Warren Pies: The Market Just Did Something That's Never Happened Before — And It's Bullish
Summary
Macro Outlook: The guest projects a Goldilocks first half with growth and earnings inflecting higher, disinflation still present near-term, and rates likely to drift lower.
AI & Disruption: AI is a core theme driving a productivity boom, major hyperscaler capex, and creative destruction, particularly in software/SaaS, while favoring hardware and compute.
Software Rotation: The software industry has derated from stretched valuations (15x to ~10x sales), with concerns over terminal values and margins, yet the rotation is seen as healthy for the broader market.
Buybacks Dynamics: Hyperscaler capex may trim MAG7 buybacks, but overall S&P 500 buybacks could still reach roughly $1.2T, mitigating fears of a buyback cliff.
Commodities Over Bonds: For diversification alongside equities, the guest shifts preference to commodities—particularly precious and industrial metals—as protection in an overheating late-cycle environment and as “undisruptible” assets.
Energy Perspective: Oil was stuck last year but is expected to bottom, with energy and even natural gas positioned as beneficiaries of the broader commodity and capex cycle.
AI Infrastructure Tailwinds: Data center buildouts and compute demand support semiconductors and select materials, positioning hardware and bottleneck inputs as potential outperformers.
Fed Risk: A less independent Fed under the new chair could raise term premiums and weaken cut transmission to the 10-year, modestly lowering the “Fed put” and posing a risk to risk assets.
Transcript
earnings inflecting higher, deficit inflecting higher, growth inflecting higher, rates are still going to come down this year, and you're having a productivity boom because of AI starting to take place in the background. So, this is a very equity positive environment. We've had some froth taken out of the software space, but here we are. I mean, at the moment, we're, you know, within spitting distance of a new all-time high in the S&P 500. I would point out that every single one of these instances where we've come up to a high and then pulled back, the pullback is higher than the previous pullback since that November selloff that we had, that little November dip. >> Warren Pies, founder of 314 Research, it is so wonderful to welcome you back to the show. Great to see you again, Warren. Really appreciate you taking the time. >> Yeah, absolutely. It's good to be back. >> It's great to have you back and it's been a while. The last conversation we had was back in August and I feel like a lot has happened in that time and here we are into February of 2026. So Warren um since it's been a while and it's been kind of a crazy time in markets of late. Can we just start big picture um the macro view the framework in which you were looking at the world today and as you know Warren on this show you can take all the time you need to set the table when it comes to that big picture macro view. Yeah, I this morning I was like, "Okay, I'm I'm going to be speaking with Julia again. What did I say back in August?" And just try to kind of pick up the conversation for anyone who was paying attention to the last time I was on the show. And so, like, if you're go back and listen to that or just to give you a quick synopsis is our view back then was that we're in this secular debasement regime. And it's become obviously much more popular to say that. uh our view is that a little more nuance that this is a mindset shift amongst investors and so and it's a secular mindset shift meaning that it's occurring over a period of years. We think that the debasement mindset really that regime took place with the pandemic and the fiscal response to the pandemic and so that's the operating in the background at a very high level. And then we also said back then our view was that despite that secular debasement regime a regime where maybe bonds are going to underperform and uh inflation will be elevated versus what it's been over this previous what we called the deflation regime which took place from the GFC to pan the pandemic. We thought we were in a period of cyclical disinflation. So the three big vectors of inflation, shelter inflation, oil, energy uh in labor market were all disinflating. And so our view is that you had this debasement regime going on in the background but cyclical disinflation which had us favoring fixed income as no first off let me back off. It's it's a a positive environment for equities in general. That's the basic takeaway. And so the question from a portfolio construction standpoint is if you're going to be overweight equities, how do you want to what's the ideal portfolio broad big picture hedge? And our view was that growth was the risk last year. So you wanted to stay with a healthy bond allocation and now we are we transitioned around the end of last year where we were saying okay in 2026 that ideal portfolio is is going to transition to an overweight and commodities and commodity related businesses uh to pair with your overweight equity position and that's that transition is taking place I it's been happening probably even more rapidly than we expected but that's Uh that's the transition we're looking for. The first part of the year we expect to be a Goldilocks environment where inflation is still tamed from those factors we talked about last time. Those three factors are still holding inflation down. Um but we do see an economic reaceleration with the fiscal expansion due to the one big beautiful bill and uh in lower rates as well. And so that to me is that's out there and you're starting to see those um in the desire of the administration to to quote unquote run it hot into midterms. So you're starting to see that out there percolating and I think that you still have this Goldilocks regime for the first half of the year. Now that's the big picture. That's our takeaway for the macro. But then you have all these intervening factors that we have to analyze at any given point in time. You have the new Fed share. you have this disruptive AI technology exploding onto the scene and destroying industries like overnight basically it feels like um and you have tensions geopolitical tensions the Iranian uh situation you have trade tensions ongoing with China and things like that and so to me the question is this is a delicate balance this goldilocks that we defined and the question in my mind is will any of these these issues um the massive capex build the software disruption the new Fed chair all these things these potential things are they big enough to knock us out of that delicate balance that's going to define in our view the first half of the year so that's where our research has been digging in is like okay we have this delicate balance we have this goldilocks thesis now all the live bullets start flying can that thesis survive this and that's where we're at right now >> what a Great frame up. So Goldilocks um is the view for the first half here, but as you kind of point out, there are some forces at play or risks. How are you starting to assess those? Maybe we can like dive in because you mentioned like AI for example and impacting industries and a lot of folks are talking about like the SAS magdon or I don't know what you you call it, but um maybe like how are you thinking about the various forces? What do you make of that one that we've seen in markets of late? >> Yeah. Uh well, we see it as like I I would say there are four risks. Last week we wrote about four risks to this delicate balance. Um number one is and they're all the first two are related. We would just say like AI, let's just put AI as the the the the broad uh label, but the two specific issues stemming from AI is this massive buildout from the hyperscalers. the capex ramping up to I think it's going to be about 670 close to 700 billion from the hyperscalers in 2026 capex. So that's almost like it's approaching 2 and a.5% of GDP. That's a massive number. And the other side of that coin is that the hyperscalers, MAG 7 in particular, have been buy net buyers of stock in recent years and a big support to buybacks, which is really an important um marginal source of demand for equities. is something we pointed out last year is that in the April selloff, Liberation Day selloff, retail set the lows, but then buybacks really spiked in that that weakness window and then that's what set the bottom and then you forced these systematics vault control CTAs uh back into the pool which is why we had one of these record lockout rallies from the bottom last year where we just never had a pullback until November. we had that 5% pullback and so the question is is will those will that capex boom cause buybacks to dry up which will then remove that support from the market can the bull market survive that that's the first AI issue we see the second AI issue is this disruption the creative disruption this creative destruction um shumper style that is taking place in the first uh big industry And at crosshairs is the software as a ser software at SAS companies in particular. Um those were the darlings of the the previous bull market and you're now like the barriers to entry are potentially leveled at this point in time. That's the the concern. That's what's getting priced. Um we're in the process of pricing that. And that I think concern is even broader than just SAS though. It's uh what companies have modes that can survive this um new technology as as AI starts to really uh improve and exponentially improve and start getting um taking share in different industries and sectors. So that's the second risk in the AI world. So we see those two. Um what I would say is I think that we neither of them at this point in time have us in a place where we would say the the equity bull market is at risk. You know that's the bottom line is like are you still bullish all that stuff that's happening? Yeah, we're still bullish. I think you have to have a healthy respect for the amount of of change that's taking place. Uh but I would say on the buyback point uh we have uh we I think the the total market buybacks have increased by $300 billion over the last two years. Uh last year MAG7 it's a big buyback source like I said but it's it's been 22% it was 22% of all buybacks last year and it did actually drop just a touch from 24 to 25 and the market clearly did just fine so you know and I think non-mag 7 buybacks increased off the top of my head if I remember it was 160 or 170 billion last year so when I do the numbers I think that mag seven buyback tax could very well be down 80 billion this year um which is meaningful and there's this shifting in this where performance could shift too because of this um that's happening but that 80 billion I think will be made up by the rest of the market so I don't see that's my first big point is I don't see buybacks falling off a cliff this year I could see like if there down the line maybe that's if we continue do this capex boom and it roll it spreads into other industries and etc. then yeah that that could happen but I don't see it happening this year. I don't think I think it's a little bit of a narrative that's taken on too much waiting and is getting discounted in people's minds too much. So that um those are the numbers there. The other thing I would add on the buybacks is you start studying uh years where buyback volume or buyback numbers uh re change and negatively fall off from one year to the next. In those years where buybacks decrease, the market since the GFC has been higher by uh double digits every year. And so it's not a death blow to see some moderation of buybacks is the the historical evidence there. So that would be like my my big picture takeaway on that risk and then on software and we can get into this more with your other questions but again I don't see it I see it pretty contained. I think this rotation is actually healthy for the market. I think it tells me that there isn't some broad bubble that's forming. uh software went from 12 and a half percent of S&P 500 market cap to 9% since the release of uh cloud code version 2 back on September 29th. And that's a that's a meaningful derating. You've never seen in the history of uh the S&P 500 a situation where an industry this large more than 8% of S&P 500 market cap has declined by more than 25% in 3 months and the market has remained at within 3% of all-time highs. I think that's um actually really impressive that the market was able to rotate that much and uh and do some some resetting of uh of the froth in the process. So it's actually healthy to me. >> That's a really interesting point that you just made. It's um as you point out it's like a rotation and because it's been able to I guess sustain despite that rotation but maybe the market's healthier than people actually were thinking or talking about. >> Yeah. I mean so when I look at the when you see fear out there and the other thing we looked at was so you know software it's gone it was overvalued. You know, the truth is like it was this the software S&P 500 software industry was trading at 15 times revenues, 15 times sales. Um we've basically knocked it down to 10 times sales. And if you do like a basic regression of um margins to price to sales, this is this entire move has really just corrected overvaluation. So the good news is that we've corrected overvaluation and on this basis when you compare the margins and topline uh multiples for this software industry we're we're kind of norm we're back to a normal valuation we've we've killed the froth. The bad news is if we're really calling the terminal value into question of these businesses, if we're really saying that um this is an existential crisis to the software industry, then I don't know that a normal quote unquote valuation is enough and you might need more and you might see margins start to deteriorate. So