The ‘One Data Point No One Can Fudge’ Signals a Crisis is Here | Stephanie Pomboy
Summary
Market Outlook: The Federal Reserve is signaling a potential rate cut in response to a weakening economy, with markets pricing in a 90% chance of a September cut, impacting the S&P 500 and gold prices.
Economic Insights: Fed Chair Powell's pivot is seen as fundamentally different due to record debt and post-pandemic inflation, raising questions about the effectiveness of rate cuts in addressing current economic challenges.
Inflation and Tariffs: Powell highlighted tariffs as a potential inflation risk, though skepticism remains about their impact on consumer prices versus corporate profit margins.
Corporate Debt: The refinancing wave of over $1 trillion in US corporate debt at higher rates could pressure corporate profitability and hiring, questioning the sustainability of share buybacks.
Labor Market Discrepancy: There is a significant divergence between headline unemployment rates and broader measures, suggesting a weaker labor market than official figures indicate.
Investment Opportunities: In a stagflationary environment, investments in precious metals, miners, and energy sectors are recommended, with skepticism about AI and tech stocks due to energy demands.
Fiscal Dominance Concerns: The potential subservience of the Federal Reserve to Treasury needs is highlighted, with implications for monetary policy and the US dollar's trajectory.
Key Takeaway: Investors should be cautious of assumptions that rate cuts will lower borrowing costs broadly, with potential risks in corporate credit and private markets.
Transcript
[Music] Welcome back. I'm Jeremy Saffron. At a landmark speech at Jackson Hole, Federal Reserve Chair Jerome Powell delivered a message that has completely reset market expectations. The Fed is now signaling it is prepared to cut interest rates in the face of a weakening economy even while it continues to see risks of higher inflation. Now, he justified this potential pivot by pointing to a sharp slowdown in the labor market with job growth collapsing to just 35,000 per month. And in a major overhaul, he simultaneously abandoned the Fed's 2020 policy framework, calling his own prior strategy irrelevant. Now, the market took this as a green light. Fed fund futures are now pricing in over 90% chance of a September rate cut, setting the S&P 500 soaring and spot gold to challenge 3380 an ounce. Now, these market moves occurred alongside a political development in Washington where the president has stated his intent to fire Federal Reserve Governor Cook if she does not resign. There's lots to get into and here to analyze all of this with me is Stephanie Palmboy. She's a founder of the macroeconomic research firm Macro Maven. Steph, it's great to see you. Welcome back. Thank you. It's a pleasure to be with you. Now, we got uh quite a bit to get into. It's been a busy week and of course, we've all been looking forward to this Jackson Hole speech. Just to kind of get a little bit of context into what the market's thinking, let's begin with the substance of that speech. I mean, a 90% probability for a rate cut implies the market believes it's it's nearly a foregone conclusion at this point. I mean, does Powell's language justify that level of conviction, or is the market kind of choosing to hear what it wants to hear? Well, to be fair, um, he's been the hold out, it seems like, at the FOMC, or not the only hold out, but, uh, the most visible one. Um, we've had several other uh Fed governors who were inclined to cut rates and uh Lord knows there's been plenty of political pressure placed on the chairman to uh become a little more accommodative. So I think uh it's not surprising that the markets are greeting this speech which was clearly more doubbish and did indicate a uh more likely uh probability that they do cut in September uh you know with such enthusiasm they also did increase the odds of rate cuts farther out in the calendar as well. So all in all I think this speech um came in just slightly more doubbish than even Wall Street was expecting. Yeah. Yeah. Well, you're seeing it right now. I mean, everything's kind of rallying. Uh, of course, he also cited that payroll job growth has slowed to an average of about 35,000 a month. Now, historically, we've seen other Fed chairs, what, Vulkar, Greenspan, Berneni, they all pivoted in response to changing data. But how does this particular pivot by Powell compare to those of his predecessors? I mean, is that is this the standard course correction or does the context of record debt and maybe this post-pandemic inflation make it kind of fundamentally different this time? Well, I mean, I think it is fundamentally different this time and I think um what we're going to find out soon is whether Fed rate cuts are really the antidote for our problem. Obviously, the administration imagines that they are and that if the Fed would just cut rates already, there would be relief to the housing market and to consumers and businesses that are highly levered and have um soaring debt service. And in fact, I was just checking before we jumped on here, the um homebuilders index is up 5% this today. Um so it's way outperforming even this monster rally in the overall averages. So clearly investors are betting that rate cuts will have the cubrious effect on the economy um that they have in the past. I am highly skeptical about that because if you look across the markets today, the 10-year yield has rallied a mere seven basis points. I mean, we're still at 425 down from 432 yesterday. So that's partly suggesting that there's going to be a tremendous amount of relief provided um across the interest rate uh spectrum from a cut in the Fed funds rate which obviously is just one interest rate and the hope obviously is that cutting that will impact everything else and right now um that remains an open question. Yeah, it certainly does. Uh and then that brings us to tariffs. Of course he touched on it. I want to play a little clip for you on what Powell said on in inflation and tariffs here. The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months with high uncertainty about both timing and amounts. The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem. A reasonable base case is that the effects will be relatively short-lived, a one-time shift in the price level. Of course, one-time does not mean all at once. It will continue to take time for tariff increases to work their way through supply chains chains and distribution networks. Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process. It's also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed. Okay. So, I mean, a lot of unknowns there. The last time I had you on this show was back in May, I think it was. And and you called tariffs a quote convenient kind of distraction from the real issue of deficit financing. And in his speech, Chair Powell just blamed future inflation risks on those same tariffs. So, I mean, is this the dynamic you pointed out with the Fed now using tariffs as a convenient scapegoat for its own stagflationary policy dilemma, slowing growth and and rising prices? Well, I guess when I referenced that back in May, I was thinking more of the stock market, you know, uh, which obviously in April had taken a swan dive on the threat of tariffs, uh, as if that was, you know, the only issue that we had to deal with on the horizon. And the much bigger issue all along has been our fiscal situation. Um so as relates to tariffs specifically and the potential inflationary consequences of them. Um I have long maintained that there wouldn't be a pass through to consumers simply because as you and I have talked about prior and we probably touched on in that conversation in May as well. Um the US consumer, the average consumer I believe has been in recession uh since COVID uh and has not seen any recovery. So they're incredibly strapped. And I don't you know the most powerful evidence of that is the fact that credit card and auto loan delinquencies and now mortgage delinquencies are all rising. Um so if the consumer is so great and can absorb infinitely higher prices, then why can't they pay their bills? Uh and then if you layer on top of that the um effect that student loan payment resumption will have on already stressed consumer pocketbooks. Um that you know just serves to further diminish the likelihood that companies on the consumer front lines will be able to pass along these prices. And you're clearly seeing evidence of that already in terms of the the earnings color that we're getting from some of these companies that cater especially to