Stephanie Pomboy: The Cracks In The Economy Are Becoming Too Large To Ignore

Summary

• Fed Policy and Market Impact: Stephanie Pomboy discusses the potential mispricing in the market regarding the Fed's rate cuts and the implications for long-term yields, emphasizing that the market's assumption of a Fed pivot may not yield the expected results.
• Economic Cracks: The conversation highlights emerging economic weaknesses, such as consumer distress and rising corporate bankruptcies, which are not yet reflected in tight credit spreads, indicating potential risks.
• Inflation Outlook: Pomboy expresses skepticism about sustained inflation due to consumer constraints, predicting that tariffs will impact corporate profit margins more than consumer prices, leading to potential earnings revisions.
• Housing Market Concerns: The discussion covers the deteriorating housing market indicators, such as high cancellation rates and increased home equity cash-outs, suggesting potential price declines and broader economic implications.
• Investment Strategy: Pomboy maintains a bullish stance on gold and energy stocks, viewing them as undervalued compared to AI stocks, and highlights the potential for gold to outperform amidst dollar weakness and economic uncertainty.
• Private Credit Risks: The podcast touches on the risks in the private credit market, where extend-and-pretend strategies mask underlying vulnerabilities, potentially leading to a repricing event if the Fed's actions do not meet market expectations.
• Future Economic Triggers: Potential triggers for market repricing include Fed rate cuts not lowering long-term yields, consumer debt issues, and private credit market stress, all of which could challenge current market complacency.

Transcript

and we should be live. Welcome to Thoughtful Money, everybody. I'm Thoughtful Money founder and your host, Adam Tagert. Welcome you back here for everybody's favorite video uh of our two week bi-weekly schedule with the wonderful macro maven herself, Stephanie Palmboy. Hi, Steph. How you doing? >> I'm awesome. How are you doing, Adam? >> I'm doing great. Um running a little bit ragged this morning, hence the hair that's still wet from the shower and are starting about a minute or two late here. That's on me, folks. Um, but very excited to catch up with you, Steph. There's been a lot going on. Um, right before we turned the camera on, we were sort of sharing our different uh, uh, headlines for today's call. And, um, mine is cracks in the economy are beginning to show. Yours was Fed falsehoods. Did I remember that correctly? >> Yes, correct. >> Okay. So, why don't we start there? So, folks, I've got some questions for Steph about some of the things that have happened, the many things that have happened since her last appearance two weeks ago. Um, and then we'll open up uh the questions to you, the live audience, uh, in the back half of this discussion. Um, but we've had a lot going on with the Fed. Um, I think I as I was interviewing Danielle D. Martino Booth the other day and I said, uh, there's more drama and curveballs than a World Series tiebreaker here. Um because we've had, you know, Jerome Pal come out with the Jackson Hole speech basically tell the world, "Yeah, we're going to start cutting." Um and then we've had all the drama in terms of um staffing replacements at the Fed. Uh whether that's who's going to replace Pal himself when his term's up next year, uh the replacement of Cougler on the FOMC, and now all the drama over Fed Governor and FOMC member Lisa Cook. Um the last you know development on that was that Trump actually sent her a letter saying you're fired and then she said no I'm not. Um so we're going to see what happens there. got a lot going on and even questions being raised Steph by Pal sorry by Trump and um Secretary Bessant on hey you know just should we revisit kind of how the Fed works too so it's not just the chairs at the Fed that might be getting new people in it >> but potentially we could you know see a revisitation of the actual structure and operation of the Fed so a lot going on there where do you want to start >> well I guess since uh our whole objective here not to be crass is to figure out ways to make money in the financial markets. Um, I would like to start with why this whole Fed thing matters. And in my view, you know, just for background for people, when I started macro mavens, my sort of self-imposed mandate was to identify where the market was mispricing potential outcomes uh related to the economy. So I would analyze the economic fundamentals and sort of look at how the markets were pricing in um the economic glide path where they were always you know anticipating stronger growth or weaker growth and uh sort of analyzing the assumptions built into the market and then going back and looking at the data carefully to see if they supported those assumptions or not. And by identifying areas where the market assumption appeared to me to be straying from the actual uh direction of the data, I was able to identify both risks and opportunities for my clients. So that's sort of just a general background as to my approach which admittedly is a fairly antagonistic approach and it's why you know I'm constantly tart as a perma bear because you know the market uh narrative always seems to be bullish and my job is to identify where that bullish narrative might fall aunder. Um and it's not necessarily always related to the market overall. It could be specific sectors like you know I identified the housing bubble and everyone was bullish on that and clearly they they missed what was happening and and then the knock-on consequence for the financial sector but that's all ancient history moving forward to today. The reason why this whole Fed uh you know drama as you put it is so crucial is that ever since uh the Fed actually started tightening, let's go back to 2022 when the Fed began to raise interest rates, we saw the markets, you know, recoil in a reaction to that initially and then it wasn't too far into the tightening cycle that investors began to anticipate the pivot because the average investor uh alive today has only ever lived in a time where the Fed put was in place. So, you know, the higher uh they raise the Fed funds rate, the sooner and more dramatically they would ultimately have to reverse it. And that was the the market assumption and it's been a good assumption for years and years and years. The problem is that they bet started making that bet I think at the end of 2022. I mean, Fed was, you know, raising rates starting in March of 22, and by the end of that year, the markets were basically saying, "Yeah, you can keep raising rates, but we're going to ease because we're already anticipating the rate cuts because you guys always get it wrong and you're going to end up panicking and and reversing." And so we've basically had the better part of, you know, two and a half, three years where the markets have been doubling, tripling, and quadrupling down on this bet that the Fed is going to cut rates. And as we saw when they finally cut rates last September, uh they didn't get the reaction that had been anticipated. Um, and I guess, you know, uh, that kind of was masked by at the time, this is very clever on the part of the previous administration, um, targeted fiscal stimulus that was kind of designed to unfold precisely going into the election, right? So you had this uh different reaction than anticipated around Fed rate cuts, but it was sort of offset by this economic stimulus coming from the fiscal side of the equation. Um, but we come into this year and again, you know, investors are sort of tapping their fingers, waning on the Fed rate cuts and I, as I've been saying forever, very broken record on this, am highly skeptical that they'll get the results they're anticipating. Um, and a lot of that is built obviously on the massive uh explosion in our federal debt over that interval. you know that postcoid period we've kind of