we modeled that out too. We looked at if margins so right now the industry is like at 30% fat margins twice that of the S&P 500. If if we went down to S&P 500 level margins roughly 15% just cut them in half. How does that impact the S&P 500? Well, if if this all were able to occur in isolation, which much of this move has occurred in isolation, which is kind of surprising, you'd see S&P 500 margins fall by 70 basis points out to 2027. So, your estimated margins right now are 15.8% for the S&P 500. if software derated it or was it was cut in half, you would see that go down 70 basis points. Um, and the bottom line read through on that and why we don't feel so um nervous about this is that uh that in our mind would take like the way we do fair value, maybe 5% off the S&P's fair value. So again, that's a the assumption there is that this is is contained to to software. The assumption is also that um everything else is held constant. These are very unsophisticated kind of assumptions. But we do it just to make points to ourselves like what's the actual what's what is the scope of the damage. The reality is if we are living in a world where software is going to be fully disrupted then you're living in a world where hardware semis needs to be bid in my opinion because compute is is uh is going to be the thing that uh everyone is is scrambling for and that's kind of what the capex numbers point at. So it doesn't make a lot of sense to derate software as aggressively as I just did in that example and not rerate in some way hardware. um or the other areas that could become bottlenecks to this massive new industrial revolution that we're going through. And so when I say all that to say, look, we put the buybacks in context, 80 billion, okay, that's 80 billion, that's out of what we could probably be getting 1.2 trillion of buybacks in total for S&P 500 this year. So, which is growth over last year. Not not a death blow to the bull market. We say the software's gone to fair value. If it's cut in half from here, you're looking at a 70 basis point reduction for S&P 500 margins. Again, not a death blow, maybe 5% off fair value. And the other side of that that we're not factoring in yet is what's the upside for hardware. So, this is our way of using data to try to take some of the scary narratives that are out there and start coming to terms with them and say, okay, is this really threatening your big big picture bull market view? We're not there. >> Hey everyone, I hope you are enjoying this interview. if you can take a quick moment and hit that subscribe button. We are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. Yeah, you're debunking a lot of those narratives and um you pointed out since the global financial crisis, there have been seven years with buyback contractions um but the S&P has returned double digits in each of those years. Um, let me ask you about just like the markets in general. Like we've seen um gosh, last week was a wild a wild week, but now we've seen the Dow at a record high. Um, we've just seen markets like touching new highs and records. >> Does it does it surprise you at all or pretty much expected? >> I mean, the when you get this kind of dis the other thing we've seen is like there's this is there's massive dispersion. It's another way you're saying is massive dispersion in the market. And so we we started digging deep into like, okay, what are these dispersion events? When do they usually occur? What does it look like? What is this? What's this one like in the um this was a top six uh when you look at like 21day dispersion of returns under the surface of the S&P 500. Like this last period we just went through was was in the top six all time uh going back the S&P 500's history. And so extreme dispersion under the surface there difference in in uh returns across the 500 stocks in the S&P 500. Uh what we find is those usually that dispersion happens during periods of during corrections or selloffs or you know when there's a lot of volatility in the index. And uh and this one's different because it's one of those those those cases, one of those six cases where we we got this kind of dispersion while we were within a few% of the all-time highs. And this is actually again you look 6 months out in these cases. There's not a lot of them, but each one is positive 6 months out. And not not just market returns. It's two or three times market returns usually. So the message I take away from that is this is a way there's two ways you can correct sentiment. We're always trying to correct sentiment in the market. This is a way of correcting sentiment other than a total collapse of the index. It's a aggressive rotation with dispersion close to all-time highs. I think the macro is really supportive of the markets. I mean we talked about that back in August and really nothing has changed. It's a slowmoving story. Like I like I said, I we're running 6ish% deficits as a percentage of GDP uh in the face of uh what is turning out to be a an industrial revolution sized capex spending spree. So 6% deficits, 2.5% capex this year from the mag 7. Um when you put all that together, I think the economic backdrop for growth looks good. You look at what earnings have done, earnings continue to track higher than we see over their seasonal averages. So Q4 stuck out ex like is extremely bullish to us because it divorced from its there's a there's a triedand-true seasonal pattern. At the end of calendar Q3, you start seeing the Q4 estimates roll over. That didn't happen this year. They went higher and then we were rolled into Q1 now and they're going higher. So what that is is telling us is that these companies there's a very upbeat message coming through these companies on the calls and going through the guidance analyst guidance and so earnings inflecting higher deficit inflecting higher growth inlecting higher inflation should be fine. I think that the Fed is a whole thing we can talk about but I think rates are still going to come down this year. Um and you're having a productivity boom because of AI starting to take place in the background. So this is a very equity positive environment. We've had some froth taken out of the software space, but here we are. I mean, at the moment, we're, you know, within spitting distance of a new all-time high in the S&P 500. And I would point out that every single one of these instances where we've come up to a high and then pulled back, the pullback is higher than the previous pullback since that November sell-off that we had, that little November dip. >> And that should be expected. I take it. >> That's positive. I mean, it's positive when you when you when you see higher lows and the things we're looking for things that >> you know, the the so the the the last low I think was um 6896 6796 on the S&P 500 and we we managed even in this last sell-off here where there was like where the this the Bitcoin selloff was starting to accelerate. The software stuff was starting to accelerate. We stayed above that. We closed above that. The other number to watch is the December low. So the December low was 6721. You don't really want to see the market break the December low in the first two months of the year. It's kind of like a it would be a bad omen for trend. But we keep holding in there. And at the same time, our objective sentiment indicators, we have a sentiment composite. We look at things like ETF inverse ETF volume. Inverse ETF volume spiked up to 43% which is really consistently what we've seen in these corrections. these like say anything from 5 to 8% that you would expect to see >> and and it shows us that retail is getting sort of scared in the background. They're starting to play try to play on the short side. So to me, like I said, there are two ways to correct sentiment. You can have a selloff and outright sell off an index or you can have rotation that shows up as this dispersion. And I think we're in that second case because it's showing up in our sentiment indicators. >> Fascinating. Okay. Um I know sentiment's important. I know it's something you look at. Can you just kind of set the stage for sentiment because I has it been more pessimistic of late? You were just referencing like the retail getting a little bit scared. What what's going on as relates to sentiment? >> Uh yeah, I've I think it was uh it's I've never seen with some of the the calls I've had. Uh there's so many different ways you can track sentiment and measure it and positioning goes along with sentiment, you know, and uh some there are many respected especially banks that have this um insight into how big pools of money that they custody are able to see. Um they they have they they have indicators. They might be better than ours. I don't know. I get to test them and and figure it out. But we have our own proprietary set of indicators. Um and like I said that we have a model a sentiment model. It's been in the at the moment it's showing mild pessimism and it's uh it spiked up after that November selloff. It never got to in our view it never got to extreme optimism which is a sell and it's moved down to I'd say just call it mild pessimism. It's not where you would expect us to be. Uh if we were going to have like a 20% bare market or something like that, you need to go lower. Like I think we're at like 39 is our reading. We scale at 0 to 100. 39. Anything below 40, we consider pessimism. Um back in liberation day last year, it got down to the teens. So that gives you an idea of where we could go if this thing were to accelerate. But we're not in some place where I think that this sentiment is just fine for the middle of a bull market as far as where we've corrected to. And that's corroborated by this by inverse ETF volume, which I do think is one of the better um indicators that are out there right now. You have like the AI, you have put call stuff, you have um margin uh balances and things like that. But I think that the the inverse ETF volume is great because we've seen this proliferation of leveraged and inverse ETFs. This is where retail this is how retail accesses when they want to be short or long or use margin. Basically, they're dealing with leveraged ETFs and inverse ETFs. And uh so what we do is we combine just what we call the speculative universe. So the inverse ETFs and leveraged long ETFs and then we look okay what percentage of that volume is going on the short side into the inverse ETFs and that number it usually during this bull market just to give people an idea it bounces around between like 20% at tops uh to 40% during pullbacks and then when there's something really nasty like liberation day we go up to 50%. We got up to 43% during this last uh situation. The last week that we were in actually a couple days ago is the high on inverse ETF volume. So to me that goes along with our sentiment indicator. I don't think that that sentiment is uh is uh is optimistic. I think it's on the pessimistic side. It's not the most washed out you'd ever see. Um but but it's more washed out than you would expect given the fact again that the index is less than 1% from an all-time high. So what it tells you is you got to look at what's happening under the surface to understand how much there's been a lot of pain. There's been pain in crypto, there's pain in software, there's pain in these high-f flyier stocks and that's showing up in these these uh sentiment gauges. But at the same time, the rotation has allowed the index to stay towards highs. I look at that, you look at the history, look at all these other things that we we boiled down and I think it's a positive >> setup. Could be wrong. I mean, it could be like the beginning of something awful and hopefully we would catch that soon enough and pivot. But I, you know, you have to take risks in this business. You have to, you know, weigh the evidence. And to me, uh, you get paid to, to get out, step out there when people are worried about terminal values and existential risks and things like that. like those are times to step in and our indicators say it's not a bad time to to stay long stocks. >> So interesting. Um and I love learning about the various indicators and it's like um it's so that one is it a bit contrarian then like if the the sentiment is a bit more negative it's actually maybe more of a buy sign because you're talking about retail inverse ETFs and >> I should have said that. Yeah. >> No, it's so interesting Warren. I really like this. Yeah. >> Sentiment is always inverse. So like >> like the other things we look at like V target funds. So that's like these are funds that dial up positions when volatility is low and then they sell when volatility spikes because they're targeting a certain overall portfolio. V. We also look at CTAs. These are trend followers. They're um your classic trend followers and you can track their positioning. We track their positioning and then basically triangulate where they're doing in different assets. And our view is that these are the kind of big buckets retail buybacks uh CTAs uh vault target. If you can figure out this picture of all these places, these these buckets, then you can get a pretty good idea of where I think the baseline market is. And our view is that like back in liberation day, these things all pointed to a screaming buy because once we set that bottom, the buybacks came in, retail came in, and then these other guys were forced in. We're not in that position, but we haven't had a 20% draw down. We've had a one person draw down, but what we have done, it's a little bit like, >> you know, changing the tires on a car while you're still going down the highway. We've kind of done a lot of repair work on the on the sentiment side while we're still in this uh pretty healthy trend environment. Um, and so yes, sentiment's always inverse. So if you hear pessimism, that's good. And if you hear short retails using inverse