Dennis DeBusschere: Taking A Victory Lap Through The K-Shaped Economy
Summary
Market Outlook: Dennis DeBusschere discusses the current state of the market, noting the S&P 500's growth since June and the ongoing volatility, with a focus on the impact of government policies and Federal Reserve actions.
Investment Strategy: Emphasizes the importance of focusing on companies with strong return on invested capital profiles that are less affected by tariffs and higher capital costs, while noting the increasing influence of AI capital expenditure on earnings.
Economic Insights: Highlights the K-shaped economy, where certain sectors thrive while others lag, and discusses the role of consumer spending and AI capex in sustaining GDP growth.
Interest Rates and Inflation: Discusses the impact of declining labor market conditions on interest rates and inflation, suggesting that current conditions may not be sustainable long-term.
Credit Market Concerns: Raises concerns about potential defaults in the private credit market and the implications of tightening credit conditions on economic growth.
China's Economic Position: Shares insights from a recent trip to China, noting the country's efforts to develop a more robust stock market and the implications of trade tensions on global markets.
Sector Analysis: Discusses the performance of various sectors, including the potential of AI-related growth in tech and energy, while expressing indifference towards traditional energy sectors like oil.
Federal Reserve Independence: Questions the future independence of the Federal Reserve amidst potential dovish shifts and the impact on inflation and financial conditions.
Transcript
In this episode of On the Tape, I welcome back Dennis Debusher, founder, president, and chief market strategist at 22B Research. Dennis was on the pod in early June just as the market was finding its footing during the tariff noise and just ahead of the passing of the one big beautiful bill, which ironically is partly responsible for the government shutdown today. This was also when the Fed's path to cutting rates was still uncertain and before the composition of the Federal Reserve Board was beginning to change, including the eventual appointment of Steve Moran. We get Dennis's current thoughts on the markets and the economy, and we always get a decent read of what his clients are thinking through the surveys he conducts. So, a lot has happened since Dennis was last here. But if you have been listening to him, you would know that the V and 22B stands for victory lap and not just victory. So, enjoy this episode of On the Tape and stick around for my week 7 NFL picks. I need to bounce back from an 0 and2 week six. All right, welcome to the On the Tape podcast. I'm your host, Danny Moses. Today, I welcome Dennis De Busher back to the pod. Dennis, thanks for being here. >> Good to be back. Thanks for having me. So, you're here four months ago. >> Yep. >> S&P's up 10% roughly since then. Although, for all we know, it's up 12 or up eight while we're sitting here because the volatility is is ridiculous. >> So, lots happened. We got the tax bill passed. The government shutdowns happening right now. Yep. >> Federal Reserve, the Constitution of the Board is being, you know, reformulated kind of as we speak here. >> We'll get into all that, but I know we went through this last time. For the people that are not familiar with 22V, run through just a quick background here. Let's get that out of the way here. Yeah. Uh so macro firm uh started four years ago. We were all the the basis of the firm or the kind of core group is out of uh ISI or Evercore ISI and the 22 is referenced to my father who was basketball player for the Knicks. V is for victory and um yeah we cover uh central bank policy, China policy. I was just in China last month. >> Talk about that. >> Uh economics, portfolio strategy, quant uh European economics and geopolitical. >> Yep. Well, it's great. And you just hired a close friend of mine. Research bank extraordinaire, Bill Heel, who I know is busy as we speak, pumping out research on the banks, which have reported earnings today. So, that was a great hire on your part as well. So, all right. So, back in June, I called you nervously bullish, which is kind of how I would describe you. There was enough things in place that would make you bullish and you know, it was kind of climbing the wall of worry right here. So, you said to ignore the tariff noise, right? focus on kind of fundamentals and what you said was which I thought was pretty accurate was that the top kind of 10 even 100 companies that have a decent return on invested capital profile that won't be impeded by either a higher cost of capital andor tariffs whatever they can sustain the market and that was right >> yes >> so give me that kind of report card there of of how you feel about that now because I want to go into some of the other things that have occurred since then as well >> so it's it's still largely the case I would say the riskreward has less compelling than it was back in June. That's more or less stating the obvious. Um, but it's still the case that the top quintile of the S&P is still growing earnings, still expected to be relatively un relatively unscathed by tariffs andor other risks because it's not just tariffs. Now, there's a little bit more to this when it relates to China and trade assuming government shutdown eventually uh we eventually reopen. Uh yeah, I think you're looking at a S&P that's still biased to be higher, just a little bit attractive, but the same fundamentals are in place. Uh now there is a there is a little bit of a wrinkle now relative to previous conversations, which is how much is AI capex actually driving earnings of the S&P 500. You could even take that down to the 1500 and what is your expectations for that on a you know one or two-year basis. So that's a little bit more of a wrinkle relative to June uh just because the size of the plans keep on accelerating which obviously then increases the risk. So >> the proof I mean right now it's by first ask questions later. So >> sure. So I'm not comparing it to 992000 although there are comparisons in that regard to how the capex will pan out and whether this math actually if you take the time to add up all of these deals you know the math doesn't work. So >> it's a very fair comparison. Yeah. Um it's just a matter of where the return will be or not and where does that compare? We are less debt financed particular TMT now versus then but that could change over the next year or so. So >> you said as long as there was GDP growth those things would be do fine. That was all right. The other thing you said which if the Fed were to change its course which in June really very little in terms of rate cut expectations were we know there was some noise but >> wasn't that the small caps could find footing. >> Yep. if indeed 10-year yields went down with the Fed also taking their cut forecast up. >> Yes. >> So that happened. >> Yes. >> Now small caps I think you are up 10 15% at least since that time period in a straight line. You thought that was a very decent riskreward. >> But let me ask you a question. If I had told you if I had given you every number today that exists, what would you have said actually had happened? So for instance, Fed funds you can figure out what would have happened in the short term two-year. Yep. But 10 year dropping like that you would assume there was a huge drop in inflation or the numbers would you would have assumed that right? >> Yes. Either a large drop in inflation and or a significantly higher recession probabilities >> right so recession pro like so let's talk about that because we are in a severe K-shaped economy right now. I mean this is it's the K's are extending even farther it feels like in terms of the bad looks really bad and the good still looks really good. Yes. How long can this kind of I don't call it equilibrium because but at what point does it does it matter and I and I say that meaning does it matter to the economy or is it still not going to affect the stock market? >> I don't think it's going to really affect the stock market. I think what um people don't realize or haven't internalized enough is that that Kshape might be necessary to keep inflation from moving significantly higher. I'm not saying that's a good thing for society. I'm just saying that's the reality and that K shape actually favors asset prices because most of the stocks in the S&P are levered to the positive outcomes there. It's a long way of saying uh consumer spending driven by the top half of the economy, no doubt about it. uh and AI capex are sustaining pretty strong GDP growth and the other areas of the economy can't really contribute especially with a fiscal expansion which we can get into which is the one of the reasons why the K shape is getting worse just for I can come back to that that means that something else has to give uh otherwise if you had everything kind of you know hitting on all cylinders right now let's just say housing was really contributing to GDP growth the lower end was really contributing in a much more forceful way with the higher end with AI cap you would have much higher 10-year yields. So to keep inflation from moving significantly higher, it's necessary that some areas of the economy lag. >> So you you do these surveys and I hope you have a recent one to talk about because the surveys you had in June were the following. >> The market would be lower from then in June. That was wrong. This is not you. I'm saying this is a survey. So this is what you want to be counter, you know, counterintuitive here. >> Labor would slow. That was correct. Yep. Right. It's much worse probably than people thought. Fed would cut more than indicated. Correct. Yep. Right. But the 10ear yields would be higher, which is what we just said. So it's clear that the driver to everything continues to be tenure yields, whether they're down for the right reasons or the wrong reasons. You just you just talked about it a minute ago. It would be the one thing that kind of doesn't work in this kind of >> Yeah. So I I think what's underappreciated as a driver of the rally, which is why I think the riskreward is less compelling right now, is that we you got away with a