low and middle inome households. Um so I've long been skeptical about this idea that tariffs posed a material threat to inflation. To me they posed a material threat to corporate profit margins, not to the consumer in terms of higher prices. Yeah. Let's talk about that because you've long warned about that corporate debt bomb that we tal about. We're now seeing what over$1 13 trillion dollars in US corporate debt with a significant portion needing to be refinanced at these much higher rates. Is is the slowdown Powell is describing the first tangible sign that this refinancing wave is beginning to bite into those corporate profitabilities and maybe even hiring plans here? Well, I think his focus, at least as articulated in that speech, was the employment side of the equation. you know, he still seems to insist that there's a chance that the tariffs end up being inflationary. And, you know, thankfully, you spared us the rest of his uh endless rant on this topic. But the two main reasons he was concerned about was that uh consumers anticipating increased prices would demand higher wages and that would create a sustained increase in inflation. And the other one was that uh inflation expectations would sew the seeds of a higher inflation reality um as people bought more today in anticipation of what would be more expensive tomorrow. So um I think that that really is very dubious in my view. Um but sorry now I've rambled so deep into the rabbit hole I forgot what the original question was. We we can't we we try not to on this show at least play Powell for more than 53 seconds which is exactly what that clip was. Uh let me ask you a diff a different subject on kind of the corporate there too. I mean for the last decade a significant driver of the stock market has been corporate buybacks and now that we're seeing these borrowing costs significantly higher and then obviously profits under pressure here. I mean is the era of buyback fueled bull market coming to an end? and and if so, what does that mean for valuations on the S&P 500? What's already historically stretched on a market cap to GDP basis here? Yeah, it's such a good question, Jeremy. In the latest month, um we saw record share buybacks. I mean, we've I've been gobsmacked that they could even increase any more than they already had, but we're on track for another record year. Um and as you astutely point out, you know, this is providing an enormous bid to equities. Um, so how sustainable is that? And again, it all comes back to my question at the top as to whether rate cuts actually succeed in bringing down borrowing costs to everybody else. And right now, the jury is still very very much out on that. And the early hints that we're getting, at least based on today's action and what we saw when the Fed cut rates uh last uh fall, is that it's unlikely that we'll see a material decline in borrowing costs both to consumers and corporations as a consequence of Fed rate cuts. So, I think this question that you're asking about what's going to hold up stock market valuations is incredibly important because if you don't have the uh money to throw after share buybacks, and I would note that the same time they're buying back shares, you're seeing huge insider selling. Um so, you know, hardly an endorsement about the outlook for profits. Um what is really going to drive a further increase in stock prices from here? you know, if Fed rate cuts don't provide the relief we're looking for, uh, and companies are struggling to pass on higher prices to consumers who are spent up and lent up, um, it's really hard to see where things are going to continue to plow higher. But I will confess, and all of your audience who's heard me before knows that this is not the first time I've trotted out that bearish view, only to watch the market just continue to, you know, give me the middle finger. So, I'm I'm wholly prepared for that. The one thing I would remark on is that those gains will strictly be nominal gains in real terms as has been the case all year and actually for the better part of the last year and a half um the stock market will be losing ground in real terms relative to gold which is the only uh currency that cannot be devalued. So it is it is the arbiter of uh monetary integrity and so far it is massively outperforming not only the S&P but if you look at gold miners versus the AI Nvidia uh of the world it's massively outperforming there too. So don't be uh don't be deluded by the continued rise in stock prices if they do move higher. You've got to think about a real return on these assets. I'm watching silver today almost hit 40 bucks, too. Uh, this brings us back. I guess we can zoom out. We've discussed this before. It almost seems like there's these two American economies. I mean, there's a divergence, right? The headline unemployment rate Powell cited is is low at 4.2%. But the broader U6 rate, which includes discouraged and underemployed workers, I mean, it sits significantly higher, almost at 8%. Which of these two numbers do you believe tells the truer story of the real American labor market right now? I mean, what are you hearing on the ground? Yeah. No, I think you're absolutely right to point that out. There is a real disconnect. Um, there has long been a disconnect between the household survey, which basically just calls people up and says, "Are people in your household working?" Um, versus the payroll survey. And the payroll survey is subject to all kinds of statistical shenanigans, I'll call them. Um, I'm sure the BLS wouldn't appreciate that characterization, but they impute, you know, job creation from businesses that haven't yet been, uh, you know, started a payroll. Uh, and that imputation is based on last year's tax return data. So, it's very, you know, notoriously lagging and particularly problematic at turning points in the economy where they're imputing a a continuation of a trend that has long since ended. Um, so I think the employment picture is certainly weaker than the headline payroll numbers have suggested and we saw that with the dramatic downward revisions. Um, but it's also been reflected in all of the consumer confidence and sentiment surveys. And I know people poo poo that as being, you know, just uh soft data that isn't relevant. But if you overlay consumer confidence about the job outlook versus actual employment data, they get it right every time. I mean, they anticipate turns. They know what's happening on the ground before the statisticians at the BLS figure it out. So they have been incredibly der about the outlook for employment even as their inflation expectations have come down and they've had sort of a modestly improved view about the state of the economy and their finances. The one thing that has not improved but it has continued to deteriorate is the outlook for employment. So I do think that uh the the uh path of least resistance on that score is weaker and that's probably what precipitated Powell to do a new Powell pivot today. Yeah. And Steph I mean you know we see the divergence elsewhere too. Corporate profits for the the largest companies are at record highs. Yet small business sentiment surveys consistently show high levels of anxiety about inflation and future demand. Are we living through a K-shaped recovery where the largest players are thriving while real underlying economy is is struggling? And I mean, how sustainable? When does that come to an end? This is softball pitch down the middle to me, Jeremy, because I this is what I've been saying for a while is that just as is the case in the consumer sector, the corporate sector is a story of the halves and have nots as well. And for a long time, it was the mag seven. And you know, facts set does this uh weekly update on the earn during the earning season as to who's contributing to the headline growth in earnings. And the last update I saw was that the MAG7 earnings were growing somewhere around 14% year-on-year. And the remaining 493 companies were posting something like 3% uh growth in earnings, which after you adjust for inflation is effectively zero growth in earnings. Um, and then of course you've seen this parade of corporate bankruptcies among, you know, companies that aren't even in that S&P 500 sphere. When you broaden out the lens and you go to look at mid and small side compsiz companies, the earnings picture is even darker there and you have these huge share of zombie corporations as it were that aren't generating enough revenue to even service their debt. So that's been a story that's been ongoing and yet the uh corporate credit market and the equity market have kind of just blindly