entered what people term uh an era of fiscal dominance um and I think that that is going to become a real obstacle to getting the long end of the curve lower and you know just weaving it back this is very big picture stuff but if that operating assumption that once the Fed cuts rates the long end of the curve and you know uh corporate credit and mortgage rates and everything tied to it will come down uh is called into question, then basically the entire foundation of the rally in risk assets, be it equities or corporate credit, private debt, etc. um is going to crumble and that obviously has massive consequences and we can get into all of those both related to the markets but also back to the economy. But that's sort of a broad overview of why I think this whole discussion about the Fed is is so interesting and mostly misses the point entirely. >> Okay. Um well, like any good um interviewe, uh you already answered several questions I was going to ask you. Um no, it's great. So, um, as if and as, uh, the Fed starts bringing down the policy rate, um, you don't necessarily think that's going to start bringing down the long end of the curve, um, for the reasons that you just mentioned. Um, let me ask you this, Steph. Um, and I want to ask you in just a moment sort of where you think inflation's going to head. Um, so keep that in mind. >> Uh, because to a certain extent, bond yields are a um, a function of inflation expectations. But where, let me ask you this. Where do you think is more like a more likely trigger for bond yields to start coming down? Um, uh, I I I get the sense from you, it's not because, um, you know, the economy is growing again and everybody just starts thinking, okay, everything's solved and good and and we're going to start taking the risk premium off ourselves. Um, though, if that's your default expectation, let me know. Um I I think it's probably more a combination of either. Uh things get so bad with uh the the bond market, bond vigilantes if you want to call them that, uh driving things higher that the Fed actually has to step in and start performing some sort of operation twist or QE, you know, outright buying. So, is it that or is it that the economy slows and then starts slowing so much, maybe contracting so much that people start freaking out and you get the safety trade of people saying, "Hey, look, I don't love treasuries, but they're still probably the safest asset out there on the block. I'm going to go into them." >> Well, I think it's uh a question of timing because I think both of those answers are correct. Just I would place them in a different order. And I would say that the first thing the you know if there's an impetus for a rally at the long end and I think there is I'm not ruling that out. I'm just saying over you know the medium to long term the path of least resistance for Treasury yields at the long end is higher not lower. But in the near term as this uh confidence that the US economy has escaped recession and is now you know going to start hitting on all cylinders courtesy in large part of this productivity boom led by AI etc and these trade deals and so on. Um as that's called into question um there is a massive speculative short position in the 10-year and and the longer dated treasuries not just a 10 year 30-year etc. So, um, hedge fun >> squeeze. >> Yeah, hedge funds basically are, uh, sort of share the view that I outlined at the top that it's it's not clear that the long end of the curve is going to move, uh, lower as the Fed cuts rates. Um, so there could be a massive short covering uh, as the economic data comes in weaker and they're forced to acknowledge that, you know, the uh, economy may actually go into recession. I was looking at this the other day. You know, the the uh forecasts of recession here in the US have collapsed uh in terms of Wall Street, you know, sellside forecasts. Um you know, they were substantially around April with liberation day. It was the majority of Wall Street uh uh brokerage firms were forecasting recession and today basically no one is. I actually did a search of Google Trends, you know, where you could look up how many people are looking at certain words, searching for certain things. So, I entered recession in there and it's flat on, you know, it's almost as low as it's ever been. And just for giggles, I thought, let me think of something else that nobody is focused on at all anymore. So I typed in and this is not a political thing but Kla Harris because she's just completely disappeared from the entire you know uh discussion whatsoever and uh she actually rates higher than recession in terms of Google searches the more people searching for Kamala today than recession. So I thought that was a pretty uh cogent illustration of just how confident uh the markets have become that that you know scenario has been you know swiftly averted. So anyway that's the short-term risk is that we see some uh deceleration in economic activity that precipitates a short covering um by these hedge funds. Um and I guess longer term as you and I have talked about many times over I do believe that uh a reluct a resistant let's say a stubborn long end of the yield curve will invite the Fed to come in and institute some form of whether it's yield curve control or QE or whatever they want to call it operation twist as you said they'll come up with you know some new fangle term for it that sounds fairly innocuous um but they're going to end up having to do that um because I think as we talked two weeks ago I had uh sort of dazzled you with the average interest rate that the Treasury is paying on all the debt outstanding and it's 3.35 a rate that exists nowhere on the uh you know scour your Bloomberg terminal and if you can find it anywhere I'd like to know but uh so clearly um they're going to have to be uh you know our interest expense is going to soar as All the debt coming is refinance at substantially higher rates. So the Fed is going to have to get involved. And that's why, you know, I've long again broken record on this one. I think all the focus on the Fed funds rate misses the point because all of the action is going to take place on the balance sheet because the Fed funds rate is going to prove to be an ineffective lever. >> Okay. So, a number of things wrapped up in there I want to talk to you about. Just to make sure I heard you correctly though, um I think I got everything except I didn't hear you mention one thing and so let me just make sure I get that. So, um in the short term you you expect I think that the risk to the economy is to the downside, >> right? >> And you you you mentioned that that there may eventually be a short squeeze of all the Treasury shorts right now. Um, do you see that because um, folks realize that yields probably aren't going higher anytime soon and so they're gonna they're going to squeeze or is it because the economy is slowing to the point where the markets start correcting like oh you know what we got to repric here because you know we weren't we wereing pricing things too richly and then as this you know the safety trade starts coming into treasuries pushing treasury prices higher that's the trigger for the squeeze. Right. Right. And then those guys have get squeezed out, prices go even higher. And because the markets are correcting, and this is the question I ahead for you, do they get to a pain point where the Fed then steps in in rescue mode, right? And that then gives the Fed the green light for the operation twist for the QE or whatever they're going to call it. >> Yeah. I mean, there are a number of things that could be a catalyst for that. Obviously, not just the headline stock market indices going lower. Um but you we could easily have a problem surrounding that opaque world of private credit. Um and that you know the insurance companies are big participants in that market. Then you can get into an issue of counterparty risk which hits on derivatives and and so you know it's this is the scary