little bit of a perfect storm positively for asset prices because the labor market deteriorated in a way that was not clearly recessionary. All right. So what's happened over the last five months, it has become absolutely more clear that activity data hels up held up aggregate, right? Forgetting the K shift. activity data has held up at the same time that the labor market has slowed aggressively. Wages are outpacing payroll growth. That is the definition of a positive productivity shock which means that incomes in aggregates should hold up, earnings should hold up. Now, can this last for a long period of time? Can we really have a 10-year yield anchor by fears of a labor market unwind at the same time that activity is very strong with inflation that's running at two and a half% minimum if you want to normalize goods and tariffs? I I mean maybe but that's where I think you're coming to the endish of this perfect positive storm. And that's the the the interesting thing that we've been talking about is that 10ear yields were down in the most benign way possible. >> Right. And one of the things you wrote about recently which has happened is you're starting to see defaults occur in the private credit market in the lending markets first brands. Maybe it's a one-off but you and I both know it's never just a one-off in terms of how you underwrite and covenant light loans etc. So if the economy is 66% consumer-driven or even more at this point at some point that stuff filters down because if the consumer if the reason first brands is a problem for many reasons we don't know yet fraud and all that stuff but point being that consumers drive product demand for some of these companies that are getting loans that are stretched consumer dips a little bit it'll have you know domino effect potentially on credit. Yeah credit has been the one thing that if that tightens which you've seen fits and starts with we might have a problem in terms of growth in the economy. So how much of kind of the growth in the economy also is is from loose lending standards and so forth and I know you look at Fed surveys and things like that but give me your thoughts there. I think a uh over the last three years it hasn't been from loose lending but the legacy of very easy lending has supported the economy. So to the extent that we last longer in the higher rate environment the slower economic growth should be all things equal. I think unless it's clear that there's a I would say the difference now is there might actually just be a melting ice cube in credit in general um and you could relate this directly to the PE names where there's a significant amount of risk that was dependent on very low interest rates. We have not had that low interest rates were unlikely to go back to that level which means your returns there are very weak in an environment where certain areas of the economy are not supporting businesses that need very low rates. That doesn't mean that we're about to get into a negative feedback loop. Possible. What that does mean is that you should assume that that part of the economy is a drag up until the point that the that interest rates come down aggressively. But there's a reason that these PE >> stocks are not acting well at all. They're not participating and blue owl's kind of probably down the most, but that's not the biggest one. But Blackstone Apollo, they don't act like we're in a you know great situation. So we saw this in 2006 and 7. the the banks and mortgage companies were underperforming while the stock market was kind of making new highs. >> Yes. >> And yeah, I don't want to be dismissive of that or >> No, I I'm just curious if the stuff that you're watching signaling your antennas are up at all in terms of >> I haven't had anything signaling from a negative feedback loop point of view or more, but I would say what is obvious is that the returns in those businesses that they're expecting are clearly going to be lower. >> Fair. All right. So, you always keep it simple. Perfect. It's very simple there and we should not necessarily extrapolate that to a recession. I so two things could be true. Returns in those businesses could be very lower without an accredited event in the immediate future and uh Microsoft can still go up a lot. >> Yeah. And so from a purely mercenary point of view, yes, I worry about a recession, but I'm more interested in now will the S&P be biased higher or lower? It's still higher, just not as much. >> So earnings also coming out of second quarter beat expectations, right? Third quarter, I would imagine you would beat a little bit more, >> which is the again backdrop, keep it simple, kind of the driver of everything. So, where are we in the earning cycle? We just mentioned that, you know, some of this stuff could peak for some of the AI kind of, you know, companies that are out there, but how are you breaking it down between sectors and what is going to be the biggest contributor? Will it still be those companies moving forward or the efficiencies from AI or what actually orders of >> Yeah. So, when it's a good question. So, when you think about the contributors to to uh earnings, it's the same things that are contributing to economic growth. So, it's consumer service spending, right? There's some questions around that, but it's uh relatively strong. Banks are strong as we know. It's tech, it's communications, uh discretionary is doing okay. Um there's a little bit of a difference within discretionary, but we'll just say if you're interest rate sensitive, you're lagging. If you're not interest sensitive, you're doing pretty well. The deeper cyclicals will continue to be lagards. And uh the defensives, which when I say defensives, your classic staples, pharma is a good example of this. uh relatively weak earnings growth but growing. So the areas of the economy that are growing which is your AI related and that's not just tech because that gets into power that gets into utilities and I should mention that and consumer services the area you're going to see the earnings growth and you've been right to kind of just ignore energy not long not short how you thinking about it these days because you're right to always assume that it's driven by demand not supply and you acknowledge that supply has been coming in. Yep. >> Um where do you sit now on that? Are you kind of still kind of indifferent on the sector? >> Still very indifferent. I mean I I am very uh this the sector calls as you might imagine are getting much more difficult right now in the sense that there is a very specific AI play that appears real within the energy sector particularly like the nat gas names. So it's it's easy for me to say yeah stay out of energy. So I'd say oil related, stay out of, not gas. You probably want to be long if you believe that's what's going to be funding the AI boom, which then gets to the question of how long will the AI boom go and how much will the power constraint story be there and real and as long as that's the case, you want to be long, not gas. >> Yeah. And you look at uranium as well, but you're right, it's such a longtail construction cycle. You're 10, 20, 30 years. So you want to own uranium if you're bullish on AI, but it's not an immediate payback for you. So people don't really pay attention to it. All right. Fresh off the heels of a trip to China. most important thing at least driving the markets this week and probably in in the future. Give me your takeaways there. Where'd you go? How long were you there? And how many investors came? >> Yeah, so we had about 11 investors with us. Uh Beijing, Shanghai, uh a number of meetings with uh economists, some government agencies. So those are the two Oh, a very a lot of private market people in in Shanghai. So logistics businesses, uh energy buildout uh businesses, things of that nature in uh in Shanghai. Uh I think the big takeaway is the need for the stock market to be a store of wealth for households there is underappreciated and all the measures they're putting in place. So the stock market has done very well there. Everybody knows this. But there is a necessary go forward when you have property that is under pressure and you have deposit rates that are very low that there's something else that needs to fill the gap for households. So they are in the process of actually creating a higher attempting to create a higher quality um I guess the best way to say higher quality more western like stock market not because they want us necessarily meaning western investors because it's necessary for households to increase wealth uh well increase savings in the stock market right so I think it's really underappreciated um that and that's a large driver and also the areas of the uh the stock market that are important to China from a national security point of view, what they want to build out of the five years will be supported, which kind of gets to what's going on right now. >> Yeah. They want to build a middle class basically. But you're right, not as many people, not even close on a percentage basis own stocks like we do here in the US. And they maybe want that to change. And you're right, it's all property driven, which is why the debacle of all the >> property stocks has been a problem. But what was your sense overall just from a protectionist perspective of why you were there? And you know, I'm sure they greeted you guys and they were couldn't have been more thrilled to have you over there. I'm just curious. always very respectful, always great conversations. I do appreciate uh being able to go there and, you know, from more of an economics point of view or economist portfolio strategy point of view, kind of look at, you know, what they're saying, what's going on on the ground, uh, as it relates to trade and your question, uh, and how they're feeling about it. Um, this is my own hindsight 2020 comment which didn't come up a lot and I wonder if the reason it didn't come up a lot when it did come up uh was because they felt pretty confident after the first round of rare earth kind of push back from them how you know our body language changed being respectful here. >> Yeah. Yep. >> Related related to that. So, it seemed like they were much more comfortable with the trade outlook and they realized that the tariffs were going to