dismissed it because they've been betting that any moment now the Fed would cut rates and that would solve the problem. So again we come back to the question will it solve the problem because the uh inves you know investors have doubled tripled and quadrupled down on that bet over the last three years. Um, so if it doesn't pan out, there's going to be some major disappointment. Yeah. Yeah. And to your point, I mean, on the consumer side, the New York Fed's data showed 90-day credit card delinquency rate was now 3.2%, the worst levels since the financial crisis. At what point do these signs of household stress begin to materially impact the earnings of these companies on the S&P that we're talking about that rely on this consumer spending? I know this is always the questions we ask, but uh, you know, they're not printing yet. I wonder when this is going to start coming out. Yeah, absolutely. And again, as I mentioned earlier, you have the resumption of student loan payments, which is actually conspiring to uh lead to higher delinquency rates on other forms of credit because that student loan debt can't be discharged. So they basically have to prioritize that ahead of everything else which I think is why you've seen this sudden move higher in the credit card auto and now even mortgage delinquency rates. Um so as to when it hits corporate profits. I mean that's a great question. The one thing I would point out though is that we all fixate on Wall Street on the S&P 500 earnings numbers. The government puts out a quarterly profit report in their NIPA accounts that's related to the GDP data and um that number is substantially weaker and ultimately my favorite indicator of the true strength of the corporate sector is just looking at corporate tax receipts. I mean it's the one data point no one can fudge. can't fudge, you know, higher profits with uh buy higher tax receipts with share buybacks and, you know, recurring non-recurring write-offs. These numbers are a dispassionate assessment of what's really happening on the front lines and uh corporate tax receipts are now showing zero growth year. So that's an important signal that I don't think anyone is paying attention to or would probably believe if it was presented to them. Yeah, that's fascinating. I want to I want to dig more into that one with you uh maybe the next time. Uh I got to ask you a little bit about I mean we don't want to come on here and talk about political developments the whole time, but there was this public statement from the president regarding his intent to remove a sitting uh Federal Reserve governor. I mean, as an analyst of institutional risk, how does the market typically factor in this direct political pressure on the central bank? I mean, it's, you know, what do you think? I guess, um, in normal administrations, people probably would be very surprised by this, but um, I think Wall Street is finally becoming a little endeared to the way that Trump operates. And uh you know I think you have to bear in mind that much of the reason why he believes and and may very well be the case he was elected was to restore credibility not necessarily to the Federal Reserve but to all of these government institutions that appear to be so corrupted and nakedly political. And so when you unear things like this, which is, you know, if it's true, clearly a flagrant uh violation and an illegal act, you know, to to um have mortgage fraud undertaken by a governor of the Federal Reserve Board. Um that's something that needs to be dealt with. And I guess in contrast to prior administrations where that probably wouldn't have been brought to light or even um warranted some kind of demand that the person leave. Um this administration really believes that this is what they were assigned the job to do. Um and so I think the markets have really kind of become a little more inear to that. uh in terms of what it means for monetary policy, it really just suggests that maybe he'll get to appoint another person who's more doubbish. But ultimately, I you know, I hate to be a broken record. Does it matter? You know, if everybody on the board unanimously agreed that they're going to cut rates 50 basis points tomorrow, I'm still not convinced that that's going to lower borrowing costs for anyone other than uh people borrowing at the Fed funds rate, which is, you know, not going to help the private sector at all. Yeah. And I mean, it's it's occurring as the US national debts over 37 trillion, bringing the debt to GDP ratio at approximately 125%. I mean, you've consistently argued that the real issue is how to finance our deficits, too, here, right? I mean, does this open political pressure on the Fed confirm that we're now in a fiscal dominance regime where the central bank's independence is kind of secondary to the Treasury's borrowing needs? Yeah. I mean, I think we'll get there. I don't think they're there yet. I mean, I think look, we can barely get Powell to admit that inflation isn't a problem and that employment is weak and that if he had been cutting rates in September, October, November, there is an even stronger case to be cutting them today. So, baby steps. I mean, I think it's going to take a long time. You the level of hubris in these institutions and the Federal Reserve particularly that seems to imagine it's omnip omnipotent and he even made some reference to it. I'm trying to remember the specific wording in his speech where he sort of took credit for um you know lowering inflation expectations such that um we were able to create this you know situation where we're in now where the economy is doing better etc. um after he completely missed it on the way up. You know, it's just amazing. But the hubris is incredible. And I think it's going to take a while and perhaps um this resistance of the longer end of the yield curve to follow Fed funds lower to persuade the Fed that maybe they need to come up with different tools because the old tools aren't working in this age of fiscal dominance. Um ultimately, as you and I have talked about before, I think the tool that they have that's the most obvious will be to use the balance sheet. Um when they realize that the the Fed funds lever is impotent, they will move to reexpand the balance sheet. And whether that's a form of QE again or some form of yield curve control or whatever they want to call it, essentially the uh Fed, as you say, it will become subservient to the Treasury um and become the the lender of last resort uh to the Treasury. And I, you know, just as an aside, since I'm a data nerd, I can't resist pointing out that last week when we got that deluge of data on inflation and retail sales, etc., and and the markets were busy digesting that. One data point that came out uh at 3:00 on Friday when everyone had already left for the beach was the latest monthly capital flows data from the treasury and it showed that foreign official institutions for another month sold treasuries. So this uh tariff diplomacy and the strongarmming of our you know foreign uh trade partners is not persuading them that they need to return to uh you know stopping up our treasury debt quite the contrary. So that remains a pressing problem especially with 7 trillion in debt to roll between now and the next you know next August. So yeah, it's going to be interesting. Interesting for you to point that out. I mean, obviously the Fed is now signaling these cuts while holding its its policy rate what just about 5%. Uh meanwhile, the ECB is holding 3.75% on theirs. Bank of Japan still near zero. I'm curious, I mean, what are the implications of this monetary policy divergence for international capital flows and major currency pairs like the Euro dollar, which it was crazy. I mean, it rallied to 117 on the news. Yeah, I mean I think that ultimately um the path of least resistance for the dollar is still lower. Um because I think uh that when the Fed starts cutting and they don't get the reaction that they expected from the long end of the market uh their conclusion will be as is the conclusion all policy monetary and fiscal policy makers make uh that they just haven't done enough that they just need to cut even more and then they'll get the results that they failed to get the first time. So, I think what you're going to see is once the Fed finally starts cutting rates, they're going to have maybe a little bit of a panic rush to cut cut. Um, and so the dollar, even though, you know, it's already sold off a lot against those other currencies, um, will probably continue to go lower. Um, as people are surprised by the inefficacy of the rate cuts and begin to anticipate