thing and the Fed is afraid as well because they have no visibility into that area. And >> I'm just going to interject with one thing because I want you to continue but I just want you to include this in your answer. So to your point about recession and you know nobody's thinking about it even fewer people are thinking about it than Kla Harris these days. Just want to put up this chart by Charlie Bello about one of your favorite topics which is credit spreads. >> So right now they are so tight that he's saying they're the tightest since 1998 I believe. Yeah. July 1998. Um, so you know, investors are reaching for yield and behaving as if there will never be another default cycle again. So right now, >> nobody is concerned at all on the credit side. So to your point, there's lots of potential pins out there that could force credit spreads to start widening, but right now, no one's worried about them. >> Yeah, there's tremendous complacency. And I guess the ultimate point um that I would get to with this is that the world of private credit is still highly intertwined with the conventional banking system. And that is where the Fed might feel the impetus to come in and provide some, you know, massive rescue/bailout. Uh because it could very easily come home to roost on bank balance sheets given the lending that they're doing to a lot of these private equity firms, uh venture firms, uh levered loans, etc. So, it's not as though the conventional banking system doesn't have significant exposure to all these highly illquid uh high-risk assets that as you note are priced for absolute perfection. Um, so I I think that might be the impetus. I still struggle though, excuse me, with the risk of I mean with the idea that you're going to get a material decline in long rates even as credit risk is unwound or repriced and equity markets uh you know revert to some semblance of reasonable valuations because people will eventually I mean I think you'll have that initially it's just a Pavlovian response you know slower economic growth deflating assets you know fly to safety which is US treasuries. Um but it won't be more than probably five minutes after that takes place that people say wait is it safe to be in US treasuries at a time when we already owe 37 trillion and we're now entering an era you know a phase where monetary and fiscal stimulus will be brought to bear on rescuing the whatever it is the financial sector the housing market whatever it is. Um and so you know the math will ultimately prove uh inelectable. You know you can't avoid the math and uh as the deficit forecasts mushroom I think that the rally at the long end of the curve will be swiftly uh brought to an end. >> Okay. Hence your continued position in gold. Yes, I'm guessing because you you think, hey, if the the equity markets are correcting, but folks aren't feeling as good as they have in past cycles about bonds, where do you go for safety? >> Yeah, absolutely. And and I have recently just because, you know, again, I get uh tred as a perma bear and I'm missing everything and and of course in addition to people of view that I missed Bitcoin because I bought gold. um that people you know there's this view that well you missed the rally in equities um uh that's being driven by AI you know aren't you current don't you understand how important AI is going to be and I do um but I come back to uh the question of valuation and if you love AI and think it's the um you know going to uh redefine our future then you have to love energy and when you look at the comparable valuations, you want to buy energy all day long because it's in the basement and and the AI stocks, you know, until just recently have been absolute juggernauts. So, um, again, you know, it gives me this optionality, let's say, where I'm effectively betting on the AI boom, but I'm doing it through hard assets and I have that protection against the forthcoming dollar debasement. Well, so it's almost in my opinion, you're you're doing a double whammy, which is it's that um but then it's also buying an asset that seems to be underpriced versus its fundamentals, right? >> Versus, you know, who who knows exactly how to fairly value these AI companies or the bitcoins of the world, but hard to argue that they're not at speculative highs right now, right? >> Yeah. So, >> absolutely. I mean, even Sam Alman said that, so you don't need to take >> Exactly. Great point. When when basically the poster child for the space says we're in a bubble. Yeah. >> Yeah. >> Um All right. Uh, so I do want to ask you about inflation again in just a second, but real quick, do you if you had to bet on a horse race um for what is going to be the trigger of the the repricing um in uh the trigger that's going to cause a repricing in the markets, a downward the type of downward repricing we're talking about. Do you what would you put your money on more? Would it be uh the cascade of consumer debt contagion potentially triggered by, you know, the student loan repayments that we've talked about where, you know, there the consumers getting more stretched, but they now have to pay those student loans that have gotten into repayment and therefore they have to start skimping on the other forms of consumer credit and that thing just sort of dominoes its way through the system. Um, or is it the private credit risk? >> Which one worries you more? >> Well, I mean, they both worry me. uh probably in in equal amounts although there's substantially more leverage around the private credit side and then you know uh more levered exposure to the financial system. Um, but I guess as I think about an actual trigger, I'm thinking September 18th, you know, that's when the Fed meets and they're going to cut rates. And I would expect, you know, at that meeting, as we saw last year, uh once they cut rates, that's when uh the 10-year and the rest of the curve will start to march higher. That will be really a rude awakening uh for investors because again it just destroys the underlying assumption uh of both equity and credit investors that they're going to get uh credit relief. So, I guess that's, you know, more than anything because the all of those things that you talked about, the consumer, uh, distress, uh, corporate distress, we've seen, you know, a huge increase in corporate bankruptcy filings, ratings downgrades. We've seen the consumer distress bleed from, uh, first subprime auto to credit card and now mortgages as the student loan payments are resumed. Um, all those things seem to be have been unfolding, you know, every day. Hey, they get a little worse. It's just this slow and steady deterioration. And it's been glacial enough that Wall Street, you know, focused entirely on this Fed rate cut has been able to kind of ignore mostly. Um, so I think that uh that really is the thing. You know, what's going to change are do we expect the uh consumer or credit distress to suddenly out of the blue get substantially worse? I don't think so. I think it's going to be a repricing of uh risk appetite, let's say a reduction in risk appetite that precipitates the real uh selloff in all of those things. It it's just going to be challenging that assumption that lower Treasury yields will bring down rates across the entire economy because if lower if Treasury yields aren't going lower, what's the impetus for further tightening of spreads? as you showed that chart, you know, can they get any tighter? I mean, maybe we could have the two uh, you know, AAA companies that are left uh, trade cheaper than, you know, borrow cheaper than the US Treasury. Maybe. I mean, >> I guess if they started paying you to borrow their debt. Sure. >> Yeah. Exactly. >> Um, okay. Uh, so in your mind, you're really looking at the the next FOMC release. um because that may be the the sell the news event after the rumor has been bought so long and so hard, right? >> Yeah. The one caveat to that is there's been a lot of chatter recently about this notion that uh they're teeing up a rate