stay, but they were much more comfortable with a potential outcome not being as severe to their economy. >> So, they feel like they hold the cards a little bit at this point. >> Yeah. And they know they don't fully hold the cards. Yeah. Right. I mean, there's blowback to the extent that this thing keeps on escalating, but I would say that yeah, they think they're uh feel like they're in a better, >> you know, a little better position than what was initially the case. So certain things you won't say while you're in China because you want to get home and see your family obviously in terms of taking a stance on you know whether it's yeah you know some type of comment politically whatever might be but in terms of the of the chip sector there is there any I mean it's obvious that they're going to copy these chips right that over time I mean am I you know I mean I would say it's obvious that they want to uh become self-sufficient and it's it's talked about and this is not something I think this is something you can say publicly because it's in their national national self-interest to do Right. Um so if you look at it from that point of view saying what is best for them, what do they think is the best way to not uh to to to have a more formidable economy on a go forward basis. Yeah. They want to build out tech. Yeah. >> They want to be a leader in AI. Chips are part of that process. So >> right, I'm just saying I I said it out loud. It was rhetorical in a way, but in a way I'm like I just don't understand again why a you know hardware company like Nvidia can how it can sustain mid70% gross margins over time. It's just it'll get commoditized at some point. That's probably the next time or two times more than you're on the pod from now. But to me it's if you think about what that is like for people out there that you know it's hardware and it's going to be a commodity. And so I guess my point is is it six months a year, two years when that secular becomes a little bit more cyclical. >> Yeah, I would I would uh I'm not really qualified to answer the question. I would say that the the the going kind of narrative would be that it's longer than two years given the sophistication of the chips and the manufacturing process. >> Okay, good enough. All right. The other thing that China's been doing is selling treasuries or letting them run off to buy gold. And I don't know if that came up on your trip at all. We've talked about gold here since I've known you. Um obviously I'm very bullish on gold. I think you are. What's your sense there for the feeling about more importantly the dollar related to gold? And we're nearing levels now where the >> I will answer it this this way. Gold was brought up the many times. No real clear answer on gold. What was asked of us plenty of times was questions around dollar weakness? >> But did they were they already knew the answer to that though? What's causing it to a degree? But I mean what >> yeah I mean there the questions which is a very fair one and this is not just them but international investors is uh how do we think about dollar weakness? Is dollar weakness assumed independence of the Fed? >> They ask those questions. >> Uh people ask those questions. Yeah. I mean, which are fair questions, right? If you're sitting from a, you know, um, so, >> um, >> yeah. So, the dollar hasn't moved since you, since you were on in June, >> the dollar's flat, >> but dollar's flat, >> but when you look at it versus the yen, it may be a little different. Euro might be a little bit different but as you know if you look at it just DXY way it was >> one of the things I try to explain to investors globally and this is how I would answer the question if I was there is it is true now that bonds are not diversifying right we know the correlations have flipped which is to say bond yields and stocks are more negatively correlated so bond yields up stocks down generally speaking vice versa that has a lot to do with the fiscal expansion globally that has a lot to do not just the US but globally. That has a lot to do with the term premiums that seem appear to be biased higher not only in the US but globally. So a hard asset does make more sense in a portfolio like gold, >> right? >> So for anybody logically, it doesn't have to be a conspiracy. I'm not saying you're saying that by the way like for anybody logically it makes sense to hold that physical asset. >> Yes. >> So why would we expect anything different? No, I would. And I think that the news today that pal was speaking today and he basically said which we all knew QT is ending >> and we're going to get you know now we're level of reserves in the system is sufficient etc etc. Gold was already sniffing that out right there's certain things that are that are important more important than anything which is either QE coming again at some point which I think we all >> so this is something I've been talking to people about. Yeah it is obvious that we have one giant trade going on. Yeah. >> Uh inflation's going to be high but not too high. Do you think that's the case or you hope? >> No, that's that's that is that is what asset prices are pricing. >> Yeah. So we can live with 3% inflation >> or maybe just below it. I don't know what where the markets will start to push back on that. But if I were to say look cross asset whether it's gold because one of the things we've noted recently is that gold and momentum have become highly correlated. >> Yeah. >> The momentum factor right which is odd historically. Okay. So why is that happening? So we have a lot of AI related names that are based on an AI buildout which of course you have maybe you assume that the cost of capital doesn't matter for them but at some point it probably does. So we have a basically stepping back we have an entire I shouldn't say entire but we have what appears to be easy moni relatively easy monetary policy inflation that's going to run above target but not in a way that's going to be a problem. That is what's driving the earnings risk factor relative to Loval. That's probably what's driving a lot of the speculation. It's not just a bunch of maniacs buying AI names. There's a lot going on under the surface that I think is related to that underlying theme globally. >> So you always talk about the Fed and term term premium as you just so dumb it down again for people when term premium is positive versus negative where we sit today. It had accelerated to positive in June which made you a lot more comfortable with liquidity in in the markets. >> Yeah. So I would say so the simplest way to think about it is either inflation risk or any risk associated with holding a longer duration asset. I I you don't necessarily just associate it with inflation risk but it's been associated with that that most often in the post global financial crisis period term premium was negative which is to say there was no inflation risk right so uh now it's positive to say that there is maybe consistent uh inflation andor fiscal expansion risk >> it was 50 basis points in June where does it roughly sit as we sit here today >> uh just above that >> just so it hasn't really moved >> yeah now >> because it's very inflation you could argue very inflation sensitive if you actually go into a recession, then turn premium probably is anchored. It's not going to go up that much theoretically. So, given that the labor market has been weak and that's likely anchoring uh 10-year yields, term premium hasn't moved. So, which gets to a very interesting question. What happens to this inflation is going to be high but not too high. Call if the labor market actually starts to retighten. >> Yeah. Like I could I could argue for a pretty significant term premium shock. >> Yeah. Yeah, I think if that happened, I don't think anything to your point, you made you make a great point where certain sectors of the economy have to suffer for this kind of goldilocks thing to continue. Yes, >> you can't. Right. And if you're saying that doesn't continue, then you might have a problem on your hands. But that brings my next question. The the independence of the Fed and Federal Reserve in general, I mean, so we're now five meetings away from Powell being gone. We're, you know, reconstituting the board of the Fed. We know it's going to be extremely dovishoriented. At what point do we worry about that? I mean, gold's are again, gold prices a lot of things, right? There's a reason that even in a strong dollar in the last kind of overall that gold has gone up with the dollar going up. There's a reason that Bitcoin is underperforming gold recently because it's more retail oriented, I think. But give me your thoughts on how how to think about the Fed. Forget if they're using the right guideposts or >> Yeah, leave that. Thanks for saying that. For forget about that. Like how independent are they going to be? Are they going to essentially ignore inflation and keep financial conditions easy? That's I think the >> Fair again. You love the way you simplify. >> I think that's the heart of your question, right? Like we're going to say all right. >> Listen, our podcast could be five minutes. I just have to over so because if I can if I can take it from that point of view, I would think it's very simple. Um we're going to get orthodox. I have a strong opinion that we're going to get orthodox policy one way or the other either the easy way or the hard way. So to the extent that inflation goes let's call it above the 3% level on a core basis and let's assume the fact that the uh labor market retightens that one of two things are going to happen either the Fed is going to tighten financial conditions or the bond market's going to do it for them because we cannot sit here and expect that the rest of the world the trillions the tens of trillions of sitting out there in treasuries are going to accept in a significantly lower real return. It's insanity to think that we have a current account deficit that's 5% of GDP. That means we have to bring in roughly a trillion a year to meaning into treasuries to fund. You think they're going to sit there like, "Okay, we'll buy them anyway. Who cares if inflation's at 4% and the 10ear yields at four? We love zero real return." No, that's insanity. Okay. So, the the rest of the world investor is not that