even though you know energy kind of finds its way into most things. So whether it's you know eating dining out um whether it's uh travel whether it's um you know goods and services energy always finds its way through the system. The question is you know how impactful is it at what rate over what time frame. So um my concern really though is on not so much on on gas. It's really on food. I think I think we're going to see you know just due to the issues with uh fertilizers. fertilizers, you know, they depend on, you know, sulfuric sulfuric acid which is a derivative of the um um uh you know refining process. So there's going to be shortages of sulfuric acid which are going to feed, you know, affect fertilizer prices and that's going to get passed on to consumers in the form of food. Um and that's kind of one thing I'm watching. So food is a big one. Um obviously food's not a part of of core, but food services is right. restaurants, people eat out, Door Dash, what all that stuff. So, you know, again, many ways to find its way through the system. And I think uh food is um going to be um kind of a node, a transfer point, if you will, into other sectors that feed into into PCE. Um so, yeah, >> I want to ask you about this uh piece here. you have here um a Substack called economic growth update, US economic growth update. And in particular, you wrote about how growth in the US could look more European if the supply shock lasts 4 to 8 quarters. Uh first of all, 4 to 8 quarters is a long time. So that's that's one assumption in itself. But what do you mean? Uh if the US were to turn more European, what does that look like? So what it comes down to is right, you know, currently, you know, pretty much before u the tariffs, our economy was geared towards optimization, right? So you know, we wanted to optimize things to be more efficient and have wider profit margins, be more productive, and that ultimately is long-term raises productivity is I'm sorry, raises living standards. It's it's productivity. So you know, you you you become more productive by being more efficient. you do things like just in time inventories, you you hold minimal, you know, you warehouse things less. Um, and in a situation where supply chains become permanently disrupted or disrupted for a long time, you as a business have to shift your your business model from optimization to resiliency. Now you have to have redundancy in your suppliers. You have to have uh warehouse stocks. You have to prepare for bad outcomes. And that shifts um resources from optimization to now resiliency. Now you're spending money on insurance. Now you're you know again it's just this it's kind of a snowball effect. Ultimately that impacts your profit margins that impacts your productivity. Lower productivity you become more European like more static if you will less dynamic. And that so that's what I meant about uh the the productivity transmission channel. So what we want to avoid is kind of becoming, you know, a more closed economy. You know, onshore, I get the the strategic concern behind onshoring, but if you want to onshore everything and make everything, you're making, you know, goofy things like toys. You know, what are you even doing? Then you're you're kind of just, you know, you're going against all, you know, basic economic models regarding trade and and and efficiency. So you know we don't want to end up in a situation in 12 18 months uh 2 years where we are now um uh less focused on optimization and more focused on resiliency survival. So we we don't want that. We don't want to become you know the functional equivalent of of preers you know these people that you know they they got their basement full of food and um you know whatever preparing for the the world to end. You know we we don't want to be in that mode. We don't want to be we don't want to be economic peppers. We want to be dynamic. We want to explore. We want to take risks. And a a a resiliency type framework moves us away from that. And that's where it is. >> Well, you're right about the abundance regime. Tell us more about that and why that's at risk of coming to an end. >> Well, you know, the the it's not so much the abundance regime. Uh that's an input. The broad the broader theme is, you know, we we've had counteryclical um product counteryclical productivity boom, the first one since the late 90s, right? In the late 90s, you know, we we had, you know, awesome growth. Um stock markets are booming, everyone's employed. And what was different about that is typically productivity is counteryclical. So productivity typically jumps when you know there's an employment extinction event going into a recession. People you know firms fire people they're doing more with less. So you kind of just have this mechanical uh productivity boom and that's kind of been the basic thing since World War II until the '9s happened. 