cut in September and that that could be one and done. Um, and so I think it'll be interesting and a lot will depend on the tone of the presser after the cut because I think at this point what are the odds 90 some odd percent that the Fed's going to cut. Um, and then the question that remains to be answered is then what? Um, yeah, and you know, the markets have, you know, it seemed like in the last couple weeks kind of reduced their idea that this is going to be the beginning of a we're cutting every meeting type of easing cycle. >> Um, you know, and I so I haven't looked today. I I thought that rates cut expectations for the rest of the year jumped up after Friday, right? where um so if if that's if that's not true then please correct me here but from what I took from Pal on Friday was basically Pal saying what I think a lot of um analysts I guess we'll say we're expecting maybe not a lot of investors but um because you know investors they've been to your point they've been waiting for Pal to to to come to the cutting table and they're probably feeling pretty validated but Pal for pretty much this entire year up until now when pressed uncharacteristically aggressively in my opinion by the press corps at his conferences was saying like I'm really not that worried folks it's not that bad it's pretty good everything I'm looking at still pretty good you know I'm basically holding back because we don't know what the inflationary aspects of tariffs are going to be so I don't want to cut too early but if I look at the jobs market yeah it's it's cooling but I call that normalizing we're not seeing anything there that worries us this is all perfectly normal folks right and you know it's his job to project confidence but I mean that's what he's been doing right up until Jackson Hole. And then at Jackson Hole, he said, "Whoa, you know what? Like, this jobs market's cool and more than we thought it was going to. There's some things in the housing market going on that now have our attention." So, it really seemed to me that he cracked open the door to, okay, I I'm I'm not cutting now because I'm less worried about tariffs. It's I'm cutting because I'm now more worried about my other mandate. >> Right. Yeah. know it does seem like the focus shift to the employment side of the mandate and with good reason after those staggering revisions that we saw uh to the payroll numbers. So, you know, I guess he kind of had to acknowledge that the Fed had been looking at data that was leading them to a false conclusion and they frankly were just ignoring all the other employment indicators that were telling you that the labor market was anything but as tight as the uh you know establishment report. >> Establishment report. Yeah. So, so I guess my point is I just think the data is going to be in the driver's seat for the next couple of Fed meetings. Like if if the employment market visibly starts getting worse, I I don't see how they don't keep cutting from here. Yeah. >> Oh, absolutely. And I guess, you know, days feel like months right now, Adam. So, because there's so much news. So, you're talking about like last Friday as the Jackson Hole, and it feels to me like that was a month ago. And so when I characterize the shift in uh thinking about whether September would kick off a string of rate cuts that actually I guess has just materialized over the last couple days more so than pre you know it's it's subsequent to uh Powell's very dovish uh or surprisingly dovish uh presentation at Jackson Hole that got everyone so enthusiastic and then I think you've seen some of that paired back subsequent on the idea that yes we'll have September And then as you say, it's really going to turn on the data. It wasn't a idea, as he keeps underscoring that Fed policy is on a preset course, right? >> Uh and that once we kick off, we're just going to be cutting, cutting, cutting. Um so I think that, you know, it does feel like it it was weeks ago, but it was actually probably only two days ago that that started. Apologies. It's coming. You know, it's like you say, drinking out of a fire hose around here. >> Yeah. And you know, I mean, if the data continues to worsen and the Fed is forced to, you know, cut and sort of chase the economy downwards, that would be the exact pattern we've seen the Fed follow over the past what, 50 years. Like, I mean, it would literally be no different than what we've what we've experienced, right? >> Um, all right. So, inflation, um, I I just want to I think I know your answer to this, but, um, >> yeah, the CPI has, you know, been nudging up in some of the recent monthly reports. Um some of that due to base effects, some of that you know potentially due to tariffs. Um obviously and you know this year you know this is the been the biggest um point of disagreement between the experts that I've interviewed. Some have said look we're in a new inflationary regime and man tariffs are going to totally you know pour gasoline all over that. Um, and then a bunch of others who have said, "No, the economy is going to slow and that's going to that's going to be and and it's going to put disinflation in the driver's seat." What do you expect from here, say, over the next 6 to 12 months? >> Well, as you and I have talked about a lot, you know, look at the consumer. Um, the wherewithal to absorb higher prices is about as low as it could possibly get. you know, after suffering this huge increase, this stairstep increase in the price level um you know, postcoid with the stimulus spectacular that took inflation measured inflation up 9%. I'm sure actual inflation was well into the double digits. Um and and importantly, even though the rate of change has come down to to whatever, uh the price level has just continued to move higher. So there's been no relief provided to Main Street. Um even though the Fed is taking a victory lap on basically reigning in inflation. Um so their capacity to absorb this was my whole problem with the tariffs or inflationary narrative. Um is that where you know consumers just they're already showing signs of massive distress as you talked about. You know, there's it's not for nothing that the delinquency rates, you know, on credit cards and auto loans are the highest since the great recession. So, >> and increasing the momentum still to the upside on those. >> Exactly. And now we're pulling in mortgages as well. So, um there's no indication that the consumer is suddenly feeling better and has better wherewithal to absorb higher prices. In fact, I saw an article the other day, I wish I had, you know, drilled down to it. I think it was a report on CNBC that was talking about recession specials at certain restaurants around the country and that that was kind of making a comeback which is interesting because it's happening at the same time as I mentioned earlier that Wall Street has concluded the recession is completely off the table and yet you're seeing restaurants around the country trying to lure back sort of you know strapped consumers with offering the these specials. Um, so I I that's that was my real concern about this na narrative that uh tariffs would equal headline inflation. I always thought it wasn't an inflation story. It was a profit margin story because yes, the cost of imports is going to go up, but your ability to pass that price increase along to consumers is going to turn out to be fairly limited. So we've already seen you know several analyses that show that uh consumers have absorbed a very small portion of the total tariff hit across the board. you know, a lot of it has been absorbed by the exporters themselves or by the companies importing here in the US. Um, with precious little of it passed through to consumers and and the areas where it has been passed through to consumers are the areas where they really have no choice but to pay for those things and it is therefore causing disinflation in the things they can live without. Um, so I I think that that, you know, my outlook for CPI inflation