stupid. So, you should expect that if we're going to really go on this ignore inflation idea, the 10-year yield will go up if inflation is significantly higher than expected. So that's the most passionate you've been here in in the 2030 and that that says a lot. So I've been saying that four and a half is kind of the new five on the 10 year. I think from where we're sitting now at four, what would take us to four and a half versus when we were sitting at 4.35 it would take us to five. >> It's the direction and the velocity that we're current and but to your point why is it occurring like why with the 10 yields and we know there'll be a lot of chatter. We've already seeing it with QT ending like they need everything they can. banks. >> Yeah. >> SLR, stuff like that, like their ability to buy. But we're kind of preparing, to your point, for that. But you're right. Is there enough ammunition to be able to kind of control the narrative on the on the 10ear yield if they were to start spiking? >> Yeah. And so we can we can start going down this whack-a-ole game of like, all right, 10year starts going up. They try and do something to control it. Uh because they don't like the fact that obviously the 10-year's going up. The power is at B, right? It it ends up being a really big problem for housing. Let's do something. Okay, you can attempt that for a little while, but then what happens to the dollar? >> Yeah. Destroyed. >> And then what happens to inflation when the dollar goes down? >> Goes up. >> That's like And so like this whack-a-mole game is just not going to is, you know, we can >> I'll take things that happen in a normal market for 200. I mean, you know, but it hasn't been there's nothing really been wrong about it. But yeah. No. >> And by the way, but we can get away with this conversation now. I think this is what people don't understand about what I'm trying to say. Or maybe I shouldn't say understand, but I want to make a point if that's okay. >> Yeah. This Fed independence issue has not impacted a risk assets because there has been an aggressive decline in uh relative expectations of payroll growth. >> So as long as you have a recession tail out there, >> a reason to cut, you're saying? >> Yeah. Like a reason to cut that's not because they're being uh because they're not independent. It's like we should probably cut because there could be a recession that could be a much higher unemployment rate. >> If that goes away, then the Fed independence question in my view becomes much more central. And if I'm not saying it's guaranteed, but if Fed independence is in question, when inflation is actually higher and the labor market is not a concern, then the game changes >> on the inflation side. I asked you this back in June. I was looking back at my notes. I said this was my concern. So since the Doge Doge cuts earlier in the year that the BLS was basically, you know, just theorizing on they had 29 from 15% numbers, they went to not having 29% of the numbers or something like that because they were just short-handed. So, we're going to get peacemeal. We'll get a CPI. I think they're going to put it out at some point, right? >> 21st, I believe. >> Yeah, it should have come out already. So, now we get peacemeal inflation numbers. Now, put your conspiracy hat on a little bit. Do we are we going to believe all those numbers? I mean, since I made that comment to you, fired the head of the BLS and so forth. I'm just saying one thing is to see it, one thing is to feel it. Are we are we ever going to reach that point where we don't trust the numbers? >> I think it's knowing how important it is, you know? >> Yeah. I so I I where where we don't trust the numbers I think that yeah I think you could reach that point under an extreme scenario but I think my understanding is the BLS process is fairly robust so we should probably more or less trust the numbers as they come out but you is probably a higher bar I shouldn't say higher bar it's probably more important to cross-ch checkck that against high frequency data >> well I'm watching what fastenol says you watch earnings more importantly than anything right those are in the private sector telling you what's happening should be And in this day and age, as you know, this goes back to which I guess no one even does anymore, the satellite imaging and all that stuff like there's enough alternative data to cross-check what the official data is saying. >> All right. So, let's get into your recent surveys that have occurred here. So, give me your I gave you what you gave me in June in terms of expectations. Give me uh >> So, we have another survey upcoming. Our last one was kind of mid to late September. What was what was interesting about that survey was uh biggest risk was interest rates, right? Not the Fed anymore. So, interest rate 10-year yield. Um, value was one of the favorite factors. That was right before the AI rip, which was interesting. Um, because >> this is interesting. >> That didn't, you know, uh, obviously that went opposite of what people thought. >> Housing was popular um, right in the face. >> Right in the face. >> So, as we exited the summer um, and turned to Labor Day in the first or second week thereof, there was an expectation that basically all interest rate sensitives would outperform. >> Yep. That's the playbook. >> Yeah. and that's been and so that didn't happen and then you had this this move into AI growth uh at the expense of at the interest rate sensitive. So I would say that that this time around they were mostly caught flatfooted on the the >> but again so it was counterintuitive again >> and it was right on the payroll number and then and on the payroll revision. Everybody was worried about the payroll revision and we and people on the street were talking about the payroll revision like >> and I get it. It's a big deal. But if we're all talking about a payroll revision, do we really end of the day care what happened through March of this year? >> No. Right. All right. So right on the revision you saw the bottom in rates and then a lot of the interest rate sensitives fade. Fast forward to today I would say it's you know the mass I'll give a survey in a couple days but um it kind of gets delayed now with the questions need to change a little bit because of the China overhang which is a big deal but AI bubble is the topic of conversation right now. >> That's why people need to subscribe to 22V so they can see the results of that survey. All right. So, you like to bucket things in kind of 3 to six months, 8 to 12 months. >> Give me your current look forward bucket. It's been four months since you've been here, right? So, the short that short buckets kind of played out. Short-term bucket. Where are we uh where are we now and kind of your thoughts here? >> I would say uh if I if I was here last Wednesday, I would have high conviction more higher conviction than what I'm about to say. That's mostly because uh when we did the survey before China, we did a before our China trip, only 13% of investors expected China trade war risk to uh to come back. So um and it doesn't appear that it's it's >> you were couchy before couchy was cool by the way. Your surveys had already had but yeah >> so um but we still stand by the the idea that uh the economy is stronger than people realize and the labor market is not as bad as people think which means that there should be uh if we're correct over the next 3 to 6 months let's call it you know into the year in a year end upside risk to the long end uh and some tight tightening of financial conditions >> upside risk to 10year yields moving Y sorry. Yes. So tenure yields moving higher >> related financial conditions tightening. >> So your S&P number has to be lower than where we sit here today. If that would be your assumption. >> It doesn't have to be because typically that's been good for the large caps because they're very nominal GDP sensitive. It's bad for the housing names. It's bad for the interest rate sensitives. >> Yeah. But if Okay, just to be clear, the reason you think that rates might be a little higher is because you think inflation might run a little hotter than you think. >> Your expectation is inflation will be higher for longer. Yes. But it's because economic growth is firm. >> Okay. I'll take I hear you. I'm not taking the other side of that per se, but I think if 10 it depends the level of tenure yields 425. >> It's a by by the way that's a very important point and I I shouldn't talk in such generality. Thanks for >> too many people talking generalities higher lower whatever. Yeah. At four and a half% or above I'll agree with you mark's not up. >> Okay fair enough. >> So that you know I don't think it's getting there but if it did that's a problem. Well, if the market if the S&P closes above 6,700 a year end from our last wager that we have, you're going to get a very nice uh M's jacket and for some reason it's below 5700, which if it does, we have a lot of more problems on our hand. I'm going to get that beautiful white >> whatever hunting jack. I don't know what you call that than you were wearing last time, Dennis. But, uh, but listen, I mean, it's great to have you on. You're always to to the point. Um, and you know, I think you're very efficient about how you kind of approach the markets and like I'm not blowing smoke. 22V is a great product. They can find it at 22V research.com. Right. And you you do retail institutional. Yes. You have events from time to time. So, want to thank you for coming back on. And uh we're going to come back in first quarter and maybe exchange jackets or we'll we'll see. Yeah, we'll see. >> Have a great holiday season. >> All right. You too. Thanks so much. >> All right. NFL picks week seven. I'm now 78 and one after an 0 and2 week. gonna bounce back here. The Bears have won two consecutive road games. They had a by-week between 25 to 24. I don't think I need to ask chat GPG if that's ever happened. I doubt it has. Caleb Williams is looking good. They're returning home playing the Saints laying five and a half. I like the Bears. I would lay it. Chargers home versus the Colts. I I'm going to short Daniel Jones one more time before I cover and go long. Chargers laying one and a half. Jones played out here against the Rams several weeks ago through two interceptions. I think that happens again. I think the Chargers defense shuts him down. giving the Chargers minus one and a half. Lastly, Chiefs home versus the Raiders. Chiefs are getting back Rashid Rice as wide receiver. I think that just adds more fuel to the fire they've been generating here over the last few weeks. They're laying 12 and a half. I think Gino Smith stinks. I think they're going to kill the Raiders lay the 12 and a half. So, the Pixar Chargers at home, Bears at home, Chiefs at home. I don't always love taking three favorites, but I'm do it here. I need a three and0 week. Thanks for listening to the On the Tape podcast with Danny Moses. If you like what you heard, please subscribe on either Apple or Spotify to the weekly podcast and please leave a rating and review, positive only. You can also watch on the on the tape channel on YouTube and give us a thumbs up there as