substantially more stimulus both in the form of rate cuts and perhaps ultimately a reexpion of the balance sheet. Yeah, what a what a macro environment. But this is what you do. So Steph, let's distill this into kind of an actionable playbook, I guess, for our audience. If we're entering a stagflationary regime driven by these fiscal dominance, where where can investors look for profits? I mean, you talked about those metals. We're obviously seeing them catch a bid today. Uh what does that mean for sector allocation? Well, I remain, you know, very bullish on the precious metals obviously uh and the miners. And I also think what an interesting story that um you know some people sort of pay dutiful obesence to but don't really position is the energy story. I mean if you believe that AI is a revolutionary technology much the way the internet was or the steam engine um that is going to transform the way we work and everything. um then you want to belong as much energy as you can possibly find, you know, every form because we're going to need it all um to power AI and to power uh crypto mining. These things consume masses, massive amounts of energy. Um and you're already seeing huge increases in electricity prices. Um there have been several warnings that our power grid is really failing already and throwing all this on top of it is going to create you know could potentially wreck real havoc. So I think that I would much prefer to be long energy than AI just because the future of AI is only as good as the access to a steady supply of energy. Um and again I view that as kind of a play on hard assets versus paper. Um much like the uh precious metals in that regard. So, those are two sectors that I'd be very bullish on. I think, you know, if you're a trader and you're uh willing to play the the near-term swings, um you there may be opportunities in things like homebuilders and financials like we're seeing today in anticipation that the Fed is going to have to be far more aggressive than even they or the markets are presently expecting for the reason I outlined that, you know, they're going to realize that they're not getting they're not having the desired result and they'll just push harder and harder. Um, and so we'll have a period where rate cut expectations really increase dramatically. Are you going after the traditional energy plays, you know, the the the OG oil and gas kind of stories? Are you more looking at the SMR nuclear side? What are your thoughts there? I would I I would say all of the above. Yeah. I mean, I think basically um there there's no holds barred in terms of access to energy as far as this administration's concerned. I mean, I think they really want to promote as much uh as many different kinds of energy sources as we can. Um, and I think it's interesting to note that despite the fact that they, you know, the president campaigned on this and on day one, you know, it was drill baby drill, um, oil prices while they've come down, have far from imploded. Um, and that against the backdrop of growth that's dramatically slowing. So I I think very similar to what we're likely to see at the long end of the yield curve, uh oil prices may be stubbornly high relative to what you would expect given the strength of the economy both domestically and globally. And that again sets up a further headwind for corporate profit margins because after after labor, energy is probably the second biggest uh cost input to these businesses. So, um, between higher rates, higher oil prices, um, you know, and a Fed that's really struggling, this strikes me as a very challenging backdrop, and I prefer to just hide out in those hard assets that I I mentioned earlier. Yeah. Or or sit with some of those miners that are starting to get, you know, these high metal prices finally on their balance sheets, too, it appears. Yeah. It's amazing. I mean it's it's very impressive to see them massively outperforming the popular stocks like Nvidia etc. and they're doing so quietly because you know if you turn on the typical financial news network uh they're not talking about the gold miners you know that is that's not sexy stuff. We gotta talk about crypto. We gotta talk about AI. We gotta talk about Tesla. You know, we're not talking about Pneumont. I know. I was I was looking at Pneumont this morning. Just crazy. And we just had Smallwood on the show, Wheat and Precious Metals. I mean, they're up 70% year to date. So, yeah, definitely not on the mainstream, but they are here. And of course, that's because we also offer contrarian views. And here's one. I mean, the market is now pricing in this dovish Fed, a weaker dollar, higher gold. What is the one major trade or or or market assumption that you believe is fundamentally wrong right now? Where's the biggest mispricing that could present an you know maybe an asymmetric opportunity for those willing to get go against the herd? Well, I come back to this idea that you won't have long rates come down as much. So, you've had an environment where, you know, and that relates to everything because you've had this risk on environment as I uh talked about with the corporate credit and all the debt that needs to roll at higher rates. Um that investors have, you know, continued to double, triple, and quadruple down on this idea that Fed rate cuts would provide the fix. I mean, even seen things like in the private debt markets and and private equity where they're just stringing, you know, the extended pretend games keep going and going. So, there are a lot of places where having that assumption called into question could wreck real havoc and in ways that we can't anticipate, especially as relates to the private markets, which have just mushroomed in the last few years. So you could have, you know, tremendous issues surrounding private equity and private debt and all of that will come home to roost uh sad to say on pension balance sheets. Um these have been the big marginal investors in all of these illquid assets. Um so that's that's a scary thing. Um but in terms of you know that would be my main thesis is that that's the overarching assumption upon which everything is built right now whether it be the rally in equities the tightening of corporate credit spreads um everyone seems to be wagering that once the Fed cuts rates all you know all sins will be permitted and we're going to be we're going to be off to the off to the races. It's almost like you you took it right out of my mouth there. I mean because there's sophisticated investors that watch this and they're wondering, you know, what that one indicator that you just mentioned that that is true tell for this new environment that isn't on the front page of financial press. I mean, are you watching those high yield credit spreads that you talked about? Is it maybe the copper to gold ratio, tips, break evens, or something else else entirely is kind of your primary guidepost? Yeah. Well, so I have been watching high yield spreads and obviously they just have been narrowing and narrowing and narrowing and uh in the last couple days they had started to widen out a bit, but I mean it's just you can barely even identify that without a microscope because they're so compressed. Um, but I, you know, I guess I would say that the one, uh, near-term risk to this thesis I have that the long end probably won't get the kind of bid it normally does is that speculators are massively short the long end. So, I'm not the only one who is concerned that maybe Fed rate cuts won't be the solution. If you look at um you know uh the speculative netl long uh commitment of traders to the 10-year, it's about as short as it's ever been. And so there is the potential for some short covering rally. And maybe that's part of what's driving the move today, albeit just seven basis points uh on the 10-year. Um, but I will say that the interesting thing about looking at that chart of netspec uh commitments to the tenure is that they were also really short in May of 2023, which I would argue was the beginning of this era post fiscal dominance, which really began with the COVID stimulus spectacular. Um, they were massively short in May of 2023, and the 10-year yield went up a 100 basis points. So, they were dead on the money with that trade. So it may be that it's not sending the contrary signal that it has prior because these people have actually figured out this time that uh the math is the math and it's inescapable. Yeah. Inescapable. Well, you heard it here and we haven't talking about it. It it's I mean as much as we maybe frontun the news a little bit, things are still happening that we've talked about. Yeah. Amazing how that works. Yeah. Amazing how that works. All right. does in incredibly deep and and and actionable analysis on this really interesting moment here on the macro space. Stephanie Pomboy, founder of Macro Mavens, joining us now. Of course, you can check out her latest research. We're going to put a link in our description. Thanks for this stuff. I appreciate it. It's my pleasure, Jeremy. Always fun. Uh lots to cover. Always lots to cover. Enjoy Colorado and we will see you soon. Appreciate your time. Thanks, Jeremy. All right, that's all we have time for in Kiko special news report today. I'm Jeremy Saffron. Don't forget to hit the subscribe button. We got you covered. Thanks for watching and we'll see you next time. [Music] Heat. Heat. [Music]