isn't substantially lower, but it's not higher either. I kind of see things kind of moving essentially sideways in this turning sideways channel. Um, but I think the PPI here is the thing to look at and we've already seen a substantial, you know, turn higher in that. And then if you look at things like uh the regional Fed surveys that manufacturing surveys that talk about uh prices paid versus prices received and I'm thinking specifically the Philly Fed manufacturing index storing prices paid almost no change in prices received and that implies obviously a real margin squeeze. Also, if you overlay those prices paid numbers, not surprisingly, those indices with the PPI, they tend to lead. Um, so it does uh sort of preage further increase in that input inflation, the PPI, and time will tell how much of that then gets passed through to the consumers. But as I just mentioned, you know, those are my reasons why I think very little of it will. And that just brings you to another headline risk for the equity market. Um is this it's interesting when we started the year the consensus estimate for S&P earnings for 2025 was 12 a.5% growth. Um and that leading going all the way into liberation day went to 7%. So they immediately once the tariff roll out began uh the sellside analysts began to fret you know well earnings are going to get clobbered by this and in the couple months subsequent they've taken earnings forecast all the way back up to almost 10%. So, um, again, underscoring this idea that we're out of the woods and that corporate pricing power is going to remain fine. Uh, you know, profit growth will be robust. Uh, and then all we have is gravy on top with Fed rate cuts. So, by by you know, >> yeah. So, you're taking the under obviously on that, >> you think? >> Yeah. So, so just to make sure that that I'm characterizing your view accordingly. Um, you got a consumer that that really can't afford to pay higher prices. Um, so much of the tariffs, at least so far, but you're guessing going forward, at least in the short to midterm, uh, will be eaten by the exporter and the the importer. Um, now we we were starting this process from kind of at or near record profit margins. Now, that's an average, but it does show that okay, corporate America's got some some fat to to cut here if it needs to. But for all the reasons you just mentioned, you know, that will equal um compression on corporate profit margins. And if that gets big enough, well, first uh Wall Street's going to have to revalue those stocks, right? It's going to so that's going to bring down stock prices, which you know places additional issues on these companies. But you know, you know, profit margins get squeezed enough. Well, companies have to cut costs and so that's probably going to equal more job losses. Right. Right. So, you know, all right, we got a poor consumer who's already strapped, but then some percentage of them lose their jobs. Well, then >> consumer spending then goes down. We're still a 70% consumer-driven economy. Therefore, profits get squeezed even more. Right. So, that's that's kind but but that's sort of what you're concerned about here, right? >> Yes. And then layer on top of that as earnings estimates are brought down presumably uh the outlook for credit quality will be revised as well. You know your ability if you're running a company and your earnings growth suddenly gets cut in half your capacity to service high-cost debt is further compromised. So you could layer in there on top of that uh an expansion of credit spreads that drives up borrowing costs which further dents profits because you're suddenly aortioning more of your money toward interest expense which further depresses you know there's a lot flying around in that feedback loop uh that could accelerate it big time. >> Okay. Um, I won't get into it in depth here, Steph, but um, if you haven't watched it yet, I I'd recommend you go watch um, just the five minute part of the interview I did last week with Steve Hanky on inflation. Um, there's a lot there he says that's I think corroborative of of your point of view. Um, I I don't want to say you guys look at the world exactly the same and actually tariffs and and their impact and who pays for them. It's actually I think you guys have somewhat of a difference of opinion there. But um one of the things he said that really has I've been noodling on since is so M2 has been increasing. Money supply has been increasing. And a lot of people say well that's your inflation right there, right? Like you know we're going to have higher prices because M2 is increasing. Now Hanky lives and dies by the quantity theory of money formula. And basically by his calculations the money supply needs to be increasing at at least 6% to um to keep the CPI at 2% or above. >> And right now it's growing at 4%. So even though money supply is growing in his calculations, it's not growing fast enough >> uh to create inflation that's going to push CPI long term above the Fed's 2% target. So he expects disinflation from here. he and it could drop below two. He's not really worried about deflation right now and he doesn't think it'll come that far below 2.0, but um it's an interesting very academic and and formulaic outlook at it and I think you'd be interested in it and obviously everybody else who might be interested hasn't watched that yet, go see it. Um okay, so um >> Mike, if I can add just a comment on that. Um, you know, obviously the money supply measures are important because that's the tinder for inflation, but I think ultimately you can't analyze that in a vacuum because velocity of money is the key. So you could pump money into the economy at a time when no one wants it as we saw at the depths of the global financial crisis when the Fed was pushing money into the financial sector and they just wouldn't do anything with it because they were so curled up in the fetal position. So the velocity of money is a crucial part of the inflation outlook and you can't just look at and I'm sure he doesn't so I will look forward to you know hearing his full analysis but you can't just look at and I've seen a lot of people on Twitter point that chart of M2 and say here comes inflation. Well not necessarily you know that's a a necessary but not sufficient condition for inflation. You need both. You need money supply growth and velocity growth. In fact, you could have zero money supply growth and massive growth in velocity and have inflation >> and still have inflation. Exactly. And that's why V is a critical variable in the quantity theory of money. >> Exactly. >> Um Okay. So, uh I want to I want to still chomping our way to the key question of today which is uh you know what do you expect the Titanic impact on the economy to be of the Taylor Swift engagement? But we're getting Don't worry. >> I I don't even know what team that football player plays for. So I I'm completely lost on that one thing. And I I would say that with pride, not about the football thing, but about Taylor Swift. I I couldn't name a song. >> Well, you clearly don't have two uh daughters like I do. >> I'm I'm a punk rocker. I am not a Taylor Swift girl. You're a Ramon's girl, not a >> Exactly. or or Black Flag or Suicidal Tendencies, whatever. Take your pick. But not not Taylor Swift. >> Wow. I I I think it would hard for folks to assume that your your stock could go even higher amongst my audience here, Steph, but I think we're going to find out in live chat here in a moment that it just did somehow. Um, all right. Well, well, let me just ask you this question, which my brain comes back to from time to time just sort of styied by it. So, back to that credit spreads chart. You know, look, it'll probably be some some black swan, as it always is, that that creates the phase change here. It'll probably be somebody that breaks under these issues that you're talking about that nobody was expecting to break, right? >> But there are plenty of white and gray swans around here that that