Dennis DeBusschere: Taking A Victory Lap Through The K-Shaped Economy
Summary
Transcript
In this episode of On the Tape, I welcome back Dennis Debusher, founder, president, and chief market strategist at 22B Research. Dennis was on the pod in early June just as the market was finding its footing during the tariff noise and just ahead of the passing of the one big beautiful bill, which ironically is partly responsible for the government shutdown today. This was also when the Fed's path to cutting rates was still uncertain and before the composition of the Federal Reserve Board was beginning to change, including the eventual appointment of Steve Moran. We get Dennis's current thoughts on the markets and the economy, and we always get a decent read of what his clients are thinking through the surveys he conducts. So, a lot has happened since Dennis was last here. But if you have been listening to him, you would know that the V and 22B stands for victory lap and not just victory. So, enjoy this episode of On the Tape and stick around for my week 7 NFL picks. I need to bounce back from an 0 and2 week six. All right, welcome to the On the Tape podcast. I'm your host, Danny Moses. Today, I welcome Dennis De Busher back to the pod. Dennis, thanks for being here. >> Good to be back. Thanks for having me. So, you're here four months ago. >> Yep. >> S&P's up 10% roughly since then. Although, for all we know, it's up 12 or up eight while we're sitting here because the volatility is is ridiculous. >> So, lots happened. We got the tax bill passed. The government shutdowns happening right now. Yep. >> Federal Reserve, the Constitution of the Board is being, you know, reformulated kind of as we speak here. >> We'll get into all that, but I know we went through this last time. For the people that are not familiar with 22V, run through just a quick background here. Let's get that out of the way here. Yeah. Uh so macro firm uh started four years ago. We were all the the basis of the firm or the kind of core group is out of uh ISI or Evercore ISI and the 22 is referenced to my father who was basketball player for the Knicks. V is for victory and um yeah we cover uh central bank policy, China policy. I was just in China last month. >> Talk about that. >> Uh economics, portfolio strategy, quant uh European economics and geopolitical. >> Yep. Well, it's great. And you just hired a close friend of mine. Research bank extraordinaire, Bill Heel, who I know is busy as we speak, pumping out research on the banks, which have reported earnings today. So, that was a great hire on your part as well. So, all right. So, back in June, I called you nervously bullish, which is kind of how I would describe you. There was enough things in place that would make you bullish and you know, it was kind of climbing the wall of worry right here. So, you said to ignore the tariff noise, right? focus on kind of fundamentals and what you said was which I thought was pretty accurate was that the top kind of 10 even 100 companies that have a decent return on invested capital profile that won't be impeded by either a higher cost of capital andor tariffs whatever they can sustain the market and that was right >> yes >> so give me that kind of report card there of of how you feel about that now because I want to go into some of the other things that have occurred since then as well >> so it's it's still largely the case I would say the riskreward has less compelling than it was back in June. That's more or less stating the obvious. Um, but it's still the case that the top quintile of the S&P is still growing earnings, still expected to be relatively un relatively unscathed by tariffs andor other risks because it's not just tariffs. Now, there's a little bit more to this when it relates to China and trade assuming government shutdown eventually uh we eventually reopen. Uh yeah, I think you're looking at a S&P that's still biased to be higher, just a little bit attractive, but the same fundamentals are in place. Uh now there is a there is a little bit of a wrinkle now relative to previous conversations, which is how much is AI capex actually driving earnings of the S&P 500. You could even take that down to the 1500 and what is your expectations for that on a you know one or two-year basis. So that's a little bit more of a wrinkle relative to June uh just because the size of the plans keep on accelerating which obviously then increases the risk. So >> the proof I mean right now it's by first ask questions later. So >> sure. So I'm not comparing it to 992000 although there are comparisons in that regard to how the capex will pan out and whether this math actually if you take the time to add up all of these deals you know the math doesn't work. So >> it's a very fair comparison. Yeah. Um it's just a matter of where the return will be or not and where does that compare? We are less debt financed particular TMT now versus then but that could change over the next year or so. So >> you said as long as there was GDP growth those things would be do fine. That was all right. The other thing you said which if the Fed were to change its course which in June really very little in terms of rate cut expectations were we know there was some noise but >> wasn't that the small caps could find footing. >> Yep. if indeed 10-year yields went down with the Fed also taking their cut forecast up. >> Yes. >> So that happened. >> Yes. >> Now small caps I think you are up 10 15% at least since that time period in a straight line. You thought that was a very decent riskreward. >> But let me ask you a question. If I had told you if I had given you every number today that exists, what would you have said actually had happened? So for instance, Fed funds you can figure out what would have happened in the short term two-year. Yep. But 10 year dropping like that you would assume there was a huge drop in inflation or the numbers would you would have assumed that right? >> Yes. Either a large drop in inflation and or a significantly higher recession probabilities >> right so recession pro like so let's talk about that because we are in a severe K-shaped economy right now. I mean this is it's the K's are extending even farther it feels like in terms of the bad looks really bad and the good still looks really good. Yes. How long can this kind of I don't call it equilibrium because but at what point does it does it matter and I and I say that meaning does it matter to the economy or is it still not going to affect the stock market? >> I don't think it's going to really affect the stock market. I think what um people don't realize or haven't internalized enough is that that Kshape might be necessary to keep inflation from moving significantly higher. I'm not saying that's a good thing for society. I'm just saying that's the reality and that K shape actually favors asset prices because most of the stocks in the S&P are levered to the positive outcomes there. It's a long way of saying uh consumer spending driven by the top half of the economy, no doubt about it. uh and AI capex are sustaining pretty strong GDP growth and the other areas of the economy can't really contribute especially with a fiscal expansion which we can get into which is the one of the reasons why the K shape is getting worse just for I can come back to that that means that something else has to give uh otherwise if you had everything kind of you know hitting on all cylinders right now let's just say housing was really contributing to GDP growth the lower end was really contributing in a much more forceful way with the higher end with AI cap you would have much higher 10-year yields. So to keep inflation from moving significantly higher, it's necessary that some areas of the economy lag. >> So you you do these surveys and I hope you have a recent one to talk about because the surveys you had in June were the following. >> The market would be lower from then in June. That was wrong. This is not you. I'm saying this is a survey. So this is what you want to be counter, you know, counterintuitive here. >> Labor would slow. That was correct. Yep. Right. It's much worse probably than people thought. Fed would cut more than indicated. Correct. Yep. Right. But the 10ear yields would be higher, which is what we just said. So it's clear that the driver to everything continues to be tenure yields, whether they're down for the right reasons or the wrong reasons. You just you just talked about it a minute ago. It would be the one thing that kind of doesn't work in this kind of >> Yeah. So I I think what's underappreciated as a driver of the rally, which is why I think the riskreward is less compelling right now, is that we you got away with a little bit of a perfect storm positively for asset prices because the labor market deteriorated in a way that was not clearly recessionary. All right. So what's happened over the last five months, it has become absolutely more clear that activity data hels up held up aggregate, right? Forgetting the K shift. activity data has held up at the same time that the labor market has slowed aggressively. Wages are outpacing payroll growth. That is the definition of a positive productivity shock which means that incomes in aggregates should hold up, earnings should hold up. Now, can this last for a long period of time? Can we really have a 10-year yield anchor by fears of a