ETFs, that's good. Um, that's what you want. >> So interesting. Okay. And um the bottom line here is you're overweight equities. Um are you actively buying equities at these levels? Are you waiting for like are you spotting opportunities? Is like what I don't know what you can even share there, but just kind of curious when you say overweight equities, is that like actively buying or kind of holding what you have? >> Well, we've been overweight since we upgraded equities back. We've been in and out benchmarking overweight for off and on. We we upgraded like back on it was that Thursday where we took it. We had set the lows back in November. I don't remember that was like the November 21st or 20th or something like that. And we've been overweight since then. We were overweight for up until a couple months before that too. And that's just been our basic uh back and forth. And we don't see a reason to downgrade stocks. We're not going to go we're overweight. We're not going to go max overweight or something like that. We don't it's not if we if let's say our sentiment indicators went even showed even more pessimism our positioning indicators got washed out and the macro look good then maybe we consider that but that's not the kind of setup we see it's more of like a don't panic sell here we don't need to res reduce our risk that's not where we're at in the cycle and our view we still believe the first half of this year is going to be strong we still believe that the economy is inflecting higher and we still believe that the overall the macro data is going to be very supportive earnings macro are going to be good. And then the question is, will any of these sort of gray swan events, will the new capex numbers, will the software disruption, will any of that disrupt it, any of that stop our the bullish outlook? And it it just doesn't at this point in time. Um, we also have the new Fed chair and what's gone on in precious metals and those things are also potential risks that we could talk about, but the net is we're still overweight. I want to talk about commodities. Um, I take it precious metals are probably in that universe as well. And I I have to give you props, too, because you talked about gold on our August episode. Um, and we've certainly seen quite the run in the precious metal. Um, just one thing you wrote in a recent note. Um, you talked about coming into the year, we argued that quote commodities will surpass bonds as the best portfolio diversifier to own alongside equities. Earlier price action suggests that the movement is here. I really like this line. When disruption is the risk, own that which cannot be disrupted. Can we hear your thesis on the commodity on commodities more broadly? >> Yeah. Well, the as a hedge to the equity portfolio, I think it has two benefits. I think number one, uh when you have a Goldilocks regime, which we're in, you're always oscillating between overheating and overcooling in the economy. And like I said, I thought last year was an over cooling worry where you had like it made sense to be long uh bonds against your stocks and that worked out. I mean, generally yields fell uh last year uh and and so that was a good hedge. And commodities, we liked gold, we like precious metals. Our big concern last year was oil was going to be stuck and that's how it played out. Um this year, I think we've been looking, we expected oil to bottom in Q1. That's obviously a little tricky and uh we think that the risk to the bull market is going to flip to overheating and we're going to have to see how the Fed and markets digest the potential for an overheating economy as we get into what what I think would be more like back half of the year type of concern. So that's the first reason to own commodities is that if you're starting to overheat in a late cycle environment, commodities are classic outperformers and we go through the different commodities that are needed for um this data center capex buildout. You're going to need a lot of metals, industrial metals, precious metals feed off that debasement theme. And oil, I think, is starting to finally come through a very fundamentally rough patch. And so to me, the stars start to align for commodities there. And then the the other reason would be what is your risk to equities? Another risk is this disruption risk. And if if you think about disruption, that's what's going on software stocks. And so I think everyone is going through this process of okay, what is it in my portfolio that can't be disrupted? And it's generally these things that if you drop them on your foot hurt and that's the that's the commodity play. I think that that fits that non undisruptible bucket very well. Um, and I mean I've been watching where quality we have a very strong quality bias in our in some of our models and we watched the quality factor just get really beaten up over the last 18 months. And there's a part of me that wonders quality is synonymous with a moat maybe asset light kind of business. Not a lot of this commodity exposure in a quality business. And you've seen those those stocks get beaten up for 18 months. And you have to wonder how much of this AI disruption story has been going on for a little bit of time now. And maybe uh you're starting to see moes across the board, not just in software question. Uh then then I think you're going to have more of a piling into these areas where there's uh it's harder to disrupt and that leads you to commodities. So those are two big things. I think we're going to overheat later this year and commodities are hard to disrupt. If you're gonna if AI is going to go exponential, you need to own hardware in commodities in non-disruptible, undisruptible, whatever the word would be >> industries. >> Such an interesting framework to put it. Do any of the other um kind of typical narratives, if you will. Do those play into wanting to own commodities like inflation, for example. Um I guess we can bring up dollar weakness, like debasement trade. those are those still applicable or is it is there something like even more like bigger here that's like not as discussed like you said that I thought that disruption um angle was really interesting I hadn't heard others talk about that >> well one thing I think is that a lot of time so number one yes there's the debasement is re like I debasement is real disruption is a real threat but I do think in the short to even intermediate term these days, the market runs on memes a little bit. >> Oh, that's a good way of putting it. Yeah, >> the long run is going to be truth and wherever the the truth of all these situations is, but in the short to intermediate term, you got to find a meme that explains the world you're in and then flow start tracking that meme. And uh I know that sounds a little bit like cute, but that I do think there's truth to that. And so I think it makes sense to kind of package the price action you're seeing into some narrative. Everyone's doing it. Um and and then to say like does that narrative make sense? Does it pass the smell test? You know, and so you know the debasement thing it I do think it works. I mean we're running we went through that last time. I won't belabor the point but like I think that's a tailwind to the precious metals. You know that's why we got the I think you started getting the first moves from central banks and then money started falling and you get speculators piling on at the end and these moves that you never can guess where they stop. That's something we've said the whole time is you get into a gold bull market, you never know where it's going to stop. It goes higher than you think. It lasts longer than you think. And so you just got to ride and rebalance. That goes to your point like you're be overweight or rebying. Well, you need to be rebalancing aggressively in these volatile markets. So if you have a target and you fall off that target, you need to be buying things that fell off your target to get back to that that target weight and then selling things that go blow way past your target to get down to that target weight. And so um gold and silver to a certain silver is kind of a small market but precious metals yes to basement's a tailwind. I think the data center buildout is a tailwind to industrial metals. It's a tailwind in fact and it's going to be a tailwind in meme too. I think people are going to start buying those things because they'll say like we need these industrial metals. We natural gas we're seeing some people start to filter into that market even though that is a widow maker market. Um, and oil is it hasn't moved. So, there's there's perceived value there from speculators. I think there's been a little bit too much speculative uh action in oil here in the short term, but it still makes it fits the bill. Like there if you're worried about getting disrupted, we don't know how AI is going to turn out turn turn out. You need to go to the base level and the base level are made up of these commodities really >> and so yes, there's I think these are all tailwinds to that same story. Overheating is the cyclical tailwind. Debasement is the precious metals tailwind. The AI industrial revolution buildout and disruption is a secular tailwind for industrial metals and to a certain extent energy as well. >> Yeah. All right. Let's talk about the Federal Reserve because I feel like you pointed to this out in your note. There's been so much happening since the announcement of the appointment of um Kevin Walsh as the next um Fed chair. reading your note, I tell you you weren't that stoked on the pick or or of I guess the universe of candidates here. Can we start with maybe more of your assessment of the pick? Like how are you thinking of about it from an investor perspective? >> Yeah, for investors like everybody has their political views and whatever and um all this stuff is so hard to disentangle, but from an investor's perspective, I think Kevin Morris was the worst pick. Um, and I don't think I think he was the worst pick from uh a merit perspective, too. And those things all kind of blend together. And so his his track record has been is poor. He he has a bad track record. He, you know, he was too hawkish going into and coming out of the GFC. um he really is always hawkish until the last couple years where Trump came into office and he's kind of been asking for the job, wanting to get the job and some you can like twist yourself into an intellectual pretzel trying to excuse why he did this but it's all for we all know why he's trying to get the job and it is what it is and so he he got it but I don't think um his track record isn't very good and so I think that we know he's got the he got the job not from track record but from because is a loyalist, is perceived as a loyalist to Trump. That hurts independence. And when you when you hurt Fed independence, you see term premium expand. You see, you would expect to see yield curve uh steepen, which is synonymous with term premium in my view. And that's exactly what we've seen since they he was nominated. um he's gonna have a hard time if the goal is to lower rates by the maximal amount, he's going to have a hard time convincing the rest of the committee to cut rates because of this track record that he has, because of their skepticism of him, and because he's constantly criticized the Fed for not being for being too data dependent, using too uh much forward guidance. He's just always critical of the Fed. Look, like everyone has it see like the most universal thing is to be like pissed off at the Federal Reserve and criticize them. I think it's like the most easy punching bag for everyone from all over the political spectrum to to to criticize the Fed. Um, and so I get it like there there's like it's very popular. like what I'm saying right now is kind of not popular, but um he he's critical, but the thing he doesn't do when he criticizes is really offer a solution. Like how what are you going to replace data dependence with not data? What is the alternative to data? You need to be able to speak the language of the other committee members if you want to convince them to cut rates. And he doesn't seem to want to do that. He's got he's just way more about like he's a grade a critic in my view, but he doesn't really solve problems. Um, yeah. Go ahead. >> I was going to say is one of the problems he's going to face like being able to build consensus like that matters. Like you said, speak the language. >> Yeah. I don't think he's going to build consensus very effectively. That's that's exactly right. Um I I think he like I said, he's just been critical. He doesn't have anything to offer except he's he likes to talk about shrinking the balance sheet. But when you really dig into shrinking the balance sheet, I my personal feeling is it's just something he says to sound smart. It's something he can say when he's trying to get the job. he wants to be perceived as hawkish and critical of the Fed, but at the same time, you know, talk up how much he wants to cut rates. So, what he what can you do there is you say, well, if we shrink the balance sheet, then we could cut rates a lot more. And I don't think there's a doesn't make a lot of sense to me. Like, what's the reason for shrinking? We did shrink the balance sheet by two and a half trillion over the last uh few years. And I don't really know that it did a whole lot. and uh and you know there that we've gotten it to the place where we can given regulatory environment and banking environment that we have and if we go farther we risk a banking crisis and for what and so you know in order for him to really shrink the balance sheet in a meaningful way it would require regulatory changes that I haven't heard him contemplate and so to me that's just something he says it's not going to change like I don't think that the balance sheet policy is really going to change when he gets