we can talk to, and you've pointed out a whole bunch in this discussion. >> What is keeping credit spread so low? Why are they acting like absolutely nothing bad, major or minor, could happen from here? Well, I think there is an incentive on the part of the lender to maintain this sort of uh placid environment. Let's put it that way. We've seen extend and pretend go into innings that I never thought we'd see. I mean, and and I'm not even just talking about uh publicly traded uh corporate credit, you know, bonds and levered loans, etc., But I'm thinking uh when you look at these continuation funds that are being launched now uh by private equity uh for portfolio companies that are so dead in the water, these zombie companies that they're throwing off zero income to the investors and now you've had a debut of CV squareds which is a continuation continuation fund. You know it's the second round. Um so I think that's it is that um it's essentially a visualization of the doubling, tripling, and quadrupling down on this bet that the Fed's going to cut rates and uh that will provide relief um to companies that are currently just scraping by and they're only scraping by by the mercy of their creditors. Um what do they say? You know, when uh you owe the bank a small amount, they own you. And when you owe, you know, owe them a tremendous amount. >> When you owe them a million, you're in trouble. When you owe them a hundred billion, they're in trouble. Yeah. >> Right. So, >> so this is basically just trying to keep kind of the Ponzi. Like, let's let's try to keep people from dying and creating a cascade here. >> Well, what you don't want to do is create visibility. You don't want to have a pricing event in that market. So you'd rather sit on your hands and extend and pretend and kind of keep throwing money so as not to have to mark to market the true value of these loans. And so I think that's the game going on and they're scrambling as I said to raise the money to continue the extended pretend by doing you know funds of funds but also and we've seen it uh recently this debut of retail ETFs which is essentially designed to you know have the retail investor be the psy for all this stuff. It's a convenient way to offload these things. Yeah. >> So, we're really, as I said, kind of pushing into the innings, you know, overtime here. Um, and I think again, this all will turn if and when the Fed cuts rates and the markets don't get the reaction that they anticipated, >> anticipate. Okay. Um, look, I mean, a lot of people would point to the credit spreads and say, look, nothing's wrong because Wall Street's telling us it's not concerned. I I think you would say and this is kind of what the vibe I'm getting which is um it's so unnatural that we should actually look at it as a danger sign. Yeah. Right. >> Yeah. >> Absolutely. And and again you know I think the fixation on spreads um people point to that like you're saying as well corporations are borrowing at these tight spreads. Well look at the nominal yields they're borrowing at. That's the key. Who cares? They don't care. You know, XYZ corporation doesn't care that he's borrowing at only 200 basis points above what the federal government's borrowing at. He cares that his rate went from four to eight. >> Exactly. >> So, it doesn't matter to him that suddenly he's not paying as much relative to the federal government. All he knows is his, you know, interest cost has doubled. And that is the situation today. So I I think that's another area where the complacency, you know, people like to look at spreads and I've been in plenty of meetings with sophisticated, you know, institutional investors who pull out that chart and say, "What are you talking about? There are no problems." You know, >> and that that is the key point is it's it's while credit spreads really do matter generally um as a sign of of you know I guess risk in the market >> stress in the market but what really matters here which you and I have talked about at Nazium Steph is the step function right it's this this rolling maturity wave that companies as they hit their maturity their their interest cost their debt costs go from here to way up here. Yeah, and you're reminding me that I need to update this chart, but I had done a chart looking at corporate bankruptcies relative to credit spreads. And not surprisingly, you know, they tend to move together. And the exception, the blaring exception is the current environment where you've seen this spike in corporate bankruptcy filings, you know, by some measures back to the highest since the financial crisis and spreads moving swiftly in the opposite direction. So, um, you know, I'd love to see that. Yeah, I'll have to update that uh and I'll send it to you to to share. But um something's going to give. Either the bankruptcies are going to collapse or spreads are going to move substantially higher. >> Right. Right. which, you know, a collapse in bankruptcies isn't going to happen unless we have this magical return to sunshine and rainbow growth anytime soon, which we'd all love to have happen, but the the probability of that way lower than these credit spreads having to start reflecting the the reality on the ground. So, yeah, place your bets accordingly, folks. But >> unless of course all the zombies die and then there are no other companies to file for bankruptcy. sort of like the unemployment rate. If everyone just left the labor force, you know, we'd have zero unemployment. So, >> Right. Right. Right. Well, if all the zombies died, um I suspect there's an awful lot of them out there and that would be a lot of jobs lost, so you know. >> Well, we've seen a lot already, but yeah, there's there's a lot more behind that for sure. >> Okay, so two other questions before we get to the really big one. Um uh >> oh, >> so um housing. So, you mentioned uh you know, we we we wanted to talk a bit about housing. I've I've had some long discussions recently on this channel, uh Ivy Zelman, then just a few days ago, Melody Wright, and then just yesterday, Danielle even wanted to throw her hat in the ring. We talked about So, I've been talking about housing non-stop for the past week. Um >> sorry, sorry to hear that. >> No, no, no. I mean, I could talk about it. You know, I could talk about it forever, but um uh >> so you're going to get your your fourth female opinion on housing. >> You know, it's been a great week. It it's really been a great stretch this week. I realized that like, okay, it's sort of like a reversion of the mean. Because I remember like a couple weeks ago being like, "Oh, besides Stephanie, I haven't had that many women on the channel recently." And then just boom, we've had this great um bounty. >> Yeah. Um so uh but what in particular have you has been catching your attention about the housing market of late? >> Well, I think uh a lot of interesting things uh when you look at the deterioration in a variety of indicators, it's pretty staggering. Um and you know, one that sticks out is the cancellation rate on home sales. Uh I think that hit the highest level the people who measure it only to have data back to 2017 but it's the highest on record in the latest month. So that's not a a positive indicator. The other thing that I uh have found interesting is that for the first time in this cycle um we're seeing a huge increase in home equity cash outs which I view not surprisingly to your audience as a sign of consumer distress. um where you know they're now reaching the point where they're having to tap equity to keep up with their rising debt service. And maybe it's been precipitated in some part by the student loan uh the resumption of student loan payments. But whatever the reason, it's uh definitely a red flag coming at a time when you're starting to hear the air hissing out of the housing bubble rather clearly. Um you know you're definitely seeing uh price deflation in a lot of key markets. Um and contrary to the popular perception that we are underhoused