labor market unwind at the same time that activity is very strong with inflation that's running at two and a half% minimum if you want to normalize goods and tariffs? I I mean maybe but that's where I think you're coming to the endish of this perfect positive storm. And that's the the the interesting thing that we've been talking about is that 10ear yields were down in the most benign way possible. >> Right. And one of the things you wrote about recently which has happened is you're starting to see defaults occur in the private credit market in the lending markets first brands. Maybe it's a one-off but you and I both know it's never just a one-off in terms of how you underwrite and covenant light loans etc. So if the economy is 66% consumer-driven or even more at this point at some point that stuff filters down because if the consumer if the reason first brands is a problem for many reasons we don't know yet fraud and all that stuff but point being that consumers drive product demand for some of these companies that are getting loans that are stretched consumer dips a little bit it'll have you know domino effect potentially on credit. Yeah credit has been the one thing that if that tightens which you've seen fits and starts with we might have a problem in terms of growth in the economy. So how much of kind of the growth in the economy also is is from loose lending standards and so forth and I know you look at Fed surveys and things like that but give me your thoughts there. I think a uh over the last three years it hasn't been from loose lending but the legacy of very easy lending has supported the economy. So to the extent that we last longer in the higher rate environment the slower economic growth should be all things equal. I think unless it's clear that there's a I would say the difference now is there might actually just be a melting ice cube in credit in general um and you could relate this directly to the PE names where there's a significant amount of risk that was dependent on very low interest rates. We have not had that low interest rates were unlikely to go back to that level which means your returns there are very weak in an environment where certain areas of the economy are not supporting businesses that need very low rates. That doesn't mean that we're about to get into a negative feedback loop. Possible. What that does mean is that you should assume that that part of the economy is a drag up until the point that the that interest rates come down aggressively. But there's a reason that these PE >> stocks are not acting well at all. They're not participating and blue owl's kind of probably down the most, but that's not the biggest one. But Blackstone Apollo, they don't act like we're in a you know great situation. So we saw this in 2006 and 7. the the banks and mortgage companies were underperforming while the stock market was kind of making new highs. >> Yes. >> And yeah, I don't want to be dismissive of that or >> No, I I'm just curious if the stuff that you're watching signaling your antennas are up at all in terms of >> I haven't had anything signaling from a negative feedback loop point of view or more, but I would say what is obvious is that the returns in those businesses that they're expecting are clearly going to be lower. >> Fair. All right. So, you always keep it simple. Perfect. It's very simple there and we should not necessarily extrapolate that to a recession. I so two things could be true. Returns in those businesses could be very lower without an accredited event in the immediate future and uh Microsoft can still go up a lot. >> Yeah. And so from a purely mercenary point of view, yes, I worry about a recession, but I'm more interested in now will the S&P be biased higher or lower? It's still higher, just not as much. >> So earnings also coming out of second quarter beat expectations, right? Third quarter, I would imagine you would beat a little bit more, >> which is the again backdrop, keep it simple, kind of the driver of everything. So, where are we in the earning cycle? We just mentioned that, you know, some of this stuff could peak for some of the AI kind of, you know, companies that are out there, but how are you breaking it down between sectors and what is going to be the biggest contributor? Will it still be those companies moving forward or the efficiencies from AI or what actually orders of >> Yeah. So, when it's a good question. So, when you think about the contributors to to uh earnings, it's the same things that are contributing to economic growth. So, it's consumer service spending, right? There's some questions around that, but it's uh relatively strong. Banks are strong as we know. It's tech, it's communications, uh discretionary is doing okay. Um there's a little bit of a difference within discretionary, but we'll just say if you're interest rate sensitive, you're lagging. If you're not interest sensitive, you're doing pretty well. The deeper cyclicals will continue to be lagards. And uh the defensives, which when I say defensives, your classic staples, pharma is a good example of this. uh relatively weak earnings growth but growing. So the areas of the economy that are growing which is your AI related and that's not just tech because that gets into power that gets into utilities and I should mention that and consumer services the area you're going to see the earnings growth and you've been right to kind of just ignore energy not long not short how you thinking about it these days because you're right to always assume that it's driven by demand not supply and you acknowledge that supply has been coming in. Yep. >> Um where do you sit now on that? Are you kind of still kind of indifferent on the sector? >> Still very indifferent. I mean I I am very uh this the sector calls as you might imagine are getting much more difficult right now in the sense that there is a very specific AI play that appears real within the energy sector particularly like the nat gas names. So it's it's easy for me to say yeah stay out of energy. So I'd say oil related, stay out of, not gas. You probably want to be long if you believe that's what's going to be funding the AI boom, which then gets to the question of how long will the AI boom go and how much will the power constraint story be there and real and as long as that's the case, you want to be long, not gas. >> Yeah. And you look at uranium as well, but you're right, it's such a longtail construction cycle. You're 10, 20, 30 years. So you want to own uranium if you're bullish on AI, but it's not an immediate payback for you. So people don't really pay attention to it. All right. Fresh off the heels of a trip to China. most important thing at least driving the markets this week and probably in in the future. Give me your takeaways there. Where'd you go? How long were you there? And how many investors came? >> Yeah, so we had about 11 investors with us. Uh Beijing, Shanghai, uh a number of meetings with uh economists, some government agencies. So those are the two Oh, a very a lot of private market people in in Shanghai. So logistics businesses, uh energy buildout uh businesses, things of that nature in uh in Shanghai. Uh I think the big takeaway is the need for the stock market to be a store of wealth for households there is underappreciated and all the measures they're putting in place. So the stock market has done very well there. Everybody knows this. But there is a necessary go forward when you have property that is under pressure and you have deposit rates that are very low that there's something else that needs to fill the gap for households. So they are in the process of actually creating a higher attempting to create a higher quality um I guess the best way to say higher quality more western like stock market not because they want us necessarily meaning western investors because it's necessary for households to increase wealth uh well increase savings in the stock market right so I think it's really underappreciated um that and that's a large driver and also the areas of the uh the stock market that are important to China from a national security point of view, what they want to build out of the five years will be supported, which kind of gets to what's going on right now. >> Yeah. They want to build a middle class basically. But you're right, not as many people, not even close on a percentage basis own stocks like we do here in the US. And they maybe want that to change. And you're right, it's all property driven, which is why the debacle of all the >> property stocks has been a problem. But what was your sense overall just from a protectionist perspective of why you were there? And you know, I'm sure they greeted you guys and they were couldn't have been more thrilled to have you over there. I'm just curious. always very respectful, always great conversations. I do appreciate uh being able to go there and, you know, from more of an economics point of view or economist portfolio strategy point of view, kind of look at, you know, what they're saying, what's going on on the ground, uh, as it relates to trade and your question, uh, and how they're feeling about it. Um, this is my own hindsight 2020 comment which didn't come up a lot and I wonder if the reason it didn't come up a lot when it did come up uh was because they felt pretty confident after the first round of rare earth kind of push back from them how you know our body language changed being respectful here. >> Yeah. Yep. >> Related related to that. So, it seemed like they were much more comfortable with the trade outlook and they realized that the tariffs were going to stay, but they were much more comfortable with a potential outcome not being as severe to their economy. >> So, they feel like they hold the cards a little bit at this point. >> Yeah. And they know they don't fully hold the cards. Yeah. Right. I mean, there's blowback to the extent that this thing keeps on escalating, but I would say that yeah, they think they're uh feel like they're in a better, >> you know, a little better position than what was initially the case. So certain things you won't say while you're in China because you want to get home and see your family obviously in terms of taking a stance on you know whether it's yeah you know some type of comment