into office at least not any or into the position at least not anytime time soon because it's just reality. It's not I just think he's running up against reality. And so we'll see. Maybe I'm proven wrong and we'll we'll take it from there. But when I step back from all that, the net of it is that there's more there's less Fed independence. There's higher term premiums and higher long-end rates because of that. Less of a proclivity to push through rate cuts if we get to a a um a controversial place in the cycle where there's some disagreement. he's not going to be the guy to sell the rest of the committee and build a consensus. And if we had a real crisis, his aversion, publicly stated aversion to expanding the balance sheet means we're not going to have QE. So when I look at all that stuff, the net net for investors is the Fed put goes lower. The Fed put being like that hypothetical place where if the market falls to this level, then the Fed gets involved. They cut rates, they expand their balance sheet, they do whatever they need to to stop the bleeding and stop systemic risk. He's been I think that shift lower under a Kevin Worsh Fed. Maybe you're happy with that. Some people will be happy with that. But I'm saying from investors, if you want to be long assets, that's a um that's that's a not a great uh phase change. >> Investors are going to want that Fed put even though people some people are going to criticize like why do we have the Fed put or whatever. From an investor perspective only, they're going to want that Fed put in the end. >> Yeah. From an investor perspective. And you can make the case that you there's there's fine debates to be had about like what are what were the societal level um benefits and weaknesses to different Fed policies. Sure. But like from the regime we've been in is one where the Fed intervenes and saves the market and there's going to be strong disagreement on whether that should be or shouldn't be. But I think Wars change pushes that Fed put a a little bit lower. I still think he's a lot of talk in what he says and when the rubber meets the road he'll he'll do whatever he has to but um there could be more waffling before we get to that place. >> Do you think um the appointment of war is that one of the kind of risks against the bull market narrative right now or does it bode well for the narrative? >> It's a risk against it. So all these things we've been talking about they all net out as bearish. >> Okay. >> It's about whether these things can >> derail. they strong enough to derail those the big time fundamental factors, economic reaceleration, earnings reaceleration, a Fed that's cutting um stronger fiscal deficit, big capex boom. >> Can we derail that >> that core? And I don't think it can, but it's all net bearish. Like don't get me wrong, the buyback dry up, the stock, the the the disruption being um forced on the rest of the big violent rotation we've seen in software and what's happened there? That's also a potential net negative and worsh is definitely a net negative for the market. >> And is it because he will he won't have the ability to do the rate cuts that Trump wants? Like what what is and be >> number one? Yeah. Number one, when he cuts rates, they won't transmit to the long as much because I think he's hurting I think he's hurt his the Fed independence. So to me, like in a normal cut cycle, when you cut 25 basis points, history says this is just a historic average. Mhm. >> The historic average is that the 2-year yield falls by 17 basis points and the 10-year yield falls by uh 10 basis points and you get a seven basis point steepening between the twos and the 10ens for every 25 basis points of Fed cuts. That's your historic rule of thumb that I would say. And with a W Fed, his 25 basis point cut will not transmit as much to the 10-year where it matters for the economy. What about with PAL when we've seen cuts because haven't we haven't we also seen like the 10-year backup as well? Is it a more recent development? Is I don't help me understand like where does why has it been behaving the way it's been behaving? And I take it that's probably not normal. >> Yeah, that's something that we talked about a little bit in August and like so the real time where the 10ear backed up when the the Fed started cutting was back in September of 2024 and through to the end of 2024. That's because the yield curve was extremely inverted. Okay? So, when the yield curve is inverted like this, all those rules that I just laid out kind of go out the window because that's a yield curve that reflects >> it's a recessionary yield curve because doesn't make sense for the the Fed funds rate to be um whatever it was 200 basis points above the 10-year back in September of 2024. It doesn't make sense for that. So when they started cutting there and they cut aggressively, they cut 50 basis points and then you saw the economic numbers come in stronger than we thought because there was a recession priced into the bond market at that point. That's what it was. Got it. >> The recession pricing had to come out and so a lot of people I know you've talked to a few on your show um like Jim Biano and I've had public kind of respectful public debates with him back and forth. Um he saw that as evidence of a Fed mistake and I saw that as just an unwind of a recessionary yield curve. >> Interesting. >> We're not at that place right now. The yield curve is 70 70 plus basis points. Two tins is totally is normally upward sloping. And so >> um at this point in time all those rules of thumb I laid out they should they should transmit >> you should at 25 basis points it should transmit somewhat to the long end to the tenure. But if the tenure doesn't believe that Worsh doesn't if the tenure thinks Worsh is it represents a less independent Fed it could you you could probably see some uh I think what you'd see is less movement out of the 10ear. So like that you cut 25 basis points and maybe the tenure just stays right where it's at would be my prediction. >> And I know the 10ear is like critically important for so many different areas of the market as well. Um what would be some of the broader implications of that? Um well I mean housing is the housing and anything interest rates that's the been the real crux of the pain for the consumer and everything. So like I think that's what you know you see Trump talking about housing >> related um antirust fights right now and things like that because we're going on an election season and everyone knows like what's the source of the pain? The source of the pain is that housing is unaffordable in this country. A new car costs $50,000 now. And interest rates combined with those headline prices. It doesn't work with incomes for most of the the country. And so you're seeing increasing pain and feeling of being left out. That's why you see everyone talking about the K-shaped economy and the the bottom half of the K is growing in size and growing in frustration. There's a political snapback coming from that that lower half of the K. No doubt. That's also part of like the debasement world. You're seeing these asset prices float up even and your income's not keeping up with it and you end up seeing consumer behaviors change. We've seen the savings rate fall, continue to make new lows. We've seen more gambling. We just had the Super Bowl last night. >> Oh my gosh. Every commercial. Yeah. >> Right. And so, and you see, like we talked about last time, coming off the bottom in Liberation Day, the weird thing about that selloff is retail at the bottom. Very abnormal. They were buying the dip. They've been conditioned to buy the dip. and it's part of these things are all related in my opinion and the changes that we've seen in the economy over the last 5 years. And so, >> um, yeah, that's that's what the if we don't get the tenure down, that angst around the housing market and those interest rate sensitive areas of the of the economy, that's going to remain. And so that's why when I when when Trump picked worsh, I was on TV saying, I tweeted about it like this is not going to accomplish your goals. This is actually counterproductive. you would have been better off picking a Fed uh chair like Waller who the market thinks is indep is is independent and will remain independent and call balls and strikes in the economy they sees because that would actually compress term premium and flatten the yield curve and cause cuts at the short end to transmit into the long end more. Um but he you know he went the other way. He value loyalty >> uh over over what I would say is merit. >> You just kind of referenced Warren the broader economic picture like the Kshaped economy. We actually haven't really talked about the economy in this episode. Um but we have like the the market remains in a bull market. There are some risks Goldilocks for now. Doesn't look like any are going to de derail any of that. But um how do you kind of think about the broader economic picture and how this does any of this like play into that impact that? Does the econ does the economic picture matter here? How are you thinking about the economy? >> Yeah, I think the economy is I think the labor market is softening. I think that the inflation will stay kind of muted here in the fir front part of the year and uh but at the same time you're going to have a fiscal impulse from the tax refunds and there is some of the the one big beautiful bill and these capex numbers you're seeing too because we have bonus depreciation so that pulls forward spending at the same time these consumers are going to get a better tax uh refund season and that's going to come through as a higher fiscal deficit. So, uh, you see all that and at the same time, um, there is a little bit of inventory restocking that has to take place because of the tariff lumpiness. And so, uh, I think there's there's basically, uh, and the big the big thing out there is AI is a true shot in the arm for productivity. So, productivity numbers were ex really high um, in Q3. Uh, if you trust the numbers, we saw, we went back and looked at it. It was the only the second quarter we've ever seen where um the unemployment rate was up by more than 20 basis points and uh and GDP grew by uh I think it was 1.8% Q over Q. Don't quote me on that. I think that was the numbers that we saw as a combination. Only other time we saw that combo of growth plus unemployment rate going up was back in 1992. Q2 1992 coming off the back of that 1991 recession. So it was this jobless recovery, >> but what we're going through right now is so it's very uh abnormal. There's a little bit of this savings because like I said, the savings rate is very low. So you have these people with the wealth effect spending down their savings, powering the economy that shows up as productivity. You could argue that's not real productivity, but I think the other component is real and that is the AI that is the AI um productivity boost and you're seeing that in the numbers now finally. Uh you're seeing it show up as a hesitancy to hire. So the economy is in a really interesting dynamic spot. I think we're going to grow. We're going to be it's going to be almost impossible to have a recession this year because of fiscal deficits in the capex boom that we're getting. But at the same time, the labor market's going to be weak on the weak side. I don't see a hiring boom because who's going to hire in front of this kind of generational technology um that's coming. And so I think it nets out as a high productivity environment where we probably accelerate some of these feelings of the K-shaped economy where the for the people who are on left out it's probably going to the the uh the nervousness might intensify the skittishness and and angst will intensify. But for the economy, for earnings, the S&P 500, the the places that um aren't going to be totally disrupted by AI like we talked about, they're I would see them accelerating and see their fundamentals accelerating and u and doing quite well this year. So, it's going to be a weird that nets out to a positive economy, but there's going to be some pockets of >> It sounds like it's going to be a weird year. Yeah. >> Yeah. I think that's >> a lot of pockets of Warren. I have to say this has been awesome having you back on. I really enjoyed your appearance back in August. I enjoyed this one as well. I know the audience is going to love um having you back. All right, before I let you go here, um let folks know where they can find you and support your work at 314 Research and any parting thoughts, anything that you'd like to leave this audience to think about. The floor is all yours. >> Um yeah, 314 research. It's the number three spellout14ress research.com if you're interested in um checking out our research. It's generally an institutional research product. The thing I would leave our room with or that we're excited about is um I know it's the age of AI is kind of the dominating theme of our conversation, but we have a our AI research assistant. We call it Caliban that um my partner Fernando and I have just >> started selling to our clients as an add-on. is now forced to get it as a client, but it's an add-on. And so, if you're interested in just like we're going to be selling it to the general public, you can look at I'll look up Caliban C a l i ban um and sign up there for when we release it to the general public if you're interested in basically being able to um expand your research capabilities. And it's um I could go on and on about it, but the best way to see it's very very impressive tool. The best way to to see it is to just check out our the 314 Twitter page, X page, and uh check out the demos. >> Love it. Warren Pies, founder of 314 Research, thank you so much for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and get better. Really appreciate you taking the time today, Warren. They grab me.