um we have this wall of supply um both under construction and uh completed that as it makes its way to market will further depress prices. I mean, but the the gap between uh the affordability of purchasing versus renting is the highest on record. So, uh that definitely suggests you're going to have to have some reversion to the mean. Um and that will be accomplished, I suspect, not by rents moving higher, but by um home prices moving substantially lower. And you won't be surprised to learn that I think the impetus for that will be when the Fed cuts rates and mortgage rates don't move low. >> Exactly. And you get you get a lot of seller capitulation. Um so I agree with everything you've said. It's very consistent with my previous conversations previous folks. Um particularly Melody >> smart ladies and I like to be in good company. So that's >> you're you're in very good company. Um, I was watching some YouTube videos yesterday on some real estate channels which were um uh you know realtors and and and home sellers um just you know just just an agony over um you know their plight. And so for the realtors it was that they're kind of at the point where they're starving, right? I mean transaction volume has been so low. Mh. >> Um uh but also to your point about cancellations, you know, they're complaining about houses that were, you know, on the finish line and then then the transaction got skunked one way or the other and then you you had the the home sellers saying, "Oh my god, we did all this stuff." And then the person backed off, right? >> Um and it it's a lot of talk amongst that crowd. I mean, just the realtor crowd itself about capitulation, seller capitulation, which is that's what it's going to take >> to start clearing this market, which, you know, I've been saying with folks like you for a long, long time now, but it sounds like the the actual market itself, the realtors and the vanguard of the sellers are beginning to realize, look, we we we we hoped we could make it through to 20, you know, it used to be stay alive to 25 because that's when rates were going to be lower, >> right? So I I think they're realizing the calvaryary is not arriving and to your point you know everybody's got their hopes now on the Fed cutting and if the Fed cuts and to your point mortgages don't come down notably um I think that's when they're going to it's be like the final stake in the heart just be like Jesus I got to get out from under this thing so whatever it takes bring the price down. >> I mean I'm so relieved that I sold my house and I was in a market that is still hot you know West Palm Beach Palm Beach area. Um there's still a huge, you know, influx of people and I presume that if this uh mayor candidate in New York actually gets elected, this Wondami, >> you'll have a lot more. Yeah, >> there'll be a lot more. But nevertheless, um it feels good not to be long real estate right now because for all the reasons you just suggested, um it just seems like we're I can hear the air hissing out of that bubble very loudly. Um and that's also has massive obviously massive implications for the outlook for growth not just for you know credit risk specifically related to mortgage delinquencies etc as homeowners find that they cashed out equity that suddenly evaporated. Um, but the multiplier effect on housing is huge. And I was just looking at the Atlanta Fed's, you know, updated estimate which came out yesterday for 2Q GDP. And they have residential housing declining over 8% in the quarter. Um, so this is not a favorable backdrop for the economy at all. this this prospect that the housing bubble deflates um could be sort of the the real fly in the ointment for the administration who's really focused very much on providing interest rate relief um but also in promoting a business you know a a favorable environment for business um and I think you know basically all they've done to address the housing situation is this massive pressure campaign on the federal ederal reserve to get rates lower. Um and if that fails, I think they're going to have a an issue that they didn't expect to have uh thrown in their lap. >> Yeah. All right. Well, look, um we'll be talking about this a lot, I'm sure, Steph. So, um, I'll I'll I'll move on from here in just a moment, but one one thing just a sort of a seed I want to plant with you in case we do need to revisit it is, um, I I I I talked with many of these ladies about, um, a topic I know you and I have talked about as well, which is that uh, you know, the whole Boomer wave um, uh, is we're we're now approach to the point where instead of 10,000 boomers are hitting retirement age a day, 10,000 boomers are aging out per day, and aging out is a polite way to say going to the nursing home or dying. Right. >> Right. >> And that that will presumably place basically at least a two decade headwind on the market as property comes on day after day after day after day from this. Right. Um, >> you're preaching to the choir because my parents just moved into a retirement community in Florida and put their home on the market in Palm Springs. Uh, so there's a perfect example of that. uh those sort of communities, those retirement communities and I assume you know Palm Springs places in Arizona, Scottsdale, whatever, Palm Beach, Naples, all those eventually will suffer from what you're saying, which is a deluge of inventory, >> right? So, you know, I' I've asked over time, so when do you think this is really going to start to matter, right? When's it going to stop being academic and being actually practical? And interestingly with Ivy, she was like, "Yeah, I really I really think, you know, it's getting closer, but you know, probably by 2030 we'll start to really see it." Melody said, "It's already here." >> And she said, "I'm seeing it in the data." So, um, point is is even if it's five years away, that's not that long, right? But if Melody's right and we're actually starting that, that that's a whole game changer um, in this whole housing market. And and like I said, we can talk more about that in the future, but just one idea I want to I want to plant in your head there, which is there's a there is a ton of assets that the boomers own, right? And >> 70 trillion. I've seen different numbers, but let's say it's around there. And yes, it there is going to be a massive transfer of that wealth to the millennial generation, and that will cushion the blow to a certain extent. Um, you know, a lot of people are saying, "Hey, look, everything's going to be fine because those assets are going to move from the boomers to the millennials. The millennials will then be spending it in the economy and everything will be propped up." And yes, there will be a ton of wealth that gets passed along. I'm just take I'm saying I'm going to take the under on that. Um, where I think a lot of that wealth is going to get either spent >> in the the later years of the boomers, especially as health care costs and stuff go up like that, right? Um, but also I believe a probably a healthy amount of that 70 trillion estimate is based on today's home prices, home equity values. So if the market actually does have a serious and sustained downward repricing, well, what do we want to shave off that 70 trillion, 10 trillion, 20 trillion, 30 trillion, right? There might just be a lot less to pass on. >> And forget about a reversion to the mean of equity valuations. Well, I was gonna say I didn't even a stock market crash and all that, right? Which could happen, right? Yeah. >> Um, Adam, I I only have a couple minutes left because after this I'm literally going to just flip over to recording with uh my partner in crime, Grant Williams. Uh, a quick conversation. So, and I know we're going to do one for you uh for your fall conference. If I can put in a little teaser for a plug for that one. >> You beat me to the plug. Thank you so much on that. All right. >> I just want to let you know that I, you know, I've got uh, you know, five or so more