The ‘One Data Point No One Can Fudge’ Signals a Crisis is Here | Stephanie Pomboy
Summary
Transcript
[Music] Welcome back. I'm Jeremy Saffron. At a landmark speech at Jackson Hole, Federal Reserve Chair Jerome Powell delivered a message that has completely reset market expectations. The Fed is now signaling it is prepared to cut interest rates in the face of a weakening economy even while it continues to see risks of higher inflation. Now, he justified this potential pivot by pointing to a sharp slowdown in the labor market with job growth collapsing to just 35,000 per month. And in a major overhaul, he simultaneously abandoned the Fed's 2020 policy framework, calling his own prior strategy irrelevant. Now, the market took this as a green light. Fed fund futures are now pricing in over 90% chance of a September rate cut, setting the S&P 500 soaring and spot gold to challenge 3380 an ounce. Now, these market moves occurred alongside a political development in Washington where the president has stated his intent to fire Federal Reserve Governor Cook if she does not resign. There's lots to get into and here to analyze all of this with me is Stephanie Palmboy. She's a founder of the macroeconomic research firm Macro Maven. Steph, it's great to see you. Welcome back. Thank you. It's a pleasure to be with you. Now, we got uh quite a bit to get into. It's been a busy week and of course, we've all been looking forward to this Jackson Hole speech. Just to kind of get a little bit of context into what the market's thinking, let's begin with the substance of that speech. I mean, a 90% probability for a rate cut implies the market believes it's it's nearly a foregone conclusion at this point. I mean, does Powell's language justify that level of conviction, or is the market kind of choosing to hear what it wants to hear? Well, to be fair, um, he's been the hold out, it seems like, at the FOMC, or not the only hold out, but, uh, the most visible one. Um, we've had several other uh Fed governors who were inclined to cut rates and uh Lord knows there's been plenty of political pressure placed on the chairman to uh become a little more accommodative. So I think uh it's not surprising that the markets are greeting this speech which was clearly more doubbish and did indicate a uh more likely uh probability that they do cut in September uh you know with such enthusiasm they also did increase the odds of rate cuts farther out in the calendar as well. So all in all I think this speech um came in just slightly more doubbish than even Wall Street was expecting. Yeah. Yeah. Well, you're seeing it right now. I mean, everything's kind of rallying. Uh, of course, he also cited that payroll job growth has slowed to an average of about 35,000 a month. Now, historically, we've seen other Fed chairs, what, Vulkar, Greenspan, Berneni, they all pivoted in response to changing data. But how does this particular pivot by Powell compare to those of his predecessors? I mean, is that is this the standard course correction or does the context of record debt and maybe this post-pandemic inflation make it kind of fundamentally different this time? Well, I mean, I think it is fundamentally different this time and I think um what we're going to find out soon is whether Fed rate cuts are really the antidote for our problem. Obviously, the administration imagines that they are and that if the Fed would just cut rates already, there would be relief to the housing market and to consumers and businesses that are highly levered and have um soaring debt service. And in fact, I was just checking before we jumped on here, the um homebuilders index is up 5% this today. Um so it's way outperforming even this monster rally in the overall averages. So clearly investors are betting that rate cuts will have the cubrious effect on the economy um that they have in the past. I am highly skeptical about that because if you look across the markets today, the 10-year yield has rallied a mere seven basis points. I mean, we're still at 425 down from 432 yesterday. So that's partly suggesting that there's going to be a tremendous amount of relief provided um across the interest rate uh spectrum from a cut in the Fed funds rate which obviously is just one interest rate and the hope obviously is that cutting that will impact everything else and right now um that remains an open question. Yeah, it certainly does. Uh and then that brings us to tariffs. Of course he touched on it. I want to play a little clip for you on what Powell said on in inflation and tariffs here. The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months with high uncertainty about both timing and amounts. The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem. A reasonable base case is that the effects will be relatively short-lived, a one-time shift in the price level. Of course, one-time does not mean all at once. It will continue to take time for tariff increases to work their way through supply chains chains and distribution networks. Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process. It's also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed. Okay. So, I mean, a lot of unknowns there. The last time I had you on this show was back in May, I think it was. And and you called tariffs a quote convenient kind of distraction from the real issue of deficit financing. And in his speech, Chair Powell just blamed future inflation risks on those same tariffs. So, I mean, is this the dynamic you pointed out with the Fed now using tariffs as a convenient scapegoat for its own stagflationary policy dilemma, slowing growth and and rising prices? Well, I guess when I referenced that back in May, I was thinking more of the stock market, you know, uh, which obviously in April had taken a swan dive on the threat of tariffs, uh, as if that was, you know, the only issue that we had to deal with on the horizon. And the much bigger issue all along has been our fiscal situation. Um so as relates to tariffs specifically and the potential inflationary consequences of them. Um I have long maintained that there wouldn't be a pass through to consumers simply because as you and I have talked about prior and we probably touched on in that conversation in May as well. Um the US consumer, the average consumer I believe has been in recession uh since COVID uh and has not seen any recovery. So they're incredibly strapped. And I don't you know the most powerful evidence of that is the fact that credit card and auto loan delinquencies and now mortgage delinquencies are all rising. Um so if the consumer is so great and can absorb infinitely higher prices, then why can't they pay their bills? Uh and then if you layer on top of that the um effect that student loan payment resumption will have on already stressed consumer pocketbooks. Um that you know just serves to further diminish the likelihood that companies on the consumer front lines will be able to pass along these prices. And you're clearly seeing evidence of that already in terms of the the earnings color that we're getting from some of these companies that cater especially to low and middle inome households. Um so I've long been skeptical about this idea that tariffs posed a material threat to inflation. To me they posed a material threat to corporate profit margins, not to the consumer in terms of higher prices. Yeah. Let's talk about that because you've long warned about that corporate debt bomb that we tal about. We're now seeing what over$1 13 trillion dollars in US corporate debt with a significant portion needing to be refinanced at these much higher rates. Is is the slowdown Powell is describing the first tangible sign that this refinancing wave is beginning to bite into those corporate profitabilities and maybe even hiring plans here? Well, I think his focus, at least as articulated in that speech, was the employment side