Warren Pies: The Market Just Did Something That's Never Happened Before — And It's Bullish
Summary
Transcript
earnings inflecting higher, deficit inflecting higher, growth inflecting higher, rates are still going to come down this year, and you're having a productivity boom because of AI starting to take place in the background. So, this is a very equity positive environment. We've had some froth taken out of the software space, but here we are. I mean, at the moment, we're, you know, within spitting distance of a new all-time high in the S&P 500. I would point out that every single one of these instances where we've come up to a high and then pulled back, the pullback is higher than the previous pullback since that November selloff that we had, that little November dip. >> Warren Pies, founder of 314 Research, it is so wonderful to welcome you back to the show. Great to see you again, Warren. Really appreciate you taking the time. >> Yeah, absolutely. It's good to be back. >> It's great to have you back and it's been a while. The last conversation we had was back in August and I feel like a lot has happened in that time and here we are into February of 2026. So Warren um since it's been a while and it's been kind of a crazy time in markets of late. Can we just start big picture um the macro view the framework in which you were looking at the world today and as you know Warren on this show you can take all the time you need to set the table when it comes to that big picture macro view. Yeah, I this morning I was like, "Okay, I'm I'm going to be speaking with Julia again. What did I say back in August?" And just try to kind of pick up the conversation for anyone who was paying attention to the last time I was on the show. And so, like, if you're go back and listen to that or just to give you a quick synopsis is our view back then was that we're in this secular debasement regime. And it's become obviously much more popular to say that. uh our view is that a little more nuance that this is a mindset shift amongst investors and so and it's a secular mindset shift meaning that it's occurring over a period of years. We think that the debasement mindset really that regime took place with the pandemic and the fiscal response to the pandemic and so that's the operating in the background at a very high level. And then we also said back then our view was that despite that secular debasement regime a regime where maybe bonds are going to underperform and uh inflation will be elevated versus what it's been over this previous what we called the deflation regime which took place from the GFC to pan the pandemic. We thought we were in a period of cyclical disinflation. So the three big vectors of inflation, shelter inflation, oil, energy uh in labor market were all disinflating. And so our view is that you had this debasement regime going on in the background but cyclical disinflation which had us favoring fixed income as no first off let me back off. It's it's a a positive environment for equities in general. That's the basic takeaway. And so the question from a portfolio construction standpoint is if you're going to be overweight equities, how do you want to what's the ideal portfolio broad big picture hedge? And our view was that growth was the risk last year. So you wanted to stay with a healthy bond allocation and now we are we transitioned around the end of last year where we were saying okay in 2026 that ideal portfolio is is going to transition to an overweight and commodities and commodity related businesses uh to pair with your overweight equity position and that's that transition is taking place I it's been happening probably even more rapidly than we expected but that's Uh that's the transition we're looking for. The first part of the year we expect to be a Goldilocks environment where inflation is still tamed from those factors we talked about last time. Those three factors are still holding inflation down. Um but we do see an economic reaceleration with the fiscal expansion due to the one big beautiful bill and uh in lower rates as well. And so that to me is that's out there and you're starting to see those um in the desire of the administration to to quote unquote run it hot into midterms. So you're starting to see that out there percolating and I think that you still have this Goldilocks regime for the first half of the year. Now that's the big picture. That's our takeaway for the macro. But then you have all these intervening factors that we have to analyze at any given point in time. You have the new Fed share. you have this disruptive AI technology exploding onto the scene and destroying industries like overnight basically it feels like um and you have tensions geopolitical tensions the Iranian uh situation you have trade tensions ongoing with China and things like that and so to me the question is this is a delicate balance this goldilocks that we defined and the question in my mind is will any of these these issues um the massive capex build the software disruption the new Fed chair all these things these potential things are they big enough to knock us out of that delicate balance that's going to define in our view the first half of the year so that's where our research has been digging in is like okay we have this delicate balance we have this goldilocks thesis now all the live bullets start flying can that thesis survive this and that's where we're at right now >> what a Great frame up. So Goldilocks um is the view for the first half here, but as you kind of point out, there are some forces at play or risks. How are you starting to assess those? Maybe we can like dive in because you mentioned like AI for example and impacting industries and a lot of folks are talking about like the SAS magdon or I don't know what you you call it, but um maybe like how are you thinking about the various forces? What do you make of that one that we've seen in markets of late? >> Yeah. Uh well, we see it as like I I would say there are four risks. Last week we wrote about four risks to this delicate balance. Um number one is and they're all the first two are related. We would just say like AI, let's just put AI as the the the the broad uh label, but the two specific issues stemming from AI is this massive buildout from the hyperscalers. the capex ramping up to I think it's going to be about 670 close to 700 billion from the hyperscalers in 2026 capex. So that's almost like it's approaching 2 and a.5% of GDP. That's a massive number. And the other side of that coin is that the hyperscalers, MAG 7 in particular, have been buy net buyers of stock in recent years and a big support to buybacks, which is really an important um marginal source of demand for equities. is something we pointed out last year is that in the April selloff, Liberation Day selloff, retail set the lows, but then buybacks really spiked in that that weakness window and then that's what set the bottom and then you forced these systematics vault control CTAs uh back into the pool which is why we had one of these record lockout rallies from the bottom last year where we just never had a pullback until November. we had that 5% pullback and so the question is is will those will that capex boom cause buybacks to dry up which will then remove that support from the market can the bull market survive that that's the first AI issue we see the second AI issue is this disruption the creative disruption this creative destruction um shumper style that is taking place in the first uh big industry And at crosshairs is the software as a ser software at SAS companies in particular. Um those were the darlings of the the previous bull market and you're now like the barriers to entry are potentially leveled at this point in time. That's the the concern. That's what's getting priced. Um we're in the process of pricing that. And that I think concern is even broader than just SAS though. It's uh what companies have modes that can survive this um new technology as as AI starts to really uh improve and exponentially improve and start getting um taking share in different industries and sectors. So that's the second risk in the AI world. So we see those two. Um what I would say is I think that we neither of them at this point in time have us in a place where we would say the the equity bull market is at risk. You know that's the bottom line is like are you still bullish all that stuff that's happening? Yeah, we're still bullish. I think you have to have a healthy respect for the amount of of change that's taking place. Uh but I would say on the buyback point uh we have uh we I think the the total market buybacks have increased by $300 billion over the last two years. Uh last year MAG7 it's a big buyback source like I said but it's it's been 22% it was 22% of all buybacks last year and it did actually drop just a touch from 24 to 25 and the market clearly did just fine so you know and I think non-mag 7 buybacks increased off the top of my head if I remember it was 160 or 170 billion last year so when I do the numbers I think that mag seven buyback tax could very well be down 80 billion this year um which is meaningful and there's this shifting in this where performance could shift too because of this um that's happening but that 80 billion I think will be made up by the rest of the market so I don't see that's my first big point is I don't see buybacks falling off a cliff this year I could see like if there down the line maybe that's if we continue do this capex boom and it roll it spreads into other industries and etc. then yeah that that could happen but I don't see it happening this year. I don't think I think it's a little bit of a narrative that's taken on too much waiting and is getting discounted in people's minds too much. So that um those are the numbers there. The other thing I would add on the buybacks is you start studying uh years where buyback volume or buyback numbers uh re change and negatively fall off from one year to the next. In those years where buybacks decrease, the market since the GFC has been higher by uh double digits every year. And so it's not a death blow to see some moderation of buybacks is the the historical evidence there. So that would be like my my big picture takeaway on that risk and then on software and we can get into this more with your other questions but again I don't see it I see it pretty contained. I think this rotation is actually healthy for the market. I think it tells me that there isn't some broad bubble that's forming. uh software went from 12 and a half percent of S&P 500 market cap to 9% since the release of uh cloud code version 2 back on September 29th. And that's a that's a meaningful derating. You've never seen in the history of uh the S&P 500 a situation where an industry this large more than 8% of S&P 500 market cap has declined by more than 25% in 3 months and the market has remained at within 3% of all-time highs. I think that's um actually really impressive that the market was able to rotate that much and uh and do some some resetting of uh of the froth in the process. So it's actually healthy to me. >> That's a really interesting point that you just made. It's um as you point out it's like a rotation and because it's been able to I guess sustain despite that rotation but maybe the market's healthier than people actually were thinking or talking about. >> Yeah. I mean so when I look at the when you see fear out there and the other thing we looked at was so you know software it's gone it was overvalued. You know, the truth is like it was this the software S&P 500 software industry was trading at 15 times revenues, 15 times sales. Um we've basically knocked it down to 10 times sales. And if you do like a basic regression of um margins to price to sales, this is this entire move has really just corrected overvaluation. So the good news is that we've corrected overvaluation and on this basis when you compare the margins and topline uh multiples for this software industry we're we're kind of norm we're back to a normal valuation we've we've killed the froth. The bad news is if we're really calling the terminal value into question of these businesses, if we're really saying that um this is an existential crisis to the software industry, then I don't know that a normal quote unquote valuation is enough and you might need more and you might see margins start to deteriorate. So we modeled that out too. We looked at if margins so right now the industry is like at 30% fat margins twice that of the S&P 500. If if we went down to S&P 500 level margins roughly 15% just cut them in half. How does that impact the S&P 500? Well, if if this all were able to occur in isolation, which much of this move has occurred in isolation, which is kind of surprising, you'd see S&P 500 margins fall by 70 basis points out to 2027. So, your estimated margins right now are 15.8% for the S&P 500. if software derated it or was it was cut in half, you would see that go down 70 basis points. Um, and the bottom line read through on that and why we don't feel so um nervous about this is that uh that in our mind would take like the way we do fair value, maybe 5% off the S&P's fair value. So again, that's a the assumption there is that this is is contained to to software. The assumption is also that um everything else is held constant. These are very unsophisticated kind of assumptions. But we do it just to make points to ourselves like what's the actual what's what is the scope of the damage. The reality is if we