minutes, but I I don't want to uh uh prevent you from teeing up that big question that you teased earlier. >> I very much appreciate you letting me know that. So, I'll be very efficient here. And folks, I'm sorry we we didn't get to uh questions from the group here. So, me too. I'm sorry. >> I will we'll make sure we create a lot more space next time for this. Um, okay. Uh, so last key point. um uh the dollar that was one of the things we talked about going uh for is there anything material you want to put on the board about the dollar and I'll I'll let you talk about it with a proper amount of time next time. >> Yeah. Uh no I mean not surprisingly I think the dollar is headed lower in the long term. Uh but there's that other side of it where as we talked about with regard to treasuries, if you got this kind of knee-jerk Pavlovian flight to safety on any repricing of risk here, you might see a short-term bid to the dollar. Uh again, I would view that as a trading opportunity because it wouldn't be something that would be long lasting and it wouldn't be long before everyone began to anticipate that we're going to have to not only cut interest rates more aggressively, but resume the expansion of the balance sheet and that's going to be hugely negative for the dollar. And again, you know, just as a as an aside, um, looking at the dollar versus how it performs versus the yen or the euro or the pound, um, less interesting to me than how it performs versus gold. So, you may see some short-term rallies versus, you know, the yen or the euro, etc. Um, but I expect that any of those rallies will be lie a continued decline against gold in, you know, in the broader scheme of things. So, Okay. So, so investing wise, you're not making any changes to your gold allocation. >> I'm not. >> Okay. Are you still shifting some a greater percentage towards miners? >> I guess I've pretty much held where I am um and have been enjoying having my um you know, my portfolio is naturally rebalancing itself given the move in the miners visav gold. So I'm seeing that you know the share of my portfolio that is represented by the miners has already increased just by dent of price appreciation. Um so I haven't had to make any additional allocation that way. >> Um >> it's for good reasons because it's gold's kind of hanging out but miners are appreciating further right. >> Yes absolutely. >> Okay great. So, um, real quick, the Taylor Swift thing, we can, it's basically a throwaway, but what is interesting is I' I've seen some chatter on FINT about what's the economic impact of this going to be. So, I mean, you remember a couple years ago, >> Taylor Swift's tour, like it it was notable in GDP growth, right? It was it was so large revenue-wise that it actually comprised a visible percentage of GDP. I think Beyonce hit a year like that, too. So there's speculation that like well pretty soon then we're probably going to get the Taylor Swift pregnancy announcement and so this is going to drive a wave of proposals and marriages and then baby spending and all this stuff. Do you think there's anything to that or is that just uh you know finit being finit? >> Well, as I confessed earlier, I'm really not the person to ask this question because I have no uh knowledge of Taylor Swift and her her whole world. Uh so I I mean it sounds like it's a huge thing. Um although I would point out that you know she weighed in on uh politics and that didn't seem to have an impact on the political outcome. So who knows? But you know I saw a clip last night about one of the I think it was CBS or NBC News reporters on air when she saw the tweet the post uh that Taylor Swift was getting married and she just completely lost her cool you know on camera. Um, so if it's that level of excitement, you could see, you know, sort of a wave of little copycats. But I I do think I mean, my only insight would be that one that, you know, she didn't impact the the election, even though she she attempted to. So, we'll see how long her uh coattails are with regard to pregnancy. And who knows? I I thought you were going to say maybe they'll televise the wedding and that'll be some huge, you know, uh, thing for people to get into. You know, I I think that's probably quite likely because they'll make a gazillion dollars on it if they do. Um, but anyways, >> the halftime show at the at the next what is it? Kansas City. Is that what he Travis Kelce plays for? Yeah. Um, uh, all right. So, but anyways, just punchline. Um, you're not holding your breath that Taylor Swift is going to save the economy. >> I guess not. Sorry to rain on everyone's parade. Well, look, I'm I'm I'm going to let you go in just a second to get to Brent. I just very quickly, Steph, want to put up your Twitter handle here for anybody that wants to follow you on Twitter, S Pomboy. Um, and then obviously folks, um, if you want more Stephanie in between her bi-weekly appearances here, and I highly recommend you get more Stephanie in your life. Um, go to macromavens.com. I've got the URL right up there on the screen, um, to get anything and everything related to Stephanie. But, you know, it actually Steph, thank you. Um we featured one of your recent reports in last week's um macro pass for our premium Substack subscribers. Got ton of great wonderful feedback from that as expected. But folks, you know, Stephanie's uh her she does a lot of institutional research, but she also does re research for the retail audience over at Macro Mavens and it is a must readad. So highly recommend you go over and check out. >> Thank you, Adam. That's very generous of you. I appreciate it. And um I am looking forward to uh this isn't what Grant and I are recording now, but we'll look forward to uh reconvening for your fall conference, which it's hard to believe it's September already because that's coming up really quickly. >> I know. Technically, it's not September yet. We got a couple of >> I guess so. I'm pushing it, but we're we're pretty damn close. >> But it is amazing how fast it's coming up. Yep. And just thank you for reminding the audience. I'm super excited. Yeah. and and very happy that you and um Grant are joining forces and so you'll you'll actually be talking with each other. I won't even be in the picture for your segment which I'm sure the audience is thrilled about. >> Oh. >> Yeah. But but but folks, it is going to be a great conference and I guess just want to remind you um if you want to go to it, which this looks like it's going to be the best one we've ever done and very timely from a macro standpoint, um get the early bird price discount while it's being offered. to go to that thoughtfulmoney.com/conference URL so you can lock in that low price, lowest price. And if you are a premium Substack subscriber, make sure you check the emails I've sent you that have uh at the bottom of it the discount code to add because you'll get an additional $50 off of the conference. Um, can't thank you enough, Steph. It's always so great to have you on here. Um, just one last URL for folks if you want to get some help from a professional financial adviser to try to figure out how to navigate what might happen in the future should Stephanie's forecasts indeed come to pass. Just fill out the short form there at Thoughtful Money and you can talk to one of the adviserss that comes on this channel with me every week for free. Um, Steph, please say hi to Grant for me. Thanks for coming on. It's always so wonderful talking to you. >> It's my pleasure. Thank you so much, Adam. And have a great rest of your week. >> Thanks. And I didn't hear her this time, but please give Willamina a scratch for me. >> I mean, she's snoring like crazy over here. I said a truck driver last time and people were offended about. Yeah, I don't even know how a truck driver snores, but whatever. She's snoring loudly. >> She says hello in her dream. >> Thanks so much, Steph. Talk to you soon. >> Have a great week. Bye. and everybody else. Thanks so much for watching.