of the equation. you know, he still seems to insist that there's a chance that the tariffs end up being inflationary. And, you know, thankfully, you spared us the rest of his uh endless rant on this topic. But the two main reasons he was concerned about was that uh consumers anticipating increased prices would demand higher wages and that would create a sustained increase in inflation. And the other one was that uh inflation expectations would sew the seeds of a higher inflation reality um as people bought more today in anticipation of what would be more expensive tomorrow. So um I think that that really is very dubious in my view. Um but sorry now I've rambled so deep into the rabbit hole I forgot what the original question was. We we can't we we try not to on this show at least play Powell for more than 53 seconds which is exactly what that clip was. Uh let me ask you a diff a different subject on kind of the corporate there too. I mean for the last decade a significant driver of the stock market has been corporate buybacks and now that we're seeing these borrowing costs significantly higher and then obviously profits under pressure here. I mean is the era of buyback fueled bull market coming to an end? and and if so, what does that mean for valuations on the S&P 500? What's already historically stretched on a market cap to GDP basis here? Yeah, it's such a good question, Jeremy. In the latest month, um we saw record share buybacks. I mean, we've I've been gobsmacked that they could even increase any more than they already had, but we're on track for another record year. Um and as you astutely point out, you know, this is providing an enormous bid to equities. Um, so how sustainable is that? And again, it all comes back to my question at the top as to whether rate cuts actually succeed in bringing down borrowing costs to everybody else. And right now, the jury is still very very much out on that. And the early hints that we're getting, at least based on today's action and what we saw when the Fed cut rates uh last uh fall, is that it's unlikely that we'll see a material decline in borrowing costs both to consumers and corporations as a consequence of Fed rate cuts. So, I think this question that you're asking about what's going to hold up stock market valuations is incredibly important because if you don't have the uh money to throw after share buybacks, and I would note that the same time they're buying back shares, you're seeing huge insider selling. Um so, you know, hardly an endorsement about the outlook for profits. Um what is really going to drive a further increase in stock prices from here? you know, if Fed rate cuts don't provide the relief we're looking for, uh, and companies are struggling to pass on higher prices to consumers who are spent up and lent up, um, it's really hard to see where things are going to continue to plow higher. But I will confess, and all of your audience who's heard me before knows that this is not the first time I've trotted out that bearish view, only to watch the market just continue to, you know, give me the middle finger. So, I'm I'm wholly prepared for that. The one thing I would remark on is that those gains will strictly be nominal gains in real terms as has been the case all year and actually for the better part of the last year and a half um the stock market will be losing ground in real terms relative to gold which is the only uh currency that cannot be devalued. So it is it is the arbiter of uh monetary integrity and so far it is massively outperforming not only the S&P but if you look at gold miners versus the AI Nvidia uh of the world it's massively outperforming there too. So don't be uh don't be deluded by the continued rise in stock prices if they do move higher. You've got to think about a real return on these assets. I'm watching silver today almost hit 40 bucks, too. Uh, this brings us back. I guess we can zoom out. We've discussed this before. It almost seems like there's these two American economies. I mean, there's a divergence, right? The headline unemployment rate Powell cited is is low at 4.2%. But the broader U6 rate, which includes discouraged and underemployed workers, I mean, it sits significantly higher, almost at 8%. Which of these two numbers do you believe tells the truer story of the real American labor market right now? I mean, what are you hearing on the ground? Yeah. No, I think you're absolutely right to point that out. There is a real disconnect. Um, there has long been a disconnect between the household survey, which basically just calls people up and says, "Are people in your household working?" Um, versus the payroll survey. And the payroll survey is subject to all kinds of statistical shenanigans, I'll call them. Um, I'm sure the BLS wouldn't appreciate that characterization, but they impute, you know, job creation from businesses that haven't yet been, uh, you know, started a payroll. Uh, and that imputation is based on last year's tax return data. So, it's very, you know, notoriously lagging and particularly problematic at turning points in the economy where they're imputing a a continuation of a trend that has long since ended. Um, so I think the employment picture is certainly weaker than the headline payroll numbers have suggested and we saw that with the dramatic downward revisions. Um, but it's also been reflected in all of the consumer confidence and sentiment surveys. And I know people poo poo that as being, you know, just uh soft data that isn't relevant. But if you overlay consumer confidence about the job outlook versus actual employment data, they get it right every time. I mean, they anticipate turns. They know what's happening on the ground before the statisticians at the BLS figure it out. So they have been incredibly der about the outlook for employment even as their inflation expectations have come down and they've had sort of a modestly improved view about the state of the economy and their finances. The one thing that has not improved but it has continued to deteriorate is the outlook for employment. So I do think that uh the the uh path of least resistance on that score is weaker and that's probably what precipitated Powell to do a new Powell pivot today. Yeah. And Steph I mean you know we see the divergence elsewhere too. Corporate profits for the the largest companies are at record highs. Yet small business sentiment surveys consistently show high levels of anxiety about inflation and future demand. Are we living through a K-shaped recovery where the largest players are thriving while real underlying economy is is struggling? And I mean, how sustainable? When does that come to an end? This is softball pitch down the middle to me, Jeremy, because I this is what I've been saying for a while is that just as is the case in the consumer sector, the corporate sector is a story of the halves and have nots as well. And for a long time, it was the mag seven. And you know, facts set does this uh weekly update on the earn during the earning season as to who's contributing to the headline growth in earnings. And the last update I saw was that the MAG7 earnings were growing somewhere around 14% year-on-year. And the remaining 493 companies were posting something like 3% uh growth in earnings, which after you adjust for inflation is effectively zero growth in earnings. Um, and then of course you've seen this parade of corporate bankruptcies among, you know, companies that aren't even in that S&P 500 sphere. When you broaden out the lens and you go to look at mid and small side compsiz companies, the earnings picture is even darker there and you have these huge share of zombie corporations as it were that aren't generating enough revenue to even service their debt. So that's been a story that's been ongoing and yet the uh corporate credit market and the equity market have kind of just blindly dismissed it because they've been betting that any moment now the Fed would cut rates and that would solve the problem. So again we come back to the question will it solve the problem because the uh inves you know investors have doubled tripled and quadrupled down on that bet over the last three years. Um, so if it doesn't pan out, there's going to be some major disappointment. Yeah. Yeah. And to your point, I mean, on the consumer side, the New York Fed's data showed 90-day credit card delinquency rate was now 3.2%, the worst levels since the financial crisis. At what point do these signs of household stress begin to materially impact the earnings of these companies on the S&P that we're talking about that rely on this consumer spending? I know this is