politically whatever might be but in terms of the of the chip sector there is there any I mean it's obvious that they're going to copy these chips right that over time I mean am I you know I mean I would say it's obvious that they want to uh become self-sufficient and it's it's talked about and this is not something I think this is something you can say publicly because it's in their national national self-interest to do Right. Um so if you look at it from that point of view saying what is best for them, what do they think is the best way to not uh to to to have a more formidable economy on a go forward basis. Yeah. They want to build out tech. Yeah. >> They want to be a leader in AI. Chips are part of that process. So >> right, I'm just saying I I said it out loud. It was rhetorical in a way, but in a way I'm like I just don't understand again why a you know hardware company like Nvidia can how it can sustain mid70% gross margins over time. It's just it'll get commoditized at some point. That's probably the next time or two times more than you're on the pod from now. But to me it's if you think about what that is like for people out there that you know it's hardware and it's going to be a commodity. And so I guess my point is is it six months a year, two years when that secular becomes a little bit more cyclical. >> Yeah, I would I would uh I'm not really qualified to answer the question. I would say that the the the going kind of narrative would be that it's longer than two years given the sophistication of the chips and the manufacturing process. >> Okay, good enough. All right. The other thing that China's been doing is selling treasuries or letting them run off to buy gold. And I don't know if that came up on your trip at all. We've talked about gold here since I've known you. Um obviously I'm very bullish on gold. I think you are. What's your sense there for the feeling about more importantly the dollar related to gold? And we're nearing levels now where the >> I will answer it this this way. Gold was brought up the many times. No real clear answer on gold. What was asked of us plenty of times was questions around dollar weakness? >> But did they were they already knew the answer to that though? What's causing it to a degree? But I mean what >> yeah I mean there the questions which is a very fair one and this is not just them but international investors is uh how do we think about dollar weakness? Is dollar weakness assumed independence of the Fed? >> They ask those questions. >> Uh people ask those questions. Yeah. I mean, which are fair questions, right? If you're sitting from a, you know, um, so, >> um, >> yeah. So, the dollar hasn't moved since you, since you were on in June, >> the dollar's flat, >> but dollar's flat, >> but when you look at it versus the yen, it may be a little different. Euro might be a little bit different but as you know if you look at it just DXY way it was >> one of the things I try to explain to investors globally and this is how I would answer the question if I was there is it is true now that bonds are not diversifying right we know the correlations have flipped which is to say bond yields and stocks are more negatively correlated so bond yields up stocks down generally speaking vice versa that has a lot to do with the fiscal expansion globally that has a lot to do not just the US but globally. That has a lot to do with the term premiums that seem appear to be biased higher not only in the US but globally. So a hard asset does make more sense in a portfolio like gold, >> right? >> So for anybody logically, it doesn't have to be a conspiracy. I'm not saying you're saying that by the way like for anybody logically it makes sense to hold that physical asset. >> Yes. >> So why would we expect anything different? No, I would. And I think that the news today that pal was speaking today and he basically said which we all knew QT is ending >> and we're going to get you know now we're level of reserves in the system is sufficient etc etc. Gold was already sniffing that out right there's certain things that are that are important more important than anything which is either QE coming again at some point which I think we all >> so this is something I've been talking to people about. Yeah it is obvious that we have one giant trade going on. Yeah. >> Uh inflation's going to be high but not too high. Do you think that's the case or you hope? >> No, that's that's that is that is what asset prices are pricing. >> Yeah. So we can live with 3% inflation >> or maybe just below it. I don't know what where the markets will start to push back on that. But if I were to say look cross asset whether it's gold because one of the things we've noted recently is that gold and momentum have become highly correlated. >> Yeah. >> The momentum factor right which is odd historically. Okay. So why is that happening? So we have a lot of AI related names that are based on an AI buildout which of course you have maybe you assume that the cost of capital doesn't matter for them but at some point it probably does. So we have a basically stepping back we have an entire I shouldn't say entire but we have what appears to be easy moni relatively easy monetary policy inflation that's going to run above target but not in a way that's going to be a problem. That is what's driving the earnings risk factor relative to Loval. That's probably what's driving a lot of the speculation. It's not just a bunch of maniacs buying AI names. There's a lot going on under the surface that I think is related to that underlying theme globally. >> So you always talk about the Fed and term term premium as you just so dumb it down again for people when term premium is positive versus negative where we sit today. It had accelerated to positive in June which made you a lot more comfortable with liquidity in in the markets. >> Yeah. So I would say so the simplest way to think about it is either inflation risk or any risk associated with holding a longer duration asset. I I you don't necessarily just associate it with inflation risk but it's been associated with that that most often in the post global financial crisis period term premium was negative which is to say there was no inflation risk right so uh now it's positive to say that there is maybe consistent uh inflation andor fiscal expansion risk >> it was 50 basis points in June where does it roughly sit as we sit here today >> uh just above that >> just so it hasn't really moved >> yeah now >> because it's very inflation you could argue very inflation sensitive if you actually go into a recession, then turn premium probably is anchored. It's not going to go up that much theoretically. So, given that the labor market has been weak and that's likely anchoring uh 10-year yields, term premium hasn't moved. So, which gets to a very interesting question. What happens to this inflation is going to be high but not too high. Call if the labor market actually starts to retighten. >> Yeah. Like I could I could argue for a pretty significant term premium shock. >> Yeah. Yeah, I think if that happened, I don't think anything to your point, you made you make a great point where certain sectors of the economy have to suffer for this kind of goldilocks thing to continue. Yes, >> you can't. Right. And if you're saying that doesn't continue, then you might have a problem on your hands. But that brings my next question. The the independence of the Fed and Federal Reserve in general, I mean, so we're now five meetings away from Powell being gone. We're, you know, reconstituting the board of the Fed. We know it's going to be extremely dovishoriented. At what point do we worry about that? I mean, gold's are again, gold prices a lot of things, right? There's a reason that even in a strong dollar in the last kind of overall that gold has gone up with the dollar going up. There's a reason that Bitcoin is underperforming gold recently because it's more retail oriented, I think. But give me your thoughts on how how to think about the Fed. Forget if they're using the right guideposts or >> Yeah, leave that. Thanks for saying that. For forget about that. Like how independent are they going to be? Are they going to essentially ignore inflation and keep financial conditions easy? That's I think the >> Fair again. You love the way you simplify. >> I think that's the heart of your question, right? Like we're going to say all right. >> Listen, our podcast could be five minutes. I just have to over so because if I can if I can take it from that point of view, I would think it's very simple. Um we're going to get orthodox. I have a strong opinion that we're going to get orthodox policy one way or the other either the easy way or the hard way. So to the extent that inflation goes let's call it above the 3% level on a core basis and let's assume the fact that the uh labor market retightens that one of two things are going to happen either the Fed is going to tighten financial conditions or the bond market's going to do it for them because we cannot sit here and expect that the rest of the world the trillions the tens of trillions of sitting out there in treasuries are going to accept in a significantly lower real return. It's insanity to think that we have a current account deficit that's 5% of GDP. That means we have to bring in roughly a trillion a year to meaning into treasuries to fund. You think they're going to sit there like, "Okay, we'll buy them anyway. Who cares if inflation's at 4% and the 10ear yields at four? We love zero real return." No, that's insanity. Okay. So, the the rest of the world investor is not that stupid. So, you should expect that if we're going to really go on this ignore inflation idea, the 10-year yield will go up if inflation is significantly higher than expected. So that's the most passionate you've been here in in the 2030 and that that says a lot. So I've been saying that four and a half is kind of the new five on the 10 year. I think from where we're sitting now at four, what would take us to four and a half versus when we were sitting at 4.35 it would take us to five. >> It's the direction and the velocity that we're current and but to your point why is it occurring like why with the 10 yields and we know there'll be a lot of chatter. We've