are living in a world where software is going to be fully disrupted then you're living in a world where hardware semis needs to be bid in my opinion because compute is is uh is going to be the thing that uh everyone is is scrambling for and that's kind of what the capex numbers point at. So it doesn't make a lot of sense to derate software as aggressively as I just did in that example and not rerate in some way hardware. um or the other areas that could become bottlenecks to this massive new industrial revolution that we're going through. And so when I say all that to say, look, we put the buybacks in context, 80 billion, okay, that's 80 billion, that's out of what we could probably be getting 1.2 trillion of buybacks in total for S&P 500 this year. So, which is growth over last year. Not not a death blow to the bull market. We say the software's gone to fair value. If it's cut in half from here, you're looking at a 70 basis point reduction for S&P 500 margins. Again, not a death blow, maybe 5% off fair value. And the other side of that that we're not factoring in yet is what's the upside for hardware. So, this is our way of using data to try to take some of the scary narratives that are out there and start coming to terms with them and say, okay, is this really threatening your big big picture bull market view? We're not there. >> Hey everyone, I hope you are enjoying this interview. if you can take a quick moment and hit that subscribe button. We are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. Yeah, you're debunking a lot of those narratives and um you pointed out since the global financial crisis, there have been seven years with buyback contractions um but the S&P has returned double digits in each of those years. Um, let me ask you about just like the markets in general. Like we've seen um gosh, last week was a wild a wild week, but now we've seen the Dow at a record high. Um, we've just seen markets like touching new highs and records. >> Does it does it surprise you at all or pretty much expected? >> I mean, the when you get this kind of dis the other thing we've seen is like there's this is there's massive dispersion. It's another way you're saying is massive dispersion in the market. And so we we started digging deep into like, okay, what are these dispersion events? When do they usually occur? What does it look like? What is this? What's this one like in the um this was a top six uh when you look at like 21day dispersion of returns under the surface of the S&P 500. Like this last period we just went through was was in the top six all time uh going back the S&P 500's history. And so extreme dispersion under the surface there difference in in uh returns across the 500 stocks in the S&P 500. Uh what we find is those usually that dispersion happens during periods of during corrections or selloffs or you know when there's a lot of volatility in the index. And uh and this one's different because it's one of those those those cases, one of those six cases where we we got this kind of dispersion while we were within a few% of the all-time highs. And this is actually again you look 6 months out in these cases. There's not a lot of them, but each one is positive 6 months out. And not not just market returns. It's two or three times market returns usually. So the message I take away from that is this is a way there's two ways you can correct sentiment. We're always trying to correct sentiment in the market. This is a way of correcting sentiment other than a total collapse of the index. It's a aggressive rotation with dispersion close to all-time highs. I think the macro is really supportive of the markets. I mean we talked about that back in August and really nothing has changed. It's a slowmoving story. Like I like I said, I we're running 6ish% deficits as a percentage of GDP uh in the face of uh what is turning out to be a an industrial revolution sized capex spending spree. So 6% deficits, 2.5% capex this year from the mag 7. Um when you put all that together, I think the economic backdrop for growth looks good. You look at what earnings have done, earnings continue to track higher than we see over their seasonal averages. So Q4 stuck out ex like is extremely bullish to us because it divorced from its there's a there's a triedand-true seasonal pattern. At the end of calendar Q3, you start seeing the Q4 estimates roll over. That didn't happen this year. They went higher and then we were rolled into Q1 now and they're going higher. So what that is is telling us is that these companies there's a very upbeat message coming through these companies on the calls and going through the guidance analyst guidance and so earnings inflecting higher deficit inflecting higher growth inlecting higher inflation should be fine. I think that the Fed is a whole thing we can talk about but I think rates are still going to come down this year. Um and you're having a productivity boom because of AI starting to take place in the background. So this is a very equity positive environment. We've had some froth taken out of the software space, but here we are. I mean, at the moment, we're, you know, within spitting distance of a new all-time high in the S&P 500. And I would point out that every single one of these instances where we've come up to a high and then pulled back, the pullback is higher than the previous pullback since that November sell-off that we had, that little November dip. >> And that should be expected. I take it. >> That's positive. I mean, it's positive when you when you when you see higher lows and the things we're looking for things that >> you know, the the so the the the last low I think was um 6896 6796 on the S&P 500 and we we managed even in this last sell-off here where there was like where the this the Bitcoin selloff was starting to accelerate. The software stuff was starting to accelerate. We stayed above that. We closed above that. The other number to watch is the December low. So the December low was 6721. You don't really want to see the market break the December low in the first two months of the year. It's kind of like a it would be a bad omen for trend. But we keep holding in there. And at the same time, our objective sentiment indicators, we have a sentiment composite. We look at things like ETF inverse ETF volume. Inverse ETF volume spiked up to 43% which is really consistently what we've seen in these corrections. these like say anything from 5 to 8% that you would expect to see >> and and it shows us that retail is getting sort of scared in the background. They're starting to play try to play on the short side. So to me, like I said, there are two ways to correct sentiment. You can have a selloff and outright sell off an index or you can have rotation that shows up as this dispersion. And I think we're in that second case because it's showing up in our sentiment indicators. >> Fascinating. Okay. Um I know sentiment's important. I know it's something you look at. Can you just kind of set the stage for sentiment because I has it been more pessimistic of late? You were just referencing like the retail getting a little bit scared. What what's going on as relates to sentiment? >> Uh yeah, I've I think it was uh it's I've never seen with some of the the calls I've had. Uh there's so many different ways you can track sentiment and measure it and positioning goes along with sentiment, you know, and uh some there are many respected especially banks that have this um insight into how big pools of money that they custody are able to see. Um they they have they they have indicators. They might be better than ours. I don't know. I get to test them and and figure it out. But we have our own proprietary set of indicators. Um and like I said that we have a model a sentiment model. It's been in the at the moment it's showing mild pessimism and it's uh it spiked up after that November selloff. It never got to in our view it never got to extreme optimism which is a sell and it's moved down to I'd say just call it mild pessimism. It's not where you would expect us to be. Uh if we were going to have like a 20% bare market or something like that, you need to go lower. Like I think we're at like 39 is our reading. We scale at 0 to 100. 39. Anything below 40, we consider pessimism. Um back in liberation day last year, it got down to the teens. So that gives you an idea of where we could go if this thing were to accelerate. But we're not in some place where I think that this sentiment is just fine for the middle of a bull market as far as where we've corrected to. And that's corroborated by this by inverse ETF volume, which I do think is one of the better um indicators that are out there right now. You have like the AI, you have put call stuff, you have um margin uh balances and things like that. But I think that the the inverse ETF volume is great because we've seen this proliferation of leveraged and inverse ETFs. This is where retail this is how retail accesses when they want to be short or long or use margin. Basically, they're dealing with leveraged ETFs and inverse ETFs. And uh so what we do is we combine just what we call the speculative universe. So the inverse ETFs and leveraged long ETFs and then we look okay what percentage of that volume is going on the short side into the inverse ETFs and that number it usually during this bull market just to give people an idea it bounces around between like 20% at tops uh to 40% during pullbacks and then when there's something really nasty like liberation day we go up to 50%. We got up to 43% during this last uh situation. The last week that we were in actually a couple days ago is the high on inverse ETF volume. So to me that goes along with our sentiment indicator. I don't think that that sentiment is uh is uh is optimistic. I think it's on the pessimistic side. It's not the most washed out you'd ever see. Um but but it's more washed out than you would expect given the fact again that the index is less than 1% from an all-time high. So what it tells you is you got to look at what's happening under the surface to understand how much there's been a lot of pain. There's been pain in crypto, there's pain in software, there's pain in these high-f flyier stocks and that's showing up in these these uh sentiment gauges. But at the same time, the rotation has allowed the index to stay towards highs. I look at that, you look at the history, look at all these other things that we we boiled down and I think it's a positive >> setup. Could be wrong. I mean, it could be like the beginning of something awful and hopefully we would catch that soon enough and pivot. But I, you know, you have to take risks in this business. You have to, you know, weigh the evidence. And to me, uh, you get paid to, to get out, step out there when people are worried about terminal values and existential risks and things like that. like those are times to step in and our indicators say it's not a bad time to to stay long stocks. >> So interesting. Um and I love learning about the various indicators and it's like um it's so that one is it a bit contrarian then like if the the sentiment is a bit more negative it's actually maybe more of a buy sign because you're talking about retail inverse ETFs and >> I should have said that. Yeah. >> No, it's so interesting Warren. I really like this. Yeah. >> Sentiment is always inverse. So like >> like the other things we look at like V target funds. So that's like these are funds that dial up positions when volatility is low and then they sell when volatility spikes because they're targeting a certain overall portfolio. V. We also look at CTAs. These are trend followers. They're um your classic trend followers and you can track their positioning. We track their positioning and then basically triangulate where they're doing in different assets. And our view is that these are the kind of big buckets retail buybacks uh CTAs uh vault target. If you can figure out this picture of all these places, these these buckets, then you can get a pretty good idea of where I think the baseline market is. And our view is that like back in liberation day, these things all pointed to a screaming buy because once we set that bottom, the buybacks came in, retail came in, and then these other guys were forced in. We're not in that position, but we haven't had a 20% draw down. We've had a one person draw down, but what we have done, it's a little bit like, >> you know, changing the tires on a car while you're still going down the highway. We've kind of done a lot of repair work on the on the sentiment side while we're still in this uh pretty healthy trend environment. Um, and so yes, sentiment's always inverse. So if you hear pessimism, that's good. And if you hear short retails using inverse ETFs, that's good. Um, that's what you want. >> So interesting. Okay. And um the bottom line here is you're overweight equities. Um are you actively buying equities at these levels? Are you waiting for like are you spotting opportunities? Is like what I don't know what you can even share there, but just kind of curious when you say overweight equities, is that like actively buying or kind of holding what you have? >> Well, we've been overweight since we upgraded equities back. We've been in and out benchmarking overweight for off and on. We we upgraded like back on it was that Thursday where we took it. We had set the lows back in November. I don't remember that was like the November 21st or 20th or something like that. And we've been overweight