always the questions we ask, but uh, you know, they're not printing yet. I wonder when this is going to start coming out. Yeah, absolutely. And again, as I mentioned earlier, you have the resumption of student loan payments, which is actually conspiring to uh lead to higher delinquency rates on other forms of credit because that student loan debt can't be discharged. So they basically have to prioritize that ahead of everything else which I think is why you've seen this sudden move higher in the credit card auto and now even mortgage delinquency rates. Um so as to when it hits corporate profits. I mean that's a great question. The one thing I would point out though is that we all fixate on Wall Street on the S&P 500 earnings numbers. The government puts out a quarterly profit report in their NIPA accounts that's related to the GDP data and um that number is substantially weaker and ultimately my favorite indicator of the true strength of the corporate sector is just looking at corporate tax receipts. I mean it's the one data point no one can fudge. can't fudge, you know, higher profits with uh buy higher tax receipts with share buybacks and, you know, recurring non-recurring write-offs. These numbers are a dispassionate assessment of what's really happening on the front lines and uh corporate tax receipts are now showing zero growth year. So that's an important signal that I don't think anyone is paying attention to or would probably believe if it was presented to them. Yeah, that's fascinating. I want to I want to dig more into that one with you uh maybe the next time. Uh I got to ask you a little bit about I mean we don't want to come on here and talk about political developments the whole time, but there was this public statement from the president regarding his intent to remove a sitting uh Federal Reserve governor. I mean, as an analyst of institutional risk, how does the market typically factor in this direct political pressure on the central bank? I mean, it's, you know, what do you think? I guess, um, in normal administrations, people probably would be very surprised by this, but um, I think Wall Street is finally becoming a little endeared to the way that Trump operates. And uh you know I think you have to bear in mind that much of the reason why he believes and and may very well be the case he was elected was to restore credibility not necessarily to the Federal Reserve but to all of these government institutions that appear to be so corrupted and nakedly political. And so when you unear things like this, which is, you know, if it's true, clearly a flagrant uh violation and an illegal act, you know, to to um have mortgage fraud undertaken by a governor of the Federal Reserve Board. Um that's something that needs to be dealt with. And I guess in contrast to prior administrations where that probably wouldn't have been brought to light or even um warranted some kind of demand that the person leave. Um this administration really believes that this is what they were assigned the job to do. Um and so I think the markets have really kind of become a little more inear to that. uh in terms of what it means for monetary policy, it really just suggests that maybe he'll get to appoint another person who's more doubbish. But ultimately, I you know, I hate to be a broken record. Does it matter? You know, if everybody on the board unanimously agreed that they're going to cut rates 50 basis points tomorrow, I'm still not convinced that that's going to lower borrowing costs for anyone other than uh people borrowing at the Fed funds rate, which is, you know, not going to help the private sector at all. Yeah. And I mean, it's it's occurring as the US national debts over 37 trillion, bringing the debt to GDP ratio at approximately 125%. I mean, you've consistently argued that the real issue is how to finance our deficits, too, here, right? I mean, does this open political pressure on the Fed confirm that we're now in a fiscal dominance regime where the central bank's independence is kind of secondary to the Treasury's borrowing needs? Yeah. I mean, I think we'll get there. I don't think they're there yet. I mean, I think look, we can barely get Powell to admit that inflation isn't a problem and that employment is weak and that if he had been cutting rates in September, October, November, there is an even stronger case to be cutting them today. So, baby steps. I mean, I think it's going to take a long time. You the level of hubris in these institutions and the Federal Reserve particularly that seems to imagine it's omnip omnipotent and he even made some reference to it. I'm trying to remember the specific wording in his speech where he sort of took credit for um you know lowering inflation expectations such that um we were able to create this you know situation where we're in now where the economy is doing better etc. um after he completely missed it on the way up. You know, it's just amazing. But the hubris is incredible. And I think it's going to take a while and perhaps um this resistance of the longer end of the yield curve to follow Fed funds lower to persuade the Fed that maybe they need to come up with different tools because the old tools aren't working in this age of fiscal dominance. Um ultimately, as you and I have talked about before, I think the tool that they have that's the most obvious will be to use the balance sheet. Um when they realize that the the Fed funds lever is impotent, they will move to reexpand the balance sheet. And whether that's a form of QE again or some form of yield curve control or whatever they want to call it, essentially the uh Fed, as you say, it will become subservient to the Treasury um and become the the lender of last resort uh to the Treasury. And I, you know, just as an aside, since I'm a data nerd, I can't resist pointing out that last week when we got that deluge of data on inflation and retail sales, etc., and and the markets were busy digesting that. One data point that came out uh at 3:00 on Friday when everyone had already left for the beach was the latest monthly capital flows data from the treasury and it showed that foreign official institutions for another month sold treasuries. So this uh tariff diplomacy and the strongarmming of our you know foreign uh trade partners is not persuading them that they need to return to uh you know stopping up our treasury debt quite the contrary. So that remains a pressing problem especially with 7 trillion in debt to roll between now and the next you know next August. So yeah, it's going to be interesting. Interesting for you to point that out. I mean, obviously the Fed is now signaling these cuts while holding its its policy rate what just about 5%. Uh meanwhile, the ECB is holding 3.75% on theirs. Bank of Japan still near zero. I'm curious, I mean, what are the implications of this monetary policy divergence for international capital flows and major currency pairs like the Euro dollar, which it was crazy. I mean, it rallied to 117 on the news. Yeah, I mean I think that ultimately um the path of least resistance for the dollar is still lower. Um because I think uh that when the Fed starts cutting and they don't get the reaction that they expected from the long end of the market uh their conclusion will be as is the conclusion all policy monetary and fiscal policy makers make uh that they just haven't done enough that they just need to cut even more and then they'll get the results that they failed to get the first time. So, I think what you're going to see is once the Fed finally starts cutting rates, they're going to have maybe a little bit of a panic rush to cut cut. Um, and so the dollar, even though, you know, it's already sold off a lot against those other currencies, um, will probably continue to go lower. Um, as people are surprised by the inefficacy of the rate cuts and begin to anticipate substantially more stimulus both in the form of rate cuts and perhaps ultimately a reexpion of the balance sheet. Yeah, what a what a macro environment. But this is what you do. So Steph, let's distill this into kind of an actionable playbook, I guess, for our audience. If we're entering a stagflationary regime driven by these fiscal dominance, where where can investors look for profits? I mean, you talked about those metals. We're obviously seeing them catch a bid today. Uh what does that mean for sector allocation? Well, I remain, you know, very bullish on the precious metals obviously uh and the miners. And I also think what an interesting story that um you know some people sort of pay dutiful obesence to but don't really position is the energy story. I mean