90s we have this crazy boom but people aren't getting fired. Um and then you know do happens and all that just gets shot in the head. Now, you know, we after COVID, we kind of start seeing the same kind of thing where, you know, in the in the 2010s, productivity was around 1.7, 1.6, maybe lower. Um, and now we're running like 2 and a half% productivity per year, and that's manifested in real time in S&P profit margins, which are continue to be at all-time highs. So we have this situation where productivity is booming, employment's low, we're at 4.3%. How do we have this magic? So there's three stools to that. One of them is abundance. Abundance feeds is is one of the three legs in the bar stool that gives us this framework for boom for productivity boom. Abundance means we can be optimal and not resilient. All right. The the other one is full employment which we currently have. Um, and the third bar stool is actually falling off the top of my head right now, but it's in my writing. And um, you know, so that's that's kind of, you know, oh, here it is. It's the it's the capex boom. So in the late 90s, we had the um.com capex boom >> and now we've got the AI capex boom. You know, it's providing a tailwind of 2% of GDP spending, right? You have almost almost threequarters of a trillion dollars in in in AI spend. So those three things, the AI spend, full employment, and the abundance regime are what support this whole framework of a productivity boom. And that's being jeopardized the more, you know, the more kind of self-inflicted, you know, foot shooting that we engage in that becomes jeopardized. >> For the last section, David, I'd like to do a quick lightning round. So I think you know the rules, you've seen this on the on game shows. I'll ask you for just your uh outlook or long or short something. Answer in two sentences or less. Starting with GDP. First quarter is already almost done. Uh second quarter are we looking at positive or negative? >> Uh zero to negative is my bias is the answer. >> S&P 500 up or down by the end of the year? >> Up. >> Favorite sectors within the S&P. >> Uh actually like uh transportation and logistics. Obviously that trade got murdered in March, but um I I do think we are seeing some kind of um industrial um renaissance. Um so I think that's going to that's going to come back. In fact, some of those stocks that I sold in in March that were linked to that are actually back at all-time highs. So we're seeing it in the price action already. >> Oil up or down by the end of the year from current levels, which is about $100 WTI. I'm inclined to up and the reason is uh these physical shortages they're not going to be resolved. You know, first we need a political settlement. So, who knows how long that can um take and then the process of actually restarting refineries takes a while. So, there's going to be physical shortages that will persist. So, the answer is up. >> So, headline CPI, we're currently uh at the highest level since May 2024. Up or down by the end of the year? >> Down. >> Down. What about core CPI excluding food and energy? >> My focus is PCE, but they're generally, you know, they're close enough as proxies. Uh the answer is by the end of the year down. I think CPI or PC, whichever one you want to measure, they will peak around uh August. >> Okay. And so ultimately the Fed then will they be hiking rates or lowering rates this year? >> They're doing nothing. >> Okay. No change. Uh gold futures, are you long or short? I'm currently in long gold futures and I want to be getting long miners as well. >> Okay. And silver. >> Uh I shorted that thing pretty successfully early in the year. It's too small of a market. It's not um it's not some it's not a jungle to play in. >> How do you play the AI stocks? >> Honestly, I I keep it simple and just buy buy the ETF. Uh XL XLK, I believe it is. I keep it simple. I'm not I'm not a uh I'm not a stock picker. U more of a sectoral gen generalist. So I just keep it simple. >> Okay. Uh what do we do with uh industrials like um sulfur producers, fertilizers, uh nitrogen fertilizers, potach so on? >> Yeah, those those those are along uh industrials like deer, you know, those that have to pay more for higher inputs, those types are short. >> Mhm. Okay. And bonds, we talked about bonds extensively. So at this particular point, long or short bonds? >> Short. >> Okay. Excellent. Thank you, David. Where can we find you? Where can we find your work and read your work? >> Uh, pinebrookcap.com on Substack or you can just go on the internet, type in pinecap.com. I'm also on uh pretty active on Twitter, econp uh and you can find me hanging around there. >> All right, we'll put the links down below. David, it was nice to meet you. Welcome to the show and I look forward to speaking with you again. Take care for now. >> Thanks for having me. Take care. Bye. >> Thank you for watching. Don't forget to like and subscribe.