since then. We were overweight for up until a couple months before that too. And that's just been our basic uh back and forth. And we don't see a reason to downgrade stocks. We're not going to go we're overweight. We're not going to go max overweight or something like that. We don't it's not if we if let's say our sentiment indicators went even showed even more pessimism our positioning indicators got washed out and the macro look good then maybe we consider that but that's not the kind of setup we see it's more of like a don't panic sell here we don't need to res reduce our risk that's not where we're at in the cycle and our view we still believe the first half of this year is going to be strong we still believe that the economy is inflecting higher and we still believe that the overall the macro data is going to be very supportive earnings macro are going to be good. And then the question is, will any of these sort of gray swan events, will the new capex numbers, will the software disruption, will any of that disrupt it, any of that stop our the bullish outlook? And it it just doesn't at this point in time. Um, we also have the new Fed chair and what's gone on in precious metals and those things are also potential risks that we could talk about, but the net is we're still overweight. I want to talk about commodities. Um, I take it precious metals are probably in that universe as well. And I I have to give you props, too, because you talked about gold on our August episode. Um, and we've certainly seen quite the run in the precious metal. Um, just one thing you wrote in a recent note. Um, you talked about coming into the year, we argued that quote commodities will surpass bonds as the best portfolio diversifier to own alongside equities. Earlier price action suggests that the movement is here. I really like this line. When disruption is the risk, own that which cannot be disrupted. Can we hear your thesis on the commodity on commodities more broadly? >> Yeah. Well, the as a hedge to the equity portfolio, I think it has two benefits. I think number one, uh when you have a Goldilocks regime, which we're in, you're always oscillating between overheating and overcooling in the economy. And like I said, I thought last year was an over cooling worry where you had like it made sense to be long uh bonds against your stocks and that worked out. I mean, generally yields fell uh last year uh and and so that was a good hedge. And commodities, we liked gold, we like precious metals. Our big concern last year was oil was going to be stuck and that's how it played out. Um this year, I think we've been looking, we expected oil to bottom in Q1. That's obviously a little tricky and uh we think that the risk to the bull market is going to flip to overheating and we're going to have to see how the Fed and markets digest the potential for an overheating economy as we get into what what I think would be more like back half of the year type of concern. So that's the first reason to own commodities is that if you're starting to overheat in a late cycle environment, commodities are classic outperformers and we go through the different commodities that are needed for um this data center capex buildout. You're going to need a lot of metals, industrial metals, precious metals feed off that debasement theme. And oil, I think, is starting to finally come through a very fundamentally rough patch. And so to me, the stars start to align for commodities there. And then the the other reason would be what is your risk to equities? Another risk is this disruption risk. And if if you think about disruption, that's what's going on software stocks. And so I think everyone is going through this process of okay, what is it in my portfolio that can't be disrupted? And it's generally these things that if you drop them on your foot hurt and that's the that's the commodity play. I think that that fits that non undisruptible bucket very well. Um, and I mean I've been watching where quality we have a very strong quality bias in our in some of our models and we watched the quality factor just get really beaten up over the last 18 months. And there's a part of me that wonders quality is synonymous with a moat maybe asset light kind of business. Not a lot of this commodity exposure in a quality business. And you've seen those those stocks get beaten up for 18 months. And you have to wonder how much of this AI disruption story has been going on for a little bit of time now. And maybe uh you're starting to see moes across the board, not just in software question. Uh then then I think you're going to have more of a piling into these areas where there's uh it's harder to disrupt and that leads you to commodities. So those are two big things. I think we're going to overheat later this year and commodities are hard to disrupt. If you're gonna if AI is going to go exponential, you need to own hardware in commodities in non-disruptible, undisruptible, whatever the word would be >> industries. >> Such an interesting framework to put it. Do any of the other um kind of typical narratives, if you will. Do those play into wanting to own commodities like inflation, for example. Um I guess we can bring up dollar weakness, like debasement trade. those are those still applicable or is it is there something like even more like bigger here that's like not as discussed like you said that I thought that disruption um angle was really interesting I hadn't heard others talk about that >> well one thing I think is that a lot of time so number one yes there's the debasement is re like I debasement is real disruption is a real threat but I do think in the short to even intermediate term these days, the market runs on memes a little bit. >> Oh, that's a good way of putting it. Yeah, >> the long run is going to be truth and wherever the the truth of all these situations is, but in the short to intermediate term, you got to find a meme that explains the world you're in and then flow start tracking that meme. And uh I know that sounds a little bit like cute, but that I do think there's truth to that. And so I think it makes sense to kind of package the price action you're seeing into some narrative. Everyone's doing it. Um and and then to say like does that narrative make sense? Does it pass the smell test? You know, and so you know the debasement thing it I do think it works. I mean we're running we went through that last time. I won't belabor the point but like I think that's a tailwind to the precious metals. You know that's why we got the I think you started getting the first moves from central banks and then money started falling and you get speculators piling on at the end and these moves that you never can guess where they stop. That's something we've said the whole time is you get into a gold bull market, you never know where it's going to stop. It goes higher than you think. It lasts longer than you think. And so you just got to ride and rebalance. That goes to your point like you're be overweight or rebying. Well, you need to be rebalancing aggressively in these volatile markets. So if you have a target and you fall off that target, you need to be buying things that fell off your target to get back to that that target weight and then selling things that go blow way past your target to get down to that target weight. And so um gold and silver to a certain silver is kind of a small market but precious metals yes to basement's a tailwind. I think the data center buildout is a tailwind to industrial metals. It's a tailwind in fact and it's going to be a tailwind in meme too. I think people are going to start buying those things because they'll say like we need these industrial metals. We natural gas we're seeing some people start to filter into that market even though that is a widow maker market. Um, and oil is it hasn't moved. So, there's there's perceived value there from speculators. I think there's been a little bit too much speculative uh action in oil here in the short term, but it still makes it fits the bill. Like there if you're worried about getting disrupted, we don't know how AI is going to turn out turn turn out. You need to go to the base level and the base level are made up of these commodities really >> and so yes, there's I think these are all tailwinds to that same story. Overheating is the cyclical tailwind. Debasement is the precious metals tailwind. The AI industrial revolution buildout and disruption is a secular tailwind for industrial metals and to a certain extent energy as well. >> Yeah. All right. Let's talk about the Federal Reserve because I feel like you pointed to this out in your note. There's been so much happening since the announcement of the appointment of um Kevin Walsh as the next um Fed chair. reading your note, I tell you you weren't that stoked on the pick or or of I guess the universe of candidates here. Can we start with maybe more of your assessment of the pick? Like how are you thinking of about it from an investor perspective? >> Yeah, for investors like everybody has their political views and whatever and um all this stuff is so hard to disentangle, but from an investor's perspective, I think Kevin Morris was the worst pick. Um, and I don't think I think he was the worst pick from uh a merit perspective, too. And those things all kind of blend together. And so his his track record has been is poor. He he has a bad track record. He, you know, he was too hawkish going into and coming out of the GFC. um he really is always hawkish until the last couple years where Trump came into office and he's kind of been asking for the job, wanting to get the job and some you can like twist yourself into an intellectual pretzel trying to excuse why he did this but it's all for we all know why he's trying to get the job and it is what it is and so he he got it but I don't think um his track record isn't very good and so I think that we know he's got the he got the job not from track record but from because is a loyalist, is perceived as a loyalist to Trump. That hurts independence. And when you when you hurt Fed independence, you see term premium expand. You see, you would expect to see yield curve uh steepen, which is synonymous with term premium in my view. And that's exactly what we've seen since they he was nominated. um he's gonna have a hard time if the goal is to lower rates by the maximal amount, he's going to have a hard time convincing the rest of the committee to cut rates because of this track record that he has, because of their skepticism of him, and because he's constantly criticized the Fed for not being for being too data dependent, using too uh much forward guidance. He's just always critical of the Fed. Look, like everyone has it see like the most universal thing is to be like pissed off at the Federal Reserve and criticize them. I think it's like the most easy punching bag for everyone from all over the political spectrum to to to criticize the Fed. Um, and so I get it like there there's like it's very popular. like what I'm saying right now is kind of not popular, but um he he's critical, but the thing he doesn't do when he criticizes is really offer a solution. Like how what are you going to replace data dependence with not data? What is the alternative to data? You need to be able to speak the language of the other committee members if you want to convince them to cut rates. And he doesn't seem to want to do that. He's got he's just way more about like he's a grade a critic in my view, but he doesn't really solve problems. Um, yeah. Go ahead. >> I was going to say is one of the problems he's going to face like being able to build consensus like that matters. Like you said, speak the language. >> Yeah. I don't think he's going to build consensus very effectively. That's that's exactly right. Um I I think he like I said, he's just been critical. He doesn't have anything to offer except he's he likes to talk about shrinking the balance sheet. But when you really dig into shrinking the balance sheet, I my personal feeling is it's just something he says to sound smart. It's something he can say when he's trying to get the job. he wants to be perceived as hawkish and critical of the Fed, but at the same time, you know, talk up how much he wants to cut rates. So, what he what can you do there is you say, well, if we shrink the balance sheet, then we could cut rates a lot more. And I don't think there's a doesn't make a lot of sense to me. Like, what's the reason for shrinking? We did shrink the balance sheet by two and a half trillion over the last uh few years. And I don't really know that it did a whole lot. and uh and you know there that we've gotten it to the place where we can given regulatory environment and banking environment that we have and if we go farther we risk a banking crisis and for what and so you know in order for him to really shrink the balance sheet in a meaningful way it would require regulatory changes that I haven't heard him contemplate and so to me that's just something he says it's not going to change like I don't think that the balance sheet policy is really going to change when he gets into office at least not any or into the position at least not anytime time soon because it's just reality. It's not I just think he's running up against reality. And so we'll see. Maybe I'm proven wrong and we'll we'll take it from there. But when I step back from all that, the net of it is that there's more there's less Fed independence. There's higher term premiums and