if you believe that AI is a revolutionary technology much the way the internet was or the steam engine um that is going to transform the way we work and everything. um then you want to belong as much energy as you can possibly find, you know, every form because we're going to need it all um to power AI and to power uh crypto mining. These things consume masses, massive amounts of energy. Um and you're already seeing huge increases in electricity prices. Um there have been several warnings that our power grid is really failing already and throwing all this on top of it is going to create you know could potentially wreck real havoc. So I think that I would much prefer to be long energy than AI just because the future of AI is only as good as the access to a steady supply of energy. Um and again I view that as kind of a play on hard assets versus paper. Um much like the uh precious metals in that regard. So, those are two sectors that I'd be very bullish on. I think, you know, if you're a trader and you're uh willing to play the the near-term swings, um you there may be opportunities in things like homebuilders and financials like we're seeing today in anticipation that the Fed is going to have to be far more aggressive than even they or the markets are presently expecting for the reason I outlined that, you know, they're going to realize that they're not getting they're not having the desired result and they'll just push harder and harder. Um, and so we'll have a period where rate cut expectations really increase dramatically. Are you going after the traditional energy plays, you know, the the the OG oil and gas kind of stories? Are you more looking at the SMR nuclear side? What are your thoughts there? I would I I would say all of the above. Yeah. I mean, I think basically um there there's no holds barred in terms of access to energy as far as this administration's concerned. I mean, I think they really want to promote as much uh as many different kinds of energy sources as we can. Um, and I think it's interesting to note that despite the fact that they, you know, the president campaigned on this and on day one, you know, it was drill baby drill, um, oil prices while they've come down, have far from imploded. Um, and that against the backdrop of growth that's dramatically slowing. So I I think very similar to what we're likely to see at the long end of the yield curve, uh oil prices may be stubbornly high relative to what you would expect given the strength of the economy both domestically and globally. And that again sets up a further headwind for corporate profit margins because after after labor, energy is probably the second biggest uh cost input to these businesses. So, um, between higher rates, higher oil prices, um, you know, and a Fed that's really struggling, this strikes me as a very challenging backdrop, and I prefer to just hide out in those hard assets that I I mentioned earlier. Yeah. Or or sit with some of those miners that are starting to get, you know, these high metal prices finally on their balance sheets, too, it appears. Yeah. It's amazing. I mean it's it's very impressive to see them massively outperforming the popular stocks like Nvidia etc. and they're doing so quietly because you know if you turn on the typical financial news network uh they're not talking about the gold miners you know that is that's not sexy stuff. We gotta talk about crypto. We gotta talk about AI. We gotta talk about Tesla. You know, we're not talking about Pneumont. I know. I was I was looking at Pneumont this morning. Just crazy. And we just had Smallwood on the show, Wheat and Precious Metals. I mean, they're up 70% year to date. So, yeah, definitely not on the mainstream, but they are here. And of course, that's because we also offer contrarian views. And here's one. I mean, the market is now pricing in this dovish Fed, a weaker dollar, higher gold. What is the one major trade or or or market assumption that you believe is fundamentally wrong right now? Where's the biggest mispricing that could present an you know maybe an asymmetric opportunity for those willing to get go against the herd? Well, I come back to this idea that you won't have long rates come down as much. So, you've had an environment where, you know, and that relates to everything because you've had this risk on environment as I uh talked about with the corporate credit and all the debt that needs to roll at higher rates. Um that investors have, you know, continued to double, triple, and quadruple down on this idea that Fed rate cuts would provide the fix. I mean, even seen things like in the private debt markets and and private equity where they're just stringing, you know, the extended pretend games keep going and going. So, there are a lot of places where having that assumption called into question could wreck real havoc and in ways that we can't anticipate, especially as relates to the private markets, which have just mushroomed in the last few years. So you could have, you know, tremendous issues surrounding private equity and private debt and all of that will come home to roost uh sad to say on pension balance sheets. Um these have been the big marginal investors in all of these illquid assets. Um so that's that's a scary thing. Um but in terms of you know that would be my main thesis is that that's the overarching assumption upon which everything is built right now whether it be the rally in equities the tightening of corporate credit spreads um everyone seems to be wagering that once the Fed cuts rates all you know all sins will be permitted and we're going to be we're going to be off to the off to the races. It's almost like you you took it right out of my mouth there. I mean because there's sophisticated investors that watch this and they're wondering, you know, what that one indicator that you just mentioned that that is true tell for this new environment that isn't on the front page of financial press. I mean, are you watching those high yield credit spreads that you talked about? Is it maybe the copper to gold ratio, tips, break evens, or something else else entirely is kind of your primary guidepost? Yeah. Well, so I have been watching high yield spreads and obviously they just have been narrowing and narrowing and narrowing and uh in the last couple days they had started to widen out a bit, but I mean it's just you can barely even identify that without a microscope because they're so compressed. Um, but I, you know, I guess I would say that the one, uh, near-term risk to this thesis I have that the long end probably won't get the kind of bid it normally does is that speculators are massively short the long end. So, I'm not the only one who is concerned that maybe Fed rate cuts won't be the solution. If you look at um you know uh the speculative netl long uh commitment of traders to the 10-year, it's about as short as it's ever been. And so there is the potential for some short covering rally. And maybe that's part of what's driving the move today, albeit just seven basis points uh on the 10-year. Um, but I will say that the interesting thing about looking at that chart of netspec uh commitments to the tenure is that they were also really short in May of 2023, which I would argue was the beginning of this era post fiscal dominance, which really began with the COVID stimulus spectacular. Um, they were massively short in May of 2023, and the 10-year yield went up a 100 basis points. So, they were dead on the money with that trade. So it may be that it's not sending the contrary signal that it has prior because these people have actually figured out this time that uh the math is the math and it's inescapable. Yeah. Inescapable. Well, you heard it here and we haven't talking about it. It it's I mean as much as we maybe frontun the news a little bit, things are still happening that we've talked about. Yeah. Amazing how that works. Yeah. Amazing how that works. All right. does in incredibly deep and and and actionable analysis on this really interesting moment here on the macro space. Stephanie Pomboy, founder of Macro Mavens, joining us now. Of course, you can check out her latest research. We're going to put a link in our description. Thanks for this stuff. I appreciate it. It's my pleasure, Jeremy. Always fun. Uh lots to cover. Always lots to cover. Enjoy Colorado and we will see you soon. Appreciate your time. Thanks, Jeremy. All right, that's all we have time for in Kiko special news report today. I'm Jeremy Saffron. Don't forget to hit the subscribe button. We got you covered. Thanks for watching and we'll see you next time. [Music] Heat. Heat. [Music]