already seeing it with QT ending like they need everything they can. banks. >> Yeah. >> SLR, stuff like that, like their ability to buy. But we're kind of preparing, to your point, for that. But you're right. Is there enough ammunition to be able to kind of control the narrative on the on the 10ear yield if they were to start spiking? >> Yeah. And so we can we can start going down this whack-a-ole game of like, all right, 10year starts going up. They try and do something to control it. Uh because they don't like the fact that obviously the 10-year's going up. The power is at B, right? It it ends up being a really big problem for housing. Let's do something. Okay, you can attempt that for a little while, but then what happens to the dollar? >> Yeah. Destroyed. >> And then what happens to inflation when the dollar goes down? >> Goes up. >> That's like And so like this whack-a-mole game is just not going to is, you know, we can >> I'll take things that happen in a normal market for 200. I mean, you know, but it hasn't been there's nothing really been wrong about it. But yeah. No. >> And by the way, but we can get away with this conversation now. I think this is what people don't understand about what I'm trying to say. Or maybe I shouldn't say understand, but I want to make a point if that's okay. >> Yeah. This Fed independence issue has not impacted a risk assets because there has been an aggressive decline in uh relative expectations of payroll growth. >> So as long as you have a recession tail out there, >> a reason to cut, you're saying? >> Yeah. Like a reason to cut that's not because they're being uh because they're not independent. It's like we should probably cut because there could be a recession that could be a much higher unemployment rate. >> If that goes away, then the Fed independence question in my view becomes much more central. And if I'm not saying it's guaranteed, but if Fed independence is in question, when inflation is actually higher and the labor market is not a concern, then the game changes >> on the inflation side. I asked you this back in June. I was looking back at my notes. I said this was my concern. So since the Doge Doge cuts earlier in the year that the BLS was basically, you know, just theorizing on they had 29 from 15% numbers, they went to not having 29% of the numbers or something like that because they were just short-handed. So, we're going to get peacemeal. We'll get a CPI. I think they're going to put it out at some point, right? >> 21st, I believe. >> Yeah, it should have come out already. So, now we get peacemeal inflation numbers. Now, put your conspiracy hat on a little bit. Do we are we going to believe all those numbers? I mean, since I made that comment to you, fired the head of the BLS and so forth. I'm just saying one thing is to see it, one thing is to feel it. Are we are we ever going to reach that point where we don't trust the numbers? >> I think it's knowing how important it is, you know? >> Yeah. I so I I where where we don't trust the numbers I think that yeah I think you could reach that point under an extreme scenario but I think my understanding is the BLS process is fairly robust so we should probably more or less trust the numbers as they come out but you is probably a higher bar I shouldn't say higher bar it's probably more important to cross-ch checkck that against high frequency data >> well I'm watching what fastenol says you watch earnings more importantly than anything right those are in the private sector telling you what's happening should be And in this day and age, as you know, this goes back to which I guess no one even does anymore, the satellite imaging and all that stuff like there's enough alternative data to cross-check what the official data is saying. >> All right. So, let's get into your recent surveys that have occurred here. So, give me your I gave you what you gave me in June in terms of expectations. Give me uh >> So, we have another survey upcoming. Our last one was kind of mid to late September. What was what was interesting about that survey was uh biggest risk was interest rates, right? Not the Fed anymore. So, interest rate 10-year yield. Um, value was one of the favorite factors. That was right before the AI rip, which was interesting. Um, because >> this is interesting. >> That didn't, you know, uh, obviously that went opposite of what people thought. >> Housing was popular um, right in the face. >> Right in the face. >> So, as we exited the summer um, and turned to Labor Day in the first or second week thereof, there was an expectation that basically all interest rate sensitives would outperform. >> Yep. That's the playbook. >> Yeah. and that's been and so that didn't happen and then you had this this move into AI growth uh at the expense of at the interest rate sensitive. So I would say that that this time around they were mostly caught flatfooted on the the >> but again so it was counterintuitive again >> and it was right on the payroll number and then and on the payroll revision. Everybody was worried about the payroll revision and we and people on the street were talking about the payroll revision like >> and I get it. It's a big deal. But if we're all talking about a payroll revision, do we really end of the day care what happened through March of this year? >> No. Right. All right. So right on the revision you saw the bottom in rates and then a lot of the interest rate sensitives fade. Fast forward to today I would say it's you know the mass I'll give a survey in a couple days but um it kind of gets delayed now with the questions need to change a little bit because of the China overhang which is a big deal but AI bubble is the topic of conversation right now. >> That's why people need to subscribe to 22V so they can see the results of that survey. All right. So, you like to bucket things in kind of 3 to six months, 8 to 12 months. >> Give me your current look forward bucket. It's been four months since you've been here, right? So, the short that short buckets kind of played out. Short-term bucket. Where are we uh where are we now and kind of your thoughts here? >> I would say uh if I if I was here last Wednesday, I would have high conviction more higher conviction than what I'm about to say. That's mostly because uh when we did the survey before China, we did a before our China trip, only 13% of investors expected China trade war risk to uh to come back. So um and it doesn't appear that it's it's >> you were couchy before couchy was cool by the way. Your surveys had already had but yeah >> so um but we still stand by the the idea that uh the economy is stronger than people realize and the labor market is not as bad as people think which means that there should be uh if we're correct over the next 3 to 6 months let's call it you know into the year in a year end upside risk to the long end uh and some tight tightening of financial conditions >> upside risk to 10year yields moving Y sorry. Yes. So tenure yields moving higher >> related financial conditions tightening. >> So your S&P number has to be lower than where we sit here today. If that would be your assumption. >> It doesn't have to be because typically that's been good for the large caps because they're very nominal GDP sensitive. It's bad for the housing names. It's bad for the interest rate sensitives. >> Yeah. But if Okay, just to be clear, the reason you think that rates might be a little higher is because you think inflation might run a little hotter than you think. >> Your expectation is inflation will be higher for longer. Yes. But it's because economic growth is firm. >> Okay. I'll take I hear you. I'm not taking the other side of that per se, but I think if 10 it depends the level of tenure yields 425. >> It's a by by the way that's a very important point and I I shouldn't talk in such generality. Thanks for >> too many people talking generalities higher lower whatever. Yeah. At four and a half% or above I'll agree with you mark's not up. >> Okay fair enough. >> So that you know I don't think it's getting there but if it did that's a problem. Well, if the market if the S&P closes above 6,700 a year end from our last wager that we have, you're going to get a very nice uh M's jacket and for some reason it's below 5700, which if it does, we have a lot of more problems on our hand. I'm going to get that beautiful white >> whatever hunting jack. I don't know what you call that than you were wearing last time, Dennis. But, uh, but listen, I mean, it's great to have you on. You're always to to the point. Um, and you know, I think you're very efficient about how you kind of approach the markets and like I'm not blowing smoke. 22V is a great product. They can find it at 22V research.com. Right. And you you do retail institutional. Yes. You have events from time to time. So, want to thank you for coming back on. And uh we're going to come back in first quarter and maybe exchange jackets or we'll we'll see. Yeah, we'll see. >> Have a great holiday season. >> All right. You too. Thanks so much. >> All right. NFL picks week seven. I'm now 78 and one after an 0 and2 week. gonna bounce back here. The Bears have won two consecutive road games. They had a by-week between 25 to 24. I don't think I need to ask chat GPG if that's ever happened. I doubt it has. Caleb Williams is looking good. They're returning home playing the Saints laying five and a half. I like the Bears. I would lay it. Chargers home versus the Colts. I I'm going to short Daniel Jones one more time before I cover and go long. Chargers laying one and a half. Jones played out here against the Rams several weeks ago through two interceptions. I think that happens again. I think the Chargers defense shuts him down. giving the Chargers minus one and a half. Lastly, Chiefs home versus the Raiders. Chiefs are getting back Rashid Rice as wide receiver. I think that just adds more fuel to the fire they've been generating here over the last few weeks. They're laying 12 and a half. I think Gino Smith stinks. I think they're going to kill the Raiders lay the 12 and a half. So, the Pixar Chargers at home, Bears at home, Chiefs at home. I don't always love taking three favorites, but I'm do it here. I need a three and0 week. 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