higher long-end rates because of that. Less of a proclivity to push through rate cuts if we get to a a um a controversial place in the cycle where there's some disagreement. he's not going to be the guy to sell the rest of the committee and build a consensus. And if we had a real crisis, his aversion, publicly stated aversion to expanding the balance sheet means we're not going to have QE. So when I look at all that stuff, the net net for investors is the Fed put goes lower. The Fed put being like that hypothetical place where if the market falls to this level, then the Fed gets involved. They cut rates, they expand their balance sheet, they do whatever they need to to stop the bleeding and stop systemic risk. He's been I think that shift lower under a Kevin Worsh Fed. Maybe you're happy with that. Some people will be happy with that. But I'm saying from investors, if you want to be long assets, that's a um that's that's a not a great uh phase change. >> Investors are going to want that Fed put even though people some people are going to criticize like why do we have the Fed put or whatever. From an investor perspective only, they're going to want that Fed put in the end. >> Yeah. From an investor perspective. And you can make the case that you there's there's fine debates to be had about like what are what were the societal level um benefits and weaknesses to different Fed policies. Sure. But like from the regime we've been in is one where the Fed intervenes and saves the market and there's going to be strong disagreement on whether that should be or shouldn't be. But I think Wars change pushes that Fed put a a little bit lower. I still think he's a lot of talk in what he says and when the rubber meets the road he'll he'll do whatever he has to but um there could be more waffling before we get to that place. >> Do you think um the appointment of war is that one of the kind of risks against the bull market narrative right now or does it bode well for the narrative? >> It's a risk against it. So all these things we've been talking about they all net out as bearish. >> Okay. >> It's about whether these things can >> derail. they strong enough to derail those the big time fundamental factors, economic reaceleration, earnings reaceleration, a Fed that's cutting um stronger fiscal deficit, big capex boom. >> Can we derail that >> that core? And I don't think it can, but it's all net bearish. Like don't get me wrong, the buyback dry up, the stock, the the the disruption being um forced on the rest of the big violent rotation we've seen in software and what's happened there? That's also a potential net negative and worsh is definitely a net negative for the market. >> And is it because he will he won't have the ability to do the rate cuts that Trump wants? Like what what is and be >> number one? Yeah. Number one, when he cuts rates, they won't transmit to the long as much because I think he's hurting I think he's hurt his the Fed independence. So to me, like in a normal cut cycle, when you cut 25 basis points, history says this is just a historic average. Mhm. >> The historic average is that the 2-year yield falls by 17 basis points and the 10-year yield falls by uh 10 basis points and you get a seven basis point steepening between the twos and the 10ens for every 25 basis points of Fed cuts. That's your historic rule of thumb that I would say. And with a W Fed, his 25 basis point cut will not transmit as much to the 10-year where it matters for the economy. What about with PAL when we've seen cuts because haven't we haven't we also seen like the 10-year backup as well? Is it a more recent development? Is I don't help me understand like where does why has it been behaving the way it's been behaving? And I take it that's probably not normal. >> Yeah, that's something that we talked about a little bit in August and like so the real time where the 10ear backed up when the the Fed started cutting was back in September of 2024 and through to the end of 2024. That's because the yield curve was extremely inverted. Okay? So, when the yield curve is inverted like this, all those rules that I just laid out kind of go out the window because that's a yield curve that reflects >> it's a recessionary yield curve because doesn't make sense for the the Fed funds rate to be um whatever it was 200 basis points above the 10-year back in September of 2024. It doesn't make sense for that. So when they started cutting there and they cut aggressively, they cut 50 basis points and then you saw the economic numbers come in stronger than we thought because there was a recession priced into the bond market at that point. That's what it was. Got it. >> The recession pricing had to come out and so a lot of people I know you've talked to a few on your show um like Jim Biano and I've had public kind of respectful public debates with him back and forth. Um he saw that as evidence of a Fed mistake and I saw that as just an unwind of a recessionary yield curve. >> Interesting. >> We're not at that place right now. The yield curve is 70 70 plus basis points. Two tins is totally is normally upward sloping. And so >> um at this point in time all those rules of thumb I laid out they should they should transmit >> you should at 25 basis points it should transmit somewhat to the long end to the tenure. But if the tenure doesn't believe that Worsh doesn't if the tenure thinks Worsh is it represents a less independent Fed it could you you could probably see some uh I think what you'd see is less movement out of the 10ear. So like that you cut 25 basis points and maybe the tenure just stays right where it's at would be my prediction. >> And I know the 10ear is like critically important for so many different areas of the market as well. Um what would be some of the broader implications of that? Um well I mean housing is the housing and anything interest rates that's the been the real crux of the pain for the consumer and everything. So like I think that's what you know you see Trump talking about housing >> related um antirust fights right now and things like that because we're going on an election season and everyone knows like what's the source of the pain? The source of the pain is that housing is unaffordable in this country. A new car costs $50,000 now. And interest rates combined with those headline prices. It doesn't work with incomes for most of the the country. And so you're seeing increasing pain and feeling of being left out. That's why you see everyone talking about the K-shaped economy and the the bottom half of the K is growing in size and growing in frustration. There's a political snapback coming from that that lower half of the K. No doubt. That's also part of like the debasement world. You're seeing these asset prices float up even and your income's not keeping up with it and you end up seeing consumer behaviors change. We've seen the savings rate fall, continue to make new lows. We've seen more gambling. We just had the Super Bowl last night. >> Oh my gosh. Every commercial. Yeah. >> Right. And so, and you see, like we talked about last time, coming off the bottom in Liberation Day, the weird thing about that selloff is retail at the bottom. Very abnormal. They were buying the dip. They've been conditioned to buy the dip. and it's part of these things are all related in my opinion and the changes that we've seen in the economy over the last 5 years. And so, >> um, yeah, that's that's what the if we don't get the tenure down, that angst around the housing market and those interest rate sensitive areas of the of the economy, that's going to remain. And so that's why when I when when Trump picked worsh, I was on TV saying, I tweeted about it like this is not going to accomplish your goals. This is actually counterproductive. you would have been better off picking a Fed uh chair like Waller who the market thinks is indep is is independent and will remain independent and call balls and strikes in the economy they sees because that would actually compress term premium and flatten the yield curve and cause cuts at the short end to transmit into the long end more. Um but he you know he went the other way. He value loyalty >> uh over over what I would say is merit. >> You just kind of referenced Warren the broader economic picture like the Kshaped economy. We actually haven't really talked about the economy in this episode. Um but we have like the the market remains in a bull market. There are some risks Goldilocks for now. Doesn't look like any are going to de derail any of that. But um how do you kind of think about the broader economic picture and how this does any of this like play into that impact that? Does the econ does the economic picture matter here? How are you thinking about the economy? >> Yeah, I think the economy is I think the labor market is softening. I think that the inflation will stay kind of muted here in the fir front part of the year and uh but at the same time you're going to have a fiscal impulse from the tax refunds and there is some of the the one big beautiful bill and these capex numbers you're seeing too because we have bonus depreciation so that pulls forward spending at the same time these consumers are going to get a better tax uh refund season and that's going to come through as a higher fiscal deficit. So, uh, you see all that and at the same time, um, there is a little bit of inventory restocking that has to take place because of the tariff lumpiness. And so, uh, I think there's there's basically, uh, and the big the big thing out there is AI is a true shot in the arm for productivity. So, productivity numbers were ex really high um, in Q3. Uh, if you trust the numbers, we saw, we went back and looked at it. It was the only the second quarter we've ever seen where um the unemployment rate was up by more than 20 basis points and uh and GDP grew by uh I think it was 1.8% Q over Q. Don't quote me on that. I think that was the numbers that we saw as a combination. Only other time we saw that combo of growth plus unemployment rate going up was back in 1992. Q2 1992 coming off the back of that 1991 recession. So it was this jobless recovery, >> but what we're going through right now is so it's very uh abnormal. There's a little bit of this savings because like I said, the savings rate is very low. So you have these people with the wealth effect spending down their savings, powering the economy that shows up as productivity. You could argue that's not real productivity, but I think the other component is real and that is the AI that is the AI um productivity boost and you're seeing that in the numbers now finally. Uh you're seeing it show up as a hesitancy to hire. So the economy is in a really interesting dynamic spot. I think we're going to grow. We're going to be it's going to be almost impossible to have a recession this year because of fiscal deficits in the capex boom that we're getting. But at the same time, the labor market's going to be weak on the weak side. I don't see a hiring boom because who's going to hire in front of this kind of generational technology um that's coming. And so I think it nets out as a high productivity environment where we probably accelerate some of these feelings of the K-shaped economy where the for the people who are on left out it's probably going to the the uh the nervousness might intensify the skittishness and and angst will intensify. But for the economy, for earnings, the S&P 500, the the places that um aren't going to be totally disrupted by AI like we talked about, they're I would see them accelerating and see their fundamentals accelerating and u and doing quite well this year. So, it's going to be a weird that nets out to a positive economy, but there's going to be some pockets of >> It sounds like it's going to be a weird year. Yeah. >> Yeah. I think that's >> a lot of pockets of Warren. I have to say this has been awesome having you back on. I really enjoyed your appearance back in August. I enjoyed this one as well. I know the audience is going to love um having you back. All right, before I let you go here, um let folks know where they can find you and support your work at 314 Research and any parting thoughts, anything that you'd like to leave this audience to think about. The floor is all yours. >> Um yeah, 314 research. It's the number three spellout14ress research.com if you're interested in um checking out our research. It's generally an institutional research product. The thing I would leave our room with or that we're excited about is um I know it's the age of AI is kind of the dominating theme of our conversation, but we have a our AI research assistant. We call it Caliban that um my partner Fernando and I have just >> started selling to our clients as an add-on. is now forced to get it as a client, but it's an add-on. And so, if you're interested in just like we're going to be selling it to the general public, you can look at I'll look up Caliban C a l i ban um and sign up there for when we release it to the general public if you're interested in basically being able to um expand your research capabilities. And it's um I could go on and on about it, but the best way to see it's very very impressive tool. The best way to to see it is to just check out our the 314 Twitter page, X page, and uh check out the demos. >> Love it. Warren Pies, founder of 314 Research, thank you so much for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and get better. Really appreciate you taking the time today, Warren. They grab me.